<PAGE> 1
As filed with the Securities and Exchange Commission on April 30, 1998
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. 8 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9 [X]
--------------
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
Tom D. Seip, 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, NW, 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):
/ / Immediately upon filing pursuant to paragraph (b)
/X/ On April 30, 1998 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485
if appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE> 2
PART A
CROSS REFERENCE SHEET
PROSPECTUS
Schwab S&P 500 Portfolio
Schwab Asset Director - High Growth Portfolio
<TABLE>
<CAPTION>
PART A ITEM PROSPECTUS CAPTION
<S> <C> <C>
1 Cover Page Cover Page
2 Synopsis Key Features of the Funds; Expenses
3 Condensed Financial Information Financial Highlights
4 General Description of Registrant Cover Page; Investment Objectives and Policies;
Investment Techniques; Organization and
Management of the Funds; General Information
5 Management of the Fund Organization and Management of the Funds
5A Management's Discussion of Fund How the Funds Report Performance
Performance
6 Capital Stock and Other Securities Cover Page; Investment Objectives and Policies;
Investment Techniques; Other Investment
Techniques; Important Information About the
Funds; General Information
7 Purchase of Securities Being Offered Important Information About the Funds; Investing
in the Funds; Share Price Calculation
8 Redemption or Repurchase Investing in the Funds
9 Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 3
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHWAB S&P 500 PORTFOLIO
---------------
PROSPECTUS APRIL 30, 1998
The SCHWAB MARKETTRACK GROWTH PORTFOLIO II (the "Growth Fund"), formerly Schwab
Asset Director -- High Growth Portfolio and the SCHWAB S&P 500 PORTFOLIO (THE
"S&P 500 FUND") (together, the "Funds") are intended as investment vehicles 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"). The Growth Fund seeks to provide high capital
growth with less volatility than an all stock portfolio. 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 S&P 500 Index.
THIS PROSPECTUS PRESENTS IMPORTANT INFORMATION you should know before investing
in either Fund. Please read it carefully and keep it for future reference. More
detailed information about the Funds is in the Statement of Additional
Information ("SAI") dated April 30, 1998 (as amended from time to time). The SAI
has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated into this Prospectus by reference (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, in New York State, call
800-838-0649.
TABLE OF CONTENTS
<TABLE>
<S> <C>
KEY FEATURES OF THE FUNDS................................... 2
EXPENSES.................................................... 3
FINANCIAL HIGHLIGHTS........................................ 4
INVESTMENT OBJECTIVES AND POLICIES.......................... 5
INVESTMENT TECHNIQUES....................................... 7
OTHER INVESTMENT TECHNIQUES................................. 9
INVESTING IN THE FUNDS...................................... 10
IMPORTANT INFORMATION ABOUT THE FUNDS....................... 11
DIVIDENDS AND OTHER DISTRIBUTIONS...................... 11
FEDERAL INCOME TAX INFORMATION......................... 11
SHARE PRICE CALCULATION..................................... 11
HOW THE FUNDS REPORT PERFORMANCE............................ 12
ORGANIZATION AND MANAGEMENT OF THE FUNDS.................... 12
OPERATING FEES AND EXPENSES............................ 13
GENERAL INFORMATION......................................... 13
</TABLE>
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
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.
1
<PAGE> 4
KEY FEATURES OF THE FUNDS
Both Funds are designed to provide investors with exposure to the growth
potential of the stock market and may be appropriate for investors who have a
long-term investment horizon and want the growth potential of stock investments
or asset allocation. In the past, common stocks have outperformed most other
types of securities over time, but 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.
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. For more details on each Fund's investments and the risks associated
with them, see "Investment Objectives and Policies" and "Investment Techniques."
The GROWTH FUND invests in a diversified mix of stocks, bonds, cash equivalents,
either directly or through other mutual funds. 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.
Research shows that a significant 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.
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 S&P 500 Index of 500 Stocks (the "S&P 500 Index") by investing
primarily in the common stocks of companies composing the Index. The S&P 500
Index is a widely recognized, unmanaged index of the prices of 500 large company
common stocks selected by Standard & Poor's. These stocks represent
approximately 74% of the market value of all common stocks publicly traded in
the United States, as measured by Wilshire 5000.*
MARKET PERFORMANCE. As of December 31, 1997, the major asset categories and
sub-categories used by the Funds provided the following average annual returns:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
STOCKS
Large company stocks (S&P 500 Index**).................... 33.34 31.12 20.24 18.04
Small company stocks (Schwab Small Cap Index(R)).......... 26.84 23.93 16.78 16.17
International stocks (Schwab International Index(R))...... 6.84 10.50 NA NA
BONDS (Lehman Brothers Aggregate Bond Index***)............. 9.68 10.42 7.48 9.18
CASH-EQUIVALENTS (3 Month Treasury Bills***)................ 5.31 5.45 4.78 5.68
</TABLE>
- -------------------------
* Source: Standard & Poor's, March 31, 1998.
** Source: Morningstar, Inc.
*** Source: Ibbotson Associates, Inc.
Total return figures assume reinvestment of all dividends paid by the securities
in an index, but do not include any fees, such as those charged by a Fund, or
any expenses, such as Separate Account or Contract charges. Total return figures
also do not include taxes, brokerage fees or other expenses that you would pay
if you were to directly invest in the securities of an index. Past performance
is no guarantee of future results.
MANAGEMENT. Charles Schwab Investment Management, Inc. (the "Investment
Manager"), 101 Montgomery Street, San Francisco, CA 94104, currently provides
investment management services to 34 SchwabFunds(R), with assets in excess of
$62 billion as of March 31, 1998. (See "Organization and Management of the
Funds.")
2
<PAGE> 5
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.")
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are fees and charges you may pay for buying or
selling shares of a fund.
ANNUAL FUND OPERATING EXPENSES are fees and expenses paid directly by each Fund
from its annual operating income and are factored into the dividends paid by the
Funds. You do not pay any of these fees directly. These expenses cover services
such as investment research, management of the Funds and the issuance of
shareholder statements.
<TABLE>
<CAPTION>
GROWTH FUND S&P 500 FUND
----------- ------------
<S> <C> <C>
Shareholder Transaction Expenses...................... None None
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE
DAILY NET ASSETS)
Management Fee (after fee reduction).................. 0.00% 0.00%
12b-1 Fee............................................. None None
Other Expenses (after fee reduction).................. 0.75% 0.28%
---- ----
TOTAL FUND OPERATING EXPENSES......................... 0.75% 0.28%
</TABLE>
The Investment Manager and Schwab have voluntarily agreed to reduce total
operating expenses (excluding interest, taxes and extraordinary expenses) of
each Fund. If these reductions were not in effect, the management fee, other
expenses and direct total operating expenses for the Growth Fund and the S&P 500
Fund, as a percentage of average daily net assets, would have been 0.74%, 1.25%
and 1.99%; and 0.36%, 0.57% and 0.93% respectively.
THE GROWTH FUND'S INVESTMENTS WILL INCLUDE OTHER SCHWABFUNDS(R), WHICH CHARGE
FEES AND INCUR OTHER EXPENSES. The Investment Manager and Schwab have
voluntarily guaranteed that total expenses of the Growth Fund, including the
expenses indirectly incurred through investment in underlying SchwabFunds, will
not exceed 0.75% of its average daily net assets through at least February 28,
1999. Total expenses do not include interest, taxes and extraordinary expenses.
EXAMPLES. Based on the expenses in the table above, you would pay the following
expenses on a $1,000 investment in each Fund, assuming a 5% annual return and
redemption at the end of each period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Growth Fund...................................... $8 $24 $42 $93
S&P 500 Fund..................................... $3 $ 9 $16 $36
</TABLE>
THESE ARE EXAMPLES ONLY AND DO NOT REPRESENT PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES ARE MAY BE GREATER OR LESS THAN THE EXPENSES SHOWN IN THE EXAMPLE.
3
<PAGE> 6
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified reports are included in each Fund's Annual
Report. The Funds' financial highlights, financial statements and reports of the
auditor are incorporated by reference into the SAI. Free copies of the Funds'
SAI and Annual Reports may be obtained by calling the telephone number on the
cover page of this Prospectus.
<TABLE>
<CAPTION>
GROWTH FUND
----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996**
------------ ------------
<S> <C> <C>
Net asset value at beginning of period...................... $ 10.42 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... 0.22(1) 0.04
Net realized and unrealized gain on investments and
foreign currency transactions.......................... 2.33 0.38
----------- ----------
Total from investment operations.......................... 2.55 0.42
LESS DISTRIBUTIONS
Dividends from net investment income...................... (0.02) --
Distributions from realized gain on investments........... (0.00)(2) --
----------- ----------
Total distributions....................................... (0.02) --
----------- ----------
Net asset value at end of period............................ 12.95 $ 10.42
----------- ----------
TOTAL RETURN (not annualized)............................... 24.54% 4.20%
RATIO/SUPPLEMENTAL DATA
Net assets, end of period................................. $10,333,000 $5,384,091
Ratio of expenses to average net assets++................. 0.75% 0.67%*
Ratio of net investment income to average net assets...... 1.98% 2.35%*
Portfolio turnover rate................................... 81% 7%
Average commission rate................................... $ 0.0328 $ 0.0217
</TABLE>
- -------------------------
++ The information contained in the above table is based on actual expenses for
the period, after giving effect to the portion of fees and expenses reduced and
reimbursed by the Investment Manager and Schwab. Had these fees and expenses not
been reduced and reimbursed, the Funds expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C>
Ratio of expenses to average net assets.............. 1.99% 4.71%*
Ratio of net investment income to average net
assets............................................. 0.74% (1.69)%*
</TABLE>
* Annualized
** For the period from November 1, 1996 (commencement of operations) to December
31, 1996.
(1) Per share information presented is based upon the average number of shares
outstanding due to large fluctuations in the number of shares outstanding during
the period.
(2) Amount does not round to a full penny.
4
<PAGE> 7
<TABLE>
<CAPTION>
S&P 500 FUND
----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996(1)
------------ ------------
<S> <C> <C>
Net asset value at beginning of period...................... $ 10.53 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... 0.09 0.03
Net realized and unrealized gain on investments........... 3.33 0.50
----------- ----------
Total from investment operations.......................... 3.42 0.53
LESS DISTRIBUTIONS
Dividends from net investment income...................... (0.01) --
----------- ----------
Total distributions....................................... (0.01) --
----------- ----------
Net asset value at end of period............................ $ 13.94 $ 10.53
=========== ==========
TOTAL RETURN (not annualized)............................... 32.46% 5.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period................................. $37,056,143 $5,923,424
Ratio of expenses to average net assets+.................. 0.29% 0.33%*
Ratio of net investment income to average net assets+..... 1.56% 2.16%*
Portfolio turnover rate................................... 4% 0%
Average commission rate................................... $ 0.0297 $ 0.0256
</TABLE>
- -------------------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
reimbursed by the Investment Manager. Had these expenses not been reduced and
reimbursed, the Fund's expense and net investment income ratios would have been:
<TABLE>
<S> <C> <C>
Ratio of expenses to average net assets.......... 0.93% 3.11%*
Ratio of net investment income to average net
assets......................................... 0.92% (0.62)%*
</TABLE>
* Annualized
(1)For the period from November 1, 1996 (commencement of operations) to December
31, 1996.
INVESTMENT OBJECTIVES AND POLICIES
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. The SAI contains a complete
listing of each Fund's other fundamental policies and limitations. Except as
noted, policies and limitations apply at the time of initial investment and
later changes generally do not require a Fund to sell an investment. For more
information regarding the Funds' investment policies and techniques read the
"Investment Techniques" and "Other Investment Techniques" sections of the
Prospectus and the Funds' SAI.
THE GROWTH FUND
The Growth Fund's investment objective is to provide high capital growth with
less volatility than an all stock portfolio. The Growth Fund intends to achieve
its investment objective by following an asset allocation strategy that will
diversify its investments across major asset classes, such as stocks, bonds and
cash. The Fund intends to use indexing strategies for selecting its investments
within each major asset class and sub-class.
Asset-allocation Strategy is an investment strategy that allocates investments
among a mix of different asset classes. The Fund intends to use this strategy to
invest in a Target Mix in the following major asset classes: stocks, bonds and
cash. The Fund also intends to invest according to a Target Mix in the following
sub-classes of the equity asset class: international, small cap and large cap.
Investments in each asset class and sub-class
5
<PAGE> 8
may deviate slightly from the Target Mix in order to minimize trading costs. The
Fund's Target Mix is set out in the chart below.
<TABLE>
<CAPTION>
TARGET MIX
----------
<S> <C>
STOCKS............................................ 80%
International................................... 20%
Small Cap....................................... 20%
Large Cap....................................... 40%
BONDS............................................. 15%
CASH-EQUIVALENTS.................................. 5%
</TABLE>
Indexing Strategy is a method of investment management that relies on an index
to determine the investments of a fund, rather than the individual judgement of
a portfolio manager. Of course, a portfolio manager of an index fund still uses
his/her judgment, but not in the traditional sense of active investment
management. By following indexing strategies, the Fund seeks to track the
investment performance of the indexes corresponding to its asset classes and
sub-classes. The indexes currently include the S&P 500 Index(R), Schwab
Small-Cap Index(R) and Schwab International Index(R)for the stock asset
allocations and the Lehman Brothers Aggregate Bond Index for the bond asset
allocations and 3-Month Treasury bills for the cash asset allocations.
The Fund attempts to manage each asset class and sub-class so that its
performance tracks that of its index. A perfect correlation is unlikely as the
Fund incurs operating expenses unlike the indices. The Investment Manager will
monitor the performance of the Fund against its indexes and will rebalance the
Fund periodically to reduce tracking differential. The Investment Manager may
adopt a different portfolio management style and may change indices without
prior notice to shareholders.
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 S&P 500 Index. The S&P 500 Fund seeks investment results that
track, rather than beat, the total return of the S&P 500 Index. Thus, it does
not "actively" choose investments in the same way as an actively managed stock
fund. Actively managed funds 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 S&P 500 Index and for cash management purposes with respect to redemptions
and purchases of Fund shares. Thus, the merits of any particular stock are not
normally judged.
Under normal market conditions, the S&P 500 Fund invests at least 80% of its
total assets in stocks in the S&P 500 Index. The S&P 500 Fund generally tries to
match its stock holdings to those stocks' weightings in the S&P 500 Index. In
extraordinary circumstances, the S&P 500 Fund may exclude a 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 S&P 500 Index.
Although the S&P 500 Fund focuses on stocks in the S&P 500 Index, 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 S&P 500
Index.
The S&P 500 Fund typically will not track the performance of the S&P 500 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 of 0.9 or better between its performance
and that of the S&P 500 Index. A figure of 1.0 would indicate perfect
correlation. The Fund monitors its performance and the performance of the S&P
500
6
<PAGE> 9
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.
INVESTMENT TECHNIQUES
THE GROWTH FUND
The Fund will invest in stocks, bonds and cash-equivalents, either directly or
through other SchwabFunds(R) in varying proportions, according to the Fund's
Target Mixes. The Fund seeks to reduce overall risk by diversifying investments
among major asset classes and sub-classes. However, shareholders will be exposed
to the risks associated with each particular asset, and diversification among
asset categories will not necessarily protect the Fund against losses. The
different types of funds and other securities in which the Fund and underlying
SchwabFunds may invest are described below.
STOCK ALLOCATION. The Fund will diversify its stock (equity) investments among
the various sub-classes (large company, small company, and international
stocks). Equity securities include common stocks, preferred stocks, convertible
securities and warrants. 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. Stock risk
includes the possibility that stock prices will decline over the short-term or
even over extended periods.
- - LARGE COMPANY STOCKS. The Fund's large company stock allocation will be
invested in all or a representative sample of the stocks which comprise the
S&P 500 Index (or other similar index).
- - SMALL COMPANY STOCKS. The Fund's small company stock allocation will be
invested in all or a representative sample of stocks in the Schwab Small-Cap
Index.(R) The Fund may also invest all or a portion of its entire small
company stock allocation in the Schwab Small-Cap Index Fund(R). The Schwab
Small-Cap Index contains stocks selected from a universe consisting of the
second 1,000 largest U.S. operating corporations, as measured by market
capitalization, and the Schwab Small-Cap Index Fund seeks to track this index.
Small company stocks have historically been characterized by greater total
returns, greater volatility of returns and lower dividend yields than large
company stocks. Small-cap stocks can be more volatile as they are normally
less liquid than the stocks of companies with medium and large capitalization,
and there may be less publicly available information on small companies and
their stocks.
- - INTERNATIONAL STOCKS. The Fund's international stock allocation will be
invested in all or a representative sample of stocks in the Schwab
International Index(R). The Fund may also invest all or a portion of its
entire international stock allocation in the Schwab International Index
Fund(R). The Schwab International Index contains stocks selected from a
universe consisting of 350 of the largest non-U.S. operating corporations, as
measured by market capitalization, and the Schwab International Index Fund
seeks to track this index. 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 Fund may also invest up
to 5% of its net assets in the stocks and bonds of issuers in developing
countries. International investments pose special risk considerations. For
example, international stocks are typically denominated in a foreign currency
and their values will be affected by changes in currency exchange rates in
addition to normal market fluctuations. In addition, foreign issuers are not
subject to the same reporting requirements as domestic issuers, and certain
information about a foreign issuer may not be available. Numerous economic
factors and political instability could affect investments in foreign
countries.
BOND ALLOCATION. Bond investments for the Fund will consist primarily of U.S.
Government securities, highly rated corporate debt obligations with fixed or
floating rates of interest, highly rated asset-backed securities, including
mortgage-related securities, and repurchase agreements for these securities. The
Fund may also invest a portion of its bond allocation in the Schwab Total Bond
Market Index Fund, a fund that seeks to track an index of investment-grade debt
securities with maturities greater than one year. The market values of bonds
fluctuate due to changes in interest rates or in the ability of an issuer to
meet its obligations. Generally, when interest rates fall, the values or prices
of bonds rise; conversely, when interest rates rise, the values or prices of
bonds fall. While securities with longer maturities tend to produce higher
yields, the prices
7
<PAGE> 10
of longer maturity securities are also subject to greater market fluctuations as
a result of changes in interest rates. Except under condition of default,
changes in the value of a bond will not affect the income derived from it by the
Fund, but will affect the value of the Fund.
U.S. Government securities are obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, including bills, notes, bonds
and stripped government securities. Not all obligations issued or guaranteed by
U.S. Government agencies are backed by the full faith and credit of the United
States. 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 an 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.
Highly-rated obligations and securities are rated in one of the four highest
categories ("BBB" or better) by a nationally recognized statistical rating
organization ("NRSRO") or considered to be investment-grade quality.
CASH-EQUIVALENT ALLOCATION. The Fund may invest in U.S. dollar-denominated
short-term money market instruments determined to present moderate credit risk,
including:
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, that have
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 Fund also may invest in assets not included in the above
categories, but which are consistent with the Fund's investment objective. These
may include real-estate and precious metal related investments and Depository
Receipts. Each of these investments is limited to 5% of the Fund's net assets.
THE S&P 500 FUND
The Fund invests primarily in the common stocks of companies composing the S&P
500 Index. 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. Stock risk includes the
possibility that stock prices will decline over the short-term or even over
extended periods. 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. The securities of small companies are especially sensitive to these
factors. The Fund seeks to reduce overall risk by diversifying investments among
its stock holdings, including a wide range of industries. However,
diversification will not necessarily protect the Fund against losses.
While the Fund tries to remain invested in stocks in the S&P 500 Index as fully
as possible, it must manage cash flows resulting from the purchase and sale of
Fund shares. Thus, the Fund also may invest in U.S. dollar-denominated
short-term bonds and money market instruments, including U.S. Government
securities, certificates of deposit, time deposits, bankers' acceptances and
repurchase agreements for these securities. The
8
<PAGE> 11
Fund may buy commercial paper rated in one of the top two rating categories by
an NRSRO or, if unrated, of comparable quality. The Fund also may buy and sell
shares of other mutual funds to manage its cash flows.
OTHER INVESTMENT TECHNIQUES
ADJUSTING INVESTMENT EXPOSURE. Each of the Funds may use a variety of
techniques in order to remain effectively fully invested or to increase or
decrease exposure to changing security prices, interest rates, currency exchange
rates, or commodity prices, including entering into futures and options
contacts, spot foreign currency exchange contracts, forward foreign currency
exchange contracts and swap agreements, and selling securities short.
Specifically, each Fund may enter into futures contracts and options provided
that the aggregate deposits required on these contracts do not exceed 5% of each
Fund's total assets. In addition, the Funds may not use futures contracts or
options to leverage their portfolios. When the Funds invest in futures
contracts, they will segregate cash or cash-equivalents in the amount of the
underlying obligation. Other government regulations also limit the Funds' use of
futures contracts and options. Each of the other techniques will be limited to
5% of each Fund's net assets. The Funds may 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.
These techniques pose certain risks. The primary risks include imperfect
correlations between the change in market value of the securities held by a Fund
and the price of a contract or agreement and possible lack of a liquid secondary
market for a contract or agreement. If the Fund judges market conditions
incorrectly or employs a strategy that does not correlate well with its
investments, these techniques could result in a loss, regardless of whether the
intent was to reduce risk or increase return. In addition, these techniques
could result in a loss if the counterparty to the transaction does not perform
as agreed on a national exchange with an active and liquid secondary market. The
risk of loss in some strategies can be substantial, due to the low margin
deposits required or small investment of cash and the relative magnitude of risk
assumed. As a result, a relatively small price movement in a futures contract or
agreement may result in an immediate and substantial loss (or gain) to the
investor.
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.
9
<PAGE> 12
SECURITIES LENDING. Pursuant to fundamental policies set forth in the SAI, 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.
INVESTING IN THE FUNDS
BUYING 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. Great West Life &
Annuity Insurance company, a participating Insurance Company, through its
Separate Account may be deemed to beneficially own more than 25% of the shares
of each Fund, and, as a result, may be deemed to be a controlling person of each
Fund.
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 any time when
trading on the New York Stock Exchange (the "Exchange") is restricted; or 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 any
other circumstances as the SEC may permit.
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. For example, violation of the
federal tax laws by one Separate Account investing in the Funds could cause the
Contracts funded through another Separate Account to lose their tax-deferred
status, unless remedial action were taken. At the same time, if these
arrangements are implemented, the Funds, the Participating Insurance Companies,
and any Plans investing in the Funds would be subject to conditions imposed by
the SEC that are designated to prevent or remedy any such conflicts. These
conditions would require the Board of Trustees to 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 net asset value per share ("NAV") next
determined after receipt by the Funds or its designee of purchase requests in
proper form.
Shares will be redeemed at NAV 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.
10
<PAGE> 13
Please refer to the appropriate Separate Account Prospectus for information on
how to allocate Contract values to or withdraw Contract values from a Fund.
IMPORTANT INFORMATION ABOUT THE FUNDS
DIVIDENDS AND OTHER DISTRIBUTIONS
Each of the Funds will distribute substantially all of its net investment income
and capital gains, if any, to the Participating Insurance Company Separate
Accounts each year in December. Distributions are normally paid or reinvested
pursuant to elections by Separate Accounts.
FEDERAL INCOME TAX INFORMATION
Each Fund has elected to be treated as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"), qualified as such, and
intends to continue to so qualify. 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 share on any given day is its NAV. This figure is computed by
taking each Fund's total assets, subtracting any liabilities and dividing the
resulting amount by the number of that Fund's outstanding shares. NAV of each
Fund is determined on each day the Exchange is open for business as of the close
of normal business (generally 4:00 p.m. Eastern time). Purchase and redemption
orders from Separate Accounts investing in a Fund that are received and accepted
by a Participating Insurance Company, as the Fund's designee, by 4:00 p.m.
Eastern time will generally be computed at each Fund's NAV determined on that
day.
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 each Fund's assets in good faith under Board of Trustees
guidelines. The Board of Trustees regularly reviews these values.
11
<PAGE> 14
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.
A Fund may compare its performance to the performance of the Index, other
indices or a combination of indices.
TOTAL RETURN is the change in value of an investment in a Fund over a given
period assuming reinvestment of any dividends. A cumulative total return
reflects actual performance over a stated period of time. An average annual
total return is a hypothetical rate of return that, if achieved annually, would
have produced the same cumulative total return if performance had been constant
over the entire period. Average annual total returns smooth out variations in
performance; they are not the same as actual year-by-year results.
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.
Additional performance information about the Fund is available in its Annual
Report. To request a free copy, call the Annuity Service Center at 800-838-0650
(800-838-0649 in New York State).
ORGANIZATION AND MANAGEMENT OF THE FUNDS
GENERAL OVERSIGHT OF THE 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 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 March 31, 1998 had aggregate net assets in
excess of $62 billion.
Geri Hom is Vice President of the Investment Manager and Senior Portfolio
Manager for the S&P 500 Fund and for the equity portions of the 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 4 Schwab MarketTrack
Portfolios(R) with combined assets of over $8.4 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.
Kimon Daifotis is Vice President and Senior Portfolio Manager. He joined Schwab
in October 1997 and is responsible for the day-to-day management of the bond and
cash assets portions of the 3 Schwab MarketTrack Portfolios. For five years
prior to joining Schwab, he was employed by Lehman Brothers, most recently, as
Vice President in fixed income institutional sales and, prior to that, Senior
Portfolio Strategist. He is a Chartered Financial Analyst and graduated with a
Masters in Business Administration from the University of Chicago. He received
his Bachelor of Arts Degree in Economics from Claremont McKenna College.
Stephen B. Ward, Senior Vice President and Chief Investment Officer, has overall
responsibility for the overall operations of the Funds. He joined Schwab as Vice
President and Portfolio Manager in April 1991 and
12
<PAGE> 15
was promoted to his current position in August 1993. Prior to joining Schwab, he
was Vice President and Portfolio Manager at Federated Investors. He holds an
M.B.A. form the Wharton School and a B.A. in economics from Virginia Tech. He
has been a chartered financial analyst since 1985.
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 4.8 million active customer
accounts and has over 271 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, Co-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.
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 period ended December 31, 1997, the Growth Fund and S&P 500 Fund paid
management fees and total operating expenses of 0.00% and 0.75%, and 0.00% and
0.29% of average daily net assets, respectively.
Schwab serves as the distributor for the Funds but receives no compensation for
this service.
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 will generally be allocated among the Trust's 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 exercises 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.
SCHWABFUNDS.(R) The Growth Fund may invest a portion of its assets in
SchwabFunds, which charge underlying fees and expenses. These costs are not
included in the Growth Fund's management fees, shareholder services and transfer
agency fees, or other expenses. These expenses, like those of the Growth Fund,
are factored into the price of the underlying mutual fund's shares and into its
dividends. Although you are not charged any of these fees directly, you still
bear the expenses of an investment in the underlying mutual funds, in addition
to the expenses of your investment in the Growth Fund.
GENERAL INFORMATION
Schwab Annuity Portfolios (the "Trust") is an open-end management investment
company 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, three Series
are offered: the Schwab MarketTrack Growth Portfolio, the Schwab S&P 500
Portfolio and the
13
<PAGE> 16
Schwab Money Market Portfolio. 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 equal rights as to
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 the
Board of Trustees requires or deems desirable 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 by the 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 S&P 500 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 S&P 500 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 S&P 500 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 shares or in the determination or calculation of the equation by which
the S&P 500 Fund's share 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 equity 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 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.
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.
14
<PAGE> 17
PART A
CROSS REFERENCE SHEET
PROSPECTUS
Schwab Money Market Portfolio
<TABLE>
<CAPTION>
PART A ITEM PROSPECTUS CAPTION
<S> <C> <C>
1 Cover Page Cover Page
2 Synopsis Key Features of the Funds; Expenses
3 Condensed Financial Information Financial Highlights
4 General Description of Registrant Cover Page; Investment Objectives and Policies;
Investment Techniques; Organization and
Management of the Funds; General Information
5 Management of the Fund Organization and Management of the Funds
5A Management's Discussion of Fund How the Funds Report Performance
Performance
6 Capital Stock and Other Securities Cover Page; Investment Objectives and Policies;
Investment Techniques; Important Information
About the Funds; General Information
7 Purchase of Securities Being Offered Important Information About the Funds; Investing
in the Funds; Share Price Calculation
8 Redemption or Repurchase Investing in the Funds
9 Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 18
SCHWAB MONEY MARKET PORTFOLIO
---------------
PROSPECTUS APRIL 30, 1998
The SCHWAB MONEY MARKET PORTFOLIO (the "Fund") is 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"). The Fund's investment objective
is to provide maximum current income consistent with liquidity and stability of
capital.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE IS NO GUARANTEE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE PER SHARE ("NAV") OF $1.00.
TABLE OF CONTENTS
<TABLE>
<S> <C>
KEY FEATURES OF THE FUND.................................... 2
EXPENSES.................................................... 2
FINANCIAL HIGHLIGHTS........................................ 3
INVESTMENT OBJECTIVE AND POLICIES........................... 4
INVESTMENT TECHNIQUES....................................... 5
INVESTING IN THE FUND....................................... 6
IMPORTANT INFORMATION ABOUT THE FUND........................ 7
DIVIDENDS AND OTHER DISTRIBUTIONS...................... 7
FEDERAL INCOME TAX INFORMATION......................... 7
SHARE PRICE CALCULATION..................................... 7
HOW THE FUND REPORTS PERFORMANCE............................ 8
ORGANIZATION AND MANAGEMENT OF THE FUND..................... 8
OPERATING FEES AND EXPENSES............................ 9
GENERAL INFORMATION......................................... 9
</TABLE>
THIS PROSPECTUS PRESENTS IMPORTANT INFORMATION THAT YOU SHOULD KNOW BEFORE
INVESTING. PLEASE READ IT AND KEEP IT FOR FUTURE REFERENCE. More detailed
information about the Fund is in the Statement of Additional Information ("SAI")
dated April 30, 1998 (as amended from time to time). The SAI has been filed with
the Securities and Exchange Commission ("SEC") and is incorporated into this
Prospectus by reference (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 in New York State, call 800-838-0649.
---------------
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.
1
<PAGE> 19
KEY FEATURES OF THE FUND
The Fund seeks maximum current income consistent with liquidity and stability of
capital by investing in money market securities. The Fund seeks to maintain a
stable NAV of $1.00, although there is no assurance that it will be able to do
so. (See "Investment Objective and Policies.")
MANAGEMENT. Charles Schwab Investment Management, Inc. (the "Investment
Manager") currently provides investment management services to 34 mutual funds,
including the Fund, with over $62 billion in assets as of March 31, 1998. (See
"Organization and Management of the Fund.")
PURCHASE, SALE AND AVAILABILITY OF SHARES OF THE FUND. You cannot buy or sell
Fund shares 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 further information on how to
make such allocations. (See "Investing in the Fund.")
SHAREHOLDER COMMUNICATIONS. A representative of the Schwab Annuity Service
Center is available toll-free to assist you at 800-838-0650 (800-838-0649 in New
York State). (See "Investing in Shares of the Fund.")
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are fees and charges you may pay for buying or
selling shares of a fund.
ANNUAL FUND OPERATING EXPENSES are fees and expenses paid directly by a Fund
from its annual operating income and are factored into the dividends paid by the
Fund. You do not pay any of these fees directly. These expenses cover services
such as investment research, management of the Fund and the issuance of
shareholder statements.
<TABLE>
<S> <C>
Shareholder transaction Expenses............................ None
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY
NET ASSETS):
Management Fee (after fee reduction)........................ 0.25%
12b-1 Fee................................................... None
Other Expenses.............................................. 0.25%
------
TOTAL FUND OPERATING EXPENSES............................... 0.50%
</TABLE>
EXAMPLES. Based on the expenses in the table above, you would pay the following
expenses on a $1,000 investment in the Fund, assuming a 5% annual return and
redemption at the end of each period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$ 5 $16 $28 $63
</TABLE>
THESE ARE EXAMPLES ONLY AND DO NOT REPRESENT PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THE EXPENSES SHOWN IN THE EXAMPLE.
The Investment Manager and Schwab have guaranteed that, through April 30, 1999,
total fund operating expenses (excluding interest, taxes, and extraordinary
expenses) will not exceed 0.50% of average daily net assets of the Fund. Without
this guarantee, management fees, other expenses and total fund operating
expenses would have been 0.46%, 0.25% and 0.71% of average daily net assets of
the Fund, respectively. The effect of this voluntary expense limitation is to
maintain or increase the Fund's total return to shareholders.
2
<PAGE> 20
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified reports are included in the Fund's Annual Report.
The Fund's financial highlights, financial statements and reports of the auditor
are incorporated by reference into the SAI. Free copies of the fund's SAI and
Annual Report may be obtained by calling the telephone number on the cover page
of this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
----------------------------------------- DECEMBER 31,
1997 1996 1995 1994(1)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value at beginning of
period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income............... 0.05 0.05 0.05 0.03
Net realized and unrealized gain on
investments(2)................... -- -- -- --
----------- ----------- ----------- ----------
Total from investment operations.... 0.05 0.05 0.05 0.03
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.05) (0.05) (0.05) (0.03)
----------- ----------- ----------- ----------
Total distributions................. (0.05) (0.05) (0.05) (0.03)
----------- ----------- ----------- ----------
Net asset value at end of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== =========== =========== ==========
TOTAL RETURN (not annualized)......... 5.12% 4.98% 5.26% 2.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period........... $47,967,612 $27,430,633 $16,912,432 $7,409,454
Ratio of expenses to average net
assets+.......................... 0.50% 0.50% 0.50% 0.50%*
Ratio of net investment income to
average net assets+.............. 5.01% 4.87% 5.17% 4.16%*
</TABLE>
- -------------------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced by the
Investment Manager. Had these expenses not been reduced, the Fund's expense and
net investment income ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Ratio of expenses to average net assets......... 0.71% 0.95% 1.02% 2.10%*
Ratio of net investment income to average net
assets........................................ 4.80% 4.42% 4.65% 2.56%*
</TABLE>
(1) For the period from May 3, 1994 (commencement of operations) to December 31,
1994.
(2) Amount does not round to a full penny.
* Annualized
3
<PAGE> 21
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide maximum current income consistent
with liquidity and stability of capital. The investment objective is fundamental
and cannot be changed without shareholder approval. The Fund's investment
policies and techniques discussed below are non-fundamental, unless otherwise
noted. The SAI contains a complete listing of the Fund's other fundamental
policies and limitations. Except as noted, policies and limitations apply at the
time of initial investment and later changes do not generally require a Fund to
sell an investment. For more information regarding the Fund's investment
policies and techniques, read the "Investment Techniques" section of the
Prospectus and the Fund's SAI.
The Fund pursues its objective by investing in high-quality, short-term U.S.
dollar-denominated money market securities, including U.S. or Canadian
Government securities, their agencies and instrumentalities, and repurchase
agreements for these securities. Securities are high-quality if rated in one of
the two highest rating categories by two nationally recognized statistical
rating organizations (NRSROs), or by one if only one NRSRO has rated the
security, or, if unrated, determined to be of comparable quality by the
Investment Manager.
MONEY MARKET SECURITIES. Money market securities are short-term debt securities
issued by banks (foreign and domestic), corporations, and other institutions and
include certificates of deposit, time deposits, notes, bankers' acceptances, and
commercial paper, including asset-backed commercial paper. Asset-backed
commercial paper is issued by a special purpose vehicle (usually a corporation)
that has been established for the purpose of issuing the commercial paper and
purchasing the underlying pool of assets. The issuer of commercial paper bears
the direct risk of prepayment on the receivables constituting the underlying
pool of assets. Credit support for asset-backed securities may be based on the
underlying assets or provided by a third party. Credit enhancement techniques
include letters of credit, insurance bonds, limited guarantees and over-
collateralization.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations issued
or guaranteed by the U.S. Government, its agencies and instrumentalities. Some
U.S. Government securities, like U.S. Treasury securities which are issued by
the U.S. Treasury, are backed by the full faith and credit of the U.S.
Government. Some U.S. Government securities are supported by a line of credit
that the agency or instrumentality has with the U.S. Treasury, although there is
no guarantee that the support will be provided to the agency or instrumentality.
Other U.S. Government securities are supported only by the credit of the agency
or instrumentality issuing the security. Short-term U.S. Government securities
are generally considered to be among the safest investments, but there is no
guarantee against loss of principal or interest for an investor.
FOREIGN SECURITIES. Investments in securities of foreign issuers or securities
traded principally overseas may involve certain special risks due to foreign
economic, political and legal developments. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. The securities of
some foreign companies and foreign securities markets are less liquid and at
times more volatile than securities of comparable U.S. companies and U.S.
securities markets. To the extent the Fund purchases Eurodollar certificates of
deposit and other similar obligations, consideration will be given to the fact
that these issuers may not be subject to the same regulatory requirements as
U.S. issuers, including U.S. banks. In addition, the fund may invest in
obligations of U.S. branches of foreign banks and foreign branches of foreign
banks having capital, surplus and undivided profits in excess of $100 million.
RESTRICTED SECURITIES. The Fund may invest in commercial paper that is exempt
from registration pursuant to federal securities regulations. The disposition of
these securities is subject to restrictions and such an investment could effect
the fund's liquidity. Pursuant to a fundamental policy set forth in the SAI, the
Fund will not invest more than 10% of net assets in illiquid securities,
including restricted securities, time deposits and repurchase agreements
maturing in more than 7 days.
4
<PAGE> 22
MATURITY. Short-term securities are deemed to mature in 397 days or less in
accordance with federal securities regulations or securities that have a
variable rate of interest readjusted no less frequently than every 397 days.
INVESTMENT TECHNIQUES
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund 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. The Fund generally will not pay for such securities or start earning
interest on them until they are received. Securities purchased on a when-issued
or delayed delivery basis are recorded as an asset. The value of such securities
may change as the general level of interest rates changes. The Fund will not
invest more than 25% of its total assets in when-issued or delayed delivery
securities. The Fund will not purchase such securities for speculative purposes
and will expect to actually acquire the securities when purchased. However, the
Fund reserves the right to sell any such securities before their settlement
dates.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund acquires ownership
of a security from a broker-dealer or bank 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 Fund's holding
period. Maturity of the securities subject to repurchase may exceed one year. If
the seller of a repurchase agreement becomes bankrupt or otherwise defaults, the
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. The Fund will enter into repurchase agreements only with banks and
institutions deemed creditworthy by the Investment Manager.
VARIABLE AND FLOATING RATE SECURITIES. The Fund may invest in instruments
having rates of interest that are adjusted periodically, or which "float"
continuously according to formulas intended to minimize any fluctuation in the
values of the instruments ("Variable Rate Securities"). The interest rate of
Variable Rate Securities ordinarily is determined by reference to, or is a
percentage of, an objective standard such as a bank's prime rate, the 90-day
U.S. Treasury bill rate or the rate of return on commercial paper or bank
certificates of deposit. As interest rates decrease or increase, Variable Rate
Securities experience less appreciation or depreciation than fixed rate
obligations. Some Variable Rate Securities ("Variable Rate Demand Securities")
have a demand feature entitling the purchaser to resell the securities at an
amount approximately equal to amortized cost, or the principal amount thereof
plus accrued interest.
CREDIT AND LIQUIDITY SUPPORTS. These enhancements may be employed by issuers to
reduce the credit risk of their securities. Credit supports include letters of
credit, insurance and guarantees provided by foreign and domestic entities.
Liquidity supports include puts, demand features, standby bond purchase
agreements and lines of credit. Most of these arrangements move the credit risk
of an investment from the issuer of the security to the support provider.
Changes in the credit quality of a support provider could cause losses to the
Fund, and affect its share price.
PUTS. These are agreements, sometimes called demand features or guarantees,
that allow the buyer to sell a security at a specified price and time to the
seller or "put provider." When the Fund buys a put, losses could occur as a
result of the costs of the put or if it exercises its rights under the put and
the put provider does not perform as agreed. Standby commitments are types of
puts.
SECURITIES LENDING. To increase its income, the Fund may lend its portfolio
securities to brokers, dealers and other financial institutions that borrow
securities. Pursuant to a fundamental policy set forth in the SAI, no more than
one-third of the Fund's total assets may be represented by loaned securities.
These loans will be fully collateralized by cash, letters of credit or U.S.
Government securities equal at all times to 100% of the loaned securities'
market value plus accrued interest. As with other extensions of credit, there
are risks of delay in recovery or even losses of rights in the securities loaned
should the borrower of the securities fail financially.
BORROWING POLICY. Pursuant to a fundamental policy set forth in the SAI, the
Fund may not borrow money except as a temporary measure for extraordinary or
emergency purposes, and then only in an amount up to
5
<PAGE> 23
one-third of the value of its total assets in order to meet redemption requests.
Any borrowings under this provision will not be collateralized. The Fund will
not borrow for leverage purposes.
DIVERSIFICATION. This investment technique involves investing in a wide range
of securities, and thereby spreading and reducing the risks of investment.
CONCENTRATION. Concentrating investments means that substantial amounts of
assets are invested in a particular industry or group of industries.
Concentration increases the Fund's investment exposure. For example, the
automotive industry may have a greater exposure to a single factor, such as an
increase in the price of oil, which may affect the sale of automobiles, and
impact the value of the industry's securities.
Restriction: The Fund will not concentrate in any one industry or group of
industries. This policy does not apply to certificates of deposit and banker's
acceptances or to U.S. Government securities. This policy may be changed only by
shareholders.
INVESTING IN THE FUND
Fund shares are currently offered 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. Transamerica Occidental Life
Insurance Company and Great West Life & Annuity Insurance Company, Participating
Insurance Companies, through their respective Separate Accounts, may be deemed
to beneficially own more than 25% of the shares of the Fund and, as a result,
each may be deemed to be a controlling person of the Fund. Shares of the Fund
will not be available to fund benefits under Contracts issued on or after May 1,
1997 by Transamerica Occidental Life Insurance Company and First Transamerica
Life Insurance Company. However, shares of the Fund will continue to be made
available for additional purchases or transfers under Contracts in effect on
that date.
Although Fund shares are not available for purchase directly by the general
public, you may nevertheless 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 further information on how to make
an allocation and how to purchase or surrender your Contract.
The Fund reserves the right, in its 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 Fund shares
are subject to acceptance by the Fund and are not binding until confirmed or
accepted in writing.
The Fund may suspend redemption rights or postpone payments at times when
trading on 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, Fund shares 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 Fund 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 Fund does 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. For example, violation of the
federal tax laws by one Separate Account investing in the Fund could cause the
Contracts funded through another Separate Account to lose their tax-deferred
status, unless remedial action were taken. At the same time, if these
arrangements are implemented, the Fund, the Participating Insurance Companies,
and any Plan investing in the Fund would be subject to conditions imposed by the
SEC that are designated to prevent or remedy any such conflicts. These
conditions
6
<PAGE> 24
would require the Board of Trustees to 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 the Fund.
Shares of the fund are sold at net asset value per share ("NAV") next determined
after receipt by the Fund or its designee of purchase requests in proper form.
Shares will be redeemed at NAV 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 Fund 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 the Fund.
IMPORTANT INFORMATION ABOUT THE FUND
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund declares dividends daily to the Participating Insurance Company
Separate Accounts. Distributions are normally paid or reinvested, pursuant to
elections by Separate Accounts, on the 25th of each month, if a business day,
otherwise on the next business day, with the exception of the dividend paid or
reinvested in December, which is scheduled to be paid or reinvested on the last
business day in December.
FEDERAL INCOME TAX INFORMATION
The Fund has elected to be treated as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"), qualified as such and
intends to continue to so qualify. In order to so qualify, the Fund will
distribute on a current basis substantially all of its investment company
taxable income and net capital gains (if any) on an annual basis and will meet
certain other requirements. Such qualification relieves the Fund of liability
for federal income taxes to the extent the Fund's earnings are distributed.
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 Fund intends to meet these requirements. Internal
Revenue Service regulations also limit the types of investors that may invest in
such a portfolio. The Fund intends 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 Fund, 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 share on any given day is its NAV. This figure is computed by
taking the Fund's total assets, subtracting any liabilities and dividing the
resulting amount by the number of the Fund's outstanding shares. NAV is
determined on each day that both the Federal Reserve Bank of New York and the
New York Stock Exchange (the "Exchange") are open for business at the close of
normal business (generally 4:00 p.m. Eastern time). Purchase and redemption
orders from Separate Accounts investing in the Fund that are
7
<PAGE> 25
received and accepted by a Participating Insurance Company, as the Fund's
designee, by 4:00 p.m. Eastern time will generally be computed at the Fund's NAV
determined on that day. While the Fund attempts to maintain a stable NAV of
$1.00, your shares are not insured against loss.
The Fund values its portfolio securities at amortized cost, which means that the
securities 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, using the amortized cost method,
with market values. If a deviation of 1/2 of 1% or more were to occur between
the Fund's NAV as calculated using market values and the Fund's NAV as
calculated using the amortized cost method, or there were any other material
deviation, the Board of Trustees would promptly consider what action, if any,
should be initiated.
HOW THE FUND REPORTS PERFORMANCE
From time to time, the Fund may advertise its yield, effective yield and total
return. Performance figures are based upon historical results and are not
intended to indicate future performance.
YIELD refers to the income generated by a hypothetical investment in the Fund
over a specific 7-day period. This income is then annualized, which means that
the income generated during the 7-day period is assumed to be generated each
week over an annual period and is shown as a percentage of the hypothetical
investment.
EFFECTIVE YIELD is calculated similarly, but the 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.
TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total returns smooth
out variations in performance; they are not the same as actual year-by-year
results.
The performance of the Fund may be compared to that of other mutual funds
tracked by mutual fund rating services, various indices of investment
performance, U.S. Government obligations, bank certificates of deposit, other
investments for which reliable performance data is available and the consumer
price index.
Yields and effective yields quoted for the Fund include 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 Fund 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 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.
Additional performance information about the Fund is available in the SAI and
the Annual Report. To request a free copy, call the Annuity Service Center at
800-838-0650 (800-838-0649 in New York State).
ORGANIZATION AND MANAGEMENT OF THE FUND
GENERAL OVERSIGHT OF THE 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 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.
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
8
<PAGE> 26
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
4.8 million active customer accounts and has over 271 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, Co-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.
OPERATING FEES AND EXPENSES
For the fiscal year ended December 31, 1997, the Fund paid a management fee and
total fund operating expenses equal to 0.25% and 0.50% respectively, of the
Fund's average daily net assets (after fee reductions).
Schwab receives no compensation for its services as transfer agent, shareholder
services agent and distributor to the Fund.
OTHER EXPENSES. The Trust pays the expenses of its operations, including: the
fees and expenses for independent accountants, legal counsel and the custodian
of its assets; the cost of maintaining books and records of account;
registration fees; the fees and expenses of qualifying the Trust and its shares
for distribution under federal and state securities laws; and industry
association membership dues. These expenses generally will be allocated among
the Trust's investment portfolios ("Series"), including the Fund, on the basis
of relative net assets at the time the expense is incurred. However, expenses
directly attributable to a particular Series will be charged to that Series. The
organizational expenses of the Fund have been capitalized and are being
amortized over the first five years of the Fund's operations.
GENERAL INFORMATION
Schwab Annuity Portfolios (the "Trust) is an open-end investment management
company 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 Series. Currently, three Series are offered: the Schwab MarketTrack
Growth Portfolio II, formerly Schwab Asset Director -- High Growth Portfolio,
the Schwab S&P 500 Portfolio and the Schwab Money Market Portfolio. 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 equal rights as to distributions, assets and liquidation of such Series.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. The Trust is not required to hold
annual shareholders' meetings. It will, however, hold special meetings as the
Board of Trustees requires or deems desirable 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 the 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.
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 FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
9
<PAGE> 27
PART B
CROSS REFERENCE SHEET
STATEMENT OF ADDITIONAL INFORMATION
Schwab S&P 500 Portfolio
Schwab Asset Director - High Growth Portfolio
Schwab Money Market Portfolio
<TABLE>
<CAPTION>
PART B ITEM STATEMENT OF ADDITIONAL INFORMATION CAPTION
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and History General Information
13 Investment Objectives and Investment Restrictions
Policies
14 Management of the Fund Management of the Trust
15 Control Persons and Principal Management of the Trust
Holders of Securities
16 Investment Advisory and Other Management of the Trust
Services
17 Brokerage Allocation and Other Portfolio Transactions and Turnover
Practices
18 Capital Stock and Other General Information
Securities
19 Purchase, Redemption and Pricing Share Price Calculation; Purchase and Redemption of Shares
of Securities Being Offered
20 Tax Status Distributions and Taxes
21 Underwriters Management of the Trust
22 Calculation of Performance Data Yield
23 Financial Statements Financial Statements
</TABLE>
<PAGE> 28
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB ANNUITY PORTFOLIOS
101 Montgomery Street, San Francisco, CA 94104
SCHWAB MONEY MARKET PORTFOLIO
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHWAB S&P 500 PORTFOLIO
April 30, 1998
This Statement of Additional Information is not a Prospectus. It should
be read in conjunction with the Prospectus dated April 30, 1998 (as amended from
time to time) for the Schwab Money Market Portfolio (the "Money Market Fund"),
and the joint Prospectus dated April 30 , 1998 (as amended from time to time)
for the Schwab MarketTrack Growth Portfolio II (the "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 copy of any of these Prospectuses,
please contact the Schwab Annuity Service Center at Charles Schwab & Co., Inc.
("Schwab") at 800-838-0650
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES.........................................................2
MANAGEMENT OF THE TRUST......................................................25
PORTFOLIO TRANSACTIONS AND TURNOVER..........................................32
DISTRIBUTIONS AND TAXES......................................................33
SHARE PRICE CALCULATION......................................................35
HOW THE FUNDS REFLECT PERFORMANCE............................................36
YIELD........................................................................36
THE BENEFITS OF INTERNATIONAL INVESTING......................................37
INDEXING AND ASSET ALLOCATION................................................38
GENERAL INFORMATION..........................................................40
PURCHASE AND REDEMPTION OF SHARES............................................42
OTHER INFORMATION............................................................42
APPENDIX - RATINGS OF INVESTMENT SECURITIES..................................42
FINANCIAL STATEMENTS.........................................................44
</TABLE>
-1-
<PAGE> 29
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 MARKETTRACK GROWTH PORTFOLIO II
The investment objective of the Growth Fund is to provide high capital
growth with less volatility than an all-stock portfolio. The 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 U.S. companies, as
represented by Standard & Poor's 500 Composite Stock Price Index(R) (the "S&P
500").
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, as
amended (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 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 Money Market
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 is normally 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)
-2-
<PAGE> 30
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 Fund Investment Policies and Restrictions.") Repayment of
these securities is intended to be obtained from an identified pool of assets,
typically receivables related to a particular industry, such as asset-backed
securities related to credit card receivables, automobile receivables, trade
receivables or diversified financial assets. Each of the Funds has identified
asset-backed securities related to the industries mentioned above and each Fund
intends to limit its investments in each such industry to 25% of its total
assets. 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. This 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. This 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 RESTRICTIONS & POLICIES FOR THE MONEY MARKET FUND
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.
(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.
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<PAGE> 31
(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
(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.
- ------------------------------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" on page 25 for an exception to this investment
restriction.
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<PAGE> 32
(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 purchase only 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 ("Moody's"), Standard & Poor's
Corporation ("S&P"), Duff and Phelps Credit Rating Co. ("Duff") and Fitch IBCA
("Fitch"), 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.
- ------------------------------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" on page 25 for an exception to this investment
restriction.
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<PAGE> 33
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.
INVESTMENT TECHNIQUES USED BY THE GROWTH FUND AND THE S&P 500 FUND
FOREIGN INVESTMENTS
The Growth Fund expects to invest in stocks of foreign issuers.
Investing in foreign issuers involves certain special considerations, including
those set forth below, which typically are not 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 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
Growth Fund endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
foreign securities exchanges, brokers, dealers and listed companies than in the
United States, which increases 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 Growth Fund is
uninvested and no return is earned thereon. The inability to make intended
security purchases due to settlement problems could cause the Growth Fund to
miss attractive investment opportunities. Losses to the Growth Fund that arise
out of the inability to fulfill a contract to sell such securities could result
in potential liability to the Growth Fund.
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<PAGE> 34
In addition, with respect to those countries in which the Growth Fund
may invest or other countries which may have a significant impact on the
companies in which the 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
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 Growth Fund may invest up to 5% of its net 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 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 Growth Fund's
investments as a result of the recent 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.
DEPOSITARY RECEIPTS
The Growth Fund may invest up to 5% of its total net assets in American
Depositary Receipts, European Depositary Receipts, Global Depositary Receipts,
Global Depositary Shares ("ADRs," "EDRs," "GDRs" and "GDSs," respectively) or
other similar global instruments, 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, EDRs, GDRs and GDSs can be sponsored or
unsponsored. Sponsored ADRs, EDRs, GDRs and GDSs are certificates in which a
bank or financial institution participates with a custodian. Issuers of
unsponsored ADRs, EDRs, GDRs and GDSs 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
ADRs, EDRs, GDRs or GDSs.
OPTIONS ON SECURITIES
Writing Covered Options. Both the 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 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 Growth Fund and
S&P 500 Fund are covered, which means that the 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 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 the Growth Fund and S&P 500 Fund write will be covered,
which means that each of the 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
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<PAGE> 35
Moody's or S&P or, if unrated, determined by the Growth Fund's and S&P 500
Fund's 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 Growth Fund and S&P 500 Fund.
However, in return for the option premium, the 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 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. These purchases are referred to as "closing purchase transactions."
Purchasing Options. The 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 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 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 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 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
Growth Fund and S&P 500 Fund are unable to effect a closing purchase transaction
with respect to covered options they have written, the 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 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) an exchange may impose restrictions 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
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<PAGE> 36
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 Growth Fund and S&P 500 Fund may purchase and sell both options
that are traded on U.S. and foreign exchanges and options 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 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 the staff of the SEC approves. The Growth Fund and S&P 500 Fund will
write or purchase an option only when 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 each of the Growth Fund's and S&P 500
Fund's net assets, respectively
FOREIGN CURRENCY TRANSACTIONS
Forward Foreign Currency Exchange Contracts. The Growth Fund may enter
into forward foreign currency exchange contracts in several circumstances. The
Growth Fund may engage in foreign currency exchange transactions to protect
against uncertainty in the level of future exchange rates. The 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 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 Growth Fund will attempt to protect against a
possible loss resulting from an adverse change in the relationship between (i)
the U.S. dollar and the applicable foreign currency during the period between
the date on which the security is purchased or sold and (ii) the transaction's
settlement date. When engaging in position hedging, the 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 Growth
Fund expects to purchase).
When engaging in position and/or transaction hedging, the Growth Fund
may purchase or sell foreign currencies on a spot (or cash) basis at the
prevailing spot rate and also may 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 Growth Fund also
may 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 Growth Fund the right to assume a short position in the futures
contract until the expiration of the option. A put option on currency gives the
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 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 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 Growth Fund to engage in hedging transactions may be limited by
tax considerations. Transaction and position hedging do
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<PAGE> 37
not eliminate fluctuations in the underlying prices of the securities that the
Growth Fund owns or expects to purchase or sell. They simply establish a rate of
exchange that may be achieved at some future point in time. Additionally,
although these techniques tend to minimize the risk of loss due to a possible
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 Growth
Fund to use forward foreign currency exchange contracts may be restricted.
The 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 Growth Fund, does not
exceed 5% of the Growth Fund's net assets.
The Growth Fund generally will not enter into a forward contract with a
term of greater than one year.
While the Growth Fund will enter into forward contracts to reduce
currency exchange rate risks, transactions in such contracts involve certain
other risks. Thus, while the Growth Fund may benefit from such transactions,
unanticipated changes in currency prices may result in a poorer overall
performance for the Growth Fund than if it had not engaged in any such
transactions. Moreover, there may be imperfect correlation between the Growth
Fund's portfolio holdings of securities denominated in a particular currency and
forward contracts into which the Growth Fund enters. Such imperfect correlation
may cause the Growth Fund to sustain losses, which will prevent the Growth Fund
from achieving a complete hedge or expose the Growth Fund to risk of foreign
exchange loss.
Writing and Purchasing Currency Call and Put Options. The 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 Growth Fund would
obligate the 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 Growth Fund would obligate the 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 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 Growth Fund may terminate its obligations under a call or put
option by purchasing an option identical to the one it has written. These
purchases are referred to as "closing purchase transactions." The 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 Growth Fund.
The purchase of a call option would entitle the Growth Fund to purchase
specified currency at a specified price during the option period in return for
the premium paid. The 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 Growth Fund to sell
specific currency at a specified price during the option period in exchange for
the premium paid. The purchase of protective puts is designed merely to offset
or hedge against a decline in the dollar value of the Growth Fund's portfolio
securities due to currency exchange rate fluctuations. The Growth Fund would
ordinarily realize a gain, if,
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<PAGE> 38
during the option period, the value of the underlying currency were to decrease
below the exercise price sufficiently to more than cover the premium and
transaction costs; otherwise the 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
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 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 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 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
The 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 Growth Fund and S&P 500 Fund are traded on
U.S. exchanges or boards of trade that the CFTC licenses and regulates or on
foreign exchanges. The Growth Fund and S&P 500 Fund are not permitted to engage
in speculative futures trading.
Futures Contracts. A futures contract generally may 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 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
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 Growth Fund and S&P 500 Fund, through the
purchase of futures contracts, may attempt to secure better rates or prices than
might later be available in the market when they effect anticipated purchases.
Similarly, the Growth Fund can sell futures contracts on a specified currency to
protect against a decline in the value of that currency and their portfolio
securities that are denominated in that currency. The Growth Fund can purchase
futures contracts on a foreign currency to fix the price in U.S. dollars of a
security denominated in that currency that the Growth Fund has acquired or
expects to acquire.
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<PAGE> 39
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 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 Growth Fund's and S&P 500 Fund's futures
contracts on securities or currency will usually be liquidated in this manner,
the 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 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 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 Growth Fund's and S&P
500 Fund's assets. By writing a call option, the Growth Fund and S&P 500 Fund
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
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 Growth Fund and
S&P 500 Fund will incur transaction costs in connection with the writing of
options on futures.
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 these closing transactions can be effected. The
Growth Fund's and S&P 500 Fund's 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 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 Growth Fund and S&P 500 Fund or securities with
characteristics similar to those of the Growth Fund's and S&P 500 Fund's
portfolio securities. Similarly, the 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 Growth Fund's and
S&P 500 Fund's portfolio securities
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and futures contracts based on other financial instruments, securities indices
or other indices, the 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 Growth Fund's and S&P 500 Fund's
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. The Investment Manager will attempt to
compensate for this volatility by having the 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 Growth Fund's and
S&P 500 Fund's portfolio securities. When hedging of this character is
successful, any depreciation in the value of the portfolio securities will be
offset substantially by appreciation in the value of the futures position. On
the other hand, any unanticipated appreciation in the value of the Growth Fund's
and S&P 500 Fund's portfolio securities will be offset substantially by a
decline in the value of the futures position.
On other occasions, the Growth Fund and S&P 500 Fund may take "long"
positions by purchasing such futures contracts. This would be done, for example,
when the 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 available on the intended date of purchase 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. This process is
known as "marking-to-market."
Regulations of the CFTC applicable to the 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 will normally 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 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 Growth
Fund's and S&P 500 Fund's futures and options practices are limited to hedging
purposes, the Investment Manager does not believe that the 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 Growth Fund and S&P 500 Fund engage
in the use of futures and options on futures other than for hedging purposes,
the 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 the
Growth Fund or S&P 500 Fund seek to "close out" its position. If the Growth Fund
or S&P 500 Fund is unable to "close out" a futures or option position and prices
move adversely, the Fund
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will have to continue to make daily cash payments to maintain its required
margin, and if the Fund has 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. The Growth Fund and S&P 500 Fund will seek to reduce the
risk that they will be unable to "close out" contracts by entering only futures
or options contracts that are traded on national exchanges and for which there
appear 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 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 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 Growth Fund and S&P 500 Fund 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 either Fund has an open position in a
futures contract or option.
The extent to which the Growth Fund and S&P 500 Fund may purchase and
sell futures, options, equity index participations and index participation
contracts may be limited by each Fund's intention to meet Internal Revenue Code
of 1986, as amended (the "Code"), requirements for qualification as a regulated
investment company. See "Distributions and Taxes - Federal Income Tax."
SWAPS
The 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 Growth Fund from interest rate fluctuations and to
hedge against fluctuations in the floating rate market in which the 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 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."
The Growth Fund may enter into these transactions to manage its
exposure to changing interest rates and other market factors. Some transactions
may reduce the 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 Growth Fund would be less favorable than it would have been
if this investment technique were not used. The Growth Fund will invest up to 5%
of its net assets in swaps.
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PREFERRED STOCK
The Growth Fund may invest in preferred stock. Preferred stock has
priority over common stock as to income and generally as to assets of an issuer;
however, income is usually limited to a definitive percentage regardless of the
issuer's earnings. Preferred stock usually has limited voting rights. The Growth
Fund will invest up to 5% of its net assets in preferred stock.
CONVERTIBLE SECURITIES
The 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 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 are typically 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.
Warrants. The Growth Fund and S&P 500 Fund may invest in warrants,
which are options to purchase equity securities at specific prices for a
specific period of time. The prices do not necessarily move parallel to the
prices of the underlying securities. Warrants have no voting rights, receive no
dividends and have no rights with respect to the assets of the issuer. If a
warrant is not exercised within the specified time period, it will become
worthless and the Fund will lose the purchase price and the right to purchase
the underlying security.
REAL ESTATE-RELATED INVESTMENTS
The Growth Fund may invest no more than 5% of its net 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 Growth Fund may invest no more than 5% of its net assets in
precious metal-related investments. The 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
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are derived from the precious metal industry. The 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."
The Growth Fund and the S&P 500 Fund also may invest in futures on
precious metals, such as gold futures, and options thereon. Such investments are
subject to the investment limitations on investments in futures and options for
the Growth Fund and the S&P 500 Fund as set forth in "Futures Contracts and
Options on Futures Contracts."
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 have been subject to extreme
fluctuations, reflecting wider economic or political instability or other
reasons.
U.S. GOVERNMENT SECURITIES
The Growth Fund and S&P 500 Fund may purchase U.S. Government
securities. Direct obligations of the U.S. Government are 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. The Growth Fund and S&P 500 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
Government "mortgage-backed" (or government guaranteed
mortgage-related) securities are among the U.S. Government securities in which
the Growth Fund and S&P 500 Fund may invest. Mortgages backing the securities
purchased by the Growth Fund and S&P 500 Fund include, among others,
conventional 30-year fixed rate mortgages, graduated payment mortgages, 15-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 than 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 be fully amortized at the time the
obligation is repaid. The opposite is true for pass-throughs purchased at a
discount. The 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 guaranteed
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by the government 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 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 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 10 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 the FHA insures.
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 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., S&P or Moody's) 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,
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<PAGE> 45
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."
"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 a 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 typically accomplished by creating one or more classes with a
right to payments on the Asset-Backed Security subordinate to that of the
remaining class or classes. Second, multiple classes may permit the issuance of
securities with payment terms, interest rates or other characteristics that
differ 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 that entitle 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 that 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 timely. Protection
against ultimate default ensures payment on at least a portion of the assets in
the pool. Such protection may be provided through
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<PAGE> 46
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. Examples of Asset-Backed Securities with credit support that
arise 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, so that
defaults on the underlying assets are borne first by the holders of the
subordinated class) and Asset-Backed Securities that have "reserve funds" (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" (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 generally based 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 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 of them 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 may usually 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 certain state and
federal consumer credit laws, many of which give card 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 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 the drawer to pay the full amount of the instrument upon maturity. Each
Fund will invest only in certificates of deposit and bankers' acceptances of
banks that have capital, surplus and undivided profits in excess of $100
million.
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COMMERCIAL PAPER
The 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 Growth Fund and S&P 500 Fund will invest only 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, or "F2" or higher by 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 Growth Fund outside the United
States and that are publicly traded in the United States, on a foreign
securities exchange or in a foreign securities market are not considered by the
Growth Fund to be illiquid assets provided that: (i) the Growth Fund acquires
and holds the securities with the intention of reselling the securities in the
foreign trading market, (ii) the Growth Fund reasonably believes it can dispose
of the securities readily in the foreign trading market or for cash in the
United States, or (iii) foreign market and current market quotations are
available readily. 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 U.S. 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 Growth Fund. Investments in
foreign securities may also subject the Growth Fund to losses due to
nationalization, expropriation or foreign accounting practices and treatments
that differ from those in the United States. Moreover, investors should
recognize that foreign securities are often traded with less frequency and
volume, and therefore may have greater price volatility, than many U.S.
securities. Notwithstanding that the Growth Fund generally intends to acquire
the securities of foreign issuers where there are public trading markets, the
Growth Fund's investments in the securities of foreign issuers may tend to
increase the risks with respect to the liquidity of the Growth Fund's portfolio
and its ability to meet a large number of shareholder redemption requests should
there be economic or political turmoil in a country in which the Growth Fund has
a substantial portion of its 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 Portfolio Securities. The Growth Fund and S&P 500 Fund may
loan securities to qualified broker-dealers or other institutional investors
provided that: (i) the loan is secured continuously by collateral consisting of
U.S. Government securities or cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (ii) the Growth Fund or S&P 500 Fund may at any time
call the loan and obtain the return of the securities loaned; (iii) the Growth
Fund or S&P 500 Fund will receive any interest or dividends paid on the loaned
securities; and (iv) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Growth Fund or S&P 500
Fund.
The lending of securities is a common practice in the securities
industry. The Growth Fund and S&P 500 Fund will engage in security lending
arrangements with the primary objective of increasing the Growth Fund's and S&P
500 Fund's income by investing the cash collateral in short-term,
interest-bearing obligations, but will do so only to the extent the Growth Fund
and S&P 500 Fund will not lose the tax treatment available to regulated
investment companies. The Growth Fund and S&P 500 Fund will be
-20-
<PAGE> 48
entitled to all dividends or interest on any loaned securities. Loans of
securities involve a risk that the borrower may fail to return the securities or
provide additional collateral.
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 Growth Fund's and S&P 500 Fund's loan of money to the seller,
collateralized by the underlying security. The interest rate is effective for
the period of time in which the 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 into which either Fund enters will involve the Fund as the
buyer and banks or broker-dealers as the 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 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 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 Growth Fund and S&P 500 Fund to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Growth Fund and S&P 500 Fund might also incur disposition costs in
liquidating the collateral. The 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 their custodian bank. The 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 Growth Fund's and S&P 500 Fund's net
assets, together with investments in other securities deemed to be not readily
marketable, would be invested in excess of the Growth Fund's and S&P 500 Fund's
limits on investments in illiquid securities.
In the event of a bankruptcy or other default of a repurchase
agreement's seller, the Growth Fund and S&P 500 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. The Growth Fund and S&P 500 Fund reserve the right
to invest up to 10% of each of their 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 Growth Fund and S&P 500 Fund have valued the instrument. Subject to
this limitation, the Growth Fund and S&P 500 Fund may invest in restricted
securities when such investment is consistent with the Growth Fund's and S&P 500
Fund's investment objectives, and such securities may be considered to be liquid
to the extent the Growth Fund's and S&P 500 Fund's Investment Manager determines
that there is a liquid institutional or other market for such securities. In
determining whether a restricted security is properly considered to be a liquid
security, the Growth Fund's and S&P 500 Fund's 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 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 Growth Fund and S&P 500 Fund invest in
restricted securities that are deemed liquid, the general level of illiquidity
in the Growth Fund's and S&P 500 Fund's portfolios may be increased if qualified
institutional buyers become uninterested in purchasing
-21-
<PAGE> 49
these securities contracts. The Growth Fund and S&P 500 Fund will limit their
investments in liquid restricted securities to 5% of their net assets.
When-Issued and Delayed Delivery Securities. The Growth Fund and S&P
500 Fund may hold 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 an yield. Generally, a Fund will not pay for
securities 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.
INVESTMENT IN UNDERLYING SCHWAB FUNDS
The Growth Fund may invest in underlying SchwabFunds(R). The investment
objectives and investment policies, limitations, and techniques and associated
risks of certain SchwabFunds are described in the Growth Fund's Prospectus, or
in this SAI. The investment policies, limitations and techniques and associated
risks of each SchwabFund is fully described in its prospectus and SAI. These are
available by calling Schwab toll-free at 1-800-435-4000, 24 hours a day, or by
writing to 101 Montgomery Street, San Francisco, California 94104 or
electronically at Schwab's Website at http://www.schwab.com/schwabfunds. TDD
users please contact Schwab at 1-800-345-2550.
In addition to utilizing the investment securities, techniques and
policies and exposing themselves to similar limitations and risks as described
in this SAI, underlying SchwabFunds also may invest in restricted securities and
index options.
The Growth Fund reserves the right to invest all of its assets
allocated to a particular class in one or more SchwabFunds subject to any
limitations imposed by the SEC or the Internal Revenue Service. Some of the
SchwabFunds in which the Growth Fund may invest are noted below.
The Schwab International Index Fund attempts to track the price and
dividend performance (total return) of the Schwab International Index(R), an
index created by Schwab to represent the performance of common stocks and other
equity securities, including preferred stocks, rights and warrants issued by
large, publicly traded companies from countries around the world with major
developed securities markets, excluding the United States. To the extent that
the Growth Fund invests in this SchwabFund, which normally invests 80% of its
assets in stocks that are included in the Schwab International Index, the Growth
Fund will be exposed to international stock risk, which is described above. The
International Index Fund may also engage in foreign currency hedging, which
involves certain costs that may result in losses to that SchwabFund, and
although tending to minimize risk of certain losses also tends to limit certain
potential gains.
The Schwab Small-Cap Index Fund(R) attempts to track the price and
dividend performance (total return) of the Schwab Small-Cap Index(R), an index
created by Schwab to represent the performance of common stocks of the second
1,000 largest U.S. corporations (excluding investment companies). To the extent
the Growth Fund invests in the Small-Cap Index Fund, which normally invests 80%
of its assets in stocks that comprise the Schwab Small-Cap Index, the Growth
Fund will be exposed to risks of small-company stocks.
The Schwab Total Bond Market Index Fund seeks current income by
tracking the performance of the Lehman Brothers Aggregate Bond Index, a
broad-based index covering bonds with maturities of one year or more.
Investments in this SchwabFund expose the Fund to bond market risks that are
described in this SAI and in the Prospectus.
-22-
<PAGE> 50
Each of these Schwab Index Funds engages in index or passive investing,
and also seeks to minimize capital gain distributions by offsetting capital
gains and capital losses and other techniques. These investment policies are
intended to minimize the adverse federal income tax consequences of portfolio
trading, but may increase the differences between the Schwab Index Funds'
performance and the relevant index's performance. Each Schwab Index Fund also
may purchase other investment securities or engage in securities techniques
(normally up to 20% of its total assets) that are similar to the Growth Fund's
and will entail similar risks.
INVESTMENT RESTRICTIONS & POLICIES FOR THE GROWTH FUND AND THE S&P 500 FUND
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 GROWTH FUND AND 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 Growth Fund and S&P 500 Fund have also adopted non-fundamental
investment policies, set forth below, which are generally more restrictive than
the fundamental investment policies of these Funds. The 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 Growth Fund's or the S&P 500 Fund's
non-fundamental investment policies will be communicated to the Fund's
shareholders prior to the effectiveness of the changes.
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 (other than obligations of, or guaranteed by,
the U.S. Government, its agencies or its instrumentalities, and the securities
of other investment companies) 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 held by the fund. "Concentration" is
generally interpreted under the 1940 Act as the investment of 25% or more of
total 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 Growth Fund and S&P 500
Fund may not:
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<PAGE> 51
(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 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.
-24-
<PAGE> 52
(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.
Except for fundamental restrictions (2) and non-fundamental restriction
(3), 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.
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 Charles Schwab Investment Management,
Inc., 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, Co-Chief Executive
July 29, 1937 Officer and July 29, 1937
Director, The Charles Schwab
Corporation; Chairman, Chief
Executive Officer and Director,
Charles Schwab Holdings, Inc.;
Chairman and Director, Charles
Schwab & Co., Inc, Charles Schwab
Investment Management, Inc., The
Charles Schwab Trust Company, and
Schwab Retirement Plan Services,
Inc.; 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).
TOM D. SEIP* President and Trustee Executive Vice President, The
February 15, 1950 Charles Schwab February 15, 1950
Corporation; Enterprise President
- International and Mutual Funds,
Charles Schwab & Co., Inc.; Chief
Executive Officer, Charles Schwab
Investment Management, Inc.
</TABLE>
- ------------------------------
*This Trustee is an "interested person" of the Trust.
-25-
<PAGE> 53
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
DONALD F. DORWARD Trustee Executive Vice President and
September 23, 1931 Managing Director, September 23,
1931 Grey Advertising. From 1990
to 1996, Mr. Dorward was President
and Chief Executive Officer,
Dorward & Associates. Dorward &
Associates is an advertising and
marketing/consulting firm.
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer
May 15, 1931 and Director, May 15, 1931 Semloh
Financial, Inc. Semloh Financial
is an international financial
services and investment advisory
firm.
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens &
June 28, 1938 Co. June 28, 1938 (investment
banking). Prior to 1995, Mr.
Stephens was Chairman and Chief
Executive Officer of North
American Trust (a real estate
investment trust). Prior to 1992,
Mr. Stephens was Chairman and
Chief Executive Officer of the
Bank of San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer
August 18, 1943 and Director, August 18, 1943
Wilsey Bennett, Inc. (truck and
air transportation, real estate
investment and management, and
investments).
TAI-CHIN TUNG Treasurer and Principal Vice President - Finance, Charles
March 7, 1951 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>
-26-
<PAGE> 54
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
WILLIAM J. KLIPP* Executive Vice Executive Vice President,
December 9, 1955 President, Chief SchwabFunds(R), Charles Schwab &
Operating Officer and Co., Inc.; President and Chief
Trustee Operating Officer, Charles 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
April 5, 1955 and Chief Investment Investment Officer, Charles Schwab
Officer Investment Management, Inc.
FRANCES COLE Secretary Senior Vice President, Chief
September 9, 1955 Counsel, Chief Compliance Officer
and Assistant Corporate Secretary,
Charles Schwab Investment
Management, Inc.
DAVID H. LUI Assistant Secretary Vice President and Senior Counsel,
October 14, 1960 Charles Schwab Investment
Management, Inc. From 1991 to
1992, he was Assistant Secretary
for the Franklin Group of Mutual
Funds and Assistant Corporate
Counsel for Franklin Resources,
Inc.
KAREN L. SEAMAN Assistant Secretary Corporate Counsel, Charles Schwab
February 27, 1968 Investment Management, Inc. From
October 1994 to July 1996, she was
an Attorney for Franklin
Resources, Inc. Prior to 1994, Ms.
Seaman was an Attorney for The
Benham Group.
MATTHEW O'TOOLE Assistant Secretary Corporate Counsel, Charles Schwab
September 26, 1964 Investment Management, Inc. From
November 1995 to April 1997, Mr.
O'Toole was Assistant General
Counsel for Chancellor LGT Asset
Management, Inc. Prior there to,
Mr. O'Toole was Senior Counsel at
the U.S. Securities and Exchange
Commission in Washington, D.C.
</TABLE>
- ------------------------------
*This Trustee is an "interested person" of the Trust.
-27-
<PAGE> 55
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
AMY L. MAUK Assistant Secretary Corporate Counsel, Charles Schwab
January 5, 1969 Investment Management, Inc. From
April 1995 to March 1997, she was
a Legal Product Manager for
Fidelity Investments.
</TABLE>
Each of the above-referenced Officers and/or Trustees also serves in
the same capacity as described for the Trust for The Charles Schwab Family of
Funds, Schwab Capital Trust and Schwab Investments 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.")
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Name of Person, Position Aggregate Pension or Estimated Annual Total Compensation
Compensation from Retirement Benefits Benefits Upon from the Fund
the Trust Accrued as Part of Retirement from the Complex 2
Fund Expenses from Fund Complex 2
the Fund Complex 2
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Timothy F. McCarthy, 3 0 N/A N/A 0
President and Trustee
-28-
</TABLE>
<PAGE> 56
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Name of Person, Position Aggregate Pension or Estimated Annual Total Compensation
Compensation from Retirement Benefits Benefits Upon from the Fund
the Trust Accrued as Part of Retirement from the Complex 2
Fund Expenses from Fund Complex 2
the Fund Complex 2
<S> <C> <C> <C> <C>
Tom D. Seip, 4 President and 0 N/A 0 0
Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice President,
Chief Operating Officer and
Trustee
Donald F. Dorward, $3,600 N/A N/A $93,450
Trustee
Robert G. Holmes, $3,600 N/A N/A $93,450
Trustee
Donald R. Stephens, $3,600 N/A N/A $93,450
Trustee
Michael W. Wilsey, $3,600 N/A N/A $93,450
Trustee
</TABLE>
1 Figures are for the Trust's fiscal year ended December 31, 1997.
2 "Fund Complex" comprises all 31 funds of the Trust, Schwab Investments, Schwab
Capital Trust and Schwab Annuity Portfolios, as of December 31, 1997.
3 After November 24, 1997, Mr. McCarthy no longer served as President and
Trustee of the Trust.
4 Mr. Seip began serving as President and Trustee of the Trust on November 24,
1997.
INVESTMENT MANAGER
The Investment Manager, a wholly-owned subsidiary of The Charles Schwab
Corporation, serves as the 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 34 mutual funds with
over $62 billion in assets as of March 31, 1998. The Investment Manager is an
affiliate of Schwab and is 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 a majority (as
defined in the 1940 Act) of the outstanding voting securities of a 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 a Fund, and will terminate automatically upon
assignment.
-29-
<PAGE> 57
Money Market Fund. For its advisory and administrative services to the
Money Market Fund, the Investment Manager is entitled to receive a graduated
annual fee, payable monthly, of 0.46% of the Fund's average daily net assets not
in excess of $1 billion; 0.45% of such net assets over $1 billion but not in
excess of $3 billion; 0.40% of such net assets over $3 billion but not in excess
of $10 billion, 0.37% of such net assets over $10 billion but not in excess of
$20 billion; and 0.34% of such net asserts over $20 billion.
For the fiscal years ended December 31, 1995, 1996 and 1997, the Fund paid
investment advisory and administration fees of $608 (fees were reduced by
$52,949), $22,322 (fees were reduced by $81,006) and $97,831 (fees were reduced
by $80,295), respectively.
Growth Fund. For its advisory and administrative services to the 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; 0.69% of the next $1 billion; and 0.64% of such net assets over
$2 billion.
For the fiscal period from November 1, 1996 (commencement of
operations) through December 31, 1996 and for the fiscal year ended December 31,
1997, the Fund paid investment advisory and administration fees of $0 (fees were
reduced by $5,433) and $211 (fees were reduced by $55,088), respectively.
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; 0.33% of the next $1 billion; and 0.31% of such net assets over
$2 billion.
For the fiscal period from November 1, 1996 (commencement of
operations) through December 31, 1996 and for the fiscal year ended December 31,
1997, the Fund paid investment advisory and administration fees of $0 (fees were
reduced by $2,890) and $122 (fees were reduced by $69,358), respectively.
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
As of February 28, 1997, Symphony no longer serves as sub-adviser to
any of the Funds. Instead, the Investment Manager became responsible for
providing all investment advisory services to the Funds.
The Investment Manager paid 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 Growth Fund and the following funds of
Schwab Capital Trust; Schwab MarketTrack Growth Portfolio, Schwab
MarketTrack-Balanced Portfolio and Schwab MarketTrack-Conservative Portfolio;
0.06% of the next $250 million; 0.04% of the next $850 million; and 0.02% of
such assets over $850 million.
For the fiscal period ended December 31, 1997, the Sub-Adviser was paid
investment sub-advisory fees of $27,257 from the Investment Manager.
-30-
<PAGE> 58
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 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
Morgan Stanley Trust Company at 1 Pierrepont Plaza, Brooklyn, New York
11201, serves as Custodian for the Growth Fund.
SEI Fund Resources, One Freedom Valley Drive, Oaks Pennsylvania 19456,
serves as Fund Accountant for the 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, auditing, tax and
advisory services when the Trust engages it to do so. Shareholders will be sent
audited annual and unaudited semi-annual financial statements. The address of
Price Waterhouse is 555 California Street, San Francisco, California 94104.
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.
In effecting securities transactions for the Funds, the Investment
Manager 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, including execution capability and financial responsibility. In
assessing these criteria, the Investment Manager will, among other things,
monitor the performance of brokers effecting transactions for the Funds to
determine the effect, if any, the Funds' transactions through those brokers have
on the market prices of the stocks involved. This may be of particular
importance for the Funds' investments in relatively smaller companies the stocks
of which are not as actively traded as those of their larger
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counterparts. The Funds will seek to buy and sell securities in a manner that
causes the least possible fluctuation in the prices of those stocks in view of
the size of the transactions.
In an attempt to obtain best execution for the Funds, the Investment
Manager may also place orders directly with market makers or with third market
brokers, Instinet or brokers on an agency basis. Placing orders with third
market brokers or through Instinet may enable the Funds to trade directly with
other institutional holders on a net basis. At times, this may allow the Funds
to trade larger blocks than would be possible if they were to trade through a
single market maker.
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 may also use such resources when it provides
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.
In determining when and to what extent to use Schwab or any other
affiliated broker-dealer as its broker for executing orders for the Funds on
securities exchanges, the Investment Manager will consider (if relevant) whether
the compensation to be paid Schwab or any other affiliated broker-dealer will be
(i) fair and reasonable, (ii) at least as favorable to the Funds as commissions
that would be charged by other qualified brokers having comparable execution
capabilities and (iii) at least as favorable as commissions contemporaneously
charged by Schwab or any other affiliated broker-dealer on comparable
transactions for its most favored unaffiliated customers. The Funds do not
consider it practicable or in the best interests of their shareholders to
solicit competitive bids for commission rates on each transaction. However, the
Board of Trustees, including a majority of the Trustees who are not "interested
persons" of Schwab or any other affiliated broker-dealer within the meaning of
the 1940 Act, (i) has prescribed procedures designed to provide that the Funds
do not pay commissions that do not meet the standards described above, (ii)
reviews those procedures annually to determine whether they remain adequate and
(iii) considers quarterly whether or not the commissions charged by Schwab or
any other affiliated broker-dealer have met the standards.
PORTFOLIO 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
each Fund owned 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 Growth Fund and S&P 500
Fund expect that their portfolio turnover rate will not exceed 100% in any given
year. A high portfolio turnover rate may increase a Fund's transaction costs.
The Growth Fund's and S&P 500 Fund's portfolio turnover rates for the period
November 1, 1996 (commencement of operations) to December 31, 1996 were 7% and
0% respectively, and for the year ended December 31, 1997 were 81% and 4%,
respectively.
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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 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 will normally 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 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 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 each Fund's policy to qualify for taxation as a "regulated
investment company" by meeting the requirements of Subchapter M of the Code. By
following this policy, each 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, 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
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(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; and
(2) 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 a Fund may engage in certain hedging transactions and may limit the range
of a Fund's 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 that the Fund meets certain minimum distribution
requirements. To comply with these requirements, a 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 its (i) tax-exempt interest income over
(ii) certain deductions attributable to that income (with certain exceptions),
for its taxable year. Each Fund intends 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.
Although the 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 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 the Growth Fund does invest in foreign securities that are
determined to be PFIC securities and is required to pay a tax on these
investments, a credit for this tax would not be allowed to be passed through to
the Growth Fund's shareholders. Therefore, the payment of this tax would reduce
the Growth Fund's economic return from its PFIC shares.
The foregoing discussion relates only to U.S. federal income tax law.
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 when 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
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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 this 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 the reduction or suspension had not taken place.
Such action could result in investors not receiving a 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 Growth Fund's and S&P 500 Fund's net asset value per share is
determined each business day at the close of trading on the New York Stock
Exchange, generally as of 4:00 p.m. (Eastern time). Currently, the New York
Stock Exchange is closed on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. The Growth Fund and S&P 500 Fund value their portfolio
securities daily based on their fair value. Each security the Growth Fund and
S&P 500 Fund hold 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.
HOW THE FUNDS REFLECT PERFORMANCE
Because shares of each Fund are purchased through a life insurance
contract, each Fund's total return and yield data must be accompanied by the
total return or yield data for the variable annuity separate account, or other
data that explains the impact of the life insurance charges on the performance
of the Fund.
STANDARDIZED TOTAL RETURN
Each Fund may advertise its average annual 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, a Fund assumes the reinvestment of all
distributions at net asset value on applicable reinvestment dates.
NONSTANDARDIZED TOTAL RETURN
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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.
Each Fund also may report the percentage of that Fund's standardized or
non-standardized total return which would be paid to taxes annually (at the
applicable federal personal income and capital gains tax rates) before
redemption of Fund shares. This proportion may be compared to that of other
mutual funds with similar investment objectives as reported by independent
sources.
A Fund may also advertise its cumulative total return since inception.
This number is calculated using the same formula that is used for average annual
total return except that, rather than calculating the total return based on a
one-year period, cumulative total return is calculated from inception to the
date specified.
YIELD
The historical performance of the Funds may be shown in the form of yield or
effective yield. These measures of performance are described below.
Yield refers to the net investment income generated by a hypothetical
investment in the Money Market Fund over a specific 7-day period and the Growth
Fund and S&P 500 Fund over a specific 30-day period. This net investment income
is then annualized, which means that the net investment income generated during
the 7-day period and 30-day period is assumed to be generated in each 7-day
period and 30-day period, respectively, over an annual period, and is shown as a
percentage of the investment. For the 7-day period ended December 31, 1997, the
Money Market Fund's yield was 5.13%.
EFFECTIVE YIELD
A Funds' effective yield is calculated similarly, but the net
investment income earned by the investment is assumed to be compounded weekly
when annualized for the Money Market Fund and monthly when annualized for the
Growth Fund and S&P 500 Fund. The effective yield will be slightly higher than
the yield due to this compounding effect. For the 7-day period ended December
31, 1997, 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 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 consumer price index and other
investments for which reliable data is available.
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The Growth Fund also may compare its historical performance figures to
the performance of indices similar to its asset categories and sub-categories,
and to the performance of "blended indices" similar to the Growth Fund's
portfolio strategies, such as those indices named in the Growth Fund's
Prospectus under "Market Performance."
From Commencement of Operations to December 31, 1997
<TABLE>
<CAPTION>
Commencement Average Annual Cumulative One Year Total Return as
Date Total Return Total Return of December 31, 1997
---- ------------ ------------ --------------------
<S> <C> <C> <C> <C>
Money Market Fund May 3, 1994 4.88% 19.12% 5.12%
Growth Fund November 1, 1996 25.02% 29.77% 24.54%
S&P 500 Fund November 1, 1996 32.99% 39.48% 32.46%
</TABLE>
THE BENEFITS OF INTERNATIONAL INVESTING
INCREASED DIVERSIFICATION CAN LOWER RISK
To some extent, all U.S.-based investments -- stocks, bonds, mutual
funds and certificates of deposit -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 20 years ended December 31, 1997, the 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
international markets produced also have kept investors well ahead of inflation.
This historical performance means that investors diversified overseas earned a
higher level of return.
BROADER GROWTH OPPORTUNITIES
Investors who limit their portfolios to U.S. securities are missing
these investment opportunities. According to Morgan Stanley, as of December 31,
1979, the United States made up more than half of the world's stock market, a
value of over $11 trillion. As of December 31, 1996, it represented forty-five
percent.
INDEXING AND ASSET ALLOCATION
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 and
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S&P 500 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.
An index's performance data assumes the reinvestment of dividends but
does not reflect deductions for administrative and management expenses. The S&P
500 Fund will be subject to these costs and expenses, while an index does not
have these expenses. In addition, various factors, such as holding a cash
balance, may cause the S&P 500 Fund's performance to be higher or lower than
that of an 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
U.S. stock market.
THE S&P 500 INDEX
The S&P 500 is representative of the performance of the U.S. stock
market. The S&P 500 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 S&P 500
proportionate to its market value. The S&P 500 does not contain the 500 largest
stocks, as measured by market capitalization. Although many of the stocks in the
S&P 500 are among the largest, there are also some relatively small companies in
the S&P 500. Those companies, however, are generally established companies
within their industry group. The S&P 500 identifies important industry groups
within the U.S. economy and then allocates a representative sample of stocks
with each group to the S&P 500. There are four major industry sectors within the
S&P 500: Industrials, Utilities, Financial and Transportation.
ASSET ALLOCATION STRATEGIES USING THE GROWTH FUND
Shareholders may choose to invest in the Growth Fund, which offers the
benefits of asset allocation in a single fund. The Growth Fund invests in a
combination of equities, bonds and money market securities, and it also invests
in common stocks in the following stock sub-categories: large company; small
company and international. The Growth Fund may also invest directly in the
Schwab Small-Cap Index Fund, the Schwab International Index Fund and the Schwab
Total Bond Market Index Fund. Under normal market conditions, the Investment
Manager currently intends to utilize an indexing approach to investing within
each stock sub-category. The Investment Manager generally intends to track the
performance of the S&P 500 for the large company stock sub-category, the Schwab
Small-Cap Index(R) for the small company stock sub-category and the Schwab
International Index(R) for the international stock sub-category by investing in
all or a representative sample of the common stocks comprising the relevant
index, or in a Fund that tracks that index. The stock sub-categories of the
Growth Fund will not track the relevant stock indices perfectly because of
factors such as Fund expenses. Over the long term, the performance of the Fund's
stock sub-categories is expected to correlate with that of the relevant stock
index. The Investment Manager retains the right to adopt a different portfolio
management style without prior notice to shareholders. The Fund's indexing
approach for each stock sub-category provides shareholders with the potential
benefits to be realized from both an asset allocation strategy and an indexing
approach with one investment.
THE SCHWAB INTERNATIONAL INDEX(R)
The Schwab International Index is a broad-based stock market index
which contains the common stocks of the 350 largest operating companies (i.e.,
non-investment companies) incorporated outside the United States. To reduce
undue risk, the Index represents equities only from countries that are
considered
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to have developed markets and economies. By tracking the largest companies in
developed markets, the Index represents the performance of the "blue chips" of
international markets. The Index is also designed to provide a broad
representation of the international market, by limiting each country to no more
than 35% of the total market capitalization of the Index. As such, the Index
provides a reliable measure of market performance. The Index was first made
available to the public on July 29, 1993.
THE SCHWAB SMALL-CAP INDEX(R)
To be included in the Schwab Small-Cap Index, a company must satisfy
all of the following criteria: (1) it must be an "operating company" (i.e., not
an investment company) incorporated in the United States or its territories or
possessions; (2) a liquid market for its common shares must exist on the New
York Stock Exchange, American Stock Exchange or the NASDAQ/NMS; and (3) its
market value must place it among the second 1,000 such companies as measured by
market capitalization (i.e., from the company with a rank of 1,001 through the
company with a rank of 2,000). Shareholders generally avoid exposure to the
smallest companies, the shares of which are often thinly traded and very
volatile, because these stocks are not included in the Index.
A particular stock's weighting in the Schwab Small-Cap Index is based
on its relative total market value (i.e., its market price per share multiplied
by the number of shares outstanding), divided by the total market capitalization
of the Schwab Small-Cap Index. The returns produced by the U. S. stock market
during the 25 years ending December 31, 1995 have been exceeded by very few
types of securities investments. Because the unmanaged performance of the U.S.
stock market 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. Indexed institutional holdings have
grown from less than $9 billion in 1980 to over $280 billion, a figure equal to
approximately one-quarter of all institutional assets. (Source: Callan
Associates Survey, reported in Fall 1990 edition of The Journal of Portfolio
Management.)
Historically, returns in a long-term investment in a group of common
stocks representative of the stock market as a whole, as well as a group of
common stocks representative of small-cap stocks, have significantly exceeded
the returns of U.S. Treasury Bills, certificates of deposit, corporate bonds and
inflation.
OTHER INFORMATION
Each Fund has adopted a number of policies that should cause its
portfolio turnover rate to be below the portfolio turnover rate of many other
mutual funds. A lower portfolio turnover rate acts to minimize associated
transaction costs.
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 is generally 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
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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 a 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 that 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.
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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 Prospectuses 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 April 15, 1998,Great West Life and Annuity Insurance Company,
8515 E. Orchard Road, Englewood Colorado 80111 and Transamerica Occidental Life
Insurance Company, 1150 South Olive Road, Los Angeles California 90015 legally
or beneficially owned 89.39% and 4.96% respectively, of the Money Market Fund's
shares of beneficial interest.
As of April 15, 1998, Great West Life and Annuity Insurance Company,
8515 E. Orchard Road, Englewood Colorado 80111 legally or beneficially owned
97.07% of the Growth Fund's shares of beneficial interest.
As of April 15, 1998 Great West Life and Annuity Insurance Company,
8515 E. Orchard Road, Englewood Colorado 80111 legally or beneficially owned
95.52% of the S&P 500 Fund's shares of beneficial interest.
In addition, as of April 15, 1998, 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 have made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of its net assets at the beginning
of such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of 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. If redemption
proceeds are paid in investment securities, such securities will be valued as
set forth in the Prospectus of the Fund affected under "Share Price Calculation"
and a redeeming shareholder would normally incur brokerage expenses if he or she
were to convert the securities to cash.
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
Prospectuses. Certain portions of the Registration Statement have been omitted
from the Prospectuses and this Statement of Additional Information pursuant to
the rules and regulations of the SEC. The Registration Statement, including the
exhibits filed therewith, may be examined at the SEC's office in Washington,
D.C.
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<PAGE> 69
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.
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 will normally be
evidenced by many of the characteristics of issuers whose commercial paper is
rated Prime-1 but to a lesser degree.
STANDARD & POOR'S CORPORATION
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 United States 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.
Fitch Investors Service, Inc.'s ("Fitch") F-1+ is the highest category,
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.
SHORT-TERM NOTES AND VARIABLE RATED DEMAND OBLIGATIONS
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MOODY'S INVESTORS SERVICE
Short-term notes/variable rate demand obligations bearing the
designations MIG-1/VMIG-1 are considered to be of the best quality, enjoying
strong protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations rated
MIG-2/VMIG-2 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.
STANDARD & POOR'S CORPORATION
An S&P SP-1 rating indicates that the subject securities' issuer has a
very strong capacity to pay principal and interest. Issues determined to possess
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 INVESTORS SERVICE
Moody's rates the bonds it judges to be of the best quality Aaa. These
bonds carry the smallest degree of investment risk and are generally 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 are generally 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.
STANDARD & POOR'S CORPORATION
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 & PHELPS CREDIT RATING CO.
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 United States 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
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<PAGE> 71
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.
FINANCIAL STATEMENTS
The Funds' financial statements and financial highlights for the fiscal
year ended December 31, 1997, are included in the Funds' Annual Reports, which
are separate reports supplied with this Statement of Additional Information. The
Funds' financial statements and financial highlights are incorporated herein by
reference.
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<PAGE> 72
PART C
OTHER INFORMATION
SCHWAB ANNUITY PORTFOLIOS
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
Financial Statements and financial highlights included in the Annual
Report for Schwab Money Market Portfolio, Schwab S&P 500 Portfolio and
Schwab Asset Director - High Growth Portfolio for the fiscal year ended
December 31, 1997, are incorporated by reference into the Statement of
Additional Information, were filed on February 27, 1998, pursuant to
Rule 30d-1 under the Investment Company Act of 1940, and are
incorporated herein by reference.
(b) Exhibits:
(1) Agreement and Declaration of Trust is incorporated by reference to
Exhibit 1 to Post Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A, electronically filed on
February 27, 1998.
(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, electronically 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 Post Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A, electronically
filed on February 27, 1998.
(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,
electronically 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(a) to Post Effective Amendment No. 6,
electronically filed on April 30, 1997.
(b) Amended Schedule A to 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(b) to Post Effective
Amendment No. 5 to Registrant's Registration Statement on form
N-1A, electronically filed on September 9, 1996.
(c) Amended Schedule B to Investment Advisory and Administration
Agreement between Registrant and Charles Schwab Investment
Management, Inc. (the "Investment Manager") is incorporated by
reference to Exhibit 5(c) to Post Effective Amendment No. 7 to
Registrants Registration Statement on form N-1A, electronically
filed on February 27, 1998.
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(d) Schedule A and B, to the Amended and Restated Investment
Sub-Advisory and Administration Agreement between the Investment
Manager and Symphony is incorporated by reference to Exhibit 5(d)
to Post-Effective Amendment No. 5 to Registrant's Registration
Statement on form N-1A, electronically filed on September 9, 1996.
(6) (a) Distribution Agreement between Registrant and Charles Schwab &
Co., Inc. ("Schwab") dated March 29, 1994 is incorporated by
reference to Exhibit 6(a) to Post Effective Amendment No. 7 to
Registrant's Registration Statement on form N-1A, electronically
filed on February 27, 1998.
(b) Amended Schedule A to Distribution Agreement between Registrant
and Schwab dated March 29, 1994 is incorporated by reference to
Exhibit 6(b) to Post-Effective Amendment No. 5 to Registrant's
Registration Statement on form N-1A, electronically filed on
September 9, 1996.
(7) Inapplicable.
(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. 7 to
Registrant's Registration Statement on form N-1A, electronically
filed on February 27, 1998.
(b) Amendment No. 1 to the Custodian Services Agreement between
Registrant and PNC Bank, National Association, dated March 29,
1994 incorporated by reference to Exhibit 8(b) to Post-Effective
Amendment No. 3 to Registrant's Registration Statement on Form
N-1A, electronically filed on April 29, 1996.
(c) Schedule A to the Custodian Services Agreement between Registrant
and PNC Bank, National Association on behalf of Schwab Money
Market Portfolio and Schwab S&P 500 Portfolio, is incorporated by
reference to Exhibit 8(c) to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on form N-1A, electronically
filed on September 9, 1996.
(d) Custodian Agreement dated April 4, 1997, and Amendment and
Schedule 1 to the Custodian Agreement, dated April 4, 1997,
between Registrant, on behalf of Asset Director - High Growth
Portfolio, and Morgan Stanley Trust Company is electronically
filed herein as Exhibit 8(d).
(e) Appendix 1, 2 and 3 to the Custodian Agreement on behalf of Schwab
MarketTrack Growth Portfolio II, formerly Schwab Asset Director -
High Growth Portfolio, is incorporated by reference to Exhibit
8(d) to Post Effective Amendment No. 6 to registrant's
registration statement on Form N-1A, electronically filed on April
30, 1997.
(f) Transfer Agency Agreement between Registrant and Schwab dated
March 29, 1994 is incorporated by reference to Exhibit 8(f) to
Post Effective Amendment No. 7 to Registrant's Registration
Statement on form N-1A, electronically filed on February 27, 1998.
(g) Schedule B and D to the Transfer Agency Agreement between
Registrant and Schwab dated March 29, 1994 is incorporated by
reference to Exhibit 8(g) to Post Effective Amendment No. 7 to
Registrant's Registration Statement on form N-1A, electronically
filed on February 27, 1998.
(h) Amended Schedules A and C to the Transfer Agency Agreement between
Registrant and Schwab dated March 29, 1994 are incorporated by
reference to Exhibit 8(f) to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on form N-1A, electronically
filed on April 30, 1997.
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<PAGE> 74
(i) Shareholder Service Agreement between Registrant and Schwab dated
March 29, 1994 is incorporated by reference to Exhibit 8(i) to
Post Effective Amendment No. 7 to Registrant's Registration
Statement on form N-1A, electronically filed on February 27, 1998.
(j) Amended Schedules A and C to the Shareholder Service Agreement
between Registrant and Schwab dated March 29, 1994 is incorporated
by reference to Exhibit 8(h) to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on form N-1A, electronically
filed on April 30, 1997.
(k) Schedule B to the Shareholder Service Agreement between Registrant
and Schwab dated March 29, 1994 is incorporated by reference to
Exhibit 8(k) to Post Effective Amendment No. 7 to Registrant's
Registration Statement on form N-1A, electronically filed on
February 27, 1998.
(l) Accounting Services Agreement and Schedule A, B and C between
Registrant and SEI Fund Resources, on behalf of Schwab Asset
Director - High Growth Portfolio, is incorporated electronically
filed herein as Exhibit 8(l).
(m) Accounting Services Agreement dated March 24, 1994 between
Registrant and PNC Bank, Inc., is incorporated by reference to
Exhibit 8(m) to Post Effective Amendment No. 7 to Registrant's
Registration Statement on form N-1A, electronically filed on
February 27, 1998.
(n) Schedule A to the Accounting Services Agreement, and Amendment 1
dated February 5, 1996 between Registrant and PNC Bank, Inc., to
be filed by subsequent Amendment.
(9) License Agreement between Registrant and Standard & Poor's
Corporation is incorporated by reference to Exhibit 9 to
Post-Effective Amendment No. 5 to Registrant's Registration
Statement on form N-1A, electronically filed on September 9, 1996.
(10) Opinion and Consent of Ropes & Gray as to legality of the
securities being registered is electronically filed herein as
Exhibit 10.
(11) Consent of Price Waterhouse LLP, Independent Accountants is
electronically filed herein as Exhibit 11
(12) Inapplicable.
(13) (a) Purchase Agreement between Registrant and Schwab relating to
Schwab Money Market Portfolio is incorporated by reference to
Exhibit 13(a) to Post Effective Amendment No. 7 to Registrant's
Registration Statement on form N-1A, electronically filed on
February 27, 1998.
(b) Purchase Agreement between Registrant and Schwab relating to
Schwab Asset Director(R)-High Growth Portfolio and Schwab S&P 500
Portfolio is incorporated herein by reference to Exhibit 13(b) to
Post-Effective Amendment No. 5 to Registrant's Registration
Statement on form N-1A, electronically filed on September 9, 1996.
(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.
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<PAGE> 75
(17) (a) Financial Data Schedule for Schwab Money Market Portfolio is
electronically filed herein as Exhibit 17(a).
(b) Financial Data Schedule for Schwab S&P 500 Portfolio is
electronically filed herein as Exhibit 17(b).
(c) Financial Data Schedule for Schwab Asset Director - High Growth
Portfolio is electronically filed herein as Exhibit 17(c).
(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 April 15, 1998, the number of record holders of Registrant was:
<TABLE>
<CAPTION>
Name of Fund/Class Number of Record Holders
- ------------------ ------------------------
<S> <C>
Asset Director - High Growth Portfolio 4
S&P 500 Portfolio 5
Money Market Portfolios 5
</TABLE>
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
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<PAGE> 76
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 Family of Funds, 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 administrator to
Registrant, the Schwab Family of Funds, Schwab Investments, Schwab
Capital Trust and any other investment companies that Schwab may
sponsor in the future.
(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, Co-Chief Executive
Officer and Director
Schwab Holdings, Inc. Chairman, Chief Executive
Officer and Director
Charles Schwab Investment Management, Inc. Chairman and Director
The Charles Schwab Trust Company Chairman and Director
Mayer & Schweitzer, Inc. Chairman and Director
Schwab Retirement Plan Services, Inc. Chairman and Director
Charles Schwab Limited Chairman, Chief Executive
Officer and Director
</TABLE>
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<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------- --------------- --------
<S> <C> <C>
Performance Technologies, Inc. Chairman and Director
TrustMark, Inc. Chairman and Director
Schwab (SIS) Holdings, Inc. I Chairman, Chief Executive
Officer and Director
Schwab International Holdings, Inc. Chairman, Chief Executive
Officer and Director
The Gap, Inc. Director
Transamerica Corporation Director
AirTouch Communications Director
Siebel Systems Director
David S. Pottruck Charles Schwab & Co., Inc. Chief Executive Officer,
President, Chief Operating
Officer and Director
The Charles Schwab Corporation President, Co-Chief Executive
Officer, Chief Operating
Officer and Director
Schwab Holdings, Inc. Director
Schwab Retirement Plan Services, Inc. Director
Charles Schwab Limited Director
Charles Schwab Investment Management, Inc. Director
Mayer & Schweitzer, Inc. Director
Performance Technologies, Inc. Director
Schwab (SIS) Holdings, Inc. I President, Chief Operating
Officer and Director
Schwab International Holdings, Inc. President, Chief Operating
Officer and Director
TrustMark, Inc. Director
Steven L. Scheid Charles Schwab & Co., Inc. Executive Vice President, Chief
Financial Officer and Director
The Charles Schwab Corporation Executive Vice President and
Chief Financial Officer
</TABLE>
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<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------- --------------- --------
<S> <C> <C>
Schwab Holdings, Inc. Executive Vice President, Chief
Financial Officer and Director
Charles Schwab Investment Management, Inc. Chief Financial Officer and
Director
The Charles Schwab Trust Company Chief Financial Officer and
Director
Charles Schwab Limited Finance Officer and Director
Schwab Retirement Plan Services, Inc. Director
Performance Technologies, Inc. Director
Mayer & Schweitzer, Inc. Director
Schwab (SIS) Holdings, Inc. I Chief Financial Officer and
Director
Schwab International Holdings, Inc. Chief Financial Officer and
Director
Tom D. Seip Charles Schwab & Co., Inc. Enterprise President
The Charles Schwab Corporation Executive Vice President
Charles Schwab Investment Management, Inc. Chief Executive Officer
Karen W. Chang Charles Schwab & Co., Inc. Enterprise President
John P. Coghlan Charles Schwab & Co., Inc. Enterprise President
The Charles Schwab Corporation Executive Vice President
The Charles Schwab Trust Company President, Chief Executive
Officer and Director
Schwab Retirement Plan Services, Inc. Director
Frances Cole, Charles Schwab Investment Management, Inc. Senior Vice President, Chief
Secretary Counsel, Chief Compliance Officer
and Assistant Corporate Secretary
Linnet F. Deily Charles Schwab & Co., Inc. Enterprise President
Christopher V. Dodds Charles Schwab & Co., Inc. Controller and Senior Vice
President
</TABLE>
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<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------- --------------- --------
<S> <C> <C>
The Charles Schwab Corporation Controller and Senior Vice
President
Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President, General
Corporate Secretary Counsel
Wayne W. Fieldsa Charles Schwab & Co., Inc. Executive Vice President
Lon Gorman Charles Schwab & Co., Inc. Enterprise President
James M. Hackley Charles Schwab & Co., Inc. Executive Vice President
Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary
Charles Schwab & Co., Inc. Assistant Corporate Secretary
Charles Schwab Investment Management, Inc. Corporate Secretary
The Charles Schwab Trust Company Assistant Corporate Secretary
Mayer & Schweitzer Secretary
Colleen M. Hummer Charles Schwab & Co., Inc. Senior Vice President
William J. Klipp, Charles Schwab & Co., Inc. Executive Vice President
Trustee, Executive Vice
President and Chief
Operating Officer
Charles Schwab Investment Management, Inc. President and Chief Operating
Officer
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President and
Chief Strategy Officer
Charles Schwab & Co., Inc. Executive Vice President and
Chief Strategy Officer
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
David H. Lui, Charles Schwab Investment Management, Inc. Vice President and Senior Counsel
Assistant Secretary
Susanne D. Lyons Charles Schwab & Co., Inc. Enterprise President
Amy L. Mauk Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
</TABLE>
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<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------- --------------- --------
<S> <C> <C>
Peter J. McIntosh Charles Schwab & Co., Inc. Executive Vice President
Matthew M. O'Toole, Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
Gideon Sasson Charles Schwab & Co., Inc. Enterprise President
Karen L. Seaman, Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
Leonard Short Charles Schwab & Co., Inc. Executive Vice President
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
Mayer & Schweitzer, Inc. Director until February 1995
The Charles Schwab Trust Company Director until December 1996
Tai-Chin Tung, Charles Schwab & Co., Inc. Vice President
Treasurer and Principal
Financial Officer
Charles Schwab Investment Management, Inc. Controller
Robertson Stephens Investment Management, Inc. Controller until 1996
Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President and
Chief Administrative Officer
The Charles Schwab Corporation Executive Vice President and
Chief Administrative Officer
Commercial Credit Corporation Managing Director until February
1994
Stephen B. Ward, Charles Schwab Investment Management, Inc. Senior Vice President and Chief
Senior Vice President and Investment Officer
Chief Investment Officer
</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.
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<PAGE> 81
(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.
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
custodian and fund accountants, Morgan Stanley Trust Company, 1
Pierrepont Plaza, Brooklyn, New York 11201, Federated Services Company,
1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222 and SEI Fund
Resources, One Freedom Valley Drive, Oaks Pennsylvania 19456;
Registrant's principal underwriter, Charles Schwab & Co., Inc., 101
Montgomery Street, San Francisco, California 94104; Registrant's
custodian and fund accountant, 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-10
<PAGE> 82
SIGNATURE
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. 8 to Registrant's Registration Statement on Form N-1A
pursuant to Rule 485(b) under the 1933 Act, and has duly caused this Post
Effective Amendment No. 8 to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Washington, District of Columbia, on
this 28th day of April, 1998.
SCHWAB ANNUITY PORTFOLIO
Registrant
Charles R. Schwab*
------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 8 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 28th day
of April, 1998.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Charles R. Schwab* Chairman and Trustee
- ---------------------------
Charles R. Schwab
Tom Seip* President and Trustee
- ---------------------------
Tom Seip
William J. Klipp* Executive Vice President,
- --------------------------- Chief Operating Officer and Trustee
William J. Klipp
Donald F. Dorward* Trustee
- ---------------------------
Donald F. Dorward
Robert G. Holmes* Trustee
- ---------------------------
Robert G. Holmes
Donald R. Stephens* Trustee
- ---------------------------
Donald R. Stephens
Michael W. Wilsey* Trustee
- ---------------------------
Michael W. Wilsey
Tai-Chin Tung* Treasurer and Principal
- --------------------------- Financial Officer
Tai-Chin Tung
</TABLE>
*By /s/ Alan G. Priest
---------------------------------------
Alan G. Priest, Attorney-In-Fact pursuant to Powers of Attorney filed
previously
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT DESCRIPTION
- ----------- --------------------
<S> <C>
8(d) Custodian Agreement and Amendment and Schedule 1 between
Registrant and Morgan Stanley Trust company on behalf of
Schwab MarketTrack Growth Portfolio II, formerly Schwab
Asset Director High Growth Portfolio.
8(l) Accounting Services Agreement and Schedule A, B and C between SEI
Fund Resources and Schwab Capital Trust and Schwab Annuity
Portfolio
10 Opinion and consent of Ropes & Gray.
11 Consent of Price Waterhouse LLP, Independent Accountants.
17(a) Financial Data Schedules for Schwab Money Market Portfolio.
17(b) Financial Data Schedules for Schwab S&P 500 Portfolio.
17(c) Financial Data Schedules for Schwab MarketTrack Growth
Portfolio II, formerly Schwab Asset Director High Growth
Portfolio.
</TABLE>
<PAGE> 1
EXHIBIT 8(d)
CUSTODY AGREEMENT
This Custody Agreement is dated April 4, 1997 between MORGAN STANLEY
TRUST COMPANY, a New York State chartered trust company (the "Custodian"), and
SCHWAB ANNUITY PORTFOLIOS, a Massachusetts business trust on behalf of its
investment portfolios (the "Client").
1. Appointment and Acceptance; Accounts. (a) The Client hereby
appoints the Custodian as a custodian of Property (as defined below) owned or
under the control of the Client that are delivered to the Custodian, or any
Subcustodian as appointed below, from time to time to be held in custody for the
benefit of the Client. The Custodian agrees to act as such custodian upon the
terms and conditions hereinafter provided. The Custodian also undertakes to
comply with the requirements of Section 17(f) of the Investment Company Act of
1940, as amended (the "1940 Act") and the rules and regulations promulgated in
connection with Section 17(f) of the 1940 Act with respect to all duties to be
performed by the Custodian pursuant to this Agreement, which requirements the
Custodian represents and warrants are the only provisions of the 1940 Act
applicable to it as a custodian of the Property.
(b) Prior to the delivery of any Property by the Client to the
Custodian, the Client shall deliver to the Custodian each document and other
item listed in Appendix 1. In addition, the Client shall deliver to the
Custodian any additional documents or items as the Custodian may deem necessary
for the performance of its duties under this Agreement.
(c) The Client instructs the Custodian to establish on the books and
records of the Custodian the accounts listed in Appendix 2 (the "Accounts") in
the name of the Client. Upon receipt of Authorized Instructions (as defined
below) and appropriate documentation, the Custodian shall open additional
Accounts for the Client, including any Accounts requested by the Client to
facilitate its compliance with laws, regulations or agreements applicable to the
Client. Upon the Custodian's confirmation to the Client of the opening of such
additional Accounts, or of the closing of Accounts, Appendix 2 shall be deemed
automatically amended or supplemented accordingly. The Custodian shall record in
the Accounts and shall have general responsibility for the safekeeping of all
securities ("Securities"), cash, cash equivalents and other property (all such
Securities, cash, cash equivalents and other property being collectively the
"Property") of the Client that are delivered to the Custodian for custody.
(d) The procedures the Custodian and the Client will use in
performing activities in connection with this Agreement are set forth in a
client services guide provided to the Client by the Custodian, as such guide may
be amended from time to time by the Custodian (the "Client Services Guide") with
10 days' prior written notice and the consent of the Client; provided, however,
that any customer enhancement or amendments deemed necessary by the Custodian in
order to comply with existing or new rules, regulations or market practices, in
any jurisdiction, may be made by Custodian without the consent of the Client;
and provided, further, that the
1
<PAGE> 2
Custodian will use its reasonable efforts to promptly notify the Client in
advance of any such enhancement or amendment. The Client Services Guide is
incorporated herein by reference, and to the extent that the terms and
conditions of this Agreement conflict with those of the Client Service Guide,
the terms and conditions of this Agreement shall govern.
2. Subcustodians. The Property may be held in custody and deposit
accounts that have been established by the Custodian with one or more domestic
or foreign banks or other institutions as listed on Exhibit A (the
"Subcustodians"), as such Exhibit may be amended from time to time by the
Custodian by 90 days' prior written notice to the Client, or through the
facilities of one or more securities depositories or clearing agencies as listed
on Exhibit B, as may be changed from time to time by the Custodian by 90 days'
prior written notice, if possible, or by notice given to the Client as soon as
the Custodian is reasonably able, upon the Custodian's receipt of notice of the
change of any securities depository or clearing agency. Each of the entities
listed on Schedule A are "eligible foreign custodians" (as such term is defined
in Rule 17f-5(c)(2) of the 1940 Act) or is a domestic bank or trust company
qualified to act as a custodian under the 1940 Act. The Custodian shall
continuously monitor the eligibility of the Subcustodians, and if, at any time,
the Custodian determines that a Subcustodian no longer satisfies the
requirements of an "eligible foreign custodian" or of a domestic bank or trust
company qualified to act as a custodian under the 1940 Act, it shall promptly
give written notice to the Client of such information. The Custodian shall hold
Property through a Subcustodian, securities depository or clearing agency only
if (a) such Subcustodian and any securities depository or clearing agency in
which such Subcustodian or the Custodian holds Property, or any of their
creditors, may not assert any right, charge, security interest, lien,
encumbrance or other claim of any kind to the Property except a claim of payment
for its safe custody or administration and (b) beneficial ownership of such
Property may be freely transferred without the payment of money or value other
than for safe custody or administration. Any Subcustodian may hold Property in a
securities depository and may utilize a clearing agency.
3. Records. The books and records of the Client shall be
prepared and maintained as provided in this Section 3 and consistent with
Rule 17f-5(a)(1)(iii)(D) of the 1940 Act. With respect to Property held by a
Subcustodian:
(a) The Custodian may hold Property for all of its customers with a
Subcustodian in a single account identified as belonging to the Custodian
for the benefit of its customers;
(b) The Custodian shall identify on its books as belonging to
the Client any Property held by a Subcustodian for the Custodian's
account;
(c) The Custodian shall require that Property held by the
Subcustodian for the Custodian's account be identified on the
Subcustodian's books as separate from any other property held by the
Subcustodian other than property of the Custodian's customers held solely
for the benefit of customers of the Custodian; and
(d) In the event the Subcustodian holds Property in a securities
depository or clearing agency, such Subcustodian shall be required by its
agreement with the Custodian
2
<PAGE> 3
to identify on its books such Property as being held for the account of
the Custodian as custodian for its customers or in such other manner as is
required by local law or market practice.
4. Access to Records. The Custodian shall allow the Client and its
designees access to the Custodian's records relating to the Property held by the
Custodian. The Custodian shall also obtain from any Subcustodian (and shall
require each Subcustodian to use reasonable efforts to obtain from any
securities depository or clearing agency listed on Exhibit B) an undertaking, to
the extent consistent with local practice and the laws of the jurisdiction or
jurisdictions to which such Subcustodian, securities depository or clearing
agency is subject, to permit the Client and its independent public accountants
and their designated representatives such access to the records of such
Subcustodian, securities depository or clearing agency as may be reasonably
required in connection with the examination of the Client's affairs or to take
such other action as the Custodian in its judgment may deem sufficient to ensure
such access.
5. Reports. The Custodian shall provide such reports and other
information to the Client and to such persons as the Client directs, including
reports (or portions thereof) of the Custodian's system of internal accounting
controls applicable to the Custodian's duties under this Agreement and such
other reports as the Custodian and the Client may agree upon from time to time.
6. Payment of Monies. The Custodian shall make, or cause any
Subcustodian to make, payments from monies being held in the Accounts only in
accordance with Authorized Instructions or as provided in Sections 9, 13 and 17.
The Custodian may act as the Client's agent or act as a principal in
foreign exchange transactions at such rates as are agreed from time to time
between the Client and the Custodian.
7. Transfer of Securities. The Custodian shall make, or cause
any Subcustodian to make, transfers, exchanges or deliveries of the Property
only in accordance with Authorized Instructions or as provided in Sections 9,
13 and 17.
8. Corporate Action. (a) The Custodian shall notify the Client
of details of all corporate actions affecting the Client's Property promptly
upon its receipt of such information.
(b) The Custodian shall take, or cause any Subcustodian to take,
such corporate action only in accordance with Authorized Instructions or as
provided in this Section 8 or Section 9.
(c) In the event the Client does not provide timely Authorized
Instructions to the Custodian in connection with any corporate action the
Custodian shall act in accordance with the default option provided in the Client
Service Guide and/or the issuer of the Securities and the Custodian shall give
the Client written notice of any such action.
3
<PAGE> 4
(d) Fractional shares resulting from corporate action activity shall
be treated in accordance with local market practices.
9. General Authority. In the absence of Authorized Instructions
to the contrary, the Custodian may, and may authorize any Subcustodian to:
(a) make payments to itself or others for expenses of handling
Property or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the
Client;
(b) receive and collect all income and principal with respect to
Securities and to credit cash receipts to the Accounts;
(c) exchange Securities when the exchange is purely ministerial
(which ministerial activities shall include without limitation, the
exchange of interim receipts or temporary securities for securities in
definitive form and the exchange of warrants, or other documents of
entitlement to securities, for the securities themselves);
(d) surrender Securities at maturity or when called for
mandatory redemption upon receiving payment therefor;
(e) execute in the Client's name such ownership and other
certificates as may be required to obtain the payment of income from
Securities;
(f) pay or cause to be paid, from the Accounts, any and all taxes
and levies in the nature of taxes imposed on Property by any governmental
authority in connection with custody of and transactions in such Property;
(g) endorse for collection, in the name of the Client, checks,
drafts and other negotiable instruments;
(h) take non-discretionary action on mandatory corporate
actions; and
(i) in general, attend to all nondiscretionary details in connection
with the custody, sale, purchase, transfer and other dealings with the
Property.
10. Authorized Instructions; Authorized Persons. (a) Except as
otherwise provided in Sections 6 through 9, 13 and 17, all payments of monies,
all transfers, exchanges or deliveries of Property and all responses to
corporate actions shall be made or taken only upon receipt by the Custodian of
Authorized Instructions; provided that such Authorized Instructions are timely
received by the Custodian. "Authorized Instructions" of the Client means
instructions from an Authorized Person received either directly or through the
Client's fund accountant by telecopy, tested telex, electronic link,
mainframe-to-mainframe computer link ("mainframe link") or other electronic
means or by such other means as may be agreed in writing between the Client and
the Custodian.
4
<PAGE> 5
(b) "Authorized Person" means each of the persons or entities
identified on Appendix 3 as amended from time to time by written notice from the
Client to the Custodian. The Client represents and warrants to the Custodian
that each Authorized Person listed in Appendix 3, as amended from time to time,
is authorized to issue Authorized Instructions on behalf of the Client. Prior to
the delivery of the Property to the Custodian, the Custodian shall provide (i) a
list of designated system user ID numbers and passwords that the Client shall be
responsible for assigning to Authorized Persons or (ii) a mainframe link to be
used by Authorized Persons. The Custodian shall assume that an electronic
transmission received and identified by a system user ID number and password or
mainframe link was sent by an Authorized Person. The Custodian agrees to provide
additional designated system user ID numbers and passwords or mainframe links as
needed by the Client. The Client authorizes the Custodian to issue new system
user ID numbers or mainframe links upon the request of a then currently existing
Authorized Person. Upon the issuance of additional system user ID numbers or
mainframe links by the Custodian to the Client, Appendix 3 shall be deemed
automatically amended accordingly. The Client authorizes the Custodian to
receive, act and rely upon any Authorized Instructions received by the Custodian
which have been issued, or which the Custodian reasonably believes have been
issued by an Authorized Person.
(c) Any Authorized Person may cancel/correct or otherwise amend any
Authorized Instruction received by the Custodian, but the Client agrees to
indemnify the Custodian for any liability, loss or expense incurred by the
Custodian and its Subcustodians as a result of their having relied upon or acted
on any prior Authorized Instruction. An amendment or cancellation of an
Authorized Instruction to deliver or receive any security or funds in connection
with a trade will not be processed once the trade has settled.
11. Registration of Securities. (a) In the absence of Authorized
Instructions to the contrary, Securities which must be held in registered form
shall be registered in the name of the Custodian or the Custodian's nominee or,
in the case of Securities in the custody of an entity other than the Custodian,
in the name of the Custodian, its Subcustodian or any such entity's nominee. The
Custodian may, without notice to the Client, cause any Securities to be
registered or re-registered in the name of the Client.
(b) Where the Custodian has been instructed by the Client to hold
any Securities in the name of any person or entity other than the Custodian, its
Subcustodian or any such entity's nominee, the Custodian shall not be
responsible for any failure to collect such dividends or other income or
participate in any such corporate action with respect to such Securities.
12. Deposit Accounts. All cash received by the Custodian for the
Accounts shall be held by the Custodian as a short-term credit balance in favor
of the Client and, if the Custodian and the Client have agreed in writing in
advance that such credit balances shall bear interest, the Client shall earn
interest at the rates and times as agreed between the Custodian, and the Client
and the Custodian shall notify the Client of the applicable interest rate and
times. The Client acknowledges that any such credit balances shall not be
accompanied by the benefit of any governmental insurance.
5
<PAGE> 6
13. Short-term Credit Extensions. (a) From time to time, the
Custodian may extend or arrange short-term credit for the Client which is (i)
necessary in connection with payment and clearance of securities and foreign
exchange transactions or (ii) pursuant to an agreed schedule, as and if set
forth in the Client Services Guide, of credits for dividends and interest
payments on Securities. All such extensions of credit shall be repayable by the
Client on demand.
(b) The Custodian shall be entitled to charge the Client interest
for any such credit extension at rates to be agreed upon from time to time or,
if such credit is arranged by the Custodian with a third party on behalf of the
Client, the Client shall reimburse the Custodian for any interest charge, and in
each case the Custodian shall notify the Client of the applicable interest
rates. In addition to any other remedies available, the Custodian shall be
entitled to a right of set-off against the Property to satisfy the repayment of
such credit extensions and the payment of, or reimbursement for, accrued
interest thereon.
14. Representations and Warranties. (a) The Client represents and
warrants that (i) the execution, delivery and performance of this Agreement
(including, without limitation, the ability to obtain the short-term extensions
of credit in accordance with Section 13) are within the Client's power and
authority and have been duly authorized by all requisite action (corporate or
otherwise) of the Client and of the beneficial owner of the Property, if other
than the Client, and (ii) this Agreement and each extension of short-term credit
extended to or arranged for the benefit of the Client in accordance with Section
13, shall at all times constitute a legal, valid and binding obligation of the
Client enforceable against the Client in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights in general and subject to the
effect of general principles of equity (regardless of whether considered in a
proceeding in equity or at law).
(b) The Custodian represents and warrants that (i) the execution,
delivery and performance of this Agreement are within the Custodian's power and
authority and have been duly authorized by all requisite action (corporate or
otherwise) of the Custodian and (ii) this Agreement constitutes the legal, valid
and binding obligation of the Custodian enforceable against the Custodian in
accordance with its terms, except as may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights in general and
subject to the effect of general principles of equity (regardless of whether
considered in a proceeding in equity or at law).
15. Standard of Care; Indemnification. (a) The Custodian shall be
responsible for the performance of only such duties as are set forth in this
Agreement or contained in Authorized Instructions given to the Custodian which
are not contrary to the provisions of any relevant law or regulation. The
Custodian shall be liable to the Client for any loss, liability or expense
incurred by the Client in connection with the performance of the Custodian's
responsibilities under this Agreement to the extent that any such loss,
liability or expense results from the negligence or willful misconduct of the
Custodian or any Subcustodian; provided, however that neither the Custodian nor
any Subcustodian shall be liable to the Client for any indirect, special or
6
<PAGE> 7
consequential damages. The Custodian shall not be liable for any loss, liability
or expense resulting from events beyond the control of the Custodian or any
Subcustodian, including, but not limited to, force majeure.
(b) The Client acknowledges that the Property may be physically held
outside the United States.
(c) In addition, the Client shall indemnify the Custodian and
Subcustodians and any nominee for, and hold each of them harmless from, any
liability, loss or expense (including attorneys' fees and disbursements)
incurred in connection with the Client's obligations under this Agreement,
including without limitation, (i) as a result of the Custodian having acted or
relied upon any Authorized Instructions or (ii) arising out of any such person
acting as a nominee or holder of record of Securities; provided, however, that
the Client shall not indemnify or hold harmless any of such entities where any
such liability, loss or expense is as a result of or has arisen from the
negligence or willful misconduct of the Custodian, any Subcustodian, any of
their nominees or any agent appointed by the Custodian or any Subcustodian to
perform their obligations under this Agreement.
16. Fees; Liens. The Client shall pay to the Custodian from time to
time such compensation for its services pursuant to this Agreement as may be
mutually agreed upon as well as the Custodian's out-of-pocket and incidental
expenses. The Client shall hold the Custodian harmless from any liability or
loss resulting from any taxes or other governmental charges, and any expenses
related thereto, which may be imposed or assessed with respect to the Accounts
or any Property held therein. The Custodian is, and any Subcustodians are,
authorized to charge the Accounts for such items. The Client shall grant the
Custodian a lien on the Property to the extent necessary: (1) to cover any
temporary short-term credit extensions under Section 13 of this Agreement, and
(2) to cover any temporary borrowing in connection with fees payable hereunder
for safe custody or administration. The Custodian shall give reasonable notice
to the Client prior to taking any action to enforce the lien granted to the
Custodian in this Section 16.
17. Termination. This Agreement may be terminated by the Client or
the Custodian by 60 days written notice to the other, sent by registered mail.
If notice of termination is given, the Client shall, within 30 days following
the giving of such notice, deliver to the Custodian a statement in writing
specifying the successor custodian or other person to whom the Custodian shall
transfer the Property. In either event, the Custodian, subject to the
satisfaction of any lien it may have, shall transfer the Property to the person
so specified. If the Custodian does not receive such statement the Custodian, at
its election, may transfer the Property to a bank or trust company established
under the laws of the United States or any state thereof, if such bank or trust
company is qualified to be a Custodian pursuant to the 1940 Act, to be held and
disposed of pursuant to the provisions of this Agreement or may continue to hold
the Property until such a statement is delivered to the Custodian. In such event
the Custodian shall be entitled to fair compensation for its services during
such period as the Custodian remains in possession of any Property and the
provisions of this Agreement relating to the duties and obligations of the
Custodian shall remain in full force and effect; provided, however, that the
Custodian shall have
7
<PAGE> 8
no obligation to settle any transactions in Securities for the Accounts. The
provisions of Sections 15 and 16 shall survive termination of this Agreement.
18. Investment Advice. The Custodian shall not supervise, recommend
or advise the Client relative to the investment, purchase, sale, retention or
other disposition of any Property held under this Agreement.
19. Confidentiality. (a) The Custodian, its agents and employees
shall maintain the confidentiality of information concerning the Property held
in the Client's account, including in dealings with affiliates of the Custodian.
In the event the Custodian or any Subcustodian is requested or required to
disclose any confidential information concerning the Property by any court or
regulatory authority, the Custodian shall, to the extent practicable and legally
permissible, promptly notify the Client in writing of such request or
requirement so that the Client may seek a protective order or waive any
objection to the Custodian's or such Subcustodian's compliance with this Section
19. In the absence of such a waiver, if the Custodian or such Subcustodian is
compelled, in the opinion of its counsel, to disclose any confidential
information, the Custodian or such Subcustodian may disclose such information to
such persons as, in the opinion of counsel, is so required.
(b) The Client shall maintain the confidentiality of, and not
provide to any third parties absent the written permission of the Custodian, any
computer software, hardware or communications facilities made available to the
Client or its agents by the Custodian.
20. Notices. Any notice or other communication from the Client to
the Custodian, unless otherwise provided by this Agreement or the Client
Services Guide, shall be sent by certified or registered mail to Morgan Stanley
Trust Company, One Pierrepont Plaza, Brooklyn, New York, 11201, Attention:
President, and any notice from the Custodian to the Client is to be mailed
postage prepaid, addressed to the Client at the address appearing below, or as
it may hereafter be changed on the Custodian's records in accordance with
written notice from the Client.
21. Assignment. This contract may not be assigned by either party
without the prior written approval of the other.
22. Miscellaneous. (a) This Agreement shall bind the successors and
assigns of the Client and the Custodian.
(b) This Agreement shall be governed by and construed in accordance
with the internal laws of the State of New York without regard to its conflicts
of law rules and to the extent not preempted by federal law. The Custodian and
the Client hereby irrevocably submit to the exclusive jurisdiction of any New
York State court or any United States District Court located in the State of New
York in any action or proceeding arising out of this Agreement and
8
<PAGE> 9
hereby irrevocably waive any objection to the venue of any such action or
proceeding brought in any such court or any defense of an inconvenient forum.
(c) 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.
In witness whereof, the parties hereto have set their hands as of
the date first above written.
SCHWAB ANNUITY PORTFOLIOS
By: /s/ William J. Klipp
-----------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
Address for record: c/o Charles Schwab Investment
Management, Inc.
101 Montgomery Street
San Francisco, CA 94104
Attn: Secretary
Accepted:
MORGAN STANLEY TRUST COMPANY
By: /s/ Authorized Signature
------------------------
Authorized Signature
9
<PAGE> 10
EXHIBIT 8(d)
AMENDMENT DATED AS OF APRIL 4, 1997
BETWEEN MORGAN STANLEY TRUST COMPANY ("THE CUSTODIAN")
AND SCHWAB ANNUITY PORTFOLIOS ("THE CLIENT")
WHEREAS the Custodian and the Client have entered into a Custody Agreement
dated as of April 4, 1997 (as amended from time to time, the "Agreement") for
the safekeeping of securities and cash received by the Custodian for the account
of the Client;
WHEREAS, the client has opened an account with Short-Term Investments Co.
in order to invest in their Liquid Assets Portfolio, MSTC Cash Reserves Class
(the "Fund");
WHEREAS, the Client and the Custodian have agreed to enter into this
Amendment in order to authorize the Custodian to take certain additional actions
on behalf of the Client;
NOW, THEREFORE, in consideration of the premises, the parties hereto agree
as follows:
1 Terms defined in the Agreement are used herein with their defined
meanings.
2 Notwithstanding any provisions in the Custody Agreement to the contrary,
the Client hereby directs the Custodian to transfer to Client's account #
______________ with the Fund (the "Fund Account"), on a daily basis, any
US dollar cash received by the Custodian for the Client's Accounts
specified on Schedule 1 hereto, in excess of the amount deemed necessary
to settle Client's cash and securities transactions. If the US dollar cash
received by the Custodian on the Client's behalf is not adequate to settle
such transactions, the Client hereby authorizes the Custodian to cause
shares to be redeemed from Client's Fund Account in amounts necessary to
settle such transactions.
3 The Client hereby authorizes the Custodian to provide the Fund Management
Company ("FMC"), an agent on behalf of the Fund, such information with
respect to the Client as may be required by applicable laws and
regulations or as may be reasonably requested by FMC and approved by the
Client in writing.
4 The Client acknowledges that the Custodian has entered into a Shareholder
Service Agreement with FMC on behalf of the Fund for certain
administrative services the Custodian provided to the Fund. The Custodian
receives a fee for such services as set forth in the Prospectus of the
Fund under "Annual Portfolio Operating Expenses, 12b-1 Fees."
5 The Client confirms that any decision to invest in the Fund is solely a
decision of the Client and the Client has not relied on the Custodian for
any investment advice. The Client confirms further that the Custodian is
not exercising any discretionary authority with respect to the Client's
investments in the Fund.
<PAGE> 11
6 Except as expressly amended hereby, all terms and provisions of the
Agreement are and shall continue to be in full force and effect. This
Amendment shall be construed in accordance with the applicable laws of the
State of New York. This Amendment may be executed by one or both of the
parties hereto on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this amendment to be
duly executed and delivered by their respective authorized officers as of
the day and year first above written.
MORGAN STANLEY TRUST COMPANY
By: /s/ Peter A. Needham
--------------------
Name: Peter A. Needham
Title: Principal and Treasurer
SCHWAB ANNUITY PORTFOLIOS
By: /s/ William J. Klipp
--------------------
Name: William J. Klipp
Title: Executive Vice President
And Chief Operating Officer
<PAGE> 12
Schedule 1
Client Accounts
<TABLE>
<CAPTION>
Account Name Account Number Account Mnemonic
- ------------ -------------- ----------------
<S> <C> <C>
1. Schwab Asset Director 000-42991 SHGP
High Growth Portfolio
</TABLE>
<PAGE> 1
EXHIBIT 8(L)
SEI INVESTMENTS Oaks, Pennsylvania 19456
April 1, 1998
William J. Klipp
President and Chief Operating Officer
Schwab Capital Trust
Schwab Annuity Portfolios
101 Montgomery Street
San Francisco, CA 94104
Re: Accounting Services Agreement
Dear Mr. Klipp:
Notwithstanding Schedule C of the Accounting Services Agreement by and among
Schwab Capital Trust and Schwab Annuity Portfolios and SEI Fund Resources, it is
agreed that the minimums as stated on Schedule C (i.e. $65,000, $75,000 and
$15,000, as the case may be) will be waived with respect to the relevant Fund or
class for a period of twelve months from the date of conversion of such Fund or
the inception of a new Fund or class.
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
By /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: President and Chief Operating Office
SEI FUND RESOURCES
By /s/ Todd Cipperman
------------------------------
Name: Todd Cipperman
Title: Vice President and Assistant Secretary
cc: Frances Cole, Esq.
<PAGE> 2
ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made as of this 1st day of April, 1998, by and among
Schwab Capital Trust and Schwab Annuity Portfolios (each a "Trust", or
collectively, the "Trusts"), each of which is a Massachusetts business trust, on
behalf of those Funds (each a "Fund", or collectively, the "Funds"), listed on
Schedule A, as it may be amended from time to time, and SEI Fund Resources
("SEI"), a Delaware business trust.
WHEREAS, each of the Trusts desires SEI to provide, and SEI is willing to
provide, fund accounting services to the Funds and to each class (each a Class,
or collectively, the "Classes") listed on Schedule A upon the terms and
conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, each Trust and SEI hereby agree as follows:
ARTICLE 1. Retention of SEI. Each Trust hereby retains SEI to act as fund
accounting agent for the Funds and to furnish the Funds with the services
described herein. SEI hereby accepts such employment and agrees to perform the
duties set forth herein. SEI shall, for all purposes herein, be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Trusts in any way and shall
not be deemed an agent of the Trust.
ARTICLE 2. Delivery of Documents; Authority. Each Trust shall furnish SEI
with copies, properly certified or authenticated, of the governing documents for
each of the Funds and such other documents as may be reasonably necessary to the
performance by SEI of the services set forth in this Agreement. Each Trust
agrees to furnish SEI with any amendments or supplements to such documents.
Each Trust represents and warrants that all appropriate action has been
taken by it and all other necessary persons or entities to authorize the
appointment of SEI to perform the services contemplated by this Agreement with
respect to each of the Funds.
SEI represents and warrants that all appropriate action has been taken by
it and all other necessary persons or entities to authorize the appointment of
SEI to perform the services contemplated by this Agreement with respect to each
of the Funds.
SEI undertakes to comply with all applicable requirements of the
securities and commodities laws, and any laws, rules or regulations of
governmental authorities having jurisdiction with respect to all duties to be
performed by SEI under this Agreement.
ARTICLE 3. Fund Accounting Services. SEI shall perform the services and
compile the records set forth on Schedule B. In providing services under this
Agreement, SEI shall provide the Funds with all necessary office space,
equipment (including back-up facilities in the event of equipment or systems
failure), personnel compensation and facilities for handling the fund accounting
responsibilities for the Funds. SEI shall enter into and maintain in effect with
appropriate parties agreements making adequate provision for emergency use of
electronic data processing equipment. SEI shall take all reasonable steps
necessary to minimize service disruptions. SEI shall have no responsibility for
supervising the performance by any investment adviser or sub-adviser of its
responsibilities.
1
<PAGE> 3
ARTICLE 4. Computation of Net Asset Value, Public Offering Price;
Valuation of Securities.
(a) When computing the net asset value per share of a Fund, SEI will
follow the specific provisions of the Fund's Registration Statement. In general,
such computation will be made by dividing the value of each Fund's securities,
cash and any other assets, less its liabilities, by the number of shares of the
Fund outstanding. Such computation will be made on each day required by each
Fund's Registration Statement.
(b) Securities will be valued in accordance with the specific provisions
of each Fund's Registration Statement, as amended from time to time. SEI may use
one or more external pricing services. SEI shall not be liable for any loss,
cost, damage, claim or other matter incurred by or assessed against the Fund,
regardless of how characterized, based on or resulting from the inaccuracy or
other deficiency in any information or data provided to SEI by any such pricing
service and used by SEI in the performance of these services hereunder, provided
that SEI has used reasonable care in the selection of the pricing agent. SEI
will provide daily to Charles Schwab Investment Management, Inc. ("CSIM") by
7:00 p.m. Eastern time via fax or other electronic delivery medium, the
securities prices used in calculating the net asset value of each Fund for its
use in preparing exception reports generated for those prices on which CSIM has
a comment. Further, upon receipt of the exception reports generated by CSIM, SEI
will diligently pursue communication regarding exception reports with the
designated pricing agent. SEI shall provide CSIM with notice as soon as possible
upon the occurrence of an event that would cause a reasonable person to conclude
that the pricing agent is acting negligently or with willful misfeasance.
ARTICLE 5. Duration and Termination of this Agreement. This Agreement
shall become effective on the dates set forth in Schedule A and shall remain in
effect for the initial term of the Agreement (the "Initial Term") and each
renewal term thereof (each, a "Renewal Term"), each as set forth under Schedule
C, unless terminated in accordance with the provisions of this Article 5. This
Agreement may be terminated only: (a) by the mutual written agreement of the
parties; (b) by either party hereto on 60 days' written notice, as of the end of
the Initial Term or at any time during any Renewal Term; (c) except for any
situation under section (g) hereof any party hereto on such date as is specified
in written notice given by the terminating party, in the event of a material
breach of this Agreement by the other party, provided the terminating party has
notified the other party of such breach at least 30 days prior to the specified
date of termination and the breaching party has not remedied such breach by the
specified date; (d) effective upon the filing of a petition for bankruptcy or
seeking protection from creditors of any party; (e) as to any Fund, effective
upon the liquidation of such Fund; (f) effective upon the liquidation of SEI;
and (g) in the event, however, of willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties by SEI at any time during the
term of this Agreement, the Trusts have a right to terminate this Agreement
immediately upon notice to SEI; however, to the extent that the Trusts' rights
under this provision arise solely due to gross negligence then the Trusts may
terminate this Agreement only if SEI fails to eliminate such gross negligence
immediately upon demand from the Trusts. If the Trusts authorize a cure period,
SEI shall take steps promptly following such demand (but in any event within 30
days thereafter) to preclude the recurrence of such gross negligence. If such
gross negligence is not cured within the cure period, this Agreement shall
terminate effective as of the first date following the cure period'. For
purposes of this Article 5, the term "liquidation" shall mean a transaction in
which the assets of a Fund are sold or otherwise disposed of and proceeds
therefrom are distributed in cash to the shareholders in complete liquidation of
the interests of such shareholders in the entity.
2
<PAGE> 4
ARTICLE 6. Compensation of SEI. For the services to be rendered by SEI
pursuant to this Agreement, the Trusts shall pay to SEI compensation at
the rate specified in Schedule C. The Trust's shall also reimburse SEI for
its reasonable out of pocket expenses as are agreed upon in advance by the
parties from time to time. SEI shall maintain detailed information about
the compensation and expenses allocated to the Trusts by Fund and by Class
and shall provide this detail to the Trusts in its monthly billings. Any
revised Schedule C agreed to by the parties shall be dated and signed by a
duly authorized officer of the Trusts and by a duly authorized officer of
SEI. SEI shall in no way be responsible for paying any expenses of the
Funds not otherwise allocated herein, including without limitation, the
cost of pricing services. If this Agreement becomes effective subsequent
to the first day of a month or terminates before the last day of a month,
SEI's compensation for that part of the month in which this Agreement is
in effect shall be prorated in a manner consistent with the calculation of
the fees as set forth above. All rights of compensation under this
Agreement for services performed as of the termination date shall survive
the termination of this Agreement.
ARTICLE 7. Limitation of Liability
(a) The duties of SEI shall be confined to those expressly set forth
herein, and no implied duties are assumed by or may be asserted against SEI
hereunder. SEI shall not be liable for any error of judgment or mistake of law
or for any loss (collectively, "Losses") arising out of any act or omission in
carrying out its duties hereunder, except for those Losses resulting from
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties or
Losses arising out of or related to a breach by SEI of its warranty and
obligations set forth in Article 10. hereto. (As used in this Article,
references to SEI shall include officers, employees and other agents of SEI and
its affiliates.) SEI may apply to the Funds at any time for instructions and may
consult counsel for the Funds or its own counsel and with accountants and other
experts with respect to any matter arising in connection with its duties, and
SEI shall not be liable to the Funds for any action taken or omitted by it in
good faith in accordance with the opinion of counsel for the Funds, Schwab or
their accountants or other experts.
(b) So long as SEI acts without willful misfeasance, bad faith, gross
negligence, or reckless disregard for its duties, the Trusts shall indemnify SEI
and hold it harmless from and against any and all actions, suits and claims,
whether groundless or otherwise, and from and against any and all losses,
liabilities, damages, costs and charges (including reasonable counsel fees and
disbursements), arising directly or indirectly out of services rendered
hereunder. The indemnity provisions set forth herein shall indefinitely survive
the termination of this Agreement.
ARTICLE 8. Recordkeeping. SEI shall maintain all records specified in this
Agreement pursuant to Rules 31 a-1 and 31 a-2 under the 1940 Act. All such
records shall be prepared and maintained at the expense of SEI, but shall be the
property of the relevant Fund and will be made available to or surrendered
promptly to such Fund or its designee on the request of either the Fund or CSIM.
SEI shall assist CSIM, the Funds' independent auditors, or upon approval of the
relevant Fund, or upon demand, any regulatory body, in any requested review of
such Fund's accounts and records but shall be reimbursed for all expenses and
employee time invested in any such review of accounts and records outside of the
expenses and employee time routinely and normally expended by SEI as part of a
regulatory review and audit. Upon receipt of the necessary information, SEI
shall supply the necessary data for a Fund's completion of any necessary tax
returns, questionnaires, periodic reports to shareholders and such other reports
and information requests as such Fund and SEI shall agree upon from time to
time.
3
<PAGE> 5
ARTICLE 9. Confidentiality. SEI agrees to keep confidential all records of
the Trusts and information relative to each Fund and its shareholders, unless
the release of such information is otherwise consented to in writing by the
Trust. SEI agrees that should the Trusts be required to provide any information
or records to regulatory bodies (who may institute civil or criminal contempt
proceedings for a failure to comply), SEI must notify the Trusts' and obtain
their consent prior to disclosing any information, unless such disclosure is
required by law.
ARTICLE 10. Year 2000 Compliance. SEI warrants that all software code owned
by or under SEI's control, used in the performance of SEI's obligations under
this contract, will be Year 2000 compliant. For purposes of this paragraph,
"Year 2000 Compliant" means that the software will continue to operate beyond
December 31, 1999 and without creating any logical, mathematical or programming
inconsistencies concerning any date after December 31, 1999 and without
decreasing the functionality of the system applicable to dates prior to January
1, 2000 including, but not limited to, making changes to [a] date and data
century recognition; [b] calculations which accommodate same- and multi- century
formulas and date values; and [c] input/output of date values which reflect
century dates.
ARTICLE 11. Activities of SEI. The services of SEI rendered to the Funds
are not exclusive. SEI is free to render such services to others and to have
other businesses and interests so long as its services hereunder are not
hindered thereby.
ARTICLE 12. Amendment; Assignment. This Agreement may only be amended or
modified by all parties hereto. Neither this Agreement nor any of the rights and
obligations under this Agreement may be assigned by any party without the
written consent of all parties hereto. If a successor fund accountant shall be
appointed by the Trusts, upon termination of this Agreement, SEI shall deliver
all records and property of the Trusts held by SEI to the successor fund
accountant.
ARTICLE 13. Trustees' Liability. A copy of the Declaration of Trust for the
Trusts is on file with the Secretary of State of the Commonwealth of
Massachusetts, and notice is hereby given that this instrument is executed on
behalf of the Trustees of the Trusts as Trustees and not individually and that
the obligations of this instrument are not binding upon any of the Trustees,
officers or shareholders of the Trusts individually, but are binding only upon
the assets and property of the Fund in question. The Names "Schwab Annuity
Portfolios, " "Schwab Capital Trust," "Trustees of Schwab Annuity Portfolios"
and "Trustees of Schwab Capital Trust" refer, respectively, to the Trusts
created and the Trustees, as trustees but not individually or personally, acting
from time to time under the applicable Declarations of Trust which are hereby
referred to and copies of which are on file at the office of the Secretary of
the Commonwealth of Massachusetts and at the principal office of the Trusts. The
obligations of "Schwab Annuity Portfolios" and "Schwab Capital Trust," 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, shareholders, representatives of the Trusts
personally, but bind only the property of the Funds in question, and all persons
dealing with any class of shares of the Funds must look solely to the Funds
property belonging to such class for the enforcement of any claims against the
Funds.
ARTICLE 14. Notice. Any notice required or permitted to be given by either
party to the other shall be deemed sufficient if sent by registered or certified
mail, postage prepaid, addressed by the party giving notice to the other party
at the last address furnished by the other party to the party giving notice: if
to the Trusts, at 101 Montgomery Street, San Francisco, CA 94104, Attention:
Secretary and if to SEI, at One Freedom Valley Drive, Oaks, PA 19456.
4
<PAGE> 6
ARTICLE 15. Governing Law. This Agreement shall be construed in accordance
with the laws of the State of California and the applicable provisions of the
1940 Act. To the extent that the applicable laws of the State of California, or
any of the provisions herein, conflict with the applicable provisions of the
1940 Act, the latter shall control.
ARTICLE 16. Multiple Originals. This Agreement may be executed in two or
more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
ARTICLE 17. Binding Agreement. This Agreement, and the rights and
obligations of the parties and the Funds hereunder, shall be binding on, and
inure to the benefit of the parties and the Funds and the respective successors
and assigns of each of them.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
By /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: President and Chief Operating Officer
SEI FUND RESOURCES
By /s/ Todd Cipperman
---------------------------
Name: Todd Cipperman
Title: Vice President and Assistant Secretary
5
<PAGE> 7
SCHEDULE A
LIST OF FUNDS
<TABLE>
<CAPTION>
Name of Fund Date
------------ ----
<S> <C>
Asset Director-High Growth Fund 4/30/98
Asset Director-Balanced Growth Fund 4/30/98
Asset Director-Conservative Growth Fund 4/30/98
Asset Director-Aggressive Growth Fund 4/15/98
International Index Fund: Investor Shares, Select Shares 4/30/98
Small-Cap Index Fund: Investor Shares, Select Shares 4/30/98
OneSource Funds-International 4/30/98
OneSource Funds-Balanced Allocation 4/30/98
OneSource Funds-Growth Allocation 4/30/98
OneSource Funds-Small-Company Fund 4/30/98
Asset Director-High Growth Portfolio 4/30/98
</TABLE>
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
By /s/ William J. Klipp
-------------------------------
Name: William J. Klipp
Title: President and Chief Operating Officer
SEI FUND RESOURCES
By /s/ Todd Cipperman
-------------------------------
Name: Todd Cipperman
Title: Vice President and Assistant Secretary
6
<PAGE> 8
SCHEDULE B
Fund Accounting:
1. Maintain general ledger accounts
2. Calculate NAV (with a primary backup at all times) by the NASDAQ deadline
(by 6:30 PST in the case of the OneSource portfolios)
3. Perform securities valuation; notify pricing committee on Fair Valued
Securities
4. Verify daily the underlying funds' NAVS with the underlying funds'
transfer agent or fund accountant
5. Maintain tax lots for portfolio holdings
6. Bifurcate currency vs. security gains/losses
7. Record investment purchases and sells
8. Record and verify daily income accruals
9. Record, verify expense accruals and monitor CSIM reimbursements and CSIM
waivers both by fund and class
10. Monitor daily collateral asset segregation for Repos, securities lending,
futures and etc.
11. Reconcile cash and positions daily with custodians
12. Compute investable cash; monitor O/D and line of credit outstanding
13. Oversee custodian's activities (settlements, tax reclaims, corporate
actions, etc.)
14. Complete the daily information sheet and investment management report
15. Record fund purchases, redemptions and reconcile outstanding shares daily
with transfer agent
16. Provide month end proof
17. Perform tax compliance quarterly, including the short-short calculation
(until states conform to Federal Code) seven business days before fiscal
quarter end 18. Complete weekly 3% portfolio compliance check for
OneSource Portfolios (until the Exempt Order is granted)
19. Calculate total returns and yields including external distribution of
information
20. Prepare statistics for Board meeting and external agents (reporting
services)
21. Prepare and coordinate the calendar quarter financial summaries for the
Board
22. Maintain book/tax differences and conform to SOPs
23. Calculate fund distribution for both excise and income taxes
24. Coordinate annual audit
25. Prepare and file N-SAR, 24F-2 and N30D through EDGAR
26. Monitor financial D&O and E&O coverage quarterly
27. Consult on general legal and tax issues
28. Prepare monthly service report card
29. Attend quarterly in-person service review meetings
30. Prepare and update accounting policies and operational procedures manual
31. Assist in the SEC examination
32. Comply with Article 10. Year 2000 compliance provisions
7
<PAGE> 9
SCHEDULE C
TO THE ACCOUNTING SERVICES AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND SCHWAB ANNUITY PORTFOLIOS
AND
SEI FUND RESOURCES
APRIL 1, 1998
FEES:
The Trusts shall pay SEI as compensation for the services performed and
the facilities and personnel provided by SEI pursuant to this Agreement, the
following fee:
(a) with respect to each Fund that invests primarily in U.S. securities, the
greater of (i) $65,000 (Sixty-five thousand dollars) or (ii) the product of the
Basis Point Multiplier (as defined below) and the average daily net assets of
such Fund; plus
(b) with respect to each Fund that invests primarily in non-U.S. securities, the
greater of (i) $75,000 (Seventy-five thousand dollars) or (ii) the product of
the Basis Point Multiplier and the average daily net assets of such Fund; plus
(c) with respect to each class of shares other than the first class of shares of
each Fund, $15,000 (Fifteen thousand dollars).
"Basis Point Multiplier" means a fraction, (a) the numerator of which is the
sum of the following:
(i) 0.04% (4 basis points) of the combined value of the average daily net
assets of the Funds (the "Combined Assets") with respect to those assets
that are less than or equal to $1 Billion (One Billion U.S. Dollars); plus
(ii) 0.03% (3 basis points) of the Combined Assets with respect to those
assets that are greater than $1 Billion (One Billion Dollars) but less
than or equal to $2 Billion (Two Billion Dollars); plus
(iii) 0.02% (2 basis points) of the Combined Assets with respect to those
assets that are greater than $2 Billion (Two Billion Dollars) but less
than or equal to $3 Billion (Three Billion Dollars); plus
(iv) 0.015% (1.5 basis points) of the Combined Assets with respect to
those assets that are greater than $3 Billion (Three Billion Dollars) but
less than or equal to $4 Billion (Four Billion Dollars); plus
(v) 0.01% (One basis point) of the Combined Assets with respect to those
assets that are in excess of $5 Billion (Five Billion Dollars) but less
than or equal to $20 Billion (Twenty Billion Dollars); plus
(vi) 0.0075% (Three quarters of One Basis Point) of the Combined Assets
with respect to those assets that are in excess of $20 Billion (Twenty
Billion Dollars) and
(b) the denominator of which is the Combined Assets.
8
<PAGE> 10
All fees payable to SEI shall accrue from the date indicated for such Fund in
Schedule A to this Agreement and be calculated daily based on the daily net
assets of each Fund. SEI's fee shall be payable monthly in arrears from the last
business day of each month for the Funds.
TERM:
The ten-n of this Agreement shall commence on the first date indicated in
Schedule A hereto (the "Commencement Date") and shall remain in effect for a
period of three years (the "Initial Term"). This agreement shall continue in
effect for successive periods of 1 year (each, a "Renewal Term") after the
Initial Term, unless terminated by either party in accordance with Article 5 of
the Agreement.
9
<PAGE> 1
Schwab Annuity Portfolio
April 28, 1998
Page 1
April 28, 1998
Schwab Annuity Portfolio
c/o Charles Schwab Investment Management, Inc.
1010 Montgomery Street
San Francisco, California 94104
Gentlemen:
You have registered under the Securities Act of 1933, as amended (the "1933
Act") an indefinite number of shares of beneficial interest ("Shares") of
Schwab Annuity Portfolio ("Trust"), as permitted by Rule 24f-2 under the
Investment Company Act of 1940, as amended (the "1940 Act"). You proposed to
file a post-effective amendment on Form N-1A (the "Post-Effective Amendment")
to your Registration Statement as required by Section 10(a)(3) of the 1933 Act
and the Rules thereunder and Section 8(b) of the 1940 Act and the rules
thereunder.
We have examined your Agreement and Declaration of Trust on file in the
office of the Secretary of The Commonwealth of Massachusetts and the Clerk of
the City of Boston. We have also examined a copy of your Bylaws and such other
documents, receipts and records as we have deemed necessary for the purpose of
this opinion.
Based upon the foregoing, we are of the opinion that the issue and sale of
the authorized but unissued Shares of the Trust have been duly authorized under
Massachusetts law. Upon the original issue and sale of your authorized but
unissued Shares of the Trust and upon receipt of the authorized
consideration therefor in an amount not less than the net asset value of the
Shares of the Trust established and in force at the time of their sale (plus
any applicable sales charge), the Shares of the Trust issued will be validly
issued, fully paid and non-assessable.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust provides for indemnification
out of the property of a particular series of shares for all loss and expenses
of any shareholder of that series held personally liable solely by reason of
his being or
<PAGE> 2
Schwab Annuity Portfolio
April 28, 1998
Page 2
having been a shareholder. Thus, the risk of shareholder liability is limited
to circumstances in which that series of shares itself would be unable to meet
its obligations.
We understand that this opinion is to be used in connection with the filing
of the Post-Effective Amendment. We consent to the filing of this opinion with
and as part of your Post-Effective Amendment.
Sincerely,
/s/ Ropes & Gray
---------------------
Ropes & Gray
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hearby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 8 to the registration statement on Form N-1A (the "Registration
Statement") of Schwab Annuity Portfolios of our report dated January 30, 1998
relating to the financial statements and financial highlights appearing in the
December 31, 1997 Annual Reports to Shareholders of Schwab Money Market
Portfolio, Schwab MarketTrack Growth Portfolio II (formerly "Schwab Asset
Director(R) - High Growth Portfolio") and Schwab S&P 500 Portfolio, which are
also incorporated by reference into the Registration Statement. We also consent
to the references to us under the heading "Financial Highlights" in the
Prospectuses and under the heading "Accountants and Reports to Shareholders" in
the Statement of Additional Information.
/s/ Price Waterhouse LLP
- --------------------------------
San Francisco, California
April 28, 1998
<PAGE> 1
[ARTICLE] 6
[CIK] 0000918266
[NAME] SCHWAB ANNUITY PORTFOLIO
[SERIES]
[NUMBER] 1
[NAME] SCHWAB MONEY MARKET PORTFOLIO
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] JAN-01-1996
[PERIOD-END] DEC-31-1996
[INVESTMENTS-AT-COST] 27011
[INVESTMENTS-AT-VALUE] 27011
[RECEIVABLES] 562
[ASSETS-OTHER] 20
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 27593
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 163
[TOTAL-LIABILITIES] 163
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 27431
[SHARES-COMMON-STOCK] 27431
[SHARES-COMMON-PRIOR] 16912
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 27430
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 1207
[OTHER-INCOME] 0
[EXPENSES-NET] 112
[NET-INVESTMENT-INCOME] 1095
[REALIZED-GAINS-CURRENT] (1)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 1094
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 1095
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 71617
[NUMBER-OF-SHARES-REDEEMED] 62152
[SHARES-REINVESTED] 1053
[NET-CHANGE-IN-ASSETS] 10518
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 103
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 215
[AVERAGE-NET-ASSETS] 22463
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] 0.05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0.05
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] 0.50
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000918266
[NAME] SCHWAB ANNUITY PORTFOLIOS
[SERIES]
[NUMBER] 3
[NAME] SCHWAB S&P 500 PORTFOLIO
[MULTIPLIER] 1,000
[CURRENCY] U.S. DOLLARS
<TABLE>
<S> <C>
[PERIOD-TYPE] 1-MO
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-START] JAN-01-1997
[PERIOD-END] JAN-31-1997
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 6,314
[INVESTMENTS-AT-VALUE] 6,926
[RECEIVABLES] 30
[ASSETS-OTHER] 5
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 6,961
[PAYABLE-FOR-SECURITIES] 47
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 27
[TOTAL-LIABILITIES] 74
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 6,251
[SHARES-COMMON-STOCK] 617
[SHARES-COMMON-PRIOR] 563
[ACCUMULATED-NII-CURRENT] 25
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 611
[NET-ASSETS] 6,887
[DIVIDEND-INCOME] 8
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] 2
[NET-INVESTMENT-INCOME] 6
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 373
[NET-CHANGE-FROM-OPS] 379
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 54
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 964
[ACCUMULATED-NII-PRIOR] 19
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 15
[AVERAGE-NET-ASSETS] 6,389
[PER-SHARE-NAV-BEGIN] 10.53
[PER-SHARE-NII] 0.01
[PER-SHARE-GAIN-APPREC] 0.63
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 11.17
[EXPENSE-RATIO] 0.34
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000918266
[NAME] SCHWAB ANNUITY PORTFOLIOS
[SERIES]
[NUMBER] 2
[NAME] SCHWAB ASSET DIRECTOR-HIGH GROWTH PORTFOLIO
[MULTIPLIER] 1,000
[CURRENCY] U.S. DOLLARS
<TABLE>
<S> <C>
[PERIOD-TYPE] 1-MO
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-START] JAN-01-1997
[PERIOD-END] JAN-31-1997
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 5,208
[INVESTMENTS-AT-VALUE] 5,523
[RECEIVABLES] 48
[ASSETS-OTHER] 60
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 5,631
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 42
[TOTAL-LIABILITIES] 42
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 5,247
[SHARES-COMMON-STOCK] 524
[SHARES-COMMON-PRIOR] 516
[ACCUMULATED-NII-CURRENT] 28
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 314
[NET-ASSETS] 5,588
[DIVIDEND-INCOME] 5
[INTEREST-INCOME] 6
[OTHER-INCOME] 0
[EXPENSES-NET] 3
[NET-INVESTMENT-INCOME] 8
[REALIZED-GAINS-CURRENT] (1)
[APPREC-INCREASE-CURRENT] 122
[NET-CHANGE-FROM-OPS] 129
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 9
[NUMBER-OF-SHARES-REDEEMED] 2
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 205
[ACCUMULATED-NII-PRIOR] 20
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 18
[AVERAGE-NET-ASSETS] 5,469
[PER-SHARE-NAV-BEGIN] 10.42
[PER-SHARE-NII] 0.02
[PER-SHARE-GAIN-APPREC] 0.23
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.67
[EXPENSE-RATIO] 0.73
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
