<PAGE> 1
As filed with the Securities and Exchange Commission on February 27, 1998
File Nos. 33-74534 and 811-8314
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 7 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 8 /X/
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SCHWAB ANNUITY PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
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)
/ / On (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ X / On April 30, 1998 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>
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 ASSET DIRECTOR(R) - HIGH GROWTH PORTFOLIO
SCHWAB S&P 500 PORTFOLIO
PROSPECTUS APRIL 30, 1998
The SCHWAB ASSET DIRECTOR--HIGH GROWTH PORTFOLIO (the "High Growth Fund") 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
High Growth Fund's investment objective is to provide high capital growth with
less volatility than an all stock portfolio. The S&P 500 Fund's investment
objective is to seek to track the price and dividend performance (total return)
of common stocks of U.S. companies, as represented by the Index.
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
Key Features of the Funds
Expenses
Financial Highlights
Investment Objectives and Policies
Investment Techniques
Other Investment Techniques
Investing in the Funds
Important Information About the Funds
Dividends and Other Distributions
Federal Income Tax Information
Share Price Calculation
How the Funds Report Performance
Organization and Management of the Funds
Operating Fees and Expenses
General Information
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
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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 "Investments and
Techniques Used by the Funds."
The HIGH 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 Index of 500 Stocks (the "Index") by investing primarily in the
common stocks of companies composing the Index. The Index is a widely
recognized, unmanaged index of the prices of 500 large company common stocks
selected by Standard & Poor's ("Index Stocks"). These stocks represent
approximately 70% of the market value of all common stocks publicly traded in
the United States.*
MARKET PERFORMANCE. For the 20 years ended 1997, the major asset categories and
sub-categories used by the Fund Index provided the following average annual
returns:
STOCKS (the Index) xx.xx %**
Large company stocks (the Index) xx.xx %***
Small company stocks (Ibbotson and BARRA small cap index) xx.xx %***
International stocks (MSCI EAFE) xx.xx %***
BONDS (Ibbotson and Lehman long-term government bond index) xx.xx %***
CASH-EQUIVALENTS (commercial paper A1P1) xx.xx %***
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.
*Source: Standard & Poor's, January 1997.
**Source: Morningstar, Inc.
***Source: BARRA, Inc.
MANAGEMENT. Charles Schwab Investment Management, Inc. (the "Investment
Manager"), 101 Montgomery Street, San Francisco, CA 94104, currently provides
investment management services to [xx] SchwabFunds(R), with assets in excess of
$[xx] billion as of [date]. (See "Organization and Management of the Funds.")
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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.")
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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>
High 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.[xx]% 0.[xx]%
12b-1 Fee None None
Other Expenses (after expense reimbursement) 0.[xx]% 0.[xx]%
TOTAL FUND OPERATING EXPENSES 0.[xx]% 0.[xx]%
</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 High Growth Fund and the
S&P 500 Fund, as a percentage of average daily net assets, would have been
0.[xx]%, 0.[xx]% and 0.[xx]%; and 0.[xx]%, 0.[xx]% and 0.[xx]% respectively.
The High Growth Fund may invest in underlying SchwabFunds,(R) which also charge
fees and incur expenses. These costs are not included in the High Growth Fund's
management fees, shareholder services and transfer agent fees, or other
expenses. Please see "Operating Fees and Expenses" for details.
EXAMPLES. Based on the expenses in the table above, you would pay the following
expenses on a $1,000 investment in each Fund, assuming (1) a 5% annual return
and (2) redemption at the end of each period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
High Growth Fund $xx $xx $xx $xx
S&P 500 fund $xx $xx $xx $xx
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
High Growth Fund......... $X $XX $XX $XX
S&P 500 Fund............. $X $XX $XX $XX
</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.
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FINANCIAL HIGHLIGHTS
The following information for the period ending [date] has been audited by
, 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.
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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 HIGH GROWTH FUND
The High Growth Fund's investment objective is to provide high capital growth
with less volatility than an all stock portfolio. The High 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 may deviate within
defined ranges from the Target Mix. The Fund's Target Mix is set out in the
chart below.
<TABLE>
<CAPTION>
TARGET MIX
<S> <C>
STOCKS 80%
International xx%
Small Cap xx%
Large Cap xx%
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, the Lehman Brothers Aggregate Bond Index and Lehman 20+ Treasury
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 indices 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 Index. The S&P 500 Fund seeks investment results that track,
rather than beat, the total return of the Index. Thus, it does not "actively"
choose investments in the same way as 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"
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strategy. It buys and sells stocks primarily to match the 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 Index Stocks. The S&P 500 Fund generally tries to match its
Index Stock holdings to those Stocks' weightings in the Index. In extraordinary
circumstances, the S&P 500 Fund may exclude an Index Stock from its holdings or
include a similar stock in its place if it believes that doing so will help
achieve its investment objective. The S&P 500 Fund may purchase securities of
companies with which it may be affiliated to the extent that these companies are
represented in the Index.
Although the S&P 500 Fund focuses on Index Stocks, it may buy and sell other
equity securities and other types of instruments. It also buys and sells
short-term debt securities for cash management purposes. In addition, it may use
options and futures contracts to adjust its correlation to the Index.
The S&P 500 Fund typically will not track the performance of the Index
perfectly. Fund costs, fees and expenses impair its correlation, as do the
amounts and timing of cash inflows and outflows. Changes in the securities
markets can also inhibit perfect tracking. Over the long term, the S&P 500 Fund
will attempt to achieve a correlation of 0.9 or better between its performance
and that of the Index. A figure of 1.0 would indicate perfect correlation. The
Fund monitors its performance and the performance of the Index on a regular
basis. In the unlikely event that the S&P 500 Fund cannot achieve a long-term
correlation of 0.9 or better, the Board of Trustees will consider alternative
arrangements.
INVESTMENT TECHNIQUES
THE HIGH 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 and defined ranges. The Fund seeks to reduce overall risk by
diversifying investments among major asset categories and sub-categories.
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-categories (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 High Growth Fund's large company stock
allocation will be invested in all or a representative sample of the
stocks which comprise the Index (or other similar index).
- - SMALL COMPANY STOCKS. The High Growth 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 High Growth 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.
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<PAGE> 10
- - INTERNATIONAL STOCKS. The High Growth Fund's international stock
allocation will be invested in all or a representative sample of stocks
in the Schwab International Index(R). The High Growth 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 High Growth 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 High Growth 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 High Growth 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 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 High Growth 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.
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3. Obligations issued or guaranteed by the U.S. Government or its agencies
or instrumentalities.
4. Repurchase agreements involving obligations that are suitable for
investment under the categories set forth above.
OTHER INVESTMENTS. The High Growth Fund 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 High
Growth Fund's net assets.
THE S&P 500 FUND
The Fund invests primarily in the common stocks of companies composing the
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 S&P 500 Fund tries to remain invested in Index Stocks as fully as
possible, it must manage cash flows resulting from the purchase and sale of Fund
shares. Thus, the S&P 500 Fund also may invest in U.S. dollar-denominated
short-term bonds and money market instruments, including U.S. Government
securities, certificates of deposit, time deposits, bankers' acceptances and
repurchase agreements for these securities. The 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.
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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.
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
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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
11
<PAGE> 14
Business Day after receipt of the redemption instructions by the Funds but in no
event later than 7-days following receipt of instructions.
Please refer to the appropriate Separate Account Prospectus for information on
how to allocate Contract values to or withdraw Contract values from a Fund.
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.
12
<PAGE> 15
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 [date] had aggregate net assets in excess of
$[xx] billion.
Geri Hom is the portfolio manager for the S&P 500 Fund and for the equity
portions of the High Growth Fund. She joined Schwab in March 1995 as Fund
Manager--Equities and currently manages the 5 Schwab index funds and the equity
portions of the 3 Schwab Asset Director(R) funds with combined assets of over
$[xx] 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 Asset Director(R) funds. 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
13
<PAGE> 16
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 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 [x.x] million active customer
accounts and has over [xxx] branch offices. Schwab also offers convenient access
to financial information services and provides products and services that help
investors make investment decisions. Schwab is a wholly owned subsidiary of The
Charles Schwab Corporation. Charles R. Schwab is the founder, Chairman, Chief
Executive Officer and a Director of The Charles Schwab Corporation. As a result
of his beneficial ownership interests in and other relationships with The
Charles Schwab Corporation and its affiliates, Mr. Schwab may be deemed to be a
controlling person of Schwab and the Investment Manager.
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 [xx], the High Growth Fund and S&P 500 Fund paid management
fees and total operating expenses of [xx]% and [xx]%, and [xx]% and [xx]% 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. The High Growth Fund may invest a portion of its assets in
SchwabFunds, which charge underlying fees and expenses. These costs are not
included in the High Growth Fund's management fees, shareholder services and
transfer agency fees, or other expenses. These expenses, like those of the High
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 High Growth Fund.
14
<PAGE> 17
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 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.
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 Index to track general stock market
performance. S&P's only relationship to the S&P 500 Fund is the licensing of
certain trademarks and trade names of S&P and of the Index, which is determined,
composed and calculated by S&P without regard to the S&P 500 Fund. S&P has no
obligation to take the needs of the S&P 500 Fund or its shareholders into
consideration in determining, composing or calculating the Index. S&P is not
responsible for and has not participated in the determination of the prices and
amount of S&P 500 Fund shares, the timing of the issuance or sale of S&P 500
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 Index or any data included therein. S&P makes no
express or implied warranties and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
Index or any data included therein. Without limiting any of the foregoing, in no
event shall S&P have any liability for any special, punitive, indirect or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR
THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
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<PAGE> 18
PART B
CROSS REFERENCE SHEET
STATEMENT OF ADDITIONAL INFORMATION
Schwab Money Market Portfolio
Schwab S&P 500 Portfolio
Schwab Asset Director - High Growth 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> 19
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB ANNUITY PORTFOLIOS
101 Montgomery Street, San Francisco, CA 94104
SCHWAB MONEY MARKET PORTFOLIO
SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH PORTFOLIO
SCHWAB S&P 500 PORTFOLIO
April 30, 1998
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectuses 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 Asset Director-High Growth Portfolio (the "High Growth
Fund") and the Schwab S&P 500 Portfolio (the "S&P 500 Fund"), three separately
managed investment portfolios (collectively the "Funds") of Schwab Annuity
Portfolios (the "Trust"). The Funds are designed to serve as investment vehicles
for variable annuity contracts ("Contracts") issued through separate accounts
("Separate Accounts") of participating life insurance companies ("Participating
Insurance Companies"). These Funds are intended for retirement savings or other
long-term investment purposes. In the future, shares of the Funds may be offered
to other Participating Insurance Companies and their Separate Accounts as an
investment vehicle for variable life insurance policies and to qualified pension
and retirement plans ("Plans"). To obtain a 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........................ 31
DISTRIBUTIONS AND TAXES.................................... 32
SHARE PRICE CALCULATION.................................... 34
HOW THE FUNDS REFLECT PERFORMANCE.......................... 35
YIELD...................................................... 36
THE BENEFITS OF INTERNATIONAL INVESTING.................... 37
INDEXING AND ASSET ALLOCATION.............................. 37
GENERAL INFORMATION........................................ 39
PURCHASE AND REDEMPTION OF SHARES.......................... 41
OTHER INFORMATION.......................................... 41
APPENDIX - RATINGS OF INVESTMENT SECURITIES................ 43
FINANCIAL STATEMENTS....................................... 44
</TABLE>
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<PAGE> 20
INVESTMENT OBJECTIVES
Schwab Money Market Portfolio
The Money Market Fund's investment objective is maximum current income
consistent with liquidity and stability of capital.
SCHWAB ASSET DIRECTOR(R)-
HIGH GROWTH PORTFOLIO
The investment objective of the High Growth Fund is to provide high
capital growth with less volatility than an all-stock portfolio. 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
-2-
<PAGE> 21
or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. Because it is not possible to predict with assurance
exactly how this market for Section 4(2) paper sold and offered under Rule 144A
will continue to develop, Charles Schwab Investment Management, Inc. (the
"Investment Manager"), pursuant to guidelines approved by the Board of Trustees,
will carefully monitor the Money Market Fund's investments in these securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information.
ASSET-BACKED COMMERCIAL PAPER
AND OTHER SECURITIES
The Money Market Fund can invest a portion of its assets in
asset-backed commercial paper and other money market fund Eligible Securities.
(See "Money Market 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.
MONEY MARKET FUND INVESTMENT
POLICIES AND RESTRICTIONS
Except as otherwise noted, the restrictions below are fundamental and
cannot be changed without approval of the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Money Market
Fund.
THE MONEY MARKET FUND MAY NOT:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies.
(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
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<PAGE> 22
all preferred stocks are each considered as one class.
(4) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that the Money Market Fund reserves the freedom of action to
invest up to 100% of its assets in certificates of deposit or bankers'
acceptances issued by domestic branches of U.S. banks and U.S. branches of
foreign banks (which the Money Market Fund has determined to be subject to the
same regulation as U.S. banks), or obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities in accordance with its investment
objective and policies.
(5) Invest more than 5% of its total net assets in securities of issuers (other
than obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities) that, with their predecessors, have a record of less than
three years of continuous operation.
(6) Enter into repurchase agreements if, as a result thereof, more than 10% of
its net assets valued at the time of the transaction would be subject to
repurchase agreements maturing in more than seven days and invested in
securities restricted as to disposition under the federal securities laws
(except commercial paper issued under Section 4(2) of the Securities Act of
1933, as amended, hereinafter the "1933 Act"). The Money Market Fund will invest
no more than 10% of its net assets in illiquid securities.
(7) Invest more than 5% of its total assets in securities restricted as to
disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the 1933 Act).
(8) Purchase or retain securities of an issuer if any of the officers, trustees
or directors of the Trust or its Investment Manager individually own
beneficially more than 1/2 of 1% of the securities of that issuer and together
beneficially own more than 5% of the securities of such issuer.
(9) Invest in commodities or commodity contracts, including futures contracts,
real estate or real estate limited partnerships, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(10) Invest for the purpose of exercising control or management of another
issuer.
(11) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.(1)
(12) Make loans to others, except the Money Market Fund may (i) purchase a
portion of an issue of short-term debt securities or similar obligations
(including repurchase agreements) that are publicly distributed or customarily
purchased by institutional investors, and (ii) lend its portfolio securities (up
to one-third of the Money Market Fund's total assets) in accordance with its
investment objectives and policies.
(13) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets in order to meet redemption requests without immediately selling any
portfolio securities. The Money Market Fund will not borrow for leverage
purposes or purchase securities or make investments while reverse repurchase
agreements or borrowings are outstanding. If, for any reason, the current value
of the Money Market Fund's total net assets falls below an amount equal to three
times the amount of its indebtedness from money borrowed, the Money Market Fund
will, within three business days, reduce its indebtedness to the extent
necessary.
(14) Write, purchase or sell puts, calls or combinations thereof.
- ----------------
(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> 23
(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.
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-
- ----------------
(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> 24
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 HIGH GROWTH FUND
AND THE S&P 500 FUND
FOREIGN INVESTMENTS
The High Growth Fund expects to invest in stocks of foreign issuers.
Investing in foreign issuers involves certain special considerations, including
those set forth below, which 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 High Growth Fund may hold cash in
foreign currencies, they may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversions between various currencies. The rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange market as well as by political and
economic factors.
Since foreign companies are not subject to uniform accounting, auditing
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. companies, there may be less publicly available
information about a foreign company than about a U.S. company. Securities of
foreign companies have less volume, are less liquid and are more volatile than
securities of U.S. companies. Fixed commissions on foreign securities exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
High Growth Fund endeavors to achieve the most favorable net results on 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 High Growth Fund is
uninvested and no return is earned thereon. The inability to make intended
security purchases due to settlement problems could cause the High Growth Fund
to miss attractive investment opportunities. Losses to the High Growth Fund that
arise out of the inability to fulfill a contract to sell such securities could
result in potential liability to the High Growth Fund.
In addition, with respect to those countries in which the High Growth
Fund may invest or other countries which may have a significant impact on the
companies in which the High Growth Fund may invest, there is the possibility of
expropriation or confiscatory taxation, political or social instability,
diplomatic
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<PAGE> 25
developments, change of government or war, which could affect the High Growth
Fund's investments. Moreover, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
The High Growth Fund may invest up to 5% of its 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 High Growth Fund's
investments as a result of the planned 1997 incorporation of the British Crown
Colony of Hong Kong into the People's Republic of China. Shareholders should
note that the risks discussed above may increase depending on political and
economic developments as the scheduled time for the change in government in Hong
Kong draws nearer.
DEPOSITARY RECEIPTS
The High Growth Fund may invest up to 5% of its total 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 High Growth Fund and the S&P 500 Fund
may write (sell) covered call and put options on any securities in which they
may invest. The High Growth Fund and S&P 500 Fund may purchase and write such
options on securities that are listed on domestic or foreign securities
exchanges or traded in the over-the-counter market. All call options written by
the High Growth Fund and S&P 500 Fund are covered, which means that the High
Growth Fund and S&P 500 Fund will own the securities subject to the option so
long as the option is outstanding. The purpose of writing covered call options
is to realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, the High Growth Fund and S&P 500 Fund may forego the opportunity to
profit from an increase in the market price of the underlying security.
All put options the High Growth Fund and S&P 500 Fund write will be
covered, which means that each of the High Growth Fund and S&P 500 Fund will
have deposited with its custodian cash, U.S. Government securities or other
high-grade debt securities (i.e., securities rated in one of the top three
categories by Moody's or S&P or, if unrated, determined by the High 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 High Growth
Fund and S&P 500 Fund. However, in return for the option premium, the
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<PAGE> 26
High Growth Fund and S&P 500 Fund accept the risk that they may be required to
purchase the underlying securities at a price in excess of the securities market
value at the time of purchase.
The High Growth Fund and S&P 500 Fund may terminate their obligations
under a written call or put option by purchasing an option identical to the one
it has written. These purchases are referred to as "closing purchase
transactions."
Purchasing Options. The High Growth Fund and S&P 500 Fund may purchase
put and call options on any securities in which they may invest or options on
any securities index based on securities in which they may invest. The High
Growth Fund and S&P 500 Fund may also enter into closing sale transactions in
order to realize gains or minimize losses on options they have purchased.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option, since, with regard to certain options, the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains the
amount of the premium. This amount may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised, the
writer must fulfill its obligation to purchase the underlying security at the
exercise price, which will usually exceed the then market value of the
underlying security.
The purchase of a call option would entitle the High Growth Fund and
S&P 500 Fund, in return for the premium paid, to purchase specified securities
at a specified price during the option period. The High Growth Fund and S&P 500
Fund would ordinarily realize a gain if, during the option period, the value of
such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the High Growth Fund and S&P 500 Fund would realize
either no gain or a loss on the purchase of the call option.
Risks Associated With Options Transactions. There is no assurance that
a liquid secondary market on a domestic or foreign options exchange will exist
for any particular exchange-traded option or at any particular time. If the High
Growth Fund and S&P 500 Fund are unable to effect a closing purchase transaction
with respect to covered options they have written, the High Growth Fund and S&P
500 Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if the High Growth Fund and S&P 500 Fund are unable to effect a
closing sale transaction with respect to options they have purchased, they would
have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) 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
outstanding options on that exchange that had been issued by the OCC as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms.
The High Growth Fund and S&P 500 Fund may purchase and sell both
options that are
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<PAGE> 27
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 High Growth Fund and S&P 500 Fund will treat purchased
over-the-counter options and all assets used to cover written over-the-counter
options as illiquid securities, except that with respect to options written with
primary dealers in U.S. Government securities pursuant to an agreement requiring
a closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to a formula the staff of the SEC
approves. The High 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 High Growth Fund's and S&P 500 Fund's net assets, respectively
FOREIGN CURRENCY TRANSACTIONS
Forward Foreign Currency Exchange Contracts. The High Growth Fund may
enter into forward foreign currency exchange contracts in several circumstances.
The High Growth Fund may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future exchange rates. The High
Growth Fund expects to engage in foreign currency exchange transactions in
connection with the purchase and sale of portfolio securities (so-called
"transaction hedging") and to protect the value of specific portfolio positions
("position hedging").
For transaction hedging purposes, the High Growth Fund enters into
foreign currency transactions with respect to specific receivables or payables
of the funds arising in connection with the purchase or sale of portfolio
securities. By transaction hedging, the High Growth Fund will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between (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 High
Growth Fund enters into foreign currency exchange transactions to protect
against a decline in the values of the foreign currencies in which portfolio
securities are denominated (or against an increase in the value of currency for
securities which the High Growth Fund expects to purchase).
When engaging in position and/or transaction hedging, the High Growth
Fund may purchase or sell foreign currencies on a spot (or cash) basis at the
prevailing spot rate and 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 High 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 High 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
High Growth Fund the right to sell a currency at an exercise price until the
expiration of the option. A call option on a futures contract gives the High
Growth Fund the right to assume a long position in the futures contract until
the expiration of the option. A call option on currency gives the High Growth
Fund the right to purchase a currency at the exercise price until the expiration
of the option.
Hedging transactions involve costs and may result in losses, and the
ability of the High Growth Fund to engage in hedging transactions may be limited
by tax considerations. Transaction and position hedging do not eliminate
fluctuations in the underlying prices of the securities that the High Growth
Fund owns or expects to purchase or sell. They simply establish a rate of
exchange that may be achieved
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<PAGE> 28
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 High
Growth Fund to use forward foreign currency exchange contracts may be
restricted.
The High Growth Fund will enter into a forward foreign currency
exchange contract only when the market value of such contract, when aggregated
with the market value of all other such contracts held by the High Growth Fund,
does not exceed 5% of the High Growth Fund's net assets.
The High Growth Fund generally will not enter into a forward contract
with a term of greater than one year.
While the High Growth Fund will enter into forward contracts to reduce
currency exchange rate risks, transactions in such contracts involve certain
other risks. Thus, while the High Growth Fund may benefit from such
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for the High Growth Fund than if it had not engaged in any
such transactions. Moreover, there may be imperfect correlation between the High
Growth Fund's portfolio holdings of securities denominated in a particular
currency and forward contracts into which the High Growth Fund enters. Such
imperfect correlation may cause the High Growth Fund to sustain losses, which
will prevent the High Growth Fund from achieving a complete hedge or expose the
High Growth Fund to risk of foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The High Growth
Fund may write covered put and call options and purchase put and call options on
foreign currencies for the purpose of protecting against declines in the dollar
value of portfolio securities and against increases in the dollar cost of
securities to be acquired. A call option written by the High Growth Fund would
obligate the High Growth Fund to sell specified currency to the holder of the
option at a specified price at any time before the expiration date. A put option
written by the High Growth Fund would obligate the High Growth Fund to purchase
specified currency from the option holder at a specified time before the
expiration date. The writing of currency options involves a risk that the High
Growth Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
The High Growth Fund may terminate 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 High Growth
Fund would also be able to enter into closing sale transactions in order to
realize gains or minimize losses on options purchased by the High Growth Fund.
The purchase of a call option would entitle the High Growth Fund to
purchase specified currency at a specified price during the option period in
return for the premium paid. The High Growth Fund would ordinarily realize a
gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the High Growth Fund 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 High Growth Fund's
portfolio securities due to currency exchange rate fluctuations. The High Growth
Fund would
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<PAGE> 29
ordinarily realize a gain, if, 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 High Growth
Fund would realize either no gain or a loss on the purchase of the put option.
Gains and losses on the purchase of protective put options would tend to be
offset by countervailing changes in the value of the underlying currency.
Special Risks Associated With Options on Foreign Currency. An exchange
traded option position may be closed out only on an options exchange that
provides a secondary market for an option of the same series. Although the High
Growth Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option or at any
particular time. For some options, no secondary market on an exchange may exist.
In such event, it might not be possible to effect closing transactions in
particular options, with the result that the High Growth Fund would have to
exercise its options in order to realize any profit and would incur transaction
costs upon the sale of underlying securities pursuant to the exercise of put
options. If the High Growth Fund, as a covered call option writer, is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying currency (or security denominated in that currency) until
the option expires or it delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the OCC inadequate. This could result in an exchange instituting special
procedures that may interfere with the timely execution of customers' orders.
The High Growth Fund will purchase and write over-the-counter options
only to the extent consistent with its limitations on investments in illiquid
securities, as described in its Prospectus. Trading in over-the-counter options
is subject to the risk that the other party will be unable or unwilling to
close-out purchasing and writing activities.
FUTURES CONTRACTS
AND OPTIONS ON FUTURES CONTRACTS
The High Growth Fund and S&P 500 Fund may purchase and sell various
kinds of futures contracts and options on futures contracts. The futures
contracts may be based on various securities (such as U.S. Government
securities), securities indices, foreign currencies and other financial
instruments and indices. All futures contracts entered into by the High Growth
Fund and S&P 500 Fund are traded on U.S. exchanges or boards of trade that the
CFTC licenses and regulates or on foreign exchanges. The High Growth Fund and
S&P 500 Fund are not permitted to engage in speculative futures trading.
Futures Contracts. A futures contract 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
High Growth Fund and S&P 500 Fund can seek, through the sale of futures
contracts, to offset a decline in the value of their current portfolio
securities. When rates are falling or prices are rising, the High Growth Fund
and S&P 500 Fund, through the purchase of futures contracts, may attempt to
secure better rates or prices than might later be available in the market when
they effect anticipated purchases. Similarly, the High Growth Fund can sell
futures contracts on a specified currency to protect against a decline in the
value of that currency and their portfolio securities that are denominated in
that currency.
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<PAGE> 30
The High Growth Fund can purchase futures contracts on a foreign currency to fix
the price in U.S. dollars of a security denominated in that currency that the
High Growth Fund has acquired or expects to acquire.
Although futures contracts, by their terms, generally call for the
actual delivery or acquisition of underlying securities or the cash value of the
index, in most cases the contractual obligation is fulfilled before the date of
the contract without having to make or take such delivery. The contractual
obligation is offset by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities or the cash value of
the index underlying the contractual obligations. The High Growth Fund and S&P
500 Fund may incur brokerage fees when they purchase or sell futures contracts.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions, which may
result in a profit or a loss. While the High Growth Fund's and S&P 500 Fund's
futures contracts on securities or currency will usually be liquidated in this
manner, the High Growth Fund and S&P 500 Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for them to do so. A clearing corporation associated with the
exchange on which futures on securities or currencies are traded guarantees
that, if still open, the sale or purchase will be performed on the settlement
date.
Options on Futures Contracts. The acquisition of put and call options
on futures contracts will give the High Growth Fund and S&P 500 Fund the right
(but not the obligation), for a specified price, to sell or to purchase,
respectively, the underlying futures contract at any time during the option
period. As the purchaser of an option on a futures contract, the High Growth
Fund and S&P 500 Fund obtain the benefit of the futures position if prices move
in a favorable direction but limit their risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
that may partially offset a decline in the value of the High Growth Fund's and
S&P 500 Fund's assets. By writing a call option, the High 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 High Growth Fund and S&P 500 Fund in writing options on futures
is potentially unlimited and may exceed the amount of the premium received. The
High Growth Fund and S&P 500 Fund will incur transaction costs in connection
with the writing of options on futures.
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 High
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 High Growth Fund and S&P 500 Fund own or
propose to acquire.
Such futures contracts may include contracts for the future delivery of
securities held by the High Growth Fund and S&P 500 Fund or securities with
characteristics similar to those of the High Growth Fund's and S&P 500 Fund's
portfolio securities. Similarly, the High Growth Fund may sell futures contracts
on currency in which its portfolio securities are denominated or in one currency
to hedge against fluctuations in the value of securities denominated in a
different
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<PAGE> 31
currency if there is an established historical pattern of correlation between
the two currencies. If, in the opinion of the Investment Manager, there is a
sufficient degree of correlation between price trends for the High Growth Fund's
and S&P 500 Fund's portfolio securities and futures contracts based on other
financial instruments, securities indices or other indices, the High Growth Fund
and S&P 500 Fund may also enter into such futures contracts as part of their
hedging strategy. Although, under some circumstances, prices of securities in
the High Growth Fund'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 High Growth Fund and S&P 500 Fund enter into a greater or lesser
number of futures contracts or by attempting to achieve only a particular hedge
against price changes affecting the High Growth Fund'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 High 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 High Growth Fund and S&P 500 Fund may take
"long" positions by purchasing such futures contracts. This would be done, for
example, when the High Growth Fund and S&P 500 Fund anticipate the subsequent
purchase of particular securities when they have the necessary cash but expect
the prices or currency exchange rates 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 High Growth Fund and S&P 500
Fund generally require that all of their futures transactions constitute "bona
fide" hedging transactions. As a result, a Fund 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 High Growth
Fund and S&P 500 Fund may purchase and sell futures contracts and options as a
substitute for a comparable market position in the underlying securities.
Futures transactions need not constitute "bona fide" hedging under CFTC
regulations if the aggregate initial margin and premiums required to establish
such positions do not exceed 5% of each Fund's net assets.
Risks Involved in Futures and Options Transactions. Futures and options
transactions involve risks which, in some strategies, can be substantial, due to
the low margin deposits required and the extremely high degree of leverage
involved in futures and options trading. However, to the extent the High Growth
Fund's and S&P 500 Fund's futures and options practices are limited to hedging
purposes, the Investment Manager does not believe that the High Growth Fund and
S&P 500 Fund are subject to the degree of risk frequently associated with
futures and options transactions. To the extent the High Growth Fund and S&P 500
Fund engage in the use of futures and options on
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<PAGE> 32
futures other than for hedging purposes, the High Growth Fund and S&P 500 Fund
may be subject to additional risk.
Three principal areas of risk are present when futures and options
contracts are used even in a hedging context. First, there may not always be a
liquid secondary market for a futures or option contract at the time when the
High Growth Fund or S&P 500 Fund seek to "close out" its position. If the High
Growth Fund or S&P 500 Fund is unable to "close out" a futures or option
position and prices move adversely, the Fund 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 High 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 High Growth
Fund and S&P 500 Fund could lose money on futures or options contracts and
experience appreciation in the value of their portfolio securities, or vice
versa.
Finally, adverse market movements could cause the High Growth Fund and
S&P 500 Fund to lose up to their full investment in an options contract and/or
to experience substantial losses on an investment in a futures contract.
However, barring such significant market distortions, a similar result could be
expected were the High 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 High Growth Fund and S&P 500 Fund may purchase
and sell futures, options, equity index participations and index participation
contracts may be limited by 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 High Growth Fund may enter into swaps on various securities (such
as U.S. Government securities), securities indices, interest rates, prepayment
rates, foreign currencies or other financial instruments or indices in order to
protect the value of the High Growth Fund from interest rate fluctuations and to
hedge against fluctuations in the floating rate market in which the High Growth
Fund's investments are traded, for both hedging and non-hedging purposes. While
swaps are different from futures contracts (and options on futures contracts) in
that swap contracts are individually negotiated with specific counterparties,
the High Growth Fund will use swap contracts for purposes similar to the
purposes for which they use options, futures and options on futures. Those uses
of swap contracts (i.e., risk management and hedging) present the Fund with
risks and opportunities similar to those associated with options contracts,
futures contracts and options on futures. See "Futures Contracts and Options on
Futures Contracts."
The High Growth Fund may enter into these transactions to manage its
exposure to changing interest rates and other market factors. Some transactions
may reduce the High Growth
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Fund's exposure to market fluctuations, while others may tend to increase market
exposure.
The use of swaps involves investment techniques and risks different
from and potentially greater than those associated with ordinary fund securities
transactions. If the Investment Manager is incorrect in its expectations of
market values, interest rates or currency exchange rates, the investment
performance of the High Growth Fund would be less favorable than it would have
been if this investment technique were not used. The High Growth Fund will
invest up to 5% of its net assets in swaps.
PREFERRED STOCK
The High 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 High
Growth Fund will invest up to 5% of its net assets in preferred stock.
CONVERTIBLE SECURITIES
The High Growth Fund may invest up to 5% of its net assets in
securities that are convertible into common stock, including convertible bonds
that are investment grade, convertible preferred stocks and warrants. The S&P
500 Fund will not purchase convertible securities directly. It may, however,
hold convertible securities to the extent that such holdings are incident to its
ownership of common stocks. Convertible bonds are issued with lower coupons than
nonconvertible bonds of the same quality and maturity, but they give holders the
option to exchange their bonds for a specific number of shares of the company's
common stock at a predetermined price. This structure allows the convertible
bond holder to participate in share price movements in the company's common
stock. The actual return on a convertible bond may exceed its stated yield if
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 High 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 High 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.
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PRECIOUS METAL-RELATED INVESTMENTS
The High Growth Fund may invest no more than 5% of its net assets in
precious metal-related investments. The High Growth Fund and the S&P 500 Fund
may invest in common stocks of domestic companies principally engaged in
precious metal-related activities which include companies principally engaged in
the extraction, processing, distribution or marketing of precious metals if at
the time of investment the Investment Manager considers that at least 50% of the
company's assets, revenues or profits are derived from the precious metal
industry. The High Growth Fund may also invest in securities of foreign
companies principally engaged in the precious metals industry. For further
disclosure on foreign securities, see "Foreign Investments."
The High 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 High 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 High 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 High 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 High Growth Fund and S&P 500 Fund may invest. Mortgages backing the
securities purchased by the High 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
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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 High Growth Fund and S&P 500 Fund may purchase mortgage-related
securities at a premium or at a discount. Principal and interest payments on the
mortgage-related securities are guaranteed 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 High Growth
Fund and S&P 500 Fund may purchase are the "modified pass-through" type, which
entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the payment.
The National Housing Act authorized GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The 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
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The High Growth Fund may invest a portion of its assets in debt
obligations known as "Asset-Backed Securities" that are rated in one of the
three highest rating categories by a nationally recognized statistical rating
organization (e.g., 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, 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
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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 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 High Growth Fund may invest in Asset-Backed Securities backed by
receivables from revolving credit card agreements ("Credit Card Receivable
Securities"). Most of the Credit Card Receivable Securities issued publicly to
date have been Pass-Through Certificates. In order to lengthen the maturity of
Credit Card Receivable Securities, most 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 High Growth Fund and S&P 500 Fund may invest in certificates of
deposit, which are certificates issued against funds deposited in
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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.
COMMERCIAL PAPER
The High Growth Fund and S&P 500 Fund may invest in Commercial Paper,
which consists of short-term, unsecured promissory notes issued to finance
short-term credit needs. The High Growth Fund and S&P 500 Fund will 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 High 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
High Growth Fund to be illiquid assets provided that: (i) the High Growth Fund
acquires and holds the securities with the intention of reselling the securities
in the foreign trading market, (ii) the High 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 High Growth Fund. Investments
in foreign securities may also subject the High 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 High Growth Fund generally intends to
acquire the securities of foreign issuers where there are public trading
markets, the High Growth Fund's investments in the securities of foreign issuers
may tend to increase the risks with respect to the liquidity of the High Growth
Fund's portfolio and its ability to meet a large number of shareholder
redemption requests should there be economic or political turmoil in a country
in which the High Growth Fund 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 High 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 High Growth Fund or S&P 500 Fund may at
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any time call the loan and obtain the return of the securities loaned; (iii) the
High 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 High Growth
Fund or S&P 500 Fund.
The lending of securities is a common practice in the securities
industry. The High Growth Fund and S&P 500 Fund will engage in security lending
arrangements with the primary objective of increasing the High Growth Fund'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 High Growth
Fund and S&P 500 Fund will not lose the tax treatment available to regulated
investment companies. The High Growth Fund and S&P 500 Fund will be entitled to
all dividends or interest on any loaned securities. 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 High 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 High Growth Fund and S&P 500 Fund are invested
in the agreement and is not related to the coupon rate on the underlying
security. Any repurchase agreements 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 High Growth Fund and S&P 500 Fund invest in repurchase agreements for
more than one year. However, securities subject to repurchase agreements may
have maturity dates in excess of one year from the effective date of the
repurchase agreements. The transaction requires the initial collateralization of
the seller's obligation with securities having a market value, including accrued
interest, equal to at least 102% of the dollar amount invested by the High
Growth Fund and S&P 500 Fund, with the value marked-to-market daily to maintain
100% coverage. A default by the seller might cause the High Growth Fund and S&P
500 Fund to experience a loss or delay in the liquidation of the collateral
securing the repurchase agreement. The High Growth Fund and S&P 500 Fund might
also incur disposition costs in liquidating the collateral. The High Growth Fund
and S&P 500 Fund will make payment for such securities only upon physical
delivery or evidence of book entry transfer to the account of their custodian
bank. The High Growth Fund and S&P 500 Fund may not enter into a repurchase
agreement of more than seven days duration if, as a result, the market value of
the High Growth Fund'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 High 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 High 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 High 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
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business at approximately the amount at which the High Growth Fund and S&P 500
Fund have valued the instrument. Subject to this limitation, the High Growth
Fund and S&P 500 Fund may invest in restricted securities when such investment
is consistent with the High Growth Fund's and S&P 500 Fund's investment
objectives, and such securities may be considered to be liquid to the extent the
High 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 High 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 High Growth Fund and S&P 500 Fund
invest in restricted securities that are deemed liquid, the general level of
illiquidity in the High Growth Fund's and S&P 500 Fund's portfolios may be
increased if qualified institutional buyers become uninterested in purchasing
these securities contracts. The High Growth Fund and S&P 500 Fund will limit
their investments in liquid restricted securities to 5% of their net assets.
When-Issued and Delayed Delivery Securities. The High 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 High 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 High 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 High 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
High 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 High
Growth Fund invests in this SchwabFund, which normally invests 80% of its assets
in stocks that are included in the Schwab International Index,
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<PAGE> 41
the High 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 High
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 High 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.
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 High Growth Fund's and will entail
similar risks.
INVESTMENT RESTRICTIONS & POLICIES
FOR THE HIGH GROWTH FUND AND THE
S&P 500 FUND
FUNDAMENTAL INVESTMENT RESTRICTIONS
The restrictions numbered (1), (2) and (3) immediately below are
fundamental and cannot be changed without approval of the holders of a majority
of the outstanding voting securities (as defined in the 1940 Act). For more
detailed information, see "1940 Act Restrictions" and "Other Investment
Policies." The High Growth Fund and S&P 500 Fund:
(1) May purchase securities of any issuer only when consistent with the
maintenance of its status as a diversified company under the 1940 Act.
(2) May not concentrate investments in a particular industry or group of
industries as concentration is defined under the 1940 Act, or the rules or
regulations thereunder; except that the S&P 500 Fund may concentrate investments
only to the extent that the S&P 500 Index(R) is also so concentrated.
(3) May (i) purchase or sell commodities, commodities contracts or real estate;
(ii) lend or borrow money; (iii) issue senior securities; (iv) underwrite
securities; or (v) pledge, mortgage or hypothecate any of its assets, only if
permitted by the 1940 Act or the rules or regulations thereunder.
The High Growth Fund and 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 High Growth Fund's or
the S&P 500 Fund's non-fundamental investment policies may be changed by a vote
of the Board of Trustees. Any changes in either the High Growth Fund's or the
S&P 500 Fund's non-fundamental investment policies will be communicated to the
Fund's shareholders prior to the effectiveness of the changes.
1940 ACT RESTRICTIONS
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<PAGE> 42
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 more than 25% of
net assets in an industry or group of industries. The 1940 Act limits the
ability of investment companies to borrow and lend money and to underwrite
securities. The 1940 Act currently prohibits an open-end fund from issuing
senior securities, as defined in the 1940 Act, except under very limited
circumstances.
OTHER INVESTMENT POLICIES
The following investment policies and restrictions are non-fundamental
and may be changed by the Trust's Board of Trustees. The High Growth Fund and
S&P 500 Fund may not:
(1) Purchase or sell commodities, commodities contracts or real estate,
including interests in real estate limited partnerships, provided that each Fund
may (i) purchase securities of companies that deal in real estate or interests
therein, (ii) purchase or sell futures contracts, options contracts, equity
index participations and index participation contracts, and (iii) purchase
securities of companies that deal in precious metals or interests therein.
(2) Lend money to any person, except that each Fund may (i) purchase a portion
of an issue of short-term debt securities or similar obligations (including
repurchase agreements) that are publicly distributed or customarily purchased by
institutional investors, and (ii) lend its portfolio securities.
(3) Borrow money or issue senior securities except that each Fund may borrow
from banks as a temporary measure to satisfy redemption requests or for
extraordinary or emergency purposes and then only in an amount not to exceed
one-third of the value of its total assets (including the amount borrowed),
provided that each Fund will not purchase securities while borrowings represent
more than 5% of its total assets.
(4) Pledge, mortgage or hypothecate any of its assets except that, to secure
allowable borrowings, each Fund may do so with respect to no more than one-third
of the value of its total assets.
(5) Underwrite securities issued by others except to the extent it may be deemed
to be an underwriter, under the federal securities laws, in connection with the
disposition of securities from its investment portfolio.
(6) Invest more than 10% of its net assets in illiquid securities, including
repurchase agreements with maturities in excess of seven days.
(7) Purchase or retain securities of an issuer if any of the officers, trustees
or directors of the Trust or the Investment Manager individually own
beneficially more than 1/2 of 1% of the securities of such issuer and together
beneficially own more than 5% of the securities of such issuer.
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<PAGE> 43
(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.
(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.
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<PAGE> 44
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 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 Charles Schwab
February 15, 1950 Corporation; Enterprise President -
International and Mutual Funds, Charles
Schwab & Co., Inc.; Chief Executive Officer,
Charles Schwab Investment Management, Inc.
DONALD F. DORWARD Trustee Executive Vice President and 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.
</TABLE>
- -----------------------
* This Trustee is an "interested person" of the Trust.
-26-
<PAGE> 45
<TABLE>
<S> <C> <C>
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer 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 & 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 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 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.
WILLIAM J. KLIPP* Executive Vice Executive Vice President, SchwabFunds(R), Charles
December 9, 1955 President, Chief Schwab & Co., Inc.; President and Chief
Operating Officer and Operating Officer, Charles Schwab Investment
Trustee Management, Inc. Prior to 1993, Mr. Klipp was
Treasurer of Charles Schwab & Co., Inc. and
Mayer & Schweitzer, Inc.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
</TABLE>
- -----------------------
* This Trustee is an "interested person" of the Trust.
-27-
<PAGE> 46
<TABLE>
<S> <C> <C>
FRANCES COLE Secretary Senior Vice President, Chief Counsel, Chief
September 9, 1955 Compliance Officer and Assistant Corporate
Secretary, Charles Schwab Investment Management,
Inc.
DAVID H. LUI Assistant Secretary Vice President and Senior Counsel, Charles
October 14, 1960 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 Investment
February 27, 1968 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 Investment
September 26, 1964 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.
AMY L. MAUK Assistant Secretary Corporate Counsel, Charles Schwab Investment
January 5, 1969 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 Annuity Portfolios. The address of each
individual listed above is 101 Montgomery Street, San Francisco, California
94104.
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<PAGE> 47
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
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, xxxx N/A N/A xxxxx
Trustee
Robert G. Holmes, xxxxx N/A N/A xxxxx
Trustee
</TABLE>
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<PAGE> 48
<TABLE>
<S> <C> <C> <C> <C>
Donald R. Stephens, xxxxx N/A N/A xxxxx
Trustee
Michael W. Wilsey, xxxxx N/A N/A xxxxx
Trustee
</TABLE>
(1) Figures are for the Trust's fiscal year ended December 31, 1997.
(2) "Fund Complex" comprises all xx 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.
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<PAGE> 49
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 [xx] mutual funds with
over $[xx] billion in assets as of [date]. 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.
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 $ 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
period from May 3, 1994 (commencement of operations) to December 31, 1994, and
for the fiscal years ended December 31, 1995 and 1996, the Fund paid investment
advisory and administration fees of $0 (fees were reduced by $8,950), $608 (fees
were reduced by $52,949), and $22,322 (fees were reduced by $81,006),
respectively.
High Growth Fund. For its advisory and administrative services to the
High Growth Fund, the Investment Manager is entitled to receive a graduated
annual fee, payable monthly, of 0.74% of the Fund's average daily net assets not
in excess of $1 billion; 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, the Fund paid investment advisory and
administration fees of $0 (fees were reduced by $5,433).
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, the Fund paid investment advisory and
administration fees of $0 (fees were reduced by $2,890).
Additional Information. The Advisory Agreement provides that the fees
to be paid to the Investment Manager will be less than the amount that would
cause the aggregate operating expenses of a Fund (excluding interest, taxes, net
brokerage commissions and extraordinary expenses) in any year to exceed the most
stringent limits prescribed by any state in which shares of a Fund are offered
for sale. The most stringent current limit for such expenses is 2.5% of a fund's
first $30 million of average net assets, 2.0% of a fund's next $70 million of
average net
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<PAGE> 50
assets and 1.5% of a fund's average net assets in excess of $100 million.
From time to time, each Fund may compare its total operating expense
ratio to the total operating expense ratio of other mutual funds or mutual fund
averages with similar investment objectives as reported by Lipper Analytical
Service, Inc., Morningstar, Inc. or other independent sources of such
information ("independent sources").
SUB-ADVISER
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.xx]% of the first $[xx] million of the
aggregate average daily net assets of the High Growth Fund and the following
funds of Schwab Capital Trust; Schwab Asset Director(R)-High Growth Fund, Schwab
Asset Director(R)-Balanced Growth Fund and Schwab Asset Director(R)-Conservative
Growth Fund; [0xx]6% of the next $[xx] million; [0.xx]% of the next $[xx]
million; and [0.xx]% of such assets over $[xx] million.
For the fiscal period ended [date], the Sub-Adviser was paid investment
sub-advisory fees of $[xx] from the Investment Manager.
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.
CONSULTANT
CUSTODIAN AND FUND ACCOUNTANT
Morgan Stanley Trust Company at 1 Pierrepont Plaza, Brooklyn, New York
11201, serves as Custodian for the High Growth Fund.
Federated Services Company at 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222, serves as Fund Accountant for the High Growth Fund.
ACCOUNTANTS AND REPORTS
TO SHAREHOLDERS
The Trust's independent accountants, _________________, 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.
______________ 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
______________is _________.
LEGAL COUNSEL
PORTFOLIO TRANSACTIONS AND
TURNOVER
PORTFOLIO TRANSACTIONS
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<PAGE> 51
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 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
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<PAGE> 52
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 High 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 High 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.
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.
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<PAGE> 53
The High Growth Fund and S&P 500 Fund will distribute substantially all
of their net investment income each year, as determined by the Board of
Trustees. The High Growth Fund and S&P 500 Fund will distribute net investment
income and capital gains, if any, to the Plans and Participating Insurance
Company Separate Accounts annually in December. The Participating Insurance
Company Separate Accounts will automatically reinvest all distributions in
additional shares at the net asset value next determined after their record
date.
FEDERAL INCOME TAXES
For a discussion of the tax status of a particular Contract and the tax
consequences of ownership of such a Contract, refer to the appropriate Separate
Account Prospectus. Shares of the Funds are available only through Separate
Accounts of Participating Insurance Companies and Plans.
It is 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
(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 High Growth Fund will
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attempt not to invest in any non-U.S. corporation which could be treated as a
passive foreign investment company ("PFIC"), or become a PFIC, under the Code,
it might inadvertently do so. This could result in adverse tax consequences upon
the disposition of, or the receipt of "excess distributions" with respect to,
such equity investments. To the extent the High Growth Fund does invest in
PFICs, it may adopt certain tax strategies to reduce or eliminate the adverse
effects of certain federal tax provisions governing PFIC investments. Many
non-U.S. banks and insurance companies may not be treated as PFICs if they
satisfy certain technical requirements under the Code. To the extent the High
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 High Growth Fund's
shareholders. Therefore, the payment of this tax would reduce the High 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 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
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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 High 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 (observed),
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The High Growth Fund and S&P 500 Fund value
their portfolio securities daily based on their fair value. Each security the
High 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
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
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.
In addition, an after-tax total return for each Fund may be calculated
by taking that Fund's standardized or non-standardized total return and
subtracting applicable federal taxes from the portions of each Fund's total
return attributable to capital gains distributions and ordinary income. This
after-tax total return may be compared to that of other mutual funds with
similar investment objectives as reported by independent sources.
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
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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. The Money Market Fund's average annual and cumulative total
return since inception (May 3, 1994) for the period ended December 31, 1996 was
4.98%. The High Growth Fund's and S&P 500 Fund's cumulative total returns since
inception (November 1, 1996) were 4.20% and 5.30% respectively.
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
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 High
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,
1996, the Money Market Fund's yield was 4.91%.
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
High 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, 1996, 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.
The High 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 High
Growth Fund's portfolio strategies, such as those indices named in the High
Growth Fund's Prospectus under "Market Performance."
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From Commencement of Operations to December 31, 1996
<TABLE>
<CAPTION>
Commencement Average Annual Cumulative One Year Total Return as
Date Total Return Total Return of December 31, 1996
---------------- -------------- ------------ ------------------------
<S> <C> <C> <C> <C>
Money Market Fund May 3, 1994 4.80% 13.3% 4.98%
High Growth Fund November 1, 1996 N/A 4.20% N/A
S&P 500 Fund November 1, 1996 N/A 5.30% N/A
</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, 1996, 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 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.
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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 HIGH GROWTH FUND
Shareholders may choose to invest in the High Growth Fund, which offers
the benefits of asset allocation in a single fund. The High 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 High 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 High 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 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
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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 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
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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 ____________, _________ legally or beneficially owned _____ and
_____ respectively, of the Money Market Fund's shares of beneficial interest.
As of _______, ____________ legally or beneficially owned _____
respectively, of the High Growth Fund's.
As of _______ legally or beneficially owned ____ and ____ respectively,
of the S&P 500 Fund's shares of beneficial interest.
In addition, as of ________, the officers and Trustees of the Trust, as
a group, owned less than ____ 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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STATEMENTS CONTAINED IN THE PROSPECTUSES OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION AS TO THE CONTENTS OF ANY CONTRACT OR OTHER DOCUMENT
REFERRED TO ARE NOT NECESSARILY COMPLETE, AND, IN EACH INSTANCE, REFERENCE IS
MADE TO THE COPY OF SUCH CONTRACT OR OTHER DOCUMENT FILED AS AN EXHIBIT TO THE
REGISTRATION STATEMENT OF WHICH THE PROSPECTUSES AND THIS STATEMENT OF
ADDITIONAL INFORMATION FORM A PART, EACH SUCH STATEMENT BEING QUALIFIED IN ALL
RESPECTS BY SUCH REFERENCE.
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APPENDIX - RATINGS OF INVESTMENT SECURITIES
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service ("Moody's"). Issuers (or related supporting institutions) of
commercial paper with this rating are considered to have a superior ability to
repay short-term promissory obligations. Issuers (or related supporting
institutions) of securities rated Prime-2 are viewed as having a strong capacity
to repay short-term promissory obligations. This capacity 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 RATE DEMAND OBLIGATIONS
MOODY'S INVESTORS SERVICE
Short-term notes/variable rate demand obligations bearing the
designations MIG-1/VMIG-1 are considered to be of the best quality, enjoying
strong protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations rated
MIG-2/VMIG-2 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.
STANDARD & POOR'S CORPORATION
An S&P SP-1 rating indicates that the subject securities' issuer has a
very strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation. S&P's
determination
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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
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, 1996, 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.
-46-
<PAGE> 65
PART C
OTHER INFORMATION
SCHWAB ANNUITY PORTFOLIOS
February 27, 1998
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
(1) Financial Statements and financial highlights included in the Annual Report
for Money Market Portfolio, Schwab S&P 500 Portfolio and Schwab Asset Director -
High Growth Portfolio for the fiscal year ended December 31, 1996, are
incorporated by reference into the Statement of Additional Information, were
filed on March 7, 1997, 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 electronically filed
herein as Exhibit (1) to the Registration Statement on Form
N-1A of Schwab Annuity Portfolios ("Registrant").
(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) above to Registrant's Registration
Statement on Form N-1A, electronically filed herein.
(b) Article 9 and Article 11 of the Amended and Restated Bylaws
are incorporated by reference to Exhibit (2) to Post-Effective
Amendment No. 3 to Registrant's Registration Statement on Form
N-1A, filed on April 29, 1996.
(5) (a) Investment Advisory and Administration Agreement between
Registrant and Charles Schwab Investment Management, Inc. (the
"Investment Manager") dated June 15,1994 is incorporated by
reference to Exhibit 5(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) of
Post-Effective Amendment No. 5, 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 electronically
filed herein.
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<PAGE> 66
(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) of Post-Effective Amendment No. 5,
electronically filed on September 9, 1996.
(6) (a) Distribution Agreement between Registrant and Charles Schwab &
Co., Inc. ("Schwab") dated March 29, 1994 is electronically
filed herein.
(b) Amended Schedule A to Distribution Agreement referred to at
Exhibit (6)(a) above is incorporated by reference to Exhibit
6(b) of Post-Effective Amendment No. 5, 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 electronically
filed herein.
(b) Amendment No. 1 to the Custodian Services Agreement referred
to at Exhibit (8)(a) above is incorporated by reference to
Exhibit (8)(b) to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A,
electronically filed on April 29, 1996.
(c) Schedule A to the Custodian Services Agreement referred to at
Exhibit (8)(a) above is incorporated by reference to Exhibit
8(c) of Post-Effective Amendment No. 5, electronically filed
on September 9, 1996.
(d) Custodian and Accounting Services Fee Agreement to be filed by
subsequent Amendment.
(e) Custodian Agreement dated April 4, 1997, and Amendment to the
Custodian Agreement, dated April 4, 1997, between Registrant,
on behalf of Asset Director - High Growth Portfolio, and
Morgan Stanley Trust Company to be filed by subsequent
Amendment.
(f) Transfer Agency Agreement between Registrant and Schwab dated
March 29, 1994 is electronically filed herein.
(g) Schedule B and D to the Transfer Agency Agreement referred to
at Exhibit (8)(e) above are electronically filed herein.
(h) Amended Schedules A and C to the Transfer Agency Agreement
referred to at Exhibit (8)(e) above are incorporated by
reference to Exhibit 8(f) of Post-Effective Amendment No. 5,
electronically filed on April 30, 1997.
(i) Shareholder Service Agreement between Registrant and Schwab
dated March 29, 1994 is electronically filed herein.
(j) Amended Schedules A and C to the Shareholder Service Agreement
referred to at Exhibit (8)(g) above was electronically filed
and is incorporated herein by reference to Exhibit 8(h) of
Post-Effective Amendment No. 5.
(k) Schedule B to the Shareholder Service Agreement referred to at
Exhibit (8)(g) above is electronically filed herein.
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<PAGE> 67
(l) Accounting Services Agreement between Registrant and Federated
Services Company, on behalf of Schwab Asset Director - High
Growth Portfolio, is incorporated herein by reference to
Exhibit 8(b) of Schwab Capital Trust's Post-Effective
Amendment No. 18 (File No. 33-62470, electronically filed on
April 4, 1997.
(m) Accounting Services Agreement dated March 24, 1994 between
Registrant and PNC Bank, Inc., is electronically filed herein.
(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 herein by reference to Exhibit 9
of Post-Effective Amendment No. 5 electronically filed on
September 9, 1996.
(10) Opinion and Consent of Ropes & Gray as to legality of the
securities being registered to be filed by subsequent
Amendment.
(11) (a) Consent of Ropes & Gray to be filed by subsequent Amendment.
(b) Consent of Price Waterhouse LLP, Independent Accountants, to
be filed by subsequent Amendment.
(12) Inapplicable.
(13) (a) Purchase Agreement between Registrant and Schwab relating to
Schwab Money Market Portfolio is electronically filed herein.
(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) of Post-Effective Amendment No. 5, 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.
(17) (a) Financial Data Schedule for Schwab Money Market Portfolio to
be filed by subsequent Amendment.
(b) Financial Data Schedule for Schwab S&P 500 Portfolio to be
filed by subsequent Amendment.
(c) Financial Data Schedule for Schwab Asset Director - High
Growth Portfolio to be filed by subsequent Amendment.
(18) Inapplicable.
Item 25. Persons Controlled by or under Common Control with Registrant.
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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 (date), the number of record holders of Registrant was:
Name of Fund/Class Number of Record Holders
- ------------------ ------------------------
Asset Director - High Growth Portfolio ( )
--------------
S&P 500 Portfolio ( )
--------------
Money Market Portfolios ( )
--------------
Item 27. Indemnification.
Article VIII of Registrant's Agreement and Declaration of Trust (Exhibit (1)
hereto, which is incorporated herein by reference) provides in effect that
Registrant will indemnify its officers and trustees against all liabilities and
expenses, including but not limited to amounts paid in satisfaction of
judgments, in compromise, or as fines and penalties, and counsel fees reasonably
incurred by any such officer or trustee in connection with the defense or
disposition of any action, suit, or other proceeding. However, in accordance
with Section 17(h) and 17(i) of the 1940 Act and its own terms, said Agreement
and Declaration of Trust does not protect any person against any liability to
Registrant or its shareholders to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office. In any
event, Registrant will comply with 1940 Act Releases No. 7221 and 11330
respecting the permissible boundaries of indemnification by an investment
company of its officers and trustees.
Insofar as indemnification for liability arising under the Securities Act of
1933, as amended (the "1933 Act"), may be permitted to trustees, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Manager.
(a) Information pertaining to business and other connections of Registrant's
Investment Manager is hereby incorporated by reference to the section of the
Prospectuses captioned "Organization and Management of the Fund" and to the
section of the Statements of Additional Information captioned "Management of the
Trust." For Schwab Asset Director(R)-High Growth Portfolio, information
pertaining to business and other connections of this Fund's sub-adviser is
hereby incorporated by reference to the section of its Prospectus captioned
"Organization and Management of the Fund" and to the section of the Statement of
Additional Information captioned "Management of the Trust."
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<PAGE> 69
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>
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
The Charles Schwab Corporation Treasurer and Senior Vice
President
Mayer & Schweitzer, Inc. Treasurer
Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President
Wayne W. Fields 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
</TABLE>
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<PAGE> 70
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
<S> <C> <C>
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
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
Timothy F. McCarthy Charles Schwab & Co., Inc. President and Chief Operating
Officer
The Charles Schwab Corporation Executive Vice President
Jardine Fleming Unit Trusts Ltd. Chief Executive Officer until
October 1995
Mayer & Schweitzer, Inc. Director
Peter J. McIntosh Charles Schwab & Co., Inc. Executive Vice President
Matthew M. O'Toole, Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
</TABLE>
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<PAGE> 71
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
<S> <C> <C>
David S. Pottruck Charles Schwab & Co., Inc. Chief Executive 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
Ronald W. Readmond Charles Schwab & Co., Inc. Vice Chairman and Director until
January 1996; Senior Executive
Vice President and Chief
Operating Officer until January
1995
The Charles Schwab Corporation Executive Vice President until
January 1996; Senior Executive
Vice President until January 1995
Mayer & Schweitzer, Inc. Director until January 1996
Gideon Sasson Charles Schwab & Co., Inc. Enterprise President
Beth Sawi The Charles Schwab Corporation Executive Vice President
Charles Schwab & Co., Inc. Executive Vice President until
December 1997
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
Schwab Holdings, Inc. Executive Vice President, Chief
Financial Officer and Director
</TABLE>
C-7
<PAGE> 72
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
<S> <C> <C>
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
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
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
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
<S> <C> <C>
Transamerica Corporation Director
AirTouch Communications Director
Siebel Systems Director
Karen L. Seaman, Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
Tom D. Seip Charles Schwab & Co., Inc. Enterprise President
The Charles Schwab Corporation Executive Vice President
Charles Schwab Investment Management, Inc. Chief Executive Officer
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
Mary B. Templeton Charles Schwab Investment Management, Inc. Assistant Corporate Secretary
until September 1997
The Charles Schwab Corporation Senior Vice President, General
Counsel and Corporate Secretary
until September 1997
Charles Schwab & Co., Inc. Senior Vice President, General
Counsel and Corporate Secretary
until September 1997
Mayer & Schweitzer Assistant Corporate Secretary
until September 1997
The Charles Schwab Trust Company Assistant Corporate Secretary
until February 1996 until
September 1997
Tai-Chin Tung, Charles Schwab & Co., Inc. Vice President
Treasurer and Principal
Financial Officer
</TABLE>
C-9
<PAGE> 74
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
<S> <C> <C>
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>
Registrant's sub-investment adviser for Schwab Asset Director(R)-High Growth
Portfolio is Symphony.
(c) The following information, which is believed to be accurate, is based upon
information provided by Symphony. The business, profession, vocation or
employment of a substantial nature in which each director and/or officer of
Symphony is or has been engaged during the past two fiscal years for his or her
own account in the capacity of director, officer, employee, partner or trustee
is as follows:
<TABLE>
<CAPTION>
Name Name of Company Capacity
<S> <C> <C>
Andrew T. Rudd Symphony Asset Management, Inc. Director and Chairman
BARRA, Inc. Director, Chief Executive Officer and
Chairman
Jeffrey L. Skelton Symphony Asset Management, Inc. Director, Chief Executive Officer and
President
BARRA, Inc. President, BARRA Ventures Div. until 1994
Neil L. Rudolph Symphony Asset Management, Inc. Chief Operating Officer/Chief Compliance
Officer
Wells Fargo Nikko Investment Advisors Managing Director, Chief Operating
Officer -- Mutual Fund Group until 1994
Praveen K. Gottipalli Symphony Asset Management, Inc. Director of Investments
BARRA, Inc. Director of Active Strategies until 1994
Michael J. Henman Symphony Asset Management, Inc. Director of Business Development
Wells Fargo Nikko Investment Advisors Managing Director until 1994
</TABLE>
Item 29. Principal Underwriter.
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<PAGE> 75
(a) Schwab acts as principal underwriter and distributor of Registrant's shares.
Schwab currently also acts as a principal underwriter for the Schwab Fund
Family, Schwab Investments, and Schwab Capital Trust, and intends to act as such
for any other investment company which Schwab may sponsor in the future.
(b) See Item 28(b) for information on the officers and directors of Schwab. The
principal business address of Schwab is 101 Montgomery Street, San Francisco,
California 94104.
(c) Not applicable.
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, and Federated Services Company, 1001 Liberty
Avenue, Pittsburgh, Pennsylvania 15222; 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.
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<PAGE> 76
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
has duly caused this Post Effective Amendment No. 7 to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Washington, District
of Columbia, on this 27th day of February, 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. 7 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 27th day
of February, 1998.
Signature Title
Charles R. Schwab* Chairman and Trustee
Charles R. Schwab
Timothy F. McCarthy* President and Trustee
Timothy F. McCarthy
William J. Klipp* Executive Vice President,
William J. Klipp Chief Operating Officer and
Trustee
Donald F. Dorward* Trustee
Donald F. Dorward
Robert G. Holmes* Trustee
Robert G. Holmes
Donald R. Stephens* Trustee
Donald R. Stephens
Michael W. Wilsey* Trustee
Michael W. Wilsey
Tai-Chin Tung* Treasurer and Principal
Tai-Chin Tung Financial Officer
*By /s/ ALAN G. PRIEST
-------------------------
Alan G. Priest, Attorney-In-Fact pursuant to Powers of Attorney filed
previously
<PAGE> 77
EXHIBIT INDEX
(1) Agreement and Declaration of Trust
(5)(c) Schedule B to Investment Advisory and Administration Agreement
(6)(a) Distribution Agreement
(8)(a) Custodian Services Agreement
(8)(f) Transfer Agency Agreement
(8)(g) Schedule B and D to the Transfer Agency Agreement
(8)(i) Shareholder Services Agreement
(8)(k) Schedule B to the Shareholder Services Agreement
(8)(m) Accounting Services Agreement between registrant and PNC Bank, Inc.
(13)(a) Purchase Agreement
<PAGE> 1
EXHIBIT 1
SCHWAB ANNUITY PORTFOLIOS
---------------
AGREEMENT AND DECLARATION OF TRUST
---------------
AGREEMENT AND DECLARATION OF TRUST made at Boston, Massachusetts on the
21st day of January, 1994, by the Trustees hereunder, and by the holders of
shares of beneficial interest to be issued hereunder as hereinafter provided.
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business of an
investment company; and
WHEREAS, the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts voluntary association with
transferable shares in accordance with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all
cash, securities and other assets, which they may from time to time acquire in
any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the pro rata benefit of the holders from
time to time of Shares in this Trust as hereinafter set forth.
<PAGE> 2
ARTICLE I
Name and Definitions
Name
Section 1. This Trust shall be known as "SCHWAB ANNUITY PORTFOLIOS",
and the Trustees shall conduct the business of the Trust under that name or any
other name as they may from time to time determine.
Definitions
Section 2. Whenever used herein, unless otherwise required by the
context or specifically provided:
(a) The "Trust" refers to the Massachusetts business
trust established by this Agreement and Declaration of Trust, as
amended from time to time;
(b) "Trustees" refers to the Trustees of the Trust
named herein or elected in accordance with Article IV;
(c) "Shares" means the equal proportionate
transferable units of interest into which the beneficial interest in
the Trust shall be divided from time to time or, if more than one
series or classes of Shares is authorized by the Trustees, the equal
proportionate transferable units into which the beneficial interest of
each series or classes of Shares shall be divided from time to time,
and includes fractions of Shares as well as whole Shares;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company
Act of 1940 and the Rules and Regulations thereunder, all as amended
from time to time;
(f) The terms "Affiliated Person", "Assignment",
"Commission", "Interested Person", "Principal Underwriter" and
"Majority Shareholder Vote" (the 67% or 50% requirement of the third
sentence of Section 2(a)(42) of the 1940 Act, whichever may be
applicable) shall have the meanings given them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement
and Declaration of Trust, as amended or restated from time to time;
and
(h) "Bylaws" shall mean the Bylaws of the Trust, as
amended from time to time.
-2-
<PAGE> 3
ARTICLE II
Purpose of Trust
The purpose of the Trust is to provide investors a managed investment
primarily in securities and debt instruments and to carry on such other business
as the Trustees may from time to time determine pursuant to their authority
under this Declaration of Trust.
ARTICLE III
Shares
Division of Beneficial Interests
Section 1. The Shares of the Trust shall be issued in one or more
series as the Trustees may, without Shareholder approval, authorize. Each series
shall be preferred over all other series in respect of the assets allocated to
that series. Each series may be divided into two or more classes, as the
Trustees may, without Shareholder approval, authorize. The beneficial interest
in each series shall be divided into Shares, with a par value of $0.00001.
Unless the Trustees have authorized the issuance of Shares of a series in two or
more classes, each Share of a series shall represent an equal proportionate
interest in the series with each other Share of the same series, none having
priority or preference over another. If the Trustees have authorized the
issuance of Shares of a series in two or more classes, then the classes may have
such variations as to dividend, redemption, and voting rights, net asset values,
expenses borne by the classes, and other matters as the Trustees have
authorized. The number of Shares authorized shall be unlimited. The Trustees may
from time to time divide or combine the Shares of any series or of any class of
a series into a greater or lesser number without thereby changing the
proportionate beneficial interests in the series.
Ownership of Shares
Section 2. The ownership of Shares shall be recorded on the books of
the Trust or a transfer or similar agent. No certificates certifying the
ownership of Shares shall be issued except as the Trustees may otherwise
determine from time to time. The Trustees may make such rules as they consider
appropriate for the issuance of Share certificates, the transfer of Shares and
similar matters. The record books of the Trust as kept by the Trust or by any
transfer or similar agent, as the case may be, shall be conclusive as to who are
the Shareholders of each series and as to the number of Shares of each series
held from time to time by each Shareholder.
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Investment in the Trust
Section 3. The Trustees shall accept investments in the Trust from such
persons and on such terms and for such consideration, which may consist of cash
or tangible or intangible property or a combination thereof, as they from time
to time authorize.
All consideration received by the Trust for the issue or sale of Shares
of each series, together with all income, earnings, profits, and proceeds
thereof, including any proceeds derived from the sale, exchange or liquidation
thereof, and any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, shall irrevocably belong to the
series of Shares with respect to which the same were received by the Trust for
all purposes, subject only to the rights of creditors, and shall be so handled
upon the books of account of the Trust and are herein referred to as "assets of"
such series.
No Preemptive Rights
Section 4. Shares shall have no preemptive or other right to subscribe
to any additional Shares or other securities issued by the Trust.
Status of Shares and Limitation of Personal Liability
Section 5. Shares shall be deemed to be personal property giving only
the rights provided in this instrument. Every Shareholder by virtue of having
become a Shareholder shall be held to have expressly assented and agreed to the
terms hereof and to have become a party hereto. The death of a Shareholder
during the continuance of the Trust shall not operate to terminate the same nor
entitle the representative of any deceased Shareholder to an accounting or to
take any action in court or elsewhere against the Trust or the Trustees, but
only to the rights of said decedent under this Trust. Ownership of Shares shall
not entitle the Shareholder to any title in or to the whole or any part of the
Trust property or right to call for a partition or division of the same or for
an accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or agent
of the Trust shall have any power to bind personally any Shareholder, nor except
as specifically provided herein to call upon any Shareholder for the payment of
any sum of money or assessment whatsoever other than such as the Shareholder may
at any time personally agree to pay.
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ARTICLE IV
The Trustees
Election
Section 1. The number of Trustees shall be as provided in the Bylaws or
as fixed from time to time by the Trustees. The Shareholders may elect Trustees
at any meeting of Shareholders called by the Trustees for that purpose. Each
Trustee shall serve during the continued lifetime of the Trust until he or she
dies, resigns or is removed, or, if sooner, until the next meeting of
Shareholders called for the purpose of electing Trustees and the election and
qualification of his or her successor. Any Trustee may resign at any time by
written instrument signed by him and delivered to any officer of the Trust, to
each other Trustee or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
Except to the extent expressly provided in a written agreement with the Trust,
no Trustee resigning and no Trustee removed shall have any right to any
compensation for any period following his or her resignation or removal, or any
right to damages on account of such removal.
Effect of Death, Resignation, etc. of a Trustee
Section 2. The death, declination, resignation, retirement, removal or
incapacity of the Trustees, or any one of them, shall not operate to annul the
Trust or to revoke any existing agency created pursuant to the terms of this
Declaration of Trust.
Powers
Section 3. Subject to the provisions of this Declaration of Trust, the
business of the Trust shall be managed by the Trustees, and they shall have all
powers necessary or convenient to carry out that responsibility. Without
limiting the foregoing, the Trustees may adopt Bylaws not inconsistent with this
Declaration of Trust providing for the conduct of the business of the Trust and
may amend and repeal them to the extent that such Bylaws do not reserve that
right to the Shareholders; they may enlarge or reduce their number, may fill
vacancies in their number, including vacancies caused by enlargement of their
number, and may remove Trustees with or without cause; they may elect and
remove, with or without cause, such officers and appoint and terminate such
agents as they consider appropriate; they may appoint from their own number, and
terminate, any one or more committees consisting of two or more Trustees,
including an executive committee which may, when the Trustees are not in
session, exercise some or all of the power and authority of the Trustees as the
Trustees may determine; they may employ one or more custodians of the assets of
the Trust and may authorize such custodians to employ subcustodians and to
deposit all or any part
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of such assets in a system or systems for the central handling of securities,
retain a transfer agent or a Shareholder servicing agent, or both, provide for
the distribution of Shares by the Trust, through one or more principal
underwriters or otherwise, set record dates for the determination of
Shareholders with respect to various matters, and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
write options on and lease any or all of the assets of the Trust;
(c) To act as a distributor of Shares and as underwriter of,
or broker or dealer in, securities or other property;
(d) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and
to execute and deliver proxies or powers of attorney to such person or
persons as the Trustees shall deem proper, granting to such person or
persons such power and discretion with relation to securities or
property as the Trustees shall deem proper;
(e) To exercise powers and rights of subscription or otherwise
which in any manner arise out of ownership of securities;
(f) To hold any security or property in a form not indicating
any trust, whether in bearer, unregistered or other negotiable form, or
in the name of the Trustees or of the Trust or in the name of a
custodian, subcustodian or other depository or a nominee or nominees or
otherwise;
(g) To allocate assets, liabilities and expenses of the Trust
to a particular series of Shares or to apportion the same among two or
more series, provided that any liabilities or expenses incurred by a
particular series of Shares shall be payable solely out of the assets
of that series;
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(h) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer,
any security of which is or was held in the Trust; to consent to any
contract, lease, mortgage, purchase or sale of property by such
corporation or issuer, and to pay calls or subscriptions with respect
to any security held in the Trust;
(i) To join with other security holders in acting through a
committee depositary, voting trustee or otherwise, and in that
connection to deposit any security with, or transfer any security to,
any such committee, depositary or trustee, and to delegate to them such
power and authority with relation to any security (whether or not so
deposited or transferred) as the Trustees shall deem proper, and to
agree to pay, and to pay, such portion of the expenses and compensation
of such committee, depositary or trustee as the Trustees shall deem
proper;
(j) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including
but not limited to claims for taxes;
(k) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(l) To borrow funds;
(m) To endorse or guarantee the payment of any notes or other
obligations of any person; to make contracts of guaranty or suretyship,
or otherwise assume liability for payment thereof; and to mortgage and
pledge the Trust property or any part thereof to secure any of or all
such obligations;
(n) To purchase and pay for entirely out of Trust property
such insurance as they may deem necessary or appropriate for the
conduct of the business, including without limitation, insurance
policies insuring the assets of the Trust and payment of distributions
and principal on its portfolio investments, and insurance policies
insuring the Shareholders, Trustees, officers, employees, agents,
investment advisers or managers, principal underwriters, or independent
contractors of the Trust individually against all claims and
liabilities of every nature arising by reason of holding, being or
having held any such office or position, or by reason of any action
alleged to have been taken or omitted by any such person as
Shareholder, Trustee, officer, employee, agent, investment adviser or
manager, principal underwriter, or independent contractor, including
any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have
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the power to indemnify such person against such liability;
(o) To pay pensions for faithful service, as deemed
appropriate by the Trustees, and to adopt, establish and carry out
pension, profit-sharing, Share bonus, Share purchase, savings, thrift
and other retirement, incentive and benefit plans, trusts and
provisions, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits,
for any or all of the Trustees, officers, employees and agents of the
Trust; and
(p) To engage in any other lawful act or activity in which
corporations organized under the Massachusetts Business Corporation Law
may engage. The Trustees shall not in any way be bound or limited by
any present or future law or custom in regard to investments by
trustees.
Except as otherwise provided herein or from time to time in the Bylaws,
any action to be taken by the Trustees may be taken by a majority of the
Trustees present at a meeting of Trustees (a quorum being present), within or
without Massachusetts, including any meeting held by means of a conference
telephone or other communications equipment by means of which all persons
participating in the meeting can hear each other at the same time and
participation by such means shall constitute presence in person at a meeting, or
by written consents of a majority of the Trustees then in office.
Payment of Expenses by Trust
Section 4. The Trustees are authorized to pay or to cause to be paid
out of the principal or income of the Trust, or partly out of principal and
partly out of income, as they deem fair, all expenses, fees, charges, taxes and
liabilities incurred or arising in connection with the Trust, in connection with
the management thereof, or in connection with the financing of the sale of
Shares, including, but not limited to, the Trustees' compensation and such
expenses and charges for the services of the Trust's officers, employees, any
investment adviser, sub-adviser, principal underwriter, auditor, counsel,
custodian, sub-custodian, transfer agent, administrator, sub-administrator,
distributor, shareholder servicing agent, and such other agents or independent
contractors and such other expenses and charges as the Trustees may deem
necessary or proper to incur, provided, however, that all expenses, fees,
charges, taxes and liabilities incurred or arising in connection with a
particular series of Shares as determined by the Trustees, shall be payable
solely out of the assets of that series.
Ownership of Assets of the Trust
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Section 5. Title to all of the assets of each series of Shares and of
the Trust shall at all times be considered as vested in the Trustees.
Advisory, Management and Distribution
Section 6. The Trustees may, at any time and from time to time,
contract for exclusive or nonexclusive advisory and/or management services with
any corporation, trust, association or other organization (the "Manager"), every
such contract to comply with such requirements and restrictions as may be set
forth in the Bylaws; and any such contract may provide for one or more
Sub-advisers who shall perform all or part of the obligations of the Manager
under such Contract and may contain such other terms interpretive of or in
addition to said requirements and restrictions as the Trustees may determine,
including, without limitation, authority to determine from time to time what
investments shall be purchased, held, sold or exchanged and what portion, if
any, of the assets of the Trust shall be held uninvested and to make changes in
the Trust's investments. The Trustees may also, at any time and from time to
time, contract with the Manager or any other corporation, trust, association or
other organization, appointing it exclusive or nonexclusive distributor or
principal underwriter for the Shares, every such contract to comply with such
requirements and restrictions as may be set forth in the Bylaws; and any such
contract may contain such other terms interpretive of or in addition to said
requirements and restrictions as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee,
manager, adviser, principal underwriter or distributor or agent of or
for any corporation, trust, association, or other organization, or of
or for any parent or affiliate of any organization, with which an
advisory or management contract, or principal underwriter's or
distributor's contract, or transfer, Shareholder servicing or other
agency contract may have been or may hereafter be made, or that any
such organization, or any parent or affiliate thereof, is a Shareholder
or has an interest in the Trust, or that
(ii) any corporation, trust, association or other organization
with which an advisory or management contract or principal
underwriter's or distributor's contract, or transfer, Shareholder
servicing or other agency contract may have been or may hereafter be
made also has an advisory or management contract, or principal
underwriter's or distributor's contract, or transfer, Shareholder
servicing
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or other agency contract with one or more other corporations, trusts,
associations, or other organizations, or has other business or
interests shall not affect the validity of any such contract or
disqualify any Shareholder, Trustee or officer of the Trust from voting
upon or executing the same or create any liability or accountability to
the Trust or its Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Shareholders shall have such power to vote as is provided for in, and
may hold meetings and take actions pursuant to the provisions of the Bylaws.
ARTICLE VI
Distributions, Redemptions and Repurchases
Distributions
Section 1. The Trustees may each year, or more frequently if they so
determine, distribute to the Shareholders of each series such income and capital
gains, accrued or realized, as the Trustees may determine, after providing for
actual and accrued expenses and liabilities (including such reserves as the
Trustees may establish) determined in accordance with good accounting practices.
The Trustees shall have full discretion to determine which items shall be
treated as income and which items as capital and their determination shall be
binding upon the Shareholders. Distributions of each year's income of each
series shall be distributed pro rata to Shareholders in proportion to the number
of Shares of each series held by each of them. Such distributions shall be made
in cash or Shares or a combination thereof as determined by the Trustees. Any
such distribution paid in Shares will be paid at the net asset value thereof as
determined in accordance with the Bylaws.
Redemptions and Repurchases
Section 2. The Trust shall purchase such Shares as are offered by any
Shareholder for redemption, upon the presentation of any certificate for the
Shares to be purchased, a proper instrument of transfer and a request directed
to the Trust or a person designated by the Trust that the Trust purchase such
Shares, or in accordance with such other procedures for redemption as the
Trustees may from time to time authorize; and the Trust will pay therefor the
net asset value thereof, as next determined in accordance with the Bylaws, less
such redemption charge or fee as the Trustees may determine from time to time.
Payment for said Shares shall be made by the Trust to the Shareholder within
seven days after the date on which the request is made. The obligation set forth
in this Section 2 is subject
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to the provision that in the event that any time the New York Stock Exchange is
closed for other than customary weekends or holidays, or, if permitted by rules
of the Commission, during periods when trading on the Exchange is restricted or
during any emergency which makes it impractical for the Trust to dispose of its
investments or to determine fairly the value of its net assets, or during any
other period permitted by order of the Commission for the protection of
investors, such obligation may be suspended or postponed by the Trustees. The
Trust may also purchase or repurchase Shares at a price not exceeding the net
asset value of such Shares in effect when the purchase or repurchase or any
contract to purchase or repurchase is made. The Trust may refuse to honor a
request by a Shareholder for redemption of his or her Shares for a specified
time after such Shareholder's purchase of such Shares, such specified time, if
any, to be set forth in the Bylaws.
Redemptions at the Option of the Trust
Section 3. The Trust shall have the right at its option and at any time
to redeem Shares of any Shareholder at the net asset value thereof as determined
in accordance with the Bylaws: (i) if at such time such Shareholder owns fewer
Shares than, or Shares having an aggregate net asset value of less than, an
amount determined from time to time by the Trustees; or (ii) to the extent that
such Shareholder owns Shares of a particular series of Shares equal to or in
excess of a percentage of the outstanding Shares of that series determined from
time to time by the Trustees; or (iii) to the extent that such Shareholder owns
Shares of the Trust representing a percentage equal to or in excess of such
percentage of the aggregate number of outstanding Shares of the Trust or the
aggregate net asset value of the Trust determined from time to time by the
Trustees. In addition, if the Net Income of any series of Shares of the Trust
which uses the amortized cost method of valuation pursuant to the 1940 Act is
determined at any time to be a negative amount, then, with respect to a
Shareholder owning Shares of such series, such Shareholder's pro rata share of
such negative amount shall constitute a liability of such Shareholder to the
Trust which shall be paid at such times and in such manner as the Trustees may
from time to time determine out of such Shareholder's accrued dividend account
in such series or otherwise. As used in this Article VI, Section 3, "Net Income"
shall mean all interest income accrued on portfolio investments of the series
plus or minus realized or unrealized gains and losses on portfolio investments
of the series, less all actual and accrued expenses and liabilities determined
in according with generally accepted accounting practices. Determination of Net
Income of a series made by the Trustees, or as they may authorize, in good
faith, shall be binding on all parties concerned.
Dividends, Distributions, Redemptions and Repurchases
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Section 4. No dividend or distribution (including, without limitation,
any distribution paid upon termination of the Trust or of any series) with
respect to, nor any redemption or repurchase of, the Shares of any series shall
be effected by the Trust other than from the assets of such series.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Compensation
Section 1. The Trustees as such shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Nothing herein shall in any way prevent the employment of any Trustee for
advisory, management, legal, accounting, investment banking, underwriting,
brokerage, or investment dealer or other services and payment for the same by
the Trust.
Limitation of Liability
Section 2. The Trustees shall not be responsible or liable in any event
for any neglect or wrongdoing of any officer, agent, employee, manager or
principal underwriter of the Trust, nor shall any Trustee be responsible for the
act or omission of any other Trustee, but nothing herein contained shall protect
any Trustee against any liability to which he or she would otherwise be subject
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only in or with respect to
their or his or her capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII
Indemnification
Trustees, Officers, etc.
Section 1. The Trust shall indemnify each of its Trustees and officers
(including persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as a
shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as
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fines and penalties, and counsel fees reasonably incurred by any Covered Person
in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in any such action, suit or
other proceeding to be liable to the Trust or its Shareholders by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties), shall be paid from time to time by the Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of such expenses
is not authorized under this Article, provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (provided that a majority of the disinterested Trustees then in office
act on the matter), or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as opposed to a
full trial type inquiry) that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Article.
Compromise Payment
Section 2. As to any matter disposed of (whether by a compromise
payment, pursuant to a consent decree or otherwise) without an adjudication by a
court, or by any other body before which the proceeding was brought, that such
Covered Person either (a) did not act in good faith in the reasonable belief
that his or her action was in the best interests of the Trust or (b) is liable
to the Trust or its Shareholders by reason of wilful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office, indemnification shall be provided if (a) approved as in the
best interests of the Trust, after notice that it involves such indemnification,
by at least a majority of the disinterested Trustees acting on the matter
(provided that a majority of the disinterested Trustees then in office act on
the matter) upon a determination, based upon a review of readily available facts
(as opposed to a full trial type inquiry) that such Covered Person acted in good
faith in the reasonable belief that his or her
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action was in the best interests of the Trust and is not liable to the Trust or
its Shareholders by reasons of wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his or her
office, or (b) there has been obtained an opinion in writing of independent
legal counsel, based upon a review of readily available facts (as opposed to a
full trial type inquiry) to the effect that such Covered Person appears to have
acted in good faith in the reasonable belief that his or her action was in the
best interests of the Trust and that such indemnification would not protect such
Person against any liability to the Trust to which he or she would otherwise be
subject by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office. Any
approval pursuant to this Section shall not prevent the recovery from any
Covered Person of any amount paid to such Covered Person in accordance with this
Section as indemnification if such Covered Person is subsequently adjudicated by
a court of competent jurisdiction not to have acted in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Trust or to have been liable to the Trust or its Shareholders by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office.
Indemnification Not Exclusive
Section 3. The right of indemnification hereby provided shall not be
exclusive of or affect any other rights to which such Covered Person may be
entitled. As used in this Article VIII, the term "Covered Person" shall include
such person's heirs, executors and administrators and a "disinterested Trustee"
is a Trustee who is not an "interested person" of the Trust as defined in
Section 2(a)(19) of the 1940 Act (or who has been exempted from being an
"interested person" by any rule, regulation or order of the Commission) and
against whom none of such actions, suits or other proceedings or another action,
suit or other proceeding on the same or similar grounds is then or has been
pending. Nothing contained in this Article shall affect any rights to
indemnification to which personnel of the Trust, other than Trustees or
officers, and other persons may be entitled by contract or otherwise under law,
nor the power of the Trust to purchase and maintain liability insurance on
behalf of any such person; provided, however, that the Trust shall not purchase
or maintain any such liability insurance in contravention of applicable law,
including without limitation the 1940 Act.
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Shareholders
Section 4. In case any Shareholder or former Shareholder shall be held
to be personally liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled to be
held harmless from and indemnified against all loss and expense arising from
such liability, but only out of the assets of the particular series of Shares of
which he or she is or was a Shareholder.
ARTICLE IX
Miscellaneous
Trustees, Shareholders, etc. Not Personally Liable; Notice
Section 1. All persons extending credit to, contracting with or having
any claim against the Trust or a particular series of Shares shall look only to
the assets of the Trust or the assets of that particular series of Shares for
payment under such credit, contract or claim; and neither the Shareholders nor
the Trustees, nor any of the Trust's officers, employees or agents, whether
past, present or future, shall be personally liable therefor. Nothing in this
Declaration of Trust shall protect any Trustee against any liability to which
such Trustee would otherwise be subject by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made
or issued by the Trustees or by any officer or officers shall give notice that
this Declaration of Trust is on file with the Secretary of The Commonwealth of
Massachusetts and shall recite that the same was executed or made by or on
behalf of the Trust or by them as Trustee or Trustees or as officer or officers
and not individually and that the obligations of such instrument are not binding
upon any of them or the Shareholders individually but are binding only upon the
assets and property of the Trust, and may contain such further recital as he or
she or they may deem appropriate, but the omission thereof shall not operate to
bind any Trustee or Trustees or officer or officers or Shareholder or
Shareholders individually.
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Trustee's Good Faith Action, Expert Advice, No Bond or Surety
Section 2. The exercise by the Trustees of their powers and discretion
hereunder shall be binding upon everyone interested. A Trustee shall be liable
for his or her own wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice or for
failing to follow such advice. Except as may be required by applicable law,
including, without limitation, the 1940 Act, the Trustees shall not be required
to give any bond as such, nor any surety if a bond is required.
Liability of Third Persons Dealing with Trustees
Section 3. No person dealing with the Trustees shall be bound to make
any inquiry concerning the validity of any transaction made or to be made by the
Trustees or to see to the application of any payments made or property
transferred to the Trust or upon its order.
Duration and Termination of Trust
Section 4. Unless terminated as provided herein, the Trust shall
continue without limitation of time. The Trust may be terminated at any time by
the vote of Shareholders holding at least a majority of the Shares of each
series entitled to vote or by the Trustees by written notice to the
Shareholders. Any series of Shares may be terminated at any time by vote of
Shareholders holding at least a majority of the Shares of such series entitled
to vote or by the Trustees by written notice to the Shareholders of such series.
Upon termination of the Trust or of any one or more series of Shares,
after paying or otherwise providing for all charges, taxes, expenses and
liabilities, whether due or accrued or anticipated, of the Trust or of the
particular series as may be determined by the Trustees, the Trust shall, in
accordance with such procedures as the Trustees consider appropriate, reduce the
remaining assets to distributable form in cash or shares or other securities, or
any combination thereof, and distribute the proceeds to the Shareholders of the
series involved, ratably according to the number of Shares of such series held
by the several Shareholders of such series on the date of termination.
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Filing of Copies, References, Headings
Section 5. The original or a copy of this instrument and of each
amendment hereto shall be kept at the office of the Trust where it may be
inspected by any Shareholder. A copy of this instrument and of each amendment
hereto shall be filed by the Trust with the Secretary of The Commonwealth of
Massachusetts and with the Boston City Clerk, as well as any other governmental
office where such filing may from time to time be required. Anyone dealing with
the Trust may rely on a certificate by an officer of the Trust as to whether or
not any such amendments have been made and as to any matters in connection with
the Trust hereunder, and, with the same effect as if it were the original, may
rely on a copy certified by an officer of the Trust to be a copy of this
instrument or of any such amendments. In this instrument and in any such
amendment, references to this instrument, and all expressions like "herein",
"hereof" and "hereunder" shall be deemed to refer to this instrument as amended
or affected by any such amendments. Headings are placed herein for convenience
of reference only and shall not be taken as a part hereof or control or affect
the meaning, construction or effect of this instrument. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
Applicable Law
Section 6. This Declaration of Trust is made in The Commonwealth of
Massachusetts, and it is created under and is to be governed by and construed
and administered according to the laws of said Commonwealth. The Trust shall be
of the type commonly called a Massachusetts business trust, and without limiting
the provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
Amendments
Section 7. This Declaration of Trust may be amended at any time by an
instrument in writing signed by a majority of the then Trustees when authorized
to do so by vote of Shareholders holding a majority of the Shares of each series
entitled to vote, except that an amendment which shall affect the holders of one
or more series of Shares but not the holders of all outstanding series shall be
authorized by vote of the Shareholders holding a majority of the Shares entitled
to vote of each series affected and no vote of Shareholders of a series not
affected shall be required. Amendments having the purpose of changing the name
of the Trust, of establishing, changing, or eliminating the par value of the
Shares or of supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision contained herein shall
not require authorization by Shareholder vote.
-17-
<PAGE> 18
IN WITNESS WHEREOF, the undersigned has executed this Agreement and
Declaration of Trust as Trustee and not individually, as of the 21st day of
January, 1994.
/s/ Peter M. Gaetani
Peter M. Gaetani
Trustee
COUNTY OF SUFFOLK :
: ss
COMMONWEALTH OF MASSACHUSETTS :
On this 21st day of January, 1994, Peter M. Gaetani, known to me and
known to be the individual described herein and who executed the foregoing
instrument, before me and acknowledged the foregoing instrument to be her free
act and deed.
/s/ Julianne Botte
Notary Public
[Notary's Seal] My Commission Expires: 10/31/97
Address of the Trustee:
127 Congress Street
Boston, MA 02110
Address of the Trust:
101 Montgomery Street
Suite 1M-19
San Francisco, CA 94101
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<PAGE> 1
EXHIBIT (5)(c)
SCHEDULE B
TO INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT
FOR SCHWAB ANNUITY PORTFOLIOS
AMENDED MAY 1, 1997
THE FEES LISTED BELOW ARE FOR SERVICES PROVIDED UNDER THIS
AGREEMENT AND ARE TO BE ACCRUED DAILY AND PAID MONTHLY IN
ARREARS:
<TABLE>
<CAPTION>
FUND FEE
<S> <C>
Schwab Money Market Portfolio Forty-six one-hundredths of one percent (0.46%) of the Fund's
average daily net assets not in excess of $1 billion,
forty-five one-hundredths of one percent (0.45%) of such net
assets over $1 billion and not in excess of $3 billion, forty
one-hundredths of one percent (0.40%) of such net assets over
$3 billion but not in excess of $10 billion, thirty-seven
one-hundredths of one percent (.37%) of such net assets over
$10 billion but not in excess of $20 billion and thirty-four
one-hundredths of one percent (.34%) of such net assets over
$20 billion.
Schwab Asset Director-High Growth Portfolio Seventy-four one-hundredths of one percent (0.74%) of the
Fund's average daily net assets not in excess of $1 billion,
sixty-nine one-hundredths of one percent (0.69%) of such net
assets over $1 billion and not in excess of $2 billion and
sixty-four one-hundredths of one percent (0.64%) of such net
assets over $2 billion.
</TABLE>
B-1
<PAGE> 2
<TABLE>
<CAPTION>
FUND FEE
<S> <C>
Schwab S&P 500 Portfolio Thirty-six one-hundredths of one percent (0.36%) of the Fund's
average daily net assets not in excess of $1 billion,
thirty-three one-hundredths of one percent (0.33%) of such net
assets over $1 billion and not in excess of $2 billion and
thirty-one one-hundredths of one percent (0.31%) of such net
assets over $2 billion.
</TABLE>
SCHWAB ANNUITY PORTFOLIOS
By:/s/ Timothy F. McCarthy
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
By:/s/ William J. Klipp
Name: William J. Klipp
Title: President and Chief Investment Officer
B-2
<PAGE> 1
EXHIBIT (6)(a)
DISTRIBUTION AGREEMENT
March 29, 1994
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, California 94104
Ladies and Gentlemen:
This is to confirm that, in consideration of the agreements hereinafter
contained, the undersigned, SCHWAB ANNUITY PORTFOLIOS (the "Trust"), a
Massachusetts business trust, has agreed that CHARLES SCHWAB & CO., INC. (the
"Distributor") shall be, for the period of this Agreement, the distributor of
the units of beneficial interest of the investment portfolios of the Trust
identified on Schedule A hereto (each a "Fund," and collectively, the "Funds").
Such units of beneficial interest are hereinafter called "Shares."
1. Services as Distributor.
1.1. Distributor will act as agent for the distribution of the Shares
covered by the registration statement and prospectus of the Trust in effect
under the Securities Act of 1933, as amended.
1.2. Distributor agrees to use appropriate efforts to solicit orders
for the sale of the Shares and will undertake such advertising and promotion as
it believes reasonable in connection with such solicitation. The Trust
understands that Distributor may, in the future, be the distributor of the
shares of several investment companies or series (together, "Companies"),
including Companies having investment objectives similar to those of the Trust.
The Trust further understands that investors and potential investors in the
Trust may invest in shares of such other Companies. The Trust agrees that
Distributor's duties to such Companies shall not be deemed to be in conflict
with its duties to the Trust under this paragraph 1.2.
Distributor shall, at its own expense, finance appropriate activities
which it deems reasonable which are primarily intended to result in the sale of
the Shares, including, but not limited to, advertising, compensation of
underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current Shareholders, and the printing and mailing of
sales literature.
1.3. All activities by Distributor and its partners, agents, and
employees as distributor of the Shares shall
<PAGE> 2
comply with all applicable laws, rules and regulations, including, without
limitation, all rules and regulations made or adopted pursuant to the Investment
Company Act of 1940 by the Securities and Exchange Commission or any securities
association registered under the Securities Exchange Act of 1934.
1.4. Distributor will provide one or more persons, during normal
business hours, to respond to telephone questions with respect to the Trust.
1.5. Distributor will transmit any orders received by it for purchase
or redemption of the Shares to the transfer agent and custodian for the Funds.
1.6. Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Trust's officers may decline to accept any orders for, or make any
sales of the Shares until such time as those officers deem it advisable to
accept such orders and to make such sales.
1.7. Distributor will act only on its own behalf as principal if it
chooses to enter into selling agreements with selected dealers or others.
1.8. The Trust agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
the Shares for sale in such states as Distributor may designate.
1.9. The Trust shall furnish from time to time, for use in connection
with the sale of the Shares, such information with respect to the Funds and the
Shares as Distributor may reasonably request; and the Trust warrants that the
statements contained in any such information shall fairly show or represent what
they purport to show or represent. The Trust shall also furnish Distributor upon
request with: (a) unaudited semi-annual statements of the Funds' books and
accounts prepared by the Trust, (b) quarterly earnings statements prepared by
the Trust, (c) a monthly itemized list of the securities in the Funds, (d)
monthly balance sheets as soon as practicable after the end of each month, and
(e) from time to time such additional information regarding the financial
condition of the Funds as Distributor may reasonably request.
1.10. The Trust represents to Distributor that all registration
statements and prospectuses filed by the Trust with the Securities and Exchange
Commission under the
-2-
<PAGE> 3
Securities Act of 1933, as amended, with respect to the Shares have been
carefully prepared in conformity with the requirements of said Act and rules and
regulations of the Securities and Exchange Commission thereunder. As used in
this agreement the terms "registration statement" and "prospectus" shall mean
any registration statement and any prospectus and Statement of Additional
Information relating to the Funds filed with the Securities and Exchange
Commission and any amendments and supplements thereto which at any time shall
have been filed with the same Commission. The Trust represents and warrants to
Distributor that any registration statement and prospectus, when such
registration statement becomes effective, will contain all statements required
to be stated therein in conformity with said Act and the rules and regulations
of said Commission; that all statements of fact contained in any such
registration statement and prospectus will be true and correct when such
registration statement becomes effective; and that neither any registration
statement nor any prospectus when such registration statement becomes effective
will include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading to a purchaser of the Shares. The Distributor may but shall not
be obligated to propose from time to time such amendment or amendments to any
registration statement and such supplement or supplements to any prospectus as,
in the light of future developments, may, in the opinion of the Distributor's
counsel, be necessary or advisable. If the Trust shall not propose such
amendment or amendments and/or supplement or supplements within fifteen days
after receipt by the Trust of a written request from Distributor to do so,
Distributor may, at its option, terminate this agreement. The Trust shall not
file any amendment to any registration statement or supplement to any prospectus
without giving Distributor reasonable notice thereof in advance; provided,
however, that nothing contained in this agreement shall in any way limit the
Trust's right to file at any time such amendments to any registration statement
and/or supplements to any prospectus, of whatever character, as the Trust may
deem advisable, such right being in all respects absolute and unconditional.
1.11. The Trust authorizes Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of the Shares. The Trust agrees to indemnify, defend and hold Distributor, its
directors, officers and employees, and any person who controls Distributor
within the meaning of Section 15 of the Securities Act of 1933, as amended, free
and harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims, demands
or liabilities and any counsel fees
-3-
<PAGE> 4
incurred in connection therewith) which Distributor, its partners and employees,
or any such controlling person, may incur under the Securities Act of 1933, as
amended, or under common law or otherwise, arising out of or based upon any
untrue statement, or alleged untrue statement, of a material fact contained in
any registration statement or any prospectus or arising out of or based upon any
omission, or alleged omission, to state a material fact required to be stated in
either any registration statement or any prospectus or necessary to make the
statements in either thereof not misleading; provided, however, that the Trust's
agreement to indemnify Distributor, its directors, officers or employees, and
any such controlling person shall not be deemed to cover any claims, demands,
liabilities or expenses arising out of any statements or representations as are
contained in any prospectus and in such financial and other statements as are
furnished in writing to the Trust by Distributor and used in the answers to the
registration statement or in the corresponding statements made in the
prospectus, or arising out of or based upon any omission or alleged omission to
state a material fact in connection with the giving of such information required
to be stated in such answers or necessary to make the answers not misleading;
and further provided that the Trust's agreement to indemnify Distributor and the
Trust's representations and warranties hereinbefore set forth in paragraph 1.10
shall not be deemed to cover any liability to the Trust or its Shareholders to
which Distributor would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
Distributor's reckless disregard of its obligations and duties under this
agreement. The Trust's agreement to indemnify Distributor, its partners and
employees, and any such controlling person, as aforesaid, is expressly
conditioned upon the Trust's being notified of any action brought against
Distributor, its directors, officers or employees, or any such controlling
person, such notification to be given by letter or by telegram addressed to the
Trust at its principal office in San Francisco, California and sent to the Trust
by the person against whom such action is brought, within 10 days after the
summons or other first legal process shall have been served. The failure to so
notify the Trust of any such action shall not relieve the Trust from any
liability which the Trust may have to the person against whom such action is
brought by reason of any such untrue, or allegedly untrue, statement or
omission, or alleged omission, otherwise than on account of the Trust's
indemnity agreement contained in this paragraph 1.11. The Trust will be entitled
to assume the defense of any suit brought to enforce any such claim, demand or
liability, but, in such case, such defense shall be conducted by counsel of good
standing chosen by the Trust and approved by Distributor, which approval shall
not be unreasonably
-4-
<PAGE> 5
withheld. In the event the Trust elects to assume the defense of any such suit
and retain counsel of good standing approved by Distributor, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case the Trust does not elect to assume
the defense of any such suit, or in case Distributor reasonably does not approve
of counsel chosen by the Trust, the Trust will reimburse Distributor, its
directors, officers and employees, or the controlling person or persons named as
defendant or defendants in such suit, for the fees and expenses of any counsel
retained by Distributor or them. The Trust's indemnification agreement contained
in this paragraph 1.11 and the Trust's representations and warranties in this
agreement shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of Distributor, its partners and employees,
or any controlling person, and shall survive the delivery of any Shares. This
agreement of indemnity will inure exclusively to Distributor's benefit, to the
benefit of its several partners and employees, and their respective estates, and
to the benefit of the controlling persons and their successors. The Trust agrees
promptly to notify Distributor of the commencement of any litigation or
proceedings against the Trust or any of its officers or Trustees in connection
with the issue and sale of any Shares.
1.12. Distributor agrees to indemnify, defend and hold the Trust, its
several officers and Trustees and any person who controls the Trust within the
meaning of Section 15 of the Securities Act of 1933, as amended, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the costs of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Trust, its officers or Trustees or any such controlling person, may incur under
the Securities Act of 1933, as amended, or under common law or otherwise, but
only to the extent that such liability or expense incurred by the Trust, its
officers or Trustees or such controlling person resulting from such claims or
demands, shall arise out of or be based upon any untrue, or alleged untrue,
statement of a material fact contained in information furnished in writing by
Distributor to the Trust and used in the answers to any of the items of the
registration statement or in the corresponding statements made in the
prospectus, or shall arise out of or be based upon any omission, or alleged
omission, to state a material fact in connection with such information furnished
in writing by Distributor to the Trust required to be stated in such answers or
necessary to make such information not misleading. Distributor's agreement to
indemnify the Trust, its officers and Trustees, and any such controlling person,
as aforesaid, is expressly conditioned upon Distributor's being notified of
-5-
<PAGE> 6
any action brought against the Trust, its officers or Trustees, or any such
controlling person, such notification to be given by letter or telegram
addressed to Distributor at its principal office in San Francisco, California
and sent to Distributor by the person against whom such action is brought,
within 10 days after the summons or other first legal process shall have been
served. Distributor shall have the right of first control of the defense of such
action, with counsel of its own choosing, satisfactory to the Trust, if such
action is based solely upon such alleged misstatement or omission on
Distributor's part, and in any other event the Trust, its officers or Trustees
or such controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action. The failure to so
notify Distributor of any such action shall not relieve Distributor from any
liability which Distributor may have to the Trust, its officers or Trustees, or
to such controlling person by reason of any such untrue or alleged untrue
statement, or omission or alleged omission, otherwise than on account of
Distributor's indemnity agreement contained in this paragraph 1.12.
1.13. No Shares shall be offered by either Distributor or the Trust
under any of the provisions of this agreement and no orders for the purchase or
sale of Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the
Securities Act of 1933, as amended, or if and so long as a current prospectus as
required by Section 10(b)(2) of said Act, as amended, is not on file with the
Securities and Exchange Commission; provided, however, that nothing contained in
this paragraph 1.13 shall in any way restrict or have an application to or
bearing upon the Trust's obligation to repurchase Shares from any Shareholder in
accordance with the provisions of the Trust's prospectus, Declaration of Trust,
or By-laws.
1.14. The Trust agrees to advise Distributor as soon as reasonably
practical by a notice in writing delivered to Distributor or its counsel:
(a) of any request by the Securities and Exchange Commission for
amendments to the registration statement or prospectus then in effect or for
additional information;
(b) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of the registration
statement or prospectus then in effect or the initiation by service of process
on the Trust of any proceeding for that purpose;
-6-
<PAGE> 7
(c) of the happening of any event that makes untrue any statement of a
material fact made in the registration statement or prospectus then in effect or
which requires the making of a change in such registration statement or
prospectus in order to make the statements therein not misleading; and
(d) of all action of the Securities and Exchange Commission with
respect to any amendment to any registration statement or prospectus which may
from time to time be filed with the Securities and Exchange Commission.
For purposes of this section, informal requests by or acts of the Staff
of the Securities and Exchange Commission shall not be deemed actions of or
requests by the Securities and Exchange Commission.
1.15. Distributor agrees on behalf of itself and its directors,
officers and employees to treat confidentially and as proprietary information of
the Trust all records and other information relative to the Trust and its prior,
present or potential Shareholders, and not to use such records and information
for any purpose other than performance of its responsibilities and duties
hereunder, except after prior notification to and approval in writing by the
Trust, which approval shall not be unreasonably withheld and may not be withheld
where Distributor may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
1.16. This agreement shall be governed by the laws of the Commonwealth
of Massachusetts.
2. Issuance of Shares.
The Trust reserves the right to issue, transfer or sell Shares of the
Funds at net asset value (a) in connection with the merger or consolidation of
the Trust or the Funds with any other investment company or the acquisition by
the Trust or the Funds of all or substantially all of the assets or of the
outstanding Shares of any other investment company; (b) in connection with a pro
rata distribution directly to the holders of Shares of a Fund in the nature of a
stock dividend or split; (c) upon the exercise of subscription rights granted to
the holders of Shares of a Fund on a pro rata basis; (d) in connection with the
issuance of Shares of a Fund pursuant to any exchange and reinvestment
privileges described in any then-current prospectus of a Fund; and (e) otherwise
in accordance with any then-current prospectus of the Funds.
-7-
<PAGE> 8
3. Term and Matters Relating to the Trust as a Massachusetts Business
Trust.
This agreement shall become effective as to the Trust on March 29, 1994
and, unless sooner terminated as provided herein, shall continue until two
years, and thereafter shall continue automatically for successive one-year
periods; provided, however, that such continuance is specifically approved at
least annually by (i) the Trust's Board of Trustees or (ii) by "vote of a
majority of the outstanding Shares" (as defined below) of the Trust, and
provided further, that in either event the continuance is also approved at least
annually by the majority of the Trust's Trustees who are not parties to the
agreement or interested persons (as defined in the 1940 Act) of any party to
this agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval. This agreement is terminable on not less than sixty
days' notice by the Trust's Board of Trustees, by "vote of a majority of the
outstanding Shares" (as defined below) of the Trust or by Distributor. This
agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act). For purposes of this Agreement, the term "vote of a
majority of the outstanding Shares" shall mean the approval, at a meeting of
Shareholders duly called, of the lesser of (i) the holders of 67% or more of the
votes present at any such meeting, if the holders of more than 50% of the
outstanding votes are present or represented by proxy thereat; or (ii) the
holders of more than 50% of the outstanding votes.
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 a
Declaration of Trust dated as of January 21, 1994 to which reference is hereby
made and a copy of which is on file at the office of the Secretary of State of
The Commonwealth of Massachusetts and elsewhere as required by law, and to any
and all amendments thereto so filed or hereafter filed. The obligations of
"Schwab Annuity Portfolios" entered into in the name or on behalf thereof by any
of the Trustees, representatives or agents are made not individually, but in
such capacities, and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the assets of the Trust,
and all persons dealing with any series of Shares of the Trust must look solely
to the assets of the Trust belonging to such series for the enforcement of any
claims against the Trust.
4. Severability
If any provision of this Agreement is found by a court
-8-
<PAGE> 9
or agency of competent jurisdiction to be in violation of any state or federal
law, rule or regulation, then the invalidity of such provision shall not affect
the enforceability or validity of the remaining provisions.
-9-
<PAGE> 10
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.
Yours very truly,
SCHWAB ANNUITY PORTFOLIOS
By: /s/ William J. Klipp
---------------------
Name: William J. Klipp
Title: Senior Vice President
Accepted:
CHARLES SCHWAB & CO., INC.
By: /s/ Tom D. Seip
----------------
Name: Tom D. Seip
Title: Executive Vice President
-10-
<PAGE> 1
EXHIBIT (8)(a)
CUSTODIAN SERVICES AGREEMENT
This Agreement is made as of March 29, 1994, by and between SCHWAB
ANNUITY PORTFOLIOS, a Massachusetts business trust (the "Fund"), and PNC BANK,
NATIONAL ASSOCIATION ("PNC Bank"), a national banking association.
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes to
retain PNC Bank to provide custody services, and PNC Bank wishes to furnish such
services to each of the Fund's investment portfolios listed on Schedule A,
hereto (each a "Portfolio" and collectively the "Portfolios"), either directly
or through an affiliate or affiliates, as more fully described herein.
In consideration of the premises and mutual covenants herein contained,
the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person"
shall mean any officer of the Fund and any other person, who is duly authorized
by the Fund's Governing Board, to give Oral and Written Instructions on behalf
of the Fund. Such persons are listed in the Certificate attached hereto as the
Authorized Persons Appendix.
(b) "Book-Entry System". The term "Book-Entry System"
means Federal Reserve Treasury book-entry system for United States and federal
agency securities, its successor or successors, and its nominee or nominees and
any book-entry system maintained by an
<PAGE> 2
exchange registered with the SEC under the 1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities
Futures Trading Commission.
(d) "Governing Board". The term "Governing Board" shall mean
the Fund's Board of Directors if the Fund is a corporation or the Fund's Board
of Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions"
shall mean oral instructions received by PNC Bank from an Authorized Person or
from a person reasonably believed by PNC Bank to be an Authorized Person.
(f) "SEC". The term "SEC" shall mean the Securities and
Exchange Commission.
(g) "Securities and Commodities Laws". The terms the "1933
Act" shall mean the Securities Act of 1933, the "1934 Act" shall mean the
Securities Exchange Act of 1934, the "1940 Act" shall mean the Investment
Company Act of 1940, as amended, and the "CEA" shall mean the Commodities
Exchange Act, as amended.
(h) "Shares". The term "Shares" shall mean the shares of stock
of any series or class of the Fund, or, where appropriate, units of beneficial
interest in a trust where the Fund is organized as a Trust.
(i) "Property". The term "Property" shall mean:
(i) any and all securities and other investment items
which the Fund may from time to time
2
<PAGE> 3
deposit, or cause to be deposited, with PNC Bank or which PNC
Bank may from time to time hold for the Fund;
(ii) All income in respect of any of such securities
or other investment items;
(iii) all proceeds of the sale of any of such
securities or investment items; and
(iv) all proceeds of the sale of securities issued by
the Fund, which are received by PNC Bank from time to time,
from or on behalf of the Fund.
(j) "Written Instructions". The term "Written Instructions"
shall mean written instructions signed by two Authorized Persons and received by
PNC Bank. The instructions may be delivered by hand, mail, tested telegram,
cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to provide custodian
services to each of the Portfolios listed in Schedule A, hereto, and PNC Bank
accepts such appointment and agrees to furnish such services.
The Fund may from time to time issue separate series or classes or
classify and reclassify shares of such series or class. PFPC shall identify to
each such series or class property belonging to such series or class and in such
reports, confirmations and notices to the Fund called for under this Agreement
shall identify the series or class to which such report,
3
<PAGE> 4
confirmation or notice pertains.
3. Delivery of Documents. The Fund has provided or, where
applicable, will provide PNC Bank with the following:
(a) certified or authenticated copies of the resolutions of the
Fund's Governing Board, approving the appointment of PNC Bank
or its affiliates to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Fund's advisory agreement or agreements;
(d) a copy of the Fund's distribution agreement or agreements;
(e) a copy of the Fund's administration agreements if PNC Bank is
not providing the Fund with such services;
(f) copies of any shareholder servicing agreements made in respect
of the Fund; and
(g) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PNC Bank
undertakes to comply with all applicable requirements of the Securities and
Commodities Laws, and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to all duties to be performed by
PNC Bank hereunder. Except as specifically set forth herein, PNC Bank assumes
no
4
<PAGE> 5
responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, PNC Bank
shall act only upon Oral and Written Instructions. PNC Bank shall be entitled to
rely upon any Oral and Written Instructions it receives from an Authorized
Persons (or from a person reasonably believed by PNC Bank to be an Authorized
Person) pursuant to this Agreement. PNC Bank may assume that any Oral or Written
Instructions received hereunder are not in any way inconsistent with the
provisions of organizational documents or this Agreement or of any vote,
resolution or proceeding of the Fund's Governing Board or of the Fund's
shareholders.
The Fund agrees to forward to PNC Bank Written Instructions confirming
Oral Instructions so that PNC Bank receives the Written Instructions by the
close of business on the same day that such Oral Instructions are received. The
fact that such confirming Written Instructions are not received by PNC Bank
shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions.
The Fund further agrees that PNC Bank shall incur no liability to the
Fund in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PNC Bank is in doubt as to any
action it should or should not take, PNC Bank may request
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<PAGE> 6
directions or advice, including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to any
questions of law pertaining to any action it should or should not take, PNC Bank
may request advice at its own cost from such counsel of its own choosing (who
may be counsel for the Fund, the Fund's advisor or PNC Bank, at the option of
PNC Bank).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PNC Bank receives from the
Fund, and the advice it receives from counsel, PNC Bank shall be entitled to
rely upon and follow the advice of counsel.
(d) Protection of PNC Bank. PNC Bank shall be protected in any
action it takes or does not take in reliance upon directions, advice or Oral or
Written Instructions it receives from the Fund or from counsel to the Fund and
which PNC Bank believes, in good faith, to be consistent with those directions,
advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PNC Bank (i) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such directions, advice or Oral
or Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PNC Bank's properly taking or not taking
such action.
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<PAGE> 7
7. Records. The books and records pertaining to the Fund, which are in
the possession of PNC Bank, shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund, or the Fund's
Authorized Persons, shall have access to such books and records at all time
during PNC Bank's normal business hours. Upon the reasonable request of the
Fund, copies of any such books and records shall be provided by PNC Bank to the
Fund or to an Authorized Person of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep confidential all records of
the Fund and information relative to the Fund and its Shareholders (past,
present and potential), unless the release of such records or information is
otherwise consented to, in writing, by the Fund. The Fund agrees that such
consent shall not be unreasonably withheld. The Fund further agrees that, should
PNC Bank be required to provide such information or records to duly constituted
authorities (who may institute civil or criminal contempt proceedings for
failure to comply), PNC Bank shall not be required to seek the Fund's consent
prior to disclosing such information.
9. Cooperation with Accountants. PNC Bank shall cooperate with the
Fund's independent public accountants and shall take all reasonable action in
the performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the expression
of their opinion,
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<PAGE> 8
as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the event of equipment failures,
PNC Bank shall, at no additional expense to the Fund, take reasonable steps to
minimize service interruptions but shall have no liability with respect thereto.
11. Compensation. As compensation for services rendered by PNC Bank
during the term of this Agreement, the Fund will pay to PNC Bank a fee or fees
as may be agreed to in writing by the Fund and PNC Bank from time to time.
12. Indemnification. The Fund agrees to indemnify and hold harmless PNC
Bank and its nominees from all taxes, charges, expenses, assessment, claims and
liabilities (including, without limitation, liabilities arising under the
Securities and Commodities Laws, and any state and foreign securities and blue
sky laws, and amendments thereto, and expenses, including (without limitation)
attorneys' fees and disbursements, arising directly or indirectly from any
action which PNC Bank takes or does not take (i) at the request or on the
direction of or in reliance on the advice of the Fund or (ii) upon Oral or
Written Instructions. Neither PNC Bank, nor any of its nominees, shall be
indemnified against any liability to the Fund or to its shareholders (or any
expenses incident to such liability) arising out of PNC Bank's own
8
<PAGE> 9
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties and obligations under this Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be under no duty to take
any action on behalf of the Fund except as specifically set forth herein or as
may be specifically agreed to by PNC Bank, in writing. PNC Bank shall be
obligated to exercise reasonable care and diligence in the performance of its
duties hereunder, to act in good faith and to use its best effort, within
reasonable limits, in performing Services provided for under this Agreement. PNC
Bank shall be responsible for damages arising out of its failure to perform its
duties under this Agreement arising out of PNC Bank's negligence.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PNC Bank, in connection with its duties under this
Agreement, shall not be under any duty or obligation to inquire into and shall
not be liable for (a) the validity or invalidity or authority or lack thereof of
any Oral or Written Instruction, notice or other instrument which conforms to
the applicable requirements of this Agreement, and which PNC Bank reasonably
believes to be genuine; or (b) delays or errors or loss of data occurring by
reason of circumstances beyond PNC Bank's control, including acts of civil or
military authority, national emergencies, labor difficulties, fire, flood or
catastrophe, acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply.
9
<PAGE> 10
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver or arrange
for delivery to PNC Bank, all the property it owns, including cash received as a
result of the distribution of its shares, during the period that is set forth in
this Agreement. PNC Bank will not be responsible for such property until actual
receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting upon
Written Instructions, shall open and maintain separate account(s) in the name of
each of the Portfolios using all cash received from or for the account of such
Portfolio, subject to the terms of this Agreement. In addition, upon Written
Instructions, PNC Bank shall open separate custodial accounts for each separate
series, portfolio or class of the Fund and shall hold in such account(s) all
cash received from or for the accounts of the Fund specifically designated to
each series, portfolio or class.
PNC Bank shall make cash payments from or for the account of the Fund
only for:
(i) purchases of securities in the name of each
of the Portfolios or PNC Bank or PNC Bank's
nominee as provided in sub-paragraph j and
for which PNC Bank has received a copy of
the broker's or dealer's confirmation or
payee's invoice, as appropriate;
(ii) purchase or redemption of shares of each of
the Portfolios delivered to PNC Bank;
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<PAGE> 11
(iii) payment of, subject to Written Instructions,
interest, taxes, administration, accounting,
distribution, advisory, management fees or similar
expenses which are to be borne by each of the
Portfolios;
(iv) payment to, subject to receipt of Written
Instructions, the Fund's transfer agent, as agent for
the shareholders, an amount equal to the amount of
dividends and distributions stated in the Written
Instructions to be distributed in cash by the
transfer agent to shareholders, or, in lieu of paying
the Fund's transfer agent, PNC Bank may arrange for
the direct payment of cash dividends and
distributions to shareholders in accordance with
procedures mutually agreed upon from time to time by
and among the Fund, PNC Bank and the Fund's transfer
agent.
(v) payments, upon receipt Written Instructions, in
connection with the conversion, exchange or surrender
of securities owned or subscribed to by each of the
Portfolios and held by or delivered to PNC Bank;
(vi) payments of the amounts of dividends received with
respect to securities sold short;
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<PAGE> 12
(vii) payments made to a sub-custodian pursuant to
provisions in sub-paragraph c of this Agreement; and
(viii) payments, upon Written Instructions made for other
proper Fund purposes. PNC Bank is hereby authorized
to endorse and collect all checks, drafts or other
orders for the payment of money received as custodian
for the account of the Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold all securities received by it for
or for the account of each of the Portfolios in
separate accounts that physically segregate such
securities from those of any other persons, firms or
corporations. All such securities shall be held or
disposed of only upon Written Instructions of the
Fund pursuant to the terms of this Agreement. PNC
Bank shall have no power or authority to assign,
hypothecate, pledge or otherwise dispose of any such
securities or investment, except upon the express
terms of this Agreement and upon Written
Instructions, accompanied by a certified resolution
of the Fund's Governing Board, authorizing the
transaction. In no
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<PAGE> 13
case may any member of the Fund's Board of
Trustees, or any officer, employee or agent
of the Fund withdraw any securities.
At PNC Bank's own expense and for its own
convenience, PNC Bank may enter into
sub-custodian agreements with other United
States banks or trust companies to perform
duties described in this sub-paragraph c.
Such bank or trust company shall have an
aggregate capital, surplus and undivided
profits, according to its last published
report, of at least one million dollars
$1,000,000), if it is a subsidiary or
affiliate of PNC Bank, or at least fifty
million dollars ($50,000,000) if such bank
or trust company is not a subsidiary or
affiliate of PNC Bank. In addition, such
bank or trust company must agree to comply
with the relevant provisions of the 1940 Act
and other applicable rules and regulations.
PNC Bank shall remain responsible for the
performance of all of its duties as
described in this Agreement and shall hold
the Fund harmless from its own acts or
omissions, under the standards of care
provided for herein, or of any sub-custodian
chosen by PNC Bank under the
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<PAGE> 14
terms of this sub-paragraph c.
(d) Transactions Requiring Instructions. Upon receipt of Oral or
Written Instructions and not otherwise, PNC Bank, directly or through the use of
the Book-Entry System, shall:
(i) deliver any securities held for each of the
Portfolios against the receipt of payment
for the sale of such securities;
(ii) execute and deliver to such persons as may
be designated in such Oral or Written
Instructions, proxies, consents,
authorizations, and any other instruments
whereby the authority of the Fund as owner
of any securities may be exercised;
(iii) deliver any securities to the issuer
thereof, or its agent, when such securities
are called, redeemed, retired or otherwise
become payable; provided that, in any such
case, the cash or other consideration is to
be delivered to PNC Bank;
(iv) deliver any securities held for each of the
Portfolios against receipt of other
securities or cash issued or paid in
connection with the liquidation,
reorganization, refinancing, tender offer,
merger, consolidation or recapitalization of
any corporation, or the
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<PAGE> 15
exercise of any conversion privilege;
(v) deliver any securities held for each of the
Portfolios to any protective committee,
reorganization committee or other person in
connection with the reorganization,
refinancing, merger, consolidation,
recapitalization or sale of assets of any
corporation, and receive and hold under the
terms of this Agreement such certificates of
deposit, interim receipts or other
instruments or documents as may be issued to
it to evidence such delivery;
(vi) make such transfer or exchanges of the
assets of the Fund and take such other steps
as shall be stated in said Oral or Written
Instructions to be for the purpose of
effectuating a duly authorized plan of
liquidation, reorganization, merger,
consolidation or recapitalization of such
Portfolio;
(vii) release securities belonging to a Portfolio
to any bank or trust company for the purpose
of a pledge or hypothecation to secure any
loan incurred by that Portfolio; provided,
however, that securities shall be released
only upon payment to PNC Bank of the monies
borrowed,
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<PAGE> 16
except that in cases where additional
collateral is required to secure a borrowing
already made subject to proper prior
authorization, further securities may be
released for that purpose; and repay such
loan upon redelivery to it of the securities
pledged or hypothecated therefor and upon
surrender of the note or notes evidencing
the loan;
(viii) release and deliver securities owned by a
Portfolio in connection with any repurchase
agreement entered into on behalf of a
Portfolio, but only on receipt of payment
therefor; and pay out moneys of a Portfolio
in connection with such repurchase
agreements, but only upon the delivery of
the securities;
(ix) release and deliver or exchange securities
owned by a Portfolio in connection with any
conversion of such securities, pursuant to
their terms, into other securities;
(x) release and deliver securities owned by a
Portfolio for the purpose of redeeming in
kind shares of a Portfolio upon delivery
thereof to PNC Bank; and
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<PAGE> 17
(xi) release and deliver or exchange securities
owned by a Portfolio for other corporate
purposes.
PNC Bank must also receive a certified
resolution describing the nature of the
corporate purpose and the name and address
of the person(s) to whom delivery shall be
made when such action is pursuant to
sub-paragraph d.(xi) above.
(e) Use of Book-Entry System. The Fund shall deliver to PNC
Bank certified resolutions of the Fund's Governing Board approving, authorizing
and instructing PNC Bank on a continuous and on-going basis, to deposit in the
Book-Entry System all securities belonging to each of the Portfolios eligible
for deposit therein and to utilize the Book-Entry System to the extent possible
in connection with settlements of purchases and sales of securities by the Fund,
and deliveries and returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with borrowings. PNC Bank shall
continue to perform such duties until it receives Written or Oral Instructions
authorizing contrary actions(s).
To administer the Book-Entry System properly, the following provisions
shall apply:
(i) With respect to securities of a Portfolio
which are maintained in the Book-Entry
system, established pursuant to this
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<PAGE> 18
sub-paragraph e hereof, the records of PNC
Bank shall identify by Book-Entry or
otherwise those securities belonging to a
Portfolio. PNC Bank shall furnish the Fund a
detailed statement of the Property held for
the Fund under this Agreement at least
monthly and from time to time and upon
written request.
(ii) Securities and any cash of a Portfolio
deposited in the Book-Entry System will at
all times be segregated from any assets and
cash controlled by PNC Bank in other than a
fiduciary or custodian capacity but may be
commingled with other assets held in such
capacities. PNC Bank and its sub-custodian,
if any, will pay out money only upon receipt
of securities and will deliver securities
only upon the receipt of money.
(iii) All books and records maintained by PNC Bank
which relate to the Fund's participation in
the Book-Entry System will at all times
during PNC Bank's regular business hours be
open to the inspection of the Fund's duly
authorized employees or agents, and the Fund
will be furnished with all information in
respect of the services rendered to it as it
may require.
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(iv) PNC Bank will provide the Fund with copies
of any report obtained by PNC Bank on the
system of internal accounting control of the
Book-Entry System promptly after receipt of
such a report by PNC Bank. PNC Bank will
also provide the Fund with such reports on
its own system of internal control as the
Fund may reasonably request from time to
time.
(f) Registration of Securities. All Securities held for the
Fund which are issued or issuable only in bearer form, except such securities
held in the Book-Entry System, shall be held by PNC Bank in bearer form; all
other securities held for the Fund may be registered in the name of the Fund;
PNC Bank; the Book-Entry System; a sub-custodian; or any duly appointed
nominee(s) of the Fund, PNC Bank, Book-Entry system or sub-custodian. The Fund
reserves the right to instruct PNC Bank as to the method of registration and
safekeeping of the securities of each of the Portfolios. The Fund agrees to
furnish to PNC Bank appropriate instruments to enable PNC Bank to hold or
deliver in proper form for transfer, or to register its registered nominee or in
the name of the Book-Entry System, any securities which it may hold for the
account of each of the Portfolios and which may from time to time be registered
in the name of a Portfolio. PNC Bank shall hold all such securities which are
not held in the Book-Entry System in a separate account for each of the
Portfolios in the name of each of
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<PAGE> 20
the Portfolios physically segregated at all times from those of any other person
or persons.
(g) Voting and Other Action. Neither PNC Bank nor its nominee
shall vote any of the securities held pursuant to this Agreement by or for the
account of the Fund, except in accordance with Written Instructions. PNC Bank,
directly or through the use of the Book-Entry System, shall execute in blank and
promptly deliver all notice, proxies, and proxy soliciting materials to the
registered holder of such securities. If the registered holder is not the Fund
then Written or Oral Instructions must designate the person(s) who owns such
securities.
(h) Transactions Not Requiring Instructions. In the absence of
contrary Written Instructions, PNC Bank is authorized to take the following
actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account
of each of the Portfolios, all
income, dividends, distributions,
coupons, option premiums, other
payments and similar items, included
or to be included in the Property,
and, in addition, promptly advise
the Fund of such receipt and credit
such income, as collected, to the
Fund's custodian account;
(B) endorse and deposit for collection,
in the name of the applicable
Portfolio,
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<PAGE> 21
checks, drafts, or other orders for
the payment of money;
(C) receive and hold for the account of
each of the Portfolios all
securities received as a
distribution on the portfolio
securities as a result of a stock
dividend, share split-up or
reorganization, recapitalization,
readjustment or other rearrangement
or distribution of rights or similar
securities issued with respect to
any portfolio securities belonging
to a Portfolio held by PNC Bank
hereunder;
(D) present for payment and collect the
amount payable upon all securities
which may mature or be called,
redeemed, or retired, or otherwise
become payable on the date such
securities become payable; and
(E) take any action which may be
necessary and proper in connection
with the collection and receipt of
such income and other payments and
the endorsement for collection of
checks, drafts, and other negotiable
instruments.
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<PAGE> 22
(ii) Miscellaneous Transactions.
(A)PNC Bank is authorized to deliver or cause to be delivered
Property against payment or other consideration or written receipt therefor in
the following cases:
(1) for examination by a broker or
dealer selling for the account of a
Portfolio in accordance with street
delivery custom;
(2) for the exchange of interim
receipts or temporary securities
for definitive securities; and
(3) for transfer of securities into the
name of a Portfolio or PNC Bank or
nominee of either, or exchange of
securities for a different number
of bonds, certificates, or other
evidence, representing the same
aggregate face amount or number of
units bearing the same interest
rate, maturity date and call
provisions, if any; provided that,
in any such case, the new
securities are to be delivered to
PNC Bank.
(B) Unless and until PNC Bank receives Oral or
Written Instructions to the contrary, PNC
Bank shall:
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<PAGE> 23
(1) pay all income items held by it which call
for payment upon presentation and hold the
cash received by it upon such payment for
the account of a Portfolio;
(2) collect interest and cash dividends
received, with notice to the Fund, to the
account of a Portfolio;
(3) hold for the account of a Portfolio all
stock dividends, rights and similar
securities issued with respect to any
securities held by us; and
(4) execute as agent on behalf of the Fund all
necessary ownership certificates required by
the Internal Revenue Code or the Income Tax
Regulations of the United States Treasury
Department or under the laws of any State
now or hereafter in effect, inserting the
Fund's name on such certificate as the owner
of the securities covered thereby, to the
extent it may lawfully do so.
(i) Segregated Accounts.
23
<PAGE> 24
(i) PNC Bank shall upon receipt of Written or
Oral Instructions establish and maintain a
segregated accounts(s) on its records for
and on behalf of each of the Portfolios.
Such account(s) may be used to transfer cash
and securities, including securities in the
Book-Entry System:
(A) for the purposes of compliance by
the Fund with the procedures
required by a securities or option
exchange, providing such procedures
comply with the 1940 Act and any
releases of the SEC relating to the
maintenance of segregated accounts
by registered investment companies;
and
(B) Upon receipt of Written
Instructions, for other proper
corporate purposes.
(ii) PNC Bank may enter into separate custodial
agreements with various futures commission
merchants ("FCMs") that the Fund uses ("FCM
Agreement"). Pursuant to an FCM Agreement,
the Fund's margin deposits in any
transactions involving futures contracts and
options on futures contracts will be held by
PNC Bank in accounts ("FCM Account") subject
to the disposition by the FCM involved in
such
24
<PAGE> 25
contracts and in accordance with the
customer contract between FCM and the Fund
("FCM Contract"), SEC rules and the rules of
the applicable commodities exchange. Such
FCM Agreements shall only be entered into
upon receipt of Written Instructions from
the Fund which state that:
(A) a customer agreement between the
FCM and the Fund has been entered
into; and
(B) the Fund is in compliance with all
the rules and regulations of the
CFTC. Transfers of initial margin
shall be made into a FCM Account
only upon Written Instructions;
transfers of premium and variation
margin may be made into a FCM
Account pursuant to Oral
Instructions. Transfers of funds
from a FCM Account to the FCM for
which PNC Bank holds such an
account may only occur upon
certification by the FCM to PNC
Bank that pursuant to the FCM
Agreement and the FCM Contract, all
conditions precedent to its right
to give PNC Bank such instructions
have been satisfied.
(iii) PNC Bank shall arrange for the establishment
of IRA custodian accounts for such
25
<PAGE> 26
shareholders holding shares through IRA
accounts, in accordance with the Prospectus,
the Internal Revenue Code (including
regulations), and with such other procedures
as are mutually agreed upon from time to
time by and among the Fund, PNC Bank and the
Fund's transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased
securities upon receipt of Oral or Written Instructions from the Fund or its
investment advisor(s) that specify:
(i) the name of the issuer and the title of the
securities, including CUSIP number if
applicable;
(ii) the number of shares or the principal amount
purchased and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase;
(vi) the name of the person from whom or the
broker through whom the purchase was made;
and
(vii) the Portfolio to which such a purchase
applies.
PNC Bank shall upon receipt of securities
purchased by or for a Portfolio pay out of
the moneys held for the account of a
Portfolio the total amount payable to the
person from whom
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<PAGE> 27
or the broker through whom the purchase was
made, provided that the same conforms to the
total amount payable as set forth in such
Oral or Written Instructions.
(k) Sales of Securities. PNC Bank shall sell securities upon
receipt of Oral Instructions from the Fund that specify:
(i) the name of the issuer and the title of the
security, including CUSIP number if
applicable;
(ii) the number of shares or principal amount
sold, and accrued interest, if any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon
such sale;
(vi) the name of the broker through whom or the
person to whom the sale was made;
(vii) the location to which the security must be
delivered and delivery deadline, if any. PNC
Bank shall deliver the securities upon
receipt of the total amount payable to the
Fund upon such sale, provided that the total
amount payable is the same as was set forth
in the Oral or Written Instructions. Subject
to the foregoing, PNC Bank may accept
payment in
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<PAGE> 28
such form as shall be satisfactory to it,
and may deliver securities and arrange for
payment in accordance with the customs
prevailing among dealers in securities.
(l) Reports.
(i) PNC Bank shall furnish the Fund the
following reports:
(A) such periodic and special reports
as the Fund may reasonably request;
(B) a monthly statement summarizing all
transactions and entries for the
account of each of the Portfolios,
listing the portfolio securities
belonging to each Portfolio with
the adjusted average cost of each
issue and the market value at the
end of such month, and stating the
cash account of the Portfolio
including disbursement;
(C) the reports to be furnished to the
Fund pursuant to Rule 17f-4; and
(D) such other information as may be
agreed upon from time to time
between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund
any proxy statement, proxy material, notice
of a call or conversion or similar
communication received by it as custodian of
the Property. PNC Bank shall be under no
other obligation to
28
<PAGE> 29
inform the Fund as to such actions or
events.
(m) Collections. All collections of monies or other property,
in respect, or which are to become part of the Property (but not the safekeeping
thereof upon receipt by PNC Bank) shall be at the sole risk of the Fund. If
payment is not received by PNC Bank within a reasonable time after proper
demands have been made, PNC Bank shall notify the Fund in writing, including
copies of all demand letters, any written responses, memoranda of all oral
responses and to telephonic demands thereto, and await instructions from the
Fund. PNC Bank shall not be obliged to take legal action for collection unless
and until reasonably indemnified to its satisfaction.
PNC Bank shall also notify the Fund as soon as reasonably practicable
whenever income due on securities is not collected in due course.
15. Duration and Termination. This Agreement shall continue unless
sooner terminated by the Fund or by PNC Bank for "cause" (as defined below) on
sixty (60) days prior written notice to the other party. For purposes of this
Agreement, "cause" shall mean any circumstances which materially impair the
ability of either party to this Agreement to perform all of its duties and
obligations hereunder. In the event this Agreement is terminated (pending
appointment of a successor to PNC Bank or vote of the shareholders any Portfolio
of the Fund to dissolve or to function without a custodian of its cash,
securities or other property), PNC Bank shall not deliver cash, securities or
other property of the
29
<PAGE> 30
applicable Portfolio to the Portfolio or the Fund. It may deliver them to a bank
or trust company of PNC Bank's, having an aggregate capital, surplus and
undivided profits, as shown by its last published report, of not less than
twenty million dollars ($20,000,000), as a custodian for such Portfolio to be
held under terms similar to those of this Agreement. PNC Bank shall not be
required to make any such delivery or payment until full payment shall have been
made to PNC Bank of all of its fees, compensation, costs and expenses. PNC Bank
shall have a security interest in and shall have a right of setoff against
Property in such Portfolio's possession as security for the payment of such
fees, compensation, costs and expenses.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at PNC
Bank's address, Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, marked for the attention of the Custodian
Services Department (or its successor) (b) if to the Fund, at the address of the
Fund; or (c) if to neither of the foregoing, at such other address as shall have
been notified to the sender of any such Notice or other communication. If notice
is sent by confirming telegram, cable, telex or facsimile sending device, it
shall be deemed to have been given immediately. If notice is sent by first-class
mail, it shall be deemed to have been given five days after it has been mailed.
If notice is sent by messenger, it shall
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<PAGE> 31
be deemed to have been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or
waived only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
18. Delegation. PNC Bank may, with the prior written consent of the
Fund, which consent may not be unreasonably withheld, assign its rights and
delegate its duties hereunder to any wholly-owned direct or indirect subsidiary
of PNC Bank, National Association or PNC Bank Corp., provided that (i) PNC Bank
gives the Fund a minimum of thirty (30) days in which to decide and to consent
by written notice; (ii) the delegate agrees with PNC Bank to comply with all
relevant provisions of the 1940 Act; and (iii) PNC Bank and such delegate
promptly provide such information as the Fund may request, and respond to such
questions as the Fund may ask, relative to the delegation, including (without
limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one more separate
31
<PAGE> 32
documents their agreement, if any, with respect to delegated and/or Oral
Instructions.
The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. A copy of the Declaration of
Trust of the Fund is on file with the Secretary of the Commonwealth of
Massachusetts and notice is hereby given that the Fund by the undersigned
officer of the Fund in his/her capacity as an officer of the Fund. The
obligations of this Agreement shall only be binding upon the assets and property
of the Fund, and shall not be binding upon any Trustee, officer or shareholder
of the Fund individually.
This Agreement shall be deemed to be a contract made in California and
governed by California law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
and shall inure to the benefit of the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Joseph Gramlich
32
<PAGE> 33
Name: Joseph Gramlich
Title: Senior Vice President
SCHWAB ANNUITY PORTFOLIOS
By: /s/ William J. Klipp
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
33
<PAGE> 1
EXHIBIT (8)(f)
TRANSFER AGENCY AGREEMENT
AGREEMENT made this 29th day of March 1994, between SCHWAB ANNUITY
PORTFOLIOS (the "Trust"), a Massachusetts business trust having its principal
place of business at 101 Montgomery Street, San Francisco, California 94104, and
CHARLES SCHWAB & CO., INC. ("Schwab"), a corporation organized under the laws of
the State of California which is a Securities and Exchange Commission licensed
transfer agent and which has its principal place of business at 101 Montgomery
Street, San Francisco, California 94104.
WHEREAS, the Trust desires that Schwab perform certain services for the
Trust, and for its series denominated as "Funds" and whose shares of beneficial
interest currently comprise the shares of the Trust identified on Schedule A
hereto (individually referred to herein as a "Fund" and collectively as the
"Funds"); and
WHEREAS, Schwab is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES; USE OF SUBTRANSFER AGENTS. Schwab will perform for the
Trust the services set forth in Schedule B hereto, including services as
Transfer Agent.
Schwab also agrees to perform for the Trust such special services
incidental to the performance of the services enumerated herein as agreed to by
the parties from time to time. Schwab will perform such additional services as
are provided on an amendment to Schedule B hereof, in consideration of such fees
as the parties hereto may agree.
Schwab may, in its discretion, appoint in writing other parties
qualified to perform transfer agency and shareholder services (individually, a
"Subtransfer Agent") to carry out some or all of its responsibilities under this
Agreement with respect to a Fund; provided, however, that the Subtransfer Agent
will be the agent of Schwab and not the agent of the Trust or such Fund, and
that Schwab will be fully responsible for the acts of such Subtransfer Agent and
shall not be relieved of any of its responsibilities hereunder by the
appointment of such Subtransfer Agent.
2. FEES. The Trust will pay Schwab for the services to be provided by
Schwab under this Agreement in accordance with, and in the manner set forth in,
Schedule C hereto. Schwab will not change the fees it charges pursuant to the
fee schedule until
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<PAGE> 2
the expiration of one year from the Effective Date of this Agreement (as defined
below), unless the Trust otherwise agrees to such change in writing; thereafter,
Schwab may change its fees only upon the written consent of the Trust. Fees for
any additional services to be provided by Schwab pursuant to an amendment to
Schedule B hereto shall be subject to mutual agreement at the time such
amendment to Schedule B is proposed.
3. REIMBURSEMENT OF EXPENSES. In addition to paying Schwab the fees
described in Section 2 hereof, the Trust agrees to reimburse Schwab for Schwab's
out-of-pocket expenses in providing services hereunder, including without
limitation the following:
A. All freight and other delivery and bonding charges incurred by
Schwab in delivering materials to and from the Trust and in
delivery of all materials to shareholders;
B. All direct telephone, telephone transmission and telecopy or
other electronic transmission expenses incurred by Schwab in
communication with the Trust, the Trust's investment adviser,
sub-investment adviser or custodian, dealers, shareholders or
others as required for Schwab to perform the services to be
provided hereunder;
C. Costs of postage, couriers, stock computer paper, statements,
labels, envelopes, checks, reports, letters, tax forms,
proxies, notices or other forms of printed material which
shall be required by Schwab for the performance of the
services to be provided hereunder;
D. The cost of microfilm or microfiche of records or other
materials; and
E. Any expenses Schwab may incur at the written direction of an
officer of the Trust thereunto duly authorized.
4. EFFECTIVE DATE. This Agreement will become effective with respect to
each Fund as of the date set forth across from its name on Schedule A, such date
for each Fund to be referred to herein as the "Effective Date."
5. TERM AND TERMINATION. This Agreement will continue in effect with
respect to the Trust and to each Fund, unless earlier terminated as to a Fund by
either party hereto as provided hereunder, for an initial term of one year from
the Effective Date. Thereafter, this Agreement will continue in
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<PAGE> 3
effect unless either party hereto terminates this Agreement with respect to a
Fund by giving 90 days' written notice to the other party, whereupon this
Agreement with respect to that Fund will terminate automatically upon the
expiration of said 90 days; provided, however, that after such termination, for
so long as Schwab, with the written consent of the Trust, in fact continues to
perform any one or more of the services contemplated by this Agreement or any
Schedule or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Fees and out-of-pocket expenses incurred by Schwab but unpaid
by the Trust upon such termination shall be immediately due and payable upon and
notwithstanding such termination. Schwab will be entitled to collect from the
Trust, in addition to the fees and disbursements provided by Paragraphs 2 and 3
hereof, the amount of Schwab's cash disbursements and a reasonable fee (which
fee shall be not less than the actual costs incurred by Schwab in performing
such service) for services in connection with Schwab's activities in effecting
such termination, including without limitation, the delivery to the Trust and/or
its distributors or investment advisers and/or other parties, of the Trust's
property, records, instruments and documents, or any copies thereof.
6. SCHWAB'S RELIANCE ON RECORDS AND INSTRUCTIONS. Schwab may rely on
any written records or instructions provided to it by the Trust or any
investment adviser and on any written records provided by any prior transfer
agent or custodian thereof, and each Fund agrees to indemnify Schwab and hold
it, its employees, officers, directors and agents harmless from and against any
and all claims, demands, actions, suits, judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature arising
out of or in any way relating to any actions taken by Schwab with respect to
such Fund in reasonable reliance upon such records or instructions.
7. UNCONTROLLABLE EVENTS. Schwab assumes no responsibility hereunder,
and will not be liable, for any damage, loss of data, delay or any other loss
whatsoever caused by events beyond its reasonable control.
8. STANDARD OF CARE. Schwab will use its best efforts to insure the
accuracy of all services performed under this Agreement, but will not be liable
to the Trust for any action taken or omitted by Schwab in the absence of bad
faith, willful misconduct or gross negligence.
9. LEGAL ADVICE. Schwab will notify the Trust at any time Schwab
believes that it is in need of the advice of counsel with regard to Schwab's
responsibilities and duties pursuant to this Agreement; upon the Trust's
consent, Schwab, at its
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discretion, will be entitled to seek, receive and act upon advice of legal
counsel of its choosing, such advice to be at the expense of the Trust or the
Fund involved unless such advice relates to a matter involving Schwab's bad
faith, willful misconduct or gross negligence with respect to Schwab's
responsibilities and duties hereunder, and Schwab in no event be liable to the
Trust or the Fund involved or any shareholder or beneficial owner of the Trust
or such Fund for any action reasonably taken pursuant to such advice.
10. INSTRUCTIONS. Whenever Schwab is requested or authorized to take
action hereunder pursuant to instructions from a shareholder concerning an
account in the Trust, Schwab will be entitled to rely upon any certificate,
letter or other instrument or communication, whether in writing or by electronic
or telephone transmission, believed by Schwab to be genuine and to have been
properly made, signed or authorized by an officer or other authorized agent of
the Trust or by the shareholder, as the case may be, and shall be entitled to
receive as conclusive proof of any fact or matter required to be ascertained by
it hereunder a certificate signed by an officer of the Trust or any other person
authorized by the Trust's Board of Trustees or by the shareholder, as the case
may be.
As to the services to be provided hereunder, Schwab may rely
conclusively upon the terms of the Prospectus of a Fund and the Statement of
Additional Information of the Trust to the extent that such services are
described therein unless Schwab receives written instructions to the contrary in
a timely manner from the Trust.
11. INDEMNIFICATION. Each Fund agrees to indemnify and hold harmless
Schwab and Schwab's employees, agents, directors, officers and nominees from and
against any and all claims, demands, actions and suits, whether groundless or
otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Schwab's actions taken or
non-actions with respect to the performance of services under this Agreement
with respect to such Fund or based, if applicable, upon information,
instructions or requests with respect to such Fund given or made to Schwab by an
officer of the Trust thereunto duly authorized; provided that this
indemnification shall not apply to actions or omissions of Schwab in cases of
its own bad faith, willful misconduct or gross negligence, and further provided
that prior to confessing any claim against it which may be the subject of this
indemnification, Schwab shall give the Trust written notice of and reasonable
opportunity to defend against said claim in its own name or in the name of
Schwab.
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<PAGE> 5
12. RECORD RETENTION AND CONFIDENTIALITY. Schwab will keep and maintain
on behalf of the Trust all records which the Trust or Schwab is, or may be,
required to keep and maintain pursuant to any applicable statutes, rules and
regulations, including without limitation Rules 31a-1 and 31a-2 under the
Investment Company Act of 1940, relating to the maintenance of records in
connection with the services to be provided hereunder. Schwab agrees to make
such records available for inspection by the Trust or by the Securities and
Exchange Commission at reasonable times and otherwise to keep confidential all
records and other information relative to the Trust and its shareholders, except
when requested to divulge such information by duly-constituted authorities or
court process, or requested by a shareholder with respect to information
concerning an account as to which such shareholder has either a legal or
beneficial interest or when requested by the Trust, the shareholder, or the
dealer of record as to such account.
13. REPORTS. Schwab will furnish to the Trust and to the Trust's
properly-authorized auditors, investment advisers, examiners, distributors,
dealers, underwriters, salesmen, insurance companies and others designated by
the Trust in writing, such reports at such times as are prescribed in Schedule D
attached hereto, or as subsequently agreed upon by the parties pursuant to an
amendment to Schedule D. The Trust agrees to examine each such report or copy
promptly and will report or cause to be reported any errors or discrepancies
therein no later than three business days from the receipt thereof. In the event
that errors or discrepancies, except such errors and discrepancies as may not
reasonably be expected to be discovered by the recipient within three days after
conducting a diligent examination, are not so reported within the aforesaid
period of time, a report will for all purposes be accepted by and binding upon
the Trust and any other recipient, and Schwab shall have no liability for errors
or discrepancies therein and shall have no further responsibility with respect
to such report except to perform reasonable corrections of such errors and
discrepancies within a reasonable time after requested to do so by the Trust.
14. RIGHTS OF OWNERSHIP. All computer programs and procedures developed
to perform services required to be provided by Schwab under this Agreement are
the property of Schwab. All records and other data except such computer programs
and procedures are the exclusive property of the Trust and all such other
records and data will be furnished to the Trust in appropriate form as soon as
practicable after termination of this Agreement for any reason.
15. RETURN OF RECORDS. Schwab may at its option at any time, and shall
promptly upon the Trust's demand, turn over to the Trust and cease to retain
Schwab's files, records and
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documents created and maintained by Schwab pursuant to this Agreement which are
no longer needed by Schwab in the performance of its services or for its legal
protection. If not so turned over to the Trust, such documents and records will
be retained by Schwab for six years from the year of creation. At the end of
such six-year period, such records and documents will be turned over to the
Trust unless the Trust authorizes in writing the destruction of such records and
documents.
16. BANK ACCOUNTS. The Trust and a Fund shall establish and maintain
such bank accounts with such bank or banks as are selected by the Trust, as are
necessary in order that Schwab may perform the services required to be performed
hereunder. To the extent that the performance of such services shall require
Schwab directly to disburse amounts for payment of dividends, redemption
proceeds or other purposes, the Trust and a Fund will provide such bank or banks
with all instructions and authorizations necessary for the Fund to effect such
disbursements.
17. PURCHASE AND REDEMPTION OF SHARES. Schwab will process instructions
from the Shareholders of the Trust to purchase and redeem shares of the Trust as
the agent for the Trust.
With respect to those Funds identified on Schedule A hereto as "Sweep
Funds" (if any), Schwab will perform such daily, and/or weekly monitoring and
other related tasks as is necessary to carry out the automatic investment and
redemption features associated with each individual shareholder's account with
Schwab.
18. REPRESENTATIONS OF THE TRUST. The Trust certifies to Schwab that:
(1) as of the close of business on the Effective Date, each Fund has authorized
unlimited shares and (2) by virtue of its Declaration of Trust, shares of each
Fund which are redeemed by the Trust may be sold by the Trust from its treasury
and (3) this Agreement has been duly authorized by the Trust and, when executed
and delivered by the Trust, will constitute a legal, valid and binding
obligation of the Trust, enforceable against the Trust in accordance with its
terms, subject to bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting the rights and remedies of creditors and
secured parties.
19. REPRESENTATIONS OF SCHWAB. Schwab represents and warrants that the
various procedures and systems which Schwab has implemented with regard to
safeguarding from loss or damage attributable to fire, theft, or any other cause
of the blank checks, records, and other data of the Trust and Schwab's records,
data, equipment facilities and other property used in
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the performance of its obligations hereunder are adequate and that it will make
such changes therein from time to time as are required for the secure
performance of its obligations hereunder.
20. INSURANCE. Schwab will use reasonable efforts to obtain insurance
covering the services to be performed by it under this Agreement and shall
notify the Trust in the event it is unable to do so within 90 days after the
Effective Date of this Agreement. Thereafter, Schwab will notify the Trust
should any of its insurance coverage be changed for any reason. Such
notification shall include the date of change and the reasons therefor. Schwab
will notify the Trust of any material claims against it with respect to services
performed under this Agreement, whether or not they may be covered by insurance,
and shall notify the Trust from time to time as may be appropriate of the total
outstanding claims made by Schwab under its insurance coverage.
21. INFORMATION TO BE FURNISHED BY THE TRUST. The Trust has furnished
to Schwab the following:
A. Copies of the Declaration of Trust of the Trust and
of any amendments thereto, certified by the proper
official of the state in which such Declaration has
been filed.
B. Copies of the following documents:
1. The Trust's By-Laws and any amendments
thereto.
2. Certified copies of resolutions of the Board
of Trustees covering the following matters:
a. Approval of this Agreement,
authorization of an officer of the
Trust to execute and deliver this
Agreement and authorization for
officers of the Trust to instruct
Schwab hereunder; and
b. Authorization of Schwab to act as
Registrar, Transfer Agent and
Dividend Disbursing Agent for the
Trust.
C. A list of all the officers of the Trust, together
with specimen signatures of those officers who are
authorized to instruct Schwab in all matters.
D. Two copies of the following:
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1. Prospectuses for each Fund and the Statement
of Additional Information of the Trust;
2. Distribution Agreement;
3. Investment Advisory and Administration
Agreement(s); and
4. All other forms commonly used by the Trust
or its Distributor with regard to their
relationships and transactions with
shareholders of the Trust.
E. A certified statement as to shares of beneficial
interest of the Trust authorized, issued, and
outstanding as of the Effective Date of Schwab's
appointment as Transfer Agent (or as of the date on
which Schwab's services are commenced, whichever is
the later date) and as to receipt of full
consideration by the Trust for all shares
outstanding, such statement to be certified by the
Treasurer of the Trust;
22. INFORMATION FURNISHED BY SCHWAB. Schwab has furnished to the
Trust the following:
A. Schwab's Articles of Incorporation.
B. Schwab's By-Laws and any amendments thereto.
C. Certified copies of actions of Schwab covering the
following matters:
1. Approval of this Agreement, and
authorization of an officer of Schwab to
execute and deliver this Agreement; and
2. Authorization of Schwab to act as Transfer
Agent for the Trust.
23. AMENDMENTS TO DOCUMENTS. The Trust shall furnish Schwab
written copies of any amendments to, and changes in, any of the items referred
to in Section 21 hereof forthwith upon such amendments and changes becoming
effective. In addition, the Trust agrees that no amendments will be made to the
Prospectus of a Fund or the Statement of Additional Information of the Trust
which might have the effect of changing the procedures employed by Schwab in
providing the services agreed to hereunder or which amendment might affect the
duties of Schwab hereunder unless the Trust first obtains Schwab's approval of
such amendments or changes.
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24. RELIANCE ON AMENDMENTS. Schwab may rely on any amendments to or
changes in any of the documents and other items to be provided by the Trust
pursuant to Sections 21 and 23 of this Agreement and a Fund will indemnify and
hold harmless Schwab from and against any and all claims, demands, actions,
suits, judgments, liabilities, losses, damages, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel fees and other expenses of
every nature and character which may result from actions or omissions on the
part of Schwab with respect to such Fund in reliance upon such amendments and/or
changes. Although Schwab is authorized to rely on the above-mentioned amendments
to and changes in the documents and other items to be provided pursuant to
Sections 21 and 23 hereof, Schwab will be under no duty to comply with or take
any action as a result of any of such amendments or changes unless the Trust
first obtains Schwab's written consent to and approval of such amendments or
changes.
25. COMPLIANCE WITH LAW. Except for the obligations of Schwab set forth
in Section 12 hereof, the Trust assumes full responsibility for the preparation,
contents and distribution of each Prospectus of the Trust, as to compliance with
all applicable requirements of the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and any other laws, rules and
regulations of governmental authorities having jurisdiction. Schwab will have no
obligation to take cognizance of any laws relating to the sale of the Trust's
shares.
26. NOTICES. Any notice provided hereunder shall be sufficient given
when sent by registered or certified mail to the party required to be served
with such notice, at the following address: 101 Montgomery Street, San
Francisco, California 94104 or at such other address as such party may from time
to time specify in writing to the other party pursuant to this Section.
27. HEADINGS. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
28. ASSIGNMENT. This Agreement and the rights and duties hereunder
shall not be assignable with respect to a Fund by either of the parties hereto
except by the specific written consent of the other party. This Section 28 shall
not limit or in any way affect Schwab's right to appoint a Subtransfer Agent
pursuant to Section 1 hereof.
29. GOVERNING LAW. This Agreement shall be governed by and provisions
shall be construed in accordance with the laws of the State of California.
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30. LIMITATION OF LIABILITY. A copy of the Declaration of Trust of the
Trust is on file with the Secretary of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees or shareholders
individually but are binding only upon the assets and property of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
SCHWAB ANNUITY PORTFOLIOS
By: /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: Senior Vice President
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
----------------------------
Name: Peter J. McIntosh
Title: Senior Vice President
D-10
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EXHIBIT (8)(g)
SCHEDULE B
TRANSFER AGENCY SERVICES
31. RECORD MAINTENANCE.
Schwab will provide full maintenance of all shareholder records for each account
in the Trust. Such records will include:
A. Share balance;
B. Account transaction history, including dividends paid and the
date and price for all transactions;
C. Name and address of the record shareholder (including zip
codes and tax identification numbers but will not include
responsibility for obtaining certified tax identification
numbers or impending back-up withholding);
D. Records of distributions and dividend payments;
E. Transfer records; and
F. Overall control records.
32. REGULAR DAILY OPERATIONS.
Schwab will perform the following functions:
A. Process new accounts on the shareholder file by processing
directly from the Trust's distributor or dealer;
B. Process additional purchases to the records of accounts
already on the shareholder file. In such instances, on the
distributor's or dealer's instructions, allocate investor
payments among the Funds;
C. Process purchases and redemptions to accounts already on the
shareholder file in accordance with the terms of all automatic
purchase and redemption provisions set forth in shareholders'
account relationship with the Trust's distributor;
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D. Transfer shares upon the receipt of proper instructions from
distributor or dealer; and
E. Process changes of dealer/representative on accounts.
33. PERIODIC OPERATIONS.
A. Upon receipt of instructions as to payment of dividends and
distributions, which may be standing instructions, compute
distributions and inform the Trust of the amount to be
reinvested in additional shares.
B. Process redemptions as instructed by distributor or dealer.
C. Mail semi-annual and annual Trust and/or Fund reports and
prospectuses.
D. Produce transcripts of account history as requested by the
Trust or by the distributor or dealer.
E. Prepare and file Form 1099's with Internal Revenue Service.
F. Monitor sales of the Funds' shares in the various States and
other jurisdictions where the Funds' shares are registered for
sale, and report on such monitoring efforts to the Funds'
Investment Manager.
34. CONTROLS.
A. Maintain all balance controls daily and produce monthly
summaries expressed in:
1. shares; and
2. dollar amounts.
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35. SPECIAL SERVICES INCLUDED.
A. Prepare envelopes/labels (from address data supplied by
distributor or dealer as to transmission accounts) and mail
proxy statements; tabulate and certify votes from returned
ballots.
SCHWAB ANNUITY PORTFOLIOS
By: /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: Senior Vice President
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
----------------------------
Name: Peter J. McIntosh
Title: Senior Vice President
B-3
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SCHEDULE D
REPORTS
36. DAILY ACTIVITY REPORT (LIQUIDATIONS PROCESSED THAT DAY)
37. DAILY SHARE SUMMARY REPORT (BY FUND)
A. Beginning balance
B. Liquidations
C. Payments
D. Exchanges
E. Adjustments
F. Ending Balance
G. Sales by each State and jurisdiction
38. DAILY PROOF SHEET SUMMARY AND TRANSACTION REGISTER
39. DAILY SHARE RECONCILIATION REPORT (RECONCILING SHARE SUMMARY REPORT TO
DAILY PROOF SUMMARY SHEET)
40. WEEKLY POSITION REPORTS (SHOWING ALL ACCOUNT BALANCES)
41. MONTHLY DIVIDEND REPORTS
42. REPORT BY INDEPENDENT PUBLIC ACCOUNTANTS CONCERNING SCHWAB'S ACCOUNTING
SYSTEM AND INTERNAL ACCOUNTING CONTROLS, AT SUCH TIMES, AS THE TRUST
MAY REASONABLY REQUIRE. THESE REPORTS SHALL BE OF SUFFICIENT DETAIL AND
SCOPE TO PROVIDE REASONABLE ACCURACY THAT ANY MATERIAL INADEQUACIES
WOULD BE DISCLOSED BY SUCH EXAMINATION, AND, IF THERE ARE NO SUCH
INADEQUACIES, SHALL STATE.
SCHWAB ANNUITY PORTFOLIOS
By: /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: Senior Vice President
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
----------------------------
Name: Peter J. McIntosh
Title: Senior Vice President
D-1
<PAGE> 1
EXHIBIT (8)(i)
SHAREHOLDER SERVICE AGREEMENT
AGREEMENT made this 29th day of March 1994 between SCHWAB ANNUITY PORTFOLIOS
(the "Trust"), a Massachusetts business trust having its principal place of
business at 101 Montgomery Street, San Francisco, California 94104, and CHARLES
SCHWAB & CO., INC. ("Schwab"), a corporation organized under the laws of the
State of California and a broker-dealer registered with the Securities and
Exchange Commission and member of the National Association of Securities
Dealers, Inc., which has its principal place of business at 101 Montgomery
Street, San Francisco, California 94104.
WHEREAS, the Trust desires that Schwab perform certain shareholder-related
services for the Trust and for its series denominated as "Funds" whose shares of
beneficial interest currently comprise the shares of the Trust identified on
Schedule A hereto (individually referred to herein as a "Fund" and collectively
as the "Funds"); and
WHEREAS, Schwab is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants herein
set forth, the parties agree as follows:
1. SERVICES. Schwab will perform for the Trust and the Funds the services
set forth in Schedule B hereto.
2. FEES. The Trust will pay Schwab for the services to be provided by Schwab
under this Agreement in accordance with, and in the manner set forth in,
Schedule C hereto. Schwab will not change the fees it charges pursuant to the
fee schedule until the expiration of one year from the Effective Date of this
Agreement (as defined below), unless the Trust otherwise agrees to such change
in writing; thereafter, Schwab may change its fees only upon the written consent
of the Trust. Fees for any additional services to be provided by Schwab pursuant
to an amendment to Schedule B hereto shall be subject to mutual agreement at the
time such amendment to Schedule B is proposed.
3. REIMBURSEMENT OF EXPENSES. In addition to paying Schwab the fees
described in Section 2 hereof, the Trust agrees to reimburse Schwab for Schwab's
out-of-pocket expenses in providing additional services incurred at the written
direction of an officer of the Trust thereunto duly authorized.
<PAGE> 2
4. EFFECTIVE DATE. This Agreement will become effective with respect to each
Fund as of the date set forth across from its name on Schedule A, such date for
each Fund to be referred to herein as the "Effective Date."
5. TERM AND TERMINATION. This Agreement will continue in effect with respect
to each Fund, unless earlier terminated by either party hereto as to a Fund as
provided hereunder, for an initial term of one year from its Effective Date.
Thereafter, this Agreement will continue in effect unless either party hereto
terminates this Agreement with respect to a Fund by giving 90 days' written
notice to the other party, whereupon this Agreement with respect to that Fund
will terminate automatically upon the expiration of said 90 days; provided,
however, that after such termination, for so long as Schwab, with the written
consent of the Trust, in fact continues to perform any one or more of the
services contemplated by this Agreement or any Schedule or exhibit hereto, the
provisions of this Agreement, including without limitation the provisions
dealing with indemnification, shall continue in full force and effect. Fees and
out-of-pocket expenses incurred by Schwab but unpaid by the Trust upon such
termination shall be immediately due and payable upon and notwithstanding such
termination. Schwab will be entitled to collect from the Trust, in addition to
the fees and disbursements provided by Paragraphs 2 and 3 hereof, the amount of
all of Schwab's cash disbursements and a reasonable fee (which fee shall be not
less than the actual costs incurred by Schwab in performing such service) for
services in connection with Schwab's activities in effecting such termination.
6. SCHWAB'S RELIANCE ON RECORDS AND INSTRUCTIONS. Schwab may rely on any
written records or instructions provided to it by the Trust or any investment
adviser or sub-adviser thereto, and on any written records provided by any
transfer agent or custodian thereof, and each Fund agrees to indemnify Schwab
and hold it, its employees, officers, directors and agents harmless from and
against any and all claims, demands, actions, suits, judgments, liabilities,
losses, damages, costs, charges, counsel fees and other expenses of every nature
arising out of or in any way relating to any actions taken by Schwab with
respect to such Fund in reasonable reliance upon such records or instructions.
7. UNCONTROLLABLE EVENTS. Schwab assumes no responsibility hereunder, and
will not be liable, for any damage, loss of data, delay or any other loss
whatsoever caused by events beyond its reasonable control.
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<PAGE> 3
8. STANDARD OF CARE. Schwab will use its best efforts to insure the accuracy
of all services performed under this Agreement, but will not be liable to the
Trust for any action taken or omitted by Schwab in the absence of bad faith,
willful misconduct or gross negligence.
9. LEGAL ADVICE. Schwab will notify the Trust at any time Schwab believes
that it is in need of the advice of counsel with regard to Schwab's
responsibilities and duties pursuant to this Agreement; upon the Trust's
consent, Schwab, at its discretion, will be entitled to seek, receive and act
upon advice of legal counsel of its choosing, such advice to be at the expense
of the Trust or the Fund involved unless such advice relates to a matter
involving Schwab's bad faith, willful misconduct or gross negligence with
respect to Schwab's responsibilities and duties hereunder, and Schwab in no
event be liable to the Trust or the Fund involved or any shareholder or
beneficial owner of the Trust or such Fund for any action reasonably taken
pursuant to such advice.
10. INSTRUCTIONS. Whenever Schwab is requested or authorized to take action
hereunder pursuant to instructions from a shareholder concerning an account in
the Trust, Schwab will be entitled to rely upon any certificate, letter or other
instrument or communication, whether in writing or by electronic or telephone
transmission, believed by Schwab to be genuine and to have been properly made,
signed or authorized by an officer or other authorized agent of the Trust or by
the shareholder, as the case may be, and shall be entitled to receive as
conclusive proof of any fact or matter required to be ascertained by it
hereunder a certificate signed by an officer of the Trust or any other person
authorized by the Trust's Board of Trustees or by the shareholder, as the case
may be.
As to the services to be provided hereunder, Schwab may rely conclusively
upon the terms of the Prospectus of a Fund and the Statement of Additional
Information of the Trust to the extent that such services are described therein
unless Schwab receives written instructions to the contrary in a timely manner
from the Trust.
11. INDEMNIFICATION. Each Fund agrees to indemnify and hold harmless Schwab
and Schwab's employees, agents, directors, officers and nominees from and
against any and all claims, demands, actions and suits, whether groundless or
otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Schwab's actions taken or
non-
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<PAGE> 4
actions with respect to the performance of services under this Agreement with
respect to such Fund or based, if applicable, upon information, instructions or
requests with respect to such Fund given or made to Schwab by an officer of the
Trust thereunto duly authorized; provided that this indemnification shall not
apply to actions or omissions of Schwab in cases of its own bad faith, willful
misconduct or gross negligence, and further provided that, prior to confessing
any claim against it which may be the subject of this indemnification, Schwab
shall give the Trust written notice of and reasonable opportunity to defend
against said claim in its own name or in the name of Schwab.
12. RECORD RETENTION AND CONFIDENTIALITY. Schwab will keep and maintain all
records which Schwab is, or may be, required to keep and maintain pursuant to
any applicable statutes, rules and regulations in connection with the services
to be provided hereunder. Schwab agrees to make such records available for
inspection by the Trust or by the Securities and Exchange Commission at
reasonable times and otherwise to keep confidential all records and other
information relative to the Trust and its shareholders, except when requested to
divulge such information by duly-constituted authorities or court process, or
requested by a shareholder with respect to information concerning an account as
to which such shareholder has either a legal or beneficial interest or when
requested by the Trust.
13. RIGHTS OF OWNERSHIP. All computer programs and procedures developed to
perform services required to be provided by Schwab under this Agreement are the
property of Schwab. All records and other data except such computer programs and
procedures are the exclusive property of the Trust and all such other records
and data will be furnished to the Trust in appropriate form as soon as
practicable after termination of this Agreement for any reason.
14. RETURN OF RECORDS. Schwab may at its option at any time, and shall
promptly upon the Trust's demand, turn over to the Trust and cease to retain all
files, records and documents created and maintained by Schwab pursuant to this
Agreement which are no longer needed by Schwab in the performance of its
services or for its legal protection. If not so turned over to the Trust, such
documents and records will be retained by Schwab for six years from the year of
creation. At the end of such six-year period, such records and documents will be
turned over to the Trust unless the Trust authorizes in writing the destruction
of such records and documents.
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15. REPRESENTATIONS OF THE TRUST. The Trust certifies to Schwab that this
Agreement has been duly authorized by the Trust and, when executed and delivered
by the Trust, will constitute a legal, valid and binding obligation of the
Trust, enforceable against the Trust in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting the rights and remedies of creditors and secured parties.
16. REPRESENTATIONS OF SCHWAB. Schwab represents and warrants that the
various procedures and systems which Schwab has implemented with regard to
safeguarding from loss or damage attributable to fire, theft, or any other cause
of the records, data, equipment facilities and other property used in the
performance of its obligations hereunder are adequate and that it will make such
changes therein from time to time as are required for the secure performance of
its obligations hereunder.
17. INFORMATION TO BE FURNISHED BY THE TRUST. The Trust has furnished to
Schwab the following:
A. Copies of the Declaration of Trust of the Trust and of any
amendments thereto, certified by the proper official of the state in
which such Declaration has been filed.
B. Copies of the following documents:
1. The Trust's By-Laws and any amendments thereto.
2. Certified copies of resolutions of the Board of Trustees
covering the following matters:
a. Approval of this Agreement, authorization of an officer of
the Trust to execute and deliver this Agreement, and
authorization for officers of the Trust to instruct Schwab
hereunder; and
b. Authorization of Schwab to act as Shareholder Service Agent
for the Trust.
C. A list of all the officers of the Trust, together with specimen
signatures of those officers who are authorized to instruct Schwab
in all matters.
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D. Two copies of the following (if such documents are employed by the
Trust):
1. Prospectuses for each Fund and the Statement(s) of Additional
Information of the Trust;
2. Distribution Agreement;
3. Investment Advisory and Administration Agreement(s); and
4. All other forms commonly used by the Trust or its Distributor
with regard to their relationships and transactions with
shareholders of the Trust.
18. INFORMATION FURNISHED BY SCHWAB. Schwab has furnished to the Trust the
following:
A. Schwab's Articles of Incorporation.
B. Schwab's By-Laws and any amendments thereto.
C. Certified copies of actions of Schwab covering the following
matters:
1. Approval of this Agreement, and authorization of an officer of
Schwab to execute and deliver this Agreement; and
2. Authorization of Schwab to act as Shareholder Service Agent for
the Trust.
19. AMENDMENTS TO DOCUMENTS. The Trust shall furnish Schwab written copies
of any amendments to, and changes in, any of the items referred to in Section 17
hereof forthwith upon such amendments and changes becoming effective. In
addition, the Trust agrees that no amendments will be made to the Prospectus of
a Fund or a Statement of Additional Information of the Trust which might have
the effect of changing the procedures employed by Schwab in providing the
services agreed to hereunder or which amendment might affect the duties of
Schwab hereunder unless the Trust first obtains Schwab's approval of such
amendments or changes.
20. RELIANCE ON AMENDMENTS. Schwab may rely on any amendments to or changes
in any of the documents and other items to be provided by the Trust pursuant to
Sections 17 and 19 of this Agreement and a Fund will indemnify and hold
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harmless Schwab from and against any and all claims, demands, actions, suits,
judgments, liabilities, losses, damages, actions, suits, judgments, liabilities,
losses, damages, costs, charges, counsel fees and other expenses of every nature
and character which may result from actions or omissions on the part of Schwab
with respect to such Fund in reliance upon such amendments and/or changes.
Although Schwab is authorized to rely on the above-mentioned amendments to and
changes in the documents and other items to be provided pursuant to Sections 17
and 19 hereof, Schwab will be under no duty to comply with or take any action as
a result of any of such amendments or changes unless the Trust first obtains
Schwab's written consent to and approval of such amendments or changes.
21. NOTICES. Any notice provided hereunder shall be sufficient given when
sent by registered or certified mail to the party required to be served with
such notice, at the following address: 101 Montgomery Street, San Francisco,
California 94104 or at such other address as such party may from time to time
specify in writing to the other party pursuant to this Section.
22. HEADINGS. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
23. ASSIGNMENT. This Agreement and the rights and duties hereunder shall not
be assignable with respect to a Fund by either of the parties hereto except by
the specific written consent of the other party.
24. GOVERNING LAW. This Agreement shall be governed by and provisions shall
be construed in accordance with the laws of the State of California.
25. LIMITATION OF LIABILITY. A copy of the Declaration of Trust of the Trust
is on file with the Secretary of The Commonwealth of Massachusetts, and notice
is hereby given that this instrument is executed on behalf of the Trustees of
the Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Trust.
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<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed all as of the day and year first above written.
SCHWAB ANNUITY PORTFOLIOS
By: /s/ William J. Klipp
------------------------
Name: William J. Klipp
Title: Senior Vice President
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
------------------------
Name: Peter J. McIntosh
Title: Senior Vice President
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<PAGE> 1
Exhibit (8)(K)
SCHEDULE B
SHAREHOLDER SERVICES
Schwab will maintain accounts for, and serve as a customer liaison to, the
shareholders of each Fund, and through its employees will perform various
services in relation thereto, which services shall include responding to
requests for information and other types of shareholder account inquiries, both
by telephone and in writing. The parties hereto expressly agree that the
services provided under this Agreement shall not include, and the amounts
payable hereunder shall not constitute compensation for, services relating to
transfer agency or sub-accounting services for the Trust or any Fund thereof.
SCHWAB ANNUITY PORTFOLIOS
By: /s/ William J. Klipp
-----------------------------
Name: William J. Klipp
Title: Senior Vice President
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
-----------------------------
Name: Peter J. McIntosh
Title: Senior Vice President
B-1
<PAGE> 1
Exhibit (8)(m)
ACCOUNTING SERVICES AGREEMENT
This Agreement is made as of March 29, 1994 by and between SCHWAB
ANNUITY PORTFOLIOS, a Massachusetts business trust (the "Fund"), and PFPC INC.
("PFPC"), a Delaware corporation which is an indirect wholly-owned subsidiary of
PNC Bank Corp.
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Fund wishes to retain PFPC to provide accounting services to each
of the Fund's investment portfolios listed on Schedule A, hereto (each a
"Portfolio" and collectively the "Portfolios"), and PFPC wishes to furnish such
services.
In consideration of the premises and mutual covenants herein contained,
the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall
mean any officer of the Fund and any other person, who is duly authorized by the
Fund's Governing Board, to give Oral and Written Instructions on behalf of the
Fund. Such persons are listed in the Certificate attached hereto as the
Authorized Persons Appendix to each Services Attachment to this Agreement. If
PFPC provides more than one service hereunder, the Fund's designation of
Authorized Persons may vary by service.
(b) "Book-Entry System". The term "Book-Entry System" means
Federal Reserve Treasury book-entry system for United States and federal agency
securities, its successor or successors, and its nominee or nominees and any
book-entry system maintained by an
<PAGE> 2
exchange registered with the SEC under the 1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Governing Board". The Term "Governing Board" shall mean
the Fund's Board of Directors if the Fund is a corporation or the Fund's Board
of Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall
mean oral instructions received by PFPC from an Authorized Person or from a
person reasonably believed by PFPC to be an Authorized Person.
(f) "SEC". The term "SEC" shall mean the Securities and
Exchange Commission.
(g) "Securities and Commodities Laws". The terms the "1933
Act" shall mean the Securities Act of 1933, as amended, the "1934 Act" shall
mean the Securities Exchange Act of 1934, as amended, the "1940 Act" shall mean
the Investment Company Act of 1940, as amended, and the "CEA" shall mean the
Commodities Exchange Act, as amended.
(h) "Services". The term "Services" shall mean the service
provided to each of the Portfolios by PFPC.
(i) "Shares". The terms "Shares" shall mean the shares of
stock of any series or class of the Fund, or, where appropriate, units of
beneficial interest in a trust where the Fund is organized as a Trust.
(j) "Property". The term "Property" shall mean:
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(i) any and all securities and other investment
items which the Fund may from time to time
deposit, or cause to be deposited, with PNC
Bank, National Association ("PNC Bank") or
which PNC Bank may from time to time hold
for the Fund;
(ii) all income in respect of any of such
securities or other investment items;
(iii) all proceeds of the sale of any of such
securities or investment items; and
(iv) all proceeds of the sale of securities
issued by the Fund, which are received by
PNC from time to time, from or on behalf of
the Fund.
(k) "Written Instructions". The term "Written Instructions"
shall mean written instructions signed by two Authorized Persons and received by
PFPC. The instructions may be delivered by hand, mail, tested telegram, cable,
telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PFPC to provide accounting
services to each of the Portfolios listed on Schedule A, hereto, in accordance
with the terms set forth in this Agreement. PFPC accepts such appointment and
agrees to furnish such services.
The Fund may from time to time issue separate series or
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classes or classify and reclassify shares of such series or class. PFPC shall
identify to such series or class property belonging to such series or class and
in such reports, confirmations and notices to the Fund called for under this
Agreement shall identify the series or class to which such report, confirmation
or notice pertains.
3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PFPC with the following:
(a) certified or authenticated copies of the resolutions of
the Fund's Governing Board, approving the appointment of PFPC or its affiliates
to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Fund's advisory agreement or agreements;
(d) a copy of the Fund's distribution agreement or agreements;
(e) copies of any shareholder servicing agreements made in
respect of the Fund; and
(f) certified or authenticated copies of any and all
amendments or supplements to the foregoing.
4. Compliance with Government Rules and Regulations.
PFPC undertakes to comply with all applicable requirements of the
Securities and Commodities Laws, and any laws, rules and regulations of
governmental authorities having jurisdiction with
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respect to all duties to be performed by PFPC hereunder. Except as specifically
set forth herein, PFPC assumes no responsibility for such compliance by the
Fund.
5. Instructions. Unless otherwise provided in this Agreement, PFPC
shall act only upon Oral and Written Instructions.
PFPC shall be entitled to rely upon any Oral and Written Instructions
it receives from an Authorized Person (or from a person reasonably believed by
PFPC to be an Authorized Person) pursuant to this Agreement. In the exercise of
reasonable judgement, PFPC may assume that any Oral or Written Instruction
received hereunder is not in any way inconsistent with the provisions of
organizational documents or this Agreement or of any vote, resolution or
proceeding of the Fund's Governing Board or of the Fund's shareholders.
The Fund agrees to forward to PFPC Written Instructions confirming Oral
Instructions so that PFPC receives the Written Instructions by the close of
business on the same day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by PFPC shall in no way
invalidate the transactions or enforceability of the transactions authorized by
the Oral Instructions. The Fund further agrees that PFPC shall incur no
liability to the Fund solely by reason of acting upon Oral or Written
Instructions provided such instructions reasonably appear to have been received
from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any
5
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action it should or should not take, PFPC may request directions or advice,
including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any
questions of law pertaining to any action it should or should not take, PFPC may
request advice at its own cost from such counsel of its own choosing (who may be
counsel for the Fund, the Fund's advisor or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PFPC receives from the Fund,
and the advice it receives from counsel, PFPC shall be entitled in good faith to
rely upon and follow the advice of counsel.
(d) Protection of PFPC. PFPC shall be protected in any action
it takes or does not take in reliance upon directions, advice or Oral or Written
Instructions it receives from the Fund or from counsel and which PFPC believes,
in good faith, to be consistent with those directions, advice and Oral or
Written Instructions.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PFPC (i) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such directions, advice or Oral
or Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PFPC's properly taking or not taking such
action.
7. Records. The books and records pertaining to the Fund, which are in
the possession of PFPC, shall be the property of the
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Fund. Such books and records shall be prepared and maintained as required by the
1940 Act and other applicable securities laws, rules and regulations. The Fund,
or the Fund's Authorized Persons, shall have access to such books and records at
all times during PFPC's normal business hours. Upon the reasonable request of
the Fund, copies of any such books and records shall be provided by PFPC to the
Fund or to an Authorized Person of the Fund, at the Fund's expense.
PFPC shall keep the following records:
(a) all books and records with respect to the Fund's books of
account;
(b) records of the Fund's securities transaction;
(c) all other books and records as PFPC is required to
maintain pursuant to Rule 31a-1 of the 1940 Act and as specifically set forth in
Appendix A hereto.
8. Confidentiality. PFPC agrees to keep confidential all records of the
Fund and information relative to the Fund and its shareholders (past, present
and potential), unless the release of such records or information is otherwise
consented to, in writing, by the Fund. The Fund agrees that such consent shall
not be unreasonably withheld. The Fund further agrees that, should PFPC be
required to provide such information or records to duly constituted authorities
(who may institute civil or criminal contempt proceedings for failure to
comply), PFPC shall not be required to seek the Fund's prior written consent
before disclosing such information, but shall instead notify an officer of the
Fund
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and obtain the officer's oral consent, which consent shall be timely and shall
not be unreasonably withheld.
9. Liaison with Accountants. PFPC shall act as liaison with the Fund's
independent public accountants and shall provide account analyses, fiscal year
summaries, and other audit-related schedules. PFPC shall take all reasonable
action in the performance of its obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Fund from time to
time.
10. Disaster Recovery. PFPC shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provision of emergency use of electronic data processing equipment to the extent
appropriate equipment is available. In the event of equipment failures, PFPC
shall, at no additional expense to the Fund, take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
11. Compensation. The fees for services rendered by PFPC during the
term of this Agreement shall be paid by the Fund to PFPC as may be agreed to in
writing by the Fund and PFPC from time to time.
12. Indemnification. The Fund agrees to indemnify and hold harmless
PFPC and its nominees from all taxes, charges, expenses, assessments, claims and
liabilities (including, without limitation, liabilities arising under the
Securities and Commodities Laws, and
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any state and foreign securities and blue sky laws, and amendments thereto, and
expenses, including (without limitation) reasonable attorneys' fees and
disbursements, arising directly or indirectly from any action which PFPC takes
or does not take (i) at the request or on the direction of or in reliance on the
advice of the Fund or (ii) upon Oral or Written Instructions. Neither PFPC, nor
any of its nominees, shall be indemnified against any liability to the Fund or
to its shareholders (or any expenses incident to such liability) arising out of
PFPC's own willful misfeasance, gross negligence or reckless disregard of its
duties and obligations under this Agreement.
13. Responsibility of PFPC. PFPC shall be under no duty to take any
action on behalf of the Fund except as specifically set forth herein or as may
be specifically agreed to by PFPC, in writing. PFPC shall be obligated to
exercise reasonable care and diligence in the performance of its duties
hereunder, to act in good faith and to use its best efforts, within reasonable
limits, in performing services provided for under this Agreement. PFPC shall be
responsible for damages arising out of its failure to perform its duties under
this Agreement arising out of PFPC's gross negligence. Notwithstanding the
foregoing, PFPC shall not be responsible for losses beyond its reasonable
control, provided that PFPC has acted in accordance with the standard of care
set forth above; and provided further that PFPC shall only be responsible for
that portion of losses or damages suffered by the Fund that are attributable to
the gross negligence of PFPC.
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<PAGE> 10
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PFPC, in connection with its duties under this
Agreement, shall not be liable for (a) the validity or invalidity or authority
or lack thereof of any Oral or Written Instruction, notice or other instrument
which conforms to the applicable requirements of this Agreement, and which PFPC
reasonably believes to be genuine; or (b) delays or errors or loss of data
occurring by reason of circumstances beyond PFPC's reasonable control, including
acts of civil or military authority, national emergencies, labor difficulties,
fire, flood or catastrophe, acts of God, insurrection, war, riots or failure of
the mails, transportation, communication or power supply.
14. Description of Accounting Services.
(a) Services on a Continuing Basis. PFPC will perform the
following accounting functions if required:
(i) Journalize each Portfolio's investment,
capital share and income and expense
activities;
(ii) Verify investment buy/sell trade tickets
when received from the Fund's investment
advisor and transmit trades to the Fund's
custodian for proper settlement;
(iii) Maintain individual ledgers for investment
securities;
(iv) Maintain historical tax lots for each
security;
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(v) Reconcile cash and investment balances of
the Fund with the custodian, and provide the
Fund's investment advisor with the beginning
cash balance available for investment
purposes;
(vi) Update the cash availability throughout the
day as required by the Fund's advisor;
(vii) Post to and prepare each Portfolio's
Statement of Assets and Liabilities and the
Statement of Operations;
(viii) Calculate various contractual expenses
(e.g., advisory and custody fees);
(ix) Monitor the expense accruals and notify Fund
management of any proposed adjustments;
(x) Control all disbursements from each
Portfolio and authorize such disbursements
upon Written Instructions;
(xi) Calculate capital gains and losses;
(xii) Determine each Portfolio's net income;
(xiii) Obtain security market quotes from
independent pricing services approved by the
Advisor, or if such quotes are unavailable,
then obtain such prices from the Advisor,
and in either case calculate the market
value of each
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Portfolio's investments;
(xiv) Transmit or mail a copy of each daily
portfolio valuation to the Advisor;
(xv) Compute the net asset value of each of the
Portfolios;
(xvi) As appropriate, compute each of the
Portfolio's yields, total return, expense
ratios, Portfolio turnover rate, and, if
required, Portfolio average dollar-weighted
maturity; and
(xvii) Prepare a monthly financial statement, which
will include the following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses.
(b) PFPC will provide the Funds' Administrator with the
following services:
(i) Assist with preparation of:
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Federal and State Tax Returns Excise Tax
Returns Annual and Semi-Annual Shareholder
Reports Rules 24(e)-2 and 24(f)-2 Notices;
(ii) Assist in the Blue Sky and Federal
registration and compliance process;
(iii) Assist in the review of registration
statements; and
(iv) Assist in monitoring compliance with Sub-
Chapter M of the Internal Revenue Code.
15. Duration and Termination. This Agreement shall continue, unless
sooner terminated by the Portfolio or by PFPC for "cause"
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(as defined below) on sixty (60) days prior written notice to the other party.
For purposes of this Agreement "cause" shall mean any circumstances which
materially impair the ability of either party to this Agreement to perform all
of its duties and obligations hereunder.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. If notice is sent by confirming telegram, cable, telex
or facsimile sending device, it shall be deemed to have been given immediately.
If notice is sent by first-class mail, it shall be deemed to have been given
three days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered. Notices shall be addressed
(a) if to PFPC at PFPC's address, 103 Bellevue Parkway, Wilmington, Delaware
19809; (b) if to the Fund, at the address of the Fund; or (c) if to neither of
the foregoing, at such other address as shall have been notified to the sender
of any such Notice or other communication.
17. Amendments. This Agreement, or any term thereof, may be changed or
waived only by written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
18. Delegation. PFPC may, with the prior written consent of the Fund,
which such consent may not be unreasonably withheld, assign its rights and
delegate its duties hereunder to any wholly-owned direct or indirect subsidiary
of PNC Bank, National Association or PNC Bank Corp., provided that (i) PFPC
gives the
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Fund a minimum of thirty (30) days in which to decide and consent by
written notice; (ii) the delegate agrees with PFPC to comply with all relevant
provisions of this Agreement and the 1940 Act; and (iii) PFPC and such delegate
promptly provide such information as the Fund may request, and respond to such
questions as the Fund may ask, relative to the delegation, including (without
limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to delegated and/or Oral Instructions.
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of the Commonwealth of Massachusetts and notice is hereby given that
the Fund by the undersigned officer of the Fund in his/her capacity as an
officer of the Fund. The obligations of this Agreement shall only be binding
upon the assets and property of the Fund, and shall not be binding upon any
Trustee, officer or shareholder of the Fund individually.
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The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
This Agreement shall be deemed to be a contract made in California and
governed by California law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
and shall inure to the benefit of the parties hereto and their respective
successors.
16
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
PFPC INC.
By: /s/ Joseph Gramlich
-----------------------------
Name: Joseph Gramlich
---------------------------
Title: Senior Vice President
--------------------------
SCHWAB ANNUITY PORTFOLIOS
By: /s/ William J. Klipp
-----------------------------
Name: William J. Klipp
---------------------------
Title: Senior Vice President and
--------------------------
Chief Operating Officer
17
<PAGE> 18
Appendix A
[List of Books and Records to be
Maintained by PFPC]
Subject to Section 7, PFPC will keep and maintain the following books
and records of each Portfolio pursuant to Rule 31a-1 under the Investment
Company Act of 1940 (the "Rule"):
a. Journals containing an itemized daily record in detail of all
purchases and sales of securities, all receipts and disbursements of cash, and
all other debits and credits, as required by subsection (b) (1) of the Rule;
b. General and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, including interest accrued and
interest received, as required by subsection (b) (2) (i) of the Rule;
c. Separate ledger accounts required by subsection (b) (2) (ii) and
(iii) of the Rule; and
d. A monthly trial balance of all ledger accounts (except shareholder
accounts) as required by subsection (b) (8) of the Rule.
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<PAGE> 1
Exhibit (13)(a)
PURCHASE AGREEMENT
Schwab Annuity Portfolios (the "Trust"), a Massachusetts
business trust, and Charles Schwab & Co., Inc. ("Schwab"), a California
corporation, hereby agree as follows:
1. The Trust hereby offers and Schwab hereby purchases 100,000
units of beneficial interest of Series A of the Trust representing interests in
the series of shares known as the Schwab Money Market Portfolio (such 100,000
units of beneficial interest being hereafter collectively known as "Shares") at
a price of $1.00 per Share. Schwab hereby acknowledges purchase of the Shares
and the Trust hereby acknowledges receipt from Schwab of funds in the amount of
$100,000 for the series of the Trust in full payment for the Shares. It is
further agreed that no certificate for the Shares will be issued by the Trust.
2. Schwab represents and warrants to the Trust that the Shares
are being acquired for investment purposes and not with a view to the
distribution thereof.
3. The names "Schwab Annuity Portfolios" and "Trustees of
Schwab Annuity Portfolios" refer, respectively to the Trust created and the
Trustees as Trustees but not individually or personally, acting from time to
time under an Agreement and Declaration of Trust dated as of January 21, 1994,
to which reference is hereby made and a copy of which is on file at the Office
of the Secretary of State of the Commonwealth of Massachusetts and elsewhere as
required by law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of "Schwab Annuity Portfolios" entered into in the name
or on behalf thereof by any of the Trustees, representatives or agents are not
made individually, but only in such capacities, and are not binding upon any of
the Trustees, Shareholders or representatives of the Trust personally, but bind
only the assets of the Trust, and all persons dealing with any series of Shares
of the Trust must look solely to the assets of the Trust belonging to such
series for the enforcement of any claims against the Trust.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed the
Agreement as of the 17th day of March 1994.
Attest: SCHWAB ANNUITY PORTFOLIOS
/s/ A.R. By: /s/ William J. Klipp
- ----------------------------- ------------------------------
Name: William J. Klipp
Title: Senior Vice President
Attest: CHARLES SCHWAB & CO., INC.
/s/ Teri J. Kern By: /s/ Tom D. Seip
- ----------------------------- ------------------------------
Name: Tom D. Seip
Title: Executive Vice President
