<PAGE>
SCHWAB ANNUITY PORTFOLIOS
JUNE 30, 1998 SEMI-ANNUAL REPORT
MARKET OVERVIEW
U.S. GROWTH RATE
- ----------------
Although somewhat dampened during the second quarter, the U.S. economy, as
measured by Gross Domestic Product (GDP), grew at a strong real annual rate of
3.5% for the first half of 1998 -- well in excess of the Federal Reserve's
estimated non-inflationary growth rate of 2.0% to 2.75%.
REAL GDP GROWTH RATE
QUARTERLY PERCENT CHANGE (ANNUALIZED RATE)
[GRAPHIC OMITTED]
PLOT POINTS FOLLOW:
Q1 1990 3.9
Q2 1990 1.2
Q3 1990 -1.9
Q4 1990 -4
Q1 1991 -2.1
Q2 1991 1.8
Q3 1991 1
Q4 1991 1
Q1 1992 4.7
Q2 1992 2.5
Q3 1992 3
Q4 1992 4.3
Q1 1993 0.1
Q2 1993 2
Q3 1993 2.1
Q4 1993 5.3
Q1 1994 3
Q2 1994 4.7
Q3 1994 1.8
Q4 1994 3.6
Q1 1995 0.9
Q2 1995 0.3
Q3 1995 3
Q4 1995 2.2
Q1 1996 1.8
Q2 1996 6
Q3 1996 1
Q4 1996 4.3
Q1 1997 4.9
Q2 1997 3.3
Q3 1997 3.1
Q4 1997 3.7
Q1 1998 5.5
Q2 1998 1.4
At the time of this writing, THE U.S. ECONOMY APPEARS POISED FOR CONTINUED
GROWTH, further extending the current economic expansion that began in 1991.
Currently, this expansion is fueled by high levels of consumer confidence,
rising real wages, and strong year-to-date gains in stock prices. Although most
economists believe the brunt of Asia's economic crisis will hit the U.S. in the
next six months, they feel it is unlikely to cause even a temporary pause in
U.S. economic growth -- however it may help slow the U.S. GDP growth rate closer
to the Federal Reserve's estimated non-inflationary levels.
UNEMPLOYMENT
- ------------
THE U.S. UNEMPLOYMENT WAS 4.5% IN JUNE AND 4.3% FOR THE TWO PRIOR MONTHS--THE
LOWEST LEVEL IN 28 YEARS.
U.S. UNEMPLOYMENT RATE
[GRAPHIC OMITTED]
PLOT POINTS FOLLOW:
Jan-90 5.4
Feb-90 5.3
Mar-90 5.2
Apr-90 5.4
May-90 5.4
Jun-90 5.2
Jul-90 5.5
Aug-90 5.7
Sep-90 5.9
Oct-90 5.9
Nov-90 6.2
Dec-90 6.3
Jan-91 6.4
Feb-91 6.6
Mar-91 6.8
Apr-91 6.7
May-91 6.9
Jun-91 6.9
Jul-91 6.8
Aug-91 6.9
Sep-91 6.9
Oct-91 7
Nov-91 7
Dec-91 7.3
Jan-92 7.3
Feb-92 7.4
Mar-92 7.4
Apr-92 7.4
May-92 7.6
Jun-92 7.8
Jul-92 7.7
Aug-92 7.6
Sep-92 7.6
Oct-92 7.3
Nov-92 7.4
Dec-92 7.4
Jan-93 7.3
Feb-93 7.1
Mar-93 7
Apr-93 7.1
May-93 7.1
Jun-93 7
Jul-93 6.9
Aug-93 6.8
Sep-93 6.7
Oct-93 6.8
Nov-93 6.6
Dec-93 6.5
Jan-94 6.6
Feb-94 6.6
Mar-94 6.5
Apr-94 6.4
May-94 6
Jun-94 6.1
Jul-94 6.1
Aug-94 6.1
Sep-94 5.9
Oct-94 5.8
Nov-94 5.6
Dec-94 5.4
Jan-95 5.6
Feb-95 5.4
Mar-95 5.4
Apr-95 5.7
May-95 5.6
Jun-95 5.6
Jul-95 5.7
Aug-95 5.7
Sep-95 5.7
Oct-95 5.6
Nov-95 5.6
Dec-95 5.6
Jan-96 5.7
Feb-96 5.5
Mar-96 5.5
Apr-96 5.5
May-96 5.5
Jun-96 5.3
Jul-96 5.5
Aug-96 5.2
Sep-96 5.2
Oct-96 5.3
Nov-96 5.4
Dec-96 5.3
Jan-97 5.3
Feb-97 5.3
Mar-97 5.2
Apr-97 5
May-97 4.8
Jun-97 5
Jul-97 4.9
Aug-97 4.9
Sep-97 4.9
Oct-97 4.8
Nov-97 4.6
Dec-97 4.7
Jan-98 4.7
Feb-98 4.6
Mar-98 4.7
Apr-98 4.3
May-98 4.3
Jun-98 4.5
Labor markets have become extremely tight, growth in the labor force has slowed,
and wage increases are
Source: Bloomberg L.P.
beginning to put more pressure on labor costs (refer to Employment Cost Index
below). ALTHOUGH INFLATION HAS BEEN WELL CONTAINED, the combination of a tight
labor market (as evidenced by low unemployment rates) and strong economic growth
typically leads to inflationary pressures on wages and, ultimately, prices. In
this environment, productivity growth becomes particularly important. Strong
productivity gains, such as those achieved in 1997, have allowed manufacturers
and other businesses to limit price increases in the face of rising wages,
without sacrificing profit margins.
INFLATION
- ---------
BOTH THE EMPLOYMENT COST INDEX (ECI) AND CONSUMER PRICE INDEX (CPI) REMAINED IN
CHECK during the first half of 1998, reflecting continued low inflation.
MEASURES OF INFLATION
[GRAPHIC OMITTED]
PLOT POINTS FOLLOW:
MONTHLY CONSUMER QUARTERLY EMPLOYMENT
PRICE INDEX -- COST INDEX --
YOY % CHANGE YOY% CHANGE
Jan-90 5.2 5.5
Feb-90 5.3 5.5
Mar-90 5.2 5.5
Apr-90 4.7 5.4
May-90 4.4 5.4
Jun-90 4.7 5.4
Jul-90 4.8 5.2
Aug-90 5.6 5.2
Sep-90 6.2 5.2
Oct-90 6.3 4.9
Nov-90 6.3 4.9
Dec-90 6.1 4.9
Jan-91 5.7 4.6
Feb-91 5.3 4.6
Mar-91 4.9 4.6
Apr-91 4.9 4.6
May-91 5 4.6
Jun-91 4.7 4.6
Jul-91 4.4 4.3
Aug-91 3.8 4.3
Sep-91 3.4 4.3
Oct-91 2.9 4.3
Nov-91 3 4.3
Dec-91 3.1 4.3
Jan-92 2.6 4
Feb-92 2.8 4
Mar-92 3.2 4
Apr-92 3.2 3.6
May-92 3 3.6
Jun-92 3.1 3.6
Jul-92 3.2 3.5
Aug-92 3.1 3.5
Sep-92 3 3.5
Oct-92 3.2 3.5
Nov-92 3 3.5
Dec-92 2.9 3.5
Jan-93 3.3 3.5
Feb-93 3.2 3.5
Mar-93 3.1 3.5
Apr-93 3.2 3.6
May-93 3.2 3.6
Jun-93 3 3.6
Jul-93 2.8 3.6
Aug-93 2.8 3.6
Sep-93 2.7 3.6
Oct-93 2.8 3.5
Nov-93 2.7 3.5
Dec-93 2.7 3.5
Jan-94 2.5 3.2
Feb-94 2.5 3.2
Mar-94 2.5 3.2
Apr-94 2.4 3.2
May-94 2.3 3.2
Jun-94 2.5 3.2
Jul-94 2.8 3.2
Aug-94 2.9 3.2
Sep-94 3 3.2
Oct-94 2.6 3
Nov-94 2.7 3
Dec-94 2.7 3
Jan-95 2.8 2.9
Feb-95 2.9 2.9
Mar-95 2.9 2.9
Apr-95 3.1 2.9
May-95 3.2 2.9
Jun-95 3 2.9
Jul-95 2.8 2.7
Aug-95 2.6 2.7
Sep-95 2.5 2.7
Oct-95 2.8 2.7
Nov-95 2.6 2.7
Dec-95 2.5 2.7
Jan-96 2.7 2.8
Feb-96 2.7 2.8
Mar-96 2.8 2.8
Apr-96 2.9 2.9
May-96 2.9 2.9
Jun-96 2.8 2.9
Jul-96 3 2.8
Aug-96 2.9 2.8
Sep-96 3 2.8
Oct-96 3 2.9
Nov-96 3.3 2.9
Dec-96 3.3 2.9
Jan-97 3 2.9
Feb-97 3 2.9
Mar-97 2.8 2.9
Apr-97 2.5 2.8
May-97 2.2 2.8
Jun-97 2.3 2.8
Jul-97 2.2 3
Aug-97 2.2 3
Sep-97 2.2 3
Oct-97 2.1 3.3
Nov-97 1.8 3.3
Dec-97 1.7 3.3
Jan-98 1.6 3.3
Feb-98 1.4 3.3
Mar-98 1.4 3.3
Apr-98 1.4 3.5
May-98 1.7 3.5
Jun-98 1.7 3.5
The CPI rose just 1.7% for the year ended June 1998 -- reaching levels during
the reporting period that were the lowest since January 1987. Its core rate
(which excludes the more volatile food and energy components) rose 2.2%--the
lowest rate of increase since 1965. The Employment Cost Index includes two
components -- Benefits, which has been well contained (up only 2.4% for the year
ended Q2 1998) and Wages and Salaries which has increased 3.8% for the same
period.
ASSET CLASS PERFORMANCE
- -----------------------
U.S. STOCKS, particularly large-cap stocks, posted strong returns for the six
month reporting period. Large capitalization stocks continued to outperform
small capitalization stocks, as reflected in the 17.7% return of the S&P
500(REGISTRATION MARK) Index versus the 5.8% return of the Schwab Small-Cap
Index(REGISTRATION MARK) over the reporting period. Amazingly, the S&P 500 Index
posted its fourteenth consecutive quarterly gain during the second quarter of
1998 and posted a return of 30.2% for the 12-month period ended June 1998.
---------------------
1
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---------------------
SCHWAB ANNUITY PORTFOLIOS
JUNE 30, 1998 SEMI-ANNUAL REPORT (CONTINUED)
MARKET OVERVIEW
TOTAL RETURN PERFORMANCE -- GROWTH OF A DOLLAR INVESTED
[GRAPHIC OMITTED]
PLOT POINTS FOLLOW:
SCHWAB SMALL SCHWAB INTERTATIONAL LEHMAN AGGREGATE
S&P 500 CAP INDEX INDEX BOND INDEX
Dec-97 1 1 1 1
Jan-98 1.011 0.984 1.04 1.013
Feb-98 1.084 1.066 1.103 1.012
Mar-98 1.14 1.114 1.132 1.015
Apr-98 1.151 1.121 1.14 1.021
May-98 1.131 1.055 1.136 1.03
Jun-98 1.177 1.058 1.145 1.039
INTERNATIONAL STOCKS, as represented by the Schwab International
Index(REGISTRATION MARK), gained 14.5% over the six-month period, primarily on
the strength of European markets.
BOND RETURNS were more in line with long-term expectations during the reporting
period. Bond returns, as represented by the Lehman Brothers Aggregate Bond
Index, were 3.9% over the six-month reporting period.
S&P 500(REGISTRATION MARK) PRICE/EARNINGS RATIO
- -----------------------------------------------
The price/earnings ratio for the S&P 500(REGISTRATION MARK) Index reached its
highest value ever during the reporting period. It stood at 27.1 at the close of
the reporting period, well above its 30-year average of 14.9. The price/earnings
ratio, also known as a multiple, is the price of a stock divided by its earnings
per share and generally indicates how much investors are willing to pay for a
company's earning potential.
Based on other traditional market valuation measures such as the price-to-book
value ratio or dividend yield, the U.S. stock market, as measured by the S&P
500(REGISTRATION MARK) Index, also reached historic highs during the reporting
period.
S&P 500(REGISTRATION MARK) PRICE EARNINGS RATIO
[GRAPH OMITTED]
PLOT POINTS FOLLOW:
S&P 500 Price Earnings Ratio
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.9
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.5
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.2
Feb-93 24.25
Mar-93 24.22
Apr-93 23.2
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.1
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.9
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.2
Mar-95 16.5
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.3
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.6
Nov-96 21.05
Dec-96 20.7
Jan-97 20.55
Feb-97 20.98
Mar-97 19.87
Apr-97 20.24
May-97 21.43
Jun-97 22.45
Jul-97 23.92
Aug-97 22.64
Sep-97 24
Oct-97 22.84
Nov-97 24.02
Dec-97 24.51
Jan-98 24.99
Feb-98 26.44
Mar-98 27.76
Apr-98 26.51
May-98 26.12
Jun-98 27.09
Source: Bloomberg L.P.
SHORT-TERM INTEREST RATE ENVIRONMENT
- ------------------------------------
SHORT-TERM INTEREST RATES REMAINED IN A NARROW RANGE throughout the reporting
period due to a widespread expectation that there would be no changes to Fed
policy.
1997 YIELDS ON 90-DAY COMMERCIAL PAPER AND 3-MONTH
TREASURY BILLS
[GRAPH OMITTED]
PLOT POINTS FOLLOW:
3 Month Treasury Bill 90 Day Commercial Paper
1/1/98 5.35 5.54
1/2/98 5.29 5.54
1/5/98 5.23 5.56
1/6/98 5.2 5.47
1/7/98 5.2 5.45
1/8/98 5.1 5.44
1/9/98 5.01 5.42
1/12/98 5.02 5.36
1/13/98 5.19 5.38
1/14/98 5.15 5.37
1/15/98 5.11 5.37
1/16/98 5.15 5.41
1/19/98 5.15 5.41
1/20/98 5.15 5.41
1/21/98 5.11 5.39
1/22/98 5.13 5.4
1/23/98 5.17 5.4
1/26/98 5.12 5.4
1/27/98 5.25 5.4
1/28/98 5.21 5.39
1/29/98 5.19 5.4
1/30/98 5.18 5.42
2/2/98 5.22 5.4
2/3/98 5.23 5.4
2/4/98 5.11 5.42
2/5/98 5.15 5.38
2/6/98 5.17 5.43
2/9/98 5.13 5.41
2/10/98 5.21 5.42
2/11/98 5.2 5.42
2/12/98 5.21 5.43
2/13/98 5.15 5.39
2/16/98 5.21 5.39
2/17/98 5.18 5.4
2/18/98 5.17 5.41
2/19/98 5.19 5.43
2/20/98 5.2 5.44
2/23/98 5.24 5.43
2/24/98 5.32 5.44
2/25/98 5.3 5.42
2/26/98 5.34 5.45
2/27/98 5.31 5.48
3/2/98 5.3 5.42
3/3/98 5.17 5.45
3/4/98 5.15 5.47
3/5/98 5.16 5.47
3/6/98 5.15 5.47
3/9/98 5.09 5.49
3/10/98 5.08 5.47
3/11/98 5.08 5.45
3/12/98 5.08 5.46
3/13/98 5.09 5.48
3/16/98 5.1 5.49
3/17/98 5.14 5.45
3/18/98 5.15 5.46
3/19/98 5.17 5.46
3/20/98 5.17 5.46
3/23/98 5.14 5.45
3/24/98 5.14 5.47
3/25/98 5.17 5.45
3/26/98 5.2 5.45
3/27/98 5.21 5.46
3/30/98 5.21 5.44
3/31/98 5.12 5.47
4/1/98 5.11 5.46
4/2/98 5.09 5.48
4/3/98 5.08 5.47
4/6/98 5.08 5.45
4/7/98 5.04 5.46
4/8/98 5.05 5.45
4/9/98 5.05 5.46
4/10/98 5.05 5.46
4/13/98 5.16 5.43
4/14/98 5.11 5.46
4/15/98 5.07 5.46
4/16/98 5.05 5.47
4/17/98 5.04 5.45
4/20/98 5.02 5.47
4/21/98 5.07 5.44
4/22/98 5.08 5.46
4/23/98 5.08 5.44
4/24/98 5.06 5.45
4/27/98 5.05 5.51
4/28/98 5.06 5.49
4/29/98 5.06 5.49
4/30/98 4.97 5.49
5/1/98 5 5.46
5/4/98 5.02 5.47
5/5/98 5.11 5.46
5/6/98 5.1 5.49
5/7/98 5.1 5.46
5/8/98 5.12 5.47
5/11/98 5.12 5.48
5/12/98 5.13 5.47
5/13/98 5.12 5.48
5/14/98 5.16 5.49
5/15/98 5.16 5.49
5/18/98 5.17 5.5
5/19/98 5.2 5.5
5/20/98 5.18 5.48
5/21/98 5.23 5.48
5/22/98 5.21 5.48
5/25/98 5.21 5.48
5/26/98 5.1 5.48
5/27/98 5.09 5.49
5/28/98 5.05 5.48
5/29/98 5.01 5.47
6/1/98 4.97 5.49
6/2/98 5.2 5.46
6/3/98 5.11 5.48
6/4/98 5.11 5.48
6/5/98 5.11 5.48
6/8/98 5.12 5.49
6/9/98 5.14 5.48
6/10/98 5.13 5.49
6/11/98 5.09 5.48
6/12/98 5.11 5.49
6/15/98 5.11 5.47
6/16/98 5.16 5.47
6/17/98 5.21 5.48
6/18/98 5.18 5.49
6/19/98 5.15 5.48
6/22/98 5.12 5.49
6/23/98 5.07 5.48
6/24/98 5.04 5.5
6/25/98 5 5.48
6/26/98 4.99 5.49
6/29/98 5 5.5
6/30/98 4.99 5.47
The combination of strong first quarter growth and tight labor markets offset by
continued low inflation and uncertainty regarding Asia resulted in an interest
rate environment with no clear direction.
As Federal Reserve Chairman Alan Greenspan said in his February congressional
testimony, "The key question going forward is whether the restraint building
from the turmoil in Asia will be sufficient to check inflationary tendencies
that might otherwise result from the strength of domestic spending and
tightening labor markets." Although many economists believe the Fed has a
longer-term bias toward more restrictive monetary policy, they also anticipate a
slowing of the GDP growth rate for the remainder of the year. Therefore, they do
not expect the Federal Reserve will, over the near-term, implement any
restrictive policy changes (interest rate increases) unless we begin to see
meaningful signs of inflation.
---------------------
2
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SCHWAB ANNUITY PORTFOLIOS
JUNE 30, 1998 SEMI-ANNUAL REPORT (CONTINUED)
MARKET OVERVIEW
SCHWAB MONEY MARKET PORTFOLIO
PORTFOLIO MANAGEMENT TEAM
- -------------------------
STEPHEN B. WARD -- Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of the Portfolios. Steve joined
Charles Schwab Investment Management, Inc. (CSIM) as Vice President and
Portfolio Manager in April 1991 and was promoted to his current position in
August 1993. Prior to joining CSIM, Steve was Vice President and Portfolio
Manager at Federated Investors.
AMY TREANOR -- Portfolio Manager, has managed the Money Market Portfolio since
May 1997. Amy joined CSIM in 1992 as Associate Portfolio Trader and was promoted
to her current position in May 1997. Prior to joining CSIM, Amy was Portfolio
Manager and Assistant Vice President with Capitalcorp Asset Management.
PORTFOLIO HIGHLIGHTS
- --------------------
Our strategy for managing the Money Market Portfolio has remained consistent
during the reporting period. Based on our expectation that the Fed would not
raise interest rates, we looked for opportunities to purchase securities with
somewhat longer maturities (and higher yields) when market conditions were
advantageous. We attempted to maintain a dollar-weighted maturity (DWAM)
slightly longer than other funds with similar investment objectives. This
strategy had a beneficial impact on yields throughout most of the period.
PERFORMANCE REVIEW
- ------------------
The table below presents 7-day yields as of the end of the reporting period for
the Money Market Portfolio. Please remember that money market fund yields
fluctuate and past performance is no guarantee of future results.
Yield Summary as of 6/30/98 1
- --------------------------------------------------------------------------------
7-Day Yield 5.05%
7-Day Effective Yield 5.18%
SCHWAB S&P 500 PORTFOLIO
PORTFOLIO MANAGEMENT TEAM
- -------------------------
STEPHEN B. WARD -- Senior Vice President and Chief Investment Officer, has
overall responsibility for the
- ----------
1 A portion of the Portfolio's expenses were reduced during the reporting
period. Without these reductions, as of 6/30/98, the 7-day yield and the
7-day effective yield for the portfolio would have been 4.92% and 5.04%,
respectively.
management of the Portfolio. Steve joined Charles Schwab Investment Management
(CSIM) as Vice President and Portfolio Manager in April 1991 and was promoted to
his current position in August 1993. Prior to joining CSIM, Steve was Vice
President and Portfolio Manager at Federated Investors.
GERI HOM -- Vice President and Senior Portfolio Manager, has primary
responsibility for the day-to-day management of the S&P 500 Portfolio. Geri
joined CSIM in March 1995 as Portfolio Manager and was promoted to her current
position in December 1996. She currently manages approximately $10 billion in
indexed equity mutual fund assets. Prior to joining CSIM, Geri was a principal
for Wells Fargo Nikko Investment Advisors and Vice President and Manager of the
Domestic Equity Portfolio Management Group at Wells Fargo Nikko.
PORTFOLIO HIGHLIGHTS
- --------------------
SCHWAB S&P 500 PORTFOLIO HYPOTHETICAL
GROWTH CHART AS OF 6/30/98
[GRAPHIC OMITTED]
PLOT POINTS FOLLOW:
S&P 500 Portfolio S&P 500 Index
10/31/96 10,000 10,000
11/30/96 10,750 10,777
12/31/96 10,530 10,564
1/31/97 11,170 11,223
2/28/97 11,250 11,311
3/31/97 10,780 10,848
4/30/97 11,410 11,494
5/31/97 12,090 12,193
6/30/97 12,630 12,739
7/31/97 13,620 13,752
8/31/97 12,860 12,982
9/30/97 13,560 13,692
10/31/97 13,120 13,235
11/30/97 13,720 13,848
12/31/97 13,948 14,086
1/31/98 14,098 14,242
2/28/98 15,108 15,269
3/31/98 15,869 16,051
4/30/98 16,029 16,213
5/31/98 15,739 15,934
6/30/98 16,369 16,581
(BULLET) The graph above compares the growth of a hypothetical $10,000
investment in the Schwab S&P 500 Portfolio at the inception, with a similar
investment in the S&P 500 Index.
(BULLET) THE INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. INDICES ARE UNMANAGED AND DO NOT REFLECT ADVISORY FEES AND
OTHER EXPENSES ASSOCIATED WITH AN INVESTMENT IN THE S&P 500 PORTFOLIO.
INVESTORS CANNOT INVEST IN AN INDEX DIRECTLY.
---------------------
3
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---------------------
SCHWAB ANNUITY PORTFOLIOS
JUNE 30, 1998 SEMI-ANNUAL REPORT (CONTINUED)
MARKET OVERVIEW
As discussed in the Market Overview section, large-cap domestic stocks (such as
those in the S&P 500(REGISTRATION MARK) Index) were clearly a strong performing
asset class for the reporting period. The Portfolio continued to closely track
the performance of its benchmark, the S&P 500(REGISTRATION MARK) Index.
NASD regulations require that we report Portfolio performance data as of the
most recent calendar quarter. As of 6/30/98, the S&P 500 Portfolio's 6-month,
1-year and since-inception average annual total returns were 17.36%1, 29.60%1
and 34.49%1, respectively.
Unlike the Portfolio, the S&P 500(REGISTRATION MARK) Index does not incur
management and other Portfolio costs that reduce returns to the shareholders.
Additionally, the Portfolio, unlike the S&P 500(REGISTRATION MARK) Index, holds
a small portion in cash to meet shareholder redemptions and to pay Portfolio
expenses. The cash portion earns interest at money market rates, which may be
more or less than the returns of the S&P 500(REGISTRATION MARK) Index during a
given period. Also, the weighting of any particular security in the Portfolio
can be greater or less than in the S&P 500(REGISTRATION MARK) Index. Lastly,
unlike the S&P 500(REGISTRATION MARK) Index, the Portfolio incurs trading costs
when it buys or sells stocks.
Taken together, these factors cause the difference in the returns of the S&P 500
Portfolio compared to the S&P 500(REGISTRATION MARK) Index, a difference
referred to as the S&P 500 Portfolio's "tracking differential." The tracking
differential for the S&P 500 Portfolio during the six-month reporting period was
0.34%. Given the S&P 500 Portfolio's current ratio of expenses to average net
assets (0.28%), and the components of tracking error (as discussed above), we
are satisfied with this level of tracking error.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
(formerly Schwab Asset Director(REGISTRATION MARK) -- High Growth Portfolio)
PORTFOLIO MANAGEMENT TEAM
- -------------------------
STEPHEN B. WARD -- Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of the portfolio. Steve joined CSIM as
Vice President and Portfolio Manager in April 1991,
- ----------
1 A portion of the S&P 500 Portfolio's expenses was reduced during the
reporting period. Without such reductions, as of 6/30/98, the Portfolio's
6-month, 1-year and since-inception average annual total returns would have
been 17.22%, 29.30% and 34.20%, respectively.
and was promoted to his current position in August 1993. Prior to joining CSIM,
Steve was the Vice President and Portfolio Manager at Federated Investors.
GERI HOM -- Vice President and Senior Portfolio Manager, has primary
responsibility for the day-to-day management of the equity securities in the
MarketTrack Growth Portfolio II(TRADEMARK). Geri joined CSIM in March 1995 as
Portfolio Manager and was promoted to her current position in December 1996. She
currently manages approximately $10 billion in indexed equity mutual fund
assets. Prior to joining CSIM, Geri was a principal for Wells Fargo Nikko
Investment Advisors and Vice President and Manager of the Domestic Equity
Portfolio Management Group at Wells Fargo Nikko.
KIMON DAIFOTIS -- Vice President and Senior Portfolio Manager, has primary
responsibility for the day-to-day management of the bonds and cash-equivalent
securities in the MarketTrack Growth Portfolio II(TRADEMARK). Kimon joined CSIM
in his current capacity in October 1997. For five years prior to joining CSIM he
was employed by Lehman Brothers, most recently as Vice President in fixed income
institutional sales and, prior to that, as Senior Portfolio Strategist.
PORTFOLIO HIGHLIGHTS
- --------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK) HYPOTHETICAL
GROWTH CHART AS OF 6/30/98
[GRAPH OMITTED]
PLOT POINTS FOLLOW:
Schwab MarketTrack Lehman Brothers
Growth Portfolio II S&P 500 Index Aggregate Bond Index
10/31/96 10,000 10,000 10,000
11/30/96 10,490 10,777 10,171
12/31/96 10,420 10,564 10,076
1/31/97 10,670 11,223 10,108
2/28/97 10,710 11,311 10,133
3/31/97 10,460 10,848 10,020
4/30/97 10,780 11,494 10,171
5/31/97 11,420 12,193 10,267
6/30/97 11,940 12,739 10,390
7/31/97 12,650 13,752 10,670
8/31/97 12,200 12,982 10,579
9/30/97 12,880 13,692 10,736
10/31/97 12,520 13,235 10,892
11/30/97 12,730 13,848 10,942
12/31/97 12,977 14,086 11,052
1/31/98 13,037 14,242 11,194
2/28/98 13,779 15,269 11,185
3/31/98 14,199 16,051 11,223
4/30/98 14,320 16,213 11,281
5/31/98 14,019 15,934 11,388
6/30/98 14,240 16,581 11,485
(BULLET) The graph above compares the growth of a hypothetical $10,000
investment in the Schwab MarketTrack Growth Portfolio II(TRADEMARK) at the
inception, with a similar investment in the S&P 500 Index and the Lehman
Brothers Aggregate Bond Index.
---------------------
4
<PAGE>
---------------------
SCHWAB ANNUITY PORTFOLIOS
JUNE 30, 1998 SEMI-ANNUAL REPORT
MARKET OVERVIEW
(BULLET) THE INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. INDICES ARE UNMANAGED AND DO NOT REFLECT ADVISORY FEES AND
OTHER EXPENSES ASSOCIATED WITH AN INVESTMENT IN THE PORTFOLIO. INVESTORS
CANNOT INVEST IN AN INDEX DIRECTLY. The table below shows the target and
actual asset mixes for the MarketTrack Growth Portfolio II(TRADEMARK) at
the beginning and end of the reporting period.
Portfolio Portfolio
Neutral Position at Position at
Target 12/31/97 6/30/98
------------------------------------
Large Cap Stocks 40.0% 40.3% 40.5%
Small Cap Stocks 20.0% 19.5% 20.7%
International Stocks 20.0% 19.5% 20.1%
Bonds 15.0% 0.0% 15.2%
Cash Equivalents 5.0% 20.7% 3.5%
------------------------------------
100.0% 100.0% 100.0%
From January through the end of February, the MarketTrack Growth Portfolio
II(TRADEMARK) maintained a neutral stock weighting, an underweighting in bonds
and an overweighting in cash. We underweighted bonds because the yield advantage
they offered over cash equivalents had declined to the point where bonds were
relatively unattractive on a risk-adjusted return basis. In early March, yields
rebounded, leading us to increase the MarketTrack Growth Portfolio's positions
closer toward each its neutral target. By the close of the period, the
MarketTrack Growth Portfolio II(TRADEMARK) was positioned approximately at its
neutral targets.
NASD regulations require that we report Portfolio performance data as of the
most recent calendar quarter. As of 6/30/98, the MarketTrack Growth Portfolio
II(TRADEMARK) 6-month, 1-year and since-inception average annual total returns
were 9.73%1, 19.26%1 and 23.72%1, respectively.
- ----------
1 A portion of the MarketTrack Growth Portfolio II(TRADEMARK) expenses was
reduced during the reporting period. Without such reductions, as of
6/30/98, the Portfolio's 6-month, 1-year and since-inception average annual
total returns would have been 9.39%, 18.36% and 22.08%, respectively.
2 Source: Financial Analysts Journal:Brinson, Singer,Beebower, May/June 1991.
Going forward, we have made a decision to maintain each MarketTrack Growth
Portfolio II(TRADEMARK) stock, bond, and cash equivalent allocations on a static
basis with only minor deviations from their neutral targets. In large part, this
decision was made in response to comments we heard from shareholders expressing
confusion about how and when asset allocation shifts were made in the
MarketTrack Growth Portfolio II(TRADEMARK), and the preference they voiced for a
portfolio that does not significantly deviate from their neutral targets.
Additionally, recent market conditions have presented a difficult environment
for the strategies previously utilized by the MarketTrack Growth Portfolio
II(TRADEMARK) to add significant value. Given these conditions, and the
preferences expressed by shareholders, we felt that a shift in strategy to more
static asset class allocations was the most appropriate course of action.
WHY THE MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK) USES AN INDEX STRATEGY
One frequently cited research study has shown that the manner in which an
investor allocates his or her portfolio among different asset classes can
determine the vast majority of the variance in the portfolio's returns.2 Unless
investors build their portfolios with investments that are designed to
consistently deliver the performance of the asset classes they seek to track,
their portfolios may not perform as they expect.
Portfolios that employ an indexing strategy can be an excellent way to implement
an asset allocation plan because they invest only in the intended asset class
and therefore should achieve returns which closely track the returns of that
benchmark asset class. Portfolios using an index strategy should not be subject
to the "style drift" periodically experienced by actively managed portfolios.
In additional to seeking to deliver reliable asset class performance, most index
portfolios seek to achieve low trading and operating costs by keeping both
portfolio turnover and operating expense ratios at low levels. These savings are
passed on to investors in the form of higher returns. By virtue of the large
number of holdings, most index strategies also offer broad diversification,
which can reduce both the company- and industry-specific risk elements of equity
investing.
---------------------
5
<PAGE>
---------------------
SCHWAB MONEY MARKET PORTFOLIO
PORTFOLIO SUMMARY
ASSET GROWTH
PERCENTAGE
TOTAL TOTAL GROWTH OVER
NET ASSETS NET ASSETS REPORTING
AS OF 6/30/98 AS OF 12/31/97 PERIOD
- --------------------------------------------------------------------------------
$65,552,725 $47,967,612 37%
- --------------------------------------------------------------------------------
AVERAGE YIELDS FOR THE PERIODS ENDED
JUNE 30, 1998*
LAST LAST LAST
SEVEN DAYS THREE MONTHS TWELVE MONTHS
- --------------------------------------------------------------------------------
5.05% 4.93% 4.92%
- --------------------------------------------------------------------------------
MATURITY SCHEDULE
PERCENT OF TOTAL INVESTMENTS
MATURITY RANGE 9/30/97 12/31/97 3/31/98 6/30/98
- --------------------------------------------------------------------------------
0-- 15 Days 16.2% 22.7% 13.2% 13.1%
16-- 30 Days 50.0 14.3 29.5 24.1
31-- 60 Days 14.5 37.4 32.2 22.4
61-- 90 Days 8.5 14.2 16.8 31.5
91--120 Days 0.9 11.4 0.0 0.0
Over 120 Days 9.9 0.0 8.3 8.9
Weighted Average 39 Days 46 Days 48 Days 51 Days
- --------------------------------------------------------------------------------
PORTFOLIO QUALITY
PERCENT OF
SEC TIER NET ASSETS
RATING 6/30/98
---------------------------------------------
Tier 1 100.0%
Tier 2 0.0%
---------------------------------------------
- ----------
* A portion of the Fund's expenses were reduced during the periods. Had these
expenses not been reduced, yields would have been lower.
---------------------
6
<PAGE>
---------------------
SCHWAB MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS
JUNE 30, 1998 (UNAUDITED)
U.S. GOVERNMENT SECURITIES--96.4% PAR VALUE
- --------------------------------------------------------------------------------
DISCOUNT NOTES--87.4%
Federal Farm Credit Bank
5.44%, 07/07/98 ........................... $ 1,495,000 $ 1,493,657
5.42%, 07/14/98 ........................... 340,000 339,341
5.42%, 07/21/98 ........................... 165,000 164,508
5.43%, 08/21/98 ........................... 4,180,000 4,148,157
5.48%, 09/04/98 ........................... 2,500,000 2,475,851
5.44%, 09/11/98 ........................... 2,825,000 2,794,659
Federal Home Loan Bank
5.46%, 08/05/98 ........................... 1,360,000 1,352,873
5.49%, 08/28/98 ........................... 470,000 465,881
5.45%, 09/02/98 ........................... 1,715,000 1,698,853
5.46%, 09/09/98 ........................... 5,725,000 5,665,247
5.47%, 09/23/98 ........................... 2,000,000 1,975,080
5.51%, 09/23/98 ........................... 1,060,000 1,046,743
Federal Home Loan Mortgage Corp.
5.47%, 07/02/98 ........................... 75,000 74,989
5.45%, 07/09/98 ........................... 1,950,000 1,947,664
5.47%, 07/10/98 ........................... 305,000 304,589
5.47%, 07/21/98 ........................... 2,305,000 2,298,046
5.48%, 07/28/98 ........................... 1,390,000 1,384,339
5.50%, 08/24/98 ........................... 2,465,000 2,444,886
5.49%, 09/04/98 ........................... 70,000 69,315
5.50%, 09/18/98 ........................... 4,265,000 4,214,304
Federal National Mortgage Assoc.
5.45%, 07/06/98 ........................... 1,000,000 999,253
5.52%, 07/16/98 ........................... 220,000 219,496
5.47%, 07/17/98 ........................... 2,150,000 2,144,840
5.49%, 07/17/98 ........................... 1,699,000 1,694,877
5.47%, 07/24/98 ........................... 70,000 69,758
5.47%, 07/30/98 ........................... 2,000,000 1,991,300
5.51%, 07/30/98 ........................... 1,320,000 1,314,237
5.46%, 08/05/98 ........................... 5,425,000 5,396,466
Tennessee Valley Authority
5.42%, 07/08/98 ........................... 3,125,000 3,121,731
5.42%, 07/24/98 ........................... 3,990,000 3,976,260
-----------
57,287,200
-----------
TOTAL DISCOUNT NOTES
(Cost $57,287,200) ........................ 57,287,200
-----------
---------------------
7
<PAGE>
---------------------
SCHWAB MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
PAR VALUE
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES--9.0%
5.88%, 08/15/98 .......................... $ 350,000 $ 350,185
5.88%, 10/31/98 .......................... 5,565,000 5,570,486
------------
TOTAL U.S. TREASURY NOTES
(Cost $5,920,671) ........................ 5,920,671
------------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $63,207,871) ....................... 63,207,871
------------
TOTAL INVESTMENTS--96.4%
(Cost $63,207,871) ....................... 63,207,871
------------
OTHER ASSETS AND LIABILITIES--3.6%
Other Assets ................................ 2,421,831
Liabilities ................................. (76,977)
------------
2,344,854
------------
NET ASSETS--100.0% .......................... $ 65,552,725
------------
- ----------
Notes to Statement of Net Assets
Yields shown are effective yields at the time of purchase except for
U.S.Treasury Notes, which reflect the coupon rate of the security. Yields for
each security are stated according to the market convention for that security
type.For each security, cost (for financial reporting and federal income tax
purposes) and carrying value are the same.
See accompanying Notes to Financial Statements.
---------------------
8
<PAGE>
---------------------
SCHWAB MONEY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
ASSETS:
Investments, at value (Cost: $63,207,871) ....... $ 63,207,871
Cash ............................................ 4,536
Receivables:
Interest ..................................... 62,584
Fund shares sold ............................. 2,342,440
Prepaid expenses ................................ 12,271
------------
Total assets ................................. 65,629,702
------------
LIABILITIES:
Payables:
Dividends ....................................... 45,596
Fund shares redeemed ............................ 3,285
Investment advisory and administration fees ..... 3,631
Other liabilities .................................. 24,465
------------
Total liabilities ............................ 76,977
------------
Net assets applicable to outstanding shares ........ $ 65,552,725
============
NET ASSETS consist of:
Paid-in-capital ................................. $ 65,546,525
Undistributed net investment income ............. 10,461
Accumulated net realized loss on investments sold (4,261)
------------
$ 65,552,725
============
PRICING OF SHARES:
Outstanding shares, $0.00001 par value
(unlimited shares authorized) ................. 65,578,604
NET ASSET VALUE, offering and redemption
price per share ................................. $ 1.00
- -------------
See accompanying Notes to Financial Statements.
---------------------
9
<PAGE>
---------------------
SCHWAB MONEY MARKET PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
INTEREST INCOME ................................ $ 1,524,784
-----------
EXPENSES:
Investment advisory and administration fees . 127,301
Custodian and portfolio accounting fees ..... 20,811
Professional fees ........................... 5,278
Shareholder reports ......................... 7,602
Trustees' fees .............................. 2,715
Insurance and other expenses ................ 8,110
-----------
171,817
Less: expenses reduced (see Note 4) ............ (33,446)
-----------
Total expenses incurred by Fund .......... $ 138,371
-----------
NET INVESTMENT INCOME .......................... 1,386,413
Net realized loss on investments sold .......... (1,432)
-----------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................. $ 1,384,981
===========
- ----------
See accompanying Notes to Financial Statements.
---------------------
10
<PAGE>
---------------------
SCHWAB MONEY MARKET PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
------------- --------------
OPERATIONS:
Net investment income ....................... $ 1,386,413 $ 1,940,633
Net realized loss on investments sold ....... (1,432) (2,110)
------------- -------------
Increase in net assets resulting
from operations ......................... 1,384,981 1,938,523
------------- -------------
Dividends to shareholders from net
investment income (see Note 2) ........... (1,397,650) (1,940,633)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
(at $1.00 per share):
Proceeds from shares sold ................... 75,611,563 112,673,512
Net asset value of shares issued in
reinvestment of dividends ................ 1,608,808 1,805,912
Less payments for shares redeemed ........... (59,622,589) (93,940,335)
------------- -------------
Increase in net assets from capital
share transactions ....................... 17,597,782 20,539,089
------------- -------------
Total increase in net assets ................ 17,585,113 20,536,979
NET ASSETS:
Beginning of period ......................... 47,967,612 27,430,633
------------- -------------
End of period ............................... $ 65,552,725 $ 47,967,612
============= =============
- ---------
See accompanying Notes to Financial Statements.
---------------------
11
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------------------- ------------------------------
NET
FISCAL NET ASSET REALIZED & TOTAL DIVIDENDS
PERIOD VALUE AT NET UNREALIZED FROM FROM NET
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT TOTAL
DECEMBER 31, OF PERIOD INCOME ON INVESTMENTS OPERATIONS INCOME DISTRIBUTIONS
- ------------ --------- ---------- -------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
1998 2 $1.00 $0.03 $-- $0.03 $(0.03)4 $(0.03)
1997 $1.00 $0.05 $-- $0.05 $(0.05) $(0.05)
1996 $1.00 $0.05 $-- $0.05 $(0.05) $(0.05)
1995 $1.00 $0.05 $-- $0.05 $(0.05) $(0.05)
1994 3 $1.00 $0.03 $-- $0.03 $(0.03) $(0.03)
<FN>
1 The information contained in the above table is based on actual expenses
for the periods, after giving effect to the portion of expenses reduced by
the Investment Manager. Had these expenses not been reduced, the Fund's
expense and net investment income ratios would have been:
FISCAL
PERIOD RATIO OF NET
ENDED RATIO OF INVESTMENT
DECEMBER 31, EXPENSES INCOME
- ------------ -------- ------------
1998 2 0.62%* 4.89%*
1997 0.71% 4.80%
1996 0.95% 4.42%
1995 1.02% 4.65%
1994 3 2.10%* 2.56%*
2 For the six months ended June 30, 1998 (Unaudited).
3 For the period May 3, 1994 (commencement of operations) to December 31,
1994.
4 The amounts shown include certain reclassifications related to book to tax
differences (See Note 2 of Notes to Financial Statements).
* Annualized.
</FN>
</TABLE>
- ------------
See accompanying Notes to Financial Statements.
---------------------
13
<PAGE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
----------------------------------------------------------------------
RATIO OF NET
RATIO OF INVESTMENT
FISCAL NET ASSET TOTAL EXPENSES INCOME
PERIOD VALUE AT RETURN TO AVERAGE TO AVERAGE
ENDED END OF (NOT ANNUALIZED) NET ASSETS NET ASSETS 1 NET ASSETS 1
DECEMBER 31, PERIOD (%) END OF PERIOD (%) (%)
- ------------ --------- ---------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1998 2 $1.00 2.53 $65,552,725 0.50* 5.01*
1997 $1.00 5.12 $47,967,612 0.50 5.01
1996 $1.00 4.98 $27,430,633 0.50 4.87
1995 $1.00 5.26 $16,912,432 0.50 5.17
1994 3 $1.00 2.55 $ 7,409,454 0.50* 4.16*
</TABLE>
---------------------
14
<PAGE>
---------------------
SCHWAB MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
1. DESCRIPTION OF THE FUND
The Schwab Money Market Portfolio (the "Fund") is a series of Schwab Annuity
Portfolios (the "Trust"), a diversified, no-load, open-end, management
investment company organized as a Massachusetts business trust on January 21,
1994 and registered under the Investment company Act of 1940, as amended.
The Fund is intended as an investment vehicle for variable annuity contracts
and variable life insurance policies to be offered by separate accounts of
participating life insurance companies and for pension and retirement plans
qualified under the Internal Revenue Code of 1986, as amended.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
SECURITY VALUATION -- Investments are stated at amortized cost, which
approximates market value.
SECURITY TRANSACTIONS AND INTEREST INCOME -- Security transactions are
accounted for on a trade date basis (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis and includes amortization of
premium and accretion of discount on investments. Realized gains and losses from
security transactions are determined on an identified cost basis.
REPURCHASE AGREEMENTS -- Repurchase agreements are fully collateralized by
U.S. Government securities. All collateral is held by the Fund's custodian and
in the case of tri-party repurchase agreements, an agent bank, and is monitored
daily to ensure that its market value at least equals the repurchase price under
the agreement.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund declares a daily
dividend, equal to its net investment income for that day, payable monthly. Net
realized capital gains, if any, are normally distributed annually.
EXPENSES -- Expenses arising in connection with the Fund are charged directly
to the Fund. Expenses common to all series of the Trust are generally allocated
to each series in proportion to their relative net assets.
FEDERAL INCOME TAXES -- It is the Fund's policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all net investment income and realized net capital gains, if any, to
shareholders. Therefore, no federal income tax provision is required. The Fund
is considered a separate entity for tax purposes.
RECLASSIFICATION -- Generally accepted accounting principles require that
certain components of net assets be reclassified to reflect permanent
differences between financial and tax reporting. Accordingly, permanent book/
tax differences of $21,698 were reclassified from paid-in-capital to
undistributed net investment income. These reclassifications have no effect on
net assets or net asset value per share.
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT -- The trust has investment
advisory and administration agreements with Charles Schwab Investment
Management, Inc. (the "Investment Manager"). For advisory services and
facilities furnished, the Fund pays an annual fee, payable monthly, of 0.46% of
the first $1 billion of average daily net assets, 0.45% the next $2 billion,
0.40% of the next $7 billion, 0.37% of the next $10 billion, and 0.34% of such
assets in excess of $20 billion. The Investment Manager has reduced a portion of
its fee for the six months ended June 30, 1998 (see Note 4).
OFFICERS AND TRUSTEES -- Certain officers and trustees of the Trust are also
officers or directors of the Investment Manager. During the six months ended
June 30, 1998, the Trust made no direct payments to its officers or trustees who
are "interested persons" within the meaning of the Investment Company Act of
1940, as amended. The Fund incurred fees of $2,715 related to the Trusts
unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER
The Investment Manager and Schwab guarantee that, through at least April 30,
1999, the Fund's total operating expenses will not exceed 0.50% of the Fund's
average daily net assets, after waivers and reimbursements. For purpose of this
guarantee, operating expenses do not include interest expenses, extraordinary
expenses and taxes. For the six months ended June 30, 1998, the total of such
fees and expenses reduced by the Investment Manager was $33,446.
---------------------
15
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS--86.5% OF SHARES VALUE
- --------------------------------------------------------------------------------
AEROSPACE/DEFENSE--1.3%
Boeing Co. ......................................... 6,096 $ 271,653
General Dynamics Corp. ............................. 1,000 46,500
Lockheed Martin Corp. .............................. 1,200 127,050
Northrop Grumman Corp. ............................. 500 51,562
Raytheon Co. Class B ............................... 2,100 124,162
Textron, Inc. ...................................... 1,000 71,687
United Technologies Corp. .......................... 1,300 120,250
----------
812,864
----------
AIR TRANSPORTATION--0.5%
AMR Corp.(DAGGER) .................................. 1,200 99,900
Delta Air Lines, Inc. .............................. 600 77,550
FDX Corp.(DAGGER) .................................. 960 60,240
Southwest Airlines Co. ............................. 1,450 42,956
U.S. Airways Group, Inc.(DAGGER) ................... 600 47,550
----------
328,196
----------
ALCOHOLIC BEVERAGES--0.4%
Adolph Coors Co. Class B ........................... 100 3,400
Anheuser-Busch Companies, Inc. ..................... 2,800 132,125
Brown-Forman Corp. ................................. 300 19,275
Seagram Co., Ltd. .................................. 2,100 85,969
----------
240,769
----------
APPAREL--0.3%
Fruit of the Loom, Inc., Class A(DAGGER) ........... 300 9,956
Liz Claiborne, Inc. ................................ 300 15,675
Nike, Inc. Class B ................................. 1,800 87,637
Reebok International, Ltd.(DAGGER) ................. 300 8,306
Russell Corp. ...................................... 100 3,019
Springs Industries, Inc. ........................... 100 4,612
V.F. Corp. ......................................... 800 41,200
----------
170,405
----------
AUTOMOTIVE PRODUCTS / MOTOR VEHICLES--2.0%
BF Goodrich Co. .................................... 500 24,812
Chrysler Corp. ..................................... 3,900 219,862
Cooper Tire & Rubber Co. ........................... 400 8,250
Cummins Engine Co., Inc. ........................... 200 10,250
Dana Corp. ......................................... 700 37,450
Eaton Corp. ........................................ 600 46,650
Echlin, Inc. ....................................... 300 14,719
Fleetwood Enterprises, Inc. ........................ 100 4,000
Ford Motor Co. ..................................... 7,600 448,400
General Motors Corp. ............................... 4,200 280,612
Genuine Parts Co. .................................. 900 31,106
Goodyear Tire & Rubber Co. ......................... 1,000 64,437
---------------------
16
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
AUTOMOTIVE PRODUCTS / MOTOR VEHICLE (CONTINUED)
Navistar International Corp.(DAGGER) ............... 400 $ 11,550
Paccar, Inc. ....................................... 400 20,900
TRW, Inc. .......................................... 800 43,700
----------
1,266,698
----------
BANKS--7.9%
Banc One Corp. ..................................... 4,090 228,273
Bank of New York Co., Inc. ......................... 2,200 133,512
BankAmerica Corp. .................................. 4,100 354,394
BankBoston Corp. ................................... 1,800 100,125
Bankers Trust New York Corp. ....................... 700 81,244
BB & T Corp. ....................................... 900 60,862
Chase Manhattan Corp. .............................. 5,100 385,050
Citicorp ........................................... 2,800 417,900
Comerica, Inc. ..................................... 1,350 89,437
Fifth Third Bancorp ................................ 1,650 103,950
First Chicago NBD Corp. ............................ 1,800 159,525
First Union Corp. .................................. 5,844 340,413
Fleet Financial Group, Inc. ........................ 1,700 141,950
Huntington Bancshares Inc. ......................... 1,300 43,550
J.P. Morgan & Co., Inc. ............................ 1,100 128,837
KeyCorp, Inc. ...................................... 2,600 92,625
MBNA Corp. ......................................... 2,875 94,875
Mellon Bank Corp. .................................. 1,700 118,362
Merchantile Bancorp, Inc. .......................... 700 35,262
National City Corp. ................................ 2,000 142,000
NationsBank Corp. .................................. 5,647 431,995
Northern Trust Corp. ............................... 600 45,750
Norwest Corp. ...................................... 4,500 168,187
PNC Bank Corp. ..................................... 1,800 96,862
Republic New York Corp. ............................ 600 37,762
State Street Corp. ................................. 1,200 83,400
Summit Bancorp ..................................... 1,300 61,750
SunTrust Banks, Inc. ............................... 1,300 105,706
Synovus Financial Corp. ............................ 1,500 35,625
U.S. Bancorp ....................................... 4,731 203,433
Wachovia Corp. ..................................... 1,200 101,400
Washington Mutual, Inc. ............................ 2,240 97,300
Wells Fargo & Co. .................................. 500 184,500
----------
4,905,816
----------
BUSINESS MACHINES & SOFTWARE--8.3%
3Com Corp.(DAGGER) ................................. 2,200 67,512
Adobe Systems, Inc. ................................ 300 12,731
Apple Computer, Inc.(DAGGER) ....................... 600 17,212
Autodesk, Inc. ..................................... 200 7,725
Bay Networks, Inc.(DAGGER) ......................... 1,300 41,925
Cabletron Systems, Inc.(DAGGER) .................... 700 9,406
---------------------
17
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
BUSINESS MACHINES & SOFTWARE (CONTINUED)
Ceridian Corp.(DAGGER) ........................... 400 $ 23,500
Cisco Systems, Inc.(DAGGER) ...................... 6,000 552,375
Compaq Computer Corp. ............................ 9,770 277,238
Computer Associates International, Inc. .......... 3,300 183,356
Computer Sciences Corp. .......................... 1,200 76,800
Data General Corp.(DAGGER) ....................... 100 1,494
Dell Computer Corp.(DAGGER) ...................... 3,900 361,969
EMC Corp.(DAGGER) ................................ 3,000 134,437
Gateway 2000, Inc.(DAGGER) ....................... 900 45,562
Hewlett-Packard Co. .............................. 6,100 365,237
Honeywell, Inc. .................................. 800 66,850
International Business Machines Corp. ............ 5,700 654,431
Microsoft Corp.(DAGGER) .......................... 14,600 1,582,275
Novell, Inc.(DAGGER) ............................. 2,000 25,500
Oracle Systems Corp.(DAGGER) ..................... 5,650 138,778
Parametric Technology Corp.(DAGGER) .............. 1,700 46,112
Pitney Bowes, Inc. ............................... 1,800 86,625
Seagate Technology, Inc.(DAGGER) ................. 1,300 30,956
Silicon Graphics, Inc.(DAGGER) ................... 1,000 12,125
Sun Microsystems, Inc.(DAGGER) ................... 2,200 95,562
Unisys Corp.(DAGGER) ............................. 1,400 39,550
Xerox Corp. ...................................... 2,000 203,250
----------
5,160,493
----------
BUSINESS SERVICES--1.7%
Automatic Data Processing, Inc. .................. 1,700 123,887
H & R Block, Inc. ................................ 500 21,062
Browning-Ferris Industries, Inc. ................. 1,000 34,750
Cendant Corp.(DAGGER) ............................ 5,022 104,834
Deluxe Corp. ..................................... 400 14,325
Dun & Bradstreet Corp.(DAGGER) ................... 1,000 36,125
Ecolab, Inc. ..................................... 600 18,600
Equifax, Inc. .................................... 1,000 36,312
First Data Corp. ................................. 2,800 93,275
IKON Office Solutions ............................ 700 10,194
IMS Health Inc.(DAGGER) .......................... 1,100 69,300
Interpublic Group of Companies, Inc. ............. 800 48,550
Laidlaw, Inc. .................................... 1,600 19,500
Moore Corp., Ltd. ................................ 400 5,300
National Service Industries, Inc. ................ 200 10,175
Omnicom Group, Inc. .............................. 1,000 49,875
R.R. Donnelley & Sons Co. ........................ 1,000 45,750
Tyco International Ltd. .......................... 3,400 214,200
Waste Management, Inc. ........................... 2,700 94,500
----------
1,050,514
----------
---------------------
18
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
CHEMICAL--2.0%
Air Products & Chemicals, Inc. ................. 1,400 $ 56,000
Dow Chemical Co. ............................... 1,300 125,694
E. I. Dupont de Nemours & Co. .................. 6,900 514,912
Eastman Chemical Co. ........................... 400 24,900
Great Lakes Chemical Corp. ..................... 300 11,831
Hercules, Inc. ................................. 500 20,562
Minnesota Mining & Manufacturing Co. ........... 2,400 197,250
Morton International, Inc. ..................... 700 17,500
Nalco Chemical Co. ............................. 300 10,537
PPG Industries, Inc. ........................... 1,100 76,519
Praxair, Inc. .................................. 1,000 46,812
Rohm & Haas Co. ................................ 500 51,969
Sigma-Aldrich Corp. ............................ 500 17,562
Union Carbide Corp. ............................ 900 48,037
W. R. Grace & Company(DAGGER) .................. 400 6,825
----------
1,226,910
----------
CONSTRUCTION--0.3%
Armstrong World Industries, Inc. ............... 200 13,475
Centex Corp. ................................... 400 15,100
Crane Co. ...................................... 200 9,712
Fluor Corp. .................................... 400 20,400
Georgia Pacific Corp. .......................... 600 35,362
Kaufman & Broad Home Corp. ..................... 100 3,175
Owens Corning .................................. 200 8,162
Pulte Corp. .................................... 200 5,975
Sherwin-Williams Co. ........................... 900 29,812
The Stanley Works .............................. 400 16,625
----------
157,798
----------
CONSUMER-DURABLE--0.3%
Black & Decker Corp. ........................... 500 30,500
Masco Corp. .................................... 1,000 60,500
Maytag Corp. ................................... 500 24,687
Newell Co. ..................................... 1,000 49,812
Snap-On, Inc. .................................. 300 10,875
Whirlpool Corp. ................................ 400 27,500
----------
203,874
----------
CONSUMER-NON-DURABLE--1.0%
American Greetings Corp. Class A ............... 500 25,469
Corning, Inc. .................................. 1,500 52,125
Darden Restaurants, Inc. ....................... 700 11,112
Harcourt General, Inc. ......................... 500 29,750
Hasbro, Inc. ................................... 650 25,553
Jostens, Inc. .................................. 200 4,825
---------------------
19
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
CONSUMER-NON-DURABLE (CONTINUED)
Mattel, Inc. ..................................... 1,700 $ 71,931
McDonald's Corp. ................................. 4,300 296,700
Rubbermaid, Inc. ................................. 1,000 33,187
Tricon Global Restaurants, Inc.(DAGGER) .......... 1,000 31,687
Wendy's International, Inc. ...................... 600 14,100
----------
596,439
----------
CONTAINERS--0.2%
Ball Corp. ....................................... 100 4,019
Bemis Co., Inc. .................................. 200 8,175
Crown Cork & Seal Co., Inc. ...................... 800 38,000
Owens-Illinois, Inc.(DAGGER) ..................... 1,000 44,750
Sealed Air Corp.(DAGGER) ......................... 514 18,889
Stone Container Corp.(DAGGER) .................... 500 7,812
----------
121,645
----------
ELECTRONICS--4.1%
Advanced Micro Devices Inc.(DAGGER) .............. 700 11,944
Applied Materials, Inc.(DAGGER) .................. 2,200 64,900
Ascend Communications, Inc.(DAGGER) .............. 1,100 54,519
DSC Communication Corp.(DAGGER) .................. 800 24,000
EG & G, Inc. ..................................... 200 6,000
Emerson Electric Co. ............................. 2,700 163,012
General Instrument Corp.(DAGGER) ................. 700 19,031
General Signal Corp. ............................. 200 7,200
Harris Corp. ..................................... 400 17,875
Intel Corp. ...................................... 10,100 748,662
KLA-Tencor Corp.(DAGGER) ......................... 400 11,075
LSI Logic Corp.(DAGGER) .......................... 700 16,144
Lucent Technologies, Inc. ........................ 7,800 648,862
Micron Technology, Inc.(DAGGER) .................. 1,100 27,294
Motorola, Inc. ................................... 3,600 189,225
National Semiconductor Corp.(DAGGER) ............. 800 10,550
Northern Telecom Ltd. ............................ 3,000 170,250
Perkin Elmer Corp. ............................... 200 12,437
Rockwell International Corp. ..................... 1,100 52,869
Scientific-Atlanta, Inc. ......................... 400 10,150
Tektronix, Inc. .................................. 250 8,844
Tellabs, Inc.(DAGGER) ............................ 1,100 78,787
Texas Instruments, Inc. .......................... 2,400 139,950
Thermo Electron Corp.(DAGGER) .................... 1,000 34,187
Thomas & Betts Corp. ............................. 400 19,700
----------
2,547,467
----------
---------------------
20
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
ENERGY-RAW MATERIALS--1.0%
Anadarko Petroleum Corp. ....................... 300 $ 20,156
Apache Corp. ................................... 500 15,750
Baker Hughes, Inc. ............................. 1,000 34,562
Burlington Resources, Inc. ..................... 1,052 45,302
Dresser Industries, Inc. ....................... 900 39,656
Eastern Enterprises ............................ 100 4,287
Halliburton Co. ................................ 1,600 71,300
Helmerich & Payne, Inc. ........................ 200 4,450
Occidental Petroleum Corp. ..................... 2,300 62,100
ONEOK, Inc. .................................... 100 3,987
Rowan Companies, Inc.(DAGGER) .................. 400 7,775
Schlumberger Ltd. .............................. 3,200 218,600
Sempra Energy(DAGGER) .......................... 1,401 38,892
Union Pacific Resources Group .................. 1,300 22,831
Western Atlas, Inc.(DAGGER) .................... 400 33,950
----------
623,598
----------
FOOD & AGRICULTURE--5.4%
Archer Daniels Midland Co. ..................... 3,390 65,681
Bestfoods, Inc. ................................ 1,800 104,512
Campbell Soup Co. .............................. 2,600 138,125
Coca-Cola Co. .................................. 14,700 1,256,850
ConAgra, Inc. .................................. 2,800 88,725
General Mills, Inc. ............................ 1,000 68,375
H.J. Heinz Co. ................................. 2,100 117,862
Hershey Foods Corp. ............................ 900 62,100
Kellogg Co. .................................... 2,600 97,662
Monsanto Co. ................................... 3,500 195,562
PepsiCo, Inc. .................................. 8,800 362,450
Pioneer-Hi-Bred International, Inc. ............ 1,500 62,062
Quaker Oats Co. ................................ 900 49,444
Ralston Purina Group ........................... 700 81,769
Sara Lee Corp. ................................. 2,700 151,031
SYSCO Corp. .................................... 1,800 46,125
Unilever NV .................................... 3,800 299,962
Wm. Wrigley Jr. Co. ............................ 800 78,400
----------
3,326,697
----------
GOLD--0.2%
Barrick Gold Corp. ............................. 2,000 38,375
Battle Mountain Gold Co. ....................... 1,000 5,937
Homestake Mining Co. ........................... 1,800 18,675
Newmont Mining Corp. ........................... 886 20,932
Placer Dome, Inc. .............................. 1,800 21,150
----------
105,069
----------
---------------------
21
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
HEALTHCARE / DRUG & MEDICINE--10.4%
Abbott Laboratories .............................. 9,200 $ 376,050
Allergan, Inc. ................................... 300 13,913
ALZA Corp.(DAGGER) ............................... 400 17,300
American Home Products Corp. ..................... 7,700 398,475
Amgen, Inc.(DAGGER) .............................. 1,600 104,600
Bausch & Lomb, Inc. .............................. 400 20,050
Baxter International, Inc. ....................... 1,700 91,481
Becton, Dickinson & Co. .......................... 800 62,100
Biomet, Inc.(DAGGER) ............................. 500 16,531
Boston Scientific Corp.(DAGGER) .................. 1,200 85,950
Bristol-Meyers Squibb Co. ........................ 6,000 689,625
C.R. Bard, Inc. .................................. 200 7,613
Cardinal Health, Inc. ............................ 700 65,625
Columbia / HCA Healthcare Corp. .................. 3,700 107,763
Guidant Corp. .................................... 900 64,181
HBO & Co. ........................................ 2,600 91,650
Healthsouth Corp.(DAGGER) ........................ 2,400 64,050
Humana, Inc.(DAGGER) ............................. 800 24,950
Johnson & Johnson ................................ 8,000 590,000
Eli Lilly & Co. .................................. 6,500 429,406
Mallinckrodt, Inc. ............................... 300 8,906
Manor Care, Inc. ................................. 300 11,531
Medtronic, Inc. .................................. 2,700 172,125
Merck & Co., Inc. ................................ 7,200 963,000
Pfizer, Inc. ..................................... 7,800 847,763
Pharmacia & Upjohn, Inc. ......................... 3,200 147,600
Schering-Plough Corp. ............................ 4,300 393,988
Service Corp. International ...................... 1,600 68,600
Shared Medical Systems Corp. ..................... 100 7,344
St. Jude Medical, Inc.(DAGGER) ................... 400 14,725
Tenet Healthcare Corp.(DAGGER) ................... 1,900 59,375
US Surgical Corp. ................................ 400 18,250
United Healthcare Corp. .......................... 1,200 76,200
Warner Lambert Co. ............................... 4,800 333,000
----------
6,443,720
----------
HOUSEHOLD PRODUCTS--2.3%
Alberto-Culver Co. Class B ....................... 200 5,800
Avon Products, Inc. .............................. 900 69,750
Clorox Co. ....................................... 700 66,763
Colgate-Palmolive Co. ............................ 1,800 158,400
Gillette Co. ..................................... 6,800 385,475
International Flavors & Fragrances, Inc. ......... 800 34,750
Procter & Gamble Co. ............................. 8,000 728,500
Tupperware Corp. ................................. 200 5,625
----------
1,455,063
----------
---------------------
22
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
INSURANCE--3.6%
Aetna, Inc. ............................................ 900 $ 68,513
Allstate Corp. ......................................... 2,500 228,906
American General Corp. ................................. 1,510 107,493
American International Group, Inc. ..................... 4,150 605,900
Aon Corp. .............................................. 1,100 77,275
Chubb Corp. ............................................ 1,200 96,450
CIGNA Corp. ............................................ 1,200 82,800
Cincinnati Financial Corp. ............................. 900 34,538
Conseco, Inc. .......................................... 1,000 46,750
General Re Corp. ....................................... 600 152,100
Hartford Financial Services Group, Inc. ................ 800 91,500
Jefferson-Pilot Corp. .................................. 900 52,144
Lincoln National Corp. ................................. 700 63,963
Marsh & McLennan Companies, Inc. ....................... 1,500 90,656
MBIA, Inc. ............................................. 500 37,438
MGIC Investment Corp. .................................. 600 34,238
Progressive Corp. of Ohio .............................. 400 56,400
SAFECO Corp. ........................................... 700 31,806
St. Paul Companies, Inc. ............................... 1,538 64,692
SunAmerica, Inc. ....................................... 1,200 68,925
Torchmark Corp. ........................................ 700 32,025
Transamerica Corp. ..................................... 500 57,563
UNUM Corp. ............................................. 900 49,950
----------
2,232,025
----------
MEDIA--2.3%
CBS Corp. .............................................. 4,400 139,700
Clear Channel Communications, Inc.(DAGGER) ............. 700 76,388
Comcast Corp. Class A .................................. 2,300 93,366
Dow Jones & Co., Inc. .................................. 500 27,875
Gannett Co., Inc. ...................................... 1,800 127,913
King World Productions, Inc.(DAGGER) ................... 300 7,650
Knight-Ridder, Inc. .................................... 400 22,025
McGraw-Hill Companies, Inc. ............................ 700 57,094
Mediaone Group(DAGGER) ................................. 3,600 158,175
Meredith Corp. ......................................... 200 9,388
New York Times Co. Class A ............................. 500 39,625
Telecommunications, Inc. Series A (TCI Group)(DAGGER) . 3,000 115,313
Time Warner, Inc. ...................................... 3,600 307,575
Times Mirror Co. Series A .............................. 600 37,725
Tribune Co. ............................................ 800 55,050
Viacom, Inc. Class B(DAGGER) ........................... 2,100 122,325
----------
1,397,187
----------
---------------------
23
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
MISCELLANEOUS FINANCE--4.2%
American Express Co. ............................... 2,700 $ 307,800
Associates First Capital Corp. ..................... 2,129 163,667
Bear Stearns Companies, Inc.(DAGGER) ............... 1,200 68,250
Beneficial Corp. ................................... 300 45,956
Capital One Financial Corp. ........................ 400 49,675
Charles Schwab Corp. ............................... 1,400 45,500
Countrywide Credit Industries, Inc. ................ 700 35,525
Fannie Mae ......................................... 6,100 370,575
Federal Home Loan Mortgage Corp. ................... 3,900 183,544
Franklin Resources, Inc.(DAGGER) ................... 1,400 75,600
Golden West Financial Corp. ........................ 300 31,894
Green Tree Financial Corp. ......................... 700 29,969
H.F. Ahmanson & Company ............................ 700 49,700
Household International, Inc. ...................... 2,100 104,475
Lehman Brothers Holdings, Inc. ..................... 700 54,294
Merrill Lynch & Co., Inc. .......................... 2,100 193,725
Morgan Stanley, Dean Witter, Discover & Co. ........ 3,525 322,097
Providian Financial Corp. .......................... 500 39,281
SLM Holding Corp.(DAGGER) .......................... 1,000 49,000
Travelers Group, Inc. .............................. 6,727 407,824
----------
2,628,351
----------
NON-FERROUS METALS--0.3%
Alcan Aluminum, Ltd. ............................... 1,200 33,150
Aluminum Company of America ........................ 1,100 72,531
Asarco, Inc. ....................................... 100 2,225
Cyprus Amax Minerals Co. ........................... 500 6,625
Engelhard Corp. .................................... 700 14,175
Freeport-McMoran Copper & Gold, Inc. Class B ....... 800 12,150
Inco, Ltd. ......................................... 800 10,900
Phelps Dodge Corp. ................................. 300 17,156
Reynolds Metals Co. ................................ 500 27,969
----------
196,881
----------
OIL-DOMESTIC--0.7%
Amerada Hess Corp. ................................. 800 43,450
Ashland, Inc. ...................................... 400 20,650
Atlantic Richfield Co. ............................. 1,900 148,438
Kerr-McGee Corp. ................................... 200 11,575
Oryx Energy Co.(DAGGER) ............................ 500 11,063
Pennzoil Co. ....................................... 200 10,125
Phillips Petroleum Co. ............................. 1,600 77,100
Sun, Inc. .......................................... 800 31,050
Unocal Corp. ....................................... 1,400 50,050
USX-Marathon Group ................................. 1,800 61,763
----------
465,264
----------
---------------------
24
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
OIL-INTERNATIONAL--4.6%
Amoco Corp. .................................... 5,600 $ 233,100
Chevron Corp. .................................. 3,900 323,944
Exxon Corp. .................................... 14,500 1,034,031
Mobil Corp. .................................... 4,600 352,475
Royal Dutch Petroleum Co. -
Sponsored ADR** ............................. 12,600 690,638
Texaco, Inc. ................................... 3,315 197,864
----------
2,832,052
----------
OPTICAL & PHOTO--0.3%
Eastman Kodak Co. .............................. 2,100 153,431
Polaroid Corp. ................................. 200 7,113
----------
160,544
----------
PAPER & FOREST PRODUCTS--0.8%
Boise Cascade Corp. ............................ 300 9,825
Champion International Corp. ................... 500 24,594
Fort James Corp. ............................... 1,400 62,300
International Paper Co. ........................ 1,900 81,700
Kimberly-Clark Corp. ........................... 3,300 151,388
Louisiana-Pacific Corp. ........................ 500 9,125
Mead Corp. ..................................... 500 15,875
Potlatch Corp. ................................. 100 4,200
Temple Inland, Inc. ............................ 300 16,163
Union Camp Corp. ............................... 300 14,888
Westvaco Corp. ................................. 500 14,125
Weyerhaeuser Co. ............................... 1,400 64,663
Willamette Industries, Inc. .................... 500 16,000
----------
484,846
----------
PRODUCER GOODS & MANUFACTURING--4.3%
Aeroquip-Vickers, Inc. ........................ 100 5,838
Allied Signal, Inc. ............................ 3,400 150,875
Avery Dennison Corp. ........................... 800 43,000
Briggs & Stratton Corp. ........................ 100 3,744
Case Corp. ..................................... 400 19,300
Caterpillar, Inc. .............................. 2,200 116,325
Cincinnati Milacron, Inc. ...................... 100 2,431
Cooper Industries, Inc. ........................ 800 43,950
Deere & Co. .................................... 1,700 89,888
Dover Corp. .................................... 1,400 47,950
FMC Corp.(DAGGER) .............................. 300 20,456
Foster Wheeler Corp. ........................... 100 2,144
General Electric Co. ........................... 19,500 1,774,500
Grainger (W.W.), Inc. .......................... 600 29,888
Harnischfeger Industries, Inc. ................. 200 5,663
Illinois Tool Works, Inc. ...................... 1,500 100,031
---------------------
25
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
PRODUCER GOODS & MANUFACTURING (CONTINUED)
Ingersoll Rand Co. ................................. 1,200 $ 52,875
ITT Industries, Inc. ............................... 700 26,163
Johnson Controls, Inc. ............................. 400 22,875
McDermott International, Inc. ...................... 300 10,331
Millipore Corp. .................................... 200 5,450
Nacco Industries, Inc. ............................. 100 12,925
Pall Corp. ......................................... 600 12,300
Parker Hannifin Corp. .............................. 550 20,969
Raychem Corp. ...................................... 400 11,825
Tenneco, Inc. ...................................... 900 34,256
Timken Co. ......................................... 300 9,244
----------
2,675,196
----------
RAILROAD & SHIPPING--0.5%
Burlington Northern Santa Fe Corp. ................. 1,000 98,188
CSX Corp. .......................................... 1,300 59,150
Norfolk Southern Corp. ............................. 2,200 65,588
Union Pacific Corp. ................................ 1,500 66,188
----------
289,114
----------
RETAIL--4.8%
Albertson's, Inc. .................................. 1,500 77,719
American Stores Co. ................................ 1,400 33,863
AutoZone, Inc.(DAGGER) ............................. 800 25,550
Circuit City Stores, Inc. .......................... 500 23,438
Consolidated Stores Corp.(DAGGER) .................. 500 18,125
CVS Corp. .......................................... 2,200 85,663
Dayton Hudson Corp. ................................ 2,600 126,100
Dillards, Inc. Class A ............................. 500 20,719
Federated Department Stores, Inc.(DAGGER) .......... 1,300 69,956
Gap, Inc. .......................................... 2,350 144,819
Giant Food, Inc. Class A ........................... 300 12,919
Great Atlantic & Pacific Tea Co., Inc. ............. 100 3,306
Home Depot, Inc. ................................... 4,300 357,169
J.C. Penney Co., Inc. .............................. 1,500 108,469
Kmart Corp.(DAGGER) ................................ 3,100 59,675
Kroger Company(DAGGER) ............................. 1,500 64,313
Limited, Inc. ...................................... 1,400 46,375
Longs Drug Stores, Inc. ............................ 100 2,888
Lowe's Companies, Inc. ............................. 2,400 97,350
May Department Stores Co. .......................... 1,500 98,250
Mercantile Stores Co., Inc. ........................ 300 23,681
Nordstrom, Inc. .................................... 400 30,900
Pep Boys-Manny, Moe & Jack ......................... 200 3,788
Price/Costco, Inc.(DAGGER) ......................... 1,400 88,288
Rite Aid Corp. ..................................... 1,900 71,369
---------------------
26
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
RETAIL (CONTINUED)
Sears, Roebuck & Co. ........................... 2,400 $ 146,550
SUPERVALU, Inc. ................................ 300 13,313
Tandy Corp. .................................... 500 26,531
TJX Companies, Inc. ............................ 2,200 53,075
Toys "R" Us, Inc.(DAGGER) ...................... 1,500 35,344
Venator Group Inc.(DAGGER) ..................... 700 13,388
Wal-Mart Stores, Inc. .......................... 13,400 814,050
Walgreen Co. ................................... 3,100 128,069
Winn Dixie Stores, Inc. ........................ 800 40,950
----------
2,965,962
----------
STEEL--0.1%
Allegheny Teledyne, Inc. ....................... 1,300 29,738
Armco, Inc.(DAGGER) ............................ 100 638
Bethlehem Steel Corp.(DAGGER) .................. 600 7,463
Nucor Corp. .................................... 400 18,400
USX-U.S. Steel Group, Inc. ..................... 400 13,200
Worthington Industries, Inc. ................... 500 7,531
----------
76,970
----------
TELEPHONE--5.9%
AirTouch Communications, Inc.(DAGGER) .......... 3,400 198,688
Alltel Corp. ................................... 1,100 51,150
Ameritech Corp. ................................ 6,500 291,688
AMP, Inc. ...................................... 1,300 44,688
Andrew Corp.(DAGGER) ........................... 350 6,322
AT&T Corp. ..................................... 9,900 565,538
Bell Atlantic Corp. ............................ 9,304 424,495
BellSouth Corp. ................................ 5,800 389,325
Frontier Corp. ................................. 1,100 34,650
GTE Corp. ...................................... 6,000 333,750
MCI Communications Corp. ....................... 4,300 249,938
Nextel Communications, Inc.(DAGGER) ............ 1,400 34,825
SBC Communications, Inc. ....................... 10,776 431,040
Sprint Corp. ................................... 2,500 176,250
US West Inc. (Media Group) ..................... 2,998 140,906
WorldCom, Inc.(DAGGER) ......................... 6,000 290,625
----------
3,663,878
----------
TOBACCO--1.1%
Fortune Brands, Inc. ........................... 1,000 38,438
Loew's Corp. ................................... 800 69,700
Philip Morris Companies, Inc. .................. 14,400 567,000
UST, Inc. ...................................... 900 24,300
----------
699,438
----------
---------------------
27
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
TRAVEL & RECREATION--0.9%
Brunswick Corp. .................................... 500 $ 12,375
Harrah's Entertainment, Inc.(DAGGER) ............... 500 11,625
Hilton Hotels Corp. ................................ 1,500 42,750
Marriott International, Inc. Class A ............... 1,600 51,800
Mirage Resorts, Inc.(DAGGER) ....................... 900 19,181
Walt Disney Co. .................................... 4,000 420,250
--------
557,981
--------
TRUCKING & FREIGHT--0.0%
Ryder Systems, Inc. ................................ 400 12,625
--------
UTILITIES - ELECTRIC & GAS--2.5%
Ameren Corp. ....................................... 700 27,825
American Electric Power Co., Inc. .................. 1,000 45,375
Baltimore Gas & Electric Co. ....................... 700 21,744
Carolina Power & Light Co. ......................... 900 39,038
Central & South West Corp. ......................... 1,100 29,563
Cinergy Corp. ...................................... 800 28,000
Coastal Corp. ...................................... 700 48,869
Columbia Gas System, Inc. .......................... 600 33,375
Consolidated Edison, Inc. .......................... 1,500 69,094
Consolidated Natural Gas Co. ....................... 500 29,438
Dominion Resources, Inc. ........................... 1,200 48,900
DTE Energy Co. ..................................... 900 36,338
Duke Power Co. ..................................... 2,217 131,357
Edison International ............................... 2,000 59,125
Enron Corp. ........................................ 1,900 102,719
Entergy Corp. ...................................... 1,300 37,375
First Energy Corp. ................................. 1,200 36,900
FPL Group, Inc. .................................... 1,100 69,300
GPU, Inc. .......................................... 600 22,688
Houston Industries, Inc. ........................... 1,650 50,944
Niagara Mohawk Power Corp.(DAGGER) ................. 700 10,456
NICOR, Inc. ........................................ 200 8,025
Northern States Power Co. .......................... 800 22,900
PacifiCorp ......................................... 1,500 33,938
PECO Energy Co. .................................... 1,400 40,863
Peoples Energy Corp. ............................... 100 3,863
PG & E Corp. ....................................... 2,300 72,594
PP&L Resources, Inc. ............................... 1,500 34,031
Public Service Enterprise Group, Inc. .............. 1,400 48,213
Sonat, Inc. ........................................ 500 19,313
Southern Co. ....................................... 4,000 110,750
---------------------
28
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
UTILITIES - ELECTRIC & GAS (CONTINUED)
Texas Utilities Co. ............................ 1,322 $ 55,028
Unicom Corp. ................................... 1,300 45,581
Williams Companies, Inc. ....................... 3,100 104,625
-----------
1,578,147
-----------
TOTAL COMMON STOCKS
(Cost $42,057,343) .......................... 53,660,496
-----------
U.S. TREASURY OBLIGATIONS--0.5% PAR
- --------------------------------------------------------------------------------
U.S. Treasury Bills (a)
5.04%, 09/17/98 ............................. $330,000 326,511
--------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $326,396) ............................. 326,511
--------
CASH EQUIVALENTS--10.4%
- --------------------------------------------------------------------------------
Temporary Investment Fund, Inc. --
TempCash Portfolio
5.21%,* 07/07/98 ............................ 3,218,080 3,218,080
Temporary Investment Fund, Inc. --
TempFund Portfolio
5.21%,* 07/07/98 ............................ 3,218,080 3,218,080
------------
TOTAL CASH EQUIVALENTS
(Cost $6,436,160) ........................... 6,436,160
------------
TOTAL INVESTMENTS--97.4%
(Cost $48,819,899) .......................... 60,423,167
------------
OTHER ASSETS AND LIABILITIES--2.6%
Other Assets ................................ 4,426,419
Liabilities ................................. (2,796,778)
------------
1,629,641
------------
NET ASSETS--100.0% ............................. $ 62,052,808
============
- --------------
Notes To Statement Of Net Assets
(DAGGER) Non-Income Producing Security.
* Interest rate represents the yield as of the report date.
** ADR--American Depository Receipt.
(a) This security is being used to collaterize open futures contracts.
See accompanying Notes to Financial Statements.
---------------------
29
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
ASSETS:
Investments, at value (Cost: $48,819,899) ............... $60,423,167
Amounts on deposit with broker .......................... 2,014,108
Cash .................................................... 2,322,445
Receivables:
Dividends ............................................ 86,051
Investments sold ..................................... 2,820
Prepaid expenses ........................................ 995
-----------
Total assets ...................................... 64,849,586
-----------
LIABILITIES:
Payables:
Investments purchased ................................... 638,618
Variation margin ........................................ 1,648,675
Fund share redeemed ..................................... 438,365
Investment advisory and administration fees ............. 5,824
Interest ................................................ 1,384
Accrued expenses ........................................... 63,912
-----------
Total liabilities ................................. 2,796,778
-----------
Net assets applicable to outstanding shares ............. $62,052,808
===========
NET ASSETS consist of:
Paid-in-capital ......................................... $49,696,867
Undistributed net investment income ..................... 671,831
Accumulated net realized loss on investments
and futures sold ...................................... (21,483)
Net unrealized appreciation on investments .............. 11,705,593
-----------
$62,052,808
===========
PRICING OF SHARES:
Outstanding shares, $0.0001 par value
(unlimited shares authorized) ........................ 3,792,565
NET ASSET VALUE, offering and redemption price per share ... $ 16.36
- ------------
See accompanying Notes to Financial Statements.
---------------------
30
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $2,270) ........ $ 433,866
Interest ................................................... 4,924
----------
Total investment income ................................. 438,790
----------
EXPENSES:
Investment advisory and administration fees ................ 87,935
Custodian and portfolio accounting fees .................... 32,031
Professional fees .......................................... 12,300
Shareholder reports ........................................ 11,403
Trustees' fees ............................................. 3,801
Insurance and other expenses ............................... 4,200
----------
151,670
Less: expenses reduced (see Note 4) ........................... (81,429)
----------
Total expenses incurred by Fund ......................... 70,241
----------
NET INVESTMENT INCOME ......................................... 368,549
----------
Net realized loss on investments sold ......................... (121,957)
Net realized gain on futures contracts ........................ 88,400
Net unrealized appreciation on futures contracts .............. 102,325
Net unrealized appreciation on investments .................... 7,018,287
----------
Net gain on investments .................................... 7,087,055
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............. $7,455,604
==========
- ---------------
See accompanying Notes to Financial Statements.
---------------------
31
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
- --------------------------------------------------------------------------------
OPERATIONS:
Net investment income ....................... $ 368,549 $ 302,447
Net realized gain (loss) on investments sold
and futures contracts ................... (33,557) 12,062
Net unrealized appreciation on investments
and futures contracts ................... 7,120,612 4,346,897
----------- -----------
Increase in net assets resulting
from operations .......................... 7,455,604 4,661,406
----------- -----------
Dividends to shareholders from net
investment income ........................ -- (19,075)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ................... 24,085,840 28,905,606
Net asset value of shares issued in
reinvestment of dividends ............... -- 19,075
Less payments for shares redeemed ........... (6,544,779) (2,434,293)
----------- -----------
Increase in net assets from capital
share transactions ...................... 17,541,061 26,490,388
----------- -----------
Total increase in net assets ................ 24,996,665 31,132,719
NET ASSETS:
Beginning of period ......................... 37,056,143 5,923,424
----------- -----------
End of period (including undistributed
net investment income of $671,831
and $302,415, respectively) .............. $62,052,808 $37,056,143
=========== ===========
NUMBER OF FUND SHARES:
Sold ........................................ 1,567,455 2,282,017
Reinvested .................................. -- 1,418
Redeemed .................................... (433,047) (187,925)
----------- -----------
Net increase in shares outstanding .......... 1,134,408 2,095,510
=========== ===========
SHARES OUTSTANDING:
Beginning of period ......................... 2,658,157 562,647
----------- -----------
End of period ............................... 3,792,565 2,658,157
=========== ===========
- ------------
See accompanying Notes to Financial Statements.
---------------------
32
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------------- ----------------------------
NET
NET ASSET REALIZED & TOTAL DIVIDENDS
PERIOD VALUE AT NET UNREALIZED FROM FROM NET
ENDED BEGINNING INVESTMENT GAIN ON INVESTMENT INVESTMENT TOTAL
DECEMBER 31, OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME DISTRIBUTIONS
- ------------ --------- ---------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
1998** $13.94 $0.07 $2.35 $2.42 $ -- $ --
1997 $10.53 $0.09 $3.33 $3.42 $(0.01) $(0.01)
1996*** $10.00 $0.03 $0.50 $0.53 $ -- $ --
<FN>
(DAGGER)The information contained in the above table is based on actual expenses
for the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager. Had these expenses not been reduced,
the Fund's expense and net investment income ratios would have been:
PERIOD RATIO OF NET
ENDED RATIO OF INVESTMENT
DECEMBER 31, EXPENSES INCOME
- ------------ -------- ------------
1998** 0.62%* 1.18%*
1997 0.93% 0.92%
1996*** 3.11%* (0.62%)*
* Annualized.
** For the six months ended June 30, 1998 (Unaudited).
*** For the period from November 1, 1996 (commencement of operations) to
December 31, 1996.
</FN>
</TABLE>
- ------------
See accompanying Notes to Financial Statements.
---------------------
33
<PAGE>
---------------------
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------
RATIO OF NET
RATIO OF INVESTMENT
NET ASSET TOTAL EXPENSES INCOME PORTFOLIO
PERIOD VALUE AT RETURN TO AVERAGE TO AVERAGE TURNOVER
ENDED END OF (NOT ANNUALIZED) NET ASSETS NET ASSETS(DAGGER) NET ASSETS(DAGGER) RATE
DECEMBER 31, PERIOD (%) END OF PERIOD (%) (%) (%)
- ------------ ---------- ---------------- ------------- ------------------ ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
1998** $16.36 17.36 $62,052,808 0.29* 1.51* 7
1997 $13.94 32.46 $37,056,143 0.29 1.56 4
1996*** $10.53 5.30 $ 5,923,424 0.33* 2.16* --
</TABLE>
---------------------
34
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
1. DESCRIPTION OF THE FUND
The Schwab S&P 500 Portfolio (the "Fund") is a series of Schwab Annuity
Portfolios (the "Trust"), a diversified, no load, open-end, management
investment company organized as a Massachusetts business trust on January 21,
1994 and registered under the Investment Company Act of 1940, as amended.
The Fund is intended as an investment vehicle for variable annuity contracts
and variable life insurance policies to be offered by separate accounts of
participating life insurance companies and for pension and retirement plans
qualified under the Internal Revenue Code of 1986, as amended.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
SECURITY VALUATION -- Investments in securities traded on an exchange are
valued at the last 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.
Unlisted securities for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities for which
no quotations are readily available are valued at fair value as determined by
the Fund's Investment Manager pursuant to guidelines adopted in good faith by
the Board of Trustees. Financial futures contracts and options thereon, which
are traded on exchanges, are valued at their settlement prices as of the close
of such exchanges. Short-term securities with 60 days or less to maturity are
stated at amortized cost, which approximates market value.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on a trade date basis (date the order to buy or sell is executed).
Realized gains and losses from security transactions are determined on an
identified cost basis. Dividend income and distributions to shareholders are
recorded on the ex-dividend date; interest income (including accretion of
discount) is accrued on a daily basis.
FUTURES CONTRACTS -- The Schwab S&P 500 Portfolio may invest in financial
futures contracts. The Fund is required to deposit with the broker an amount of
cash or cash equivalents equal to a certain percentage of the contract amount.
This is known as the "initial margin." Subsequent payments ("variation margin")
are made or received by the Fund each day, depending on the daily fluctuation of
the value of the contract.
The Fund will invest in these instruments to hedge against the effects of
changes in value of portfolio securities due to anticipated changes in interest
rates and/or market conditions, for duration management, or risk inherent in the
management of the Fund and not for trading purposes. The use of futures contacts
involves certain risks, which include (1) imperfect correlation between the
price movement of the contracts and the underlying securities, (2) inability to
close out positions due to different trading hours, or the temporary absence of
a liquid market, for either the contract or underlying securities, or (3) an
inaccurate prediction by the Investment Manager of the future direction of
interest rates. Any of these risks may involve amounts exceeding the amount
recognized in the Fund's Statement of Operations at any given time.
As of June 30, 1998, the Schwab S&P 500 Portfolio had the following open S&P
500 Index futures contracts:
Number of Unrealized
Contacts Contract Value Expiration Appreciation
---------- -------------- ---------- ------------
31 $8,858,250 9/30/98 $102,325
The aggregate value of cash and eligible securities pledged to cover margin
requirements for open futures positions at June 30, 1998 was $501,219.
EXPENSES -- Expenses arising in connection with the Fund are charged directly
to the Fund. Expenses common to all series of the Trust are generally allocated
to each series in proportion to their relative net assets.
---------------------
35
<PAGE>
---------------------
SCHWAB S&P 500 PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
FEDERAL INCOME TAXES -- It is the Fund's policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all net investment income and realized net capital gains, if any, to
shareholders. Therefore, no federal income tax provision is required. The Fund
is considered a separate entity for tax purposes.
At June 30, 1998, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $11,705,593, of which $ 12,424,214
related to appreciated securities and $718,621 related to depreciated
securities.
RECLASSIFICATION -- Generally accepted accounting principles require that
certain components of net assets be reclassified to reflect permanent
differences between financial and tax reporting. Accordingly, permanent book/tax
differences of $867 were reclassified from paid-in-capital to undistributed net
investment income. These reclassifications have no effect on net assets or net
asset value per share.
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT -- The Trust has an
investment advisory and administration agreement with Charles Schwab Investment
Management, Inc. (the "Investment Manager"). For advisory services and
facilities furnished, the Fund pays an annual fee, payable monthly, of 0.36% of
the first $1 billion of average daily net assets, 0.33% of the next $1 billion
and 0.31% of such assets in excess of $2 billion. The Investment Manager has
reduced its fee for the six months ended June 30, 1998 (see Note 4).
OFFICERS AND TRUSTEES -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager. For the six months ended
June 30, 1998, the Fund made no direct payments to its officers or trustees who
are "interested persons" within the meaning of the Investment Company Act of
1940, as amended. For the six months ended June 30, 1998, the Fund incurred fees
of $3,801 related to its unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER
The Investment Manager and Schwab guarantee that, through at least April 30,
1999, the Fund's total operating expenses will not exceed 0.29% of the Fund's
average daily net assets, after reductions. For purposes of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses and
taxes.
For the six months ended June 30, 1998, the total of such fees and expenses
reduced by the Investment Manager was $81,429.
5. BORROWING AGREEMENT
The Trust has an arrangement with PNC Bank, N.A., the Fund's custodian,
whereby the Fund may borrow up to $10,000,000, on a temporary basis, to fund
redemptions. Amounts borrowed under this arrangement bear interest at
periodically negotiated rates and may be collateralized by the assets of the
Fund. The average daily loan balance for the six months ended June 30, 1998 was
$62,560 at a weighted average interest rate of 5.87%. The maximum loan
outstanding during the period was $1,733,589 and as of June 30, 1998, there were
no outstanding borrowings.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term
obligations, aggregated $13,220,169 and $2,989,589, respectively, for the six
months ended June 30, 1998.
Included in the aforementioned purchases of common stock are purchases of
Charles Schwab Corp., an affiliated issuer, with a current value as of June 30,
1998, of $45,500.
---------------------
36
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS--40.2% OF SHARES VALUE
- --------------------------------------------------------------------------------
AEROSPACE/DEFENSE--0.8%
Boeing Co. ....................................... 438 $ 19,518
General Dynamics Corp. ........................... 200 9,300
Lockheed Martin Corp. ............................ 200 21,175
Northrop Grumman Corp., Class B .................. 61 6,291
Raytheon Company, Class B ........................ 200 11,825
Textron, Inc. .................................... 100 7,169
TRW, Inc. ........................................ 100 5,462
United Technologies Corp. ........................ 200 18,500
---------
99,240
---------
AIR TRANSPORTATION--0.4%
AMR Corp.(DAGGER) ................................ 200 16,650
Delta Airlines, Inc. ............................. 100 12,925
FDX Corp.(DAGGER) ................................ 500 31,375
---------
60,950
---------
ALCOHOLIC BEVERAGES--0.2%
Adolph Coors Co., Class B ........................ 200 6,800
Anheuser-Busch Companies, Inc. ................... 200 9,437
Seagram Co., Ltd. ................................ 200 8,187
---------
24,424
---------
APPAREL--0.3%
NIKE, Inc., Class B .............................. 100 4,869
Springs Industries, Inc. ......................... 600 27,675
V.F. Corp. ....................................... 200 10,300
---------
42,844
---------
AUTOMOTIVE PRODUCTS--0.9%
Chrysler Corp. ................................... 300 16,913
Cummins Engine Co., Inc. ......................... 100 5,125
Eaton Corp. ...................................... 100 7,775
Ford Motor Co. ................................... 500 29,500
General Motors Corp. ............................. 400 26,725
Goodyear Tire & Rubber Co. ....................... 100 6,444
Navistar International Corp.(DAGGER) ............. 900 25,988
---------
118,470
---------
---------------------
37
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
BANKS--4.2%
Banc One Corp. ................................. 348 $ 19,423
Bank of New York Co., Inc. ..................... 200 12,137
BankAmerica Corp. .............................. 400 34,575
BankBoston Corp. ............................... 200 11,125
Bankers Trust New York Corp. ................... 100 11,606
BB & T Corp. ................................... 213 14,404
Chase Manhattan Corp. .......................... 600 45,300
Citicorp ....................................... 300 44,775
Comerica, Inc. ................................. 150 9,937
Fifth Third Bancorp ............................ 150 9,450
First Chicago NBD Corp. ........................ 200 17,725
First Union Corp. .............................. 524 30,523
Fleet Financial Group, Inc. .................... 200 16,700
Huntington Bancshares, Inc. .................... 100 3,350
J.P. Morgan & Co., Inc. ........................ 100 11,712
KeyCorp, Inc. .................................. 400 14,250
MBNA Corp. ..................................... 150 4,950
Mellon Bank Corp. .............................. 100 6,962
Mercantile Bancorp ............................. 100 5,037
National City Corp. ............................ 312 22,152
NationsBank Corp. .............................. 567 43,375
Northern Trust Corp. ........................... 100 7,625
Norwest Corp. .................................. 400 14,950
PNC Bank Corp. ................................. 200 10,762
Republic New York Corp. ........................ 200 12,587
State Street Corp. ............................. 100 6,950
Summit Bancorp ................................. 100 4,750
SunTrust Banks, Inc. ........................... 200 16,262
Synovus Financial Corp. ........................ 150 3,562
U.S. Bancorp ................................... 525 22,575
Wachovia Corp. ................................. 100 8,450
Washington Mutual, Inc. ........................ 300 13,031
Wells Fargo & Co. .............................. 100 36,900
---------
547,872
---------
BUSINESS MACHINES & SOFTWARE--3.8%
3COM Corp.(DAGGER) ............................. 100 3,069
Adobe Systems, Inc. ............................ 100 4,244
Cisco Systems, Inc.(DAGGER) .................... 600 55,237
---------------------
38
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
BUSINESS MACHINES & SOFTWARE (CONTINUED)
Compaq Computer Corp. .......................... 900 $ 25,537
Computer Associates International, Inc. ........ 300 16,669
Computer Sciences Corp.(DAGGER) ................ 200 12,800
Dell Computer Corp.(DAGGER) .................... 400 37,125
EMC Corp./Mass.(DAGGER) ........................ 200 8,962
Gateway 2000, Inc.(DAGGER) ..................... 100 5,062
Hewlett Packard Co. ............................ 600 35,925
Honeywell, Inc. ................................ 100 8,356
International Business Machines Corp. .......... 600 68,887
Microsoft Corp.(DAGGER) ........................ 1,400 151,725
Novell, Inc.(DAGGER) ........................... 100 1,275
Oracle Systems Corp.(DAGGER) ................... 450 11,053
Parametric Technology Corp(DAGGER) ............. 200 5,425
Pitney Bowes, Inc. ............................. 200 9,625
Seagate Technology, Inc.(DAGGER) ............... 100 2,381
Sun Microsystems, Inc.(DAGGER) ................. 200 8,687
Xerox Corp. .................................... 200 20,325
-----------
492,369
-----------
BUSINESS SERVICES--0.3%
Automatic Data Processing, Inc. ................ 100 7,287
Cognizant Corp. ................................ 100 6,300
Dun & Bradstreet Corp. ......................... 100 3,600
Equifax, Inc. .................................. 100 3,631
First Data Corp. ............................... 200 6,662
Laidlaw, Inc. .................................. 100 1,219
Omnicom Group, Inc. ............................ 200 9,975
Waste Management, Inc. ......................... 200 7,000
-----------
45,674
-----------
CHEMICAL--0.9%
Air Products & Chemicals, Inc. ................. 200 8,000
Dow Chemical Co. ............................... 200 19,337
E.I. du Pont de Nemours & Co. .................. 500 37,312
Eastman Chemical Co. ........................... 100 6,225
Minnesota Mining & Manufacturing Co. ........... 300 24,656
PPG Industries, Inc. ........................... 100 6,956
Rohm & Haas Co. ................................ 100 10,394
W.R. Grace & Co.(DAGGER) ....................... 100 1,706
-----------
114,586
-----------
---------------------
39
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
CONSTRUCTION--0.2%
Armstrong World Industries, Inc. ............... 100 $ 6,737
Pulte Corp. .................................... 800 23,900
----------
30,637
----------
CONSUMER NON-DURABLE--0.2%
Corning, Inc. .................................. 100 3,475
Mattel, Inc. ................................... 100 4,231
McDonald's Corp. ............................... 300 20,700
Tricon Global Restaurants, Inc.(DAGGER) ........ 60 1,901
----------
30,307
----------
CONTAINERS--0.1%
Ball Corp. ..................................... 200 8,037
Owens-Illinois, Inc.(DAGGER) ................... 100 4,475
Sealed Air Corp.(DAGGER) ....................... 53 1,948
Stone Container Corp.(DAGGER) .................. 300 4,687
----------
19,147
----------
ELECTRONICS--2.0%
AMP, Inc. ...................................... 100 3,438
Applied Materials, Inc.(DAGGER) ................ 200 5,900
Ascend Communications Inc.(DAGGER) ............. 100 4,956
EG&G, Inc. ..................................... 500 15,000
Intel Corp. .................................... 1,100 81,538
KLA-Tencor Corp.(DAGGER) ....................... 200 5,538
Lucent Technologies, Inc. ...................... 800 66,550
Micron Technology, Inc.(DAGGER) ................ 100 2,481
Motorola, Inc. ................................. 400 21,025
Perkin Elmer Corp. ............................. 100 6,219
Rockwell International Corp. ................... 100 4,806
Tektronix, Inc. ................................ 150 5,306
Tellabs Inc.(DAGGER) ........................... 100 7,163
Texas Instruments, Inc. ........................ 400 23,325
Thermo Electron Corp.(DAGGER) .................. 100 3,419
----------
256,664
----------
ENERGY--RAW MATERIALS--0.5%
Anadarko Petroleum Corp. ....................... 100 6,719
Apache Corp. ................................... 100 3,150
Baker Hughes, Inc. ............................. 161 5,565
Halliburton Co. ................................ 100 4,456
Helmerich & Payne, Inc. ........................ 200 4,450
---------------------
40
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
ENERGY--RAW MATERIALS (CONTINUED)
Occidental Petroleum Corp. ................... 100 $ 2,700
Schlumberger Ltd. ............................ 300 20,494
Sempra Energy(DAGGER) ........................ 100 2,775
Western Atlas, Inc.(DAGGER) .................. 100 8,488
----------
58,797
----------
FOOD & AGRICULTURE--2.4%
Archer-Daniels-Midland Co. ................... 210 4,069
Bestfoods .................................... 200 11,612
Campbell Soup Co. ............................ 200 10,625
Coca-Cola Co. ................................ 1,400 119,700
ConAgra, Inc. ................................ 200 6,337
General Mills, Inc. .......................... 100 6,837
H.J. Heinz Co. ............................... 200 11,225
Hershey Foods Corp. .......................... 100 6,900
Kellogg Co. .................................. 200 7,512
Monsanto Co. ................................. 300 16,762
PepsiCo, Inc. ................................ 900 37,069
Pioneer Hi-Bred International, Inc. .......... 300 12,412
Ralston Purina Co. ........................... 100 11,681
Sara Lee Corp. ............................... 200 11,187
Unilever NV .................................. 400 31,575
Wm. Wrigley, Jr. Co. ......................... 100 9,800
----------
315,303
----------
GOLD--0.0%
Barrick Gold Corp. ........................... 100 1,919
Battle Mountain Gold Co.(DAGGER) ............. 100 594
----------
2,513
----------
HEALTHCARE--4.7%
Abbott Laboratories .......................... 1,000 40,875
American Home Products Corp. ................. 800 41,400
Amgen, Inc.(DAGGER) .......................... 100 6,538
Baxter International, Inc. ................... 100 5,381
Boston Scientific Corp.(DAGGER) .............. 107 7,664
Bristol-Myers Squibb Co. ..................... 600 68,963
Cardinal Health, Inc. ........................ 100 9,375
Columbia/HCA Healthcare Corp. ................ 300 8,738
Eli Lilly & Co. .............................. 700 46,244
Guidant Corp. ................................ 200 14,263
HBO & Co. .................................... 200 7,050
---------------------
41
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
HEALTHCARE (CONTINUED)
HealthSouth Corp.(DAGGER) .................... 268 $ 7,152
Johnson & Johnson ............................ 800 59,000
Medtronic, Inc. .............................. 200 12,750
Merck & Co., Inc. ............................ 700 93,625
Pfizer, Inc. ................................. 800 86,950
Pharmacia & Upjohn, Inc. ..................... 200 9,225
Schering-Plough Corp. ........................ 400 36,650
Service Corp International ................... 100 4,288
United Healthcare Co. ........................ 100 6,350
Warner Lambert Co. ........................... 600 41,625
----------
614,106
----------
HOUSEHOLD PRODUCTS--1.2%
Avon Products, Inc. .......................... 100 7,750
Clorox Co. ................................... 100 9,537
Colgate-Palmolive Co. ........................ 200 17,600
Gillette Co. ................................. 800 45,350
Procter & Gamble Co. ......................... 800 72,850
----------
153,087
----------
INSURANCE--2.2%
Aetna, Inc. .................................. 100 7,612
Allstate Corp. ............................... 300 27,469
American General Corp. ....................... 100 7,119
American International Group, Inc. ........... 400 58,400
Aon Corp. .................................... 100 7,025
Chubb Corp. .................................. 100 8,037
CIGNA Corp. .................................. 300 20,700
Cincinnati Financial Corp. ................... 300 11,512
Conseco, Inc. ................................ 32 1,496
General Re Corp. ............................. 100 25,350
Hartford Financial Services Group ............ 100 11,437
Jefferson-Pilot Corp. ........................ 150 8,691
Lincoln National Corp. ....................... 100 9,137
Marsh & McLennan Companies, Inc. ............. 150 9,066
MBIA Inc. .................................... 200 14,975
MGIC Investment Corp. ........................ 200 11,412
Progressive Corp. ............................ 100 14,100
St. Paul Companies, Inc. ..................... 200 8,412
SunAmerica, Inc. ............................. 150 8,616
Transamerica Corp. ........................... 100 11,512
----------
282,078
----------
---------------------
42
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
INTERNATIONAL--0.2%
CANADA--0.2%
Toronto Dominion Bank Ontario .................... 82 $ 3,710
Northern Telecom, Ltd. ........................... 400 22,700
----------
26,410
----------
UNITED KINGDOM--0.0%
BTR PLC(DAGGER) .................................. 1,129 650
Smithkline Beecham ............................... 3 37
----------
687
----------
27,097
----------
MEDIA--0.7%
CBS Corp. ........................................ 200 6,350
Clear Channel Communications, Inc.(DAGGER) ....... 100 10,912
Gannett Co., Inc. ................................ 200 14,212
McGraw-Hill Companies, Inc. ...................... 100 8,156
Mediaone Group (DAGGER) .......................... 200 8,787
Telecommunications, Inc., Series A
(TCI Group)(DAGGER) .......................... 200 7,688
Time Warner, Inc. ................................ 200 17,088
Viacom, Inc., Class B(DAGGER) .................... 200 11,650
----------
84,843
----------
MISCELLANEOUS FINANCE--1.9%
American Express Co. ............................. 300 34,200
Associates First Capital ......................... 231 17,758
Beneficial Corp. ................................. 100 15,319
Charles Schwab Corp. ............................. 150 4,875
Countrywide Credit Industries, Inc. .............. 100 5,075
Fannie Mae ....................................... 400 24,300
Franklin Resources, Inc .......................... 100 5,400
Freddie Mac ...................................... 200 9,413
Golden West Financial Corp. ...................... 100 10,631
Household International, Inc. .................... 300 14,925
Lehman Brothers Holdings, Inc. ................... 100 7,756
Merrill Lynch & Co., Inc. ........................ 200 18,450
Morgan Stanley, Dean Witter, Discover & Co. ...... 365 33,352
Travelers Group, Inc. ............................ 718 43,529
----------
244,983
----------
---------------------
43
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
NON-FERROUS--0.1%
Aluminum Company of America .................... 100 $ 6,594
Phelps Dodge Corp. ............................. 100 5,719
Reynolds Metals Co. ............................ 100 5,594
----------
17,907
----------
OIL--DOMESTIC--0.3%
Amerada Hess Corp. ............................. 100 5,431
Atlantic Richfield Co. ......................... 200 15,625
Kerr-McGee Corp. ............................... 100 5,788
Pennzoil Co. ................................... 100 5,063
Phillips Petroleum Co. ......................... 100 4,819
Unocal Corp. ................................... 100 3,575
USX-Marathon Group ............................. 100 3,431
----------
43,732
----------
OIL--INTERNATIONAL--2.1%
Amoco Corp. .................................... 600 24,975
Chevron Corp. .................................. 400 33,225
Exxon Corp. .................................... 1,500 106,969
Mobil Corp. .................................... 500 38,313
Royal Dutch Petroleum Co.-Sponsored ADR ........ 1,200 65,775
Texaco, Inc. ................................... 200 11,938
----------
281,195
----------
OPTICAL & PHOTO--0.1%
Eastman Kodak Co. .............................. 200 14,613
----------
PAPER--0.3%
Fort James Corp. ............................... 100 4,450
Georgia-Pacific Corp. .......................... 100 5,894
International Paper Co. ........................ 200 8,600
Kimberly-Clark Corp. ........................... 200 9,175
Mead Corp. ..................................... 200 6,350
Temple Inland, Inc. ............................ 100 5,388
Weyerhaeuser Co. ............................... 100 4,619
----------
44,476
----------
PRODUCER GOODS & MANUFACTURING--3.0%
Allied Signal, Inc. ............................ 200 8,875
Case Corp. ..................................... 100 4,825
---------------------
44
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
PRODUCER GOODS & MANUFACTURING (CONTINUED)
Caterpillar, Inc. ................................ 200 $ 10,575
Cincinnati Milacron, Inc. ........................ 200 4,863
Deere & Co. ...................................... 100 5,288
Dover Corp. ...................................... 200 6,850
Emerson Electric Co. ............................. 200 12,075
FMC Corp.(DAGGER) ................................ 100 6,819
General Electric Co. ............................. 1,800 163,800
Illinois Tool Works, Inc. ........................ 200 13,338
McDermott International, Inc. .................... 1,200 41,325
NACCO Industries, Inc. Class A ................... 600 77,550
Raychem Corp. .................................... 200 5,913
Tyco International Ltd. .......................... 296 18,648
W.W. Grainger, Inc. .............................. 200 9,963
----------
390,707
----------
RAILROAD--0.2%
Burlington Northern Santa Fe Corp. ............... 100 9,819
CSX Corp. ........................................ 100 4,550
Norfolk Southern Corp. ........................... 300 8,944
Union Pacific Corp. .............................. 200 8,825
----------
32,138
----------
RETAIL--1.6%
Albertson's, Inc. ................................ 100 5,181
Autozone, Inc.(DAGGER) ........................... 100 3,194
Cendant Corp.(DAGGER) ............................ 440 9,185
Consolidated Stores Corp.(DAGGER) ................ 288 10,440
CVS Corp. ........................................ 390 15,186
Dayton-Hudson Corp. .............................. 200 9,700
Federated Department Stores, Inc.(DAGGER) ........ 100 5,381
Gap, Inc. ........................................ 150 9,244
Home Depot, Inc. ................................. 300 24,919
J.C. Penney Co., Inc. ............................ 100 7,231
Kmart Corp.(DAGGER) .............................. 100 1,925
Longs Drug Stores, Inc. .......................... 400 11,550
May Department Stores Co. ........................ 100 6,550
Sears Roebuck & Co. .............................. 200 12,213
Toys 'R' Us, Inc.(DAGGER) ........................ 100 2,356
Wal-Mart Stores, Inc. ............................ 1,200 72,900
Walgreen Co. ..................................... 200 8,263
----------
215,418
----------
---------------------
45
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
STEEL--0.4%
Bethlehem Steel Corp.(DAGGER) .................... 1,800 $ 22,388
Inland Steel Industries, Inc. .................... 1,000 28,188
----------
50,576
----------
TELEPHONE--2.5%
AirTouch Communications, Inc.(DAGGER) ............ 200 11,688
Ameritech Corp. .................................. 800 35,900
AT&T Corp. ....................................... 900 51,413
Bell Atlantic Corp. .............................. 906 41,336
BellSouth Corp. .................................. 400 26,850
Frontier Corp. ................................... 100 3,150
GTE Corp. ........................................ 400 22,250
MCI Communications Corp. ......................... 500 29,063
Nextel Communications, Inc. Class A(DAGGER) ...... 200 4,975
SBC Communications, Inc. ......................... 1,092 43,680
Sprint Corp. ..................................... 200 14,100
US West (New) ................................... 205 9,657
WorldCom, Inc.(DAGGER) ........................... 600 29,063
----------
323,125
----------
TOBACCO--0.5%
Fortune Brands, Inc. ............................. 100 3,844
Loew's Corp. ..................................... 100 8,713
Philip Morris Companies, Inc. .................... 1,400 55,125
----------
67,682
----------
TRAVEL & RECREATION--0.4%
Marriott International, Inc. ..................... 200 6,475
Mirage Resorts, Inc.(DAGGER) ..................... 100 2,131
Walt Disney Co. .................................. 400 42,025
----------
50,631
----------
UTILITIES--0.6%
American Electric Power Co., Inc. ................ 100 4,538
Coastal Corp. .................................... 100 6,981
Columbia Gas System, Inc. ........................ 150 8,344
Duke Power Co. ................................... 100 5,925
Eastern Enterprises .............................. 400 17,150
Edison International ............................. 100 2,956
Enron Corp. ...................................... 100 5,406
---------------------
46
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
NUMBER
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
UTILITIES (CONTINUED)
First Energy Corp. .............................. 100 $ 3,075
FPL Group, Inc. ................................. 100 6,300
PacifiCorp ...................................... 100 2,263
Pacific, Gas, & Electric Corp. .................. 100 3,156
Southern Co. .................................... 200 5,538
Texas Utilities Co. ............................. 100 4,163
-----------
75,795
-----------
TOTAL COMMON STOCK
(Cost $3,738,770) ............................ 5,273,986
-----------
MUTUAL FUNDS--59.2%
- --------------------------------------------------------------------------------
Schwab International Index Fund, Investor Shares 174,717 2,655,691
Schwab Small-Cap Index Fund, Investor Shares .... 146,622 2,724,242
Schwab Total Bond Market Index Fund ............. 197,610 1,987,961
Schwab Value Advantage Money Market ............. 400,000 400,000
-----------
TOTAL MUTUAL FUNDS
(Cost $7,854,262) ............................ 7,767,894
-----------
WARRANTS--0.0%
- --------------------------------------------------------------------------------
BELGIUM--0.0%
Societe Generale de Beligique (expire 11/30/99) . 4 1
-----------
FRANCE--0.0%
AXA UAP CVG (expire 01/07/99) ................... 38 13
Cie Generale de Eaux (expire 05/02/01) .......... 35 69
-----------
82
-----------
TOTAL WARRANTS
(Cost $95) ................................... 83
-----------
TOTAL INVESTMENTS--99.4%
(Cost $11,593,127) ........................... $13,041,963
===========
OTHER ASSETS--0.9% .............................. 115,221
-----------
OTHER LIABILITIES--(0.3%) ....................... (31,996)
-----------
TOTAL NET ASSETS--100.0% ........................ $13,125,188
===========
- ------------
(DAGGER)--Non-Income Producing Security.
ADR--American Depository Receipt.
PLC--Private Limited Company
See accompanying Notes to Financial Statements.
---------------------
47
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
ASSETS:
Investments, at value (Cost: $11,593,127) ................... $13,041,963
Cash ........................................................ 54,948
Receivables:
Fund shares sold ......................................... 40,469
From advisor ............................................. 1,079
Dividends ................................................ 8,288
Interest ................................................. 2,019
Foreign dividend tax refund .............................. 3,126
Deferred organization costs ................................. 5,292
-----------
Total assets .......................................... 13,157,184
-----------
LIABILITIES:
Payables:
Investments purchased .................................... 2,893
Fund shares redeemed ..................................... 210
Custodian fees ........................................... 21,266
Accrued expenses ............................................ 7,627
-----------
Total liabilities ..................................... 31,996
-----------
Net assets applicable to outstanding shares ................. $13,125,188
===========
NET ASSETS consist of:
Paid-in-capital ............................................. $10,280,114
Undistributed net investment income ......................... 233,540
Accumulated net realized gain on investments sold
and foreign currency transactions ........................ 1,160,772
Accumulated net unrealized appreciation on investments
and translating assets and
liabilities into reporting currency* ..................... 1,450,759
-----------
$13,125,188
===========
PRICING OF SHARES:
Outstanding shares, $0.0001 par value
(unlimited shares authorized) ............................. 923,605
NET ASSET VALUE, offering and redemption price per share .... $ 14.21
- ----------------
* Includes $1,923 in unrealized appreciation on translating other assets and
liabilities into reporting currency.
See accompanying Notes to Financial Statements.
---------------------
48
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign tax withheld of $4,450) ........... $ 63,499
Interest .................................................... 60,152
-----------
Total investment income .................................. 123,651
-----------
EXPENSES:
Investment advisory and administration fee .................. 43,440
Custodian fees .............................................. 12,216
Professional fees ........................................... 4,057
Portfolio accounting fees ................................... 5,523
Shareholder reports ......................................... 4,254
Trustees' fees .............................................. 3,325
Amortization of deferred organization costs ................. 818
Insurance and other expenses ................................ 4,447
-----------
78,080
Less: expenses reduced and absorbed (see Note 4) ............... (38,240)
-----------
Net expenses incurred by Fund ............................... 39,840
===========
NET INVESTMENT INCOME .......................................... 83,811
-----------
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain on investments sold ....................... 931,608
Net realized loss on foreign currency transactions .......... (8,122)
-----------
Net realized gain on investments sold and
foreign currency transactions ............................ 923,486
-----------
CHANGE IN NET UNREALIZED APPRECIATION ON INVESTMENTS AND
FOREIGN CURRENCY TRANSLATION:
Net unrealized appreciation on investments .................. 46,307
Net unrealized appreciation on foreign currency ............. 1,923
-----------
Net unrealized appreciation on investments
and foreign currency ..................................... 48,230
Net gain on investments ..................................... 971,716
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $ 1,055,527
===========
- -----------
See accompanying Notes to Financial Statements.
---------------------
49
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
- --------------------------------------------------------------------------------
OPERATIONS:
Net investment income ....................... $ 83,811 $ 148,846
Net realized gain on investments sold and
foreign currency transactions ............ 923,486 238,313
Net unrealized appreciation on investments
and foreign currency ..................... 48,230 1,210,483
----------- -----------
Increase in net assets resulting
from operations .......................... 1,055,527 1,597,642
----------- -----------
Dividends to shareholders from net
investment income ........................ -- (19,177)
Distributions to shareholders from
net capital gains ........................ -- (1,671)
----------- -----------
Total distributions ......................... -- (20,848)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ................... 2,307,748 3,901,562
Net asset value of shares issued in
reinvestment of dividends ................ -- 20,848
Less payments for share redeemed ............ (571,187) (550,195)
----------- -----------
Increase in net assets from capital
share transactions ....................... 1,736,561 3,372,215
----------- -----------
Total increase in net assets ................ 2,792,088 4,949,009
----------- -----------
NET ASSETS:
Beginning of period ......................... 10,333,100 5,384,091
----------- -----------
End of period (including undistributed
net investment income of
$233,540 and $149,729, respectively) ..... $13,125,188 $10,333,100
=========== ===========
NUMBER OF FUND SHARES:
Sold ........................................ 166,856 329,511
Reinvested .................................. -- 1,653
Redeemed .................................... (40,963) (49,965)
----------- -----------
Net increase in shares outstanding .......... 125,893 281,199
=========== ===========
SHARES OUTSTANDING:
Beginning of period ......................... 797,712 516,513
----------- -----------
End of period ............................... 923,605 797,712
=========== ===========
- -------------
See accompanying Notes to Financial Statements.
---------------------
50
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
--------------------------------------- ---------------------------------------------
NET
NET ASSET REALIZED & TOTAL DIVIDENDS
PERIOD VALUE AT NET UNREALIZED FROM FROM NET DIVIDENDS FROM
ENDED BEGINNING INVESTMENT GAIN ON INVESTMENT INVESTMENT REALIZED GAIN TOTAL
DECEMBER 31, OF PERIOD INCOME INVESTMENTS INCOME INCOME ON INVESTMENTS DISTRIBUTIONS
- ------------ --------- ---------- ----------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998** $12.95 $0.25 $1.01 $1.26 $ -- $ -- $ --
1997 $10.42 $0.22(1) $2.33 $2.55 $(0.02) $(0.00)(2) $(0.02)
1996*** $10.00 $0.04 $0.38 $0.42 $ -- $ -- $ --
<FN>
(DAGGER)The information contained in the above table is based on actual expenses
for the period, after giving effect to the portion of fees and expenses
reduced and expensed absorbed by the Investment Manager and Schwab. Had
these fees and expenses not been reduced and absorbed, the Funds' expense
and net investment income ratios would have been:
PERIOD RATIO OF NET
ENDED RATIO OF INVESTMENT
DECEMBER 31, EXPENSES INCOME
- ------------ -------- ------------
1998** 1.33%* 0.78%*
1997 1.99% 0.74%
1996*** 4.71%* (1.69%)*
* Annualized.
** For the six months ended June 30, 1998 (Unaudited).
*** For the period from November 1, 1996 (commencement of operations) to
December 31, 1996.
(1) Per share information presented is based upon the average number of shares
outstanding due to large fluctuations in the number of shares outstanding
during the period.
(2) Less than one cent per share.
</FN>
</TABLE>
- ----------
See accompanying Notes to Financial Statements.
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51
<PAGE>
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<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
----------------------------------------------------------------------------------------------------
RATIO OF NET
RATIO OF INVESTMENT
NET ASSET TOTAL EXPENSES INCOME PORTFOLIO
PERIOD VALUE AT RETURN TO AVERAGE TO AVERAGE TURNOVER
ENDED END OF (NOT ANNUALIZED) NET ASSETS NET ASSETS(DAGGER) NET ASSETS(DAGGER) RATE
DECEMBER 31, PERIOD (%) END OF PERIOD (%) (%) (%)
- ------------ --------- ---------------- ------------- ------------------ ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
1998** $14.21 9.73 $13,125,188 0.68* 1.43* 93
1997 $12.95 24.54 $10,333,100 0.75 1.98 81
1996*** $10.42 4.20 $ 5,384,091 0.67* 2.35* 7
</TABLE>
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<PAGE>
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SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
1. DESCRIPTION OF THE FUND
The Schwab MarketTrack Growth Portfolio II (formerly Schwab Asset
Director(REGISTRATION MARK) -- High Growth Portfolio) (the "Fund") is a series
of Schwab Annuity Portfolios (the "Trust"), a diversified, no-load, open-end
investment management company organized as a Massachusetts business trust on
January 21, 1994 and registered under the Investment Company Act of 1940, as
amended.
The Fund is intended as an investment vehicle for variable annuity contracts
and variable life insurance policies to be offered by separate accounts of
participating life insurance companies and for pension and retirement plans
qualified under the Internal Revenue Code of 1986, as amended.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
SECURITY VALUATION--Investments in securities traded on an exchange and
unlisted securities are 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. Securities for which no quotations are readily
available are valued at fair value as determined by the Funds' investment
manager pursuant to guidelines adopted in good faith by the Board of Trustees.
Bonds and notes are generally valued at prices obtained from an independent
bond-pricing service. These securities are valued at the mean between the
representative quoted bid and asked prices or if such prices are not available,
at prices for securities of comparable maturity, quality and type. Short-term
securities with 60 days or less to maturity are stated at amortized cost, which
approximates market value.
SECURITY TRANSACTIONS AND INVESTMENT INCOME--Security transactions accounted
for on a trade date basis (date the order to buy or sell is executed). Realized
gains and losses from security transactions are determined on an identified cost
basis. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and includes
amortization of premium and accretion of discount on investments. For callable
bonds purchased at a premium, the excess of the purchase price over the call
value is amortized against interest income through the call date. If the call
provision is not exercised, any remaining premium is amortized through the final
maturity date.
FOREIGN CURRENCY TRANSLATION--The accounting records of the Fund are
maintained in U.S. dollars. Investment securities and all other assets and
liabilities of the Funds denominated in a foreign currency are translated into
U.S. dollars at the exchange rates on June 30, 1998. Purchases and sales of
foreign securities, foreign income receipts and foreign expense payments are
translated into U.S. dollars at the exchange rate in effect on the dates of the
respective transactions.
The Fund separates within its statement of operations the portion of
realized and unrealized gains and losses resulting from changes in foreign
exchange rates from that arising from changes in securities' market values.
DEFERRED ORGANIZATION COSTS--Costs incurred in connection with the
organization of the Fund are amortized on a straight-line basis over a five-year
period from each Fund's commencement of operations.
EXPENSES--Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are generally allocated to
each series in proportion to their relative net assets.
FEDERAL INCOME TAXES--It is the Fund's policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all net investment income and realized net capital gains, if any, to
shareholders. Therefore, no federal income tax provision is required. The Fund
is considered a separate entity for tax purposes.
At June 30, 1998, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $1,448,836 of which $1,649,291 related to
appreciated securities and $200,455 related to depreciated securities.
---------------------
53
<PAGE>
---------------------
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TRADEMARK)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT--The Trust has an
investment advisory and administration agreement with Charles Schwab Investment
Management, Inc. (the "Investment Manager"). For advisory services and
facilities furnished, each Fund pays an annual fee, payable monthly, of 0.74% of
the first $1 billion of average daily net assets, 0.69% of the next $1 billion
and 0.64% of such assets over $2 billion. The Investment Manager has reduced a
portion of its fee for the six months ended June 30, 1998. (see Note 4)
OFFICERS AND TRUSTEES--Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager. During the six months ended
June 30, 1998, the Trust made no direct payments to its officers or trustees who
were "interest persons" within the meaning of the Investment Company Act of
1940, as amended. The Fund incurred fees of $3,325 related to the Trust's
unaffiliated trustees.
OTHER AFFILIATED PARTIES AND TRANSACTIONS--Pursuant to an Exemptive Order
issued by the SEC, the Funds may invest in other SchwabFunds(REGISTRATION MARK).
As of June 30, 1998, the Growth Portfolio II owned 1% of the outstanding shares
of the Schwab International Index Fund; 0%(1) of the outstanding shares of the
Schwab Value Advantage Money Market Fund; 1% of the outstanding shares of the
Schwab Total Bond Market Index Fund, and 0%(1) of the outstanding shares of the
Schwab Small-Cap Index Fund.
INTERFUND TRANSACTIONS--For the six months ended June 30, 1999, the Fund
engaged in purchase and sale transactions with funds that have a common
Investment Manager, common Trustees, and Officers. These sale transactions, made
at current market value pursuant to Rule 17a-7 under the Act was $4,860,165.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager guarantee that, through at least April 30, 1999, the
Fund's total operating expenses will not exceed 0.75% of the Fund's average
daily net assets, after waivers and reimbursements. For purpose of this
guarantee, operating expenses do not include interest expenses, extraordinary
expenses, taxes and foreign taxes.
For the six months ended June 30, 1998, the total of such fees and expenses
reduced and absorbed by the Investment Manager were $38,240.
5. BORROWING AGREEMENT
The Trust has an arrangement with Bank of New York Trust Company whereby the
Fund may borrow, in aggregate, up to $100,000,000, on a temporary basis, to fund
redemptions. Amounts borrowed under this arrangement bear interest at
periodically negotiated rates and may be collateralized by the assets of the
Fund. During the six months ended June 30, 1998, no borrowings were made under
this arrangement.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term
obligations, aggregated $13,535,901 and $10,649,239, respectively, for the six
months ended June 30, 1998.
(1) Less than one percent of outstanding shares.
---------------------
54
