SCHWAB ANNUITY PORTFOLIOS
SCHWAB MONEY MARKET PORTFOLIO
JUNE 30, 1999 SEMI-ANNUAL REPORT
PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD -- Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of the Portfolio. 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.
KAREN WIGGAN -- Portfolio Manager, has managed the Schwab Money Market Portfolio
since March 1999. Karen joined Schwab in 1986, CSIM in 1991, and was promoted to
her current position in March 1999.
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by gross domestic product (GDP), continued its
remarkable expansion with a strong real growth rate of 3.3% during the first
half of 1999. The second quarter growth rate of 2.3% marks the 33rd consecutive
quarter of positive growth -- the longest peacetime expansion ever. Strong
consumer spending leveraged by record domestic stock market levels and its
associated wealth effect continued to provide momentum for this historic
expansion.
The consensus of most economists is that the U.S. economy appears poised for
continued growth, but at a more moderate pace than the 4.3% rate experienced
during 1998. High levels of consumer confidence and spending, low interest
rates, rising real wages and strong gains in stock prices have been the
principal factors continuing this lengthy expansion. Last year's concerns over
the impact of international economic problems have been displaced by concerns
over imbalances in the domestic economy, namely the surging current account
(trade) deficit, record high stock valuations, and the negative savings rate.
Going forward, the behavior of domestic consumers in response to continued stock
market volatility may also be a key determinant of whether the economy continues
on its current course or softens throughout the remainder of 1999.
UNEMPLOYMENT
Labor markets continue to be extremely tight in many areas of the country. After
declining to 4.2% in May -- the lowest level in 28 years -- the U.S.
unemployment rate stood at 4.3% in June. Growth in the labor force has slowed,
and there continues to be concern that wage and benefits increases may begin to
put more pressure on labor costs (refer to Employment Cost Index below).
INFLATION
Price inflation continued to remain well contained. The CPI rose just 2.0% for
the year ended June 1999. Its core rate (which excludes the more volatile food
and energy components) rose 2.1%. The Employment Cost Index, which measures
inflation in wages, salaries and benefits was also well contained, increasing
3.2% for the year ended June 1999.
Even though there is little evidence of acceleration in core inflation, the Fed
has expressed concerns that should labor markets continue to tighten,
significant increases in wages, in excess of productivity growth, will
inevitably emerge. In this environment, productivity growth becomes particularly
important. Strong productivity gains allow companies to pay higher wages without
raising prices. Non-farm productivity grew 2.2% in 1998 and at a 2.4% annualized
rate in the first half of 1999, continuing a healthy trend that began in 1996.
1
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
SCHWAB MONEY MARKET PORTFOLIO
JUNE 30, 1999 SEMI-ANNUAL REPORT
SHORT-TERM INTEREST RATE ENVIRONMENT
1999 YIELDS ON 90-DAY COMMERCIAL PAPER AND 3-MONTH
TREASURY BILLS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
3 MONTH TREASURY BILL 90 DAY COMMERCIAL PAPER
01/04/99 4.47 4.8
01/05/99 4.49 4.8
01/06/99 4.45 4.75
01/07/99 4.43 4.79
01/08/99 4.47 4.78
01/11/99 4.50 4.80
01/12/99 4.48 4.79
01/13/99 4.42 4.8
01/14/99 4.42 4.79
01/15/99 4.43 4.78
01/19/99 4.38 4.77
01/20/99 4.37 4.76
01/21/99 4.28 4.76
01/22/99 4.34 4.75
01/25/99 4.42 4.74
01/26/99 4.47 4.75
01/27/99 4.42 4.75
01/28/99 4.49 4.75
01/29/99 4.45 4.74
02/01/99 4.52 4.75
02/02/99 4.53 4.76
02/03/99 4.48 4.75
02/04/99 4.47 4.76
02/05/99 4.49 4.76
02/08/99 4.5 4.78
02/09/99 4.51 4.79
02/10/99 4.46 4.78
02/11/99 4.51 4.78
02/12/99 4.52 4.79
02/16/99 4.51 4.8
02/17/99 4.52 4.79
02/18/99 4.54 4.81
02/19/99 4.56 4.8
02/22/99 4.6 4.79
02/23/99 4.66 4.81
02/24/99 4.65 4.81
02/25/99 4.63 4.81
02/26/99 4.67 4.82
03/01/99 4.69 4.83
03/02/99 4.64 4.83
03/03/99 4.59 4.83
03/04/99 4.6 4.82
03/05/99 4.6 4.84
03/08/99 4.61 4.82
03/09/99 4.58 4.8
03/10/99 4.58 4.81
03/11/99 4.59 4.82
03/12/99 4.59 4.81
03/15/99 4.58 4.81
03/16/99 4.53 4.81
03/17/99 4.51 4.8
03/18/99 4.49 4.81
03/19/99 4.49 4.81
03/22/99 4.5 4.82
03/23/99 4.48 4.81
03/24/99 4.48 4.81
03/25/99 4.5 4.8
03/26/99 4.49 4.81
03/29/99 4.49 4.8
03/30/99 4.47 4.82
03/31/99 4.48 4.82
04/01/99 4.41 4.8
04/02/99 4.39 4.84
04/05/99 4.39 4.81
04/06/99 4.39 4.82
04/07/99 4.41 4.8
04/08/99 4.39 4.8
04/09/99 4.35 4.79
04/12/99 4.32 4.79
04/13/99 4.27 4.79
04/14/99 4.28 4.8
04/15/99 4.32 4.8
04/16/99 4.31 4.77
04/19/99 4.32 4.79
04/20/99 4.38 4.78
04/21/99 4.34 4.8
04/22/99 4.38 4.78
04/23/99 4.41 4.76
04/26/99 4.45 4.77
04/27/99 4.48 4.73
04/28/99 4.36 4.78
04/29/99 4.5 4.79
04/30/99 4.54 4.78
05/03/99 4.58 4.78
05/04/99 4.6 4.79
05/05/99 4.59 4.8
05/06/99 4.6 4.79
05/07/99 4.6 4.79
05/10/99 4.58 4.78
05/11/99 4.58 4.79
05/12/99 4.58 4.79
05/13/99 4.57 4.79
05/14/99 4.65 4.8
05/17/99 4.64 4.83
05/18/99 4.65 4.81
05/19/99 4.6 4.85
05/20/99 4.59 4.83
05/21/99 4.58 4.84
05/24/99 4.61 4.84
05/25/99 4.64 4.83
05/26/99 4.63 4.83
05/27/99 4.63 4.85
05/28/99 4.64 4.86
06/01/99 4.66 4.86
06/02/99 4.73 4.86
06/03/99 4.61 4.89
06/04/99 4.54 4.86
06/07/99 4.5 4.91
06/08/99 4.61 4.89
06/09/99 4.59 4.9
06/10/99 4.68 4.9
06/11/99 4.73 4.91
06/14/99 4.66 5
06/15/99 4.72 5
06/16/99 4.64 5.01
06/17/99 4.62 4.99
06/18/99 4.65 5
06/21/99 4.67 5
06/22/99 4.74 5.01
06/23/99 4.72 5.03
06/24/99 4.72 5.03
06/25/99 4.79 5.06
06/28/99 4.79 5.13
06/29/99 4.82 5.12
06/30/99 4.78 5.17
Source: Bloomberg L.P.
PORTFOLIO HIGHLIGHTS
As seen on the chart above, short-term interest
rates increased marginally, but remained in a narrow range throughout most of
the reporting period. The economy demonstrated continued signs of growth, in
part due to the accommodative financial conditions resulting from the three
Federal Funds Rate cuts last fall. Until the April CPI report there was no
significant evidence of accelerating inflation or indications that the Fed would
move to change short-term rates. Following the unexpectedly high April CPI
report, the Fed adopted a "tightening" bias in May, followed by a 0.25% increase
in the Federal Funds Rate and a return to a "neutral" bias at the June meeting.
The Fed expressed concern about the potential for a buildup of inflationary
imbalances that could undermine the favorable performance of the economy.
Although not universally anticipated, many market observers expect there will be
at least one additional 0.25% increase in the Federal Funds Rate by year-end.
These developments caused short-term rates to edge upward toward the end of the
reporting period.
Our overall strategy for the funds was consistent with our long-term pattern,
that is to maintain a dollar-weighted average maturity (DWAM) slightly longer
than that of other funds with similar investment objectives. This strategy had a
beneficial impact on yields throughout most of the period.
During the first quarter of 1999, based on our expectation that short-term rates
would remain relatively stable, we looked for opportunities to buy securities
with longer-dated maturities when they were available at attractive prices. In
May, as the Fed bias changed from neutral to restrictive, we deviated from this
strategy somewhat by concentrating the portfolio in shorter-term securities
while still buying higher yielding securities on a selective basis when
opportunities arose.
Yield Summary as of 6/30/99 1
- ----------------------------
7-Day Yield 4.38%
7-Day Effective Yield 4.48%
- ----------------------------
1 A portion of the Portfolio's expenses were reduced during the reporting
period. Without these reductions, as of June 30, 1999, the 7-day yield and
7-day effective yield for the Portfolio would have been 4.33%, and 4.42%,
respectively.
2
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
PORTFOLIO SUMMARY (000's)
ASSET GROWTH
Percentage
Total Total Growth Over
Net Assets Net Assets Reporting
as of 6/30/99 as of 12/31/98 Period
- ----------------------------------------------------------------------------
$103,768 $78,266 33%
- ----------------------------------------------------------------------------
AVERAGE YIELDS FOR THE PERIODS ENDED
JUNE 30, 1999*
Last Last Last
Seven Days Three Months Twelve Months
- ----------------------------------------------------------------------------
4.38% 4.34% 4.63%
- ----------------------------------------------------------------------------
MATURITY SCHEDULE
PERCENT OF TOTAL INVESTMENTS
Maturity Range 3/31/99 6/30/99
- ----------------------------------------------------------------------------
0-- 15 Days 28.7% 28.3%
16-- 30 Days 5.2 16.4
31-- 60 Days 43.9 35.0
61-- 90 Days 12.4 8.2
91--120 Days 6.7 8.4
Over 120 Days 3.1 3.7
Weighted Average 43 Days 41 Days
- ----------------------------------------------------------------------------
PORTFOLIO QUALITY
Percent of
SEC Tier Total Investments
Rating 6/30/99
----------------------------------
Tier 1 100.0%
- --------------
* A portion of the Fund's expenses were reduced during the periods. Had these
expenses not been reduced, yields would have been lower.
3
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
SCHEDULE OF INVESTMENTS (IN THOUSANDS)
JUNE 30, 1999 (UNAUDITED)
U.S. GOVERNMENT SECURITIES--95.6% PAR VALUE
- --------------------------------------------------------------------------
Discount Notes--95.6%
Federal Farm Credit Bank
4.78%, 07/06/99 ................................. $ 500 $ 500
4.75%, 07/08/99 ................................. 4,000 3,996
4.77%, 07/26/99 ................................. 1,200 1,196
4.91%, 08/03/99 ................................. 2,100 2,091
4.91%, 08/05/99 ................................. 3,191 3,176
4.97%, 08/12/99 ................................. 3,220 3,201
4.81%, 09/30/99 ................................. 2,000 1,976
4.81%, 10/01/99 ................................. 1,210 1,195
4.83%, 11/08/99 ................................. 2,000 1,966
4.93%, 11/24/99 ................................. 1,000 980
Federal Home Loan Bank
4.75%, 07/02/99 ................................. 2,000 2,000
4.79%, 07/23/99 ................................. 1,000 997
4.83%, 07/23/99 ................................. 1,350 1,346
4.88%, 08/04/99 ................................. 2,000 1,991
4.78%, 08/06/99 ................................. 2,000 1,991
4.82%, 08/13/99 ................................. 3,000 2,983
4.83%, 08/13/99 ................................. 1,000 994
4.84%, 08/20/99 ................................. 2,000 1,987
4.90%, 09/01/99 ................................. 3,000 2,975
4.86%, 10/28/99 ................................. 1,190 1,171
5.12%, 12/10/99 ................................. 1,000 978
Federal Home Loan Mortgage Corporation
4.81%, 07/01/99 ................................. 4,080 4,080
4.81%, 07/28/99 ................................. 1,290 1,285
4.92%, 08/12/99 ................................. 5,000 4,972
4.88%, 08/23/99 ................................. 2,655 2,636
4.88%, 08/26/99 ................................. 3,000 2,977
4.85%, 09/24/99 ................................. 5,000 4,944
Federal National Mortgage Association
4.86%, 07/09/99 ................................. 1,050 1,049
4.76%, 07/13/99 ................................. 2,000 1,997
4.80%, 08/13/99 ................................. 2,000 1,989
4.86%, 08/20/99 ................................. 2,000 1,987
4.85%, 08/24/99 ................................. 1,000 993
4.86%, 08/27/99 ................................. 2,000 1,985
4.90%, 08/27/99 ................................. 2,000 1,985
4.88%, 09/16/99 ................................. 1,000 990
4.84%, 10/08/99 ................................. 1,000 987
4.93%, 10/12/99 ................................. 1,789 1,764
4.84%, 10/22/99 ................................. 2,000 1,970
4
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
SCHEDULE OF INVESTMENTS (IN THOUSANDS) (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
PAR VALUE
- ---------------------------------------------------------------------------
Tennessee Valley Authority
4.76%, 07/07/99 ................................. $2,000 $ 1,998
4.77%, 07/07/99 ................................. 2,000 1,998
4.76%, 07/09/99 ................................. 4,000 3,996
4.90%, 07/20/99 ................................. 4,000 3,990
4.82%, 07/22/99 ................................. 9,000 8,975
-------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $99,237) ............................................... 99,237
-------
REPURCHASE AGREEMENTS--8.8% (a) MATURITY VALUE VALUE
- ---------------------------------------------------------------------------
Credit Suisse First Boston Corp. Tri-Party Repurchase
Agreement Collaterized by U.S. Government Securities
4.80% Issue 06/30/99
Due 07/01/99 ..................... 9,070 9,069
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $9,069) ................................................ 9,069
--------
TOTAL INVESTMENTS--104.4%
(Cost $108,306) .............................................. 108,306
--------
OTHER ASSETS AND LIABILITIEs--(4.4)%
Other assets .................................................... 36
Liabilities ..................................................... (4,574)
--------
(4,538)
--------
NET ASSETS--100.0% .............................................. $103,768
========
- -----------
NOTES TO SCHEDULE OF INVESTMENTS
Yields shown are effective yields at the time of purchase. 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.
(a) Repurchase agreement due dates are considered the maturity date. Repurchase
agreement with due dates later than seven days from issue dates may be
subject to seven day putable demand features for liquidity purposes.
See accompanying Notes to Financial Statements.
5
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS)
JUNE 30, 1999 (UNAUDITED)
ASSETS:
Investments, at value (Cost: $108,306) .................. $108,306
Receivables:
Interest ............................................. 1
Prepaid expenses ........................................ 35
--------
Total assets ......................................... 108,342
--------
LIABILITIES:
Payables:
Dividends ............................................ 67
Fund shares redeemed ................................. 4,485
Investment advisory and administration fees .......... 7
Other liabilities ....................................... 15
--------
Total liabilities .................................... 4,574
--------
Net assets applicable to outstanding shares ................ $103,768
========
NET ASSETS consist of:
Paid-in capital ......................................... $103,781
Accumulated net realized loss on investments sold ....... (13)
$103,768
========
PRICING OF SHARES:
Outstanding shares, $0.00001 par value
(unlimited shares authorized) ........................... 103,813
NET ASSET VALUE, offering and redemption price per share ... $1.00
- -------------
See accompanying Notes to Financial Statements.
6
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
STATEMENT OF OPERATIONS (IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
- -----------------------------------------------------------------------
INTEREST INCOME ................................................ $2,344
------
EXPENSES:
Investment advisory and administration fees ................. 206
Custodian and portfolio accounting fees ..................... 35
Registration fees ........................................... 6
Professional fees ........................................... 9
Shareholder reports ......................................... 13
Trustees' fees .............................................. 5
Insurance and other expenses ................................ 6
------
............................................................... 280
Less: expenses reduced (see Note 4) ............................ (40)
------
Total expenses incurred by fund .......................... 240
------
NET INVESTMENT INCOME .......................................... 2,104
NET REALIZED LOSS ON INVESTMENTS SOLD .......................... (1)
------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $2,103
======
- -----------
See accompanying Notes to Financial Statements
7
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS)
Six months
ended Year ended
June 30, 1999 December 31,
(unaudited) 1998
--------------- ----------
OPERATIONS:
Net investment income ......................... $ 2,104 $ 3,425
Net realized loss on investments sold ......... (1) (9)
--------- ---------
Increase in net assets resulting
from operations ............................. 2,103 3,416
--------- ---------
Dividends to shareholders from
net investment income
(see Note 2): .............................. (2,104) (3,447)
--------- ---------
CAPITAL SHARE TRANSACTIONS: (at $1.00 per share):
Proceeds from shares sold ..................... 227,350 219,491
Net asset value of shares issued
in reinvestment of dividends ................ 2,414 3,327
Less payments for shares redeemed ............. (204,261) (192,489)
--------- ---------
Increase in net assets from capital
share transactions .......................... 25,503 30,329
--------- ---------
Total increase in net assets ..................... 25,502 30,298
NET ASSETS:
Beginning of period ........................... 78,266 47,968
--------- ---------
End of period ................................. $ 103,768 $ 78,266
========= =========
- ----------------
See accompanying Notes to Financial Statements.
8
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1999 1 1998 1997 1996 1995 1994 2
-------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- ------- ------
From investment operations:
Net investment income 0.02 0.05 0.05 0.05 0.05 0.03
-------- ------- ------- ------- ------- ------
Total from investments
operations 0.02 0.05 0.05 0.05 0.05 0.03
Less distributions:
Dividends from net investment
income (0.02) (0.05) (0.05) (0.05) (0.05) (0.03)
-------- ------- ------- ------- ------- ------
Total distributions (0.02) (0.05) (0.05) (0.05) (0.05) (0.03)
-------- ------- ------- ------- ------- ------
NET ASSET VALUE AT END
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ======= ======= ======
Total return (%) 2.19** 5.07 5.12 4.98 5.26 2.55**
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------
Ratio of net operating expenses to
average net assets 0.50* 0.50 0.50 0.50 0.50 0.50*
Reductions reflected in above
expense ratio 0.08* 0.11 0.21 0.45 0.52 1.60*
Ratio of net investment income
to average net assets 4.38* 4.91 5.01 4.87 5.17 4.16*
Net assets, end of period (000s) $103,768 $78,266 $47,968 $27,431 $16,912 $7,409
<FN>
- --------------
1 For the six months ended June 30, 1999 (unaudited).
2 For the period May 3, 1994 (commencement of operations) to December 31, 1994.
* Annualized.
** Not annualized.
</FN>
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
(All dollar amounts are in thousands unless otherwise noted)
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 (the "Act"), 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. 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,
except in the case of a tri-party repurchase agreement, under which the
collateral is held by an agent bank. The collateral 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 federal income tax purposes.
As of December 31, 1998, the unused capital loss carryforwards for Federal
income tax purposes with expiration dates, were as follows:
Expiring in:
-----------
12/31/05 $1
12/31/06 $3
--
$4
==
10
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
(All dollar amounts are in thousands unless otherwise noted)
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 adviser"). For advisory services and
facilities furnished, the fund pays an annual fee, payable monthly, of 0.38% on
the first $1 billion of average daily net assets, 0.35% on such assets in excess
of $1 billion to $10 billion, 0.32% on such assets in excess of $10 billion to
$20 billion, and 0.30% on such assets in excess of $20 billion. Prior to May 1,
1999 the fund paid an annual fee, payable monthly, of 0.46% on the first $1
billion of average daily net assets, 0.45% on the next $2 billion, 0.40% on the
next $7 billion, 0.37% on the next $10 billion, and 0.34% on such net assets in
excess of $20 billion. The investment adviser has reduced a portion of its fee
for the six months ended June 30, 1999 (see Note 4).
OFFICERS AND TRUSTEES -- Certain officers and trustees of the Trust are also
officers or directors of the investment adviser. During the six months ended
June 30, 1999, the Trust made no direct payments to its officers or trustees who
are "interested persons" within the meaning of the Act, as amended. The fund
incurred fees of $5 related to the Trusts unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT ADVISER AND SCHWAB
The investment adviser guarantees that, through at least April 30, 2000, 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, 1999, the total of such
fees and expenses reduced by the investment adviser was $40.
11
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
JUNE 30, 1999 SEMI-ANNUAL REPORT
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by gross domestic
product (GDP), continued its remarkable expansion
with a strong real growth rate of 3.3% during the first
half of 1999. The second quarter growth rate of 2.3%
marks the 33rd consecutive quarter of positive
growth--the longest peacetime expansion ever.
Strong consumer spending leveraged by record
domestic stock market levels and its associated
wealth effect continued to provide momentum for
this historic expansion.
[BAR CHART OMITTED]
REAL GDP GROWTH RATE
Quarterly Percent Change (Annualized Rate)
PLOT POINTS FOLLOWS:
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 1.8
Q3 1998 3.7
Q4 1998 5.6
Q1 1999 4.3
Q2 1999 2.3
Source: Bloomberg L.P.
The consensus of most economists is that the U.S.
economy appears poised for continued growth, but at
a more moderate pace than the 4.3% rate experienced
during 1998. High levels of consumer confidence and
spending, low interest rates, rising real wages and
strong gains in stock prices have been the principal
factors continuing this lengthy expansion. Last year's
concerns over the impact of international economic
problems have been displaced by concerns over
imbalances in the domestic economy, namely the
surging current account (trade) deficit, record high
stock valuations, and the negative savings rate.
Going forward, the behavior of domestic consumers in
response to continued stock market volatility may
also be a key determinant of whether the economy
continues on its current course or softens throughout
the remainder of 1999.
UNEMPLOYMENT
Labor markets continue to be extremely tight in
many areas of the country. After declining to 4.2% in
May -- the lowest level in 28 years -- the U. S.
unemployment rate stood at 4.3% in June. Growth in
the labor force has slowed, and there continues to be
concern that wage and benefits increases may begin
[LINE CHART OMITTED]
U.S. UNEMPLOYMENT RATE
PLOT POINTS FOLLOWS:
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
Jul-98 4.5
Aug-98 4.5
Sep-98 4.6
Oct-98 4.6
Nov-98 4.4
Dec-98 4.3
Jan-99 4.3
Feb-99 4.4
Mar-99 4.2
Apr-99 4.33
May-99 4.2
Jun-99 4.3
Source: Bloomberg L.P.
to put more pressure on labor costs (refer to
Employment Cost Index below).
INFLATION
Price inflation continued to remain well contained.
The CPI rose just 2.0% for the year ended June 1999.
Its core rate (which excludes the more volatile food
and energy components) rose 2.1%. The GDP price
deflator, the broadest measure of inflation, showed
prices rising at an annual rate of 2.1% during the
second quarter. The Employment Cost Index, which
measures inflation in wages, salaries and benefits was
also well contained, increasing 3.2% for the year
ended June 1999.
[LINE CHART OMITTED]
MEASURES OF INFLATION
- --- Quaraterly Employment Cost Index -- YOY% Change
- --- Monthly Consumer Price Index -- YOY% Change
PLOT POINTS FOLLOWS:
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
Jul-98 1.7 3.7
Aug-98 1.6 3.7
Sep-98 1.5 3.7
Oct-98 1.5 3.4
Nov-98 1.5 3.4
Dec-98 1.6 3.4
Jan-99 1.7 3
Feb-99 1.6 3
Mar-99 1.7 3
Apr-99 2.3 3.2
May-99 2.1 3.2
Jun-99 2 3.2
Source: Bloomberg L.P.
Even though there is little evidence of acceleration in
core inflation, the Fed has expressed concerns that
should labor markets continue to tighten, significant
increases in wages, in excess of productivity growth,
will inevitably emerge. In this environment, productivity
growth becomes particularly important. Strong
----------
1
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
JUNE 30, 1999 SEMI-ANNUAL REPORT
MARKET OVERVIEW (CONTINUED)
productivity gains allow companies to pay higher
wages without raising prices. Non-farm productivity
grew 2.2% in 1998 and at a 2.4% annualized rate in
the first half of 1999, continuing a healthy trend
that began in 1996.
ASSET CLASS PERFORMANCE
Large-cap domestic stocks, as represented by the
S&P 500@ Index, continued to be the strongest
performing asset class, achieving a total return of
12.4% for the six-month period. Within the S&P
500, value stocks displaced growth stocks as the
strongest performing style for the period. Small-cap
stocks as represented by the Russell 2000@ Index,
also experienced a positive return of 9.3%.
Total Return Performance--Growth of a Dollar Invested
PLOT POINTS FOLLOWS:
<TABLE>
<CAPTION>
S&P 500 Russell Small Cap Index MSCE Index Lehman Aggregate Bond Index
<S> <C> <C> <C> <C>
Dec-98 1 1 1 1
Jan-99 1.042 1.013 0.997 1.007
Feb-99 1.009 0.931 0.973 0.989
Mar-99 1.05 0.946 1.014 0.995
Apr-99 1.09 1.03 1.055 0.998
May-99 1.065 1.044 1.001 0.989
Jun-99 1.124 1.091 1.04 0.986
</TABLE>
Compiled by Charles Schwab & Co., Inc.
Source: Bloomberg L.P.
Assisted by the rebound in Asian markets,
International stock returns, as represented by the
MSCI EAFE@ Index, experienced a positive total
return of 4.0% for the six-month reporting period.
Reflecting the moderate rise in intermediate and
long-term interest rates, fixed income returns were
generally weak for the period. Bond returns, as
represented by the Lehman Brothers Aggregate
Bond Index, were a negative 1.4% for the six-month
reporting period.
U.S. EQUITY VALUATION
The price/earnings ratio for the S&P 500 Index
reached new record highs during the reporting
period and ended the period at a lofty 34.7 times
earnings, more than twice its long term average.
[LINE CHART OMITTED]
PLOT POINTS FOLLOWS:
S&P 500 INDEX 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
Jul-98 26.78
Aug-98 22.77
Sep-98 24.23
Oct-98 27.53
Nov-98 30.14
Dec-98 31.97
Jan-99 33.29
Feb-99 32.65
Mar-99 33.78
Apr-99 33.9
May-99 32.74
Jun-99 34.7
Source: Bloomberg L.P.
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 continues to remain at
record high valuation levels.
SCHWAB S&P 500 PORTFOLIO
PORTFOLIO MANAGEMENT TEAM
GERI HOM -- Vice President and Senior Portfolio
Manager, has primary responsibility for the day-to-day
management of the 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
for Wells Fargo Nikko.
----------
2
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
JUNE 30, 1999 SEMI-ANNUAL REPORT
MARKET OVERVIEW (CONTINUED)
PORTFOLIO HIGHLIGHTS
[LINE CHART OMITTED]
S&P 500 PORTFOLIO HYPOTHETICAL
GROWTH CHART AS OF 06/30/99
PLOT POINTS FOLLOWS:
S&P 500 Portfolio S&P 500 Index
11/01/96 10000 10000
11/30/96 10750 10777
12/31/96 10530 10564
01/31/97 11170 11223
02/28/97 11250 11311
03/31/97 10780 10848
04/30/97 1410 11494
05/31/97 2090 12193
06/30/97 2630 12739
07/31/97 13620 13752
08/31/97 12860 12982
09/30/97 13560 13692
10/31/97 13120 13235
11/30/97 13720 13848
12/31/97 13948 14086
01/31/98 14098 14242
02/28/98 15108 15269
03/31/98 15869 16051
04/30/98 16029 16213
05/31/98 15739 15934
06/30/98 16369 16581
07/31/98 16189 16405
08/31/98 13848 14036
09/30/98 14738 14936
10/31/98 15929 16150
11/30/98 16879 17129
12/31/98 17862 18116
01/31/99 18595 18873
02/28/99 18012 18286
03/31/99 18726 19017
04/30/99 19439 19753
05/31/99 18967 19287
06/30/99 20012 20357
Source: Bloomberg L.P.
[BULLET] The graph above compares the growth of a
hypothetical $10,000 investment in the Schwab
S&P 500 Portfolio at 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
PORTFOLIO. INVESTORS CANNOT INVEST IN AN INDEX
DIRECTLY.
Q. HOW DID THE PORTFOLIO PERFORM DURING THE
REPORTING PERIOD?
A. As discussed in the Market Overview section,
large cap domestic stocks (such as those in the
S&P 500 Index) continued to be the strongest
performing major asset class for the reporting
period. The S&P 500 Portfolio achieved a total
return of 12.04% and 22.25% for the six-month
and 12-month reporting periods ended 6/30/99,
respectively. The since-inception (11/1/96)
average annual return was 29.76%1. The Portfolio
continued to closely track the performance of its
benchmark, the S&P 500 Index.
Unlike the Portfolio, the Index does not incur
management and other Portfolio costs that reduce
returns to the shareholders. Additionally, the
1 A portion of the S&P 500 Portfolio's expenses was reduced. Without
these reductions, the Portfolio's six-month, 12-month and since-
inception average annual returns would have been 12.00%, 22.02%, and
28.95%, respectively.
Portfolio, unlike the 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 Index during a given period. Also,
the weighting of any particular security in the
Portfolio can be greater or less than in the Index.
Lastly, unlike the Index, the Portfolio incurs trading
costs when it buys or sells stocks.
Taken together, these factors cause the difference in
the returns of the Portfolio compared to the Index, a
difference referred to as the Portfolio's "tracking
differential." The tracking differential for the
Portfolio during the six-month reporting period was
0.34%. Given the 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.
Q. HOW HAVE THE INDUSTRY SECTORS IN THE S&P 500
INDEX CHANGED OVER THE LAST FIVE YEARS?
A. The chart below shows the top ten economic
sectors of the S&P 500 Index as of 4/30/99 as well
as the historical weightings of these sectors since
4/30/95. Since 1995, the Index has become
moderately more concentrated, with the top ten
sectors currently representing approximately 70%
of the total versus approximately 60% in 1995.
The sectors with the largest gains during the
period were Business Machines (from 5.4% to
12.1%) and Miscellaneous Finance (from 2.8%
to 5.9%). The sectors with the largest declines
during the period were International Oil
(from 7.3% to 4.7%) and Food and Agriculture
(from 6.6% to 4.1%).
S&P 500 Index 4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
- -------------------------------------------------------------
Business
Machines 5.40 5.87 6.95 7.74 12.10
Drugs &
Medicine 9.32 10.10 10.79 11.61 11.08
Telephone 8.35 8.17 6.28 6.74 8.36
Banks 5.58 7.02 7.82 8.82 7.14
Retail 5.56 4.93 4.59 5.26 6.30
Miscellaneous
Finance 2.79 3.10 3.55 4.94 5.93
Electronics 4.56 4.79 6.03 5.94 5.61
Producer
Goods 5.52 5.53 5.54 5.32 4.85
International
Oil 7.27 6.63 6.55 5.65 4.65
Food &
Agriculture 6.57 6.26 6.68 5.66 4.14
- ------------------------------------------------------------
60.92 62.41 64.78 67.68 70.16
Source: Bloomberg L.P.
----------
3
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
JUNE 30, 1999 SEMI-ANNUAL REPORT
MARKET OVERVIEW (CONTINUED)
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO MANAGEMENT TEAM
GERI HOM -- Vice President and Senior Portfolio
Manager, has primary responsibility for the day-to-day
management of the equity securities in the portfolio.
Geri joined CSIM in March 1995 as Portfolio
Manager and was promoted to her current position in
December 1996. She currently manages approxi-
mately $15 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 for 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
equivalents in the portfolio. Kimon joined CSIM in
his current capacity in October 1997. For five years
prior to joining Schwab, he was employed by Lehman
Brothers, most recently as Vice President in fixed
income institutional sales and, prior to that, Senior
Portfolio Strategist.
PORTFOLIO HIGHLIGHTS
[LINE CHART OMITTED]
PLOT POINTS FOLLOWS:
Schwab MarketTrack Growth Portfolio II Hypothetical
Growth Chart as of 06/30/99
Lehman Brothers
Schwab MarketTrack Aggregate Growth Composite
Growth Portfolio II S&P 500 Index Bond Index Index II
11/1/96 10000 10000 10000 10000
1/30/96 10490 10777 10178 10420
12/31/96 10420 10564 10083 10396
1/31/97 10670 11223 10115 10645
2/28/97 10710 11311 10140 10615
3/31/97 10460 10848 10027 10349
4/30/97 10780 11494 10178 10514
5/31/97 11420 12193 10274 11161
6/30/97 11940 12739 10397 11588
7/31/97 12650 13752 10677 12184
8/31/97 12200 12982 10587 11841
9/30/97 12880 13692 10743 12440
10/31/97 12520 13235 10899 11980
11/30/97 12730 13848 10942 12038
12/31/97 12977 14086 10949 12154
1/31/98 13037 14242 11060 12242
2/28/98 13779 15269 11201 12936
3/31/98 14199 16051 11192 13442
4/30/98 14320 16213 11230 13575
5/31/98 14019 15934 11388 13357
6/30/98 14240 16581 11289 13502
7/31/98 13959 16405 11396 13280
8/31/98 12285 14036 11705 11617
9/30/98 12696 14936 11979 11915
10/31/98 13478 16150 11915 12510
11/30/98 14079 17129 11983 13094
12/30/98 14673 18116 12019 13681
1/31/99 14921 18873 12104 13898
2/28/99 14395 18286 11893 13404
3/31/99 14807 19017 11958 13766
4/30/99 15405 19753 11996 14320
5/31/99 15127 19287 11891 14111
6/30/99 15735 20357 11853 14747
Compiled by Charles Schwab & Co., Inc.
[BULLET] The graph above compares the growth of a
hypothetical $10,000 investment in the Schwab
MarketTrack Growth Portfolio II at the inception,
with a similar investment in the S&P 500@ Index,
Growth Composite Index II1 and the Lehman
Brothers Aggregate Bond 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 PORTFOLIO.
INVESTORS CANNOT INVEST IN AN INDEX DIRECTLY.
PORTFOLIO HIGHLIGHTS
Q. HOW DID THE PORTFOLIO PERFORM DURING THE
REPORTING PERIOD?
A. As discussed in the Market Overview section and
detailed in the table below, there was a wide range
of returns for the various asset classes during the
reporting period. The Portfolio's six-month return
for the period ended 6/30/99 of 7.23% was a
reflection of the Portfolio's holdings in these various
asset categories. The 12-month return was 10.50%.
The since-inception (11/1/96) average annual
return was 18.58%2.
Six-Month Portfolio
Returns as Neutral
Asset Class Index of 6/30/99 Target
- ---------------------------------------------------------------------------
Large-Cap Stocks S&P 500 Index 12.38% 40%
Small-Cap Stocks Schwab Small-Cap
Index@ 11.28% 20%
International Stocks Schwab International
Index@ 5.12% 20%
Bonds Lehman Brothers
Aggregate Bond Index -1.37% 15%
Cash Equivalents 3-Month U.S. Treasury
Bill 2.29% 5%
- ---------------------------------------------------------------------------
Source: Bloomberg L.P.
1 The Growth Composite Index II is composed of Morningstar category
averages and cash equivalents as represented by the 90-day T-bill and is
calculated using the following portfolio allocations: 40% large-cap stocks,
20% small-cap stocks, 20% foreign stocks, 15% bonds and 5% cash. As of
6/30/99, there were 2,032 large-cap funds, 824 small-cap funds, 645 foreign
funds and 560 intermediate-term bond funds tracked by Morningstar.
Performance includes changes in price and reinvestment of dividends and
capital gains. The hypothetical $10,000 investments assume investment on
the first day of the month following Fund inception and include changes in
share prices and reinvestment of dividends and capital gains.
2 A portion of the Schwab MarketTrack Growth Portfolio II's expenses was
reduced. Without these reductions, the Portfolio's six-month, 12-month
and since-inception average annual returns would have been 6.66%,
9.60% and 17.22%, respectively.
----------
4
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
JUNE 30, 1999 SEMI-ANNUAL REPORT
MARKET OVERVIEW (CONTINUED)
Because the Portfolio is designed to incorporate a mix
of different asset classes, its return over any given
period is expected to lag the return of the strongest
performing asset class. Conversely, the return of the
Portfolio is expected to exceed that of the worst
performing asset class for any given period. By
dampening the return volatility of any single asset
class, the Portfolio is designed to provide more stable
returns throughout market cycles which, on a risk-
adjusted basis, is expected to be favorable over
extended periods of time.
Q. CAN YOU PROVIDE AN EXAMPLE OF HOW ASSET
ALLOCATION REDUCES PORTFOLIO VOLATILITY?
A. Adding bonds and cash equivalents to a stock
portfolio can help reduce its overall risk. The
following chart displays the high, low, and average
annual returns from 1970 - 1998 for five
hypothetical portfolios representing the returns of
stocks and bonds measured by indices1.# As the
chart demonstrates, adding bonds to a stock-heavy
portfolio would have reduced risk while still
producing competitive returns.
Hypothetical MarketTrack Report-
Effect of Adding Bonds to an All-Stock Portfolio
90% 80% 70% 60%
STOCKS STOCKS STOCKS STOCKS
100% 10% 20% 30% 40%
STOCKS BONDS BONDS BONDS BONDS
- -----------------------------------------------------------
Maximum 37.43 35.37 33.30 31.24 29.18
Average 13.48% 13.14% 12.77% 12.38% 11.97%
Minimum -26.47 -23.25 -20.04 -16.82 -13.60
- -----------------------------------------------------------
Compiled by Charles Schwab & Co., Inc.
A portfolio comprising 40% bonds and 60% stocks,
for example, achieved an average annual return of
11.97% -- roughly 1.5% less than the 13.48% return
of the all-stock portfolio -- and with significantly less
volatility. The lowest annual return of the portfolio
invested 40% in bonds and 60% in stocks, which was
actually a loss of 13.60%, was about half of the
26.47% loss in the all-stock portfolio. This hypothet-
ical example is for illustrative purposes only and,
of course, past performance does not guarantee
future results.
Q. WHY DOES INVESTING IN ALL THE MAJOR ASSET CLASSES
MAKE SENSE?
A. The chart below shows the performance of large-
cap, small-cap, and international stocks over nine
non-overlapping three-year periods spanning 1974
through 1998. The chart shows that the
performance of the various asset classes varied
considerably. Sometimes large-caps performed
better than small-caps and vice versa. Some
international stocks performed better than
domestic stocks and vice versa. These shifting
results are driven by the fact that different asset
classes tended to take turns leading the market
and these "performance cycles" have varied in
length and magnitude, as shown by the chart.
While these cycles may not be entirely random,
predicting them can prove to be very difficult. By
investing in several asset classes, you can partici-
pate in the long-term return performance of the
various classes, reduce portfolio volatility (com-
pared to investing in just one asset class) and
avoid the whole issue of trying to predict which
asset class will be the next winner.
Non-Overlapping 3-Year Intervals
1972 - 1998
Annualized Returns
CRSP NY/AM/NM 6-
S&P500 102 MSCIEAFE
LARGE-CAP SMALL-CAP INTERNATIONAL
STOCKS STOCKS STOCKS
- ----------------------------------------------------------
12/31/74 -9.28% -22.01% -2.76%
12/31/77 16.40% 43.46% 19.31%
12/31/80 18.67% 31.50% 21.06%
12/31/83 12.25% 20.23% 6.93%
12/31/86 18.50% 10.08% 42.15%
12/31/89 17.36% 9.37% 21.19%
12/31/92 10.82% 12.51% 8.68%
12/31/95 15.26% 15.01% 17.02%
12/31/98 28.27% 13.29% 9.31%
- ----------------------------------------------------------
Source: Bloomberg L.P.
1 The returns do not reflect actual investment in any security. The
hypothetical returns are all weighted averages and assume reinvestment of
dividends. The indices represented are the S&P 500@ Index and the
Ibbotson Intermediate Government Bond Index. Indices are unmanaged,
do not incur costs and expenses, and cannot be invested in directly.
2 Center for Research of Securities Prices NYSE/AMEX/NASDAQ 6 to 10 decile.
----------
5
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK--94.0% OF SHARES (000S)
- -------------------------------------------------------------------------------
AEROSPACE/DEFENSE--1.3%
Boeing Co. ............................... 9,596 $ 424
General Dynamics Corp. ................... 1,200 82
Lockheed Martin Corp. .................... 3,900 145
Northrop Grumman Corp. ................... 600 40
Raytheon Co., Class B .................... 3,300 232
Rockwell International Corp. ............. 1,900 115
Textron, Inc. ............................ 1,600 132
United Technologies Corp. ................ 4,700 337
------
1,507
------
AIR TRANSPORTATION--0.4%
AMR Corp./Del[dagger] .................... 1,800 123
Delta Air Lines, Inc. .................... 1,300 75
FDX Corp.[dagger] ........................ 2,920 158
Southwest Airlines Co. ................... 3,175 99
U.S. Airways Group, Inc.[dagger] ......... 800 35
------
490
------
ALCOHOLIC BEVERAGES--0.5%
Adolph Coors Co., Class B ................ 300 15
Anheuser-Busch Companies, Inc. ........... 4,700 333
Brown-Forman Corp., Class B .............. 700 46
Seagram Co., Ltd. ........................ 4,300 217
------
611
------
APPAREL--0.2%
Fruit of the Loom, Inc., Class A[dagger] . 900 9
Liz Claiborne, Inc. ...................... 500 18
Nike, Inc., Class B ...................... 2,700 171
Reebok International, Ltd.[dagger] ....... 600 11
Russell Corp. ............................ 400 8
VF Corp. ................................. 1,100 47
------
264
------
AUTOMOTIVE PRODUCTS/MOTOR VEHICLES--1.5%
B.F. Goodrich Co. ........................ 700 30
Cooper Tire & Rubber Co. ................. 700 17
Cummins Engine Co., Inc. ................. 400 23
Dana Corp. ............................... 1,578 73
Danaher Corp. ............................ 1,400 81
Delphi Automotive Systems Corp. .......... 5,363 100
Eaton Corp. .............................. 700 64
Fleetwood Enterprises, Inc. .............. 300 8
Ford Motor Co. ........................... 11,900 672
General Motors Corp. ..................... 6,300 416
----------
6
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- -------------------------------------------------------------------------------
AUTOMOTIVE PRODUCTS/MOTOR VEHICLES (CONTINUED)
Genuine Parts Co. ........................ 1,700 $ 59
Goodyear Tire & Rubber Co. ............... 1,600 94
Navistar International Corp.[dagger]...... 600 30
TRW, Inc. ................................ 1,200 66
-----
1,733
-----
BANKS--6.6%
AmSouth Bancorp. ......................... 1,650 38
Bank of America Corp. .................... 17,212 1,262
Bank of New York Co., Inc. ............... 7,400 271
Bank One Corp. ........................... 11,706 697
BankBoston Corp. ......................... 3,000 153
BB&T Corp. ............................... 3,100 114
Chase Manhattan Corp. .................... 8,300 719
Comerica, Inc. ........................... 1,550 92
Fifth Third Bancorp. ..................... 2,650 176
First Union Corp. ........................ 9,444 444
Firstar Corp. ............................ 6,600 185
Fleet Financial Group, Inc. .............. 5,600 249
Golden West Financial Corp. .............. 500 49
Huntington Bancshares, Inc. .............. 1,930 68
J.P. Morgan & Co., Inc. .................. 1,800 253
KeyCorp, Inc. ............................ 4,300 138
Mellon Bank Corp. ........................ 5,000 182
Mercantile Bancorp., Inc. ................ 1,600 91
National City Corp. ...................... 3,100 203
Northern Trust Corp. ..................... 1,200 116
PNC Bank Corp. ........................... 2,900 167
Regions Financial Corp. .................. 2,100 81
Republic New York Corp. .................. 1,000 68
SouthTrust Corp. ......................... 1,600 61
State Street Corp. ....................... 1,600 137
Summit Bancorp. .......................... 1,700 71
SunTrust Banks, Inc. ..................... 3,200 222
Synovus Financial Corp. .................. 2,700 54
U.S. Bancorp. ............................ 7,231 246
Union Planters Corp. ..................... 1,400 63
Wachovia Corp. ........................... 2,000 171
Washington Mutual, Inc. .................. 5,816 206
Wells Fargo Co. .......................... 16,300 697
-----
7,744
-----
----------
7
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
June 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- ------------------------------------------------------------------------------
BUSINESS MACHINES & SOFTWARE--12.2%
3Com Corp.[dagger] ....................... 3,500 $ 93
Adobe Systems, Inc. ...................... 700 58
Apple Computer, Inc.[dagger] ............. 1,500 69
Autodesk, Inc. ........................... 600 18
BMC Software, Inc.[dagger] ............... 2,300 124
Cabletron Systems, Inc.[dagger] .......... 1,600 21
Ceridian Corp.[dagger] ................... 1,400 46
Cisco Systems, Inc.[dagger] .............. 31,400 2,023
Compaq Computer Corp. .................... 16,770 397
Computer Associates International, Inc. .. 5,200 286
Compuware Corp.[dagger] .................. 3,500 111
Data General Corp.[dagger] ............... 500 7
Dell Computer Corp.[dagger] .............. 25,000 925
Gateway 2000, Inc.[dagger] ............... 1,700 100
Hewlett-Packard Co. ...................... 10,000 1,005
Honeywell, Inc. .......................... 1,300 151
International Business Machines Corp. .... 17,900 2,314
Microsoft Corp.[dagger] .................. 50,200 4,527
Network Appliance, Inc.[dagger] .......... 700 39
Novell, Inc.[dagger] ..................... 3,300 87
Oracle Sytems Corp.[dagger] .............. 14,225 528
Parametic Technology Corp.[dagger] ....... 2,700 37
PeopleSoft, Inc.[dagger] ................. 2,500 43
Pitney Bowes, Inc. ....................... 2,600 167
Seagate Technology, Inc.[dagger] ......... 2,300 59
Silicon Graphics, Inc.[dagger] ........... 1,800 29
Sun Microsystems, Inc.[dagger] ........... 7,600 523
Unisys Corp.[dagger] ..................... 2,700 105
Xerox Corp. .............................. 6,500 384
-------
14,276
-------
BUSINESS SERVICES--3.1%
ADVO, Inc. ............................... 300 6
America Online, Inc.[dagger] ............. 10,700 1,182
Automatic Data Processing, Inc. .......... 6,000 264
Browing-Ferris Industries, Inc. .......... 1,500 65
Cendant Corp.[dagger] .................... 7,922 162
Computer Sciences Corp.[dagger] .......... 1,600 111
Deluxe Corp. ............................. 800 31
Ecolab, Inc. ............................. 1,200 52
Equifax, Inc. ............................ 1,300 46
First Data Corp. ......................... 4,200 206
----------
8
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
-----------------------------------------------------------------------
BUSINESS SERVICES (CONTINUED)
H&R Block, Inc. .......................... 900 $ 45
Interpublic Group of Companies, Inc. ..... 1,400 121
Laidlaw, Inc. ............................ 2,900 21
National Service Industries, Inc. ........ 400 14
Omnicom Group, Inc. ...................... 1,800 144
Paychex, Inc. ............................ 2,400 77
R.R. Donnelly & Sons Co. ................. 1,200 44
Tyco International Ltd. .................. 8,030 761
Waste Management, Inc. ................... 6,057 326
------
3,678
------
CHEMICAL--1.7%
Air Products & Chemicals, Inc. ........... 2,200 89
ChemFirst, Inc. .......................... 200 5
Dow Chemical Co. ......................... 2,200 279
E.I. du Pont de Nemours & Co. ............ 11,100 758
Eastman Chemical Co. ..................... 800 41
Great Lakes Chemical Corp. ............... 500 23
Hercules, Inc. ........................... 1,100 43
Minnesota Mining & Manufacturing Co. ..... 3,900 339
Nalco Chemical Co. ....................... 700 36
PPG Industries, Inc. ..................... 1,700 100
Praxair, Inc. ............................ 1,500 73
Rohm & Haas Co. .......................... 2,105 90
Sigma-Aldrich Corp. ...................... 1,000 34
Union Carbide Corp. ...................... 1,400 68
W.R. Grace & Co.[dagger] ................. 700 13
------
1,991
------
CONSTRUCTION--0.3%
Armstrong World Industries, Inc. ......... 400 23
Centex Corp. ............................. 600 23
Crane Co. ................................ 600 19
Fluor Corp. .............................. 800 32
Kaufman & Broad Home Corp. ............... 500 12
Masco Corp. .............................. 3,400 98
Owens Corning ............................ 400 14
Pulte Corp. .............................. 500 12
Sherwin-Williams Co. ..................... 1,800 50
The Stanley Works ........................ 900 29
Vulcan Materials Co. ..................... 1,100 53
------
365
------
----------
9
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- ---------------------------------------------------------------------------
CONSUMER - DURABLE--0.3%
Black & Decker Corp. ..................... 900 $ 57
Fortune Brands, Inc. ..................... 1,700 70
Maytag Corp. ............................. 900 63
Newell Rubbermaid, Inc. .................. 2,724 127
Whirlpool Corp. .......................... 700 52
------
369
------
CONSUMER - NONDURABLE--1.2%
American Greetings Corp., Class A ........ 700 21
Darden Restaurants, Inc. ................. 1,300 28
Hasbro, Inc. ............................. 1,925 54
Jostens, Inc. ............................ 200 4
Mattel, Inc. ............................. 4,000 106
McDonald's Corp. ......................... 13,400 554
RJR Nabisco Holdings Corp. ............... 3,200 63
Tricon Global Restaurants, Inc.[dagger] .. 1,600 87
Unilever NV .............................. 5,567 388
Wendy's International, Inc. .............. 1,300 37
------
1,342
------
CONTAINERS--0.1%
Ball Corp. ............................... 300 13
Bemis Co., Inc. .......................... 400 16
Crown Cork & Seal Co., Inc. .............. 1,100 31
Owens-Illinois, Inc.[dagger] ............. 1,400 46
Sealed Air Corp.[dagger] ................. 814 53
------
159
------
ELECTRONICS--6.3%
Advanced Micro Devices, Inc.[dagger] ..... 1,300 23
Andrew Corp.[dagger] ..................... 850 16
Applied Materials, Inc.[dagger] .......... 3,600 266
EG&G, Inc. ............................... 400 14
Electronic Data Systems Corp. ............ 4,800 272
EMC Corp.[dagger] ........................ 10,000 550
Emerson Electric Co. ..................... 4,300 270
General Instrument Corp.[dagger] ......... 1,700 72
Harris Corp. ............................. 800 31
Intel Corp. .............................. 32,700 1,946
KLA-Tencor Corp.[dagger] ................. 900 58
LSI Logic Corp.[dagger] .................. 1,400 65
Lucent Technologies, Inc. ................ 29,895 2,016
Micron Technology, Inc.[dagger] .......... 2,500 101
----------
10
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- -------------------------------------------------------------------------
ELECTRONICS (CONTINUED)
Motorola, Inc. ......................... 5,900 $ 559
National Semiconductor Corp.[dagger] ... 1,500 38
PE Corp-PE Biosystems Group ............ 500 57
Scientific-Atlanta, Inc. ............... 800 29
Solectron Corp.[dagger] ................ 2,400 160
Tektronix, Inc. ........................ 550 17
Tellabs, Inc.[dagger] .................. 3,900 263
Texas Instruments, Inc. ................ 3,900 566
Thermo Electron Corp.[dagger] .......... 1,600 32
Thomas & Betts Corp. ................... 600 28
------
7,449
------
ENERGY - RAW MATERIALS--0.9%
Anadarko Petroleum Corp. ............... 1,400 52
Apache Corp. ........................... 1,100 43
Baker Hughes, Inc. ..................... 3,080 103
Burlington Resources, Inc. ............. 1,652 71
Constellation Energy Group[dagger] ..... 1,400 41
Halliburton Co. ........................ 4,400 199
Helmerich & Payne, Inc. ................ 500 12
McDermott International, Inc. .......... 700 20
Occidental Petroleum Corp. ............. 3,300 70
ONEOK, Inc. ............................ 300 10
Rowan Companies, Inc.[dagger] .......... 700 13
Schlumberger Ltd. ...................... 5,300 338
Sempra Energy .......................... 2,401 54
Sunoco, Inc. ........................... 800 24
Union Pacific Resources Group, Inc. .... 2,400 39
------
1,089
------
FOOD & AGRICULTURE--3.6%
Archer Daniels Midland Co. 5,659 87
Bestfoods, Inc. 2,800 139
Campbell Soup Co. 4,300 199
Coca-Cola Co. 24,300 1,519
Coca-Cola Enterprises, Inc. 4,200 125
ConAgra, Inc. 4,700 125
General Mills, Inc. 1,600 129
H.J. Heinz Co. 3,500 175
Hershey Foods Corp. 1,300 77
Kellogg Co. 4,000 132
Monsanto Co. 6,200 245
PepsiCo, Inc. 14,600 565
Pioneer-Hi-Bred International, Inc. 2,400 93
----------
11
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- ----------------------------------------------------------------------------
FOOD & AGRICULTURE (CONTINUED)
Quaker Oats Co. .......................... 1,400 $ 93
Ralston-Ralston Purina Group ............. 3,100 94
Sara Lee Corp. ........................... 8,700 197
SYSCO Corp. .............................. 3,200 95
Wm. Wrigley Jr. Co. ...................... 1,200 108
-----
4,197
-----
GOLD--0.2%
Barrick Gold Corp. ....................... 3,800 74
Battle Mountain Gold Co. ................. 1,000 2
Homestake Mining Co. ..................... 2,400 20
Newmont Mining Corp. ..................... 1,486 30
Placer Dome, Inc. ........................ 3,100 37
-----
163
-----
HEALTHCARE/DRUGS & MEDICINE--10.3%
Abbott Laboratories ...................... 15,000 683
Allergan, Inc. ........................... 700 78
ALZA Corp.[dagger] ....................... 900 46
American Home Products Corp. ............. 12,900 742
Amgen, Inc.[dagger] ...................... 5,000 304
Bausch & Lomb, Inc. ...................... 500 38
Baxter International, Inc. ............... 2,800 170
Becton, Dickinson & Co. .................. 2,300 69
Biomet, Inc. ............................. 1,000 40
Boston Scientific Corp.[dagger] .......... 3,900 171
Bristol-Meyers Squibb Co. ................ 19,600 1,381
C.R. Bard, Inc. .......................... 500 24
Cardinal Health, Inc. .................... 2,750 176
Columbia / HCA Healthcare Corp. .......... 6,200 141
Eli Lilly & Co. .......................... 10,900 781
Guidant Corp. ............................ 3,000 154
HCR Manor Care, Inc.[dagger] ............. 1,000 24
HealthSouth Corp.[dagger] ................ 4,100 61
Humana, Inc.[dagger] ..................... 1,500 19
IMS Health, Inc. ......................... 3,000 94
Johnson & Johnson ........................ 13,300 1,303
Mallinckrodt, Inc. ....................... 600 22
McKesson HBOC, Inc. ...................... 2,606 84
Medtronic, Inc. .......................... 5,700 444
Merck & Co., Inc. ........................ 23,200 1,717
Pfizer, Inc. ............................. 12,800 1,405
Pharmacia & Upjohn, Inc. ................. 5,000 284
Schering-Plough Corp. .................... 14,500 769
----------
12
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- -----------------------------------------------------------------------------
HEALTHCARE/DRUGS & MEDICINE (CONTINUED)
Service Corp. International .............. 2,500 $ 48
Shared Medical Systems Corp. ............. 300 20
St. Jude Medical, Inc.[dagger] ........... 800 29
Tenet Healthcare Corp.[dagger] ........... 2,900 54
United Healthcare Corp. .................. 1,800 113
Warner Lambert Co. ....................... 8,300 576
Watson Pharmaceuticals, Inc.[dagger] ..... 900 32
Wellpoint Health Networks, Inc.[dagger] .. 600 51
-------
$12,147
-------
HOUSEHOLD PRODUCTS--1.9%
Alberto-Culver Co., Class B .............. 600 16
Avon Products, Inc. ...................... 2,500 139
Clorox Co. ............................... 1,200 128
Colgate-Palmolive Co. .................... 2,900 286
Gillette Co. ............................. 10,800 443
International Flavors & Fragrances, Inc. . 1,000 44
Procter & Gamble Co. ..................... 13,100 1,169
Tupperware Corp. ......................... 500 13
-------
2,238
-------
INSURANCE--3.2%
Aetna, Inc. .............................. 1,500 134
AFLAC, Inc. .............................. 2,700 129
Allstate Corp. ........................... 7,800 280
American General Corp. ................... 2,410 182
American International Group, Inc. ....... 12,264 1,436
Aon Corp. ................................ 2,550 105
Chubb Corp. .............................. 1,600 111
CIGNA Corp. .............................. 2,000 178
Cincinnati Financial Corp. ............... 1,500 56
Conseco, Inc. ............................ 3,241 99
Hartford Financial Services Group, Inc. .. 2,200 128
Jefferson-Pilot Corp. .................... 1,000 66
Lincoln National Corp. ................... 2,000 105
Marsh & McLennan Companies, Inc. ......... 2,600 196
MBIA, Inc. ............................... 900 58
MGIC Investment Corp. .................... 1,000 49
Progressive Corp. ........................ 700 102
Provident Companies, Inc. ................ 1,200 48
SAFECO Corp. ............................. 1,300 57
----------
13
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- ---------------------------------------------------------------------------
INSURANCE (CONTINUED)
St. Paul Companies, Inc. ................... 2,238 $ 71
Torchmark Corp. ............................ 1,300 44
Transamerica Corp. ......................... 1,200 90
UNUM Corp.[dagger] ......................... 1,300 71
-----
3,795
-----
MEDIA--2.6%
CBS Corp.[dagger] .......................... 6,900 300
Clear Channel Communications, Inc.[dagger] . 3,200 221
Comcast Corp., Class A ..................... 7,200 277
Dow Jones & Co., Inc. ...................... 900 48
Gannett Co., Inc. .......................... 2,800 200
Harcourt General, Inc. ..................... 700 36
King World Productions, Inc.[dagger] ....... 600 21
Knight-Ridder, Inc. ........................ 700 38
McGraw-Hill Companies, Inc. ................ 2,000 108
Mediaone Group, Inc.[dagger] ............... 5,900 439
Meredith Corp. ............................. 500 17
New York Times Co., Class A ................ 1,600 59
Time Warner, Inc. .......................... 11,700 860
Times Mirror Co., Series A ................. 700 41
Tribune Co. ................................ 1,200 105
Viacom, Inc., Class B[dagger] .............. 6,800 299
-----
3,069
-----
MISCELLANEOUS FINANCE--5.1%
American Express Co. ....................... 4,400 573
Associates First Capital Corp. ............. 7,058 313
Bear Stearns Companies, Inc. ............... 1,050 49
Capital One Financial Corp. ................ 2,100 117
Charles Schwab Corp. ....................... 4,000 440
Citigroup, Inc. ............................ 33,240 1,579
Countrywide Credit Industries, Inc. ........ 1,100 47
Dun & Bradstreet Corp. ..................... 1,600 57
Fannie Mae ................................. 10,000 684
Franklin Resources, Inc. ................... 2,500 102
Freddie Mac ................................ 6,800 394
Household International, Inc. .............. 4,619 219
Lehman Brothers Holdings, Inc. ............. 1,100 68
MBNA Corp. ................................. 7,862 241
Merrill Lynch & Co., Inc. .................. 3,600 288
Morgan Stanley Dean Witter & Co. ........... 5,625 577
----------
14
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
-----------------------------------------------------------------------
MISCELLANEOUS FINANCE (CONTINUED)
Paine Webber Group Inc. .......................... 1,500 $ 70
Providian Financial Corp. ........................ 1,450 136
SLM Holding Corp. ................................ 1,500 69
------
6,023
------
NON-FERROUS METALS--0.4%
Alcan Aluminum, Ltd. ............................. 2,300 73
Alcoa Inc. ....................................... 3,600 223
Asarco, Inc. ..................................... 600 11
Cyprus Amax Minerals Co. ......................... 900 14
Engelhard Corp. .................................. 1,500 34
Freeport-McMoRan Copper & Gold, Inc., Class B .... 1,300 23
Inco, Ltd. ....................................... 1,900 34
Phelps Dodge Corp. ............................... 500 31
Reynolds Metals Co. .............................. 700 41
------
484
------
OIL - DOMESTIC--0.6%
Amerada Hess Corp. ............................... 800 48
Ashland, Inc. .................................... 800 32
Atlantic Richfield Co. ........................... 3,200 267
Kerr-McGee Corp. ................................. 784 39
Phillips Petroleum Co. ........................... 2,500 126
Unocal Corp. ..................................... 2,400 95
USX-Marathon Group ............................... 2,900 94
------
701
------
OIL - INTERNATIONAL--4.1%
Chevron Corp. .................................... 6,400 609
Exxon Corp. ...................................... 23,900 1,843
Mobil Corp. ...................................... 7,700 762
Royal Dutch Petroleum Co. - Sponsored ADR ........ 21,100 1,271
Texaco, Inc. ..................................... 5,215 326
------
4,811
------
OPTICAL & PHOTO--0.2%
Eastman Kodak Co. ................................ 3,200 217
Polaroid Corp. ................................... 500 14
------
231
------
PAPER & FOREST PRODUCTS--0.9%
Boise Cascade Corp. .............................. 700 30
Champion International Corp. ..................... 900 43
Fort James Corp. ................................. 2,200 83
Georgia-Pacific Group ............................ 1,600 76
----------
15
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
-----------------------------------------------------------------------
PAPER & FOREST PRODUCTS (CONTINUED)
International Paper Co. .......................... 3,991 $ 202
Kimberly-Clark Corp. ............................. 5,300 302
Louisiana-Pacific Corp. .......................... 900 21
Mead Corp. ....................................... 1,000 42
Potlatch Corp. ................................... 400 18
Temple Inland, Inc. .............................. 500 34
Westvaco Corp. ................................... 1,000 29
Weyerhaeuser Co. ................................. 2,200 151
Willamette Industries, Inc. ...................... 1,000 46
------
1,077
------
PRODUCER GOODS & MANUFACTURING--4.6%
Allied Signal, Inc. .............................. 5,400 340
Avery Dennison Corp. ............................. 1,100 66
Briggs & Stratton Corp. .......................... 200 12
Case Corp. ....................................... 700 34
Caterpillar, Inc. ................................ 3,500 210
Cooper Industries, Inc. .......................... 900 47
Corning, Inc. .................................... 2,400 168
Deere & Co. ...................................... 2,300 91
Dover Corp. ...................................... 2,000 70
FMC Corp.[dagger] ................................ 300 20
Foster Wheeler Corp. ............................. 100 1
General Electric Co. ............................. 32,200 3,639
Illinois Tool Works, Inc. ........................ 2,400 197
Ingersoll Rand Co. ............................... 1,700 110
ITT Industries, Inc. ............................. 900 34
Johnson Controls, Inc. ........................... 800 55
Milacron Inc. .................................... 400 7
Millipore Corp. .................................. 600 24
NACCO Industries, Inc., Class A .................. 100 7
Pall Corp. ....................................... 1,200 27
Parker-Hannifin Corp. ............................ 1,150 53
Raychem Corp. .................................... 800 30
Snap-On, Inc. .................................... 700 25
Springs Industries, Inc. ......................... 100 4
Tenneco, Inc. .................................... 1,500 36
The Timken Co. ................................... 700 14
W.W. Grainger, Inc. .............................. 1,000 54
------
5,375
------
----------
16
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- -----------------------------------------------------------------------------
RAILROAD & SHIPPING--0.5%
Burlington Northern Santa Fe Corp. .............. 4,600 $143
CSX Corp. ....................................... 2,100 95
Kansas City Southern Industries, Inc. ........... 1,000 64
Norfolk Southern Corp. .......................... 3,700 111
Union Pacific Corp. ............................. 2,500 146
----
559
----
RETAIL--6.2%
Albertson's, Inc. ............................... 4,175 215
AutoZone, Inc.[dagger] .......................... 1,500 45
Best Buy Co., Inc.[dagger] ...................... 2,000 135
Circuit City Stores, Inc. ....................... 1,100 102
Consolidated Stores Corp.[dagger] ............... 1,000 27
Costco Companies, Inc.[dagger] .................. 2,100 168
CVS Corp. ....................................... 3,900 198
Dayton Hudson Corp. ............................. 4,400 286
Dillards, Inc., Class A ......................... 1,000 35
Dollar General Corp. ............................ 2,031 59
Federated Department Stores, Inc.[dagger] ....... 2,000 106
Gap, Inc. ....................................... 8,362 421
Great Atlantic & Pacific Tea Co., Inc. .......... 500 17
Home Depot, Inc. ................................ 14,600 941
IKON Office Solutions ........................... 1,500 23
J.C. Penny Co., Inc. ............................ 2,600 126
Kmart Corp.[dagger] ............................. 4,900 81
Kohl's Corp.[dagger] ............................ 1,600 124
Kroger Co.[dagger] .............................. 8,200 229
Limited, Inc. ................................... 2,100 95
Longs Drug Stores, Inc. ......................... 300 10
Lowe's Companies, Inc. .......................... 3,700 210
May Department Stores Co. ....................... 3,350 137
Nordstrom, Inc. ................................. 1,300 44
Office Depot, Inc.[dagger] ...................... 3,600 79
Pep Boys-Manny, Moe, & Jack ..................... 800 17
Rite Aid Corp. .................................. 2,600 64
Safeway, Inc.[dagger] ........................... 4,900 243
Sears, Roebuck & Co. ............................ 3,800 169
Staples, Inc.[dagger] ........................... 4,400 136
SUPERVALU, Inc. ................................. 1,200 31
Tandy Corp. ..................................... 1,800 88
TJX Companies, Inc. ............................. 3,100 103
Toys 'R' Us, Inc.[dagger] ....................... 2,300 48
----------
17
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- ------------------------------------------------------------------------------
RETAIL (CONTINUED)
Wal-Mart Stores, Inc. ....................... 43,800 $2,113
Walgreen Co. ................................ 9,700 285
Winn Dixie Stores, Inc. ..................... 1,500 55
------
7,265
------
STEEL--0.1%
Allegheny Teledyne, Inc. .................... 1,700 38
Bethlehem Steel Corp.[dagger] ............... 1,100 8
Nucor Corp. ................................. 800 38
USX-U.S. Steel Group, Inc. .................. 700 19
Worthington Industries, Inc. ................ 900 15
------
118
------
TELEPHONE--8.4%
Alltel Corp. ................................ 2,700 193
Ameritech Corp. ............................. 10,900 801
AT&T Corp. .................................. 31,317 1,748
Bell Atlantic Corp. ......................... 15,304 1,000
BellSouth Corp. ............................. 18,600 872
Centurytel Inc. ............................. 1,400 56
Frontier Corp. .............................. 1,700 100
GTE Corp. ................................... 9,500 720
MCI WorldCom, Inc.[dagger] .................. 18,297 1,575
Nextel Communications Inc., Class A[dagger] . 2,800 141
Nortel Networks Corp. ....................... 6,480 563
SBC Communications, Inc. .................... 19,376 1,124
Sprint Corp. ................................ 8,600 454
Sprint Corp. (PCS Group)[dagger] ............ 4,350 248
U. S. WEST Inc. ............................. 4,898 288
------
9,883
------
TOBACCO--0.9%
Loew's Corp. ................................ 1,200 95
Phillip Morris Companies, Inc. .............. 23,600 948
UST, Inc. ................................... 1,800 53
------
1,096
------
TRAVEL & RECREATION--1.0%
Brunswick Corp. ............................. 1,000 28
Carnival Corp. .............................. 6,100 296
Harrah's Entertainment, Inc.[dagger] ........ 1,300 29
Hilton Hotels Corp. ......................... 2,400 34
Marriott International, Inc., Class A ....... 2,500 93
Mirage Resorts, Inc.[dagger] ................ 1,900 32
Walt Disney Co. ............................. 20,300 625
------
1,137
------
----------
18
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
---------------------------------------------------------------------
Trucking & Freight--0.1%
PACCAR, Inc. 800 $ 43
Ryder Systems, Inc. 700 18
------
61
------
UTILITIES - ELECTRIC & GAS--2.5%
AES Corp.[dagger] ........................ 1,800 105
Ameren Corp. ............................. 1,400 54
American Electric Power Co., Inc. ........ 1,800 68
Carolina Power & Light Co. ............... 1,500 64
Central & South West Corp. ............... 2,000 47
Cinergy Corp. ............................ 1,500 48
CMS Energy Corp. ......................... 1,100 46
Coastal Corp. ............................ 2,000 80
Columbia Energy Group .................... 800 50
Consolidated Edison, Inc. ................ 2,200 100
Consolidated Natural Gas Co. ............. 900 55
Dominion Resources, Inc. ................. 1,800 78
DTE Energy Co. ........................... 1,500 60
Duke Energy Corp. ........................ 3,517 191
Eastern Enterprises ...................... 100 4
Edison International ..................... 3,400 91
Enron Corp. .............................. 3,500 286
Entergy Corp. ............................ 2,300 72
First Energy Corp. ....................... 2,400 74
Florida Progress Corp. ................... 900 37
FPL Group, Inc. .......................... 1,700 93
GPU, Inc. ................................ 1,300 55
New Centuries Energies, Inc. ............. 1,100 43
Niagara Mohawk Holdings, Inc.[dagger] .... 1,800 29
NICOR, Inc. .............................. 400 15
Northern States Power Co. ................ 1,400 34
PacifiCorp. .............................. 2,800 51
PECO Energy Co. .......................... 2,100 88
Peoples Energy Corp. ..................... 300 11
PG&E Corp. ............................... 3,800 124
PP&L Resources, Inc. ..................... 1,500 46
Public Service Enterprise Group, Inc. .... 2,100 86
Reliant Energy, Inc. ..................... 2,750 76
Sonat, Inc. .............................. 1,000 33
Southern Co. ............................. 6,700 178
Texas Utilities Co. ...................... 2,722 112
Unicom Corp. ............................. 2,200 85
Williams Companies, Inc. ................. 4,300 183
------
2,952
------
----------
19
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- ------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $82,403) $110,449
--------
SHORT-TERM INVESTMENTS--5.9%
- ------------------------------------------------------------------------------
Temporary Investment Fund, Inc.
Temporary Cash Portfolio, 4.59%* 3,473,773 3,474
Temporary Investment Fund, Inc.
Temporary Cash Portfolio, 4.61%* 3,473,773 3,474
--------
Total Short-Term Investments
(Cost $6,948) 6,948
--------
Par
U.S. TREASURY OBLIGATIONS--0.4% (000s)
- -------------------------------------------------------------------------------
U.S. Treasury Bills (a) (b)
4.53%, 09/23/99 .............................. $200 198
4.56%, 09/16/99 .............................. 200 198
4.64%, 09/16/99 .............................. 100 99
----
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $495) ............................... 495
--------
TOTAL INVESTMENTS--100.3%
(Cost $89,846) ............................ 117,892
--------
OTHER ASSETS AND LIABILITIES, NET--(0.3%)
Other assets .............................. 1,392
Liabilities ............................... (1,710)
--------
(318)
--------
TOTAL NET ASSETS--100.0% ..................... $117,574
========
NOTES TO SCHEDULES OF INVESTMENTS
[dagger] Non-Income Producing Security.
* Interest rate represents the yield as of the report date.
ADR--American Depository Receipt.
(a) Yields shown are effective yields at the time of purchase.
(b) These securities, or a portion thereof, are being used to
collaterize open financial futures contracts.
See accompanying Notes to Financial Statements.
----------
20
<PAGE>
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (Cost $89,846) ........................................... $117,892
Amounts on deposit with broker ................................................. 126
Receivables:
Investments sold .......................................................... 601
Fund shares sold .......................................................... 316
Dividends ................................................................. 93
Interest .................................................................. 24
Variation margin .......................................................... 231
Prepaid expenses ............................................................... 1
--------
Total assets ............................................................ 119,284
--------
LIABILITIES
Payables:
Investments purchased ..................................................... 1,645
Investment advisory and administration fees ............................... 4
Accrued expenses ............................................................... 61
--------
Total liabilities ....................................................... 1,710
--------
Net assets applicable to outstanding shares .................................... $117,574
========
NET ASSETS consist of:
Paid-in capital ................................................................ $ 87,599
Undistributed net investment income ............................................ 1,464
Accumulated net realized gain on investments sold and futures contracts ........ 234
Net unrealized appreciation on investments and futures contracts ............... 28,277
--------
$117,574
========
PRICING OF SHARES:
Outstanding shares, $0.00001 par value (unlimited shares authorized) ........... 5,901
NET ASSET VALUE, offering and redemption price per share ....................... $19.92
</TABLE>
- ----------
See accompanying Notes to Financial Statements.
----------
21
<PAGE>
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF OPERATIONS (IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends (net of foreign taxes withheld of $10) ............................ $ 629
Interest .................................................................... 104
-------
Total investment income 733
-------
EXPENSES:
Investment advisory and administration fees ................................. 147
Custodian fees .............................................................. 25
Portfolio accounting fees ................................................... 7
Professional fees ........................................................... 11
Shareholder reports ......................................................... 7
Trustees' fees .............................................................. 2
Insurance and other expenses ................................................ 11
-------
210
Less: expenses reduced (see Note 4) ............................................ (73)
-------
Net expenses incurred by fund ............................................. 137
-------
NET INVESTMENT INCOME .......................................................... 596
-------
NET REALIZED GAIN ON INVESTMENTS SOLD
AND FUTURES CONTRACTS:
Net realized gain on investments sold ..................................... 313
Net realized gain on futures contracts .................................... 75
-------
Net realized gain on investments sold and futures contracts ............. 388
-------
CHANGE IN NET UNREALIZED APPRECIATION ON INVESTMENTS
AND FUTURES CONTRACTS:
Net unrealized appreciation on investments ................................ 10,146
Net unrealized appreciation on futures contracts .......................... 160
-------
Net unrealized appreciation on investments and futures contracts ........ 10,306
-------
NET GAIN ON INVESTMENTS ........................................................ 10,694
-------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $11,290
=======
</TABLE>
- ----------
See accompanying Notes to Financial Statements.
----------
22
<PAGE>
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
- ------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
<S> <C> <C>
Net investment income ................................................................... $ 596 $ 869
Net realized gain (loss) on investments sold and futures contracts ...................... 388 (133)
Change in net unrealized appreciation on investments and futures contracts .............. 10,306 13,386
-------- -------
Increase in net assets resulting from operations ........................................ 11,290 14,122
-------- -------
DIVIDENDS AND DISTRIBUTIONS:
Dividends to shareholders from net investment income .................................... -- (303)
Distributions to shareholders from net capital gains .................................... -- (33)
-------- -------
Total dividends and distributions to shareholders ....................................... -- (336)
-------- -------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ............................................................... 27,589 46,964
Net asset value of shares issued in reinvestment of dividends ........................... -- 336
Less payments for shares redeemed ....................................................... (5,174) (14,273)
-------- -------
Increase in net assets from capital share transactions .................................. 22,415 33,027
-------- -------
Total increase in net assets ............................................................... 33,705 46,813
NET ASSETS:
Beginning of period ..................................................................... 83,869 37,056
-------- -------
End of period (including undistributed net investment income
of $1,464 and $869, respectively) ..................................................... $117,574 $83,869
======== =======
NUMBER OF FUND SHARES:
Sold .................................................................................... 1,466 2,979
Reinvested .............................................................................. -- 19
Redeemed ................................................................................ (283) (938)
-------- -------
Net increase in shares outstanding ...................................................... 1,183 2,060
SHARES OUTSTANDING:
Beginning of period ..................................................................... 4,718 2,658
-------- -------
End of period ........................................................................... 5,901 4,718
======== =======
</TABLE>
- ----------
See accompanying Notes to Financial Statements.
----------
23
<PAGE>
SCHWAB S&P 500 PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1999 (1) 1998 1997 1996(2)
------------ ------------ ------------ ------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<S> <C> <C> <C> <C>
Net asset valueat beginning of period $ 17.78 $ 13.94 $ 10.53 $ 10.00
-------- -------- ------- -------
From investment operations:
Net investment income 0.06 0.13 0.09 0.03
Net realized and unrealized gains
on investments 2.08 3.78 3.33 0.50
-------- -------- ------- -------
Total from investment operations 2.14 3.91 3.42 0.53
Less distributions:
Dividends from net investment income -- (0.06) (0.01) --
Distributions from realized gain on investments -- (0.01) -- --
-------- -------- ------- -------
Total distributions -- (0.07) (0.01) --
-------- -------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 19.92 $ 17.78 $ 13.94 $ 10.53
======== ======== ======= =======
Total return (%) 12.04* 28.06 32.46* 5.30*
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------
Ratio of actual operating expenses to average
net assets 0.28** 0.28 0.29 0.33**
Reductions reflected in above expense ratio 0.15** 0.27 0.64 2.78**
Ratio of net investment income to average
net assets 1.21** 1.52 1.56 2.16**
Portfolio turnover rate -- 7 4 --
Net assets, end of period (000s) $117,574 $83,869 $37,056 $5,923
* Not annualized.
** Annualized.
(1) For the six months ended June 30, 1999 (unaudited).
(2) For the period from November 1, 1996 (commencement of operations) to December 31, 1996.
</TABLE>
- ------------
See accompanying Notes to Financial Statements
----------
24
<PAGE>
SCHWAB S&P 500 PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1999 (UNAUDITED)
(ALL CURRENCY AMOUNTS ARE IN THOUSANDS UNLESS OTHERWISE NOTED.)
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 investment management
company organized as a Massachusetts business trust on January 21, 1994 and
registered under the Investment Company Act of 1940 (the "Act"), 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. 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 or in the
over-the-counter market 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 fund's
investment adviser pursuant to guidelines adopted in good faith by the Board of
Trustees. Short-term securities with 60 days or less to maturity are stated at
amortized cost, which approximates market value. Financial futures contracts
which are traded on exchanges, are valued at their settlement prices as of the
close of such exchanges.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND REALIZED GAIN (LOSS)--Security
transactions are accounted for on a trade date basis (date the order to buy or
sell is executed). Dividend income and distributions to shareholders are
recorded on the ex-dividend date; interest income is accrued on a daily basis.
Realized gains and losses from security transactions are determined on an
identified cost 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
equivalents equal to a certain percentage of the contract amount. This is known
as the "initial margin." The "variation margin" represents unrealized gains
(losses) due to daily fluctuation in the value of the contract. The fund records
a realized gain or loss equal to the variation margin at the time the contracts
are closed.
The fund will invest in these instruments to participate in the return of an
index. The use of futures contracts involves certain risks, which include (1)
imperfect correlation between the price movement of the contracts and the
underlying securities, or (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. These risks may involve amounts exceeding the
amount recognized in the fund's Statements of Operations at any given time.
As of June 30, 1999, the Schwab S&P 500 Portfolio had the following open S&P 500
Index futures contracts:
Number of Contract Unrealized
Contracts Value Expiration Appreciation
--------- -------- ---------- ------------
19 $6,563 09/21/99 $231
The cash and eligible securities on deposit with brokers available to cover
margin requirements for open futures positions at June 30, 1999 was $126 and
$495 for the Schwab S&P 500 Portfolio. The fund has segregated short-term
investments for the remaining portion of the contract value.
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.
----------
25
<PAGE>
SCHWAB S&P 500 PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
(ALL CURRENCY AMOUNTS ARE IN THOUSANDS UNLESS OTHERWISE NOTED.)
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, 1999 (for financial reporting and federal income tax purposes), net
unrealized appreciation aggregated $28,277 of which $30,935 related to
appreciated securities and $2,658 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 $1 was reclassified from undistributed net investment income to paid-in
capital. 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 adviser"). For advisory services and facilities furnished,
the fund pays an annual fee, payable monthly, of 0.20% on the first $500 million
of average daily net assets, and 0.17% on such assets over $500 million. Prior
to May 1, 1999, the fund paid an annual fee, payable monthly, of 0.36% on the
first $1 billion of average daily net assets, 0.33% on the next $1 billion and
0.31% on such assets over $2 billion. The investment adviser voluntarily reduced
its fee for the period ended June 30, 1999. (see Note 4)
OFFICERS AND TRUSTEES--Certain officers and trustees of the Trust are also
officers and/or directors of the investment adviser. For the period ended June
30, 1999, the fund made no direct payments to its officers or trustees who are
"interested persons" within the meaning of the Act of 1940, as amended. The fund
incurred fees of $2 related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT ADVISER AND SCHWAB
The investment adviser guarantees that, through at least April 30, 2000, the
fund's total operating expenses will not exceed 0.28% 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 period ended June 30, 1999 the total of such fees and expenses reduced
by the investment adviser was $73.
5. BORROWING AGREEMENT
The fund has a line of credit arrangement with PNC Bank N.A. and Bank of America
NT & SA whereby the Trust may borrow on behalf of the Schwab S&P 500 Portfolio,
on a temporary basis, to fund shareholder redemptions. The Trust may borrow in
an aggregate amount of up to $100 million from PNC Bank N.A. and $100 million
from Bank of America NT & SA. Amounts borrowed under this arrangement bear
interest at periodically negotiated rates and may be collateralized by the
assets of the fund. As of June 30, 1999, there were no outstanding borrowings
made under this arrangement.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated $20,109 and $1,335, respectively, for the period ended June 30, 1999.
Included in the aforementioned purchases of common stock of The Charles Schwab
Corp., an affiliated issuer, with a current value as of June 30, 1999 of $440
for the fund.
----------
26
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK--40.5% OF SHARES (000S)
----------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE/DEFENSE--0.6%
Boeing Co. .................................................... 638 $ 28
General Dynamics Corp. ........................................ 100 7
Lockheed Martin Corp. ......................................... 300 11
Northrop Grumman Corp. ........................................ 61 4
Raytheon Co., Class B ......................................... 200 14
Rockwell International Corp. .................................. 100 6
Textron, Inc. ................................................. 100 8
United Technologies Corp. ..................................... 200 14
----
92
----
AIR TRANSPORTATION--0.2%
AMR Corp./Del[dagger] ......................................... 100 7
Delta Air Lines, Inc. ......................................... 100 6
FDX Corp.[dagger] ............................................. 200 11
Southwest Airlines Co. ........................................ 200 6
----
30
----
ALCOHOLIC BEVERAGES--0.2%
Adolph Coors Co., Class B ..................................... 100 5
Anheuser-Busch Companies, Inc. ................................ 200 14
Seagram Co., Ltd. ............................................. 200 10
----
29
----
APPAREL--0.1%
Nike, Inc., Class B ........................................... 100 6
VF Corp. ...................................................... 200 9
----
15
----
AUTOMOTIVE PRODUCTS/MOTOR VEHICLES--0.7%
Cummins Engine Co., Inc. ...................................... 100 6
Danaher Corp. ................................................. 100 6
Delphi Automotive Systems Corp. ............................... 379 7
Eaton Corp. ................................................... 100 9
Ford Motor Co. ................................................ 700 39
General Motors Corp. .......................................... 400 26
Goodyear Tire & Rubber Co. .................................... 100 6
Navistar International Corp.[dagger] .......................... 100 5
TRW, Inc. ..................................................... 100 5
----
109
----
BANKS--3.1%
AmSouth Bancorp. .............................................. 150 3
Bank of America Corp. ......................................... 1,019 75
Bank of New York Co., Inc. .................................... 400 15
Bank One Corp. ................................................ 672 40
</TABLE>
----------
27
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
-----------------------------------------------------------------------------------
<S> <C> <C>
BANKS (CONTINUED)
BankBoston Corp. ........................................... 200 $ 10
BB&T Corp. ................................................. 226 8
Chase Manhattan Corp. ...................................... 500 43
Comerica, Inc. ............................................. 150 9
Fifth Third Bancorp. ....................................... 150 10
First Union Corp. .......................................... 524 25
Firstar Corp. .............................................. 300 8
Fleet Financial Group, Inc. ................................ 400 18
Golden West Financial Corp. ................................ 100 10
Huntington Bancshares, Inc. ................................ 110 4
J.P. Morgan & Co., Inc. .................................... 100 14
KeyCorp, Inc. .............................................. 400 13
Mellon Bank Corp. .......................................... 200 7
Mercantile Bancorp., Inc. .................................. 100 6
National City Corp. ........................................ 112 7
Northern Trust Corp. ....................................... 100 10
PNC Bank Corp. ............................................. 200 12
Regions Financial Corp. .................................... 100 4
Republic New York Corp. .................................... 200 14
SouthTrust Corp. ........................................... 100 4
State Street Corp. ......................................... 100 9
Summit Bancorp. ............................................ 100 4
SunTrust Banks, Inc. ....................................... 200 14
Synovus Financial Corp. .................................... 150 3
U.S. Bancorp. .............................................. 525 18
Union Planters Corp. ....................................... 100 4
Wachovia Corp. ............................................. 100 9
Washington Mutual, Inc. .................................... 300 11
Wells Fargo Co. ............................................ 900 38
----
479
----
BUSINESS MACHINES & SOFTWARE--5.0%
3Com Corp.[dagger] ......................................... 100 3
Adobe Systems, Inc. ........................................ 100 8
BMC Software, Inc.[dagger] ................................. 100 5
Cisco Systems, Inc.[dagger] ................................ 1,800 116
Compaq Computer Corp. ...................................... 900 21
Computer Associates International, Inc. .................... 300 16
Compuware Corp.[dagger] .................................... 200 6
Dell Computer Corp.[dagger] ................................ 1,300 48
Gateway 2000, Inc.[dagger] ................................. 100 6
Hewlett-Packard Co. ........................................ 600 60
Honeywell, Inc. ............................................ 100 12
International Business Machines Corp. ...................... 1,000 129
</TABLE>
----------
28
<PAGE>
SCHWAB MARKET TRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
BUSINESS MACHINES & SOFTWARE (CONTINUED)
Microsoft Corp.[dagger] ................................ 2,800 $253
Network Appliance, Inc.[dagger] ........................ 100 6
Novell, Inc.[dagger] ................................... 100 3
Oracle Sytems Corp.[dagger] ............................ 675 25
Parametic Technology Corp.[dagger] ..................... 200 3
PeopleSoft, Inc.[dagger] ............................... 100 2
Pitney Bowes, Inc. ..................................... 200 13
Seagate Technology, Inc.[dagger] ....................... 100 3
Sun Microsystems, Inc.[dagger] ......................... 400 28
Xerox Corp. 400 24
----
790
----
BUSINESS SERVICES--1.3%
America Online, Inc.[dagger] ........................... 600 66
Automatic Data Processing, Inc. ........................ 300 13
Cendant Corp.[dagger] .................................. 440 9
Computer Sciences Corp.[dagger] ........................ 200 14
Equifax, Inc. .......................................... 100 4
First Data Corp. ....................................... 200 10
Interpublic Group of Companies, Inc. ................... 100 9
Laidlaw, Inc. .......................................... 100 1
Omnicom Group, Inc. .................................... 100 8
Paychex, Inc. .......................................... 150 5
Tyco International Ltd. ................................ 461 44
Waste Management, Inc. ................................. 345 19
----
202
----
CHEMICAL--0.7%
Air Products & Chemicals, Inc. ......................... 200 8
Dow Chemical Co. ....................................... 100 13
E.I. du Pont de Nemours & Co. .......................... 700 48
Eastman Chemical Co. ................................... 100 5
Minnesota Mining & Manufacturing Co. ................... 300 26
PPG Industries, Inc. ................................... 100 6
Rohm & Haas Co. ........................................ 100 4
W.R. Grace & Co.[dagger] ............................... 100 2
----
112
----
CONSTRUCTION--0.2%
Armstrong World Industries, Inc. ....................... 100 6
Masco Corp. ............................................ 400 12
Pulte Corp. ............................................ 200 5
Vulcan Materials Co. ................................... 100 5
----
28
----
</TABLE>
----------
29
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER - DURABLE--0.1%
Fortune Brands, Inc. ................................... 100 $ 4
Newell Rubbermaid, Inc. ................................ 100 5
----
9
----
CONSUMER - NONDURABLE--0.4%
Mattel, Inc. ........................................... 100 3
McDonald's Corp. ....................................... 800 33
RJR Nabisco Holdings Corp. ............................. 200 4
Tricon Global Restaurants, Inc.[dagger] ................ 60 3
Unilever NV ............................................ 357 25
----
68
----
CONTAINERS--0.1%
Ball Corp. ............................................. 100 4
Owens-Illinois, Inc.[dagger] ........................... 100 3
Sealed Air Corp.[dagger] ............................... 53 3
----
10
----
ELECTRONICS--2.8%
Applied Materials, Inc.[dagger] ........................ 200 15
EG&G, Inc. ............................................. 200 7
Electronic Data Systems Corp. .......................... 300 17
EMC Corp.[dagger] ...................................... 600 33
Emerson Electric Co. ................................... 200 13
Intel Corp. ............................................ 1,800 107
KLA-Tencor Corp.[dagger] ............................... 100 6
Lucent Technologies, Inc. .............................. 1,765 119
Micron Technology, Inc.[dagger] ........................ 100 4
Motorola, Inc. ......................................... 400 38
PE Corp-PE Biosystems Group ............................ 100 11
Solectron Corp.[dagger] ................................ 200 13
Tektronix, Inc. ........................................ 150 5
Tellabs, Inc.[dagger] .................................. 200 14
Texas Instruments, Inc. ................................ 200 29
Thermo Electron Corp.[dagger] .......................... 100 2
----
433
----
ENERGY - RAW MATERIALS--0.4%
Anadarko Petroleum Corp. 200 7
Apache Corp. 100 4
Baker Hughes, Inc. 131 4
Halliburton Co. 200 9
Helmerich & Payne, Inc. 200 5
McDermott International, Inc. 200 6
Occidental Petroleum Corp. 100 2
</TABLE>
----------
30
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
-----------------------------------------------------------------------------------
<S> <C> <C>
ENERGY - RAW MATERIALS (CONTINUED)
Schlumberger Ltd. ...................................... 300 $ 19
Sempra Energy .......................................... 100 2
----
58
----
FOOD & AGRICULTURE--1.6%
Archer Daniels Midland Co. ............................. 220 3
Bestfoods, Inc. ........................................ 200 10
Campbell Soup Co. ...................................... 200 9
Coca-Cola Co. .......................................... 1,400 87
Coca-Cola Enterprises, Inc. ............................ 200 6
ConAgra, Inc. .......................................... 200 5
General Mills, Inc. .................................... 100 8
H.J. Heinz Co. ......................................... 200 10
Hershey Foods Corp. .................................... 100 6
Kellogg Co. ............................................ 200 7
Monsanto Co. ........................................... 300 12
PepsiCo, Inc. .......................................... 900 35
Pioneer-Hi-Bred International, Inc. .................... 300 12
Ralston-Ralston Purina Group ........................... 300 9
Sara Lee Corp. ......................................... 400 9
SYSCO Corp. ............................................ 200 6
Wm. Wrigley Jr. Co. .................................... 100 9
----
$243
----
GOLD--0.0%
Barrick Gold Corp. ..................................... 100 2
Battle Mountain Gold Co. ............................... 100 0
----
2
----
HEALTHCARE/DRUGS & MEDICINE--4.2%
Abbott Laboratories .................................... 800 36
American Home Products Corp. ........................... 800 46
Amgen, Inc.[dagger]..................................... 200 12
Baxter International, Inc. ............................. 100 6
Becton, Dickinson & Co. ................................ 100 3
Boston Scientific Corp.[dagger]......................... 214 9
Bristol-Meyers Squibb Co. .............................. 1,100 77
Cardinal Health, Inc. .................................. 150 10
Columbia / HCA Healthcare Corp. ........................ 300 7
Eli Lilly & Co. ........................................ 600 43
Guidant Corp. .......................................... 200 10
HCR Manor Care, Inc.[dagger]............................ 100 2
HealthSouth Corp.[dagger]............................... 268 4
</TABLE>
----------
31
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
-----------------------------------------------------------------------------------
<S> <C> <C>
HEALTHCARE/DRUGS & MEDICINE (CONTINUED)
IMS Health, Inc. ....................................... 200 $ 6
Johnson & Johnson ...................................... 800 78
McKesson HBOC, Inc. .................................... 174 6
Medtronic, Inc. ........................................ 400 31
Merck & Co., Inc. ...................................... 1,300 96
Pfizer, Inc. ........................................... 700 77
Pharmacia & Upjohn, Inc. ............................... 200 11
Schering-Plough Corp. .................................. 800 42
Service Corp. International ............................ 100 2
United Healthcare Corp. ................................ 100 6
Warner Lambert Co. ..................................... 400 28
Watson Pharmaceuticals, Inc.[dagger].................... 100 4
Wellpoint Health Networks, Inc.[dagger]................. 100 8
----
660
----
HOUSEHOLD PRODUCTS--0.9%
Avon Products, Inc. .................................... 200 11
Clorox Co. ............................................. 100 11
Colgate-Palmolive Co. .................................. 200 20
Gillette Co. ........................................... 600 25
Procter & Gamble Co. ................................... 800 71
----
138
----
INSURANCE--1.6%
Aetna, Inc. ............................................ 100 9
AFLAC, Inc. ............................................ 100 5
Allstate Corp. ......................................... 600 22
American General Corp. ................................. 100 8
American International Group, Inc. ..................... 728 85
Aon Corp. .............................................. 150 6
Chubb Corp. ............................................ 100 7
CIGNA Corp. ............................................ 100 9
Cincinnati Financial Corp. ............................. 100 4
Conseco, Inc. .......................................... 132 4
Hartford Financial Services Group, Inc. ................ 200 12
Jefferson-Pilot Corp. .................................. 150 10
Lincoln National Corp. ................................. 200 10
Marsh & McLennan Companies, Inc. ....................... 150 11
MBIA, Inc. ............................................. 100 6
MGIC Investment Corp. .................................. 200 10
Progressive Corp. ...................................... 100 14
Provident Companies, Inc. .............................. 100 4
St. Paul Companies, Inc. ............................... 200 6
Transamerica Corp. ..................................... 100 7
----
249
----
</TABLE>
----------
32
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
MEDIA--1.1%
CBS Corp.[dagger] ...................................... 400 $ 17
Clear Channel Communications, Inc.[dagger] ............. 300 21
Comcast Corp., Class A ................................. 400 15
Gannett Co., Inc. ...................................... 200 14
McGraw-Hill Companies, Inc. ............................ 200 11
Mediaone Group, Inc.[dagger] ........................... 400 30
Time Warner, Inc. ...................................... 600 44
Tribune Co. ............................................ 100 9
Viacom, Inc., Class B[dagger] .......................... 400 18
----
179
----
MISCELLANEOUS FINANCE--2.4%
American Express Co. ................................... 300 39
Associates First Capital Corp. ......................... 462 20
Bear Stearns Companies, Inc. ........................... 105 5
Capital One Financial Corp. ............................ 300 17
Charles Schwab Corp. ................................... 225 25
Citigroup, Inc. ........................................ 1,952 93
Countrywide Credit Industries, Inc. .................... 100 4
Dun & Bradstreet Corp. ................................. 100 4
Fannie Mae ............................................. 600 41
Franklin Resources, Inc. ............................... 100 4
Freddie Mac ............................................ 400 23
Household International, Inc. .......................... 306 14
Lehman Brothers Holdings, Inc. ......................... 100 6
MBNA Corp. ............................................. 425 13
Merrill Lynch & Co., Inc. .............................. 200 16
Morgan Stanley Dean Witter & Co. ....................... 365 37
Paine Webber Group Inc. ................................ 100 5
Providian Financial Corp. .............................. 100 9
SLM Holding Corp. ...................................... 100 5
----
380
----
NON-FERROUS METALS--0.1%
Alcoa Inc. ............................................. 200 12
Phelps Dodge Corp. ..................................... 100 6
Reynolds Metals Co. .................................... 100 6
----
24
----
OIL - DOMESTIC--0.3%
Amerada Hess Corp. ..................................... 100 6
Atlantic Richfield Co. ................................. 200 17
Kerr-McGee Corp. ....................................... 100 5
Phillips Petroleum Co. ................................. 100 5
Unocal Corp. ........................................... 100 4
USX-Marathon Group ..................................... 100 3
----
40
----
</TABLE>
----------
33
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
---------------------------------------------------------------------------
<S> <C> <C>
OIL - INTERNATIONAL--1.7%
Chevron Corp. ...................................... 400 $ 38
Exxon Corp. ........................................ 1,300 100
Mobil Corp. ........................................ 400 40
Royal Dutch Petroleum Co.-Sponsored ADR ............ 1,200 72
Texaco, Inc. ....................................... 300 19
----
269
----
OPTICAL & PHOTO--0.1%
Eastman Kodak Co. .................................. 200 14
-----
PAPER & FOREST PRODUCTS--0.4%
Fort James Corp. ................................... 100 4
Georgia-Pacific Group .............................. 200 9
International Paper Co. ............................ 200 10
Kimberly-Clark Corp. ............................... 300 17
Mead Corp. ......................................... 200 8
Temple Inland, Inc. ................................ 100 7
Weyerhaeuser Co. ................................... 100 7
----
62
----
PRODUCER GOODS & MANUFACTURING--2.1%
Allied Signal, Inc. ................................ 300 19
Case Corp. ......................................... 100 5
Caterpillar, Inc. .................................. 200 12
Corning, Inc. ...................................... 100 7
Deere & Co. ........................................ 100 4
Dover Corp. ........................................ 200 7
FMC Corp.[dagger]................................... 100 7
General Electric Co. ............................... 1,800 203
Illinois Tool Works, Inc. .......................... 200 16
Ingersoll Rand Co. ................................. 100 6
Milacron Inc. ...................................... 200 4
NACCO Industries, Inc., Class A .................... 100 7
Raychem Corp. ...................................... 200 7
Springs Industries, Inc. ........................... 200 9
W.W. Grainger, Inc. ................................ 200 11
----
324
----
RAILROAD & SHIPPING--0.3%
Burlington Northern Santa Fe Corp. ................. 300 9
CSX Corp. .......................................... 100 5
Kansas City Southern Industries, Inc. .............. 100 6
Norfolk Southern Corp. ............................. 300 9
Union Pacific Corp. ................................ 200 12
-----
41
-----
</TABLE>
----------
34
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
--------------------------------------------------------------------------------
<S> <C> <C>
RETAIL--2.5%
Albertson's, Inc. ...................................... 300 $ 15
AutoZone, Inc.[dagger].................................. 100 3
Best Buy Co., Inc.[dagger].............................. 100 7
Circuit City Stores, Inc. .............................. 100 9
Consolidated Stores Corp.[dagger]....................... 88 2
Costco Companies, Inc.[dagger].......................... 100 8
CVS Corp. .............................................. 190 10
Dayton Hudson Corp. .................................... 200 13
Dollar General Corp. ................................... 156 5
Federated Department Stores, Inc.[dagger]............... 100 5
Gap, Inc. .............................................. 537 27
Home Depot, Inc. ....................................... 900 58
J.C. Penny Co., Inc. ................................... 100 5
Kmart Corp.[dagger]..................................... 100 2
Kohl's Corp.[dagger].................................... 100 8
Kroger Co.p[dagger]..................................... 400 11
Limited, Inc. .......................................... 100 5
Longs Drug Stores, Inc. ................................ 200 7
Lowe's Companies, Inc. ................................. 200 11
May Department Stores Co. .............................. 150 6
Office Depot, Inc.[dagger].............................. 200 4
Rite Aid Corp. ......................................... 200 5
Safeway, Inc.[dagger]................................... 300 15
Sears, Roebuck & Co. ................................... 200 9
Staples, Inc.[dagger]................................... 300 9
TJX Companies, Inc. .................................... 200 7
Toys 'R' Us, Inc.[dagger]............................... 100 2
Wal-Mart Stores, Inc. .................................. 2,400 116
Walgreen Co. ........................................... 400 12
----
396
----
STEEL--0.0%
Bethlehem Steel Corp.[dagger]........................... 100 1
----
TELEPHONE--3.7%
Alltel Corp. ........................................... 200 14
Ameritech Corp. ........................................ 600 44
AT&T Corp. ............................................. 1,732 97
Bell Atlantic Corp. .................................... 906 59
BellSouth Corp. ........................................ 1,200 56
Centurytel Inc. ........................................ 150 6
Frontier Corp. ......................................... 100 6
GTE Corp. .............................................. 600 45
</TABLE>
----------
35
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
------------------------------------------------------------------------------------
<S> <C> <C>
TELEPHONE (CONTINUED)
MCI WorldCom, Inc.[dagger] ............................. 1,021 $ 88
Nextel Communications Inc., Class A[dagger] ............ 200 10
Nortel Networks Corp. .................................. 400 35
SBC Communications, Inc. ............................... 1,092 63
Sprint Corp. ........................................... 400 21
Sprint Corp. (PCS Group)[dagger] ....................... 300 17
U S WEST Inc. .......................................... 205 12
-----
573
-----
TOBACCO--0.4%
Loew's Corp. ........................................... 100 8
Phillip Morris Companies, Inc. ......................... 1,400 56
----
64
----
TRAVEL & RECREATION--0.4%
Carnival Corp. ......................................... 300 15
Marriott International, Inc., Class A .................. 200 7
Mirage Resorts, Inc.[dagger] ........................... 100 2
Walt Disney Co. ........................................ 1,200 37
----
61
----
UTILITIES - ELECTRIC & GAS--0.8%
AES Corp.[dagger] ...................................... 100 6
American Electric Power Co., Inc. ...................... 100 4
CMS Energy Corp. ....................................... 100 4
Coastal Corp. .......................................... 200 8
Columbia Energy Group .................................. 150 9
Consolidated Edison, Inc. .............................. 100 5
Duke Energy Corp. ...................................... 200 11
Eastern Enterprises .................................... 100 4
Edison International ................................... 100 3
Enron Corp. ............................................ 200 16
First Energy Corp. ..................................... 100 3
Florida Progress Corp. ................................. 100 4
FPL Group, Inc. ........................................ 100 5
New Centuries Energies, Inc. ........................... 100 4
PacifiCorp. ............................................ 100 2
PECO Energy Co. ........................................ 100 4
PG&E Corp. ............................................. 100 3
Public Service Enterprise Group, Inc. .................. 100 4
Reliant Energy, Inc. ................................... 200 6
</TABLE>
----------
36
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
-------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES-ELECTRIC & GAS (CONTINUED)
Southern Co. ........................................... 400 $ 11
Texas Utilities Co. .................................... 100 4
Unicom Corp. ........................................... 100 4
Williams Companies, Inc. ............................... 200 9
-------
133
-------
TOTAL COMMON STOCK
(Cost $3,880) ....................................... 6,317
-------
INVESTMENT FUNDS--55.1%
-------------------------------------------------------------------------------------
Schwab International Index Fund, Select Shares ......... 193,003 3,088
Schwab S&P 500 Index Fund, Select Shares ............... 741 16
Schwab Small-Cap Index Fund, Select Shares ............. 180,399 3,168
Schwab Total Bond Market Index Fund .................... 240,692 2,337
-------
TOTAL INVESTMENT FUNDS
(Cost $8,603) ....................................... 8,609
-------
SHORT-TERM INVESTMENT--2.4%
-------------------------------------------------------------------------------------
Schwab Value Advantage Money Market, Class A, 4.66%* ... 371,151 371
-------
TOTAL SHORT-TERM INVESTMENT
(Cost $371) ......................................... 371
-------
TOTAL INVESTMENTS--98.0%
(Cost $12,854) ...................................... $15,297
-------
OTHER ASSETS AND LIABILITIES, NET--2.0%
Other assets ........................................ 514
Liabilities ......................................... (195)
-------
319
-------
TOTAL NET ASSETS--100.0% ............................... $15,616
=======
<FN>
NOTES TO SCHEDULES OF INVESTMENTS
[dagger] Non-Income Producing Security.
* Interest rate represents the yield as of the report date.
ADR--American Depository Receipt.
</FN>
</TABLE>
See accompanying Notes to Financial Statements.
----------
37
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (Cost $12,854) .............................................................. $15,297
Cash .............................................................................................. 470
Receivables:
Investments sold ............................................................................. 32
Dividends .................................................................................... 7
Interest ..................................................................................... 1
Dividend tax reclaim ......................................................................... 2
Prepaid expenses .................................................................................. 2
-------
Total assets ............................................................................... 15,811
-------
LIABILITIES
Payables:
Investments purchased ........................................................................ 148
Fund shares redeemed ......................................................................... 18
Accrued expenses .................................................................................. 29
-------
Total liabilities .......................................................................... 195
-------
Net assets applicable to outstanding shares ....................................................... $15,616
=======
NET ASSETS consist of:
Paid-in capital ................................................................................... $11,674
Undistributed net investment income ............................................................... 279
Accumulated net realized gain on investments sold and foreign currency transactions ............... 1,219
Net unrealized appreciation on investments ........................................................ 2,443
Net unrealized appreciation on translating assets and liabilities into reporting currency ......... 1
-------
$15,616
=======
PRICING OF SHARES:
Outstanding shares, $0.00001 par value (unlimited shares authorized) 1,023
NET ASSET VALUE, offering and redemption price per share $15.26
- ------------
See accompanying Notes to Financial Statements.
</TABLE>
----------
38
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
STATEMENT OF OPERATIONS (IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends (net of foreign taxes withheld of $1) ................................................ $ 109
Interest ....................................................................................... 5
------
Total investment income ...................................................................... 114
------
EXPENSES:
Investment advisory and administration fees .................................................... 49
Custodian fees ................................................................................. 7
Portfolio accounting fees ...................................................................... 1
Professional fees .............................................................................. 22
Shareholder reports ............................................................................ 3
Trustees' fees ................................................................................. 2
Insurance and other expenses ................................................................... 3
------
87
Less: expenses reduced (see Note 4) ............................................................... (49)
------
Net expenses incurred by fund ................................................................ 38
------
NET INVESTMENT INCOME ............................................................................. 76
------
NET REALIZED GAIN ON INVESTMENTS SOLD
AND CHANGE IN NET UNREALIZED APPRECIATION ON INVESTMENTS:
Net realized gain on investments sold ........................................................ 102
Change in net unrealized appreciation on investments ......................................... 866
------
NET GAIN ON INVESTMENTS ........................................................................... 968
------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................................. $1,044
======
- ------------
See accompanying Notes to Financial Statements.
</TABLE>
----------
39
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income ........................................................... $ 76 $ 206
Net realized gain on investments sold and foreign currency transactions ......... 102 1,114
Change in net unrealized appreciation on investments and foreign currency ....... 866 175
------- -------
Increase in net assets resulting from operations ................................ 1,044 1,495
------- -------
DIVIDENDS AND DISTRIBUTIONS:
Dividends to shareholders from net investment income ............................ -- (147)
Distributions to shareholders from net capital gains ............................ -- (242)
------- -------
Total dividends and distributions to shareholders ............................... -- (389)
------- -------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ....................................................... 1,343 4,024
Net asset value of shares issued in reinvestment of dividends ................... -- 389
Less payments for shares redeemed ............................................... $(1,125) (1,498)
------- -------
Increase in net assets from capital share transactions .......................... 218 2,915
------- -------
Total increase in net assets ....................................................... 1,262 4,021
NET ASSETS:
Beginning of period ............................................................. 14,354 10,333
------- -------
End of period (including undistributed net investment income
of $279 and $206, respectively) ............................................... $15,616 $14,354
======= =======
NUMBER OF FUND SHARES:
Sold ............................................................................ 91 292
Reinvested ...................................................................... -- 28
Redeemed ........................................................................ (76) (110)
------- -------
Net increase in shares outstanding .............................................. 15 210
SHARES OUTSTANDING:
Beginning of period ............................................................. 1,008 798
------- -------
End of period ................................................................... 1,023 1,008
======= =======
- ------------
See accompanying Notes to Financial Statements.
</TABLE>
----------
40
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1999(1) 1998 1997 1996(2)
---------- ---------- ---------- ----------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<S> <C> <C> <C> <C>
Net asset valueat beginning of period $ 14.24 $ 12.95 $ 10.42 $10.00
------- ------- ------- ------
From investment operations:
Net investment income 0.07 0.17 0.22(3) 0.04
Net realized and unrealized gains
on investments 0.95 1.52 2.33 0.38
------- ------- ------- ------
Total from investment operations 1.02 1.69 2.55 0.42
Less distributions:
Dividends from net investment income -- (0.15) (0.02) --
Distributions from realized gain on investments -- (0.25) --(4) --
------- ------- ------- ------
Total distributions -- (0.40) (0.02) --
------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 15.26 $ 14.24 $ 12.95 $10.42
======= ======= ======= ======
Total return (%) 7.23* 13.07 24.54 4.20*
RATIOS/SUPPLEMENTAL DATA (%)
- -------------------------------------------
Ratio of actual operating expenses to average
net assets 0.52** 0.57 0.75 0.67**
Reductions reflected in above expense ratio 0.68** 0.71 1.24 4.04**
Ratio of net investment income to average
net assets 1.06** 1.64 1.98 2.35**
Portfolio turnover rate 9 67 81 7
Net assets, end of period (000s) $15,616 $14,354 $10,333 $5,384
<FN>
* Not annualized.
** Annualized.
(1) For the six months ended June 30, 1999 (unaudited).
(2) For the period from November 1, 1996 (commencement of operations) to December 31, 1996.
(3) 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.
(4) Less than one cent per share.
</FN>
</TABLE>
- -----------
See accompanying Notes to Financial Statements.
----------
41
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
(ALL CURRENCY AMOUNTS ARE IN THOUSANDS UNLESS OTHERWISE NOTED.)
1. DESCRIPTION OF THE FUND
The Schwab MarketTrack Growth Portfolio II (formerly Schwab Asset Director(R)--
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 (the "Act"), 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. 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 or in the
over-the-counter market 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 fund's
investment adviser pursuant to guidelines adopted in good faith by the Board of
Trustees. Investments in underlying funds are valued at their respective net
asset values as determined by those funds, in accordance with the Act, for a
given day. Short-term securities with 60 days or less to maturity are stated at
amortized cost, which approximates market value.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND REALIZED GAIN (LOSS)--Security
transactions are accounted for on a trade date basis (date the order to buy or
sell is executed). 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. Realized gains and losses from security transactions are determined
on an identified cost basis.
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 fund denominated in a foreign currency are translated into U.S. dollars at
the exchange rates on June 30, 1999. 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.
EXPENSES--Expenses arising in connection with the 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, 1999, (for financial reporting and federal income tax purposes), net
unrealized appreciation aggregated $2,443 of which $2,690 related to appreciated
securities and $247 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 $2 and $3 were reclassified from paid-in capital and undistributed net
investment income, respectively, to accumulated net realized gain. These
reclassifications have no effect on net assets or net asset value per share.
42
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
(ALL CURRENCY AMOUNTS ARE IN THOUSANDS UNLESS OTHERWISE NOTED.)
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 adviser"). For advisory services and facilities furnished,
the fund pays an annual fee, payable monthly, of 0.54% of the first $500 million
of average daily net assets, and 0.49% of such assets over $500 million. Prior
to May 1, 1999, the fund paid an annual fee, payable monthly, of 0.74% on the
first $1 billion of average daily net assets, 0.69% on the next $1 billion and
0.64% on such assets over $2 billion. The investment adviser has reduced a
portion of its fee for the period ended June 30, 1999. (see Note 4)
Officers and trustees--Certain officers and trustees of the Trust are also
officers and/or directors of the investment adviser. For the period ended June
30, 1999, the Trust made no direct payments to its officers or trustees who were
"interest persons" within the meaning of the Act. The fund incurred fees of $2
related to the Trust's unaffiliated trustees.
Other affiliated parties and transactions--Pursuant to an Exemptive Order issued
by the SEC, the fund may invest in other SchwabFunds@. As of June 30, 1999, the
fund owned 0.40% of the outstanding shares of the Schwab International Index
Fund@; 0.00%(1) of the outstanding shares of the Schwab Value Advantage Money
Market Fund@; 0.50% of the outstanding shares of the Schwab Total Bond Market
Index Fund@; 0.40% of the outstanding shares of the Schwab Small-Cap Index
Fund@; and 0.00%(1) of the outstanding shares of the Schwab S&P 500 Index Fund.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT ADVISER AND SCHWAB
The investment adviser guarantees that, through at least April 30, 2000, the
fund's total operating expenses will not exceed 0.60% 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 period ended June 30, 1999, the total of such fees and expenses reduced
by the investment adviser were $49.
5. BORROWING AGREEMENT
The fund has a line of credit arrangement with The Bank of New York whereby the
Trust may borrow on behalf of the fund an aggregate amount up to $150 million on
a temporary basis to fund shareholder redemptions. Amounts borrowed under this
arrangement bear interest at periodically negotiated rates and may be
collateralized by the assets of the fund. As of June 30, 1999, there were no
borrowings made under this arrangement on behalf of the fund.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated $1,459 and $1,236, respectively, for the period ended June 30, 1999.
Included in the aforementioned are purchases of common stock of The Charles
Schwab Corp., an affiliated issuer, with a current value as of June 30, 1999 of
$25.
(1) Less than one-tenth percent of outstanding shares.
----------
43
