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Previous: WORLD INVESTMENT SERIES INC, 24F-2NT, 1999-02-26 |
Next: PRICE T ROWE EQUITY SERIES INC, NSAR-B, 1999-02-26 |
SCHWAB ANNUITY PORTFOLIOS
SCHWAB MONEY MARKET PORTFOLIO
DECEMBER 31, 1998 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.
AMY TREANOR--portfolio manager, has managed the Portfolio since May 1997
through December 31, 1998. Amy joined CSIM in 1992 as associate portfolio trader
and was promoted to her current position in May 1997. Prior to joining CSIM, Amy
was portfolio manager and assistant vice president with Capitalcorp Asset
Management.
Please note that going forward the Fund will be managed by LINDA KLINGMAN.Linda,
a vice president and senior portoflio manager, has managed the Schwab Money
Market Fund since April of 1991 and the Schwab Value Advantage Fund(R) since its
inception in 1992.Linda joined CSIMin 1990 and was promoted to her current
position in August 1996. Prior to joining CSIM, Linda was senior money market
trader with AIM Management.
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by gross domestic product (GDP), continued to grow
at a strong real rate of 3.9% during 1998 -- in excess of the Federal Reserve's
target range of 3.00% to 3.25%. Hurt by the Asian economic crisis and declining
exports, the growth rate slowed from 5.5% in the first quarter to 1.8% in the
second quarter. Strong consumer spending -- which represents about two-thirds of
economic activity -- helped the growth rate rebound to 3.7% and 5.6% during the
third and fourth quarters respectively.
At the time of this writing, the consensus of most economists is that the U.S.
economy appears poised for continued growth, but at a more moderate rate than
during 1998. High levels of consumer confidence, low interest rates, rising real
wages and strong gains in stock prices have been the principal factors
continuing this lengthy expansion. Uncertainties persist, however, as to the
ultimate effect international economic problems will have on the U.S. economy,
particularly on corporate earnings. Going forward, the behavior of domestic
consumers in response to recent stock market volatility may also be a key
determinant of whether the economy continues on its current course or softens in
1999.
UNEMPLOYMENT
The unemployment rate in December was 4.3%. Labor markets have become extremely
tight, growth in the labor force has slowed, and wage increases are beginning to
put more pressure on labor costs (refer to Employment Cost Index below).
INFLATION
Price inflation remained remarkably well contained. The Consumer Price Index
(CPI) rose just 1.6% during 1998 -- the lowest level since 1986. Its core rate
(which excludes the more volatile food and energy components) rose 2.4% -- its
lowest level since 1966.
The Employment Cost Index, which measures inflation in wages, salaries and
benefits increased 3.4% for 1998, its largest increase in over six years.
Although inflation has been well contained, the combination of a tight labor
market (as evidenced by low unemployment rates) and strong economic growth
typically leads to inflationary pressures on wages and, ultimately, prices. In
this environment, productivity growth becomes particularly important. Strong
productivity gains allow companies to pay higher wages without raising prices.
Non-farm productivity grew at an annualized rate of 2.2% in 1998, continuing a
healthy trend which began in 1996.
SHORT-TERM INTEREST RATE
ENVIRONMENT
Short-term interest rates remained in a narrow range throughout the first half
of the reporting period due to a widespread expectation that there would be no
changes to Fed policy. In the second half of the year, amid increasing concerns
surrounding international economic problems and financial markets liquidity, the
Federal Reserve initiated a series of three reductions to the Federal Funds
Rate. Although this accompanied a decline in short-term rates in general,
Treasury Bill yields, in particular, declined as investors sought a safe haven
in U.S. Treasury securities. Towards the end of the period, the "spread" in
yields between Treasury Bills and commercial paper returned to more normal
levels.
--------
1
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
SCHWAB MONEY MARKET PORTFOLIO (continued)
DECEMBER 31, 1998 ANNUAL REPORT
[Graph Omitted]
1998 YIELDS ON 90-DAY COMMERCIAL PAPAER AND 3-MONTH TRASURY BILLS
[plot points follow]
3 Month Treasury Bill 90 Day Commercial Paper
1/1/98 5.35 5.54
1/2/98 5.29 5.54
1/5/98 5.23 5.56
1/6/98 5.2 5.47
1/7/98 5.2 5.45
1/8/98 5.1 5.44
1/9/98 5.01 5.42
1/12/98 5.02 5.36
1/13/98 5.19 5.38
1/14/98 5.15 5.37
1/15/98 5.11 5.37
1/16/98 5.15 5.41
1/19/98 5.15 5.41
1/20/98 5.15 5.41
1/21/98 5.11 5.39
1/22/98 5.13 5.4
1/23/98 5.17 5.4
1/26/98 5.12 5.4
1/27/98 5.25 5.4
1/28/98 5.21 5.39
1/29/98 5.19 5.4
1/30/98 5.18 5.42
2/2/98 5.22 5.4
2/3/98 5.23 5.4
2/4/98 5.11 5.42
2/5/98 5.15 5.38
2/6/98 5.17 5.43
2/9/98 5.13 5.41
2/10/98 5.21 5.42
2/11/98 5.2 5.42
2/12/98 5.21 5.43
2/13/98 5.15 5.39
2/16/98 5.21 5.39
2/17/98 5.18 5.4
2/18/98 5.17 5.41
2/19/98 5.19 5.43
2/20/98 5.2 5.44
2/23/98 5.24 5.43
2/24/98 5.32 5.44
2/25/98 5.3 5.42
2/26/98 5.34 5.45
2/27/98 5.31 5.48
3/2/98 5.3 5.42
3/3/98 5.17 5.45
3/4/98 5.15 5.47
3/5/98 5.16 5.47
3/6/98 5.15 5.47
3/9/98 5.09 5.49
3/10/98 5.08 5.47
3/11/98 5.08 5.45
3/12/98 5.08 5.46
3/13/98 5.09 5.48
3/16/98 5.1 5.49
3/17/98 5.14 5.45
3/18/98 5.15 5.46
3/19/98 5.17 5.46
3/20/98 5.17 5.46
3/23/98 5.14 5.45
3/24/98 5.14 5.47
3/25/98 5.17 5.45
3/26/98 5.2 5.45
3/27/98 5.21 5.46
3/30/98 5.21 5.44
3/31/98 5.12 5.47
4/1/98 5.11 5.46
4/2/98 5.09 5.48
4/3/98 5.08 5.47
4/6/98 5.08 5.45
4/7/98 5.04 5.46
4/8/98 5.05 5.45
4/9/98 5.05 5.46
4/10/98 5.05 5.46
4/13/98 5.16 5.43
4/14/98 5.11 5.46
4/15/98 5.07 5.46
4/16/98 5.05 5.47
4/17/98 5.04 5.45
4/20/98 5.02 5.47
4/21/98 5.07 5.44
4/22/98 5.08 5.46
4/23/98 5.08 5.44
4/24/98 5.06 5.45
4/27/98 5.05 5.51
4/28/98 5.06 5.49
4/29/98 5.06 5.49
4/30/98 4.97 5.49
5/1/98 5 5.46
5/4/98 5.02 5.47
5/5/98 5.11 5.46
5/6/98 5.1 5.49
5/7/98 5.1 5.46
5/8/98 5.12 5.47
5/11/98 5.12 5.48
5/12/98 5.13 5.47
5/13/98 5.12 5.48
5/14/98 5.16 5.49
5/15/98 5.16 5.49
5/18/98 5.17 5.5
5/19/98 5.2 5.5
5/20/98 5.18 5.48
5/21/98 5.23 5.48
5/22/98 5.21 5.48
5/25/98 5.21 5.48
5/26/98 5.1 5.48
5/27/98 5.09 5.49
5/28/98 5.05 5.48
5/29/98 5.01 5.47
6/1/98 4.97 5.49
6/2/98 5.2 5.46
6/3/98 5.11 5.48
6/4/98 5.11 5.48
6/5/98 5.11 5.48
6/8/98 5.12 5.49
6/9/98 5.14 5.48
6/10/98 5.13 5.49
6/11/98 5.09 5.48
6/12/98 5.11 5.49
6/15/98 5.11 5.47
6/16/98 5.16 5.47
6/17/98 5.21 5.48
6/18/98 5.18 5.49
6/19/98 5.15 5.48
6/22/98 5.12 5.49
6/23/98 5.07 5.48
6/24/98 5.04 5.5
6/25/98 5 5.48
6/26/98 4.99 5.49
6/29/98 5 5.5
6/30/98 4.99 5.47
7/1/98 5.1 5.48
7/2/98 5.06 5.48
7/3/98 5.05 5.48
7/6/98 5.05 5.48
7/7/98 5.1 5.49
7/8/98 5.08 5.48
7/9/98 5.05 5.47
7/10/98 5.04 5.47
7/13/98 5.07 5.47
7/14/98 5.14 5.49
7/15/98 5.13 5.48
7/16/98 5.16 5.47
7/17/98 5.14 5.49
7/20/98 5.12 5.48
7/21/98 5.07 5.5
7/22/98 5.07 5.47
7/23/98 5.09 5.48
7/24/98 5.08 5.48
7/27/98 5.07 5.51
7/28/98 5.06 5.49
7/29/98 5.06 5.5
7/30/98 5.07 5.5
7/31/98 5.08 5.5
8/3/98 5.11 5.5
8/4/98 5.08 5.49
8/5/98 5.08 5.47
8/6/98 5.02 5.49
8/7/98 4.98 5.49
8/10/98 4.97 5.49
8/11/98 5.02 5.47
8/12/98 4.99 5.49
8/13/98 5.06 5.47
8/14/98 5.01 5.47
8/17/98 5.05 5.48
8/18/98 5.08 5.48
8/19/98 5.06 5.47
8/80/98 5.04 5.47
8/21/98 4.98 5.46
8/24/98 5.05 5.47
8/25/98 5.07 5.48
8/26/98 5.05 5.47
8/27/98 4.97 5.47
8/28/98 4.88 5.48
8/31/98 4.83 5.43
9/1/98 4.9 5.42
9/2/98 4.89 5.42
9/3/98 4.84 5.43
9/4/98 4.85 5.41
9/7/98 4.86 5.41
9/8/98 4.87 5.43
9/9/98 4.86 5.4
9/10/98 4.78 5.38
9/11/98 4.86 5.35
9/14/98 4.84 5.33
9/15/98 4.79 5.34
9/16/98 4.71 5.34
9/17/98 4.67 5.31
9/18/98 4.61 5.3
9/21/98 4.66 5.32
9/22/98 4.8 5.32
9/23/98 4.68 5.3
9/24/98 4.59 5.2
9/25/98 4.49 5.2
9/28/98 4.43 5.13
9/29/98 4.39 5.08
9/30/98 4.36 5.12
10/1/98 4.24 5.14
10/2/98 4.19 5.08
10/5/98 4.11 5.08
10/6/98 4.16 5.1
10/7/98 4.12 5.14
10/8/98 3.9 5.13
10/9/98 3.89 5.11
10/12/98 3.89 5.11
10/13/98 3.88 5.1
10/14/98 4.01 5.11
10/15/98 3.91 5.13
10/16/98 3.62 5
10/19/98 3.8 4.98
10/20/98 3.99 4.95
10/21/98 3.98 4.95
10/22/98 3.97 5
10/23/98 3.98 5.02
10/26/98 4.09 4.97
10/27/98 4.16 4.96
10/28/98 4.26 4.96
10/29/98 4.31 4.96
10/30/98 4.32 5.05
11/2/98 4.4 5.07
11/3/98 4.49 5.05
11/4/98 4.57 5.03
11/5/98 4.56 5.1
11/6/98 4.64 5.14
11/9/98 4.63 5.15
11/10/98 4.56 5.13
11/11/98 4.56 5.13
11/12/98 4.46 5.13
11/13/98 4.46 5.12
11/16/98 4.51 5.06
11/17/98 4.39 5.15
11/18/98 4.43 4.97
11/19/98 4.44 4.97
11/20/98 4.45 5
11/23/98 4.59 4.97
11/24/98 4.6 4.97
11/25/98 4.56 5
11/26/98 4.55 5
11/27/98 4.52 5
11/30/98 4.48 5.02
12/1/98 4.49 5.08
12/2/98 4.48 5.03
12/3/98 4.43 5.04
12/4/98 4.47 5.02
12/7/98 4.49 5.02
12/8/98 4.42 5
12/9/98 4.41 4.98
12/10/98 4.48 4.99
12/11/98 4.5 5.03
12/14/98 4.49 5
12/15/98 4.49 5
12/16/98 4.42 4.99
12/17/98 4.46 5.01
12/18/98 4.49 5
12/21/98 4.51 5.01
12/22/98 4.5 5
12/23/98 4.58 5.02
12/24/98 4.56 5.03
12/25/98 4.56 5.03
12/28/98 4.52 5.03
12/29/98 4.59 5.07
12/30/98 4.54 4.86
12/31/98 4.45 4.84
Source: Bloomberg L.P.
PORTFOLIO HIGHLIGHTS
- --------------------
Our strategy for managing the Fund remained consistent during the one-year
reporting period. We attempted 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 half of the reporting period, based on our expectation that the
Federal Reserve would not raise the Federal Funds rate, thereby not increasing
interest rates, we looked for opportunities to purchase securities with somewhat
longer maturities (and higher yields) when market conditions were advantageous.
During the second half of the period, credit and liquidity concerns surfaced
both domestically and abroad, which sent the financial markets into an extended
period of uncertainty and turmoil. Based on our expectation that the Federal
Reserve would need to lower the Federal Funds rate to provide stability in the
markets, we again purchased securities with longer maturities in an effort to
mitigate, or delay, the impact of the reduction in short-term interest rates.
Although the Fund's yield fell noticeably during the second half of the
reporting period, money market fund yields in general tend to respond to
short-term interest rate changes slower than other types of short-term interest
bearing investments (such as certificates of deposit). This is because a money
market fund purchases a portfolio of securities, each with its own maturity
date. The longer the DWAM of the portfolio, the longer it holds its current
securities, and the longer it takes for changes in short-term interest rates be
reflected in the fund. This structure may help money market funds maintain
higher yields when short-term rates are falling. Conversely, money market yields
may be somewhat slower to respond to increases in short-term yields during
periods of rapidly rising short-term rates.
YIELD SUMMARY AS OF 12/31/98 1
- ---------------------------------------------------------------------------
7-Day Yield 4.64%
7-Day Effective Yield 4.74%
- -----------
1 A portion of the Portfolio's expenses were reduced during the reporting
period. Without these reductions, as of 12/31/98, the 7-day yield and 7-day
effective yield for the portfolio would have been 4.54% and 4.64%, respectively.
--------
2
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
PORTFOLIO SUMMARY (000's)
<TABLE>
<CAPTION>
ASSET GROWTH
PERCENTAGE
TOTAL TOTAL GROWTH OVER
NET ASSETS NET ASSETS REPORTING
AS OF 12/31/98 AS OF 12/31/97 PERIOD
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$78,266 $47,968 63%
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELDS FOR THE PERIODS ENDED
DECEMBER 31, 1998*
LAST LAST LAST
SEVEN DAYS THREE MONTHS TWELVE MONTHS
- ---------------------------------------------------------------------------------------------------------------------------
4.64% 4.67% 4.96%
- ---------------------------------------------------------------------------------------------------------------------------
MATURITY SCHEDULE
PERCENT OF TOTAL INVESTMENTS
MATURITY RANGE 3/31/98 6/30/98 9/30/98 12/31/98
- ---------------------------------------------------------------------------------------------------------------------------
0-- 15 Days 13.2% 13.1% 27.6% 34.2%
16-- 30 Days 29.5 24.1 35.3 27.8
31-- 60 Days 32.2 22.4 28.4 22.3
61-- 90 Days 16.8 31.5 7.8 15.7
91--120 Days 0.0 0.0 0.0 0.0
Over 120 Days 8.3 8.9 0.9 0.0
Weighted Average 48 Days 51 Days 30 Days 31 Days
- ---------------------------------------------------------------------------------------------------------------------------
PORTFOLIO QUALITY
PERCENT OF
SEC TIER NET ASSETS
RATING 12/31/98
---------------------------------
Tier 1 100.0%
</TABLE>
- ----------
* 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)
December 31, 1998
<TABLE>
<CAPTION>
U.S. Government Securities--94.8%(a) Par Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DISCOUNT NOTES--94.8%
Federal Farm Credit Bank
5.09%, 01/20/99 $9,587 $ 9,561
5.07%, 01/25/99 5,000 4,983
Federal Home Loan Bank
5.10%, 01/08/99 5,000 4,995
5.12%, 01/13/99 3,000 2,995
5.11%, 01/20/99 6,000 5,984
5.03%, 03/03/99 3,000 2,975
Federal Home Loan Mortgage Corporation
5.09%, 01/12/99 4,000 3,994
5.15%, 02/10/99 2,000 1,989
5.08%, 02/25/99 3,000 2,977
5.03%, 02/26/99 5,000 4,962
5.06%, 03/23/99 6,115 6,046
Federal National Mortgage Association
5.13%, 01/08/99 4,000 3,996
5.09%, 02/05/99 3,000 2,985
5.13%, 02/10/99 2,500 2,486
5.37%, 02/17/99 870 864
5.06%, 02/19/99 1,755 1,743
4.93%, 03/04/99 220 218
5.03%, 03/05/99 1,500 1,487
5.03%, 03/11/99 2,000 1,981
Tennessee Valley Authority
5.06%, 01/04/99 5,000 4,998
5.06%, 01/27/99 2,000 1,993
-------
74,212
-------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $74,212) 74,212
-------
-------
4
</TABLE>
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
SCHEDULE OF INVESTMENTS (in thousands) (continued)
December 31, 1998
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--8.6%(b) Maturity Value Value
-----------------------------------------------------------------------------------------------------------
Lehman Brothers Inc.
Repurchase Agreement Collateralized by
U.S. Government Securities
<S> <C> <C> <C>
4.70% Issue 12/31/98
Due 01/04/99 $6,710 $ 6,707
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $6,707) 6,707
--------
TOTAL INVESTMENTS--103.4%
(Cost $80,919) 80,919
--------
OTHER ASSETS AND LIABILITIES--(3.4)%
Other assets 1
Liabilities (2,654)
--------
(2,653)
--------
TOTAL NET ASSETS--100.0% $ 78,266
========
</TABLE>
---------
Notes to Schedule of Investments
(a) 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.
(b) 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>
ASSETS:
Investments, at value (Cost: $80,919) $80,919
Receivables:
Interest 1
-------
Total assets 80,920
-------
LIABILITIES:
Payables:
Dividends 377
Fund shares redeemed 2,273
Investment advisory and administration fees 3
Other liabilities 1
-------
Total liabilities 2,654
-------
Net assets applicable to outstanding shares $78,266
=======
NET ASSETS consist of:
Paid-in-capital $78,278
Accumulated net realized loss on investments sold (12)
-------
$78,266
=======
PRICING OF SHARES:
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 78,310
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 year ended December 31, 1998
- -----------------------------------------------------------------------
INTEREST INCOME $3,774
------
EXPENSES:
Investment advisory and administration fees 321
Custodian and portfolio accounting fees 52
Professional fees 16
Shareholder reports 15
Trustees' fees 6
Other expenses 16
------
426
Less: expenses reduced (see Note 4) (77)
------
Total expenses incurred by Fund 349
------
NET INVESTMENT INCOME 3,425
Net realized loss on investments sold (9)
------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,416
======
- ---------
See accompanying Notes to the Financial Statements.
-------
7
<PAGE>
<TABLE>
<CAPTION>
SCHWAB MONEY MARKET PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
For the year ended December 31,
1998 1997
--------- --------
OPERATIONS:
<S> <C> <C>
Net investment income $ 3,425 $ 1,941
Net realized loss on investments sold (9) (2)
-------- -------
Increase in net assets resulting from operations 3,416 1,939
-------- -------
Dividends to shareholders from net investment income (see Note 2) (3,447) (1,941)
-------- -------
CAPITAL SHARE TRANSACTIONS: (at $1.00 per share):
Proceeds from shares sold 219,491 112,673
Net asset value of shares issued in reinvestment of dividends 3,327 1,806
Less payments for shares redeemed (192,489) (93,940)
-------- --------
Increase in net assets from capital share transactions 30,329 20,539
-------- --------
Total increase in net assets 30,298 20,537
NET ASSETS:
Beginning of period 47,968 27,431
-------- --------
End of period $ 78,266 $ 47,968
======== ========
- ---------
See accompanying Notes to Financial Statements.
--------
8
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
1998 1997 1996 1995 1994(1)
--------- -------- --------- ---------- ----------
For a share outstanding throughout each period:
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------
From investment operations
Net investment income 0.05 0.05 0.05 0.05 0.03
------- ------- ------- ------- ------
Total from investments
operations 0.05 0.05 0.05 0.05 0.03
Less distributions
Dividends from net investment
income (0.05)2 (0.05) (0.05) (0.05) (0.03)
------- ------- ------- ------- ------
Total distributions (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
======= ======= ======= ======= ======
Total return (%) 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*
Reductions reflected in above
expense ratio 0.11 0.21 0.45 0.52 1.60*
Ratio of net investment income
to average net assets 4.91 5.01 4.87 5.17 4.16*
Net assets, end of period (000s) $78,266 $47,968 $27,431 $16,912 $7,409
- --------------
<FN>
1 For the period May 3, 1994 (commencement of operations) to December 31, 1994.
2 The amounts shown include certain reclassifications related to book to tax
differences (see Notes to Financial Statements).
* Annualized.
** Not annualized.
</FN>
</TABLE>
See accompanying Notes to Financial Statements.
---------
9
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
Year ended December 31, 1998
(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, 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 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
===
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 $22 were reclassified from paid-in-capital to undistributed net
investment income. These reclassifications have no effect on net assets or net
asset value per share.
------
10
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (continued)
Year ended December 31, 1998
(All dollar amounts are in thousands unless otherwise noted)
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT--The Trust has investment
advisory and administration agreements with Charles Schwab Investment
Management, Inc. (the "Investment Adviser"). For advisory services and
facilities furnished, the Fund pays 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
assets in excess of $20 billion. The Investment Adviser has reduced a portion of
its fee for the year ended December 31, 1998 (see Note 4).
OFFICERS AND TRUSTEES--Certain officers and trustees of the Trust are also
officers or directors of the Investment Adviser. During the year ended December
31, 1998, the Trust made no direct payments to its officers or trustees who are
"interested persons" within the meaning of the Investment Company Act of 1940,
as amended. The Fund incurred fees of $6 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, 1999, the
Fund's total operating expenses will not exceed 0.50% of the Fund's average
daily net assets, after waivers and reimbursements. For purpose of this
guarantee, operating expenses do not include interest expenses, extraordinary
expenses and taxes. For the year ended December 31, 1998, the total of such fees
and expenses reduced by the Investment Adviser was $77.
-------
11
<PAGE>
SCHWAB MONEY MARKET PORTFOLIO
DECEMBER 31, 1998 ANNUAL REPORT
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Schwab Money Market Portfolio
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Schwab Money Market Portfolio (one
series constituting part of Schwab Annuity Portfolios, hereafter referred to as
the "Fund") at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles.These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits.We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco,California
January 29, 1999
-------
12
<PAGE>
Schwab Annuity Portfolios
================================================================================
SCHWAB ANNUITY PORTFOLIOS
DECEMBER 31, 1998 ANNUAL REPORT
Market Overview
U.S. ECONOMIC GROWTH
- --------------------
The U.S. economy, as measured by gross domestic product (GDP), continued to grow
at a strong real rate of 3.9% during 1998 -- in excess of the Federal Reserve's
target range of 3.00% to 3.25%. Hurt by the Asian economic crisis and declining
exports, the growth rate slowed from 5.5% in the first quarter to 1.8% in the
second quarter. Strong consumer spending -- which represents about two-thirds of
economic activity -- helped the growth rate rebound to 3.7% and 5.6% during the
third and fourth quarters.
[GRAPH OMITTED]
REAL GDP GROWTH RATE
QUARTERLY PERCENT CHANGE (ANNUALIZED RATE)
[PLOT POINTS FOLLOW]
Q1 1990 3.9
Q2 1990 1.2
Q3 1990 -1.9
Q4 1990 -4
Q1 1991 -2.1
Q2 1991 1.8
Q3 1991 1
Q4 1991 1
Q1 1992 4.7
Q2 1992 2.5
Q3 1992 3
Q4 1992 4.3
Q1 1993 0.1
Q2 1993 2
Q3 1993 2.1
Q4 1993 5.3
Q1 1994 3
Q2 1994 4.7
Q3 1994 1.8
Q4 1994 3.6
Q1 1995 0.9
Q2 1995 0.3
Q3 1995 3
Q4 1995 2.2
Q1 1996 1.8
Q2 1996 6
Q3 1996 1
Q4 1996 4.3
Q1 1997 4.9
Q2 1997 3.3
Q3 1997 3.1
Q4 1997 3.7
Q1 1998 5.5
Q2 1998 1.8
Q3 1998 3.7
Q4 1998 5.6
Source: Bloomberg L.P.
At the time of this writing, the consensus of most economists is that the U.S.
economy appears poised for continued growth, but at a more moderate rate than
during 1998. High levels of consumer confidence, low interest rates, rising real
wages and strong gains in stock prices have been the principal factors
continuing this lengthy expansion. Uncertainties persist, however, as to the
ultimate effect international economic problems will have on the U.S. economy,
particularly on corporate earnings. Going forward, the behavior of domestic
consumers in response to recent stock market volatility may also be a key
determinant of whether the economy continues on its current course or softens in
1999.
UNEMPLOYMENT
- ------------
The U.S. unemployment rate stood at 4.3% in December -- the lowest level in 28
years. Labor markets have become extremely tight, growth in the labor force has
slowed, and wage increases are beginning to put more pressure on labor costs
(refer to Employment Cost Index).
[GRAPH 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
Source: Bloomberg L.P.
INFLATION
- ---------
Price inflation remained remarkably well contained. The Consumer Price Index
(CPI) rose just 1.6% during 1998 -- the lowest level since 1986. Its core rate
(which excludes the more volatile food and energy components) rose 2.4% -- its
lowest level since 1966.
The Employment Cost Index, which measures inflation in wages, salaries and
benefits increased 3.7% for the year ended September 1998, its largest increase
in over six years.
[GRAPH OMITTED]
MEASURES OF INFLATION
[PLOT POINTS FOLLOW]
MONTHLY CONSUMER QUARTERLY EMPLOYMENT
PRICE INDEX COST INDEX
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
Source: Bloomberg L.P.
Although inflation has been well contained, the combination of a tight labor
market (as evidenced by low unemployment rates) and strong economic growth
typically leads to inflationary pressures on wages and, ultimately, prices. In
this environment, productivity growth becomes particularly important. Strong
productivity gains allow companies to pay higher wages without raising prices.
Non-farm productivity grew at an annualized rate of 2.2% in 1998, continuing a
healthy trend that began in 1996.
-------
1
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
DECEMBER 31, 1998 ANNUAL REPORT
Market Overview (continued)
ASSET CLASS PERFORMANCE
- ------------------------
The 12-month reporting period served as a textbook example of the benefits of
asset allocation--demonstrating that various segments of the equities market can
exhibit markedly divergent returns as well as the relative stability of the
bonds and cash asset classes.
[GRAPH OMITTED]
TOTAL RETURN PERFORMANCE - GROWTH OF A DOLLAR INVESTED
[PLOT POINTS FOLLOW]
S&P 500[R] RUSSELL MSCI- LEHMAN
INDEX 2000[R] EAFE[R] BROTHERS
INDEX INDEX AGGREGATE
BOND
INDEX
Jan-98 1.011 0.984 1.046 1.013
Feb-98 1.084 1.057 1.113 1.012
Mar-98 1.14 1.1 1.147 1.015
Apr-98 1.151 1.106 1.156 1.021
May-98 1.131 1.047 1.151 1.03
Jun-98 1.177 1.049 1.159 1.039
Jul-98 1.165 0.964 1.171 1.041
Aug-98 0.996 0.777 1.026 1.058
Sep-98 1.06 0.838 0.994 1.083
Oct-98 1.147 0.872 1.098 1.077
Nov-98 1.216 0.917 1.154 1.083
Dec-98 1.286 0.974 1.2 1.087
Compiled by Charles Schwab & Co., Inc.
[BULLET] TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
represent returns of specific market sectors during the reporting period and do
not reflect the performance of any fund. Indices are unmanaged and, unlike a
fund, do not reflect the payment of advisory fees and other expenses associated
with an investment in a fund. Investors cannot invest in an index directly.
The equities markets experienced significant volatility throughout the period,
however, what was truly remarkable was the difference between the returns of
large- and small-cap stocks. Large-cap stocks, as represented by the S&P 500
Index, achieved a total return of 28.58% for the 12-month period. Small-cap
stocks as represented by the Russell 2000 Index, experienced a negative total
return of -2.57%, resulting in a difference of 31.15% between the 12-month total
returns for the two asset classes.
International stock returns were characterized by the markedly divergent
performance of Asian countries, most of which experienced significant declines,
and European countries, most of which experienced healthy gains for the period.
Combined, international stock returns, as represented by the MSCI-EAFE Index,
experienced a positive total return of 20.00% for the 12-month reporting period.
Reflecting the decline in interest rates, fixed income returns were generally
strong for the period. Bond returns, as represented by the Lehman Brothers
Aggregate Bond Index, were 8.69% for the 12-month reporting period.
U.S. EQUITY VALUATION
- ---------------------
[GRAPH OMITTED]
S&P 500[R] INDEX PRICE EARNINGS RATIO
[PLOT POINTS FOLLOWS]
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
Source: Bloomberg L.P.
The price/earnings ratio for the S&P 500 Index demonstrated both the volatility
and high valuations of U.S. equities during the reporting period, beginning the
period at 24.51 at the end of December 1997, then reaching a high for the decade
of 28.3 in April before declining precipitously to 22.8 at the end of August,
and then rising once again to a new high of 32.0 at the end of December, 1998.
In addition to being volatile, these valuation levels remain well above the
30-year average of 15.0. 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 high
valuation levels.
---------
2
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
DECEMBER 31, 1998 ANNUAL REPORT
Market Overview (continued)
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.
PORTFOLIO HIGHLIGHTS
- --------------------
[GRAPH OMITTED]
SCHWAB S&P 500 PORTFOLIO HYPOTHETICAL
GROWTH CHART AS OF 12/31/98
[PLOT POINTS FOLLOW]
S&P 500 S&P 500[R]
PORTFOLIO INDEX
10/31/96 10000 10000
11/30/96 10750 10777
12/31/96 10530 10564
1/31/97 11170 11223
2/28/97 11250 11311
3/31/97 10780 10848
4/30/97 11410 11494
5/31/97 12090 12193
6/30/97 12630 12739
7/31/97 13620 13752
8/31/97 12860 12982
9/30/97 13560 13692
10/31/97 13120 13235
11/30/97 13720 13848
12/31/97 13948 14086
1/31/98 14098 14242
2/28/98 15108 15269
3/31/98 15869 16051
4/30/98 16029 16213
5/31/98 15739 15934
6/30/98 16369 16581
7/31/98 16189 16150
8/31/98 13848 13739
9/30/98 14738 14637
10/31/98 15929 15821
11/30/98 16879 16808
12/31/98 17862 17873
Source: Bloomberg L.P.
[Bullet] The graph above compares the growth of a hypothetical $10,000
investment in the Schwab S&P 500 Portfolio from 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.
As discussed in the Market Overview section, large-cap domestic stocks (such as
those in the S&P 500 Index) were clearly a strong performing asset class for the
reporting period. The Schwab S&P 500 Portfolio achieved a very strong one-year
return of 28.06%1 for the period ended 12/31/98. The since-inception (11/1/96)
average annual return was 30.69%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 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
one-year reporting period was 0.52%. Given the Portfolio's current ratio of
expenses to average net assets (0.28%), and the components of tracking
differential (as discussed above), we are satisfied with this level of tracking
differential.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
- -------------------------------------------
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 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.
- -----------
1 A portion of the Schwab S&P 500 Portfolio's expenses was reduced during the
reporting period. Without such reductions, as of 12/31/98, the Portfolio's
1-year and since-inception average annual total returns would have been 27.69%
and 29.72%, respectively.
---------
3
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
DECEMBER 31, 1998 ANNUAL REPORT
Market Overview (continued)
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
- ---------------------
[GRAPH OMITTED]
SCHWAB MARKETTRACK GROWTH PORTFOLIO II (TM)
HYPOTHETICAL GROWTH CHART AS OF 12/31/98
[PLOT POINTS FOLLOWS]
Schwab Market Lehman
Track Brothers Growth
Growth S&P 500[R] Aggregate Composite
Portfolio II Index Bond Index Index
11/1/96 10000 10000 10000 10000
11/30/96 10490 10777 10171 10490
12/31/96 10420 10564 10076 10465
1/31/97 10670 11223 10108 10719
2/28/97 10710 11311 10133 10689
3/31/97 10460 10848 10020 10417
4/30/97 10780 11494 10171 10586
5/31/97 11420 12193 10267 11241
6/30/97 11940 12739 10390 11668
7/31/97 12650 13752 10670 12272
8/31/97 12200 12982 10579 11927
9/30/97 12880 13692 10736 12534
10/31/97 12520 13235 10892 12067
11/30/97 12730 13848 10942 12122
12/31/97 12977 14086 11052 12241
1/31/98 13037 14242 11194 12326
2/28/98 13779 15269 11185 13025
3/31/98 14199 16051 11223 13535
4/30/98 14320 16213 11281 13672
5/31/98 14019 15934 11388 13445
6/30/98 14240 16581 11485 13589
7/31/98 13959 16405 11517 13361
8/31/98 12285 14036 11705 11678
9/30/98 12696 14936 11979 11982
10/31/98 13478 16150 11915 12578
11/30/98 14079 17129 11983 13165
12/30/98 14673 18116 12019 13752
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 from inception, with a
similar investment in the S&P 500 Index 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.
- ---------
1 A portion of the Schwab MarketTrack Growth Portfolio II expenses was reduced
during the reporting period. Without such reductions, as of 12/31/98, the
Portfolio's 1-year and since-inception average annual total returns would have
been 12.16% and 17.90%, respectively.
PERFORMANCE
- -----------
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 one-year return ending 12/31/98 of 13.07%1 is
a reflection of the Portfolio's holdings in these various asset categories. The
since-inception (11/1/96) average annual return was 19.36% (1).
ONE YEAR RETURNS
ASSET CLASS INDEX AS OF 12/31/98
- -----------------------------------------------------------------
Large-Cap Stocks S&P 500 Index 25.58%
Small-Cap Stocks Russell 2000 Index -2.57%
International Stocks MSCI-EAFE Index 20.0%
Bonds Lehman Brothers
Aggregate Bond Index 8.69%
Cash Equivalents 3-Month U.S. Treasury Bill 5.01%
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.
You may have noted a new addition to the Hypothetical Growth Chart as of
12/31/98. The chart now includes an additional benchmark called the Growth
Composite Index II2. This benchmark was developed to compare the performance of
the Portfolio with the appropriate weighted average actively managed fund based
on data provided by Morningstar.
- ------------
(2) 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 12/31/98, there
were 1,810 large-cap funds, 773 small-cap funds, 595 foreign funds and 527
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.
------------
4
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
DECEMBER 31, 1998 ANNUAL REPORT
Market Overview (continued)
ASSET POSITIONING
- ------------------
The table below shows the neutral target and actual target asset mixes for the
Portfolio at the beginning, middle, and end of the reporting period.
Portfolio Portfolio Portfolio
Neutral Position at Position at Position at
Target 12/31/97 6/30/98 12/31/98
----------------------------------------------
Large-Cap Stocks 40.0% 40.3% 40.5% 40.0%
Small-Cap Stocks 20.0% 19.5% 20.7% 19.8%
International Stocks 20.0% 19.5% 20.1% 20.4%
Bonds 15.0% 0.0% 15.2% 14.8%
Short-Term
Investments 5.0% 20.7% 3.5% 5.0%
----------------------------------------------
100.0% 100.0% 100.0% 100.0%
At the beginning of the reporting period through approximately the end of
February, the Portfolio maintained a neutral stock weighting, an underweighting
in bonds and an overweighting in short-term investments. Bonds were
underweighted because the yield advantage they offered over cash equivalents had
declined to the point where bonds were relatively unattractive on a
risk-adjusted return basis. In early March, yields rebounded, leading us to
increase the Portfolio's bond position closer to its neutral target. By the
close of the period, the Portfolio was positioned near its neutral targets.
As we mentioned in the June 30, 1998 Semi-Annual Report to Shareholders, we have
made a decision to maintain the Portfolio's stock, bond, and cash equivalent
allocations on a static basis with only minor deviations from its neutral
targets. In large part, this decision was made in response to comments we heard
from shareholders of this and other MarketTrack Portfolios that expressed a
preference for portfolios that do not significantly deviate from their neutral
targets. Additionally, recent market conditions have presented a difficult
environment for the strategies previously utilized by the Portfolio to add
significant value. Given these conditions, we felt that a shift in strategy to
more static asset class allocations was in the best interest of our
shareholders.
USE OF AN INDEX STRATEGY
- ------------------------
One frequently cited research study has shown that the manner in which an
investor allocates his or her portfolio among different asset classes can
determine the majority of the variance in the portfolio's returns.1 Unless
investors build their portfolios with investments that are designed to
consistently deliver the performance of the asset classes they wish to track,
their portfolios may not behave as they expect.
Portfolios that employ an indexing strategy can be an excellent way to implement
an asset allocation plan because they seek to invest only in the intended asset
class and therefore should, because of their investment objectives, achieve
returns that closely track those of that benchmark asset class. Index portfolios
should not be subject to the "style drift" that investors may face with many
actively managed portfolios.
In addition to seeking to deliver consistent asset class returns, indexing is
typically efficient both from a cost and a tax standpoint. Most portfolios
utilizing an index strategy minimize their trading and operating costs by
keeping both portfolio turnover and operating expense ratios low. These savings
are passed on to investors in the form of higher returns. By virtue of the large
number of holdings, most indexing strategies also offer broad diversification,
which can reduce both the company- and industry-specific risk elements of equity
investing.
- ---------
1 "Determinants of Portfolio Performance" by Gary P. Brinson, et al., Financial
Analysts Journal, July/August 1986.
------------
5
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1998
Number
Common Stock--97.3% of Shares Value
-------------------------------------------------------------
AEROSPACE/DEFENSE--1.2
Boeing Co. 8,296 $ 270,657
General Dynamics Corp. 1,000 58,625
Lockheed Martin Corp. 1,600 135,600
Northrop Grumman Corp. 500 36,562
Raytheon Co., Class B 2,800 149,100
Rockwell International Corp. 1,500 72,844
Textron, Inc. 1,400 106,312
United Technologies Corp. 1,900 206,625
----------
1,036,325
----------
AIR TRANSPORTATION--0.4%
AMR Corp.+ 1,400 83,125
Delta Air Lines, Inc.+ 1,200 62,400
FDX Corp.+ 1,160 103,240
Southwest Airlines Co. 2,575 57,777
U.S. Airways Group, Inc.+ 600 31,200
----------
337,742
----------
ALCOHOLIC BEVERAGES--0.6%
Adolph Coors Co., Class B 300 16,931
Anheuser-Busch Companies, Inc.4,000 262,500
Brown-Forman Corp., Class B 700 52,981
Seagram Co., Ltd. 3,200 121,600
----------
454,012
----------
APPAREL--0.2%
Fruit of the Loom, Inc.,
Class A + 300 4,144
Liz Claiborne, Inc. 500 15,781
Nike, Inc., Class B 2,400 97,350
Reebok International, Ltd. 300 4,462
Russell Corp. 400 8,125
Springs Industries, Inc. 100 4,144
V.F. Corp. 1,100 51,562
----------
185,568
----------
AUTOMOTIVE PRODUCTS/MOTOR VEHICLES--1.6%
BF Goodrich Co. 700 25,112
Cooper Tire & Rubber Co. 400 8,175
Cummins Engine Co., Inc. 200 7,100
Dana Corp. 1,378 56,326
Danaher Corp. 1,000 54,312
Eaton Corp. 600 42,412
-------
6
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automotive Products/Motor Vehicles (continued)
Fleetwood Enterprises, Inc. 300 $ 10,425
Ford Motor Co. 9,900 581,006
General Motors Corp. 5,400 386,437
Genuine Parts Co. 1,300 43,469
Goodyear Tire & Rubber Co. 1,200 60,525
Navistar International Corp.+ 400 11,400
Paccar, Inc. 600 24,675
TRW, Inc. 1,000 56,187
----------
1,367,561
----------
BANKS--7.2%
Bank of New York Co., Inc. 6,500 261,625
Bank One Corp. 9,606 490,506
BankAmerica Corp. 14,112 848,484
BankBoston Corp. 2,400 93,450
Bankers Trust New York Corp. 800 68,350
BB&T Corp. 2,300 92,719
Chase Manhattan Corp. 7,000 476,437
Comerica, Inc. 1,350 92,053
Fifth Third Bancorp. 2,250 160,453
First Union Corp. 8,144 495,257
Firstar Corp. 1,800 167,812
Fleet Financial Group, Inc. 4,700 210,031
Golden West Financial Corp. 500 45,844
Huntington Bancshares Inc. 1,730 52,008
J.P. Morgan & Co., Inc. 1,400 147,087
KeyCorp, Inc. 3,600 115,200
Mellon Bank Corp. 2,100 144,375
Merchantile Bancorp, Inc. 1,200 55,350
National City Corp. 2,800 203,000
Northern Trust Corp. 900 78,581
PNC Bank Corp. 2,500 135,312
Regions Financial Corp. 1,900 76,594
Republic New York Corp. 800 36,450
State Street Corp. 1,400 97,387
Summit Bancorp 1,300 56,794
SunTrust Banks, Inc. 1,700 130,050
Synovus Financial Corp. 2,200 53,625
U.S. Bancorp 6,131 217,650
Union Planters Corp. 1,000 45,312
Wachovia Corp. 1,700 148,644
Washington Mutual, Inc. 4,816 183,911
Wells Fargo & Co. 13,200 527,175
----------
6,007,526
----------
----------
7
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
BUSINESS MACHINES & SOFTWARE--11.4%
<S> <C> <C>
3Com Corp.+ 2,900 $ 129,956
Adobe Systems, Inc. 500 23,375
Apple Computer, Inc. 1,100 45,031
Autodesk, Inc. 600 25,612
BMC Software, Inc.+ 1,700 75,756
Cabletron Systems, Inc.+ 1,600 13,400
Ceridian Corp.+ 600 41,887
Cisco Systems, Inc.+ 12,900 1,197,281
Compaq Computer Corp. 13,970 585,867
Computer Associates International, Inc. 4,400 187,550
Compuware Corp.+ 1,500 117,188
Data General Corp.+ 500 8,219
Dell Computer Corp.+ 10,500 768,469
Gateway 2000, Inc.+ 1,300 66,544
Hewlett-Packard Co. 8,500 580,656
Honeywell, Inc. 1,100 82,844
International Business Machines Corp. 7,600 1,404,100
Microsoft Corp.+ 20,400 2,829,225
Novell, Inc.+ 3,000 54,375
Oracle Systems Corp.+ 7,950 342,844
Parametic Technology Corp.+ 2,300 37,375
Peoplesoft, Inc.+ 1,700 32,194
Pitney Bowes, Inc. 2,200 145,337
Seagate Technology, Inc.+ 1,900 57,475
Silicon Graphics, Inc.+ 1,800 23,175
Sun Mircosystems, Inc.+ 3,200 274,000
Unisys Corp.+ 2,100 72,319
Xerox Corp. 2,700 318,600
----------
9,540,654
----------
BUSINESS SERVICES--2.5%
Advo, Inc. 300 7,912
America Online, Inc.+ 3,700 590,936
Automatic Data Processing, Inc. 2,500 200,469
Browing-Ferris Industries, Inc. 1,500 42,656
Computer Sciences Corp.+ 1,300 83,769
Deluxe Corp. 600 21,937
Ecolab, Inc. 1,000 36,187
Equifax, Inc. 1,300 44,444
First Data Corp. 3,600 114,075
H&R Block, Inc. 700 31,500
IKON Office Solutions 700 5,994
Interpublic Group of Companies, Inc. 1,200 95,700
Laidlaw, Inc. 2,200 22,137
Moore Corp., Ltd. 400 4,400
National Service Industries, Inc. 200 7,600
Ominicom Group, Inc. 1,400 81,200
----------
8
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Business Services (continued)
Paychex, Inc. 1,400 $ 72,012
R.R. Donnelly & Sons 1,000 43,813
Tyco International Ltd. 5,304 400,120
Waste Management, Inc. 4,657 217,133
----------
2,123,994
----------
CHEMICAL--1.6%
Air Products & Chemicals, Inc. 1,900 76,000
Chemfirst, Inc. 200 3,950
Dow Chemical Co. 1,900 172,781
E.I. du Pont de Nemours & Co. 9,200 488,175
Eastman Chemical Co. 600 26,850
Great Lakes Chemical Corp. 500 20,000
Hercules, Inc. 700 19,162
Minnesota Mining & Manufacturing Co. 3,200 227,600
Morton International, Inc. 1,100 26,950
Nalco Chemical Co. 500 15,500
PPG Industries, Inc. 1,500 87,375
Praxair, Inc. 1,300 45,825
Rohm & Haas Co. 1,500 45,187
Sigma-Aldrich Corp. 800 23,500
Union Carbide Corp. 1,200 51,000
W.R. Grace & Co.+ 400 6,275
----------
1,336,130
----------
CONSTRUCTION--0.3%
Armstrong World Industries, Inc. 400 24,125
Centex Corp. 400 18,025
Crane Co. 600 18,112
Fluor Corp. 600 25,537
Kaufman & Broad Home Corp. 500 14,375
Masco Corp. 2,700 77,625
Owens Corning 400 14,175
Pulte Corp. 200 5,562
Sherwin-Williams Co. 1,200 35,250
The Stanley Works 700 19,425
----------
252,211
----------
CONSUMER - DURABLE--0.2%
Black & Decker Corp. 700 39,244
Maytag Corp. 700 43,575
Newell Co. 1,300 53,625
Snap-On, Inc. 500 17,406
Whirlpool Corp. 600 33,225
----------
187,075
----------
---------
9
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER - NONDURABLE--1.4%
American Greetings Corp. Class A 700 $ 28,744
Darden Restaurants, Inc. 1,300 23,400
Fortune Brands, Inc. 1,500 47,437
Hasbro, Inc. 950 34,319
Jostens, Inc. 200 5,237
Mattel, Inc. 2,200 50,187
McDonald's Corp. 5,600 429,100
Rubbermaid, Inc. 1,300 40,869
Tricon Global Restaurants, Inc.+ 1,200 60,150
Unilever NV 5,200 431,275
Wendy's International, Inc. 900 19,631
----------
1,170,349
----------
CONTAINERS--0.2%
Ball Corp. 300 13,725
Bemis Co., Inc. 400 15,175
Crown Cork & Seal Co., Inc. 800 24,650
Owens-Illinois, Inc.+ 1,200 36,750
Sealed Air Corp.+ 814 41,565
---------
131,865
---------
ELECTRONICS--6.4%
Advanced Micro Devices, Inc.+ 1,300 37,619
AMP, Inc. 1,700 88,506
Andrew Corp.+ 850 14,025
Applied Materials, Inc.+ 3,000 128,062
Ascend Communications, Inc.+ 1,700 111,775
EG&G, Inc. 200 5,562
Electronic Data Systems Corp. 3,900 195,975
EMC Corp.+ 4,100 348,500
Emerson Electric Co. 3,600 217,800
General Instrument Corp.+ 1,500 50,906
Harris Corp. 600 21,975
Intel Corp. 13,700 1,624,306
KLA-Tencor Corp.+ 900 39,037
LSI Logic Corp.+ 1,200 19,350
Lucent Technologies, Inc. 10,700 1,177,000
Micron Technology, Inc. 1,800 91,012
Motorola, Inc. 4,900 299,206
National Semiconductor Corp.+ 1,500 20,250
Nextel Communications, Class A+ 2,200 51,975
Northern Telecom Ltd. 5,380 269,672
Perkin Elmer Corp. 400 39,025
Scientific-Atlanta, Inc. 400 9,125
---------
10
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Electronics (continued)
Solectron Corp.+ 1,000 $ 92,937
Tektronix, Inc. 250 7,516
Tellabs, Inc.+ 1,500 102,844
Texas Instruments, Inc. 3,200 273,800
Thermo Electron Corp.+ 1,000 16,937
Thomas & Betts Corp. 400 17,325
----------
5,372,022
----------
ENERGY - RAW MATERIALS--0.7%
Anadarko Petroleum Corp. 800 24,700
Apache Corp. 700 17,719
Baker Hughes, Inc. 2,480 43,865
Burlington Resources, Inc. 1,452 52,000
Halliburton Co. 3,600 106,650
Helmerich & Payne, Inc. 500 9,687
Occidental Petroleum Corp. 2,900 48,937
ONEOK, Inc. 300 10,837
Rowan Companies, Inc.+ 400 4,000
Schlumberger Ltd. 4,400 202,950
Union Pacific Resources, Inc. 2,100 19,031
----------
540,376
----------
FOOD & AGRICULTURE--4.5%
Archer-Daniels-Midland Co. 4,959 85,233
Bestfoods, Inc. 2,400 127,800
Campbell Soup Co. 3,700 203,500
Coca-Cola Co. 20,100 1,344,187
Coca-Cola Enterprises, Inc. 3,300 117,975
ConAgra, Inc. 3,900 122,850
General Mills, Inc. 1,200 93,300
H.J. Heinz Co. 3,000 169,875
Hershey Foods Corp. 1,100 68,406
Kellogg Co. 3,200 109,200
Monsanto Co. 5,200 247,000
PepsiCo, Inc. 12,000 491,250
Pioneer-Hi-Bred International, Inc. 1,800 48,600
Quaker Oats Co. 1,100 65,450
Ralston Purnia Co. 2,400 77,700
Sara Lee Corp. 7,400 208,587
SYSCO Corp. 2,800 76,825
Wm. Wrigley Jr. Co. 1,000 89,562
----------
3,747,300
----------
----------
11
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GOLD--0.1%
Barrick Gold Corp. 2,800 $ 54,600
Battle Mountain Gold Co. 1,000 4,125
Homestake Mining Co. 1,800 16,537
Newmont Mining Corp. 1,186 21,422
Placer Dome, Inc. 1,800 20,700
-----------
117,384
-----------
HEALTHCARE/DRUG & MEDICINE--12.1%
Abbott Laboratories 12,600 617,400
Allergan, Inc. 500 32,375
ALZA Corp.+ 600 31,350
American Home Products Corp. 10,700 602,544
Amgen, Inc.+ 2,100 219,581
Bausch & Lomb, Inc. 400 24,000
Baxter International, Inc. 2,400 154,350
Becton, Dickinson & Co. 1,900 81,106
Biomet, Inc. 800 32,200
Boston Scientific Corp.+ 3,200 85,800
Bristol-Meyers Squibb Co.+ 8,100 1,083,881
C.R. Bard, Inc. 500 24,750
Cardinal Health, Inc. 1,650 125,194
Columbia / HCA Healthcare Corp. 5,100 126,225
Eli Lilly & Co. 9,000 799,875
Guidant Corp. 1,300 143,325
HBO & Co. 3,800 109,012
HCR Manor Care, Inc.+ 700 20,562
HealthSouth Corp.+ 3,200 49,400
Humana, Inc.+ 1,200 21,375
IMS Health, Inc.+ 1,300 98,069
Johnson & Johnson 11,000 922,625
Mallinckrodt, Inc. 600 18,487
Medtronic, Inc. 4,100 304,425
Merck & Co., Inc. 9,700 1,432,569
Pfizer, Inc. 10,700 1,342,181
Pharmacia & Upjohn, Inc. 4,200 237,825
Schering-Plough Corp.+ 12,000 663,000
Service Corp. International 2,200 83,737
Shared Medical Systems Corp. 300 14,962
St. Jude Medical, Inc. 600 16,612
Tenet Healthcare Corp.+ 2,400 63,000
United Healthcare Corp. 1,500 64,594
Warner Lambert Co. 6,700 503,756
-----------
10,150,147
-----------
---------
12
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSEHOLD PRODUCTS--2.3%
Alberto-Culver Co., Class B 600 $ 16,012
Avon Products, Inc. 2,100 92,925
Clorox Co. 900 105,131
Colgate-Palmolive Co. 2,500 232,187
Gillette Co. 9,100 439,644
International Flavors & Fragrances, Inc. 800 35,350
Procter & Gamble Co. 10,900 995,306
Tupperware Corp. 200 3,287
----------
1,919,842
----------
INSURANCE--3.3%
Aetna, Inc. 1,100 86,487
Allstate Corp. 6,800 262,650
American General Corp. 2,010 156,780
American International Group, Inc. 8,625 833,391
Aon Corp. 1,300 71,987
Chubb Corp. 1,400 90,825
CIGNA Corp. 1,800 139,162
Cincinnati Financial Corp. 1,200 43,950
Conseco, Inc. 2,541 77,659
Hartford Financial Services Group, Inc. 1,800 98,775
Jefferson-Pilot Corp. 900 67,500
Lincoln National Corp. 900 73,631
Marsh & McLennan Companies, Inc. 2,100 122,719
MBIA, Inc. 900 59,006
MGIC Investment Corp. 800 31,850
Progressive Corp. of Ohio 600 101,625
Provident Companies, Inc. 1,000 41,500
SAFECO Corp. 1,100 47,231
St. Paul Companies, Inc. 1,838 63,871
SunAmerica, Inc. 1,800 146,025
Torchmark Corp. 1,100 38,844
Transamerica Corp. 500 57,750
UNUM Corp. 1,100 64,213
----------
2,777,431
----------
MEDIA--2.7%
CBS Corp. 5,600 183,400
Clear Channel Communications, Inc.+ 2,100 114,450
Comcast Corp., Class A 3,000 176,063
Dow Jones & Co., Inc. 700 33,688
Gannett Co., Inc. 2,400 154,800
King World Productions, Inc. 600 17,663
Knight-Ridder, Inc. 700 35,788
McGraw-Hill Companies, Inc. 900 91,688
--------
13
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEDIA (CONTINUED)
Mediaone Group+ 5,000 $ 235,000
Meredith Group+ 500 18,938
New York Times Co., Class A 1,600 55,500
Telecommunications, Inc., Series A (TCI Group)+ 4,300 237,844
Time Warner, Inc. 10,100 626,831
Times Mirror Co., Series A 600 33,600
Tribune Co. 1,000 66,000
Viacom, Inc., Class B+ 2,900 214,600
----------
2,295,853
----------
MISCELLANEOUS FINANCE--4.8%
American Express Co. 3,800 388,550
Associates First Capital Corp. 6,058 256,708
Bear Stearns Companies, Inc. 800 29,900
Capital One Financial Corp. 500 57,500
Charles Schwab Corp. 3,300 185,419
Citigroup, Inc. 18,627 922,037
Countrywide Credit Industries, Inc. 900 45,169
Dun & Bradstreet Corp. 1,200 37,875
Fannie Mae 8,500 629,000
Franklin Resources, Inc. 2,100 67,200
Freddie Mac 5,600 360,850
Household International, Inc. 4,019 159,253
Lehman Brothers Holdings, Inc. 900 39,656
MBNA Corp. 6,162 153,665
Merrill Lynch & Co., Inc. 2,900 193,575
Morgan Stanley, Dean Witter, Discover & Co. 4,825 342,575
Providian Financial Corp. 1,250 93,750
SML Holdings Corp. 1,300 62,400
----------
4,025,082
----------
NON-FERROUS METALS--0.3%
Alcan Aluminum, Ltd. 1,900 51,419
Aluminum Company of America 1,500 111,844
Asarco, Inc. 600 9,038
Cyprus Amax Minerals Co. 500 5,000
Engelhard Corp. 900 17,550
Freeport-McMoran Copper & Gold, Inc., Class B 1,300 13,569
Inco, Ltd. 1,500 15,844
Phelps Dodge Corp. 500 25,438
Reynolds Metals Co. 500 26,344
---------
276,046
---------
</TABLE>
14
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OIL - DOMESTIC--0.6%
Amerada Hess Corp. 800 $ 39,800
Ashland, Inc. 600 29,025
Atlantic Richfield Co. 2,700 176,175
Kerr-McGee Corp. 400 15,300
Oryx Energy Co.+ 500 6,719
Phillips Petroleum Co. 2,100 89,513
Sunoco, Inc. 800 28,850
Unocal Corp. 2,000 58,375
USX-Marathon Group 2,500 75,313
----------
519,070
----------
OIL - INTERNATIONAL--4.2%
Chevron Corp. 5,400 447,863
Exxon Corp. 19,900 1,455,188
Mobil Corp. 6,400 557,600
Royal Dutch Petroleum Co.--Sponsored ADR 17,500 837,813
Texaco, Inc. 4,415 233,443
----------
3,531,907
----------
OPTICAL & PHOTO--0.2%
Eastman Kodak Co. 2,700 194,400
Polaroid Corp. 200 3,737
----------
198,137
----------
PAPER & FOREST PRODUCTS--0.9%
Boise Cascade Corp. 300 9,300
Champion International Corp. 700 28,350
Fort James Corp. 1,800 72,000
Georgia-Pacific Group 800 46,850
International Paper Co. 2,500 112,031
Kimberly-Clark Corp. 4,500 245,250
Louisiana-Pacific Corp. 700 12,819
Mead Corp. 800 23,450
Potlatch Corp. 400 14,750
Temple Inland, Inc. 500 29,656
Union Camp Corp. 500 33,750
Westvaco Corp. 800 21,450
Weyerhaeuser Co. 1,600 81,300
Willamette Industries, Inc. 800 26,800
---------
757,756
---------
PRODUCER GOODS & MANUFACTURING--4.6%
Aeroquip-Vickers, Inc. 100 2,994
Allied Signal, Inc. 4,600 203,838
Avery Dennison Corp. 1,000 45,063
---------
15
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER GOODS & MANUFACTURING (continued)
Briggs & Stratton Corp. 100 $ 4,988
Case Corp. 400 8,725
Caterpillar, Inc. 3,000 138,000
Cooper Industries, Inc. 800 38,150
Corning, Inc. 1,800 81,000
Deere & Co. 2,100 69,563
Dover Corp. 1,700 62,263
FMC Corp.+ 300 16,800
Foster Wheeler Corp. 100 1,319
General Electric Co. 26,900 2,745,481
Harnischfeger Industries, Inc. 200 2,038
Illinois Tool Works, Inc. 2,000 116,000
Ingersoll Rand Co. 1,400 65,713
ITT Industries, Inc. 900 35,775
Johnson Controls, Inc. 600 35,400
McDermott International, Inc. 300 7,406
Milacron Inc. 100 1,925
Millipore Corp. 200 5,688
Nacco Industries, Inc. 100 9,200
Pall Corp. 900 22,781
Parker-Hannifin Corp. 750 24,563
Raychem Corp. 600 19,388
Tenneco, Inc. 1,300 44,281
Timken Co. 300 5,663
(W.W.) Grainger, Inc. 800 33,300
----------
3,847,305
----------
RAILROAD & SHIPPING--0.5%
Burlington Northern Santa Fe Corp. 3,900 131,625
CSX Corp. 1,700 70,550
Norfolk Southern Corp. 3,100 98,231
Union Pacific Corp. 1,900 85,619
----------
386,025
----------
RETAIL--6.6%
Albertson's, Inc. 2,100 133,744
American Stores Co. 2,100 77,569
AutoZone, Inc.+ 1,100 36,231
Cendant Corp.+ 6,822 130,044
Circuit City Stores, Inc. 700 34,956
Consolidated Stores Corp.+ 800 16,150
Costco Companies, Inc. 1,800 129,938
CVS Corp. 3,100 170,500
Dayton Hudson Corp. 3,600 195,300
Dillards, Inc., Class A 800 22,700
Dollar General Corp. 1,325 31,303
Federated Department Stores, Inc.+ 1,800 78,413
Fred Meyer, Inc.+ 1,300 78,325
---------
16
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL (continued)
Gap, Inc. 4,875 $ 274,219
Great Atlantic & Pacific Tea Co., Inc. 500 14,813
Harcourt General, Inc. 500 26,594
Home Depot, Inc. 12,800 783,200
J.C. Penney Co., Inc. 2,100 98,438
Kmart Corp. 3,600 55,125
Kohl's Corp.+ 1,300 79,869
Kroger Co.+ 2,100 127,050
Limited, Inc. 1,700 49,513
Longs Drug Stores, Inc. 300 11,250
Lowe's Companies, Inc. 2,900 148,444
May Department Stores Co. 1,900 114,713
Nordstrom, Inc. 1,300 45,094
Pep Boys-Manny, Moe, & Jack 800 12,550
Rite Aid Corp. 2,100 104,081
Safeway, Inc.+ 4,000 243,750
Sears, Roebuck & Co. 3,200 136,000
Staples, Inc.+ 2,600 113,588
SUPERVALU, Inc. 900 25,200
Tandy Corp. 700 28,831
TJX Companies, Inc. 2,600 75,400
Toys `R' Us, Inc.+ 1,900 32,063
Wal-Mart Stores, Inc. 18,500 1,506,594
Walgreen Co. 4,100 240,106
Winn Dixie Stores, Inc. 1,300 58,338
----------
5,539,996
----------
STEEL--0.1%
Allegheny Teledyne, Inc. 1,700 34,744
Bethlehem Steel Corp.+ 600 5,025
Nucor Corp. 600 25,950
USX-U.S. Steel Group, Inc. 700 16,100
Worthington Industries, Inc. 500 6,250
---------
88,069
---------
TELEPHONE--8.1%
AirTouch Communications, Inc.+ 4,700 338,988
Alltel Corp. 2,300 137,569
Ameritech Corp. 9,000 570,375
AT&T Corp. 14,700 1,106,175
Bell Atlantic Corp. 12,704 673,312
BellSouth Corp. 16,000 798,000
Frontier Corp. 1,300 44,200
GTE Corp. 7,900 513,500
MCI WorldCom, Inc.+ 15,097 1,083,210
SBC Communications, Inc. 15,976 856,713
--------
17
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TELEPHONE (continued)
Sprint Corp. (PCS Group)+ 3,150 $ 72,844
Sprint Corp. (FON Group) 3,500 294,438
U.S. WEST, Inc. (Media Group) 4,098 264,833
----------
6,754,157
----------
TOBACCO--1.5%
Loew's Corp. 1,000 98,250
Philip Morris Companies, Inc. 19,800 1,059,300
RJR Nabisco Holding Corp. 2,700 80,156
UST, Inc. 1,600 55,800
----------
1,293,506
----------
TRAVEL & RECREATION--1.1%
Brunswick Corp. 1,000 24,750
Carnival Corp., Class A 4,900 235,200
Harrah's Entertainment, Inc.+ 500 7,844
Hilton Hotels Corp. 2,000 38,250
Marriott International Inc., Class A 1,900 55,100
Mirage Resorts, Inc.+ 1,300 19,419
Walt Disney Co. 16,700 501,000
---------
881,563
---------
TRUCKING & FREIGHT--0.0%
Ryder Systems, Inc. 400 10,400
---------
UTILITIES - ELECTRIC & GAS--2.9%
AES Corp.+ 1,400 66,325
Ameren Corp. 1,000 42,688
American Electric Power Co., Inc. 1,600 75,300
Baltimore Gas & Electric Co. 1,200 37,050
Carolina Power & Light Co. 1,300 61,181
Central & South West Corp. 2,000 54,875
Cinergy Corp. 1,300 44,688
Coastal Corp. 1,600 55,900
Columbia Gas System, Inc. 600 34,650
Consolidated Edison, Inc. 1,900 100,463
Consolidated Natural Gas Co. 700 37,800
Dominion Resources, Inc. 1,600 74,800
DTE Energy Co. 1,100 47,163
Duke Energy Corp. 2,917 186,870
Eastern Enterprises 100 4,375
Edison International 2,900 80,838
Enron Corp. 2,600 148,363
Entergy Corp. 2,100 65,363
First Energy Corp. 1,800 58,613
FPL Group, Inc. 1,500 92,438
-------
18
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - ELECTRIC & GAS (continued)
GPU, Inc. 1,000 $ 44,188
Houston Industries, Inc. 2,250 72,281
New Century Energies, Inc. 900 43,875
Niagra Mohawk Power Corp. 1,200 19,350
NICOR, Inc. 400 16,900
Northern States Power Co. 1,100 30,525
PacifiCorp. 2,500 52,656
PECO Energy Co. 1,700 70,763
Peoples Energy Corp. 300 11,963
PG&E Corp. 3,200 100,800
PP&L Resources, Inc. 1,500 41,813
Public Service Enterprise Group, Inc. 1,900 76,000
Sempra Energy 1,801 45,700
Sonat, Inc. 800 21,650
Southern Co. 5,500 159,844
Texas Utilities Co. 2,322 108,408
Unicom Corp. 1,800 69,413
Williams Companies, Inc. 3,500 109,156
-----------
2,465,028
-----------
TOTAL COMMON STOCK
(Cost $63,725,194) 81,625,414
-----------
U.S. TREASURY OBLIGATION--0.1% Par
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bill, 4.13%, 03/04/99 (a) (b) 53,000 52,619
-----------
TOTAL U.S. TREASURY OBLIGATION
(Cost $52,611) 52,619
-----------
--------
19
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
SHORT-TERM INVESTMENTS--2.7% of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Temporary Investment Fund, Inc.--
TempCash Portfolio, 4.77%* 1,121,999 $ 1,121,999
Temporary Investment Fund, Inc.--
TempCash Portfolio, 4.71%* 1,121,999 1,121,999
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $2,243,998) 2,243,998
------------
TOTAL INVESTMENTS--100.1%
(Cost $66,021,803) 83,922,031
------------
OTHER ASSETS AND LIABILITIES--(0.1%)
Other assets 977,770
Liabilities (1,030,978)
------------
(53,208)
------------
TOTAL NET ASSETS--100.0% $ 83,868,823
============
NOTES TO SCHEDULES OF INVESTMENTS
+ Non-Income Producing Security.
* Interest rate represents the yield as of the report date.
(a) Yields shown are effective yields at the time of purchase.
(b) These securities, or a portion thereof, are being used to
collateralize open financial futures contracts.
ADR--American Depository Receipt.
See accompanying Notes to Financial Statements.
-------
20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS
<S> <C>
Investments, at value (Cost $66,021,803) $83,922,031
Amounts on deposit with broker 14,162
Receivables:
Investments sold 477,068
Fund shares sold 317,893
Dividends 81,588
Interest 16,184
Variation margin 70,875
-----------
Total assets 84,899,801
-----------
LIABILITIES
Payables:
Investments purchased 969,446
Investment advisory and administration fees 1,221
Accrued expenses 60,311
-----------
Total liabilities 1,030,978
-----------
Net assets applicable to outstanding shares $83,868,823
===========
NET ASSETS consist of:
Paid-in-capital $65,182,495
Undistributed net investment income 868,952
Accumulated net realized loss on investments sold and futures contracts (153,727)
Net unrealized appreciation on investments and futures contracts 17,971,103
-----------
$83,868,823
===========
PRICING OF SHARES:
Outstanding shares, $0.00001 par value (unlimited shares authorized) 4,718,315
NET ASSET VALUE, offering and redemption price per share $ 17.78
- ----------
See accompanying Notes to Financial Statements.
</TABLE>
---------
21
<PAGE>
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended December 31, 1998
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends $ 966,822
Interest 64,431
-----------
Total investment income 1,031,253
-----------
EXPENSES:
Investment advisory and administration fees 206,072
Custodian fees 33,826
Portfolio accounting fees 11,923
Professional fees 23,340
Shareholder reports 22,995
Trustees' fees 7,665
Interest expense (see Note 5) 2,514
Insurance and other expenses 6,739
-----------
315,074
Less: expenses reduced (see Note 4) (152,282)
-----------
Net expenses incurred by Fund 162,792
-----------
NET INVESTMENT INCOME 868,461
-----------
NET REALIZED GAIN (LOSS) ON INVESTMENTS SOLD AND FUTURES CONTRACTS:
Net realized gain on investments sold 4,879
Net realized loss on futures contracts (137,625)
-----------
Net realized loss on investments sold and futures contracts (132,746)
-----------
CHANGE IN NET UNREALIZED APPRECIATION ON INVESTMENTS AND FUTURES CONTRACTS:
Net unrealized appreciation on investments 13,315,247
Net unrealized appreciation on futures contracts 70,875
-----------
Net unrealized appreciation on investments and futures contracts 13,386,122
-----------
Net gain on investments 13,253,376
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $14,121,837
===========
- ---------
See accompanying Notes to Financial Statements.
---------
22
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
<S> <C> <C>
Net investment income $ 868,461 $ 302,447
Net realized gain (loss) on investments sold and futures contracts (132,746) 12,062
Change in net unrealized appreciation on investments and futures contracts 13,386,122 4,346,897
----------- -----------
Increase in net assets resulting from operations 14,121,837 4,661,406
----------- -----------
Dividends to shareholders from net investment income (302,791) (19,075)
Distributions to shareholders from net capital gains (33,055) --
----------- -----------
Total distributions (335,846) (19,075)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 46,963,765 28,905,606
Net asset value of shares issued in reinvestment of dividends 335,846 19,075
Less payments for shares redeemed (14,272,922) (2,434,293)
----------- -----------
Increase in net assets from capital share transactions 33,026,689 26,490,388
----------- -----------
Total increase in net assets 46,812,680 31,132,719
NET ASSETS:
Beginning of period 37,056,143 5,923,424
----------- -----------
End of period (including undistributed net investment income of $868,952
and $302,415, respectively) $83,868,823 $37,056,143
=========== ===========
NUMBER OF FUND SHARES:
Sold 2,978,687 2,282,017
Reinvested 18,942 1,418
Redeemed (937,471) (187,925)
----------- -----------
Net increase in shares outstanding 2,060,158 2,095,510
SHARES OUTSTANDING:
Beginning of period 2,658,157 562,647
----------- -----------
End of period 4,718,315 2,658,157
=========== ===========
- ----------
See accompanying Notes to Financial Statements.
---------
23
</TABLE>
<PAGE>
SCHWAB S&P 500 PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997 1996(1)
-------------- ---------------- -------------
For a share outstanding throughout each period:
<S> <C> <C> <C>
Net asset value at beginning of period $ 13.94 $ 10.53 $ 10.00
----------- ----------- ----------
Income from investment operations:
Net investment income 0.13 0.09 0.03
Net realized and unrealized gains
on investments 3.78 3.33 0.50
----------- ----------- ----------
Total income from investment operations 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) (0.00) --
----------- ----------- ----------
Total distributions (0.07) (0.01) --
----------- ----------- ----------
Net asset value at end of period $ 17.78 $ 13.94 $ 10.53
=========== =========== ==========
Total return (%) 28.06 32.46 5.30*
Ratios/Supplemental Data (%)
- ----------------------------------
Ratio of actual operating expenses to average
net assets 0.28 0.29 0.33**
Reductions reflected in above expense ratio 0.27 0.64 2.78**
Ratio of net investment income to average
net assets 1.52 1.56 2.16**
Portfolio turnover rate 7 4 0
Net assets, end of period $83,868,823 $37,056,143 $5,923,424
<FN>
(1) For the period from November 1, 1996 (commencement of operations) to December 31, 1996.
* Not annualized.
** Annualized.
</FN>
</TABLE>
- ------------
See accompanying Notes to Financial Statements.
----------
24
<PAGE>
SCHWAB S&P 500 PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1998
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 December 31, 1998, the Schwab S&P 500 Portfolio had the following open S&P
500 Index futures contracts:
Number of Contract Unrealized
Contracts Value Expiration Appreciation
---------- ---------- ---------- ----------------
6 $1,868,250 03/19/99 $70,875
The cash and eligible securities on deposit with brokers available to cover
margin requirements for open futures positions at December 31, 1998 was $14,162
and $52,619 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)
December 31, 1998
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 December 31, 1998, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $17,900,228 of which $20,157,074 related
to appreciated securities and $2,256,846 related to depreciated securities.
RECLASSIFICATION--Generally accepted accounting principles require that certain
components of net assets be reclassified to reflect permanent differences
between financial and tax reporting. Accordingly, permanent book/tax differences
of $867 were reclassified from paid-in-capital to undistributed net investment
income. These reclassifications have no effect on net assets or net asset value
per share.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement--The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Adviser"). For advisory services and facilities furnished,
the Fund pays 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 year ended December 31, 1998. (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 year ended December
31, 1998, 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 $7,665 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 February 28, 1999, 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 year ended December 31, 1998, the total of such fees and expenses
reduced by the Investment Adviser was $152,282.
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. During the current year, the Fund incurred interest expense
of $2,514 for borrowings at a rate of 5.93%. The Trust has a line of credit
arrangements with The Bank of New York whereby the Trust may borrow on behalf of
the Schwab S&P 500 Portfolio an aggregate amount of up to $150 million, on a
temporary basis, to fund shareholder redemptions. As of December 31, 1998, there
were no outstanding borrowings made under this arrangement.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated $34,893,510 and $3,528,673, respectively, for the year ended December
31, 1998.
Included in the aforementioned purchases of common stock of The Charles Schwab
Corp., an affiliated issuer, with a current value as of December 31, 1998 of
$185,419 for the Fund.
----------
26
<PAGE>
SCHWAB S&P 500 PORTFOLIO
DECEMBER 31, 1998 ANNUAL REPORT
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Schwab S&P 500 Portfolio
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Schwab S&P 500 Portfolio (one
series constituting part of Schwab Annuity Portfolios, hereafter referred to as
the "Fund") at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 1999
--------
27
<PAGE>
SCHWAB S&P 500 PORTFOLIO
DECEMBER 31, 1998 ANNUAL REPORT
TAX DESIGNATIONS (UNAUDITED)
Pursuant to Section 854(b)(2) of the Internal Revenue Code, the Schwab S&P 500
Portfolio hereby designates 97% of the ordinary income dividends as qualifying
for the dividends received deduction for the fiscal year ended December 31,
1998.
---------
28
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock--40.0% of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE/DEFENSE--0.7%
Boeing Co. 638 $ 20,815
General Dynamics Corp. 200 11,725
Lockheed Martin Corp. 200 16,950
Northrop Grumman Corp., Class B 61 4,461
Raytheon Company, Class B 200 10,650
Rockwell International Corp. 100 4,856
Textron, Inc. 100 7,594
United Technologies Corp. 200 21,750
--------
98,801
--------
AIR TRANSPORTATION--0.2%
AMR Corp.+ 200 11,875
Delta Airlines, Inc.+ 200 10,400
FDX Corp.+ 100 8,900
--------
31,175
--------
ALCOHOLIC BEVERAGES--0.2%
Adolph Coors Co., Class B 100 5,644
Anheuser-Busch Companies, Inc. 200 13,125
Seagram Co., Ltd. 200 7,600
--------
26,369
--------
APPAREL--0.1%
Nike, Inc., Class B 100 4,056
Springs Industries, Inc. 200 8,287
V.F. Corp. 200 9,375
--------
21,718
--------
AUTOMOTIVE PRODUCTS/MOTOR VEHICLES--0.6%
Cummins Engine Co., Inc. 100 3,550
Danaher Corp. 100 5,431
Eaton Corp. 100 7,069
Ford Motor Co. 500 29,344
General Motors Corp. 400 28,625
Goodyear Tire & Rubber Co. 100 5,044
Navistar International Corp.+ 200 5,700
TRW, Inc. 100 5,619
--------
90,382
--------
--------
29
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BANKS--3.3%
Bank of New York Co., Inc. 400 $ 16,100
Bank One Corp. 672 34,314
BankAmerica Corp. 1,019 61,267
BankBoston Corp. 200 7,787
Bankers Trust New York Corp. 100 8,544
BB&T Corp. 226 9,111
Chase Manhattan Corp. 600 40,837
Comerica, Inc. 150 10,228
Fifth Third Bancorp 150 10,697
Firstar Corp. 100 9,323
First Union Corp. 524 31,866
Fleet Financial Group, Inc. 400 17,875
Golden West Financial Corp. 100 9,169
Huntington Bancshares, Inc. 110 3,307
J.P. Morgan & Co., Inc. 100 10,506
KeyCorp, Inc. 400 12,800
MBNA Corp. 225 5,611
Mellon Bank Corp. 100 6,875
Mercantile Bancorp, Inc. 100 4,612
National City Corp. 312 22,620
Northern Trust Corp. 100 8,731
PNC Bank Corp. 200 10,825
Regions Financial Corp. 100 4,031
Republic New York Corp. 200 9,112
State Street Corp. 100 6,956
Summit Bancorp 100 4,369
SunTrust Banks, Inc. 200 15,300
Synovus Financial Corp. 150 3,656
U.S. Bancorp 525 18,637
Union Planters Corp. 100 4,531
Wachovia Corp. 100 8,744
Washington Mutual, Inc. 300 11,456
Wells Fargo & Co. 900 35,943
--------
475,740
--------
BUSINESS MACHINES & SOFTWARE--4.5%
3COM Corp.+ 100 4,481
Adobe Systems, Inc. 100 4,675
BMC Software, Inc.+ 100 4,456
Cisco Systems, Inc.+ 900 83,531
Compaq Computer Corp. 900 37,744
Computer Associates International, Inc. 300 12,787
--------
30
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUSINESS MACHINES & SOFTWARE (CONTINUED)
Compuware Corp.+ 100 $ 7,813
Dell Computer Corp.+ 800 58,550
EMC Corp./Mass.+ 200 17,000
Gateway 2000, Inc.+ 100 5,119
Hewlett Packard Co. 600 40,987
Honeywell, Inc. 100 7,531
International Business Machines Corp. 500 92,375
Microsoft Corp.+ 1,400 194,163
Novell, Inc.+ 100 1,812
Oracle Systems Corp.+ 450 19,406
Parametric Technology Corp.+ 200 3,250
Peoplesoft, Inc.+ 100 1,894
Pitney Bowes, Inc. 200 13,212
Seagate Technology, Inc.+ 100 3,025
Sun Microsystems, Inc.+ 200 17,125
Xerox Corp. 200 23,600
--------
654,536
--------
BUSINESS SERVICES--0.9%
America Online, Inc.+ 300 47,916
Automatic Data Processing, Inc. 100 8,019
Computer Sciences Corp.+ 200 12,887
Equifax, Inc. 100 3,419
First Data Corp. 200 6,337
Laidlaw, Inc. 100 1,006
Nielsen Media Research 33 600
Omnicom Group, Inc. 200 11,600
Paychex, Inc. 100 5,144
Tyco International Ltd. 296 22,330
Waste Management, Inc. 345 16,086
--------
135,344
--------
CHEMICAL--0.7%
Air Products & Chemicals, Inc. 200 8,000
Dow Chemical Co. 200 18,187
E.I. du Pont de Nemours & Co. 700 37,144
Eastman Chemical Co. 100 4,475
Minnesota Mining & Manufacturing Co. 300 21,337
PPG Industries, Inc. 100 5,825
Rohm & Haas Co. 300 9,037
W.R. Grace & Co.+ 100 1,569
--------
105,574
--------
</TABLE>
---------
31
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSTRUCTION--0.2%
Armstrong World Industries, Inc. 100 $ 6,031
Masco Corp. 400 11,500
Pulte Corp. 200 5,562
--------
23,093
--------
CONSUMER - NONDURABLE--0.5%
Mattel, Inc. 100 2,281
McDonald's Corp. 400 30,650
Tricon Global Restaurants, Inc.+ 60 3,007
Unilever NV 400 33,175
--------
69,113
--------
CONTAINERS--0.1%
Ball Corp. 100 4,575
Owens-Illinois, Inc.+ 100 3,062
Sealed Air Corp.+ 53 2,706
--------
10,343
--------
ELECTRONICS--2.5%
AMP, Inc. 87 4,529
Applied Materials, Inc.+ 200 8,537
Ascend Communications, Inc.+ 100 6,575
EG&G, Inc. 200 5,562
Electronic Data Systems Corp. 300 15,075
Emerson Electric Co. 200 12,100
Intel Corp. 1,000 118,562
KLA-Tencor Corp.+ 200 8,675
Lucent Technologies, Inc. 800 88,000
Micron Technology, Inc. 100 5,056
Motorola, Inc. 400 24,425
Perkin Elmer Corp. 100 9,756
Solectron Corp.+ 100 9,294
Tektronix, Inc. 150 4,509
Tellabs, Inc.+ 100 6,856
Texas Instruments, Inc. 300 25,669
Thermo Electron Corp.+ 100 1,694
--------
354,874
--------
--------
32
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY - RAW MATERIALS--0.3%
Anadarko Petroleum Corp. 200 $ 6,175
Apache Corp. 100 2,531
Baker Hughes, Inc. 431 7,623
Halliburton Co. 100 2,962
Helmerich & Payne, Inc. 200 3,875
Occidental Petroleum Corp. 100 1,687
Schlumberger Ltd. 300 13,837
--------
38,690
--------
FOOD & AGRICULTURE--1.8%
Archer-Daniels-Midland Co. 220 3,781
Bestfoods, Inc. 200 10,650
Campbell Soup Co. 200 11,000
Coca-Cola Co. 1,400 93,625
Coca-Cola Enterprises, Inc. 200 7,150
ConAgra, Inc. 200 6,300
General Mills, Inc. 100 7,775
H.J. Heinz Co. 200 11,325
Hershey Foods Corp. 100 6,219
Kellogg Co. 200 6,825
Monsanto Co. 300 14,250
PepsiCo, Inc. 900 36,844
Pioneer Hi-Bred International, Inc. 300 8,100
Ralston Purina Co. 300 9,712
Sara Lee Corp. 400 11,275
Wm. Wrigley, Jr. Co. 100 8,956
--------
253,787
--------
GOLD--0.0%
Barrick Gold Corp. 100 1,950
Battle Mountain Gold Co. 100 412
--------
2,362
--------
HEALTHCARE/DRUG & MEDICINE--4.9%
Abbott Laboratories 1,000 49,000
American Home Products Corp. 800 45,050
Amgen, Inc.+ 100 10,456
Baxter International, Inc. 100 6,431
Becton, Dickinson & Co. 100 4,269
Boston Scientific Corp.+ 214 5,738
--------
33
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULEOFINVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTHCARE / DRUG & MEDICINE (continued)
Bristol-Myers Squibb Co.+ 600 $ 80,287
Cardinal Health, Inc. 150 11,381
Columbia/HCA Healthcare Corp. 300 7,425
Eli Lilly & Co. 700 62,212
Guidant Corp. 100 11,025
HBO & Co. 200 5,737
HCR Manor Care+ 100 2,937
HealthSouth Corp.+ 268 4,137
IMS Health, Inc.+ 100 7,544
Johnson & Johnson 800 67,100
Medtronic, Inc.+ 200 14,850
Merck & Co., Inc. 700 103,381
Pfizer, Inc. 800 100,350
Pharmacia & Upjohn, Inc. 200 11,325
Schering-Plough Corp.+ 800 44,200
Service Corp. International 100 3,806
United Healthcare Co. 100 4,306
Warner Lambert Co. 600 45,112
--------
708,059
--------
HOUSEHOLD PRODUCTS--1.0%
Avon Products, Inc. 200 8,850
Clorox Co. 100 11,681
Colgate-Palmolive Co. 200 18,575
Gillette Co. 800 38,650
Procter & Gamble Co. 800 73,050
--------
150,806
--------
INSURANCE--1.8%
Aetna, Inc. 100 7,862
Allstate Corp. 600 23,175
American General Corp. 100 7,800
American International Group, Inc. 600 57,975
Aon Corp. 100 5,537
Chubb Corp. 100 6,487
CIGNA Corp. 200 15,462
Cincinnati Financial Corp. 300 10,987
Conseco, Inc. 132 4,034
--------
34
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE (continued)
Hartford Financial Services Group, Inc. 200 $ 10,975
Jefferson-Pilot Corp. 150 11,250
Lincoln National Corp. 100 8,181
Marsh & McLennan Companies, Inc. 150 8,766
MBIA, Inc. 200 13,112
MGIC Investment Corp. 200 7,963
Progressive Corp. of Ohio 100 16,938
Provident Companies, Inc. 100 4,150
St. Paul Companies, Inc. 200 6,950
SunAmerica, Inc. 150 12,169
Transamerica Corp. 100 11,550
--------
251,323
--------
MEDIA--1.0%
CBS Corp. 400 13,100
Clear Channel Communications, Inc.+ 200 10,900
Comcast Corp., Class A 200 11,738
Gannett Co., Inc. 200 12,900
McGraw-Hill Companies, Inc. 100 10,188
Mediaone Group+ 400 18,800
Telecommunications, Inc., Series A (TCI Group)+ 200 11,063
Time Warner, Inc. 600 37,238
Viacom, Inc., Class B+ 200 14,800
--------
140,727
--------
MISCELLANEOUS FINANCE--2.1%
American Express Co. 300 30,675
Associates First Capital Corp. 462 19,577
Bear Stearns Companies, Inc. 100 3,738
Capital One Financial Corp. 100 11,500
Charles Schwab Corp. 225 12,642
Citigroup, Inc. 1,468 72,666
Countrywide Credit Industries, Inc. 100 5,019
Dun & Bradstreet Corp. 100 3,156
Fannie Mae 600 44,400
Franklin Resources, Inc . 100 3,200
Freddie Mac 400 25,775
Household International, Inc. 406 16,088
Lehman Brothers Holdings, Inc. 100 4,406
Merrill Lynch & Co., Inc. 200 13,350
Morgan Stanley, Dean Witter, Discover & Co. 365 25,915
SLM Holding Corp. 100 4,800
--------
296,907
--------
--------
35
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NON-FERROUS METALS--0.1%
Aluminum Company of America 100 $ 7,456
Phelps Dodge Corp. 100 5,088
Reynolds Metals Co. 100 5,269
--------
17,813
--------
OIL - DOMESTIC--0.2%
Amerada Hess Corp. 100 4,975
Atlantic Richfield Co. 200 13,050
Kerr-McGee Corp. 100 3,825
Phillips Petroleum Co. 100 4,263
Unocal Corp. 100 2,919
USX-Marathon Group 100 3,013
--------
32,045
--------
OIL - INTERNATIONAL--1.8%
Chevron Corp. 400 33,175
Exxon Corp. 1,500 109,688
Mobil Corp. 500 43,563
Royal Dutch Petroleum Co.--Sponsored ADR 1,200 57,450
Texaco, Inc. 300 15,863
--------
259,739
--------
OPTICAL & PHOTO--0.1%
Eastman Kodak Co. 200 14,400
--------
PAPER & FOREST PRODUCTS--0.4%
Fort James Corp. 100 4,000
Georgia-Pacific Corp. 100 5,856
International Paper Co. 200 8,963
Kimberly-Clark Corp. 300 16,350
Mead Corp. 200 5,863
Temple Inland, Inc. 100 5,931
Weyerhaeuser Co. 100 5,081
--------
52,044
--------
PRODUCER GOODS & MANUFACTURING--2.0%
Allied Signal, Inc. 200 8,863
Case Corp. 100 2,181
Caterpillar, Inc. 200 9,200
Corning, Inc. 100 4,500
Deere & Co. 100 3,313
--------
36
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER GOODS & MANUFACTURING (continued)
Dover Corp. 200 $ 7,325
FMC Corp.+ 100 5,600
General Electric Co. 1,900 193,919
Illinois Tool Works, Inc. 200 11,600
McDermott International, Inc. 200 4,938
Milacron, Inc. 200 3,850
NACCO Industries, Inc., Class A 100 9,200
Raychem Corp. 200 6,463
W.W. Grainger, Inc. 200 8,325
--------
279,277
--------
RAILROAD & SHIPPING--0.2%
Burlington Northern Santa Fe Corp. 300 10,125
CSX Corp. 100 4,150
Norfolk Southern Corp. 300 9,506
Union Pacific Corp. 200 9,013
--------
32,794
---------
RETAIL--2.4%
Albertson's, Inc. 100 6,369
Autozone, Inc.+ 100 3,294
Cendant Corp.+ 440 8,388
Consolidated Stores Corp.+ 288 5,814
CVS Corp. 390 21,450
Dayton Hudson Corp. 200 10,850
Dollar General Corp. 125 2,953
Federated Department Stores, Inc.+ 100 4,356
Fred Meyer, Inc.+ 100 6,025
Gap, Inc. 225 12,656
Home Depot, Inc. 900 55,069
J.C. Penney Co., Inc. 100 4,688
Kmart Corp.+ 100 1,531
Kohl's Corp.+ 100 6,144
Kroger Company+ 100 6,050
Longs Drug Stores, Inc. 200 7,500
Lowe's Companies, Inc. 200 10,238
May Department Stores Co. 100 6,038
Price/Costco, Inc. 100 7,219
Rite Aid Corp. 200 9,913
Safeway, Inc.+ 300 18,281
-------
37
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL (continued)
Sears Roebuck & Co. 200 $ 8,500
Staples, Inc.+ 200 8,738
Toys 'R' Us, Inc.+ 100 1,688
Wal-Mart Stores, Inc. 1,200 97,725
Walgreen Co. 200 11,713
--------
343,190
--------
STEEL--0.1%
Bethlehem Steel Corp.+ 800 6,700
--------
TELEPHONE--3.4%
AirTouch Communications, Inc.+ 300 21,638
Alltel Corp. 200 11,963
Ameritech Corp. 800 50,700
AT&T Corp. 1,100 82,775
Bell Atlantic Corp. 906 48,018
BellSouth Corp. 1,200 59,850
Frontier Corp. 100 3,400
GTE Corp. 600 39,000
MCI WorldCom, Inc.+ 1,021 73,257
Nextel Communications, Inc., Class A+ 200 4,725
SBC Communications, Inc. 1,092 58,559
Sprint Corp. (PCS Group)+ 300 6,938
Sprint Corp. (FON Group) 200 16,825
U.S. West, Inc. (Media Group) 205 13,248
--------
490,896
--------
TOBACCO--0.6%
Fortune Brands, Inc. 100 3,163
Loew's Corp. 100 9,825
Philip Morris Companies, Inc. 1,400 74,900
RJR Nabisco Holdings Corp. 200 5,938
--------
93,826
--------
TRAVEL & RECREATION--0.4%
Carnival Corp., Class A 300 14,400
Marriott International, Inc., Class A 200 5,800
Mirage Resorts, Inc.+ 100 1,494
Walt Disney Co. 1,200 36,000
--------
57,694
--------
-------
38
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
Common Stock (continued) of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - ELECTRIC & GAS--0.7%
AES Corp.+ 100 $ 4,738
American Electric Power Co., Inc. 100 4,706
Coastal Corp. 200 6,988
Columbia Gas System, Inc. 150 8,663
Consolidated Edison, Inc. 100 5,288
Duke Energy Corp. 100 6,406
Eastern Enterprises 200 8,750
Edison International 100 2,788
Enron Corp. 100 5,706
First Energy Corp. 100 3,256
FPL Group, Inc. 100 6,163
New Century Energies, Inc. 100 4,875
PG & E Corp. 100 3,150
PacifiCorp 100 2,106
Sempra Energy 100 2,537
Southern Co. 400 11,625
Texas Utilities Co. 100 4,669
Williams Companies, Inc. 200 6,238
--------
98,652
--------
INTERNATIONAL--0.2%
CANADA--0.2%
Northern Telecom, Ltd. 400 20,050
Toronto Dominion Bank Ontario + 82 2,873
--------
22,923
--------
UNITED KINGDOM--0.0%
BTR PLC 1,129 648
Smithkline Beecham 9 126
Tesco PLC 27 77
--------
851
--------
23,774
--------
TOTAL COMMON STOCK
(Cost $3,833,271) 5,742,567
---------
--------
39
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
SCHEDULE OF INVESTMENTS (continued)
December 31, 1998
<TABLE>
<CAPTION>
Number
WARRANTS--0.0% of Shares Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BELGIUM--0.0%
Societe Generale de Beligique (expire 11/30/99)+ 4 $ 1
-----------
FRANCE--0.0%
AXA UAP CVG (expire 01/07/99)+ 38 18
Cie Generale de Eaux (expire 05/02/01)+ 35 91
-----------
109
-----------
TOTAL WARRANTS
(Cost $95) 110
-----------
INVESTMENT FUNDS--55.4%
- ---------------------------------------------------------------------------------------------------------------------------
Schwab International Index Fund, Investor Shares 191,052 2,917,379
Schwab Small-Cap Index Fund, Investor Shares 178,707 2,904,003
Schwab Total Bond Market Index Fund 208,763 2,125,213
-----------
TOTAL INVESTMENT FUNDS
(Cost $8,279,408) 7,946,595
-----------
SHORT-TERM INVESTMENT--3.3%
- ---------------------------------------------------------------------------------------------------------------------------
Schwab Value Advantage Money Fund, 4.99%* 472,243 472,243
-----------
TOTAL SHORT-TERM INVESTMENT
(Cost $472,243) 472,243
-----------
TOTAL INVESTMENTS--98.7%
(Cost $12,585,017) 14,161,515
-----------
OTHER ASSETS AND LIABILITIES--1.3%
Other assets 308,615
Liabilities (116,039)
-----------
192,576
-----------
TOTAL NET ASSETS--100.0% $14,354,091
============
Notes to Schedules of Investments
+ Non-Income Producing Security.
* Interest rate represents the yield as of the report date.
ADR--American Depository Receipt.
PLC--Public Limited Company.
See accompanying Notes to Financial Statements.
----------
40
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (Cost $12,585,017) $14,161,515
Cash 245,424
Receivables:
Investments sold 38,491
Dividends 9,530
Interest 253
Dividend tax reclaim 2,436
Investment Adviser 12,481
-----------
Total assets 14,470,130
-----------
LIABILITIES
Payables:
Investments purchased 74,403
Fund shares redeemed 8,073
Custodian fees 26,710
Investment advisory and administration fees 1,532
Accrued expenses 5,321
-----------
Total liabilities 116,039
-----------
Net assets applicable to outstanding shares $14,354,091
===========
NET ASSETS consist of:
Paid-in-capital $11,458,105
Undistributed net investment income 206,038
Accumulated net realized gain on investments sold and foreign currency transactions 1,112,450
Net unrealized appreciation on investments 1,576,498
Net unrealized appreciation on translating assets and liabilities into reporting currency 1,000
-----------
$14,354,091
===========
PRICING OF SHARES:
Outstanding shares, $0.00001 par value (unlimited shares authorized) 1,008,045
NET ASSET VALUE, offering and redemption price per share $ 14.24
- ---------
See accompanying Notes to Financial Statements.
---------
41
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
STATEMENT OF OPERATIONS
For the year ended December 31, 1998
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends (net of foreign taxes withheld of $2,529) $ 204,642
Interest 72,451
----------
Total investment income 277,093
----------
EXPENSES:
Investment advisory and administration fees 92,578
Custodian fees 20,146
Portfolio accounting fees 7,293
Professional fees 12,847
Shareholder reports 11,315
Trustees' fees 6,935
Insurance and other expenses 9,621
----------
160,735
Less: expenses reduced (see Note 4) (89,361)
----------
Net expenses incurred by Fund 71,374
----------
NET INVESTMENT INCOME 205,719
----------
NET REALIZED GAIN (LOSS) ON INVESTMENTS sold
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on investments sold 1,117,439
Net realized loss on foreign currency transactions (2,908)
----------
Net realized gain on investments sold and foreign currency transactions 1,114,531
----------
CHANGE IN NET UNREALIZED APPRECIATION ON INVESTMENTS
AND FOREIGN CURRENCY TRANSLATION:
Net unrealized appreciation on investments 171,878
Net unrealized appreciation on foreign currency transactions 3,091
----------
Net unrealized appreciation on investments and foreign currency transactions 174,969
----------
Net gain on investments 1,289,500
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,495,219
==========
- ----------
See accompanying Notes to Financial Statements.
----------
42
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
<S> <C> <C>
Net investment income $ 205,719 $ 148,846
Net realized gain on investments sold and foreign currency transactions 1,114,531 238,313
Change in net unrealized appreciation on investments and foreign currency 174,969 1,210,483
----------- ----------
Increase in net assets resulting from operations 1,495,219 1,597,642
----------- ----------
Dividends to shareholders from net investment income (147,519) (19,177)
Distributions to shareholders from net capital gains (242,011) (1,671)
----------- ----------
Total distributions (389,530) (20,848)
----------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 4,023,518 3,901,562
Net asset value of shares issued in reinvestment of dividends 389,529 20,848
Less payments for shares redeemed (1,497,745) (550,195)
----------- -----------
Increase in net assets from capital share transactions 2,915,302 3,372,215
----------- -----------
Total increase in net assets 4,020,991 4,949,009
NET ASSETS:
Beginning of period 10,333,100 5,384,091
----------- -----------
End of period (including undistributed net investment income of $206,038
and $149,729, respectively) $14,354,091 $10,333,100
=========== ===========
NUMBER OF FUND SHARES:
Sold 292,375 329,511
Reinvested 27,725 1,653
Redeemed (109,767) (49,965)
----------- -----------
Net increase in shares outstanding 210,333 281,199
SHARES OUTSTANDING:
Beginning of period 797,712 516,513
----------- -----------
End of period 1,008,045 797,712
=========== ===========
- ---------
See accompanying Notes to Financial Statements.
-----------
43
</TABLE>
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997 1996(1)
------------ ----------- ---------
For a share outstanding throughout each period:
<S> <C> <C> <C>
Net asset valueat beginning of period $ 12.95 $ 10.42 $ 10.00
----------- ----------- ----------
Income from investment operations:
Net investment income 0.17 0.22(2) 0.04
Net realized and unrealized gains
on investments 1.52 2.33 0.38
----------- ----------- ----------
Total income from investment operations 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) (0.00)(3) --
----------- ----------- ----------
Total distributions (0.40) (0.02) --
----------- ----------- ----------
Net asset value at end of period $ 14.24 $ 12.95 $ 10.42
=========== =========== ==========
Total return (%) 13.07 24.54 4.20*
Ratios/Supplemental Data (%)
- ------------------------------
Ratio of actual operating expenses to average
net assets 0.57 0.75 0.67**
Reductions reflected in above expense ratio 0.71 1.24 4.04**
Ratio of net investment income to average
net assets 1.64 1.98 2.35**
Portfolio turnover rate 67 81 7
Net assets, end of period $14,354,091 $10,333,100 $5,384,091
(1) For the period from November 1, 1996 (commencement of operations) to
December 31, 1996.
(2) 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.
(3) Less than one cent per share.
* Not annualized.
** Annualized.
- ----------
See accompanying Notes to Financial Statements.
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44
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SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1998
1. DESCRIPTION OF THE FUND
The Schwab MarketTrack Growth Portfolio II(TM) (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 December 31, 1998. Purchases and sales of foreign
securities, foreign income receipts and foreign expense payments are translated
into U.S. dollars at the exchange rate in effect on the dates of the respective
transactions.
The Fund separates within its statement of operations the portion of realized
and unrealized gains and losses resulting from changes in foreign exchange rates
from that arising from changes in securities' market values.
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 December 31, 1998, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $1,576,498 of which $2,102,977 related to
appreciated securities and $526,479 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 $750 and $1,891 were reclassified from paid-in-capital and undistributed net
investment income, respectively, to accumulated net realized gain (loss). These
reclassifications have no effect on net assets or net asset value per share.
---------
45
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
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 0.74% of the first $1 billion
of average daily net assets, 0.69% of the next $1 billion and 0.64% of such
assets over $2 billion. The Investment Adviser has reduced a portion of its fee
for the year ended December 31, 1998. (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 year ended December
31, 1998, 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
$6,935 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(R). As of December 31,
1998, the Fund owned 1% of the outstanding shares of the Schwab International
Index Fund; 0%(1) of the outstanding shares of the Schwab Value Advantage Money
Market Fund; 1% of the outstanding shares of the Schwab Total Bond Market Index
Fund; and 0%(1) of the outstanding shares of the Schwab Small-Cap Index Fund.
INTERFUND TRANSACTIONS--For the year ended December 31, 1998, the Fund engaged
in purchase and sale transactions with funds that have a common Investment
Adviser, common Trustees, and Officers. These sale transactions, made at current
market value pursuant to Rule 17a-7 under the Act were $4,860,165.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT ADVISER AND SCHWAB
The Investment Adviser guarantees that, through at least April 30, 1999, the
Fund's total operating expenses will not exceed 0.75% of the Fund's average
daily net assets, after waivers and reimbursements. For purpose of this
guarantee, operating expenses do not include interest expenses, extraordinary
expenses and taxes.
For the year ended December 31, 1998, the total of such fees and expenses
reduced by the Investment Adviser were $89,361.
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 December 31, 1998, 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 $10,823,923 and $8,091,007, respectively, for the year ended December
31, 1998.
Included in the aforementioned are purchases of common stock of The Charles
Schwab Corp., an affiliated issuer, with a current value as of December 31, 1998
of $12,642.
(1) Less than one percent of outstanding shares.
---------
46
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
DECEMBER 31, 1998 ANNUAL REPORT
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Schwab MarketTrack Growth Portfolio II(TM)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Schwab MarketTrack Growth Portfolio
II(TM) (one series constituting part of Schwab Annuity Portfolios, hereafter
referred to as the "Fund") at December 31, 1998, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended and the financial highlights for the periods presented,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 1999
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47
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
DECEMBER 31, 1998 ANNUAL REPORT
TAX DESIGNATIONS (UNAUDITED)
Pursuant to Section 854(b)(2) of the Internal Revenue Code, the Schwab
MarketTrack Growth Portfolio II hereby designates 17% of the ordinary income
dividends as qualifying for the dividends received deduction for the fiscal year
ended December 31, 1998.
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48
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