<PAGE>
SCHWAB ANNUITY PORTFOLIOS
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
DECEMBER 31, 1999
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by the real (inflation adjusted) growth in gross
domestic product (GDP), continued its lengthy expansion with a strong growth
rate of 4.0%--the third consecutive year at 4% or more--a rate considered by
many economists to be in excess of what the economy can absorb without
experiencing inflationary pressures. High levels of consumer spending and
business capital investment, as well as rising real wages and strong gains in
stock prices have been the principal factors continuing this lengthy expansion.
In a major revision of the GDP benchmark data going back four decades, the
Commerce Department reported that, during the 1990s, growth was stronger,
personal savings higher, and inflation lower than previously calculated.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GDP GROWTH RATE
QUARTERLY PERCENTAGE CHANGE
(ANNUALIZED RATE)
<S> <C>
Q1 1990 5.0%
Q2 1990 1.0%
Q3 1990 -0.6%
Q4 1990 -3.0%
Q1 1991 -1.7%
Q2 1991 2.6%
Q3 1991 1.3%
Q4 1991 2.5%
Q1 1992 4.3%
Q2 1992 4.0%
Q3 1992 3.1%
Q4 1992 5.2%
Q1 1993 -0.7%
Q2 1993 2.1%
Q3 1993 1.5%
Q4 1993 6.0%
Q1 1994 3.6%
Q2 1994 5.7%
Q3 1994 2.2%
Q4 1994 5.1%
Q1 1995 1.5%
Q2 1995 0.8%
Q3 1995 3.2%
Q4 1995 3.3%
Q1 1996 2.9%
Q2 1996 6.9%
Q3 1996 2.2%
Q4 1996 4.9%
Q1 1997 4.9%
Q2 1997 5.1%
Q3 1997 4.0%
Q4 1997 3.1%
Q1 1998 6.7%
Q2 1998 2.1%
Q3 1998 3.8%
Q4 1998 5.9%
Q1 1999 3.7%
Q2 1999 1.9%
Q3 1999 5.7%
Q4 1999 5.8%
</TABLE>
Source: Bloomberg L.P.
Concerns in 1998 over the impact of international economic problems have been
displaced by concerns over imbalances in the domestic economy, namely the
surging current account (trade) deficit, record high stock valuations, and the
low savings rate.
Looking ahead, the availability of increasingly scarce labor resources and the
behavior of domestic consumers in response to continued stock market volatility
may be key determinants of whether the economy continues on its current course
or softens throughout 2000. The consensus of most economists is that the U.S.
economy appears poised for continued growth, but at a more moderate pace than
the last four years.
UNEMPLOYMENT
December's unemployment rate of 4.1% was a 29-year low. Labor markets continue
to be extremely tight in many areas of the country. Growth in the labor force
has slowed, and there continues to be concern that wage and benefits increases
may begin to put more pressure on labor costs.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
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 7.0%
Nov-91 7.0%
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 7.0%
Apr-93 7.1%
May-93 7.1%
Jun-93 7.0%
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 6.8%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.1%
Jun-94 6.1%
Jul-94 6.3%
Aug-94 6.0%
Sep-94 5.8%
Oct-94 5.8%
Nov-94 5.6%
Dec-94 5.5%
Jan-95 5.6%
Feb-95 5.4%
Mar-95 5.3%
Apr-95 5.8%
May-95 5.8%
Jun-95 5.6%
Jul-95 5.6%
Aug-95 5.7%
Sep-95 5.6%
Oct-95 5.5%
Nov-95 5.7%
Dec-95 5.6%
Jan-96 5.6%
Feb-96 5.5%
Mar-96 5.6%
Apr-96 5.5%
May-96 5.6%
Jun-96 5.3%
Jul-96 5.5%
Aug-96 5.1%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.4%
Jan-97 5.3%
Feb-97 5.3%
Mar-97 5.1%
Apr-97 5.0%
May-97 4.7%
Jun-97 5.0%
Jul-97 4.7%
Aug-97 4.9%
Sep-97 4.7%
Oct-97 4.7%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.5%
Feb-98 4.6%
Mar-98 4.6%
Apr-98 4.3%
May-98 4.3%
Jun-98 4.5%
Jul-98 4.5%
Aug-98 4.5%
Sep-98 4.5%
Oct-98 4.5%
Nov-98 4.4%
Dec-98 4.3%
Jan-99 4.3%
Feb-99 4.4%
Mar-99 4.2%
Apr-99 4.3%
May-99 4.2%
Jun-99 4.3%
Jul-99 4.3%
Aug-99 4.2%
Sep-99 4.2%
Oct-99 4.1%
Nov-99 4.1%
Dec-99 4.1%
</TABLE>
Source: Bloomberg L.P.
INFLATION
Price inflation continued to remain well contained. The CPI rose a modest 2.7%
during 1999. Its core rate (which excludes the more volatile food and energy
components) rose just 1.9%. The GDP price deflator, the broadest measure of
inflation, indicated prices rising at an annual rate of 1.5% for 1999. The
Employment Cost Index, which measures inflation in wages, salaries and benefits
was also well contained, increasing 3.4% for the year.
---------------------
1
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
DECEMBER 31, 1999
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION MONTHLY CONSUMER PRICE INDEX QUARTERLY EMPLOYMENT COST INDEX
<S> <C> <C>
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 5.0% 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 3.0% 4.3%
Dec-91 3.1% 4.3%
Jan-92 2.6% 4.0%
Feb-92 2.8% 4.0%
Mar-92 3.2% 4.0%
Apr-92 3.2% 3.6%
May-92 3.0% 3.6%
Jun-92 3.1% 3.6%
Jul-92 3.2% 3.5%
Aug-92 3.1% 3.5%
Sep-92 3.0% 3.5%
Oct-92 3.2% 3.5%
Nov-92 3.0% 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 3.0% 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 3.0% 3.2%
Oct-94 2.6% 3.0%
Nov-94 2.7% 3.0%
Dec-94 2.7% 3.0%
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 3.0% 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 3.0% 2.8%
Aug-96 2.9% 2.8%
Sep-96 3.0% 2.8%
Oct-96 3.0% 2.9%
Nov-96 3.3% 2.9%
Dec-96 3.3% 2.9%
Jan-97 3.0% 2.9%
Feb-97 3.0% 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% 3.0%
Aug-97 2.2% 3.0%
Sep-97 2.2% 3.0%
Oct-97 2.1% 3.3%
Nov-97 1.8% 3.3%
Dec-97 1.7% 3.3%
Jan-98 1.6% 3.3%
Feb-98 1.4% 3.3%
Mar-98 1.4% 3.3%
Apr-98 1.4% 3.5%
May-98 1.7% 3.5%
Jun-98 1.7% 3.5%
Jul-98 1.7% 3.7%
Aug-98 1.6% 3.7%
Sep-98 1.5% 3.7%
Oct-98 1.5% 3.4%
Nov-98 1.5% 3.4%
Dec-98 1.6% 3.4%
Jan-99 1.7% 3.0%
Feb-99 1.6% 3.0%
Mar-99 1.7% 3.0%
Apr-99 2.3% 3.2%
May-99 2.1% 3.2%
Jun-99 2.0% 3.2%
Jul-99 2.1% 3.1%
Aug-99 2.3% 3.1%
Sep-99 2.6% 3.1%
Oct-99 2.6% 3.4%
Nov-99 2.6% 3.4%
Dec-99 2.7% 3.4%
</TABLE>
Source: Bloomberg L.P.
Although there is little evidence of accelerating core inflation, the Federal
Reserve has expressed concern that should labor markets continue to tighten,
increases in wages may outpace productivity growth. In such an environment,
productivity growth becomes particularly critical, as it enables companies to
pay higher wages without raising prices. Non-farm productivity grew 2.8% in 1998
and 2.9% during 1999, continuing a healthy trend that began in 1996.
ASSET CLASS PERFORMANCE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ASSET CLASS TOTAL RETURN PERFORMANCE S&P 500 INDEX - REGISTERED TRADEMARK RUSSELL 2000 SMALL-CAP INDEX
GROWTH OF A $1 INVESTMENT
<S> <C> <C>
Dec-98 $1.00 $1.00
Jan-99 $1.04 $1.01
Feb-99 $1.01 $0.93
Mar-99 $1.05 $0.95
Apr-99 $1.09 $1.03
May-99 $1.06 $1.05
Jun-99 $1.12 $1.09
Jul-99 $1.09 $1.06
Aug-99 $1.08 $1.02
Sep-99 $1.05 $1.02
Oct-99 $1.12 $1.03
Nov-99 $1.14 $1.09
Dec-99 $1.21 $1.21
<CAPTION>
ASSET CLASS TOTAL RETURN PERFORMANCE MSCI EAFE -REGISTERED TRADEMARK- (ND) INDEX LEHMAN AGGREGATE BOND INDEX
GROWTH OF A $1 INVESTMENT
<S> <C> <C>
Dec-98 $1.00 $1.00
Jan-99 $1.00 $1.01
Feb-99 $0.97 $0.99
Mar-99 $1.01 $0.99
Apr-99 $1.05 $1.00
May-99 $1.00 $0.99
Jun-99 $1.04 $0.99
Jul-99 $1.07 $0.98
Aug-99 $1.07 $0.98
Sep-99 $1.08 $0.99
Oct-99 $1.12 $1.00
Nov-99 $1.16 $1.00
Dec-99 $1.27 $0.99
</TABLE>
Compiled by Charles Schwab & Co., Inc.
/ / 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.
For the first time since 1994, international stocks outperformed the
long-dominant domestic large cap stocks. Assisted by the rebound in Asian
markets, international stocks, as represented by the MSCI EAFE Index, achieved a
total return of 26.96% for 1999 versus 21.04% for the S&P
500-Registered Trademark- Index. Within the S&P 500 Index, growth stocks in
general, and technology growth stocks in particular, continued to be the
strongest performing style for the reporting period. Small-cap stocks as
represented by the Russell 2000 Index, also experienced a positive return of
21.26% for the year.
Reflecting the rise in intermediate and long-term interest rates, fixed income
returns were generally weak for the reporting period. Bond returns, as
represented by the Lehman Brothers Aggregate Bond Index, were -0.82% for the
year.
U.S. EQUITY VALUATION
The price/earnings ratio for the S&P 500-Registered Trademark- Index reached
record highs during 1999 and ended the year at a lofty 32.59 times earnings,
approximately twice its long term average. The price/earnings ratio, also known
as a multiple, is the price of a stock divided by its earnings per share, and
generally indicates how much investors are willing to pay for a company's
earning potential. Based on other traditional market valuation measures such as
the price-to-book value ratio or dividend yield, the U.S. stock market continues
to remain at record high valuation levels.
----------------
2
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
DECEMBER 31, 1999
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 INDEX PRICE/EARNINGS RATIO
<S> <C>
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 14.90
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 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
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 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
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 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
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 24.00
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 27.58
Nov-98 30.14
Dec-98 31.97
Jan-99 33.29
Feb-99 32.65
Mar-99 33.78
Apr-99 33.90
May-99 32.74
Jun-99 34.70
Jul-99 31.62
Aug-99 31.21
Sep-99 29.90
Oct-99 29.92
Nov-99 30.65
Dec-99 32.53
30-Year Average 15.5
</TABLE>
Source: Bloomberg L.P.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO MANAGEMENT TEAM
GERI HOM -- Vice President and Senior Portfolio Manager, has primary
responsibility for the day-to-day management of the equity securities in the
portfolio. Geri joined CSIM in March 1995 as Portfolio Manager and was promoted
to her current position in December 1996. She currently manages approximately
$20 billion in indexed equity mutual fund assets. Prior to joining CSIM, Geri
was a principal for Wells Fargo Nikko Investment Advisors and Vice President and
Manager of the Domestic Equity Portfolio Management Group for Wells Fargo Nikko.
KIMON DAIFOTIS -- Vice President and Senior Portfolio Manager, has primary
responsibility for the day-to-day management of the bonds and cash equivalents
in the portfolio. Kimon joined CSIM in his current capacity in October 1997. For
five years prior to joining Schwab he was employed by Lehman Brothers, most
recently as Vice President in fixed income institutional sales and, prior to
that, Senior Portfolio Strategist.
PORTFOLIO HIGHLIGHTS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKET TRACK GROWTH PORTFOLIO II SCHWAB MARKETTRACK GROWTH PORTFOLIO II S&P 500 INDEX LEHMAN AGGREGATE BOND INDEX
<S> <C> <C> <C>
11/01/96 $10,000 $10,000 $10,000
11/30/96 $10,490 $10,777 $10,178
12/31/96 $10,420 $10,564 $10,083
01/31/97 $10,670 $11,223 $10,115
02/28/97 $10,710 $11,311 $10,140
03/31/97 $10,460 $10,848 $10,027
04/30/97 $10,780 $11,494 $10,178
05/31/97 $11,420 $12,193 $10,274
06/30/97 $11,940 $12,739 $10,397
07/31/97 $12,650 $13,752 $10,677
08/31/97 $12,200 $12,982 $10,587
09/30/97 $12,880 $13,692 $10,743
10/31/97 $12,520 $13,235 $10,899
11/30/97 $12,730 $13,848 $10,949
12/31/97 $12,977 $14,086 $11,060
01/31/98 $13,037 $14,242 $11,201
02/28/98 $13,779 $15,269 $11,192
03/31/98 $14,199 $16,051 $11,230
04/30/98 $14,320 $16,213 $11,289
05/31/98 $14,019 $15,934 $11,396
06/30/98 $14,240 $16,581 $11,493
07/31/98 $13,959 $16,405 $11,517
08/31/98 $12,285 $14,036 $11,705
09/30/98 $12,696 $14,936 $11,979
10/31/98 $13,478 $16,150 $11,915
11/30/98 $14,079 $17,129 $11,983
12/31/98 $14,673 $18,116 $12,019
01/31/99 $14,921 $18,873 $12,104
02/28/99 $14,395 $18,286 $11,893
03/31/99 $14,807 $19,017 $11,958
04/30/99 $15,405 $19,753 $11,996
05/31/99 $15,127 $19,287 $11,891
06/30/99 $15,735 $20,357 $11,853
07/31/99 $15,621 $19,722 $11,803
08/31/99 $15,518 $19,624 $11,797
09/30/99 $15,467 $19,086 $11,934
10/31/99 $16,095 $20,294 $11,978
11/30/99 $16,569 $20,707 $11,977
12/31/99 $17,553 $21,926 $11,919
<CAPTION>
SCHWAB MARKET TRACK GROWTH PORTFOLIO II GROWTH COMPOSITE INDEX II
<S> <C>
11/01/96 $10,000
11/30/96 $10,429
12/31/96 $10,396
01/31/97 $10,671
02/28/97 $10,624
03/31/97 $10,334
04/30/97 $10,517
05/31/97 $11,169
06/30/97 $11,593
07/31/97 $12,221
08/31/97 $11,897
09/30/97 $12,498
10/31/97 $12,059
11/30/97 $12,136
12/31/97 $12,257
01/31/98 $12,337
02/28/98 $13,040
03/31/98 $13,546
04/30/98 $13,676
05/31/98 $13,439
06/30/98 $13,615
07/31/98 $13,370
08/31/98 $11,690
09/30/98 $12,049
10/31/98 $12,653
11/30/98 $13,250
12/31/98 $13,876
01/31/99 $14,119
02/28/99 $13,611
03/31/99 $13,993
04/30/99 $14,550
05/31/99 $14,354
06/30/99 $15,004
07/31/99 $14,894
08/31/99 $14,773
09/30/99 $14,689
10/31/99 $15,188
11/30/99 $15,861
12/31/99 $17,058
</TABLE>
Source: Bloomberg L.P.
/ / The graph above compares the growth of a hypothetical $10,000 investment in
the Schwab MarketTrack Growth Portfolio II at the inception, with a similar
investment in the S&P 500 Index, Growth Composite Index II(1) and the Lehman
Brothers Aggregate Bond Index.
/ / THE INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. TOTAL
RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. INDICES ARE
UNMANAGED AND DO NOT REFLECT ADVISORY FEES AND OTHER EXPENSES ASSOCIATED WITH AN
INVESTMENT IN THE PORTFOLIO. INVESTORS CANNOT INVEST IN AN INDEX DIRECTLY.
PORTFOLIO HIGHLIGHTS
Q. HOW DID THE PORTFOLIO PERFORM DURING THE REPORTING PERIOD?
A. As discussed in the Market Overview section and detailed in the table below,
there was a wide range of returns for the various asset classes during the
reporting period. The Portfolio's one-year return for the period ended 12/31/99
of 19.63% was a
(1)The Growth Composite Index II is composed of Morningstar category averages
and cash equivalents as represented by the 90-day T-bill and is calculated
using the following portfolio allocations: 40% large-cap stocks, 20%
small-cap stocks, 20% foreign stocks, 15% bonds and 5% cash. As of 12/31/99,
there were 2,190 large-cap funds, 845 small-cap funds, 666 foreign funds and
553 intermediate-term bond funds tracked by Morningstar. Performace 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.
---------------------
3
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
DECEMBER 31, 1999
reflection of the Portfolio's holdings in these various asset categories. The
since-inception (11/1/96) average annual return was 19.44%(2).
<TABLE>
<CAPTION>
ONE-YEAR
RETURNS PORTFOLIO
AS OF NEUTRAL
ASSET CLASS INDEX 12/31/99 TARGET
<S> <C> <C> <C>
- --------------------------------------------------------------------------
Large Cap Stocks S&P 500 Index 21.04% 40%
Small-Cap Stocks Schwab Small-Cap Index 27.67% 20%
International Schwab International Index 33.81% 20%
Stocks
Bonds Lehman Brothers Aggregate Bond -0.82% 15%
Index
Cash Equivalents 3-Month U.S. Treasury Bill 4.87% 5%
</TABLE>
Source: Bloomberg L.P.
Because the Portfolio is designed to incorporate a mix of different asset
classes, its return over any given period is expected to lag the return of the
strongest performing asset class. Conversely, the return of the Portfolio is
expected to exceed that of the worst performing asset class for any given
period. By dampening the return volatility of any single asset class, the
Portfolio is designed to provide more stable returns throughout market cycles
which, on a risk-adjusted basis, is expected to be favorable over extended
periods of time.
Q. CAN YOU PROVIDE AN EXAMPLE OF HOW ASSET ALLOCATION REDUCES PORTFOLIO
VOLATILITY?
A. Adding bonds and cash equivalents to a stock portfolio can help reduce its
overall risk. In 1999 the Schwab Center for Investment Research conducted a
study analyzing this issue and created the following chart. The chart displays
the high, low, and average annual returns from 1970-1998 for five hypothetical
portfolios representing the returns of stocks and bonds measured by indices(3).
As the chart demonstrates, adding bonds to a stock-heavy portfolio would have
reduced risk while still producing competitive returns.
A portfolio comprising 40% bonds and 60% stocks, for example, achieved an
average annual return of 11.97%--roughly 1.5% less than the 13.48% return of the
all-stock portfolio--and with significantly less volatility. The lowest annual
return of the portfolio invested 40% in bonds and 60% in stocks, which was
actually a loss of 13.60%, was about half of the 26.47% loss in the all-stock
portfolio. This hypothetical example is for illustrative purposes only, and, of
course, past performance does not guarantee future results.
(1970--1998)
<TABLE>
<CAPTION>
THE EFFECTS OF ADDING BONDS TO AN ALL-STOCK PORTFOLIO
90% 80% 70% 60%
STOCKS STOCKS STOCKS STOCKS
100% 10% 20% 30% 40%
STOCKS BONDS BONDS BONDS BONDS
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Maximum 37.43% 35.37% 33.30% 31.24% 29.18%
Average 13.48% 13.14% 12.77% 12.38% 11.97%
Minimum -26.47% -23.25% -20.04% -16.82% -13.60%
</TABLE>
Compiled by Charles Schwab & Co., Inc.
Q. WHY DOES INVESTING IN ALL THE MAJOR ASSET CLASSES MAKE SENSE?
A. The chart below shows the performance of large-cap, small-cap, and
international stocks as measured by indices over nine non-overlapping three-year
periods spanning 1973 through 1999. The chart shows that the performance of the
various asset classes varied considerably. Sometimes large-caps performed better
than small-caps and vice versa. Some international stocks performed better than
domestic stocks and vice versa. These shifting results are driven by the fact
that different asset classes tended to take turns leading the market and these
"performance cycles" have varied in length and magnitude, as shown by the chart.
While these cycles may not be entirely random, predicting them can prove to be
very difficult. By investing in several asset classes, you can participate in
the long-term return performance of the various classes, reduce portfolio
volatility (compared to investing in just one asset class) and avoid the whole
issue of trying to predict which asset class will be the next winner.
(2)A portion of the Schwab MarketTrack Growth Portfolio II's expenses was
reduced. Without these reductions, the Portfolio's 12-month, and since
inception average annual returns would have been 18.73% and 18.23%,
respectively.
(3)The returns do not reflect actual investment in any security. The
hypothetical returns are all weighted averages and assume reinvestment of
dividends. The indices represented are the S&P 500-Registered Trademark-
Index and the Ibbotson Intermediate Government Bond Index. Indices are
unmanaged, do not incur costs and expenses, and cannot be invested in
directly.
----------------
4
<PAGE>
SCHWAB ANNUITY PORTFOLIOS
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
DECEMBER 31, 1999
NON-OVERLAPPING 3-YEAR INTERVALS
ANNUALIZED RETURNS
<TABLE>
<CAPTION>
3-YEAR CRSP MSCI-EAFE INDEX
PERIOD S&P 500 INDEX NY/AM/NM 6-10 INDEX INTERNATIONAL
ENDING LARGE-CAP STOCKS SMALL-CAP STOCKS STOCKS
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
1975 -4.87% -9.06% -2.88%
1978 7.00% 28.50% 18.49%
1981 14.25% 26.05% 9.35%
1984 16.49% 16.48% 10.04%
1987 18.11% 8.61% 49.29%
1990 14.15% 4.74% 3.05%
1993 15.63% 28.29% 9.65%
1996 19.66% 14.92% 8.64%
1999 27.56% 17.03% 16.06%
</TABLE>
Source: Ibbotson Associates, Inc.
/ / THE RETURNS DO NOT REFLECT AN ACTUAL INVESTMENT IN ANY SECURITY. INDICES ARE
UNMANAGED, DO NOT INCUR COSTS OR EXPENSES AND CAN NOT BE INVESTED IN DIRECTLY.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
---------------------
5
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK--40.3% OF SHARES (000S)
- --------------------------------------------------------------
<S> <C> <C>
AEROSPACE / DEFENSE--0.4%
Boeing Co. 538 $ 22
General Dynamics Corp. 100 5
Lockheed Martin Corp. 200 4
Northrop Grumman Corp. 61 3
Raytheon Co., Class B 200 5
Rockwell International Corp. 100 5
Textron, Inc. 100 8
United Technologies Corp. 300 20
------
72
------
AIR TRANSPORTATION--0.2%
AMR Corp. + 100 7
Delta Air Lines, Inc. 100 5
FDX Corp.+ 200 8
Southwest Airlines Co. 300 5
------
25
------
ALCOHOLIC BEVERAGES--0.2%
Anheuser-Busch Companies, Inc. 300 21
Seagram Co. Ltd. 300 14
------
35
------
APPAREL--0.1%
Nike, Inc., Class B 200 10
VF Corp. 100 3
------
13
------
AUTOMOTIVE PRODUCTS / MOTOR VEHICLES--0.5%
B.F. Goodrich Co. 100 3
Dana Corp. 100 3
Danaher Corp. 100 5
Delphi Automotive Systems Corp. 379 6
Fleetwood Enterprises, Inc. 100 2
Ford Motor Co. 700 37
General Motors Corp., Class H 500 36
Genuine Parts Co. 100 2
Goodyear Tire & Rubber Co. 100 3
TRW, Inc. 100 5
------
102
------
BANKS--2.1%
AmSouth Bancorp. 250 5
Bank of America Corp. 1,019 51
Bank of New York Co., Inc. 500 20
</TABLE>
---------------
6
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- --------------------------------------------------------------
<S> <C> <C>
BANKS (CONTINUED)
Bank One Corp. 672 $ 22
BB&T Corp. 226 6
Chase Manhattan Corp. 500 39
Comerica, Inc. 50 2
Fifth Third Bancorp. 150 11
First Union Corp. 624 20
Firstar Corp. 709 15
Fleet Boston Corp. 536 19
Golden West Financial Corp. 100 3
Huntington Bancshares, Inc. 121 3
J.P. Morgan & Co., Inc. 100 13
KeyCorp, Inc. 300 7
Mellon Financial Corp. 300 10
National City Corp. 424 10
Northern Trust Corp. 100 5
Old Kent Financial Corp. 100 4
PNC Bank Corp. 200 9
Regions Financial, Corp. 100 3
Republic New York Corp. 100 7
SouthTrust Corp. 200 8
State Street Corp. 100 7
Summit Bancorp. 200 6
SunTrust Banks, Inc. 200 14
Synovus Financial Corp. 150 3
U.S. Bancorp. 425 10
Union Planters Corp. 100 4
Wachovia Corp. 100 7
Washington Mutual, Inc. 400 10
Wells Fargo & Co. 1,000 40
------
393
------
BUSINESS MACHINES & SOFTWARE--6.5%
3Com Corp.+ 200 9
Adaptec, Inc.+ 100 5
Adobe Systems, Inc. 100 7
Apple Computer, Inc.+ 200 21
BMC Software, Inc.+ 200 16
Cabletron Systems, Inc.+ 100 3
Ceridian Corp.+ 100 2
Cisco Systems, Inc.+ 2,000 214
Compaq Computer Corp. 1,100 30
Computer Associates International,
Inc. 300 21
Compuware Corp.+ 200 7
</TABLE>
---------------
7
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- --------------------------------------------------------------
<S> <C> <C>
BUSINESS MACHINES & SOFTWARE (CONTINUED)
Dell Computer Corp.+ 1,600 $ 82
Gateway, Inc.+ 200 14
Hewlett-Packard Co. 600 68
International Business
Machines Corp. 1,100 119
Lexmark International Group, Inc.,
Class A+ 100 9
Microsoft Corp.+ 3,200 375
Novell, Inc.+ 200 8
Oracle Sytems Corp.+ 875 98
Parametic Technology Corp.+ 200 5
PeopleSoft, Inc.+ 200 4
Pitney Bowes, Inc. 200 10
Seagate Technology, Inc.+ 100 5
Silicon Graphics, Inc.+ 100 1
Sun Microsystems, Inc.+ 1,000 77
Unisys Corp.+ 200 6
Xerox Corp. 500 11
------
1,227
------
BUSINESS SERVICES--1.8%
Allied Waste Industries, Inc.+ 100 1
America Online, Inc.+ 1,400 106
Automatic Data Processing, Inc. 300 16
Cendant Corp.+ 440 12
Citrix Systems, Inc.+ 100 12
Computer Sciences Corp.+ 100 9
Ecolab, Inc. 100 4
First Data Corp. 300 15
H&R Block, Inc. 100 4
Interpublic Group of Companies,
Inc. 200 12
Ominicom Group, Inc. 100 10
Paychex, Inc. 150 6
R.R. Donnelly & Sons Co. 100 2
Tyco International Ltd. 1,022 40
Waste Management, Inc. 345 6
Yahoo!, Inc.+ 200 87
------
342
------
CHEMICAL--0.6%
Air Products & Chemicals, Inc. 100 3
Dow Chemical Co. 100 13
E.I. du Pont de Nemours & Co. 669 44
Hercules, Inc. 100 3
Minnesota Mining &
Manufacturing Co. 200 20
PPG Industries, Inc. 100 6
</TABLE>
---------------
8
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- --------------------------------------------------------------
<S> <C> <C>
CHEMICAL (CONTINUED)
Praxair, Inc. 200 $ 10
Rohm & Haas Co. 100 4
Sigma-Aldrich Corp. 100 3
Union Carbide Corp. 100 7
W.R. Grace & Co.+ 200 3
------
116
------
CONSTRUCTION--0.1%
Crane Co. 100 2
Kaufman & Broad Home Corp. 100 2
Masco Corp. 300 8
Sherwin-Williams Co. 100 2
The Stanley Works 100 3
Vulcan Materials Co. 100 4
------
21
------
CONSUMER - DURABLE--0.2%
Black & Decker Corp. 100 5
Fortune Brands, Inc. 200 7
Leggett & Platt, Inc. 100 2
Maytag Corp. 100 5
Newell Rubbermaid, Inc. 200 6
------
25
------
CONSUMER - NON-DURABLE--0.2%
Darden Restaurants, Inc. 100 2
Hasbro, Inc. 100 2
Jostens, Inc. 100 3
Mattel, Inc. 300 4
McDonald's Corp. 800 32
Tricon Global Restaurants, Inc.+ 60 2
Wendy's International, Inc. 100 2
------
47
------
CONTAINERS--0.0%
Crown Cork & Seal Co., Inc. 100 2
Owens-Illinois, Inc.+ 100 3
Sealed Air Corp.+ 53 3
------
8
------
ELECTRONICS--4.0%
ADC Telecommunications, Inc.+ 100 7
Advanced Micro Devices, Inc.+ 100 3
Analog Devices, Inc.+ 100 9
</TABLE>
---------------
9
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- --------------------------------------------------------------
<S> <C> <C>
ELECTRONICS (CONTINUED)
Applied Materials, Inc.+ 200 $ 25
Electronic Data Systems Corp. 200 13
EMC Corp.+ 600 66
Emerson Electric Co. 300 17
General Instrument Corp.+ 100 9
Intel Corp. 2,100 173
KLA-Tencor Corp.+ 100 11
LSI Logic Corp.+ 100 7
Lucent Technologies, Inc. 1,965 147
Micron Technology, Inc. + 200 16
Molex, Inc. 100 6
Motorola, Inc. 400 59
National Semiconductor Corp.+ 100 4
Niagara Mohawk Holdings, Inc.+ 100 1
PE Corp-PE Biosystems Group 100 12
QUALCOMM, Inc.+ 400 70
Solectron Corp.+ 200 19
Tektronix, Inc. 50 2
Tellabs, Inc.+ 200 13
Teradyne, Inc.+ 100 7
Texas Instruments, Inc. 500 48
Thermo Electron Corp.+ 100 2
Xilinx, Inc.+ 200 9
------
755
------
ENERGY - RAW MATERIALS--0.3%
Anadarko Petroleum Corp. 100 3
Apache Corp. 100 4
Baker Hughes, Inc. 231 5
Burlington Resources, Inc. 100 3
Constellation Energy Group 100 3
Halliburton Co. 300 12
McDermott International, Inc. 100 1
Occidental Petroleum Corp. 200 4
Rowan Companies, Inc.+ 100 2
Schlumberger Ltd. 300 17
Sempra Energy 100 2
Sunoco, Inc. 100 2
Union Pacific Resources Group, Inc. 200 3
------
61
------
FOOD & AGRICULTURE--1.3%
Archer-Daniels Midland Co. 331 4
Bestfoods, Inc. 200 11
</TABLE>
---------------
10
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- --------------------------------------------------------------
<S> <C> <C>
FOOD & AGRICULTURE (CONTINUED)
Campbell Soup Co. 300 $ 12
Coca-Cola Co. 1,500 87
Coca-Cola Enterprises, Inc. 300 6
ConAgra, Inc. 300 7
General Mills, Inc. 100 4
H.J. Heinz Co. 200 8
Kellogg Co. 300 9
Monsanto Co. 400 14
PepsiCo, Inc. 900 32
Quaker Oats Co. 100 7
Ralston-Ralston Purina Group 200 6
Sara Lee Corp. 600 13
SYSCO Corp. 200 8
Unilever NV+ 357 19
Wm. Wrigley Jr. Co. 100 8
------
255
------
GOLD--0.1%
Barrick Gold Corp. 200 4
Homestake Mining Co. 200 2
Newmont Mining Corp. 100 2
Placer Dome, Inc. 200 2
------
10
------
HEALTHCARE / DRUGS & MEDICINE--3.7%
Abbott Laboratories 1,000 36
Allergan, Inc. 100 5
ALZA Corp.+ 100 3
American Home Products Corp. 800 32
Amgen, Inc.+ 600 36
Baxter International, Inc. 200 13
Becton, Dickinson & Co. 200 5
Biomet, Inc. 100 4
Boston Scientific Corp.+ 214 5
Bristol-Meyers Squibb Co. 1,200 77
Cardinal Health, Inc. 150 7
Columbia / HCA Healthcare Corp. 300 9
Eli Lilly & Co. 700 47
Guidant Corp. + 200 9
HealthSouth Corp.+ 268 1
Humana, Inc.+ 100 1
IMS Health, Inc. 100 3
Johnson & Johnson 900 84
</TABLE>
---------------
11
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- --------------------------------------------------------------
<S> <C> <C>
HEALTHCARE / DRUGS & MEDICINE (CONTINUED)
Manor Care, Inc. + 100 $ 2
McKesson HBOC, Inc. 274 6
Medtronic, Inc. 700 26
Merck & Co., Inc. 1,400 94
Pfizer, Inc. 2,400 78
Pharmacia & Upjohn, Inc. 300 14
Quintiles Transnational Corp.+ 100 2
Schering-Plough Corp. 900 38
Service Corp. International 200 1
St. Jude Medical, Inc. + 100 3
Tenet Healthcare Corp.+ 200 5
United Healthcare Corp. 200 11
Warner-Lambert Co. 500 41
Watson Pharmaceuticals, Inc.+ 100 4
------
702
------
HOUSEHOLD PRODUCTS--0.8%
Avon Products, Inc. 200 7
Clorox Co. 100 5
Colgate-Palmolive Co. 400 26
Gillette Co. 700 29
International Flavors &
Fragrances, Inc. 100 4
Procter & Gamble Co. 800 88
Tupperware Corp. 100 2
------
161
------
INSURANCE--1.2%
Aetna, Inc. 100 6
AFLAC, Inc. 200 9
Allstate Corp. 500 12
American General Corp. 200 15
American International Group, Inc. 910 98
Aon Corp. 250 10
Chubb Corp. 100 6
CIGNA Corp. 100 8
Cincinnati Financial Corp. 100 3
Conseco, Inc. 232 4
Hartford Financial Services Group,
Inc. 100 5
Jefferson-Pilot Corp. 50 3
Lincoln National Corp. 100 4
Marsh & McLennan Companies, Inc. 150 14
MBIA, Inc. 100 5
MGIC Investment Corp. 100 6
</TABLE>
---------------
12
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- --------------------------------------------------------
<S> <C> <C>
INSURANCE (CONTINUED)
SAFECO Corp. 100 $ 2
St. Paul Companies, Inc. 100 3
Torchmark Corp. 100 3
UnumProvident Corp. 173 6
------
222
------
MEDIA--1.2%
CBS Corp. + 500 32
Clear Channel Communications,
Inc.+ 200 18
Comcast Corp., Class A 500 25
Dow Jones & Co., Inc. 100 7
Gannett Co., Inc. 200 16
Knight-Ridder, Inc. 100 6
McGraw-Hill Companies, Inc. 100 6
Mediaone Group+ 400 31
New York Times Co., Class A 100 5
Time Warner, Inc. 700 51
Tribune Co. 100 6
Viacom, Inc., Class B+ 400 24
------
227
------
MISCELLANEOUS--0.0%
Pactiv Corp.+ 100 1
ScottishPower PLC-ADR 58 2
------
3
------
MISCELLANEOUS FINANCE--2.0%
American Express Co. 300 50
Associates First Capital Corp. 362 10
Bear Stearns Companies, Inc. 110 5
Capital One Financial Corp. 100 5
Charles Schwab Corp. 550 21
Citigroup, Inc. 2,052 114
Countrywide Credit Industries,
Inc. 100 3
Fannie Mae 600 37
Franklin Resources, Inc. 200 6
Freddie Mac 400 19
Household International, Inc. 206 8
Lehman Brothers Holdings, Inc. 100 8
MBNA Corp. 525 14
Merrill Lynch & Co., Inc. 200 17
Morgan Stanley Dean Witter
Discover & Co. 365 52
Providian Financial Corp. 100 9
</TABLE>
---------------
13
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- -------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS FINANCE (CONTINUED)
SLM Holding Corp. 100 $ 4
T. Rowe Price Associates, Inc. 100 4
-----
386
-----
NON-FERROUS METALS--0.2%
Alcan Aluminum Ltd. 100 4
Alcoa, Inc. 200 17
Engelhard Corp. 100 2
Freeport-McMoRan Copper & Gold, Inc., Class B + 100 2
Inco Limited + 100 2
Phelps Dodge Corp. 100 7
-----
34
-----
OIL - DOMESTIC--0.3%
Amerada Hess Corp. 100 6
Atlantic Richfield Co. 200 17
Conoco, Inc., Class B 300 7
Kerr-McGee Corp. 100 6
Phillips Petroleum Co. 200 9
Transocean Sedco Forex, Inc. 158 5
Unocal Corp. 200 7
USX-Marathon Group 100 2
-----
59
-----
OIL - INTERNATIONAL--1.6%
Chevron Corp. 400 35
Exxon Mobil Corp. 2,160 174
Royal Dutch Petroleum Co. 1,300 79
Texaco, Inc. 300 16
-----
304
-----
OPTICAL & PHOTO--0.0%
Eastman Kodak Co. 100 7
- -----
PAPER & FOREST PRODUCTS--0.4%
Champion International Corp. 100 6
Fort James Corp. 100 3
Georgia-Pacific Group 100 5
International Paper Co. 300 17
Kimberly-Clark Corp. 300 20
Louisiana-Pacific Corp. 100 1
Mead Corp. 100 4
Westvaco Corp. 100 3
</TABLE>
---------------
14
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- -------------------------------------------------------------------------
<S> <C> <C>
PAPER & FOREST PRODUCTS (CONTINUED)
Weyerhaeuser Co. 100 $ 7
Willamette Industries, Inc. 100 5
-----
71
-----
PRODUCER GOODS & MANUFACTURING--2.3%
Avery Dennison Corp. 100 7
Caterpillar, Inc. 200 9
Cooper Industries, Inc. 100 4
Corning, Inc. 200 26
Deere & Co. 100 4
Dover Corp. 100 5
General Electric Co. 2,000 310
Honeywell International 487 28
Illinois Tool Works, Inc. 200 14
Ingersoll-Rand Co. 100 6
ITT Industries, Inc. 100 3
Johnson Controls, Inc. 100 6
Milacron, Inc. 100 2
Pall Corp. 100 2
Parker-Hannifin Corp. 100 5
W.W. Grainger, Inc. 100 5
-----
436
-----
RAILROAD & SHIPPING--0.1%
Burlington Northern Santa Fe Corp. 200 5
CSX Corp. 100 3
Kansas City Southern Industries, Inc. 100 7
Norfolk Southern Corp. 200 4
Union Pacific Corp. 200 9
-----
28
-----
RETAIL--2.7%
Albertson's, Inc. 300 10
AutoZone, Inc.+ 100 3
Bed, Bath & Beyond, Inc.+ 100 3
Best Buy Co., Inc.+ 100 5
Circuit City Stores, Inc. 100 5
Consolidated Stores Corp.+ 88 1
Costco Wholesale Corp.+ 100 9
CVS Corp. 290 12
Dayton Hudson Corp. 300 22
Dillards, Inc., Class A 100 2
</TABLE>
---------------
15
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- -------------------------------------------------------------------------
<S> <C> <C>
RETAIL (CONTINUED)
Dollar General Corp. 156 $ 4
Federated Department Stores, Inc.+ 100 5
Gap, Inc. 537 25
Home Depot, Inc. 1,500 103
IKON Office Solutions 100 1
J.C. Penny Co., Inc. 200 4
Kmart Corp.+ 300 3
Kohl's Corp.+ 100 7
Kroger Co.+ 500 9
Limited, Inc. 100 4
Lowe's Companies, Inc. 200 12
May Department Stores Co. 250 8
Nordstrom, Inc. 100 3
Office Depot, Inc.+ 200 2
Rite Aid Corp. 100 1
Safeway, Inc.+ 300 11
Sears, Roebuck & Co. 200 6
Staples, Inc.+ 300 6
SUPERVALU, Inc. 100 2
Tandy Corp. 100 5
TJX Companies, Inc. 200 4
Toys 'R' Us, Inc.+ 200 3
Wal-Mart Stores, Inc. 2,800 194
Walgreen Co. 600 18
Winn Dixie Stores, Inc. 100 2
-----
514
-----
STEEL--0.1%
Allegheny Teledyne, Inc. 100 2
Nucor Corp. 100 5
USX-U.S. Steel Group, Inc. 100 3
Worthington Industries, Inc. 100 2
-----
12
-----
TELEPHONE--3.6%
Alltel Corp. 100 8
AT&T Corp. 1,932 98
Bell Atlantic Corp. 1,006 62
BellSouth Corp. 1,200 56
CenturyTel, Inc. 50 2
Global Crossing, Ltd.+ 505 25
GTE Corp. 600 42
</TABLE>
---------------
16
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- --------------------------------------------------------------
<S> <C> <C>
TELEPHONE (CONTINUED)
MCI WorldCom, Inc.+ 1,831 $ 97
Nextel Communications, Inc.,
Class A+ 200 21
Nortel Networks Corp. 800 81
SBC Communications, Inc. 2,081 101
Sprint Corp (FON Group) 500 34
Sprint Corp. (PCS Group)+ 300 31
US WEST, Inc. 305 22
-----
680
-----
TOBACCO--0.2%
Loew's Corp. 100 6
Phillip Morris Companies, Inc. 1,500 35
R.J. Reynolds Tobacco Holdings,
Inc. 200 2
UST, Inc. 100 3
-----
46
-----
TRAVEL & RECREATION--0.4%
Brunswick Corp. 100 2
Carnival Corp. 400 19
Harrah's Entertainment, Inc.+ 100 3
Hilton Hotels Corp. 200 2
Marriott International, Inc.,
Class A 200 6
Walt Disney Co. 1,300 38
-----
70
-----
UTILITIES-ELECTRIC & GAS--0.9%
AES Corp.+ 100 7
Ameren Corp. 100 3
American Electric Power Co., Inc. 100 3
Carolina Power & Light Co. 100 3
Central & South West Corp. 100 2
Cinergy Corp. 100 2
CMS Energy Corp. 100 3
Coastal Corp. 100 4
Columbia Energy Group 150 9
Consolidated Edison, Inc. 100 3
Consolidated Natural Gas Co. 100 6
Dominion Resources, Inc. 100 4
DTE Energy Co. 100 3
Duke Energy Corp. 200 10
Eastern Enterprises 100 6
Edison International 200 5
</TABLE>
---------------
17
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE
COMMON STOCK (CONTINUED) OF SHARES (000S)
- --------------------------------------------------------------
<S> <C> <C>
UTILITIES - ELECTRIC & GAS (CONTINUED)
El Paso Energy Corp. 100 $ 4
Enron Corp. 400 18
Entergy Corp. 200 5
First Energy Corp. 100 2
Florida Progress Corp. 100 4
FPL Group, Inc. 100 4
GPU, Inc. 100 3
New Centuries Energies, Inc. 100 3
Northern States Power Co. 100 2
PECO Energy Co. 100 3
PG&E Corp. 200 4
Pinnacle West Capital 100 3
PP&L Resources, Inc. 100 2
Public Service Enterprise
Group, Inc. 100 3
Reliant Energy, Inc. 200 5
Southern Co. 400 9
Texas Utilities Co. 200 7
Unicom Corp. 100 3
Williams Cos., Inc. 300 9
-------
166
-------
TOTAL COMMON STOCK
(Cost $4,671) 7,635
-------
INVESTMENT FUNDS--55.1%
- --------------------------------------------------------------
Schwab International Index Fund,
Select Shares 185,647 3,759
Schwab Small-Cap Index Fund,
Select Shares 194,424 3,920
Schwab Total Bond Market
Index Fund 291,533 2,775
------
TOTAL INVESTMENT FUNDS
(Cost $9,198) 10,454
------
SHORT-TERM INVESTMENTS--4.7%
First National Bank of Chicago
Time Deposit
3.75%*, 01/03/00 514,402 514
Schwab Value Advantage Money
Fund, Investor Shares
5.63%* 378,905 379
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $893) 893
-------
</TABLE>
---------------
18
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
VALUE
(000S)
- --------------------------------------------------------------
<S> <C>
TOTAL INVESTMENTS -- 100.1%
(Cost $14,762) $ 18,982
--------
OTHER ASSETS AND LIABILITIES--(0.1%)
Other assets 33
Liabilities (59)
--------
(26)
--------
NET ASSETS -- 100.0% $ 18,956
========
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
+ Non-Income Producing Security.
* Interest rate represents the yield as of the report date.
ADR--American Depository Receipt.
Ltd.-- Limited Company
PLC -- Public Limited Company
- -----------
See accompanying Notes to Financial Statements.
---------------
19
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS)
DECEMBER 31, 1999
ASSETS
Investments, at value (Cost $14,762) $18,982
Receivables:
Fund shares sold 7
Dividends 23
Dividend tax reclaim 1
Prepaid expenses 2
-------
Total assets 19,015
-------
LIABILITIES
Payables:
Investments purchased 3
Investment advisory and administration fees 1
Accrued expenses 55
-------
Total liabilities 59
-------
Net assets applicable to outstanding shares $18,956
=======
NET ASSETS CONSIST OF:
Paid-in capital $14,378
Undistributed net investment income 206
Accumulated net realized gain on investments
sold and foreign currency transactions 152
Net unrealized appreciation on investments 4,220
-------
$18,956
=======
PRICING OF SHARES
Outstanding shares, $0.00001 par
value (unlimited shares authorized) 1,197
NET ASSET VALUE, offering and
redemption price per share $15.84
- ----------
See accompanying Notes to Financial Statements.
---------------
20
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
STATEMENT OF OPERATIONS (IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1999
INVESTMENT INCOME:
Dividends (net of foreign taxes
withheld of $1) $ 279
Interest 14
------
Total investment income 293
------
EXPENSES:
Investment advisory and administration fees 94
Custodian fees 6
Portfolio accounting fees 2
Professional fees 44
Registration fees 3
Shareholder reports 17
Trustees' fees 1
Other expenses 2
------
169
Less: expenses reduced (82)
------
Net expenses incurred by fund 87
------
NET INVESTMENT INCOME 206
------
NET REALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain on investments sold 150
Net realized gain on foreign currency
transactions 1
------
Net realized gain on investments and
foreign currency transactions 151
------
CHANGE IN NET UNREALIZED APPRECIATION
(DEPRECIATION)ON INVESTMENTS AND FOREIGN
CURRENCY TRANSLATION:
Net unrealized appreciation on investments 2,644
Net unrealized depreciation on foreign
currency translation (1)
------
Net unrealized appreciation on investments
and foreign currency translation 2,643
------
Net gain on investments 2,794
------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,000
======
- ----------
See accompanying Notes to Financial Statements.
---------------
21
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 206 $ 206
Net realized gain on investments and
foreign currency transactions 151 1,114
Change in net unrealized appreciation
on investments and foreign
currency translation 2,643 175
------- --------
Increase in net assets resulting from operations 3,000 1,495
------- --------
DIVIDENDS AND DISTRIBUTIONS:
Dividends to shareholders from net investment income (203) (147)
Distributions to shareholders from net capital gains (1,117) (242)
------- --------
Total dividends and distributions to shareholders (1,320) (389)
------- --------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 3,291 4,024
Net asset value of shares issued in reinvestment of dividends 1,321 389
Payments for shares redeemed (1,690) (1,498)
------- --------
Increase in net assets from capital share transactions 2,922 2,915
------- --------
Total increase in net assets 4,602 4,021
------- --------
NET ASSETS:
Beginning of year 14,354 10,333
------- --------
End of year (including undistributed net investment income
of $206 and $206, respectively) $18,956 $14,354
NUMBER OF FUND SHARES:
Sold 217 292
Reinvested 85 28
Redeemed (113) (110)
------- --------
Net increase in shares outstanding 189 210
SHARES OUTSTANDING:
Beginning of year 1,008 798
------- --------
End of year 1,197 1,008
======= ========
</TABLE>
- ----------
See accompanying Notes to Financial Statements.
---------------
22
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
FINANCIAL HIGHLIGHTS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996(1)
-------- -------- -------- -------
<S> <C> <C> <C> <C>
PER-SHARE DATA ($):
Net asset value at beginning of period 14.24 12.95 10.42 10.00
------- ------- ------- ------
Income from investment operations:
Net Investment Income 0.15 0.17 0.22(2) 0.04
Net realized and unrealized gains
on investments 2.63 1.52 2.33 0.38
------- ------- ------- ------
Total income from investment operations 2.78 1.69 2.55 0.42
Less distributions:
Dividends from net investment income (0.18) (0.15) (0.02) --
Distributions from realized gains on investments (1.00) (0.25) -- --
------- ------- ------- ------
Total distributions (1.18) (0.40) (0.02) --
------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD 15.84 14.24 12.95 10.42
======= ======= ======= ======
TOTAL RETURN (%) 19.63 13.07 24.54 4.20(3)
RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------
Ratio of net operating expenses to average
Net Assets 0.56 0.57 0.75 0.67(4)
Expense reductions reflected in above ratio 0.53 0.71 1.24 4.04(4)
Ratio of net investment income to average
Net Assets 1.32 1.64 1.98 2.35(4)
Portfolio turnover rate 14 67 81 7
Net assets, end of period ($ x 1,000) $18,956 $14,354 $10,333 $5,384
</TABLE>
(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) Not annualized.
(4) Annualized.
- -----------
See accompanying Notes to Financial Statements.
---------------
23
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
NOTES TO FINANCIAL STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS UNLESS OTHERWISE NOTED)
1. DESCRIPTION OF THE FUND
The Schwab MarketTrack Growth Portfolio II (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 "1940 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 daily
net asset values as determined by those funds, in accordance with the 1940 Act.
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 GAINS (LOSSES)--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 (including accretion of
discount) is recorded on accrual basis. 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 currencies are translated into U.S. dollars at
the exchange rates on December 31, 1999. Purchases and sales of securities,
income receipts and 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 currency
exchange rates from the fluctuations in market prices of investments held.
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 substantially 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, 1999, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $4,220 of which $4,585 related to
appreciated securities and $365 related to depreciated securities.
RECLASSIFICATIONS--Generally accepted accounting principles require that certain
components of net assets be reclassified between financial and tax reporting.
Accordingly, permanent book/tax differences of $2 and $3 were reclassified from
paid-in capital and undistributed net investment income, respectively, to
accumulated net realized gain. These reclassifications have no effect on net
assets or net asset value per share.
---------------
24
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
NOTES TO FINANCIAL STATEMENT (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT--The trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "investment adviser"). For advisory services and facilities furnished,
the fund pays an annual fee, payable monthly, of 0.54% of the first $500 million
of average daily net assets, and 0.49% of such net assets over $500 million.
Prior to April 30, 1999, the fund paid an annual fee, payable monthly, of 0.74%
on the first $1 billion of average daily net assets, 0.69% on the next $1
billion of average daily net assets and 0.64% on such net assets over $2
billion. The investment adviser has reduced a portion of its fee for the year
ended December 31, 1999. (see Note 4)
OFFICERS AND TRUSTEES--Certain officers and trustees of the trust are also
officers and/or directors of the investment adviser. For the year ended December
31, 1999, the fund made no direct payments to its officers or trustees who were
"interest persons" within the meaning of the "1940 Act," as amended. The fund
incurred fees of $1 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-Registered Trademark-. As
of December 31, 1999, the fund owned 0.30% of the outstanding shares of the
Schwab International Index Fund-Registered Trademark-; less than one-tenth
percent of the outstanding shares of the Schwab Value Advantage Money Fund
- -Registered Trademark-; 0.50% of the outstanding shares of the Schwab Total Bond
Market Index Fund-TM- and; 0.43% of the outstanding shares of the Schwab Small-
Cap Index Fund.-Registered Trademark-
As of December 31, 1999, The Schwab MarketTrack Growth Portfolio II held common
stock of The Charles Schwab Corp., an affiliated issuer, with a current value of
$21.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT ADVISER AND SCHWAB
The investment adviser guarantees that, through at least April 30, 2000, the
fund's net operating expenses will not exceed 0.60% of the fund's average daily
net assets, after waivers and reimbursements. For purpose of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses,
taxes, foreign taxes, and capital items.
For the year ended December 31, 1999, the total of such fees and expenses
reduced by the investment adviser were $82.
5. BORROWING AGREEMENT
The trust 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, 1999, there were no
borrowings made under this arrangement on behalf of the fund.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations
and U.S. government securities, aggregated $3,678 and $2,074, respectively, for
the year ended December 31, 1999.
---------------
25
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM- DECEMBER 31, 1999 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 (one of the portfolios constituting Schwab Annuity Portfolios, hereafter
referred to as the "fund") at December 31, 1999, 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 each of the periods
presented, in conformity with accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States, 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, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
February 4, 2000
---------------
26
<PAGE>
SCHWAB MARKETTRACK GROWTH PORTFOLIO II-TM-
DECEMBER 31, 1999 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, 1999.
---------------
27
