UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-8314
Schwab Annuity Portfolios
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(Exact name of registrant as specified in charter)
101 Montgomery Street, San Francisco, California 94104
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(Address of principal executive offices) (Zip code)
Evelyn Dilsaver
Schwab Annuity Portfolios
101 Montgomery Street, San Francisco, California 94104
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(Name and address of agent for service)
Registrant's telephone number, including area code: (415) 627-7000
Date of fiscal year end: December 31
Date of reporting period: June 30, 2005
ITEM 1: REPORT(S) TO SHAREHOLDERS.
[CHARLES SCHWAB LOGO]
LARGE BLEND
SCHWAB S&P 500
INDEX PORTFOLIO
(formerly Schwab S&P 500 Portfolio)
LARGE-CAP
SEMIANNUAL REPORT FOR THE PERIOD ENDED JUNE 30, 2005
Inception Date: November 1, 1996
An investor should consider a fund's investment objectives, risks, and charges
and expenses carefully before investing or sending money. This and other
important information can be found in the fund's prospectus. Please call
1-888-311-4887 for a prospectus. Please read the prospectus carefully before you
invest.
PROXY VOTING POLICIES, PROCEDURES AND RESULTS
A description of the proxy voting policies and procedures used to determine how
to vote proxies on behalf of the funds is available without charge, upon
request, by visiting Schwab's website at www.schwab.com/schwabfunds, the SEC's
website at http://www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.
Information regarding how a fund voted proxies relating to portfolio securities
during the most recent twelve-month period ended June 30 is available, without
charge, by visiting Schwab's website at www.schwab.com/schwabfunds or the SEC's
website at http://www.sec.gov.
The industry/sector classification of the fund's portfolio holdings uses the
Global Industry Classification Standard (GICS) which was developed by and is the
exclusive property of Morgan Stanley Capital International Inc. and Standard &
Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by
Charles Schwab & Co., Inc.
MANAGEMENT'S DISCUSSION for the six months ended June 30, 2005
[PHOTO OF JEFFREY MORTIMER]
JEFFREY MORTIMER, CFA, senior vice president and chief investment officer,
equities, of the investment adviser is responsible for the overall management of
the portfolio. Prior to joining the firm in October 1997, he worked for more
than nine years in asset management.
[PHOTO OF LARRY MANO]
LARRY MANO, vice president and senior portfolio manager, is responsible for the
overall management of the portfolio. Prior to joining the firm in 1998, he
worked for 20 years in equity management.
THE INVESTMENT ENVIRONMENT AND THE FUND
Oil prices hit highs never seen before and the Federal Reserve Open Market
Committee continued to raise short-term interest rates to curb inflationary
pressures, raising rates for the fourth time this year. At the same time, GDP
continued to grow at a healthy pace and the housing market remained strong,
largely due to low mortgage rates.
The firming labor market, as well as steady gains in capital spending, kept the
economic expansion on a self-sustaining path. Businesses, unable to continue
boosting productivity by restraining hiring, added new jobs during the six-month
report period. Moreover, many leading indicators, such as the Institute for
Supply Management's business activity surveys, suggested ongoing expansion,
while continuing claims for unemployment benefits remained near cyclical lows.
Business investments grew only modestly, but consumers continued to spend. In
fact, consumer confidence rose to a level not experienced since before September
11, 2001. With consumers in a spending mode and consumer spending comprising
about 70% of GDP, first quarter GDP remained strong and retail sales were
healthy. In this positive economic environment, strong labor market conditions
remained positive for domestic consumption.
While high energy prices remained a significant headwind for economic
performance, supply no longer was the issue; demand, especially in China, drove
prices up. At the end of the six-month report period, a barrel of oil cost
$56.50 versus $42.55 at the beginning of 2005.
Though high oil and commodity prices could have hampered growth and stirred
inflationary pressures, productivity gains, slow growth in the money supply and
slack in the economy have mostly kept a lid on
ASSET CLASS PERFORMANCE COMPARISON % returns during the report period
This graph compares the performance of various asset classes during the report
period. Final performance figures for the period are in the key below.
1.25% THREE-MONTH U.S. TREASURY BILLS (T-BILLS): measures short-term U.S.
Treasury obligations
2.51% LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX: measures the U.S. bond market
- -0.81% S&P 500(R) INDEX: measures U.S. large-cap stocks
- -1.25% RUSSELL 2000(R) INDEX: measures U.S. small-cap stocks
- -1.17% MSCI EAFE(R) INDEX: measures (in U.S. dollars) large-cap stocks in
Europe, Australasia and the Far East
[LINE GRAPH]
THREE-MONTH LEHMAN BROTHERS RUSSELL MSCI
U.S. TREASURY U.S. AGGREGATE S&P 500(R) 2000(R) EAFE(R)
BILLS (T-BILLS) BOND INDEX INDEX INDEX INDEX
31-Dec-04 0.00 0.00 0.00 0.00 0.00
07-Jan-05 0.03 -0.20 -2.08 -5.87 -2.71
14-Jan-05 0.07 0.15 -2.20 -5.20 -2.49
21-Jan-05 0.12 0.57 -3.56 -6.18 -3.32
28-Jan-05 0.15 0.58 -3.26 -5.86 -2.55
04-Feb-05 0.20 0.93 -0.60 -2.09 -0.98
11-Feb-05 0.24 0.92 -0.33 -2.48 -0.32
18-Feb-05 0.28 0.40 -0.61 -3.18 1.11
25-Feb-05 0.32 0.36 0.26 -2.02 1.69
04-Mar-05 0.37 0.33 1.19 -0.87 3.51
11-Mar-05 0.42 -0.54 -0.59 -3.62 3.61
18-Mar-05 0.46 -0.46 -1.44 -4.26 2.28
25-Mar-05 0.51 -0.90 -2.94 -5.37 -0.08
01-Apr-05 0.57 -0.27 -2.78 -5.88 0.02
08-Apr-05 0.63 -0.39 -2.06 -5.98 0.45
15-Apr-05 0.68 0.44 -5.24 -10.58 -1.26
22-Apr-05 0.73 0.67 -4.44 -9.22 -1.04
29-Apr-05 0.79 0.87 -4.00 -10.76 -2.51
06-May-05 0.84 0.68 -2.77 -8.10 -0.78
13-May-05 0.90 1.15 -4.13 -10.31 -3.08
20-May-05 0.96 1.23 -1.16 -6.07 -2.85
27-May-05 1.00 1.62 -0.34 -4.89 -1.89
03-Jun-05 1.05 2.12 -0.54 -4.36 -1.82
10-Jun-05 1.10 1.84 -0.34 -3.41 -1.90
17-Jun-05 1.16 1.82 1.27 -0.62 -0.15
24-Jun-05 1.22 2.55 -0.82 -2.74 -0.98
30-Jun-05 1.25 2.51 -0.81 -1.25 -1.17
These figures assume dividends and distributions were reinvested. Index figures
do not include trading and management costs, which would lower performance.
Indices are unmanaged, and you cannot invest in them directly. Remember that
past performance is not an indication of future results.
Data source: Charles Schwab & Co., Inc.
Source of Sector Classification: S&P and MSCI.
Schwab S&P 500 Index Portfolio 1
MANAGEMENT'S DISCUSSION continued
[PHOTO OF TOM BROWN]
TOM BROWN, an associate portfolio manager of the investment adviser, is a
day-to-day manager of the portfolio. He joined Schwab in 1995, became a trader
in 1999, and was named to his current position in 2004.
core inflation. The productivity gains, coupled with foreign central banks
buying large amounts of U.S. Treasury securities, also helped to keep long-term
interest rates under control. These conditions also caused the dollar to rally
unexpectedly, which took a little bit of pressure off the price of imported
goods.
Amid signs of solidly expanding output and improved hiring, the Fed continued to
tighten. It increased short-term interest rates at each of the four meetings in
the first half of 2005, ending the six-month report period at a still moderate
3.25%. The moves have had a limited impact on overall economic growth, due
primarily to the record-low level of rates from which the increases began.
Nonetheless, the higher rates succeeded in moving money fund yields higher,
making them a more attractive investment vehicle.
THE S&P 500 INDEX PORTFOLIO ended the six-month report period down 0.80%, just
outperforming its benchmark, the S&P 500 Index, which was down 0.81%. Value was
the favored style over the period. The price of crude oil increased
substantially over the period, making energy-related stocks the top performing
sector in the Portfolio. Utilities also enjoyed strong gains. Conversely, the
Materials and Consumer Discretionary sectors were the laggards.
Past performance does not indicate future results.
Source of Sector Classification: S&P and MSCI.
All portfolio and index figures on this page assume dividends and distributions
were reinvested. Index figures do not include trading and management costs,
which would lower performance. Indices are unmanaged, and you cannot invest in
them directly. The portfolio's share price and principal values change and when
you sell your shares they may be worth more or less than what you paid for them.
Nothing in this report represents a recommendation of a security by the
investment adviser. Manager views and portfolio holdings may have changed since
the report date.
Portfolio returns do not reflect the additional fees and expenses imposed by the
insurance company under the variable insurance product contract.
Portfolio expenses have been partially absorbed by CSIM and Schwab. Without
these reductions, the portfolio's returns would have been lower.
2 Schwab S&P 500 Index Portfolio
SCHWAB S&P 500 INDEX PORTFOLIO
PERFORMANCE as of 6/30/05
AVERAGE ANNUAL TOTAL RETURNS 1, 2, 3
This bar chart compares performance of the portfolio with its benchmark and
Morningstar category.
[BAR CHART]
Benchmark: Fund Category:
S&P 500(R) MORNINGSTAR
PORTFOLIO INDEX LARGE-CAP BLEND
6 MONTHS -0.80% -0.81% -1.20%
1 YEAR 6.15% 6.32% 5.13%
5 YEARS -2.67% -2.37% -3.55%
SINCE INCEPTION: 11/1/96 7.48% 7.92% n/a
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES
NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA
QUOTED. TO OBTAIN PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH END,
PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS.
PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1, 2
This graph shows performance since inception of a hypothetical $10,000
investment in the portfolio, compared with a similar investment in its
benchmark.
$18,686 PORTFOLIO
$19,363 S&P 500(R) INDEX
[LINE GRAPH]
S&P 500(R)
PORTFOLIO INDEX
01-Nov-96 $10,000 $10,000
30-Nov-96 $10,750 $10,777
31-Dec-96 $10,530 $10,564
31-Jan-97 $11,170 $11,223
28-Feb-97 $11,250 $11,311
31-Mar-97 $10,780 $10,848
30-Apr-97 $11,410 $11,494
31-May-97 $12,090 $12,193
30-Jun-97 $12,630 $12,739
31-Jul-97 $13,620 $13,752
31-Aug-97 $12,860 $12,982
30-Sep-97 $13,560 $13,692
31-Oct-97 $13,120 $13,235
30-Nov-97 $13,720 $13,848
31-Dec-97 $13,948 $14,086
31-Jan-98 $14,098 $14,242
28-Feb-98 $15,108 $15,269
31-Mar-98 $15,869 $16,051
30-Apr-98 $16,029 $16,213
31-May-98 $15,739 $15,934
30-Jun-98 $16,369 $16,581
31-Jul-98 $16,189 $16,405
31-Aug-98 $13,848 $14,036
30-Sep-98 $14,738 $14,936
31-Oct-98 $15,929 $16,150
30-Nov-98 $16,879 $17,129
31-Dec-98 $17,862 $18,116
31-Jan-99 $18,595 $18,873
28-Feb-99 $18,012 $18,286
31-Mar-99 $18,726 $19,017
30-Apr-99 $19,439 $19,753
31-May-99 $18,967 $19,287
30-Jun-99 $20,012 $20,357
31-Jul-99 $19,389 $19,722
31-Aug-99 $19,288 $19,624
30-Sep-99 $18,756 $19,086
31-Oct-99 $19,931 $20,294
30-Nov-99 $20,323 $20,707
31-Dec-99 $21,517 $21,926
31-Jan-00 $20,434 $20,825
29-Feb-00 $20,040 $20,431
31-Mar-00 $22,003 $22,429
30-Apr-00 $21,335 $21,754
31-May-00 $20,890 $21,308
30-Jun-00 $21,396 $21,835
31-Jul-00 $21,072 $21,494
31-Aug-00 $22,367 $22,829
30-Sep-00 $21,183 $21,624
31-Oct-00 $21,082 $21,533
30-Nov-00 $19,412 $19,836
31-Dec-00 $19,506 $19,933
31-Jan-01 $20,183 $20,641
28-Feb-01 $18,337 $18,758
31-Mar-01 $17,178 $17,569
30-Apr-01 $18,501 $18,934
31-May-01 $18,614 $19,061
30-Jun-01 $18,163 $18,598
31-Jul-01 $17,978 $18,416
31-Aug-01 $16,850 $17,263
30-Sep-01 $15,486 $15,868
31-Oct-01 $15,784 $16,171
30-Nov-01 $16,984 $17,411
31-Dec-01 $17,135 $17,565
31-Jan-02 $16,876 $17,308
28-Feb-02 $16,544 $16,974
31-Mar-02 $17,155 $17,612
30-Apr-02 $16,119 $16,545
31-May-02 $15,995 $16,423
30-Jun-02 $14,855 $15,253
31-Jul-02 $13,695 $14,065
31-Aug-02 $13,768 $14,157
30-Sep-02 $12,266 $12,618
31-Oct-02 $13,343 $13,728
30-Nov-02 $14,120 $14,537
31-Dec-02 $13,292 $13,683
31-Jan-03 $12,935 $13,325
28-Feb-03 $12,735 $13,125
31-Mar-03 $12,861 $13,252
30-Apr-03 $13,911 $14,344
31-May-03 $14,635 $15,100
30-Jun-03 $14,824 $15,294
31-Jul-03 $15,076 $15,563
31-Aug-03 $15,370 $15,866
30-Sep-03 $15,202 $15,698
31-Oct-03 $16,063 $16,587
30-Nov-03 $16,200 $16,732
31-Dec-03 $17,042 $17,609
31-Jan-04 $17,339 $17,933
29-Feb-04 $17,583 $18,183
31-Mar-04 $17,318 $17,908
30-Apr-04 $17,042 $17,627
31-May-04 $17,276 $17,868
30-Jun-04 $17,605 $18,215
31-Jul-04 $17,021 $17,612
31-Aug-04 $17,085 $17,682
30-Sep-04 $17,265 $17,873
31-Oct-04 $17,520 $18,147
30-Nov-04 $18,231 $18,882
31-Dec-04 $18,837 $19,524
31-Jan-05 $18,386 $19,047
28-Feb-05 $18,772 $19,447
31-Mar-05 $18,440 $19,103
30-Apr-05 $18,086 $18,740
31-May-05 $18,665 $19,336
30-Jun-05 $18,686 $19,363
All portfolio and index figures on this page assume dividends and
distributions were reinvested. Index figures do not include trading and
management costs, which would lower performance. Indices are unmanaged, and
you cannot invest in them directly. Performance results less than one year are
not annualized.
1 Portfolio expenses have been partially absorbed by CSIM and Schwab. Without
these reductions, the portfolio's returns would have been lower. Portfolio
returns do not reflect the additional fees and expenses imposed by the
insurance company under the variable insurance product contract. If those
contract fees and expenses were included, the returns would be less than those
shown. Please refer to the variable insurance product prospectus for a
complete listing of these expenses.
2 Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500(R) and 500(R)
are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for
use by the portfolio. The portfolio is not sponsored, endorsed, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no representation
regarding the advisability of investing in the portfolio.
3 Source for category information: Morningstar, Inc.
Schwab S&P 500 Index Portfolio 3
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO FACTS as of 6/30/05
STYLE ASSESSMENT 1
[GRAPHIC]
INVESTMENT STYLE
Value Blend Growth
Market Cap
Large / / /X/ / /
Medium / / / / / /
Small / / / / / /
STATISTICS
NUMBER OF HOLDINGS 501
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WEIGHTED AVERAGE MARKET CAP ($ x 1,000,000) $59,335
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PRICE/EARNINGS RATIO (P/E) 21.4
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PRICE/BOOK RATIO (P/B) 2.6
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PORTFOLIO TURNOVER RATE 2 1%
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TOP HOLDINGS 3
% OF
SECURITY NET ASSETS
- --------------------------------------------------------------------------------
(1) GENERAL ELECTRIC CO. 3.4%
- --------------------------------------------------------------------------------
(2) EXXON MOBIL CORP. 3.4%
- --------------------------------------------------------------------------------
(3) MICROSOFT CORP. 2.3%
- --------------------------------------------------------------------------------
(4) CITIGROUP, INC. 2.2%
- --------------------------------------------------------------------------------
(5) PFIZER, INC. 1.9%
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(6) JOHNSON & JOHNSON 1.8%
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(7) BANK OF AMERICA CORP. 1.7%
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(8) WAL-MART STORES, INC. 1.5%
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(9) INTEL CORP. 1.5%
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(10) AMERICAN INTERNATIONAL GROUP, INC. 1.4%
- --------------------------------------------------------------------------------
TOTAL 21.1%
SECTOR WEIGHTINGS % of Investments
This chart shows the portfolio's sector composition as of the report date. A
sector is a portion of the overall stock market that is made up of industries
whose business components share similar characteristics.
[PIE CHART]
17.9% FINANCIALS
16.1% INFORMATION TECHNOLOGY
14.8% INDUSTRIALS
14.0% CONSUMER DISCRETIONARY
12.2% HEALTH CARE
8.9% CONSUMER STAPLES
7.1% ENERGY
3.0% UTILITIES
3.0% TELECOMMUNICATION SERVICES
2.9% MATERIALS
0.1% OTHER
Portfolio holdings may have changed since the report date.
Source of Sector Classification: S&P and MSCI.
1 Source: Morningstar, Inc. This style assessment is the result of evaluating
the portfolio based on a ten-factor model for value and growth
characteristics. The portfolio's market capitalization placement is determined
by the geometric mean of its holdings' market capitalizations. The assessment
reflects the portfolio as of 6/30/05, which may have changed since then, and
is not a precise indication of risk or performance--past, present, or future.
2 Not annualized.
3 This list is not a recommendation of any security by the investment adviser.
4 Schwab S&P 500 Index Portfolio
PORTFOLIO EXPENSES
EXAMPLES FOR A $1,000 INVESTMENT
As a fund shareholder, you incur two types of costs: transaction costs, such as
redemption fees; and, ongoing costs, such as management fees, transfer agent and
shareholder services fees, and other fund expenses.
The expense examples below are intended to help you understand your ongoing cost
(in dollars) of investing in a fund and to compare this cost with the ongoing
cost of investing in other mutual funds. These examples are based on an
investment of $1,000 invested for six-months beginning January 1, 2005 and held
through June 30, 2005.
ACTUAL RETURN lines in the table below provide information about actual account
values and actual expenses. You may use this information, together with the
amount you invested, to estimate the expenses that you paid over the period. To
do so, simply divide your account value by $1,000 (for example, an $8,600
account value / $1,000 = 8.6), then multiply the result by the number given for
your fund under the heading entitled "Expenses Paid During Period."
HYPOTHETICAL RETURN lines in the table below provide information about
hypothetical account values and hypothetical expenses based on a fund's actual
expense ratio and an assumed return of 5% per year before expenses. Because the
return used is not an actual return, it may not be used to estimate the actual
ending account value or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only, and do not reflect any transactional costs, such as
redemption fees. If these transactional costs were included, your costs would
have been higher.
ENDING
BEGINNING ACCOUNT VALUE EXPENSES
EXPENSE RATIO 1 ACCOUNT VALUE (Net of Expenses) PAID DURING PERIOD 2
(Annualized) at 1/1/05 at 6/30/05 1/1/05-6/30/05
- ------------------------------------------------------------------------------------------------------------------------------------
SCHWAB S&P 500 INDEX PORTFOLIO
Actual Return 0.28% $1,000 $992.00 $1.38
Hypothetical 5% Return 0.28% $1,000 $1,023.41 $1.40
1 Based on the most recent six-month expense ratio; may differ from the expense
ratio provided in Financial Highlights.
2 Expenses for the portfolio are equal to its annualized expense ratio,
multiplied by the average account value over the period, multiplied by 181
days of the period, and divided by 365 days of the fiscal year.
Schwab S&P 500 Index Portfolio 5
SCHWAB S&P 500 INDEX PORTFOLIO
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
1/1/05- 1/1/04- 1/1/03- 1/1/02- 1/1/01- 1/1/00-
6/30/05* 12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
- ------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 17.56 16.06 12.66 16.54 19.02 21.26
----------------------------------------------------------------------
Income or loss from investment operations:
Net investment income 0.15 0.29 0.17 0.19 0.15 0.18
Net realized and unrealized gains or losses (0.29) 1.40 3.40 (3.90) (2.46) (2.17)
----------------------------------------------------------------------
Total income or loss from investment operations (0.14) 1.69 3.57 (3.71) (2.31) (1.99)
Less distributions:
Dividends from net investment income -- (0.19) (0.17) (0.17) (0.17) (0.19)
Distributions from net realized gains -- -- -- -- -- (0.06)
----------------------------------------------------------------------
Total distributions -- (0.19) (0.17) (0.17) (0.17) (0.25)
----------------------------------------------------------------------
Net asset value at end of period 17.42 17.56 16.06 12.66 16.54 19.02
----------------------------------------------------------------------
Total return (%) (0.80) 1 10.53 28.22 (22.43) (12.16) (9.34)
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net operating expenses 0.28 2 0.28 0.28 0.28 0.28 0.29 3
Gross operating expenses 0.31 2 0.31 0.32 0.35 0.33 0.31
Net investment income 1.54 2 1.75 1.50 1.33 1.09 0.99
Portfolio turnover rate 1 1 4 2 11 5 10
Net assets, end of period ($ x 1,000,000) 154 162 146 98 128 126
* Unaudited.
1 Not annualized.
2 Annualized.
3 The ratio of net operating expenses would have been 0.28% if certain
non-routine expenses (proxy fees) had not been included.
6 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS as of June 30, 2005, unaudited
This section shows all the securities in the fund's portfolio by industry
classification and their value, as of the report date.
The fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is
available on the SEC's website at http://www.sec.gov and may be reviewed and
copied at the SEC's Public Reference Room in Washington D.C. Call 1-800-SEC-0330
for information on the operation of the Public Reference Room. The schedule of
portfolio holdings filed on the fund's most recent Form N-Q is available by
visiting Schwab's website at www.schwab.com/schwabfunds.
We use the symbols below to designate certain characteristics of the securities.
With the top ten holdings, the number in the circle is the security's rank among
the top ten.
(1) Top ten holding
o Non-income producing security
/ Issuer is affiliated with the fund's adviser
@ All or a portion of this security is on loan
COST VALUE
HOLDINGS BY CATEGORY ($ x 1,000) ($ x 1,000)
- --------------------------------------------------------------------------------
99.9% COMMON STOCK 130,749 154,117
0.1% U.S. TREASURY
OBLIGATION 99 99
- --------------------------------------------------------------------------------
100.0% TOTAL INVESTMENTS 130,848 154,216
6.3% COLLATERAL INVESTED FOR
SECURITIES ON LOAN 9,755 9,755
(6.3)% OTHER ASSETS AND
LIABILITIES, NET (9,806)
- --------------------------------------------------------------------------------
100.0% TOTAL NET ASSETS 154,165
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
COMMON STOCK 99.9% of net assets
AUTOMOBILES & COMPONENTS 0.7%
--------------------------------------------------------------------------
Cooper Tire & Rubber Co. 1,000 19
Dana Corp. 2,178 33
@ Delphi Corp. 7,563 35
Ford Motor Co. 25,852 265
@ General Motors Corp. 8,000 272
@o Goodyear Tire & Rubber Co. 2,500 37
Harley-Davidson, Inc. 4,200 208
Johnson Controls, Inc. 2,600 146
Visteon Corp. 1,584 10
-----------
1,025
BANKS 7.6%
--------------------------------------------------------------------------
AmSouth Bancorp. 5,050 131
(7) Bank of America Corp. 56,784 2,590
BB&T Corp. 7,800 312
Comerica, Inc. 2,350 136
Compass Bancshares, Inc. 1,700 76
Countrywide Financial Corp. 8,000 309
Fannie Mae 13,790 805
Fifth Third Bancorp 7,405 305
@ First Horizon National Corp. 1,700 72
Freddie Mac 9,700 633
@ Golden West Financial Corp. 4,000 258
Huntington Bancshares, Inc. 3,256 79
KeyCorp, Inc. 5,900 196
M&T Bank Corp. 1,400 147
Marshall & Ilsley Corp. 2,938 131
MGIC Investment Corp. 1,400 91
National City Corp. 8,500 290
North Fork Bancorp., Inc. 6,600 185
PNC Financial Services Group, Inc. 4,000 218
@ Regions Financial Corp. 6,427 218
Sovereign Bancorp, Inc. 5,300 118
SunTrust Banks, Inc. 4,800 347
Synovus Financial Corp. 4,300 123
U.S. Bancorp 26,420 771
Wachovia Corp. 22,427 1,112
@ Washington Mutual, Inc. 12,424 506
Wells Fargo & Co. 23,999 1,478
Zions Bancorp. 1,200 88
-----------
11,725
CAPITAL GOODS 8.9%
--------------------------------------------------------------------------
3M Co. 11,050 799
American Power Conversion Corp. 2,825 67
American Standard Cos., Inc. 2,600 109
The Boeing Co. 11,696 772
Caterpillar, Inc. 4,800 458
Cooper Industries Ltd., Class A 1,300 83
Cummins, Inc. 700 52
Danaher Corp. 3,900 204
Deere & Co. 3,500 229
See financial notes. 7
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS continued
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
Dover Corp. 2,800 102
Eaton Corp. 2,200 132
Emerson Electric Co. 5,900 370
Fluor Corp. 1,100 63
General Dynamics Corp. 2,800 307
(1) General Electric Co. 150,040 5,199
Goodrich Corp. 1,700 70
Honeywell International, Inc. 12,237 448
Illinois Tool Works, Inc. 3,920 312
Ingersoll-Rand Co., Class A 2,400 171
ITT Industries, Inc. 1,300 127
L-3 Communications Holdings, Inc. 1,500 115
Lockheed Martin Corp. 5,670 368
Masco Corp. 6,300 200
o Navistar International Corp. 1,000 32
Northrop Grumman Corp. 5,114 283
Paccar, Inc. 2,550 173
Pall Corp. 1,700 52
Parker Hannifin Corp. 1,650 102
Raytheon Co. 6,300 246
Rockwell Automation, Inc. 2,470 120
Rockwell Collins, Inc. 2,500 119
Textron, Inc. 1,900 144
Tyco International Ltd. 28,729 839
United Technologies Corp. 14,600 750
W.W. Grainger, Inc. 1,300 71
----------
13,688
COMMERCIAL SERVICES & SUPPLIES 1.0%
-------------------------------------------------------------------------
o Allied Waste Industries, Inc. 4,300 34
@o Apollo Group, Inc., Class A 2,400 188
Avery Dennison Corp. 1,500 80
Cendant Corp. 14,902 333
@ Cintas Corp. 2,112 82
Equifax, Inc. 2,000 71
H&R Block, Inc. 2,300 134
@o Monster Worldwide, Inc. 1,644 47
Pitney Bowes, Inc. 3,400 148
R.R. Donnelley & Sons Co. 3,000 104
Robert Half International, Inc. 2,400 60
Waste Management, Inc. 8,157 231
----------
1,512
CONSUMER DURABLES & APPAREL 1.3%
-------------------------------------------------------------------------
Black & Decker Corp. 1,100 99
Brunswick Corp. 1,200 52
Centex Corp. 1,800 127
o Coach, Inc. 5,400 181
Eastman Kodak Co. 4,100 110
Fortune Brands, Inc. 2,000 178
Hasbro, Inc. 2,525 53
Jones Apparel Group, Inc. 1,800 56
KB Home 1,160 88
Leggett & Platt, Inc. 2,800 74
Liz Claiborne, Inc. 1,600 64
Mattel, Inc. 5,900 108
@ Maytag Corp. 1,120 18
@ Newell Rubbermaid, Inc. 3,924 94
Nike, Inc., Class B 3,260 282
Pulte Homes, Inc. 1,800 152
Reebok International Ltd. 800 33
Snap-On, Inc. 800 27
The Stanley Works 1,100 50
VF Corp. 1,410 81
Whirlpool Corp. 900 63
----------
1,990
DIVERSIFIED FINANCIALS 7.7%
-------------------------------------------------------------------------
American Express Co. 16,690 888
The Bank of New York Co., Inc. 10,900 314
@ The Bear Stearns Cos., Inc. 1,512 157
Capital One Financial Corp. 3,400 272
/ The Charles Schwab Corp. 16,342 184
CIT Group, Inc. 2,900 125
(4) Citigroup, Inc. 73,466 3,396
o E*TRADE Financial Corp. 5,200 73
Federated Investors, Inc., Class B 1,500 45
Franklin Resources, Inc. 2,800 216
Goldman Sachs Group, Inc. 6,347 647
Janus Capital Group, Inc. 3,300 50
JPMorgan Chase & Co. 49,705 1,756
Lehman Brothers Holdings, Inc. 3,950 392
MBNA Corp. 18,243 477
Mellon Financial Corp. 6,000 172
Merrill Lynch & Co., Inc. 13,280 730
Moody's Corp. 3,880 174
Morgan Stanley 15,450 811
Northern Trust Corp. 2,870 131
Principal Financial Group, Inc. 4,274 179
o Providian Financial Corp. 3,800 67
SLM Corp. 6,000 305
@ State Street Corp. 4,800 232
T. Rowe Price Group, Inc. 1,700 106
----------
11,899
8 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
ENERGY 8.8%
-------------------------------------------------------------------------
@ Amerada Hess Corp. 1,200 128
Anadarko Petroleum Corp. 3,347 275
Apache Corp. 4,684 303
@o Ashland, Inc. 900 65
Baker Hughes, Inc. 4,780 244
BJ Services Co. 2,300 121
Burlington Resources, Inc. 5,474 302
ChevronTexaco Corp. 29,790 1,666
ConocoPhillips 19,828 1,140
Devon Energy Corp. 6,800 345
El Paso Corp. 8,929 103
EOG Resources, Inc. 3,214 182
(2) Exxon Mobil Corp. 89,990 5,172
@ Halliburton Co. 7,100 339
Kerr-McGee Corp. 1,516 116
@ Kinder Morgan, Inc. 1,550 129
Marathon Oil Corp. 4,900 261
o Nabors Industries Ltd. 2,000 121
o National-Oilwell Varco, Inc. 2,400 114
Noble Corp. 1,800 111
Occidental Petroleum Corp. 5,700 438
o Rowan Cos., Inc. 1,400 42
Schlumberger Ltd. 8,300 630
Sunoco, Inc. 970 110
o Transocean, Inc. 4,584 247
Unocal Corp. 3,700 241
Valero Energy Corp. 3,600 285
Williams Cos., Inc. 7,900 150
XTO Energy, Inc. 4,933 168
-----------
13,548
FOOD & STAPLES RETAILING 2.8%
-------------------------------------------------------------------------
@ Albertson's, Inc. 5,275 109
Costco Wholesale Corp. 6,500 291
CVS Corp. 11,400 331
o Kroger Co. 10,600 202
@o Safeway, Inc. 6,200 140
Supervalu, Inc. 1,900 62
Sysco Corp. 9,100 329
(8) Wal-Mart Stores, Inc. 47,260 2,278
Walgreen Co. 14,540 669
-----------
4,411
FOOD BEVERAGE & TOBACCO 4.8%
-------------------------------------------------------------------------
Altria Group, Inc. 29,280 1,893
Anheuser-Busch Cos., Inc. 11,010 504
Archer-Daniels-Midland Co. 9,200 197
Brown-Forman Corp., Class B 1,304 79
Campbell Soup Co. 4,600 142
The Coca-Cola Co. 32,070 1,339
Coca-Cola Enterprises, Inc. 5,000 110
ConAgra Foods, Inc. 7,170 166
General Mills, Inc. 5,080 238
H.J. Heinz Co. 5,000 177
Hershey Foods Corp. 3,100 192
Kellogg Co. 5,000 222
McCormick & Co., Inc. 2,000 65
Molson Coors Brewing Co., Class B 1,100 68
The Pepsi Bottling Group, Inc. 2,802 80
PepsiCo, Inc. 23,870 1,287
@ Reynolds American, Inc. 1,628 128
Sara Lee Corp. 11,100 220
UST, Inc. 2,400 110
Wm. Wrigley Jr. Co. 2,800 193
-----------
7,410
HEALTH CARE EQUIPMENT & SERVICES 5.0%
-------------------------------------------------------------------------
Aetna, Inc. 4,200 348
@ AmerisourceBergen Corp. 1,600 111
Bausch & Lomb, Inc. 800 66
Baxter International, Inc. 8,600 319
Becton Dickinson & Co. 3,600 189
Biomet, Inc. 3,725 129
o Boston Scientific Corp. 10,800 292
C.R. Bard, Inc. 1,400 93
Cardinal Health, Inc. 6,175 356
o Caremark Rx, Inc. 6,413 285
CIGNA Corp. 1,860 199
o Express Scripts, Inc. 2,200 110
o Fisher Scientific International, Inc. 1,605 104
Guidant Corp. 4,500 303
HCA, Inc. 5,820 330
@ Health Management Associates, Inc.,
Class A 3,300 86
o Hospira, Inc. 2,210 86
o Humana, Inc. 2,100 83
IMS Health, Inc. 3,300 82
See financial notes. 9
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS continued
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
o Laboratory Corp. of America
Holdings 2,000 100
Manor Care, Inc. 1,300 52
McKesson Corp. 4,106 184
o Medco Health Solutions, Inc. 3,888 207
Medtronic, Inc. 17,200 891
o Millipore Corp. 800 45
PerkinElmer, Inc. 1,700 32
Quest Diagnostics 2,760 147
o St. Jude Medical, Inc. 5,000 218
Stryker Corp. 5,300 252
@o Tenet Healthcare Corp. 6,500 80
o Thermo Electron Corp. 2,200 59
@ UnitedHealth Group, Inc. 18,220 950
o Waters Corp. 1,700 63
o WellPoint, Inc. 8,602 599
o Zimmer Holdings, Inc. 3,500 267
-----------
7,717
HOTELS RESTAURANTS & LEISURE 1.5%
--------------------------------------------------------------------------
@ Carnival Corp. 7,500 409
Darden Restaurants, Inc. 2,090 69
Harrah's Entertainment, Inc. 2,600 187
Hilton Hotels Corp. 5,400 129
International Game Technology 5,000 141
Marriott International, Inc., Class A 2,820 192
McDonald's Corp. 17,800 494
o Starbucks Corp. 5,660 292
Starwood Hotels & Resorts
Worldwide, Inc. 2,900 170
Wendy's International, Inc. 1,700 81
Yum! Brands, Inc. 4,100 214
-----------
2,378
HOUSEHOLD & PERSONAL PRODUCTS 2.4%
--------------------------------------------------------------------------
Alberto-Culver Co., Class B 1,200 52
Avon Products, Inc. 6,600 250
Clorox Co. 2,100 117
Colgate-Palmolive Co. 7,600 379
The Gillette Co. 14,130 715
Kimberly-Clark Corp. 6,800 426
Procter & Gamble Co. 35,010 1,847
-----------
3,786
INSURANCE 4.4%
--------------------------------------------------------------------------
ACE Ltd. 3,900 175
AFLAC, Inc. 7,200 312
The Allstate Corp. 9,700 580
AMBAC Financial Group, Inc. 1,592 111
(10) American International Group,
Inc. 36,868 2,142
AON Corp. 4,550 114
@ Chubb Corp. 2,700 231
Cincinnati Financial Corp. 2,535 100
Hartford Financial Services
Group, Inc. 4,200 314
Jefferson-Pilot Corp. 1,850 93
Lincoln National Corp. 2,600 122
Loews Corp. 2,300 178
Marsh & McLennan Cos., Inc. 7,200 200
@ MBIA, Inc. 1,950 116
Metlife, Inc. 10,367 466
The Progressive Corp. 2,850 282
Prudential Financial, Inc. 7,300 479
Safeco Corp. 1,900 103
The St. Paul Travelers Cos., Inc. 9,459 374
Torchmark Corp. 1,500 78
@ UnumProvident Corp. 4,276 78
XL Capital Ltd., Class A 1,900 141
-----------
6,789
MATERIALS 2.9%
--------------------------------------------------------------------------
Air Products & Chemicals, Inc. 3,300 199
Alcoa, Inc. 12,272 321
Allegheny Technologies, Inc. 1,260 28
Ball Corp. 1,600 58
Bemis Co. 1,400 37
The Dow Chemical Co. 13,555 604
E.I. du Pont de Nemours & Co. 14,254 613
Eastman Chemical Co. 1,000 55
Ecolab, Inc. 3,100 100
Engelhard Corp. 1,800 51
@ Freeport-McMoran Copper & Gold, Inc.,
Class B 2,400 90
Georgia-Pacific Corp. 3,655 116
Great Lakes Chemical Corp. 700 22
o Hercules, Inc. 1,500 21
@ International Flavors & Fragrances,
Inc. 1,400 51
International Paper Co. 6,798 205
Louisiana-Pacific Corp. 1,400 34
MeadWestvaco Corp. 2,549 72
Monsanto Co. 3,725 234
Newmont Mining Corp. 6,186 241
Nucor Corp. 2,400 110
o Pactiv Corp. 2,300 50
Phelps Dodge Corp. 1,315 122
PPG Industries, Inc. 2,500 157
10 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
Praxair, Inc. 4,600 214
Rohm & Haas Co. 2,805 130
o Sealed Air Corp. 1,214 60
Sigma-Aldrich Corp. 1,000 56
Temple-Inland, Inc. 1,600 59
United States Steel Corp. 1,500 52
Vulcan Materials Co. 1,500 98
Weyerhaeuser Co. 3,400 216
-----------
4,476
MEDIA 3.7%
--------------------------------------------------------------------------
Clear Channel Communications,
Inc. 7,496 232
o Comcast Corp., Class A 31,259 960
@ Dow Jones & Co., Inc. 1,100 39
Gannett Co., Inc. 3,560 253
o Interpublic Group of Cos., Inc. 5,700 69
@ Knight-Ridder, Inc. 1,200 74
The McGraw-Hill Cos., Inc. 5,400 239
Meredith Corp. 700 34
New York Times Co., Class A 2,200 68
News Corp, Inc., Class A 41,100 665
Omnicom Group, Inc. 2,600 208
o Time Warner, Inc. 65,450 1,094
Tribune Co. 4,400 155
@o Univision Communications, Inc.,
Class A 4,125 114
Viacom, Inc., Class B 22,761 729
The Walt Disney Co. 29,170 734
-----------
5,667
PHARMACEUTICALS & BIOTECHNOLOGY 8.4%
--------------------------------------------------------------------------
Abbott Laboratories 22,200 1,088
@ Allergan, Inc. 1,800 153
o Amgen, Inc. 17,504 1,058
Applied Biosystems Group -- Applera
Corp. 2,800 55
o Biogen Idec, Inc. 4,700 162
Bristol-Myers Squibb Co. 27,810 695
o Chiron Corp. 2,100 73
Eli Lilly & Co. 16,170 901
o Forest Laboratories, Inc. 5,200 202
o Genzyme Corp. 3,500 210
o Gilead Sciences, Inc. 6,000 264
(6) Johnson & Johnson 42,088 2,736
o King Pharmaceuticals, Inc. 3,466 36
o Medimmune, Inc. 3,400 91
Merck & Co., Inc. 31,500 970
Mylan Laboratories, Inc. 3,800 73
(5) Pfizer, Inc. 105,609 2,913
Schering-Plough Corp. 20,800 397
o Watson Pharmaceuticals, Inc. 1,500 44
Wyeth 19,000 846
-----------
12,967
REAL ESTATE 0.6%
--------------------------------------------------------------------------
Apartment Investment & Management
Co., Class A 1,300 53
@ Archstone-Smith Trust 2,700 104
Equity Office Properties Trust 5,600 185
Equity Residential 4,200 155
Plum Creek Timber Co., Inc. 2,560 93
ProLogis 2,600 105
Simon Property Group, Inc. 3,100 225
-----------
920
RETAILING 4.1%
--------------------------------------------------------------------------
o Autonation, Inc. 3,700 76
o AutoZone, Inc. 1,000 92
o Bed, Bath & Beyond, Inc. 4,200 175
Best Buy Co., Inc. 4,250 291
@o Big Lots, Inc. 1,400 18
Circuit City Stores, Inc. 2,900 50
@ Dillards, Inc., Class A 1,100 26
Dollar General Corp. 4,263 87
o eBay, Inc. 17,288 571
Family Dollar Stores, Inc. 2,400 63
@ Federated Department Stores, Inc. 2,500 183
The Gap, Inc. 10,462 207
Genuine Parts Co. 2,500 103
Home Depot, Inc. 30,300 1,179
J.C. Penney Co., Inc. Holding Co. 3,700 195
o Kohl's Corp. 4,610 258
Limitedbrands 5,705 122
Lowe's Cos., Inc. 11,000 640
The May Department Stores Co. 4,050 163
Nordstrom, Inc. 1,780 121
o Office Depot, Inc. 4,500 103
OfficeMax, Inc. 1,200 36
RadioShack Corp. 2,400 56
o Sears Holdings Corp. 1,475 221
The Sherwin-Williams Co. 1,840 87
Staples, Inc. 10,500 224
Target Corp. 12,700 691
See financial notes. 11
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS continued
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
Tiffany & Co. 2,000 65
TJX Cos., Inc. 6,710 163
o Toys `R' Us, Inc. 3,000 79
-----------
6,345
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.2%
--------------------------------------------------------------------------
o Advanced Micro Devices, Inc. 5,600 97
o Altera Corp. 5,480 109
Analog Devices, Inc. 5,400 202
o Applied Materials, Inc. 24,000 388
o Applied Micro Circuits Corp. 4,082 11
o Broadcom Corp., Class A 4,110 146
o Freescale Semiconductor, Inc.,
Class B 5,566 118
@(9) Intel Corp. 87,250 2,274
o KLA-Tencor Corp. 2,700 118
Linear Technology Corp. 4,400 161
o LSI Logic Corp. 5,300 45
Maxim Integrated Products, Inc. 4,700 180
o Micron Technology, Inc. 8,800 90
National Semiconductor Corp. 5,000 110
@o Novellus Systems, Inc. 2,200 54
o Nvidia Corp. 2,400 64
o PMC -- Sierra, Inc. 2,500 23
o Teradyne, Inc. 2,700 32
Texas Instruments, Inc. 23,480 659
Xilinx, Inc. 4,800 122
-----------
5,003
SOFTWARE & SERVICES 5.3%
--------------------------------------------------------------------------
Adobe Systems, Inc. 6,800 195
@o Affiliated Computer Services, Inc.,
Class A 1,791 92
Autodesk, Inc. 3,000 103
Automatic Data Processing, Inc. 8,120 341
o BMC Software, Inc. 3,200 57
o Citrix Systems, Inc. 2,400 52
Computer Associates International,
Inc. 7,600 209
o Computer Sciences Corp. 2,700 118
o Compuware Corp. 5,100 37
o Convergys Corp. 2,054 29
o Electronic Arts, Inc. 4,258 241
Electronic Data Systems Corp. 6,900 133
First Data Corp. 10,959 440
o Fiserv, Inc. 2,700 116
o Intuit, Inc. 2,820 127
@o Mercury Interactive Corp. 1,200 46
(3) Microsoft Corp. 142,040 3,528
o Novell, Inc. 5,200 32
o Oracle Corp. 62,460 824
o Parametric Technology Corp. 3,800 24
Paychex, Inc. 5,250 171
Sabre Holdings Corp., Class A 1,883 38
o Siebel Systems, Inc. 7,000 62
o SunGard Data Systems, Inc. 4,031 142
o Symantec Corp. 9,796 213
o Unisys Corp. 4,700 30
o Veritas Software Corp. 6,000 146
o Yahoo! Inc. 18,600 644
-----------
8,190
TECHNOLOGY HARDWARE & EQUIPMENT 6.6%
--------------------------------------------------------------------------
o ADC Telecommunications, Inc. 1,471 32
o Agilent Technologies, Inc. 6,117 141
o Andrew Corp. 2,250 29
o Apple Computer, Inc. 11,600 427
o Avaya, Inc. 6,432 54
o CIENA Corp. 6,700 14
o Cisco Systems, Inc. 90,360 1,727
o Comverse Technology, Inc. 2,700 64
o Corning, Inc. 19,540 325
o Dell, Inc. 34,220 1,352
o EMC Corp. 34,012 466
@o Gateway, Inc. 4,600 15
Hewlett-Packard Co. 41,277 970
International Business Machines
Corp. 22,800 1,692
o Jabil Circuit, Inc. 2,727 84
o JDS Uniphase Corp. 20,155 31
@o Lexmark International, Inc., Class A 1,800 117
o Lucent Technologies, Inc. 60,295 175
Molex, Inc. 2,700 70
Motorola, Inc. 34,905 637
o NCR Corp. 2,800 98
@o Network Appliance, Inc. 5,200 147
o QLogic Corp. 1,295 40
Qualcomm, Inc. 23,400 772
o Sanmina -- SCI Corp. 7,400 41
Scientific-Atlanta, Inc. 2,200 73
o Solectron Corp. 13,300 50
o Sun Microsystems, Inc. 45,800 171
Symbol Technologies, Inc. 3,052 30
12 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
Tektronix, Inc. 1,500 35
o Tellabs, Inc. 5,900 51
o Xerox Corp. 13,600 188
-----------
10,118
TELECOMMUNICATION SERVICES 3.2%
--------------------------------------------------------------------------
@ Alltel Corp. 4,400 274
AT&T Corp. 11,216 214
BellSouth Corp. 25,800 685
CenturyTel, Inc. 1,900 66
Citizens Communications Co. 4,718 63
o Nextel Communications, Inc.,
Class A 15,700 507
o Qwest Communications International,
Inc. 24,216 90
SBC Communications, Inc. 47,100 1,119
Sprint Corp. (FON Group) 21,050 528
Verizon Communications, Inc. 39,450 1,363
-----------
4,909
TRANSPORTATION 1.6%
--------------------------------------------------------------------------
Burlington Northern Santa Fe Corp. 5,200 245
CSX Corp. 2,900 124
@o Delta Air Lines, Inc. 1,400 5
FedEx Corp. 4,220 342
Norfolk Southern Corp. 5,600 173
Ryder Systems, Inc. 900 33
Southwest Airlines Co. 10,428 145
Union Pacific Corp. 3,700 240
United Parcel Service, Inc.,
Class B 15,915 1,101
-----------
2,408
UTILITIES 3.4%
--------------------------------------------------------------------------
o The AES Corp. 8,800 144
o Allegheny Energy, Inc. 1,941 49
Ameren Corp. 2,700 149
American Electric Power Co., Inc. 5,560 205
@o Calpine Corp. 7,500 26
Centerpoint Energy, Inc. 4,150 55
Cinergy Corp. 2,600 117
@o CMS Energy Corp. 2,400 36
Consolidated Edison, Inc. 3,300 155
Constellation Energy Group, Inc. 2,500 144
Dominion Resources, Inc. 4,880 358
DTE Energy Co. 2,400 112
Duke Energy Corp. 13,234 393
o Dynegy, Inc., Class A 5,200 25
Edison International 4,700 191
Entergy Corp. 3,120 236
Exelon Corp. 9,230 474
FirstEnergy Corp. 4,628 223
FPL Group, Inc. 5,400 227
@ KeySpan Corp. 2,300 94
Nicor, Inc. 600 25
NiSource, Inc. 3,546 88
Peoples Energy Corp. 500 22
PG&E Corp. 5,100 191
Pinnacle West Capital Corp. 1,200 53
PPL Corp. 2,600 154
@ Progress Energy, Inc. 3,502 158
Public Service Enterprise Group,
Inc. 3,300 201
Sempra Energy 3,141 130
The Southern Co. 10,300 357
TECO Energy, Inc. 2,700 51
TXU Corp. 3,422 284
Xcel Energy, Inc. 5,605 109
-----------
5,236
SECURITY FACE AMOUNT
RATE, MATURITY DATE ($ x 1,000)
U.S. TREASURY OBLIGATION
0.1% of net assets
U.S. Treasury Bill
2.92%, 09/15/05 100 99
END OF INVESTMENTS.
See financial notes. 13
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS continued
SECURITY FACE AMOUNT VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
COLLATERAL INVESTED FOR SECURITIES ON LOAN
6.3% of net assets
COMMERCIAL PAPER & OTHER CORPORATE
OBLIGATIONS 2.4%
--------------------------------------------------------------------------
Skandinav Enskilda Bank
3.21%, 07/17/05 1,345 1,345
UBS Bank
3.04%, 07/01/05 2,377 2,377
-----------
3,722
SHORT-TERM INVESTMENTS 3.9%
--------------------------------------------------------------------------
Rabobank, Time Deposit
3.35%, 07/01/05 995 995
Societe Generale, Time Deposit
3.38%, 07/01/05 251 251
SECURITY AND NUMBER OF SHARES
Institutional Money Market
Trust 4,786,791 4,787
-----------
6,033
END OF COLLATERAL INVESTED FOR SECURITIES ON LOAN.
14 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
Statement of
ASSETS AND LIABILITIES
As of June 30, 2005; unaudited. All numbers x 1,000 except NAV.
ASSETS
- --------------------------------------------------------------------------------
Investments, at value
(including $9,379 of securities on loan) $154,216 a
Collateral invested for securities on loan 9,755
Receivables:
Fund shares sold 14
Dividends 186
Investments sold 532
Income from securities on loan + 2
------------
TOTAL ASSETS 164,705
LIABILITIES
- --------------------------------------------------------------------------------
Collateral invested for securities on loan 9,755
Bank overdraft 436
Payables:
Fund shares redeemed 131
Investments bought 157
Investment adviser and administrator fees 7
Accrued expenses + 54
------------
TOTAL LIABILITIES 10,540
NET ASSETS
- --------------------------------------------------------------------------------
TOTAL ASSETS 164,705
TOTAL LIABILITIES - 10,540
------------
NET ASSETS $154,165
NET ASSETS BY SOURCE
Capital received from investors 139,194
Net investment income not yet distributed 3,844
Net realized capital losses (12,241) b
Net unrealized capital gains 23,368 b
NET ASSET VALUE (NAV)
SHARES
NET ASSETS / OUTSTANDING = NAV
$154,165 8,852 $17.42
Unless stated, all numbers are x 1,000.
a The fund paid $130,848 for these securities.
Not counting short-term obligations and government securities, the fund's
security transactions during the period were:
Purchases $2,242
Sales/maturities $4,521
b These derive from investments and futures.
FEDERAL TAX DATA
--------------------------------------
PORTFOLIO COST $131,036
NET UNREALIZED GAINS AND LOSSES:
Gains $42,792
Losses + (19,612)
------------
$23,180
AS OF DECEMBER 31, 2004:
NET UNDISTRIBUTED EARNINGS:
Ordinary income $2,649
Long-term capital gains $--
UNUSED CAPITAL LOSSES:
Expires 12/31 of: Loss amount
2008 $664
2009 1,821
2010 7,810
2011 38
2012 + 359
------------
$10,692
DEFERRED CAPITAL LOSSES $7
See financial notes. 15
SCHWAB S&P 500 INDEX PORTFOLIO
Statement of
OPERATIONS
For January 1, 2005 through June 30, 2005 unaudited. All numbers x 1,000.
INVESTMENT INCOME
- --------------------------------------------------------------------------------
Dividends $1,382
Interest 19
Securities on loan + 11
-----------
TOTAL INVESTMENT INCOME 1,412
NET REALIZED GAINS AND LOSSES
- --------------------------------------------------------------------------------
Net realized losses on investments (916)
Net realized losses on futures contracts + (2)
-----------
NET REALIZED LOSSES (918)
NET UNREALIZED GAINS AND LOSSES
- --------------------------------------------------------------------------------
Net unrealized losses on investments (1,692)
Net unrealized losses on futures contracts + (43)
-----------
NET UNREALIZED LOSSES (1,735)
EXPENSES
- --------------------------------------------------------------------------------
Investment adviser and administrator fees 155 a
Trustees' fees 11 b
Custodian fees 14
Portfolio accounting fees 10
Professional fees 15
Shareholder reports 26
Other expenses + 8
-----------
Total expenses 239
Expense reduction - 22 c
-----------
NET EXPENSES 217
DECREASE IN NET ASSETS FROM OPERATIONS
- --------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 1,412
NET EXPENSES - 217
-----------
NET INVESTMENT INCOME 1,195
NET REALIZED LOSSES (918) d
NET UNREALIZED LOSSES + (1,735) d
-----------
DECREASE IN NET ASSETS FROM OPERATIONS ($1,458)
Unless stated, all numbers are x 1,000.
a Calculated as a percentage of average daily net assets: 0.20% of the first
$500 million and 0.17% of the assets beyond that. These fees are paid to
Charles Schwab Investment Management, Inc. (CSIM).
b For the fund's independent trustees only.
c This reduction was made by the investment adviser (CSIM). It reflects a
guarantee by CSIM to limit the operating expenses of this fund through April
29, 2006, to 0.28% of average daily net assets. This limit excludes interest,
taxes and certain non-routine expenses.
d These add up to a net loss on investments of $2,653.
16 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
Statements of
CHANGES IN NET ASSETS
For the current and prior report periods. All numbers x 1,000.
Figures for current period are unaudited.
OPERATIONS
- --------------------------------------------------------------------------------
1/1/05-6/30/05 1/1/04-12/31/04
Net investment income $1,195 $2,650
Net realized losses (918) (12)
Net unrealized gains or losses + (1,735) 12,681
-------------------------------------
INCREASE OR DECREASE IN NET ASSETS
FROM OPERATIONS (1,458) 15,319
DISTRIBUTIONS PAID
- --------------------------------------------------------------------------------
Dividends from net investment income $-- $1,720 a
TRANSACTIONS IN FUND SHARES
- --------------------------------------------------------------------------------
1/1/05-6/30/05 1/1/04-12/31/04
SHARES VALUE SHARES VALUE
Shares sold 746 $12,917 2,284 $37,513
Shares reinvested -- -- 100 1,720
Shares redeemed + (1,116) (19,285) (2,259) (36,911)
--------------------------------------------------
NET TRANSACTIONS IN
FUND SHARES (370) ($6,368) 125 $2,322
SHARES OUTSTANDING AND NET ASSETS
- --------------------------------------------------------------------------------
1/1/05-6/30/05 1/1/04-12/31/04
SHARES NET ASSETS SHARES NET ASSETS
Beginning of period 9,222 $161,991 9,097 $146,070
Total increase or
decrease + (370) (7,826) 125 15,921 b
--------------------------------------------------
END OF PERIOD 8,852 $154,165 9,222 $161,991 c
Unless stated, all numbers are x 1,000.
a The tax-basis components of distributions for the period ended 12/31/04 are:
Ordinary income $1,720
Long-term capital gains $--
b Figures for shares represent shares sold plus shares reinvested, minus shares
redeemed. Figures for net assets represent the changes in net assets from
operations plus the changes in value of transactions in fund shares, minus
distributions paid.
c Includes distributable net investment income in the amount of $3,844 and
$2,649 for the current period and prior period, respectively.
See financial notes. 17
SCHWAB S&P 500 INDEX PORTFOLIO
FINANCIAL NOTES unaudited
BUSINESS STRUCTURE OF THE FUND
THE FUND DISCUSSED IN THIS REPORT IS A SERIES OF SCHWAB ANNUITY PORTFOLIOS, A
NO-LOAD, OPEN-END MANAGEMENT INVESTMENT COMPANY. The company is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended. The sidebar shows the fund in this report and its trust.
THE FUND OFFERS ONE SHARE CLASS. Shares are bought and sold at net asset value
(NAV), which is the price for all outstanding shares. Each share has a par value
of 1/1,000 of a cent, and the trust may issue as many shares as necessary.
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.
FUND OPERATIONS
Most of the fund's investments are described earlier in this report. However,
there are certain other fund operations and policies that may affect the fund's
financials, as described below. Other policies concerning the fund's business
operations also are described here.
THE FUND PAYS DIVIDENDS from net investment income and makes distributions from
net capital gains once a year.
THE FUND MAY INVEST IN FUTURES CONTRACTS. Futures contracts involve certain
risks because they can be very sensitive to market movements.
One risk is that the price of a futures contract may not move in perfect
correlation with the price of the underlying securities. Another risk is that,
at certain times, it may be impossible for the fund to close out a position in a
futures contract due to a difference in trading hours or to market conditions
that may reduce the liquidity for a futures contract or its underlying
securities.
Because futures carry inherent risks, the fund must give the broker a deposit of
cash and/or securities (the "initial margin") whenever it enters into a futures
contract. The amount of the deposit may vary from one contract to another, but
it is generally a percentage of the contract amount.
Futures are traded publicly on exchanges, and their market value changes daily.
The fund records the change in market value of futures, and also the change in
the amount of margin deposit required ("variation margin").
THE FUND MAY ENTER INTO REPURCHASE AGREEMENTS. In a repurchase agreement, the
fund buys a security from another party (usually a financial institution) with
the agreement that it be sold back in the future. The date, price and other
conditions are all specified when the agreement is created.
THE TRUST AND ITS FUNDS
This list shows all of the funds included in Schwab Annuity Portfolios. The fund
discussed in this report is highlighted.
SCHWAB ANNUITY PORTFOLIOS organized January 21, 1994
Schwab Money Market Portfolio
Schwab MarketTrack Growth Portfolio II
SCHWAB S&P 500 INDEX PORTFOLIO
18
SCHWAB S&P 500 INDEX PORTFOLIO
The fund's repurchase agreements will be fully collateralized by U.S. government
securities. All collateral is held by the fund's custodian (or, with tri-party
agreements, the agent's bank) and is monitored daily to ensure that its market
value is at least equal to the repurchase price under the agreement.
THE FUND MAY LOAN SECURITIES TO CERTAIN BROKERS, DEALERS AND OTHER FINANCIAL
INSTITUTIONS WHO PAY THE FUND NEGOTIATED FEES. The fund receives cash, letters
of credit or U.S. government securities as collateral on these loans. All of the
cash collateral received is reinvested in high quality, short-term investments.
The value of the collateral must be at least 102% of the market value of the
loaned securities as of the first day of the loan, and at least 100% each day
thereafter.
THE FUND PAYS FEES TO AFFILIATES OF THE INVESTMENT ADVISER FOR VARIOUS SERVICES.
Through its trust, the fund has agreements with Charles Schwab Investment
Management, Inc. (CSIM) to provide investment advisory and administrative
services and with Charles Schwab & Co., Inc. (Schwab) to provide transfer agent,
shareholder services and transaction services.
Although these agreements specify certain fees for these services, CSIM has made
additional agreements with the fund that may limit the total expenses charged.
The rates and limitations for these fees are described in the fund's Statement
of Operations.
THE FUND MAY ENGAGE IN CERTAIN TRANSACTIONS INVOLVING RELATED PARTIES. For
instance, the fund may own shares of The Charles Schwab Corporation if that
company is included in its index.
The fund may make direct transactions with certain other Schwab Funds(R) when
practical. When one fund is seeking to sell a security that another is seeking
to buy, an interfund transaction can allow both funds to benefit by reducing
transaction costs. This practice is limited to funds that share the same
investment adviser, trustees and officers.
Pursuant to an exemptive order issued by the SEC, the fund may enter into
interfund borrowing and lending transactions within the Schwab Funds(R). All
loans are for temporary or emergency purposes only. The interest rate charged on
the loan is the average of the overnight repurchase agreement rate and the
short-term bank loan rate. The interfund lending facility is subject to the
oversight and periodic review of the Board of Trustees of the Schwab Funds(R).
TRUSTEES MAY INCLUDE PEOPLE WHO ARE OFFICERS AND/OR DIRECTORS OF THE INVESTMENT
ADVISER OR SCHWAB. Federal securities law limits the percentage of such
"interested persons" who may serve on a trust's board, and the trust was in
compliance with these limitations throughout the report period. The trust did
not pay any of these persons for their service as trustees, but it did pay
non-interested persons (independent trustees), as noted in the fund's Statement
of Operations.
THE FUND MAY BORROW MONEY FROM BANKS AND CUSTODIANS. The fund may obtain
temporary bank loans through the trust to which the fund belongs to use for
meeting shareholder redemptions or for extraordinary or emergency purposes. The
trust has custodian overdraft facilities and line of credit arrangements of $150
million and $100 million with PNC Bank, N.A. and Bank of America, N.A.,
respectively. The fund pays interest on the amounts it borrows at rates that are
negotiated periodically.
AMOUNT WEIGHTED
OUTSTANDING AVERAGE AVERAGE
AT 6/30/05 BORROWING* INTEREST
($ x 1,000) ($ x 1,000) RATE* (%)
- --------------------------------------------------------------------------------
436 205 3.05
*Based on the number of days for which the borrowing is outstanding.
19
SCHWAB S&P 500 INDEX PORTFOLIO
THE FUND INTENDS TO MEET FEDERAL INCOME TAX REQUIREMENTS FOR REGULATED
INVESTMENT COMPANIES. Accordingly, the fund distributes substantially all of its
net investment income and net realized capital gains (if any) to the
participating insurance company separate accounts each year. As long as the fund
meets the tax requirements, it is not required to pay federal income tax. The
net investment income and net realized capital gains and losses may differ for
financial statement and tax purposes primarily due to differing treatments of
losses on wash sales.
UNDER THE FUND'S ORGANIZATIONAL DOCUMENTS, ITS OFFICERS AND TRUSTEES ARE
INDEMNIFIED AGAINST CERTAIN LIABILITY ARISING OUT OF THE PERFORMANCE OF THEIR
DUTIES TO THE FUND. In addition, in the normal course of business the fund
enters into contracts with its vendors and others that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
However, based on experience, the fund expects the risk of loss to be remote.
ACCOUNTING POLICIES
The following are the main policies the fund uses in preparing its financial
statements.
THE FUND VALUES THE SECURITIES IN ITS PORTFOLIO EVERY BUSINESS DAY. The fund
uses the following policies to value various types of securities:
- - SECURITIES TRADED ON AN EXCHANGE OR OVER-THE-COUNTER: valued at the closing
value for the day, or, on days when no closing value has been reported,
halfway between the most recent bid and asked quotes. Securities that are
primarily traded on foreign exchanges are valued at the closing values of
such securities on their respective exchanges with these values then
translated into U.S. dollars at the current exchange rate.
- - SECURITIES FOR WHICH NO MARKET QUOTATIONS ARE READILY AVAILABLE or when a
significant event has occurred between the time of the security's last close
and the time that a fund calculates net asset value: valued at fair value, as
determined in good faith by the fund's investment adviser using guidelines
adopted by the fund's Board of Trustees and the Pricing Committee. Some of
the more common reasons that may necessitate that a security be valued at
fair value include: the security's trading has been halted or suspended; the
security has been de-listed from a national exchange; the security's primary
trading market is temporarily closed at a time when under normal conditions
it would be open; or the security's primary pricing source is not able or
willing to provide a price.
- - FUTURES: open contracts are valued at their settlement prices as of the close
of their exchanges. When the fund closes out a futures position, it
calculates the difference between the value of the position at the beginning
and at the end, and records a realized gain or loss accordingly.
- - SHORT-TERM SECURITIES (60 DAYS OR LESS TO MATURITY): valued at amortized
cost.
SECURITY TRANSACTIONS are recorded as of the date the order to buy or sell the
security is executed.
DIVIDENDS AND DISTRIBUTIONS FROM PORTFOLIO SECURITIES are recorded on the date
they are effective (the ex-dividend date), although the fund records certain
foreign security dividends on the day it learns of the ex-dividend date.
INCOME FROM INTEREST AND THE ACCRETION OF DISCOUNTS is recorded as it accrues.
REALIZED GAINS AND LOSSES from security transactions are based on the identified
costs of the securities involved.
20
SCHWAB S&P 500 INDEX PORTFOLIO
ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES are reported in U.S.
dollars. For assets and liabilities held on a given date, the dollar value is
based on market exchange rates in effect on that date. Transactions involving
foreign currencies, including purchases, sales, income receipts and expense
payments, are calculated using exchange rates in effect on the transaction date.
EXPENSES that are specific to the fund are charged directly to the fund.
Expenses that are common to all funds within a trust generally are allocated
among the funds in proportion to their average daily net assets.
THE FUND MAINTAINS ITS OWN ACCOUNT FOR PURPOSES OF HOLDING ASSETS AND
ACCOUNTING, and is considered a separate entity for tax purposes. Within its
account, the fund also keeps certain assets in segregated accounts, as may be
required by securities law.
THE ACCOUNTING POLICIES DESCRIBED ABOVE CONFORM WITH ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. Notwithstanding this,
shareholders should understand that in order to follow these principles, fund
management has to make estimates and assumptions that affect the information
reported in the financial statements. It's possible that once the results are
known, they may turn out to be different from these estimates.
21
INVESTMENT ADVISORY AGREEMENT APPROVAL
The Investment Company Act of 1940 (the "1940 Act") requires that initial
approval of, as well as the continuation of, a fund's investment advisory
agreement must be specifically approved (1) by the vote of the trustees or by a
vote of the shareholders of the fund, and (2) by the vote of a majority of the
trustees who are not parties to the investment advisory agreement or "interested
persons" of any party (the "Independent Trustees"), cast in person at a meeting
called for the purpose of voting on such approval. In connection with such
approvals, the fund's trustees must request and evaluate, and the investment
adviser is required to furnish, such information as may be reasonably necessary
to evaluate the terms of the advisory agreement. In addition, the Securities and
Exchange Commission (the "SEC") takes the position that, as part of their
fiduciary duties with respect to fund fees, fund boards are required to evaluate
the material factors applicable to a decision to approve an investment advisory
agreement.
Consistent with these responsibilities, the Board of Trustees (the "Board")
calls and holds one or more meetings each year that are dedicated, in whole or
in part, to considering whether to renew the investment advisory agreement
between Schwab Annuity Portfolios (the "Trust") and CSIM (the "Agreement") with
respect to existing funds in the Trust, which includes the Schwab S&P 500 Index
Portfolio, and to review certain other agreements pursuant to which CSIM
provides investment advisory services to certain other registered investment
companies. In preparation for the meeting(s), the Board requests and reviews a
wide variety of materials provided by CSIM, including information about CSIM's
affiliates, personnel and operations. The Board also receives extensive data
provided by third parties. This information is in addition to the detailed
information about the funds that the Board reviews during the course of each
year, including information that relates to fund operations and fund
performance. The trustees also receive a memorandum from fund counsel regarding
the responsibilities of trustees for the approval of investment advisory
contracts. In addition, the Independent Trustees receive advice from independent
counsel to the Independent Trustees, meet in executive session outside the
presence of fund management and participate in question and answer sessions with
representatives of CSIM.
At the May 24, 2005 meeting of the Board, the trustees, including a majority of
the Independent Trustees, approved the renewal of the Agreement for an
additional one year period. The Board's approval of the Agreement was based on
consideration and evaluation of a variety of specific factors discussed at that
meeting and at prior meetings, including:
1. the nature, extent and quality of the services provided to the funds under
the Agreement, including the resources of CSIM and its affiliates dedicated
to the funds;
2. each fund's investment performance and how it compared to that of certain
other comparable mutual funds;
3. each fund's expenses and how those expenses compared to those of certain
other comparable mutual funds;
4. the profitability of CSIM and its affiliates, including Schwab, with respect
to each fund, including both direct and indirect benefits accruing to CSIM
and its affiliates; and
5. the extent to which economies of scale would be realized as the funds grow
and whether fee levels in the Agreement reflect those economies of scale for
the benefit of fund investors.
22
NATURE, EXTENT AND QUALITY OF SERVICES. The Board considered the nature,
extent and quality of the services provided by CSIM to the funds and the
resources of CSIM and its affiliates dedicated to the funds. In this regard,
the trustees evaluated, among other things, CSIM's personnel, experience,
track record and compliance program. The trustees considered the role of
unaffiliated insurance companies in the distribution of the funds. The
trustees also considered Schwab's excellent reputation as a full service
brokerage firm and its overall financial condition, and how this affects the
success of the funds. Following such evaluation, the Board concluded, within
the context of its full deliberations, that the nature, extent and quality of
services provided by CSIM to the funds and the resources of CSIM and its
affiliates dedicated to the funds supported renewal of the Agreement.
FUND PERFORMANCE. The Board considered fund performance in determining
whether to renew the Agreement. Specifically, the trustees considered each
fund's performance relative to a peer group of other mutual funds and
appropriate indices/benchmarks, in light of total return, yield and market
trends. As part of this review, the trustees considered the composition of
the peer group, selection criteria and the reputation of the third party who
prepared the peer group analysis. In evaluating the performance of each fund,
the trustees considered both risk and shareholder risk expectations for such
fund. Following such evaluation, the Board concluded, within the context of
its full deliberations, that the performance of the funds supported renewal
of the Agreement.
FUND EXPENSES. With respect to the funds' expenses, the trustees considered
the rate of compensation called for by the Agreement, and each fund's net
operating expense ratio, in each case, in comparison to those of other
comparable mutual funds, such peer groups and comparisons having been
selected and calculated by an independent third party. The trustees
considered the effects of CSIM's and Schwab's voluntary waiver of management
and other fees to prevent total fund expenses from exceeding a specified cap.
The trustees also considered fees charged by CSIM to other mutual funds and
to other types of accounts, such as wrap accounts and offshore funds.
However, the trustees accorded less weight to such comparisons due to the
unique legal, regulatory, compliance and operating features of mutual funds
as compared to such other types of accounts, and the unique
insurance-dedicated distribution arrangements of the funds as compared to
other funds managed by CSIM. Following such evaluation, the Board concluded,
within the context of its full deliberations, that the expenses of the funds
are reasonable and supported renewal of the Agreement.
PROFITABILITY. With regard to profitability, the trustees considered the
compensation flowing to CSIM and its affiliates, directly or indirectly. In
this connection, the trustees reviewed management's profitability analyses,
together with certain commentary thereon from an independent accounting firm.
The trustees also considered any other benefits derived by CSIM from its
relationship with the funds, such as whether, by virtue of its management of
the Funds, CSIM obtains investment information or other research resources
that aid it in providing advisory services to other clients. The trustees
considered whether the varied levels of compensation and profitability under
the Agreement and other service agreements were reasonable and justified in
light of the quality of all services rendered to each fund by CSIM and its
affiliates. Based on this evaluation, the Board concluded, within the context
of its full deliberations, that the profitability of CSIM is reasonable and
supported renewal of the Agreement.
23
ECONOMIES OF SCALE. The trustees considered the existence of any economies of
scale and whether those are passed along to a fund's shareholders through a
graduated investment advisory fee schedule or other means, including any fee
waivers by CSIM and its affiliates. In this regard, and consistent with their
consideration of fund expenses, the trustees considered that CSIM and Schwab
have previously committed resources to minimize the effects on shareholders
of diseconomies of scale during periods when fund assets were relatively
small through their contractual expense waivers. For example, such
diseconomies of scale may particularly affect newer funds or funds with
investment strategies that are from time to time out of favor, but
shareholders may benefit from the continued availability of such funds at
subsidized expense levels. The trustees also considered CSIM's agreement to
contractual investment advisory fee schedules which include lower fees at
higher graduated asset levels. Based on this evaluation, the Board concluded,
within the context of its full deliberations, that the funds obtain
reasonable benefit from economies of scale.
In the course of their deliberations, the trustees did not identify any
particular information or factor that was all-important or controlling. Based on
the trustees' deliberation and their evaluation of the information described
above, the Board, including all of the Independent Trustees, unanimously
approved the continuation of the Agreement and concluded that the compensation
under the Agreement is fair and reasonable in light of such services and
expenses and such other matters as the trustees have considered to be relevant
in the exercise of their reasonable judgment.
24
TRUSTEES AND OFFICERS
A fund's Board of Trustees is responsible for protecting the interests of
that fund's shareholders. The tables below give information about the
people who serve as trustees and officers for the Schwab Funds(R),
including the funds covered in this report. Trustees remain in office
until they resign, retire or are removed by shareholder vote. 1
Under the Investment Company Act of 1940, any officer, director, or
employee of Schwab or CSIM is considered an "interested person," meaning
that he or she is considered to have a business interest in Schwab or
CSIM. These individuals are listed as "interested trustees." The
"independent trustees" are individuals who, under the 1940 Act, are not
considered to have a business interest in Schwab or CSIM.
Each of the 56 Schwab Funds belongs to one of these trusts: The Charles
Schwab Family of Funds, Schwab Investments, Schwab Capital Trust or Schwab
Annuity Portfolios. Currently all these trusts have the same trustees and
officers. The address for all trustees and officers is 101 Montgomery
Street, San Francisco, CA 94104. You can find more information about the
trustees and officers in the Statement of Additional Information, which is
available free by calling 1-800-435-4000.
INTERESTED TRUSTEES AND OFFICERS
TRUST POSITION(S);
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES R. SCHWAB 2 Chairman, Trustee: Chair, CEO, Director, The Charles Schwab Corp., Charles Schwab &
7/29/37 Family of Funds, 1989; Co., Inc.; Chair, Director, Charles Schwab Investment Management,
Investments, 1991; Inc.; Chair, Charles Schwab Holdings (UK); Chair, Director, U.S. Trust
Capital Trust, 1993; Corp., United States Trust Co. of New York, U.S. Trust Co., N.A.;
Annuity Portfolios, 1994. CEO, Director, Charles Schwab Holdings, Inc.; Chair, CEO Schwab
(SIS) Holdings, Inc. I, Schwab International Holdings, Inc.; Director,
Charles Schwab Bank, N.A., The Charles and Helen Schwab
Foundation, All Kinds of Minds (education); Trustee, Stanford
University. Until 5/04: Director, The Gap, Inc. (clothing retailer).
Until 5/03: Co-CEO, The Charles Schwab Corp. Until 3/02: Director,
Audiobase, Inc. (Internet audio solutions). Until 5/02: Director,
Vodaphone AirTouch PLC (telecommunications). Until 7/01:
Director, The Charles Schwab Trust Co.
1 The Schwab Funds retirement policy requires that independent trustees
elected after January 1, 2000 retire at age 72 or after twenty years of
service as a trustee, whichever comes first. Independent trustees elected
prior to January 1, 2000 will retire on the following schedule: Messrs.
Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens
and Wilsey will retire on December 31, 2010.
2 In addition to his position with the investment adviser and the
distributor, Mr. Schwab also owns stock of The Charles Schwab Corporation.
25
INTERESTED TRUSTEES BUT NOT OFFICERS
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
RANDALL W. MERK 2005 (all trusts). EVP, President, AMPS Enterprise. Until 7/04: President, CEO,
7/25/54 Charles Schwab Investment Management, Inc.; VP, Charles Schwab
& Co., Inc. Until 8/02: President, Chief Investment Officer, American
Century Management; Director, American Century Companies, Inc.
Until 6/01: Chief Investment Officer, Fixed Income, American Century
Companies, Inc.
OFFICERS OF THE TRUST
NAME AND BIRTHDATE TRUST OFFICE(S) HELD MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
EVELYN DILSAVER President, CEO EVP, President, Director, Charles Schwab Investment Management,
5/4/55 (all trusts). Inc. Until 7/04: SVP for Development and Distribution, Asset
Management Products and Services Enterprise. Until 6/03: EVP,
CFO, Chief Administrative Officer, U.S. Trust.
- ------------------------------------------------------------------------------------------------------------------------------------
STEPHEN B. WARD SVP, Chief Investment SVP, Chief Investment Officer, Director, Charles Schwab Investment
4/5/55 Officer (all trusts). Management, Inc.; Chief Investment Officer, The Charles Schwab
Trust Co.
- ------------------------------------------------------------------------------------------------------------------------------------
KIMON DAIFOTIS SVP, Chief Investment Since 9/04: Chief Investment Officer, Fixed Income, Charles
7/10/59 Officer (all trusts). Schwab Investment Management, Inc. Since 6/04: SVP, Charles Schwab
Investment Management, Inc. Until 6/04: VP, Charles Schwab
Investment Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY MORTIMER SVP, Chief Investment Since 5/04: SVP, Chief Investment Officer, Equities, Charles Schwab
9/29/63 Officer (all trusts). Investment Management, Inc. Since 6/04: VP, Chief Investment
Officer, Laudus Trust, Laudus Variable Insurance Trust. Until 5/04:
VP, Charles Schwab Investment Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
RANDALL FILLMORE Chief Compliance Since 9/04: SVP, Institutional Compliance and Chief Compliance
11/11/60 Officer (all trusts). Officer, Charles Schwab Investment Management, Inc.; Chief
Compliance Officer, Laudus Trust, Laudus Variable Insurance Trust.
Until 9/04: VP, Charles Schwab & Co., Inc., Charles Schwab Investment
Management, Inc. Until 2002: VP of Internal Audit, Charles Schwab
& Co., Inc. Prior to 2000: PricewaterhouseCoopers.
- ------------------------------------------------------------------------------------------------------------------------------------
KOJI E. FELTON Secretary (all trusts). SVP, Chief Counsel, Assistant Corporate Secretary, Charles Schwab
3/13/61 Investment Management, Inc. Until 6/98: Branch Chief in Enforcement,
U.S. Securities and Exchange Commission, San Francisco.
- ------------------------------------------------------------------------------------------------------------------------------------
GEORGE PEREIRA Treasurer, Principal Since 11/04: SVP, CFO, Charles Schwab Investment Management,
6/9/64 Financial Officer Inc. Until 11/04: SVP, Financial Reporting, Charles Schwab & Co., Inc.
(all trusts). Until 12/99: CFO, Commerzbank Capital Markets. Until 9/99:
Managing Director at the New York Stock Exchange.
26
INDEPENDENT TRUSTEES
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
MARIANN BYERWALTER 2000 (all trusts). Chair, JDN Corp. Advisory LLC (real estate); Trustee, Stanford
8/13/60 University, America First Cos., Omaha, NE (venture capital/fund
management), Redwood Trust, Inc. (mortgage finance), Stanford
Hospitals and Clinics, SRI International (research), PMI Group, Inc.
(mortgage insurance), Lucile Packard Children's Hospital.
Since 2/05: Director, Pacific Mutual Holding Company (insurance).
Since 2004: Laudus Trust, Laudus Variable Insurance Trust.
Until 2001: Stanford University, Special Assistant to the President.
From 1996-2001: VP of Business Affairs, CFO.
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD F. DORWARD Family of Funds, 1989; CEO, Dorward & Associates (corporate management, marketing
9/23/31 Investments, 1991; and communications consulting). Until 1999: EVP, Managing Director,
Capital Trust, 1993; Grey Advertising. Until 1996: President, CEO, Allen & Dorward
Annuity Portfolios,1994. Advertising.
- ------------------------------------------------------------------------------------------------------------------------------------
WILLIAM A. HASLER 2000 (all trusts). Dean Emeritus, Haas School of Business, University of California,
11/22/41 Berkeley; Director, Aphton Corp. (bio-pharmaceuticals); Non-
Executive Chair, Solectron Corp. (manufacturing), Mission West
Properties (commercial real estate), Stratex Networks (network
equipment), TOUSA (home building); Public Governor, Member,
executive committee, Pacific Stock & Options Exchange. Since
2004: Trustee, Laudus Trust, Laudus Variable Insurance Trust.
Until 2/04: Co-CEO, Aphton Corp. (bio-pharmaceuticals).
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT G. HOLMES Family of Funds, 1989; Chair, CEO, Director, Semloh Financial, Inc. (international financial
5/15/31 Investments, 1991; services and investment advisory firm).
Capital Trust, 1993;
Annuity Portfolios, 1994.
- ------------------------------------------------------------------------------------------------------------------------------------
GERALD B. SMITH 2000 (all trusts). Chair, CEO, Founder, Smith Graham & Co. (investment advisers);
9/28/50 Trustee, Cooper Industries (electrical products, tools and hardware);
Chairman, audit committee, Northern Border Partners, L.P. (energy).
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD R. STEPHENS Family of Funds, 1989; Managing Partner, D.R. Stephens & Co. (investments). Until 1996:
6/28/38 Investments, 1991; Chair, CEO, North American Trust (real estate investment trust).
Capital Trust, 1993;
Annuity Portfolios, 1994.
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL W. WILSEY Family of Funds, 1989; Chair, CEO, Wilsey Bennett, Inc. (real estate investment and
8/18/43 Investments, 1991; management, and other investments).
Capital Trust, 1993;
Annuity Portfolios, 1994.
27
Prospectus Supplement and Semiannual Report Enclosed
[CHARLES SCHWAB LOGO]
LARGE-CAP BLEND
SCHWAB MARKETTRACK
GROWTH PORTFOLIO II(TM)
BALANCED
SUPPLEMENT TO THE PROSPECTUS DATED APRIL 30, 2005
SEMIANNUAL REPORT FOR THE PERIOD ENDED JUNE 30, 2005
THIS PROSPECTUS SUPPLEMENT IS NOT PART OF THE SHAREHOLDER REPORT.
SUPPLEMENT TO THE SCHWAB MARKETTRACK GROWTH PORTFOLIO II(TM)
PROSPECTUS DATED APRIL 30, 2005
EFFECTIVE JULY 22, 2005, under "Portfolio Management" on page 8 of the
prospectus, the Michael Shearer biography is deleted and the following biography
is added.
STEVEN HUNG, a director and portfolio manager of the investment adviser, has
day-to-day co-responsibility for the management of the bond and cash portions of
the portfolio. He joined the firm in 1998 and has worked in fixed-income asset
management since 1999.
Please retain this supplement for future reference.
[CHARLES SCHWAB LOGO]
LARGE-CAP BLEND
SCHWAB MARKETTRACK
GROWTH PORTFOLIO II(TM)
BALANCED
SEMIANNUAL REPORT FOR THE PERIOD ENDED JUNE 30, 2005
Inception Date: November 1, 1996
An investor should consider a fund's investment objectives, risks, and charges
and expenses carefully before investing or sending money. This and other
important information can be found in the fund's prospectus. Please call
1-888-311-4887 for a prospectus. Please read the prospectus carefully before you
invest.
PROXY VOTING POLICIES, PROCEDURES AND RESULTS
A description of the proxy voting policies and procedures used to determine how
to vote proxies on behalf of the funds is available without charge, upon
request, by visiting Schwab's website at www.schwab.com/schwabfunds, the SEC's
website at http://www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.
Information regarding how a fund voted proxies relating to portfolio securities
during the most recent twelve-month period ended June 30 is available, without
charge, by visiting Schwab's website at www.schwab.com/schwabfunds or the SEC's
website at http://www.sec.gov.
The industry/sector classification of the fund's portfolio holdings uses the
Global Industry Classification Standard (GICS) which was developed by and is the
exclusive property of Morgan Stanley Capital International Inc. and Standard &
Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by
Charles Schwab & Co., Inc.
MANAGEMENT'S DISCUSSION for the six months ended June 30, 2005
[PHOTO OF LARRY MANO]
LARRY MANO, vice president and senior portfolio manager, is responsible for the
overall management of the portfolio. Prior to joining the firm in 1998, he
worked for 20 years in equity management.
[PHOTO OF TOM BROWN]
TOM BROWN, an associate portfolio manager of the investment adviser, is a
day-to-day manager of the equity portions of the portfolio. He joined Schwab in
1995, became a trader in 1999, and was named to his current position in 2004.
THE INVESTMENT ENVIRONMENT AND THE FUND
Oil prices hit highs never seen before and the Federal Reserve Open Market
Committee continued to raise short-term interest rates to curb inflationary
pressures, raising rates for the fourth time this year. At the same time, GDP
continued to grow at a healthy pace and the housing market remained strong,
largely due to low mortgage rates.
The firming labor market, as well as steady gains in capital spending, kept the
economic expansion on a self-sustaining path. Businesses, unable to continue
boosting productivity by restraining hiring, added new jobs during the six-month
report period. Moreover, many leading indicators, such as the Institute for
Supply Management's business activity surveys, suggested ongoing expansion,
while continuing claims for unemployment benefits remained near cyclical lows.
Business investments grew only modestly, but consumers continued to spend. In
fact, consumer confidence rose to a level not experienced since before September
11, 2001. With consumers in a spending mode and consumer spending comprising
about 70% of GDP, first quarter GDP remained strong and retail sales were
healthy. In this positive economic environment, strong labor market conditions
remained positive for domestic consumption.
While high energy prices remained a significant headwind for economic
performance, supply no longer was the issue; demand, especially in China, drove
prices up. At the end of the six-month report period, a barrel of oil cost
$56.50 versus $42.55 at the beginning of 2005.
Though high oil and commodity prices could have hampered growth and stirred
inflationary pressures, productivity gains, slow growth in the money supply and
slack in the economy have mostly kept a lid on
ASSET CLASS PERFORMANCE COMPARISON % returns during the report period
This graph compares the performance of various asset classes during the report
period. Final performance figures for the period are in the key below.
1.25% THREE-MONTH U.S. TREASURY BILLS (T-BILLS): measures short-term U.S.
Treasury obligations
2.51% LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX: measures the U.S. bond market
- -0.81% S&P 500(R) INDEX: measures U.S. large-cap stocks
- -1.25% RUSSELL 2000(R) INDEX: measures U.S. small-cap stocks
- -1.17% MSCI EAFE(R) INDEX: measures (in U.S. dollars) large-cap stocks in
Europe, Australasia and the Far East
[LINE GRAPH]
THREE-MONTH LEHMAN BROTHERS RUSSELL MSCI
U.S. TREASURY U.S. AGGREGATE S&P 500(R) 2000(R) EAFE(R)
BILLS (T-BILLS) BOND INDEX INDEX INDEX INDEX
31-Dec-04 0.00 0.00 0.00 0.00 0.00
07-Jan-05 0.03 -0.20 -2.08 -5.87 -2.71
14-Jan-05 0.07 0.15 -2.20 -5.20 -2.49
21-Jan-05 0.12 0.57 -3.56 -6.18 -3.32
28-Jan-05 0.15 0.58 -3.26 -5.86 -2.55
04-Feb-05 0.20 0.93 -0.60 -2.09 -0.98
11-Feb-05 0.24 0.92 -0.33 -2.48 -0.32
18-Feb-05 0.28 0.40 -0.61 -3.18 1.11
25-Feb-05 0.32 0.36 0.26 -2.02 1.69
04-Mar-05 0.37 0.33 1.19 -0.87 3.51
11-Mar-05 0.42 -0.54 -0.59 -3.62 3.61
18-Mar-05 0.46 -0.46 -1.44 -4.26 2.28
25-Mar-05 0.51 -0.90 -2.94 -5.37 -0.08
01-Apr-05 0.57 -0.27 -2.78 -5.88 0.02
08-Apr-05 0.63 -0.39 -2.06 -5.98 0.45
15-Apr-05 0.68 0.44 -5.24 -10.58 -1.26
22-Apr-05 0.73 0.67 -4.44 -9.22 -1.04
29-Apr-05 0.79 0.87 -4.00 -10.76 -2.51
06-May-05 0.84 0.68 -2.77 -8.10 -0.78
13-May-05 0.90 1.15 -4.13 -10.31 -3.08
20-May-05 0.96 1.23 -1.16 -6.07 -2.85
27-May-05 1.00 1.62 -0.34 -4.89 -1.89
03-Jun-05 1.05 2.12 -0.54 -4.36 -1.82
10-Jun-05 1.10 1.84 -0.34 -3.41 -1.90
17-Jun-05 1.16 1.82 1.27 -0.62 -0.15
24-Jun-05 1.22 2.55 -0.82 -2.74 -0.98
30-Jun-05 1.25 2.51 -0.81 -1.25 -1.17
These figures assume dividends and distributions were reinvested. Index figures
do not include trading and management costs, which would lower performance.
Indices are unmanaged, and you cannot invest in them directly. Remember that
past performance is not an indication of future results.
Data source: Charles Schwab & Co., Inc.
Source of Sector Classification: S&P and MSCI.
Schwab MarketTrack Growth Portfolio II 1
MANAGEMENT'S DISCUSSION continued
core inflation. The productivity gains, coupled with foreign central banks
buying large amounts of U.S. Treasury securities, also helped to keep long-term
interest rates under control. These conditions also caused the dollar to rally
unexpectedly, which took a little bit of pressure off the price of imported
goods.
Amid signs of solidly expanding output and improved hiring, the Fed continued to
tighten. It increased short-term interest rates at each of the four meetings in
the first half of 2005, ending the six-month report period at a still moderate
3.25%. The moves have had a limited impact on overall economic growth, due
primarily to the record-low level of rates from which the increases began.
Nonetheless, the higher rates succeeded in moving money fund yields higher,
making them a more attractive investment vehicle.
THE MARKETTRACK GROWTH PORTFOLIO II was down 0.40% for the six-month report
period, lagging the Growth Composite Index, which was down 0.09%. The
Portfolio's performance was hurt by its equity components. Positive returns in
the fixed-income portion of the Portfolio, however, contributed positively and
kept performance close to that of its benchmark.
During the six-month report period, the S&P 500(R) Index was down 0.81%, while
the Schwab Small-Cap Index(R) was down 0.49% and the Schwab International
Index(R) was down 0.90%. In terms of style, value edged out growth. Bonds were
the better performers over the report period, up 2.51%, as measured by the
Lehman Brothers Aggregate Index.
Past performance does not indicate future results.
Source of Sector Classification: S&P and MSCI.
Small company stocks are subject to greater volatility than other asset
categories. Foreign securities can involve risks such as political and economic
instability and currency risk.
All portfolio and index figures on this page assume dividends and distributions
were reinvested. Index figures do not include trading and management costs,
which would lower performance. Indices are unmanaged, and you cannot invest in
them directly. The portfolio's share price and principal values change and when
you sell your shares they may be worth more or less than what you paid for them.
Nothing in this report represents a recommendation of a security by the
investment adviser. Manager views and portfolio holdings may have changed since
the report date.
Portfolio returns do not reflect the additional fees and expenses imposed by the
insurance company under the variable insurance product contract.
Portfolio expenses have been partially absorbed by CSIM and Schwab. Without
these reductions, the portfolio's returns would have been lower.
2 Schwab MarketTrack Growth Portfolio II
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PERFORMANCE as of 6/30/05
AVERAGE ANNUAL TOTAL RETURNS 1, 2
This chart compares performance of the portfolio with a benchmark and the
portfolio's Morningstar category.
[BAR CHART]
Fund Category:
Benchmark: GROWTH MORNINGSTAR
PORTFOLIO COMPOSITE INDEX LARGE-CAP BLEND
6 MONTHS -0.40% -0.09% -1.20%
1 YEAR 8.00% 8.23% 5.13%
5 YEARS 0.74% 1.79% -3.55%
SINCE INCEPTION: 11/1/96 7.19% 7.81% n/a
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES
NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA
QUOTED. TO OBTAIN PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH END,
PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS.
PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1, 2
This graph shows performance since inception of a hypothetical $10,000
investment in the portfolio, compared with a similar investment in a benchmark
and two additional indices.
$18,258 PORTFOLIO
$19,201 GROWTH COMPOSITE INDEX
$19,363 S&P 500(R) INDEX
$17,715 LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX
[LINE GRAPH]
GROWTH LEHMAN BROTHERS
COMPOSITE S&P 500(R) U.S. AGGREGATE
PORTFOLIO INDEX INDEX BOND INDEX
01-Nov-96 $10,000 $10,000 $10,000 $10,000
30-Nov-96 $10,490 $10,473 $10,777 $10,178
31-Dec-96 $10,420 $10,658 $10,564 $10,083
31-Jan-97 $10,670 $10,933 $11,223 $10,115
28-Feb-97 $10,710 $10,913 $11,311 $10,140
31-Mar-97 $10,460 $10,634 $10,848 $10,027
30-Apr-97 $10,780 $10,833 $11,494 $10,178
31-May-97 $11,420 $11,495 $12,193 $10,274
30-Jun-97 $11,940 $11,936 $12,739 $10,397
31-Jul-97 $12,650 $12,585 $13,752 $10,677
31-Aug-97 $12,200 $12,256 $12,982 $10,587
30-Sep-97 $12,880 $12,873 $13,692 $10,743
31-Oct-97 $12,520 $12,425 $13,235 $10,899
30-Nov-97 $12,730 $12,522 $13,848 $10,949
31-Dec-97 $12,977 $12,661 $14,086 $11,060
31-Jan-98 $13,037 $12,739 $14,242 $11,201
28-Feb-98 $13,779 $13,460 $15,269 $11,192
31-Mar-98 $14,199 $13,978 $16,051 $11,230
30-Apr-98 $14,320 $14,113 $16,213 $11,289
31-May-98 $14,019 $13,869 $15,934 $11,396
30-Jun-98 $14,240 $14,020 $16,581 $11,493
31-Jul-98 $13,959 $13,760 $16,405 $11,517
31-Aug-98 $12,285 $12,041 $14,036 $11,705
30-Sep-98 $12,696 $12,405 $14,936 $11,979
31-Oct-98 $13,478 $13,043 $16,150 $11,915
30-Nov-98 $14,079 $13,649 $17,129 $11,983
31-Dec-98 $14,673 $14,253 $18,116 $12,019
31-Jan-99 $14,921 $14,471 $18,873 $12,104
28-Feb-99 $14,395 $13,958 $18,286 $11,893
31-Mar-99 $14,807 $14,329 $19,017 $11,958
30-Apr-99 $15,405 $14,947 $19,753 $11,996
31-May-99 $15,127 $14,777 $19,287 $11,891
30-Jun-99 $15,735 $15,405 $20,357 $11,853
31-Jul-99 $15,621 $15,285 $19,722 $11,803
31-Aug-99 $15,518 $15,134 $19,624 $11,797
30-Sep-99 $15,467 $15,011 $19,086 $11,934
31-Oct-99 $16,095 $15,471 $20,294 $11,978
30-Nov-99 $16,569 $16,061 $20,707 $11,977
31-Dec-99 $17,553 $17,185 $21,926 $11,919
31-Jan-00 $16,777 $16,635 $20,825 $11,880
29-Feb-00 $17,176 $17,286 $20,431 $12,024
31-Mar-00 $17,975 $17,941 $22,429 $12,182
30-Apr-00 $17,376 $17,333 $21,754 $12,147
31-May-00 $16,965 $16,960 $21,308 $12,141
30-Jun-00 $17,598 $17,572 $21,835 $12,394
31-Jul-00 $17,232 $17,329 $21,494 $12,506
31-Aug-00 $18,108 $18,207 $22,829 $12,688
30-Sep-00 $17,442 $17,693 $21,624 $12,768
31-Oct-00 $17,254 $17,428 $21,533 $12,852
30-Nov-00 $16,245 $16,462 $19,836 $13,063
31-Dec-00 $16,707 $17,116 $19,933 $13,306
31-Jan-01 $17,045 $17,489 $20,641 $13,523
28-Feb-01 $15,872 $16,479 $18,758 $13,640
31-Mar-01 $15,150 $15,666 $17,569 $13,708
30-Apr-01 $16,064 $16,609 $18,934 $13,651
31-May-01 $16,097 $16,681 $19,061 $13,733
30-Jun-01 $15,951 $16,491 $18,598 $13,785
31-Jul-01 $15,754 $16,264 $18,416 $14,094
31-Aug-01 $15,172 $15,733 $17,263 $14,256
30-Sep-01 $14,022 $14,461 $15,868 $14,421
31-Oct-01 $14,360 $14,874 $16,171 $14,722
30-Nov-01 $15,060 $15,612 $17,411 $14,519
31-Dec-01 $15,303 $15,917 $17,565 $14,426
31-Jan-02 $14,962 $15,662 $17,308 $14,543
28-Feb-02 $14,773 $15,499 $16,974 $14,684
31-Mar-02 $15,350 $16,121 $17,612 $14,441
30-Apr-02 $14,997 $15,871 $16,545 $14,721
31-May-02 $14,867 $15,740 $16,423 $14,846
30-Jun-02 $14,184 $14,991 $15,253 $14,975
31-Jul-02 $13,112 $13,823 $14,065 $15,156
31-Aug-02 $13,206 $13,884 $14,157 $15,412
30-Sep-02 $12,193 $12,857 $12,618 $15,662
31-Oct-02 $12,829 $13,422 $13,728 $15,590
30-Nov-02 $13,418 $14,043 $14,537 $15,585
31-Dec-02 $12,940 $13,548 $13,683 $15,908
31-Jan-03 $12,567 $13,236 $13,325 $15,922
28-Feb-03 $12,387 $13,020 $13,125 $16,142
31-Mar-03 $12,411 $13,034 $13,252 $16,129
30-Apr-03 $13,314 $13,927 $14,344 $16,263
31-May-03 $14,072 $14,717 $15,100 $16,565
30-Jun-03 $14,252 $14,913 $15,294 $16,532
31-Jul-03 $14,481 $15,176 $15,563 $15,977
31-Aug-03 $14,794 $15,544 $15,866 $16,082
30-Sep-03 $14,818 $15,535 $15,698 $16,508
31-Oct-03 $15,528 $16,307 $16,587 $16,355
30-Nov-03 $15,769 $16,572 $16,732 $16,394
31-Dec-03 $16,431 $17,210 $17,609 $16,561
31-Jan-04 $16,686 $17,528 $17,933 $16,694
29-Feb-04 $16,881 $17,764 $18,183 $16,874
31-Mar-04 $16,808 $17,732 $17,908 $17,001
30-Apr-04 $16,406 $17,273 $17,627 $16,559
31-May-04 $16,552 $17,382 $17,868 $16,492
30-Jun-04 $16,906 $17,740 $18,215 $16,586
31-Jul-04 $16,382 $17,158 $17,612 $16,751
31-Aug-04 $16,431 $17,177 $17,682 $17,071
30-Sep-04 $16,759 $17,561 $17,873 $17,117
31-Oct-04 $17,064 $17,851 $18,147 $17,260
30-Nov-04 $17,819 $18,654 $18,882 $17,122
31-Dec-04 $18,332 $19,217 $19,524 $17,280
31-Jan-05 $17,938 $18,845 $19,047 $17,389
28-Feb-05 $18,308 $19,235 $19,447 $17,286
31-Mar-05 $17,987 $18,885 $19,103 $17,198
30-Apr-05 $17,605 $18,444 $18,740 $17,430
31-May-05 $18,074 $18,953 $19,336 $17,618
30-Jun-05 $18,258 $19,201 $19,363 $17,715
All portfolio and index figures on this page assume dividends and
distributions were reinvested. Index figures do not include trading and
management costs, which would lower performance. Indices are unmanaged, and
you cannot invest in them directly. The portfolio's share price and principal
values change, and when you sell your shares, they may be worth more or less
than what you paid for them. Past performance does not indicate future
results. Performance results less than one year are not annualized.
1 Portfolio expenses have been partially absorbed by CSIM and Schwab. Without
these reductions, the portfolio's returns would have been lower. Portfolio
returns do not reflect the additional fees and expenses imposed by the
insurance company under the variable insurance product contract. If those
contract fees and expenses were included, the returns would be less than those
shown. Please refer to the variable insurance product prospectus for a
complete listing of these expenses.
2 The Growth Composite Index is composed of Morningstar category averages and
cash equivalents as represented by the 90-day T-bill and is calculated using
the following portfolio allocations: 40% large-cap stocks, 20% small-cap
stocks, 20% foreign stocks, 15% bonds and 5% cash. Source: Morningstar, Inc.
Schwab MarketTrack Growth Portfolio II 3
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO FACTS as of 6/30/05
STYLE ASSESSMENT 1
[GRAPHIC]
INVESTMENT STYLE
Value Blend Growth
Market Cap
Large / / /X/ / /
Medium / / / / / /
Small / / / / / /
STATISTICS
NUMBER OF HOLDINGS 512
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE MARKET CAP ($ x 1,000,000) $89,210
- --------------------------------------------------------------------------------
PRICE/EARNINGS RATIO (P/E) 19.7
- --------------------------------------------------------------------------------
PRICE/BOOK RATIO (P/B) 2.9
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 2 1%
- --------------------------------------------------------------------------------
TOP HOLDINGS 3
% OF
SECURITY NET ASSETS
- --------------------------------------------------------------------------------
(1) SCHWAB SMALL-CAP INDEX FUND(R) Select Shares(R) 20.8%
- --------------------------------------------------------------------------------
(2) SCHWAB INTERNATIONAL INDEX FUND(R) Select Shares 19.8%
- --------------------------------------------------------------------------------
(3) SCHWAB TOTAL BOND MARKET FUND(TM) 14.7%
- --------------------------------------------------------------------------------
(4) SCHWAB VALUE ADVANTAGE MONEY FUND(R) Select Shares 3.6%
- --------------------------------------------------------------------------------
(5) EXXON MOBIL CORP. 1.3%
- --------------------------------------------------------------------------------
(6) GENERAL ELECTRIC CO. 1.3%
- --------------------------------------------------------------------------------
(7) MICROSOFT CORP. 0.9%
- --------------------------------------------------------------------------------
(8) CITIGROUP, INC. 0.9%
- --------------------------------------------------------------------------------
(9) PFIZER, INC. 0.7%
- --------------------------------------------------------------------------------
(10) WAL-MART STORES, INC. 0.7%
- --------------------------------------------------------------------------------
TOTAL 64.7%
ASSET CLASS WEIGHTINGS % of Investments
This chart shows the portfolio's asset class composition as of the report date.
[PIE CHART]
39.0% LARGE-CAP STOCKS
20.8% SMALL-CAP STOCKS
19.9% INTERNATIONAL STOCKS
14.7% BONDS
5.6% SHORT-TERM INVESTMENTS
Portfolio holdings may have changed since the report date.
Source of Sector Classification: S&P and MSCI.
1 Source: Morningstar, Inc. This style assessment is the result of evaluating
the stock portion of the portfolio based on a ten-factor model for value and
growth characteristics. The portfolio's market capitalization placement is
determined by the geometric mean of its holdings' market capitalizations. The
assessment reflects the portfolio as of 6/30/05, which may have changed since
then, and is not a precise indication of risk or performance--past, present,
or future.
2 Not annualized.
3 This list is not a recommendation of any security by the investment adviser.
4 Schwab MarketTrack Growth Portfolio II
PORTFOLIO EXPENSES
EXAMPLES FOR A $1,000 INVESTMENT
As a fund shareholder, you incur two types of costs: transaction costs, such as
redemption fees; and, ongoing costs, such as management fees, transfer agent and
shareholder services fees, and other fund expenses.
The expense examples below are intended to help you understand your ongoing cost
(in dollars) of investing in a fund and to compare this cost with the ongoing
cost of investing in other mutual funds. These examples are based on an
investment of $1,000 invested for six-months beginning January 1, 2005 and held
through June 30, 2005.
ACTUAL RETURN lines in the table below provide information about actual account
values and actual expenses. You may use this information, together with the
amount you invested, to estimate the expenses that you paid over the period. To
do so, simply divide your account value by $1,000 (for example, an $8,600
account value / $1,000 = 8.6), then multiply the result by the number given for
your fund under the heading entitled "Expenses Paid During Period."
HYPOTHETICAL RETURN lines in the table below provide information about
hypothetical account values and hypothetical expenses based on a fund's actual
expense ratio and an assumed return of 5% per year before expenses. Because the
return used is not an actual return, it may not be used to estimate the actual
ending account value or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only, and do not reflect any transactional costs, such as
redemption fees. If these transactional costs were included, your costs would
have been higher.
ENDING
BEGINNING ACCOUNT VALUE EXPENSES
EXPENSE RATIO 1 ACCOUNT VALUE (Net of Expenses) PAID DURING PERIOD 2
(Annualized) at 1/1/05 at 6/30/05 1/1/05-6/30/05
- ---------------------------------------------------------------------------------------------------------------------------
SCHWAB MARKETTRACK
GROWTH PORTFOLIO II
Actual Return 0.50% $1,000 $996.00 $2.47
Hypothetical 5% Return 0.50% $1,000 $1,022.32 $2.51
1 Based on the most recent six-month expense ratio; may differ from the expense
ratio provided in Financial Highlights.
2 Expenses for the portfolio are equal to its annualized expense ratio,
multiplied by the average account value over the period, multiplied by 181
days of the period, and divided by 365 days of the fiscal year.
Schwab MarketTrack Growth Portfolio II 5
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
1/1/05- 1/1/04- 1/1/03- 1/1/02- 1/1/01- 1/1/00-
6/30/05* 12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
- -----------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 14.87 13.49 10.75 12.99 14.81 15.84
------------------------------------------------------------------------------
Income or loss from investment operations:
Net investment income 0.06 0.21 0.16 0.17 0.18 0.35
Net realized and unrealized gains or losses (0.12) 1.35 2.74 (2.17) (1.43) (1.13)
------------------------------------------------------------------------------
Total income or loss from investment operations (0.06) 1.56 2.90 (2.00) (1.25) (0.78)
Less distributions:
Dividends from net investment income -- (0.18) (0.16) (0.20) (0.35) (0.14)
Distributions from net realized gains -- -- -- (0.04) (0.22) (0.11)
------------------------------------------------------------------------------
Total distributions -- (0.18) (0.16) (0.24) (0.57) (0.25)
------------------------------------------------------------------------------
Net asset value at end of period 14.81 14.87 13.49 10.75 12.99 14.81
------------------------------------------------------------------------------
Total return (%) (0.40) 1 11.58 26.97 (15.44) (8.40) (4.82)
RATIOS/SUPPLEMENTAL DATA (%)
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net operating expenses 2 0.50 3 0.50 0.50 0.50 0.50 0.56 4
Gross operating expenses 2 0.69 3 0.69 0.87 1.00 0.82 0.84
Net investment income 0.89 3 1.52 1.70 1.59 1.67 2.80
Portfolio turnover rate 1 1 8 10 30 13 19
Net assets, end of period ($ x 1,000,000) 34 34 30 20 22 22
* Unaudited.
1 Not annualized.
2 The expense incurred by underlying funds in which the portfolio invests are
not included in this ratio.
The income received by the portfolio from underlying funds is reduced by those
expenses.
3 Annualized.
4 The ratio of net operating expenses would have been 0.55% if certain
non-routine expenses (proxy fees) had not been included.
6 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS as of June 30, 2005, unaudited
This section shows all the securities in the fund's portfolio by industry
classification and their value, as of the report date.
The fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is
available on the SEC's website at http://www.sec.gov and may be reviewed and
copied at the SEC's Public Reference Room in Washington D.C. Call 1-800-SEC-0330
for information on the operation of the Public Reference Room. The schedule of
portfolio holdings filed on the fund's most recent Form N-Q is available by
visiting Schwab's website at www.schwab.com/schwabfunds.
We use the symbols below to designate certain characteristics of the securities.
With the top ten holdings, the number in the circle is the security's rank among
the top ten.
(1) Top ten holding
o Non-income producing security
/ Issuer is affiliated with the fund's adviser
COST VALUE
HOLDINGS BY CATEGORY ($ x 1,000) ($ x 1,000)
- --------------------------------------------------------------------------------
58.9% OTHER INVESTMENT
COMPANIES 17,296 19,904
38.9% COMMON STOCK 10,878 13,164
2.0% SHORT-TERM
INVESTMENT 669 669
- --------------------------------------------------------------------------------
99.8% TOTAL INVESTMENTS 28,843 33,737
0.2% OTHER ASSETS AND
LIABILITIES, NET 60
- --------------------------------------------------------------------------------
100.0% TOTAL NET ASSETS 33,797
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
COMMON STOCK 38.9% of net assets
AUTOMOBILES & COMPONENTS 0.3%
---------------------------------------------------------------------------
Cooper Tire & Rubber Co. 100 2
Dana Corp. 180 3
Delphi Corp. 579 3
Ford Motor Co. 2,098 21
General Motors Corp. 650 22
o Goodyear Tire & Rubber Co. 100 1
Harley-Davidson, Inc. 350 17
Johnson Controls, Inc. 240 14
Visteon Corp. 104 1
-----------
84
BANKS 3.0%
---------------------------------------------------------------------------
AmSouth Bancorp. 430 11
Bank of America Corp. 4,840 221
BB&T Corp. 626 25
Comerica, Inc. 200 12
Compass Bancshares, Inc. 100 5
Countrywide Financial Corp. 660 25
Fannie Mae 1,145 67
Fifth Third Bancorp 667 28
First Horizon National Corp. 150 6
Freddie Mac 800 52
Golden West Financial Corp. 350 23
Huntington Bancshares, Inc. 333 8
KeyCorp, Inc. 500 17
M&T Bank Corp. 140 15
Marshall & Ilsley Corp. 300 13
MGIC Investment Corp. 100 7
National City Corp. 824 28
North Fork Bancorp., Inc. 600 17
PNC Financial Services Group, Inc. 340 19
Regions Financial Corp. 595 20
Sovereign Bancorp, Inc. 500 11
SunTrust Banks, Inc. 420 30
Synovus Financial Corp. 325 9
U.S. Bancorp 2,274 66
Wachovia Corp. 1,882 93
Washington Mutual, Inc. 1,050 43
Wells Fargo & Co. 2,000 123
Zions Bancorp. 100 7
-----------
1,001
CAPITAL GOODS 3.4%
---------------------------------------------------------------------------
3M Co. 925 67
American Power Conversion Corp. 275 6
American Standard Cos., Inc. 300 13
The Boeing Co. 1,038 69
Caterpillar, Inc. 400 38
Cooper Industries Ltd., Class A 100 6
Crane Co. 100 3
Cummins, Inc. 50 4
Danaher Corp. 350 18
Deere & Co. 350 23
Dover Corp. 260 9
Eaton Corp. 200 12
Emerson Electric Co. 500 31
Fluor Corp. 100 6
See financial notes. 7
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS continued
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
General Dynamics Corp. 250 27
(6) General Electric Co. 12,500 433
Goodrich Corp. 100 4
Honeywell International, Inc. 987 36
Illinois Tool Works, Inc. 350 28
Ingersoll-Rand Co., Class A 200 14
ITT Industries, Inc. 100 10
L-3 Communications Holdings, Inc. 100 8
Lockheed Martin Corp. 540 35
Masco Corp. 500 16
o Navistar International Corp. 100 3
Northrop Grumman Corp. 428 24
Paccar, Inc. 187 13
Pall Corp. 100 3
Parker Hannifin Corp. 150 9
o Power-One, Inc. 226 1
Raytheon Co. 500 19
Rockwell Automation, Inc. 200 10
Rockwell Collins, Inc. 200 10
Textron, Inc. 150 11
o Thomas & Betts Corp. 80 2
Tyco International Ltd. 2,360 69
United Technologies Corp. 1,260 65
W.W. Grainger, Inc. 100 5
-----------
1,160
COMMERCIAL SERVICES & SUPPLIES 0.4%
---------------------------------------------------------------------------
o Allied Waste Industries, Inc. 400 3
o Apollo Group, Inc., Class A 200 16
Avery Dennison Corp. 150 8
Cendant Corp. 1,190 27
Cintas Corp. 182 7
Deluxe Corp. 100 4
Equifax, Inc. 175 6
H&R Block, Inc. 200 12
o Monster Worldwide, Inc. 95 3
o PHH Corp. 59 1
Pitney Bowes, Inc. 250 11
R.R. Donnelley & Sons Co. 300 10
Robert Half International, Inc. 200 5
Waste Management, Inc. 720 20
-----------
133
CONSUMER DURABLES & APPAREL 0.5%
---------------------------------------------------------------------------
Black & Decker Corp. 100 9
Brunswick Corp. 100 4
Centex Corp. 150 11
o Coach, Inc. 400 13
Eastman Kodak Co. 300 8
Fortune Brands, Inc. 175 15
Hasbro, Inc. 200 4
Jones Apparel Group, Inc. 150 5
KB Home 100 8
Leggett & Platt, Inc. 200 5
Liz Claiborne, Inc. 100 4
Mattel, Inc. 500 9
Maytag Corp. 100 2
Newell Rubbermaid, Inc. 300 7
Nike, Inc., Class B 300 26
Pulte Homes, Inc. 150 13
Reebok International Ltd. 100 4
Snap-On, Inc. 75 3
The Stanley Works 100 4
VF Corp. 100 6
Whirlpool Corp. 100 7
-----------
167
DIVERSIFIED FINANCIALS 3.0%
---------------------------------------------------------------------------
American Express Co. 1,550 83
The Bank of New York Co., Inc. 900 26
The Bear Stearns Cos., Inc. 110 11
Capital One Financial Corp. 290 23
/ The Charles Schwab Corp. 1,575 18
CIT Group, Inc. 200 9
(8) Citigroup, Inc. 6,222 288
o E*TRADE Financial Corp. 400 6
Federated Investors, Inc., Class B 100 3
Franklin Resources, Inc. 300 23
Goldman Sachs Group, Inc. 562 57
Janus Capital Group, Inc. 300 5
JPMorgan Chase & Co. 4,286 151
Lehman Brothers Holdings, Inc. 350 35
MBNA Corp. 1,487 39
Mellon Financial Corp. 525 15
Merrill Lynch & Co., Inc. 1,150 63
Moody's Corp. 350 16
Morgan Stanley 1,330 70
Northern Trust Corp. 250 11
Principal Financial Group, Inc. 381 16
o Providian Financial Corp. 350 6
SLM Corp. 550 28
State Street Corp. 400 19
8 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
T. Rowe Price Group, Inc. 150 9
-----------
1,030
ENERGY 3.4%
---------------------------------------------------------------------------
Amerada Hess Corp. 100 11
Anadarko Petroleum Corp. 295 24
Apache Corp. 386 25
o Ashland, Inc. 100 7
Baker Hughes, Inc. 431 22
BJ Services Co. 200 10
Burlington Resources, Inc. 500 28
ChevronTexaco Corp. 2,540 142
ConocoPhillips 1,610 93
Devon Energy Corp. 580 29
El Paso Corp. 696 8
EOG Resources, Inc. 264 15
(5) Exxon Mobil Corp. 7,780 447
Halliburton Co. 500 24
Kerr-McGee Corp. 100 8
Kinder Morgan, Inc. 156 13
Marathon Oil Corp. 400 21
o Nabors Industries Ltd. 175 11
Noble Corp. 200 12
Occidental Petroleum Corp. 465 36
o Rowan Cos., Inc. 100 3
Schlumberger Ltd. 700 53
Sunoco, Inc. 100 11
o Transocean, Inc. 358 19
Unocal Corp. 300 20
Valero Energy Corp. 300 24
Williams Cos., Inc. 600 11
XTO Energy, Inc. 400 14
-----------
1,141
FOOD & STAPLES RETAILING 1.2%
---------------------------------------------------------------------------
Albertson's, Inc. 400 8
Costco Wholesale Corp. 560 25
CVS Corp. 980 29
o Kroger Co. 900 17
o Safeway, Inc. 500 11
Supervalu, Inc. 175 6
Sysco Corp. 700 25
(10) Wal-Mart Stores, Inc. 5,050 244
Walgreen Co. 1,175 54
o Winn-Dixie Stores, Inc. 100 --
-----------
419
FOOD BEVERAGE & TOBACCO 1.9%
---------------------------------------------------------------------------
Altria Group, Inc. 2,440 158
Anheuser-Busch Cos., Inc. 975 45
Archer-Daniels-Midland Co. 774 16
Brown-Forman Corp., Class B 150 9
Campbell Soup Co. 500 15
The Coca-Cola Co. 2,825 118
Coca-Cola Enterprises, Inc. 550 12
ConAgra Foods, Inc. 650 15
General Mills, Inc. 450 21
H.J. Heinz Co. 400 14
Hershey Foods Corp. 300 19
Kellogg Co. 500 22
McCormick & Co., Inc. 200 6
Molson Coors Brewing Co., Class B 25 2
The Pepsi Bottling Group, Inc. 312 9
PepsiCo, Inc. 2,055 111
Reynolds American, Inc. 200 16
Sara Lee Corp. 900 18
UST, Inc. 200 9
Wm. Wrigley Jr. Co. 250 17
-----------
652
HEALTH CARE EQUIPMENT & SERVICES 2.0%
---------------------------------------------------------------------------
Aetna, Inc. 400 33
AmerisourceBergen Corp. 150 10
Bausch & Lomb, Inc. 100 8
Baxter International, Inc. 725 27
Becton Dickinson & Co. 300 16
Biomet, Inc. 325 11
o Boston Scientific Corp. 988 27
C.R. Bard, Inc. 100 7
Cardinal Health, Inc. 525 30
o Caremark Rx, Inc. 535 24
CIGNA Corp. 175 19
o Express Scripts, Inc. 200 10
o Fisher Scientific International, Inc. 100 6
Guidant Corp. 350 24
HCA, Inc. 600 34
Health Management Associates, Inc.,
Class A 300 8
o Hospira, Inc. 186 7
o Humana, Inc. 200 8
IMS Health, Inc. 300 7
o Laboratory Corp. of America Holdings 200 10
Manor Care, Inc. 100 4
See financial notes. 9
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS continued
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
McKesson Corp. 374 17
o Medco Health Solutions, Inc. 337 18
Medtronic, Inc. 1,440 75
o Millipore Corp. 75 4
PerkinElmer, Inc. 118 2
Quest Diagnostics 278 15
o St. Jude Medical, Inc. 400 17
Stryker Corp. 464 22
o Tenet Healthcare Corp. 450 5
o Thermo Electron Corp. 175 5
UnitedHealth Group, Inc. 1,660 86
o Waters Corp. 150 6
o WellPoint, Inc. 700 49
o Zimmer Holdings, Inc. 275 21
-----------
672
HOTELS RESTAURANTS & LEISURE 0.6%
---------------------------------------------------------------------------
Carnival Corp. 725 40
Darden Restaurants, Inc. 150 5
Harrah's Entertainment, Inc. 150 11
Hilton Hotels Corp. 400 9
International Game Technology 413 12
Marriott International, Inc., Class A 250 17
McDonald's Corp. 1,450 40
o Starbucks Corp. 470 24
Starwood Hotels & Resorts
Worldwide, Inc. 260 15
Wendy's International, Inc. 140 7
Yum! Brands, Inc. 320 17
-----------
197
HOUSEHOLD & PERSONAL PRODUCTS 1.0%
---------------------------------------------------------------------------
Alberto-Culver Co., Class B 150 7
Avon Products, Inc. 540 20
Clorox Co. 250 14
Colgate-Palmolive Co. 650 32
The Gillette Co. 1,200 61
Kimberly-Clark Corp. 600 38
Procter & Gamble Co. 3,040 160
-----------
332
INSURANCE 1.7%
---------------------------------------------------------------------------
ACE Ltd. 340 15
AFLAC, Inc. 600 26
The Allstate Corp. 840 50
AMBAC Financial Group, Inc. 123 9
American International Group, Inc. 3,106 180
AON Corp. 325 8
Chubb Corp. 240 21
Cincinnati Financial Corp. 220 9
Hartford Financial Services Group, Inc. 340 25
Jefferson-Pilot Corp. 175 9
Lincoln National Corp. 200 9
Loews Corp. 200 15
Marsh & McLennan Cos., Inc. 625 17
MBIA, Inc. 150 9
Metlife, Inc. 915 41
The Progressive Corp. 265 26
Prudential Financial, Inc. 650 43
Safeco Corp. 150 8
The St. Paul Travelers Cos., Inc. 797 32
Torchmark Corp. 150 8
UnumProvident Corp. 323 6
XL Capital Ltd., Class A 155 12
-----------
578
MATERIALS 1.1%
---------------------------------------------------------------------------
Air Products & Chemicals, Inc. 250 15
Alcoa, Inc. 1,000 26
Allegheny Technologies, Inc. 100 2
Ball Corp. 200 7
Bemis Co. 100 3
The Dow Chemical Co. 1,121 50
E.I. du Pont de Nemours & Co. 1,169 50
Eastman Chemical Co. 100 5
Ecolab, Inc. 275 9
Engelhard Corp. 160 5
Freeport-McMoran Copper & Gold, Inc.,
Class B 200 7
Georgia-Pacific Corp. 326 10
Great Lakes Chemical Corp. 100 3
o Hercules, Inc. 100 1
International Flavors & Fragrances,
Inc. 100 4
International Paper Co. 570 17
Louisiana-Pacific Corp. 100 2
MeadWestvaco Corp. 197 6
Monsanto Co. 314 20
Neenah Paper, Inc. 18 1
Newmont Mining Corp. 500 20
Nucor Corp. 200 9
o Pactiv Corp. 200 4
Phelps Dodge Corp. 100 9
PPG Industries, Inc. 200 13
Praxair, Inc. 400 19
Rohm & Haas Co. 300 14
10 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
o Sealed Air Corp. 103 5
Sigma-Aldrich Corp. 100 6
Temple-Inland, Inc. 100 4
United States Steel Corp. 100 3
Vulcan Materials Co. 100 6
Weyerhaeuser Co. 250 16
Worthington Industries, Inc. 100 2
-----------
373
MEDIA 1.4%
---------------------------------------------------------------------------
Clear Channel Communications, Inc. 729 23
o Comcast Corp., Class A 2,576 79
Dow Jones & Co., Inc. 100 4
Gannett Co., Inc. 325 23
o Interpublic Group of Cos., Inc. 500 6
Knight-Ridder, Inc. 100 6
The McGraw-Hill Cos., Inc. 450 20
Meredith Corp. 50 2
New York Times Co., Class A 200 6
News Corp, Inc., Class A 3,100 50
Omnicom Group, Inc. 220 18
o Time Warner, Inc. 5,500 92
Tribune Co. 400 14
o Univision Communications, Inc., Class A 354 10
Viacom, Inc., Class B 1,992 64
The Walt Disney Co. 2,430 61
-----------
478
PHARMACEUTICALS & BIOTECHNOLOGY 3.2%
---------------------------------------------------------------------------
Abbott Laboratories 1,860 91
Allergan, Inc. 150 13
o Amgen, Inc. 1,470 89
Applied Biosystems Group -- Applera
Corp. 200 4
o Biogen Idec, Inc. 380 13
Bristol-Myers Squibb Co. 2,300 57
o Chiron Corp. 200 7
Eli Lilly & Co. 1,320 74
o Forest Laboratories, Inc. 450 17
o Genzyme Corp. 250 15
o Gilead Sciences, Inc. 450 20
Johnson & Johnson 3,536 230
o King Pharmaceuticals, Inc. 233 2
o Medimmune, Inc. 300 8
Merck & Co., Inc. 2,550 79
Mylan Laboratories, Inc. 300 6
(9) Pfizer, Inc. 8,959 247
Schering-Plough Corp. 1,700 32
o Watson Pharmaceuticals, Inc. 100 3
Wyeth 1,600 71
-----------
1,078
REAL ESTATE 0.2%
---------------------------------------------------------------------------
Apartment Investment & Management Co.,
Class A 100 4
Archstone-Smith Trust 200 8
Equity Office Properties Trust 500 17
Equity Residential 300 11
Plum Creek Timber Co., Inc. 200 7
ProLogis 200 8
Simon Property Group, Inc. 240 17
-----------
72
RETAILING 1.6%
---------------------------------------------------------------------------
o Autonation, Inc. 300 6
o AutoZone, Inc. 100 9
o Bed, Bath & Beyond, Inc. 350 15
Best Buy Co., Inc. 390 27
o Big Lots, Inc. 88 1
Circuit City Stores, Inc. 200 4
Dillards, Inc., Class A 100 2
Dollar General Corp. 395 8
o eBay, Inc. 1,718 57
Family Dollar Stores, Inc. 200 5
Federated Department Stores, Inc. 200 15
The Gap, Inc. 1,037 21
Genuine Parts Co. 200 8
Home Depot, Inc. 2,600 101
J.C. Penney Co., Inc. Holding Co. 300 16
o Kohl's Corp. 400 22
Limitedbrands 521 11
Lowe's Cos., Inc. 940 55
The May Department Stores Co. 350 14
Nordstrom, Inc. 200 14
o Office Depot, Inc. 325 7
OfficeMax, Inc. 75 2
RadioShack Corp. 200 5
o Sears Holdings Corp. 94 14
The Sherwin-Williams Co. 175 8
Staples, Inc. 900 19
Target Corp. 1,090 59
Tiffany & Co. 150 5
TJX Cos., Inc. 600 15
o Toys `R' Us, Inc. 200 5
-----------
550
See financial notes. 11
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS continued
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.3%
---------------------------------------------------------------------------
o Advanced Micro Devices, Inc. 400 7
o Altera Corp. 464 9
Analog Devices, Inc. 450 17
o Applied Materials, Inc. 2,000 32
o Applied Micro Circuits Corp. 221 1
o Broadcom Corp., Class A 355 13
o Freescale Semiconductor, Inc., Class B 300 6
Intel Corp. 7,675 200
o KLA-Tencor Corp. 240 10
Linear Technology Corp. 400 15
o LSI Logic Corp. 400 3
Maxim Integrated Products, Inc. 400 15
o Micron Technology, Inc. 650 7
National Semiconductor Corp. 400 9
o Novellus Systems, Inc. 175 4
o Nvidia Corp. 200 5
o PMC -- Sierra, Inc. 200 2
o Teradyne, Inc. 200 2
Texas Instruments, Inc. 2,050 58
Xilinx, Inc. 375 10
-----------
425
SOFTWARE & SERVICES 2.1%
---------------------------------------------------------------------------
Adobe Systems, Inc. 500 14
o Affiliated Computer Services, Inc.,
Class A 203 10
Autodesk, Inc. 200 7
Automatic Data Processing, Inc. 700 29
o BMC Software, Inc. 200 4
o Citrix Systems, Inc. 175 4
Computer Associates International, Inc. 700 19
o Computer Sciences Corp. 200 9
o Compuware Corp. 400 3
o Convergys Corp. 137 2
o Electronic Arts, Inc. 354 20
Electronic Data Systems Corp. 550 11
First Data Corp. 1,032 41
o Fiserv, Inc. 225 10
o Intuit, Inc. 244 11
o Mercury Interactive Corp. 100 4
(7) Microsoft Corp. 12,915 321
o Novell, Inc. 400 3
o Oracle Corp. 6,000 79
o Parametric Technology Corp. 200 1
Paychex, Inc. 425 14
Sabre Holdings Corp., Class A 172 3
o Siebel Systems, Inc. 600 5
o SunGard Data Systems, Inc. 361 13
o Symantec Corp. 800 17
o Unisys Corp. 350 2
o Veritas Software Corp. 500 12
o Yahoo! Inc. 1,580 55
-----------
723
TECHNOLOGY HARDWARE & EQUIPMENT 2.5%
---------------------------------------------------------------------------
o ADC Telecommunications, Inc. 100 2
o Agilent Technologies, Inc. 566 13
o Andrew Corp. 200 3
o Apple Computer, Inc. 1,000 37
o Avaya, Inc. 513 4
o CIENA Corp. 300 1
o Cisco Systems, Inc. 7,925 151
o Comverse Technology, Inc. 200 5
o Corning, Inc. 1,500 25
o Dell, Inc. 2,925 116
o EMC Corp. 2,850 39
o Gateway, Inc. 200 1
Hewlett-Packard Co. 3,462 81
International Business Machines
Corp. 2,020 150
o Jabil Circuit, Inc. 208 6
o JDS Uniphase Corp. 1,654 2
o Lexmark International, Inc., Class A 150 10
o Lucent Technologies, Inc. 5,055 15
Molex, Inc. 225 6
Motorola, Inc. 2,721 50
o NCR Corp. 200 7
o Network Appliance, Inc. 400 11
o QLogic Corp. 113 3
Qualcomm, Inc. 1,900 63
o Sanmina -- SCI Corp. 500 3
Scientific-Atlanta, Inc. 175 6
o Solectron Corp. 1,000 4
o Sun Microsystems, Inc. 3,675 14
Symbol Technologies, Inc. 289 3
Tektronix, Inc. 100 2
o Tellabs, Inc. 500 4
o Xerox Corp. 900 12
-----------
849
12 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
VALUE
SECURITY AND NUMBER OF SHARES ($ x 1,000)
TELECOMMUNICATION SERVICES 1.2%
---------------------------------------------------------------------------
Alltel Corp. 400 25
AT&T Corp. 935 18
BellSouth Corp. 2,180 58
CenturyTel, Inc. 150 5
Citizens Communications Co. 358 5
o Nextel Communications, Inc.,
Class A 1,275 41
o Qwest Communications International,
Inc. 2,027 7
SBC Communications, Inc. 3,956 94
Sprint Corp. (FON Group) 1,662 42
Verizon Communications, Inc. 3,313 114
-----------
409
TRANSPORTATION 0.6%
---------------------------------------------------------------------------
Burlington Northern Santa Fe Corp. 400 19
CSX Corp. 225 10
o Delta Air Lines, Inc. 100 --
FedEx Corp. 350 28
Norfolk Southern Corp. 480 15
Ryder Systems, Inc. 75 3
Southwest Airlines Co. 900 13
Union Pacific Corp. 295 19
United Parcel Service, Inc.,
Class B 1,347 93
-----------
200
UTILITIES 1.3%
---------------------------------------------------------------------------
o The AES Corp. 650 11
o Allegheny Energy, Inc. 78 2
Ameren Corp. 200 11
American Electric Power Co., Inc. 460 17
o Calpine Corp. 500 2
Centerpoint Energy, Inc. 400 5
Cinergy Corp. 200 9
o CMS Energy Corp. 300 4
Consolidated Edison, Inc. 300 14
Constellation Energy Group, Inc. 200 12
Dominion Resources, Inc. 396 29
DTE Energy Co. 200 9
Duke Energy Corp. 1,050 31
o Dynegy, Inc., Class A 300 1
Edison International 400 16
Entergy Corp. 250 19
Exelon Corp. 774 40
FirstEnergy Corp. 391 19
FPL Group, Inc. 400 17
KeySpan Corp. 200 8
Nicor, Inc. 50 2
NiSource, Inc. 357 9
Peoples Energy Corp. 50 2
PG&E Corp. 500 19
Pinnacle West Capital Corp. 100 4
PPL Corp. 200 12
Progress Energy, Inc. 277 13
Public Service Enterprise Group,
Inc. 300 18
Sempra Energy 285 12
The Southern Co. 875 30
TECO Energy, Inc. 250 5
TXU Corp. 350 29
Xcel Energy, Inc. 505 10
-----------
441
OTHER INVESTMENT COMPANIES
58.9% of net assets
/(2) Schwab International Index Fund,
Select Shares 422,025 6,702
/(1) Schwab Small-Cap Index Fund,
Select Shares 317,952 7,011
/(3) Schwab Total Bond Market
Fund 492,069 4,980
/(4) Schwab Value Advantage Money Fund,
Select Shares 1,210,734 1,211
-----------
19,904
FACE
SECURITY AMOUNT
RATE, MATURITY DATE ($ x 1,000)
SHORT TERM INVESTMENT
2.0% of net assets
Wachovia Bank, Grand Cayman
Time Deposit
2.70%, 07/01/05 669 669
END OF INVESTMENTS.
See financial notes. 13
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
Statement of
ASSETS AND LIABILITIES
As of June 30, 2005; unaudited. All numbers x 1,000 except NAV.
ASSETS
- ---------------------------------------------------------------------------------
Investments, at value $33,737 a
Receivables:
Fund shares sold 114
Dividends + 20
-----------
TOTAL ASSETS 33,871
LIABILITIES
- ---------------------------------------------------------------------------------
Payables:
Fund shares redeemed 56
Investment adviser and administrator fees 1
Accrued expenses + 17
-----------
TOTAL LIABILITIES 74
NET ASSETS
- ---------------------------------------------------------------------------------
TOTAL ASSETS 33,871
TOTAL LIABILITIES - 74
-----------
NET ASSETS $33,797
NET ASSETS BY SOURCE
Capital received from investors 29,282
Net investment income not yet distributed 614
Net realized capital losses (993)
Net unrealized capital gains 4,894
NET ASSET VALUE (NAV)
SHARES
NET ASSETS / OUTSTANDING = NAV
$33,797 2,282 $14.81
Unless stated, all numbers x 1,000.
a The fund paid $28,843 for these securities.
Not counting short-term obligations and government securities, the fund's
security transactions during the period were:
Purchases $477
Sales/maturities $382
Percent of fund shares of other Schwab Funds owned as of the end of the report
period:
SCHWAB EQUITY INDEX FUNDS
Small-Cap Index Fund 0.4%
International Index Fund 0.5%
SCHWAB BOND FUNDS
Total Bond Market Fund 0.4%
SCHWAB MONEY FUNDS
Value Advantage
Money Fund Less than 0.1%
FEDERAL TAX DATA
---------------------------------------
PORTFOLIO COST $29,096
NET UNREALIZED GAINS AND LOSSES:
Gains $6,362
Losses + (1,721)
------------
$4,641
AS OF DECEMBER 31, 2004:
NET UNDISTRIBUTED EARNINGS:
Ordinary income $466
Long-term capital gains $--
UNUSED CAPITAL LOSSES:
Expires 12/31 of: Loss amount
2010 $347
2011 200
2012 + 101
------------
$648
14 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
Statement of
OPERATIONS
For January 1, 2005 through June 30, 2005; unaudited. All numbers x 1,000.
INVESTMENT INCOME
- ---------------------------------------------------------------------------------
Dividends $222
Interest + 9
---------
TOTAL INVESTMENT INCOME 231
NET REALIZED GAINS AND LOSSES
- ---------------------------------------------------------------------------------
Net realized gains on investments sold 37
Net realized gains received from underlying funds + 1
---------
NET REALIZED GAINS 38
NET UNREALIZED GAINS AND LOSSES
- ---------------------------------------------------------------------------------
Net unrealized losses on investments (327)
EXPENSES
- ---------------------------------------------------------------------------------
Investment adviser and administrator fees 73 a
Trustees' fees 6 b
Custodian fees 8
Portfolio accounting fees 2
Professional fees 15
Shareholder reports 7
Other expenses + 3
---------
Total expenses 114
Expense reduction - 31 c
---------
NET EXPENSES 83
DECREASE IN NET ASSETS FROM OPERATIONS
- ---------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 231
NET EXPENSES - 83
---------
NET INVESTMENT INCOME 148
NET REALIZED GAINS 38 d
NET UNREALIZED LOSSES + (327) d
---------
DECREASE IN NET ASSETS FROM OPERATIONS ($141)
Unless stated, all numbers x 1,000.
a Calculated as a percentage of average daily net assets: 0.44% of the first
$500 million and 0.39% of assets beyond that. These fees are paid to Charles
Schwab Investment Management, Inc. (CSIM).
b For the fund's independent trustees only.
c This reduction was made by the investment adviser (CSIM). It reflects a
guarantee by CSIM to limit the operating expenses of this fund through April
29, 2006, to 0.50% of average daily net assets. This limit excludes interest,
taxes and certain non-routine expenses.
d These add up to a net loss on investments of $289.
See financial notes. 15
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
Statements of
CHANGES IN NET ASSETS
For the current and prior report periods. All numbers x 1,000.
Figures for current period are unaudited.
OPERATIONS
- ---------------------------------------------------------------------------------
1/1/05-6/30/05 1/1/04-12/31/04
Net investment income $148 $467
Net realized gains 38 78
Net unrealized gains or losses + (327) 2,883
----------------------------------
INCREASE OR DECREASE IN NET ASSETS
FROM OPERATIONS (141) 3,428
DISTRIBUTIONS PAID
- ---------------------------------------------------------------------------------
Dividends from net investment income $-- $394 a
TRANSACTIONS IN FUND SHARES
- ---------------------------------------------------------------------------------
1/1/05-6/30/05 1/1/04-12/31/04
SHARES VALUE SHARES VALUE
Shares sold 164 $2,401 319 $4,455
Shares reinvested -- -- 27 394
Shares redeemed + (158) (2,306) (288) (3,967)
--------------------------------------------
NET TRANSACTIONS IN
FUND SHARES 6 $95 58 $882
SHARES OUTSTANDING AND NET ASSETS
- ---------------------------------------------------------------------------------
1/1/05-6/30/05 1/1/04-12/31/04
SHARES NET ASSETS SHARES NET ASSETS
Beginning of period 2,276 $33,843 2,218 $29,927
Total increase or
decrease + 6 (46) 58 3,916 b
--------------------------------------------
END OF PERIOD 2,282 $33,797 2,276 $33,843 c
Unless stated, all numbers x 1,000.
a The tax-basis components of distributions for the period ended 12/31/04 are:
Ordinary income $394
Long-term capital gains $--
b Figures for shares represent shares sold plus shares reinvested, minus shares
redeemed. Figures for net assets represent the changes in net assets from
operations plus the changes in value of transactions in fund shares, minus
distributions paid.
c Includes distributable net investment income in the amount of $614 and $466 at
the end of the current period and prior period, respectively.
16 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
FINANCIAL NOTES unaudited
BUSINESS STRUCTURE OF THE FUND
THE FUND DISCUSSED IN THIS REPORT IS A SERIES OF SCHWAB ANNUITY PORTFOLIOS, A
NO-LOAD, OPEN-END MANAGEMENT INVESTMENT COMPANY. The company is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended. The sidebar shows the fund in this report and its trust.
THE FUND OFFERS ONE SHARE CLASS. Shares are bought and sold at net asset value
(NAV) which is the price for all outstanding shares. Each share has a par value
of 1/1,000 of a cent, and the trust may issue as many shares as necessary.
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.
FUND OPERATIONS
Most of the fund's investments are described earlier in this report. However,
there are certain other fund operations and policies that may affect the fund's
financials, as described below. Other policies concerning the fund's business
operations also are described here.
THE FUND PAYS DIVIDENDS from net investment income and makes distributions from
net capital gains once a year.
THE FUND MAY INVEST IN FUTURES CONTRACTS. Futures contracts involve certain
risks because they can be very sensitive to market movements.
One risk is that the price of a futures contract may not move in perfect
correlation with the price of the underlying securities. Another risk is that,
at certain times, it may be impossible for the fund to close out a position in a
futures contract due to a difference in trading hours or to market conditions
that may reduce the liquidity for a futures contract or its underlying
securities.
Because futures carry inherent risks, the fund must give the broker a deposit of
cash and/or securities (the "initial margin") whenever it enters into a futures
contract. The amount of the deposit may vary from one contract to another, but
it is generally a percentage of the contract amount.
Futures are traded publicly on exchanges, and their market value changes daily.
The fund records the change in market value of futures, and also the change in
the amount of margin deposit required ("variation margin").
THE FUND MAY ENTER INTO REPURCHASE AGREEMENTS. In a repurchase agreement, the
fund buys a security from another party (usually a financial institution) with
the agreement that it be sold back in the future. The date, price and other
conditions are all specified when the agreement is created.
The fund's repurchase agreements will be fully collateralized by U.S. government
securities. All collateral is held by the fund's custodian (or, with tri-party
agreements, the agent's bank) and is monitored daily to ensure that its market
value is at least equal to the repurchase price under the agreement.
THE TRUST AND ITS FUNDS
This list shows all of the funds included in Schwab Annuity Portfolios. The fund
discussed in this report is highlighted.
SCHWAB ANNUITY PORTFOLIOS
organized January 21, 1994
Schwab Money Market Portfolio
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
Schwab S&P 500 Index Portfolio
See financial notes. 17
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
THE FUND PAYS FEES TO AFFILIATES OF THE INVESTMENT ADVISER FOR VARIOUS SERVICES.
Through its trust, the fund has agreements with Charles Schwab Investment
Management, Inc. (CSIM) to provide investment advisory and administrative
services and with Charles Schwab & Co., Inc. (Schwab) to provide transfer agent,
shareholder services and transaction services.
Although these agreements specify certain fees for these services, CSIM has made
additional agreements with the fund that may limit the total expenses charged.
The rates and limitations for these fees are described in the fund's Statement
of Operations.
THE FUND MAY ENGAGE IN CERTAIN TRANSACTIONS INVOLVING RELATED PARTIES. For
instance, the fund may own shares of The Charles Schwab Corporation if that
company is included in its index.
Pursuant to an exemptive order issued by the SEC, the fund may invest in other
related funds. The percentages of fund shares of other related funds owned are
shown in the fund's Statement of Assets and Liabilities.
The fund may make direct transactions with certain other Schwab Funds(R) when
practical. When one fund is seeking to sell a security that another is seeking
to buy, an interfund transaction can allow both funds to benefit by reducing
transaction costs. This practice is limited to funds that share the same
investment adviser, trustees and officers.
Pursuant to an exemptive order issued by the SEC, the fund may enter into
interfund borrowing and lending transactions within the Schwab Funds(R). All
loans are for temporary or emergency purposes only. The interest rate charged on
the loan is the average of the overnight repurchase agreement rate and the
short-term bank loan rate. The interfund lending facility is subject to the
oversight and periodic review of the Board of Trustees of the Schwab Funds(R).
TRUSTEES MAY INCLUDE PEOPLE WHO ARE OFFICERS AND/OR DIRECTORS OF THE INVESTMENT
ADVISER OR SCHWAB. Federal securities law limits the percentage of such
"interested persons" who may serve on a trust's board, and the trust was in
compliance with these limitations throughout the report period. The trust did
not pay any of these persons for their service as trustees, but it did pay
non-interested persons (independent trustees), as noted in the fund's Statement
of Operations.
THE FUND MAY BORROW MONEY FROM BANKS AND CUSTODIANS. The fund may obtain
temporary bank loans through the trust to which the fund belongs to use for
meeting shareholder redemptions or for extraordinary or emergency purposes. The
trust has custodian overdraft facilities and line of credit arrangements of $150
million and $100 million with PNC Bank, N.A. and Bank of America, N.A.,
respectively. The fund pays interest on the amounts it borrows at rates that are
negotiated periodically. There was no borrowing for this fund during the period.
THE FUND INTENDS TO MEET FEDERAL INCOME TAX REQUIREMENTS FOR REGULATED
INVESTMENT COMPANIES. Accordingly, the fund distributes substantially all of its
net investment income and net realized capital gains (if any) to the
participating insurance company separate accounts each year. As long as the fund
meets the tax requirements, it is not required to pay federal income tax. The
net investment income and net realized capital gains and losses may differ for
financial statement and tax purposes primarily due to differing treatments of
losses on wash sales.
UNDER THE FUND'S ORGANIZATIONAL DOCUMENTS, ITS OFFICERS AND TRUSTEES ARE
INDEMNIFIED AGAINST CERTAIN LIABILITY ARISING OUT OF THE PERFORMANCE OF THEIR
DUTIES TO THE FUND. In addition, in the normal course of business the fund
enters into contracts with its vendors and others that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
However, based on experience, the fund expects the risk of loss to be remote.
18
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
ACCOUNTING POLICIES
The following are the main policies the fund uses in preparing its financial
statements.
THE FUND VALUES THE SECURITIES IN ITS PORTFOLIO EVERY BUSINESS DAY. The fund
uses the following policies to value various types of securities:
- - SECURITIES TRADED ON AN EXCHANGE OR OVER-THE-COUNTER: valued at the closing
value for the day, or, on days when no closing value has been reported,
halfway between the most recent bid and asked quotes. Securities that are
primarily traded on foreign exchanges are valued at the closing values of
such securities on their respective exchanges with these values then
translated into U.S. dollars at the current exchange rate.
- - SECURITIES FOR WHICH NO MARKET QUOTATIONS ARE READILY AVAILABLE or when a
significant event has occurred between the time of the security's last close
and the time that a fund calculates net asset value: valued at fair value, as
determined in good faith by the fund's investment adviser using guidelines
adopted by the fund's Board of Trustees and the Pricing Committee. Some of
the more common reasons that may necessitate that a security be valued at
fair value include: the security's trading has been halted or suspended; the
security has been de-listed from a national exchange; the security's primary
trading market is temporarily closed at a time when under normal conditions
it would be open; or the security's primary pricing source is not able or
willing to provide a price.
- - FUTURES: open contracts are valued at their settlement prices as of the close
of their exchanges. When the fund closes out a futures position, it
calculates the difference between the value of the position at the beginning
and at the end, and records a realized gain or loss accordingly.
- - UNDERLYING FUNDS: valued at their respective net asset values as determined
by those funds, in accordance with the 1940 Act for a given day.
- - SHORT-TERM SECURITIES (60 DAYS OR LESS TO MATURITY): valued at amortized
cost.
SECURITY TRANSACTIONS are recorded as of the date the order to buy or sell the
security is executed.
DIVIDENDS AND DISTRIBUTIONS FROM PORTFOLIO SECURITIES are recorded on the date
they are effective (the ex-dividend date), although the fund records certain
foreign security dividends on the day it learns of the ex-dividend date.
INCOME FROM INTEREST AND THE ACCRETION OF DISCOUNTS is recorded as it accrues.
REALIZED GAINS AND LOSSES from security transactions are based on the identified
costs of the securities involved.
ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES are reported in U.S.
dollars. For assets and liabilities held on a given date, the dollar value is
based on market exchange rates in effect on that date. Transactions involving
foreign currencies, including purchases, sales, income receipts and expense
payments, are calculated using exchange rates in effect on the transaction date.
EXPENSES that are specific to the fund are charged directly to that fund.
Expenses that are common to all funds within a trust generally are allocated
among the funds in proportion to their average daily net assets.
THE FUND MAINTAINS ITS OWN ACCOUNT FOR PURPOSES OF HOLDING ASSETS AND
ACCOUNTING, and is considered a separate entity for tax purposes. Within its
account, the fund also keeps certain assets in segregated accounts, as may be
required by securities law.
THE ACCOUNTING POLICIES DESCRIBED ABOVE CONFORM WITH ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. Notwithstanding this,
shareholders should understand that in order to follow these principles, fund
management has to make estimates and assumptions that affect the information
reported in the financial statements. It's possible that once the results are
known, they may turn out to be different from these estimates.
19
INVESTMENT ADVISORY AGREEMENT APPROVAL
The Investment Company Act of 1940 (the "1940 Act") requires that initial
approval of, as well as the continuation of, a fund's investment advisory
agreement must be specifically approved (1) by the vote of the trustees or by a
vote of the shareholders of the fund, and (2) by the vote of a majority of the
trustees who are not parties to the investment advisory agreement or "interested
persons" of any party (the "Independent Trustees"), cast in person at a meeting
called for the purpose of voting on such approval. In connection with such
approvals, the fund's trustees must request and evaluate, and the investment
adviser is required to furnish, such information as may be reasonably necessary
to evaluate the terms of the advisory agreement. In addition, the Securities and
Exchange Commission (the "SEC") takes the position that, as part of their
fiduciary duties with respect to fund fees, fund boards are required to evaluate
the material factors applicable to a decision to approve an investment advisory
agreement.
Consistent with these responsibilities, the Board of Trustees (the "Board")
calls and holds one or more meetings each year that are dedicated, in whole or
in part, to considering whether to renew the investment advisory agreement
between Schwab Annuity Portfolios (the "Trust") and CSIM (the "Agreement") with
respect to existing funds in the Trust, which includes the Schwab MarketTrack
Growth Portfolio II, and to review certain other agreements pursuant to which
CSIM provides investment advisory services to certain other registered
investment companies. In preparation for the meeting(s), the Board requests and
reviews a wide variety of materials provided by CSIM, including information
about CSIM's affiliates, personnel and operations. The Board also receives
extensive data provided by third parties. This information is in addition to the
detailed information about the funds that the Board reviews during the course of
each year, including information that relates to fund operations and fund
performance. The trustees also receive a memorandum from fund counsel regarding
the responsibilities of trustees for the approval of investment advisory
contracts. In addition, the Independent Trustees receive advice from independent
counsel to the Independent Trustees, meet in executive session outside the
presence of fund management and participate in question and answer sessions with
representatives of CSIM.
At the May 24, 2005 meeting of the Board, the trustees, including a majority of
the Independent Trustees, approved the renewal of the Agreement for an
additional one year period. The Board's approval of the Agreement was based on
consideration and evaluation of a variety of specific factors discussed at that
meeting and at prior meetings, including:
1. the nature, extent and quality of the services provided to the funds under
the Agreement, including the resources of CSIM and its affiliates dedicated
to the funds;
2. each fund's investment performance and how it compared to that of certain
other comparable mutual funds;
3. each fund's expenses and how those expenses compared to those of certain
other comparable mutual funds;
4. the profitability of CSIM and its affiliates, including Schwab, with respect
to each fund, including both direct and indirect benefits accruing to CSIM
and its affiliates; and
5. the extent to which economies of scale would be realized as the funds grow
and whether fee levels in the Agreement reflect those economies of scale for
the benefit of fund investors.
20
NATURE, EXTENT AND QUALITY OF SERVICES. The Board considered the nature,
extent and quality of the services provided by CSIM to the funds and the
resources of CSIM and its affiliates dedicated to the funds. In this regard,
the trustees evaluated, among other things, CSIM's personnel, experience,
track record and compliance program. The trustees considered the role of
unaffiliated insurance companies in the distribution of the funds. The
trustees also considered Schwab's excellent reputation as a full service
brokerage firm and its overall financial condition, and how this affects the
success of the funds. Following such evaluation, the Board concluded, within
the context of its full deliberations, that the nature, extent and quality of
services provided by CSIM to the funds and the resources of CSIM and its
affiliates dedicated to the funds supported renewal of the Agreement.
FUND PERFORMANCE. The Board considered fund performance in determining
whether to renew the Agreement. Specifically, the trustees considered each
fund's performance relative to a peer group of other mutual funds and
appropriate indices/benchmarks, in light of total return, yield and market
trends. As part of this review, the trustees considered the composition of
the peer group, selection criteria and the reputation of the third party who
prepared the peer group analysis. In evaluating the performance of each fund,
the trustees considered both risk and shareholder risk expectations for such
fund. Following such evaluation, the Board concluded, within the context of
its full deliberations, that the performance of the funds supported renewal
of the Agreement.
FUND EXPENSES. With respect to the funds' expenses, the trustees considered
the rate of compensation called for by the Agreement, and each fund's net
operating expense ratio, in each case, in comparison to those of other
comparable mutual funds, such peer groups and comparisons having been
selected and calculated by an independent third party. The trustees
considered the effects of CSIM's and Schwab's voluntary waiver of management
and other fees to prevent total fund expenses from exceeding a specified cap.
The trustees also considered fees charged by CSIM to other mutual funds and
to other types of accounts, such as wrap accounts and offshore funds.
However, the trustees accorded less weight to such comparisons due to the
unique legal, regulatory, compliance and operating features of mutual funds
as compared to such other types of accounts, and the unique
insurance-dedicated distribution arrangements of the funds as compared to
other funds managed by CSIM. Following such evaluation, the Board concluded,
within the context of its full deliberations, that the expenses of the funds
are reasonable and supported renewal of the Agreement.
PROFITABILITY. With regard to profitability, the trustees considered the
compensation flowing to CSIM and its affiliates, directly or indirectly. In
this connection, the trustees reviewed management's profitability analyses,
together with certain commentary thereon from an independent accounting firm.
The trustees also considered any other benefits derived by CSIM from its
relationship with the funds, such as whether, by virtue of its management of
the Funds, CSIM obtains investment information or other research resources
that aid it in providing advisory services to other clients. The trustees
considered whether the varied levels of compensation and profitability under
the Agreement and other service agreements were reasonable and justified in
light of the quality of all services rendered to each fund by CSIM and its
affiliates. Based on this evaluation, the Board concluded, within the context
of its full deliberations, that the profitability of CSIM is reasonable and
supported renewal of the Agreement.
21
ECONOMIES OF SCALE. The trustees considered the existence of any economies of
scale and whether those are passed along to a fund's shareholders through a
graduated investment advisory fee schedule or other means, including any fee
waivers by CSIM and its affiliates. In this regard, and consistent with their
consideration of fund expenses, the trustees considered that CSIM and Schwab
have previously committed resources to minimize the effects on shareholders
of diseconomies of scale during periods when fund assets were relatively
small through their contractual expense waivers. For example, such
diseconomies of scale may particularly affect newer funds or funds with
investment strategies that are from time to time out of favor, but
shareholders may benefit from the continued availability of such funds at
subsidized expense levels. The trustees also considered CSIM's agreement to
contractual investment advisory fee schedules which include lower fees at
higher graduated asset levels. Based on this evaluation, the Board concluded,
within the context of its full deliberations, that the funds obtain
reasonable benefit from economies of scale.
In the course of their deliberations, the trustees did not identify any
particular information or factor that was all-important or controlling. Based on
the trustees' deliberation and their evaluation of the information described
above, the Board, including all of the Independent Trustees, unanimously
approved the continuation of the Agreement and concluded that the compensation
under the Agreement is fair and reasonable in light of such services and
expenses and such other matters as the trustees have considered to be relevant
in the exercise of their reasonable judgment.
22
TRUSTEES AND OFFICERS
A fund's Board of Trustees is responsible for protecting the interests of
that fund's shareholders. The tables below give information about the
people who serve as trustees and officers for the Schwab Funds(R),
including the funds covered in this report. Trustees remain in office
until they resign, retire or are removed by shareholder vote. 1
Under the Investment Company Act of 1940, any officer, director, or
employee of Schwab or CSIM is considered an "interested person," meaning
that he or she is considered to have a business interest in Schwab or
CSIM. These individuals are listed as "interested trustees." The
"independent trustees" are individuals who, under the 1940 Act, are not
considered to have a business interest in Schwab or CSIM.
Each of the 56 Schwab Funds belongs to one of these trusts: The Charles
Schwab Family of Funds, Schwab Investments, Schwab Capital Trust or Schwab
Annuity Portfolios. Currently all these trusts have the same trustees and
officers. The address for all trustees and officers is 101 Montgomery
Street, San Francisco, CA 94104. You can find more information about the
trustees and officers in the Statement of Additional Information, which is
available free by calling 1-800-435-4000.
INTERESTED TRUSTEES AND OFFICERS
TRUST POSITION(S);
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES R. SCHWAB 2 Chairman, Trustee: Chair, CEO, Director, The Charles Schwab Corp., Charles Schwab &
7/29/37 Family of Funds, 1989; Co., Inc.; Chair, Director, Charles Schwab Investment Management,
Investments, 1991; Inc.; Chair, Charles Schwab Holdings (UK); Chair, Director, U.S. Trust
Capital Trust, 1993; Corp., United States Trust Co. of New York, U.S. Trust Co., N.A.;
Annuity Portfolios, 1994. CEO, Director, Charles Schwab Holdings, Inc.; Chair, CEO Schwab
(SIS) Holdings, Inc. I, Schwab International Holdings, Inc.; Director,
Charles Schwab Bank, N.A., The Charles and Helen Schwab
Foundation, All Kinds of Minds (education); Trustee, Stanford
University. Until 5/04: Director, The Gap, Inc. (clothing retailer).
Until 5/03: Co-CEO, The Charles Schwab Corp. Until 3/02: Director,
Audiobase, Inc. (Internet audio solutions). Until 5/02: Director,
Vodaphone AirTouch PLC (telecommunications). Until 7/01:
Director, The Charles Schwab Trust Co.
1 The Schwab Funds retirement policy requires that independent trustees elected
after January 1, 2000 retire at age 72 or after twenty years of service as a
trustee, whichever comes first. Independent trustees elected prior to January
1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will
retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on
December 31, 2010.
2 In addition to his position with the investment adviser and the distributor,
Mr. Schwab also owns stock of The Charles Schwab Corporation.
23
INTERESTED TRUSTEES BUT NOT OFFICERS
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
RANDALL W. MERK 2005 (all trusts). EVP, President, AMPS Enterprise. Until 7/04: President, CEO,
7/25/54 Charles Schwab Investment Management, Inc.; VP, Charles Schwab
& Co., Inc. Until 8/02: President, Chief Investment Officer, American
Century Management; Director, American Century Companies, Inc.
Until 6/01: Chief Investment Officer, Fixed Income, American Century
Companies, Inc.
OFFICERS OF THE TRUST
NAME AND BIRTHDATE TRUST OFFICE(S) HELD MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
EVELYN DILSAVER President, CEO EVP, President, Director, Charles Schwab Investment Management,
5/4/55 (all trusts). Inc. Until 7/04: SVP for Development and Distribution, Asset
Management Products and Services Enterprise. Until 6/03: EVP,
CFO, Chief Administrative Officer, U.S. Trust.
- ------------------------------------------------------------------------------------------------------------------------------------
STEPHEN B. WARD SVP, Chief Investment SVP, Chief Investment Officer, Director, Charles Schwab Investment
4/5/55 Officer (all trusts). Management, Inc.; Chief Investment Officer, The Charles Schwab
Trust Co.
- ------------------------------------------------------------------------------------------------------------------------------------
KIMON DAIFOTIS SVP, Chief Investment Since 9/04: Chief Investment Officer, Fixed Income, Charles
7/10/59 Officer (all trusts). Schwab Investment Management, Inc. Since 6/04: SVP, Charles Schwab
Investment Management, Inc. Until 6/04: VP, Charles Schwab
Investment Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY MORTIMER SVP, Chief Investment Since 5/04: SVP, Chief Investment Officer, Equities, Charles Schwab
9/29/63 Officer (all trusts). Investment Management, Inc. Since 6/04: VP, Chief Investment
Officer, Laudus Trust, Laudus Variable Insurance Trust. Until 5/04:
VP, Charles Schwab Investment Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
RANDALL FILLMORE Chief Compliance Since 9/04: SVP, Institutional Compliance and Chief Compliance
11/11/60 Officer (all trusts). Officer, Charles Schwab Investment Management, Inc.; Chief
Compliance Officer, Laudus Trust, Laudus Variable Insurance Trust.
Until 9/04: VP, Charles Schwab & Co., Inc., Charles Schwab Investment
Management, Inc. Until 2002: VP of Internal Audit, Charles Schwab
& Co., Inc. Prior to 2000: PricewaterhouseCoopers.
- ------------------------------------------------------------------------------------------------------------------------------------
KOJI E. FELTON Secretary (all trusts). SVP, Chief Counsel, Assistant Corporate Secretary, Charles Schwab
3/13/61 Investment Management, Inc. Until 6/98: Branch Chief in Enforcement,
U.S. Securities and Exchange Commission, San Francisco.
- ------------------------------------------------------------------------------------------------------------------------------------
GEORGE PEREIRA Treasurer, Principal Since 11/04: SVP, CFO, Charles Schwab Investment Management,
6/9/64 Financial Officer Inc. Until 11/04: SVP, Financial Reporting, Charles Schwab & Co., Inc.
(all trusts). Until 12/99: CFO, Commerzbank Capital Markets. Until 9/99:
Managing Director at the New York Stock Exchange.
24
INDEPENDENT TRUSTEES
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
MARIANN BYERWALTER 2000 (all trusts). Chair, JDN Corp. Advisory LLC (real estate); Trustee, Stanford
8/13/60 University, America First Cos., Omaha, NE (venture capital/fund
management), Redwood Trust, Inc. (mortgage finance), Stanford
Hospitals and Clinics, SRI International (research), PMI Group, Inc.
(mortgage insurance), Lucile Packard Children's Hospital.
Since 2/05: Director, Pacific Mutual Holding Company (insurance).
Since 2004: Laudus Trust, Laudus Variable Insurance Trust.
Until 2001: Stanford University, Special Assistant to the President.
From 1996-2001: VP of Business Affairs, CFO.
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD F. DORWARD Family of Funds, 1989; CEO, Dorward & Associates (corporate management, marketing
9/23/31 Investments, 1991; and communications consulting). Until 1999: EVP, Managing Director,
Capital Trust, 1993; Grey Advertising. Until 1996: President, CEO, Allen & Dorward
Annuity Portfolios,1994. Advertising.
- ------------------------------------------------------------------------------------------------------------------------------------
WILLIAM A. HASLER 2000 (all trusts). Dean Emeritus, Haas School of Business, University of California,
11/22/41 Berkeley; Director, Aphton Corp. (bio-pharmaceuticals); Non-
Executive Chair, Solectron Corp. (manufacturing), Mission West
Properties (commercial real estate), Stratex Networks (network
equipment), TOUSA (home building); Public Governor, Member,
executive committee, Pacific Stock & Options Exchange. Since
2004: Trustee, Laudus Trust, Laudus Variable Insurance Trust.
Until 2/04: Co-CEO, Aphton Corp. (bio-pharmaceuticals).
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT G. HOLMES Family of Funds, 1989; Chair, CEO, Director, Semloh Financial, Inc. (international financial
5/15/31 Investments, 1991; services and investment advisory firm).
Capital Trust, 1993;
Annuity Portfolios,1994.
- ------------------------------------------------------------------------------------------------------------------------------------
GERALD B. SMITH 2000 (all trusts). Chair, CEO, Founder, Smith Graham & Co. (investment advisers);
9/28/50 Trustee, Cooper Industries (electrical products, tools and hardware);
Chairman, audit committee, Northern Border Partners, L.P. (energy).
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD R. STEPHENS Family of Funds, 1989; Managing Partner, D.R. Stephens & Co. (investments). Until 1996:
6/28/38 Investments, 1991; Chair, CEO, North American Trust (real estate investment trust).
Capital Trust, 1993;
Annuity Portfolios, 1994.
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL W. WILSEY Family of Funds, 1989; Chair, CEO, Wilsey Bennett, Inc. (real estate investment and
8/18/43 Investments, 1991; management, and other investments).
Capital Trust, 1993;
Annuity Portfolios, 1994.
25
[CHARLES SCHWAB LOGO]
MONEY MARKET
SCHWAB MONEY
MARKET PORTFOLIO(TM)
MONEY MARKET
SEMIANNUAL REPORT FOR THE PERIOD ENDED JUNE 30, 2005
Inception Date: May 3, 1994
An investor should consider a fund's investment objectives, risks, and charges
and expenses carefully before investing or sending money. This and other
important information can be found in the fund's prospectus. Please call
1-888-311-4887 for a prospectus. Please read the prospectus carefully before you
invest.
PROXY VOTING POLICIES, PROCEDURES AND RESULTS
A description of the proxy voting policies and procedures used to determine how
to vote proxies on behalf of the funds is available without charge, upon
request, by visiting Schwab's website at www.schwab.com/schwabfunds, the SEC's
website at http://www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.
Information regarding how a fund voted proxies relating to portfolio securities
during the most recent twelve-month period ended June 30 is available, without
charge, by visiting Schwab's website at www.schwab.com/schwabfunds or the SEC's
website at http://www.sec.gov.
MANAGEMENT'S DISCUSSION for the six months ended June 30, 2005
[PHOTO OF KAREN WIGGAN]
KAREN WIGGAN, a vice president of the investment adviser and senior portfolio
manager, has been responsible for day-to-day management of the portfolio since
1999. She joined the firm in 1987 and has worked in fixed income portfolio
management since 1991.
THE INVESTMENT ENVIRONMENT AND THE FUND
Oil prices hit highs never seen before and the Federal Reserve Open Market
Committee continued to raise short-term interest rates to curb inflationary
pressures, raising rates for the fourth time this year. At the same time, GDP
continued to grow at a healthy pace and the housing market remained strong,
largely due to low mortgage rates.
The firming labor market, as well as steady gains in capital spending, kept the
economic expansion on a self-sustaining path. Businesses, unable to continue
boosting productivity by restraining hiring, added new jobs during the six-month
report period. Moreover, many leading indicators, such as the Institute for
Supply Management's business activity surveys, suggested ongoing expansion,
while continuing claims for unemployment benefits remained near cyclical lows.
Business investments grew only modestly, but consumers continued to spend. In
fact, consumer confidence rose to a level not experienced since before September
11, 2001. With consumers in a spending mode and consumer spending comprising
about 70% of GDP, first quarter GDP remained strong and retail sales were
healthy. In this positive economic environment, strong labor market conditions
remained positive for domestic consumption.
While high energy prices remained a significant headwind for economic
performance, supply no longer was the issue; demand, especially in China, drove
prices up. At the end of the six-month report period, a barrel of oil cost
$56.50 versus $42.55 at the beginning of 2005.
Though high oil and commodity prices could have hampered growth and stirred
inflationary pressures, productivity gains, slow growth in the money supply and
slack in the economy have mostly kept a lid on core inflation. The productivity
gains, coupled with foreign central banks buying large amounts of U.S. Treasury
securities, also helped to keep long-term interest rates under control. These
conditions also caused the dollar to rally unexpectedly, which took a little bit
of pressure off the price of imported goods.
Amid signs of solidly expanding output and improved hiring, the Fed continued to
tighten. It increased short-term interest rates at each of the four meetings in
the first half of 2005, ending the six-month report period at a still moderate
3.25%. The moves have had a limited impact on overall economic growth, due
primarily to the record-low level of rates from which the increases began.
Nonetheless, the higher rates succeeded in moving money fund yields higher,
making them a more attractive investment vehicle.
In response to the Federal Reserve's stated intentions to raise short-term
interest rates at a "measured" pace, the yield curve for money market funds
steepened during the first quarter. Over the course of the second quarter the
yield curve began to flatten as the market questioned the duration of the Fed's
tightening campaign.
In this market environment, our strategy was to position the fund for a
continued rise in rates. To take advantage of the rising-rate environment, we
kept the weighted average maturity (WAM) short. Keeping the WAM short provided
flexibility to adapt and respond to the changes in interest rates. This is a
similar strategy to that used by our peers, as shortening the WAM enabled money
funds to more quickly reinvest at higher rates.
Nothing in this report represents a recommendation of a security by the
investment adviser. Manager views and portfolio holdings may have changed since
the report date.
Schwab Money Market Portfolio 1
MANAGEMENT'S DISCUSSION continued
PERFORMANCE AND PORTFOLIO FACTS as of 6/30/05
SEVEN-DAY YIELDS 1
The seven-day yields are calculated using standard SEC formulas. The effective
yield includes the effect of reinvesting daily dividends. Please remember that
money market fund yields fluctuate.
- --------------------------------------------------------------------------------
SEVEN-DAY YIELD 2.61%
- --------------------------------------------------------------------------------
SEVEN-DAY EFFECTIVE YIELD 2.64%
- --------------------------------------------------------------------------------
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES
NOT GUARANTEE FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE
VISIT WWW.SCHWAB.COM/SCHWABFUNDS.
STATISTICS
Money funds must maintain a dollar-weighted average maturity of no longer than
90 days, and cannot invest in any security whose effective maturity is longer
than 397 days (approximately 13 months).
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE MATURITY 18 days
- --------------------------------------------------------------------------------
CREDIT QUALITY OF HOLDINGS % of portfolio 100% Tier 1
- --------------------------------------------------------------------------------
AN INVESTMENT IN A MONEY FUND IS NEITHER INSURED NOR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH
MONEY FUNDS SEEK TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT
IS POSSIBLE TO LOSE MONEY BY INVESTING IN A MONEY FUND.
Portfolio holdings may have changed since the report date.
1 Portfolio yields do not reflect the additional fees and expenses imposed by
the insurance company under the variable insurance product contract. If those
contract fees and expenses were included, the yields would be less than those
shown. Please refer to the variable insurance product prospectus for a
complete listing of these expenses.
2 Schwab Money Market Portfolio
PORTFOLIO EXPENSES
EXAMPLES FOR A $1,000 INVESTMENT
As a fund shareholder, you incur two types of costs: transaction costs, such as
redemption fees; and, ongoing costs, such as management fees, transfer agent and
shareholder services fees, and other fund expenses.
The expense examples below are intended to help you understand your ongoing cost
(in dollars) of investing in a fund and to compare this cost with the ongoing
cost of investing in other mutual funds. These examples are based on an
investment of $1,000 invested for six-months beginning January 1, 2005 and held
through June 30, 2005.
ACTUAL RETURN lines in the table below provide information about actual account
values and actual expenses. You may use this information, together with the
amount you invested, to estimate the expenses that you paid over the period. To
do so, simply divide your account value by $1,000 (for example, an $8,600
account value / $1,000 = 8.6), then multiply the result by the number given for
your fund under the heading entitled "Expenses Paid During Period."
HYPOTHETICAL RETURN lines in the table below provide information about
hypothetical account values and hypothetical expenses based on a fund's actual
expense ratio and an assumed return of 5% per year before expenses. Because the
return used is not an actual return, it may not be used to estimate the actual
ending account value or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only, and do not reflect any transactional costs, such as
redemption fees. If these transactional costs were included, your costs would
have been higher.
ENDING
BEGINNING ACCOUNT VALUE EXPENSES
EXPENSE RATIO 1 ACCOUNT VALUE (Net of Expenses) PAID DURING PERIOD 2
(Annualized) at 1/1/05 at 6/30/05 1/1/05-6/30/05
- ------------------------------------------------------------------------------------------------------------------
SCHWAB MONEY MARKET PORTFOLIO
Actual Return 0.49% $1,000 $1,010.90 $2.44
Hypothetical 5% Return 0.49% $1,000 $1,022.37 $2.46
1 Based on the most recent six-month expense ratio; may differ from the expense
ratio provided in Financial Highlights.
2 Expenses for the portfolio are equal to its annualized expense ratio,
multiplied by the average account value over the period, multiplied by 181
days of the period, and divided by 365 days of the fiscal year.
Schwab Money Market Portfolio 3
SCHWAB MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
1/1/05- 1/1/04- 1/1/03- 1/1/02- 1/1/01- 1/1/00-
6/30/05* 12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
- ------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00 1.00
---------------------------------------------------------------
Income from investment operations:
Net investment income 0.01 0.01 0.01 0.01 0.04 0.06
---------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.01) (0.01) (0.01) (0.01) (0.04) (0.06)
---------------------------------------------------------------
Net asset value at end of period 1.00 1.00 1.00 1.00 1.00 1.00
---------------------------------------------------------------
Total return (%) 1.09 1 0.90 0.74 1.31 3.72 5.95
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net operating expenses 0.49 2 0.46 0.44 0.48 0.49 0.49 3
Gross operating expenses 0.49 2 0.46 0.44 0.48 0.50 0.51
Net investment income 2.20 2 0.89 0.75 1.31 3.55 5.81
Net assets, end of period ($ x 1,000,000) 120 116 141 215 204 160
* Unaudited.
1 Not annualized.
2 Annualized.
3 The ratio of net operating expenses would have been 0.48% if certain
non-routine expenses (proxy fees) had not been included.
4 See financial notes.
SCHWAB MONEY MARKET PORTFOLIO
PORTFOLIO HOLDINGS as of June 30, 2005; unaudited.
This section shows all the securities in the fund's portfolio and their value,
as of the report date.
The fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is
available on the SEC's website at http://www.sec.gov and may be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call
1-800-SEC-0330 for information on the operation of the Public Reference Room.
The schedule of portfolio holdings filed on the fund's most recent Form N-Q is
available by visiting Schwab's website at www.schwab.com/schwabfunds.
For fixed-rate obligations, the rate shown is the effective yield at the time of
purchase, except for U.S. government agency coupon notes and U.S. Treasury
notes, for which the rate shown is the interest rate (the rate established when
obligation was issued). For variable-rate obligations, the rate shown is the
rate as of the report date. For variable-rate obligations with scheduled
maturities greater than 397 days, the maturity shown is the later of the next
interest rate change date or demand date. For variable-rate obligations with
scheduled maturities less than 397 days, the maturity shown is the earlier of
the next interest rate change date or demand date. For variable-rate obligations
without demand features, the maturity shown is the next interest rate change
date.
COST VALUE
HOLDINGS BY CATEGORY ($x1,000) ($x1,000)
- --------------------------------------------------------------------------------
84.8% U.S. GOVERNMENT
SECURITIES 101,806 101,806
15.5% OTHER INVESTMENTS 18,660 18,660
- --------------------------------------------------------------------------------
100.3% TOTAL INVESTMENTS 120,466 120,466
(0.3)% OTHER ASSETS AND
LIABILITIES (420)
- --------------------------------------------------------------------------------
100.0% NET ASSETS 120,046
ISSUER FACE AMOUNT VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
U.S. GOVERNMENT SECURITIES 84.8% of net assets
DISCOUNT NOTES 84.8%
-------------------------------------------------------------------------
FANNIE MAE
3.02%, 07/01/05 1,000 1,000
3.00%, 07/06/05 2,000 1,999
3.01%, 07/06/05 1,300 1,299
3.02%, 07/06/05 1,143 1,142
3.04%, 07/06/05 2,000 1,999
3.06%, 07/06/05 2,000 1,999
3.00%, 07/13/05 1,410 1,409
3.03%, 07/13/05 1,100 1,099
3.07%, 07/13/05 1,000 999
3.02%, 07/18/05 1,700 1,698
3.05%, 07/18/05 1,300 1,298
3.04%, 07/20/05 1,050 1,048
3.12%, 08/03/05 1,400 1,396
3.28%, 08/17/05 2,741 2,729
3.17%, 08/24/05 3,000 2,986
FEDERAL FARM CREDIT BANK
3.03%, 07/06/05 3,000 2,999
3.01%, 07/18/05 1,000 999
3.06%, 07/18/05 3,000 2,996
FEDERAL HOME LOAN BANK
3.06%, 07/06/05 1,700 1,699
3.05%, 07/13/05 2,000 1,998
3.11%, 07/13/05 1,753 1,751
3.01%, 07/15/05 7,000 6,992
3.03%, 07/22/05 2,129 2,125
3.06%, 07/22/05 2,165 2,161
3.14%, 07/22/05 1,100 1,098
3.03%, 08/02/05 2,000 1,995
3.22%, 08/19/05 2,000 1,991
3.28%, 09/14/05 3,000 2,980
FREDDIE MAC
2.99%, 07/01/05 1,795 1,795
3.01%, 07/01/05 4,630 4,630
3.01%, 07/05/05 6,175 6,173
3.03%, 07/12/05 1,100 1,099
3.13%, 07/12/05 1,000 999
3.05%, 07/15/05 1,116 1,115
3.03%, 07/19/05 2,000 1,997
3.05%, 07/19/05 1,400 1,398
3.13%, 07/26/05 2,100 2,096
3.14%, 08/01/05 1,500 1,496
3.25%, 08/01/05 1,175 1,172
3.23%, 08/09/05 1,000 996
3.29%, 10/18/05 2,000 1,980
See financial notes. 5
SCHWAB MONEY MARKET PORTFOLIO
ISSUER FACE AMOUNT VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
TENNESSEE VALLEY AUTHORITY
3.01%, 07/14/05 4,000 3,996
3.03%, 07/14/05 10,000 9,989
3.09%, 07/21/05 5,000 4,991
-----------
101,806
MATURITY AMOUNT
($ x 1,000)
OTHER INVESTMENTS 15.5% of net assets
REPURCHASE AGREEMENTS 15.5%
--------------------------------------------------------------------------------
CREDIT SUISSE FIRST BOSTON L.L.C.
Tri-Party Repurchase Agreement
Collateralized by U.S. Treasury
Securities with a value of $19,594
2.90%, issued 06/30/05
due 07/01/05 18,661 18,660
END OF INVESTMENTS.
6 See financial notes.
SCHWAB MONEY MARKET PORTFOLIO
Statement of
ASSETS AND LIABILITIES
As of June 30, 2005; unaudited. All numbers x 1,000 except NAV.
ASSETS
- ----------------------------------------------------------------------------------
Investments, at value $101,806 a
Repurchase agreements, at value 18,660 a
Receivables:
Interest 2
Fund shares sold + 333
------------
TOTAL ASSETS 120,801
LIABILITIES
- ----------------------------------------------------------------------------------
Payables:
Dividend to shareholders 129
Fund shares redeemed 583
Investment advisory and administration fees 4
Trustees' fees 2
Accrued expenses + 37
------------
TOTAL LIABILITIES 755
NET ASSETS
- ----------------------------------------------------------------------------------
TOTAL ASSETS 120,801
TOTAL LIABILITIES - 755
------------
NET ASSETS $120,046
NET ASSETS BY SOURCE
Capital received from investors 120,060
Net realized capital losses (14)
NET ASSET VALUE (NAV)
SHARES
NET ASSETS / OUTSTANDING = NAV
$120,046 120,093 $1.00
Unless stated, all numbers x 1,000.
a The amortized cost for the fund's securities was $120,466.
FEDERAL TAX DATA
--------------------------------------
COST BASIS OF PORTFOLIO $120,466
AS OF DECEMBER 31, 2004:
UNUSED CAPITAL LOSSES:
Expires 12/31 of: Loss amount:
2005 $1
2006 3
2007 9
2008 + 1
------------
$14
See financial notes. 7
SCHWAB MONEY MARKET PORTFOLIO
Statement of
OPERATIONS
For January 1, 2005 through June 30, 2005; unaudited. All numbers x 1,000.
INVESTMENT INCOME
- --------------------------------------------------------------------------------
Interest $1,610
EXPENSES
- --------------------------------------------------------------------------------
Investment adviser and administrator fees 228 a
Trustees' fees 11 b
Custodian and portfolio accounting fees 10
Professional fees 15
Shareholder reports 25
Other expenses + 3
---------
TOTAL EXPENSES 292 c
INCREASE IN NET ASSETS FROM OPERATIONS
- --------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 1,610
TOTAL EXPENSES - 292
---------
NET INVESTMENT INCOME 1,318
---------
INCREASE IN NET ASSETS FROM OPERATIONS $1,318
Unless stated, all numbers x 1,000.
a Calculated on a graduated basis as a percentage of average daily net assets:
0.38% of the first $1 billion, 0.35% over $1 billion, 0.32% over $10 billion,
0.30% over $20 billion and 0.27% over $40 billion. These fees are paid to
Charles Schwab Investment Management, Inc. (CSIM).
b For the fund's independent trustees only.
c The investment adviser (CSIM) guarantees to limit the annual operating
expenses through April 29, 2006 to 0.50% of average daily net assets. This
limit excludes interest, taxes and certain non-routine expenses.
8 See financial notes.
SCHWAB MONEY MARKET PORTFOLIO
Statements of
CHANGES IN NET ASSETS
For the current and prior report periods. All numbers x 1,000.
Figures for the current period are unaudited.
OPERATIONS
- ---------------------------------------------------------------------------------
1/1/05-6/30/05 1/1/04-12/31/04
Net investment income $1,318 $1,169
-------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 1,318 1,169
DISTRIBUTIONS PAID
- ---------------------------------------------------------------------------------
Dividends from net investment income 1,318 1,169 a
TRANSACTIONS IN FUND SHARES b
- ---------------------------------------------------------------------------------
Shares sold 62,962 115,803
Shares reinvested 1,189 1,169
Shares redeemed + (60,165) (141,823)
-------------------------------------
NET TRANSACTIONS IN FUND SHARES 3,986 (24,851)
NET ASSETS
- ---------------------------------------------------------------------------------
Beginning of period 116,060 140,911
Total increase or decrease + 3,986 (24,851) c
-------------------------------------
END OF PERIOD $120,046 $116,060
Unless stated, all numbers x 1,000.
a The tax-basis components of distributions for the period ended 12/31/04 are:
Ordinary income $1,169
Long-term capital gains $--
b Because all transactions in this section took place at $1.00 per share,
figures for share quantities are the same as for dollars.
c Represents the changes in net assets from operations plus the changes in value
of transactions in fund shares, minus distributions paid.
See financial notes. 9
SCHWAB MONEY MARKET PORTFOLIO
FINANCIAL NOTES unaudited
BUSINESS STRUCTURE OF THE FUND
THE FUND DISCUSSED IN THIS REPORT IS A SERIES OF SCHWAB ANNUITY PORTFOLIOS, A
NO-LOAD, OPEN-END MANAGEMENT INVESTMENT COMPANY. The company is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended. The sidebar shows the fund in this report and its trust.
THE FUND OFFERS ONE SHARE CLASS. Shares are bought and sold at $1.00 per share.
Each share has a par value of 1/1,000 of a cent, and the trust may issue as many
shares as necessary.
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.
FUND OPERATIONS
Most of the fund's investments are described in sections earlier in this report.
However, there are certain other fund operations and policies that may affect
the fund's financials, as described below. Other policies concerning the fund's
business operations also are described here.
THE FUND DECLARES DIVIDENDS EVERY DAY IT IS OPEN FOR BUSINESS. These dividends,
which are equal to the fund's net investment income for that day, are paid out
to shareholders once a month. The fund may make distributions from any net
realized capital gains once a year.
THE FUND MAY BUY SECURITIES ON A DELAYED-DELIVERY BASIS. In these transactions,
the fund agrees to buy a security for a stated price, with settlement generally
occurring within two weeks. If the security's value falls before settlement
occurs, the fund could end up paying more for the security than its market value
at the time of settlement. The fund has set aside sufficient securities as
collateral for those securities bought on a delayed-delivery basis.
THE FUND MAY ENTER INTO REPURCHASE AGREEMENTS. In a repurchase agreement, the
fund buys a security from another party (usually a financial institution) with
the agreement that it be sold back in the future. The
THE TRUST AND ITS FUNDS
This list shows all of the funds included in Schwab Annuity Portfolios. The fund
discussed in this report is highlighted.
SCHWAB ANNUITY PORTFOLIOS
Organized January 21, 1994
SCHWAB MONEY MARKET PORTFOLIO
Schwab MarketTrack Growth Portfolio II
Schwab S&P 500 Index Portfolio
10
SCHWAB MONEY MARKET PORTFOLIO
date, price and other conditions are all specified when the agreement is
created. Any repurchase agreement with due dates later than seven days from
issue dates may be subject to seven day put features for liquidity purposes.
The fund's repurchase agreements will be fully collateralized by U.S. government
securities. All collateral is held by the fund's custodian (or, with tri-party
agreements, the agent's bank) and is monitored daily to ensure that its market
value is at least equal to the repurchase price under the agreement.
THE FUND PAYS FEES TO AFFILIATES OF THE INVESTMENT ADVISER FOR VARIOUS SERVICES.
Through its trust, the fund has agreements with Charles Schwab Investment
Management, Inc. (CSIM) to provide investment advisory and administrative
services and with Charles Schwab & Co., Inc. (Schwab) to provide transfer agent,
shareholder services and transaction services.
Although these agreements specify certain fees for these services, CSIM and
Schwab have made additional agreements with the fund that may limit the total
expenses charged. The rates and limitations for these fees are described in the
fund's Statement of Operations.
THE FUND MAY ENGAGE IN CERTAIN TRANSACTIONS INVOLVING AFFILIATES. The fund may
make direct transactions with certain other Schwab Funds(R) when practical. When
one fund is seeking to sell a security that another is seeking to buy, an
interfund transaction can allow both funds to benefit by reducing transaction
costs. This practice is limited to funds that share the same investment adviser,
trustees and officers.
Pursuant to an exemptive order issued by the SEC, the fund may enter into
interfund borrowing and lending transactions within the Schwab Funds. All loans
are for temporary or emergency purposes only. The interest rate charged on the
loan is the average of the overnight repurchase agreement rate and the
short-term bank loan rate. The interfund lending facility is subject to the
oversight and periodic review of the Board of Trustees of the Schwab Funds.
TRUSTEES MAY INCLUDE PEOPLE WHO ARE OFFICERS AND/OR DIRECTORS OF THE INVESTMENT
ADVISER OR SCHWAB. Federal securities law limits the percentage of such
"interested persons" who may serve on a trust's board, and the trust was in
compliance with these limitations throughout the report period. The trust did
not pay any of these persons for their service as trustees, but it did pay
non-interested persons (independent trustees), as noted in the fund's Statement
of Operations.
THE FUND MAY BORROW MONEY FROM BANKS AND CUSTODIANS. The fund may obtain
temporary bank loans through the trust to which the fund belongs, to use for
meeting shareholder redemptions or for extraordinary or emergency purposes. The
Schwab Funds has custodian overdraft facilities and line of credit arrangements
of $150 million and $100 million with PNC Bank, N.A. and Bank of America, N.A.,
respectively. The fund pays interest on the amounts it borrows at rates that are
negotiated periodically. There was no borrowing for the fund during the period.
THE FUND INTENDS TO MEET FEDERAL INCOME TAX REQUIREMENTS FOR REGULATED
INVESTMENT COMPANIES. Accordingly, the fund distributes substantially all of its
net investment income and net realized capital gains (if any) to the
participating insurance company separate accounts each year. As long as the fund
meets the tax requirements, it is not required to pay federal income tax.
UNDER THE FUND'S ORGANIZATIONAL DOCUMENTS, ITS OFFICERS AND TRUSTEES ARE
INDEMNIFIED AGAINST CERTAIN LIABILITY ARISING OUT OF THE PERFORMANCE OF THEIR
DUTIES TO THE FUND. In addition, in the normal course of business the fund
enters into contracts with its vendors and others that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
However, based on experience, the fund expects the risk of loss to be remote.
11
SCHWAB MONEY MARKET PORTFOLIO
ACCOUNTING POLICIES
The following are the main policies the fund uses in preparing its financial
statements.
THE FUND VALUES ITS SECURITIES AT AMORTIZED COST, which approximates market
value.
SECURITY TRANSACTIONS are recorded as of the date the order to buy or sell the
security is executed.
INTEREST INCOME is recorded as it accrues. If the fund buys a debt instrument at
a discount (that is, for less than its face value) or a premium (more than face
value), it amortizes the discount or premium from the current date up to
maturity. The fund then increases (in the case of discounts) or reduces (in the
case of premiums) the income it records from the security. If the security is
callable (meaning that the issuer has the option to pay it off before its
maturity date), then the fund amortizes the premium to the security's call date
and price, rather than the maturity date and price.
REALIZED GAINS AND LOSSES from security transactions are based on the identified
costs of the securities involved.
EXPENSES that are specific to the fund are charged directly to the fund.
Expenses that are common to all funds within the trust generally are allocated
among the funds in proportion to their average daily net assets.
THE FUND MAINTAINS ITS OWN ACCOUNT FOR PURPOSES OF HOLDING ASSETS AND
ACCOUNTING, and is considered a separate entity for tax purposes. Within its
account, the fund also may keep certain assets in segregated accounts, as
required by securities law.
THE ACCOUNTING POLICIES DESCRIBED ABOVE CONFORM WITH ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. Notwithstanding this,
shareholders should understand that in order to follow these principles, fund
management has to make estimates and assumptions that affect the information
reported in the financial statements. It's possible that once the results are
known, they may turn out to be different from these estimates.
12
INVESTMENT ADVISORY AGREEMENT APPROVAL
The Investment Company Act of 1940 (the "1940 Act") requires that initial
approval of, as well as the continuation of, a fund's investment advisory
agreement must be specifically approved (1) by the vote of the trustees or by a
vote of the shareholders of the fund, and (2) by the vote of a majority of the
trustees who are not parties to the investment advisory agreement or "interested
persons" of any party (the "Independent Trustees"), cast in person at a meeting
called for the purpose of voting on such approval. In connection with such
approvals, the fund's trustees must request and evaluate, and the investment
adviser is required to furnish, such information as may be reasonably necessary
to evaluate the terms of the advisory agreement. In addition, the Securities and
Exchange Commission (the "SEC") takes the position that, as part of their
fiduciary duties with respect to fund fees, fund boards are required to evaluate
the material factors applicable to a decision to approve an investment advisory
agreement.
Consistent with these responsibilities, the Board of Trustees (the "Board")
calls and holds one or more meetings each year that are dedicated, in whole or
in part, to considering whether to renew the investment advisory agreement
between Schwab Annuity Portfolios (the "Trust") and CSIM (the "Agreement") with
respect to existing funds in the Trust, which includes the Schwab Money Market
Portfolio, and to review certain other agreements pursuant to which CSIM
provides investment advisory services to certain other registered investment
companies. In preparation for the meeting(s), the Board requests and reviews a
wide variety of materials provided by CSIM, including information about CSIM's
affiliates, personnel and operations. The Board also receives extensive data
provided by third parties. This information is in addition to the detailed
information about the funds that the Board reviews during the course of each
year, including information that relates to fund operations and fund
performance. The trustees also receive a memorandum from fund counsel regarding
the responsibilities of trustees for the approval of investment advisory
contracts. In addition, the Independent Trustees receive advice from independent
counsel to the Independent Trustees, meet in executive session outside the
presence of fund management and participate in question and answer sessions with
representatives of CSIM.
At the May 24, 2005 meeting of the Board, the trustees, including a majority of
the Independent Trustees, approved the renewal of the Agreement for an
additional one year period. The Board's approval of the Agreement was based on
consideration and evaluation of a variety of specific factors discussed at that
meeting and at prior meetings, including:
1. the nature, extent and quality of the services provided to the funds under
the Agreement, including the resources of CSIM and its affiliates dedicated
to the funds;
2. each fund's investment performance and how it compared to that of certain
other comparable mutual funds;
3. each fund's expenses and how those expenses compared to those of certain
other comparable mutual funds;
4. the profitability of CSIM and its affiliates, including Schwab, with respect
to each fund, including both direct and indirect benefits accruing to CSIM
and its affiliates; and
5. the extent to which economies of scale would be realized as the funds grow
and whether fee levels in the Agreement reflect those economies of scale for
the benefit of fund investors.
13
NATURE, EXTENT AND QUALITY OF SERVICES. The Board considered the nature,
extent and quality of the services provided by CSIM to the funds and the
resources of CSIM and its affiliates dedicated to the funds. In this regard,
the trustees evaluated, among other things, CSIM's personnel, experience,
track record and compliance program. The trustees considered the role of
unaffiliated insurance companies in the distribution of the funds. The
trustees also considered Schwab's excellent reputation as a full service
brokerage firm and its overall financial condition, and how this affects the
success of the funds. Following such evaluation, the Board concluded, within
the context of its full deliberations, that the nature, extent and quality of
services provided by CSIM to the funds and the resources of CSIM and its
affiliates dedicated to the funds supported renewal of the Agreement.
FUND PERFORMANCE. The Board considered fund performance in determining
whether to renew the Agreement. Specifically, the trustees considered each
fund's performance relative to a peer group of other mutual funds and
appropriate indices/benchmarks, in light of total return, yield and market
trends. As part of this review, the trustees considered the composition of
the peer group, selection criteria and the reputation of the third party who
prepared the peer group analysis. In evaluating the performance of each fund,
the trustees considered both risk and shareholder risk expectations for such
fund. Following such evaluation, the Board concluded, within the context of
its full deliberations, that the performance of the funds supported renewal
of the Agreement.
FUND EXPENSES. With respect to the funds' expenses, the trustees considered
the rate of compensation called for by the Agreement, and each fund's net
operating expense ratio, in each case, in comparison to those of other
comparable mutual funds, such peer groups and comparisons having been
selected and calculated by an independent third party. The trustees
considered the effects of CSIM's and Schwab's voluntary waiver of management
and other fees to prevent total fund expenses from exceeding a specified cap.
The trustees also considered fees charged by CSIM to other mutual funds and
to other types of accounts, such as wrap accounts and offshore funds.
However, the trustees accorded less weight to such comparisons due to the
unique legal, regulatory, compliance and operating features of mutual funds
as compared to such other types of accounts, and the unique
insurance-dedicated distribution arrangements of the funds as compared to
other funds managed by CSIM. Following such evaluation, the Board concluded,
within the context of its full deliberations, that the expenses of the funds
are reasonable and supported renewal of the Agreement.
PROFITABILITY. With regard to profitability, the trustees considered the
compensation flowing to CSIM and its affiliates, directly or indirectly. In
this connection, the trustees reviewed management's profitability analyses,
together with certain commentary thereon from an independent accounting firm.
The trustees also considered any other benefits derived by CSIM from its
relationship with the funds, such as whether, by virtue of its management of
the Funds, CSIM obtains investment information or other research resources
that aid it in providing advisory services to other clients. The trustees
considered whether the varied levels of compensation and profitability under
the Agreement and other service agreements were reasonable and justified in
light of the quality of all services rendered to each fund by CSIM and its
affiliates. Based on this evaluation, the Board concluded, within the context
of its full deliberations, that the profitability of CSIM is reasonable and
supported renewal of the Agreement.
14
ECONOMIES OF SCALE. The trustees considered the existence of any economies of
scale and whether those are passed along to a fund's shareholders through a
graduated investment advisory fee schedule or other means, including any fee
waivers by CSIM and its affiliates. In this regard, and consistent with their
consideration of fund expenses, the trustees considered that CSIM and Schwab
have previously committed resources to minimize the effects on shareholders
of diseconomies of scale during periods when fund assets were relatively
small through their contractual expense waivers. For example, such
diseconomies of scale may particularly affect newer funds or funds with
investment strategies that are from time to time out of favor, but
shareholders may benefit from the continued availability of such funds at
subsidized expense levels. The trustees also considered CSIM's agreement to
contractual investment advisory fee schedules which include lower fees at
higher graduated asset levels. Based on this evaluation, the Board concluded,
within the context of its full deliberations, that the funds obtain
reasonable benefit from economies of scale.
In the course of their deliberations, the trustees did not identify any
particular information or factor that was all-important or controlling. Based on
the trustees' deliberation and their evaluation of the information described
above, the Board, including all of the Independent Trustees, unanimously
approved the continuation of the Agreement and concluded that the compensation
under the Agreement is fair and reasonable in light of such services and
expenses and such other matters as the trustees have considered to be relevant
in the exercise of their reasonable judgment.
15
TRUSTEES AND OFFICERS
A fund's Board of Trustees is responsible for protecting the interests of
that fund's shareholders. The tables below give information about the
people who serve as trustees and officers for the Schwab Funds(R),
including the funds covered in this report. Trustees remain in office
until they resign, retire or are removed by shareholder vote. 1
Under the Investment Company Act of 1940, any officer, director, or
employee of Schwab or CSIM is considered an "interested person," meaning
that he or she is considered to have a business interest in Schwab or
CSIM. These individuals are listed as "interested trustees." The
"independent trustees" are individuals who, under the 1940 Act, are not
considered to have a business interest in Schwab or CSIM.
Each of the 56 Schwab Funds belongs to one of these trusts: The Charles
Schwab Family of Funds, Schwab Investments, Schwab Capital Trust or Schwab
Annuity Portfolios. Currently all these trusts have the same trustees and
officers. The address for all trustees and officers is 101 Montgomery
Street, San Francisco, CA 94104. You can find more information about the
trustees and officers in the Statement of Additional Information, which is
available free by calling 1-800-435-4000.
INTERESTED TRUSTEES AND OFFICERS
TRUST POSITION(S);
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
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CHARLES R. SCHWAB 2 Chairman, Trustee: Chair, CEO, Director, The Charles Schwab Corp., Charles Schwab &
7/29/37 Family of Funds, 1989; Co., Inc.; Chair, Director, Charles Schwab Investment Management,
Investments, 1991; Inc.; Chair, Charles Schwab Holdings (UK); Chair, Director, U.S. Trust
Capital Trust, 1993; Corp., United States Trust Co. of New York, U.S. Trust Co., N.A.;
Annuity Portfolios, 1994. CEO, Director, Charles Schwab Holdings, Inc.; Chair, CEO Schwab
(SIS) Holdings, Inc. I, Schwab International Holdings, Inc.; Director,
Charles Schwab Bank, N.A., The Charles and Helen Schwab
Foundation, All Kinds of Minds (education); Trustee, Stanford
University. Until 5/04: Director, The Gap, Inc. (clothing retailer).
Until 5/03: Co-CEO, The Charles Schwab Corp. Until 3/02: Director,
Audiobase, Inc. (Internet audio solutions). Until 5/02: Director,
Vodaphone AirTouch PLC (telecommunications). Until 7/01:
Director, The Charles Schwab Trust Co.
1 The Schwab Funds retirement policy requires that independent trustees elected
after January 1, 2000 retire at age 72 or after twenty years of service as a
trustee, whichever comes first. Independent trustees elected prior to January
1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward
will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire
on December 31, 2010.
2 In addition to his position with the investment adviser and the distributor,
Mr. Schwab also owns stock of The Charles Schwab Corporation.
16
INTERESTED TRUSTEES BUT NOT OFFICERS
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
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RANDALL W. MERK 2005 (all trusts). EVP, President, AMPS Enterprise. Until 7/04: President, CEO,
7/25/54 Charles Schwab Investment Management, Inc.; VP, Charles Schwab
& Co., Inc. Until 8/02: President, Chief Investment Officer, American
Century Management; Director, American Century Companies, Inc.
Until 6/01: Chief Investment Officer, Fixed Income, American Century
Companies, Inc.
OFFICERS OF THE TRUST
NAME AND BIRTHDATE TRUST OFFICE(S) HELD MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
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EVELYN DILSAVER President, CEO EVP, President, Director, Charles Schwab Investment Management,
5/4/55 (all trusts). Inc. Until 7/04: SVP for Development and Distribution, Asset
Management Products and Services Enterprise. Until 6/03: EVP,
CFO, Chief Administrative Officer, U.S. Trust.
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STEPHEN B. WARD SVP, Chief Investment SVP, Chief Investment Officer, Director, Charles Schwab Investment
4/5/55 Officer (all trusts). Management, Inc.; Chief Investment Officer, The Charles Schwab
Trust Co.
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KIMON DAIFOTIS SVP, Chief Investment Since 9/04: Chief Investment Officer, Fixed Income, Charles
7/10/59 Officer (all trusts). Schwab Investment Management, Inc. Since 6/04: SVP, Charles Schwab
Investment Management, Inc. Until 6/04: VP, Charles Schwab
Investment Management, Inc.
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JEFFREY MORTIMER SVP, Chief Investment Since 5/04: SVP, Chief Investment Officer, Equities, Charles Schwab
9/29/63 Officer (all trusts). Investment Management, Inc. Since 6/04: VP, Chief Investment
Officer, Laudus Trust, Laudus Variable Insurance Trust. Until 5/04:
VP, Charles Schwab Investment Management, Inc.
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RANDALL FILLMORE Chief Compliance Since 9/04: SVP, Institutional Compliance and Chief Compliance
11/11/60 Officer (all trusts). Officer, Charles Schwab Investment Management, Inc.; Chief
Compliance Officer, Laudus Trust, Laudus Variable Insurance Trust.
Until 9/04: VP, Charles Schwab & Co., Inc., Charles Schwab Investment
Management, Inc. Until 2002: VP of Internal Audit, Charles Schwab
& Co., Inc. Prior to 2000: PricewaterhouseCoopers.
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KOJI E. FELTON Secretary (all trusts). SVP, Chief Counsel, Assistant Corporate Secretary, Charles Schwab
3/13/61 Investment Management, Inc. Until 6/98: Branch Chief in Enforcement,
U.S. Securities and Exchange Commission, San Francisco.
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GEORGE PEREIRA Treasurer, Principal Since 11/04: SVP, CFO, Charles Schwab Investment Management,
6/9/64 Financial Officer Inc. Until 11/04: SVP, Financial Reporting, Charles Schwab & Co., Inc.
(all trusts). Until 12/99: CFO, Commerzbank Capital Markets. Until 9/99:
Managing Director at the New York Stock Exchange.
17
INDEPENDENT TRUSTEES
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
MARIANN BYERWALTER 2000 (all trusts). Chair, JDN Corp. Advisory LLC (real estate); Trustee, Stanford
8/13/60 University, America First Cos., Omaha, NE (venture capital/fund
management), Redwood Trust, Inc. (mortgage finance), Stanford
Hospitals and Clinics, SRI International (research), PMI Group, Inc.
(mortgage insurance), Lucile Packard Children's Hospital.
Since 2/05: Director, Pacific Mutual Holding Company (insurance).
Since 2004: Laudus Trust, Laudus Variable Insurance Trust.
Until 2001: Stanford University, Special Assistant to the President.
From 1996-2001: VP of Business Affairs, CFO.
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DONALD F. DORWARD Family of Funds, 1989; CEO, Dorward & Associates (corporate management, marketing
9/23/31 Investments, 1991; and communications consulting). Until 1999: EVP, Managing Director,
Capital Trust, 1993; Grey Advertising. Until 1996: President, CEO, Allen & Dorward
Annuity Portfolios,1994. Advertising.
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WILLIAM A. HASLER 2000 (all trusts). Dean Emeritus, Haas School of Business, University of California,
11/22/41 Berkeley; Director, Aphton Corp. (bio-pharmaceuticals); Non-
Executive Chair, Solectron Corp. (manufacturing), Mission West
Properties (commercial real estate), Stratex Networks (network
equipment), TOUSA (home building); Public Governor, Member,
executive committee, Pacific Stock & Options Exchange. Since
2004: Trustee, Laudus Trust, Laudus Variable Insurance Trust.
Until 2/04: Co-CEO, Aphton Corp. (bio-pharmaceuticals).
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ROBERT G. HOLMES Family of Funds, 1989; Chair, CEO, Director, Semloh Financial, Inc. (international financial
5/15/31 Investments, 1991; services and investment advisory firm).
Capital Trust, 1993;
Annuity Portfolios,1994.
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GERALD B. SMITH 2000 (all trusts). Chair, CEO, Founder, Smith Graham & Co. (investment advisers);
9/28/50 Trustee, Cooper Industries (electrical products, tools and hardware);
Chairman, audit committee, Northern Border Partners, L.P. (energy).
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DONALD R. STEPHENS Family of Funds, 1989; Managing Partner, D.R. Stephens & Co. (investments). Until 1996:
6/28/38 Investments, 1991; Chair, CEO, North American Trust (real estate investment trust).
Capital Trust, 1993;
Annuity Portfolios, 1994.
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MICHAEL W. WILSEY Family of Funds, 1989; Chair, CEO, Wilsey Bennett, Inc. (real estate investment and
8/18/43 Investments, 1991; management, and other investments).
Capital Trust, 1993;
Annuity Portfolios, 1994.
18
ITEM 2: CODE OF ETHICS.
Not applicable to this semi-annual report.
ITEM 3: AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable to this semi-annual report.
ITEM 4: PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable to this semi-annual report.
ITEM 5: AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6: SCHEDULE OF INVESTMENTS.
The schedules of investments are included as part of the report to
shareholders filed under Item 1 of this Form.
ITEM 7: DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8: PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANY AND
AFFILIATED PURCHASERS.
Not applicable.
ITEM 9: PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11: CONTROLS AND PROCEDURES.
(a) Based on their evaluation of Registrant's disclosure controls and
procedures, as of a date within 90 days of the filing date, Registrant's
Chief Executive Officer, Evelyn Dilsaver and Registrant's Principal
Financial Officer, George Pereira, have concluded that Registrant's
disclosure controls and procedures are: (i) reasonably designed to ensure
that information required to be disclosed in this report is appropriately
communicated to Registrant's officers to allow timely decisions regarding
disclosures required in this report; (ii) reasonably designed to ensure that
information required to be disclosed in this report is recorded, processed,
summarized and reported in a timely manner; and (iii) are effective in
achieving the goals described in (i) and (ii) above.
(b) During the second fiscal quarter of the period covered by this report, there
have been no changes in Registrant's internal control over financial
reporting that the above officers believe to have materially affected, or to
be reasonably likely to materially affect, Registrant's internal control
over financial reporting.
ITEM 12: EXHIBITS.
(a)(1) Code of ethics -- not applicable to this semi-annual report.
(2) Separate certifications for Registrant's principal executive officer
and principal financial officer, as required by Rule 30a-2(a) under the
1940 Act, are attached.
(3) Not applicable.
(b) A certification for Registrant's principal executive officer and principal
financial officer, as required by Rule 30a-2(b) under the 1940 Act, is
attached. This certification is being furnished to the Securities and
Exchange Commission solely pursuant to 18 U.S.C. section 1350 and is not
being filed as part of the Form N-CSR with the Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Schwab Annuity Portfolios
-------------------------
By: /s/ Evelyn Dilsaver
----------------------
Evelyn Dilsaver
Chief Executive Officer
Date: August 17, 2005
---------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Evelyn Dilsaver
----------------------
Evelyn Dilsaver
Chief Executive Officer
Date: August 17, 2005
---------------
By: /s/ George Pereira
----------------------
George Pereira
Principal Financial Officer
Date: August 17, 2005
---------------