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, 2006
ITEM 1: REPORT(s) TO SHAREHOLDERS.
[CHARLES SCHWAB LOGO]
MONEY MARKET
SCHWAB MONEY
MARKET PORTFOLIO(TM)
MONEY MARKET
SEMIANNUAL REPORT FOR THE PERIOD ENDED JUNE 30, 2006
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 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 www.sec.gov.
MANAGEMENT'S DISCUSSION for the six months ended June 30, 2006
[PHOTO OF KAREN WIGGAN]
KAREN WIGGAN, a vice president of the investment adviser and senior portfolio
manager, is responsible for the overall management of the portfolio. She joined
the firm in 1987 and has worked in fixed income portfolio management since 1991.
THE INVESTMENT ENVIRONMENT AND THE FUND
After a volatile six months in the domestic markets, equity and fixed income
funds ended the period with mixed returns. Several key issues dominated market
discussions throughout the period, including slowing economic growth, inflation
fears, U.S. Federal Reserve (the Fed) interest rate increases, and volatile
crude oil prices.
The markets remained in a steady growth mode over the first quarter of 2006 and
ended the period on a positive note. Volatility was up during the second quarter
of the year, but remained lower than its historical norm. During the six-month
report period, oil prices hit new record highs and the Fed continued to raise
short-term interest rates to curb inflationary pressures, boosting its Fed Funds
target rate four consecutive times during the six-month period and bringing the
benchmark rate up to 5.25%. This was the 17th rate hike over the past two years.
Rising sharply in the second half of the report period, crude oil prices peaked
in April at around $75 per barrel while domestic gasoline prices were above $3 a
gallon. In recent months, crude oil prices climbed back in response to declining
crude inventories and geopolitical concerns. Despite the volatility in energy
prices, gains in productivity have remained strong and corporate earnings
continue to rise. Reasonable valuations, a solid earnings season, and
expectations that monetary policy tightening will soon come to an end, helped
support the markets. Additionally, job and income growth remained positive,
though they slowed during the report period. Moderate inflationary expectations
and large foreign capital inflows helped to contain increases in long-term
interest rates.
As noted above, the Fed continued its tightening cycle throughout the period,
raising its Fed Funds target 0.25% at each of its four meetings. At the end of
the six-month report period, the benchmark rate was up to 5.25%. As the Fed
raised rates, the yield curve flattened and had brief periods of inversion.
Historically, economic slowdowns or recessions have followed the inversion of
the yield curve. Nonetheless, higher short-term rates succeeded in moving money
fund yields higher, making them a more attractive investment vehicle. Following
a strong start to 2006, economic growth has moderated over the past six months.
Rising interest rates have led to volatility in the equities markets and have
weighed down bond returns. Meanwhile, money market funds enticed investors as
the rise in short-term interest rates offered yields that have not been seen in
years. The mixed messages that arose from the slowing economy and rising
inflation have left investors puzzled about the direction of the Fed policy. The
June 29 Federal Open Market Committee (FOMC) policy statement did little to
alleviate uncertainty, as the Fed acknowledged slower growth while expressing
concern about inflation risks.
IN THIS MARKET ENVIRONMENT, OUR STRATEGY WAS TO POSITION THE FUND FOR A
CONTINUED RISE IN INTEREST RATES. The fund continued to maintain a shorter
weighted average maturity (WAM) by focusing on shorter-term discount notes.
Keeping the WAM short provided the flexibility to adapt and respond to the
changes in rising money market rates. During the six-month reporting period, the
supply of agency discount notes continued to decline. This was due to a reduced
demand for short-term funding from the various government sponsored enterprises
(GSEs).
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 6/30/06
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.
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SEVEN-DAY YIELD 4.66%
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SEVEN-DAY EFFECTIVE YIELD 4.77%
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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).
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WEIGHTED AVERAGE MATURITY 41 days
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CREDIT QUALITY OF HOLDINGS % of portfolio 100% Tier 1
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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 (unaudited)
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, 2006 and held
through June 30, 2006.
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 1/1/06 at 6/30/06 1/1/06-6/30/06
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SCHWAB MONEY MARKET PORTFOLIO
Actual Return 0.46% $1,000 $1,021.01 $2.31
Hypothetical 5% Return 0.46% $1,000 $1,022.51 $2.31
1 Based on the most recent six-month expense ratio; may differ from the expense
ratio provided in Financial Highlights.
2 Expenses for the portfolio are equal to its annualized expense ratio,
multiplied by the average account value over the period, multiplied by 181
days of the period, and divided by 365 days of the fiscal year.
Schwab Money Market Portfolio 3
SCHWAB MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
1/1/06- 1/1/05- 1/1/04- 1/1/03- 1/1/02- 1/1/01-
6/30/06* 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
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PER-SHARE DATA ($)
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Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00 1.00
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Income from investment operations:
Net investment income 0.02 0.03 0.01 0.01 0.01 0.04
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Less distributions:
Dividends from net investment income (0.02) (0.03) (0.01) (0.01) (0.01) (0.04)
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Net asset value at end of period 1.00 1.00 1.00 1.00 1.00 1.00
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Total return (%) 2.10 1 2.75 0.90 0.74 1.31 3.72
RATIOS/SUPPLEMENTAL DATA (%)
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Ratios to average net assets:
Net operating expenses 0.46 2 0.47 0.46 0.44 0.48 0.49
Gross operating expenses 0.47 2 0.47 0.46 0.44 0.48 0.50
Net investment income 4.20 2 2.74 0.89 0.75 1.31 3.55
Net assets, end of period ($ x 1,000,000) 161 133 116 141 215 204
* Unaudited.
1 Not annualized.
2 Annualized.
4 See financial notes.
SCHWAB MONEY MARKET PORTFOLIO
PORTFOLIO HOLDINGS as of June 30, 2006 (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 www.sec.gov and may be viewed 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 a fund's most recent Form N-Q is also 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. Treasury notes, for which the rate shown is the
interest rate (the rate established when the obligation was issued). For
variable-rate obligations, the rate shown is the rate as of the report date and
the maturity date shown is the next interest rate change date.
COST VALUE
HOLDINGS BY CATEGORY ($x1,000) ($x1,000)
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93.4% FEDERAL AGENCY
SECURITIES 150,447 150,447
6.9% OTHER INVESTMENTS 11,080 11,080
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100.3% TOTAL INVESTMENTS 161,527 161,527
(0.3)% OTHER ASSETS
AND LIABILITIES (496)
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100.0% NET ASSETS 161,031
ISSUER FACE AMOUNT VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
FEDERAL AGENCY SECURITIES 93.4% of net assets
DISCOUNT NOTES 93.4%
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FANNIE MAE
4.86%, 07/05/06 2,000 1,999
5.00%, 07/12/06 3,000 2,995
4.93%, 07/17/06 1,240 1,237
4.97%, 07/19/06 1,774 1,770
4.98%, 07/19/06 2,000 1,995
4.96%, 07/26/06 1,000 997
4.99%, 07/26/06 1,900 1,893
4.99%, 07/26/06 1,000 997
5.21%, 07/26/06 1,000 996
5.00%, 08/02/06 1,178 1,173
5.01%, 08/02/06 1,071 1,066
5.08%, 08/16/06 1,000 994
5.27%, 08/16/06 6,190 6,149
5.25%, 08/21/06 2,970 2,948
5.30%, 08/23/06 4,000 3,969
5.16%, 09/01/06 1,670 1,655
5.17%, 09/06/06 2,000 1,981
5.33%, 09/13/06 2,900 2,869
5.35%, 09/13/06 1,000 989
FEDERAL FARM CREDIT BANK
4.98%, 07/05/06 3,000 2,998
5.08%, 07/14/06 4,000 3,993
5.17%, 07/25/06 3,000 2,990
4.96%, 07/26/06 2,000 1,993
5.17%, 07/26/06 5,000 4,982
5.18%, 07/28/06 1,548 1,542
4.89%, 08/07/06 1,185 1,179
4.99%, 08/11/06 1,000 994
5.33%, 10/16/06 1,000 984
FEDERAL HOME LOAN BANK
4.97%, 07/07/06 2,000 1,998
4.90%, 07/14/06 3,512 3,506
4.91%, 07/14/06 2,500 2,496
4.92%, 07/19/06 2,000 1,995
4.95%, 07/19/06 1,000 998
4.98%, 07/19/06 1,060 1,057
5.25%, 08/02/06 1,075 1,070
5.01%, 08/04/06 3,000 2,986
5.26%, 08/16/06 1,118 1,111
5.24%, 08/18/06 2,000 1,986
5.26%, 08/25/06 1,500 1,488
5.16%, 09/08/06 5,000 4,951
5.17%, 09/13/06 2,000 1,979
See financial notes. 5
SCHWAB MONEY MARKET PORTFOLIO
PORTFOLIO HOLDINGS (Unaudited) continued
ISSUER FACE AMOUNT VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
5.23%, 09/13/06 5,000 4,947
5.27%, 09/15/06 4,768 4,716
FREDDIE MAC
4.86%, 07/03/06 1,129 1,129
5.00%, 07/11/06 1,000 999
4.95%, 07/18/06 1,000 998
4.88%, 07/25/06 1,355 1,351
4.90%, 07/25/06 2,000 1,994
4.97%, 07/25/06 2,216 2,209
5.21%, 07/31/06 1,900 1,892
4.94%, 08/04/06 1,095 1,090
4.95%, 08/04/06 1,070 1,065
5.23%, 08/08/06 2,700 2,685
5.25%, 08/08/06 1,000 995
5.27%, 08/22/06 1,000 992
5.27%, 08/30/06 1,123 1,113
5.29%, 09/05/06 6,445 6,383
5.30%, 09/05/06 1,565 1,550
5.33%, 09/05/06 3,000 2,971
5.23%, 09/18/06 1,067 1,055
5.33%, 09/19/06 2,550 2,520
5.22%, 11/14/06 2,000 1,961
TENNESSEE VALLEY AUTHORITY
4.94%, 07/06/06 3,000 2,998
5.03%, 07/20/06 3,000 2,992
5.18%, 08/03/06 4,000 3,981
5.25%, 09/14/06 6,000 5,935
5.25%, 09/14/06 2,000 1,978
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150,447
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ISSUER MATURITY AMOUNT VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
OTHER INVESTMENTS 6.9% of net assets
REPURCHASE AGREEMENTS 6.9%
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CREDIT SUISSE FIRST BOSTON L.L.C.
Tri-Party Repurchase Agreement
Collateralized by U.S. Treasury
Securities with a value of $11,305
4.50%, issued 06/30/06,
due 07/03/06 11,084 11,080
END OF INVESTMENTS.
At 06/30/06, the cost of the fund's investments was $161,527.
6 See financial notes.
SCHWAB MONEY MARKET PORTFOLIO
Statement of
ASSETS AND LIABILITIES
As of June 30, 2006; unaudited. All numbers x 1,000 except NAV.
ASSETS
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Investments, at cost and value $150,447
Repurchase agreements, at cost and value 11,080
Receivables:
Fund shares sold 668
Interest + 1
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TOTAL ASSETS 162,196
LIABILITIES
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Payables:
Dividends to shareholders 301
Fund shares redeemed 824
Investment adviser and administrator fees 5
Trustees' fees 3
Accrued expenses + 32
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TOTAL LIABILITIES 1,165
NET ASSETS
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TOTAL ASSETS 162,196
TOTAL LIABILITIES - 1,165
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NET ASSETS $161,031
NET ASSETS BY SOURCE
Capital received from investors 161,044
Net realized capital losses (13)
NET ASSET VALUE (NAV)
SHARES
NET ASSETS / OUTSTANDING = NAV
$161,031 161,078 $1.00
See financial notes. 7
SCHWAB MONEY MARKET PORTFOLIO
Statement of
OPERATIONS
For January 1, 2006 through June 30, 2006; unaudited. All numbers x 1,000.
INVESTMENT INCOME
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Interest $3,126
EXPENSES
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Investment adviser and administrator fees 255
Trustees' fees 11
Custodian fees 7
Portfolio accounting fees 10
Professional fees 4
Shareholder reports 23
Other expenses + 2
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Total expenses 312
Custody credits - 1
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NET EXPENSES 311
INCREASE IN NET ASSETS FROM OPERATIONS
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TOTAL INVESTMENT INCOME 3,126
NET EXPENSES - 311
NET INVESTMENT INCOME 2,815
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INCREASE IN NET ASSETS FROM OPERATIONS $2,815
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 current period are unaudited.
OPERATIONS
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1/1/06-6/30/06 1/1/05-12/31/05
Net investment income $2,815 $3,417
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INCREASE IN NET ASSETS FROM OPERATIONS 2,815 3,417
DISTRIBUTIONS PAID
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Dividends from net investment income 2,815 3,417
TRANSACTIONS IN FUND SHARES*
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Shares sold 153,488 150,665
Shares reinvested 2,526 3,417
Shares redeemed +(128,029) (137,096)
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NET TRANSACTIONS IN FUND SHARES 27,985 16,986
NET ASSETS
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Beginning of period 133,046 116,060
Total increase +27,985 16,986
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END OF PERIOD $161,031 $133,046
* Transactions took place at $1.00 per share; figures for share quantities are
the same as for dollars.
See financial notes. 9
SCHWAB MONEY MARKET PORTFOLIO
FINANCIAL NOTES, unaudited.
Unless stated, all dollar amounts are x 1,000.
1. BUSINESS STRUCTURE OF THE FUND
Schwab Money Market Portfolio 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 list below shows all the funds in the trust including
the fund in this report, which is highlighted:
SCHWAB ANNUITY PORTFOLIOS
Organized January 21, 1994
SCHWAB MONEY MARKET PORTFOLIO
Schwab MarketTrack Growth Portfolio II
Schwab S&P 500 Index Portfolio
Schwab Money Market Portfolio 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
trustees 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.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies the fund uses
in its operations and in the preparation of financial statements:
(A) SECURITY VALUATION:
The fund values the securities in its portfolio at amortized cost, which
approximates market value.
(B) PORTFOLIO INVESTMENTS:
DELAYED-DELIVERY: 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.
REPURCHASE AGREEMENTS: 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. Any repurchase agreements with due dates later than seven days from
issue dates may be subject to seven day put features for liquidity purposes.
10
SCHWAB MONEY MARKET PORTFOLIO
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(C) SECURITY TRANSACTIONS:
Security transactions are recorded as of the date the order to buy or sell the
security is executed. Realized gains and losses from security transactions are
based on the identified costs of the securities involved.
(D) INCOME, EXPENSES AND DISTRIBUTIONS:
Interest income is recorded as it accrues. If the fund buys a debt security at a
discount (that is, for less than face value) or a premium (more than face
value), it amortizes the discount or premium from the current date 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.
Expenses that are specific to a fund are charged directly to that 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 declares dividends every day it is open for business. These dividends,
which are equal to a fund's net investment income for that day, are paid out to
the insurance company separate accounts once a month. The fund may make
distributions from any net realized capital gains once a year.
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.
(E) BORROWING:
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 the fund during the period.
(F) ACCOUNTING ESTIMATES:
The accounting policies described in this report 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.
(G) INDEMNIFICATION:
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
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
3. AFFILIATES AND AFFILIATED TRANSACTIONS
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, serves as the fund's
investment adviser and administrator pursuant to an Investment Advisory and
Administration Agreement (Advisory Agreement) between it and the trust. Charles
Schwab & Co., Inc. ("Schwab") is an affiliate of the investment adviser and is
the trust's shareholder services agent and transfer agent.
For its advisory and administrative services to the fund, the investment adviser
is entitled to receive an annual fee payable monthly based on the fund's average
daily net assets described as follows:
AVERAGE DAILY NET ASSETS
------------------------
First $1 billion 0.38%
Over $1 billion 0.35%
Over $10 billion 0.32%
Over $20 billion 0.30%
Over $40 billion 0.27%
Schwab does not charge the fund for transfer agent and shareholder services
fees.
Although these agreements specify certain fees for these services, CSIM and
Schwab have made additional agreements with the fund to limit the total expenses
charged, excluding interest, taxes and certain non-routine expenses to 0.50%
through April 29, 2007.
The fund may make direct transactions with certain other Schwab Funds 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. For the period ended June 30, 2006,
the fund had no security transactions with other Schwab Funds.
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.
There was no interfund borrowing or lending activity for the fund during the
period.
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.
4. FEDERAL INCOME TAXES
The fund intends to meet federal income and excise tax requirements for
regulated investment companies. Accordingly, the fund distributes substantially
all of its net investment income and realized net 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. As of
December 31, 2005, the fund had no undistributed earnings on a tax basis.
12
SCHWAB MONEY MARKET PORTFOLIO
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
4. FEDERAL INCOME TAXES (CONTINUED)
As of December 31, 2005, the fund had capital loss carry forwards available to
offset future net capital gains before the expiration date:
EXPIRE
2006 $3
2007 9
2008 1
---
TOTAL $13
---
The tax-basis components of distributions for the fiscal year ended December 31,
2005 were:
From ordinary income $3,417
From long-term capital gains --
From return of capital --
The permanent book and tax basis differences may result in reclassifications
between capital account and other accounts as required. The adjustments will
have no impact on net assets or the results of operations. As of December 31,
2005, the fund made the following reclassifications:
Capital received from investors ($1)
Net realized capital losses $1
13
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, including 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.
The Board, including a majority of the Independent Trustees, considered
information specifically relating to the continuance of the Agreement at
meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the
renewal of the Agreement for an additional one year term at the meeting held on
June 12, 2006. The Board's approval of the Agreement was based on consideration
and evaluation of a variety of specific factors discussed at these meetings 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 Charles Schwab & Co.,
Inc. ("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.
14
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
information considered by the trustees included specific information
concerning changes in the nature, extent and quality of services provided by
CSIM since the trustees had last considered approval of the Agreement. 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, when
applicable, 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 and the appropriateness of
the benchmark used to compare the performance of each fund. The trustees
further considered the level of fund performance in the context of its review
of fund expenses and adviser profitability discussed below. 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 historical practice of
voluntarily waiving 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, but, with respect to such other types of
accounts, accorded less weight to such comparisons due to the different
legal, regulatory, compliance and operating features of mutual funds as
compared to these 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. The Board also con-
15
sidered information relating to changes to CSIM's cost structure, including
cost savings, technology investments and increased operating efficiencies and
how these changes affected CSIM's profitability under the Agreement. 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.
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 that include lower fees at
higher graduated asset levels. The Board also considered certain commitments
by CSIM and Schwab that are designed to pass along potential economies of
scale to fund shareholders. Specifically, the Board considered CSIM and
Schwab's commitments, which may be changed only with Board approval: (i) to
reduce contractual advisory fees or add breakpoints for certain funds, and
(ii) to implement, by means of expense limitation agreement, reductions in
net overall expenses for certain funds. Based on this evaluation, and in
consideration of the commitments made by CSIM and Schwab as discussed above,
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.
16
TRUSTEES AND OFFICERS
The tables below give information about the trustees and officers for The Schwab
Annuity Portfolios, which includes the fund covered in this report. The "Fund
Complex" includes The Charles Schwab Family of Funds, Schwab Investments, Schwab
Capital Trust, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable
Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and
Excelsior Funds Trust. As of June 30, 2006, the Fund Complex included 98 funds.
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.
INDEPENDENT TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF
AND POSITION(S) WITH PORTFOLIOS IN
THE TRUST; (TERM OF FUND COMPLEX
OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY
TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
MARIANN BYERWALTER Chairman of JDN Corporate Advisory 98 Board 1--Director, Redwood Trust, Inc.
1960 LLC. From 1996 to 2001, Vice Board 2--Director, PMI Group, Inc.
Trustee President for Business Affairs and
(Trustee of The Schwab Chief Financial Officer of Stanford
Annuity Portfolios since University, and in 2001, Special
2000.) Advisor to the President of Stanford
University.
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD F. DORWARD Chief Executive Officer, Dorward & 57 None.
1931 Associates (corporate management,
Trustee marketing and communications con-
(Trustee of The Schwab sulting firm). From 1996-1999,
Annuity Portfolios since Executive Vice President and
1989.) Managing Director, Grey Advertising.
Prior to 1996, President and Chief
Executive Officer, Allen & Dorward
Advertising.
- ------------------------------------------------------------------------------------------------------------------------------------
WILLIAM A. HASLER Retired. Dean Emeritus, Haas School 98 Board 1--Director, Aphton Corp.
1941 of Business, University of California, Board 2--Director, Mission West Properties
Trustee Berkeley. Until February 2004, Co- Board 3--Director, TOUSA
(Trustee of The Schwab Chief Executive Officer, Aphton Corp. Board 4--Director, Stratex Networks
Annuity Portfolios since (bio-pharmaceuticals). Prior to August Board 5--Director, Genitope Corp.
2000.) 1998, Dean of the Haas School of Board 6--Director & Non-Executive
Business, University of California, Chairman, Solectron Corp.
Berkeley (higher education). Board 7--Director, Ditech Communications
Corp.
17
INDEPENDENT TRUSTEES continued
NAME, YEAR OF BIRTH, NUMBER OF
AND POSITION(S) WITH PORTFOLIOS IN
THE TRUST; (TERM OF FUND COMPLEX
OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY
TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT G. HOLMES Chairman, Chief Executive Officer 57 None.
1931 and Director, Semloh Financial, Inc.
Trustee (international financial services and
(Trustee of The Schwab investment advisory firm).
Annuity Portfolios since
1989.)
- ------------------------------------------------------------------------------------------------------------------------------------
GERALD B. SMITH Chairman and Chief Executive 57 Board 1--Board of Cooper Industries
1950 Officer and founder of Smith Board 2--Chairman of the Audit
Trustee Graham & Co. (investment advisors). Committee of Northern Border Partners,
(Trustee of The Schwab M.L.P.
Annuity Portfolios since
2000.)
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD R. STEPHENS Managing Partner, D.R. Stephens & 57 None.
1938 Company (investments). Prior to
Trustee 1996, Chairman and Chief
(Trustee of The Schwab Executive Officer of North American
Annuity Portfolios since Trust (real estate investment trust).
1989.)
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL W. WILSEY Chairman and Chief Executive 57 None.
1943 Officer, Wilsey Bennett, Inc. (real
Trustee estate investment and management,
(Trustee of The Schwab and other investments).
Annuity Portfolios since
1989.)
18
INTERESTED TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF
AND POSITION(S) WITH PORTFOLIOS IN
THE TRUST; (TERM OF FUND COMPLEX
OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY
TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES R. SCHWAB 2 Chairman, Chief Executive Officer 57 None.
1937 and Director, The Charles Schwab
Chairman and Trustee Corporation, Charles Schwab & Co.,
(Chairman and Trustee Inc.; Chairman and Director, Charles
of The Schwab Annuity Schwab Investment Management,
Portfolios since 1989.) Inc., Charles Schwab Bank, N. A.;
Chairman and Chief Executive
Officer, Schwab (SIS) Holdings Inc. I,
Schwab International Holdings, Inc.;
Chief Executive Officer and Director,
Schwab Holdings, Inc.; Director, U.S.
Trust Company, N. A., U.S. Trust
Corporation, United States Trust
Company of New York. Until May
2003, Co-Chief Executive Officer,
The Charles Schwab Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
RANDALL W. MERK 2 Executive Vice President and 98 None.
1954 President, Schwab Financial
Trustee Products, Charles Schwab & Co.,
(Trustee of The Schwab Inc.; Director, Charles Schwab Asset
Annuity Portfolios since Management (Ireland) Limited and
2005.) Charles Schwab Worldwide Funds
PLC. From September 2002 to July
2004, Chief Executive Officer and
President, Charles Schwab
Investment Management, Inc. and
Executive Vice President, Charles
Schwab & Co., Inc. Prior to
September 2002, President and
Chief Investment Officer, American
Century Investment Management,
and Director, American Century
Companies, Inc.
19
OFFICERS OF THE TRUST
NAME, YEAR OF BIRTH, AND POSITION(S)
WITH THE TRUST; (TERM OF OFFICE, AND
LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
EVELYN DILSAVER President, Chief Executive Officer, and Director, Charles Schwab Investment
1955 Management, Inc.; Executive Vice President, Charles Schwab & Co., Inc; President
President and Chief Executive Officer and Chief Executive Officer, Laudus Trust and Laudus Variable Insurance Trust;
(Officer of The Schwab Annuity President, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior
Portfolios since 2004.) Funds Trust; President, Mutual Fund Division, UST Advisers, Inc. From June 2003
to July 2004, Senior Vice President, Asset Management Products and Services,
Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief
Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The
Charles Schwab Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
STEPHEN B. WARD Director, Senior Vice President and Chief Investment Officer, Charles Schwab
1955 Investment Management, Inc.; Chief Investment Officer, The Charles Schwab
Senior Vice President and Chief Trust Company.
Investment Officer
(Officer of The Schwab Annuity
Portfolios since 1991.)
- ------------------------------------------------------------------------------------------------------------------------------------
GEORGE PEREIRA Senior Vice President and Chief Financial Officer, Charles Schwab Investment
1964 Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable
Treasurer and Principal Financial Officer Insurance Trust; Chief Financial Officer and Chief Accounting Officer, Excelsior
(Officer of The Schwab Annuity Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief
Portfolios since 2004.) Financial Officer, Mutual Fund Division, UST Advisors, Inc. Director, Charles
Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland)
Limited. From December 1999 to November 2004, Sr. Vice President, Financial
Reporting, Charles Schwab & Co., Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
KIMON DAIFOTIS Senior Vice President and Chief Investment Officer--Fixed Income, Charles
1959 Schwab Investment Management, Inc. Prior to 2004, Vice President and Sr.
Senior Vice President and Chief Portfolio Manager, Charles Schwab Investment Management, Inc.
Investment Officer--Fixed Income
(Officer of The Schwab Annuity
Portfolios since 2004.)
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY MORTIMER Senior Vice President and Chief Investment Officer--Equities, Charles Schwab
1963 Investment Management, Inc.; Vice President and Chief Investment Officer,
Senior Vice President and Chief Laudus Trust and Laudus Variable Insurance Trust. Prior to 2004, Vice President
Investment Officer--Equities and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
(Officer of The Schwab Annuity
Portfolios since 2004.)
20
OFFICERS OF THE TRUST continued
NAME, YEAR OF BIRTH, AND POSITION(S)
WITH THE TRUST; (TERM OF OFFICE, AND
LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
RANDALL FILLMORE Senior Vice President and Chief Compliance Officer, Charles Schwab Investment
1960 Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief
Chief Compliance Officer and AML Compliance Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief
Officer Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and
(Officer of The Schwab Annuity Excelsior Funds Trust. From 2002 to 2003, Vice President, Charles Schwab & Co.,
Portfolios since 2002.) Inc., and Charles Schwab Investment Management, Inc. From 2000 to 2002, Vice
President, Internal Audit, Charles Schwab & Co., Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
KOJI E. FELTON Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab
1961 Investment Management, Inc.; Senior Vice President and Deputy General Counsel,
Secretary and Chief Legal Officer Charles Schwab & Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable
(Officer of The Schwab Annuity Insurance Trust; Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt
Portfolios since 1998.) Funds, Inc., and Excelsior Funds Trust. Prior to June 1998, Branch Chief in
Enforcement at U.S. Securities and Exchange Commission in San Francisco.
1 Trustees remain in office until they resign, retire or are removed by
shareholder vote. The Schwab Funds retirement policy requires that independ-
ent 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 their employment with the investment adviser and the
distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab
Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are
employees of Schwab and/or the adviser.
3 The President, Treasurer and Secretary hold office until their respective
successors are chosen and qualified or until he or she sooner dies, resigns,
is removed or becomes disqualified. Each other officer serves at the pleasure
of the Board.
21
[CHARLES SCHWAB LOGO]
LARGE-CAP BLEND
SCHWAB MARKETTRACK
GROWTH PORTFOLIO II(TM)
BALANCED
SEMIANNUAL REPORT FOR THE PERIOD ENDED JUNE 30, 2006
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 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 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, 2006
[PHOTO OF LARRY MANO]
LARRY MANO, a vice president and senior portfolio manager of the investment
adviser, 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
After a volatile six months in the domestic markets, equity and fixed income
funds ended the period with mixed returns. Several key issues dominated market
discussions throughout the period, including slowing economic growth, inflation
fears, U.S. Federal Reserve (the Fed) interest rate increases, and volatile
crude oil prices.
The markets remained in a steady growth mode over the first quarter of 2006 and
ended the period on a positive note. Volatility was up during the second quarter
of the year, but remained lower than its historical norm. During the six-month
report period, oil prices hit new record highs and the Fed continued to raise
short-term interest rates to curb inflationary pressures, boosting its Fed Funds
target rate four consecutive times during the six-month period and bringing the
benchmark rate up to 5.25%. This was the 17th rate hike over the past two years.
Rising sharply in the second half of the report period, crude oil prices peaked
in April at around $75 per barrel while domestic gasoline prices were above $3 a
gallon. In recent months, crude oil prices climbed back in response to declining
crude inventories and geopolitical concerns. Despite the volatility in energy
prices, gains in productivity have remained strong and corporate earnings
continue to rise. Reasonable valuations, a solid earnings season, and
expectations that monetary policy tightening will soon come to an end, helped
support the markets. Additionally, job and income growth remained positive,
though they slowed during the report period. Moderate inflationary expectations
and large foreign capital inflows helped to contain increases in long-term
interest rates.
As noted above, the Fed continued its tightening cycle throughout the period,
raising its Fed Funds target 0.25% at each of its four meetings. As the Fed
raised rates, the yield curve flattened and had brief periods
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.
2.21% THREE-MONTH U.S. TREASURY BILLS (T-BILLS): measures short-term U.S.
Treasury obligations
- -0.72% LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX: measures the U.S. bond market
2.71% S&P 500(R) INDEX: measures U.S. large-cap stocks
8.21% RUSSELL 2000(R) INDEX: measures U.S. small-cap stocks
10.16% 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 BILLS U.S. AGGREGATE S&P 500(R) 2000(R) EAFE(R)
(T-BILLS) BOND INDEX INDEX INDEX INDEX
31-Dec-05 0.00 0.00 0.00 0.00 0.00
6-Jan-06 0.05 0.26 3.02 3.90 5.12
13-Jan-06 0.12 0.52 3.22 5.26 4.71
20-Jan-06 0.21 0.57 1.13 4.70 2.71
27-Jan-06 0.28 0.04 2.94 8.82 5.74
3-Feb-06 0.36 -0.02 1.41 7.65 4.74
10-Feb-06 0.43 -0.22 1.70 6.61 3.97
17-Feb-06 0.52 0.13 3.38 8.69 4.02
24-Feb-06 0.60 0.16 3.61 9.54 5.79
3-Mar-06 0.69 -0.27 3.49 9.84 5.51
10-Mar-06 0.77 -0.50 3.07 8.06 5.22
17-Mar-06 0.86 0.01 5.18 11.03 8.89
24-Mar-06 0.94 0.08 4.84 12.19 8.69
31-Mar-06 1.03 -0.65 4.21 13.94 9.40
7-Apr-06 1.11 -0.98 4.31 12.62 11.15
14-Apr-06 1.19 -1.23 3.82 11.89 9.88
21-Apr-06 1.30 -0.86 5.62 15.03 13.93
28-Apr-06 1.41 -0.83 5.61 13.92 14.62
5-May-06 1.47 -0.98 6.85 16.51 17.90
12-May-06 1.56 -1.32 4.15 10.67 16.70
20-May-05 1.66 -0.72 2.24 7.72 10.49
27-May-05 1.75 -0.65 3.33 8.78 11.01
3-Jun-05 1.84 -0.26 4.03 9.98 11.98
10-Jun-05 1.93 -0.22 1.17 4.62 5.52
17-Jun-05 2.02 -0.86 1.14 3.42 4.84
24-Jun-05 2.12 -1.32 0.60 2.99 5.34
30-Jun-06 2.21 -0.72 2.71 8.21 10.16
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
[PHOTO OF MATTHEW HASTINGS]
MATTHEW HASTINGS, CFA, a vice president and senior portfolio manager of the
investment adviser, has day-to-day responsibility for the co-management of the
bond and cash portions of the portfolio. He joined the firm in 1999 and has
worked in fixed-income and asset management since 1996.
[PHOTO OF STEVEN HUNG]
STEVEN HUNG, a director and portfolio manager of the investment adviser, has
day-to-day responsibility for the co-management for the bond and cash portions
of the portfolio. He joined the firm in 1998 and has worked in fixed-income
asset management since 1999.
of inversion. Historically, economic slowdowns or recessions have followed the
inversion of the yield curve. Following a strong start to 2006, economic growth
has moderated over the past six months.
Despite rising interest rates and soaring energy prices, the S&P 500 Index 1
posted gains of 2.71% for the six-month period ending June 30, 2006 while the
Russell 2000 Index also displayed a positive return of 8.21%. As improving
fundamentals and attractive valuations have strengthened investor interest in
emerging markets, the MSCI EAFE (Morgan Stanley Capital International, Inc.
Europe, Australasia, and Far East) Index also had an impressive return of 10.16%
for the six-month period.
Although performance of the bond markets was sluggish, as measured by the Lehman
Brothers U.S. Aggregate Bond Index, which was down 0.72% for the six-month
period, these types of results are not unusual. When the economy is strong and
job growth is robust, investors normally expect to see more inflation, which
generally leads to higher interest rates and lower bond prices.
Rising interest rates have led to volatility in the equities markets and have
weighed down bond returns. Meanwhile, money market funds enticed investors as
the rise in short-term interest rates offered yields that have not been seen in
years. The mixed messages that arose from the slowing economy and rising
inflation have left investors puzzled about the direction of the Fed policy. The
June 29 Federal Open Market Committee (FOMC) policy statement did little to
alleviate uncertainty, as the Fed acknowledged slower growth while expressing
concern about inflation risks.
THE SCHWAB MARKETTRACK GROWTH PORTFOLIO II incorporates a mix of different asset
classes. Accordingly, its returns over a given period will reflect a blend of
the returns of those asset classes, and will depend on their relative weightings
within the portfolio. By spreading its exposure over various asset classes, The
MarketTrack Growth Portfolio II is designed to provide more stable returns while
seeking to reduce risk over various market cycles.
The portfolio was up 4.38% for the six-month period, compared to a 4.14% return
for its benchmark, the Growth Composite Index. The portfolio has an 80% target
stock allocation that is divided amongst large-cap, small-cap, and international
stocks. The 20% target allocation to fixed income, which includes 5% cash, is
designed to reduce volatility and risk over the long term. In this report
period, due to the volatility in the equity markets, the fund benefited from its
allocation to larger-capitalization stocks and the fixed income portion of the
portfolio.
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.
1 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 fund. The fund 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 fund.
2 Schwab MarketTrack Growth Portfolio II
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PERFORMANCE as of 6/30/06
AVERAGE ANNUAL TOTAL RETURNS 1, 2
This chart compares performance of the portfolio with a benchmark and the
portfolio's Morningstar category.
[BAR CHART]
Benchmark: Fund Category:
GROWTH COMPOSITE MORNINGSTAR
PORTFOLIO INDEX LARGE-CAP BLEND
6 MONTHS 4.38% 4.14% 1.42%
1 YEAR 10.85% 11.23% 7.46%
5 YEARS 4.88% 5.52% 1.00%
SINCE INCEPTION: 11/1/96 7.57% 7.71% 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.
$20,239 PORTFOLIO
$20,495 GROWTH COMPOSITE INDEX
$20,991 S&P 500(R) INDEX
$17,560 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 $10,505 $10,756 $10,171
31-Dec-96 $10,420 $10,394 $10,543 $10,076
31-Jan-97 $10,670 $10,662 $11,201 $10,108
28-Feb-97 $10,710 $10,700 $11,289 $10,133
31-Mar-97 $10,460 $10,409 $10,826 $10,020
30-Apr-97 $10,780 $10,718 $11,472 $10,171
31-May-97 $11,420 $11,331 $12,169 $10,267
30-Jun-97 $11,940 $11,790 $12,714 $10,390
31-Jul-97 $12,650 $12,423 $13,725 $10,670
31-Aug-97 $12,200 $11,944 $12,957 $10,579
30-Sep-97 $12,880 $12,530 $13,665 $10,736
31-Oct-97 $12,520 $12,117 $13,209 $10,892
30-Nov-97 $12,730 $12,341 $13,820 $10,942
31-Dec-97 $12,977 $12,521 $14,058 $11,052
31-Jan-98 $13,037 $12,703 $14,214 $11,194
28-Feb-98 $13,779 $13,421 $15,239 $11,185
31-Mar-98 $14,199 $13,917 $16,019 $11,223
30-Apr-98 $14,320 $14,052 $16,181 $11,281
31-May-98 $14,019 $13,837 $15,903 $11,388
30-Jun-98 $14,240 $14,170 $16,548 $11,485
31-Jul-98 $13,959 $14,020 $16,373 $11,509
31-Aug-98 $12,285 $12,400 $14,009 $11,697
30-Sep-98 $12,696 $12,856 $14,907 $11,971
31-Oct-98 $13,478 $13,690 $16,119 $11,907
30-Nov-98 $14,079 $14,362 $17,095 $11,975
31-Dec-98 $14,673 $15,036 $18,080 $12,011
31-Jan-99 $14,921 $15,378 $18,836 $12,096
28-Feb-99 $14,395 $14,933 $18,250 $11,884
31-Mar-99 $14,807 $15,418 $18,980 $11,950
30-Apr-99 $15,405 $15,997 $19,715 $11,988
31-May-99 $15,127 $15,604 $19,249 $11,883
30-Jun-99 $15,735 $16,206 $20,318 $11,845
31-Jul-99 $15,621 $15,983 $19,684 $11,795
31-Aug-99 $15,518 $15,908 $19,585 $11,789
30-Sep-99 $15,467 $15,722 $19,048 $11,926
31-Oct-99 $16,095 $16,451 $20,254 $11,970
30-Nov-99 $16,569 $16,899 $20,666 $11,969
31-Dec-99 $17,553 $17,964 $21,883 $11,911
31-Jan-00 $16,777 $17,283 $20,785 $11,872
29-Feb-00 $17,176 $17,644 $20,391 $12,015
31-Mar-00 $17,975 $18,449 $22,385 $12,174
30-Apr-00 $17,376 $17,675 $21,712 $12,139
31-May-00 $16,965 $17,222 $21,267 $12,133
30-Jun-00 $17,598 $17,869 $21,792 $12,385
31-Jul-00 $17,232 $17,529 $21,452 $12,498
31-Aug-00 $18,108 $18,366 $22,784 $12,679
30-Sep-00 $17,442 $17,695 $21,581 $12,759
31-Oct-00 $17,254 $17,408 $21,491 $12,843
30-Nov-00 $16,245 $16,286 $19,797 $13,054
31-Dec-00 $16,707 $16,625 $19,894 $13,296
31-Jan-01 $17,045 $17,054 $20,601 $13,513
28-Feb-01 $15,872 $15,854 $18,722 $13,631
31-Mar-01 $15,150 $15,014 $17,535 $13,699
30-Apr-01 $16,064 $15,955 $18,897 $13,641
31-May-01 $16,097 $15,950 $19,024 $13,723
30-Jun-01 $15,951 $15,670 $18,562 $13,775
31-Jul-01 $15,754 $15,515 $18,380 $14,084
31-Aug-01 $15,172 $14,909 $17,229 $14,246
30-Sep-01 $14,022 $13,833 $15,837 $14,411
31-Oct-01 $14,360 $14,159 $16,139 $14,712
30-Nov-01 $15,060 $14,886 $17,377 $14,509
31-Dec-01 $15,303 $15,051 $17,530 $14,416
31-Jan-02 $14,962 $14,799 $17,274 $14,533
28-Feb-02 $14,773 $14,659 $16,941 $14,674
31-Mar-02 $15,350 $15,167 $17,578 $14,431
30-Apr-02 $14,997 $14,788 $16,513 $14,711
31-May-02 $14,867 $14,741 $16,391 $14,836
30-Jun-02 $14,184 $14,022 $15,224 $14,965
31-Jul-02 $13,112 $13,093 $14,038 $15,146
31-Aug-02 $13,206 $13,168 $14,129 $15,402
30-Sep-02 $12,193 $12,125 $12,593 $15,651
31-Oct-02 $12,829 $12,805 $13,701 $15,579
30-Nov-02 $13,418 $13,384 $14,508 $15,575
31-Dec-02 $12,940 $12,892 $13,657 $15,897
31-Jan-03 $12,567 $12,592 $13,299 $15,911
28-Feb-03 $12,387 $12,433 $13,099 $16,131
31-Mar-03 $12,411 $12,468 $13,226 $16,118
30-Apr-03 $13,314 $13,342 $14,316 $16,252
31-May-03 $14,072 $14,030 $15,071 $16,554
30-Jun-03 $14,252 $14,219 $15,264 $16,521
31-Jul-03 $14,481 $14,423 $15,532 $15,966
31-Aug-03 $14,794 $14,715 $15,835 $16,071
30-Sep-03 $14,818 $14,766 $15,667 $16,497
31-Oct-03 $15,528 $15,472 $16,554 $16,344
30-Nov-03 $15,769 $15,676 $16,700 $16,383
31-Dec-03 $16,431 $16,368 $17,575 $16,550
31-Jan-04 $16,686 $16,653 $17,898 $16,682
29-Feb-04 $16,881 $16,904 $18,147 $16,863
31-Mar-04 $16,808 $16,834 $17,873 $16,989
30-Apr-04 $16,406 $16,478 $17,592 $16,547
31-May-04 $16,552 $16,616 $17,833 $16,481
30-Jun-04 $16,906 $16,911 $18,179 $16,575
31-Jul-04 $16,382 $16,440 $17,578 $16,739
31-Aug-04 $16,431 $16,535 $17,648 $17,059
30-Sep-04 $16,759 $16,805 $17,838 $17,105
31-Oct-04 $17,064 $17,114 $18,111 $17,249
30-Nov-04 $17,819 $17,809 $18,845 $17,111
31-Dec-04 $18,332 $18,380 $19,486 $17,268
31-Jan-05 $17,938 $18,038 $19,010 $17,377
28-Feb-05 $18,308 $18,405 $19,409 $17,274
31-Mar-05 $17,987 $18,105 $19,066 $17,186
30-Apr-05 $17,605 $17,813 $18,704 $17,418
31-May-05 $18,074 $18,263 $19,298 $17,606
30-Jun-05 $18,258 $18,427 $19,325 $17,703
31-Jul-05 $18,850 $18,980 $20,044 $17,542
31-Aug-05 $18,875 $19,004 $19,862 $17,767
30-Sep-05 $19,047 $19,226 $20,023 $17,584
31-Oct-05 $18,690 $18,893 $19,688 $17,445
30-Nov-05 $19,220 $19,458 $20,433 $17,521
31-Dec-05 $19,390 $19,681 $20,439 $17,688
31-Jan-06 $20,139 $20,348 $20,980 $17,690
28-Feb-06 $20,126 $20,346 $21,037 $17,748
31-Mar-06 $20,488 $20,691 $21,298 $17,574
30-Apr-06 $20,801 $21,019 $21,583 $17,542
31-May-06 $20,214 $20,463 $20,962 $17,523
30-Jun-06 $20,239 $20,495 $20,991 $17,560
All portfolio and index figures on this page assume dividends and
distributions were reinvested. Index figures do not include trading and
management costs, which would lower performance. Indices are unmanaged, and
you cannot invest in them directly. The portfolio's share price and principal
values change, and when you sell your shares, they may be worth more or less
than what you paid for them. Past performance does not indicate future
results. Performance results less than one year are not annualized.
1 Portfolio expenses have been partially absorbed by CSIM and Schwab. Without
these reductions, the portfolio's returns would have been lower. Portfolio
returns do not reflect the additional fees and expenses imposed by the
insurance company under the variable insurance product contract. If those
contract fees and expenses were included, the returns would be less than those
shown. Please refer to the variable insurance product prospectus for a
complete listing of these expenses.
2 The Growth Composite Index is based on a comparable portfolio asset allocation
and calculated using the following portion allocations: 60% Dow Jones Wilshire
5000 Composite IndexSM, 20% MSCI EAFE(R) Index, 15% Lehman Brothers U.S.
Aggregate Bond Index, and 5% Morningstar 3-Month T-Bill Index.
Schwab MarketTrack Growth Portfolio II 3
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO FACTS as of 6/30/06
STYLE ASSESSMENT 1
[GRAPHIC]
INVESTMENT STYLE
Value Blend Growth
MARKET CAP
Large / / /X/ / /
Medium / / / / / /
Small / / / / / /
STATISTICS
NUMBER OF HOLDINGS 507
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE MARKET CAP ($ x 1,000,000) $60,516
- --------------------------------------------------------------------------------
PRICE/EARNINGS RATIO (P/E) 19.0
- --------------------------------------------------------------------------------
PRICE/BOOK RATIO (P/B) 2.6
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 2 32%
- --------------------------------------------------------------------------------
TOP HOLDINGS 3
% OF
SECURITY NET ASSETS
- --------------------------------------------------------------------------------
(1) SCHWAB INSTITUTIONAL SELECT(R)
S&P 500 FUND 23.8%
- --------------------------------------------------------------------------------
(2) SCHWAB INTERNATIONAL INDEX FUND(R),
Select Shares(R) 21.1%
- --------------------------------------------------------------------------------
(3) SCHWAB SMALL-CAP INDEX FUND(R),
Select Shares 20.5%
- --------------------------------------------------------------------------------
(4) SCHWAB TOTAL BOND MARKET FUND(TM) 14.8%
- --------------------------------------------------------------------------------
(5) SCHWAB VALUE ADVANTAGE MONEY FUND(R),
Select Shares 0.7%
- --------------------------------------------------------------------------------
(6) EXXON MOBIL CORP. 0.5%
- --------------------------------------------------------------------------------
(7) GENERAL ELECTRIC CO. 0.4%
- --------------------------------------------------------------------------------
(8) CITIGROUP, INC. 0.3%
- --------------------------------------------------------------------------------
(9) BANK OF AMERICA CORP. 0.3%
- --------------------------------------------------------------------------------
(10) MICROSOFT CORP. 0.3%
- --------------------------------------------------------------------------------
TOTAL 82.7%
ASSET CLASS WEIGHTINGS % of Investments
This chart shows the portfolio's asset class composition as of the report date.
[PIE CHART]
37.6% LARGE-CAP STOCKS
21.0% INTERNATIONAL STOCKS
20.4% SMALL-CAP STOCKS
14.7% BONDS
6.3% 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 6/30/06, 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 (unaudited)
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, 2006 and held
through June 30, 2006.
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 1/1/06 at 6/30/06 1/1/06-6/30/06
- ------------------------------------------------------------------------------------------------------------------------
SCHWAB MARKETTRACK
GROWTH PORTFOLIO II
Actual Return 0.50% $1,000 $1,043.79 $2.53
Hypothetical 5% Return 0.50% $1,000 $1,022.32 $2.51
1 Based on the most recent six-month expense ratio; may differ from the expense
ratio provided in Financial Highlights.
2 Expenses for the portfolio are equal to its annualized expense ratio,
multiplied by the average account value over the period, multiplied by 181
days of the period, and divided by 365 days of the fiscal year.
Schwab MarketTrack Growth Portfolio II 5
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
1/1/06- 1/1/05- 1/1/04- 1/1/03- 1/1/02- 1/1/01-
6/30/06* 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
- ------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 15.53 14.87 13.49 10.75 12.99 14.81
-------------------------------------------------------------------------
Income or loss from investment operations:
Net investment income 0.08 0.24 0.21 0.16 0.17 0.18
Net realized and unrealized gains or losses 0.60 0.62 1.35 2.74 (2.17) (1.43)
-------------------------------------------------------------------------
Total income or loss from investment operations 0.68 0.86 1.56 2.90 (2.00) (1.25)
Less distributions:
Dividends from net investment income -- (0.20) (0.18) (0.16) (0.20) (0.35)
Distributions from net realized gains -- -- -- -- (0.04) (0.22)
-------------------------------------------------------------------------
Total distributions -- (0.20) (0.18) (0.16) (0.24) (0.57)
-------------------------------------------------------------------------
Net asset value at end of period 16.21 15.53 14.87 13.49 10.75 12.99
-------------------------------------------------------------------------
Total return (%) 4.38 2 5.77 11.58 26.97 (15.44) (8.40)
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net operating expenses 1 0.50 3 0.48 0.50 0.50 0.50 0.50
Gross operating expenses 1 0.70 3 0.68 0.69 0.87 1.00 0.82
Net investment income 0.98 3 1.66 1.52 1.70 1.59 1.67
Portfolio turnover rate 32 5 8 10 30 13
Net assets, end of period ($ x 1,000,000) 39 37 34 30 20 22
* Unaudited.
1 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.
2 Not annualized.
3 Annualized.
6 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS as of June 30, 2006 (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 www.sec.gov and may be viewed 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 a fund's most recent Form N-Q is also available by
visiting Schwab's website at www.schwab.com/schwabfunds.
<Table>
<Caption>
COST VALUE
HOLDINGS BY CATEGORY ($x1,000) ($x1,000)
- --------------------------------------------------------------------------------
14.0% COMMON STOCK 3,048 5,471
80.7% OTHER INVESTMENT
COMPANIES 27,041 31,515
5.6% SHORT-TERM
INVESTMENTS 2,155 2,155
0.1% U.S. GOVERNMENT
SECURITIES 45 45
- --------------------------------------------------------------------------------
100.4% TOTAL INVESTMENTS 32,289 39,186
(0.4)% OTHER ASSETS
AND LIABILITIES (148)
- --------------------------------------------------------------------------------
100.0% NET ASSETS 39,038
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
COMMON STOCK 14.0% of net assets
AUTOMOBILES & COMPONENTS 0.1%
- --------------------------------------------------------------------------------
Cooper Tire & Rubber Co. 30 --
Ford Motor Co. 882 6
General Motors Corp. 266 8
Harley-Davidson, Inc. 127 7
Johnson Controls, Inc. 90 8
The Goodyear Tire & Rubber Co. * 84 1
-----------
30
BANKS 1.1%
- --------------------------------------------------------------------------------
AmSouth Bancorp 163 4
Bank of America Corp. 2,196 106
BB&T Corp. 253 11
Comerica, Inc. 78 4
Compass Bancshares, Inc. 59 3
Countrywide Financial Corp. 285 11
Fannie Mae 457 22
Fifth Third Bancorp 262 10
First Horizon National Corp. 60 2
Freddie Mac 326 19
Golden West Financial Corp. 122 9
Huntington Bancshares, Inc. 118 3
KeyCorp 191 7
M&T Bank Corp. 37 4
Marshall & Ilsley Corp. 106 5
MGIC Investment Corp. 42 3
National City Corp. 260 9
North Fork Bancorp, Inc. 226 7
PNC Financial Services
Group, Inc. 138 10
Regions Financial Corp. 215 7
Sovereign Bancorp, Inc. 176 4
SunTrust Banks, Inc. 175 13
Synovus Financial Corp. 149 4
U.S. Bancorp 851 26
Wachovia Corp. 766 41
Washington Mutual, Inc. 469 21
Wells Fargo & Co. 791 53
Zions Bancorp 50 4
-----------
422
CAPITAL GOODS 1.3%
- --------------------------------------------------------------------------------
3M Co. 357 29
American Power Conversion
Corp. 72 1
American Standard Cos., Inc. 85 4
Caterpillar, Inc. 317 24
Cooper Industries Ltd.,
Class A 44 4
Cummins, Inc. 22 3
Danaher Corp. 112 7
Deere & Co. 113 9
Dover Corp. 97 5
Eaton Corp. 71 5
Emerson Electric Co. 194 16
Fluor Corp. 42 4
General Dynamics Corp. 189 12
General Electric Co. 4,931 163
Goodrich Corp. 59 2
Honeywell International, Inc. 393 16
Illinois Tool Works, Inc. 196 9
Ingersoll-Rand Co., Class A 154 7
ITT Industries, Inc. 88 4
L-3 Communications
Holdings, Inc. 58 4
Lockheed Martin Corp. 169 12
Masco Corp. 196 6
Navistar International Corp. * 30 1
Northrop Grumman Corp. 165 11
Paccar, Inc. 81 7
Pall Corp. 60 2
Parker Hannifin Corp. 56 4
</Table>
See financial notes. 7
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS (Unaudited) continued
<Table>
<Caption>
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
Raytheon Co. 212 9
Rockwell Automation, Inc. 83 6
Rockwell Collins, Inc. 82 5
Textron, Inc. 62 6
The Boeing Co. 377 31
Tyco International Ltd. 952 26
United Technologies Corp. 479 30
W.W. Grainger, Inc. 37 3
-----------
487
COMMERCIAL SERVICES & SUPPLIES 0.1%
- --------------------------------------------------------------------------------
Allied Waste Industries, Inc. * 114 1
Avery Dennison Corp. 53 3
Cendant Corp. 477 8
Cintas Corp. 66 3
Equifax, Inc. 62 2
H&R Block, Inc. 155 4
Monster Worldwide, Inc. * 60 3
Pitney Bowes, Inc. 108 5
R.R. Donnelley & Sons Co. 103 3
Robert Half International, Inc. 82 3
Waste Management, Inc. 260 9
-----------
44
CONSUMER DURABLES & APPAREL 0.2%
- --------------------------------------------------------------------------------
Brunswick Corp. 45 1
Centex Corp. 59 3
Coach, Inc. * 180 5
D.R. Horton, Inc. 128 3
Eastman Kodak Co. 134 3
Fortune Brands, Inc. 70 5
Harman International
Industries, Inc. 32 3
Hasbro, Inc. 85 2
Jones Apparel Group, Inc. 55 2
KB Home 37 2
Leggett & Platt, Inc. 87 2
Lennar Corp., Class A 64 3
Liz Claiborne, Inc. 50 2
Mattel, Inc. 182 3
Newell Rubbermaid, Inc. 128 3
Nike, Inc., Class B 89 7
Pulte Homes, Inc. 102 3
Snap-On, Inc. 27 1
The Black & Decker Corp. 36 3
The Stanley Works 35 2
VF Corp. 42 3
Whirlpool Corp. 36 3
-----------
64
CONSUMER SERVICES 0.2%
- --------------------------------------------------------------------------------
Apollo Group, Inc., Class A * 67 3
Carnival Corp. 204 9
Darden Restaurants, Inc. 63 3
Harrah's Entertainment, Inc. 88 6
Hilton Hotels Corp. 155 4
International Game Technology 158 6
Marriott International, Inc.,
Class A 152 6
McDonald's Corp. 593 20
Starbucks Corp. * 360 14
Starwood Hotels & Resorts
Worldwide, Inc. 103 6
Wendy's International, Inc. 55 3
YUM! Brands, Inc. 130 7
-----------
87
DIVERSIFIED FINANCIALS 1.1%
- --------------------------------------------------------------------------------
American Express Co. 584 31
Ameriprise Financial, Inc. 118 5
Capital One Financial Corp. 142 12
CIT Group, Inc. 95 5
Citigroup, Inc. 2,360 114
E*TRADE Financial Corp. * 197 5
Federated Investors, Inc.,
Class B 40 1
Franklin Resources, Inc. 72 6
Janus Capital Group, Inc. 102 2
JPMorgan Chase & Co. 1,648 69
Legg Mason, Inc. 59 6
Lehman Brothers Holdings, Inc. 350 23
Mellon Financial Corp. 197 7
Merrill Lynch & Co., Inc. 434 30
Moody's Corp. 116 6
Morgan Stanley 507 32
Northern Trust Corp. 87 5
SLM Corp. 197 10
State Street Corp. 157 9
T. Rowe Price Group, Inc. 126 5
The Bank of New York Co., Inc. 64 12
The Bear Stearns Cos., Inc. 56 8
The Charles Schwab Corp. (a) 487 8
The Goldman Sachs Group, Inc. 206 31
-----------
442
ENERGY 1.4%
- --------------------------------------------------------------------------------
Anadarko Petroleum Corp. 220 11
Apache Corp. 156 11
</Table>
8 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS (Unaudited) continued
<Table>
<Caption>
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
Baker Hughes, Inc. 161 13
BJ Services Co. 154 6
Chesapeake Energy Corp. 176 5
ChevronTexaco Corp. 1,052 65
ConocoPhillips 779 51
Devon Energy Corp. 210 13
El Paso Corp. 310 5
EOG Resources, Inc. 114 8
Exxon Mobil Corp. 2,888 177
Halliburton Co. 244 18
Hess Corp. 111 6
Kerr-McGee Corp. 108 7
Kinder Morgan, Inc. 49 5
Marathon Oil Corp. 173 14
Murphy Oil Corp. 79 4
Nabors Industries, Ltd. * 149 5
National-Oilwell Varco, Inc. * 82 5
Noble Corp. 64 5
Occidental Petroleum Corp. 203 21
Rowan Cos., Inc. 52 2
Schlumberger Ltd. 558 36
Sunoco, Inc. 64 4
Transocean, Inc. * 154 12
Valero Energy Corp. 294 20
Weatherford International, Ltd. * 166 8
Williams Cos., Inc. 282 7
XTO Energy, Inc. 171 8
-----------
552
FOOD & STAPLES RETAILING 0.3%
- --------------------------------------------------------------------------------
Costco Wholesale Corp. 223 13
CVS Corp. 385 12
Safeway, Inc. 212 5
Supervalu, Inc. 96 3
Sysco Corp. 293 9
The Kroger Co. 343 8
Wal-Mart Stores, Inc. 1,181 57
Walgreen Co. 477 21
Whole Foods Market, Inc. 66 4
Winn-Dixie Stores, Inc. * 100 --
-----------
132
FOOD, BEVERAGE & TOBACCO 0.7%
- --------------------------------------------------------------------------------
Altria Group, Inc. 986 72
Anheuser-Busch Cos., Inc. 366 17
Archer-Daniels-Midland Co. 309 13
Brown-Forman Corp., Class B 40 3
Campbell Soup Co. 88 3
Coca-Cola Enterprises, Inc. 144 3
ConAgra Foods, Inc. 245 5
Constellation Brands, Inc.,
Class A * 94 2
Dean Foods Co. * 65 2
General Mills, Inc. 168 9
H.J. Heinz Co. 158 6
Kellogg Co. 118 6
McCormick & Co., Inc. 63 2
Molson Coors Brewing Co.,
Class B 25 2
PepsiCo, Inc. 782 47
Reynolds American, Inc. 40 5
Sara Lee Corp. 358 6
The Coca-Cola Co. 973 42
The Hershey Co. 84 5
The Pepsi Bottling Group, Inc. 63 2
Tyson Foods, Inc., Class A 99 1
UST, Inc. 78 4
Wm. Wrigley Jr. Co., Class A 105 5
-----------
262
HEALTH CARE EQUIPMENT & SERVICES 0.6%
- --------------------------------------------------------------------------------
Aetna, Inc. 268 11
AmerisourceBergen Corp. 98 4
Bausch & Lomb, Inc. 26 1
Baxter International, Inc. 305 11
Becton Dickinson & Co. 118 7
Biomet, Inc. 118 4
Boston Scientific Corp. * 544 9
C.R. Bard, Inc. 50 4
Cardinal Health, Inc. 199 13
Caremark Rx, Inc. 212 11
CIGNA Corp. 58 6
Coventry Health Care, Inc. * 75 4
Express Scripts, Inc. * 70 5
HCA, Inc. 194 8
Health Management Associates,
Inc., Class A 114 2
Hospira, Inc. * 77 3
Humana, Inc. * 78 4
IMS Health, Inc. 95 2
Laboratory Corp. of America
Holdings * 60 4
Manor Care, Inc. 38 2
McKesson Corp. 144 7
Medco Health Solutions, Inc. * 145 8
Medtronic, Inc. 570 27
</Table>
See financial notes. 9
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS (Unaudited) continued
<Table>
<Caption>
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
Patterson Cos., Inc. * 66 2
Quest Diagnostics 76 4
St. Jude Medical, Inc. * 173 6
Stryker Corp. 139 6
Tenet Healthcare Corp. * 223 1
UnitedHealth Group, Inc. 640 29
WellPoint, Inc. * 311 23
Zimmer Holdings, Inc. * 118 7
-----------
235
HOUSEHOLD & PERSONAL PRODUCTS 0.3%
- --------------------------------------------------------------------------------
Alberto-Culver Co., Class B 36 2
Avon Products, Inc. 213 7
Clorox Co. 72 4
Colgate-Palmolive Co. 242 15
Kimberly-Clark Corp. 218 13
Procter & Gamble Co. 1,555 87
The Estee Lauder Cos., Inc.,
Class A 57 2
-----------
130
INSURANCE 0.7%
- --------------------------------------------------------------------------------
ACE Ltd. 152 8
AFLAC, Inc. 235 11
Ambac Financial Group, Inc. 49 4
American International Group,
Inc. 1,227 72
AON Corp. 153 5
Cincinnati Financial Corp. 83 4
Genworth Financial, Inc.,
Class A 179 6
Lincoln National Corp. 134 8
Loews Corp. 195 7
Marsh & McLennan Cos., Inc. 258 7
MBIA, Inc. 64 4
Metlife, Inc. 357 18
Principal Financial Group, Inc. 132 7
Prudential Financial, Inc. 234 18
SAFECO Corp. 59 3
The Allstate Corp. 304 17
The Chubb Corp. 190 9
The Hartford Financial Services
Group, Inc. 144 12
The Progressive Corp. 375 10
The St. Paul Travelers Cos., Inc. 328 15
Torchmark Corp. 50 3
UnumProvident Corp. 142 3
XL Capital Ltd., Class A 83 5
-----------
256
MATERIALS 0.4%
- --------------------------------------------------------------------------------
Air Products & Chemicals, Inc. 106 7
Alcoa, Inc. 411 13
Allegheny Technologies, Inc. 40 3
Ashland, Inc. 34 2
Ball Corp. 50 2
Bemis Co. 50 2
E.I. du Pont de Nemours & Co. 434 18
Eastman Chemical Co. 39 2
Ecolab, Inc. 87 3
Freeport-McMoran Copper &
Gold, Inc., Class B 88 5
Hercules, Inc. * 54 1
International Flavors &
Fragrances, Inc. 38 1
International Paper Co. 233 8
Louisiana-Pacific Corp. 51 1
MeadWestvaco Corp. 86 2
Monsanto Co. 127 11
Newmont Mining Corp. 210 11
Nucor Corp. 146 8
Pactiv Corp. * 68 2
Phelps Dodge Corp. 97 8
PPG Industries, Inc. 79 5
Praxair, Inc. 152 8
Rohm & Haas Co. 69 3
Sealed Air Corp. 39 2
Sigma-Aldrich Corp. 39 3
Temple-Inland, Inc. 53 2
The Dow Chemical Co. 456 18
United States Steel Corp. 52 4
Vulcan Materials Co. 48 4
Weyerhaeuser Co. 116 7
-----------
166
MEDIA 0.5%
- --------------------------------------------------------------------------------
CBS Corp., Class B 995 27
Clear Channel Communications,
Inc. 244 7
Comcast Corp., Class A * 1,010 33
Dow Jones & Co., Inc. 28 1
Gannett Co., Inc. 112 6
Interpublic Group of Cos.,
Inc. * 204 2
McGraw-Hill Cos., Inc. 173 9
Meredith Corp. 20 1
New York Times Co., Class A 74 2
News Corp., Class A 1,134 22
Omnicom Group, Inc. 84 7
The E.W. Scripps Co., Class A 41 2
</Table>
10 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS (Unaudited) continued
<Table>
<Caption>
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
The McClatchy Co., Class A 16 1
The Walt Disney Co. 911 27
Time Warner, Inc. 2,130 37
Tribune Co. 123 4
Univision Communications, Inc.,
Class A * 105 3
Viacom, Inc., Class B * 365 13
-----------
204
PHARMACEUTICALS & BIOTECHNOLOGY 1.1%
- --------------------------------------------------------------------------------
Abbott Laboratories 728 32
Allergan, Inc. 71 8
Amgen, Inc. * 552 36
Applera Corp. - Applied
Biosystems Group 87 3
Barr Pharmaceuticals, Inc. * 50 2
Biogen Idec, Inc. * 162 8
Bristol-Myers Squibb Co. 925 24
Eli Lilly & Co. 534 30
Fisher Scientific International,
Inc. * 59 4
Forest Laboratories, Inc. * 155 6
Genzyme Corp. * 122 7
Gilead Sciences, Inc. * 218 13
Johnson & Johnson 1,407 84
King Pharmaceuticals, Inc. * 115 2
MedImmune, Inc. * 120 3
Merck & Co., Inc. 1,033 38
Millipore Corp. * 25 2
Mylan Laboratories, Inc. 104 2
PerkinElmer, Inc. 62 1
Pfizer, Inc. (b) 3,480 82
Schering-Plough Corp. 701 13
Thermo Electron Corp. * 77 3
Waters Corp. * 49 2
Watson Pharmaceuticals, Inc. * 49 1
Wyeth 635 28
-----------
434
REAL ESTATE 0.1%
- --------------------------------------------------------------------------------
Apartment Investment &
Management Co., Class A 46 2
Archstone-Smith Trust 100 5
Boston Properties, Inc. 43 4
Equity Office Properties Trust 174 6
Equity Residential 137 6
Kimco Realty Corp. 100 4
Plum Creek Timber Co., Inc. 88 3
ProLogis 115 6
Public Storage, Inc. 40 3
Simon Property Group, Inc. 86 7
Vornado Realty Trust 57 6
-----------
52
RETAILING 0.5%
- --------------------------------------------------------------------------------
Amazon.com, Inc. * 146 6
AutoNation, Inc. * 70 2
AutoZone, Inc. * 27 2
Bed, Bath & Beyond, Inc. * 132 4
Best Buy Co., Inc. 192 11
Big Lots, Inc. * 88 2
Circuit City Stores, Inc. 73 2
Dillard's, Inc. 30 1
Dollar General Corp. 150 2
eBay, Inc. * 544 16
Family Dollar Stores, Inc. 74 2
Federated Department Stores,
Inc. 256 9
Genuine Parts Co. 81 3
Home Depot, Inc. 1,004 36
J.C. Penney Co., Inc. 109 7
Kohl's Corp. * 164 10
Limited Brands, Inc. 165 4
Lowe's Cos., Inc. 368 22
Nordstrom, Inc. 103 4
Office Depot, Inc. * 139 5
OfficeMax, Inc. 34 1
RadioShack Corp. 11 --
Sears Holdings Corp. * 48 8
Staples, Inc. 343 8
Target Corp. 416 20
The Gap, Inc. 270 5
The Sherwin-Williams Co. 53 3
The TJX Cos., Inc. 217 5
Tiffany & Co. 68 2
-----------
202
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.4%
- --------------------------------------------------------------------------------
Advanced Micro Devices, Inc. * 227 5
Altera Corp. * 171 3
Analog Devices, Inc. 174 5
Applied Materials, Inc. 749 12
Applied Micro Circuits Corp. * 221 1
Broadcom Corp., Class A * 208 6
Freescale Semiconductor, Inc.,
Class B * 195 6
Intel Corp. 2,782 53
KLA-Tencor Corp. 95 4
</Table>
See financial notes. 11
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS (Unaudited) continued
<Table>
<Caption>
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
Linear Technology Corp. 144 5
LSI Logic Corp. * 186 2
Maxim Integrated Products, Inc. 151 5
Micron Technology, Inc. * 318 5
National Semiconductor Corp. 159 4
Novellus Systems, Inc. * 64 1
NVIDIA Corp. * 161 3
PMC - Sierra, Inc. * 88 1
Teradyne, Inc. * 94 1
Texas Instruments, Inc. 756 23
Xilinx, Inc. 164 4
-----------
149
SOFTWARE & SERVICES 0.7%
- --------------------------------------------------------------------------------
Adobe Systems, Inc. * 283 9
Affiliated Computer Services,
Inc., Class A * 55 3
Autodesk, Inc. * 110 4
Automatic Data Processing, Inc. 274 13
BMC Software, Inc. * 101 2
CA, Inc. 215 5
Citrix Systems, Inc. * 85 3
Computer Sciences Corp. * 89 4
Compuware Corp. * 182 1
Convergys Corp. * 67 1
Electronic Arts, Inc. * 143 6
Electronic Data Systems Corp. 243 6
First Data Corp. 362 16
Fiserv, Inc. * 88 4
Google, Inc., Class A * 96 40
Intuit, Inc. * 83 5
Microsoft Corp. (b) 4,203 98
Novell, Inc. * 185 1
Oracle Corp. * 1,783 26
Parametric Technology Corp. * 53 1
Paychex, Inc. 159 6
Sabre Holdings Corp., Class A 63 1
Symantec Corp. * 492 8
Unisys Corp. * 162 1
VeriSign, Inc. * 116 3
Yahoo! Inc. * 597 20
-----------
287
TECHNOLOGY HARDWARE & EQUIPMENT 0.9%
- --------------------------------------------------------------------------------
ADC Telecommunications, Inc. * 56 1
Agilent Technologies, Inc. * 202 6
Andrew Corp. * 76 1
Apple Computer, Inc. * 402 23
Avaya, Inc. * 198 2
CIENA Corp. * 276 1
Cisco Systems, Inc. * 2,909 57
Comverse Technology, Inc. * 96 2
Corning, Inc. * 731 18
Dell, Inc. * 1,113 27
EMC Corp. * 1,124 12
Gateway, Inc. * 200 1
Hewlett-Packard Co. 1,337 43
International Business
Machines Corp. 741 57
Jabil Circuit, Inc. 83 2
JDS Uniphase Corp. * 794 2
Juniper Networks, Inc. * 200 3
Lexmark International, Inc.,
Class A * 52 3
Lucent Technologies, Inc. * 2,113 5
Molex, Inc. 68 2
Motorola, Inc. 1,181 24
NCR Corp. * 87 3
Network Appliance, Inc. * 178 6
QLogic Corp. * 76 1
Qualcomm, Inc. 783 31
SanDisk Corp. * 88 5
Sanmina -- SCI Corp. * 252 1
Solectron Corp. * 433 2
Sun Microsystems, Inc. * 1,636 7
Symbol Technologies, Inc. 120 1
Tektronix, Inc. 39 1
Tellabs, Inc. * 214 3
Xerox Corp. * 440 6
-----------
359
TELECOMMUNICATION SERVICES 0.5%
- --------------------------------------------------------------------------------
Alltel Corp. 183 12
AT&T Corp. 1,834 51
BellSouth Corp. 849 31
CenturyTel, Inc. 55 2
Citizens Communications Co. 156 2
Embarq Corp * 70 3
Qwest Communications
International, Inc. * 734 6
Sprint Nextel Corp. 1,404 28
Verizon Communications, Inc. 1,383 46
-----------
181
TRANSPORTATION 0.3%
- --------------------------------------------------------------------------------
Burlington Northern Santa
Fe Corp. 175 14
CSX Corp. 103 7
Delta Air Lines, Inc. * 100 --
FedEx Corp. 143 17
</Table>
12 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
PORTFOLIO HOLDINGS (Unaudited) continued
<Table>
<Caption>
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
Norfolk Southern Corp. 195 10
Ryder System, Inc. 29 2
Southwest Airlines Co. 335 6
Union Pacific Corp. 125 12
United Parcel Service, Inc.,
Class B 515 42
-----------
110
UTILITIES 0.5%
- --------------------------------------------------------------------------------
Allegheny Energy, Inc. * 78 3
Ameren Corp. 96 5
American Electric Power Co.,
Inc. 187 6
CenterPoint Energy, Inc. 147 2
CMS Energy Corp. * 105 1
Consolidated Edison, Inc. 117 5
Constellation Energy Group,
Inc. 85 5
Dominion Resources, Inc. 164 12
DTE Energy Co. 85 3
Duke Energy Corp. 585 17
Dynegy, Inc., Class A * 143 1
Edison International 155 6
Entergy Corp. 98 7
Exelon Corp. 314 18
FirstEnergy Corp. 157 9
FPL Group, Inc. 190 8
KeySpan Corp. 83 3
Nicor, Inc. 32 1
NiSource, Inc. 130 3
Peoples Energy Corp. 19 1
PG&E Corp. 163 6
Pinnacle West Capital Corp. 47 2
PPL Corp. 179 6
Progress Energy, Inc. 120 5
Public Service Enterprise
Group, Inc. 118 8
Sempra Energy 123 6
TECO Energy, Inc. 99 1
The AES Corp. * 310 6
The Southern Co. 349 11
TXU Corp. 217 13
Xcel Energy, Inc. 192 4
-----------
184
</Table>
<Table>
<Caption>
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
OTHER INVESTMENT COMPANIES 80.7% of net assets
Schwab Institutional Select
S&P 500 Fund,
Select Shares (a) 920,990 9,274
Schwab International Index
Fund, Select Shares (a),(b) 420,294 8,225
Schwab Small-Cap Index
Fund, Select Shares (a) 325,458 7,990
Schwab Total Bond Market
Fund (a) 601,781 5,771
Schwab Value Advantage
Money Fund, Select
Shares (a) 254,860 255
-----------
31,515
</Table>
<Table>
<Caption>
FACE AMOUNT VALUE
SECURITY ($ X 1,000) ($ X 1,000)
SHORT-TERM INVESTMENTS 5.6% of net assets
Brown Brothers Harriman & Co.
Cash Management Sweep 2,155 2,155
</Table>
<Table>
<Caption>
SECURITY FACE AMOUNT VALUE
RATE, MATURITY DATE ($ X 1,000) ($ X 1,000)
U.S. GOVERNMENT SECURITIES 0.1% of net assets
U.S. Treasury Bill
4.71%, 09/14/06 45 45
</Table>
END OF INVESTMENTS.
At 06/30/2006, the tax basis cost of the fund's investments was $32,596 and the
unrealized appreciation and depreciation were $7,083 and ($493), respectively,
with a net unrealized appreciation of $6,590.
In addition to the above, the fund held the following at 06/30/2006. All numbers
are x 1,000 except number of futures contracts.
<Table>
<Caption>
NUMBER OF CONTRACT UNREALIZED
CONTRACTS VALUE GAINS
FUTURES CONTRACT 1.0% of net assets
S & P Mini 500 Index
Future, Long Expires
09/15/06 6 384 9
</Table>
* Non-income producing security.
(a) Issuer is affiliated with the fund's adviser.
(b) All or a portion of this security is held as collateral for open futures
contracts.
See financial notes. 13
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
Statement of
ASSETS AND LIABILITIES
As of June 30, 2006; unaudited. All numbers x 1,000 except NAV.
ASSETS
- --------------------------------------------------------------------------------
Investments in affiliated underlying funds, at value (cost $27,041) $31,515
Investments, at value (cost $5,248) 7,671
Receivables:
Fund shares sold 36
Dividends + 32
----------
TOTAL ASSETS 39,254
LIABILITIES
- --------------------------------------------------------------------------------
Payables:
Fund shares redeemed 175
Investments bought 27
Due to brokers for futures 1
Investment adviser and administrator fees 1
Accrued expenses + 12
----------
TOTAL LIABILITIES 216
NET ASSETS
- --------------------------------------------------------------------------------
Total assets 39,254
Total liabilities - 216
----------
NET ASSETS $39,038
NET ASSETS BY SOURCE
Capital received from investors 31,319
Net investment income not yet distributed 761
Net realized capital gains 52
Net unrealized capital gains 6,906
NET ASSET VALUE (NAV)
SHARES
NET ASSETS / OUTSTANDING = NAV
$39,038 2,409 $16.21
14 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
Statement of
OPERATIONS
For January 1, 2006 through June 30, 2006; unaudited. All numbers x 1,000.
INVESTMENT INCOME
- --------------------------------------------------------------------------------
Dividends received from affiliated underlying funds $132
Dividends 136
Interest + 12
----------
TOTAL INVESTMENT INCOME $280
NET REALIZED GAINS AND LOSSES
- --------------------------------------------------------------------------------
Net realized losses on sales of affiliated issuers (5)
Net realized gains received from affiliated underlying funds 36
Net realized gains on investments 929
Net realized losses on futures contracts + (31)
----------
NET REALIZED GAINS 929
NET UNREALIZED GAINS AND LOSSES
- --------------------------------------------------------------------------------
Net unrealized losses on investments (401)
Net unrealized gains on affiliated funds 822
Net unrealized gains on futures contracts + 9
----------
NET UNREALIZED GAINS 430
EXPENSES
- --------------------------------------------------------------------------------
Investment adviser and administrator fees 84
Trustees' fees 8
Custodian fees 3
Portfolio accounting fees 8
Professional fees 15
Registration fees 1
Shareholder reports 11
Other expenses + 2
----------
Total expenses 132
Expense reduction - 37
----------
NET EXPENSES 95
INCREASE IN NET ASSETS FROM OPERATIONS
- --------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 280
NET EXPENSES - 95
----------
NET INVESTMENT INCOME 185
NET REALIZED GAINS 929
NET UNREALIZED GAINS + 430
----------
INCREASE IN NET ASSETS FROM OPERATIONS $1,544
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
- -------------------------------------------------------------------------------------------
1/1/06-6/30/06 1/1/05-12/31/05
Net investment income $185 $576
Net realized gains 929 156
Net unrealized gains + 430 1,255
-----------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 1,544 1,987
DISTRIBUTIONS PAID
- -------------------------------------------------------------------------------------------
Dividends from net investment income -- 466
TRANSACTIONS IN FUND SHARES
- -------------------------------------------------------------------------------------------
1/1/06-6/30/06 1/1/05-12/31/05
SHARES VALUE SHARES VALUE
Shares sold 316 $5,152 339 $5,081
Shares reinvested -- -- 29 466
Shares redeemed + (273) (4,407) (278) (4,162)
----------------------------------------------
NET TRANSACTIONS IN FUND SHARES 43 $745 90 $1,385
SHARES OUTSTANDING AND NET ASSETS
- -------------------------------------------------------------------------------------------
SHARES NET ASSETS SHARES NET ASSETS
Beginning of period 2,366 $36,749 2,276 $33,843
Total increase + 43 2,289 90 2,906
----------------------------------------------
END OF PERIOD 2,409 $39,038 2,366 $36,749
Net investment income not yet distributed $761 $576
16 See financial notes.
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
FINANCIAL NOTES, unaudited.
Unless stated, all dollar amounts are x 1,000.
1. BUSINESS STRUCTURE OF THE FUND
Schwab MarketTrack Growth Portfolio II 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 list below shows all the funds in the trust including
the fund in this report, which is highlighted:
SCHWAB ANNUITY PORTFOLIOS
Organized January 21, 1994
Schwab Money Market Portfolio
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
Schwab S&P 500 Index Portfolio
Schwab MarketTrack Growth Portfolio II offers one share class. Shares are bought
and sold at net asset value, or NAV, which is the price for all outstanding
shares. Each share has a par value of 1/1,000 of a cent, and the trustees 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.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies the fund uses
in its operations and in the preparation of financial statements:
(A) SECURITY VALUATION:
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 QUOTED VALUE IS AVAILABLE OR WHEN A SIGNIFICANT EVENT
HAS OCCURRED BETWEEN THE TIME OF THE SECURITY'S LAST CLOSE AND THE TIME THE
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 a 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 Investment Company Act of 1940.
17
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- - SHORT-TERM SECURITIES (60 DAYS OR LESS TO MATURITY): valued at amortized cost.
(B) PORTFOLIO INVESTMENTS:
FUTURES CONTRACT: 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. The potential for losses associated with futures contracts may
exceed amounts recorded in the Statement of Assets and Liabilities.
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 the
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 ("due to/from broker").
(C) SECURITY TRANSACTIONS:
Security transactions are recorded as of the date the order to buy or sell the
security is executed. 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.
For the period ended June 30, 2006, purchases and sales of securities (excluding
short-term obligations) were as follows:
PURCHASES SALES/MATURITIES
--------- ----------------
$11,743 $12,335
(D) INCOME, EXPENSES AND DISTRIBUTIONS:
Income from interest and the accretion of discount is recorded as it accrues.
Dividends and distributions from portfolio securities and underlying funds 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.
Expenses that are specific to a 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 pays dividends from net investment income and makes distributions from
net realized capital gains once a year.
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.
18
SCHWAB MARKETTRACK GROWTH PORTFOLIO II
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) BORROWING:
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 $100 million with PNC Bank, N.A., and Bank of America, N.A.,
respectively. The fund pays interest on the amounts it borrows at rates that are
negotiated periodically.
AMOUNT
OUTSTANDING AVERAGE WEIGHTED
AT 6/30/06 BORROWING* AVERAGE INTEREST
($ X 1000) ($ X 1000) RATE* (%)
---------- ---------- ---------
Schwab MarketTrack Growth Portfolio II -- 329 5.24
* Based on the number of days for which the borrowing is outstanding.
(F) ACCOUNTING ESTIMATES:
The accounting policies described in this report 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.
(G) INDEMNIFICATION:
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.
3. AFFILIATES AND AFFILIATED TRANSACTIONS
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, serves as the fund's
investment adviser and administrator pursuant to an Investment Advisory and
Administration Agreement (Advisory Agreement) between it and the trust. Charles
Schwab & Co., Inc. ("Schwab") is an affiliate of the investment adviser and is
the trust's shareholder services agent and transfer agent.
For its advisory and the administrative services to the fund, the investment
adviser is entitled to receive an annual fee payable monthly based on the fund's
average daily net assets described as follows:
AVERAGE DAILY NET ASSETS
------------------------
First $500 million 0.44%
Over $500 million 0.39%
Schwab does not charge the fund for transfer agent and shareholder services
fees.
Although these agreements specify certain fees for these services, CSIM and
Schwab have made additional agreements with the fund to limit the total expenses
charged, excluding interest, taxes and certain non-routine expenses to 0.50%
through April 29, 2007.
19
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
3. AFFILIATES AND AFFILIATED TRANSACTIONS (CONTINUED)
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 an index which the fund uses as part of an indexing
strategy. Pursuant to an exemptive order issued by the SEC, the fund may invest
in other related funds. As of June 30, 2006, the shares owned by the fund as a
percentage of the total shares of the underlying funds is:
SCHWAB EQUITY INDEX FUNDS
Institutional Select S&P 500 Fund 0.6%
International Index Fund 0.5%
Small-Cap Index Fund 0.5%
SCHWAB BOND FUNDS
Total Bond Market Fund 0.5%
SCHWAB MONEY FUNDS
Value Advantage Money Fund less than 0.1%
The fund may make direct transactions with certain other Schwab Funds 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. For the period ended June 30, 2006,
the fund had no security transactions with other Schwab Funds.
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.
There was no interfund borrowing or lending activity for the fund during the
period.
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.
4. FEDERAL INCOME TAXES
The fund intends to meet federal income and excise tax requirements for
regulated investment companies. Accordingly, the fund distributes substantially
all of its net investment income and realized net capital gains (if any) to the
participating insurance company separate accounts each year. The net investment
income and realized capital gains and losses may differ for financial statement
and tax purposes primarily due to differing treatments of losses on wash sales.
As long as the fund meets the tax requirements, it is not required to pay
federal income tax.
As of December 31, 2005, the components of distributable earnings on a tax basis
were as follows:
Ordinary income $576
Long-term capital gains --
20 Schwab MarketTrack Portfolios(R)
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
4. FEDERAL INCOME TAXES (CONTINUED)
As of December 31, 2005, the fund had capital loss carry forwards available to
offset future net capital gains before the expiration dates:
EXPIRE
2010 $293
2011 200
2012 103
----
Total $596
====
The tax-basis components of distributions for the fiscal year ended December 31,
2005 were:
From ordinary income $466
From long-term capital gains --
From return of capital --
The permanent book and tax basis differences may result in reclassifications
between capital account and other accounts as required. The adjustments will
have no impact on net assets or the results of operations. As of December 31,
2005, the fund made the following reclassifications:
Capital received from investors $2
Net realized capital losses ($2)
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, including 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.
The Board, including a majority of the Independent Trustees, considered
information specifically relating to the continuance of the Agreement at
meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the
renewal of the Agreement for an additional one year term at the meeting held on
June 12, 2006. The Board's approval of the Agreement was based on consideration
and evaluation of a variety of specific factors discussed at these meetings 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 Charles Schwab & Co.,
Inc. ("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
information considered by the trustees included specific information
concerning changes in the nature, extent and quality of services provided by
CSIM since the trustees had last considered approval of the Agreement. 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, when
applicable, 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 and the appropriateness of
the benchmark used to compare the performance of each fund. The trustees
further considered the level of fund performance in the context of its review
of fund expenses and adviser profitability discussed below. 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 historical practice of
voluntarily waiving 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, but, with respect to such other types of
accounts, accorded less weight to such comparisons due to the different
legal, regulatory, compliance and operating features of mutual funds as
compared to these 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
23
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. The Board also considered information relating to changes to
CSIM's cost structure, including cost savings, technology investments and
increased operating efficiencies and how these changes affected CSIM's
profitability under the Agreement. 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.
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 that include lower fees at
higher graduated asset levels. The Board also considered certain commitments
by CSIM and Schwab that are designed to pass along potential economies of
scale to fund shareholders. Specifically, the Board considered CSIM and
Schwab's commitments, which may be changed only with Board approval: (i) to
reduce contractual advisory fees or add breakpoints for certain funds, and
(ii) to implement, by means of expense limitation agreement, reductions in
net overall expenses for certain funds. Based on this evaluation, and in
consideration of the commitments made by CSIM and Schwab as discussed above,
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
The tables below give information about the trustees and officers for The Schwab
Annuity Portfolios, which includes the fund covered in this report. The "Fund
Complex" includes The Charles Schwab Family of Funds, Schwab Investments, Schwab
Capital Trust, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable
Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and
Excelsior Funds Trust. As of June 30, 2006, the Fund Complex included 98 funds.
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.
INDEPENDENT TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF
AND POSITION(S) WITH PORTFOLIOS IN
THE TRUST; (TERM OF FUND COMPLEX
OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY
TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
MARIANN BYERWALTER Chairman of JDN Corporate 98 Board 1--Director, Redwood Trust, Inc.
1960 Advisory LLC. From 1996 to Board 2--Director, PMI Group, Inc.
Trustee 2001, Vice President for
(Trustee of The Schwab Business Affairs and Chief
Annuity Portfolios since Financial Officer of Stanford
2000.) University, and in 2001,
Special Advisor to the
President of Stanford
University.
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD F. DORWARD Chief Executive Officer, 57 None.
1931 Dorward & Associates (corporate
Trustee management,marketing and
(Trustee of The Schwab communications consulting
Annuity Portfolios since firm). From 1996-1999,
1989.) Executive Vice President and
Managing Director, Grey
Advertising. Prior to 1996,
President and Chief Executive
Officer, Allen & Dorward
Advertising.
- ------------------------------------------------------------------------------------------------------------------------------------
WILLIAM A. HASLER Retired. Dean Emeritus, Haas 98 Board 1--Director, Aphton Corp.
1941 School of Business, University Board 2--Director, Mission West Properties
Trustee of California,Berkeley. Until Board 3--Director, TOUSA
(Trustee of The Schwab February 2004, Co-Chief Board 4--Director, Stratex Networks
Annuity Portfolios since Executive Officer, Aphton Board 5--Director, Genitope Corp.
2000.) Corp.(bio-pharmaceuticals). Board 6--Director & Non-Executive
Prior to August 1998, Dean of Chairman, Solectron Corp.
the Haas School of Business, Board 7--Director, Ditech Communications Corp.
University of California,
Berkeley (higher education).
25
INDEPENDENT TRUSTEES continued
NAME, YEAR OF BIRTH, NUMBER OF
AND POSITION(S) WITH PORTFOLIOS IN
THE TRUST; (TERM OF FUND COMPLEX
OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY
TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT G. HOLMES Chairman, Chief Executive 57 None.
1931 Officer and Director, Semloh
Trustee Financial, Inc. (international
(Trustee of The Schwab financial services and
Annuity Portfolios since investment advisory firm).
1989.)
- ------------------------------------------------------------------------------------------------------------------------------------
GERALD B. SMITH Chairman and Chief Executive 57 Board 1--Board of Cooper Industries
1950 Officer and founder of Smith Board 2--Chairman of the Audit
Trustee Graham & Co. (investment Committee of Northern Border Partners,
(Trustee of The Schwab advisors). M.L.P.
Annuity Portfolios since
2000.)
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD R. STEPHENS Managing Partner, D.R. 57 None.
1938 Stephens & Company
Trustee (investments). Prior to 1996,
(Trustee of The Schwab Chairman and Chief Executive
Annuity Portfolios since Officer of North American
1989.) Trust (real estate investment
trust).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL W. WILSEY Chairman and Chief Executive 57 None.
1943 Officer, Wilsey Bennett, Inc.
Trustee (real estate investment and
(Trustee of The Schwab management, and other
Annuity Portfolios since investments).
1989.)
26
INTERESTED TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF
AND POSITION(S) WITH PORTFOLIOS IN
THE TRUST; (TERM OF FUND COMPLEX
OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY
TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES R. SCHWAB 2 Chairman, Chief Executive 57 None.
1937 Officer and Director, The
Chairman and Trustee Charles Schwab Corporation,
(Chairman and Trustee Charles Schwab & Co.,Inc.;
of The Schwab Annuity Chairman and Director,
Portfolios since 1989.) Charles Schwab Investment
Management, Inc., Charles
Schwab Bank, N. A.; Chairman
and Chief Executive Officer,
Schwab (SIS) Holdings Inc. I,
Schwab International Holdings,
Inc.; Chief Executive Officer
and Director, Schwab Holdings,
Inc.; Director, U.S. Trust
Company, N. A., U.S. Trust
Corporation, United States
Trust Company of New York.
Until May 2003, Co-Chief
Executive Officer, The Charles
Schwab Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
RANDALL W. MERK 2 Executive Vice President 98 None.
1954 and President, Schwab
Trustee Financial Products, Charles
(Trustee of The Schwab Schwab & Co.,Inc.; Director,
Annuity Portfolios since Charles Schwab Asset Management
2005.) (Ireland) Limited and Charles
Schwab Worldwide Funds PLC.
From September 2002 to July
2004, Chief Executive Officer
and President, Charles
Schwab Investment Management,
Inc. and Executive Vice
President, Charles Schwab
& Co., Inc. Prior to September
2002, President and Chief
Investment Officer, American
Century Investment Management,
and Director, American Century
Companies, Inc.
27
OFFICERS OF THE TRUST
NAME, YEAR OF BIRTH, AND POSITION(S)
WITH THE TRUST; (TERM OF OFFICE, AND
LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
EVELYN DILSAVER President, Chief Executive Officer, and Director, Charles Schwab Investment
1955 Management, Inc.; Executive Vice President, Charles Schwab & Co., Inc; President
President and Chief Executive Officer and Chief Executive Officer, Laudus Trust and Laudus Variable Insurance Trust;
(Officer of The Schwab Annuity President, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior
Portfolios since 2004.) Funds Trust; President, Mutual Fund Division, UST Advisers, Inc. From June 2003
to July 2004, Senior Vice President, Asset Management Products and Services,
Charles Schwab & Co., Inc. Prior to June 2003, Executive Vice President, Chief
Financial Officer, and Chief Administrative Officer, U.S. Trust, a subsidiary of The
Charles Schwab Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
STEPHEN B. WARD Director, Senior Vice President and Chief Investment Officer, Charles Schwab
1955 Investment Management, Inc.; Chief Investment Officer, The Charles Schwab
Senior Vice President and Chief Trust Company.
Investment Officer
(Officer of The Schwab Annuity
Portfolios since 1991.)
- ------------------------------------------------------------------------------------------------------------------------------------
GEORGE PEREIRA Senior Vice President and Chief Financial Officer, Charles Schwab Investment
1964 Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable
Treasurer and Principal Financial Officer Insurance Trust; Chief Financial Officer and Chief Accounting Officer, Excelsior
(Officer of The Schwab Annuity Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief
Portfolios since 2004.) Financial Officer, Mutual Fund Division, UST Advisors, Inc. Director, Charles
Schwab Worldwide Fund, PLC and Charles Schwab Asset Management (Ireland)
Limited. From December 1999 to November 2004, Sr. Vice President,
Financial Reporting, Charles Schwab & Co., Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
KIMON DAIFOTIS Senior Vice President and Chief Investment Officer--Fixed Income, Charles
1959 Schwab Investment Management, Inc. Prior to 2004, Vice President and Sr.
Senior Vice President and Chief Portfolio Manager, Charles Schwab Investment Management, Inc.
Investment Officer--Fixed Income
(Officer of The Schwab Annuity
Portfolios since 2004.)
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY MORTIMER Senior Vice President and Chief Investment Officer--Equities, Charles Schwab
1963 Investment Management, Inc.; Vice President and Chief Investment Officer,
Senior Vice President and Chief Laudus Trust and Laudus Variable Insurance Trust. Prior to 2004, Vice President
Investment Officer--Equities and Sr. Portfolio Manager, Charles Schwab Investment Management, Inc.
(Officer of The Schwab Annuity
Portfolios since 2004.)
28
OFFICERS OF THE TRUST continued
NAME, YEAR OF BIRTH, AND POSITION(S)
WITH THE TRUST; (TERM OF OFFICE, AND
LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
RANDALL FILLMORE Senior Vice President and Chief Compliance Officer, Charles Schwab Investment
1960 Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief
Chief Compliance Officer and AML Compliance Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief
Officer Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and
(Officer of The Schwab Annuity Excelsior Funds Trust. From 2002 to 2003, Vice President, Charles Schwab & Co.,
Portfolios since 2002.) Inc., and Charles Schwab Investment Management, Inc. From 2000 to 2002, Vice
President, Internal Audit, Charles Schwab & Co., Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
KOJI E. FELTON Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab
1961 Investment Management, Inc.; Senior Vice President and Deputy General Counsel,
Secretary and Chief Legal Officer Charles Schwab & Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable
(Officer of The Schwab Annuity Insurance Trust; Chief Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt
Portfolios since 1998.) Funds, Inc., and Excelsior Funds Trust. Prior to June 1998, Branch Chief in
Enforcement at U.S. Securities and Exchange Commission in San Francisco.
1 Trustees remain in office until they resign, retire or are removed by
shareholder vote. 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 their employment with the investment adviser and the
distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab
Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are
employees of Schwab and/or the adviser.
3 The President, Treasurer and Secretary hold office until their respective
successors are chosen and qualified or until he or she sooner dies, resigns,
is removed or becomes disqualified. Each other officer serves at the pleasure
of the Board.
29
[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, 2006
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 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 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, 2006
[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 eight years in asset management.
[PHOTO OF LARRY MANO]
LARRY MANO, a vice president and senior portfolio manager of the investment
adviser, is responsible for the day-to-day co-management of the portfolio. Prior
to joining the firm in November 1998, he worked for 20 years in equity
management.
THE INVESTMENT ENVIRONMENT AND THE FUND
After a volatile six months in the domestic markets, equity and fixed income
funds ended the period with mixed returns. Several key issues dominated market
discussions throughout the period, including slowing economic growth, inflation
fears, U.S. Federal Reserve (the Fed) interest rate increases, and volatile
crude oil prices.
The markets remained in a steady growth mode over the first quarter of 2006 and
ended the period on a positive note. Volatility was up during the second quarter
of the year, but remained lower than its historical norm. During the six-month
report period, oil prices hit new record highs and the Fed continued to raise
short-term interest rates to curb inflationary pressures, boosting its Fed Funds
target rate four consecutive times during the six-month period and bringing the
benchmark rate up to 5.25%. This was the 17th rate hike over the past two years.
Rising sharply in the second half of the report period, crude oil prices peaked
in April at around $75 per barrel while domestic gasoline prices were above $3 a
gallon. In recent months, crude oil prices climbed back in response to declining
crude inventories and geopolitical concerns. Despite the volatility in energy
prices, gains in productivity have remained strong and corporate earnings
continue to rise. Reasonable valuations, a solid earnings season, and
expectations that monetary policy tightening will soon come to an end, helped
support the markets. Additionally, job and income growth remained positive,
though they slowed during the report period. Moderate inflationary expectations
and large foreign capital inflows helped to contain increases in long-term
interest rates.
As noted above, the Fed continued its tightening cycle throughout the period,
raising its Fed Funds target 0.25% at each of its four meetings. As the Fed
raised rates, the yield curve flattened and had brief periods of inversion.
Historically, economic slowdowns or recessions have followed
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.
2.21% THREE-MONTH U.S. TREASURY BILLS (T-BILLS): measures short-term U.S.
Treasury obligations
- -0.72% LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX: measures the U.S. bond market
2.71% S&P 500(R) INDEX: measures U.S. large-cap stocks
8.21% RUSSELL 2000(R) INDEX: measures U.S. small-cap stocks
10.16% 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 BILLS U.S. AGGREGATE S&P 500(R) 2000(R) EAFE(R)
(T-BILLS) BOND INDEX INDEX INDEX INDEX
31-Dec-05 0.00 0.00 0.00 0.00 0.00
6-Jan-06 0.05 0.26 3.02 3.90 5.12
13-Jan-06 0.12 0.52 3.22 5.26 4.71
20-Jan-06 0.21 0.57 1.13 4.70 2.71
27-Jan-06 0.28 0.04 2.94 8.82 5.74
3-Feb-06 0.36 -0.02 1.41 7.65 4.74
10-Feb-06 0.43 -0.22 1.70 6.61 3.97
17-Feb-06 0.52 0.13 3.38 8.69 4.02
24-Feb-06 0.60 0.16 3.61 9.54 5.79
3-Mar-06 0.69 -0.27 3.49 9.84 5.51
10-Mar-06 0.77 -0.50 3.07 8.06 5.22
17-Mar-06 0.86 0.01 5.18 11.03 8.89
24-Mar-06 0.94 0.08 4.84 12.19 8.69
31-Mar-06 1.03 -0.65 4.21 13.94 9.40
7-Apr-06 1.11 -0.98 4.31 12.62 11.15
14-Apr-06 1.19 -1.23 3.82 11.89 9.88
21-Apr-06 1.30 -0.86 5.62 15.03 13.93
28-Apr-06 1.41 -0.83 5.61 13.92 14.62
5-May-06 1.47 -0.98 6.85 16.51 17.90
12-May-06 1.56 -1.32 4.15 10.67 16.70
20-May-05 1.66 -0.72 2.24 7.72 10.49
27-May-05 1.75 -0.65 3.33 8.78 11.01
3-Jun-05 1.84 -0.26 4.03 9.98 11.98
10-Jun-05 1.93 -0.22 1.17 4.62 5.52
17-Jun-05 2.02 -0.86 1.14 3.42 4.84
24-Jun-05 2.12 -1.32 0.60 2.99 5.34
30-Jun-06 2.21 -0.72 2.71 8.21 10.16
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 the
day-to-day co-manager of the portfolio. He joined Schwab in 1995, became a
trader in 1999, and was named to his current position in 2004.
the inversion of the yield curve. Following a strong start to 2006, economic
growth has moderated over the past six months.
Despite rising interest rates and soaring energy prices, the S&P 500 Index 1
posted gains of 2.71% for the six-month period ending June 30, 2006 while the
Russell 2000 Index also displayed a positive return of 8.21%. As improving
fundamentals and attractive valuations have strengthened investor interest in
emerging markets, the MSCI EAFE (Morgan Stanley Capital International, Inc.
Europe, Australasia, and Far East) Index also had an impressive return of 10.16%
for the six-month period.
Although performance of the bond markets was sluggish, as measured by the Lehman
Brothers U.S. Aggregate Bond Index, which was down 0.72% for the six-month
period, these types of results are not unusual. When the economy is strong and
job growth is robust, investors normally expect to see more inflation, which
generally leads to higher interest rates and lower bond prices.
Rising interest rates have led to volatility in the equities markets and have
weighed down bond returns. Meanwhile, money market funds enticed investors as
the rise in short-term interest rates offered yields that have not been seen in
years. The mixed messages that arose from the slowing economy and rising
inflation have left investors puzzled about the direction of the Fed policy. The
June 29 Federal Open Market Committee (FOMC) policy statement did little to
alleviate uncertainty, as the Fed acknowledged slower growth while expressing
concern about inflation risks.
THE SCHWAB S&P 500 INDEX PORTFOLIO was up 2.65%, closely tracking its benchmark,
the S&P 500 Index, which was up 2.71%. Bear in mind that the fund's return,
unlike the index, includes the impact of operating expenses. Most of the fund's
appreciation occurred during the first quarter of 2006. Within the portfolio,
the best performing Sectors were Energy and Telecommunication Services. With the
price of crude oil appreciating during the period, energy-related stocks were
the overall top performers in the fund. On the downside, Information Technology
was the worst performing Sector and slightly detracted from the fund's overall
performance.
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.
1 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 fund. The fund 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 fund.
2 Schwab S&P 500 Index Portfolio
SCHWAB S&P 500 INDEX PORTFOLIO
PERFORMANCE as of 6/30/06
AVERAGE ANNUAL TOTAL RETURNS 1, 2, 3
This bar chart compares performance of the portfolio with its benchmark and
Morningstar category.
[BAR CHART]
Fund Category:
Benchmark: MORNINGSTAR
PORTFOLIO S&P 500(R) INDEX LARGE-CAP BLEND
6 MONTHS 2.65% 2.71% 1.42%
1 YEAR 8.40% 8.63% 7.46%
5 YEARS 2.20% 2.49% 1.00%
SINCE INCEPTION: 11/1/96 7.58% 8.00% 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.
$20,255 PORTFOLIO
$21,032 S&P 500(R) INDEX
[LINE GRAPH]
DATE PORTFOLIO S&P 500 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
31-Jul-05 $19,373 $20,084
31-Aug-05 $19,191 $19,901
30-Sep-05 $19,341 $20,062
31-Oct-05 $19,008 $19,727
30-Nov-05 $19,727 $20,473
31-Dec-05 $19,732 $20,479
31-Jan-06 $20,244 $21,022
28-Feb-06 $20,299 $21,078
31-Mar-06 $20,561 $21,340
30-Apr-06 $20,833 $21,626
31-May-06 $20,222 $21,003
30-Jun-06 $20,255 $21,032
All portfolio and index figures on this page assume dividends and
distributions were reinvested. Index figures do not include trading and
management costs, which would lower performance. Indices are unmanaged, and
you cannot invest in them directly. Performance results less than one year are
not annualized.
1 Portfolio expenses have been partially absorbed by CSIM and Schwab. Without
these reductions, the portfolio's returns would have been lower. Portfolio
returns do not reflect the additional fees and expenses imposed by the
insurance company under the variable insurance product contract. If those
contract fees and expenses were included, the returns would be less than those
shown. Please refer to the variable insurance product prospectus for a
complete listing of these expenses.
2 Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500(R) and 500(R)
are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for
use by the portfolio. The portfolio is not sponsored, endorsed, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no representation
regarding the advisability of investing in the portfolio.
3 Source for category information: Morningstar, Inc.
Schwab S&P 500 Index Portfolio 3
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO FACTS as of 6/30/06
STYLE ASSESSMENT 1
INVESTMENT STYLE
Value Blend Growth
MARKET CAP
Large / / /x/ / /
Medium / / / / / /
Small / / / / / /
STATISTICS
NUMBER OF HOLDINGS 501
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE MARKET CAP ($ x 1,000,000) $87,250
- --------------------------------------------------------------------------------
PRICE/EARNINGS RATIO (P/E) 17.2
- --------------------------------------------------------------------------------
PRICE/BOOK RATIO (P/B) 2.8
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 2 2%
- --------------------------------------------------------------------------------
TOP HOLDINGS 3
% OF
SECURITY NET ASSETS
- --------------------------------------------------------------------------------
(1) EXXON MOBIL CORP. 3.2%
- --------------------------------------------------------------------------------
(2) GENERAL ELECTRIC CO. 3.0%
- --------------------------------------------------------------------------------
(3) CITIGROUP, INC. 2.1%
- --------------------------------------------------------------------------------
(4) BANK OF AMERICA CORP. 1.9%
- --------------------------------------------------------------------------------
(5) MICROSOFT CORP. 1.8%
- --------------------------------------------------------------------------------
(6) PROCTER & GAMBLE CO. 1.6%
- --------------------------------------------------------------------------------
(7) JOHNSON & JOHNSON 1.6%
- --------------------------------------------------------------------------------
(8) PFIZER, INC. 1.5%
- --------------------------------------------------------------------------------
(9) ALTRIA GROUP, INC. 1.3%
- --------------------------------------------------------------------------------
(10) AMERICAN INTERNATIONAL GROUP, INC. 1.3%
- --------------------------------------------------------------------------------
TOTAL 19.3%
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]
21.5% FINANCIALS
15.0% INFORMATION TECHNOLOGY
12.3% HEALTH CARE
11.7% INDUSTRIALS
10.2% CONSUMER DISCRETIONARY
10.1% ENERGY
9.6% CONSUMER STAPLES
3.3% TELECOMMUNICATION
SERVICES
3.3% UTILITIES
3.0% MATERIALS
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 6/30/06, 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 (unaudited)
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, 2006 and held
through June 30, 2006.
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 1/1/06 at 6/30/06 1/1/06-6/30/06
- -------------------------------------------------------------------------------------------------------------
SCHWAB S&P 500 INDEX PORTFOLIO
Actual Return 0.28% $1,000 $1,026.50 $1.41
Hypothetical 5% Return 0.28% $1,000 $1,023.41 $1.40
1 Based on the most recent six-month expense ratio; may differ from the expense
ratio provided in Financial Highlights.
2 Expenses for the portfolio are equal to its annualized expense ratio,
multiplied by the average account value over the period, multiplied by 181
days of the period, and divided by 365 days of the fiscal year.
Schwab S&P 500 Index Portfolio 5
SCHWAB S&P 500 INDEX PORTFOLIO
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
1/1/06- 1/1/05- 1/1/04- 1/1/03- 1/1/02- 1/1/01-
6/30/06* 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
- -------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 18.09 17.56 16.06 12.66 16.54 19.02
--------------------------------------------------------------------
Income or loss from investment operations:
Net investment income 0.18 0.31 0.29 0.17 0.19 0.15
Net realized and unrealized gains or losses 0.30 0.53 1.40 3.40 (3.90) (2.46)
---------------------------------------------------------------------
Total income or loss from investment operations 0.48 0.84 1.69 3.57 (3.71) (2.31)
Less distributions:
Dividends from net investment income -- (0.31) (0.19) (0.17) (0.17) (0.17)
--------------------------------------------------------------------
Net asset value at end of period 18.57 18.09 17.56 16.06 12.66 16.54
--------------------------------------------------------------------
Total return (%) 2.65 1 4.75 10.53 28.22 (22.43) (12.16)
RATIOS/SUPPLEMENTAL DATA (%)
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net operating expenses 0.28 2 0.27 0.28 0.28 0.28 0.28
Gross operating expenses 0.31 2 0.30 0.31 0.32 0.35 0.33
Net investment income 1.63 2 1.59 1.75 1.50 1.33 1.09
Portfolio turnover rate 2 4 4 2 11 5
Net assets, end of period ($ x 1,000,000) 150 157 162 146 98 128
* Unaudited.
1 Not annualized.
2 Annualized
6 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS as of June 30, 2006, (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 www.sec.gov and may be viewed 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 a fund's most recent Form N-Q is also available by
visiting Schwab's website at www.schwab.com/schwabfunds.
COST VALUE
HOLDINGS BY CATEGORY ($ x 1,000) ($ x 1,000)
- --------------------------------------------------------------------------------
99.7% COMMON STOCK 112,654 149,320
0.2% SHORT-TERM
INVESTMENTS 199 199
--% U.S. GOVERNMENT
SECURITIES 45 45
- --------------------------------------------------------------------------------
99.9% TOTAL INVESTMENTS 112,898 149,564
3.7% COLLATERAL INVESTED FOR
SECURITIES ON LOAN 5,618 5,618
(3.6)% OTHER ASSETS AND
LIABILITIES (5,446)
- --------------------------------------------------------------------------------
100.0% NET ASSETS 149,736
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
COMMON STOCK 99.7% of net assets
AUTOMOBILES & COMPONENTS 0.5%
- --------------------------------------------------------------------------------
Cooper Tire & Rubber Co. (b)(c) 400 4
Ford Motor Co. (b)(c) 24,213 168
General Motors Corp. (b)(c) 6,278 187
Harley-Davidson, Inc. (b)(c) 3,800 208
Johnson Controls, Inc. 2,600 214
The Goodyear Tire &
Rubber Co. (b)(c)* 2,500 28
-----------
809
BANKS 7.8%
- --------------------------------------------------------------------------------
AmSouth Bancorp 4,453 118
Bank of America Corp. 60,202 2,896
BB&T Corp. 6,870 286
Comerica, Inc. 2,330 121
Commerce Bancorp, Inc. (b)(c) 2,300 82
Compass Bancshares, Inc. 1,610 89
Countrywide Financial Corp. 8,000 305
Fannie Mae 12,540 603
Fifth Third Bancorp 7,405 274
First Horizon National Corp. 1,400 56
Freddie Mac 9,010 514
Golden West Financial Corp. 3,500 260
Huntington Bancshares, Inc. 3,256 77
KeyCorp 5,400 193
M&T Bank Corp. (b)(c) 1,071 126
Marshall & Ilsley Corp. 2,738 125
MGIC Investment Corp. 733 48
National City Corp. 7,100 257
North Fork Bancorp, Inc. 6,200 187
PNC Financial
Services Group, Inc. 3,770 264
Regions Financial Corp. 6,127 203
Sovereign Bancorp, Inc. 3,606 73
SunTrust Banks, Inc. 4,800 366
Synovus Financial Corp. 4,300 115
U.S. Bancorp 23,571 728
Wachovia Corp. 20,995 1,135
Washington Mutual, Inc. 12,845 585
Wells Fargo & Co. 21,779 1,461
Zions Bancorp 1,408 110
-----------
11,657
CAPITAL GOODS 8.9%
- --------------------------------------------------------------------------------
3M Co. 9,840 795
American Power
Conversion Corp. 2,025 39
American Standard Cos., Inc. 2,400 104
Caterpillar, Inc. 8,680 647
Cooper Industries
Ltd., Class A 1,300 121
Cummins, Inc. (b)(c) 600 73
Danaher Corp. 3,126 201
Deere & Co. 3,100 259
Dover Corp. 2,800 138
Eaton Corp. 1,740 131
Emerson Electric Co. 5,380 451
Fluor Corp. (b)(c) 1,100 102
General Dynamics Corp. 5,230 342
General Electric Co. (c) 135,130 4,454
Goodrich Corp. 1,660 67
Honeywell International, Inc. 11,037 445
Illinois Tool Works, Inc. 5,344 254
Ingersoll-Rand Co., Class A 4,400 188
ITT Industries, Inc. 2,480 123
See financial notes. 7
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
L-3 Communications
Holdings, Inc. 1,500 113
Lockheed Martin Corp. 4,690 336
Masco Corp. 5,710 169
Navistar International Corp. * 1,000 25
Northrop Grumman Corp. 4,534 290
Paccar, Inc. 1,864 154
Pall Corp. 1,400 39
Parker Hannifin Corp. 1,650 128
Raytheon Co. 5,830 260
Rockwell Automation, Inc. 2,350 169
Rockwell Collins, Inc. 2,500 140
Textron, Inc. 1,700 157
The Boeing Co. 10,396 852
Tyco International Ltd. 26,380 725
United Technologies Corp. 13,201 837
W.W. Grainger, Inc. 800 60
-----------
13,388
COMMERCIAL SERVICES & SUPPLIES 0.8%
- --------------------------------------------------------------------------------
Allied Waste Industries, Inc. * 525 6
Avery Dennison Corp. 1,300 75
Cendant Corp. 13,603 222
Cintas Corp. 1,157 46
Equifax, Inc. 2,000 69
H&R Block, Inc. 4,200 100
Monster Worldwide, Inc. * 1,704 73
Pitney Bowes, Inc. 3,000 124
R.R. Donnelley & Sons Co. 2,960 94
Robert Half International, Inc. 1,550 65
Waste Management, Inc. 7,358 264
-----------
1,138
CONSUMER DURABLES & APPAREL 1.1%
- --------------------------------------------------------------------------------
Brunswick Corp. 1,200 40
Centex Corp. 1,600 81
Coach, Inc. * 5,101 153
D.R. Horton, Inc. (b)(c) 3,600 86
Eastman Kodak Co. (b)(c) 3,155 75
Fortune Brands, Inc. 1,607 114
Harman International
Industries, Inc. 800 68
Hasbro, Inc. 2,525 46
Jones Apparel Group, Inc. 1,500 48
KB Home 960 44
Leggett & Platt, Inc. 2,300 57
Lennar Corp., Class A 1,800 80
Liz Claiborne, Inc. 997 37
Mattel, Inc. 5,301 88
Newell Rubbermaid, Inc. 3,924 101
Nike, Inc., Class B 2,460 199
Pulte Homes, Inc. 2,800 81
Snap-On, Inc. 800 32
The Black & Decker Corp. 1,010 85
The Stanley Works 391 18
VF Corp. 1,110 75
Whirlpool Corp. 1,033 85
-----------
1,693
CONSUMER SERVICES 1.6%
- --------------------------------------------------------------------------------
Apollo Group, Inc.,
Class A (b)(c)* 1,327 69
Carnival Corp. 5,222 218
Darden Restaurants, Inc. 2,090 82
Harrah's Entertainment, Inc. 2,400 171
Hilton Hotels Corp. 4,410 125
International Game
Technology 4,700 178
Marriott International,
Inc., Class A 3,512 134
McDonald's Corp. 16,301 548
Starbucks Corp. * 10,121 382
Starwood Hotels &
Resorts Worldwide, Inc. 2,900 175
Wendy's International, Inc. 1,500 87
YUM! Brands, Inc. 3,700 186
-----------
2,355
DIVERSIFIED FINANCIALS 8.0%
- --------------------------------------------------------------------------------
American Express Co. 16,071 855
Ameriprise Financial, Inc. 3,278 146
Capital One Financial Corp. 3,980 340
CIT Group, Inc. 2,600 136
Citigroup, Inc. (c) 64,683 3,120
E*TRADE Financial Corp. * 5,160 118
Federated Investors,
Inc., Class B 1,100 35
Franklin Resources, Inc. 2,100 182
Janus Capital Group, Inc. 1,941 35
JPMorgan Chase & Co. 45,246 1,900
Legg Mason, Inc. 1,500 149
Lehman Brothers
Holdings, Inc. 7,000 456
Mellon Financial Corp. 5,600 193
Merrill Lynch & Co., Inc. 11,880 826
Moody's Corp. 3,180 173
Morgan Stanley 14,147 894
8 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
Northern Trust Corp. 2,470 137
SLM Corp. 5,600 296
State Street Corp. 4,500 261
T. Rowe Price Group, Inc. 3,400 129
The Bank of New York
Co., Inc. 10,300 332
The Bear Stearns Cos., Inc. 1,512 212
The Charles Schwab
Corp. (a) 14,146 226
The Goldman Sachs
Group, Inc. 5,607 844
-----------
11,995
ENERGY 10.0%
- --------------------------------------------------------------------------------
Anadarko Petroleum Corp. 6,094 291
Apache Corp. 4,008 274
Baker Hughes, Inc. 4,400 360
BJ Services Co. 4,300 160
Chesapeake Energy
Corp. (b)(c) 4,800 145
ChevronTexaco Corp. 28,839 1,790
ConocoPhillips 21,353 1,399
CONSOL Energy, Inc. 1,200 56
Devon Energy Corp. 5,863 354
El Paso Corp. 6,441 97
EOG Resources, Inc. (b)(c) 3,214 223
Exxon Mobil Corp. (c) 79,219 4,860
Halliburton Co. (b)(c) 6,710 498
Hess Corp. (b)(c) 2,610 138
Kerr-McGee Corp. 2,552 177
Kinder Morgan, Inc. 1,350 135
Marathon Oil Corp. 4,832 402
Murphy Oil Corp. 1,632 91
Nabors Industries, Ltd. (b)(c)* 4,000 135
National-Oilwell Varco, Inc. * 1,893 120
Noble Corp. 1,800 134
Occidental Petroleum Corp. 5,500 564
Rowan Cos., Inc. 1,400 50
Schlumberger Ltd. 15,340 999
Sunoco, Inc. 1,740 121
Transocean, Inc. * 4,033 324
Valero Energy Corp. 8,260 549
Weatherford
International, Ltd. * 4,280 212
Williams Cos., Inc. 7,900 184
XTO Energy, Inc. 4,229 187
-----------
15,029
FOOD & STAPLES RETAILING 2.4%
- --------------------------------------------------------------------------------
Costco Wholesale Corp. 6,100 349
CVS Corp. 10,900 335
Safeway, Inc. 6,200 161
Supervalu, Inc. 2,735 84
Sysco Corp. 8,300 254
The Kroger Co. 9,400 205
Wal-Mart Stores, Inc. 32,331 1,557
Walgreen Co. 12,976 582
Whole Foods Market, Inc. 1,800 116
-----------
3,643
FOOD, BEVERAGE & TOBACCO 4.8%
- --------------------------------------------------------------------------------
Altria Group, Inc. 27,111 1,991
Anheuser-Busch
Cos., Inc. (b)(c) 9,783 446
Archer-Daniels-Midland Co. 8,700 359
Brown-Forman Corp., Class B 1,204 86
Campbell Soup Co. 2,300 85
Coca-Cola Enterprises, Inc. 4,000 81
ConAgra Foods, Inc. (b)(c) 6,770 150
Constellation Brands,
Inc., Class A * 2,300 58
Dean Foods Co. * 1,700 63
General Mills, Inc. 4,880 252
H.J. Heinz Co. 4,510 186
Kellogg Co. 3,400 165
McCormick & Co., Inc. 1,700 57
Molson Coors
Brewing Co., Class B 339 23
PepsiCo, Inc. 21,441 1,287
Reynolds American, Inc. 1,078 124
Sara Lee Corp. 10,600 170
The Coca-Cola Co. 26,963 1,160
The Hershey Co. 2,244 124
The Pepsi Bottling Group, Inc. 1,902 61
Tyson Foods, Inc., Class A 1,186 18
UST, Inc. 2,200 99
Wm. Wrigley Jr. Co., Class A 1,929 87
Wm. Wrigley Jr. Co., Class B 482 22
-----------
7,154
HEALTH CARE EQUIPMENT & SERVICES 4.3%
- --------------------------------------------------------------------------------
Aetna, Inc. 7,640 305
AmerisourceBergen Corp. 2,720 114
Bausch & Lomb, Inc. 800 39
Baxter International, Inc. 8,690 320
Becton Dickinson & Co. 3,300 202
See financial notes. 9
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
Biomet, Inc. 2,507 79
Boston Scientific Corp. * 15,090 254
C.R. Bard, Inc. 1,520 111
Cardinal Health, Inc. 5,665 364
Caremark Rx, Inc. 6,054 302
CIGNA Corp. 1,560 154
Coventry Health Care, Inc. * 2,050 113
Express Scripts, Inc. * 2,040 146
HCA, Inc. 4,890 211
Health Management
Associates, Inc., Class A 1,870 37
Hospira, Inc. * 2,100 90
Humana, Inc. * 2,100 113
IMS Health, Inc. 2,600 70
Laboratory Corp. of
America Holdings * 1,504 94
Manor Care, Inc. 387 18
McKesson Corp. 3,956 187
Medco Health Solutions, Inc. * 3,888 223
Medtronic, Inc. 15,710 737
Patterson Cos., Inc. * 980 34
Quest Diagnostics 2,260 135
St. Jude Medical, Inc. * 4,204 136
Stryker Corp. 3,900 164
Tenet Healthcare Corp. * 6,500 45
UnitedHealth Group, Inc. 17,631 790
WellPoint, Inc. * 8,636 628
Zimmer Holdings, Inc. * 3,184 181
-----------
6,396
HOUSEHOLD & PERSONAL PRODUCTS 2.4%
- --------------------------------------------------------------------------------
Alberto-Culver Co., Class B 1,000 49
Avon Products, Inc. 5,116 159
Clorox Co. 2,100 128
Colgate-Palmolive Co. 6,671 399
Kimberly-Clark Corp. 5,706 352
Procter & Gamble Co. (c) 42,674 2,373
The Estee Lauder Cos.,
Inc., Class A 1,500 58
-----------
3,518
INSURANCE 4.7%
- --------------------------------------------------------------------------------
ACE Ltd. 3,900 197
AFLAC, Inc. 6,610 306
Ambac Financial Group, Inc. 1,392 113
American International
Group, Inc. 33,639 1,986
AON Corp. 4,550 158
Cincinnati Financial Corp. 2,335 110
Genworth Financial,
Inc., Class A 5,000 174
Lincoln National Corp. 3,661 207
Loews Corp. 5,640 200
Marsh & McLennan
Cos., Inc. (b)(c) 7,200 194
MBIA, Inc. 1,750 102
Metlife, Inc. 9,807 502
Principal Financial Group, Inc. 3,874 216
Prudential Financial, Inc. 6,470 503
SAFECO Corp. 1,600 90
The Allstate Corp. 8,440 462
The Chubb Corp. 5,160 258
The Hartford Financial
Services Group, Inc. 3,930 333
The Progressive Corp. 10,201 262
The St. Paul Travelers
Cos., Inc. 8,999 401
Torchmark Corp. 1,500 91
UnumProvident Corp. 4,276 78
XL Capital Ltd., Class A 1,900 116
-----------
7,059
MATERIALS 3.0%
- --------------------------------------------------------------------------------
Air Products &
Chemicals, Inc. 3,000 192
Alcoa, Inc. 11,672 378
Allegheny Technologies, Inc. 770 53
Ashland, Inc. 900 60
Ball Corp. 1,400 52
Bemis Co. 1,400 43
E.I. du Pont de Nemours
& Co. 12,115 504
Eastman Chemical Co. 1,000 54
Ecolab, Inc. 2,604 106
Freeport-McMoran Copper
& Gold, Inc., Class B (b)(c) 2,400 133
Hercules, Inc. * 700 11
International Flavors
& Fragrances, Inc. 1,000 35
International Paper Co. 6,498 210
Louisiana-Pacific Corp. 1,260 28
MeadWestvaco Corp. 2,549 71
Monsanto Co. 3,525 297
Newmont Mining Corp. (b)(c) 5,446 288
Nucor Corp. 4,000 217
Pactiv Corp. * 1,800 44
Phelps Dodge Corp. 2,690 221
PPG Industries, Inc. 2,300 152
Praxair, Inc. 4,165 225
10 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
Rohm & Haas Co. 2,105 105
Sealed Air Corp. 1,214 63
Sigma-Aldrich Corp. 641 47
Temple-Inland, Inc. 1,600 69
The Dow Chemical Co. 12,706 496
United States Steel Corp. 1,500 105
Vulcan Materials Co. 1,300 101
Weyerhaeuser Co. 3,300 205
-----------
4,565
MEDIA 3.5%
- --------------------------------------------------------------------------------
CBS Corp., Class B 10,980 297
Clear Channel
Communications, Inc. * 5,956 184
Comcast Corp., Class A * 27,726 908
Dow Jones & Co., Inc. (b)(c) 800 28
Gannett Co., Inc. 3,160 177
McGraw-Hill Cos., Inc. 4,750 239
Meredith Corp. 500 25
News Corp., Class A 30,575 586
Omnicom Group, Inc. 2,300 205
The E.W. Scripps Co., Class A 1,000 43
The Interpublic Group
of Cos., Inc. (b)(c)* 4,997 42
The New York Times Co.,
Class A (b)(c) 1,900 47
The Walt Disney Co. 28,501 855
Time Warner, Inc. 58,962 1,020
Tribune Co. 3,400 110
Univision Communications,
Inc., Class A * 3,025 101
Viacom, Inc., Class B * 9,380 336
-----------
5,203
PHARMACEUTICALS & BIOTECHNOLOGY 8.0%
- --------------------------------------------------------------------------------
Abbott Laboratories 20,130 878
Allergan, Inc. (b)(c) 1,880 202
Amgen, Inc. * 15,154 988
Applera Corp. - Applied
Biosystems Group 2,800 90
Barr Pharmaceuticals, Inc. * 1,400 67
Biogen Idec, Inc. * 4,700 218
Bristol-Myers Squibb Co. 25,640 663
Eli Lilly & Co. 14,620 808
Fisher Scientific
International, Inc. * 1,605 117
Forest Laboratories, Inc. * 3,720 144
Genzyme Corp. * 3,500 214
Gilead Sciences, Inc. * 6,200 367
Johnson & Johnson 38,599 2,313
King Pharmaceuticals, Inc. * 3,466 59
MedImmune, Inc. * 3,400 92
Merck & Co., Inc. 28,301 1,031
Millipore Corp. * 700 44
Mylan Laboratories, Inc. 3,091 62
PerkinElmer, Inc. 1,700 35
Pfizer, Inc. (c) 95,432 2,240
Schering-Plough Corp. 19,190 365
Thermo Electron Corp. * 1,380 50
Waters Corp. * 1,400 62
Watson Pharmaceuticals, Inc. * 1,500 35
Wyeth 17,470 776
-----------
11,920
REAL ESTATE 1.0%
- --------------------------------------------------------------------------------
Apartment Investment &
Management Co., Class A 1,300 56
Archstone-Smith Trust 2,700 137
Boston Properties, Inc. 1,216 110
Equity Office Properties
Trust (b)(c) 5,001 183
Equity Residential 4,001 179
Kimco Realty Corp. 2,710 99
Plum Creek Timber Co., Inc. 2,560 91
ProLogis 2,600 136
Public Storage, Inc. 1,100 83
Simon Property Group, Inc. 2,400 199
Vornado Realty Trust 1,600 156
-----------
1,429
RETAILING 3.4%
- --------------------------------------------------------------------------------
Amazon.com, Inc. * 3,000 116
AutoNation, Inc. (b)(c)* 1,900 41
AutoZone, Inc. * 700 62
Bed, Bath & Beyond, Inc. * 3,016 100
Best Buy Co., Inc. 5,475 300
Big Lots, Inc. * 1,400 24
Circuit City Stores, Inc. 2,054 56
Dillard's, Inc., Class A 600 19
Dollar General Corp. 4,263 60
Family Dollar Stores, Inc. 2,000 49
Federated Department
Stores, Inc. 6,822 250
Genuine Parts Co. 2,500 104
Home Depot, Inc. 27,551 986
J.C. Penney Co., Inc. 3,100 209
Kohl's Corp. * 4,610 272
See financial notes. 11
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
Limited Brands, Inc. 3,908 100
Lowe's Cos., Inc. 10,230 621
Nordstrom, Inc. 2,850 104
Office Depot, Inc. * 4,100 156
OfficeMax, Inc. 900 37
RadioShack Corp. 259 4
Sears Holdings Corp. * 1,275 197
Staples, Inc. 9,850 239
Target Corp. 11,371 556
The Gap, Inc. 8,162 142
The Sherwin-Williams Co. 1,133 54
The TJX Cos., Inc. 6,310 144
Tiffany & Co. 1,126 37
-----------
5,039
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.7%
- --------------------------------------------------------------------------------
Advanced Micro Devices, Inc. * 5,530 135
Altera Corp. * 4,880 86
Analog Devices, Inc. 4,730 152
Applied Materials, Inc. (c) 20,571 335
Broadcom Corp., Class A * 6,165 185
Freescale Semiconductor,
Inc., Class B * 5,566 164
Intel Corp. 76,272 1,445
KLA-Tencor Corp. 2,700 112
Linear Technology Corp. (b)(c) 4,000 134
LSI Logic Corp. * 5,410 48
Maxim Integrated
Products, Inc. 4,200 135
Micron Technology, Inc. (b)(c)* 8,800 133
National Semiconductor Corp. 4,400 105
Novellus Systems, Inc. * 1,900 47
NVIDIA Corp. * 4,800 102
PMC - Sierra, Inc. * 2,390 23
Teradyne, Inc. * 2,100 29
Texas Instruments, Inc. 20,941 634
Xilinx, Inc. 4,400 100
-----------
4,104
SOFTWARE & SERVICES 5.6%
- --------------------------------------------------------------------------------
Adobe Systems, Inc. * 7,900 240
Affiliated Computer
Services, Inc., Class A * 1,591 82
Autodesk, Inc. * 3,320 114
Automatic Data
Processing, Inc. 7,173 325
BMC Software, Inc. * 3,200 76
CA, Inc. 6,444 132
Citrix Systems, Inc. * 2,360 95
Computer Sciences Corp. * 2,400 116
Compuware Corp. * 5,150 35
Convergys Corp. * 1,354 26
eBay, Inc. * 15,288 448
Electronic Arts, Inc. * 4,058 175
Electronic Data
Systems Corp. 7,220 174
First Data Corp. 9,959 449
Fiserv, Inc. * 2,700 122
Google, Inc., Class A * 2,577 1,081
Intuit, Inc. * 2,520 152
Microsoft Corp. (c) 115,291 2,686
Novell, Inc. * 5,200 34
Oracle Corp. * 49,321 715
Parametric Technology Corp. * 1,484 19
Paychex, Inc. 4,450 173
Sabre Holdings Corp.,
Class A (b)(c) 1,883 41
Symantec Corp. * 13,941 217
Unisys Corp. * 4,700 30
VeriSign, Inc. * 2,025 47
Yahoo! Inc. (b)(c)* 16,601 548
-----------
8,352
TECHNOLOGY HARDWARE & EQUIPMENT 6.6%
- --------------------------------------------------------------------------------
ADC Telecommunications,
Inc. * 971 16
Agilent Technologies, Inc. * 5,867 185
Andrew Corp. * 1,450 13
Apple Computer, Inc. * 11,200 640
Avaya, Inc. * 5,632 64
CIENA Corp. * 6,700 32
Cisco Systems, Inc. * 79,601 1,555
Comverse Technology, Inc. * 2,700 53
Corning, Inc. * 20,650 499
Dell, Inc. * 30,772 751
EMC Corp. * 30,822 338
Gateway, Inc. * 1,000 2
Hewlett-Packard Co. 37,013 1,173
International Business
Machines Corp. 20,285 1,558
Jabil Circuit, Inc. 2,327 60
JDS Uniphase Corp. * 20,155 51
Juniper Networks, Inc. * 7,200 115
Lexmark International,
Inc., Class A * 1,300 73
Lucent Technologies,
Inc. (b)(c)* 60,296 146
12 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
Molex, Inc. 1,800 60
Motorola, Inc. 32,435 654
NCR Corp. * 2,400 88
Network Appliance, Inc. * 4,800 169
QLogic Corp. * 2,590 45
Qualcomm, Inc. 21,490 861
SanDisk Corp. * 2,000 102
Sanmina -- SCI Corp. * 7,400 34
Solectron Corp. * 13,490 46
Sun Microsystems, Inc. * 45,801 190
Symbol Technologies, Inc. 2,212 24
Tektronix, Inc. 1,100 32
Tellabs, Inc. * 6,230 83
Xerox Corp. (b)(c)* 12,190 170
-----------
9,882
TELECOMMUNICATION SERVICES 3.3%
- --------------------------------------------------------------------------------
Alltel Corp. 5,160 329
AT&T Corp. 50,212 1,400
BellSouth Corp. 23,530 852
CenturyTel, Inc. 1,490 55
Citizens Communications Co. 4,718 62
Embarq Corp * 1,997 82
Qwest Communications
International, Inc. * 21,216 172
Sprint Nextel Corp. 38,840 776
Verizon Communications, Inc. 38,305 1,283
-----------
5,011
TRANSPORTATION 2.0%
- --------------------------------------------------------------------------------
Burlington Northern
Santa Fe Corp. 4,730 375
CSX Corp. 3,010 212
FedEx Corp. 3,920 458
Norfolk Southern Corp. 5,600 298
Ryder System, Inc. 600 35
Southwest Airlines Co. 7,887 129
Union Pacific Corp. 3,570 332
United Parcel Service,
Inc., Class B 14,116 1,162
-----------
3,001
UTILITIES 3.3%
- --------------------------------------------------------------------------------
Allegheny Energy, Inc. * 2,241 83
Ameren Corp. 2,700 136
American Electric
Power Co., Inc. 5,170 177
CenterPoint Energy, Inc. 4,150 52
CMS Energy Corp. * 2,960 38
Consolidated Edison, Inc. 3,300 147
Constellation
Energy Group, Inc. 2,500 136
Dominion
Resources, Inc. (b)(c) 4,380 328
DTE Energy Co. 2,400 98
Duke Energy Corp. 15,564 457
Dynegy, Inc., Class A * 4,200 23
Edison International 4,200 164
Entergy Corp. 2,377 168
Exelon Corp. 8,690 494
FirstEnergy Corp. 4,288 233
FPL Group, Inc. 5,400 224
KeySpan Corp. 2,300 93
Nicor, Inc. (b)(c) 510 21
NiSource, Inc. 3,546 77
Peoples Energy Corp. (b)(c) 500 18
PG&E Corp. 4,800 189
Pinnacle West Capital Corp. 1,200 48
PPL Corp. (b)(c) 4,960 160
Progress Energy, Inc. 2,730 117
Public Service
Enterprise Group, Inc. 3,300 218
Sempra Energy 3,141 143
TECO Energy, Inc. 2,840 42
The AES Corp. * 8,800 162
The Southern Co. 9,511 305
TXU Corp. 5,954 356
Xcel Energy, Inc. 3,809 73
-----------
4,980
FACE AMOUNT VALUE
SECURITY ($ x 1,000) ($ x 1,000)
SHORT-TERM INVESTMENTS 0.2% of net assets
Brown Brothers Harriman & Co.
Cash Management Sweep 199 199
SECURITY FACE AMOUNT VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
U.S. GOVERNMENT SECURITIES 0.0% of net assets
TREASURY BILLS 0.0%
- --------------------------------------------------------------------------------
U.S. Treasury Bill
4.71%, 09/14/06 45 45
END OF INVESTMENTS.
See financial notes. 13
SCHWAB S&P 500 INDEX PORTFOLIO
PORTFOLIO HOLDINGS (Unaudited) continued
NUMBER OF VALUE
SECURITY SHARES ($ x 1,000)
COLLATERAL INVESTED FOR SECURITIES ON LOAN 3.7% of net assets
State Street Navigator
Security Lending Prime
Portfolio 5,618 5,618
END OF COLLATERAL INVESTED FOR SECURITIES ON LOAN.
At June 30, 2006 the tax basis cost of the fund's investments was $113,991, and
the unrealized appreciation and depreciation was $46,494 and ($10,921),
respectively, with a net unrealized appreciation of $35,573.
In addition to the above, the fund held the following at 06/30/06. All numbers x
1,000 except number of contracts.
NUMBER OF CONTRACT UNREALIZED
CONTRACTS VALUE GAINS
FUTURES CONTRACT
S & P Mini 500 Index
Future, Long Expires
9/15/06 4 256 6
* Non-income producing security.
(a) Issuer is affiliated with the fund's adviser.
(b) All or portion of security is on loan.
(c) All or a portion of this security is held as collateral for open futures
contracts.
14 See financial notes.
SCHWAB S&P 500 INDEX PORTFOLIO
Statement of
ASSETS AND LIABILITIES
As of June 30, 2006; unaudited. All numbers x 1,000 except NAV.
ASSETS
- ------------------------------------------------------------------------------------------
Investments, at value including securities on loan of $5,501 (cost $112,898) $149,564
Collateral invested for securities on loan 5,618
Receivables:
Fund shares sold 57
Dividends 173
Prepaid expenses + 24
-----------
TOTAL ASSETS 155,436
LIABILITIES
- ------------------------------------------------------------------------------------------
Collateral invested for securities on loan 5,618
Payables:
Due to brokers for futures 1
Fund shares redeemed 14
Investment adviser and administrator fees 2
Accrued expenses + 65
-----------
TOTAL LIABILITIES 5,700
NET ASSETS
- ------------------------------------------------------------------------------------------
TOTAL ASSETS 155,436
TOTAL LIABILITIES - 5,700
-----------
NET ASSETS $149,736
NET ASSETS BY SOURCE
Capital received from investors 124,650
Net investment income not yet distributed 3,762
Net realized capital losses (15,348)
Net unrealized capital gains 36,672
NET ASSET VALUE (NAV) BY SHARE CLASS
SHARES
NET ASSETS / OUTSTANDING = NAV
$149,736 8,065 $18.57
See financial notes. 15
SCHWAB S&P 500 INDEX PORTFOLIO
Statement of
OPERATIONS
For January 1, 2006 through June 30, 2006; unaudited. All numbers x 1,000.
INVESTMENT INCOME
- --------------------------------------------------------------------------------
Dividends $1,474
Interest 7
Securities on loan + 3
---------
TOTAL INVESTMENT INCOME $1,484
NET REALIZED GAINS AND LOSSES
- --------------------------------------------------------------------------------
Net realized losses received from affiliated issuers (1)
Net realized losses on investments sold + (718)
----------
NET REALIZED LOSSES (719)
NET UNREALIZED GAINS AND LOSSES
- --------------------------------------------------------------------------------
Net unrealized gains on investments 3,652
Net unrealized gains on futures contracts + 16
----------
NET UNREALIZED GAINS 3,668
EXPENSES
- --------------------------------------------------------------------------------
Investment adviser and administrator fees 155
Trustees' fees 15
Custodian fees 9
Portfolio accounting fees 18
Professional fees 15
Shareholder reports 19
Other expenses + 12
----------
Total expenses 243
Expense reduction - 26
----------
NET EXPENSES 217
INCREASE IN NET ASSETS FROM OPERATIONS
- --------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 1,484
NET EXPENSES - 217
----------
NET INVESTMENT INCOME 1,267
NET REALIZED LOSSES (719)
NET UNREALIZED GAINS + 3,668
----------
INCREASE IN NET ASSETS FROM OPERATIONS $4,216
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
- --------------------------------------------------------------------------------
1/1/06-6/30/06 1/1/05-12/31/05
Net investment income $1,267 $2,490
Net realized losses (719) (3,306)
Net unrealized gains + 3,668 7,901
-----------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 4,216 7,085
DISTRIBUTIONS PAID
- --------------------------------------------------------------------------------
Dividends from net investment income -- 2,644
TRANSACTIONS IN FUND SHARES
- --------------------------------------------------------------------------------
1/1/06-6/30/06 1/1/05-12/31/05
SHARES VALUE SHARES VALUE
Shares sold 441 $8,225 1,528 $26,939
Shares reinvested -- -- 144 2,644
Shares redeemed + (1,077) (20,091) (2,193) (38,629)
----------------------------------------------
NET TRANSACTIONS IN FUND SHARES (636) ($11,866) (521) ($9,046)
SHARES OUTSTANDING AND NET ASSETS
- --------------------------------------------------------------------------------
SHARES NET ASSETS SHARES NET ASSETS
Beginning of period 8,701 $157,386 9,222 $161,991
Total decrease + (636) (7,650) (521) (4,605)
----------------------------------------------
END OF PERIOD 8,065 $149,736 8,701 $157,386
Net investment income not yet distributed $3,762 $2,495
See financial notes. 17
SCHWAB S&P 500 INDEX PORTFOLIO
FINANCIAL NOTES, unaudited.
Unless stated, all dollar amounts are x 1,000.
1. BUSINESS STRUCTURE OF THE FUND
Schwab S&P 500 Index Portfolio 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 list below shows all the funds in the trust including
the fund in this report, which is highlighted:
SCHWAB ANNUITY PORTFOLIOS
Organized January 21,1994
Schwab Money Market Portfolio
Schwab MarketTrack Growth Portfolio II
SCHWAB S&P 500 INDEX PORTFOLIO
Schwab S&P 500 Index Portfolio offers one share class. Shares are bought and
sold at net asset value, or NAV, which is the price for all outstanding shares.
Each share has a par value of 1/1,000 of a cent, and the trustees 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.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies the fund uses
in its operations and in the preparation of financial statements:
(A) SECURITY VALUATION:
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 QUOTED VALUE IS AVAILABLE OR WHEN A SIGNIFICANT EVENT
HAS OCCURRED BETWEEN THE TIME OF THE SECURITY'S LAST CLOSE AND THE TIME THE
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.
18
SCHWAB S&P 500 INDEX PORTFOLIO
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- - FUTURES: open contracts are valued at their settlement prices as of the close
of their exchanges. When a 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.
(B) PORTFOLIO INVESTMENTS:
FUTURES CONTRACT: 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. The potential for losses associated with futures contracts may
exceed amounts recorded in the Statement of Assets and Liabilities.
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 the
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 ("due to/from broker").
Securities Lending: 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. If the value of the collateral falls below 100%,
it will be adjusted the following day.
(C) SECURITY TRANSACTIONS:
Security transactions are recorded as of the date the order to buy or sell the
security is executed. 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.
For the period ended June 30, 2006, purchases and sales of securities (excluding
short-term obligations) were as follows:
PURCHASES SALES/MATURITIES
--------- ----------------
$3,083 $11,970
19
SCHWAB S&P 500 INDEX PORTFOLIO
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) INCOME, EXPENSES AND DISTRIBUTIONS:
Income from interest and the accretion of discount is recorded as it accrues.
Dividends and distributions from portfolio securities and underlying funds 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.
Expenses that are specific to a 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 pays dividends from net investment income and makes distributions from
net realized capital gains once a year.
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.
(E) BORROWING:
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 $100 million with PNC Bank, N.A., and Bank of America, N.A.,
respectively. The fund pays interest on the amounts it borrows at rates that are
negotiated periodically.
AMOUNT
OUTSTANDING AVERAGE WEIGHTED
AT 6/30/06 BORROWING* AVERAGE INTEREST
($ X 1000) ($ X 1000) RATE* (%)
---------- ---------- ---------
S&P 500 Index Portfolio -- 238 5.06
* Based on the number of days for which the borrowing is outstanding.
(F) ACCOUNTING ESTIMATES:
The accounting policies described in this report 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.
(G) INDEMNIFICATION:
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.
20
SCHWAB S&P 500 INDEX PORTFOLIO
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
3. AFFILIATES AND AFFILIATED TRANSACTIONS
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, serves as the fund's
investment adviser and administrator pursuant to an Investment Advisory and
Administration Agreement (Advisory Agreement) between it and the trust. Charles
Schwab & Co., Inc. ("Schwab") is an affiliate of the investment adviser and is
the trust's shareholder services agent and transfer agent.
For its advisory and administrative services to the fund, the investment adviser
is entitled to receive an annual fee payable monthly based on the fund's average
daily net assets described as follows:
AVERAGE DAILY NET ASSETS
------------------------
First $500 million 0.20%
Over $500 million 0.17%
Schwab does not charge the fund for transfer agent and shareholder services
fees.
Although these agreements specify certain fees for these services, CSIM and
Schwab have made additional agreements with the fund to limit the total expenses
charged, excluding interest, taxes and certain non-routine expenses to 0.28%
through April 29, 2007.
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 an index which the fund uses as part of an indexing
strategy.
The fund may make direct transactions with certain other Schwab Funds 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. For the period ended June 30, 2006,
the fund had no security transactions with other Schwab Funds.
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.
There was no interfund borrowing or lending activity for the fund during the
period.
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.
4. FEDERAL INCOME TAXES
The fund intends to meet federal income and excise tax requirements for
regulated investment companies. Accordingly, the fund distributes substantially
all of its net investment income and realized net capital gains (if any) to the
participating
21
SCHWAB S&P 500 INDEX PORTFOLIO
FINANCIAL NOTES, unaudited (continued).
Unless stated, all dollar amounts are x 1,000.
4. FEDERAL INCOME TAXES (CONTINUED)
insurance company separate accounts each year. The net investment income and
realized capital gains and losses may differ for financial statement and tax
purposes primarily due to differing treatments of losses on wash sales. As long
as the fund meets the tax requirements, it is not required to pay federal income
tax.
As of December 31, 2005, the components of distributable earnings on a tax basis
were as follows:
Ordinary income $2,495
Long-term capital gains --
As of December 31, 2005, the fund had capital loss carry forwards available to
offset future net capital gains before the expiration dates:
EXPIRE
2008 $664
2009 1,821
2010 7,810
2011 38
2012 359
2013 2,130
-------
Total $12,822
=======
The fund deferred capital losses occurring after December 31, 2005 to the next
fiscal year ending at December 31, 2006. The aggregate amounts of these deferred
losses are $732.
The tax-basis components of distributions for the fiscal year ended December 31,
2005 were:
From ordinary income $2,644
From long-term capital gains --
From return of capital --
22
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, including 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.
The Board, including a majority of the Independent Trustees, considered
information specifically relating to the continuance of the Agreement at
meetings held on May 2, 2006, May 24, 2006 and June 12, 2006, and approved the
renewal of the Agreement for an additional one year term at the meeting held on
June 12, 2006. The Board's approval of the Agreement was based on consideration
and evaluation of a variety of specific factors discussed at these meetings 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 Charles Schwab & Co.,
Inc. ("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.
23
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
information considered by the trustees included specific information
concerning changes in the nature, extent and quality of services provided by
CSIM since the trustees had last considered approval of the Agreement. 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, when
applicable, 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 and the appropriateness of
the benchmark used to compare the performance of each fund. The trustees
further considered the level of fund performance in the context of its
review of fund expenses and adviser profitability discussed below. 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 historical practice of
voluntarily waiving 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, but, with respect to such other types of
accounts, accorded less weight to such comparisons due to the different
legal, regulatory, compliance and operating features of mutual funds as
compared to these 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
24
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.
The Board also considered information relating to changes to CSIM's cost
structure, including cost savings, technology investments and increased
operating efficiencies and how these changes affected CSIM's profitability
under the Agreement. 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.
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 dis-economies 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 that include lower fees at
higher graduated asset levels. The Board also considered certain commitments
by CSIM and Schwab that are designed to pass along potential economies of
scale to fund shareholders. Specifically, the Board considered CSIM and
Schwab's commitments, which may be changed only with Board approval: (i) to
reduce contractual advisory fees or add break points for certain funds, and
(ii) to implement, by means of expense limitation agreement, reductions in
net overall expenses for certain funds. Based on this evaluation, and in
consideration of the commitments made by CSIM and Schwab as discussed above,
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.
25
TRUSTEES AND OFFICERS
The tables below give information about the trustees and officers for The Schwab
Annuity Portfolios, which includes the fund covered in this report. The "Fund
Complex" includes The Charles Schwab Family of Funds, Schwab Investments, Schwab
Capital Trust, Schwab Annuity Portfolios, Laudus Trust, Laudus Variable
Insurance Trust, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc., and
Excelsior Funds Trust. As of June 30, 2006, the Fund Complex included 98 funds.
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.
INDEPENDENT TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF
AND POSITION(S) WITH PORTFOLIOS IN
THE TRUST; (TERM OF FUND COMPLEX
OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY
TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
MARIANN BYERWALTER Chairman of JDN Corporate Advisory 98 Board 1--Director, Redwood Trust, Inc.
1960 LLC. From 1996 to 2001, Vice Board 2--Director, PMI Group, Inc.
Trustee President for Business Affairs and
(Trustee of The Schwab Chief Financial Officer of Stanford
Annuity Portfolios since University, and in 2001, Special
2000.) Advisor to the President of Stanford
University.
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD F. DORWARD Chief Executive Officer, Dorward & 57 None.
1931 Associates (corporate management,
Trustee marketing and communications consulting
(Trustee of The Schwab firm). From 1996-1999, Executive Vice
Annuity Portfolios since President and Managing Director, Grey
1989.) Advertising. Prior to 1996, President
and Chief Executive Officer, Allen &
Dorward Advertising.
- ------------------------------------------------------------------------------------------------------------------------------------
WILLIAM A. HASLER Retired. Dean Emeritus, Haas School 98 Board 1--Director, Aphton Corp.
1941 of Business, University of California, Board 2--Director, Mission West Properties
Trustee Berkeley. Until February 2004, Co- Board 3--Director, TOUSA
(Trustee of The Schwab Chief Executive Officer, Aphton Corp. Board 4--Director, Stratex Networks
Annuity Portfolios since (bio-pharmaceuticals). Prior to August Board 5--Director, Genitope Corp.
2000.) 1998, Dean of the Haas School of Board 6--Director & Non-Executive
Business, University of California, Chairman, Solectron Corp.
Berkeley (higher education). Board 7--Director, Ditech Communications
Corp.
26
INDEPENDENT TRUSTEES continued
NAME, YEAR OF BIRTH, NUMBER OF
AND POSITION(S) WITH PORTFOLIOS IN
THE TRUST; (TERM OF FUND COMPLEX
OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY
TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT G. HOLMES Chairman, Chief Executive Officer 57 None.
1931 and Director, Semloh Financial, Inc.
Trustee (international financial services and
(Trustee of The Schwab investment advisory firm).
Annuity Portfolios since
1989.)
- ------------------------------------------------------------------------------------------------------------------------------------
GERALD B. SMITH Chairman and Chief Executive 57 Board 1--Board of Cooper Industries
1950 Officer and founder of Smith Board 2--Chairman of the Audit Committee
Trustee Graham & Co. (investment advisors). of Northern Border Partners, M.L.P.
(Trustee of The Schwab
Annuity Portfolios since
2000.)
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD R. STEPHENS Managing Partner, D.R. Stephens & 57 None.
1938 Company (investments). Prior to
Trustee 1996, Chairman and Chief
(Trustee of The Schwab Executive Officer of North American
Annuity Portfolios since Trust (real estate investment trust).
1989.)
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL W. WILSEY Chairman and Chief Executive 57 None.
1943 Officer, Wilsey Bennett, Inc. (real
Trustee estate investment and management,
(Trustee of The Schwab and other investments).
Annuity Portfolios since
1989.)
27
INTERESTED TRUSTEES
NAME, YEAR OF BIRTH, NUMBER OF
AND POSITION(S) WITH PORTFOLIOS IN
THE TRUST; (TERM OF FUND COMPLEX
OFFICE, AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY
TIME SERVED 1) DURING THE PAST FIVE YEARS THE TRUSTEE OTHER DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES R. SCHWAB 2 Chairman, Chief Executive Officer 57 None.
1937 and Director, The Charles Schwab
Chairman and Trustee Corporation, Charles Schwab & Co.,
(Chairman and Trustee Inc.; Chairman and Director, Charles
of The Schwab Annuity Schwab Investment Management,
Portfolios since 1989.) Inc., Charles Schwab Bank, N. A.;
Chairman and Chief Executive Officer,
Schwab (SIS) Holdings Inc. I,
Schwab International Holdings, Inc.;
Chief Executive Officer and Director,
Schwab Holdings, Inc.; Director, U.S.
Trust Company, N. A., U.S. Trust
Corporation, United States Trust
Company of New York. Until May
2003, Co-Chief Executive Officer,
The Charles Schwab Corporation.
RANDALL W. MERK 2 Executive Vice President and 98 None.
1954 President, Schwab Financial
Trustee Products, Charles Schwab & Co., Inc.;
(Trustee of The Schwab Director, Charles Schwab Asset
Annuity Portfolios since Management (Ireland) Limited and
2005.) Charles Schwab Worldwide Funds PLC.
From September 2002 to July 2004, Chief
Executive Officer and President,
Charles Schwab Investment Management,
Inc. and Executive Vice President,
Charles Schwab & Co., Inc. Prior to
September 2002, President and Chief
Investment Officer, American Century
Investment Management, and Director,
American Century Companies, Inc.
28
OFFICERS OF THE TRUST
NAME, YEAR OF BIRTH, AND POSITION(S)
WITH THE TRUST; (TERM OF OFFICE, AND
LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
EVELYN DILSAVER President, Chief Executive Officer, and Director, Charles Schwab Investment Management,
1955 Inc.; Executive Vice President, Charles Schwab & Co., Inc; President and Chief
President and Chief Executive Officer Executive Officer, Laudus Trust and Laudus Variable Insurance Trust; President,
(Officer of The Schwab Annuity Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust;
Portfolios since 2004.) President, Mutual Fund Division, UST Advisers, Inc. From June 2003 to July 2004, Senior
Vice President, Asset Management Products and Services, Charles Schwab & Co., Inc.
Prior to June 2003, Executive Vice President, Chief Financial Officer, and Chief
Administrative Officer, U.S. Trust, a subsidiary of The Charles Schwab Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
STEPHEN B. WARD Director, Senior Vice President and Chief Investment Officer, Charles Schwab Investment
1955 Management, Inc.; Chief Investment Officer, The Charles Schwab Trust Company.
Senior Vice President and Chief
Investment Officer
(Officer of The Schwab Annuity
Portfolios since 1991.)
- ------------------------------------------------------------------------------------------------------------------------------------
GEORGE PEREIRA Senior Vice President and Chief Financial Officer, Charles Schwab Investment
1964 Management, Inc.; Chief Financial Officer, Laudus Trust and Laudus Variable Insurance
Treasurer and Principal Financial Officer Trust; Chief Financial Officer and Chief Accounting Officer, Excelsior Funds Inc.,
(Officer of The Schwab Annuity Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust; Chief Financial Officer,
Portfolios since 2004.) Mutual Fund Division, UST Advisors, Inc. Director, Charles Schwab Worldwide Fund, PLC
and Charles Schwab Asset Management (Ireland) Limited. From December 1999 to November
2004, Sr. Vice President, Financial Reporting, Charles Schwab & Co., Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
KIMON DAIFOTIS Senior Vice President and Chief Investment Officer--Fixed Income, Charles Schwab
1959 Investment Management, Inc. Prior to 2004, Vice President and Sr. Portfolio Manager,
Senior Vice President and Chief Charles Schwab Investment Management, Inc.
Investment Officer--Fixed Income
(Officer of The Schwab Annuity
Portfolios since 2004.)
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY MORTIMER Senior Vice President and Chief Investment Officer--Equities, Charles Schwab
1963 Investment Management, Inc.; Vice President and Chief Investment Officer, Laudus Trust
Senior Vice President and Chief and Laudus Variable Insurance Trust. Prior to 2004, Vice President and Sr. Portfolio
Investment Officer--Equities Manager, Charles Schwab Investment Management, Inc.
(Officer of The Schwab Annuity
Portfolios since 2004.)
29
OFFICERS OF THE TRUST continued
NAME, YEAR OF BIRTH, AND POSITION(S)
WITH THE TRUST; (TERM OF OFFICE, AND
LENGTH OF TIME SERVED 3) PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
RANDALL FILLMORE Senior Vice President and Chief Compliance Officer, Charles Schwab Investment
1960 Management, Inc.; Senior Vice President Charles Schwab & Co., Inc.; Chief Compliance
Chief Compliance Officer and AML Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief Compliance Officer,
Officer Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior Funds Trust. From
(Officer of The Schwab Annuity 2002 to 2003, Vice President, Charles Schwab & Co., Inc., and Charles Schwab Investment
Portfolios since 2002.) Management, Inc. From 2000 to 2002, Vice President, Internal Audit, Charles Schwab &
Co., Inc.
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KOJI E. FELTON Senior Vice President, Chief Counsel and Corporate Secretary, Charles Schwab Investment
1961 Management, Inc.; Senior Vice President and Deputy General Counsel, Charles Schwab &
Secretary and Chief Legal Officer Co., Inc.; Chief Legal Officer, Laudus Trust and Laudus Variable Insurance Trust; Chief
(Officer of The Schwab Annuity Legal Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and Excelsior
Portfolios since 1998.) Funds Trust. Prior to June 1998, Branch Chief in Enforcement at U.S. Securities and
Exchange Commission in San Francisco.
1 Trustees remain in office until they resign, retire or are removed by
shareholder vote. 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 their employment with the investment adviser and the
distributor, Messrs. Schwab and Merk also own stock of The Charles Schwab
Corporation. Mr. Schwab and Mr. Merk are Interested Trustees because they are
employees of Schwab and/or the adviser.
3 The President, Treasurer and Secretary hold office until their respective
successors are chosen and qualified or until he or she sooner dies, resigns,
is removed or becomes disqualified. Each other officer serves at the pleasure
of the Board.
30
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
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Evelyn Dilsaver
President and Chief Executive Officer
Date: August 16, 2006
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
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Evelyn Dilsaver
President and Chief Executive Officer
Date: August 16, 2006
By: /s/ George Pereira
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George Pereira
Treasurer and Principal Financial Officer
Date: August 16, 2006