<PAGE> 1
LIFE & ANNUITY TRUST
ANNUAL REPORT
DECEMBER 31, 1995
ASSET ALLOCATION FUND
GROWTH AND INCOME FUND
MONEY MARKET FUND
U.S. GOVERNMENT ALLOCATION FUND
17
<PAGE> 2
LIFE & ANNUITY TRUST
ASSET ALLOCATION FUND
The Asset Allocation Fund is a professionally managed Fund, advised by Wells
Fargo Bank, N.A. ("Wells Fargo Bank"). BZW Barclays Global Fund Advisors
("BGFA") serves as investment sub-adviser. BGFA and its predecessors are
pioneers in the use of quantitative techniques in investment decision-making.
The first model was developed in 1973 and BGFA and its predecessors have been
managing assets with these techniques since 1977. Looking at the asset classes
through the framework of a model gives the advantage of assessing the relative
risk versus reward of stocks, bonds, and cash consistently through time.
PORTFOLIO MANAGEMENT INTERVIEW
Q. How did the Asset Allocation Fund perform in 1995?
A. The Asset Allocation Fund had a total return of 28.95% -- after fee
waivers -- for the year ended December 31, 1995.
Q. This is a significant increase from the return posted one year earlier. What
brought about this change?
A. The positive performance this year resulted from the remarkable performance
of both the stock and bond markets.
In 1995, the stock market rallied to new highs -- the return for the S&P 500 was
the highest since 1958 -- and the bond market also posted very strong returns.
Because the Fund invested primarily in stocks and bonds during the year, it was
able to capture the very strong returns offered by these markets.
Q. The Federal Reserve lowered the federal funds target rate by .25% in July and
by another .25% in December. How did this affect the Fund's allocation and
performance?
A. The cuts in the federal funds target rate this year signaled that the Federal
Reserve Board believed the threat of inflation had been reduced. This was a
primary cause of the strong gains in the bond market. The drop in interest rates
helped fuel the strong rally for stocks. The drop in bond yields -- which
measure the total return offered investors for holding bonds -- reduced the
attractiveness of holding bonds relative to stocks or money market instruments.
As a result, the Fund reduced its bond position during the year, thus realizing
gains from the bond market rally. Any interest rate cuts in 1996 by the Federal
Reserve should be positive for the stock and bond markets.
Q. How did the Fund's allocation change during the year and why?
A. The clear trend in the allocation changes in 1995 was the reduction of the
Fund's bond allocation. The Fund began 1995 with 60% of its assets invested in
bonds. The allocation was reduced by 20% in March and again by 20% in May in
response to the rally in the bond market which caused bond yields to drop.
Yields on long-term corporate bonds began 1995 at 8.47%, by mid-year the yield
had fallen more than one-percent to 7.26%, and by the end of the year the yield
stood at 6.61%. Most of the proceeds from the bond sales were invested in money
market instruments, reflecting the model's view that the expected return on
stocks was not high enough to fully offset their risk. The asset allocation
model ended the year with a recommended allocation of 50% to stocks, 20% to
bonds, and 30% to money market instruments. Due to the small size of the Fund,
its exposure to equities was realized through the use of S&P 500 futures
contracts instead of direct investments in all of the common stocks which
comprise the S&P 500 Index. BGFA adopted this strategy to maximize the Fund's
ability to meet its investment objective. The amount of futures contracts held
by the Fund will vary depending on the allocation to stocks.
18
<PAGE> 3
Q. Does the Fund's strategy indicate a correction in the securities markets
during 1996?
A. The asset allocation model does not attempt to make short-term predictions,
but instead seeks to identify long-term value across the stock and bond markets.
The model does not attempt to determine exactly when or even how a market
correction will occur, but rather to recognize when markets are relatively over-
or under-valued. In that way, the Fund seeks to be correctly positioned when a
market correction might occur. Today, the model indicates that the stock market
is fairly valued relative to both bonds and cash, although both stocks and bonds
are offering lower returns than they have averaged over the past ten years.
According to the model, the under-weighting in bonds and over-weighting in money
market instruments indicate that yields on long-term bonds are not compensating
investors adequately for the interest rate risk in bonds.
Q. How will the change in sub-advisor to BGFA affect the management of the Fund?
A. Barclays has advised the Board of Directors that it intends to continue
providing sub-advisory services to the Fund using the same management team,
investment professionals and resources as before the change. They have further
advised the Board that they do not anticipate material changes to Fund's
investment philosophy, policies or strategies.
19
<PAGE> 4
LIFE & ANNUITY TRUST
ASSET ALLOCATION FUND
- --------------------------------------------------------------------------------
COMPARISON OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
AA Lehman IBC S&P500
------------------------------
<S> <C> <C> <C> <C>
10,000 10,000 10,000 10,000
9,940 9,934 10,028 10,164
6/94 9,796 9,840 10,058 9,915
10,107 10,173 10,090 10,241
10,248 10,098 10,123 10,660
9/94 9,964 9,780 10,158 10,400
10,055 9,746 10,195 10,633
9,954 9,803 10,234 10,246
12/94 10,113 9,954 10,277 10,398
10,384 10,209 10,322 10,668
10,707 10,499 10,369 11,083
3/95 10,894 10,590 10,416 11,409
11,137 10,778 10,464 11,745
11,686 11,605 10,512 12,214
6/95 11,870 11,740 10,580 12,497
12,031 11,553 10,608 12,911
12,127 11,809 10,654 12,944
9/95 12,438 12,026 10,701 13,490
12,514 12,363 10,747 13,442
12,860 12,672 10,794 14,031
12/95 13,041 13,009 10,841 14,301
</TABLE>
Total Return for the year ended December 31, 1995: 28.95%
Average Annual Return Since Inception: 16.38%
- --------------------------------------------------------------------------------
1. Investors should note that the Fund is a professionally managed
portfolio, while the indices are unmanaged, do not incur expenses and are
not available directly for investment. If Fund operating expenses had been
applied to the indices, their performance would have been lower.
2. The Lehman Brothers U.S. Treasury Bond Index is an unmanaged index
comprised of Treasury bonds with maturities between 10 and 30 years.
3. The IBC/Donoghue Money Fund Average is comprised of the average yields
of over 600 taxable money funds.
4. The S&P 500 Index is an unmanaged index of 500 widely held common
stocks, representing industrial, financial, utility and transportation
companies, listed or traded on national exchanges and the over-the-counter
market.
5. Performance is historical, assumes reinvestment of all dividends and
capital gains at net asset value, and is not indicative of future results.
Portfolio performance numbers are net of all portfolio expenses, but do
not reflect deduction of insurance account charges. The value of an
investment in the Asset Allocation Fund will fluctuate with market
conditions so that redemption proceeds may be worth more or less than
their original cost.
6. During 1995, the Fund's adviser and administrator have voluntarily
waived portions of their fees or assumed responsibility for other
expenses, which has reduced operating expenses for shareholders. Without
these reductions, the Fund's returns would have been lower.
20
<PAGE> 5
LIFE & ANNUITY TRUST ASSET ALLOCATION FUND--DECEMBER 31, 1995
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
<C> <S> <C> <C> <C>
U.S. TREASURY BONDS (20.71%)
$ 100,000 U.S. Treasury Bonds 7.13% 02/15/23 $ 114,219
500,000 U.S. Treasury Bonds 7.25 05/15/16 570,938
200,000 U.S. Treasury Bonds 7.25 08/15/22 231,562
300,000 U.S. Treasury Bonds 7.63 02/15/25 366,562
550,000 U.S. Treasury Bonds 7.88 02/15/21 677,015
1,200,000 U.S. Treasury Bonds 8.00 11/15/21 1,501,873
200,000 U.S. Treasury Bonds 8.75 05/15/17 264,562
650,000 U.S. Treasury Bonds 8.75 08/15/20 872,015
400,000 U.S. Treasury Bonds 8.88 02/15/19 539,624
100,000 U.S. Treasury Bonds 9.00 11/15/18 136,281
-----------
TOTAL U.S. TREASURY BONDS $ 5,274,651
(Cost $4,649,589)
U.S. TREASURY BILLS (78.55%)
$1,994,000 U.S. Treasury Bills + 4.06%* 01/11/96 $ 1,990,829
2,265,000 U.S. Treasury Bills + 4.54 * 01/18/96 2,259,205
5,656,000 U.S. Treasury Bills + 4.74 * 02/08/96 5,624,348
177,000 U.S. Treasury Bills 4.78 * 02/29/96 175,642
733,000 U.S. Treasury Bills + 4.81 * 02/22/96 728,002
9,082,000 U.S. Treasury Bills + 5.03 * 03/07/96 9,002,133
227,000 U.S. Treasury Bills 5.06 * 03/14/96 224,762
-----------
TOTAL U.S. TREASURY BILLS $20,004,921
(Cost $19,997,582)
TOTAL INVESTMENTS IN SECURITIES
(Cost $24,647,171)** (Notes 1 & 3) 99.26% $25,279,572
Other Assets and Liabilities, Net 0.74 187,200
------ -----------
TOTAL NET ASSETS 100.00% $25,466,772
====== ===========
</TABLE>
- --------------------------------------------------------------------------------
* Yield to maturity.
+ These U.S. Treasury Bills are held in segregated accounts in connection with
the Fund's holdings of S&P 500 futures contracts. See Note 1.
** Cost for federal income tax purposes is the same as for financial statement
purposes and net unrealized appreciation consists of:
<TABLE>
<S> <C> <C>
Gross Unrealized Appreciation $714,968
Gross Unrealized Depreciation (82,567)
--------
NET UNREALIZED APPRECIATION $632,401
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 6
LIFE & ANNUITY TRUST
GROWTH AND INCOME FUND
Brian K. Mulligan assumed responsibility as manager for the Growth and Income
Fund on October 1, 1995. He is also co-manager of the Wells Fargo Core Equities
Group. He is manager of the San Francisco Investment Office. Mr. Mulligan has
been with Wells Fargo Bank since 1986. He was graduated from Skidmore College
with a B.S. in business management. He is a Chartered Financial Analyst, and a
former member of the Board of Governors for the Los Angeles Society of Financial
Analysts and a present member of the San Francisco Security Analysts Society.
PORTFOLIO MANAGER INTERVIEW
Q. How did the Growth and Income Fund perform in 1995?
A. The Growth and Income Fund had a total return of 29.19% -- after fee
waivers -- for the year ended December 31, 1995.
Q. This is a significant increase from the return posted one year earlier. What
brought about this change?
A. The reduction in interest rates at the beginning of the year changed the tone
of the market for stocks. Companies took advantage of moderate economic growth
by expanding their businesses and posted solid gains. Financial stocks, which
benefit from lower interest rates, also responded positively.
Q. On what sectors of the stock market did you focus in 1995?
A. The Fund held technology companies like Intel, Digital Equipment, Compaq
Computer and Ericsson (the telephone equipment provider). Late in December, as
technology shares pulled back, we added Cisco Systems (a systems integrator) and
Komag (an information storage company). Technology continues to provide
companies with the productivity enhancing capabilities which allow further
earnings gains. The financial industry saw significant consolidation in 1995.
Several large companies will begin to benefit from a national and global
strategy after solidifying their balance sheets in 1993-1994. For example, we
recently added Charles Schwab as a diversified financial services provider
offering all the traditional banking and brokerage services at low cost provider
prices. Household International, our largest position, is reaping rewards from
an expansion of consumer credit opportunities and an extension of its popular
credit card business.
Q. Do you expect to focus in these same sectors in 1996?
A. Both technology and financial sectors are currently expected to do well in
1996. We have also added to our consumer sector by increasing the weighting in
pharmaceutical, biotechnology, and drug retailing. Energy and gas stocks also
may play a strong role as the cold winter, higher speed limits (which drive
higher fuel consumption), and further restructuring at major oil firms
continues. Although companies like CUC International, Thermo Electron, Danaher,
and Grace don't fit well into economic sectors, they do have attractive earnings
(both historical and expected), solid management teams, and strong industry
fundamentals.
Q. Can you discuss the investment strategy with which you manage the Fund?
A. The Fund is managed using a "core and trading" approach. The core, roughly
70% of the Fund, is invested in solid, long-term holdings with good earnings
outlooks, strong management owners/teams, and attractive appreciation potential.
The other 30% is trading-oriented and relies on recognizing those companies that
have a greater value than investors currently realize. We hold these companies
for a shorter time period, and look for earnings surprises, upcoming
announcements of restructuring, new product introductions, de-mergers, to drive
up their value.
22
<PAGE> 7
LIFE & ANNUITY TRUST
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
COMPARISON OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
GROWTH S&P 500
------ -------
<S> <C> <C>
10,000 10,000
10,110 10,164
6/94 9,888 9,915
10,189 10,241
10,511 10,660
9/94 10,422 10,400
10,502 10,633
10,260 10,246
12/94 10,447 10,398
10,508 10,668
10,994 11,083
3/95 11,237 11,409
11,390 11,745
11,930 12,214
6/95 12,209 12,497
12,589 12,911
12,794 12,944
9/95 13,223 13,490
12,801 13,442
13,325 14,031
12/95 13,497 14,301
</TABLE>
Total Return for the Year Ended December 31, 1995: 29.19%
Average Annual Total Return Since Inception: 18.69%
- --------------------------------------------------------------------------------
1. Investors should note that the Fund is a professionally managed
portfolio, while the index is unmanaged, does not incur expenses and is
not available directly for investment. If Fund operating expenses had been
applied to the index, its performance would have been lower.
2. Performance is historical, assumes reinvestment of all dividends and
capital gains at net asset value, and is not indicative of future results.
Portfolio performance numbers are net of all portfolio expenses, but do
not reflect deduction of insurance account charges. The value of an
investment in the Growth and Income Fund will fluctuate with the market
conditions so that redemption proceeds may be worth more or less than
their original cost.
3. The S&P 500 Index is an unmanaged index of 500 widely held common
stocks, representing industrial, financial, utility and transportation
companies, listed or traded on national exchanges and the over-the-counter
market.
4. During 1995, the Fund's adviser and administrator have voluntarily
waived portions of their fees or assumed responsibility for other
expenses, which has reduced operating expenses for shareholders. Without
these reductions, the Fund's returns would have been lower.
23
<PAGE> 8
LIFE & ANNUITY TRUST GROWTH AND INCOME FUND--DECEMBER 31, 1995
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES SECURITY NAME COST VALUE
<C> <S> <C> <C>
COMMON STOCKS (91.68%)
ADVERTISING (1.50%)
4,400 Omnicom Group $ 123,926 $ 163,900
AUTOMOBILE & RELATED (4.86%)
6,100 Danaher Corp $ 186,479 $ 193,675
5,245 Ford Motor Co 150,604 152,105
3,500 General Motors Corp 162,945 185,063
---------- -----------
$ 500,028 $ 530,843
BASIC INDUSTRIES (5.50%)
4,000 Grace (W R) & Co $ 247,120 $ 236,500
2,620 Kimberly-Clark Corp 163,649 216,805
1,200 Monsanto Co 105,998 147,000
---------- -----------
$ 516,767 $ 600,305
BIOTECHNOLOGY (1.14%)
2,000 Genzyme Corp -- General Division + $ 121,500 $ 124,750
COMMERCIAL SERVICES (2.68%)
2,500 CUC International Inc + $ 79,263 $ 85,313
4,700 Service Corp International 192,923 206,800
---------- -----------
$ 272,186 $ 292,113
COMPUTER SOFTWARE (0.89%)
2,500 Reynolds & Reynolds Co Class A $ 91,138 $ 97,188
COMPUTER SYSTEMS (9.01%)
3,500 Cisco Systems Inc + $ 228,981 $ 261,188
3,700 Compaq Computer Corp + 164,867 177,600
2,000 Digital Equipment Corp + 92,271 128,250
2,500 Hewlett Packard Co 218,405 209,375
4,500 Komag Inc + 265,313 207,563
---------- -----------
$ 969,837 $ 983,976
CONGLOMERATES (1.97%)
3,700 Harsco Corp $ 184,739 $ 215,063
ELECTRICAL EQUIPMENT (4.67%)
3,500 AMP Inc $ 134,224 $ 134,313
2,000 Motorola Inc 125,645 114,000
3,500 Thermedics Inc + 68,648 97,125
1,200 Xerox Corp 134,972 164,400
---------- -----------
$ 463,489 $ 509,838
</TABLE>
24
<PAGE> 9
LIFE & ANNUITY TRUST GROWTH AND INCOME FUND--DECEMBER 31, 1995
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES SECURITY NAME COST VALUE
<C> <S> <C> <C>
ENERGY & RELATED (9.19%)
1,500 Amoco Corp $ 105,713 $ 107,813
4,500 Anadarko Petroleum Corp 194,877 243,563
1,600 Mobil Corp 151,948 179,200
5,980 Sonat Inc 183,985 213,038
2,500 Texaco Inc 171,138 196,250
2,500 Union Pacific Resources Group Inc + 52,500 63,438
---------- -----------
$ 860,161 $ 1,003,302
FINANCE & RELATED (12.40%)
2,500 BankAmerica Corp $ 133,448 $ 161,875
3,000 Citicorp 171,424 201,750
6,500 Household International Inc 323,438 384,313
5,500 MBNA Corp 199,077 202,813
14,400 Mercury Financial Corp 155,281 190,800
2,500 Patriot American Hospitality Inc + 60,719 64,375
1,500 Post Properties Inc 46,275 47,813
5,000 Schwab (Charles) Corp 101,650 100,625
---------- -----------
$1,191,312 $ 1,354,364
FOOD & RELATED (4.94%)
3,000 Anheuser-Busch Inc $ 186,503 $ 200,625
4,750 Heinz (H J) Co 141,319 157,344
2,000 Philip Morris Co Inc 141,008 181,000
---------- -----------
$ 468,830 $ 538,969
GENERAL BUSINESS & RELATED (1.42%)
3,400 Alco Standard Corp $ 121,180 $ 155,125
HEALTHCARE (2.70%)
4,500 United Healthcare Corp $ 250,184 $ 294,750
MANUFACTURING PROCESSING (3.95%)
3,200 Allied Signal Inc $ 127,269 $ 152,000
3,000 Eastman Kodak Co 167,016 201,000
1,500 Thermo Electron Corp + 74,400 78,000
---------- -----------
$ 368,685 $ 431,000
MATERIAL MANUFACTURING (1.83%)
5,600 Tyco International Inc $ 151,099 $ 199,500
PHARMACEUTICALS (4.60%)
4,500 Smithkline Beecham Plc ADR (UK) $ 245,255 $ 249,750
2,600 Warner Lambert Co 220,889 252,517
---------- -----------
$ 466,144 $ 502,267
</TABLE>
25
<PAGE> 10
LIFE & ANNUITY TRUST GROWTH AND INCOME FUND--DECEMBER 31, 1995
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES SECURITY NAME COST VALUE
<C> <S> <C> <C>
RETAIL & RELATED (7.32%)
6,500 Lowe's Co Inc $ 209,833 $ 217,750
10,000 Mattel Inc 291,410 307,500
8,000 Rite Aid Corp 209,194 274,000
---------- -----------
$ 710,437 $ 799,250
SEMICONDUCTORS (3.01%)
5,800 Intel Corp $ 315,875 $ 329,150
TELECOMMUNICATIONS (5.98%)
5,000 Alltel Corp $ 138,362 $ 147,500
2,500 AT & T Corp 159,565 161,875
7,500 Comsat Corp 154,986 139,688
10,500 Ericsson Telefonaktiebolaget L M Class B ADR 214,040 204,750
---------- -----------
$ 666,953 $ 653,813
TRANSPORTATION (2.12%)
3,500 Union Pacific Corp $ 224,789 $ 231,000
TOTAL COMMON STOCKS $9,039,259 $10,010,466
PREFERRED STOCKS (0.82%)
CONVERTIBLES (0.82%)
5,000 First Chicago NBD Corp expires 02/15/1997 $ 96,389 $ 90,000
</TABLE>
26
<PAGE> 11
LIFE & ANNUITY TRUST GROWTH AND INCOME FUND--DECEMBER 31, 1995
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
<C> <S> <C> <C> <C>
CORPORATE BONDS & NOTES (0.93%)
$100,000 Magna International Inc 5.00% 10/15/02 $ 102,000
TOTAL CORPORATE BONDS & NOTES $ 102,000
(Cost $100,000)
SHORT-TERM INSTRUMENTS (6.75%)
REPURCHASE AGREEMENTS (6.75%)
$737,000 Goldman Sachs Pooled Repurchase Agreement -
102% Collateralized by U.S. Government Securities 5.75% 01/02/96 $ 737,000
TOTAL REPURCHASE AGREEMENTS $ 737,000
(Cost $737,000)
TOTAL INVESTMENTS IN SECURITIES
(Cost $9,972,648)* (Notes 1 & 3) 100.18% $10,939,466
Other Assets and Liabilities, Net (0.18) (19,874)
------ -----------
TOTAL NET ASSETS 100.00% $10,919,592
====== ===========
</TABLE>
- --------------------------------------------------------------------------------
+ Non-income earning securities.
* Cost for federal income tax purposes is the same as for financial statement
purposes and net unrealized appreciation consists of:
<TABLE>
<S> <C> <C>
Gross Unrealized Appreciation $1,163,689
Gross Unrealized Depreciation (196,871)
----------
NET UNREALIZED APPRECIATION $ 996,818
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 12
LIFE & ANNUITY TRUST
MONEY MARKET FUND
Mark Kraschel and Madeline Gish are co-managers of the Life and Annuity Trust
Money Market Fund.
Mr. Kraschel is Wells Fargo Bank's senior specialist for short-term taxable
securities. He has specialized in bond investment applications for over a
decade. He joined Wells Fargo Bank in 1988 after five years in fixed income
management at First Boston Corporation. Mr. Kraschel holds a B.S. in business
administration from the University of Oregon and an M.B.A. in finance from the
University of San Francisco. He has been co-managing the Money Market Fund since
its inception.
Ms. Gish joined Wells Fargo Bank in 1989 as the Fund coordinator for the Mutual
Funds Division. Since joining the fixed income group in 1992, she has traded
adjustable-rate mortgage securities in research and trading and is currently
managing taxable liquidity funds. She holds a B.S. degree in business
administration from the University of Kansas and is a Chartered Financial
Analyst candidate.
PORTFOLIO MANAGER INTERVIEW
Q. How did the Money Market Fund perform during 1995?
A. For the seven-day period ended December 31, 1995, the current yield was
4.85% -- after fee waivers.
Q. What factors contributed to this Fund's yields in 1995?
A. After peaking in February, money market yields decreased steadily over the
course of the year. The federal funds target rate declined by .25% in July and
by another .25% in December. As a result, the Fund's yield fell by a similar
amount. The Fund's yield would be expected to move in tandem with the federal
funds target rate in 1996, and still remain an attractive alternative for
investors seeking liquidity and capital preservation.
Q. What is the current composition of the Fund?
A. Currently, the Fund is composed of 96% U.S. Treasury bills and 4% repurchase
agreements.
Q. What steps will you take during 1996 in anticipation of lower interest rates?
A. In anticipation of the Federal Reserve further easing target rates, the
weighted average maturity, or the average length of time before the securities
in a portfolio mature weighted by dollar values, has been extended in order to
lock in current rates for a longer period of time. In 1996, if current market
conditions prevail, we intend to maintain a longer average maturity in
anticipation of lower interest rates.
- --------------------------------------------------------------------------------
1. The Money Market Fund seeks to maintain a constant net asset value of
$1.00; however, there can be no assurance that it will be able to do so.
Yields will vary with changes in market conditions.
2. During 1995, the Fund's adviser and administrator have voluntarily
waived portions of their fees or assumed responsibility for other
expenses, which has reduced operating expenses for shareholders. Without
these reductions, the Fund's yield would have been lower. Shares in the
Fund are neither insured nor guaranteed by the U.S. Government or any
other government agency, nor by Wells Fargo Bank.
28
<PAGE> 13
LIFE & ANNUITY TRUST MONEY MARKET FUND--DECEMBER 31, 1995
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
<C> <S> <C> <C> <C>
U.S. TREASURY BILLS (91.16%)
$1,850,000 U.S. Treasury Bills 4.54%* 01/18/96 $1,845,392
500,000 U.S. Treasury Bills 4.74* 02/08/96 497,163
1,500,000 U.S. Treasury Bills 4.81* 02/22/96 1,489,427
1,500,000 U.S. Treasury Bills 5.07* 04/18/96 1,476,612
----------
TOTAL U.S. TREASURY BILLS $5,308,594
REPURCHASE AGREEMENTS (3.93%)
$ 229,000 Goldman Sachs Pooled Repurchase Agreement -
102% Collateralized by U.S. Government Securities 5.75% 01/02/96 $ 229,000
TOTAL INVESTMENTS IN SECURITIES
(Cost $5,537,594)** (Note 1) 95.09% $5,537,594
Other Assets and Liabilities, Net 4.91 285,754
------ ----------
TOTAL NET ASSETS 100.00% $5,823,348
====== ==========
</TABLE>
- --------------------------------------------------------------------------------
* Yield to maturity.
** Cost for federal income tax purposes is the same as for financial statement
purposes.
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 14
LIFE & ANNUITY TRUST
U.S. GOVERNMENT ALLOCATION FUND
The U.S. Government Allocation Fund is a professionally managed fund, advised by
Wells Fargo Bank, N.A. ("Wells Fargo Bank"). BZW Barclays Global Fund Advisors
("BGFA") serves as investment sub-adviser. BGFA and its predecessors are
pioneers in the use of quantitative techniques in investment decision-making.
The first model was developed in 1973 and BGFA and its predecessors have been
managing assets with these techniques since 1977. Looking at the asset classes
through the framework of a model gives the advantage of assessing the relative
risk versus reward of U.S. Treasury bonds, U.S. Treasury notes, and money market
instruments consistently through time.
PORTFOLIO MANAGEMENT INTERVIEW
Q. How did the U.S. Government Allocation Fund perform in 1995?
A. The U.S. Government Allocation Fund had a total return of 14.40% for the year
ended December 31, 1995.
Q. This is a significant increase from the return posted one year earlier. What
brought about this change?
A. The economic story throughout 1995 was one of slow growth and low inflation,
the combination of which has contributed to declining interest rates on
long-term government bonds down from 7.80% to 5.90% at year-end. This large
decline in interest rates resulted in a significant price appreciation for U.S.
Government obligations. The Fund was well positioned throughout the year to
capitalize on this bond rally while controlling the overall risk of the Fund.
The price appreciation of the bonds along with the coupon income delivered a
handsome return for the year.
Q. The Federal Reserve lowered the federal funds target rate by .25% in July and
by another .25% in December. How did this affect the Fund?
A. In early July, the market rallied somewhat after the Federal Reserve target
rate cut of .25%. However, with the Federal Reserve Chairman's positive comments
during the third week of July on the renewed strength of the economy, interest
rates rose rapidly. A strong economy would generally increase inflation which in
turn would undermine the value of bonds. Bond prices fell across all maturities,
and the Fund had a -0.20% return for the month of July. With the December rate
cut, however, the bond market rallied decisively bringing down the 30-year bond
yield to 5.95%, the lowest level in two years, and the Fund had a positive
return of 1.00% for the month.
Q. Has the relationship between long-term and short-term interest rates changed
significantly during 1995?
A. The relationship between short-term and long-term interest rates changed
during 1995 primarily due to reports of low inflation and slowing growth. At the
start of the year, long-term interest rates were more than 2% higher than short-
term rates. The higher rate for longer term bonds reflected investor concerns
about higher inflation rates in the future. As these concerns diminished through
the first half of the year, longer term interest rates declined more than
short-term rates to bring the interest rate difference down to about 1%. Through
the second half of the year, long-term rates remained at about 1% over
short-term rates.
Q. How did the Fund's allocation change during the year and why?
A. The Fund can invest in three different classes of debt instruments:
short-term money market instruments, intermediate-term U.S. Treasury Notes and
long-term U.S. Treasury bonds. At the start of the year the Fund was primarily
invested in intermediate-term notes, as this sector of the bond market provided
the best risk-adjusted yields. As yields came down in the first half of 1995,
the allocation moved, first to 80% notes and 20% bills, before settling in May
to 70% bills and 30% long-term bonds. This "barbell" position was gradually
shortened to 80% bills and 20% bonds through the second half of the year. The
yield curve position of the Fund strategy through the year has kept the overall
interest rate risk of the Fund close to that of its benchmark, yet outperformed
it by .50%.
30
<PAGE> 15
Q. How has the federal budget debate affected confidence in U.S. Government
obligations?
A. The disagreements expressed in the federal budget debate have made investors
in long-term government bonds a bit more cautious. With the perception that
these bonds have become more risky, investors now require an additional yield of
about .25% to hold long-term bonds. However, when compared to the impact of the
risk of an increase in inflation -- which generally requires a 1% to 2%
additional yield to hold long-term bonds -- a .25% additional yield appears to
be small.
Q. What is the Fund's strategy?
A. The Fund is designed to take advantage of the relative yields between long
bonds, intermediate notes and money market securities. The model seeks to
position the Fund to make the optimal allocation between short and long-term
bonds so as to maximize return and control risk, regardless of the particular
market environment. Over a full market cycle this strategy has delivered returns
in excess of 2% over the benchmark. The strategy does not depend on expectations
of interest rate increases or decreases in any given year.
Q. How will the change in investment sub-adviser to BGFA affect the management
of the Fund?
A. Barclays has advised the Board of Directors that it intends to continue
providing sub-advisory services to the Fund using the same management team,
investment professionals and resources as before the change. They have further
advised the Board that they do not anticipate material changes to Fund's
investment philosophy, policies or strategies.
31
<PAGE> 16
LIFE & ANNUITY TRUST
U.S. GOVERNMENT ALLOCATION FUND
- --------------------------------------------------------------------------------
COMPARISON OF A $10,000 INVESTMENT
U.S. Government Allocation Fund
<TABLE>
<CAPTION>
US Allo Lehman IBC S&P500
<S> <C> <C> <C> <C>
4/94 10,000 10,000 10,000 10,000
10,005 9,934 10,028 10,007
6/94 10,000 9,840 10,058 10,009
10,164 10,173 10,090 10,139
10,190 10,098 10,123 10,169
9/94 10,061 9,780 10,158 10,085
10,054 9,746 10,195 10,088
9,985 9,803 10,234 10,042
12/94 10,041 9,954 10,277 10,074
10,204 10,209 10,322 10,237
10,449 10,499 10,369 10,433
3/95 10,518 10,590 10,416 10,490
10,643 10,778 10,464 10,611
10,955 11,605 10,512 10,911
6/95 11,029 11,740 10,560 10,983
11,015 11,553 10,608 10,988
11,109 11,809 10,654 11,076
9/95 11,209 12,026 10,701 11,150
11,310 12,363 10,747 11,274
11,388 12,672 10,794 11,412
12/95 11,487 13,009 10,841 11,526
</TABLE>
Total Return for the Year Ended December 31, 1995: 14.40%
30 day SEC yield: 4.98% as of December 31, 1995.
Average Annual Total Return Since Inception: 8.24%.
- --------------------------------------------------------------------------------
1. Investors should note that the Fund is a professionally managed
portfolio, while the indices are unmanaged, do not incur expenses and are
not available directly for investment. If Fund operating expenses had been
applied to the indices, their performance would have been lower.
2. The Lehman Brothers U.S. Treasury Bond Index is an unmanaged index
comprised of Treasury bonds with maturities between 10 and 30 years.
3. The IBC/Donoghue Money Fund Average is comprised of the average yields
of over 600 taxable money funds.
4. Lehman Brothers U.S. Treasury Note Index is an unmanaged index
comprised of U.S. Treasury 2-10 year notes.
5. Performance is historical, assumes reinvestment of all dividends and
capital gains at net asset value, and is not indicative of future results.
Portfolio performance numbers are net of all portfolio expenses, but do
not reflect deduction of insurance account charges. The value of an
investment in the U.S. Government Allocation Fund will fluctuate with
market conditions so that redemption proceeds may be worth more of less
than their original cost.
6. Yield, calculated as required by the SEC, is based on earnings of the
Fund's portfolio during the 30 days ended December 31, 1995.
7. During 1995, the Fund's adviser and administrator have voluntarily
waived portions of their fees or assumed responsibility for other
expenses, which has reduced operating expenses for shareholders. Without
these reductions, the Fund's returns and yield would have been lower.
32
<PAGE> 17
LIFE & ANNUITY TRUST U.S. GOVERNMENT ALLOCATION FUND--DECEMBER 31, 1995
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
<C> <S> <C> <C> <C>
U.S. TREASURY SECURITIES (19.48%)
U.S. TREASURY BONDS (19.48%)
$ 550,000 U.S. Treasury Bonds 7.88% 02/15/21 $ 677,015
150,000 U.S. Treasury Bonds 8.75 05/15/20 200,765
50,000 U.S. Treasury Bonds 9.00 11/15/18 68,141
----------
$ 945,921
TOTAL U.S. TREASURY SECURITIES $ 945,921
(Cost $891,966)
SHORT-TERM INSTRUMENTS (79.74%)
U.S. TREASURY BILLS (79.74%)
$ 561,000 U.S. Treasury Bills 4.06%* 01/11/96 $ 560,108
583,000 U.S. Treasury Bills 4.54* 01/18/96 581,508
788,000 U.S. Treasury Bills 4.74* 02/08/96 783,590
27,000 U.S. Treasury Bills 4.78* 02/29/96 26,793
324,000 U.S. Treasury Bills 4.81* 02/22/96 321,791
1,551,000 U.S. Treasury Bills 5.03* 03/07/96 1,537,361
61,000 U.S. Treasury Bills 5.06* 03/14/96 60,398
----------
$3,871,549
TOTAL SHORT-TERM INSTRUMENTS $3,871,549
(Cost $3,870,247)
TOTAL INVESTMENTS IN SECURITIES
Cost ($4,762,213)** (Notes 1 and 3) 99.22% $4,817,470
Other Assets and Liabilities, Net 0.78 37,683
------ ----------
TOTAL NET ASSETS 100.00% $4,855,153
====== ==========
</TABLE>
- --------------------------------------------------------------------------------
* Yield to maturity.
** Cost for federal income tax purposes is the same as for financial statement
purposes and net unrealized appreciation consists of:
<TABLE>
<S> <C> <C>
Gross Unrealized Appreciation $55,362
Gross Unrealized Depreciation (105)
-------
NET UNREALIZED APPRECIATION $55,257
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE> 18
LIFE & ANNUITY TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Asset Growth and Money U.S. Government
Allocation Income Market Allocation
Fund Fund Fund Fund
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments:
In securities, at identified cost (Note 3) $24,647,171 $9,972,648 $5,537,594 $4,762,213
In securities, at market value $25,279,572 $10,939,466 $5,537,594 $4,817,470
Cash 358 1,780 1,497 743
Variation margin of financial futures contracts 14,900 0 0 0
Receivables:
Dividends and interest 88,558 18,312 36 18,636
Due from administrator (Note 2) 10,546 0 13,066 10,477
Investment securities sold 0 306,827 0 0
Fund shares sold 369,704 278,554 307,370 42,693
Organization expenses, net of amortization 33,661 34,328 35,213 34,556
Prepaid expenses 6,299 4,098 0 373
TOTAL ASSETS 25,803,598 11,583,365 5,894,776 4,924,948
LIABILITIES
Payables:
Investment securities purchased 0 573,136 0 0
Distribution to shareholders 278,637 40,471 20,881 19,497
Organizational costs 38,473 38,473 38,473 38,473
Due to administrator 4,972 1,611 652 488
Due to advisor 0 7,800 0 0
Accrued expenses 14,744 2,282 11,422 11,337
TOTAL LIABILITIES 336,826 663,773 71,428 69,795
NET ASSETS $25,466,772 $10,919,592 $5,823,348 $4,855,153
Net assets consist of:
Paid-in capital 24,319,785 9,923,130 5,823,348 4,799,848
Undistributed net realized gain on investments 330,811 29,644 0 48
Net unrealized appreciation of futures contracts 183,775 0 0 0
Net unrealized appreciation of investments 632,401 966,818 0 55,257
NET ASSETS $25,466,772 $10,919,592 $5,823,348 $4,855,153
COMPUTATION OF NET ASSET
VALUE AND OFFERING PRICE (NOTE 4):
Net assets $25,466,772 $10,919,592 $5,823,348 $4,855,153
Shares outstanding 2,259,262 845,941 5,823,351 471,204
Net asset value and offering price $11.27 $12.91 $1.00 $10.30
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE> 19
LIFE & ANNUITY TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Asset Growth and Money U.S. Government
Allocation Income Market Allocation
Fund Fund Fund Fund
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 0 $104,224 $ 0 $ 0
Interest 853,721 29,974 122,606 136,387
TOTAL INCOME 853,721 134,198 122,606 136,387
EXPENSES (NOTE 2):
Advisory fees 85,107 19,169 9,854 12,949
Custody fees 0 7,208 2,107 0
Portfolio accounting fees 0 27,740 25,567 0
Transfer Agency fees 7,133 2,681 1,095 1,079
Administration fees 4,255 1,770 657 647
Amortization of organization expenses 10,424 10,424 10,424 10,424
Legal and audit 53,410 26,768 22,622 17,099
Registration fees 778 881 0 0
Directors fees 11,250 11,250 11,250 11,250
Other 1,056 986 853 0
TOTAL EXPENSES 173,413 108,877 84,429 53,448
Less: Waived Fees and Reimbursed Expenses (Note 2) (115,555) (85,505) (75,181) (43,665)
Net expenses 57,858 23,372 9,248 9,783
NET INVESTMENT INCOME 795,863 110,826 113,358 126,604
REALIZED AND
UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on sale of investments 1,687,439 158,953 409 58,078
Net unrealized appreciation of futures contracts 171,775 0 0 0
Net unrealized appreciation of investments 718,398 947,667 0 69,148
NET GAIN ON INVESTMENTS 2,577,612 1,106,620 409 127,226
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS $3,373,475 $1,217,446 $113,767 $253,830
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 20
LIFE & ANNUITY TRUST
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Asset Growth and
Allocation Income
Fund Fund
------------------------- -------------------------
For the For the For the For the
Year Period Year Period
Ended Ended Ended Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994* 1995 1994**
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations:
Net investment income $795,863 $184,556 $110,826 $20,607
Net realized gain (loss) on sale of investments 1,687,439 (15,774) 158,953 (6,889)
Net unrealized appreciation of futures contract 171,775 12,000 0 0
Net unrealized appreciation (depreciation)
of investments 718,398 (85,996) 947,667 19,151
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 3,373,475 94,786 1,217,446 32,869
Distributions to shareholders:
From net investment income (795,863) (184,556) (110,826) (20,607)
From net realized capital gain (1,266,518) (74,335) (122,419) 0
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 15,133,424 7,716,275 7,617,935 2,169,419
Net asset value of shares issued in reinvestment
of dividend distributions 2,062,380 258,893 233,244 20,607
Cost of shares redeemed (503,715) (372,474) (52,261) (90,816)
Net increase in net assets resulting from
capital share transactions (Note 4) 16,692,089 7,602,694 7,798,918 2,099,210
INCREASE IN NET ASSETS 18,003,183 7,438,589 8,783,119 2,111,472
NET ASSETS
Beginning net assets 7,463,589 25,000 2,136,472 25,000
ENDING NET ASSETS $25,466,772 $7,463,589 $10,919,592 $2,136,472
SHARES ISSUED AND REDEEMED
Shares sold 1,352,899 777,328 624,798 211,849
Shares issued in reinvestment of dividends and
distributions 182,663 26,593 18,398 2,007
Shares redeemed (45,222) (37,498) (4,706) (8,905)
NET INCREASE IN SHARES OUTSTANDING 1,490,340 766,423 638,490 204,951
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
* The Fund commenced operations on April 15, 1994.
** The Fund commenced operations on April 12, 1994.
36
<PAGE> 21
LIFE & ANNUITY TRUST
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. Government
Money Allocation
Market Fund
Fund -------------------------------
------------------------------- For the
For the Year Year
Ended For the Period Ended For the Period
Dec. 31, Ended Dec. 31, Ended
1995 Dec. 31, 1994*** 1995 Dec. 31, 1994****
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations:
Net investment income $113,358 $24,035 $126,604 $26,658
Net realized gain (loss) on sale
of investments 409 5 58,078 (17,226)
Net unrealized appreciation (depreciation)
of investments 0 0 69,148 (13,891)
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS 113,767 24,040 253,830 (4,459)
Distributions to shareholders:
From net investment income (113,358) (24,035) (126,604) (26,658)
From net realized capital gain (409) (5) (40,804) 0
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 6,635,924 3,110,954 3,905,350 948,941
Net asset value of shares issued in
reinvestment
of dividend distributions 113,769 24,040 167,408 26,658
Cost of shares redeemed (2,417,893) (1,668,446) (169,600) (103,909)
Net increase in net assets resulting from
capital share transactions (Note 4) 4,331,800 1,466,548 3,903,158 871,690
INCREASE IN NET ASSETS 4,331,800 1,466,548 3,989,580 840,573
NET ASSETS
Beginning net assets 1,491,548 25,000 865,573 25,000
ENDING NET ASSETS $5,823,348 $1,491,548 $4,855,153 $865,573
SHARES ISSUED AND REDEEMED
Shares sold 6,635,924 3,110,954 381,576 95,072
Shares issued in reinvestment of dividends and
distributions 113,769 24,040 16,384 2,724
Shares redeemed (2,417,893) (1,668,446) (16,619) (10,432)
NET INCREASE IN SHARES OUTSTANDING 4,331,800 1,466,548 381,341 87,364
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
*** The Fund commenced operations on May 19, 1994.
**** The Fund commenced operations on April 26, 1994.
37
<PAGE> 22
LIFE & ANNUITY TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
<TABLE>
<CAPTION>
Asset Allocation Fund Growth and Income Fund
From inception From inception
Year ended on April 15, Year ended on April 12,
December 31, 1994 to Dec. 31, December 31, 1994 to Dec. 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning
of period $ 9.71 $10.00 $ 10.30 $ 10.00
Income from investment
operations:
Net investment income 0.55 0.30 0.22 0.14
Net realized and unrealized
gains/(losses) on
investments 2.21 (0.19) 2.77 0.30
------- ------ ------- ------
Total from investment
operations 2.76 0.11 2.99 0.44
Less distributions:
Dividends from net
investment income (0.55) (0.30) (0.22) (0.14)
Distributions from realized
capital gains (0.65) (0.10) (0.16) 0.00
------- ------ ------- ------
Total from distributions (1.20) (0.40) (0.38) (0.14)
------- ------ ------- ------
Net Asset Value, End of
period $ 11.27 $ 9.71 $ 12.91 $ 10.30
======= ====== ======= ======
Total Return (not
annualized) 28.95% 1.13% 29.19% 4.47%
Ratios/Supplemental Data:
Net assets, end of period
(000) $25,467 $7,464 $10,920 $ 2,136
Number of shares
outstanding, end of
period (000) 2,259 769 846 207
Ratios to average net
assets (annualized):
Ratio of expenses to
average net assets(1) 0.41% 0.00% 0.43% 0.00%
Ratio of net investment
income to average net
assets(2) 5.58% 6.30% 2.05% 3.00%
Portfolio turnover 97% 0% 84% 21%
- ---------------------------------------------------------------------------------------------------------------------------
(1) Ratio of expenses to
average net assets prior
to waived fees and
reimbursed expenses 1.22% 2.24% 2.02% 10.18%
(2) Ratio of net investment
income to average net
assets prior to waived
fees and reimbursed
expenses 4.77% 4.06% 0.46% (7.18)%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 23
LIFE & ANNUITY TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
<TABLE>
<CAPTION>
Money Market Fund U.S. Government Allocation Fund
From inception From inception
Year ended on May 19, Year ended on April 26,
December 31, 1994 to Dec. 31, December 31, 1994 to Dec. 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning
of period $ 1.00 $ 1.00 $ 9.63 $ 10.00
Income from investment
operations:
Net investment income 0.05 0.03 0.60 0.40
Net realized and unrealized
gains/(losses) on
investments 0.00 0.00 0.77 (0.37)
------ ------ ------ ------
Total from investment
operations 0.05 0.03 1.37 0.03
Less distributions:
Dividends from net
investment income (0.05) (0.03) (0.60) (0.40)
Distributions from realized
capital gains 0.00 0.00 (0.10) 0.00
------ ------ ------ ------
Total from distributions (0.05) (0.03) (0.70) (0.40)
------ ------ ------ ------
Net Asset Value, End of
period $ 1.00 $ 1.00 $10.30 $ 9.63
====== ====== ====== ======
Total Return (not
annualized) 5.41% 2.71% 14.40% 0.41%
Ratios/Supplemental Data:
Net assets, end of period
(000) $ 5,823 $1,492 $4,855 $ 866
Number of shares
outstanding, end of period
(000) 5,823 1,492 471 90
Ratios to average net assets
(annualized):
Ratio of expenses to average
net assets(1) 0.42% 0.00% 0.45% 0.00%
Ratio of net investment
income to average net
assets(2) 5.15% 4.63% 5.82% 7.35%
Portfolio turnover N/A N/A 405% 130%
- ---------------------------------------------------------------------------------------------------------------------------
(1) Ratio of expenses to
average net assets prior
to waived fees and
reimbursed expenses 3.83% 11.43% 2.46% 12.73%
(2) Ratio of net investment
income to average net
assets prior to waived
fees and reimbursed
expenses 1.74% (6.80)% 3.81% (5.38)%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE> 24
LIFE & ANNUITY TRUST
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Life and Annuity Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended, as an open-end series investment
company. The Trust was organized as a Delaware business trust on October 28,
1993. The Trust consists of four separate diversified funds (the "Funds"): the
Asset Allocation Fund, the Growth and Income Fund, the Money Market Fund, and
the U.S. Government Allocation Fund. These Funds invest in a range of
securities, generally including money market instruments, equities and U.S.
Government securities.
The Funds are available exclusively as pooled funding vehicles for certain
participating life insurance companies offering variable annuity contracts and
variable life insurance policies.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The following significant accounting policies are consistently followed by
the Trust in the preparation of its financial statements, and such policies are
in conformity with generally accepted accounting principles for investment
companies.
INVESTMENT POLICY AND SECURITY VALUATION
For all of the Funds, except the Money Market Fund, investments in
securities, for which the primary market is a national securities exchange or
the Nasdaq National Market System, are valued at the last reported sales price
on the day of valuation. U.S. Government obligations are valued in a range
between the last reported bid and ask prices. In the absence of any sale of such
securities on the valuation date and in the case of other securities, excluding
money market instruments maturing in 60 days or less, the valuations are based
on latest quoted bid prices. Debt securities maturing in 60 days or less are
valued at amortized cost, which approximates market value. Securities for which
quotations are not readily available are valued at fair value as determined by
procedures set by the Board of Trustees.
The Money Market Fund uses the amortized cost method to value its portfolio
securities and seeks to maintain a constant net asset value of $1.00 per share.
There is no assurance that the Fund will be able to do so. The amortized cost
method involves valuing a security at its cost, plus accretion of discount or
minus amortization of premium over the period until maturity, which approximates
market value.
Cash or high-quality money market instruments relating to firm commitment
purchase agreements and/or futures contracts are segregated by the custodian and
may not be sold while the current commitment is outstanding.
SECURITY TRANSACTIONS AND INCOME RECOGNITION
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Dividend income is recognized on the ex-dividend
date, and interest income is accrued daily. Realized gains or losses are
reported on the basis of identified cost of securities delivered. Bond discounts
and premiums are accreted or amortized as required by the Internal Revenue Code
(the "Code").
40
<PAGE> 25
LIFE & ANNUITY TRUST
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
REPURCHASE AGREEMENTS
Transactions involving purchases of securities under agreements to resell
("repurchase agreements") are treated as collateralized financing transactions
and are recorded at their contracted resale amounts. These repurchase
agreements, if any, are detailed in each Fund's Portfolio of Investments. The
adviser pools the Funds' cash and invests in repurchase agreements entered into
by the Funds. The repurchase agreements must be fully collateralized based on
values that are marked to market daily. The collateral is held by an agent bank
under a tri-party agreement. It is the adviser's responsibility to value
collateral daily and to obtain additional collateral as necessary to maintain
market value equal to or greater than the resale price. Any repurchase
agreements held in the Funds at December 31, 1995 are collateralized by U.S.
Treasury or federal agency obligations. The repurchase agreements were entered
into on December 29, 1995.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from any net investment income of the Asset
Allocation Fund and the Growth and Income Fund are declared and distributed
quarterly. Dividends of the U.S. Government Allocation Fund are declared and
distributed monthly. Dividends of the Money Market Fund are declared daily and
distributed monthly. Any dividends to shareholders from net realized capital
gains are declared and distributed annually.
FEDERAL INCOME TAXES
The Trust's policy with respect to each Fund is to comply with the
requirements of the Code that are applicable to regulated investment companies
and to distribute substantially all of the Fund's taxable income and any net
realized capital gains to its shareholders. Accordingly, there is no provision
for federal or state income taxes.
FUTURES CONTRACTS
The Asset Allocation Fund and the U. S. Government Allocation Fund may
purchase futures contracts to gain exposure to market changes as this procedure
may be more efficient or cost effective than actually buying the securities. A
futures contract is an agreement between parties to buy or sell a security at a
set price on a future date. Upon entering into such a contract, a Fund is
required to pledge to the broker an amount of cash, U.S. Government obligations
or other high-quality debt securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. Pursuant
to the contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in the value of the contract. Such
receipts or payments are known as "variation margin" and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission, the Asset Allocation Fund and the U.S. Government
Allocation Fund may be required to segregate cash or high-quality money market
instruments in connection with futures transactions in an amount generally equal
to the entire value of the underlying contracts. Risks of entering into futures
contracts include the possibility that there may be an illiquid market and that
a change in the value of the contract or option may not correlate with changes
in the value of the underlying securities. On December 31, 1995 the Asset
Allocation Fund held the following futures contracts:
<TABLE>
<CAPTION>
Notional Net Unrealized
Contract Appreciation/
Contracts Type Expiration Date Value (Depreciation)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
38 S&P 500 Index March 1996 11,750,550 (4,550)
4 S&P 500 Index June 1996 $ 1,248,100 $188,325
</TABLE>
41
<PAGE> 26
LIFE & ANNUITY TRUST
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
The Life & Annuity Trust Asset Allocation Fund has pledged to brokers U.S.
Treasury bills for initial margin requirements with a par value of $480,000.
ORGANIZATION EXPENSES
Stephens Inc. ("Stephens"), the Funds' administrator and distributor, has
charged the Funds for expenses incurred in connection with the organization and
initial registration of the Funds. Organizational expenses of $38,473 for each
fund are payable to Stephens as of December 31, 1995. These expenses are being
amortized by the Funds on a straight-line basis over 60 months from the date
each Fund commenced operations. In the event that any of the initial interests
are redeemed during the 60 month amortization period, Stephens will reimburse
the Funds for the unamortized balance of the organizational costs in the same
proportion as the number of interests reduced bears to the number of initial
interests outstanding at the time of redemption.
2. AGREEMENTS AND OTHER TRANSACTIONS
WITH AFFILIATES
The Trust has entered into advisory contracts on behalf of the Funds with
Wells Fargo Bank, N.A. ("WFB"). Pursuant to the contracts, WFB furnishes to the
Funds investment guidance and policy direction in connection with daily
portfolio management of the funds. Under the contracts with the Asset Allocation
Fund and the U.S. Government Allocation Fund and with the Growth and Income
Fund, WFB is entitled to a monthly advisory fee at an annual rate of 0.60% of
average daily net assets. Under the contract with the Money Market Fund, WFB is
entitled to a monthly advisory fee based on an annual rate of 0.45% of the
average daily net assets.
In connection with the Asset Allocation Fund and the U.S. Government
Allocation Fund, the Trust and WFB have entered into sub-advisory contracts with
Wells Fargo Nikko Investment Advisors ("WFNIA"). WFNIA is an affiliate of WFB.
Wells Fargo Institutional Trust Company, N.A. ("WFITC"), a subsidiary of WFNIA,
provides custody and portfolio accounting services for the Asset Allocation Fund
and the U.S. Government Allocation Fund. WFITC is compensated for these services
from the fees paid to WFNIA for its sub-advisory services. Pursuant to the
sub-advisory contracts, WFB pays WFNIA the Asset Allocation Fund and the U.S.
Government Allocation Fund annual sub-advisory fees equal to .20% and .15% of
the average daily net assets, respectively.
The Trust has also entered into contracts on behalf of the Growth and
Income Fund and the Money Market Fund with WFB for custody servicing and
portfolio accounting functions. WFB is entitled to be compensated for custody
services based on an annual rate of 0.0167% of the average daily net assets of
the Funds, plus transaction charges. For portfolio accounting services, WFB is
compensated at a base rate of $2,000 monthly plus 0.07% for the first $50
million, 0.045% for the next $50 million and 0.02% for the net assets over $100
million.
The Trust has entered into a contract on behalf of each Fund with WFB
whereby WFB provides transfer agent servicing functions for each of the Funds.
Under the contract, WFB is entitled to an annual rate of 0.05% of each Fund's
average daily net assets unless the net assets of a Fund are under $20 million.
For as long as its net assets remain under $20 million, a Fund will not be
charged any transfer agent fees by WFB.
The Trust has entered into an administration agreement on behalf of the
Funds with Stephens. Under the agreement, Stephens provides supervisory and
administrative services to the Funds. For these services, Stephens is entitled
to a monthly fee at the annual rate of 0.03% of each Fund's average daily net
assets.
42
<PAGE> 27
LIFE & ANNUITY TRUST
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
Effective January 1, 1996, BZW Barclays Global Fund Advisors ("BGFA")
replaced WFNIA as investment sub-adviser to the Asset Allocation Fund and the
U.S. Government Allocation Fund. BGFA was created by the reorganization of WFNIA
with and into an affiliate of WFITC. Pursuant to a sub-advisory contract with
each Fund and subject to the overall supervision of Wells Fargo Bank, the
investment adviser to each Fund, BGFA is responsible for day-to-day portfolio
management of each Fund. BGFA will continue to employ substantially the same
personnel and will continue to use the computer-based investment model developed
and previously used by WFNIA to determine the recommended mix of assets in each
Fund's portfolio. BGFA is entitled to receive monthly fees at an annual rate of
0.20% and 0.15% of the average daily net assets of the Asset Allocation Fund and
U.S. Government Allocation Fund, respectively, as compensation for its
sub-advisory services. BGFA is an indirect subsidiary of Barclays Bank PLC and
is located at 45 Fremont Street, San Francisco, CA 94105. As of January 1, 1996
BGFA and its affiliates provide investment advisory services for over $220
billion of assets under management. As of January 1, 1996, WFB provides
investment advisory services for approximately $33 billion of assets.
Effective January 1, 1996, WFITC, due to a change in control of its
outstanding voting securities, became a wholly owned subsidiary of BZW Barclays
Global Investors Holdings Inc. (formerly, The Nikko Building U.S.A., Inc.) and
WFITC was renamed BZW Barclays Global Investors, N.A. ("BGI"). BGI currently
acts as custodian to the Asset Allocation Fund and the U.S. Government
Allocation Fund. BGFA is a subsidiary of BGI. BGI will not be entitled to
receive compensation for its services to the Funds so long as BGFA is entitled
to receive fees for providing investment
sub-advisory services to such Funds. The principal business address of BGI is 45
Fremont Street, San Francisco,
California 94105.
WAIVED FEES AND REIMBURSED EXPENSES
The following amounts of fees and expenses have been waived and/or
reimbursed for the year ended December 31, 1995:
<TABLE>
<CAPTION>
Waived and
Waived Fees Reimbursed Fees
FUND by WFB by Administrator Total
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Allocation Fund................................................ $ 92,240 $23,315 $115,555
Growth and Income Fund............................................... 56,798 28,707 85,505
Money Market Fund.................................................... 38,623 36,558 75,181
U. S. Government Allocation Fund..................................... 14,028 29,637 43,665
</TABLE>
- --------------------------------------------------------------------------------
Waived fees and reimbursed expenses continue at the discretion of Wells
Fargo Bank and the administrator.
All of the officers and certain of the directors of the Trust are also
officers of Stephens. As of December 31, 1995, Stephens owned 2,893 shares of
the Asset Allocation Fund; 2,614 shares of the Growth and Income Fund; 27,088
shares of the Money Market Fund and 2,788 shares of the U.S. Government
Allocation Fund.
43
<PAGE> 28
LIFE & ANNUITY TRUST
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
3. INVESTMENT PORTFOLIO TRANSACTIONS
Purchases and sales of investments, exclusive of short-term securities, for
each Fund for the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Asset Growth and U.S. Government
Allocation Income Allocation
AGGREGATE PURCHASES AND SALES OF: Fund Fund Fund
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS:
Purchases at cost $3,817,844 $ 0 $3,105,715
Sales proceeds 3,966,021 0 3,089,983
OTHER SECURITIES:
Purchases at cost 0 11,326,334 0
Sales proceeds 0 4,194,517 0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Money Market Fund, not reflected in this schedule, trades exclusively
in short-term securities.
4. CAPITAL SHARE TRANSACTIONS
The Trust has authorized an unlimited number of no par value of interests.
Capital share transactions for each of the Funds for the years ended December
31, 1995 and 1994 are disclosed in detail in the Statements of Changes in Net
Assets.
44
<PAGE> 29
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
LIFE & ANNUITY TRUST:
We have audited the accompanying statement of assets and liabilities,
including the portfolios of investments, of Asset Allocation Fund, Growth and
Income Fund, Money Market Fund, and U.S. Government Allocation Fund
(constituting Life & Annuity Trust) as of December 31, 1995, and the related
statement of operations for the year then ended, the statements of changes in
net assets and financial highlights for the year then ended, and for the period
from April 15, 1994 (date of inception) to December 31, 1994 for the Asset
Allocation Fund, from April 12, 1994 (date of inception) to December 31, 1994
for the Growth and Income Fund, from May 19, 1994 (date of inception) to
December 31, 1994 for the Money Market Fund, and from April 26, 1994 (date of
inception) to December 31, 1994 for the U.S. Government Allocation Fund. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
December 31, 1995, by examination and other appropriate audit procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the aforementioned funds constituting Life & Annuity Trust as of
December 31, 1995, the results of their operations, the changes in their net
assets and their financial highlights for the periods indicated above in
conformity with generally accepted accounting principles.
SAN FRANCISCO, CALIFORNIA
FEBRUARY 14, 1996
45
<PAGE> 30
A special meeting of interestholders was held on December 5, 1995 to vote on
the following proposal for the Asset Allocation Fund and the U.S. Government
Allocation Fund. The proposal received the required majority of votes and was
adopted.
PROXY VOTING RESULTS
PROPOSAL (ASSET ALLOCATION FUND)
To approve a new Sub-Advisory Contract for the Trust, on behalf of the Fund,
with Wells Fargo Bank, N.A. as adviser, and BZW Global Advisors Investors, as
sub-adviser.
<TABLE>
<CAPTION>
Units Units Units Total Units
For Against Abstained Received
<S> <C> <C> <C>
- -------------------------------------------------
764,884 13,049 40,344 818,277
</TABLE>
PROPOSAL (U.S. GOVERNMENT ALLOCATION FUND)
<TABLE>
<CAPTION>
Units Units Units Total Units
For Against Abstained Received
<S> <C> <C> <C>
- -------------------------------------------------
158,432 250 2,536 161,218
</TABLE>
46
<PAGE> 31
LIFE & ANNUITY TRUST
ASSET ALLOCATION FUND
GROWTH AND INCOME FUND
MONEY MARKET FUND
U.S. GOVERNMENT ALLOCATION FUND
SUPPLEMENT DATED FEBRUARY 16, 1996
TO PROSPECTUS DATED MAY 1, 1995
AS SUPPLEMENTED ON JUNE 23 AND SEPTEMBER 1, 1995,
AND JANUARY 2, 1996
THE FOLLOWING TWO PARAGRAPHS REPLACE THE SEVENTH AND EIGHT PARAGRAPHS UNDER
THE PROSPECTUS SECTION "THE FUNDS, MANAGEMENT AND SERVICING FEES -- INVESTMENT
ADVISER":
Robert Bissell has been responsible for the day-to-day management of the
portfolio of the Growth and Income Fund since its inception, excluding the
period from October 1, 1995 to February 14, 1996. Mr. Bissell joined Wells Fargo
Bank at the time of its merger with Crocker Bank and has been with the combined
organization for over 20 years. Prior to joining Wells Fargo Bank, he was vice
president and investment counsel with M. H. Edie Investment Counseling where he
managed institutional and high-net-worth portfolios. Mr. Bissell holds a finance
degree from the University of Virginia. He is a chartered financial analyst and
a member of the Los Angeles Society of Financial Analysts.
Brian K. Mulligan has been responsible for the day-to-day management of the
portfolio of the Growth and Income Fund since October 1, 1995. Mr. Mulligan is
also co-manager of the Wells Fargo Core Equities Group. He is a vice president
and manager of the San Francisco Investment office, where he is primarily
responsible for personal accounts including individuals, charitable foundations
and IRAs. He also covers, from a research standpoint, the telecommunications and
electric utilities industries. Mr. Mulligan had been with Wells Fargo Bank since
its merger with Crocker National Bank in 1986. Mr. Mulligan was graduated from
Skidmore College with a B.S. degree in business management. He is a chartered
financial analyst and serves as a member of the staff of graders. In addition,
Mr. Mulligan is a former member of the Board of Governors for the Los Angeles
Society of Financial Analysts and a present member of the San Francisco Security
Analysts Society.
111
