<PAGE> 1
LIFE & ANNUITY TRUST
ANNUAL REPORT
DECEMBER 31, 1996
ASSET ALLOCATION FUND
GROWTH AND INCOME FUND
MONEY MARKET FUND
U.S. GOVERNMENT ALLOCATION FUND
5
<PAGE> 2
ASSET ALLOCATION FUND
The Asset Allocation Fund is a professionally managed portfolio, advised by
Wells Fargo Bank, N.A. ("Wells Fargo Bank"). Barclays Global Fund Advisors
("BGFA") serves as sub-investment adviser. BGFA uses an investment model
developed over the past 20 years that analyzes extensive financial data from
numerous sources and recommends a portfolio allocation. Looking at the asset
classes through the framework of a model gives the advantage of assessing the
relative attractiveness of stocks, bonds, and cash consistently through time.
Q. How did the Asset Allocation Fund perform in 1996?
A. The Asset Allocation Fund had a total return of 11.46% -- after fee
waivers -- for the year ended December 31, 1996.
Q. The Fund posted modest returns for the first half of the year. What factors
affected the performance?
A. The first half of the year saw a continuing decline in the bond markets (as
measured by the Lehman Brothers 20+ Treasury Index). This decline was driven by
various factors in the economy, such as: strong jobs reports; positive comments
on the renewed strength of the U.S. economy by Federal Reserve Chairman Alan
Greenspan; fears of rising inflation; and faster than expected growth.
The poor performance of the bond market during the first quarter put bonds down
more than -7.50%, while stocks were up about 5.30% in the same period. In order
to take advantage of the strong performance in the equity market, the Fund
rebalanced from 50/20/30 (stocks/bonds/cash) to a position of 60/20/20. In the
second quarter bonds continued their trend and became even more undervalued
relative to stocks, which hurt the Fund's performance slightly. Through May,
stocks had outperformed bonds by nearly 20%. This caused another shift away from
stocks on May 8, to a mix 50/50/0; and by year-end the allocation settled at
40/60/0. 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.
Bonds finally snapped their year-long losing streak in June, and ended the month
as the best performing asset class with a return of 2.23% for the month. This
trend continued through September and helped contribute to the mid-year bond
market rally. Unfortunately, the Lehman Brothers 20+ Treasury Index ended the
year down -1.46%.
Q. What is the basis behind the asset allocation strategy?
A. The asset allocation model is designed to invest in the optimal combination
of asset classes (stocks, bonds, cash) to provide the highest risk-adjusted
expected return. The 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.
Q. During 1996, what factors influenced the allocation shifts between stocks,
bonds and cash of the Fund?
A. The primary drivers of our asset allocation decisions are consensus-based,
value oriented long-term return expectations. For each asset class we use a
statistical measure of value: for stocks, a dividend discount model (DDM)
quantifies the average earnings and earnings growth expectations into a single
statistical measure similar to a yield; for bonds and cash, simple yield to
maturity measures are used. As the differences or spreads between each of these
statistical measures widen or narrow, it indicates that the relative
attractiveness of the assets are changing. For example, the first half of this
year was marked by rising bond yields and unchanged DDM estimates; therefore,
bonds began displaying a higher than expected return (from a higher yield) while
stock expected returns were fairly unchanged. This made bonds more attractive,
leading to our shifts from stocks to bonds.
In October, two additional valuation signals were added to the Asset Allocation
strategy. These signals -- based on management actions and corporate yield
spreads -- are complementary to the primary DDM and yield measures and provide
additional information on the expected return spread between stocks and bonds.
6
<PAGE> 3
ASSET ALLOCATION FUND
COMPARISON OF A $10,000 INVESTMENT
[GRAPH]
Total Return for the year ended December 31, 1996: 11.46%
Average Annual Return Since Inception: 14.57%
- --------------------------------------------------------------------------------
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 20+ Treasury Bond Index is an unmanaged index
comprised of Treasury bonds with maturities averaging 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 1996, 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.
7
<PAGE> 4
LIFE & ANNUITY TRUST ASSET ALLOCATION FUND--DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
<C> <S> <C> <C> <C>
U.S. TREASURY SECURITIES (99.86%)
U.S. TREASURY BILLS (44.19%)
$ 326,000 U.S. Treasury Bills 4.98%# 01/02/97 $ 325,914
498,000 U.S. Treasury Bills 5.01# 01/09/97 497,412
70,000 U.S. Treasury Bills 5.12# 01/23/97 69,783
744,000 U.S. Treasury Bills 5.12# 01/30/97 740,996
2,955,000 U.S. Treasury Bills 5.17# 02/06/97 2,940,223
261,000 U.S. Treasury Bills 5.17# 02/13/97 259,534
3,801,000 U.S. Treasury Bills 5.18# 02/20/97 3,775,532
1,079,000 U.S. Treasury Bills+ 5.19# 03/13/97 1,068,530
13,328,000 U.S. Treasury Bills 5.20# 03/06/97 13,212,071
-----------
$22,889,995
U.S. TREASURY BONDS (55.67%)
$ 300,000 U.S. Treasury Bonds 6.25% 08/15/23 $ 281,156
500,000 U.S. Treasury Bonds 6.50 11/15/26 490,625
450,000 U.S. Treasury Bonds 6.75 08/15/26 453,094
2,050,000 U.S. Treasury Bonds 7.13 02/15/23 2,139,048
1,500,000 U.S. Treasury Bonds 7.25 08/15/22 1,586,719
450,000 U.S. Treasury Bonds 7.63 11/15/22 496,547
3,100,000 U.S. Treasury Bonds 7.63 02/15/25 3,441,970
3,600,000 U.S. Treasury Bonds 7.88 02/15/21 4,066,877
3,650,000 U.S. Treasury Bonds 8.00 11/15/21 4,183,813
250,000 U.S. Treasury Bonds 8.13 08/15/19 288,906
900,000 U.S. Treasury Bonds 8.13 05/15/21 1,044,000
850,000 U.S. Treasury Bonds 8.13 08/15/21 986,531
1,300,000 U.S. Treasury Bonds 8.75 05/15/17 1,585,188
3,000,000 U.S. Treasury Bonds 8.75 08/15/20 3,693,750
850,000 U.S. Treasury Bonds 8.88 08/15/17 1,049,219
1,850,000 U.S. Treasury Bonds 8.88 02/15/19 2,294,000
600,000 U.S. Treasury Bonds 9.00 11/15/18 752,063
-----------
$28,833,506
-----------
TOTAL U.S. TREASURY SECURITIES $51,723,501
(Cost $51,115,231)
</TABLE>
8
<PAGE> 5
LIFE & ANNUITY TRUST ASSET ALLOCATION FUND--DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
VALUE
<C> <S> <C> <C>
TOTAL INVESTMENTS IN SECURITIES
(Cost $51,115,231)* (Notes 1 & 3) 99.86% $51,723,501
Other Assets and Liabilities, Net 0.14 73,440
------ -----------
TOTAL NET ASSETS 100.00% $51,796,941
====== ===========
</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.
* 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 $ 763,636
Gross Unrealized Depreciation (155,366)
---------
NET UNREALIZED APPRECIATION $ 608,270
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 6
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 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.
Q. How did the Growth and Income Fund perform in 1996?
A. The Growth and Income Fund had a total return of 22.44% -- after fee
waivers -- for the year ended December 31, 1996. This return beat both the
Lipper Growth and the Growth and Income averages, which returned 17.50% and
20.70% respectively. The return was slightly behind the 22.70% of the S&P 500.
Q. The Fund's performance is down compared to last year. Why?
A. Although 1995's return was higher than 1996's return, the Fund outperformed
the Lipper performance benchmark this year. Sector emphasis and careful stock
selection aided the performance in both years. An overweighting in two of the
leading sectors, Technology and Finance (versus underweighting in both in 1995)
contributed to the outperformance in 1996.
Q. On what sectors of the stock market did you focus in 1996?
A. Technology, Finance, and Energy were overweighted all year due to good
earnings and price performance expectations. They all performed extremely well.
Select holdings in the technology area included Intel and Cisco Systems (up more
than 100% in 1996) and Ericsson Telecom. In the finance area, the Fund currently
owns Citicorp, Charles Schwab and American International Group, all very
successful holdings last year.
Q. Do you expect to focus on these same sectors in 1997?
A. Yes, we do expect to focus on the same sectors, with the addition of Real
Estate Investment Trusts (REITs). All of last year's sectors continue to have
attractive earnings growth rates, and current economic conditions favor these
industries.
Q. What is the current composition of the Fund?
A. Currently, the Fund is invested approximately 91% in stocks, 6% in bonds, and
3% cash.
Q. Can you discuss the investment strategy with which you manage the Fund?
A. We buy medium to large companies with better, and generally more consistent,
earnings growth than the market average. They must have quality management with
proper incentives to get the stock price up, and generally dominate and/or lead
their industry. Risk is controlled by our sector emphasis and under-emphasis and
sell disciplines.
10
<PAGE> 7
GROWTH AND INCOME FUND
COMPARISON OF A $10,000 INVESTMENT
[GRAPH]
Total Return for the Year Ended December 31, 1996: 22.44%
Average Annual Total Return Since Inception: 20.04%
- --------------------------------------------------------------------------------
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. 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.
3. 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.
4. During 1996, 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.
11
<PAGE> 8
LIFE & ANNUITY TRUST GROWTH AND INCOME FUND--DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES SECURITY NAME COST VALUE
<C> <S> <C> <C>
COMMON STOCKS (89.82%)
ADVERTISING (0.92%)
6,700 Omnicom Group $ 219,243 $ 306,525
APPLIANCES AND FURNITURE (3.11%)
40,300 Sunbeam-Oster Co. Inc. $ 1,077,188 $ 1,037,725
AUTOMOBILE & RELATED (2.36%)
16,900 Danaher Corp $ 582,665 $ 787,963
BASIC INDUSTRIES (5.87%)
9,100 Aluminum Co of America $ 558,612 $ 580,125
10,300 Case Corp 526,274 561,350
21,000 Monsanto Co 602,411 816,375
----------- -----------
$ 1,687,297 $ 1,957,850
BEVERAGE (1.86%)
21,000 Pepsico Inc. $ 630,741 $ 614,250
CAPITAL GOODS (0.41%)
5,000 Lexmark International Group Inc Class A + $ 101,234 $ 138,125
COMMERCIAL SERVICES (2.54%)
3,500 AccuStaff Inc + $ 72,654 $ 73,938
18,000 CUC International Inc + 402,624 427,500
12,400 Service Corp International 270,098 347,200
----------- -----------
$ 745,376 $ 848,638
COMPUTER SOFTWARE (4.29%)
14,800 First Data Corp $ 529,600 $ 540,200
7,000 Oracle Systems Corp + 236,833 292,250
23,046 Reynolds & Reynolds Co Class A 523,255 599,196
----------- -----------
$ 1,289,688 $ 1,431,646
COMPUTER SYSTEMS (2.70%)
9,900 Cisco Systems Inc + $ 483,051 $ 629,888
10,000 Komag Inc + 251,217 271,250
----------- -----------
$ 734,268 $ 901,138
CONSUMER-BASIC (1.55%)
5,600 Colgate-Palmolive Co. $ 470,258 $ 516,600
DIVERSIFIED-OPERATIONS (2.37%)
9,000 General Electric $ 814,640 $ 791,000
ELECTRICAL EQUIPMENT (0.81%)
4,700 Nokia Corp ADR Class A $ 267,134 $ 270,250
</TABLE>
12
<PAGE> 9
LIFE & ANNUITY TRUST GROWTH AND INCOME FUND--DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES SECURITY NAME COST VALUE
<C> <S> <C> <C>
ENERGY & RELATED (10.33%)
8,000 Anadarko Petroleum Corp $ 443,692 $ 518,000
3,000 Cabot Corp 77,587 75,375
4,800 Mobil Corp 527,433 586,800
19,200 Reading & Bates Corp + 443,738 508,800
847 Smedvig ASA -- Sponsored ADR Class B + 17,999 17,046
11,780 Sonat Inc 457,831 606,670
6,000 Texaco Inc 588,672 588,750
5,000 Transocean Offshore Inc 316,061 313,125
7,400 U.S. Filter Corp 234,574 234,950
----------- -----------
$ 3,107,587 $ 3,449,516
FINANCE & RELATED (17.38%)
13,300 Aetna Inc $ 884,077 $ 1,064,000
2,500 American International Group Inc 237,179 270,625
9,900 Amli Residential Properties 215,325 231,413
8,700 Associates First Capital Corp 359,571 383,888
10,000 Brandywine Realty Trust 165,000 195,000
4,500 Cali Realty Corp 120,143 138,938
5,700 Citicorp 439,926 587,100
12,000 Excel Realty Trust 274,500 304,500
5,500 Federal Home Loan Mortgage Corp 473,339 605,688
2,500 Guidant Corp 121,198 142,500
10,000 Household International Inc 699,005 922,500
8,500 MBNA Corp 222,891 352,750
14,200 Schwab (Charles) Corp 349,410 454,400
7,000 Security Capital Industrial Trust 142,762 149,625
----------- -----------
$ 4,704,326 $ 5,802,927
FOOD & RELATED (1.74%)
5,150 Philip Morris Co Inc $ 474,296 $ 580,019
FOOTWEAR (0.93%)
5,200 Nike Inc Class B $ 291,157 $ 310,700
GENERAL BUSINESS & RELATED (1.53%)
2,400 Corrections Corp of America + $ 70,882 $ 73,500
9,500 Groupe AB SA-ADR + 199,500 136,563
7,000 Patriot American Hospitality Inc 299,354 301,875
----------- -----------
$ 569,736 $ 511,938
HEALTHCARE (0.97%)
14,800 Tenet Healthcare Corp + $ 317,768 $ 323,750
</TABLE>
13
<PAGE> 10
LIFE & ANNUITY TRUST GROWTH AND INCOME FUND--DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES SECURITY NAME COST VALUE
<C> <S> <C> <C>
MANUFACTURING PROCESSING (5.01%)
6,600 Allied Signal Inc $ 336,740 $ 442,200
4,200 Harsco Corp 265,467 287,700
11,100 Potash Corp of Saskatchewan Inc 769,670 943,500
----------- -----------
$ 1,371,877 $ 1,673,400
MEDICAL EQUIPMENT & SUPPLIES (1.39%)
11,300 Baxter International Inc $ 458,133 $ 463,300
PHARMACEUTICALS (3.13%)
13,000 Astra AB ADR Class A $ 567,695 $ 637,000
6,000 Smithkline Beecham Plc 308,730 408,000
----------- -----------
$ 876,425 $ 1,045,000
REAL ESTATE INVESTMENT TRUSTS (2.39%)
5,400 Equity Residential Properties Trust $ 222,750 $ 222,750
16,000 Spieker Properties Inc 478,427 576,000
----------- -----------
$ 701,177 $ 798,750
RETAIL & RELATED (5.44%)
12,700 Gillette Co $ 727,819 $ 987,425
29,900 Mattel Inc 767,650 829,725
----------- -----------
$ 1,495,469 $ 1,817,150
SEMICONDUCTORS (4.92%)
7,300 Intel Corp $ 491,100 $ 955,844
11,200 Motorola Inc 513,101 687,400
----------- -----------
$ 1,004,201 $ 1,643,244
TELECOMMUNICATIONS (5.87%)
12,800 Alltel Corp $ 378,677 $ 401,600
38,300 Ericson Telefonaktiebolaget L M Class B 762,955 1,156,181
12,500 U.S. West Inc 375,802 403,125
----------- -----------
$ 1,517,434 $ 1,960,906
TOTAL COMMON STOCKS $25,509,318 $29,982,310
PREFERRED STOCKS (1.67%)
CONVERTIBLES (0.78%)
19,500 First Chicago NBD Corp expires 02/15/1997 $ 338,427 $ 258,375
TELECOMMUNICATIONS (0.89%)
10,900 Airtouch Communications Inc + $ 317,213 $ 297,025
TOTAL PREFERRED STOCKS $ 655,640 $ 555,400
</TABLE>
14
<PAGE> 11
LIFE & ANNUITY TRUST GROWTH AND INCOME FUND--DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
INTEREST MATURITY
PRINCIPAL RATE DATE VALUE
<C> <S> <C> <C> <C>
CORPORATE BONDS & NOTES (0.51%)
CONVERTIBLE CORPORATE BONDS (0.51%)
$ 170,000 U.S. Filter Corp
(Cost $170,000) 4.50% 12/15/01 $ 171,275
U.S. TREASURY SECURITIES (5.93%)
U.S. TREASURY BILLS (5.93%)
$2,000,000 U.S. Treasury Bills
(Cost $1,978,017) 5.00%- 03/20/97 $ 1,978,736
SHORT-TERM INSTRUMENTS (2.38%)
REPURCHASE AGREEMENTS (2.38%)
$ 795,000 Goldman Sachs Pooled Repurchase Agreement -
102% Collateralized by U.S. Government Securities (Cost
$795,000) 6.58% 01/02/97 $ 795,000
TOTAL INVESTMENTS IN SECURITIES
(Cost $29,107,975)* (Notes 1 and 3) 100.31% $33,482,721
Other Assets and Liabilities, Net (0.31) (102,083)
------ -----------
TOTAL NET ASSETS 100.00% $33,380,638
====== ===========
</TABLE>
- --------------------------------------------------------------------------------
- - Yield to maturity.
+ 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 $4,713,110
Gross Unrealized Depreciation (338,364)
----------
NET UNREALIZED APPRECIATION $4,374,746
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 12
MONEY MARKET FUND
Michael Neitzke and Madeline Gish are co-managers of the Money Market Fund.
Mr. Neitzke joined Wells Fargo in 1996 from First Interstate Capital Management.
He has over a decade of experience in managing taxable money market mutual funds
at First Interstate Bank and Union Capital Advisors. He holds a B.A. in finance
from California State University and is a Chartered Financial Analyst Candidate.
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.
Q. How did the Money Market Fund perform during 1996?
A. The Money Market Fund generated relatively high, consistent yields throughout
the year, providing a high degree of quality and liquidity. For the period ended
December 31, 1996, the total return was 4.72% -- after fee waivers.
Q. How did 1996's economic environment influence the performance of the Fund?
A. The Federal Reserve lowered the federal funds target rate by .25% in January,
and the markets saw this as the end to any further easing. Short-term rates rose
throughout the first half of the year. The Fund purchased securities in the six
to twelve month range in July as the yield curve steepened. This turned out to
be the high in yields for the year as the economy showed signs of slowing.
Q. What is the current composition of the Fund?
A. Currently, the Fund is invested approximately 59% in U.S. Treasuries and 41%
in repurchase agreements.
Q. How will the current and expected economic environment affect the Money
Market Fund?
A. With the current U.S. expansion continuing, and the stock market coming off
another year of strong gains, money market funds could see inflows as a result
of cautious investors moving money to a more stable asset class. Several
regulatory changes permitting a more broad use of money market funds will also
likely cause assets in money funds to grow again in 1997.
Q. What is your strategy for 1997?
A. The Federal Reserve is likely to leave target rates unchanged through the
first quarter of 1997. We expect the next Fed move will be to raise interest
rates, although the timing is unclear. Tightness in the labor markets and
relatively high capacity utilization in the manufacturing sector could trigger
an increase in inflation. The Treasury bill market continues to trade at levels
consistent with a Fed easing of rates, which we do not expect. The Treasury bill
curve remains positively sloped, with securities maturing in six months or
longer offering the greatest yield pickup.
- ---------------
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 1996, 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.
16
<PAGE> 13
LIFE & ANNUITY TRUST MONEY MARKET FUND--DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
<C> <S> <C> <C> <C>
U.S. TREASURY SECURITIES (58.40)%
U.S. TREASURY BILLS (52.86)%
$ 750,000 U.S. Treasury Bills 5.01%# 01/09/97 $ 749,171
2,750,000 U.S. Treasury Bills 5.12# 01/23/97 2,741,629
1,250,000 U.S. Treasury Bills 5.17# 02/06/97 1,243,706
100,000 U.S. Treasury Bills 5.24# 05/08/97 98,218
1,000,000 U.S. Treasury Bills 5.27# 05/15/97 981,463
900,000 U.S. Treasury Bills 5.28# 05/22/97 882,410
-----------
TOTAL U.S. TREASURY BILLS $ 6,696,597
U.S. TREASURY NOTES (5.54)%
$ 700,000 U.S. Treasury Notes 5.88% 07/31/97 $ 701,764
-----------
TOTAL U.S. TREASURY SECURITIES $ 7,398,361
SHORT TERM INSTRUMENTS (40.77)%
REPURCHASE AGREEMENTS (40.77)%
$ 815,000 Goldman Sachs Pooled Repurchase Agreement - 102%
Collateralized by U.S. Government Securities 6.58% 01/02/97 $ 815,000
1,747,000 HSBC Securities Inc Repurchase Agreement - 102%
Collateralized by U.S. Government Securities 6.00 01/02/97 1,747,000
1,102,000 JP Morgan Securities Inc Repurchase Agreement - 102%
Collateralized by U.S. Government Securities 6.37 01/02/97 1,102,000
1,500,000 Morgan Stanley & Co Repurchase Agreement - 102%
Collateralized by U.S. Government Securities 6.50 01/02/97 1,500,000
-----------
TOTAL REPURCHASE AGREEMENTS $ 5,164,000
TOTAL INVESTMENTS IN SECURITIES
(Cost $12,562,361)* (Note 1) 99.17% $12,562,361
Other Assets and Liabilities, Net 0.83 104,590
------ -----------
TOTAL NET ASSETS 100.00% $12,666,951
====== ===========
</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.
17
<PAGE> 14
US GOVERNMENT ALLOCATION FUND
The U.S. Government Allocation portfolio is a professionally managed portfolio,
advised by Wells Fargo Bank, N.A. ("Wells Fargo Bank"). Barclays Global Fund
Advisors ("BGFA") serves as sub-investment adviser. BGFA uses an investment
model developed over the past 20 years that analyzes extensive financial data
from numerous sources and recommends a portfolio allocation. Looking at the
asset classes through the framework of a model gives the advantage of assessing
the relative attractiveness of U.S. Treasury bonds, U.S. Treasury notes, and
money market instruments consistently through time.
Q. How did the U.S. Government Allocation Fund perform in 1996?
A. The U.S. Government Allocation Fund had a total return of 3.99% -- after fee
waivers -- for the year ended December 31, 1996.
Q. This is a significant decrease from the return for 1995. What brought about
this change?
A. In 1995, the yields on long bonds declined throughout the year, providing the
best price increase the bond market had seen in ten years. 1995 was
characterized by slow growth and low inflation, with long bond yields declining
from a 7.80% level to 5.95%. In 1996, however, we have experienced signs of
strong economic growth in better than expected employment reports, and fears of
inflation. The yields have increased this year, with the long bond yield hitting
a high of 7.20% in mid-year before settling down by year end. Intermediate
yields have been even more volatile.
Q. How has the Fund positioned itself in response to this environment?
A. The Fund allocates among three classes of debt instruments: long-term bonds,
intermediate-term notes, and short-term money market instruments. Allocation of
assets among these classes is determined by a computer-driven model. By
analyzing the relative advantages of yield and risk between classes, the Fund's
allocation changes as the external environment changes. 1996 saw more volatility
than usual, leading to the Fund reallocating assets more frequently. In the
first quarter, the model indicated holding relatively more long bonds and cash,
and the Fund outperformed the benchmark. During the second and third quarters,
with strong fears of inflation and much speculation about Federal changes in the
target rate, the Fund held almost entirely intermediate notes, outperforming the
benchmark slightly. In the fourth quarter, the model indicated a move away from
intermediate notes and toward money market instruments, again providing a net
benefit to the Fund.
Q. What is the Fund's strategy for 1997?
A. The Fund will continue to be managed according to the computer-driven model,
following any recommended shifts in response to changes in relative interest
rates. 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.
18
<PAGE> 15
U.S. GOVERNMENT ALLOCATION FUND
COMPARISON OF A $10,000 INVESTMENT
[GRAPH]
Total Return for the Year Ended December 31, 1996: 3.99%
30 day SEC yield: 5.23% as of December 31, 1996.
Average Annual Total Return Since Inception: 6.68%.
- --------------------------------------------------------------------------------
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, 1996.
7. During 1996, 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.
19
<PAGE> 16
LIFE & ANNUITY TRUST U.S. GOVERNMENT ALLOCATION FUND--DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
<C> <S> <C> <C> <C>
U.S. TREASURY SECURITIES (97.02%)
U.S. TREASURY BILLS (20.55%)
$ 23,000 U.S. Treasury Bills 4.98%- 01/02/97 $ 22,994
36,000 U.S. Treasury Bills 5.01- 01/09/97 35,957
25,000 U.S. Treasury Bills 5.11- 01/16/97 24,947
71,000 U.S. Treasury Bills 5.12- 01/23/97 70,780
883,000 U.S. Treasury Bills 5.17- 02/06/97 878,585
1,067,000 U.S. Treasury Bills 5.17- 02/13/97 1,061,008
277,000 U.S. Treasury Bills 5.18- 02/20/97 275,144
20,000 U.S. Treasury Bills 5.18- 02/27/97 19,844
147,000 U.S. Treasury Bills 5.19- 03/13/97 145,574
247,000 U.S. Treasury Bills 5.20- 03/06/97 244,852
$ 2,779,685
U.S. TREASURY BONDS (2.89%)
$ 300,000 U.S. Treasury Bonds 11.88% 11/15/03 $ 391,125
U.S. TREASURY NOTES (73.58%)
$3,000,000 U.S. Treasury Notes 5.75% 08/15/03 $ 2,910,000
1,850,000 U.S. Treasury Notes 6.25 02/15/03 1,848,266
2,850,000 U.S. Treasury Notes 6.38 08/15/02 2,868,704
2,200,000 U.S. Treasury Notes 7.50 05/15/02 2,326,500
$ 9,953,470
TOTAL U.S. TREASURY SECURITIES $13,124,280
(Cost $13,101,094)
TOTAL INVESTMENTS IN SECURITIES
(Cost $13,101,094)* (Notes 1 and 3) 97.02% $13,124,280
Other Assets and Liabilities, Net 2.98 403,054
------ -----------
TOTAL NET ASSETS 100.00% $13,527,334
====== ===========
</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>
Gross Unrealized Appreciation $ 56,504
Gross Unrealized Depreciation (33,318)
--------
NET UNREALIZED APPRECIATION $ 23,186
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 17
LIFE & ANNUITY TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
U.S.
Asset Growth and Money Government
Allocation Income Market Allocation
Fund Fund Fund Fund
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments:
In securities, at identified cost (Note 3) $51,115,231 $29,107,975 $12,562,361 $13,101,094
In securities, at market value $51,723,501 $33,482,721 $12,562,361 $13,124,280
Cash 614 1,445 1,820 0
Receivables:
Dividends and Interest 612,448 58,754 18,116 203,507
Investment securities sold 0 2,537 0 0
Fund shares sold 652,370 119,879 166,308 297,690
Prepaid expenses 15,893 6,722 0 1,139
TOTAL ASSETS 53,004,826 33,672,058 12,748,605 13,626,616
LIABILITIES
Variation margin on futures contracts 408,800 0 0 0
Payables:
Distribution to shareholders 652,371 119,880 49,873 58,582
Fund shares redeemed 65,327 130,184 0 0
Due to administrator (Note 2) 16,872 7,902 2,281 2,947
Due to advisor (Note 2) 28,088 13,702 1,634 3,496
Accrued expenses 36,427 19,752 27,866 34,257
TOTAL LIABILITIES 1,207,885 291,420 81,654 99,282
TOTAL NET ASSETS $51,796,941 $33,380,638 $12,666,951 $13,527,334
Net assets consist of:
Paid-in capital $50,471,742 $28,820,399 $12,666,951 $13,507,669
Undistributed net realized gain (loss) on investments 495,304 185,493 0 (3,521)
Net unrealized appreciation of futures 221,625 0 0 0
Net unrealized appreciation of investments 608,270 4,374,746 0 23,186
TOTAL NET ASSETS $51,796,941 $33,380,638 $12,666,951 $13,527,334
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
(NOTE 4)
Net assets $51,796,941 $33,380,638 $12,666,951 $13,527,334
Shares outstanding 4,537,205 2,176,280 12,666,954 1,334,979
Net asset value and offering price $11.42 $15.34 $1.00 $10.13
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 18
LIFE & ANNUITY TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<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 $290,801 $ 0 $ 0
Interest 2,396,945 157,749 492,085 520,326
TOTAL INCOME 2,396,945 448,550 492,085 520,326
EXPENSES (NOTE 2)
Advisory Fees 238,004 127,818 43,071 49,164
Custody fees 0 12,502 1,593 0
Portfolio accounting fees 0 40,435 30,711 0
Transfer agency fees 19,833 10,485 4,785 4,097
Administration fees 16,872 6,291 2,871 742
Legal and audit fees 29,055 23,586 18,732 24,998
Registration fees 3,800 999 0 999
Directors' fees 11,250 11,250 11,250 11,250
Other 166 3,039 3,561 5,478
TOTAL EXPENSES 318,980 236,405 116,574 96,728
Less: Waived Fees and Reimbursed Expenses (43,876) (109,481) (67,411) (47,252)
Net Expenses 275,104 126,924 49,163 49,476
NET INVESTMENT INCOME 2,121,841 321,626 442,922 470,850
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on sale of investments 2,464,924 670,537 225 (3,569)
Net unrealized appreciation of futures contracts 37,850 0 0 0
Net change in unrealized appreciation (depreciation)
of investments (24,131) 3,407,928 0 (32,071)
NET GAIN (LOSS) ON INVESTMENTS 2,478,643 4,078,465 225 (35,640)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,600,484 $4,400,091 $443,147 $435,210
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 19
LIFE & ANNUITY TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Asset Growth and
Allocation Income
Fund Fund
-------------------------- --------------------------
For the For the For the For the
Year Ended Year Ended Year Ended Year Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income $2,121,841 $795,863 $321,626 $110,826
Net realized gain (loss) on sale of investments 2,464,924 1,687,439 670,537 158,953
Net unrealized appreciation of futures contracts 37,850 171,775 0 0
Net unrealized appreciation (depreciation) of
investments (24,131) 718,398 3,407,928 947,667
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 4,600,484 3,373,475 4,400,091 1,217,446
Distributions to shareholders:
From net investment income (2,121,841) (795,863) (321,626) (110,826)
From net realized gain on sales of investments (2,300,431) (1,266,518) (514,688) (122,419)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 25,372,586 15,133,424 19,876,206 7,617,936
Reinvestment of dividends 4,422,270 2,062,380 836,312 233,244
Cost of shares redeemed (3,642,899) (503,715) (1,815,249) (52,261)
Net increase in net assets resulting from capital share
transactions (Note 4) 26,151,957 16,692,089 18,897,269 7,798,919
INCREASE IN NET ASSETS 26,330,169 18,003,183 22,461,046 8,783,120
NET ASSETS
Beginning net assets 25,466,772 7,463,589 10,919,592 2,136,472
ENDING NET ASSETS $51,796,941 $25,466,772 $33,380,638 $10,919,592
SHARES ISSUED AND REDEEMED:
Shares sold 2,210,668 1,352,899 1,407,558 624,798
Shares issued in reinvestment of dividends 385,749 182,663 56,387 18,398
Shares redeemed (318,474) (45,222) (133,606) (4,706)
NET INCREASE IN SHARES OUTSTANDING 2,277,943 1,490,340 1,330,339 638,490
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 20
LIFE & ANNUITY TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Money U.S. Government
Market Allocation
Fund Fund
-------------------------- --------------------------
For the For the For the For the
Year Ended Year Ended Year Ended Year Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income $442,922 $113,358 $470,850 $126,604
Net realized gain (loss) on sale of investments 225 409 (3,569) 58,078
Net unrealized appreciation of futures contracts 0 0 0 0
Net unrealized appreciation (depreciation) of
investments 0 0 (32,071) 69,148
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 443,147 113,767 435,210 253,830
Distributions to shareholders:
From net investment income (442,922) (113,358) (470,850) (126,604)
From net realized gain on sales of investments (225) (409) 0 (40,804)
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 15,213,897 6,635,924 8,754,298 3,905,350
Reinvestment of dividends 443,145 113,769 470,850 167,408
Cost of shares redeemed (8,813,439) (2,417,893) (517,327) (169,600)
Net increase in net assets resulting from capital share
transactions (Note 4) 6,843,603 4,331,800 8,707,821 3,903,158
INCREASE IN NET ASSETS 6,843,603 4,331,800 8,672,181 3,989,580
NET ASSETS
Beginning net assets 5,823,348 1,491,548 4,855,153 865,573
ENDING NET ASSETS $12,666,951 $5,823,348 $13,527,334 $4,855,153
SHARES ISSUED AND REDEEMED:
Shares sold 15,213,897 6,635,924 868,061 381,576
Shares issued in reinvestment of dividends 443,145 113,769 46,768 16,384
Shares redeemed (8,813,439) (2,417,893) (51,054) (16,619)
NET INCREASE IN SHARES OUTSTANDING 6,843,603 4,331,800 863,775 381,341
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 21
LIFE & ANNUITY TRUST
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
<TABLE>
<CAPTION>
Asset Allocation Fund Growth and Income Fund
---------------------------------------- ----------------------------------------
Year Year From inception Year Year From inception
Ended Ended on April 15, Ended Ended April 12,
Dec. Dec. 1994 to Dec. Dec. 1994 to
31, 31, Dec. 31, 31, 31, Dec. 31,
1996 1995 1994 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $ 11.27 $ 9.71 $10.00 $ 12.91 $ 10.30 $10.00
Income from investment operations:
Net investment income 0.56 0.55 0.30 0.20 0.22 0.14
Net realized and unrealized gain (loss)
on investments 0.69 2.21 (0.19) 2.68 2.77 0.30
------- ------ ------ ------ ------- ------
Total from investment operations 1.25 2.76 0.11 2.88 2.99 0.44
Less Distributions:
Dividends from net investment income (0.56) (0.55) (0.30) (0.20) (0.22) (0.14)
Distributions from net realized gain (0.54) (0.65) (0.10) (0.25) (0.16) 0.00
------- ------ ------ ------ ------- ------
Total from Distributions (1.10) (1.20) (0.40) (0.45) (0.38) (0.14)
------- ------ ------ ------ ------- ------
Net Asset Value, end of period $ 11.42 $ 11.27 $ 9.71 $ 15.34 $ 12.91 $10.30
======= ====== ====== ====== ======= ======
Total Return (not annualized)* 11.46% 28.95% 1.13% 22.44% 29.19% 4.47%
Ratios/supplemental data:
Net assets, end of period (000) $51,797 $25,467 $7,464 $33,381 $10,920 $2,136
Number of shares outstanding, end of
period (000) 4,537 2,259 769 2,176 846 207
Ratios to average net assets
(annualized):
Ratio of expenses to average net
assets(1) 0.69% 0.41% 0.00% 0.60% 0.43% 0.00%
Ratio of net investment income to average
net assets(2) 5.34% 5.58% 6.30% 1.53% 2.05% 3.00%
Portfolio turnover 4% 97% 0% 95% 84% 21%
Average commission rate paid(3) N/A N/A N/A $0.0810 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
(1) Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses: 0.80% 1.22% 2.24% 1.12% 2.02% 10.18%
(2) Ratio of net investment income to
average net assets prior to waived
fees and reimbursed expenses: 5.23% 4.77% 4.06% 1.01% 0.46% -7.18%
- ------------------------------------------------------------------------------------------------------------------------------
(3) For fiscal years beginning on or after September 15, 1995,
a fund is required to disclose its average commission rate
per share for security trades on which commissions are
charged. This amount may vary from period to period and
fund to fund depending on the mix of trades executed in
various markets where trading practices and commission rate
structures may differ.
</TABLE>
* Total returns do not include any sales charges.
25
<PAGE> 22
LIFE & ANNUITY TRUST
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD IS AS FOLLOWS:
<TABLE>
<CAPTION>
Money Market Fund U.S. Government Allocation Fund
--------------------------------------- ---------------------------------------
Year Year From inception Year Year From inception
Ended Ended May 19, Ended Ended April 26,
Dec. Dec. 1994 to Dec. Dec. 1994 to
31, 31, Dec. 31, 31, 31, Dec. 31,
1996 1995 1994 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 10.30 $ 9.63 $10.00
Income from investment operations:
Net investment income 0.05 0.05 0.03 0.56 0.60 0.40
Net realized and unrealized gain (loss) on
investments 0.00 0.00 0.00 (0.17) 0.77 (0.37)
------- ------ ---------- ------- ------ ----------
Total from investment operations 0.05 0.05 0.03 0.39 1.37 0.03
Less Distributions:
Dividends from net investment income (0.05) (0.05) (0.03) (0.56) (0.60) (0.40)
Distributions from net realized gain 0.00 0.00 0.00 0.00 (0.10) 0.00
------- ------ ---------- ------- ------ ----------
Total from Distributions (0.05) (0.05) (0.03) (0.56) (0.70) (0.40)
------- ------ ---------- ------- ------ ----------
Net Asset Value, end of period $ 1.00 $ 1.00 $ 1.00 $ 10.13 $10.30 $ 9.63
======= ====== ========== ======= ====== ==========
Total Return (not annualized)* 4.72% 5.41% 2.71% 3.99% 14.40% 0.41%
Ratios/supplemental data:
Net assets, end of period (000) $12,667 $5,823 $1,492 $13,527 $4,855 $866
Number of shares outstanding, end of period
(000) 12,667 5,823 1,492 1,335 471 90
Ratios to average net assets (annualized):
Ratio of expenses to average net assets(1) 0.51% 0.42% 0.00% 0.60% 0.45% 0.00%
Ratio of net investment income to average
net assets(2) 4.64% 5.15% 4.63% 5.75% 5.82% 7.35%
Portfolio turnover N/A N/A N/A 222% 405% 130%
Average commission rate paid(3) N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
(1) Ratio of expenses to average net assets
prior to waived fees and reimbursed
expenses: 1.22% 3.83% 11.43% 1.18% 2.46% 12.73%
(2) Ratio of net investment income to
average net assets prior to waived fees
and reimbursed expenses: 3.93% 1.74% -6.80% 5.17% 3.81% -5.38%
- ------------------------------------------------------------------------------------------------------------------------------
(3) For fiscal years beginning on or after September 15, 1995, a
fund is required to disclose its average commission rate per
share for security trades on which commissions are charged.
This amount may vary from period to period and fund to fund
depending on the mix of trades executed in various markets
where trading practices and commission rate structures may
differ.
</TABLE>
* Total returns do not include any sales charges.
26
<PAGE> 23
LIFE & ANNUITY TRUST
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Life & 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 at the mean 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 policies 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
Securities 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
are accreted and premiums are amortized as required by the Internal Revenue Code
(the "Code").
27
<PAGE> 24
LIFE & ANNUITY TRUST
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
REPURCHASE AGREEMENTS
Transactions involving purchases of securities under agreements to resell such
securities ("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
may be 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.
The repurchase agreements held in the Funds at December 31, 1996 are
collateralized by U.S. Treasury or Federal Agency obligations. The repurchase
agreements were entered into on December 31, 1996.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from 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. Therefore, no provision for federal or state
income taxes is required.
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
28
<PAGE> 25
LIFE & ANNUITY TRUST
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
may not correlate with changes in the value of the underlying securities. On
December 31, 1996 the Asset Allocation Fund held the following futures
contracts:
<TABLE>
<CAPTION>
Notional
Contract Net Unrealized
Contracts Type Expiration Date Value Appreciation
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
56 S&P 500 Index March 1997 $ 20,846,000 $221,625
</TABLE>
The Life & Annuity Trust Asset Allocation Fund has pledged to brokers U.S.
Treasury bills for initial margin requirements with a par value of $820,000.
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, the
Growth and Income Fund, and the U.S. Government Allocation Fund, WFB is entitled
to a monthly advisory fee at an annual rate of 0.60% of each Fund's average
daily net assets. Under the contract with the Money Market Fund, WFB is entitled
to a monthly advisory fee at an annual rate of 0.45% of the Fund's 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 Barclays
Global Fund Advisors ("BGFA"). Subject to the overall supervision of Wells Fargo
Bank, BGFA is responsible for day-to-day portfolio management of such Funds.
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 the U.S.
Government Allocation Fund, respectively, as compensation for its sub-advisory
services. BGFA is an indirect subsidiary of Barclays Bank PLC. BGFA was formed
by the reorganization of Wells Fargo Nikko Investment Advisors ("WFNIA"), a
former affiliate of Wells Fargo & Company. Prior to January 1, 1996, WFNIA
served as sub-advisor to the Funds and was entitled to receive the same fees as
currently received by BGFA. Barclays Global Investors, N.A. ("BGI") acts as
custodian to the Asset Allocation Fund and the U.S. Government Allocation Fund.
BGI will not be entitled to receive compensation for its services to the Asset
Allocation Fund and the U.S. Government Allocation Fund so long as BGFA is
entitled to receive fees for providing investment sub-advisory services to such
Funds. Prior to January 1, 1996, BGI was known as Wells Fargo Institutional
Trust Company N.A. and was an affiliate of WFB.
The Trust has also entered into contracts on behalf of the Growth and Income
Fund and the Money Market Fund with WFB for custody and portfolio accounting
services. WFB is entitled to be compensated for custody services at 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% of the first $50 million of each Fund's average daily
net assets, 0.045% of the next $50 million and 0.02% of each Fund's average
daily net assets over $100 million.
The Trust has entered into a contract on behalf of each Fund with WFB whereby
WFB provides transfer agency services for each of the Funds. Under the contract,
WFB is entitled to receive fees at an annual rate of 0.05% of each Funds'
average daily net assets. Effective February 1, 1997, WFB will be entitled to
receive fees for transfer agency
29
<PAGE> 26
LIFE & ANNUITY TRUST
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
services at an annual rate of 0.14% of the average daily net assets of the Asset
Allocation, Growth and Income and U.S. Government Allocation Funds and 0.10% of
the average daily net assets of the Money Market Fund.
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 receive a monthly fee at the annual rate of 0.03% of each of the Fund's
average daily net assets.
The Board of Trustees has approved a change in fund administrative duties.
Effective May 1, 1997, WFB will become Administrator to the Trust on behalf of
the Funds and Stephens will become Co-Administrator to the Trust on behalf of
the Funds. WFB and Stephens will be entitled to receive monthly fees at the
annual rates of 0.04% and 0.02%, respectively, of the average daily net assets
of each Fund.
WAIVED FEES AND REIMBURSED EXPENSES
The following amounts of fees and expenses have been waived and/or reimbursed
for the year ended December 31, 1996:
<TABLE>
<CAPTION>
Waived Fees and
Reimbursed
Waived Fees Expenses
FUND by WFB by Stephens Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Allocation.......................................................... $ 43,876 $ 0 $ 43,876
Growth and Income......................................................... 109,481 0 109,481
Money Market.............................................................. 63,235 4,176 67,411
U. S. Government Allocation............................................... 35,951 11,301 47,252
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Waived fees and reimbursed expenses continue at the discretion of WFB and
Stephens.
All of the officers and one of the directors of the Trust are also officers of
Stephens. As of December 31, 1996, Stephens owned 3,182 shares of the Asset
Allocation Fund; 2,693 shares of the Growth and Income Fund; 28,367 shares of
the Money Market Fund and 2,948 shares of the U.S. Government Allocation Fund.
30
<PAGE> 27
LIFE & ANNUITY TRUST
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
3. INVESTMENT PORTFOLIO TRANSACTIONS
Purchases and sales of investments, exclusive of short-term securities, for each
Fund for the year ended December 31, 1996 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 $25,635,509 $ 0 $30,724,328
Sales proceeds 708,094 0 13,059,504
OTHER SECURITIES:
Purchases at cost 0 34,021,000 0
Sales proceeds 0 17,592,246 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 shares of
beneficial interests. Capital share transactions for each of the Funds for the
years ended December 31, 1996 and 1995 are disclosed in detail in the Statements
of Changes in Net Assets.
31
<PAGE> 28
To the Shareholders and Board of Trustees
Life & Annuity Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Asset Allocation Fund, Growth and Income
Fund, Money Market Fund and U.S. Government Allocation Fund (constituting Life &
Annuity Trust) as of December 31, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and financial highlights for the periods
indicated herein. 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 confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian 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
the aforementioned funds of Life & Annuity Trust as of December 31, 1996, the
results of their operations, the changes in their net assets and their financial
highlights for the periods indicated herein in conformity with generally
accepted accounting principles.
[Signature)
San Francisco, California
February 14, 1997
32
