<PAGE>
As filed with the Securities and Exchange Commission
on April 30, 1999
Registration No. 33-70988; 811-8118
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Post-Effective Amendment No. 13 [X]
And
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 15 [X]
________________________
LIFE & ANNUITY TRUST
(Exact Name of Registrant as specified in Certificate of Trust)
111 Center Street
Little Rock, Arkansas 72201
(Address of Principal Executive Offices, including Zip Code)
__________________________
Registrant's Telephone Number, including Area Code: (800) 643-9691
Richard H. Blank, Jr.
c/o Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
(Name and Address of Agent for Service)
With a copy to:
Robert M. Kurucza, Esq.
Marco E. Adelfio, Esq.
Morrison & Foerster LLP
2000 Pennsylvania Ave., N.W.
Washington, D.C. 20006
[X] Immediately upon filing pursuant to Rule 485(b), or
[_] on _________ pursuant to Rule 485(b)
[_] 60 Days after filing pursuant to Rule 485(a)(1), or
[_] on _________ pursuant to Rule 485(a)(1)
[_] 75 days after filing pursuant to Rule 485(a)(2), or
[_] on _________ pursuant to Rule 485(a)(2)
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
EXPLANATORY NOTE
----------------
This Post-Effective Amendment No. 13 to the Registration Statement of Life &
Annuity Trust (the "Trust") is being filed to register the definitive form of
prospectus and statement of additional information for the Asset Allocation,
Equity Value, Growth, Money Market, Strategic Growth, and U.S. Government
Allocation Funds.
<PAGE>
LIFE & ANNUITY TRUST
--------------------
Cross Reference Sheet
---------------------
Form N-1A Item Number
- ---------------------
Part A Prospectus Captions
- ------ -------------------
1 Front and Back Cover Pages
2 Objectives and Principal Strategies
Important Risks
3 Not applicable
4 Objectives and Principal Strategies
Important Risks
See Individual Fund Summaries
General Investment Risks
5 Not applicable
6 Organization and Management of the Funds
7 Investing in the Funds
Dividends and Distributions
Taxes
8 Not applicable
9 See Individual Fund Summaries
Part B Statement of Additional Information Captions
- ------ --------------------------------------------
10 Cover Page and Table of Contents
11 Not applicable
12 Investment Restrictions
Additional Investment Policies
Risk Factors
13 Management
14 Capital Stock
15 Management
16 Portfolio Transactions
17 Capital Stock
18 Determination of Net Asset Value
19 Federal Income Taxes
20 Management
21 Performance Calculations
22 Financial Information
Part C Other Information
- ------ -----------------
23-30 Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C of this Document.
<PAGE>
May 1, 1999
Life & Annuity Trust
Prospectus
Asset Allocation Fund Please read this Prospectus and keep it for
future reference. It is designed to provide
Equity Value Fund you with important information and to help
you decide if a Fund's goals match your own.
Growth Fund
Money Market Fund These securities have not been approved or
disapproved by the Securities and Exchange
Strategic Growth Commission ("SEC") nor has the SEC passed upon
Fund the accuracy or adequacy of this Prospectus.
Any representation to the contrary is a
U. S. Government criminal offense.
Allocation Fund
Fund shares are NOT deposits or other
obligations of, or issued, endorsed or
guaranteed by, Wells Fargo Bank, N.A. ("Wells
Fargo Bank") or any of its affiliates. Fund
shares are NOT insured or guaranteed by the
Federal Deposit Insurance Corporation
("FDIC"), the Federal Reserve Board or any
governmental agency. AN INVESTMENT IN A FUND
INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C> <C>
Overview Objectives and Principal Strategies 4
This section contains Summary of Important Risks 6
important summary
information about Performance History 8
the Funds.
- --------------------------------------------------------------------------------
The Funds Asset Allocation Fund 14
This section contains Equity Value Fund 18
important information
about the individual Funds. Growth Fund 22
Money Market Fund 26
Strategic Growth Fund 28
U. S. Government Allocation Fund 32
General Investment Risks 36
Organization and Management
of the Funds 42
- -------------------------------------------------------------------------------
Your Investment Investing in the Funds 44
Turn to this section for Important Information About 47
information on your Your Investment
investments including how
to buy and sell Fund shares.
- --------------------------------------------------------------------------------
Glossary 49
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life & Annuity Trust Funds Overview
- -------------------------------------------------------------------------------
----------------------------------------------------------------------
FUND OBJECTIVE
<S> <C>
----------------------------------------------------------------------
Asset Allocation Seeks to earn over the long term a high
Fund level of total return, including net
realized and unrealized capital gains and
net investment income, consistent with
reasonable risk.
----------------------------------------------------------------------
Equity Value Fund Seeks to provide investors with long-term
capital appreciation.
----------------------------------------------------------------------
Growth Fund Seeks to earn current income and achieve
long-term capital appreciation.
----------------------------------------------------------------------
Money Market Fund Seeks to provide investors with a high
level of income, while preserving capital
and liquidity, by investing in high
quality, short-term securities.
----------------------------------------------------------------------
Strategic Growth Seeks to provide investors with an above-
Fund average level of capital appreciation.
----------------------------------------------------------------------
U.S. Government Seeks over the long term a high level of
Allocation Fund total return, including net realized and
unrealized capital gains and net
investment income, consistent with
reasonable risk.
----------------------------------------------------------------------
</TABLE>
4 Life & Annuity Trust Prospectus
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
----------------------------------------------------------------------
FUND PRINCIPAL STRATEGY
<S> <C>
----------------------------------------------------------------------
Asset Allocation We allocate and reallocate assets among
Fund common stocks, U.S. Treasury bonds and
money market instruments. We invest in
asset classes that we believe are under-
valued in order to achieve better long-
term, risk adjusted returns.
----------------------------------------------------------------------
Equity Value Fund We invest in equity securities that we
believe are undervalued. Dividends are a
secondary consideration when selecting
stocks.
----------------------------------------------------------------------
Growth Fund We invest in equity securities of
domestic and foreign companies whose
market capitalization within the range of
the Russell 1000 Index, which is
considered a mid-to large-capitalization
index. We buy stocks of companies that
have a strong earnings growth trend and
above-average prospects for future
growth, or are undervalued, or have
above-average dividend yields.
----------------------------------------------------------------------
Money Market Fund We invest in U.S. dollar-denominated,
high quality money market instruments
with short term maturities in order to
maintain a stable net asset value of $1
per share.
----------------------------------------------------------------------
Strategic Growth We invest in equity securities of
Fund companies that are expected to have
strong growth in revenues, earnings and
assets, and that are selected from
different industry groups. We buy
acquisition candidates, established
growth companies and large cap companies.
----------------------------------------------------------------------
U.S. Government We allocate and reallocate assets among
Allocation Fund long-term U.S. Treasury bonds,
intermediate-term U.S. Treasury notes and
short-term money market instruments. We
invest in asset classes that we believe
are undervalued in order to achieve
better long-term, risk-adjusted returns.
----------------------------------------------------------------------
</TABLE>
Life & Annuity Trust Prospectus 5
<PAGE>
Summary Of Important Risks
- -------------------------------------------------------------------------------
This section summarizes important risks that are common to all of the Funds
described in this Prospectus, and important risks that relate specifically to
particular Funds. These are important to your investment choice. Additional
information about these and other risks is included in the individual Fund
Descriptions later in this Prospectus and under General Investment Risks
beginning on page 36. An investment in a Fund is not a deposit of Wells Fargo
Bank and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although the Money Market Fund seeks
to maintain the value of your investment at $1.00 per share, it is possible to
lose money by investing in the Fund.
- --------------------------------------------------------------------------------
COMMON RISKS FOR THE FUNDS
- --------------------------------------------------------------------------------
Equity Securities
The Funds invest in equity securities, which are subject to equity market risk.
This is the risk that stock prices will fluctuate and can decline and reduce the
value of a Fund's portfolio. Certain types of stock and certain individual
stocks selected for a Fund's portfolio may underperform or decline in value more
than the overall market. As of the date of this Prospectus, the equity markets,
as measured by the S&P 500 Index and other commonly used indexes, are trading at
or close to record levels. There can be no guarantee that these levels will
continue. The Funds that invest in smaller companies, in foreign companies
(including investments made through American Depositary Receipts and similar
instruments), and in emerging markets are subject to additional risks, including
less liquidity and greater price volatility. A Fund's investment in foreign
companies and emerging markets are also subject to special risks associated with
international investing, including currency, political, regulatory and
diplomatic risks.
Fixed Income Securities
The Funds may invest in debt instruments, such as notes and bonds, which are
subject to credit risk and interest rate risk. Credit risk is the possibility
that an issuer of an instrument will be unable to make interest payments or
repay principal. Changes in the financial strength of an issuer or changes in
the credit rating of a security may affect its value. Interest rate risk is the
risk that interest rates may increase, which will reduce the resale value of
instruments in a Fund's portfolio. Debt instruments with longer maturities are
generally more sensitive to interest rate changes than those with shorter
maturities. Changes in market interest rates do not affect the rate payable on
debt instruments held in a Fund, unless the instrument has adjustable or
variable rate features, which can reduce interest rate risk. Changes in market
interest rates may also extend or shorten the duration of certain types of
instruments, such as asset-backed securities, thereby affecting their value and
the return on your investment.
-------------------------------------------------------------------------------
6 Life & Annuity Trust Prospectus
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FUND SPECIFIC RISKS
- -------------------------------------------------------------------------------
<S> <C>
The Fund uses an investment model that seeks undervalued
Asset Allocation asset classes. There is no guarantee that the model will
Fund make accurate determinations or that an asset class we
believe is undervalued will perform as expected.
- -------------------------------------------------------------------------------
Stocks of smaller, medium-sized [and foreign companies]
Equity Value Fund purchased for this Fund may be more volatile and less
liquid than larger company stocks.
- -------------------------------------------------------------------------------
Growth Fund This Fund is primarily subject to the equity market
risks described in the Common Risks section, above.
- -------------------------------------------------------------------------------
Money Market Although the Fund seeks to maintain a stable net asset
Fund value of $1.00 per share, there is no assurance it will
be able to do so.
- -------------------------------------------------------------------------------
The Fund may invest in companies that pay low or no
dividends, have smaller market capitalizations, have
less market liquidity, have no or relatively short
operating histories, or are newly public companies. Some
of these companies have aggressive capital structures,
Strategic Growth including high debt levels, or are involved in rapidly
Fund growing or changing industries and/or new technologies.
Because the Fund may invest in such aggressive
securities, share prices may rise and fall more than the
share prices of other funds. In addition, our active
trading investment strategy may result in a higher-than-
average portfolio turnover ratio, increased trading
expenses, and higher short-term capital gains.
- -------------------------------------------------------------------------------
The Fund uses an investment model that seeks undervalued
U.S. Government asset classes. There is no guarantee that the model will
Allocation Fund make accurate determinations or that an asset class we
believe is undervalued will perform as expected.
- -------------------------------------------------------------------------------
</TABLE>
Life & Annuity Trust Prospectus 7
<PAGE>
Performance History
The information on the following pages shows you how each Fund has performed and
illustrates the variability of a Fund's returns over time. Each Fund's average
annual returns for one-, five- and ten-year periods are compared to the
performance of an appropriate broad-based index. Please remember that past
performance is no guarantee of future results. The Equity Value Fund and
Strategic Growth Fund have been in operation less than a calendar year, so
return information is not reported for these Funds.
- --------------------------------------------------------------------------------
ASSET ALLOCATION FUND
CALENDAR YEAR RETURNS
[CHART APPEARS HERE]
Best Qtr.: Worst Qtr.:
Q4 '98 Q3 '98
15.86% -5.38%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
1 year Since Inception
(April 15, 1994)
- --------------------------------------------------------------------------------
<S> <C> <C>
Life & Annuity Trust
Asset Allocation Fund 25.26 18.24
- --------------------------------------------------------------------------------
S&P 500/1/ 20.94 19.49
- --------------------------------------------------------------------------------
</TABLE>
/1/ S&P 500 is a registered trademark of Standard and Poors.
8 Life & Annuity Trust Prospectus
<PAGE>
Performance History
- --------------------------------------------------------------------------------
GROWTH FUND
CALENDAR YEAR RETURNS
[CHART APPEARS HERE]
Best Qtr.: Worst Qtr.:
Q4 '98 Q3 '98
22.93% -10.40%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
1 year Since Inception
(April 12, 1994)
- --------------------------------------------------------------------------------
<S> <C> <C>
Life & Annuity Trust
Growth Fund 28.81 21.42
- --------------------------------------------------------------------------------
S&P 500/1/ 28.58 26.71
- --------------------------------------------------------------------------------
</TABLE>
/1/ S&P 500 is a registered trademark of Standard and Poors.
Life & Annuity Trust Prospectus 9
<PAGE>
Performance History
- -------------------------------------------------------------------------------
MONEY MARKET FUND
CALENDAR YEAR RETURNS
[CHART APPEARS HERE]
Best Qtr.: Worst Qtr.:
Q1 '95 Q3 '94
1.37% 1.04%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
1 year Since Inception
(May 19, 1994)
- --------------------------------------------------------------------------------
<S> <C> <C>
Life & Annuity Trust
Money Market Fund 4.77 4.91
- --------------------------------------------------------------------------------
IBC All Taxable Money Market Fund Average 5.07 5.47
- --------------------------------------------------------------------------------
</TABLE>
10 Life & Annuity Trust Prospectus
<PAGE>
Performance History
- --------------------------------------------------------------------------------
U.S. GOVERNMENT ALLOCATION FUND
CALENDAR YEAR RETURNS
[CHART APPEARS HERE]
Best Qtr.: Worst Qtr.:
Q2 '95 Q1 '97
4.86% -0.89%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
1 year Since Inception
(April 26, 1994)
- --------------------------------------------------------------------------------
<S> <C> <C>
Life & Annuity Trust
U.S. Government Allocation Fund 5.86 6.78
- --------------------------------------------------------------------------------
Lehman Bros. U.S. Treasury Index 10.03 9.05
- --------------------------------------------------------------------------------
Lehman Bros. Treasury Intermediate Index 8.62 7.82
- --------------------------------------------------------------------------------
</TABLE>
Life & Annuity Trust Prospectus 11
<PAGE>
- --------------------------------------------------------------------------------
The summary information on the previous pages is designed to provide you with an
overview of each Fund. The sections that follow provide more detailed
information about the investments and management of each Fund.
Important information you should look for:
Investment Objective and Investment Policies
What is the Fund trying to achieve? How do we intend to invest your money? What
makes a Fund different from the other Funds offered in this Prospectus?
Permitted Investments
A summary of the Fund's key permitted investments and practices.
Important Risk Factors
What are key risk factors for the Fund? This will include the factors described
in "General Investment Risks" together with any special risk factors for the
Fund.
Financial Highlights
Provides important financial information about each class of shares of the Fund.
Words appearing in italicized print and highlighted in color are defined in the
Glossary.
12 Life & Annuity Trust Prospectus
<PAGE>
This page intentionally left blank
- --------------------------------------------------------------------------------
<PAGE>
Asset Allocation Fund
- --------------------------------------------------------------------------------
Investment Objective
The Asset Allocation Fund seeks to earn over the long-term a high level of total
return, including net realized and unrealized capital gains and net investment
income, consistent with reasonable risk.
Investment Policies
We allocate and reallocate assets among common stocks, U.S. Treasury Bonds and
money market instruments. This strategy is based on the premise that asset
classes are at times undervalued or overvalued in comparison to one another and
that investing in undervalued asset classes offers better long-term, risk-
adjusted returns.
Permitted Investments
The asset classes we invest in are composed as follows:
. Stock Investments--We invest in common stocks representative of the S&P 500
Index. We do not individually select common stocks on the basis of
traditional investment analysis. Instead, stock investments are made
according to a weighted formula intended to match the total return of the S&P
500 Index as closely as possible;
. Bond Investments--We invest in U.S. Treasury Bonds representative of the
Lehman Brothers 20+ Bond Index. Bonds on this Index have remaining maturities
of twenty years or more;
. Money Market Investments--We invest this portion of the Fund in high-quality
money market instruments, including U.S. Government obligations, obligations
of foreign and domestic banks, short-term corporate debt instruments and
repurchase agreements.
In addition, under normal market conditions, we may invest:
. In call and put options on stock indexes, stock index futures, options on
stock index futures, interest rate and interest rate futures contracts as a
substitute for a comparable market position in stocks;
. In interest rate and index swaps; and
. Up to 25% of total assets in foreign obligations qualifying as money market
investments.
We manage the allocation of investments in the Fund's portfolio assuming a
"normal" allocation of 60% stocks and 40% bonds. This is not a "target"
allocation but rather as means to set a level of risk tolerance for the Fund.
14 Life & Annuity Trust Prospectus
<PAGE>
- --------------------------------------------------------------------------------
We are not required to keep a minimum investment in any of the three asset
classes described above, nor are we prohibited from investing substantially all
of our assets in a single class. The allocation may shift at any time. In
addition, we may temporarily hold assets in cash or in money market instruments,
including U.S. Government obligations, repurchase agreements and other short-
term investments, to maintain liquidity or when we believe it is in the best
interests of shareholders to do so. During such periods, the Fund may not
achieve its objective. The Fund is a diversified portfolio.
Important Risk Factors
We may incur a higher than average portfolio turnover ratio due to allocation
shifts recommended by the model. This can increase transaction costs, which in
turn, can lower Fund performance. Foreign obligations may entail additional
risks, such as currency, diplomatic and political risks, which are described in
more detail in the General Investment Risks section below. The value of
investments in options on stock indexes is affected by price level movements for
a particular index, rather than price movements for an individual security.
You should consider the Summary of Important Risks on page 6, the General
Investment Risks beginning on page 36, and the specific risks listed above. They
are all important to your investment choice.
Portfolio Management
The Fund is managed by a team of advisors who, using the allocation model,
jointly make investment decisions for the Fund.
Life & Annuity Trust Prospectus 15
<PAGE>
Asset Allocation Fund Financial Highlights
- --------------------------------------------------------------------------------
This table is intended to help you understand the Fund's financial performance
for the past 5 years (or since inception, if shorter). KPMG LLP audited this
information which, along with their report and the Fund's financial statements,
is available upon request in the Fund's annual report.
<TABLE>
<CAPTION>
====================================================================================================================================
FOR A SHARE OUTSTANDING
====================================================================================================================================
From
Inception
Year Ended Year Ended Year Ended Year Ended on April 15,
Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1994 to
1998 1997 1996 1995 Dec. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $11.99 $11.42 $11.27 $9.71 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.34 0.60 0.56 0.55 0.30
Net realized and unrealized gain
(loss) on investments 2.60 1.73 0.69 2.21 (0.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.94 2.33 1.25 2.76 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.34) (0.60) (0.56) (0.55) (0.30)
Distributions from net realized gain (1.14) (1.16) (0.54) (0.65) (0.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from distributions (1.48) (1.76) (1.10) (1.20) (0.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.45 $11.99 $11.42 $11.27 $9.71
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (not annualized)/1/ 25.26% 20.88% 11.46% 28.95% 1.13%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $156,241 $86,506 $51,797 $25,467 $7,464
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets (annualized):
Ratio of expenses to average net assets 0.92% 0.80% 0.69% 0.41% 0.00%
Ratio of net investment income to
average net assets 2.62% 5.20% 5.34% 5.58% 6.30%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 29% 156% 4% 97% 0%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses 1.11% 0.85% 0.80% 1.22% 2.24%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets prior to waived
fees and reimbursed expenses 2.43% 5.15% 5.23% 4.77% 4.06%
- ------------------------------------------------------------------------------------------------------------------------------------
/1/ Total returns do not include any sales charges.
</TABLE>
16 Life & Annuity Trust Prospectus
<PAGE>
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- --------------------------------------------------------------------------------
<PAGE>
Equity Value Fund
- -------------------------------------------------------------------------------
Investment Objective
The Equity Value Fund seeks to provide investors with long-term capital
appreciation.
Investment Policies
We seek long-term capital appreciation by investing in a diversified portfolio
composed primarily of equity securities that are trading at low price-to-
earnings ratios, as measured against the stock market as a whole or against the
individual stock's own price history. In addition we look at the price-to-book
value and price-to-cash flow ratios of companies for indications of attractive
valuation. We use both quantitative and qualitative analysis to identify
possible investments. Dividends are a secondary consideration when selecting
stocks. We may purchase particular stocks when we believe that a history of
strong dividends may increase their market value.
Permitted Investments
Under normal market conditions, we invest:
. primarily in common stocks of both large, well-established companies and
smaller companies with market capitalization exceeding $50 million at the
time of purchase;
. in debt instruments that may be converted into the common stock of both U.S.
and foreign companies; and
. up to 25% of our assets in foreign companies through American Depositary
Receipts and similar instruments.
We may also purchase convertible debt securities with the same characteristics
as common stock, as well as in preferred stock and warrants. We may temporarily
hold assets in cash or in money market instruments, including U.S. Government
obligations, shares of other mutual funds and repurchase agreements, or make
short-term investments, either to maintain liquidity or for short-term defensive
purposes when we believe it is in the best interests of shareholders. During
these periods, the Fund may not achieve its objective of long-term capital
appreciation.
Important Risk Factors
Stocks of smaller, medium-sized and foreign companies purchased for this Fund
may be more volatile and less liquid than larger company stocks.
You should consider the Summary of Important Risks on page 6, the General
Investment Risks beginning on page 36, and the specific risks listed above. They
are all important to your investment choice.
18 Life & Annuity Trust Prospectus
<PAGE>
- -------------------------------------------------------------------------------
Portfolio Managers
. Rex Wardlaw, CFA
Principal--Value Equity Team Leader
Has managed the Equity Value Fund since May 1, 1998, and has been with Wells
Fargo/Wells Capital Management since 1986. Since 1993, Mr. Wardlaw has
managed investment funds, pensions assets, and private accounts for Wells
Fargo Bank/Wells Capital Management. Prior to 1993, he was an investment
analyst specializing in general equity market sectors; including utilities,
transportation, basic industries and capital goods. Mr. Wardlaw leads the
Value Equity Investment Team, managing portfolios and directing the research
effort. He has over ten years of investment management experience.
. Allen Wisniewski, CFA
Principal
Has co-managed the Equity Value Fund since May 1, 1998, and has been with
Wells Fargo/Wells Capital Management as a portfolio manager and research
analyst since 1987. Mr. Wisniewski has over eighteen years of equity and
balanced portfolio investment management experience.
. Gregg Giboney, CFA
Principal
Has co-managed the Equity Value Fund since May 1, 1998, and has been with
Wells Fargo/Wells Capital Management as a member of the Value Equity Team
providing security analysis and portfolio management since 1996. Mr. Giboney
was with First Interstate Capital Management prior to 1996 in various
capacities, including fixed-income trading, derivatives management, equity
analysis, stable value asset management and as a portfolio manager for
personal, institutional and trust accounts.
Life & Annuity Trust Prospectus 19
<PAGE>
Equity Value Fund Financial Highlights
- --------------------------------------------------------------------------------
This table is intended to help you understand the Fund's financial performance
for the past 5 years (or since inception, if shorter). KPMG LLP audited this
information which, along with their report and the Fund's financial statements,
is available upon request in the Fund's annual report.
<TABLE>
<CAPTION>
=================================================================
FOR A SHARE OUTSTANDING
=================================================================
From Inception
May 1, 1998
Dec. 31, 1998
- -----------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $10.00
- -----------------------------------------------------------------
Income from investment operations:
Net investment income 0.07
Net realized and unrealized gain (loss)
on investments (0.45)
- -----------------------------------------------------------------
Total from investment operations (0.38)
- -----------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.07)
Distributions from net realized gain 0.00
- -----------------------------------------------------------------
Total from distributions (0.07)
- -----------------------------------------------------------------
Net asset value, end of period $ 9.55
- -----------------------------------------------------------------
Total return (not annualized)/1/ (3.76)%
- -----------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $11,072
- -----------------------------------------------------------------
Ratios to average net assets (annualized):
Ratio of expenses to average net assets 1.09%
Ratio of net investment income to
average net assets 1.54%
- -----------------------------------------------------------------
Portfolio turnover 27%
- -----------------------------------------------------------------
Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses 2.52%
- -----------------------------------------------------------------
Ratio of net investment income
to average net assets prior to waived
fees and reimbursed expenses (loss) 0.11%
- -----------------------------------------------------------------
</TABLE>
/1/ Total returns do not include any sales charges.
20 Life & Annuity Trust Prospectus
<PAGE>
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- --------------------------------------------------------------------------------
<PAGE>
Growth Fund
- -------------------------------------------------------------------------------
Investment Objective
The Growth Fund seeks to earn current income and achieve long-term capital
appreciation.
Investment Policies
We seek current income and long-term capital appreciation by investing primarily
in common stocks and preferred stocks and debt securities that are convertible
into common stocks. We actively manage a diversified portfolio of securities and
we look for companies that have a strong earnings growth trend that we believe
have above-average prospects for future growth. We may also invest in the stocks
of medium- to smaller-size companies that we believe have the potential to
produce high levels of future earnings growth or when we believe the stock is
undervalued.
Permitted Investments
Under normal market conditions, we invest:
. at least 65% of our total assets in equity securities, including common and
preferred stocks;
. at least 65% of our total assets in income-producing securities; and
. the majority of our total assets in issues of companies with market
capitalization that falls within the range of the Russell 1000 Index. (As of
March 31, 1999, this range was from $20 million to $452 billion. The range is
expected to change frequently.)
We may temporarily hold assets in cash or in money market instruments, including
U.S. Government obligations, shares of other mutual funds and repurchase
agreements, or make short-term investments, either to maintain liquidity or for
short-term defensive purposes when we believe it is in the best interests of
shareholders to do so. During such periods, the Fund may not achieve its
investment objective of long-term capital appreciation.
Important Risk Factors
This Fund is primarily subject to the equity market risks described in the
Common Risks section.
You should consider the Common Risks on page 6 and the General Investment Risks
beginning on page 36. They are all important to your investment choice.
22 Life & Annuity Trust Prospectus
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Manager
. Kelli Hill
Principal--Core Equity Team Leader
Has managed the Growth Fund since February 1997, and has been with Wells
Fargo/Wells Capital Management since 1987. Ms. Hill is the Core Equity Team
Leader, providing portfolio management and fundamental security analysis for
the team. She has over twelve years of equity investment management
experience.
Life & Annuity Trust Prospectus 23
<PAGE>
Growth Fund Financial Highlights
- --------------------------------------------------------------------------------
This table is intended to help you understand the Fund's financial performance
for the past 5 years (or since inception, if shorter). KPMG LLP audited this
information which, along with their report and the Fund's financial statements,
is available upon request in the Fund's annual report.
<TABLE>
<CAPTION>
====================================================================================================================================
FOR A SHARE OUTSTANDING
====================================================================================================================================
From
Inception
Year Ended Year Ended Year Ended Year Ended on April 12,
Dec. 31, Dec. 31, Mar. 31, Dec. 31, 1994 to
1998 1997 1996 1995 Dec. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $16.79 $15.34 $12.91 $10.30 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.09 0.19 0.20 0.22 0.14
Net realized and unrealized gain
(loss) on investments 4.65 2.48 2.68 2.77 0.30
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.74 2.67 2.88 2.99 0.44
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.09) (0.19) (0.20) (0.22) (0.14)
Distributions from net realized gain (1.39) (1.03) (0.25) (0.16) 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total from distributions (1.48) (1.22) (0.45) (0.38) (1.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $20.05 $16.79 $15.34 $12.91 $10.30
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (not annualized)/1/ 28.81% 17.33% 22.44% 29.19% 4.47%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $100,927 $71,944 $33,381 $10,920 $2,136
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets (annualized):
Ratio of expenses to average net assets 1.04% 0.65% 0.60% 0.43% 0.00%
Ratio of net investment income to
average net assets 0.51% 1.19% 1.53% 2.05% 3.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 69% 124% 95% 84% 21%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses 1.18% 1.01% 1.12% 2.02% 10.18%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets prior to waived
fees and reimbursed expenses (loss) 0.37% 0.83% 1.01% 0.46% (7.18)%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Total returns do not include any sales charges.
24 Life & Annuity Trust Prospectus
<PAGE>
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- --------------------------------------------------------------------------------
<PAGE>
Money Market Fund
- -------------------------------------------------------------------------------
Investment Objective
The Money Market Fund seeks to provide investors with a high level of income,
while preserving capital and liquidity, by investing in high quality, short-term
instruments.
Investment Policies
We actively manage a portfolio of U.S. dollar-denominated, high quality money
market instruments, including debt obligations with remaining maturities of 397
days or less. We maintain an overall dollar-weighted average maturity of 90 days
or less. We may also make certain other investments including, for example,
repurchase agreements.
Permitted Investments
Under normal market conditions, we invest:
. commercial paper rated at the date of purchase as "P-1" by Moody's or "A-1+"
or "A-1" by S&P;
. negotiable certificates of deposits and banker's acceptances;
. repurchase agreements;
. U.S. Government obligations;
. short-term, U.S. dollar-denominated debt obligations of U.S. branches of
foreign banks and foreign branches of U.S. banks;
. municipal obligations; and
. shares of other money market funds.
Important Risk Factors
There is no guarantee that we will be able to maintain a $1.00 per share net
asset value. Fluctuations in share value may cause a loss or gain in principal.
Generally, short-term funds do not earn as high a level of income as funds that
invest in longer-term instruments. No government agency either directly or
indirectly insures or guarantees the performance of the Fund.
You should consider the Common Risks on page 6, the General Investment Risks
beginning on page 36, and the specific risks listed above. They are all
important to your investment choice.
26 Life & Annuity Trust Prospectus
<PAGE>
Money Market Fund Financial Highlights
- --------------------------------------------------------------------------------
This table is intended to help you understand the Fund's financial performance
for the past 5 years (or since inception, if shorter). KPMG LLP audited this
information which, along with their report and the Fund's financial statements,
is available upon request in the Fund's annual report.
<TABLE>
<CAPTION>
====================================================================================================================================
FOR A SHARE OUTSTANDING
====================================================================================================================================
From
Inception
Year Ended Year Ended Year Ended Year Ended on April 12,
Dec. 31, Dec. 31, Mar. 31, Dec. 31, 1994 to
1998 1997 1996 1995 Dec. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.05 0.05 0.05 0.05 0.03
Net realized and unrealized gain
(loss) on investments 0.00 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.05 0.05 0.05 0.05 0.03
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.05) (0.05) (0.05) (0.05) (0.03)
Distributions from net realized gain 0.00 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total from distributions (0.05) (0.05) (0.05) (0.05) (0.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (not annualized)/1/ 4.77% 5.04% 4.72% 5.41% 2.71%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $26,319 $14,788 $12,667 $5,823 $1,492
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets (annualized):
Ratio of expenses to average net assets 0.82% 0.53% 0.51% 0.42% 0.00%
Ratio of net investment income to
average net assets 4.62% 4.95% 4.64% 5.15% 4.63%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses 1.28% 1.07% 1.22% 3.83% 11.43%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets prior to waived
fees and reimbursed expenses (loss) 4.16% 4.41% 3.93% 1.74% (6.80%)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Total returns do not include any sales charges.
Life & Annuity Trust Prospectus 27
<PAGE>
Strategic Growth Fund
- --------------------------------------------------------------------------------
Investment Objective
The Strategic Growth Fund seeks to provide investors with an above-average level
of long-term capital appreciation.
Investment Policies
We seek an above-average level of capital appreciation for investors willing to
assume above-average risk. We actively manage a broadly diversified equity
portfolio of companies expected to have strong growth in revenues, earnings and
assets. We select a range of companies from different industry groups, with the
majority of our holdings consisting of established growth companies, turnaround
or acquisition candidates, or attractive larger capitalization companies.
Permitted Investments
Under normal market conditions, we invest:
. in at least 20 common stock issues spread across a number of different
industry groups;
. at least 65% of our assets in common stocks and securities which are
convertible into common stocks that we believe have better-than-average
prospects to increase in value;
. up to 40% of our assets in initial public offerings and/or small and newer
equity issues;
. up to 65% of our assets in companies whose market capitalization at the time
we buy their stock is within the capitalization range of the companies listed
on the Russell MidCap/TM/ Index. (As of March 31, 1999, this range was from
$20 million to $38.5 billion. The range is expected to change frequently.)
We may invest in preferred stock or investment-grade debt securities that are
convertible into common stock, and in money market instruments to maintain
liquidity, to meet expected redemption requests or as a defensive measure when
we believe that the basic investment strategy is not in the best interests of
shareholders. Generally, these defensive investments are temporary and will not
exceed 35% of total assets. During such periods, the Fund may not achieve its
objective of long-term capital appreciation.
28 Life & Annuity Trust Prospectus
<PAGE>
- --------------------------------------------------------------------------------
Important Risk Factors
This fund is designed for investors willing to assume above average risk. We may
invest in companies that:
. pay low or no dividends;
. have smaller market capitalization;
. have less market liquidity;
. have no or relatively short operating histories or are newly public;
. have aggressive capital structures, including high debt levels; or
. are involved in rapidly growing or changing industries and/or new
technologies.
The Fund's share price may rise and fall more than the share prices of other
funds. Investments in foreign and emerging markets may also present special
risks, including currency, political, diplomatic, regulatory and liquidity
risks. In addition, our active trading investment strategy may result in a
higher-than-average portfolio turnover ratio, increased trading expenses, and
short-term capital gains that pass through to the Fund's shareholders.
You should consider the Summary of Important Risks on page 6, the General
Investment Risks beginning on page 36, and the specific risks listed above. They
are all important to your investment choice.
Portfolio Managers
. Chris Greene
Has managed the Strategic Growth Fund since May 1, 1998 and has been with
Wells Fargo/Wells Capital Management since September 1997. For the three
years prior to his co-managing the Fund, Mr. Greene provided fundamental
security analysis for Hambrecht & Quist, an investment banking firm focusing
on growth companies. Mr. Greene has over seven years of investment experience
and over two years of equity investment management experience.
. Thomas Zeifang, CFA
Has co-managed the Strategic Growth Fund since February 1999, and has been
with Wells Fargo/Wells Capital Management since 1995. Mr. Zeifang provided
fundamental security analysis for Fleet Investment Advisors for three years
prior to joining Wells Fargo. He has over five years of equity investment
management experience.
Life & Annuity Trust Prospectus 29
<PAGE>
Strategic Growth Fund Financial Highlights
- -------------------------------------------------------------------------------
This table is intended to help you understand the Fund's financial performance
for the past 5 years (or since inception, if shorter). KPMG LLP audited this
information which, along with their report and the Fund's financial statements,
is available upon request in the Fund's annual report.
<TABLE>
<CAPTION>
=================================================================
FOR A SHARE OUTSTANDING
=================================================================
From Inception
May 1, 1998
For the period ended: Dec. 31, 1998
- -----------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $10.00
- -----------------------------------------------------------------
Net investment income (loss) (0.03)
Net realized and unrealized gain (loss)
on investments 4.00
- -----------------------------------------------------------------
Total from investment operations 3.97
- -----------------------------------------------------------------
Less distributions:
Dividends from net investment income 0.00
Distributions from net realized gain (0.03)
- -----------------------------------------------------------------
Total from distributions (0.03)
- -----------------------------------------------------------------
Net asset value, end of period $13.94
- -----------------------------------------------------------------
Total return (not annualized)/1/ 39.74%
- -----------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $1,204
- -----------------------------------------------------------------
Ratios to average net assets (annualized):
Ratio of expenses to average net assets 1.09%
Ratio of net investment income to
average net assets (0.72%)
- -----------------------------------------------------------------
Portfolio turnover 200%
- -----------------------------------------------------------------
Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses 13.44%
Ratio of net investment income (loss)
to average net assets prior to waived
fees and reimbursed expenses (13.07%)
- -----------------------------------------------------------------
</TABLE>
/1/ Total returns do not include any sales charges.
30 Life & Annuity Trust Prospectus
<PAGE>
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- -------------------------------------------------------------------------------
<PAGE>
U.S. Government Allocation Fund
- -------------------------------------------------------------------------------
Investment Objective
The U.S. Government Allocation Fund seeks over the long-term a high level of
total return, including net realized and unrealized capital gains and net
investment income, consistent with reasonable risk.
Investment Policies
We allocate and reallocate assets among long-term U.S. Treasury bonds,
intermediate-term U.S. Treasury notes, and short-term money market instruments.
This strategy is based on the premise that asset classes are at times
undervalued or overvalued in comparison to one another and that investing in
undervalued asset classes offers better long-term, risk-adjusted returns.
Permitted Investments
The asset classes we invest in are composed as follows:
. Long Term Investments--We invest in U.S. Treasury bonds representative of the
Lehman Brothers 20+ Bond Index. Bonds on this Index have maturities of twenty
years or more.
. Intermediate--Term Investments-We invest in U.S. Treasury securities
representative of the Lehman Brothers U.S. Government Intermediate Bond
Index. Bonds on this Index have maturities of one to twenty years.
. Short-Term Investments--We invest in high-quality money market instruments,
including U.S. Government obligations, obligations of foreign and domestic
banks, short-term corporate debt instruments and repurchase agreements.
In addition, under normal market conditions, we invest:
. at least 65% of total assets in U.S. Government obligations; and
. up to 25% of total assets in foreign obligations qualifying as money market
investments.
As long as we keep 65% of assets in U.S. Government obligations, we are not
required to keep a minimum investment in any of the three asset classes, nor are
we prohibited from investing substantially all of our assets in a single asset
class. The allocation may shift any time.
In addition, we may temporarily hold assets in cash or in money market
instruments, including U.S. Government obligations, repurchase agreements and
other short-term investments, to maintain liquidity or when we believe it is in
the best interests of shareholders to do so. During such periods, the Fund may
not achieve its objective. The Fund is a diversified portfolio.
32 Life & Annuity Trust Prospectus
<PAGE>
- -------------------------------------------------------------------------------
Important Risk Factors
We may incur a higher than average portfolio turnover ratio due to allocation
shifts recommended by the model. This can increase transaction costs, which in
turn, can lower the Fund's performance.
You should consider the Common Risks on page 6, the General Investment Risks
beginning on page 36, and the specific risks listed above. They are all
important to your investment choice.
Portfolio Management
The Fund is managed by a team of advisors who, using the allocation model,
jointly make investment decisions for the Fund.
Life & Annuity Trust Prospectus 33
<PAGE>
U.S. Government Allocation Fund Financial Highlights
This table is intended to help you understand the Fund's financial performance
for the past 5 years (or since inception, if shorter). KPMG LLP audited this
information which, along with their report and the Fund's financial statements,
is available upon request in the Fund's annual report.
<TABLE>
<CAPTION>
====================================================================================================================================
FOR A SHARE OUTSTANDING
====================================================================================================================================
From
Inception
Year Ended Year Ended Year Ended Year Ended on May 9,
Dec. 31, Dec. 31, Mar. 31, Dec. 31, 1994 to
For the period ended: 1998 1997 1996 1995 Dec. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.27 $10.13 $10.30 $9.63 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.48 0.58 0.56 0.60 0.40
Net realized and unrealized gain
(loss) on investments 0.10 0.15 (0.17) 0.77 (0.37)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.58 0.73 0.39 1.37 0.03
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.48) (0.58) (0.56) (0.60) (0.40)
Distributions from net realized gain (0.16) (0.01) (0.00) (0.10) (0.00)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from distributions (0.64) (0.59) (0.56) (0.70) (0.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.21 $10.27 $10.13 $10.30 $9.63
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (not annualized)/1/ 5.86% 7.47% 3.99% 14.40% 0.41%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $34,731 $23,894 $13,527 $4,855 $866
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets (annualized):
Ratio of expenses to average net assets 0.95% 0.64% 0.60% 0.45% 0.00%
Ratio of net investment income to
average net assets 4.70% 5.75% 5.75% 5.82% 7.35%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 230% 135% 222% 405% 130%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses 1.23% 0.97% 1.18% 2.46% 12.73%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets prior to waived
fees and reimbursed expenses 4.42% 5.42% 5.17% 3.81% (5.38%)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Total returns do not include any sales charges.
34 Life & Annuity Trust Prospectus
<PAGE>
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- -------------------------------------------------------------------------------
<PAGE>
General Investment Risks
- -------------------------------------------------------------------------------
Understanding the risks involved in mutual fund investing will help you make an
informed decision that takes into account your risk tolerance and preferences.
You should carefully consider the risks common to investing in all mutual funds,
including the Stagecoach Funds. Certain common risks are identified in the
Summary of Important Risks on page 6. Other risks of mutual fund investing
include the following:
. Unlike bank deposits such as CDs or savings accounts, mutual funds are not
insured by the FDIC.
. We cannot guarantee that we will meet our investment objectives.
. We do not guarantee the performance of a Fund, nor can we assure you that the
market value of your investment will not decline. We will not "make good" any
investment loss you may suffer, nor can anyone we contract with to provide
certain services, such as selling agents or investment advisors, offer or
promise to make good any such losses.
. Share prices--and therefore the value of your investment--will increase and
decrease with changes in the value of the underlying securities and other
investments. This is referred to as price volatility.
. Investing in any mutual fund, including those deemed conservative, involves
risk, including the possible loss of any money you invest.
. An investment in a single Fund, by itself, does not constitute a complete
investment plan.
. The Funds that invest in smaller companies, foreign companies (including
investments made through American Depositary Receipts and similar
instruments), and in emerging markets are subject to additional risks,
including less liquidity and greater price volatility. A Fund's investment in
foreign and emerging markets may also be subject to special risks associated
with international trade, including currency, political, regulatory and
diplomatic risk.
. The Funds may invest a portion of their assets in U.S. Government
obligations. It is important to recognize that the U.S. Government does not
guarantee the market value or current yield of those obligations. Not all
U.S. Government obligations are backed by the full faith and credit of the
U.S. Treasury, and the U.S. Government's guarantee does not extend to the
Funds themselves.
. The Asset Allocation, Equity Value, Growth and U.S. Government Allocation
Funds may also use certain derivative instruments, such as options or futures
contracts. The term "derivatives" covers a wide number of investments, but in
general it refers to any financial instrument whose value is derived, at
least in part, from the price of another security or a
36 Life & Annuity Trust Prospectus
<PAGE>
- --------------------------------------------------------------------------------
specified index, asset or rate. Some derivatives may be more sensitive to
interest rate changes or market moves, and some may be susceptible to changes
in yields or values due to their structure or contract terms.
. The Asset Allocation and U.S. Government Allocation Funds also invest a
portion of their assets in GNMAs, FNMAs and FHLMCs. Each are mortgage-backed
securities representing partial ownership of a pool of residential mortgage
loans. A "pool" or group of such mortgages is assembled and, after being
approved by the issuing entity, is offered to invest through securities
dealers. Once approved by GNMA, a government corporation within the U.S.
Department of Housing and Urban Development, the timely payment of interest
and principal of a GNMA security is guaranteed by the full faith and credit
of the U.S. Government. FNMA and FHLMC are federally chartered corporations
supervised by the U.S. Government acting as government-sponsored enterprises.
FNMA and FHLMC securities are not direct obligations of the U.S. Treasury,
and are supported by the credit of FNMA or FHLMC only. FNMA guarantees timely
payment of interest and principal on its securities; FHLMC guarantees timely
payment of interest and ultimate payment of principal only.
Investment practices and risk levels are carefully monitored. Every attempt is
made to ensure that the risk exposure for each Fund remains within the
parameters of its objective.
What follows is a general list of the types of risks (some of which are
described above) that may apply to a given Fund and a table showing some of the
additional investment practices that each Fund may use and the risks associated
with them. Additional information about these practices is available in the
Statement of Additional Information.
Counter-Party Risk--The risk that the other party in a repurchase agreement or
other transaction will not fulfill its contract obligation.
Credit Risk--The risk that the issuer of a debt security will be unable to make
interest payments or repay principal on schedule. If an issuer does default, the
affected security could lose all of its value, or be renegotiated at a lower
interest rate or principal amount. Affected securities might also lose
liquidity. Credit risk also includes the risk that a party in a transaction may
not be able to complete the transaction as agreed.
Currency Risk--The risk that a change in the exchange rate between U.S. dollars
and a foreign currency may reduce the value of an investment made in a security
denominated in that foreign currency.
Life & Annuity Trust Prospectus 37
<PAGE>
General Investment Risks
- -------------------------------------------------------------------------------
Diplomatic Risk--The risk that an adverse change in the diplomatic relations
between the United States and another country might reduce the value of
liquidity of investments in either country.
Emerging Market Risk--The risk that the emerging market, as defined in the
glossary, may be more sensitive to certain economic changes. For example,
emerging market countries are often dependent on international trade and are
therefore often vulnerable to recessions in other countries. They may have
obsolete financial systems, have volatile currencies and may be more sensitive
than more mature markets to a variety of economic factors. Emerging market
securities may also be less liquid than securities of more developed countries
and could be difficult to sell, particularly during a market downturn.
Experience Risk--The risk presented by a new or innovative security. The risk
is that insufficient experience exists to forecast how the security's value
might be affected by various economic conditions:
Information Risk--The risk that information about a security is either
unavailable, incomplete or is inaccurate.
Interest Rate Risk--The risk that changes in interest rates can reduce the
value of an existing security. Generally, when interest rates increase, the
value of a debt security decreases. The effect is usually more pronounced for
securities with longer dates to maturity.
Leverage Risk--The risk that a practice may increase a Fund's exposure to
market risk, interest rate risk or other risks by, in effect, increasing assets
available for investment.
Liquidity Risk--The risk that a security cannot be sold, or cannot be sold
without adversely affecting the price.
Market Risk--The risk that the value of a stock, bond or other security will be
reduced by market activity. This is a basic risk associated with all securities.
Political Risk--The risk that political actions, events or instability may be
unfavorable for investments made in a particular nation's or region's industry,
government or markets.
Regulatory Risk--The risk that changes in government regulations will adversely
affect the value of a security. Also the risk that an insufficiently regulated
market might permit inappropriate trading practices.
38 Life & Annuity Trust Prospectus
<PAGE>
- --------------------------------------------------------------------------------
Year 2000 Risk--The Funds' principal service providers have advised the Funds
that they are working on the necessary changes to their computer systems to
avoid any system failure based on an inability to distinguish the year 2000 from
the year 1900, and that they expect their systems to be adapted in time. There
can, of course, be no assurance of success. In addition, the companies or
entities in which the Funds invest also could be adversely impacted by the Year
2000 issue. The extent of such impact cannot be predicted.
Investment Practice/Risk
The following table lists some of the additional investment practices of the
Funds, including some not disclosed in the Investment Objective and
Investment Policies sections of the Prospectus. The risks indicated after the
description of the practice are NOT the only potential risks associated with
that practice, but are among the more prominent. Market risk is assumed for
each. See the Investment Objective and Investment Policies for each Fund or
the Statement of Additional Information for more information on these
practices.
Remember, each Fund is designed to meet different investment needs and
objectives.
In addition to the general risks discussed above, you should carefully
consider and evaluate any special risks that may apply to investing in a
particular Fund. See the Specific Risks on page 7, and the "Important Risk
Factors" in the description of each Fund. You should also see the Statement
of Additional Information for additional information about the investment
practices and risks particular to each Fund.
Life & Annuity Trust Prospectus 39
<PAGE>
<TABLE>
<CAPTION>
U.S.
ASSET EQUITY MONEY STRATEGIC GOVERNMENT
ALLOCATION VALUE GROWTH MARKET GROWTH ALLOCATION
===================================================================================================================================
INVESTMENT PRACTICE: RISK:
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
FLOATING AND VARIABLE RATE DEBT
Instruments with interest rates that are Interest Rate and . . . . . .
adjusted either on a schedule or when an Credit Risk
index or benchmark changes.
- -----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
A transaction in which the seller of a Credit and . . . . . .
security agrees to buy back a security Counter-Party Risk
at an agreed upon time and price, usually
with interest.
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER MUTUAL FUNDS
The temporary investment in shares of Market Risk . . . . . .
another mutual fund. A pro rata
portion of the other fund's expenses, in
addition to the expenses paid by the Funds,
will be borne by Fund shareholders.
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN OBLIGATIONS
Dollar-denominated debt obligations Information, Liquidity, . .
of foreign branches of U.S. banks or U.S. Political, Regulatory,
branches of foreign banks. and Diplomatic Risk
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES
Securities issued by a non-U.S. company or Information, Political, . . . . .
debt of a foreign government in the form of Regulatory, Diplomatic,
an American Depositary Receipt or similar Liquidity and Currency
instrument. Limited to 25% of total assets. Risk
- -----------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS
Investments in companies located or operating Information, Political, . .
in countries considered developing or to have Regulatory, Diplomatic,
"emerging" stock markets. Generally, these and Currency Risk
investments have the same type of risks as
foreign securities, but to a higher degree.
Limited to 25% of total assets.
- -----------------------------------------------------------------------------------------------------------------------------------
OPTIONS
The right or obligation to receive or deliver Credit, Information and
a security or cash payment depending on the Liquidity Risk
security's price or the performance of an
index or benchmark.
-------------------------------------------------------------------------------------------------------------------------------
Options on Specific Securities . . . .
Options on a Stock Index . . . .
Stock Index Futures and options on Stock . . .
Index Futures to protect liquidity and
portfolio value
- -----------------------------------------------------------------------------------------------------------------------------------
PRIVATELY ISSUED SECURITIES
Securities that are not publicly traded Liquidity Risk . . . . .
but which may be resold in accordance with
Rule 144A of the Securities Act of 1933.
- -----------------------------------------------------------------------------------------------------------------------------------
LOANS OF PORTFOLIO SECURITIES
The practice of loaning securities to brokers, Credit, Counter-Party . . . . .
dealers and financial institutions to increase and Leverage Risk
return on those securities. Loans may be made
in accordance with existing investment
policies and may not exceed 33 1/3% of total
assets.
- -----------------------------------------------------------------------------------------------------------------------------------
BORROWING POLICIES
The ability to borrow an equivalent of Leverage Risk . . . . . .
10% of total assets (20% for the Allocation
Funds) from banks for temporary purposes
to meet shareholder redemptions.
- -----------------------------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES
A security that cannot be readily sold, Liquidity Risk . . . . . .
or cannot be readily sold without negatively
affecting its fair price. Limited to 15% of
assets (10% for the Money Market Fund)
- -----------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Securities consisting of an undivided Interest Rate, Credit . .
fractional interest in pools of consumer and Experience Risk
loans, such as car loans or credit card
debt, or receivables held in trust.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
40 Life & Annuity Trust Prospectus
<PAGE>
- --------------------------------------------------------------------------------
A number of different entities provide services to the Funds. This section shows
how the Funds are organized, the entities that perform different services, and
how they are compensated. Further information is available in the Statement of
Additional Information for the Funds.
About Life & Annuity Trust
Life & Annuity Trust was organized as a Delaware business trust on October 28,
1993. The Board of Trustees of the Trust supervises each Fund's activities,
monitors its contractual arrangements with various service-providers and decides
upon matters of general policy.
Life & Annuity Trust offers shares of the Funds only to participating Insurance
Companies, and only Participating Insurance Companies and their separate
accounts are considered shareholders of, or investors in, the Funds. Although
the Participating Insurance Companies and their separate accounts are the
shareholders or investors, such companies will pass through voting rights to
their VA Contract and VLI Policy holders. For a discussion of the voting rights
of VA Contract and VLI Policy holders, please refer to the Participating
Insurance Companies' prospectuses.
Life & Annuity Trust Prospectus 41
<PAGE>
Organization and Management of the Funds
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
================================================================================
CONTRACT HOLDERS
================================================================================
|
================================================================================
PARTICIPATING INSURANCE COMPANIES
================================================================================
Assist current and prospective contract holders with Fund investments
- --------------------------------------------------------------------------------
|
================================================================================
TRANSFER AND
DIVIDEND DISBURSING SHAREHOLDER
DISTRIBUTOR ADMINISTRATOR AGENT SERVICING AGENTS
================================================================================
Stephens Inc. Wells Fargo Bank Wells Fargo Bank Various Agents
111 Center St. 525 Market St. 525 Market St.
Little Rock, AR San Francisco, CA San Francisco, CA
Markets the Fund Manages the Funds' Maintains records Provide services
and distributes business activities of shares and to customers
shares supervises the
paying of dividends
- -------------------------------------------------------------------------------
|
================================================================================
INVESTMENT SUB-ADVISOR
================================================================================
Barclay's Global Fund Advisors Wells Capital Management
45 Fremont, San Francisco, CA 525 Market St., San Francisco, CA
Manages the Asset Allocation and Manages all other Funds'
U.S. Government Allocation Funds' investment activities
investment activities
- --------------------------------------------------------------------------------
|
================================================================================
INVESTMENT ADVISOR CUSTODIAN
================================================================================
Wells Fargo Bank, 525 Market St., Wells Fargo Bank, 525 Market St.,
San Francisco, CA San Francisco, CA
Manages the Funds' investment activities Provides safekeeping for the
Non-Allocation Funds' assets
Barclays's Global Investors N.A.
45 Fremont, San Francisco, CA
Provides safekeeping for the
Allocation Fund's asset
- --------------------------------------------------------------------------------
|
================================================================================
BOARD OF TRUSTEES
================================================================================
Supervises the Funds' activities
- --------------------------------------------------------------------------------
</TABLE>
In the following sections, the percentages shown are the percentages of the
average daily Net Assets of each Fund class paid on an annual basis for the
services described.
The Investment Advisor
Wells Fargo Bank provides portfolio management and fundamental security analysis
services as the advisor for each of the Funds. Wells Fargo Bank, founded in
1852, is the oldest bank in the western United States and is one of the largest
banks in the United States. Wells Fargo Bank is a wholly owned subsidiary of
Wells Fargo & Company, a national bank holding company. As of December 31, 1999,
Wells Fargo Bank and its affiliates managed over $121 billion in assets.
42 Life & Annuity Trust Prospectus
<PAGE>
- --------------------------------------------------------------------------------
The Funds paid Wells Fargo Bank the following for advisory services (after fee
waivers) for the last fiscal year:
- --------------------------------------------------------------------------------
Asset Allocation Fund .41%
- --------------------------------------------------------------------------------
Equity Value Fund .15%
- --------------------------------------------------------------------------------
Growth Fund .46%
- --------------------------------------------------------------------------------
Money Market Fund .15%
- --------------------------------------------------------------------------------
Strategic Growth Fund .15%
- --------------------------------------------------------------------------------
U.S. Government Allocation Fund .31%
- --------------------------------------------------------------------------------
The Sub-Advisor
Wells Capital Management ("WCM"), a wholly owned subsidiary of Wells Fargo Bank
N.A., is the sub-advisor for each of the Funds except the Asset Allocation and
U.S. Government Allocation Funds. As of December 31, 1999, WCM provided advisory
services for assets aggregating in excess of $39 billion.
Barclays Global Fund Advisors ("BGFA"), a wholly owned subsidiary of Barclays
Global Investors and an indirect subsidiary of Barclays Bank PLC, is the sub-
advisor for the Asset Allocation and U.S. Government Allocation Funds. BGFA was
created from the reorganization of Wells Fargo Nikko Investment Advisors, a
former affiliate of Wells Fargo Bank, and is one of the largest providers of
index portfolio management services. As of January 31, 1999, BGFA managed or
provided investment advice for assets aggregating in excess of $27 billion.
The Administrator
Wells Fargo Bank provides the Funds with administration services, including
general supervision of each Fund's operation, coordination of the other services
provided to each Fund, compilation of information for reports to the SEC and the
state securities commissions, preparation of proxy statements and shareholder
reports, and general supervision of data compilation in connection with
preparing periodic reports to the Trust's Trustees and officers. Wells Fargo
Bank also furnishes office space and certain facilities to conduct each Fund's
business, and compensates the Trust's Trustees.
Life & Annuity Trust Prospectus 43
<PAGE>
Organization and Management of the Funds
- -------------------------------------------------------------------------------
Shareholder Servicing Plan
We have a shareholder servicing plan for each Fund. We have agreements with
various shareholder servicing agents to process purchase and redemption
requests, to service shareholder accounts, and to provide other related
services.
For these services each Fund pays as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Asset Allocation Fund .25%
- --------------------------------------------------------------------------------
Equity Value Fund .25%
- --------------------------------------------------------------------------------
Growth Fund .25%
- --------------------------------------------------------------------------------
Money Market Fund .25%
- --------------------------------------------------------------------------------
Strategic Growth Fund .25%
- --------------------------------------------------------------------------------
U.S. Government Allocation Fund .25%
- --------------------------------------------------------------------------------
</TABLE>
The Distributor
Stephens, as the principal underwriter of the Funds within the meaning of the
1940 Act, has entered into a Distribution Agreement with Life & Annuity Trust
pursuant to which Stephens has the responsibility for distributing shares of the
Funds.
Stephens, as distributor of each Fund's shares, or the Participating Insurance
Companies that offer VA Contracts and VLI Policies that are funded by the Funds,
bears all of the Funds' marketing expenses. These expenses include the cost of
printing prospectuses, statements of additional information and other sales-
related materials.
The Transfer Agent
Wells Fargo Bank acts as transfer and dividend disbursing agent for the Funds.
After July 17, 1999, Boston Financial Data Services will provide these services
to the Funds.
Investing in the Funds
The Funds are available for purchase through certain VA Contracts and VLI
Policies offered by the separate accounts of Participating Insurance Companies.
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of each Fund based on, among other things, the amount
of premium payments to be invested and the amount of surrender and transfer
requests (as defined in the prospectuses describing the VA Contracts and VLI
Policies issued by the Participating
44 Life & Annuity Trust Prospectus
<PAGE>
- --------------------------------------------------------------------------------
Insurance Companies) to be effected on that day pursuant to VA Contracts and VLI
policies. Please refer to the prospectus provided by your selling agent for more
detailed information describing the separate accounts.
Life & Annuity Trust does not assess any fees, either when it sells or when it
redeems its shares. Surrender charges, mortality and expense risk fees and other
charges may be assessed by Participating Insurance Companies under the VA
Contracts or VLI Policies. These fees and charges are described in the
Participating Insurance Companies' prospectuses.
Should any conflict between VA Contract and VLI Policy holders arise which would
require that a substantial amount of Net Assets be withdrawn from a Fund of Life
& Annuity Trust, orderly portfolio management could be disrupted to the
potential detriment of the VA Contract and VLI Policy holders.
Dividends and Distributions
Each Fund is treated separately in determining the amounts of dividends of net
investment income and distributions of capital gains payable to its
shareholders. Dividends and distributions are automatically reinvested on the
payment date for each shareholder's account in additional shares of the Fund
that paid the dividend or distribution at NAV or are paid in cash at the
election of the Participating Insurance Company.
The Asset Allocation, Equity Value and Growth Funds declare and pay a quarterly
dividend, the Strategic Growth Fund declares and pays an annual dividend and
U.S. Government Allocation Fund declares and pays a monthly dividend, of
substantially all of their respective net investment income. The Money Market
Fund declares dividends daily and pays the dividends monthly. The Funds
generally distribute any capital gains once a year. Participating Insurance
Companies will be informed by January 31 about the amount and character of
dividends and distributions.
Pricing Fund Shares:
. As with all mutual fund investments, the price you pay to purchase shares or
the price you receive when you redeem shares is not determined until after a
request has been received in proper form. We determine the Net Asset Value
("NAV") of the non-money market Funds' shares each business day as of the
close of regular trading on the NYSE. We determine the NAV of Money Market
Fund shares each business day at 9:00 a.m. (Pacific Time). We determine the
NAV by subtracting the Fund class' liabilities from its total assets, and
then dividing the result by the total number of outstanding shares of that
class. Each Fund's assets are generally valued
Life & Annuity Trust Prospectus 45
<PAGE>
- --------------------------------------------------------------------------------
at current market prices. See the Statement of Additional Information for
further disclosure.
. We process requests to buy or sell shares each business day for the non-money
market Funds as of the close of regular trading on the New York Stock
Exchange ("NYSE"), which is usually 1:00 p.m. (Pacific time), and for the
Money Market Fund, at 9:00 a.m. (Pacific time). Any request we receive in
proper form before the 1:00 p.m. or 9:00 a.m. cut off is processed the same
day. Requests we receive after the close are processed the next business day.
. The Funds are generally open for business Monday through Friday. The non-
money market Funds are closed each day the NYSE is closed. NYSE holidays
include New Year's Day, Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. When any holiday falls on a weekend, the NYSE typically is
closed on the weekday immediately before or after such holiday. The Money
Market Fund is generally closed on federal bank holidays.
Taxes
Distributions from a Fund's net investment income and net short-term capital
gain, if any, are taxable to the Fund's shareholders as ordinary income.
Distributions from a Fund's net long-term capital gains are taxable to the
Fund's shareholders as long-term capital gains. In general, distributions will
be taxable when paid, whether such distributions are taken in cash or are
automatically reinvested in additional Fund shares. However, dividends declared
in October, November or December of one year and distributed in January of the
following year will be taxable as if they were paid by December 31 of the first
year.
As described in the prospectuses of the Participating Insurance Companies,
individual holders of VA Contracts and VLI Policies may qualify for favorable
tax treatment. In order to qualify for such treatment, the Internal Revenue Code
of 1986, as amended (the "Code"), requires, among other things, the "separate
accounts" of the Participating Insurance Companies, which maintain and invest
net proceeds form the VA Contracts and VLI Policies, to be "adequately
diversified." See "Taxation of a Separate Account of a Participating Insurance
Company" in the SAI. Subject to certain conditions, for purposes of the
"adequate diversification" test, shares of a Fund will not be treated as single
investment. Rather, the separate account will be treated as the owner of its
proportionate share of each of the assets of the Fund. Each Funds intends to
satisfy the relevant conditions of the Code and Treasury
46 Life & Annuity Trust Prospectus
<PAGE>
- -------------------------------------------------------------------------------
Regulations so that its shares held in a separate account of a Participating
Insurance Company, and the VA Contracts and VLI Policies underlying such
account, may qualify for favorable tax treatment.
The foregoing discussion regarding taxes is based on tax laws which were in
effect as of the date of this Prospectus and summarizes only some of the
material federal income tax considerations affecting the Funds and their
shareholders. It is not intended as a substitute for careful tax planning and
does not discuss state, local or foreign income tax considerations; you should
consult your own tax advisor with respect to your specific tax situation. Please
see the SAI for further federal income tax considerations. Federal income
taxation of separate accounts of life insurance companies, VA Contracts and VLI
Policies is discussed in the Prospectuses of the Participating Insurance
Companies.
Important Information About Your Investment
On March 25, 1999, the Board of Trustees of Life & Annuity Trust (the "Trust")
approved the reorganization of the Trust's Funds into new portfolios of Wells
Fargo Variable Trust ("Variable Trust"). The reorganization is part of a plan to
consolidate the Wells Fargo Bank-advised fund family with the Norwest Advantage
fund family, following last November's merger of Wells Fargo & Company and
Norwest Corporation. The variable annuity ("VA") and variable life insurance
("VLI") providers through which the Trust's Funds are sold, will present the
reorganization to contractholders for their approval and will vote all shares in
accordance with procedures described in the VA and VLI product prospectuses at a
special meeting that is planned for August 1999. If the reorganization is
approved by contractholders, the following Funds will be reorganized into the
following portfolios of Variable Trust:
Life & Annuity Trust Wells Fargo Variable Trust
- -------------------- --------------------------
Strategic Growth Fund --> Small Cap Fund
U.S. Government Allocation Fund --> Corporate Bond Fund
Although the investment objective of the Small Cap Fund of Variable Trust is
substantially similar to the investment objective of the Strategic Growth Fund,
the principal investment strategies differ somewhat. The investment objective
and principal investment strategies of the Corporate Bond Fund of Variable Trust
differ from the objective and strategies of the U.S. Government Allocation Fund.
In addition, these Variable Trust portfolios are expected to
Life & Annuity Trust Prospectus 47
<PAGE>
Organization and Management of the Funds
- --------------------------------------------------------------------------------
absorb other Norwest Select funds. All of the other Funds of the Trust will, if
approved by contractholders, be reorganized into new portfolios of Variable
Trust that have investment objectives and strategies that are substantially
identical to the corresponding Funds. These substantially identical Variable
Trust portfolios will not absorb other funds.
No contractholder action is necessary at this time. The Trust's proxy materials,
which are expected to be mailed in June to all persons who are contractholders
on May 6, 1999, will describe the reorganization in detail, including any effect
on expense ratios. If you buy your shares after that date, you will not be
entitled to vote on the reorganization, but you may request a copy of the proxy
materials.
Investors in the Strategic Growth Fund should be aware that an expense ratio
increase of 0.10% is contemplated. U.S. Government Allocation Fund expense
ratios are expected to decline.
For all of the Trust's Funds, the reorganization will not trigger any tax
consequences for contractholders. The reorganization will not trigger any sales
charges.
If you have any questions or, after early June, if you would like to request a
copy of the proxy materials, you should call 1-800-680-8920.
48 Life & Annuity Trust Prospectus
<PAGE>
Glossary
- -------------------------------------------------------------------------------
We provide the following definitions to assist you in reading this prospectus.
For a more complete understanding of these terms you should consult your
financial adviser.
ACH
Refers to the "Automated Clearing House" system maintained by the Federal
Reserve Bank which allows banks to process checks, transfer funds and perform
other tasks.
American Depository Receipts ("ADRs")
Receipts for non-U.S. company stocks. The stocks underlying ADRs are typically
held in bank vaults. The ADR's owner is entitled to any capital gains or
dividends. ADRs are one way of owning an equity interest in foreign companies.
Annual and Semi-Annual Report
A document that provides certain financial and other important information for
the most recent reporting period and each Fund's portfolio of investments.
Below Investment Grade
Securities rated BBB or lower by S&P or Baa or lower by Moody's Investor
Services, or that may be unrated securities or securities considered to be "high
risk."
Business Day
Any day the New York Stock Exchange is open is a business day for the Non-Money
Market Funds. Any day that is not a federal bank holiday is a business day for
the Money Market Fund.
Capital Appreciation, Capital Growth
The increase in the value of a security. See also "Total Return."
Capitalization
When referring to the size of a company, capitalization means the total number
of a company's outstanding shares of stock multiplied by the price per share.
This is an accepted method of determining a company's size and is sometimes
referred to as "market capitalization."
Capital Structure
Refers to how a company has raised money to operate. Can include, for example,
borrowing or selling stock.
Commercial Paper
Debt instruments issued by banks, corporations and other issuers to finance
short-term credit needs. Commercial paper typically is of high credit quality
and offers below market interest rates.
Life & Annuity Trust Prospectus 49
<PAGE>
Glossary
- -------------------------------------------------------------------------------
Convertible Debt Securities
Bonds or notes that are exchangeable for equity securities at a set price on a
set date or at the election of the holder.
Current Income
Earnings in the form of dividends or interest as opposed to capital growth. See
also "Total Return."
Debt Securities
Generally, a promise to pay interest and repay principal by an individual or
group of individuals sold as a security. The owner of the security is entitled
to receive any such payments. Examples include bonds and mortgage-backed
securities and can include securities in which the right to receive interest and
principal repayment have been sold separately.
Derivatives
Securities whose values are derived in part from the value of another security
or index. An example is a stock option.
Distributions
Dividends and/or capital gains paid by a Fund on its shares.
Diversified
A diversified fund, as defined by the Investment Company Act of 1940, is one
that invests in cash, Government securities, other investment companies and no
more than 5% of its total assets in a single issuer. These policies must apply
to 75% of the Funds' total assets.
Dollar-Denominated
Securities issued by foreign banks, companies or governments in U.S. dollars.
Duration
A measure of a security's or portfolio's sensitivity to changes in interest
rates. Duration is usually expressed in years, with longer durations typically
more sensitive to interest rate changes than shorter durations.
Emerging Markets
Markets associated with a country that is considered by international financial
organizations, such as the International Finance Corporation and the
International Bank for Reconstruction and Development, and the international
financial community to have an "emerging" stock market. Such markets may be
under-capitalized, have less-developed legal and financial systems or may have
less stable currencies than markets in the developed world.
50 Life & Annuity Trust Prospectus
<PAGE>
- --------------------------------------------------------------------------------
FDIC
The Federal Deposit Insurance Corporation. This is the company that provides
federally sponsored insurance covering bank deposits such as savings accounts
and CDs. Mutual funds are not FDIC insured.
Illiquid Security
A security which cannot be readily sold, or cannot be readily sold without
negatively affecting its fair price.
Index Swaps
The exchange with another party of cash flows based on the performance of an
index of securities or a portion of an index that usually includes dividends or
income.
Interest Rate Futures
Agreements to buy or sell finance instruments or cash at a particular time and
price based on movements in interest rate. Unlike Options, in which the holder
may or may not execute the right, a futures contract must be fulfilled.
Initial Public Offering
The first time a company's stock is offered for sale to the public.
Investment-Grade Debt
A type of bond rated in the top four investment categories by a nationally
recognized ratings organization. Generally these are bonds whose issuers are
considered to have a strong ability to pay interest and repay principal,
although some investment-grade bonds may have some speculative characteristics.
Lehman Brothers 20+ Bond Index
An unmanaged index composed of U.S. Treasury bonds with 20 years or longer dates
to maturity.
Liquidity
The ability to readily sell a security at a fair price.
Moody's
A nationally recognized ratings organization.
Nationally Recognized Rating Organization (NRRO)
A company that examines the ability of a bond issuer to meet its obligations and
which rates the bonds accordingly.
Life & Annuity Trust Prospectus 51
<PAGE>
Glossary
- --------------------------------------------------------------------------------
Net Assets
The value of the investments in a Fund's portfolio (after accounting for
expenses) that are attributable to a particular class of the Funds.
Net Asset Value (NAV)
The value of a single fund share. It is determined by adding together all of a
Fund's assets, subtracting expenses and other liabilities, then dividing by the
total number of shares.
Net Investment Income
Net investment income is calculated by subtracting the aggregate Fund expenses
from the Funds' investment income. The number in the financial highlights is the
net investment income of a class divided by the number of outstanding shares of
that class. The amount distributed to shareholders is listed under the heading
"Less Distributions-Dividends from Net Investment Income."
Net Realized and Unrealized Gain (Loss) on Investments
We continually buy and sell investments. The profit on an investment sold for
more than its purchase price is a realized capital gain while a loss on an
investment sold for less than its purchase price is a realized capital loss. An
unrealized gain or loss occurs when an investment gains or loses value but is
not sold. The amount of capital gain or loss per share that was paid to
shareholders is listed under the heading "Less Distributions-Distributions From
Net Realized Gains."
Options
An option is the right to buy or sell a security based on an agreed upon price
for at a specified time. For example, an option may give the holder of a stock
the right to sell the stock to another party, allowing the seller to profit if
the price has fallen below the agreed price. Options may also be based on the
movement of an index such as the S&P 500.
Portfolio Turnover
Portfolio turnover reflects the trading activity in the Fund's portfolio and is
expressed as a percentage of a Fund's investment portfolio. For example, a Fund
with a 50% portfolio turnover has sold and bought half of its investment
portfolio during the given period.
Public Offering Price (POP)
The NAV with the sales load added.
52 Life & Annuity Trust Prospectus
<PAGE>
- --------------------------------------------------------------------------------
Price-to-Earnings Ratio
The ratio between a stock's price and its historical, current or anticipated
earnings. Low ratios typically indicate a high yield. High ratios are
characteristic of growth stocks which generally have low current yields.
Ratio of Expenses to Average Net Assets
This ratio reflects the amount paid by a Fund to cover the costs of its daily
operations, and includes advisory, administration and other operating expenses.
It is expressed as a percentage of the average daily net assets of a class.
Ratio of Net Investment Income (Loss) to Average Net Assets
This ratio is the result of dividing net investment income (or loss) by average
net assets
Repurchase Agreement
An agreement between a buyer and seller of a security in which the seller agrees
to repurchase the security at an agreed upon price and time.
Russell Indexes
The Russell 1000 Index used by the Growth Fund is an index comprised of the 1000
largest firms listed on the Russell 3000 Index. The Russell 3000 Index is a
listing of 3000 corporations by the Frank Russell Company that is intended to be
representative of the U.S. economy. Similarly, the Russell Midcap Index used by
the Strategic Growth Fund is a listing of the 800 smallest companies in the
Russell 1000 Index.
Selling Agent
A person who has an agreement with the Funds' distributors that allows them to
sell a Fund's shares.
Shareholder Servicing Agent
Anyone appointed by the Fund to maintain shareholder accounts and records,
assist and provide information to shareholders or perform similar functions.
Signature Guarantee
A guarantee given by a financial institution that has verified the identity of
the maker of the signature.
S&P, S&P 500 Index
Standard and Poors, a nationally recognized ratings organization. S&P's also
publishes various indexes or lists of companies representative of sectors of the
U.S. economy.
Life & Annuity Trust Prospectus 53
<PAGE>
Glossary
- --------------------------------------------------------------------------------
Statement of Additional Information
A document that supplements the disclosures made in the Prospectus.
Taxpayer Identification Number
Usually the social security number for an individual or the Employer
Identification Number for a corporation.
Total Return
The annual return on an investment, including any appreciation or decline in
share value, assumes reinvestment of all dividends and capital gains, reflects
fee waivers and excludes sales loads.
Turnover Ratio
The percentage of the securities held in a Fund's portfolio, other than short-
term securities, that were bought or sold within a year.
Undervalued
Describes a stock that is believed to be worth more than its current price.
U.S. Government Obligations
Obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Value Strategy
A strategy of investing which tries to identify and buy undervalued stocks under
the assumption that the stock will eventually rise to its "fair market" value.
Warrants
The right to buy a stock at a set price for a set time.
Weighted-Average Maturity
The average maturity for the debt securities in a portfolio on a dollar-for-
dollar basis.
Zero Coupon Bonds
Bonds that make no periodic interest payments and which are usually sold at a
discount of their face value. Zero coupon bonds are subject to interest rate and
credit risk.
54 Life & Annuity Trust Prospectus
<PAGE>
LIFE & ANNUITY
TRUST FUNDS/R/
You may wish to review the following documents:
Statement of Additional Information
supplements the disclosures made by this Prospectus. The Statement of Additional
Information has been filed with the SEC and is incorporated by reference into
this Prospectus and is legally part of this Prospectus.
Annual/Semi-Annual Report
provides certain financial and other important information including a
discussion of the market conditions and investment strategies that significantly
affected Fund performance, for the most recent reporting period.
These documents are available free of charge:
1-800-680-8920, or write to:
Life & Annuity Trust
PO Box 7066
San Francisco, CA
94120-7066
Visit the SEC's web site:
http://www.sec.gov, or
Request copies for a fee by writing to:
SEC Public Reference Room,
Washington, DC 20549-6009
(call: 1-800-SEC-0330 for details)
-----------------------------------------------------
NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
-----------------------------------------------------
ICA Reg. No. 811-8118 LAT P (5/99)
<PAGE>
LIFE & ANNUITY TRUST
800-680-8920
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1999
ASSET ALLOCATION FUND
EQUITY VALUE FUND
GROWTH FUND
MONEY MARKET FUND
STRATEGIC GROWTH FUND
U.S. GOVERNMENT ALLOCATION FUND
Life & Annuity Trust (the "Trust") is an open-end series investment company.
This Statement of Additional Information ("SAI") contains additional information
about six of the series of Life & Annuity Trust -- the Asset Allocation Fund,
Equity Value Fund, Growth Fund (formerly, the "Growth and Income Fund"), Money
Market Fund, Strategic Growth Fund and U.S. Government Allocation Fund (each, a
"Fund" and collectively, the "Funds"). The investment objective of each Fund is
described in the Prospectus under "Investment Objectives and Policies."
This SAI is not a prospectus and should be read in conjunction with the Funds'
Prospectus, dated May 1, 1999. All terms used in this SAI that are defined in
the Prospectus have the meanings assigned in the Prospectus. A copy of the
Prospectus may be obtained without charge by calling (800) 680-8920 or by
writing to American Skandia, P.O. Box 883, Shelton, Connecticut 06484-0883,
Attn: Stagecoach Variable Annuity Administration.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Restrictions............................................ 1
Investment Models.................................................. 4
Additional Permitted Investment Activities......................... 6
Risk Factors....................................................... 28
Management......................................................... 36
Performance Calculations........................................... 45
Determination of Net Asset Value................................... 49
Additional Purchase and Redemption Information..................... 51
Portfolio Transactions............................................. 51
Fund Expenses...................................................... 54
Federal Income Taxes............................................... 54
Capital Stock...................................................... 58
Other.............................................................. 60
Counsel............................................................ 60
Independent Auditors............................................... 61
Financial Information.............................................. 61
Appendix........................................................... A-1
</TABLE>
i
<PAGE>
INVESTMENT RESTRICTIONS
Fundamental Investment Policies. The Funds are subject to the following
investment restrictions, all of which are fundamental policies; that is, they
may not be changed, without approval by the vote of the holders of a majority
(as defined in the Investment Company Act of 1940, as amended (the "1940 Act"))
of the outstanding voting securities of such Fund.
The Funds may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a
result thereof, the value of any Fund's investments in that industry would be
25% or more of the current value of such Fund's total assets, provided that
there is no limitation with respect to investments in (i) obligations of the
U.S. Government, its agencies or instrumentalities; (ii) in the case of the
Asset Allocation Fund, any industry in which the S&P 500 Index becomes
concentrated to the same degree during the same period; (iii) in the case of
the Asset Allocation Fund, its money market instruments may be invested in the
banking industry (but the Fund will not do so unless the Securities and
Exchange Commission ("SEC") staff confirms that it does not object to the Fund
reserving freedom of action to concentrate investments in the banking
industry); and (iv) in the case of the Money Market Fund, the obligations of
domestic banks (for the purpose of this restriction, domestic bank obligations
do not include obligations of U.S. branches of foreign banks or obligations of
foreign branches of U.S. banks);
(2) purchase or sell real estate or real estate limited partnerships (other
than securities secured by real estate or interests therein or securities
issued by companies that invest in real estate or interests therein);
(3) invest in commodities, except that the Asset Allocation and U.S.
Government Allocation Funds (together, the "Allocation Funds") and the Equity
Value and Strategic Growth Funds may purchase and sell (i.e., write) options
and futures contracts, including those relating to indices and options on
futures contracts or indices and, together with the Growth Fund, may purchase
securities of an issuer which invests or deals in commodities or commodity
contracts;
(4) purchase interests, leases, or limited partnership interests in oil,
gas, or other mineral exploration or development programs;
(5) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions and, in the case of the Equity Value,
Strategic Growth and Allocation Funds, except for margin payments in
connection with options, futures and options on futures) or make short sales
of securities;
(6) underwrite securities of other issuers, except to the extent that the
purchase of permitted investments directly from the issuer thereof or from an
underwriter for an issuer and the later
1
<PAGE>
disposition of such securities in accordance with a Fund's investment program
may be deemed to be an underwriting;
(7) make investments for the purpose of exercising control or management;
(8) issue senior securities, except that the Growth, Equity Value, Money
Market and Strategic Growth Funds may borrow from banks up to 10%, and the
Allocation Funds may borrow up to 20%, of the current value of their
respective net assets for temporary purposes only in order to meet
redemptions, and these borrowings may be secured by the pledge of up to 10%
and 20%, respectively, (i.e., amounts equal to the amount borrowed, except
that the Equity Value Fund may pledge up to 15% to secure 10%) of the current
value of its net assets (but investments may not be purchased while any such
outstanding borrowing in excess of 5% of a Fund's net assets exists).
Securities held in escrow or separate accounts in connection with a Fund's
investment practices described in this SAI or in the Prospectus are not deemed
to be pledged for purposes of this limitation;
(9) write, purchase or sell puts, calls, or combinations thereof, except as
may be described in the Funds' offering documents and except that the Asset
Allocation, Growth, Money Market and Strategic Growth Funds may purchase
securities with put rights in order to maintain liquidity, and except that the
Equity Value and Growth Funds may invest up to 5% and the Strategic Growth
Fund may invest up to 15% of its net assets in such securities, in accordance
with their investment policies stated below;
(10) in the case of the Asset Allocation, Equity Value, Growth, Strategic
Growth and U.S. Government Allocation Funds, purchase securities of any issuer
(except securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities) if, as a result, with respect to 75% of a Fund's
assets, more than 5% of the value of a Fund's total assets would be invested
in the securities of any one issuer or the Fund's ownership would be more than
10% of the outstanding voting securities of such issuer; or
(11) in the case of the Money Market Fund, make loans of portfolio
securities or other assets, except that loans for purposes of this restriction
will not include the purchase of fixed time deposits, repurchase agreements,
commercial paper and other short-term obligations, and other types of debt
instruments commonly sold in public or private offerings; the Non-Money Market
Funds may lend portfolio securities to brokers, dealers and financial
institutions as described below.
Non-Fundamental Investment Policies. Each Fund has adopted the following non-
fundamental policies which may be changed by a vote of a majority of the
Trustees of the Trust or at any time without approval of such Fund's
shareholders.
(1) Each Fund may invest in shares of other registered investment
companies, subject to the limitations of Section 12(d)(1) of the 1940 Act.
Under the 1940 Act, a Fund's investment in such securities currently is
generally limited to, subject to certain exceptions, (i) 3% of the total voting
stock of any one investment company, (ii) 5% of such Fund's net assets with
respect to
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any one investment company, and (iii) 10% of such Fund's net assets in the
aggregate. Other investment companies in which the Funds invest can be expected
to charge fees for operating expenses, such as investment advisory and
administration fees, that would be in addition to those charged by a Fund.
(2) Each Fund may not invest or hold more than 15% (10% for the Money
Market Fund), of it's net assets in illiquid securities. For this purpose,
illiquid securities include, among others, (a) securities that are illiquid by
virtue of the absence of a readily available market or legal or contractual
restrictions on resale, (b) fixed time deposits that are subject to withdrawal
penalties and that have maturities of more than seven days, and (c) repurchase
agreements not terminable within seven days.
(3) Each Fund may invest up to 25% of its net assets in securities of
foreign governmental and foreign private issuers that are denominated in and pay
interest in U.S. dollars.
(4) Each Fund may lend securities from its portfolio to brokers, dealers
and financial institutions, in amounts not to exceed (in the aggregate) one-
third of each Fund's total assets. Any such loans of portfolio securities will
be fully collateralized based on values that are marked to market daily. The
Funds will not enter into any portfolio security lending arrangement having a
duration of longer than one year.
In addition, as provided in Rule 2a-7 under the 1940 Act, the Money Market
Fund may only purchase "Eligible Securities" (as defined in Rule 2a-7) and only
if, immediately after such purchase: the Money Market Fund would have no more
than 5% of its total assets in "First Tier Securities" (as defined in Rule 2a-7)
of any one issuer, excluding government securities and except as otherwise
permitted for temporary purposes and for certain guarantees and unconditional
puts; the Money Market Fund would own no more than 10% of the voting securities
of any one issuer; the Money Market Fund would have no more than 5% of its total
assets in "Second Tier Securities" (as defined in Rule 2a-7); and the Money
Market Fund would have no more than the greater of $1 million or 1% of its total
assets in Second Tier Securities of any one issuer.
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INVESTMENT MODELS
This section contains supplemental information about the proprietary
investment models used by Barclays Global Fund Advisors ("BGFA"), as sub-
advisor, to manage the Asset Allocation Fund's and U.S. Government Allocation
Fund's portfolios.
Asset Allocation Model. The portfolio of investments for the Asset Allocation
Fund is determined with the assistance of an investment allocation model that
selects an optimal mix of assets from among common stocks, U.S. Treasury Bonds
and money market instruments in accordance with the long-term investment
objective of the Fund. BGFA compares the Asset Allocation Fund's investments
daily to the Asset Allocation Model's recommended allocation. The investment
model recommends allocations among each asset class in 5% increments only. Any
recommended reallocation will be implemented in accordance with trading policies
that have been designed to take advantage of market opportunities and to reduce
transaction costs. Under current trading policies employed by BGFA, recommended
reallocations may be implemented promptly upon receipt of recommendations or may
not be acted upon for as long as two or three months thereafter depending on
factors such as the percentage change from previous recommendations and the
consistency of recommended reallocations over a period of time. In addition, the
Asset Allocation Fund generally will invest the net proceeds from the sale of
shares of the Fund and will liquidate existing Fund investments to meet net
redemption requirements in a manner that best allows the Fund's existing asset
allocation to follow that recommended by the Model. Notwithstanding any
recommendation of the Model to the contrary, the Asset Allocation Fund will
generally maintain at least that portion of its assets in money market
instruments reasonably considered necessary to meet redemption requirements. In
general, cash maintained for short-term liquidity needs is only invested in U.S.
Treasury bills, shares of other mutual funds and repurchase agreements. There is
no requirement that the Fund maintain positions in any particular asset class or
classes.
Wells Fargo Bank and BGFA manage other portfolios which also invest in
accordance with the Asset Allocation Model. The performance of each of those
other portfolios is likely to vary from each other and from the performance of
the Fund. Such variation in performance is primarily due to different
equilibrium asset mix assumptions used for the various portfolios, timing
differences in the implementation of the Model's recommendations and differences
in expenses and liquidity requirements.
The Fund invests the common stock portion of its portfolio in the securities
of the S&P 500 Index. There are 500 common stocks, including Wells Fargo &
Company stock, that make up the S&P 500 Index. Standard & Poor's Ratings Group
("S&P") occasionally makes changes in the S&P 500 Index based on its criteria
for inclusion of stocks in the S&P 500 Index. The S&P 500 Index is market-
capitalization-weighted so that each stock in the S&P 500 Index represents its
proportion of the total market value of all stocks in the S&P 500 Index. In
making its stock investments, the policy of the Asset Allocation Fund is to
invest those assets in substantially the same stocks, and in substantially the
same percentages, as the S&P 500 Index, including Wells Fargo & Company stock.
A key component of the Asset Allocation Model is a set of assumptions
concerning expected risk and return and investor attitudes toward risk which are
incorporated into the asset allocation
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decision. The principal inputs of financial data to the Asset Allocation Model
currently are (i) consensus estimates of the earnings, dividends and payout
ratios on a broad cross-section of common stocks as reported by independent
financial reporting services which survey a broad cross-section of Wall Street
analysts, (ii) the estimated current yield to maturity on new long-term
corporate bonds rated "AA" by S&P, (iii) the present yield on money market
instruments, (iv) the historical statistical standard deviation in investment
return for each class of asset, and (v) the historical statistical correlation
of investment returns among the various asset classes in which the Asset
Allocation Fund invests. Using this data, the Asset Allocation Model is run
daily to determine the recommended asset allocation.
Although BGFA intends to use the Model as a basis for investment decisions,
BGFA may change from time to time the criteria and methods it uses to implement
the Model's recommendations if it believes such a change is desirable for the
Fund. Nevertheless, Wells Fargo Bank has continuing and exclusive authority over
the management of the Fund, the conduct of its affairs and the disposition of
the Funds' assets, and Wells Fargo Bank has the right to reject BGFA's
investment decisions for the Fund if Wells Fargo Bank determines that any such
decision is not consistent with the best interests of the Fund.
U.S. Government Allocation Model. The portfolio of investments for the U.S.
Government Allocation Fund is determined with the assistance of an investment
allocation model that selects an optimal mix of assets from among long-term U.S.
Treasury bonds, intermediate-term U.S. Treasury notes and short-term money
market instruments in accordance with the long-term investment objective of the
Fund. BGFA compares the U.S. Government Allocation Fund's investments daily to
the U.S. Government Allocation Model's recommended allocation. The investment
model recommends allocations among each asset class in 5% increments only. Any
recommended reallocation will be implemented in accordance with trading policies
that have been designed to take advantage of market opportunities and to reduce
transaction costs. Under current trading policies employed by BGFA, recommended
reallocations may be implemented promptly upon receipt of recommendations or may
not be acted upon for as long as two to three months thereafter depending on
factors such as the percentage change from previous recommendations and the
consistency of recommended reallocations over a period of time. In addition, the
U.S. Government Allocation Fund generally will invest the net proceeds from the
sale of shares of the Fund and will liquidate existing Fund investments to meet
net redemption requirements in a manner that best allows the Fund's existing
asset allocation to follow the allocation recommended by the computer Model.
Notwithstanding any recommendation of the computer model to the contrary, the
Fund will generally maintain at least that portion of its assets in money market
instruments reasonably considered necessary to meet redemption requirements. In
general, cash maintained for short-term liquidity needs is only invested in U.S.
Treasury bills, shares other mutual funds and repurchase agreements. There is no
requirement that the Fund maintain positions in any particular asset class or
classes.
BGFA manages other funds which invest in accordance with a substantially
similar version of the Model. The performance of each of those other funds is
likely to vary from each other and from the performance of the U.S. Government
Allocation Fund. Such variation in performance is primarily due to timing
differences in the implementation of the Model's recommendations, differences in
expenses and liquidity requirements, and the ability of other funds to invest a
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higher portion of their assets in short-term investments that may generate a
higher yield, but are not issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
A key component of the U.S. Government Allocation Model is a set of
assumptions concerning expected risk and return and investor attitudes toward
risk, which are incorporated into the allocation decision. The principal inputs
of financial data to the model currently are: (i) yields on 90-day U.S. Treasury
bills, 5-year U.S. Treasury notes and 30-year U.S. Treasury bonds; (ii) the
expected statistical standard deviation in investment returns for each class of
fixed income instrument; and (iii) the expected statistical correlation of
investment return among the various classes of fixed income instruments. Using
these and other data, the Model is run daily to determine the recommended
allocation. Because the Fund may shift its investment allocations significantly
from time to time, its performance may differ from funds which invest in one
asset class or from funds with a constant mix of assets.
Although BGFA intends to use the Model as a basis for investment decisions,
BGFA may change from time to time the criteria and methods it uses to implement
the Model's recommendations if it believes such a change is desirable for the
Fund. Nevertheless, Wells Fargo Bank has continuing and exclusive authority over
the management of the Fund, the conduct of its affairs and the disposition of
the Fund's assets, and Wells Fargo Bank has the right to reject BGFA's
investment decisions for the Fund if Wells Fargo Bank determines that any such
decision is not consistent with the best interests of the Fund.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Asset-Backed Securities. The Equity Value, Growth and Strategic Growth Funds
may purchase asset-backed securities unrelated to mortgage loans. These asset-
backed securities may consist of undivided fractional interests in pools of
consumer loans or receivables held in trust. Examples include certificates for
automobile receivables (CARS) and credit card receivables (CARDS). Payments of
principal and interest on these asset-backed securities are "passed through" on
a monthly or other periodic basis to certificate holders and are typically
supported by some form of credit enhancement, such as a letter of credit, surety
bond, limited guaranty, or subordination. The extent of credit enhancement
varies, but usually amounts to only a fraction of the asset-backed security's
par value until exhausted. Ultimately, asset-backed securities are dependent
upon payment of the consumer loans or receivables by individuals, and the
certificate holder frequently has no recourse to the entity that originated the
loans or receivables. The actual maturity and realized yield will vary based
upon the prepayment experience of the underlying asset pool and prevailing
interest rates at the time of prepayment. Asset-backed securities are relatively
new instruments and may be subject to greater risk of default during periods of
economic downturn than other instruments. Also, the secondary market for certain
asset-backed securities may not be as liquid as the market for other types of
securities, which could result in a Fund experiencing difficulty in valuing or
liquidating such securities.
Bank Obligations. The Equity Value and Strategic Growth Funds may invest in
bank obligations, including certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations of domestic banks, foreign
subsidiaries of domestic banks, foreign branches of
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domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, a Fund may be subject to additional investment risks that are different
in some respects from those incurred by a Fund which invests only in debt
obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits. In addition, foreign branches of U.S. banks and foreign banks may be
subject to less stringent reserve requirements and to different accounting,
auditing, reporting and recordkeeping standards than those applicable to
domestic branches of U.S. banks.
Certificates of deposit are negotiable certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by a Fund will not benefit from insurance from the Bank Insurance
Fund or the Savings Association Insurance Fund administered by the Federal
Deposit Insurance Corporation ("FDIC"). Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other short-
term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
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Commercial Paper. The Allocation Funds, Equity Value and Strategic Growth
Funds may invest in commercial paper (including variable amount master demand
notes) which refers to short-term, unsecured promissory notes issued by
corporations to finance short-term credit needs. Commercial paper is usually
sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. Variable amount master demand notes are demand
obligations which permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes.
Investments by the Funds in commercial paper (including variable rate demand
notes and variable rate master demand notes issued by domestic and foreign bank
holding companies, corporations and financial institutions, as well as similar
instruments issued by government agencies and instrumentalities) will consist of
issues that are rated in one of the two highest rating categories by a
Nationally Recognized Statistical Ratings Organization ("NRSRO"). Commercial
paper may include variable- and floating-rate instruments.
Convertible Securities (Lower-Rated Securities). The Equity Value, Growth, and
Strategic Growth Funds may invest in convertible securities that are not rated
in one of the four highest rating categories by a NRSRO. The yields on such
lower rated securities, which include securities also known as junk bonds,
generally are higher than the yields available on higher-rated securities.
However, investments in lower rated securities and comparable unrated securities
generally involve greater volatility of price and risk of loss of income and
principal, including the probability of default by or bankruptcy of the issuers
of such securities. Lower rated securities and comparable unrated securities (a)
will likely have some quality and protective characteristics that, in the
judgment of the rating organization, are outweighed by large uncertainties or
major risk exposures to adverse conditions and (b) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. Accordingly, it is possible that
these types of factors could, in certain instances, reduce the value of
securities held in a Fund's portfolio, with a commensurate effect on the value
of the Fund's shares.
While the market values of lower rated securities and comparable unrated
securities tend to react less to fluctuations in interest rate levels than the
market values of higher-rated securities, the market values of certain lower
rated securities and comparable unrated securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, lower rated securities
and comparable unrated securities generally present a higher degree of credit
risk. Issuers of lower rated securities and comparable unrated securities often
are highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their debt obligations during
an economic downturn or during sustained periods of rising interest rates may be
impaired. The risk of loss due to default by such issuers is significantly
greater because lower rated securities and comparable unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. The Funds may incur additional expenses to the extent that
it is required to seek recovery upon a default in the payment of principal or
interest on their portfolio holdings. The existence of limited markets for
lower rated securities and comparable unrated securities may diminish a Fund's
ability to (a) obtain accurate market quotations for purposes of valuing such
securities and calculating its net asset value and (b) sell the securities at
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fair value either to meet redemption requests or to respond to changes in the
economy or in financial markets.
Certain lower rated debt securities and comparable unrated securities
frequently have call or buy-back features that permit their issuers to call or
repurchase the securities from their holders, such as a Fund. If an issuer
exercises these rights during periods of declining interest rates, a Fund may
have to replace the security with a lower yielding security, thus resulting in a
decreased return to the Fund.
The market for certain lower rated securities and comparable unrated
securities is relatively new and has not weathered a major economic recession.
The effect that such a recession might have on such securities is not known.
Any such recession, however, could disrupt severely the market for such
securities and adversely affect the value of such securities. Any such economic
downturn also could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
The Funds may invest in convertible securities that provide current income and
are issued by companies with the characteristics described above for each Fund
and that have a strong earnings and credit record. The Funds may purchase
convertible securities that are fixed-income debt securities or preferred
stocks, and which may be converted at a stated price within a specified period
of time into a certain quantity of the common stock of the same issuer.
Convertible securities, while usually subordinate to similar nonconvertible
securities, are senior to common stocks in an issuer's capital structure.
Convertible securities offer flexibility by providing the investor with a steady
income stream (which generally yield a lower amount than similar nonconvertible
securities and a higher amount than common stocks) as well as the opportunity to
take advantage of increases in the price of the issuer's common stock through
the conversion feature. Fluctuations in the convertible security's price can
reflect changes in the market value of the common stock or changes in market
interest rates. At most, 5% of each Fund's net assets will be invested, at the
time of purchase, in convertible securities that are not rated in the four
highest rating categories by one or more NRSROs, such as Moody's Investors
Service, Inc. ("Moody's") or S&P, or unrated but determined by the advisor to be
of comparable quality.
Corporate Reorganizations. The Equity Value and Strategic Growth Funds may
invest in securities for which a tender or exchange offer has been made or
announced, and in securities of companies for which a merger, consolidation,
liquidation or similar reorganization proposal has been announced if, in the
judgment of Wells Fargo Bank, there is a reasonable prospect of capital
appreciation significantly greater than the added portfolio turnover expenses
inherent in the short-term nature of such transactions. The principal risk
associated with such investments is that such offers or proposals may not be
consummated within the time and under the terms contemplated at the time of the
investment, in which case, unless such offers or proposals are replaced by
equivalent or increased offers or proposals which are consummated, the Funds may
sustain a loss.
Custodial Receipts for Treasury Securities. The Equity Value and Strategic
Growth Funds may purchase participations in trusts that hold U.S. Treasury
securities (such as TIGRs and CATS) or other obligations where the trust
participations evidence ownership in either the future interest payments or the
future principal payments on the
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obligations. These participations are normally issued at a discount to their
"face value," and can exhibit greater price volatility than ordinary debt
securities because of the way in which their principal and interest are returned
to investors. Investments by a Fund in such participations will not exceed 5% of
the value of that Fund's total assets.
Emerging Markets. The Growth and Strategic Growth Funds each may invest up to
-------------------
15% of its assets in equity securities of companies in "emerging markets." The
Funds consider countries with emerging markets to include the following: (i)
countries with an emerging stock market as defined by the International Finance
Corporation; (ii) countries with low- to middle-income economies according to
the International Bank for Reconstruction and Development (more commonly
referred to as the World Bank); and (iii) countries listed in World Bank
publications as developing. The advisor may invest in those emerging markets
that have a relatively low gross national product per capita, compared to the
world's major economies, and which exhibit potential for rapid economic growth.
The advisor believes that investment in equity securities of emerging market
issuers offers significant potential for long-term capital appreciation. Equity
securities of emerging market issuers may include common stock, preferred stocks
(including convertible preferred stocks) and warrants; bonds, notes and
debentures convertible into common or preferred stock; equity interests in
foreign investment funds or trusts and real estate investment trust securities.
The Funds may invest in American Depository Receipts ("ADRs"), Canadian
Depository Receipts ("CDRs"), European Depository Receipts ("EDRs"), Global
Depository Receipts ("GDRs") and International Depository Receipts ("IDRs") of
such issuers.
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Emerging market countries include, but are not limited to: Argentina, Brazil,
Chile, China, the Czech Republic, Columbia, Ecuador, Greece, Hong Kong,
Indonesia, India, Malaysia, Mexico, the Philippines, Poland, Portugal, Peru,
Russia, Singapore, South Africa, Thailand, Taiwan and Turkey. A company is
considered in a country, market or region if it conducts its principal business
activities there, namely, if it derives a significant portion (at least 50%) of
its revenues or profits from goods produced or sold, investments made, or
services performed therein or has at least 50% of its assets situated in such
country, market or region.
There are special risks involved in investing in emerging-market countries.
Many investments in emerging markets can be considered speculative, and their
prices can be much more volatile than in the more developed nations of the
world. This difference reflects the greater uncertainties of investing in less
established markets and economies. The financial markets of emerging markets
countries are generally less well capitalized and thus securities of issuers
based in such countries may be less liquid. Most are heavily dependent on
international trade, and some are especially vulnerable to recessions in other
countries. Many of these countries are also sensitive to world commodity prices.
Some countries may still have obsolete financial systems, economic problems or
archaic legal systems. In addition, many of these nations are experiencing
political and social uncertainties.
Floating- and Variable-Rate Obligations. The Funds may purchase floating- and
variable-rate obligations. Each Fund may purchase floating- and variable-rate
demand notes and bonds. Variable-rate demand notes include master demand notes
that are obligations that permit a Fund to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the Fund,
as lender, and the borrower. The interest rates on these notes may fluctuate
from time to time. The issuer of such obligations ordinarily has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating-rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable-rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally will
be traded, and there generally is no established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, a Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such obligations frequently
are not rated by credit rating agencies and each Fund may invest in obligations
which are not so rated only if Wells Fargo Bank determines that at the time of
investment the obligations are of comparable quality to the other obligations in
which such Fund may invest. Wells Fargo Bank, on behalf of each Fund, considers
on an ongoing basis the creditworthiness of the issuers of the floating- and
variable-rate demand obligations in such Fund's portfolio. No Fund will invest
more than 15% of the value of its total net assets in floating- or variable-rate
demand obligations whose demand feature is not exercisable within seven days.
Such obligations may be treated as liquid, provided that an active secondary
market exists. Floating- and variable-rate instruments are subject to interest-
rate risk and credit risk.
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The floating- and variable-rate instruments that the Funds may purchase
include certificates of participation in such instruments.
The Equity Value Fund may also hold floating- and variable-rate instruments
that have interest rates that re-set inversely to changing current market rates
and/or have embedded interest rate floors and caps that require the issuer to
pay an adjusted interest rate if market rates fall below or rise above a
specified rate. These instruments represent relatively recent innovations in the
bond markets, and the trading market for these instruments is less developed
than the markets for traditional types of debt instruments. It is uncertain how
these instruments will perform under different economic and interest-rate
scenarios. The market value of these instruments may be more volatile than other
types of debt instruments and may present greater potential for capital-gain or
loss. In some cases, it may be difficult to determine the fair value of a
structured or derivative instrument because of a lack of reliable objective
information and an established secondary market for some instruments may not
exist.
Foreign Obligations. The Funds may invest in foreign securities through ADRs,
CDRs, EDRs, IDRs and GDRs or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs (sponsored or unsponsored) are receipts typically issued by a
U.S. bank or trust company and traded on a U.S. stock exchange, and CDRs are
receipts typically issued by a Canadian bank or trust company that evidence
ownership of underlying foreign securities. Issuers of unsponsored ADRs are not
contractually obligated to disclose material information in the U.S. and,
therefore, such information may not correlate to the market value of the
unsponsored ADR. EDRs and IDRs are receipts typically issued by European banks
and trust companies, and GDRs are receipts issued by either a U.S. or non-U.S.
banking institution, that evidence ownership of the underlying foreign
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets and EDRs and IDRs in bearer form are designed primarily for
use in Europe. Each Fund may not invest 25% or more of its assets in foreign
obligations.
Investments in foreign securities involve certain considerations that are not
typically associated with investing in domestic securities. There may be less
publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to the same accounting,
auditing and financial reporting standards or governmental supervision as
domestic issuers. In addition, with respect to certain foreign countries, taxes
may be withheld at the source under foreign tax laws, and there is a possibility
of expropriation or confiscatory taxation, political, social and monetary
instability or diplomatic developments that could adversely affect investments
in, the liquidity of, and the ability to enforce contractual obligations with
respect to, securities of issuers located in those countries.
Foreign Currency Transactions. The Equity Value Fund may enter into forward
currency exchange contracts in order to protect against uncertainty in the level
of future foreign exchange rates. A forward currency exchange contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into the interbank market conducted between currency traders (usually large
commercial banks) and their customers. Forward currency exchange contracts may
be bought or sold to protect the Funds against a possible loss resulting from an
adverse change in the relationship
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between foreign currencies and the U.S. dollar, or between foreign currencies.
Although such contracts are intended to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time, they tend to
limit any potential gain which might result should the value of such currency
increase.
Because the Funds may invest in securities denominated in currencies other
than the U.S. dollar and may temporarily hold funds in bank deposits or other
money market investments denominated in foreign currencies, they may be affected
favorably or unfavorably by exchange control regulations or changes in the
exchange rate between such currencies and the dollar. Changes in foreign
currency exchange rates influence values within a Fund from the perspective of
U.S. investors. Changes in foreign currency exchange rates may also affect the
value of dividends and interest earned, gains and losses realized on the sale of
securities, and any net investment income and gains to be distributed to
shareholders by a Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors.
Investments in foreign securities also involve certain inherent risks, such as
political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations. In addition,
there may be less publicly available information about a foreign company than
about a domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Investments in foreign securities and forward
contracts may also be subject to withholding and other taxes imposed by foreign
governments. With respect to certain foreign countries, there is also a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investments in those countries.
Forward Commitments, When-Issued Purchases and Delayed-Delivery Transactions.
Each Fund may purchase or sell securities on a when-issued or delayed-delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Securities purchased or sold on a
when-issued, delayed-delivery or forward commitment basis involve a risk of loss
if the value of the security to be purchased declines, or the value of the
security to be sold increases, before the settlement date. Although each Fund
will generally purchase securities with the intention of acquiring them, a Fund
may dispose of securities purchased on a when-issued, delayed-delivery or a
forward commitment basis before settlement when deemed appropriate by the
advisor. Securities purchased on a when-issued or forward commitment basis may
expose the relevant Fund to risk because they may experience such fluctuations
prior to their actual delivery. Purchasing securities on a when-issued or
forward commitment basis can involve the additional risk that the yield
available in the market when the delivery takes place actually may be higher
than that obtained in the transaction itself.
Each Fund will segregate cash, U.S. Government obligations or other high-
quality debt instruments in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will segregate additional liquid
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assets on a daily basis so that the value of the segregated assets is equal to
the amount of such commitments.
Illiquid Securities. The Funds may invest in securities not registered under
the 1933 Act and other securities subject to legal or other restrictions on
resale. Because such securities may be less liquid than other investments, they
may be difficult to sell promptly at an acceptable price. Delay or difficulty in
selling securities may result in a loss or be costly to the Fund. The Funds may
invest up to 15% of their net assets in illiquid securities, except the Money
Market Fund, which may invest up to 10% of its net assets in illiquid
securities.
Loans of Portfolio Securities. Each Non-Money Market Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided:
(1) the loan is secured continuously by collateral consisting of U.S. Government
securities or cash or letters of credit maintained on a daily marked-to-market
basis in an amount at least equal to the current market value of the securities
loaned; (2) the Fund may at any time call the loan and obtain the return of the
securities loaned within five business days; (3) the Fund will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed one third of the
total assets of the Fund.
A Fund will earn income for lending its securities because cash collateral
pursuant to these loans will be invested in short-term money market instruments.
In connection with lending securities, a Fund may pay reasonable finders,
administrative and custodial fees. A Fund will not enter into any security
lending arrangement having a duration longer than one year. Loans of securities
involve a risk that the borrower may fail to return the securities or may fail
to provide additional collateral. In either case, a Fund could experience delays
in recovering securities or collateral or could lose all or part of the value of
the loaned securities. When a Fund lends its securities, it continues to
receive interest or dividends on the securities loaned and may simultaneously
earn interest on the collateral received from the borrower or from the
investment of cash collateral in readily marketable, high-quality, short-term
obligations. Although voting rights, or rights to consent, attendant to
securities on loan pass to the borrower, such loans may be called at any time
and will be called so that the securities may be voted by a Fund if a material
event affecting the investment is to occur. A Fund may pay a portion of the
interest or fees earned from securities lending to a borrower or placing broker.
Borrowers and placing brokers may not be affiliated, directly or indirectly,
with Wells Fargo Bank, Stephens Inc. or any of their affiliates.
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Money Market Instruments and Temporary Investments. The Funds may invest in
the following types of high quality money market instruments that have remaining
maturities not exceeding one year: (i) U.S. Government obligations; (ii)
negotiable certificates of deposit, bankers' acceptances and fixed time deposits
and other obligations of domestic banks (including foreign branches) that have
more than $1 billion in total assets at the time of investment and are members
of the Federal Reserve System or are examined by the Comptroller of the Currency
or whose deposits are insured by the FDIC; (iii) commercial paper rated at the
date of purchase
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"Prime-1" by Moody's or "A-1" or "A-1--" by S&P, or, if unrated, of comparable
quality as determined by Wells Fargo Bank, as investment advisor; and (iv)
repurchase agreements. The Funds also may invest in short-term U.S. dollar-
denominated obligations of foreign banks (including U.S. branches) that at the
time of investment: (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) are among the 75 largest foreign banks in the
world as determined on the basis of assets; (iii) have branches or agencies in
the United States; and (iv) in the opinion of Wells Fargo Bank, as investment
advisor, are of comparable quality to obligations of U.S. banks which may be
purchased by the Funds.
Letters of Credit. Certain of the debt obligations (including certificates of
participation, commercial paper and other short-term obligations) which the
Funds may purchase may be backed by an unconditional and irrevocable letter of
credit of a bank, savings and loan association or insurance company which
assumes the obligation for payment of principal and interest in the event of
default by the issuer. Only banks, savings and loan associations and insurance
companies which, in the opinion of Wells Fargo Bank, are of comparable quality
to issuers of other permitted investments of the Fund may be used for letter of
credit-backed investments.
Repurchase Agreements. A Fund may enter into repurchase agreements, wherein
the seller of a security to the Fund agrees to repurchase that security from the
Fund at a mutually agreed upon time and price. A Fund may enter into repurchase
agreements only with respect to securities that could otherwise be purchased by
the Fund. All repurchase agreements will be fully collateralized at 102% based
on values that are marked to market daily. The maturities of the underlying
securities in a repurchase agreement transaction may be greater than twelve
months, although the maximum term of a repurchase agreement will always be less
than twelve months. If the seller defaults and the value of the underlying
securities has declined, a Fund may incur a loss. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security, the Fund's
disposition of the security may be delayed or limited. Each Fund may not enter
into a repurchase agreement with a maturity of more than seven days, if, as a
result, more than 15% (10% for the Money Market Fund) of the market value of
such Fund's total net assets would be invested in repurchase agreements with
maturities of more than seven days, restricted securities and illiquid
securities. A Fund will only enter into repurchase agreements with primary
broker/dealers and commercial banks that meet guidelines established by the
Board of Trustees and that are not affiliated with the investment advisor. The
Funds may participate in pooled repurchase agreement transactions with other
funds advised by Wells Fargo Bank.
Mortgage-Related Securities. The Allocation Fund may invest in mortgage-
related securities. Mortgage pass-through securities are securities representing
interests in "pools" of mortgages in which payments of both interest and
principal on the securities are made monthly, in effect "passing through"
monthly payments made by the individual borrowers on the residential mortgage
loans which underlie the securities (net of fees paid to the issuer or guarantor
of the securities). The stated maturities of pass-through obligations may be
shortened by unscheduled prepayments of principal on the underlying mortgages.
Therefore, it is not possible to predict accurately the average maturity of a
particular pass-through obligation. Variations in the maturities of pass-through
obligations will affect the yield of a Fund. Early repayment of principal on
mortgage pass-through securities (arising from prepayments of principal due to
sale of the underlying property, refinancing, or foreclosure, net of fees and
costs which may be incurred)
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may expose a Fund to a lower rate of return upon reinvestment of principal.
Also, if a security subject to prepayment has been purchased at a premium, in
the event of prepayment the value of the premium would be lost. Like other
fixed-income securities, when interest rates rise, the value of a mortgage-
related security generally will decline; however, when interest rates decline,
the value of mortgage-related securities with prepayment features may not
increase as much as other fixed-income securities. Payment of principal and
interest on some mortgage pass-through securities (but not the market value of
the securities themselves) may be guaranteed by the full faith and credit of the
U.S. Government or its agencies or instrumentalities. Mortgage pass-through
securities created by non-government issuers (such as commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers) may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit, which may be issued by governmental entities,
private insurers or the mortgage poolers.
Adjustable Rate Mortgages ("ARMs") The Allocation Fund may invest in ARMs
issued or guaranteed by the GNMA, FNMA or the FHLMC. The full and timely payment
of principal and interest on GNMA ARMs is guaranteed by GNMA and backed by the
full faith and credit of the U.S. Government. FNMA also guarantees full and
timely payment of both interest and principal, while FHLMC guarantees full and
timely payment of interest and ultimate payment of principal. FNMA and FHLMC
ARMs are not backed by the full faith and credit of the United States. However,
because FNMA and FHLMC are government-sponsored enterprises, these securities
are generally considered to be high quality investments that present minimal
credit risks. The yields provided by these ARMs have historically exceeded the
yields on other types of U.S. Government securities with comparable maturities,
although there can be no assurance that this historical performance will
continue.
The mortgages underlying ARMs guaranteed by GNMA are typically insured or
guaranteed by the Federal Housing Administration, the Veterans Administration or
the Farmers Home Administration, while those underlying ARMs issued by FNMA or
FHLMC are typically conventional residential mortgages which are not so insured
or guaranteed, but which conform to specific underwriting, size and maturity
standards.
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The interest rates on the mortgages underlying the ARMs in which the Asset
Allocation Fund may invest generally are readjusted at periodic intervals
ranging from one year or less to several years in response to changes in a
predetermined interest rate index. There are two main categories of indices:
those based on U.S. Treasury securities and those derived from a calculated
measure, such as a cost-of-funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year and five-year constant maturity
Treasury note rates, the three-month Treasury bill rate, the 180-day Treasury
bill rate, rates on longer-term Treasury securities, the National Median Cost of
Funds, the one-month, three-month, six-month or one-year LIBOR, a published
prime rate or commercial paper rates. Certain of these indices follow overall
market interest rates more closely than others.
Adjustable rate mortgages, a common form of residential financing, generally
have a specified maturity date. Most provide for amortization of principal in a
manner similar to fixed-rate mortgages, but have interest rates that change in
response to changes in a specified interest rate index. The rate of interest
due on such a mortgage is calculated by adding an agreed-upon "margin" to the
specified index, although there generally are limitations or "caps" on interest
rate movements in any given period or over the life of the mortgage. To the
extent that the interest rates on adjustable rate mortgages cannot be adjusted
in response to interest rate changes because of interest rate caps, the ARMs or
CMOs backed by such mortgages are likely to respond to changes in market rates
more like fixed rate securities. In other words, interest rate increases in
excess of such caps can be expected to cause CMOs or ARMs backed by mortgages
that have such caps to decline in value to a greater extent than would be the
case in the absence of such caps. Conversely, interest rate decreases below
interest rate floors can be expected to cause the CMOs or ARMs backed by
mortgages that have such floors to increase in value to a greater extent than
would be the case in the absence of such floors.
These adjustable rate features should reduce, but will not eliminate, price
fluctuations in such securities, particularly when market interest rates
fluctuate. Since the interest rates on mortgages typically are reset at most
annually and generally are subject to caps, it can be expected that the prices
of ARMs backed by such mortgages will fluctuate to the extent prevailing market
interest rates are not reflected in the interest rates payable on the underlying
ARMs. In this regard, the net asset value of a Funds' shares could fluctuate to
the extent interest rates on underlying mortgages differ from prevailing market
interest rates during interim periods between interest rate reset dates.
Accordingly, investors could experience some principal loss or less gain than
might otherwise be achieved if they redeem their shares of a Fund or if the
Funds sells these portfolio securities before the interest rates on the
underlying mortgages are adjusted to reflect prevailing market interest rates.
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The holder of ARMs receives not only monthly scheduled payments of principal
and interest, but also may receive unscheduled principal payments representing
prepayments on the underlying mortgages. Changes in market interest rates and
interest rate indexes can affect these prepayment rates, thereby shortening or
lengthening their duration, the holder therefore, may have to reinvest the
periodic payments and any unscheduled prepayments of principal it receives at a
rate of interest which is lower than the rate on the ARMs held by it.
Options Trading. The Non-Money Market Funds may purchase or sell options on
individual securities or options on indices of securities as described below.
The purchaser of an option risks a total loss of the premium paid for the option
if the price of the underlying security does not increase or decrease
sufficiently to justify exercise. The seller of an option, on the other hand,
will recognize the premium as income if the option expires unrecognized but
foregoes any capital appreciation in excess of the exercise price in the case of
a call option and may be required to pay a price in excess of current market
value in the case of a put option.
Call and Put Options on Specific Securities. The Equity Value Fund may invest
in call and put options on a specific security. The Strategic Growth Fund may
invest up to 15% of its assets, represented by the premium paid, in the purchase
of call and put options in respect of specific securities (or groups of
"baskets" of specific securities). The Equity Value Fund may purchase put and
call options listed on a national securities exchange and issued by the Options
Clearing Corporation in an amount not exceeding 5% of its net assets.
A call option gives the purchaser of the option the right to buy, and
obligates the writer to sell, an underlying security at the exercise price at
any time during the option period. Conversely, a put option gives the purchaser
of the option the right to sell, and obligates the writer to buy, an
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underlying security at the exercise price at any time during the option period.
Investments by a Fund in off-exchange options will be treated as "illiquid" and
therefore subject to the Fund's policy of not investing more than 15% of its net
assets in illiquid securities.
The Equity Value Fund may write covered call option contracts and secured put
options as Wells Fargo Bank deems appropriate. A covered call option is a call
option for which the writer of the option owns the security covered by the
option. Covered call options written by a Fund expose the Fund during the term
of the option (i) to the possible loss of opportunity to realize appreciation in
the market price of the underlying security or (ii) to possible loss caused by
continued holding of a security which might otherwise have been sold to protect
against depreciation in the market price of the security. If a Fund writes a
secured put option, it assumes the risk of loss should the market value of the
underlying security decline below the exercise price of the option. The
aggregate value of the securities subject to options written by a Fund will not
exceed 25%. The use of covered call options and securities put options will not
be a primary investment technique of the Funds, and they are expected to be used
infrequently. If the advisor is incorrect in its forecast of market value or
other factors when writing the foregoing options, a Fund would be in a worse
position than it would have been had the foregoing investment techniques not
been used.
Each Fund may engage in unlisted over-the-counter options with broker/dealers
deemed creditworthy by the advisor. Closing transactions for such options are
usually effected directly with the same broker/dealer that effected the original
option transaction. A Fund bears the risk that the broker/dealer will fail to
meet its obligations. There is no assurance that a liquid secondary trading
market exists for closing out an unlisted option position. Furthermore, unlisted
options are not subject to the protections afforded purchasers of listed options
by the Options Clearing Corporation, which performs the obligations of its
members who fail to perform in connection with the purchase or sale of options.
Each Fund may buy put and call options and write covered call and secured put
options. Options trading is a highly specialized activity which entails greater
than ordinary investment risk. Options may be more volatile than the underlying
instruments, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
instruments themselves. Purchasing options is a specialized investment
technique that entails a substantial risk of a complete loss of the amounts paid
as premiums to the writer of the option.
The Funds may also write covered call and secured put options from time to
time as the advisor deems appropriate. By writing a covered call option, a Fund
forgoes the opportunity to profit from an increase in the market of the
underlying security above the exercise price except insofar as the premium
represents such a profit, and it is not able to sell the underlying security
until the option expires or is exercised or the Fund effects a closing purchase
transaction by purchasing an option of the same series. If a Fund writes a
secured put option, it assumes the risk of loss should the market value of the
underlying security decline below the exercise price of the option. If the
advisor is incorrect in its forecast of market value or other factors when
writing the foregoing options, the Fund would be in a worse position than it
would have been had the foregoing investment techniques not been used.
A call option for a particular security gives the purchaser of the option the
right to buy, and a writer the obligation to sell, the underlying security at
the stated exercise price at any time prior to
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the expiration of the option, regardless of the market price of the security.
The premium paid to the writer is in consideration for undertaking the
obligation under the option contract. A put option for a particular security
gives the purchaser the right to sell the security at the stated exercise price
at any time prior to the expiration date of the option, regardless of the market
price of the security. Options on indices provide the holder with the right to
make or receive a cash settlement upon exercise of the option. With respect to
options on indices, the amount of the settlement equals the difference between
the closing price of the index at the time of exercise and the exercise price of
the option expressed in dollars, times a specified multiple.
The Funds will write call options only if they are "covered." In the case of a
call option on a security or currency, the option is "covered" if a Fund owns
the instrument underlying the call or has an absolute and immediate right to
acquire that instrument without additional cash consideration (or, if additional
cash consideration is required, cash, U.S. Government securities or other liquid
high grade debt obligations, in such amount are held in a segregated account by
the Fund's custodian) upon conversion or exchange of other securities held by
it. For a call option on an index, the option is covered if a Fund maintains
with its custodian a diversified portfolio of securities comprising the index or
liquid assets equal to the contract value. A call option is also covered if a
Fund holds a call on the same instrument or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. The Funds will write put options only if
they are "secured" by liquid assets maintained in a segregated account by the
Funds' custodian in an amount not less than the exercise price of the option at
all times during the option period.
A Fund's obligation to sell an instrument subject to a covered call option
written by it, or to purchase an instrument subject to a secured put option
written by it, may be terminated prior to the expiration date of the option by
the Fund's execution of a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
instrument, exercise price and expiration date) as the option previously
written. Such a purchase does not result in the ownership of an option. A
closing purchase transaction is ordinarily effected to realize a profit on an
outstanding option, to prevent an underlying instrument from being called, to
permit the sale of the underlying instrument or to permit the writing of a new
option containing different terms on such underlying instrument. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying instrument (in the case of a covered call option) or liquidate the
segregated account (in the case of a secured put option) until the option
expires or the optioned instrument or currency is delivered upon exercise with
the result that the writer in such circumstances will be subject to the risk of
market decline or appreciation in the instrument during such period.
When a Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by a Fund is included in the
liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value
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of the traded option is the last sale price or, in the absence of a sale, the
current bid price. If an option purchased by a Fund expires unexercised the Fund
realizes a loss equal to the premium paid. If a Fund enters into a closing sale
transaction on an option purchased by it, the Fund realizes a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by a
Fund expires on the stipulated expiration date or if a Fund enters into a
closing purchase transaction, it realizes a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the deferred credit related to such option is eliminated. If an option
written by a Fund is exercised, the proceeds of the sale are increased by the
net premium originally received and the Fund realizes a gain or loss.
There are several risks associated with transactions in options. For example,
there are significant differences between the securities, currency and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. In addition, a liquid
secondary market for particular options, whether traded over-the-counter or on
an exchange, may be absent for reasons that include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities or currencies;
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; the facilities of an exchange or the Options Clearing Corporation may
not be adequate at all times to handle current trading value; or one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms. A Fund is likely to be unable to control losses by closing its
position where a liquid secondary market does not exist. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
The Strategic Growth Fund may purchase or sell options on individual
securities or options on indices of securities as described below. The purchaser
of an option risks a total loss of the premium paid for the option if the price
of the underlying security does not increase or decrease sufficiently to justify
exercise. The seller of an option, on the other hand, will recognize the premium
as income if the option expires unrecognized but foregoes any capital
appreciation in excess of the exercise price in the case of a call option and
may be required to pay a price in excess of current market value in the case of
a put option.
The Strategic Growth Fund may engage in unlisted over-the-counter options with
broker/dealers deemed creditworthy by the advisor. Closing transactions for such
options are usually effected directly with the same broker/dealer that effected
the original option transaction. A Fund bears the risk that the broker/dealer
will fail to meet its obligations. There is no assurance that a liquid secondary
trading market exists for closing out an unlisted option position. Furthermore,
unlisted options are not subject to the protections afforded purchasers of
listed options by the Options Clearing Corporation, which performs the
obligations of its members who fail to perform in connection with the purchase
or sale of options.
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Stock Index Options. The Equity Value and Strategic Growth Funds may purchase
call and put options and write covered call options on stock indices listed on
national securities exchanges or traded in the over-the-counter market to the
extent of 25% of the value of its net assets.
The effectiveness of purchasing or writing stock index options will depend
upon the extent to which price movements in a Fund's investment portfolio
correlate with price movements of the stock index selected. Because the value of
a stock index option depends upon changes to the price of all stocks comprising
the index rather than the price of a particular stock, whether a Fund will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the price of all stocks in the index, rather than
movements in the price of a particular stock. Accordingly, successful use by a
Fund of options on stock indexes will be subject to Wells Fargo Bank's ability
to correctly analyze movements in the direction of the stock market generally or
of particular industry or market segments.
Stock Index Futures Contracts and Options on Stock Index Futures Contracts.
The Equity Value and Strategic Growth Funds may participate in stock index
futures contracts and options on stock index futures contracts. A futures
transaction involves a firm agreement to buy or sell a commodity or financial
instrument at a particular price on a specified future date, while an option
transaction generally involves a right, which may or may not be exercised, to
buy or sell a commodity of financial instrument at a particular price on a
specified future date. Futures contracts and options are standardized and
exchange-traded, where the exchange serves as the ultimate counterparty for all
contracts. Consequently, the only credit risk on futures contracts is the
creditworthiness of the exchange. Futures contracts, however, are subject to
market risk (i.e., exposure to adverse price changes).
A stock index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount
multiplied by the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. As the aggregate market value of the stocks in the index
changes, the value of the index also changes. In the event that the index level
rises above the level at which the stock index futures contract was sold, the
seller of the stock index futures contract realizes a loss determined by the
difference between the two index levels at the time of expiration of the stock
index futures contract, and the purchaser realizes a gain in that amount. In the
event the index level falls below the level at which the stock index futures
contract was sold, the seller recognizes a gain determined by the difference
between the two index levels at the expiration of the stock index futures
contract, and the purchaser realizes a loss. Stock index futures contracts
expire on a fixed date, currently one to seven months from the date of the
contract, and are settled upon expiration of the contract.
Stock index futures contracts may be purchased to protect a Fund against an
increase in the prices of stocks that Fund intends to purchase. If a Fund is
unable to invest its cash (or cash equivalents) in stock in an orderly fashion,
a Fund may purchase a stock index futures contract to offset any increase in the
price of the stock. However, it is possible that the market may decline instead,
resulting in a loss on the stock index futures contract. If a Fund then
concludes not to invest in stock at that time, or if the price of the securities
to be purchased remains constant or increases, a Fund realizes a loss on the
stock index futures contract that is not offset by a reduction in the price
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of securities purchased. The Funds also may buy or sell stock index futures
contracts to close out existing futures positions.
The Funds also may purchase put options on stock index futures contracts.
Sales of such options may also be made to close out an open option position. The
Funds may, for example, purchase a put option on a particular stock index
futures contract or stock index to protect against a decline in the value of the
common stocks it holds. If the stocks in the index decline in value, the put
should become more valuable and the Funds could sell it to offset losses in the
value of the common stocks. In this way, put options may be used to achieve the
same goals the Funds seek in selling futures contracts. A put option on a stock
index future gives the purchaser the right, in return for a premium paid, to
assume a short (i.e., the right to sell stock index futures) position in a stock
index futures contract at a specified exercise price ("strike price") at any
time during the period of the option. If the option is exercised by the holder
before the last trading date during the option period, the holder receives the
futures position, as well as any balance in the futures margin account. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement is made entirely in cash in an amount equal to the
difference between the strike price and the closing level of the relevant index
on the expiration date.
Wells Fargo Bank expects that an increase or decrease in the index in relation
to the strike price level would normally correlate to an increase or decrease
(but not necessarily to the same extent) in the value of a Fund's common stock
portfolio against which the option was written. Thus, any loss in the option
transaction may be offset by an increase in the value of the common stock
portfolio to the extent changes in the index correlate to changes in the value
of that portfolio. The Funds may liquidate the put options they have purchased
by effecting a closing sale transaction rather than exercising the option. This
is accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that the Funds will be able to effect the
closing sale transaction. The Funds realize a gain from a closing sale
transaction if the price at which the transaction is effected exceeds the
premium paid to purchase the option and, if less, the Funds realize a loss.
The Funds may each invest in stock index futures in order to protect the value
of common stock investments or to maintain liquidity, provided not more than 5%
of a Fund's net assets are committed to such transactions. A stock index future
obligates the seller to deliver (and the purchaser to take), effectively, an
amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
the underlying stocks in the index is made. With respect to stock indices that
are permitted investments, the Funds intend to purchase and sell futures
contracts on the stock index for which it can obtain the best price with
consideration also given to liquidity. There can be no assurance that a liquid
market will exist at the time when a Fund seeks to close out a futures contract
or a futures option position. Lack of a liquid market may prevent liquidation of
an unfavorable position.
Other Investment Companies. The Funds may invest in shares of other
registered investment companies, up to the limits prescribed in Section 12(d) of
the 1940 Act. Under the 1940 Act, a Fund's investment in such securities
currently is generally limited to, subject to certain exceptions, (i) 3% of the
total voting stock of any one investment company, (ii) 5% of such Fund's net
assets with respect to any one investment company and (iii) 10% of such Fund's
24
<PAGE>
net assets in aggregate. Other investment companies in which the Funds invest
can be expected to charge fees for operating expenses such as investment
advisory and administration fees, that would be in addition to those charged by
the Funds.
Privately Issued Securities. The Equity Value, Growth and Strategic Growth
Funds may invest in privately issued securities, including those which may be
resold only in accordance with Rule 144A under the Securities Act of 1933 ("Rule
144A Securities"). Rule 144A Securities are restricted securities that are not
publicly traded. Accordingly, the liquidity of the market for specific Rule 144A
Securities may vary. Delay or difficulty in selling such securities may result
in a loss to a Fund. Privately issued or Rule 144A securities that are
determined by the investment advisor to be "illiquid" are subject to the Funds'
policy of not investing more than 15% of its net assets in illiquid securities.
The investment advisor, under guidelines approved by Board of Trustees of the
Trust, will evaluate the liquidity characteristics of each Rule 144A Security
proposed for purchase by a Fund on a case-by-case basis and will consider the
following factors, among others, in their evaluation: (1) the frequency of
trades and quotes for the Rule 144A Security; (2) the number of dealers willing
to purchase or sell the Rule 144A Security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the Rule 144A Security;
and (4) the nature of the Rule 144A Security and the nature of the marketplace
trades (e.g., the time needed to dispose of the Rule 144A Security, the method
of soliciting offers and the mechanics of transfer).
Short-Term Corporate Debt Instruments. The Allocation Fund may invest in
commercial paper (including variable amount master demand notes), which refers
to short-term, unsecured promissory notes issued by corporations to finance
short-term credit needs. Commercial paper is usually sold on a discount basis
and has a maturity at the time of issuance not exceeding nine months. Variable
amount master demand notes are demand obligations that permit the investment of
fluctuating amounts at varying market rates of interest pursuant to arrangements
between the issuer and a commercial bank acting as agent for the payee of such
notes whereby both parties have the right to vary the amount of the outstanding
indebtedness on the notes.
The Funds also may invest in nonconvertible corporate debt securities (e.g.,
bonds and debentures) with no more than one Year remaining to maturity at the
date of settlement. The Funds will invest only in such corporate bonds and
debentures that are rated at the time of purchase at least "Aa" by Moody's or
"AA" by S&P.
Stripped Securities. The Non-Money Market Funds may purchase Treasury
receipts and other "stripped" securities that evidence ownership in either the
future interest payments or the future principal payments on U.S. Government and
other obligations. The stripped securities the Funds may purchase are issued by
the U.S. Government (or a U.S. Government agency or instrumentality) or by
private issuers such as banks, corporations and other institutions at a discount
to their face value. The Funds will not purchase stripped mortgage-backed
securities ("SMBS"). The stripped securities purchased by the Funds generally
are structured to make a lump-sum payment at maturity and do not make periodic
payments of principal or interest. Hence, the duration of these securities
tends to be longer and they are therefore more sensitive to interest rate
fluctuations than similar securities that offer periodic payments over time.
The stripped securities purchased by the Funds are not subject to prepayment or
extension risk.
25
<PAGE>
Temporary Investments. The Funds may hold a certain portion of its assets in
cash or short-term investments in order to maintain adequate liquidity for
redemption requests or other cash management needs or for temporary defensive
purposes during periods of unusual market volatility. The short-term investments
that the Funds may purchase include, among other things, U.S. government
obligations, shares of other mutual funds, repurchase agreements, obligations of
domestic banks and short-term obligations of foreign banks, corporations and
other entities. Some of these short-term investments are described below.
Letters of Credit. Certain of the debt obligations (including certificates of
participation, commercial paper and other short-term obligations) which the
Funds may purchase may be backed by an unconditional and irrevocable letter of
credit of a bank, savings and loan association or insurance company which
assumes the obligation for payment of principal and interest in the event of
default by the issuer. Only banks, savings and loan associations and insurance
companies which, in the opinion of Wells Fargo Bank, are of comparable quality
to issuers of other permitted investments of such Fund may be used for letter of
credit-backed investments.
Repurchase Agreements. Each Fund may enter into repurchase agreements,
wherein the seller of a security to a Fund agrees to repurchase that security
from a Fund at a mutually agreed upon time and price. A Fund may enter into
repurchase agreements only with respect to securities that could otherwise be
purchased by such Fund. All repurchase agreements will be fully collateralized
at 102% based on values that are marked to market daily. The maturities of the
underlying securities in a repurchase agreement transaction may be greater than
twelve months, although the maximum term of a repurchase agreement will always
be less than twelve months. If the seller defaults and the value of the
underlying securities has declined, a Fund may incur a loss. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
the Funds' disposition of the security may be delayed or limited.
A Fund may not enter into a repurchase agreement with a maturity of more than
seven days, if, as a result, more than 15% (10% for the Money Market Fund) of
the market value of such Fund's total net assets would be invested in repurchase
agreements with maturities of more than seven days, restricted securities and
illiquid securities. A Fund will only enter into repurchase agreements with
primary broker/dealers and commercial banks that meet guidelines established by
the Board of Directors and that are not affiliated with the investment advisor.
The Funds may participate in pooled repurchase agreement transactions with other
funds advised by Wells Fargo Bank.
Unrated And Downgraded Investments. The Funds may purchase instruments that
are not rated if, in the opinion of Wells Fargo Bank, such obligations are
comparable to other rated investments that are permitted to be purchased by such
Fund. After purchase by a Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by such Fund. Neither
event requires an immediate sale of such security by such Fund. To the extent
the ratings given by Moody's or S&P may change as a result of changes in such
organizations or their rating systems, each Fund will attempt to use comparable
ratings as standards for investments in accordance with the investment policies
contained in the Prospectus and in this SAI. The ratings of Moody's and S&P are
more fully described in the Appendix.
26
<PAGE>
U.S. Government Obligations. The Funds may invest in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government obligations"). Payment of principal and interest on U.S. Government
obligations (i) may be backed by the full faith and credit of the United States
(as with U.S. Treasury bills and Government National Mortgage Association
("GNMA") certificates) or (ii) may be backed solely by the issuing or
guaranteeing agency or instrumentality itself (as with Federal National Mortgage
Association ("FNMA") notes). In the latter case investors must look principally
to the agency or instrumentality issuing or guaranteeing the obligation for
ultimate repayment, which agency or instrumentality may be privately owned.
There can be no assurance that the U.S. Government will provide financial
support to its agencies or instrumentalities where it is not obligated to do so.
In addition, U.S. Government obligations are subject to fluctuations in market
value due to fluctuations in market interest rates. As a general matter, the
value of debt instruments, including U.S. Government obligations, declines when
market interest rates increase and rises when market interest rates decrease.
Certain types of U.S. Government obligations are subject to fluctuations in
yield or value due to their structure or contract terms.
When-Issued Securities. Certain of the securities in which the Non-Money
Market Funds may invest may be purchased on a when-issued basis, in which case
delivery and payment normally take place within 45 days (120 days with respect
to the Growth Fund) after the date of the commitment to purchase. These Funds
will only make commitments to purchase securities on a when-issued basis with
the intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable. When-issued securities are subject to
market fluctuation, and no income accrues to the purchaser during the period
prior to issuance. The purchase price and the interest rate that will be
received on debt instruments are fixed at the time the purchaser enters into the
commitment. Purchasing a security on a when-issued basis can involve a risk that
the market price at the time of delivery may be lower than the agreed-upon
purchase price, in which case there could be an unrealized loss at the time of
delivery. Each Fund currently does not intend to invest more than 5% of its
assets in when-issued securities during the coming year.
Each Fund will segregate cash, U.S. Government obligations or other high-
quality debt instruments in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will segregate additional liquid assets on a daily basis so
that the value of the segregated assets is equal to the amount of such
commitments.
Warrants. Each of the Equity Value, Growth and Strategic Growth Funds may
invest no more than 5% of its net assets at the time of purchase in warrants
(other than those that have been acquired in units or attached to other
securities), and not more than 2% of its net assets in warrants which are not
listed on the New York or American Stock Exchange. Warrants represent rights to
purchase securities at a specific price valid for a specific period of time. The
prices of warrants do not necessarily correlate with the prices of the
underlying securities. The Funds may only purchase warrants on securities in
which the Fund may invest directly.
Zero Coupon Bonds. The Equity Value and Strategic Growth Funds may invest in
zero coupon bonds. Zero coupon bonds are securities that make no periodic
interest payments, but are instead sold at discounts from face value. The buyer
of such a bond receives
27
<PAGE>
the rate of return by the gradual appreciation of the security, which is
redeemed at face value on a specified maturity date. Because zero coupon bonds
bear no interest, they are more sensitive to interest-rate changes and are
therefore more volatile. When interest rates rise, the discount to face value of
the security deepens and the securities decrease more rapidly in value, when
interest rates fall, zero coupon securities rise more rapidly in value because
the bonds carry fixed interest rates that become more attractive in a falling
interest rate environment.
Nationally Recognized Statistical Ratings Organizations. The ratings of
Moody's Investors Service, Inc., Standard & Poor's Ratings Group, Division of
McGraw Hill, Duff & Phelps Credit Rating Co., Fitch Investors Service, Inc.
Thomson Bank Watch and IBCA Inc. represent their opinions as to the quality of
debt securities. It should be emphasized, however, that ratings are general and
not absolute standards of quality, and debt securities with the same maturity,
interest rate and rating may have different yields while debt securities of the
same maturity and interest rate with different ratings may have the same yield.
Subsequent to purchase by a Fund, an issue of debt securities may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by a Fund. The advisor will consider such an event in determining
whether the Fund involved should continue to hold the obligation.
The payment of principal and interest on debt securities purchased by the
Funds depends upon the ability of the issuers to meet their obligations. An
issuer's obligations under its debt securities are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or, in the case of governmental entities, upon the ability
of such entities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest and principal of its debt securities may
be materially adversely affected by litigation or other conditions. Further, it
should also be, noted with respect to all municipal obligations issued after
August 15, 1986 (August 31, 1986 in the case of certain bonds), the issuer must
comply with certain rules formerly applicable only to "industrial development
bonds" which, if the issuer fails to observe them, could cause interest on the
municipal obligations to become taxable retroactive to the date of issue.
RISK FACTORS
------------
Investments in a Fund are not bank deposits or obligations of Wells Fargo
Bank, are not insured by the FDIC and are not insured against loss of principal.
When the value of the securities that a Fund owns declines, so does the value of
your Fund shares. You should be prepared to accept some risk with the money you
invest in a Fund.
Equity Securities
The portfolio equity securities of each Fund are subject to equity market
risk. Equity market risk is the risk that stock prices will fluctuate or decline
over short or even extended periods. Throughout 1998, the stock market, as
measured by the S&P 500 Index and other commonly used indices, has been trading
at or close to record levels. There can be no guarantee that these performance
levels will continue. The portfolio debt instruments of a Fund are subject to
credit and interest-rate risk. Credit risk is the risk that issuers of the debt
instruments in which
28
<PAGE>
a Fund invests may default on the payment of principal and/or interest.
Interest-rate risk is the risk that increases in market interest rates may
adversely affect the value of the debt instruments in which the Funds invest and
hence the value of your investment in a Fund.
The market value of a Fund's investment in fixed-income securities will change
in response to various factors, such as changes in market interest-rates and the
relative financial strength of an issuer. During periods of falling interest
rates, the value of fixed-income securities generally rises. Conversely, during
periods of rising interest rates, the value of such securities generally
declines. Debt securities with longer maturities, which tend to produce higher
yields, are subject to potentially greater capital appreciation and depreciation
than obligations with shorter maturities. Fluctuations in the market value of
fixed-income securities can be reduced, but not eliminated, by variable and
floating-rate features.
Securities rated in the fourth highest rating category are regarded by S&P as
having an adequate capacity to pay interest and repay principal, but changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make such repayments. Moody's considers such securities as having
speculative characteristics. Subsequent to its purchase by the Fund, an issue of
securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Fund. The advisor will consider such an
event in determining whether a Fund should continue to hold the obligation.
Securities rated below the fourth highest rating category (sometimes called
"junk bonds") are often considered to be speculative and involve greater risk of
default or price changes due to changes in the issuer's credit-worthiness. The
market prices of these securities may fluctuate more than higher quality
securities and may decline significantly in periods of general economic
difficulty.
There may be some additional risks associated with investments in smaller
and/or newer companies because their shares tend to be less liquid than
securities of larger companies. Further, shares of small and new companies are
generally more sensitive to purchase and sale transactions and changes in the
issuer's financial condition and, therefore, the prices of such stocks may be
more volatile than those of larger company stocks and may be subject to more
abrupt price movements than securities of larger companies.
Investing in the securities of issuers in any foreign country, including
American Depository Receipts ("ADRs") and European Depository Receipts ("EDRs")
and similar securities, involves special risks and considerations not typically
associated with investing in U.S. companies. These include differences in
accounting, auditing and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political, social and monetary
or diplomatic developments that could affect U.S. investments in foreign
countries. Additionally, dispositions of foreign securities and dividends and
interest payable on those securities may be subject to foreign taxes, including
withholding taxes. Foreign securities often trade with less frequency and volume
than domestic securities and, therefore, may exhibit greater price volatility.
Additional costs associated with an investment in foreign securities may include
higher custodial fees than apply to domestic custodial arrangements and
transaction costs of foreign currency conversions. Changes in foreign exchange
rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar. A Fund's performance may be
29
<PAGE>
affected either unfavorably or favorably by fluctuations in the relative rates
of exchange between the currencies of different nations, by exchange control
regulations and by indigenous economic and political developments.
There are special risks involved in investing in emerging-market countries.
Many investments in emerging markets can be considered speculative, and their
prices can be much more volatile than in the more developed nations of the
world. This difference reflects the greater uncertainties of investing in less
established markets and economies. In addition, the financial markets of
emerging markets countries are generally less well capitalized and thus
securities of issuers based in such countries may be less liquid. Further, such
markets may be vulnerable to high inflation and interest rates. Most are
heavily dependent on international trade, and some are especially vulnerable to
recessions in other countries. Some of these countries are also sensitive to
world commodity prices and may be subject to political and social uncertainties.
Illiquid securities, which may include certain restricted securities, may be
difficult to sell promptly at an acceptable price. Certain restricted securities
may be subject to legal restrictions on resale. Delay or difficulty in selling
securities may result in a loss or be costly to a Fund.
The advisor may use certain derivative investments or techniques, such as
buying and selling options and futures contracts and entering into currency
exchange contracts or swap agreements, to adjust the risk and return
characteristics of a Fund's portfolio. Derivatives are financial instruments
whose value is derived, at least in part, from the price of another security or
a specified asset, index or rate. Some derivatives may be more sensitive than
direct securities to changes in interest rates or sudden market moves. Some
derivatives also may be susceptible to fluctuations in yield or value due to
their structure or contract terms. If a Fund's advisor judges market conditions
incorrectly, the use of certain derivatives could result in a loss, regardless
of the advisor's intent in using the derivatives.
The Non-Allocation Funds pursue an active trading investment strategy, and the
length of time a Fund has held a particular security is not generally a
consideration in investment decisions. Accordingly, the portfolio turnover rate
for the Funds may be higher than that of other funds that do not pursue an
active trading investment strategy. Portfolio turnover generally involves some
expense to a Fund, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and the reinvestment in other
securities. Portfolio turnover also can generate short-term capital gains tax
consequences.
Debt Securities
The portfolio debt instruments of a Fund may be subject to credit risk. Credit
risk is the risk that the issuers of securities in which a Fund invests may
default in the payment of principal and/or interest. Interest rate risk is the
risk that increases in market interest rates may adversely affect the value of
the debt instruments in which a Fund invests and hence the value of your
investment in a Fund.
The market value of a Fund's investments in fixed-income securities will
change in response to various factors, such as changes in market interest rates
and the relative financial strength of an issuer. During periods of falling
interest rates, the value of fixed-income securities generally rises.
30
<PAGE>
Conversely, during periods of rising interest rates, the value of such
securities generally declines. Debt securities with longer maturities, which
tend to produce higher yields, are subject to potentially greater price
fluctuation than obligations with shorter maturities. Fluctuations in the market
value of fixed-income securities can be reduced, but not eliminated, by variable
rate or floating rate features. In addition, some of the asset-backed securities
in which the Funds invest are subject to extension risk. This is the risk that
when interest rates rise, prepayments of the underlying obligations slow,
thereby lengthening the duration and potentially reducing the value of these
securities.
Although some of the Funds' portfolio securities are guaranteed by the U.S.
Government, its agencies or instrumentalities, such securities are subject to
interest rate risk and the market value of these securities, upon which the
Funds' daily net asset value are based, will fluctuate. No assurance can be
given that the U.S. Government would provide financial support to its agencies
or instrumentalities where it is not obligated to do so.
Although GNMA securities are guaranteed by the U.S. Government as to timely
payment of principal and interest and ARMs are guaranteed by the U.S.
Government, its agencies or instrumentalities (including government-sponsored
enterprises as noted above), the market value of these securities, upon which
the Funds' daily net asset value is based, will fluctuate. The Funds are subject
to interest-rate risk, that is, the risk that increases in interest rates may
adversely affect the value of the securities in which the Funds invest, and
hence the value of your investment in the Funds. The value of the securities in
which a Fund invests generally changes inversely to changes in interest rates.
However, the adjustable-rate feature of the mortgages underlying the ARMs and
the CMOs in which a Fund may invest should reduce, but will not eliminate, price
fluctuations in such securities, particularly during periods of extreme
fluctuations in market interest rates.
The full and timely payment of principal and interest on GNMA ARMs is
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. FNMA also guarantees full and timely payment of both interest and
principal, while FHLMC guarantees full and timely payment of interest and
ultimate payment of principal. FNMA and FHLMC ARMs are not backed by the full
faith and credit of the U.S. Government. However, because FNMA and FHLMC are
government-sponsored enterprises, these securities are considered by some
investors to be high-quality investments that present minimal credit risks. The
yields provided by these ARMs have historically exceeded the yields on other
types of U.S. Government securities with comparable maturities. Of course, there
can be no assurance that this historical performance will continue or that
either Fund, which are diversified funds, will meet its investment objective.
Moreover, no assurance can be given that the U.S. Government would supply
financial support to U.S. Government-sponsored enterprises such as FNMA and
FHLMC in the event of a default in payment on the underlying mortgages which the
government- sponsored enterprise is unable to make good. Principal on the
mortgages underlying the mortgage pass-through securities in which the Funds may
invest may be prepaid in advance of maturity. Such prepayments tend to increase
when interest rates decline and may present a Fund with more principal to invest
at lower rates. The converse also tends to be the case.
S&P and Moody's assign ratings based upon their judgment of the risk of
default (i.e., the risk that the issuer or guarantor may default in the payment
of principal and/or interest) of the securities
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<PAGE>
underlying the CMOs. However, investors should understand that most of the risk
of these securities comes from interest-rate risk (i.e., the risk that market
interest rates may adversely affect the value of the securities in which a Fund
invests) and not from the risk of default. CMOs may have significantly greater
interest rate risk than traditional government securities with identical
ratings. The adjustable-rate portions of CMOs have significantly less interest
rate risk.
The Funds may invest in illiquid securities which may include certain
restricted securities. Illiquid securities may be difficult to sell promptly at
an acceptable price. Certain restricted securities may be subject to legal
restrictions on resale. Delay or difficulty in selling securities may result in
a loss or be costly to a Fund.
Wells Fargo Bank may use certain derivative investments or techniques, such as
investments in floating- and variable-rate instruments, structured notes and
certain U.S. Government obligations, to adjust the risk and return
characteristics of a Fund's portfolio. Derivatives are financial instruments
whose value is derived, at least in part, from the price of another security or
a specified asset, index or rate. Some derivatives may be more sensitive than
direct securities to changes in interest rates or sudden market moves. Some
derivatives also may be susceptible to fluctuations in yield or value due to
their structure or contract terms. If Wells Fargo Bank judges market conditions
incorrectly, the use of certain derivatives could result in a loss, regardless
of Wells Fargo Bank's intent in using the derivatives.
The Funds may invest up to 25% of their assets in "Yankee Bonds." Yankee Bonds
are U.S. dollar-denominated debt obligations issued in the U.S. by foreign banks
and corporations. Such investments may involve special risks and considerations
not typically associated with investing in U.S. companies. These include
differences in accounting, auditing and financial reporting standards; generally
higher commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political instability which
could affect U.S. investments in foreign countries. Additionally, dispositions
of foreign securities and dividends and interest payable on those securities may
be subject to foreign taxes, including withholding taxes. Foreign securities
often trade with less frequency and volume than domestic securities and,
therefore, may exhibit greater price volatility. A Fund's investments may be
affected either unfavorably or favorably by fluctuations in the relative rates
of exchange between the currencies of different nations, by exchange control
regulations and by indigenous economic and political developments.
Concentration. As market conditions change, it is conceivable that all of the
assets of the Strategic Income Fund could be invested in common stocks or,
conversely, in debt securities. It is a fundamental policy of the Fund that
concentration of investment in a single industry may not exceed 25% of the
Fund's total assets.
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<PAGE>
Money Market Fund
The Money Market Fund under the 1940 Act, must comply with certain investment
criteria designed to provide liquidity, reduce risk, and allow the Funds to
maintain a stable net asset value of $1.00 per share. The Fund's dollar-
weighted average portfolio maturity must not exceed 90 days. Any security that
the Fund purchases must have a remaining maturity of not more than 397 days (13
months). In addition, any security that the Fund purchases must present minimal
credit risks and be of "high quality," or be of the "highest quality." "High
quality" means to be rated in the top two rating categories and "highest
quality" means to be rated only in the top rating category, by the requisite
NRSROs or, if unrated, determined to be of comparable quality to such rated
securities by Wells Fargo Bank, as the Fund's investment advisor, under
guidelines adopted by the Board of Trustees of the Trust.
Generally, securities in which the Fund invests will not earn as high a yield
as securities of longer maturity and/or of lesser quality that are more subject
to market volatility. The Money Market Fund attempts to maintain the value of
its shares at a constant $1.00 per share, although there can be no assurance
that a Fund will always be able to do so.
General
There is, of course, no assurance that a Fund will achieve its investment
objective or be successful in preventing or minimizing the risk of loss that is
inherent in investing in particular types of investment products.
33
<PAGE>
MANAGEMENT
The following information supplements, and should be read in conjunction with,
the section in the Prospectus entitled "Management of the Funds." The principal
occupations during the past five years of the Trustees and executive officers of
Life & Annuity Trust are listed below. The address of each, unless otherwise
indicated, is 111 Center Street, Little Rock, Arkansas 72201. Trustees deemed to
be "interested persons" of Life & Annuity Trust for purposes of the 1940 Act
are indicated by an asterisk.
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position During Past 5 Years
- ------------------------------------- ------------------ -----------------------------------------------
<S> <C> <C>
Jack S. Euphrat, 77 Director Private Investor.
415 Walsh Road
Atherton, CA 94027.
*R. Greg Feltus, 47 Director, Senior Vice President of Stephens Inc.;
Chairman and Manager of Financial Services Group; President
President of Stephens Insurance Services Inc.; Senior
Vice President of Stephens Sports Management
Inc.; and President of Investor Brokerage
Insurance Inc.
Thomas S. Goho, 56 Director Business Associate Professor, Wake Forest
321 Beechcliff Court University, Calloway School of Business and
Winston-Salem, NC 27104 Accountancy since 1994; previously Associate
Professor of Finance.
Peter G. Gordon, 56 Director Chairman and Co-Founder of Crystal Geyser
Crystal Geyser Water Co. Water Company and President of Crystal Geyser
55 Francisco Street, Suite 410 Roxane Water Company since 1977.
San Francisco, CA 94133
Joseph N. Hankin, 59 Director President of Westchester Community College
75 Grasslands Road since 1971; Adjunct Professor of Columbia
Valhalla, NY 10595 University Teachers College since 1976.
*W. Rodney Hughes, 72 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
*J. Tucker Morse, 54 Director Private Investor/Real Estate Developer;
Four Beaufain Street Chairman of Vault Holdings, LLC.
Charleston, SC 29401
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position During Past 5 Years
- ---------------------- --------- -------------------
<S> <C> <C>
Richard H. Blank, Jr., 42 Chief Operating Vice President of Stephens Inc.; Director of
Officer, Stephens Sports Management Inc.; and Director
Secretary and of Capo Inc.
Treasurer
</TABLE>
Compensation Table
Year Ended December 31, 1998
----------------------------
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------------------------- --------------------------------------------- ------------------------------------------
<S> <C> <C>
Jack S. Euphrat $7,750 $34,500
Trustee
R. Greg Feltus $ 0 $ 0
Trustee
Thomas S. Goho $7,750 $34,500
Trustee
Joseph N. Hankin $7,750 $34,500
Trustee
W. Rodney Hughes $7,250 $33,500
Trustee
Peter Gordon $7,750 $34,500
Trustee
J. Tucker Morse $7,250 $33,500
Trustee
</TABLE>
Trustees of the Trust are compensated annually by the Trust and by all the
registrants in the Fund complex they serve as indicated above and also are
reimbursed for all out-of-pocket expenses relating to attendance at board
meetings. Stagecoach Funds, Inc. Stagecoach Trust and the Trust are considered
to be members of the same fund complex as such term is defined in Form N-1A
under the 1940 Act (the "Wells Fargo Fund Complex"). MasterWorks Funds Inc.,
Master Investment Portfolio, and Managed Series Investment Trust together form a
separate fund complex (the "BGFA Fund Complex"). Each of the Trustees and
Officers of the Trust serves in the identical capacity as directors or trustees
and/or officers of each registered open-end management investment company in
both the Wells Fargo and BGFA Fund Complexes, except for Joseph N. Hankin and
Peter G. Gordon, who only serve the aforementioned members of the Wells Fargo
Fund Complex.
35
<PAGE>
The Trustees are compensated by other companies and trusts within a Fund complex
for their services as directors/trustees to such companies and trusts. Currently
the Trustees do not receive any retirement benefits or deferred compensation
from the Trust or any other member of the Fund complex.
As of the date of this SAI, Trustees and officers of Life & Annuity Trust,
as a group, beneficially owned less than 1% of the outstanding interests of
Life & Annuity Trust.
Investment Advisor. Each of the Funds is advised by Wells Fargo Bank
pursuant to an Advisory Contract. The Advisory Contracts provide that Wells
Fargo Bank shall furnish to the Funds investment guidance and policy direction
in connection with the daily portfolio management of each Fund. Under the
Advisory Contracts, Wells Fargo Bank furnishes to the Board of Trustees periodic
reports on the investment strategy and performance of each Fund. Wells Fargo
Bank has agreed to provide to the Funds, among other things, money market and
fixed-income research, analysis and statistical and economic data and
information concerning interest rate and security market trends, portfolio
composition, credit conditions and, in the case of the Money Market Fund, the
U.S. Government Allocation Fund and the Asset Allocation Fund, average
maturities of the portfolios of each Fund. As compensation for its advisory
services, Wells Fargo Bank is entitled to receive a monthly fee at the annual
rate of 0.60% of each Fund's average daily net assets, with the exceptions of
the Corporate Bond Fund and the Money Market Fund, from which Wells Fargo Bank
is entitled to receive 0.50% and 0.45%, respectively, of each such Fund's
average daily net assets.
For the years ended December 31, 1998, 1997 and 1996, each of the Funds
below paid to Wells Fargo Bank as compensation for its advisory services the
amounts indicated below and Wells Fargo Bank waived the indicated amounts:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96
--------- --------- ---------
Fees Fees Fees Fees Fees Fees
Fund Paid Waived Paid Waived Paid Waived
- ----------------------------- ----------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Asset Allocation $474,140 $214,173 $419,704 $ 0 $213,961 $24,043
Equity Value Fund* $ 5,392 $ 15,920 N/A N/A N/A N/A
Growth $392,817 $118,761 $277,841 $40,391 $ 81,759 $46,059
Money Market $ 26,238 $ 52,554 $ 42,375 $29,403 $ 15,620 $27,451
Strategic Growth Fund* $ 570 $ 1,681 N/A N/A N/A N/A
U.S. Government Allocation $ 94,926 $ 86,481 $ 86,904 $28,118 $ 6,751 $42,413
</TABLE>
- --------------------
* The Equity Value Fund and Strategic Growth Fund commenced operations on
May 1, 1998.
General. Each Fund's Advisory Contract will continue in effect for more than
-------
two years from the effective date provided the continuance is approved annually
(i) by the holders of a majority of the respective Fund's outstanding voting
securities or by Life & Annuity Trust's Board of Trustees and (ii) by a
majority of the Trustees of Life & Annuity Trust who are not parties to the
Advisory Contract or "interested persons" (as defined in the 1940 Act) of any
such party. A
36
<PAGE>
Fund's Advisory Contract may be terminated on 60 days' written notice by either
party and will terminate automatically if assigned.
Investment Sub-Advisor. Barclays Global Fund Advisors ("BGFA") serves as sub-
advisor to the Asset Allocation and U.S. Government Allocation Funds pursuant to
a Sub-Advisory Contract (the "Sub-Advisory Contract") among Life & Annuity
Trust, Wells Fargo Bank and BGFA. Subject to the direction of Life & Annuity
Trust's Board of Trustees and the overall supervision and control of Wells Fargo
Bank and Life & Annuity Trust, BGFA makes recommendations regarding the
investment and reinvestment of the Asset Allocation and U.S. Government
Allocation Funds' assets. BGFA is responsible for implementing and monitoring
the performance of the asset allocation model employed with respect to these
Funds. BGFA furnishes to Wells Fargo Bank periodic reports on the investment
activity and performance of these Funds and such additional reports and
information as Wells Fargo Bank and Life & Annuity Trust's Board of Trustees
and officers may reasonably request. BGFA was created by the reorganization of
Wells Fargo Nikko Investment Advisors ("WFNIA"), a former affiliate of Wells
Fargo Bank, with and into an affiliate of Wells Fargo Institutional Trust
Company, N.A. ("WFITC"). Prior to January 1, 1996, WFNIA provided sub-advisory
services directly to the Asset Allocation and U.S. Government Allocation Funds.
As compensation for its sub-advisory services, BGFA is entitled to receive a
monthly fee equal to an annual rate of 0.15% of the first $900 million of the
Asset Allocation Fund's average daily net assets and 0.10% of net assets over
$900 million. As compensation for sub-advisory services for the U.S. Government
Allocation Fund, BGFA is entitled to receive a monthly fee equal to an annual
rate of 0.05% of the first $75 million of the U.S. Government Allocation Fund's
average daily net assets, 0.04% of the next $75 million of such Fund's net
assets, and 0.03% of net assets over $150 million.
Prior to May 1, 1998, BGFA was entitled to receive a monthly fee equal to an
annual rate of 0.20% of the first $500 million of the Asset Allocation Fund's
average daily net assets, 0.15% of the next $500 million of such Fund's net
assets, and 0.10% of net assets over $1 billion. Also prior to May 1, 1998,
BGFA was entitled to receive a monthly fee equal to an annual rate of 0.05% of
the first $100 million of the U.S. Government Allocation Fund's average daily
net assets, 0.04% of the next $50 million of such Fund's net assets, and 0.03%
of net assets over $150 million. Prior to October 30, 1997, BGFA was entitled
to receive a monthly fee equal to an annual rate of 0.20% of the Asset
Allocation Fund's average daily net assets and 0.15% of the U.S. Government
Allocation net assets.
For the years ended December 31, 1998, 1997 and 1996, Wells Fargo Bank paid to
WFNIA/ BGFA the amounts indicated below for its services as sub-advisor to the
Asset Allocation and U.S. Government Allocation Funds, without waiver.
<TABLE>
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96
Fund Fees Paid Fees Paid Fees Paid
- ------------------------------------------ ---------------- ---------------- ------------------
Asset Allocation $ 172,294 $ 131,848 $ 79,587
U.S. Government Allocation $ 15,114 $ 24,439 $ 12,320
</TABLE>
37
<PAGE>
As of May 1, 1998, Wells Capital Management ("WCM") serves as sub-advisor to
the Non-Allocation Funds. As sub-advisor, WCM makes recommendations regarding
the investment and reinvestment of the Funds' assets, furnishes to Wells Fargo
Bank periodic reports on the investment activity and performance of the Funds,
and furnishes such additional reports and information as Wells Fargo Bank and
the Trust's Board of Trustees and officers may reasonably request. As
compensation for its sub-advisory services, WCM is entitled to receive a monthly
fee equal to an annual rate of 0.25% of the first $200 million of the Equity
Value, Growth and Strategic Growth Funds' average daily net assets, 0.20% of the
next $200 million of such Funds' net assets, and 0.15% of net assets over $400
million. As compensation for sub-advisory services for the Money Market
Fund, WCM is entitled to receive a monthly fee equal to an annual rate of 0.05%
of the first $960 million of the Money Market Fund's average daily net assets
and 0.04% of net assets over $960 million. WCM receives a minimum annual fee
from each Fund of $120,000. This minimum annual fee does not increase the
advisory fees paid by the Funds to Wells Fargo Bank.
For the year ended December 31, 1998, Wells Fargo Bank paid to WCM the amounts
indicated below for its services as sub-advisor to these Funds:
<TABLE>
<CAPTION>
Fund Fees Paid Fees Waived
---- --------- -----------
<S> <C> <C>
Equity Value $ 5,392 $ 15,920
Growth $392,817 $118,761
Money Market $ 26,238 $ 52,554
Strategic Growth $ $
</TABLE>
General. Each Fund's Sub-Advisory Contract will continue in effect for more
-------
than two years from the effective date provided the continuance is approved
annually (i) by the holders of a majority of the respective Fund's outstanding
voting securities or (ii) by the Company's Board of Directors, including a
majority of the Directors of the Company who are not parties to the Sub-Advisory
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
A Fund's Sub-Advisory Contract may be terminated on 60 days written notice by
either party and will terminate automatically if assigned.
Portfolio Managers.
------------------
Ms. Kelli Hill, as portfolio manager, has been responsible for the day-to-day
management of the Growth Fund since February 1, 1997. Ms. Hill is the lead
portfolio manager for the core growth equity team. She joined Wells Fargo
Bank/Wells Capital Management, Inc. ("WCM") in 1987. She manages institutional
equity portfolios, including a publicly traded mutual fund, and conducts
fundamental security analysis for the team. In her research capacity, she
specializes in the capital goods and technology sectors. Previously, Ms. Hill
managed individual portfolios for high net-worth clients. Her 13 years of
investment experience includes 10 years with WCM. Ms. Hill began her career as
an institutional trader at E.F. Hutton. She holds a B.A. in Economics and
International Relations from the University of Southern California and is a
currently a Chartered Financial Analyst Level II candidate. Ms. Hill is also
the Treasurer for the San Francisco Ballet Association Encore!, and a board
member for Las Casa de les Madres, the largest women's shelter in the San
Francisco area.
38
<PAGE>
Mr. Rex Wardlaw, as portfolio manager, has been responsible for the day-to-day
management of the portfolio of the Equity Value Fund since May 1, 1998. Mr.
Wardlaw joined Wells Fargo Bank in 1996 and has eight years of investment
experience. Prior to joining Wells Fargo Bank, Mr. Wardlaw was a portfolio
manager for First Interstate Bank since 1986. He is the Private Client Services
investment manager for the Portland office and is responsible for stock market
research in healthcare, basic industries and transportation sectors. He holds an
M.B.A. from the University of Oregon and a B.A. from Northwest Nazarene College.
Mr. Wardlaw is a chartered financial analyst and a member of the Portland
Society of Financial Analysts. He is also a member of the Association for
Investment management and Research and the American Association of Individual
Investors.
Mr. Allen Wisniewski has been responsible, as co-manager, for the day-to-day
management of the portfolio of the Equity Value Fund since May 1998. Mr.
Wisniewski is portfolio manager for the value equity team and research analyst
focusing on the higher yield segment of the value strategy. Mr. Wisniewski is
portfolio manager for the value equity team and research analyst focusing on the
higher yield segment of the value strategy. Mr. Wisniewski joined Wells Fargo
Bank in 1987 with the acquisition of Bank of America's consumer trust services,
where he had been a portfolio manager. He has 18 years of investment management
experience. Mr. Wisniewski received his M.B.A. and B.A. in from the University
of California at Los Angeles. He is a Chartered Financial Analyst, and a member
of the Association for Investment Management and Research (AIMR) and he Los
Angeles Society of Financial Analysts.
Mr. Chris Greene joined Wells Fargo Bank on April 1, 1997, and has been
responsible as portfolio co-manager of the Strategic Growth Fund since May 1998.
Mr. Greene is also responsible for fundamental security analysis on the small
and mid cap growth equity team. Mr. Greene specializes in the broadly defined
services sector as well as multiple technology industries. Prior to joining the
firm in 1997, he previously worked as an analyst in the corporate finance
department of Hambrecht & Quist, an investment banking firm specializing in
emerging growth companies. Mr. Greene also worked as a research analyst for GB
Capital Management from 1992 to 1993, both investment management firms focused
on equity and fixed-income securities. He has 7 years of investment management
experience. Mr. Greene received a B.A. in Economics from Claremont McKenna
College and is currently a Chartered Financial Analyst Level II candidate.
Mr. Thomas M. Zeifang has been responsible as portfolio co-manager of the
Small Cap Fund and the Strategic Growth Fund since February 1999. He is also
responsible for fundamental security analysis on the small and mid cap growth
equity team. Prior to joining the firm in 1995, he spent 3 years as an analyst
at Fleet Investment Advisors and 3 years as an assistant portfolio manager at
Marine Midland Bank. Mr. Zeifang holds an MBA in Finance and Business Policy
from the William E. Simon School of Business Administration and a BBA in Finance
from Saint Bonaventure University. Mr. Zeifang is a Chartered Financial Analyst
and a member of the Association for Investment Management and Research (AIMR).
39
<PAGE>
Gregg A. Giboney, CFA. Mr. Giboney manages portfolios and provides security
analysis as a member of the value equity team. In his research capacity, he
focuses primarily on financial stocks. He has been with the firm for 13 years
and has held various investment positions including fixed-income trading,
derivatives management, equity analysis, stable value asset management, and
portfolio manager for personal, institutional and trust accounts. Mr. Giboney
holds an MBA from the University of Portland and a BA from Washington State
University. He is a Chartered Financial Analyst and a board member and past
President of the Portland Society of Financial Analysts. In addition, he is a
grader for the CFA examinations and is a member of the Association for
Investment Management and Research (AIMR).
Administrator. The Trust has retained Wells Fargo Bank as administrator on
behalf of each Fund. The Administration Agreement between Wells Fargo and each
Fund states that Wells Fargo Bank shall provide as administration services,
among other things: (i) general supervision of the operation of each Fund,
including coordination of the services performed by the Fund's investment
advisor, transfer agent, custodian, shareholder servicing agent(s), independent
public accountants and legal counsel, regulatory compliance, including the
compilation of information for documents such as reports to, and filings with,
the SEC and state securities commissions; and preparation of proxy statements
and shareholder reports for the Fund; and (ii) general supervision relative to
the compilation of data required for the preparation of periodic reports
distributed to Life & Annuity Trust's officers and Board of Trustees. Wells
Fargo Bank also furnishes office space and certain facilities required for
conducting the business of each Fund together with ordinary clerical and
bookkeeping services. Wells Fargo Bank pays the compensation of Life & Annuity
Trust's Trustees and officers. The administrator is entitled to receive a fee
of 0.15% of the average daily net assets of each Fund. Prior to March 25,
1999, Wells Fargo Bank served as Administrator and Stephens served as Co-
Administrator for the Funds. For providing these services, Wells Fargo Bank
and Stephens were entitled to receive, respectively, 0.03% and 0.04% of each
Fund's average daily net assets on an annual basis. Prior to May 1, 1998,
administrator and co-administrator were entitled to receive a monthly fee of
0.04% and 0.02%, respectively, of the average daily net assets of each Fund.
40
<PAGE>
Prior to February 1, 1997 Stephens served as sole administrator to the Funds.
Stephens performed substantially the same services now provided by Wells Fargo
Bank and was entitled to monthly administration fees at the annual rate of 0.03%
of each Fund's average daily net assets. For the year ended December 31, 1995
and 1996, Stephens was paid, and for the year ended December 31, 1997, Wells
Fargo and Stephens were paid, administration fees as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Fund 12/31/98 12/31/97 12/31/96
---- --------- --------- ---------
<S> <C> <C> <C>
Asset Allocation $ 77,161 $ 36,082 $ 16,872
Equity Value* $ 1,438 N/A N/A
Growth $ 57,090 $ 28,024 $ 6,291
Money Market $ 6,997 $ 8,107 $ 0
Strategic Growth* $ 152 N/A N/A
U.S. Government Allocation $ 20,324 $ 10,010 $ 0
</TABLE>
* Amounts shown reflect period from May 1, 1998.
Custodian. Wells Fargo Bank acts as Custodian for the Non-Allocation Funds.
Barclays Global Investors, N.A. ("BGI") acts as Custodian for the Asset
Allocation and U.S. Government Allocation Funds. The Custodian, among other
things, maintains a custody account or accounts in the name of each Fund;
receives and delivers all assets for each Fund upon purchase and upon sale or
maturity; collects and receives all income and other payments and distributions
on account of the assets of each Fund and pays all expenses of each Fund. For
its services as Custodian to the Equity Non-Allocation Funds, Wells Fargo Bank
is entitled to an asset-based fee and transaction charges. BGI is not entitled
to receive compensation for its services as Custodian to the Allocation Funds so
long as its subsidiary, BGFA, is entitled to receive fees for providing
investment advisory services to such Funds. For the year ended December 31,
1998, the Growth Fund paid $23,240 in custody fees, and the Money Market Fund
paid $6,424. No other Funds paid custody fees during the period. For the year
ended December 31, 1998, the Growth Fund paid $23,240 in custody fees, and the
Money Market Fund paid $6,424. No other Funds paid custody fees during the
period.
Fund Accountant. Wells Fargo Bank acts as Fund Accountant for each Fund. The
Fund Accountant, among other things, computes net asset values on a daily basis,
and performance calculations on a regular basis and as requested by the Funds.
For providing such services, Wells Fargo Bank will be entitled to receive from
each Fund a monthly base fee of $2,000, plus a fee equal to an annual rate of
0.070% of the first $50,000,000 of the Fund's average daily net assets, 0.045%
of the next $50,000,000, and 0.020% of the average daily net assets in excess of
$100,000,000.
Transfer and Dividend Disbursing Agent. Wells Fargo Bank acts as Transfer and
Dividend Disbursing Agent for the Funds. For its services as transfer and
dividend disbursing agent to the Funds, Wells Fargo Bank is entitled to receive
monthly payments at the annual rate of 0.10% of the Money Market Fund's average
daily net assets and 0.14% of each other Fund's average daily net assets. Under
the transfer agency agreement in place for the year ended December 31, 1997,
Wells Fargo Bank was entitled to be compensated at an annual rate of 0.05% of
each Fund's average daily net assets when the assets of each Fund exceeded $20
million. After July 17, 1999, BFDS will replace Wells Fargo Bank as transfer
agent under the same terms as are currently in effect.
41
<PAGE>
For the years ended December 31, 1996 and 1997, Wells Fargo Bank waived all
fees and expenses payable to it under the transfer agency and custody agreements
with the Funds, except for $55,960 of transfer agency fees paid by the Asset
Allocation Fund for the year ended December 31, 1997.
For the year ended December 31, 1998, the Funds paid transfer agency fees as
follows, without waiver:
<TABLE>
<CAPTION>
Fund Fees Paid
- ----
<S> <C>
Asset Allocation $160,606
Equity Value* $ 0
Growth $119,368
Money Market $ 17,509
Strategic Growth* $ 0
U.S. Government Allocation $ 42,328
</TABLE>
* Fees, for period May 1, 1998 to December 31, 1998, were waived.
Shareholder Servicing Agent. Life & Annuity Trust has approved a Servicing
Plan on behalf of each Fund and has approved the Funds' entry into related
shareholder servicing agreements with financial institutions, including American
Skandia Life Insurance Company. Under the agreements, Shareholder Servicing
Agents (including Wells Fargo Bank) agree to perform, as agents for their
customers, administrative services, with respect to Fund shares, which include
aggregating and transmitting shareholder orders for purchases, exchanges and
redemptions; maintaining shareholder accounts and records; and providing such
other related services as the Company to a shareholder may reasonably request.
For providing shareholder services, a Servicing Agent is entitled to a fee from
the applicable Fund, on an annualized basis, of the average daily net assets of
the class of shares owned of record or beneficially by the customers of the
Servicing Agent during the period for which payment is being made. For
providing these services, a shareholder servicing agent is entitled to a fee
from the Fund of up to 0.25%, on an annualized basis, of the average daily net
asset value of the Fund shares owned by or attributable to such customers of the
Shareholder Servicing Agent. The Servicing Plan and related shareholder
servicing agreements were approved by Life & Annuity Trust's Board of Trustees
including a majority of the Trustees who were not "interested persons" (as
defined in the Act) of the Funds and who had no direct or indirect financial
interest in the operation of the Servicing Plan or in any agreement related to
the Servicing Plan (the "Servicing Plan Qualified Trustees"). The actual fee
payable to servicing agents under the Servicing Plan for the Funds is
determined, within such limits, from time to time by mutual agreement between
Life & Annuity Trust and each servicing agent and will not exceed the maximum
amounts payable by mutual funds sold by members of the NASD under the Conduct
Rules of the NASD.
For the year ended December 31, 1998, the Funds paid shareholder servicing
fees as follows:
<TABLE>
<CAPTION>
Fund Fees Paid
- ----
<S> <C>
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Asset Allocation $208,384
Equity Value* $ 0
Growth $148,369
Money Market $ 31,936
Strategic Growth* $ 0
U.S. Government Allocation $ 54,581
</TABLE>
* Fees, for period May 1, 1998 to December 31, 1998, were waived.
General. The Servicing Plan for the Funds will continue in effect from year
-------
to year if such continuance is approved by a majority vote of the Trustees of
Life & Annuity Trust, including the Trustees who are not "interested" persons,
as defined under the 1940 Act. Any form of servicing agreement related to the
Servicing Plan also must be approved by such vote of the Trustees. Servicing
agreements may be terminated at any time, without payment of any penalty, by
vote of a majority of the Trustees who are not "interested" persons, as defined
under the 1940 Act. No material amendment to the Servicing Plan may be made
except by a majority vote of the Trustees, including the Trustees who are not
"interested" persons, as defined under the 1940 Act.
The Servicing Plan for the Funds requires that the administrator shall provide
to the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under the Servicing Plan.
PERFORMANCE CALCULATIONS
The Funds may advertise certain yield and total return information.
Quotations of yield and total return reflect only the performance of a
hypothetical investment in a Fund or class of shares during the particular time
period shown. Yield and total return vary based on changes in the market
conditions and the level of a Fund's expenses, and no reported performance
figure should be considered an indication of performance which may be expected
in the future.
In connection with communicating its performance to current or prospective
shareholders, these figures may also be compared to the performance of other
mutual funds tracked by mutual fund rating services or to unmanaged indices
which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
Performance information for a Fund or Class of shares in a Fund may be useful
in reviewing the performance of such Fund or Class of shares and for providing a
basis for comparison with investment alternatives. The yield of a Fund and the
yield of a Class of shares in a Fund, however, may not be comparable to the
yields from investment alternatives because of differences in the foregoing
variables and differences in the methods used to value portfolio securities,
compute expenses and calculate yield.
Performance information may be advertised for non-standardized periods,
including year-to-date and other periods less than a year for the Funds.
Average Annual Total Return: Each Fund may advertise certain total return
information. Any Fund advertising would be accompanied by performance
information of the related insurance company separate accounts or by an
explanation that Fund performance information
43
<PAGE>
does not reflect separate account fees and charges. As and to the extent
required by the SEC, an average annual total rate of return ("T") is computed by
using the redeemable value at the end of a specified period ("ERV") of a
hypothetical initial investment of $1,000 ("P") over a period of years ("n")
according to the following formula: P(1+T)/n/ = ERV.
Cumulative Total Return: In addition to the above performance information,
the Funds may advertise cumulative total return of shares. Cumulative total
return of shares is computed on a per share basis and assumes the reinvestment
of dividends and distributions. Cumulative total return of shares generally is
expressed as a percentage rate which is calculated by combining the income and
principal charges for a specified period and dividing by the net asset value per
share at the beginning of the period. Advertisements may include the percentage
rate of total return of shares or may include the value of a hypothetical
investment in shares at the end of the period which assumes the application of
the percentage rate of total return.
For the periods ended December 31, 1998, the following chart provides the
average annual and cumulative total returns for the Funds listed below:
<TABLE>
<CAPTION>
Cumulative
Average Annual Total Return Total
Return:
<S> <C> <C> <C> <C>
One Year Three Years
Fund Ended Ended Inception to Inception to
---- 12/31/98 12/31/98 12/31/98 12/31/98
-------- -------- -------- --------
Asset Allocation 25.26% 19.06% 18.24% 120.08%
Equity Value N/A N/A N/A -3.76%
Growth 28.81% 22.77% 21.42% 149.75%
Strategic Growth N/A N/A N/A 39.74%
U.S. Government Allocation 5.86% 5.77% 6.78% 35.90%
</TABLE>
Yield Calculations: The U.S. Government Allocation Fund may advertise certain
yield information. As and to the extent required by the SEC, yield is calculated
based on a 30-day (or one month) period, computed by dividing the net investment
income per share earned during the period by the net asset value per share on
the last day of the period, according to the following formula: YIELD = 2[((a-
b/cd)+1)/6/-1], where a = dividends and interest earned during the period; b =
expenses accrued for the period (net of reimbursements); c = the average daily
number of shares outstanding during the period that were entitled to receive
dividends; and d = the net asset value per share on the last day of the period.
The net investment income of each Fund includes actual interest income, plus or
minus amortized purchase discount (which may include original issue discount) or
premium, less accrued expenses. Realized and unrealized gains and losses on
portfolio securities are not included in the Fund's net investment income. The
U.S. Government Allocation Fund's 30-day yield for the 30 days ended December
31, 1998 was 4.34%.
In addition, the Money Market Fund may advertise certain yield information.
Current yield for the Money Market Fund is calculated based on the net changes,
exclusive of capital changes, over a seven-day period, in the value of a
hypothetical pre-existing account having a balance of
44
<PAGE>
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
The Fund's seven-day yield for the period ended December 31, 1997 was 5.09%.
The yields for the U.S. Government Allocation and Money Market Funds will
fluctuate from time to time, unlike bank deposits or other investments that pay
a fixed yield for a stated period of time, and do not provide a basis for
determining future yields since they are based on historical data. Yield is a
function of portfolio quality, composition, maturity and market conditions as
well as the expenses allocated to the Fund.
In addition, investors should recognize that changes in the net asset value of
shares of the U.S. Government Allocation Fund will affect the yield of the Fund
for any specified period, and such changes should be considered together with
the Fund's yield in ascertaining the Fund's total return to shareholders for the
period. Yield information for the Fund may be useful in reviewing the
performance of the Fund and for providing a basis for comparison with investment
alternatives. The yield of the Fund, however, may not be comparable to the
yields from investment alternatives because of differences in the foregoing
variables and differences in the methods used to value portfolio securities,
compute expenses and calculate yield.
From time to time, and only to the extent the comparison is appropriate for a
Fund, Life & Annuity Trust may quote the Fund's performance or price-earning
ratio in advertising and other types of literature as compared to the
performance of the S&P 500 Index, the Dow Jones Industrial Average, the Wilshire
5000 Equity Index, the Lehman Brothers 20+ Treasury Index, the Lehman Brothers
5-7 Year Treasury Index, Donoghue's Money Fund Averages, Real Estate Investment
Averages (as reported by the National Association of Real Estate Investment
Trusts), Gold Investment Averages (provided by the World Gold Council), Bank
Averages (which is calculated from figures supplied by the U.S. League of
Savings Institutions based on effective annual rates of interest on both
passbook and certificate accounts), average annualized certificate of deposit
rates (from the Federal Reserve G-13 Statistical Releases or the Bank Rate
Monitor), the Salomon One Year Treasury Benchmark Index, the Consumer Price
Index (as published by the U.S. Bureau of Labor Statistics), Ten Year U.S.
Government Bond Average, S&P's Corporate Bond Yield Averages, Schabacter
Investment Management Indices, Salomon Brothers High Grade Bond Index, Lehman
Brothers Long-Term High Quality Government/Corporate Bond Index, other managed
or unmanaged indices or performance data of bonds, stocks or government
securities (including data provided by Ibbotson Associates), or by other
services, companies, publications or persons who monitor mutual funds on overall
performance or other criteria. The S&P 500 Index and the Dow Jones Industrial
Average are unmanaged indices of selected common stock prices. Unmanaged indices
may assume the reinvestment of dividends, but generally do not reflect
deductions for administrative and management costs and expenses. Managed indices
generally do reflect such deductions.
The Funds' performance also may be compared to those of other mutual funds
having similar objectives. This comparative performance could be expressed as a
ranking prepared by Lipper
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Analytical Services, Inc., CDA Investment Technologies, Inc., Bloomberg
Financial Markets or Morningstar, Inc., independent services which monitor the
performance of mutual funds. The Funds' performance is calculated by relating
net asset value per share at the beginning of a stated period to the net asset
value of the investment, assuming reinvestment of all gains distributions and
dividends paid, at the end of the period. The Money Market Fund's comparative
performance will be based on a comparison of yields, as described above, or
total return, as reported by Lipper, Survey Publications, Donoghue or
Morningstar, Inc.
Any such comparisons may be useful to investors who wish to compare a Fund's
past performance with that of its competitors. Of course, past performance
cannot be a guarantee of future results. Life & Annuity Trust also may include,
from time to time, a reference to certain marketing approaches of the
Distributor, including, for example, a reference to a potential holder being
contacted by a selected broker or dealer. General mutual fund statistics
provided by the Investment Company Institute may also be used.
Life & Annuity Trust also may disclose, in advertising and other types of
literature, information and statements that Wells Capital Management, Inc.
("WCM" formerly, WFIM), a division of Wells Fargo Bank, is listed in the top 100
by Institutional Investor magazine in its July 1997 survey "America's Top 300
Money Managers." This survey ranks money managers in several asset categories.
Life & Annuity Trust also may disclose in advertising and other types of sales
literature the assets and categories of assets under management by its
investment advisor or sub-advisor and the total amount of assets and mutual fund
assets managed by Wells Fargo Bank. As of October 31, 1998, Wells Fargo Bank and
its affiliates provided investment advisory services for approximately $121
billion of assets of individuals, trusts, estates and institutions and $28
billion of mutual fund assets.
In addition, Life & Annuity Trust also may use, in advertisements and other
types of literature, information and statements: (1) showing that bank savings
accounts offer a guaranteed return of principal and a fixed rate of interest,
but no opportunity for capital growth; and (2) describing Wells Fargo Bank, and
its affiliates and predecessors, as one of the first investment managers to
advise investment accounts using asset allocation and index strategies. Life &
Annuity Trust also may include in advertising and other types of literature
information and other data from reports and studies prepared by the Tax
Foundation, including information regarding federal and state tax levels and the
related "Tax Freedom Day."
Life & Annuity Trust also may use the following information in advertisements
and other types of literature, only to the extent the information is appropriate
for a Fund: (i) the Consumer Price Index may be used to assess the real rate of
return from an investment in a Fund; (ii) other government statistics,
including, but not limited to, The Survey of Current Business, may be used to
illustrate investment attributes of a Fund or the general economic, business,
investment, or financial environment in which a Fund operates; (iii) the effect
of tax-deferred compounding on the investment returns of a Fund, or on returns
in general, may be illustrated by graphs, charts, etc., where such graphs or
charts would compare, at various points in time, the return from an investment
in a Fund (or returns in general) on a tax deferred basis (assuming reinvestment
of capital gains and dividends and assuming one or more tax rates) with the
return on a taxable basis; and (iv) the sectors or industries in which a Fund
invests may be compared to relevant
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indices of stocks or surveys (e.g., S&P Industry Surveys) to evaluate a Fund's
historical performance or current or potential value with respect to the
particular industry or sector.
From time to time, Life & Annuity Trust also may include in advertisements or
other marketing materials a discussion of certain of the objectives of the
investment strategy of the U.S. Government Allocation Fund and the Asset
Allocation Fund and a comparison of this strategy with other investment
strategies. In particular, the responsiveness of these Funds to changing market
conditions may be discussed. For example, Life & Annuity Trust may describe the
benefits derived by having Wells Fargo Bank, as Investment Advisor, and BGFA, as
investment sub-advisor, monitor and reallocate investments among the three asset
categories described in the Funds' Prospectus. Life & Annuity Trust's
advertising or other marketing material also might set forth illustrations
depicting examples of recommended allocations in different market conditions. It
may state, for example, that when the model indicates that stocks represent a
better value than bonds or money market instruments, the Asset Allocation Fund
might consist of 70% stocks, 25% bonds and 5% money market instruments and that
when the model indicates that bonds represent a better value than stocks or
money market instruments, the balance of assets might shift to 60% bonds, 20%
stocks and 20% money market instruments.
Life & Annuity Trust also may discuss in advertising and other types of
literature that a Fund has been assigned a rating by an NRSRO, such as Standard
& Poor's Corporation. Such rating would assess the creditworthiness of the
investments held by a Fund. The assigned rating would not be a recommendation to
purchase, sell or hold a Fund's shares since the rating would not comment on the
net asset value of the Fund's shares or the suitability of the Fund for a
particular investor. In addition, the assigned rating would be subject to
change, suspension or withdrawal as a result of changes in, or unavailability
of, information relating to the Fund or its investments. Life & Annuity Trust
may compare a Fund's performance with other investments which are assigned
ratings by NRSROs. Any such comparisons may be useful to investors who wish to
compare the Fund's past performance with other rated investments.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for each of the Non-Money Market Funds is determined
by the custodian of the Fund at 1:00 p.m. (Pacific time) on each day the New
York Stock Exchange ("NYSE") is open for trading. Net asset value per share for
the Money Market Fund is determined by the custodian at 9:00 a.m. (Pacific time)
on each day Wells Fargo Bank is open for business.
Non-Money Market Funds. Securities of a Non-Money Market Fund for which
market quotations are available are valued at latest prices. Securities for
which the primary market is a national securities exchange or the National
Association of Securities Dealers Automated Quotations National Market System
are valued at last sale prices. In the absence of any sale of such securities on
the valuation date and in the case of other securities, including U.S.
Government obligations but excluding debt instruments maturing in 60 days or
less, the valuations are based on latest quoted bid prices. Debt instruments
maturing in 60 days or less are valued at amortized cost. Futures contracts are
marked to market daily at their respective settlement prices determined by the
relevant exchange. These prices are not necessarily final
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closing prices but are intended to represent prices prevailing during the final
30 seconds of the trading day. Options listed on a national exchange are valued
at the last sale price on the exchange on which they are traded at the close of
the NYSE, or, in the absence of any sale on the valuation date, at latest quoted
bid prices. Options not listed on a national exchange are valued at latest
quoted bid prices. In all cases, bid prices are furnished by a reputable
independent pricing service approved by the Board of Trustees. Prices provided
by an independent pricing service may be determined without exclusive reliance
on quoted prices and may take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. All other securities and other assets of the Funds for which current
market quotations are not readily available are valued at fair value as
determined in good faith by Life & Annuity Trust's Trustees and in accordance
with procedures adopted by the Trustees.
Money Market Fund. As indicated under "Investing in the Funds" in the
Prospectus, the Money Market Fund uses the amortized cost method to determine
the value of its portfolio securities pursuant to Rule 2a-7 under the 1940 Act.
The amortized cost method involves valuing a security at its cost and amortizing
any discount or premium over the period until maturity, regardless of the impact
of fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
that the Money Market Fund would receive if the security were sold. During these
periods, the yield to a shareholder may differ somewhat from that which could be
obtained from a similar fund that uses a method of valuation based upon market
prices. Thus, during periods of declining interest rates, if the use of the
amortized cost method resulted in a lower value of the Money Market Fund's
portfolio on a particular day, a prospective investor in the Fund would be able
to obtain a somewhat higher yield than would result from investment in a fund
using solely market values, and existing Fund shareholders would receive
correspondingly less income. The converse would apply during periods of rising
interest rates.
Rule 2a-7 provides that in order to value its portfolio using the amortized
cost method, a fund must maintain a dollar-weighted average portfolio maturity
of 90 days or less, purchase securities having remaining maturities (as defined
in Rule 2a-7) of thirteen months or less and invest only in those high-quality
securities that are determined by the Board of Trustees to present minimal
credit risks. The maturity of an instrument is generally deemed to be the period
remaining until the date when the principal amount thereof is due or the date on
which the instrument is to be redeemed. However, Rule 2a-7 provides that the
maturity of an instrument may be deemed shorter in the case of certain
instruments, including certain variable and floating rate instruments subject to
demand features. Pursuant to the Rule, the Board is required to establish
procedures designed to stabilize, to the extent reasonably possible, a fund's
price per share as computed for the purpose of sales and redemptions at $1.00.
Such procedures include review of the Money Market Fund's portfolio holdings by
the Board of Trustees, at such intervals as it may deem appropriate, to
determine whether the Money Market Fund's net asset value calculated by using
available market quotations deviates from $1.00 per share based on amortized
cost. The extent of any deviation is examined by the Board of Trustees. If such
deviation exceeds 1/2 of 1%, the Board will promptly consider what action, if
any, will be initiated. In the event the Board determines that a deviation
exists that may result in material dilution or other unfair results to
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investors or existing shareholders, the Board will take such corrective action
as it regards as necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Payment for shares may, in the discretion of the advisor, be made in the form
of securities that are permissible investments for the Funds as described in the
Prospectuses. For further information about this form of payment please contact
Stephens. In connection with an in-kind securities payment, the Funds will
require, among other things, that the securities be valued on the day of
purchase in accordance with the pricing methods used by a Fund and that such
Fund receives satisfactory assurances that (i) it will have good and marketable
title to the securities received by it; (ii) that the securities are in proper
form for transfer to the Fund; and (iii) adequate information will be provided
concerning the basis and other matters relating to the securities.
As indicated in the Prospectus, the Trust may suspend redemption rights or
postpone redemption payments for such periods as are permitted under the 1940
Act. The Trust may also redeem shares involuntarily or make payment for
redemption in securities or other property if it appears appropriate to do so in
light of Life & Annuity Trust's responsibilities under the 1940 Act.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities on a securities exchange are effected
through brokers who charge a negotiated commission for their services. Orders
may be directed to any broker including, to the extent and in the manner
permitted by applicable law, Stephens or Wells Fargo Securities Inc. In the
over-the-counter market, securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price that includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount.
Purchases and sales of non-equity securities are usually principal
transactions. Non-equity securities normally are purchased or sold from or to
dealers serving as market makers for the securities at a net price. Each of the
Funds also may purchase portfolio securities in underwritten offerings and may
purchase securities directly from the issuer. Generally, money market securities
are traded on a net basis and do not involve brokerage commissions. The cost of
executing non-equity securities transactions consists primarily of dealer
spreads and underwriting commissions. Under the 1940 Act, persons affiliated
with Life & Annuity Trust are prohibited from dealing with Life & Annuity
Trust as principals in the purchase and sale of securities unless an exemptive
order allowing such transactions is obtained from the SEC or an exemption is
otherwise available.
Life & Annuity Trust has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by Life & Annuity Trust's Board of Trustees, Wells Fargo
Bank, as advisor, or BGFA, as sub-advisor, is
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responsible for each Fund's portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of Life & Annuity Trust to
obtain the best results taking into account the dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities involved. Wells Fargo Bank
and BGFA generally seek reasonably competitive spreads or commissions.
In assessing the best overall terms available for any transaction, Wells Fargo
Bank and BGFA consider factors deemed relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
As a result, the Master Portfolio may pay a broker/dealer which furnishes
brokerage and research services a higher commission than that which may be
charged by another broker/dealer for effecting the same transaction. Such
brokerage and research services might consist of reports and statistics relating
to specific companies or industries, general summaries of groups of stocks or
bonds and their comparative earnings and yields, or broad overviews of the
stock, bond and government securities markets and the economy.
Supplementary research information so received is in addition to, and not in
lieu of, services required to be performed by Wells Fargo Bank and BGFA and does
not reduce the advisory fees payable by a Fund. The Board of Trustees will
periodically review the commissions paid by each Fund to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Fund. It is possible that certain of the
supplementary research or other services received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, a Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
Under Section 28(e) of the Securities Exchange Act of 1934, an advisor shall
not be "deemed to have acted unlawfully or to have breached its fiduciary duty"
solely because under certain circumstances it has caused the account to pay a
higher commission than the lowest available. To obtain the benefit of Section
28(e), an advisor must make a good faith determination that the commissions paid
are "reasonable in relation to the value of the brokerage and research services
provided . . . viewed in terms of either that particular transaction or its
overall responsibilities with respect to the accounts as to which it exercises
investment discretion and that the services provided by a broker provide an
advisor with lawful and appropriate assistance in the performance of its
investment decision-making responsibilities." Accordingly, the price to a Fund
in any transaction may be less favorable than that available from another
broker/dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered.
Broker/dealers may furnish statistical, research and other information or
services which are deemed to be beneficial to a Fund's investment programs.
Research services received from brokers supplement the advisors' own research
and may include the following types of information: statistical and background
information on industry groups and individual companies; forecasts and
interpretations with respect to U.S. and foreign economies, securities, market,
specific industry groups and individual companies; information on political
developments; portfolio management strategies; performance information on
securities and
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information concerning prices of securities; and information supplied by
specialized services with respect to the performance, investment activities and
fees and expenses of other mutual funds. Such information may be communicated
electronically, orally or in written form. Research services may also include
the providing of equipment used to communicate research information, the
arranging of meetings with management of companies and the providing of access
to consultants who supply research information.
For the year ended December 31, 1998, the Trust paid $97,946 in commissions
to various broker/dealers in connection with such allocated transactions.
The outside research assistance may be useful, since the brokers utilized by
the funds as a group may follow a broader universe of securities and other
matters than the staff of Wells Fargo Bank and/or BGFA can follow. In addition,
this research may provide Wells Fargo Bank and/or BGFA with a diverse
perspective on financial markets. Research services which are provided to Wells
Fargo Bank and/or BGFA by brokers are available for the benefit of all accounts
managed or advised by Wells Fargo Bank and/or BGFA. It is the opinion of Wells
Fargo Bank that this material is beneficial in supplementing their research and
analysis; and, therefore, it may benefit the Funds by improving the qualify of
Wells Fargo Bank's investment advice. The advisory fees paid by the Funds are
not reduced because Wells Fargo Bank and BGFA may receive such services.
Brokerage Commissions. For the year ended December 31, 1998 the Asset
Allocation, Equity Value, Growth, and Strategic Growth Funds paid brokerage
commissions in the amounts of $11,063, $22,947, $94,796, and $1,704,
respectively. For the year ended December 31, 1997, the Asset Allocation and
Growth Funds paid brokerage commissions in the amount of $5,722 and $184,263,
respectively. For the year ended December 31, 1996, the Asset Allocation and
Growth Funds paid brokerage commissions in the amount of $2,682 and $85,137,
respectively. The other Funds did not pay brokerage commissions during these
periods.
Securities of Regular Broker/Dealers. On December 31, 1998, the Funds owned
securities (repurchase agreements) of their "regular brokers or dealers," as
defined in the 1940 Act, or their parents as follows:
<TABLE>
<CAPTION>
Fund Amount Regular Broker/Dealer
---- ------ ---------------------
<S> <C> <C>
Equity Value $ 67,000 Goldman Sachs
$ 211,000 HSBC Securities Inc.
$ 58,000 JP Morgan Securities
$ 32,000 Morgan Stanley & Co.
Growth $5,010,000 Goldman Sachs
$ 71,000 HSBC Securities Inc.
$ 103,000 JP Morgan Securities
$ 38,000 Morgan Stanley & Co.
Money Market $1,161,000 Goldman Sachs
$ 483,000 HSBC Securities Inc.
$ 149,000 JP Morgan Securities
$1,960,000 Morgan Stanley & Co.
</TABLE>
The other Funds did not own securities of their "regular brokers or dealers"
on December 31, 1998.
Portfolio Turnover. For the year ended December 31, 1998, the portfolio
turnover rates for the Asset Allocation Fund, the Equity Value Fund, the Growth
Fund, the Strategic Growth Fund and the U.S. Government Allocation Fund were
29%, 27%, 69%, 200% and 230% respectively. The higher portfolio turnover rates
for the U.S. Government Allocation Fund should not materially adversely affect
this Fund because portfolio transactions ordinarily will be made directly with
principals on a net basis (although they may be subject to markups) and,
consequently, this Fund usually will not incur brokerage expenses. Because the
portfolio of the Money Market Fund consists of securities with relatively short-
term maturities, the Money Market Fund can expect to experience a high portfolio
turnover. A high portfolio turnover rate should not adversely affect the Fund,
however, because portfolio transactions ordinarily will be made directly with
principals on a net basis (although they may be subject to markups) and,
consequently, the Money Market Fund usually will not incur brokerage
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expenses. The portfolio turnover rate will not be a limiting factor when Wells
Fargo Bank deems portfolio changes appropriate.
FUND EXPENSES
From time to time, Wells Fargo Bank and Stephens may waive fees from the Funds
in whole or in part. Any such waiver will reduce expenses of a Fund and,
accordingly, have a favorable impact on such Fund's performance. Except for the
expenses borne by Wells Fargo Bank and Stephens, the Funds bear all costs of
their respective operations, including the compensation of Life & Annuity
Trust's trustees who are not officers or employees of Wells Fargo Bank or
Stephens or any of their affiliates; advisory, shareholder servicing, and
administration fees; payments pursuant to any Plans; interest charges; taxes;
fees and expenses of independent auditors; legal counsel, transfer agent and
dividend disbursing agent; expenses of redeeming Fund shares; expenses of
preparing and printing prospectuses (except the expense of printing and mailing
prospectuses used for promotional purposes, unless otherwise payable pursuant to
a Plan), shareholders' or investors' reports, notices, proxy statements and
reports to regulatory agencies; insurance premiums and certain expenses relating
to insurance coverage; trade association membership dues; brokerage and other
expenses connected with the execution of portfolio transactions; fees and
expenses of the custodian, including those of keeping books and accounts and
calculating the net asset value of each Fund; expenses of shareholders' or
investors' meetings; expenses relating to the issuance, registration and
qualification of shares of the Funds; pricing services; organizational expenses;
and any extraordinary expenses. Expenses attributable to a Fund are charged
against the respective assets of the Fund. A pro rata portion of the expenses of
Life & Annuity Trust are charged against the assets of a Fund.
FEDERAL INCOME TAXES
The following information supplements and should be read in conjunction with
the Prospectus section entitled "Taxes." The Prospectus of the Funds describes
generally the tax treatment of the Funds and their shareholders (i.e., the
Participating Insurance Companies and their separate accounts). This section of
the SAI includes additional information concerning federal income taxes.
In General. The Trust intends to qualify each Fund as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), as long as such qualification is in the best interest of the Fund's
shareholders. Each Fund will be treated as a separate entity for federal income
tax purposes. Thus, the provisions of the Code applicable to regulated
investment companies generally will be applied to each Fund, rather than to the
Company as a whole. In addition, net capital gains, net investment income, and
operating expenses will be determined separately for each Fund. As a regulated
investment company, each Fund will not be taxed on its net investment income and
capital gains distributed to its shareholders.
For a Fund to qualify as a regulated investment company under the Code, the
following requirements must also be satisfied: (a) at least 90% of the Fund's
annual gross income must be derived from dividends, interest, certain payments
with respect to securities loans, gains from the sale or other disposition of
stock or securities or foreign currencies (to the extent such currency gains are
directly related to the Fund's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; (b) the
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Fund must diversify its holdings so that, at the end of each quarter of the
taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, government securities and other securities limited in
respect of any one issuer to an amount not greater than 5% of the Fund's assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government obligations and the securities of other
regulated investment companies) or in two or more issuers which the Fund
controls and which are determined to be engaged in the same or similar trades or
businesses; and (c) for taxable years beginning before August 5, 1997, the Fund,
in general, must derive less than 30% of its gross income in a taxable year from
the sale or other disposition of securities or options thereon held for less
than three months.
Each Fund must also distribute or be deemed to distribute to its shareholders
at least 90% of its net investment income (which, for this purpose, includes net
short-term capital gains) earned in each taxable year. Although a Fund must
ordinarily make such distributions during the taxable year in which it realized
the net investment income, in certain circumstances, the Fund may make such
distributions in the following taxable year. Furthermore, distributions to a
shareholder of record declared in October, November or December of one taxable
year and paid by January 31 of the following taxable year are treated as paid by
December 31 of the first taxable year. The Funds intend to pay out
substantially all of their net investment income and net realized capital gains
(if any) for each year.
Excise Tax. A 4% non-deductible excise tax will be imposed on each Fund to
the extent it does not meet certain minimum distribution requirements by the end
of each calendar year. Each Fund intends to actually or be deemed to distribute
substantially all of its net investment income and net capital gains by the end
of each calendar year and, thus, expects not to be subject to the excise tax.
Taxation of Portfolio Investments. Except as provided herein, gains and
losses on the sale of portfolio securities by a Fund will generally be capital
gains and losses. Such gains and losses will ordinarily be long-term capital
gains and losses if the securities have been held by the Fund for more than one
year at the time of disposition of the securities.
Gains recognized on the disposition of a debt obligation (including tax-exempt
obligations purchased after April 30, 1993) purchased by a Fund at a market
discount (generally at a price less than its principal amount) will be treated
as ordinary income to the extent of the portion of market discount which
accrued, but was not previously recognized pursuant to an available election,
during the term the Fund held the debt obligation.
If an option granted by a Fund lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder, the
Fund will realize a short-term capital gain or loss, depending on whether the
premium income is greater or less than the amount paid by the Fund in the
closing transaction. Some realized capital losses may be deferred if they
result from a position which is part of a "straddle," discussed below. If
securities are sold by a Fund pursuant to the exercise of a call option written
by it, the Fund will add the premium received to the sale price of the
securities delivered in determining the amount of gain or loss on the sale. If
securities are purchased by a Fund pursuant to the exercise of a put option
written by it, the Fund will subtract the premium received from its cost basis
in the securities purchased.
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The amount of any gain or loss realized by a Fund on closing out a regulated
futures contract, dealer equity option or a nonequity option will generally
result in a realized capital gain or loss for federal income tax purposes. Such
contracts and options held at the end of each fiscal year will be required to be
"marked to market" for federal income tax purposes pursuant to Section 1256 of
the Code. In this regard, they will be deemed to have been sold at market value.
Under Section 1256 of the Code, sixty percent (60%) of any net gain or loss
recognized on these deemed sales and sixty percent (60%) of any net realized
gain or loss from any actual sales, will generally be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. Transactions that qualify as designated hedges are excepted from
the "mark-to-market" rule and the "60%/40%" rule.
Under Section 988 of the Code, a Fund will generally recognize ordinary income
or loss to the extent gain or loss realized on the disposition of portfolio
securities is attributable to changes in foreign currency exchange rates. In
addition, gain or loss realized on the disposition of a foreign currency forward
contract, futures contract, option or similar financial instrument, or of
foreign currency itself, will generally be treated as ordinary income or loss.
The Funds will attempt to monitor Section 988 transactions, where applicable, to
avoid adverse Federal tax impact.
Offsetting positions held by the Funds involving certain financial forward,
futures or options contracts may be considered, for federal income tax purposes,
to constitute "straddles." "Straddles" are defined to include "offsetting
positions" in actively traded personal property. The tax treatment of
"straddles" is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256 of the Code,
described above. If a Fund were treated as entering into "straddles" by
engaging in certain financial forward, futures or option contracts, such
straddles could be characterized as "mixed straddles" if the futures, forwards,
or options comprising a part of such straddles were governed by Section 1256 of
the Code. A Fund may make one or more elections with respect to "mixed
straddles." Depending upon which election is made, if any, the results with
respect to the Fund may differ. Generally, to the extent the straddle rules
apply to positions established by a Fund, losses realized by the Fund may be
deferred to the extent of unrealized gain in any offsetting positions.
Moreover, as a result of the straddle and the conversion transaction rules,
short-term capital loss on straddle positions may be recharacterized as long-
term capital loss, and long-term capital gain may be characterized as short-term
capital gain or ordinary income.
If a Fund enters into a "constructive sale" of any appreciated position in
stock, a partnership interest, or certain debt instruments, the Fund must
recognize gain (but not loss) with respect to that position. For this purpose,
a constructive sale occurs when the Fund enters into one of the following
transactions with respect to the same or substantially identical property: (i) a
short sale; (ii) an offsetting notional principal contract; or (iii) a futures
or forward contract.
If a Fund purchases shares in a "passive foreign investment company" ("PFIC"),
the Fund may be subject to federal income tax and an interest charge imposed by
the Internal Revenue Service (the "IRS") upon certain distributions from the
PFIC or the Fund's disposition of its PFIC shares. If a Fund invests in a PFIC,
the Fund intends to make an available election to mark-to-market its interest in
PFIC shares. Under the election, the Fund will be treated as recognizing at the
end of
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<PAGE>
each taxable year the difference, if any, between the fair market value of its
interest in the PFIC shares and its basis in such shares. In some circumstances,
the recognition of loss may be suspended. The Fund will adjust its basis in the
PFIC shares by the amount of income (or loss) recognized. Although such income
(or loss) will be taxable to the Fund as ordinary income (or loss)
notwithstanding any distributions by the PFIC, the Fund will not be subject to
federal income tax or the interest charge with respect to its interest in the
PFIC under the election.
Income and dividends received by the Fund from sources within foreign
countries and gains on the disposition of foreign securities may be subject to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes.
Taxation of a Separate Account of a Participating Insurance Company. Under
the Code, the investments of a segregated asset account, such as the separate
accounts of the Participating Insurance Companies, must be "adequately
diversified" in order for the holders of the VA Contracts or VLI Policies
underlying the account to receive the tax-favored tax treatment generally
afforded holders of annuities or life insurance policies.
In general, the investments of a segregated asset account are considered to be
"adequately diversified" only if (i) no more than 55% of the value of the total
assets of the account is represented by any one investment; (ii) no more than
70% of the value of the total assets of the account is represented by any two
investments; (iii) no more than 80% of the value of the total assets of the
account is represented by any three investments; and (iv) no more than 90% of
the value of the total assets of the account is represented by any four
investments. In general, all securities of the same issuer are treated as a
single investment for such purposes. However, Treasury Regulations provide a
"look-through rule" with respect to a segregated asset account's investments in
a regulated investment company for purposes of the applicable diversification
requirements, provided certain conditions are satisfied by the regulated
investment company. In particular, if the beneficial interests in the regulated
investment company are held by one or more segregated asset accounts of one or
more insurance companies, and if public access to such regulated investment
company is available exclusively through the purchase of a VA Contract or VLI
Policy, then a segregated asset account's beneficial interest in the regulated
investment company is not treated as a single investment. Instead, a pro rata
portion of each asset of the regulated investment company is treated as an asset
of the segregated asset account.
Each Fund intends to satisfy the relevant conditions at all times to enable
the corresponding separate accounts to be "adequately diversified."
Accordingly, each separate account of the Participating Insurance Companies will
be able to treat its interests in a Fund as ownership of a pro rata portion of
each asset of the Fund, so that individual holders of the VA Contracts or VLI
Policies underlying the separate account will qualify for favorable federal
income tax treatment under the Code.
For information concerning the federal income tax consequences for the holders
of VA Contracts and VLI Policies, such holders should consult the prospectus
used in connection with the issuance of their particular contracts or policies
and should consult their own tax advisors.
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<PAGE>
Capital Gain Distributions
Distributions which are designated by a Fund as capital gain distributions
will be taxed to shareholders as long-term capital gain (to the extent of the
Fund's actual net capital gains for the taxable year), regardless of how long a
shareholder has held Fund shares. Such distributions will be designated as
capital gain distributions in a written notice mailed by the Fund to its
shareholders not later than 60 days after the close of the Fund's taxable year.
Other Distributions
For federal income tax purposes, the Money Market Fund's earnings and
profits will be determined at the end of each taxable year and will be allocated
pro rata over the entire year. For federal income tax purposes, only amounts
paid out of earnings and profits will qualify as dividends. Thus, if during a
taxable year the Money Market Fund's declared dividends (as declared daily
throughout the year) exceed the Money Market Fund's net income (as determined at
the end of the year), only that portion of the year's distributions which equals
the year's earnings and profits will be deemed to have constituted a dividend.
It is expected that the Money Market Fund's net income, on an annual basis, will
equal the dividends declared during the year.
Disposition of Fund Shares
A disposition of Fund shares pursuant to a redemption (including a
redemption in-kind) or an exchange ordinarily will result in a taxable capital
gain or loss, depending on the amount received for the shares (or deemed to be
received in the case of an exchange) and the cost of the shares.
If a shareholder exchanges or otherwise disposes of Fund shares within 90
days of having acquired such shares and if, as a result of having acquired those
shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different regulated investment company, the
sales charge previously incurred acquiring the Fund's shares shall not be taken
into account (to the extent such previous sales charges do not exceed the
reduction in sales charges on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
If a shareholder receives a designated capital gain distribution (to be
treated by the shareholder as a long-term capital gain) with respect to any Fund
share and such Fund share is held for six months or less, then (unless otherwise
disallowed) any loss on the sale or exchange of that Fund share will be treated
as a long-term capital loss to the extent of the designated capital gain
distribution. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department is authorized to issue regulations reducing the
six-month holding requirement to a period of not less than the greater of 31
days or the period between regular dividend distributions where a Fund regularly
distributes at least 90% of its net tax-exempt interest, if any. No such
regulations have been issued as of the date of this SAI. The loss disallowance
rules described in this paragraph do not apply to losses realized under a
periodic redemption plan.
Federal Income Tax Rates. As of the printing of this SAI, the maximum
individual tax rate applicable to ordinary income is 39.6% (marginal tax rates
may be higher for some individuals to reduce or eliminate the benefit of
exemptions and deductions); the maximum individual marginal tax rate applicable
to net capital gain is 20%; and the maximum corporate tax rate applicable to
ordinary income and net capital gain is 35% (marginal tax rates may be higher
for some corporations to reduce or eliminate the benefit of lower marginal
income tax rates). The amount of tax payable by an individual or corporation,
however, may be affected by a combination of tax laws covering, for example,
deductions, credits, deferrals, exemptions, sources of income and other matters.
Other Matters. Investors should be aware that the investments to be made by
the Funds may involve sophisticated tax rules that may result in income or gain
recognition by the Funds without corresponding current cash receipts. Although
each Fund will seek to avoid significant noncash income, such noncash income
could be recognized by a Fund, in which case the Fund may distribute cash
derived from other sources in order to meet the minimum distribution
requirements described above.
The foregoing discussion and the discussions in the Prospectus applicable to
each shareholder address only some of the Federal tax considerations generally
affecting investments in the Portfolio. Each investor is urged to consult his
or her tax advisor regarding specific questions as to Federal, state, local or
foreign taxes.
CAPITAL STOCK
Life & Annuity Trust, an open-end, management investment company, was
organized as a Delaware Business Trust on October 28, 1993. As of the date of
this SAI, Life & Annuity Trust's Board of Trustees has authorized the issuance
of six series of shares, each representing an unlimited number of beneficial
interests -- the Asset Allocation Fund, the Equity Value Fund, the Growth Fund,
the Money Market Fund, the Strategic Growth Fund and the U.S. Government
Allocation Fund -- and the Board of Trustees may, in the future, authorize the
creation of additional investment portfolios.
All shares of a Fund have equal voting rights and will be voted in the
aggregate, and not by series, except where voting by a series is required by law
or where the matter involved only affects one series. For example, a change in a
Fund's fundamental investment policy would be voted upon only by shareholders of
the Fund involved. Additionally, approval of an advisory contract is a matter to
be determined separately by Fund. Approval by the shareholders of one Fund is
effective as to that Fund whether or not sufficient votes are received from the
Shareholders of the other investment portfolios to approve the proposal as to
those investment portfolios. As used in the Prospectus and in this SAI, the term
"majority," when referring to approvals to be obtained from shareholders of the
Fund, means the vote of the lesser of (i) 67% of the shares of the Fund
represented at a meeting if the shareholders of more
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than 50% of the outstanding interests of the Fund are present in person or by
proxy, or (ii) more than 50% of the outstanding shares of the Fund. The term
"majority," when referring to the approvals to be obtained from shareholders of
Life & Annuity Trust as a whole, means the vote of the lesser of (i) 67% of
Life & Annuity Trust's shares represented at a meeting if the shareholders of
more than 50% of Life & Annuity Trust's outstanding shares are present in
person or by proxy, or (ii) more than 50% of Life & Annuity Trust's outstanding
shares. Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held.
Life & Annuity Trust may dispense with an annual meeting of shareholders in
any year in which it is not required to elect Trustees under the 1940 Act.
However, Life & Annuity Trust has undertaken to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Trustee
or Trustees if requested in writing by the shareholders of at least 10% of Life
& Annuity Trust's outstanding voting shares, and to assist in communicating with
other shareholders as required by Section 16(c) of the 1940 Act.
Each share of a Fund represents an equal proportional interest in the Fund
with each other share and is entitled to such dividends and distributions out of
the income earned on the assets belonging to the Fund as are declared in the
discretion of the Trustees. In the event of the liquidation or dissolution of
Life & Annuity Trust, shareholders of a Fund are entitled to receive the assets
attributable to the Fund that are available for distribution, and a distribution
of any general assets not attributable to a particular investment portfolio that
are available for distribution in such manner and on such basis as the Trustees
in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares, when
issued as described in the Prospectus, will be fully paid and non-assessable by
Life & Annuity Trust.
Set forth below is the name, address and share ownership of each person known
by the Trust to have beneficial or record ownership of 5% or more of the voting
securities of a Fund as a whole.
5% OWNERSHIP AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
Name And Address Percentage
Name of Fund of Shareholder of Class Capacity
- --------------------------------- -------------------------- ------------ ----------
<S> <C> <C> <C>
Asset Allocation American Skandia Life 99.97% Record
P.O. Box 883
Shelton, CT 06484
Equity Value American Skandia Life 99.37% Record
P.O. Box 883
Shelton, CT 06484
Growth American Skandia Life 99.94% Record
P.O. Box 883
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Shelton, CT 06484
Money Market American Skandia Life 99.89% Record
P.O. Box 883
Shelton, CT 06484
Strategic Growth American Skandia Life 89.96% Record
P.O. Box 883
Shelton, CT 06484
Stephens Inc. 10.04% Beneficial
Attn. Accounting
111 Center Street
Little Rock, AR 72201
U.S. Government American Skandia Life 99.25% Record
Allocation P.O. Box 883
Shelton, CT 06484
Security Equity 5.52% Record
Life Insurance Co.
84 Business Park Drive
Suite 303
Armonk, NY 10504
</TABLE>
For purposes of the 1940 Act, any person who owns directly or through one or
more controlled companies more than 25% of the voting securities of a company is
presumed to "control" such company. Accordingly, to the extent that a
shareholder identified in the foregoing table is identified as the beneficial
holder of more than 25% of a class (or Fund), or is identified as the holder of
record of more than 25% of a class (or Fund) and has voting and/or investment
powers, it may be presumed to control such class (or Fund).
COUNSEL
Morrison & Foerster LLP, 2000 Pennsylvania Avenue, N.W., Suite 5500,
Washington, D.C. 20006, as counsel for the Trust, has rendered its opinion as to
certain legal matters regarding the due authorization and valid issuance of the
shares of beneficial interest being sold pursuant to the Funds' Prospectus.
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<PAGE>
INDEPENDENT AUDITORS
KPMG LLP has been selected as the independent auditors for Life & Annuity
Trust. KPMG LLP provides audit services, tax return preparation and assistance
and consultation in connection with review of certain SEC filings. KPMG LLP's
address is Three Embarcadero Center, San Francisco, California 94111.
FINANCIAL INFORMATION
The audited financial statements, which included the portfolios of
investments, and independent auditors' report for the Funds for the year ended
December 31, 1998, except for the Equity Value and Strategic Growth Funds, which
are for the period from May 1, 1998 to December 31, 1998, are hereby
incorporated by reference to the Annual Reports as filed with the SEC on March
1, 1999.
Annual and Semi-Annual Reports may be obtained by calling 1-800-680-8920.
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APPENDIX
The following is a description of the ratings given by Moody's and S&P to
corporate bonds and commercial paper.
CORPORATE BONDS
MOODY'S: The four highest ratings for corporate bonds are "Aaa,""Aa","A" and
"Baa." Bonds rated "Aaa" are judged to be of the "best quality" and carry the
smallest amount of investment risk. Bonds rated "Aa" are of "high quality by all
standards," but margins of protection or other elements make long-term risks
appear somewhat greater than "Aaa" rated bonds. Bonds rated "A" possess many
favorable investment attributes and are considered to be upper medium grade
obligations. Bonds rated "Baa" are considered to be medium grade obligations;
interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds have speculative
characteristics as well. Moody's applies numerical modifiers: 1, 2 and 3 in each
rating category from "Aa" through "Baa" in its rating system. The modifier 1
indicates that the security ranks in the higher end of its category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end.
S&P: The four highest ratings for corporate bonds are "AAA,""AA,""A" and
"BBB." Bonds rated "AAA" have the highest ratings assigned by S&P and have an
extremely strong capacity to pay interest and repay principal. Bonds rated "AA"
have a "very strong capacity to pay interest and repay principal" and differ
"from the highest rated issued only in small degree." Bonds rated "A" have a
"strong capacity" to pay interest and repay principal, but are "somewhat more
susceptible" to adverse effects of changes in economic conditions or other
circumstances than bonds in higher rated categories. Bonds rated "BBB" are
regarded as having an "adequate capacity" to pay interest and repay principal,
but changes in economic conditions or other circumstances are more likely to
lead to a "weakened capacity" to make such repayments. The ratings from "AA" to
"BBB" may be modified by the addition of a plus or minus sign to show relative
standing within the category.
CORPORATE COMMERCIAL PAPER
MOODY'S: The highest rating for corporate commercial paper is "P-1" (Prime-
1). Issuers rated "P-1" have a "superior capacity for repayment of short-term
promissory obligations." Issuers rated "P-2" (Prime-2) "have a strong capacity
for repayment of short-term promissory obligations," but earnings trends, while
sound, will be subject to more variation.
S&P: The "A-1" rating for corporate commercial paper indicates that the
"degree of safety regarding timely payment is either overwhelming or very
strong." Commercial paper with "overwhelming safety characteristics" will be
rated "A-1+." Commercial paper with a strong capacity for timely payments on
issues will be rated "A-2."
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SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Amendment to its Registration Statement on Form N-1A to be signed on its
behalf by the undersigned, thereto duly authorized in the City of Little Rock,
State of Arkansas on the 30th day of April, 1999.
LIFE & ANNUITY TRUST
By /s/ Richard H. Blank, Jr.
-------------------------
(Richard H. Blank, Jr.)
Secretary and Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement on Form N-1A has been signed below by
the following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
--------- ----- ----
* Trustee, Chairman and President
-------------------------
(R. Greg Feltus) (Principal Executive Officer)
/s/ Richard H. Blank, Jr. Secretary and Treasurer 4/30/99
-------------------------
(Richard H. Blank, Jr.) (Principal Financial Officer)
* Trustee
------------------------
(Jack S. Euphrat)
* Trustee
-------------------------
(Thomas S. Goho)
* Trustee
-------------------------
(Peter G. Gordon)
* Trustee
-------------------------
(Joseph N. Hankin)
* Trustee
-------------------------
(W. Rodney Hughes)
* Trustee
-------------------------
(J. Tucker Morse)
</TABLE>
*By:/s/ Richard H. Blank, Jr.
-------------------------
Richard H. Blank, Jr.
As Attorney-in-Fact
April 30, 1999
