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Filed pursuant to rule 497(c)
Registration No: 333-59185
PROSPECTUS January 8, 1999
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
2000 CLASSEN CENTER
OKLAHOMA CITY, OKLAHOMA 73106
TELEPHONE: (405) 523-2000
American Fidelity Dual Strategy Fund, Inc. (the "Fund") is an open-end
management investment company. The Fund seeks long-term capital growth which the
Fund endeavors to achieve through a diversified investment portfolio consisting
primarily of common stock. A secondary objective of the Fund is the production
of income.
Shares of the Fund are offered only to separate accounts of American
Fidelity Assurance Company (the "Company") to fund the benefits of variable
annuity contracts. Individuals may not purchase Fund shares directly from the
Fund. Each variable annuity contract involves fees and expenses not described in
this Prospectus. See the accompanying variable annuity contract prospectus for
information regarding contract fees and expenses and any restrictions on
purchases or allocations.
Pursuant to an investment advisory agreement and subject to the authority
of the Fund's Board of Directors, the Company serves as the Fund's investment
adviser and conducts the business and affairs of the Fund. The Company has
engaged Lawrence W. Kelly & Associates, Inc. ("Kelly") and Todd Investment
Advisors, Inc. ("Todd Investment") to act as the Fund's sub-advisers to provide
the day-to-day portfolio management for the Fund. Kelly and Todd Investment are
referred to together as the "Sub-Advisers."
This Prospectus contains concise information about the Fund that a
prospective purchaser of a variable annuity contract should know before
allocating purchase payments or premiums to the Fund. It should be read in
conjunction with the prospectus for the variable annuity contract and should be
retained for future reference. A statement of additional information (the
"Statement of Additional Information") containing more detailed information
about the Fund is available free by writing to the Fund at P.O. Box 25523,
Oklahoma City, Oklahoma 73125-0523, or by calling (800) 654-8489. The Statement
of Additional Information, which has the same date as this Prospectus, as it may
be supplemented from time to time, has been filed with the Securities and
Exchange Commission and is available along with other related materials on the
SEC's Web site (http://www.sec.gov). The Statement of Additional Information is
incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE
VARIABLE ANNUITY CONTRACT.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, NOR ARE FUND SHARES FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTING IN FUND SHARES INVOLVES CERTAIN INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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TABLE OF CONTENTS
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PAGE
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DESCRIPTION OF THE FUND..................................... 3
General................................................... 3
Investment Objectives and Policies........................ 3
Investment Considerations and Risks....................... 4
State Insurance Regulation................................ 5
MANAGEMENT.................................................. 5
Directors and Officers.................................... 5
Investment Adviser........................................ 5
Investment Sub-Advisers................................... 5
Expenses.................................................. 6
Custodian................................................. 6
FINANCIAL HIGHLIGHTS........................................ 7
PERFORMANCE INFORMATION..................................... 7
DETERMINATION OF NET ASSET VALUE............................ 8
OFFERING, PURCHASE AND REDEMPTION OF SHARES................. 9
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................... 9
OTHER INFORMATION........................................... 10
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DESCRIPTION OF THE FUND
GENERAL
The Fund is the successor to American Fidelity Variable Annuity Fund A
("Variable Annuity Fund A"), a separate account of the Company which operated as
an open-end diversified management investment company from 1968 to 1998.
Effective January 1, 1999, it was converted to a unit investment trust separate
account and renamed American Fidelity Separate Account A ("Separate Account A"),
and it transferred its investment portfolio to the Fund in exchange for Fund
shares (the "Reorganization"). Through this Prospectus, the Fund is offering its
shares to separate accounts of the Company, initially only Separate Account A,
to fund benefits under variable annuity contracts issued by the Company. The
separate prospectus which accompanies this Prospectus describes the variable
annuity contracts.
As long as the Fund offers its shares only to separate accounts of the
Company, the Company will be the sole shareholder of the Fund. Thus, the terms
"shareholder" and "shareholders" refer to the Company. The rights of the Company
as a shareholder should be distinguished from the rights of an owner of a
variable annuity contract funded by Fund shares. The Company will pass through
voting rights to variable annuity contract owners, but contract owners are not
shareholders of the Fund.
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to seek long-term growth of
capital through investment in a diversified portfolio of securities, primarily
common stock. The production of income is a secondary investment objective. Such
objectives do not preclude investments from time to time for short-term capital
appreciation. There can be no assurance that the Fund will achieve its
investment objectives. As with any security, a risk of loss, including possible
loss of principal, is inherent in an investment in shares of the Fund.
In order to achieve its investment objectives, the Fund normally invests in
a diversified portfolio consisting primarily of common stocks based upon an
assessment of particular industries or companies. Through its two Sub-Advisers,
the Fund uses both a growth and a value-oriented strategy to manage its
investments. Kelly is a growth stock manager. Its strategy is to invest in
high-quality companies with strong earnings growth and superior product
leadership. Todd Investment is a value-oriented manager. It emphasizes a
diversified portfolio of predominantly undervalued, large capitalization, high
quality equity securities. Todd Investment seeks to include in the Fund's
portfolio companies which indicate the presence of some catalyst for change.
The Fund is classified as "diversified," as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). The investment objectives and
classification of the Fund may not be changed without the approval of the
holders of a majority of the outstanding shares of the Fund. The Company has
adopted a number of restrictions and policies relating to the investment of its
assets and its activities which are fundamental policies and also may not be
changed without the approval of the holders of a majority of outstanding Fund
shares. See the Statement of Additional Information for a complete description
of such restrictions and policies.
The following are fundamental policies of the Fund. The Fund invests not
more than 5% of its assets in any one issuer, except obligations of the United
States Government and instrumentalities thereof, and will acquire not more than
10% of the voting securities of any one issuer. In addition, the Fund invests
not more than 25% of the Fund's assets in any one industry and not more than 10%
of the Fund's assets in real estate (including real estate investment trusts)
and illiquid securities. The Fund may invest up to 35% of its assets in equity
securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), other depositary receipts or ordinary shares if U.S. dollar
denominated and publicly traded in the United States. Investments in companies
of any one foreign country are limited to not more than 20% of Fund assets. The
Fund does not engage in the purchase or sale of puts, calls or other options or
in writing such options. Although not a fundamental policy, the Fund does not
invest in tobacco-producing companies.
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The Fund's Sub-Advisers may determine that prevailing market and economic
conditions indicate investment in other than common stocks may be advantageous,
in which event investments may be made on a short-term basis in securities which
are a direct obligation or guaranteed by the United States Government or in
bonds, notes or other evidences of indebtedness, issued publicly or privately,
of a type customarily purchased for investment by institutional investors. Such
nongovernmental investments may be convertible into stock or may be accompanied
by stock purchase options or warrants for the purchase of stock. The Fund is
normally fully invested, apart from cash balances needed to meet redemptions.
The Fund's assets may be held in cash equivalents or securities which are direct
obligations of the United States Government for this purpose.
INVESTMENT CONSIDERATIONS AND RISKS
General. The Fund's net asset value per share should be expected to
fluctuate. Investors should consider the Fund as a supplement to an overall
investment program and should invest only if they are willing to undertake the
risks involved. Achievement of the Fund's investment objectives cannot be
assured due to the risks of loss of capital or income inherent in any investment
in equity securities and the special risks associated with investing in the
equity securities of foreign corporations.
Equity Securities. Although equity securities have a history of long-term
growth, they fluctuate in value based on changes in an issuer's financial
condition and results of operations and often based on factors unrelated to the
value of the issuer of the securities. Such fluctuations can be pronounced.
Changes in the value of the Fund's investments will result in changes in the
value of Fund shares and thus the Fund's total return to investors.
Foreign Securities. Since the stocks of some foreign issuers are included
in the Fund's portfolio, the Fund is subject to additional investment risks with
respect to those securities that are different in some respects from those
incurred by a fund which invests only in securities of domestic issuers. Such
risks include exposure to fluctuations in foreign currencies, less publicly
available information, nonuniform accounting, auditing and financial reporting
standards, less liquidity and more volatility, foreign withholding or other
taxes, and possible adverse political and economic developments, seizure or
nationalization of foreign deposits or adoption of governmental restrictions
which might adversely affect or restrict the payment of principal and interest
on the foreign securities to investors located outside the country of the
issuer, whether from currency blockage or otherwise. The Fund's foreign
investments are normally in the form of ADRs. ADRs are certificates issued by a
U.S. bank or trust company and represent the right to receive securities of a
foreign issuer which are deposited in a domestic bank or foreign branch of a
U.S. bank. ADRs are traded on a U.S. exchange or in the over-the-counter market.
Investment in ADRs has certain advantages over direct investment in the
underlying foreign securities. ADRs are U.S. dollar-denominated investments that
are easily transferable and for which market quotations are readily available.
Also, issuers whose securities are represented by ADRs generally provide more
financial information than non-ADR foreign issuers.
Year 2000 Risks. Like other mutual funds, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by the Company and the Fund's other
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." The Company has had a formal project team (including 22
information systems professionals) working to correct the problem since 1996. In
the briefest terms, the correction is to change all date related fields in the
Company's computer systems to four digits instead of two digits. At the same
time, all relationships with systems outside the Company must be checked for the
same change and all must be tested to determine that relationships continue to
be compatible. Those systems tested on December 31, 1997 and 1998 and went
through year-end processing without incident each time. The final test of all
systems will be run on December 31, 1998. Even though management of the Company
is expending considerable resources in a concerted effort to meet this
technology-related threat, there is no guarantee that there will be no adverse
impact on the Fund of some sort as January 1, 2000 passes.
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STATE INSURANCE REGULATION
The Fund is a funding vehicle for variable annuity contracts to be offered
by insurance companies and will seek to be offered in as many jurisdictions as
possible. Certain states have regulations or guidelines concerning concentration
of investments and other investment techniques. If such regulations and
guidelines are applied to the Fund, the Fund may be limited in its ability to
invest in certain types of securities. The Fund intends to operate in material
compliance with current insurance laws and regulations, as applied, in each
jurisdiction in which the Fund is offered.
MANAGEMENT
DIRECTORS AND OFFICERS
The Fund's Board of Directors is responsible for overseeing the management
of the Fund, including the establishment and supervision of the Fund's
investment policies and objectives, reviewing and approving the Fund's contracts
and other arrangements and monitoring Fund performance and operations. The
officers of the Fund supervise its daily business operations. The Statement of
Additional Information contains information as to the identity of, and other
information about, the directors and officers of the Fund.
INVESTMENT ADVISER
The Company, located at 2000 Classen Center, Oklahoma City, Oklahoma 73106,
is the investment adviser of the Fund. The Company is a stock life insurance
company incorporated in the state of Oklahoma in 1960. The Company acted as
investment adviser to Variable Annuity Fund A, the Fund's predecessor, from 1968
until the Fund acquired its investment portfolio as a result of the
Reorganization. The Company is a wholly owned subsidiary of American Fidelity
Corporation, which is itself controlled by Cameron Enterprises, A Limited
Partnership ("CELP"). The general partners of CELP are Cameron Associates, Inc.,
Theodore M. Elam and, in their capacities as trustees, William E. Durrett,
Edward C. Joullian, III, John W. Rex and the Bank of Oklahoma, N.A. In
accordance with the CELP partnership agreement, management of the affairs of
CELP is vested in five managing general partners: William M. Cameron and Messrs.
Durrett, Joullian, Rex and Elam.
The Fund has entered into a Management and Investment Advisory Agreement
with the Company under which the Company assumes overall responsibility, subject
to the supervision of the Fund's Board of Directors, for administering all
operations of the Fund and for monitoring and evaluating the management of the
assets of the Fund by the Sub-Advisers on an ongoing basis. The Company had the
same management and investment advisory responsibility for the Fund's
predecessor under a similar agreement first entered into in 1973. The Company
provides or arranges for the provision of the overall business management and
administrative services necessary for the Fund's operations and furnishes or
procures any other services and information necessary for the proper conduct of
the Fund's business. The Company also acts as liaison among, and supervisor of,
the various service providers to the Fund.
For its services to the Fund, the Company receives an annual management and
investment advisory fee of 0.50% of the average daily net assets of the Fund.
The fee is deducted daily from the assets of the Fund.
INVESTMENT SUB-ADVISERS
The Company has engaged Kelly and Todd Investment as Sub-Advisers. Subject
to the fundamental investment objectives and policies of the Fund and any other
guidelines provided by the Company, each Sub-Adviser has complete discretion and
authority in the investment and reinvestment of the Fund assets under its
management. The Company has allocated Fund assets equally between Kelly and Todd
Investment on an annual basis and will review the asset allocation between
Sub-Advisers at least annually. Each Sub-Adviser determines what securities are
acquired, held or disposed of and, subject to any instructions from the Company
as to the Fund's cash requirements from time to time, the portion of Fund assets
which will be held uninvested. The Sub-Advisers are also authorized to exercise
all voting rights pertaining to the Fund assets
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they manage. The Sub-Advisers are authorized to select brokers to effect
securities transactions on behalf of the Fund. Neither Sub-Adviser nor any of
their respective affiliates may act as a broker with respect to securities
transactions for the Fund.
Kelly has provided the Company research and investment advice since 1985.
Beginning in the fourth quarter of 1995, Kelly's services relating to Fund
assets (including the assets of the Fund's predecessor) have been rendered
pursuant to its sub-advisory agreement with the Company, and its services
relating to other assets managed by the Company have been provided under a
separate consulting agreement. Lawrence W. Kelly, the chairman, chief executive
officer, treasurer and founder of Kelly, has 31 years of experience in the
investment advisory business and he and his wife, Janice M. Kelly, are the
majority shareholders of Kelly. Mr. Kelly has primary responsibility for the
day-to-day management of the Fund's portfolio managed by Kelly. From 1980 to
1985, Mr. Kelly was chairman of Webster Management Corporation, an investment
advisory firm which provided investment advice to the Company. In addition, Mr.
Kelly was a vice president (1974 to 1988) and director (1981 to 1985) of Kidder,
Peabody & Co., Inc. and the chairman of five mutual funds managed by Webster and
Kidder from various dates between 1981 and 1984 until 1986. As of December 31,
1997, Kelly managed 50 client securities portfolios on a discretionary basis
with an aggregate market value of $396 million. It also managed or supervised 16
client securities portfolios on a non-discretionary basis with an aggregate
market value of $992 million. Kelly has not acted as an investment adviser to
any investment company registered under the 1940 Act other than the Fund and its
predecessor. Kelly is located at 200 South Los Robles Avenue, Suite 510,
Pasadena, California 91101.
Todd Investment has 30 years of experience managing investments for
institutional clients. At December 31, 1997, Todd Investment managed over $2.7
billion for 50 clients, of which $1.2 billion represented equity assets. Todd
Investment generates all of its revenues from fee-based investment counseling
and employs six portfolio managers. The primary portfolio manager for the Fund
assets managed by Todd Investment is Robert Bordogna, who has been with Todd
Investment since 1980 and in the business for 28 years. The backup portfolio
manager is Curtiss M. Scott, Jr., who has been with Todd Investment since 1996,
in the business for 19 years and is a chartered financial analyst. Prior to
joining Todd Investment, Mr. Scott was a partner and managing director of
Executive Investment Advisors, Inc. in Louisville, Kentucky. Todd Investment has
not acted as an investment adviser to a registered investment company other than
the Fund and its predecessor. Todd Investment is located at 101 South Fifth
Street, Suite 3160, Louisville, Kentucky 40202 and, since December 1993, has
been an indirect wholly-owned subsidiary of Stifel Financial Corporation, a
financial services holding company based in St. Louis, Missouri.
The fees of the Sub-Advisers are paid by the Company. Kelly receives an
annual fee of .30% of Fund assets under its management. Todd Investment receives
an annual fee of .38% of Fund assets under its management or $50,000, whichever
is greater. The Sub-Advisers' fees are payable quarterly and, when based on Fund
assets, are calculated on the value of Fund assets on the last trading day of
each calendar quarter.
EXPENSES
The Fund pays the Company's management and investment advisory fee which
has the effect of reducing investors' return. The Company pays all other
expenses of the Fund except investment transaction costs. The Fund will not
reimburse the Company at a later time for any such amounts. The yield to
investors increases to the extent that the Fund does not bear all of its
expenses.
In allocating brokerage transactions, the Sub-Advisers seek to obtain the
best execution of orders at the most favorable net price. Subject to this
determination, the Sub-Advisers may consider, among other things, the receipt of
research services as a factor in the selection of broker-dealers to execute
portfolio transactions for the Fund. See "Portfolio Transactions" in the
Statement of Additional Information.
CUSTODIAN
InvesTrust, N.A., 6301 N. Western, Suite 210, Oklahoma City, Oklahoma
73118, is the custodian of the Fund's portfolio securities.
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FINANCIAL HIGHLIGHTS
On January 1, 1999, Dual Strategy Fund acquired all of the assets and
liabilities (other than liabilities relating to insurance charges) of Variable
Annuity Fund A as part of the Reorganization. The information below relates to
Variable Annuity Fund A and is derived from its financial statements. Such
financial statements were audited by KPMG LLP for the eight years ended December
31, 1997 and by Arthur Andersen LLP for the two years ended December 31, 1989.
This table should be read in conjunction with the financial statements and notes
thereto of Variable Annuity Fund A which are included in the Fund's Statement of
Additional Information under "Financial Statements."
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SIX MONTHS
ENDED YEARS ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------------------------------
1998 1997 1996 1995(A) 1994 1993 1992 1991
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Accumulation Unit value, beginning
of period........................ $ 19.463 $ 15.339 $12.199 $ 9.094 $ 9.709 $ 9.108 $ 8.866 $ 6.924
-------- -------- ------- ------- ------- ------- ------- -------
Income from investment
operations....................... 0.162 0.328 0.282 0.216 0.210 0.211 0.226 0.233
Expenses.......................... 0.154 0.257 0.188 0.136 0.119 0.118 0.111 0.100
-------- -------- ------- ------- ------- ------- ------- -------
Net investment income............. 0.008 0.071 0.094 0.080 0.091 0.093 0.115 0.133
Net realized and unrealized gains
(losses) on securities........... 3.223 4.053 3.046 3.025 (0.706) 0.508 0.127 1.809
-------- -------- ------- ------- ------- ------- ------- -------
Total from investment
operations....................... 3.231 4.124 3.140 3.105 0.615 0.601 0.242 1.942
-------- -------- ------- ------- ------- ------- ------- -------
Accumulation Unit value, end of
period........................... $ 22.694 $ 19.463 $15.339 $12.199 $ 9.094 $ 9.709 $ 9.108 $ 8.866
======== ======== ======= ======= ======= ======= ======= =======
Total return...................... 16.60% 26.89% 25.74% 34.14% (6.33)% 6.60% 2.73% 28.05%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's).......................... $167,786 $137,091 $98,829 $73,153 $51,066 $49,651 $42,303 $37,839
Ratio of expenses to average net
assets........................... 0.72% 1.46% 1.38% 1.29% 1.28% 1.28% 1.28% 1.28%
Ratio of net income to average net
assets........................... 0.37% 0.40% 0.69% 0.75% 0.98% 1.01% 1.33% 1.70%
Portfolio turnover rate........... 13.10% 26.60% 36.90% 66.10% 43.50% 51.20% 31.70% 41.20%
Average commission rate paid
(b).............................. 6.27% 6.19% 6.36% 5.51%
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YEARS ENDED DECEMBER 31,
---------------------------
1990 1989 1988
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Accumulation Unit value, beginning
of period........................ $ 6.514 $ 5.110 $ 4.601
------- ------- -------
Income from investment
operations....................... 0.251 0.208 0.175
Expenses.......................... 0.086 0.083 0.052
------- ------- -------
Net investment income............. 0.165 0.125 0.123
Net realized and unrealized gains
(losses) on securities........... 0.245 1.279 0.386
------- ------- -------
Total from investment
operations....................... 0.410 1.404 0.509
------- ------- -------
Accumulation Unit value, end of
period........................... $ 6.924 $ 6.514 $ 5.110
======= ======= =======
Total return...................... 6.29% 27.48% 11.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's).......................... $27,985 $24,792 $19,622
Ratio of expenses to average net
assets........................... 1.29% 1.28% 1.29%
Ratio of net income to average net
assets........................... 2.48% 1.93% 3.10%
Portfolio turnover rate........... 41.10% 50.10% 34.00%
Average commission rate paid
(b)..............................
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(a) Investment management by the Sub-Advisors commenced October 2, 1995.
(b) This disclosure is required for fiscal periods beginning on or after
September 1, 1995 and represents the average commission rate paid on equity
security transactions on which commissions were charged.
PERFORMANCE INFORMATION
For the purpose of advertising, performance is calculated on the basis of
average annual total return and/or total return.
Average annual total return is calculated pursuant to a standardized
formula which assumes that an investment in the Fund was purchased with an
initial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends and
distributions during the period. The return is expressed as a percentage rate
which, if applied on a compounded annual basis to the original investment, would
result in the redeemable value of the investment at the end of the period.
Advertisements of the Fund's performance will include the Fund's average annual
total return for one, five and ten year periods.
Total return is computed based on an original $1,000 investment and assumes
the reinvestment of dividends and distributions. Total return generally is
expressed as a percentage rate which is calculated by combining the income and
principal changes for a specified period and dividing by the original
investment. Advertisements may include the percentage rate of total return or
may include the value of a hypothetical investment at the end of the period
which assumes the application of the percentage rate of total return.
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Performance will vary from time to time and past results are not
necessarily representative of future results. Performance information, such as
that described above, may not provide a basis for comparison with other
investments or other investment companies using a different method of
calculating performance.
As the successor to the Company's Variable Annuity Fund A, the Fund treats
the historical performance data of Variable Annuity Fund A as its own for
periods prior to the Reorganization. See "Description of the Fund" on page 3. In
computing returns for periods prior to the Reorganization, the Fund deducts only
the type of charge currently imposed by the Fund. The Fund's performance data,
both before and after the Reorganization, do not reflect any separate account or
contract level charges. Since the Fund is not available directly to the public,
its performance data will not be advertised unless accompanied by comparable
data for a participating separate account.
The Fund's average annual total return and total return should not be
compared with other funds that offer their shares directly to the public since
the figures provided do not reflect charges of participating separate accounts.
In addition, the Fund's total return should be distinguished from the rate of
return of a participating separate account, which rate will reflect the
deduction of additional charges, including mortality and expense risk, sales and
administrative charges, and therefore will be lower. Contract owners should
consult the prospectus for such contract.
The investment results of the Fund will fluctuate over time and any
presentation of investment results for any prior period should not be considered
a representation of what an investment may earn or what the Fund's performance
may be in any future period. In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time make a list of the
Fund's holdings available to investors upon request.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is normally determined once daily
as of the close of regular trading on the New York Stock Exchange, currently
4:00 p.m. Eastern Time, on each day the Company is open for business. The
Company is scheduled to be open Monday through Friday throughout the year,
except for the following holidays: New Year's Day, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and the immediately following Friday, and
Christmas Day. On any day when the Company is open for business and the New York
Stock Exchange is not (presently Martin Luther King, Jr. Day, Washington's
Birthday and Good Friday), the Fund values its portfolio securities for which
current-day prices are not available using the same prices included in the
determination of net asset value on the immediately preceding business day. Net
asset value per share of the Fund is determined by dividing the value of the
Fund's securities, cash, and other assets (including accrued but unallocated
interest and dividends), less all liabilities (including accrued expenses but
excluding capital and surplus) by the number of shares of the Fund outstanding.
The value of the Fund's securities and assets, except certain short-term
debt securities, is determined on the basis of their market values. Short-term
debt securities having remaining maturities of less than one year are valued by
the amortized cost method, which approximates market value. Equity securities
held by the Fund are valued at the last sales price on a national securities
exchange or the Nasdaq National Market or, lacking any sales, at the last
reported bid price. Over-the-counter securities not quoted in the Nasdaq
National Market are valued at the reported bid price. Investments for which
market quotations are not readily available, if any, are valued at their fair
market value as determined in good faith by the Board of Directors.
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OFFERING, PURCHASE AND REDEMPTION OF SHARES
FUND SHARES CURRENTLY ARE OFFERED ONLY TO ONE OR MORE SEPARATE ACCOUNTS OF
THE COMPANY. INDIVIDUALS MAY NOT PLACE PURCHASE OR REDEMPTION ORDERS DIRECTLY
WITH THE FUND.
Pursuant to a participation agreement between the Fund and the Company,
Fund shares are sold on a continuous basis to the Company. The Company, on
behalf of participating separate accounts, places orders based on, among other
things, the amount of premium payments to be invested pursuant to separate
account variable annuity contracts. See the prospectus of the applicable
separate account for more information on the purchase of Fund shares.
Participating separate accounts purchase and redeem Fund shares at net asset
value without sales or redemption charges.
For each day on which the Fund's net asset value is calculated, the Company
will transmit to the Fund any orders to purchase or redeem shares of the Fund
based on the purchase payments and redemption (surrender) requests received from
contract owners, annuitants and beneficiaries of participating separate accounts
that have been processed on that day. If an order is received by the Company by
3:00 p.m. Central Time on any business day, Fund shares will be purchased or
redeemed at the net asset value determined as of the day the order was received
by the Company. Otherwise, Fund shares will be purchased or redeemed at the net
asset value next computed after receipt of purchase or redemption orders. No
charges are imposed by the Fund when shares are redeemed.
The Fund ordinarily will make payment for all shares redeemed within seven
days after receipt of a redemption request in proper form, except as provided by
the rules of the Securities and Exchange Commission.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund ordinarily declares and pays dividends from net investment income
at least once a year and automatically reinvests them in additional Fund shares
at net asset value. The Fund makes distributions from net realized securities
gains, if any, once a year, but may make distributions on a more frequent basis
to comply with the distribution requirements of the Internal Revenue Code of
1986, as amended (the "Code"), in all events in a manner consistent with the
provisions of the 1940 Act. The Fund will not make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired. If all shares in an account are redeemed at any time,
all dividends to which the shareholder is entitled will be paid along with the
proceeds of the redemption. All expenses are accrued daily and deducted before
declaration of dividends to investors.
Section 817(h) of the Code requires that the investments of a segregated
asset account of an insurance company be "adequately diversified" as provided
therein or in accordance with U.S. Treasury Regulations, in order for the
account to serve as the basis for variable annuity contracts. Section 817(h) and
the U.S. Treasury Regulations issued thereunder provide the manner in which a
segregated asset account will treat investments in a regulated investment
company for purposes of the diversification requirements. If the Fund satisfies
certain conditions, a segregated asset account owning shares of the Fund will be
treated as owning multiple investments consisting of the account's proportionate
share of each of the assets of the Fund. The Fund intends to satisfy these
conditions so that the shares of the Fund owned by a segregated asset account
will be treated as multiple investments. Further, the Fund intends to satisfy
the diversification standards prescribed under Section 817(h) for segregated
accounts. By meeting these and other requirements, the Company, rather than
variable annuity contract holders, should be subject to tax on distributions
received with respect to Fund shares. The tax treatment on distributions to the
Company will depend on the Company's tax status.
Notice as to the tax status of dividends and distributions will be mailed
to shareholders annually. Dividends derived from net investment income, together
with distributions of net realized short-term securities gains and all or a
portion of any gains realized from the sale or other disposition of certain
market discount bonds, generally are taxable as ordinary income. Distributions
from net realized long-term securities gains
9
<PAGE> 10
generally are taxable as long-term capital gains. For information concerning the
federal income taxes to participating separate account contract owners, see the
applicable separate account prospectus.
Management of the Fund believes that the Fund will qualify as a "regulated
investment company" under the Code. The Fund intends to continue to so qualify
if such qualification is in the best interest of its shareholders. Qualification
as a regulated investment company relieves the Fund of any liability for federal
income taxes to the extent its earnings are distributed in accordance with the
applicable provisions of the Code. The Fund is subject to a non-deductible 4%
excise tax, measured with respect to certain undistributed amounts of taxable
investment income and capital gains.
OTHER INFORMATION
The Fund was incorporated on March 18, 1998 as a Maryland corporation and
commenced operations upon completion of the Reorganization described on page 3.
The authorized capital stock of the Fund consists of 200 million shares of
common stock, par value $.001 per share. Each share outstanding is entitled to
one vote on all matters submitted to a vote of shareholders of the Fund and is
entitled to a pro rata share of any distributions made by the Fund and, in the
event of liquidation, of its net assets remaining after satisfaction of
outstanding liabilities. Each share of the Fund, when issued, is nonassessable
and has no preemptive or conversion rights. The shares have noncumulative voting
rights.
As a Maryland corporation, the Fund is not required to hold regular annual
shareholder meetings. The Fund is, however, required to hold shareholder
meetings for the following purposes: (i) approving certain agreements as
required by the 1940 Act; (ii) changing fundamental investment objectives,
policies and restrictions of the Fund; and (iii) filling vacancies on the Board
of Directors in the event that less than a majority of the members of the Board
of Directors were elected by shareholders. Directors may also be removed by
shareholders by a vote of a majority of all votes entitled to be cast for the
election of directors. The Fund has the obligation to assist in shareholder
communications. As the sole record holder of the outstanding shares of the Fund,
the Company will be deemed a controlling person of the Fund, as that term is
defined in the 1940 Act.
Annual reports containing audited financial statements of the Fund and
semiannual reports containing unaudited financial statements, as well as proxy
materials, are sent to participating separate account contract owners and their
participants, annuitants or beneficiaries, as appropriate.
Inquiries may be made by writing to the Fund at P.O. Box 25523, Oklahoma
City, Oklahoma 73125-0523, or by calling toll-free (800) 654-8489.
10
<PAGE> 11
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
January 8, 1999
This Statement of Additional Information is not a prospectus, and should be
read in conjunction with the current Prospectus of American Fidelity Dual
Strategy Fund, Inc. (the "Fund") dated January 8, 1999, as it may be revised
from time to time (the "Prospectus"). A copy of the Prospectus may be obtained
by writing to the Fund at the following address or calling the number listed
below:
American Fidelity Dual Strategy Fund, Inc.
P. O. Box 25523
Oklahoma City, Oklahoma 73125-0523
1-800-654-8489
Shares of the Fund are offered only to variable annuity separate accounts
established by American Fidelity Assurance Company (the "Company") to fund
variable annuity contracts (the "Contracts").
The Company serves as the Fund's investment adviser. The Company has
engaged Lawrence W. Kelly & Associates, Inc. ("Kelly") and Todd Investment
Advisors, Inc. ("Todd Investment") to serve as sub-advisers (together, the
"Sub-Advisers") to the Fund and provide day-to-day portfolio management for the
Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION................................................ B-2
INVESTMENT OBJECTIVES AND POLICIES.......................... B-2
MANAGEMENT.................................................. B-4
INVESTMENT ADVISORY AND OTHER SERVICES...................... B-5
PORTFOLIO TRANSACTIONS...................................... B-6
CAPITAL STOCK............................................... B-8
FEDERAL TAX MATTERS......................................... B-8
CALCULATION OF PERFORMANCE DATA............................. B-9
CUSTODIAN, INDEPENDENT ACCOUNTANTS AND COUNSEL.............. B-10
FINANCIAL STATEMENTS........................................ B-10
</TABLE>
<PAGE> 12
INTRODUCTION
American Fidelity Dual Strategy Fund, Inc. is an open-end management
investment company established as a Maryland corporation on March 18, 1998. The
Fund is the successor to American Fidelity Variable Annuity Fund A ("Variable
Annuity Fund A"). The reorganization (the "Reorganization") of Variable Annuity
Fund A from a management investment company into a unit investment trust
("Separate Account A") was approved by the Contract owners of Variable Annuity
Fund A at a meeting of Contract owners on December 21, 1998. Effective January
1, 1999, the assets of Variable Annuity Fund A were transferred intact to the
Fund in exchange for shares of the Fund which are held by the Company on behalf
of Separate Account A.
By investing in the Fund, an investor becomes entitled to a pro rata share
of all dividends and distributions arising from the net income and capital gains
on the investments of the Fund. Likewise, an investor shares pro rata in any
losses of the Fund.
Initially, the Fund is offering its shares only to Separate Account A as
the underlying funding vehicle for the Contracts supported by Separate Account
A. The Fund does not offer its stock directly to the general public. Separate
Account A, like the Fund, is registered as an investment company with the
Securities and Exchange Commission ("SEC"), and a separate prospectus, which
accompanies the Prospectus for the Fund, describes that separate account and the
Contracts it supports. The prospectus for Separate Account A also has a
statement of additional information. The Fund may, in the future, offer its
stock to other separate accounts of the Company supporting other variable
annuity contracts.
Terms appearing in this Statement of Additional Information that are
defined in the Prospectus have the same meaning as in the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The Fund has adopted the fundamental policies listed below. These policies
cannot be changed without approval by the holders of a majority, as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"), of the Fund's
outstanding voting shares.
(1) Not more than 5% of the value of the Fund's assets will be
invested in securities of any one issuer, except obligations of the United
States Government and instrumentalities thereof.
(2) Not more than 10% of the voting securities of any one issuer will
be acquired.
(3) Not more than 25% of the value of the Fund's assets will be
invested in any one industry.
(4) No borrowings will be made except that the right is reserved to
borrow from banks for emergency purposes, provided that such borrowings do
not exceed 5% of the value of the assets of the Fund and that there always
will be asset coverage of at least 300% for all outstanding borrowings of
the Fund.
(5) The Fund will not act as an underwriter of securities of other
issuers, except to the extent that the Fund might be construed to be a
statutory underwriter by virtue of its investment in restricted securities.
(6) Not more than 10% of the value of the assets of the Fund may be
invested in real estate (including shares of real estate investment
trusts), securities for which there is no established market, or securities
(including bonds, notes or other evidences of indebtedness) which are not
readily marketable without registration under Federal or state securities
laws.
(7) No purchase of commodities or commodity contracts will be
effected.
(8) The Fund may not engage in the purchase or sale of puts, calls or
other options or in writing such options.
B-2
<PAGE> 13
(9) Loans will not be made except through the acquisition of bonds,
debentures or other evidences of indebtedness of a type customarily
purchased by institutional investors, whether or not publicly distributed.
(10) Investment will not be made in the securities of a company for
the purpose of exercising management or control.
(11) Although it is not intended that investments be made in
securities of other investment companies, the Fund may make such
investments up to a maximum of 10% of its assets, provided that not more
than 3% of the total outstanding voting stock of any one investment company
may be held.
(12) Investments in repurchase agreements will be limited to the top
thirty-five U.S. Banks, by deposits, that are rated at least "B/C" by
Keefe, Bruyette, Woods, a national bank rating agency, or a comparable
rating from a similar bank rating service. Additionally, there must be an
appropriate amount of excess collateralization depending upon the length of
the agreement, to protect against downward market fluctuation and the Fund
must take delivery of the collateral. The market value of the securities
held as collateral will be valued daily. In the event the market value of
the collateral falls below the repurchase price, the bank issuing the
repurchase agreement will be required to provide additional collateral
sufficient to cover the repurchase price.
(13) Short sales of securities will not be made.
(14) Purchases will not be made on margin, except for such short-term
credits as are necessary for the clearance of transactions.
(15) Investments in high-yield or non-investment grade bonds will not
be made.
(16) Investments in the equity securities of foreign issuers will be
limited to American Depositary Receipts ("ADRs"), other depository receipts
or ordinary shares if U.S. dollar denominated and publicly traded in the
United States. Not more than 35% of the Fund's assets will be invested in
foreign issuers. In addition, not more than 20% of the Fund's assets will
be invested in issuers of any one foreign country.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values or
assets will not constitute a violation of that restriction.
The Fund has also adopted the following non-fundamental investment
policies:
(1) The Fund should generally conform to the issuer guidelines noted
below with exceptions noted at the time of recommendation and variances
reviewed annually:
(a) $150,000,000 or more in assets,
(b) Operational for at least 10 years, and
(c) $50,000,000 or more in stockholders' equity.
(2) Although the Fund does not intend to engage to a large extent in
short-term trading, it may make investments for the purpose of seeking
short-term capital appreciation.
(3) The Fund will not invest in the securities of tobacco-producing
companies.
B-3
<PAGE> 14
MANAGEMENT
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus captioned "Management."
Information about each director and officer of the Fund is as follows:
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE* WITH REGISTRANT DURING PAST 5 YEARS
---------------------- ---------------- -----------------------
<S> <C> <C>
John W. Rex, 64 Chairman of the Board, Director (1982 to present),
2000 Classen Center President and President and Chief Operating
Oklahoma City, OK 73106 Treasurer(1)(2) Officer (1992 to present), and
Treasurer (1972 to 1995) of the
Company; Director (1982 to
present), Executive Vice President
(1990 to present) and Treasurer
(1972 to 1995) of American Fidelity
Corporation
Daniel D. Adams, Jr., 56 Director and Secretary(1) Vice President and Investment
2000 Classen Center Officer of the Company and American
Oklahoma City, OK 73106 Fidelity Corporation
Jean G. Gumerson, 75 Director President and Chief Executive
711 Stanton L. Young Blvd., Officer, Presbyterian Health
Suite 604 Foundation
Oklahoma City, OK 73104
Edward C. Joullian, III, 69 Director(1)(2) Chairman of the Board of Directors
2000 Classen Center, 800 East and Chief Executive Officer,
Oklahoma, City, OK 73106 Mustang Fuel Corporation; Director,
Fleming Companies, Inc.; Director,
The LTV Corporation; Director of
the Company and American Fidelity
Corporation
Gregory M. Love, 36 Director President and Chief Operating
10601 N. Pennsylvania Avenue Officer (1995 to present), Vice
Oklahoma City, OK 73120 President -- Real Estate and
Development (1990 to 1995) of
Love's Country Stores, Inc.;
Director, Affiliated Food Stores,
Inc.
J. Dean Robertson, D.D.S., Director Private practice in pediatric
M.Ed., 81 dentistry; Professor Emeritus,
5222 North Portland University of Oklahoma, College of
Oklahoma City, OK 73112 Dentistry
G. Rainey Williams, Jr., 38 Director President, Pinnacle Asset
6301 N. Western Management, Inc. (1996 to present);
Suite 200 Managing Partner, Marco Capital
Oklahoma City, OK 73118 Group (1988 to 1996); Director,
Mustang Fuel Corporation.
</TABLE>
- ---------------
* As of September 30, 1998.
(1) "Interested person" of the Fund under Section 2(a)(19) of the 1940 Act.
(2) Also a director of the Company.
Until the date of the Reorganization, all members of the Board of Directors
were members of the Board of Managers of the Fund's predecessor, Variable
Annuity Fund A.
B-4
<PAGE> 15
No officer or director of the Fund or the Company receives any remuneration
from the Fund. Members of the Board of Directors who are not employees of the
Company receive a fee, paid by the Company, of $500 for each meeting attended.
A shareholder that owns more than 25% of the Fund's voting securities may
be deemed to be a "control person," as defined in the 1940 Act, of the Fund. The
Company is the sole shareholder of record of the Fund. The only person known by
the Fund to own beneficially 5% or more of the securities of Variable Annuity
Fund A, the Fund's predecessor, was American Fidelity Companies Employee Savings
Plan Trust (8.67% as of October 5, 1998). Its address is 2000 Classen Center,
Oklahoma City, Oklahoma 73106. The Trust's beneficial ownership percentage of
the Fund's shares immediately after the Reorganization was the same as its
beneficial ownership percentage of Variable Annuity Fund A securities
immediately prior to the Reorganization. No officer or director of the Fund
beneficially owns any shares of the Fund, although Messrs. Rex and Adams are
participants in the Trust and therefore beneficially own securities of the Fund.
Their beneficial ownership percentage of Fund shares immediately after the
Reorganization was the same as their pre-Reorganization percentage in the
predecessor. Their beneficial ownership, together, as of October 5, 1998, was
less than 1%.
INVESTMENT ADVISORY AND OTHER SERVICES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus captioned "Management."
MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT
The Company provides management services and serves as the investment
adviser to the Fund pursuant to a Management and Investment Advisory Agreement.
Under this Agreement, the Company assumes overall responsibility, subject to the
supervision of the Board of Directors, for administering all operations of the
Fund, including monitoring and evaluating the management of the Fund's portfolio
by the Sub-Advisers on an ongoing basis. The Company provides or arranges for
the provision of the overall business management and administrative services
necessary for the Fund's operations. The Company is also responsible for
overseeing the Fund's compliance with the requirements of applicable law and
conformity with the Fund's investment objectives and policies, including
oversight of the Sub-Advisers.
For its services to the Fund, the Company receives an annual management and
investment advisory fee of 0.50% of the average daily net assets of the Fund.
The Company supplies or pays for occupancy and office rental, clerical and
bookkeeping, accounting, stationery, supplies, the expenses of printing and
distributing any prospectuses, reports or sales literature in connection with
the sale of Fund shares, salaries and other compensation of the Fund's directors
and officers, costs of shareholder reports and meetings, costs of any
independent pricing service, the cost of any advertising, the Sub-Advisers'
fees, custodian fees, legal and auditing fees, registration and filing fees, and
all ordinary expenses incurred in the ordinary course of business.
The Company received investment and advisory fees from Variable Annuity
Fund A, the Fund's predecessor, of $200,800 in 1995, $353,000 in 1996 and
$416,700 in 1997 pursuant to a management and investment advisory agreement
having the same fee arrangement as the Agreement with the Fund from and after
July 1, 1996 (previously provided for an annual fee of .325% of average daily
net assets).
The Management and Investment Advisory Agreement was approved for the Fund
by the Board of Directors, including a majority of the directors who are not
"interested persons," as defined in the 1940 Act, on September 18, 1998 and by
the Fund's sole shareholder on December 22, 1998. The Agreement will remain in
effect from year to year, provided that it will not continue for more than two
years unless such continuance is approved at least annually by the Fund's Board
of Directors, including a majority of the members of the Board of Directors who
are not interested persons by vote cast in person at a meeting called for the
purpose of voting on such approval. The Agreement is terminable without penalty,
on 60 days' notice, by the Fund's Board of Directors or by the vote of the
holders of a majority of the Fund's shares. The Company may not terminate the
Agreement without the approval of a new investment advisory agreement by a
majority of the
B-5
<PAGE> 16
Fund's shares. The Agreement will terminate automatically in the event of its
"assignment," as defined in the 1940 Act.
American Fidelity Corporation is the parent of the Company. American
Fidelity Corporation is itself controlled by Cameron Enterprises, A Limited
Partnership ("CELP"). The general partners of CELP are Cameron Associates, Inc.,
Theodore M. Elam and, in their capacities as trustees, William E. Durrett,
Edward C. Joullian, III, John W. Rex and the Bank of Oklahoma, N.A. In
accordance with the CELP partnership agreement, management of the affairs of
CELP is vested in five managing general partners: William M. Cameron and Messrs.
Durrett, Joullian, Rex and Elam.
INVESTMENT SUB-ADVISORY AGREEMENTS
The Company has contracted with the Sub-Advisers to provide day-to-day
portfolio investment management services to the Fund. The fees of the
Sub-Advisers are paid by the Company. Kelly receives an annual fee of .30% of
Fund assets under its management. Todd Investment receives an annual fee of .38%
of Fund assets under its management or $50,000, whichever is greater. The
Sub-Advisers' fees are payable quarterly and, when based on Fund assets, are
calculated on the value of Fund assets on the last trading day of each calendar
quarter.
Kelly served as a research consultant to Variable Annuity Fund A, the
Fund's predecessor, from 1985 until it became a sub-adviser to Variable Annuity
Fund A in October 1995. Kelly provided investment research and specific
investment recommendations to the Company and Variable Annuity Fund A for an
annual fee of $50,000. The Company paid all of Kelly's fees under the consulting
agreement, of which $20,100 in 1995 was allocated to Variable Annuity Fund A.
Pursuant to the Variable Annuity Fund A sub-advisory agreements which contained
the same fee arrangements as are in the Sub-Advisers' Agreements with respect to
the Fund, in 1995, 1996 and 1997, the Company paid Kelly $27,150, $131,000 and
$182,050, respectively, and Todd Investment $34,700, $165,300 and $234,600,
respectively.
The Investment Sub-Advisory Agreement for each of the Sub-Advisers was
approved for the Fund by the Board of Directors, including a majority of the
directors who are not "interested persons," as defined in the 1940 Act, on
September 18, 1998 and by the sole shareholder of the Fund on December 22, 1998.
Each Agreement will remain in effect from year to year provided such continuance
is approved at least annually by the Fund's Board of Directors, including a
majority of the members of the Board of Directors who are not interested persons
by vote cast in person at a meeting called for the purpose of voting on such
approval. Each Agreement is terminable without penalty, on 30 days' notice, by
the Company, the Fund's Board of Directors or by the vote of the holders of a
majority of the Fund's shares or, upon 30 days' notice, by the Sub-Adviser. Each
Agreement will terminate automatically in the event of its "assignment," as
defined in the 1940 Act.
Lawrence W. Kelly and his wife, Janice M. Kelly, are the majority
shareholders of Kelly, each holding 48.8% of Kelly's outstanding stock. Todd
Investment is a wholly-owned subsidiary of Stifel Asset Management Corp., which
is a wholly-owned subsidiary of Stifel Financial Corporation.
PORTFOLIO TRANSACTIONS
Each of the Sub-Advisers is responsible for decisions to buy and sell
securities for the Fund, the selection of brokers to effect transactions and the
negotiation of brokerage commissions, in each case with respect to Fund
securities under its management. Neither Sub-Adviser nor any of their respective
affiliates may act as a broker for Fund securities transactions.
In selecting a broker to execute portfolio transactions, Kelly's objective
is to obtain the best execution, while at the same time obtaining research used
to service its clients. The selection of a broker takes into account the quality
of brokerage services, including such factors as execution capability, financial
stability and clearance and settlement capability. Research furnished by brokers
may be used in serving any or all of Kelly's clients, including clients which
have not paid commissions to the broker providing the research. Kelly evaluates
the reasonableness of brokerage commissions on an on-going basis in light of the
general level of commissions being paid from time to time and the value of
research services received. In order to obtain lower
B-6
<PAGE> 17
commission rates for clients, Kelly engages from time to time in block trades,
i.e., grouping orders with a single broker. Accounts involved in such
transactions receive the average executed price, except that brokers may charge
smaller accounts a minimum commission resulting in smaller accounts paying
slightly more in commissions per share than larger accounts.
In selecting brokers to effect portfolio transactions, Todd Investment uses
its best efforts to obtain for its clients the most favorable price and
execution available except to the extent that it determines that clients should
pay a higher brokerage commission for brokerage and research services. In
evaluating the overall reasonableness of brokerage commissions paid, Todd
Investment reviews the type and quality of the execution services rendered and
the quantity and nature of the portfolio transactions effected and compares
generally the commissions paid to brokers with the commissions believed to be
charged by other brokers for effecting similar transactions as well as with
commissions generally charged by brokers prior to the introduction of negotiated
commission rates. In addition, it takes into account the quality and usefulness
of the brokerage and research services, if any, that may be furnished by such
brokers. Research services provided by brokers may be used by Todd Investment in
advising all of its clients and not all such services may be used by the clients
which paid the commissions. Conversely, however, a client of Todd Investment may
benefit from research services provided by brokers whose commissions are paid by
other clients. As a result, Todd Investment may cause clients to pay a broker
which provides brokerage and research services to Todd Investment a higher
brokerage commission than would have been charged by another broker which was
not providing such services.
Research services provided by brokers may include research reports on
companies, industries and securities; economic and financial data, including
reports on macro-economic trends and monetary and fiscal policy; financial
publications; computer data bases; quotation equipment and services; and
research-oriented computer hardware, software and services.
For the years 1995, 1996 and 1997, the Fund's predecessor, Variable Annuity
Fund A, paid brokerage commissions of $137,100, $87,100 and $90,500. The higher
commissions in 1995 were largely because of the increased trading in the fourth
quarter after the Sub-Advisers started managing Variable Annuity Fund A's
portfolio. As a percentage of net assets, commissions were .18% in 1995, .09% in
1996 and .07% in 1997.
The rate of portfolio turnover is not a limiting factor when changes are
deemed appropriate. Under normal circumstances the annual portfolio turnover
will not exceed 80% although, in any particular year, conditions could result in
portfolio activity at a greater rate than anticipated. A turnover ratio is the
lesser of the cost of securities purchased or the consideration of securities
sold divided by the monthly average value of securities held during a year. A
higher turnover rate than anticipated does not, in and of itself, indicate a
variation of investment policy. During periods of increased market volatility,
or after a prolonged advance in the equity market, a turnover rate of more than
100% may be incurred in order to shift assets from securities that are more
fully valued to securities that are perceived to be undervalued. A high
portfolio turnover rate may involve correspondingly greater broker commissions
and other transaction costs which will be borne by the Fund. The Fund will not
engage in transactions contributing to a high portfolio turnover rate unless the
Sub-Advisers believe their added benefit exceeds their added cost. The Fund does
not expect that the assets of the Fund will be subject to Federal income tax.
Therefore, any change in portfolio activity is not expected to have any adverse
tax consequences at this time. See "Federal Tax Matters."
The annual portfolio turnover rate for Variable Annuity Fund A, predecessor
to the Fund, during the years 1995, 1996 and 1997 was 66.1%, 36.9% and 26.6%,
respectively.
B-7
<PAGE> 18
CAPITAL STOCK
Each issued and outstanding share of the Fund is entitled to participate
equally in dividends and distributions declared for the Fund's stock and, upon
liquidation or dissolution, in the Fund's net assets remaining after
satisfaction of outstanding liabilities. The outstanding shares of the Fund are
fully paid and non-assessable and have no preemptive or conversion rights.
As the successor to Variable Annuity Fund A, the Fund received the assets
of Variable Annuity Fund A in exchange for shares of the Fund.
Under normal circumstances, subject to the reservation of rights explained
below, the Fund will redeem shares in cash within seven days. However, the right
of a shareholder to redeem shares and the date of payment by the Fund may be
suspended for more than seven days for any period during which the New York
Stock Exchange is closed, other than customary weekends or holidays, or when
trading on such Exchange is restricted as determined by the SEC; or during any
emergency, as determined by the SEC, as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its net assets; or for such other period as the SEC may
by order permit for the protection of shareholders.
Under Maryland law, the Fund is not required to hold annual shareholder
meetings and does not intend to do so.
FEDERAL TAX MATTERS
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus captioned "Dividends, Distributions
and Taxes."
The Fund intends to qualify and to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). In order to qualify for that treatment, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income, consisting of net investment income, net
short-term capital gain and net gains from certain foreign currency
transactions.
SOURCES OF GROSS INCOME
To qualify for treatment as a regulated investment company, the Fund must
also, among other things, derive its income from certain sources. Specifically,
in each taxable year, the Fund must generally derive at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of securities or foreign currencies, or
other income derived with respect to its business of investing in securities, or
foreign currencies.
DIVERSIFICATION OF ASSETS
To qualify for treatment as a regulated investment company, the Fund must
also satisfy certain requirements with respect to the diversification of its
assets. The Fund must have, at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets represented by cash, cash
items, United States Government securities, securities of other regulated
investment companies, and other securities which, in respect of any one issuer,
do not exceed 5% of the value of the Fund's total assets and that do not
represent more than 10% of the outstanding voting securities of the issuer. In
addition, not more than 25% of the value of the Fund's total assets may be
invested in securities (other than United States Government securities or the
securities of other regulated investment companies) of any one issuer, or of two
or more issuers which the Fund controls and which are engaged in the same or
similar trades or businesses or related trades or businesses. The Fund's
investments in U.S. Government securities are not subject to these limitations.
The foregoing diversification requirements are in addition to those imposed by
the 1940 Act.
Because the Fund is established as an investment medium for variable
annuity contracts, Section 817(h) of the Code imposes additional diversification
requirements on the Fund. These requirements which are in addition to the
diversification requirements mentioned above, place certain limitations on the
proportion of the
B-8
<PAGE> 19
Fund's assets that may be represented by any single investment. In general, no
more than 55% of the value of the assets of the Fund may be represented by any
one investment; no more than 70% by any two investments; no more than 80% by any
three investments; and no more than 90% by any four investments. For these
purposes, all securities of the same issuer are treated as a single investment
and each United States government agency or instrumentality is treated as a
separate issuer.
ADDITIONAL TAX CONSIDERATIONS
The Fund will not be subject to the 4% federal excise tax imposed on
amounts not distributed to shareholders on a timely basis because the Fund
intends to make sufficient distributions to avoid such excise tax. If the Fund
fails to qualify as a regulated investment company, owners of Contracts based on
the Fund might be taxed currently on the investment earnings under their
Contracts and thereby lose the benefit of tax deferral, and the Fund might incur
additional taxes. In addition, if the Fund failed to qualify as a regulated
investment company, or if the Fund failed to comply with the diversification
requirements of Section 817(h) of the Code, owners of Contracts based on the
Fund would be taxed on the investment earnings under their Contracts and thereby
lose the benefit of tax deferral.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. It is not
intended to be a complete explanation or a substitute for consultation with
individual tax advisers. For the complete provisions, reference should be made
to the pertinent Code sections and the Treasury Regulations promulgated
thereunder. The Code and Regulations are subject to change.
CALCULATION OF PERFORMANCE DATA
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus captioned "Performance Information."
The Fund may from time to time quote or otherwise use average annual total
return information for the Fund in advertisements, shareholder reports or sales
literature. The Fund's total return for the twelve months ended June 30, 1998
and average annual total returns over the five and ten year periods ended June
30, 1998 were 28.52%, 21.50% and 17.57%, respectively. Average annual total
return quotations are computed by finding the average annual compounded rates of
return over one, five and ten year periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P(1+T)(n) = ERV
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the one, five or ten-year period.
From time to time, the Fund may disclose cumulative total returns in
conjunction with the standardized returns described above. The Fund's cumulative
total returns for the one, five and ten year time periods ended June 30, 1998
were 28.52%, 164.83% and 404.82%, respectively. Total return is calculated by
subtracting the initial investment from the value at the end of the period, and
dividing the result by the initial investment.
Any performance data quoted for the Fund will represent historical
performance, and the investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than original cost.
B-9
<PAGE> 20
As the successor to Variable Annuity Fund A, the Fund treats the historical
performance data of Variable Annuity Fund A as its own for periods prior to the
Reorganization. In computing returns for periods prior to the Reorganization,
the Fund deducts only the type of charge currently imposed by the Fund (i.e.,
the management and investment advisory fee). The Fund's performance data, both
before and after the Reorganization, do not reflect any sales, insurance or
other charges imposed under the annuity contracts supported by the Fund.
CUSTODIAN, INDEPENDENT ACCOUNTANTS AND COUNSEL
All of the assets of the Fund are held under a custodial safekeeping
agreement by InvesTrust, N.A., 6301 N. Western, Suite 210, Oklahoma City,
Oklahoma 73118. Under its agreement with the Fund, InvesTrust, N.A., which is an
indirect subsidiary of American Fidelity Corporation, holds the Fund's portfolio
securities and keeps all necessary accounts and records.
This Statement of Additional Information contains financial statements for
the Fund's predecessor, Variable Annuity Fund A. KPMG LLP, Oklahoma City,
Oklahoma served as Variable Annuity Fund A's independent certified public
accountants and is expected to continue in that capacity for the Fund.
McAfee & Taft A Professional Corporation, Two Leadership Square, Tenth
Floor, Oklahoma City, Oklahoma 73102 has rendered its opinion as to certain
legal matters regarding the shares being sold pursuant to the Fund's Prospectus.
FINANCIAL STATEMENTS
The following financial statements appear hereafter:
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
Independent Auditors' Report
Statements of Assets and Liabilities as of December 31, 1997 and 1996
Statements of Operations for the Years Ended December 31, 1997 and
1996
Statements of Changes in Net Assets for the Years Ended December 31,
1997 and 1996
Schedule of Portfolio Investments as of December 31, 1997
Financial Highlights for the Five Years Ended December 31, 1997
Notes to Financial Statements
Statements of Assets and Liabilities as of June 30, 1998 (unaudited)
and December 31, 1997
Statements of Operations for the Six Months Ended
June 30, 1998 and 1997 (unaudited)
Schedule of Portfolio Investments as of June 30, 1998 (unaudited)
Financial Highlights for the Six Months Ended June 30, 1998
(unaudited)
and the Five Years Ended December 31, 1997
Notes to Financial Statements (unaudited)
B-10
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
Board of Managers and Contract Owners
American Fidelity Variable Annuity Fund A:
We have audited the accompanying statements of assets and liabilities of
American Fidelity Variable Annuity Fund A (the Fund) as of December 31, 1997 and
1996, and the related statements of operations and changes in net assets for the
years then ended, the financial highlights for each of the years in the
five-year period ended December 31, 1997, and the Schedule of Portfolio
Investments as of December 31, 1997. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 and 1996, by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
American Fidelity Variable Annuity Fund A as of December 31, 1997 and 1996, the
results of its operations and changes in its net assets for the years then
ended, and the financial highlights for each of the years in the five-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG LLP
Oklahoma City, Oklahoma
January 16, 1998
B-11
<PAGE> 22
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Investments, at market value (cost $85,275,367 and
$66,094,445 in 1997 and 1996, respectively)............... $136,542,104 $98,234,687
Cash........................................................ 327,520 469,711
Accrued interest and dividends.............................. 220,927 191,430
------------ -----------
Total assets...................................... 137,090,551 98,895,828
============ ===========
LIABILITIES
Payable to broker........................................... -- 66,429
------------ -----------
Total liabilities................................. -- 66,429
------------ -----------
Net assets.................................................. $137,090,551 $98,829,399
============ ===========
Accumulation units outstanding.............................. 7,043,575 6,443,056
============ ===========
Net asset value per unit.................................... $ 19.4632 $ 15.3389
============ ===========
</TABLE>
See accompanying notes to financial statements.
B-12
<PAGE> 23
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Investment income:
Income:
Dividends.............................................. $ 1,954,633 $ 1,538,540
Interest............................................... 271,265 201,294
----------- -----------
2,225,898 1,739,834
----------- -----------
Expenses:
Mortality and expense guaranty fees (note 3)........... 1,148,308 809,048
Investment management fees (note 3).................... 598,077 353,001
----------- -----------
1,746,385 1,162,049
----------- -----------
Net investment income............................. 479,513 577,785
----------- -----------
Realized gains on investments:
Proceeds from sales....................................... 31,160,087 31,697,825
Cost of securities sold................................... 23,009,137 27,483,951
----------- -----------
Net realized gains................................ 8,150,950 4,213,874
----------- -----------
Unrealized appreciation on investments:
End of year............................................... 51,266,737 32,140,242
Beginning of year......................................... 32,140,242 17,459,492
----------- -----------
Increase in unrealized appreciation............... 19,126,495 14,680,750
----------- -----------
Net increase in net assets resulting from
operations...................................... $27,756,958 $19,472,409
=========== ===========
</TABLE>
See accompanying notes to financial statements.
B-13
<PAGE> 24
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Increase in net assets from operations:
Net investment income..................................... $ 479,513 $ 577,785
Net realized gains on investments......................... 8,150,950 4,213,874
Increase in unrealized appreciation on investments........ 19,126,495 14,680,750
------------ -----------
Net increase in net assets resulting from
operations..................................... 27,756,958 19,472,409
------------ -----------
Changes from principal transactions:
Net purchase payments received (note 3)................... 21,031,010 15,914,163
Withdrawal of funds....................................... (10,526,816) (9,709,707)
------------ -----------
Increase in net assets derived from principal
transactions................................... 10,504,194 6,204,456
------------ -----------
Increase in net assets............................ 38,261,152 25,676,865
Net assets:
Beginning of year......................................... 98,829,399 73,152,534
------------ -----------
End of year............................................... $137,090,551 $98,829,399
============ ===========
Accumulation units:
Outstanding, beginning of year............................ 6,443,056 5,996,795
Increase for payments received......................... 1,190,147 1,159,575
Decrease for withdrawal of funds....................... (589,628) (713,314)
------------ -----------
Outstanding, end of year.................................. 7,043,575 6,443,056
============ ===========
</TABLE>
See accompanying notes to financial statements.
B-14
<PAGE> 25
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARKET VALUE
-------------------------
SHARES OR PERCENTAGE
PRINCIPAL OF NET
AMOUNT AMOUNT ASSETS
---------- ------------ ----------
<S> <C> <C> <C>
Common stocks:
Chemicals and Allied Products:
Avery-Dennison Corporation......................... 84,400 $ 3,776,900
Pfizer, Inc........................................ 43,800 3,265,816
Johnson & Johnson.................................. 44,000 2,898,500
Novartis AG-ADR**.................................. 23,000 1,863,000
Procter & Gamble Company........................... 22,600 1,803,751
Merck & Company, Inc............................... 11,700 1,243,125
American Home Products Corporation................. 16,000 1,224,000
Abbott Laboratories................................ 16,800 1,101,442
Eli Lilly and Company.............................. 12,800 891,200
DuPont............................................. 14,400 864,893
------------
18,932,627 13.81%
------------
Business Services:
Interpublic Group of Companies..................... 66,450 3,310,007
Cisco Systems, Inc.*............................... 59,250 3,303,188
Automatic Data Processing.......................... 34,000 2,086,750
Computer Associates................................ 25,800 1,364,175
Reuters Holdings PLC ADR**......................... 13,000 861,250
Microsoft Corporation*............................. 5,500 710,875
------------
11,636,245 8.49%
------------
Depository Institutions:
Citicorp........................................... 16,500 2,086,210
MBNA............................................... 67,500 1,843,560
BankAmerica Corporation............................ 20,000 1,460,000
CoreStates Financial Corporation................... 18,200 1,457,128
Nationsbank Corporation............................ 19,400 1,179,753
J.P. Morgan & Company.............................. 10,000 1,128,750
Wachovia Corporation............................... 13,500 1,095,188
Regions Financial Corporation...................... 17,600 742,491
------------
10,993,080 8.02%
------------
Insurance Carriers:
American International Group....................... 39,150 4,257,562
AFLAC, Inc......................................... 59,775 3,055,997
Allstate Corporation............................... 21,000 1,908,375
------------
9,221,934 6.73%
------------
</TABLE>
See accompanying notes to financial statements.
B-15
<PAGE> 26
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARKET VALUE
-------------------------
SHARES OR PERCENTAGE
PRINCIPAL OF NET
AMOUNT AMOUNT ASSETS
---------- ------------ ----------
<S> <C> <C> <C>
Petroleum and Coal Products:
Royal Dutch Petroleum.............................. 61,200 3,316,244
Texaco, Inc........................................ 55,200 3,001,500
Exxon Corporation.................................. 36,000 2,202,732
------------
8,520,476 6.22%
------------
Electronic and Other Electric Equipment:
General Electric Company........................... 72,500 $ 5,319,687
Intel Corporation.................................. 41,600 2,922,400
------------
8,242,087 6.01%
------------
Food and Kindred Products:
The Coca-Cola Company.............................. 49,200 3,277,950
Sara Lee Corporation............................... 44,000 2,477,728
Ralston Purina..................................... 23,900 2,221,194
------------
7,976,872 5.82%
------------
Holding and Other Investment Offices:
Wells Fargo & Company.............................. 7,100 2,410,003
First Industrial Realty Trust...................... 28,000 1,011,500
Mack-Cali Realty Corporation....................... 20,400 836,400
Meditrust.......................................... 18,744 686,499
Felcor Suite Hotels, Inc........................... 17,300 614,150
Federal Realty Investment Trust.................... 22,300 574,225
------------
6,132,777 4.47%
------------
Industrial Machinery and Equipment:
Hewlett-Packard Company............................ 36,600 2,287,500
International Business Machines Corporation........ 14,000 1,463,868
Baker Hughes, Inc.................................. 32,200 1,404,725
United Technologies................................ 10,000 728,120
------------
5,884,213 4.29%
------------
Communications:
Bell Atlantic Corporation.......................... 16,896 1,537,536
SBC Communications, Inc............................ 18,800 1,377,100
Ameritech.......................................... 16,700 1,344,350
Bellsouth Corporation.............................. 15,000 844,680
------------
5,103,666 3.72%
------------
Electric, Gas and Sanitary Services:
GTE................................................ 34,800 1,818,300
Teco Energy, Inc................................... 37,500 1,054,688
Duke Energy Company................................ 16,000 886,000
Texas Utilities.................................... 19,500 810,459
------------
4,569,447 3.33%
------------
</TABLE>
See accompanying notes to financial statements.
B-16
<PAGE> 27
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARKET VALUE
-------------------------
SHARES OR PERCENTAGE
PRINCIPAL OF NET
AMOUNT AMOUNT ASSETS
---------- ------------ ----------
<S> <C> <C> <C>
Oil & Gas Extraction:
Diamond Offshore*.................................. 47,400 2,281,125
Schlumbereger, LTD................................. 26,000 2,093,000
------------
4,374,125 3.19%
------------
Food Stores:
Safeway, Inc.*..................................... 68,600 4,338,950
------------
4,338,950 3.16%
------------
Personal Services:
Loewen Group, Inc.**............................... 71,000 $ 1,832,652
H & R Block........................................ 34,300 1,537,052
------------
3,369,704 2.46%
------------
Railroad Transportation:
Burlington Northern/Santa Fe....................... 31,000 2,881,047
------------
2,881,047 2.10%
------------
Miscellaneous Retail:
Costco, Inc.*...................................... 57,700 2,574,862
------------
2,574,862 1.88%
------------
Transportation Equipment:
Allied Signal, Inc................................. 30,000 1,168,110
Chrysler Corporation............................... 24,000 844,488
------------
2,012,598 1.47%
------------
Non-Depository Institutions:
Federal National Mortgage Association.............. 34,400 1,962,933
------------
1,962,933 1.43%
------------
Motion Pictures:
Disney (Walt) Company.............................. 19,200 1,901,990
------------
1,901,990 1.39%
------------
Radio, TV and Computer Stores:
Circuit City Stores................................ 53,000 1,884,786
------------
1,884,786 1.37%
------------
Miscellaneous Manufacturing Industries:
Tiffany & Company.................................. 47,200 1,702,126
------------
1,702,126 1.24%
------------
Hotels and Other Lodging Places:
Mirage Resorts, Inc.*.............................. 61,800 1,405,950
------------
1,405,950 1.03%
------------
</TABLE>
See accompanying notes to financial statements.
B-17
<PAGE> 28
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARKET VALUE
-------------------------
SHARES OR PERCENTAGE
PRINCIPAL OF NET
AMOUNT AMOUNT ASSETS
---------- ------------ ----------
<S> <C> <C> <C>
Fabricated Metal Products:
The Gillette Company............................... 13,800 1,386,031
------------
1,386,031 1.01%
------------
Primary Metal Industries:
Englehard Corporation.............................. 58,000 1,007,750
------------
1,007,750 0.73%
------------
Health Services:
Phycor, Inc........................................ 19,000 513,000
MedPartners, Inc.*................................. 21,000 469,875
------------
982,875 0.72%
------------
Eating and Drinking Places:
McDonald's Corporation............................. 16,000 $ 764,000
------------
764,000 0.56%
------------
General Merchandise:
Wal-Mart Corporation............................... 16,200 638,879
------------
638,879 0.47%
------------
Building Materials and Gardening Supplies:
Home Depot, Inc.................................... 10,500 618,188
------------
618,188 0.45%
------------
Paper & Allied Products:
Kimberly Clark Corporation......................... 3,300 162,730
------------
162,730 0.12%
------------ ------
Total common stocks (cost $79,916,211)........ 131,182,948 95.69%
------------ ------
Short-term investments:
Associates Corporation of North America Master Note
Fltg (5.57% at December 31, 1997).................. $4,395,744 4,395,744
U.S. Treasury Bill (5.2% maturing December 10,
1998).............................................. $ 500,000 475,083
U.S. Treasury Bill (5.2% maturing June 11, 1998)...... $ 500,000 488,329
------------
Total short-term investments.................. 5,359,156 3.91%
------------ ------
Total investments (cost $85,275,367).......... 136,542,104 99.60%
Other assets and liabilities, net............. 548,447 0.40%
------------ ------
Total net assets.............................. $137,090,551 100.00%
============ ======
</TABLE>
- ---------------
* Presently not producing dividend income
** Foreign investments
See accompanying notes to financial statements.
B-18
<PAGE> 29
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PER ACCUMULATION UNIT INCOME AND CAPITAL CHANGES
--------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Investment income and expenses:
Investment income.............. $ .3284 $ .2817 $ .2163 $ .2105 $ .2113
Operating expenses............. .2576 .1882 .1364 .1193 .1180
---------- ---------- ---------- ---------- ----------
Net investment
income............... .0708 .0935 .0799 .0912 .0933
Capital changes:
Net realized and unrealized
gains (losses) from
securities.................. 4.0535 3.0468 3.0251 (.7066) .5074
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in
accumulation unit value..... 4.1243 3.1403 3.1050 (.6154) .6007
Accumulation unit value,
beginning of period......... 15.3389 12.1986 9.0936 9.7090 9.1083
---------- ---------- ---------- ---------- ----------
Accumulation unit
value, end of
period............... $ 19.4632 $ 15.3389 $ 12.1986 $ 9.0936 $ 9.7090
========== ========== ========== ========== ==========
Number of accumulation units
outstanding, end of period..... 7,043,575 6,443,056 5,996,795 5,615,645 5,113,999
========== ========== ========== ========== ==========
Ratios:
Ratio of expenses to average
net assets.................. 1.4603% 1.3777% 1.2880% 1.2826% 1.2783%
Ratio of net investment income
to average net assets....... .4042% .6850% .7542% .9797% 1.0110%
Portfolio turnover rate........ 26.6% 36.9% 66.1% 43.5% 51.2%
Average commission rate paid... $ .0619 $ .0636 $ .0551
</TABLE>
See accompanying notes to financial statements.
B-19
<PAGE> 30
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
American Fidelity Variable Annuity Fund A (the Fund) is a separate account
of American Fidelity Assurance Company (AFA). The Fund is registered as an
open-end, diversified management investment company under the Investment Company
Act of 1940, as amended. The purpose of the Fund is to provide a means of
investing for supplemental retirement income. Shares are only available in
connection with variable annuity policies issued by AFA.
The Fund's investment objectives are primarily long-term growth of capital
and secondarily the production of income. In order to achieve these investment
objectives, the Fund normally invests in a diversified portfolio consisting
primarily of common stocks.
Investments
Investments in corporate stocks are valued by Merrill Lynch Pricing
Service. Securities for which published quotations are not available are valued
at the quotation obtained from the Fund's primary broker. Short-term investments
are valued on the basis of amortized cost, which approximates market, and
include all investments with maturities less than one year.
The Fund's portfolio of investments is diversified such that not more than
five percent (5%) of the value of the total assets of the Fund are invested in
any one issuer and not more than twenty-five percent (25%) are invested in any
one industry or group of industries. Management does not believe the Fund has
any significant concentrations of credit risk.
Realized gains and losses from investment transactions and unrealized
appreciation or depreciation of investments are determined on the
specific-identification basis.
Dividend income is recorded on the ex-dividend date, and interest income is
recorded on the daily accrual basis. For certain securities in which the exact
dividend is unknown on the ex-dividend date, such as stock in foreign companies,
an estimate of the dividend is recorded on the ex-dividend date, and any
necessary adjustments are added to the Fund's investment income on the date the
dividend is received by the Fund. Any taxes withheld by foreign governments or
any foreign exchange expenses (gains or losses) incurred by investment in such
securities are paid by the Fund. The Fund does not expect these costs to be
significant.
Income Taxes
The Fund is not taxed separately because the operations of the Fund are
part of the total operations of AFA. AFA files its federal income tax returns
under sections of the Internal Revenue Code applicable to life insurance
companies. The Fund's net increase in net assets from operations is not expected
to result in taxable income under present regulations. The Fund will not be
taxed as a "Regulated Investment Company" under Subchapter "M" of the Internal
Revenue Code.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increase and decrease in net assets from
operations during the period. Actual results could differ from those estimates.
B-20
<PAGE> 31
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) INVESTMENTS
The aggregate dollar amount of investment purchases (exclusive of
short-term investments) was $39,825,220 and $34,924,178 for the years ended
December 31, 1997 and 1996, respectively. At December 31, 1997, net unrealized
appreciation on investments of $51,266,737, was composed of gross appreciation
of $52,797,920 and gross depreciation of $1,531,183.
(3) VARIABLE ANNUITY CONTRACTS
Net purchase payments received represent gross payments less deductions of
$803,592 and $578,837 for the years ended December 31, 1997 and 1996,
respectively. The deductions are comprised of sales and administrative expenses,
minimum death benefits, administrative charges, and certificate issuance fees.
These deductions were paid to AFA.
AFA acts as the Fund's investment manager and assumes certain mortality and
expense risks under the variable annuity contracts. Investment management fees
are equal to .0013698% of the Fund's daily net assets (.5% per annum). Mortality
and expense guaranty fees are equal to .0026308% of the Fund's daily net assets
(.96025% per annum). Such fees were paid to AFA.
During the accumulation period, contract owners may partially or totally
withdraw from the Fund by surrendering a portion or all of their accumulation
units. The Internal Revenue Code may limit certain withdrawals based upon age,
disability, and other factors. When contract owners withdraw, they receive the
current value of their accumulation units.
(4) ANNUITY RESERVES
Annuity reserves are computed for currently payable contracts according to
the Progressive Annuity Mortality Table. The assumed interest rate is 3.5
percent unless the annuitant elects otherwise, in which case the rate may vary
from zero to 5 percent, as regulated by the laws of the respective states.
Charges to annuity reserves for mortality and expense risks experience are
reimbursed to AFA if the reserves required are less than originally estimated.
If additional reserves are required, AFA reimburses the Fund. At December 31,
1997 and 1996, there were no contract owners who had elected the variable
annuity method of payout. Accordingly, the Fund held no annuity reserves at
December 31, 1997 and 1996.
(5) SUBSEQUENT EVENT
In 1998, AFA and the Fund intend to implement a reorganization plan whereby
the Fund will become a unit investment trust and exchange its assets solely for
shares of a new management investment company formed by AFA. The reorganization
is subject to approval by contract owners of the Fund and to regulatory
approvals.
B-21
<PAGE> 32
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1998 AND DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
Cash........................................................ $ 436,290 $ 327,520
Investments, at market value (Cost $99,940,636 and
$85,275,367 at June 30, 1998 and December 31, 1997,
respectively)............................................. 168,710,314 136,542,104
Accrued interest and dividends.............................. 167,157 220,927
Accounts Receivable for Securities Sold..................... 0 0
------------ ------------
Total Assets...................................... 169,313,761 137,090,551
============ ============
LIABILITIES
Accounts Payable for Securities Purchased................... 1,527,718 0
Accounts Payable............................................ 0 0
------------ ------------
Net Assets.................................................. $167,786,043 $137,090,551
============ ============
Accumulation Units Outstanding.............................. 7,393,375 7,043,575
============ ============
Net Asset Value Per Unit.................................... $ 22.6941 $ 19.4632
</TABLE>
See accompanying notes to financial statements.
B-22
<PAGE> 33
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Investment Income:
Income:
Dividends.............................................. $ 1,041,793 $ 971,185
Interest............................................... 125,870 123,773
----------- -----------
1,167,663 1,094,958
----------- -----------
Expenses:
Mortality and expense guaranty fees (note 3).............. 730,347 516,526
Investment management fee (note 3)........................ 380,389 269,024
----------- -----------
1,110,736 785,550
----------- -----------
Net Investment Income............................. 56,927 309,408
----------- -----------
Realized gains on investments:
Proceeds from sales....................................... 25,138,032 14,337,480
Costs of securities sold.................................. 19,491,914 10,485,430
----------- -----------
Net realized gains................................ 5,646,118 3,852,050
----------- -----------
Unrealized appreciation on investments:
End of year............................................... 68,769,678 44,749,689
Beginning of year......................................... 51,266,737 32,140,242
----------- -----------
Increase in unrealized appreciation............... 17,502,941 12,609,447
----------- -----------
Net increase in net assets resulting from
operations...................................... $23,205,986 $16,770,905
=========== ===========
</TABLE>
See accompanying notes to financial statements.
B-23
<PAGE> 34
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Increase in net assets from operations:
Net investment income..................................... $ 56,927 $ 309,408
Net realized gain on investments.......................... 5,646,118 3,852,050
Increase in unrealized appreciation of investments........ 17,502,941 12,609,447
------------ ------------
Net increase in net assets resulting from
operations...................................... 23,205,986 16,770,905
------------ ------------
Changes from principal transactions:
Net purchase payments received (note 3)................... 13,776,632 9,609,924
Withdrawal of funds....................................... (6,287,125) (4,052,418)
------------ ------------
Increase in net assets derived from principal
transactions.................................... 7,489,507 5,557,506
------------ ------------
Increase in net assets............................ 30,695,493 22,328,411
Net Assets:
Beginning of year......................................... 137,090,551 98,829,399
------------ ------------
End of year............................................... $167,786,044 $121,157,810
============ ============
Accumulation units:
Outstanding, beginning of year............................ 7,043,575 6,443,056
Increase for payments received......................... 646,189 585,521
Decrease for withdrawal of funds....................... (296,389) (246,432)
------------ ------------
Outstanding, end of year.................................. 7,393,375 6,782,145
============ ============
</TABLE>
See accompanying notes to financial statements.
B-24
<PAGE> 35
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
MARKET VALUE
-------------------------
SHARES OR PERCENTAGE
PRINCIPAL OF NET
AMOUNT AMOUNT ASSETS
--------- ------------ ----------
<S> <C> <C> <C>
COMMON STOCKS:
CHEMICALS & ALLIED PRODUCTS
Pfizer, Inc......................................... 43,800 $ 4,760,491
Avery-Dennison Corporation.......................... 84,400 4,536,500
Johnson & Johnson................................... 44,000 3,245,000
Procter & Gamble Company............................ 22,600 2,058,001
Novartis AG-ADR**................................... 24,700 2,047,012
Bristol-Meyers Squibb Company....................... 14,200 1,632,105
Merck & Company, Inc................................ 11,700 1,564,875
Abbott Laboratories................................. 33,600 1,373,400
Dupont.............................................. 14,400 1,074,600
Eli Lilly and Company............................... 12,800 845,594
------------
23,137,578 13.79%
ELECTRONIC & OTHER ELECTRIC EQUIPMENT
General Electric Company............................ 72,500 6,597,500
Lucent Technologies................................. 39,400 3,277,568
Intel Corporation................................... 43,600 3,231,850
Philips Electronics NV.............................. 30,000 2,550,000
------------
15,656,918 9.33%
BUSINESS SERVICES
Cisco Systems, Inc.*................................ 59,250 5,454,674
Microsoft Corporation*.............................. 38,400 4,161,600
Automatic Data Processing........................... 34,000 2,477,750
Interpublic Group of Companies...................... 25,500 1,547,518
Computer Associates................................. 25,800 1,433,500
------------
15,075,042 8.98%
DEPOSITORY INSTITUTIONS
MBNA................................................ 67,500 2,227,500
Chase Manhattan Bank................................ 27,600 2,083,800
Bank America Corporation............................ 20,000 1,728,740
First Union Corporation............................. 29,484 1,717,443
Wachovia Corporation................................ 20,000 1,690,000
Nationsbank Corporation............................. 19,400 1,484,100
J. P. Morgan & Company.............................. 10,000 1,171,250
Regions Financial Corporation....................... 17,600 722,691
------------
12,825,524 7.64%
</TABLE>
See accompanying notes to financial statements.
B-25
<PAGE> 36
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARKET VALUE
-------------------------
SHARES OR PERCENTAGE
PRINCIPAL OF NET
AMOUNT AMOUNT ASSETS
--------- ------------ ----------
<S> <C> <C> <C>
PETROLEUM & COAL PRODUCTS
Royal Dutch Petroleum............................... 61,200 3,354,494
Texaco, Inc......................................... 55,200 3,294,722
Exxon Corporation................................... 36,000 2,567,232
Chevron Corporation................................. 25,000 2,076,550
------------
11,292,998 6.73%
INSURANCE CARRIERS
American International Group........................ 39,150 $ 5,715,900
AFLAC, Inc.......................................... 70,200 2,127,902
Allstate Corporation................................ 21,000 1,922,802
------------
9,766,604 5.82%
ELECTRIC, GAS & SANITARY SERVICES
Williams Companies, Inc............................. 62,900 2,122,875
GTE................................................. 34,800 1,935,750
Teco Energy, Inc.................................... 55,500 1,488,066
Texas Utilities..................................... 34,500 1,436,063
Duke Energy Company................................. 16,000 948,000
------------
7,930,754 4.73%
INDUSTRIAL MACHINERY & EQUIPMENT
United Technologies................................. 30,500 2,821,250
Applied Materials*.................................. 62,000 1,829,000
International Business Machines Corporation......... 14,000 1,607,368
Hewlett-Packard Company............................. 16,400 981,950
------------
7,239,568 4.31%
HOLDING & OTHER INVESTMENT OFFICES
Wells Fargo & Company............................... 7,100 2,619,900
First Industrial Realty Trust....................... 28,000 890,736
Mack-Cali Realty Corporation........................ 25,400 873,125
Felcor Suite Hotels, Inc............................ 23,300 731,038
Simon Debartolo Group, Inc.......................... 20,000 650,000
Meditrust........................................... 18,744 523,651
------------
6,288,450 3.75%
FOOD & KINDRED PRODUCTS
The Coca-Cola Company............................... 49,200 4,206,600
Sara Lee Corporation................................ 36,500 2,041,701
------------
6,248,301 3.72%
FOOD STORES
Safeway, Inc.*...................................... 137,200 5,582,256 3.33%
</TABLE>
See accompanying notes to financial statements.
B-26
<PAGE> 37
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARKET VALUE
-------------------------
SHARES OR PERCENTAGE
PRINCIPAL OF NET
AMOUNT AMOUNT ASSETS
--------- ------------ ----------
<S> <C> <C> <C>
COMMUNICATIONS
SBC Communications, Inc............................. 37,600 1,504,000
Ameritech........................................... 33,400 1,498,825
Bell Atlantic Corporation........................... 31,792 1,450,510
Bellsouth Corporation............................... 15,000 1,006,875
------------
5,460,210 3.25%
OIL & GAS EXTRACTION
Schlumberger, LTD................................... 27,500 1,878,580
Diamond Offshore.................................... 44,400 1,776,000
R & B Falcon Company................................ 71,000 1,606,375
------------
5,260,955 3.14%
NON-DEPOSITORY INSTITUTIONS
American Express Company............................ 19,600 $ 2,234,400
Federal National Mortgage Association............... 34,400 2,089,800
------------
4,324,200 2.58%
MISCELLANEOUS RETAIL
Costco Company, Inc.*............................... 57,700 3,638,677 2.17%
GENERAL MERCHANDISE
Wal-Mart Corporation................................ 29,700 1,804,275
Sears Roebuck & Company............................. 16,800 1,025,842
------------
2,830,117 1.69%
TRANSPORTATION EQUIPMENT
Chrysler Corporation................................ 24,000 1,353,000
Allied Signal, Inc.................................. 30,000 1,331,250
------------
2,684,250 1.60%
RADIO, TV & COMPUTER STORES
Circuit City Stores................................. 53,000 2,484,375 1.48%
MISCELLANEOUS MANUFACTURING INDUSTRIES
Tiffany & Company................................... 47,200 2,265,600 1.35%
MOTION PICTURES
Disney (Walt) Company............................... 19,200 2,017,190 1.20%
WHOLESALE TRADE-NONDURABLE GOODS
Unilever NV**....................................... 25,000 1,973,425 1.18%
BUILDING MATERIALS & GARDENING SUPPLIES
Home Depot, Inc..................................... 23,000 1,910,426 1.14%
FABRICATED METAL PRODUCTS
The Gillette Company................................ 30,500 1,728,954 1.03%
PERSONAL SERVICES
H & R Block......................................... 39,300 1,655,513 0.99%
TRANSPORTATION BY AIR
Delta Airlines, Inc................................. 12,000 1,551,000 0.92%
</TABLE>
See accompanying notes to financial statements.
B-27
<PAGE> 38
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARKET VALUE
-------------------------
SHARES OR PERCENTAGE
PRINCIPAL OF NET
AMOUNT AMOUNT ASSETS
--------- ------------ ----------
<S> <C> <C> <C>
EATING & DRINKING PLACES
McDonald's Corporation.............................. 16,000 1,104,000
Norrell Corporation................................. 20,000 398,740
------------
1,502,740 0.90%
PRIMARY METAL INDUSTRIES
Englehard Corporation............................... 58,000 1,174,500 0.70%
HEALTH SERVICES
Phycor, Inc.*....................................... 39,000 645,918 0.38%
------------
Total Common Stocks (Cost $95,382,365)......... 164,152,043 97.83%
------------
SHORT-TERM INVESTMENTS:
Associates Corporation of North America
Master Note Fltg (5.57% @ 06/30/98)............... 3,583,239 $ 3,583,239
U.S. Treasury Bill (5.2% maturing Dec. 10, 1998).... 500,000 488,061
U.S. Treasury Bill (4.9% maturing Jan. 7, 1999)..... 500,000 486,971
--------- ------------
Total Short-Term Investments................... 4,558,271 2.72%
------------
TOTAL INVESTMENTS: (COST $99,940,636).......... $168,710,314 100.55%
Other assets and liabilities, net.............. $ (924,271) -0.55%
------------
Total net assets............................... $167,786,044 100.00%
============
</TABLE>
- ---------------
* Presently not producing dividend income.
** Foreign Investments
See accompanying notes to financial statements.
B-28
<PAGE> 39
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
PER ACCUMULATION UNIT INCOME AND CAPITAL CHANGES
-----------------------------------------------------------------
SIX MONTHS YEARS ENDED DECEMBER 31,
ENDED -------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994
------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Investment income and expenses:
Investment Income............. $ 0.162 $ 0.328 $ 0.282 $ 0.216 $ 0.210
Operating expenses............ 0.154 0.257 0.188 0.136 0.119
---------- ---------- ---------- ---------- ----------
Net investment
income.............. 0.008 0.071 0.094 0.080 0.091
Capital changes:
Net realized and unrealized
gains (losses) from
securities................. 3.223 4.053 3.046 3.025 (0.706)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in
accumulation unit value.... 3.231 4.124 3.140 3.105 (0.615)
Accumulation unit value,
beginning of period........ 19.463 15.339 12.199 9.094 9.709
---------- ---------- ---------- ---------- ----------
Accumulation unit value, end of
period........................ $ 22.694 $ 19.463 $ 15.339 $ 12.199 $ 9.094
========== ========== ========== ========== ==========
Number of accumulation units
outstanding, end of period.... 7,393,375 7,043,575 6,443,056 5,996,795 5,113,999
========== ========== ========== ========== ==========
Ratios
Ratio of expenses to average
net assets................. 0.72% 1.46% 1.38% 1.29% 1.28%
Ratio of net investment income
to average net assets...... 0.37% 0.40% 0.69% 0.75% 0.98%
Portfolio turnover rate.... 13.10% 26.60% 36.90% 66.10% 43.50%
Average commission rate
paid..................... $ .0627 $ .0619 $ .0636 $ .0551
</TABLE>
See accompanying notes to financial statements.
B-29
<PAGE> 40
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
American Fidelity Variable Annuity Fund A (the Fund) is a separate account
of American Fidelity Assurance Company (AFA). The Fund is registered as an
open-end, diversified management investment company under the Investment Company
Act of 1940, as amended. The purpose of the Fund is to provide a means of
investing for supplemental retirement income. Shares are only available in
connection with variable annuity policies issued by AFA.
The Fund's investment objectives are primarily long-term growth of capital
and secondarily the production of income. In order to achieve these investment
objectives, the Fund normally invests in a diversified portfolio consisting
primarily of common stocks.
Investments
Investments in corporate stocks are valued by Merrill Lynch Pricing
Service. Securities for which published quotations are not available are valued
at the quotation obtained from the Fund's primary broker. Short-term investments
are valued on the basis of amortized cost, which approximates market, and
include all investments with maturities less than one year.
The Fund's portfolio of investments is diversified such that not more than
five percent (5%) of the value of the total assets of the Fund are invested in
any one issuer and not more than twenty-five percent (25%) are invested in any
one industry or group of industries. Management does not believe the Fund has
any significant concentrations of credit risk.
Realized gains and losses from investment transactions and unrealized
appreciation or depreciation of investments are determined on the average cost
basis.
Dividend income is recorded on the ex-dividend date, and interest income is
recorded on the daily accrual basis. For certain securities in which the exact
dividend is unknown on the ex-dividend date, such as stock in foreign companies,
an estimate of the dividend is recorded on the ex-dividend date, and any
necessary adjustments are added to the Fund's investment income on the date the
dividend is received by the Fund. Any taxes withheld by foreign governments or
any foreign exchange expenses (gains or losses) incurred by investment in such
securities are paid by the Fund. The Fund does not expect these costs to be
significant.
Income Taxes
The Fund is not taxed separately because the operations of the Fund are
part of the total operations of AFA. AFA files its federal income tax returns
under sections of the Internal Revenue Code applicable to life insurance
companies. The Fund's net increase in net assets from operations is not expected
to result in taxable income under present regulations. The Fund will not be
taxed as a "Regulated Investment Company" under Subchapter "M" of the Internal
Revenue Code.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increase and decrease in net assets from
operations during the period. Actual results could differ from those estimates.
B-30
<PAGE> 41
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) INVESTMENTS
The aggregate dollar amount of investment purchases (exclusive of
short-term investments) was $34,958,068 and $19,642,622 for the six months ended
June 30, 1998 and 1997, respectively. At June 30, 1998, net unrealized
appreciation on investments of $68,769,678, was composed of gross appreciation
of $69,791,836 and gross depreciation of $1,022,158.
(3) VARIABLE ANNUITY CONTRACTS
Net purchase payments received represent gross payments less deductions of
$513,252 and $364,642 for the six months ended June 30, 1998 and 1997,
respectively. The deductions are comprised of sales and administrative expenses,
minimum death benefits, administrative charges, and certificate issuance fees.
These deductions were paid to AFA.
AFA acts as the Fund's investment manager and assumes certain mortality and
expense risks under the variable annuity contracts. Investment management fees
are equal to .0013698% of the Fund's daily net assets (.5% per annum). Mortality
and expense guaranty fees are equal to .0026308% of the Fund's daily net assets
(.96025% per annum). Such fees were paid to AFA.
During the accumulation period, contract owners may partially or totally
withdraw from the Fund by surrendering a portion or all of their accumulation
units. The Internal Revenue Code may limit certain withdrawals based upon age,
disability, and other factors. When contract owners withdraw, they receive the
current value of their accumulation units.
(4) ANNUITY RESERVES
Annuity reserves are computed for currently payable contracts according to
the Progressive Annuity Mortality Table. The assumed interest rate is 3.5
percent unless the annuitant elects otherwise, in which case the rate may vary
from zero to 5 percent, as regulated by the laws of the respective states.
Charges to annuity reserves for mortality and expense risks experience are
reimbursed to AFA if the reserves required are less than originally estimated.
If additional reserves are required, AFA reimburses the Fund. At June 30, 1998
and December 31, 1997, there were no contract owners who had elected the
variable annuity method of payout. Accordingly, the Fund held no annuity
reserves at June 30, 1998 and December 31, 1997.
(5) SUBSEQUENT EVENT
On January 1, 1999, the Fund was converted to a unit investment trust
separate account and transferred its investment portfolio to American Fidelity
Dual Strategy Fund, Inc., a new management investment company formed by AFA, in
exchange for shares of American Fidelity Dual Strategy Fund, Inc.
B-31
