1999
Annual
Report
American Fidelity
Dual Strategy Fund, Inc.
January, 2000
Dear Participant:
The U.S. equity markets rallied sharply to new highs during
the fourth quarter, capping off a record five-year advance.
An ideal combination of rapid economic expansion, double-
digit corporate profit growth and restrained inflation
helped to drive all the major market indices to new record
highs. American Fidelity Dual Strategy Fund, Inc. reported a
net asset value increase of 18.5% for the year ended
December 31, 1999.
U.S. economic growth rebounded sharply in the second half,
led by strong consumer and business spending. We expect real
Gross Domestic Product for 1999 to be just shy of 1998's
robust 4.3% growth rate due to strong holiday spending, Y2K
inventory building and increased spending on capital goods.
As we begin the new year, we expect the pace of economic
growth to slow from the unsustainable levels of the past few
years. Higher interest rates will temper housing and capital
goods spending while consumer spending will be challenged by
the fact that income growth has not kept pace with spending
growth.
Inflation rates, as measured by the Consumer Price Index
("CPI"), rose at a 2.7% year-over-year rate for 1999 versus
1.6% at the end of 1998, primarily due to the sharp rise in
energy costs. However, excluding the price increases in oil,
"core" inflation actually declined in 1999 to 1.9%. This is
the slowest rate of advance in 34 years. Stronger than
expected economic growth and tight labor markets have failed
to ignite a significant increase in the rate of inflation,
largely due to rising productivity, a stronger dollar and
ample global manufacturing capacity. We expect the overall
CPI in 2000 to remain relatively unchanged versus 1999
levels, as a rise in core inflation rates is partially
offset by softer energy prices.
The yield on the 30-year U.S. Treasury Bond continued to
move higher during the fourth quarter, ending the year at
6.48% versus 5.08% at the end of 1998. The Federal Reserve
pushed short-term interest rates higher during the year with
three separate .25% increases of the Federal Funds rate. We
believe the Federal Reserve will focus future policy
decisions largely on how well the tight labor markets react
to continued strong economic growth, and we would not be
surprised by a further tightening in short-term rates in the
first half of the year. However, we believe long-term
interest rates could decrease over the latter part of the
first quarter as economic growth shows signs of moderating.
During the second half of the year, we expect rates to trend
somewhat higher, reflecting a firming global recovery and a
moderate rise in inflationary pressures.
The exceptionally strong fourth quarter and year for the
technology laden NASDAQ Composite masked a generally weak
overall tone for the balance of the market. This was
evidenced by the fact that over 50% of the stocks in the S&P
500 were down for the year. While continued narrow market
breadth raises some increased concerns that stock prices
could correct over the near-term, we expect broader market
participation over the next year as earnings growth spreads
to other areas of the economy.
As we enter 2000, we believe the prospects for the U.S.
equity markets remain favorable over the longer term. Strong
economic growth coupled with low inflation have led to
record levels of real returns on equity and expanding profit
margins for corporate America. Our major concerns for the
new year arise from potentially higher interest rates, the
uncertain political climate and the valuation differential
between technology and other sectors of the market.
If you have any questions about your account, please let us
know.
Sincerely,
JOHN W. REX
John W. Rex, President
American Fidelity Dual Strategy
Fund, Inc.
<PAGE>
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1999
Market Value
Shares or -----------------------
Principal Percentage of
COMMON STOCKS: Amount Amount Net Assets
- ----------------------------------------------------------------------------
Business Services:
Automatic Data Processing 68,000 3,663,500
Computer Associates International,
Inc. 25,800 1,804,375
Computer Sciences Corporation* 36,000 3,406,500
Compuware Corporation* 30,000 1,117,500
Interpublic Group of Companies,
Inc. 112,000 6,460,944
Microsoft Corporation* 81,800 9,550,150
Sungard Data Systems* 45,000 1,068,750
Sterling Commerce, Inc. 30,000 1,021,860
WPP Group PLC** 71,000 5,901,875
----------
33,995,454 14.83%
Electronic & Other Electric Equipment:
General Electric Company 61,600 9,532,600
Intel Corporation 90,400 7,441,005
Koninkiijke Philips Electronics,
N.V.** 34,040 4,595,400
Lucent Technologies 67,000 5,012,404
Nokia Corporation** 12,000 2,280,000
----------
28,861,409 12.59%
Chemicals & Allied Products:
Abbott Laboratories 33,600 1,220,083
Avery Dennison Corporation 55,800 4,066,425
Bristol-Myers Squibb Company 76,800 4,929,562
Eil Lilly and Company 63,800 4,242,700
Merck & Company Inc. 23,400 1,569,250
Pfizer, Inc. 43,800 1,420,741
----------
17,448,761 7.61%
Petroleum Refining & Related Industries:
Chevron Corporation 31,600 2,737,350
Coastal Corporation 46,000 1,630,102
Conoco, Inc.-Class B 38,688 962,364
Exxon Mobil Corporation 27,723 2,233,420
Royal Dutch Petroleum** 68,200 4,121,803
Texaco, Inc. 75,700 4,111,418
----------
15,769,457 6.89%
Insurance Carriers:
AFLAC, Inc. 84,800 4,001,458
American General Corporation 42,000 3,186,750
American International Group 36,562 3,953,266
MGIC Investment Corporation 43,000 2,588,041
----------
13,729,515 5.99%
Depository Institutions:
Bank of America Corporation 62,032 3,113,200
The Chase Manhattan Corporation 36,300 2,820,038
Citigroup, Inc. 61,000 3,389,282
First Union Corporation 29,484 967,429
J.P. Morgan & Company, Inc. 10,000 1,266,250
Regions Financial Corporation 17,600 442,200
Wachovia Corporation 20,000 1,360,000
----------
13,358,399 5.83%
Industrial Machinery & Equipment:
Cisco Systems, Inc.* 52,400 5,613,350
Hewlett-Packard Company 16,400 1,868,567
United Technologies Corporation 76,000 4,940,000
----------
12,421,917 5.42%
General Merchandise Stores:
Dayton Hudson Corporation 108,000 7,931,196
Dollar General 47,500 1,080,625
----------
9,011,821 3.93%
Communications:
Bell Atlantic Corporation 31,792 1,957,179
GTE Corporation 34,800 2,455,558
MCI Worldcom, Inc.* 28,500 1,512,267
SBC Communications Inc. 59,182 2,885,122
----------
8,810,126 3.84%
Non-Depository Institutions:
American Express Company 19,600 3,258,500
FNMA 34,400 2,147,833
MBNA Corporation 87,750 2,391,187
----------
7,797,520 3.40%
Miscellaneous Manufacturing Industries:
Tiffany & Company 56,400 5,033,700
Tyco International, Ltd.** 58,000 2,254,750
----------
7,288,450 3.18%
Food & Kindred Products:
Anheuser-Busch Companies, Inc. 31,000 2,197,125
The Coca-Cola Company 32,800 1,910,600
Pepsico, Inc. 73,000 2,573,250
----------
6,680,975 2.91%
Paper & Allied Products:
Kimberly-Clark Corporation 45,000 2,936,250
Willamette Industries 47,000 2,182,539
----------
5,118,789 2.23%
Electric, Gas, Sanitary Services:
Duke Energy Company 37,000 1,854,625
Northern States Power Company 45,000 877,500
Teco Energy, Inc. 55,500 1,030,191
Texas Utilities Company 34,500 1,226,889
----------
4,989,205 2.18%
Holding Companies and Other Investment Offices:
Archstone Communities Trust 40,000 820,000
Duke-Weeks Realty Corporation 30,000 585,000
First Industrial Realty Trust 35,000 960,295
Mack-Cali Realty Corporation 31,400 818,347
Simon Property Group, Inc. 30,000 688,110
Spieker Properties, Inc. 24,000 874,488
----------
4,746,240 2.07%
Nondurable Goods-Wholesale:
Cardinal Health, Inc. 97,700 1,196,875
Safeway, Inc.* 25,000 3,474,407
----------
4,671,282 2.04%
Transportation Equipment:
Ford Motor Company 28,000 1,496,236
Honeywell International Inc. 53,000 3,057,411
----------
4,553,647 1.99%
Miscellaneous Retail:
Costco Wholesale Corporation* 48,900 4,462,125
----------
4,462,125 1.95%
Durable Goods Wholesale:
Johnson & Johnson 44,000 4,097,500
----------
4,097,500 1.79%
Building Materials, Hardware and Gardening Supplies:
Home Depot, Inc. 54,000 3,702,348
----------
3,702,348 1.61%
Home Furniture and Equipment Store:
Circuit City Stores-Circuit
City Group 56,000 2,523,472
----------
2,523,472 1.10%
Rubber and Miscellaneous Plastic Products:
Sealed Air Corporation 42,000 2,176,104
----------
2,176,104 0.95%
Personal Services:
H & R Block Inc. 39,300 1,719,375
----------
1,719,375 0.75%
Security and Commodity Brokers:
The Charles Schwab Corporation 41,000 1,573,375
----------
1,573,375 0.69%
Eating and Drinking Places:
McDonald's Corporation 32,000 1,289,984
----------
1,289,984 0.56%
Transportation by Air:
Delta Air Lines, Inc. 24,000 1,195,488
----------
1,195,488 0.52%
Oil and Gas Extraction:
Atlantic Richfield Company 13,000 1,124,500
----------
1,124,500 0.49%
Primary Metal Industries:
Engelhard Corporation 58,000 1,094,750
----------
1,094,750 0.48%
-------------------------------------
Total Common Stocks
(Cost-$192,175,615) $3,750,353 $224,238,989 97.82%
-------------------------------------
SHORT-TERM INVESTMENTS:
Associates Corporation of North America
Master Note Fltg (5.01% at 12/31/99) 4,774,032 4,774,032 0
-------------------------------------
Total Short-Term Investments: $4,774,032 2.08%
-------------------------------------
Total Investments: $229,013,021 99.90%
Other Assets and Liabilities, net: $240,391 0.10%
-------------------------------------
Total Net Assets: $229,253,412 100.00%
=====================================
* Presently not producing dividend income
** Foreign Investments
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
-----------------
ASSETS:
Cash $0
Investments at market value
(cost $196,949,647) $229,013,021
Accrued interest and dividends 240,391
-----------
Total Assets: 229,253,412
LIABILITIES:
Total Liabilities: 0
-----------
NET ASSETS $229,253,412
===========
Composition of net assets:
Net capital paid in on shares of capital
stock $194,288,069
Undistributed net investment income 2,012,121
Accumulated net realized gains 889,848
Unrealized appreciation on investments 32,063,374
-----------
Net assets (equivalent to $11.847 per share
based on 19,351,516 shares of capital
stock outstanding) $229,253,412
===========
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1999
----------------------------
INVESTMENT INCOME:
Income:
Dividends $2,783,854
Interest 252,302
----------
3,036,156
Expenses:
Investment management fees (note 2) 1,024,035
----------
NET INVESTMENT INCOME 2,012,121
REALIZED GAIN ON INVESTMENTS:
Proceeds from sales 73,672,594
Cost of securities sold 72,782,746
----------
NET REALIZED GAINS 889,848
UNREALIZED APPRECIATION
ON INVESTMENTS:
End of year 32,063,374
Beginning of year 0
----------
INCREASE IN UNREALIZED APPRECIATION 32,063,374
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $34,965,343
===========
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Years Ended December 31,
------------------------
1999
----
Increase in net assets from operations:
Net investment income $ 2,012,121
Net realized gains on investments 889,848
Increase in unrealized appreciation
of investments 32,063,374
-----------
Net increase in net assets
resulting from operations 34,965,343
-----------
Changes from capital stock transactions:
Shares sold 199,004,011
Shares redeemed 4,715,942
-----------
Increase in net assets derived from
principal transactions 194,288,069
-----------
Increase in net assets 229,253,412
NET ASSETS:
Beginning of year 0
-----------
End of year $229,253,412
===========
CAPITAL STOCK SHARES:
Shares sold 19,791,437
Shares issued in reinvestment of dividends
and distribution 0
Shares redeemed (439,921)
-----------
Outstanding, end of year 19,351,516
===========
See accompanying notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
Per Accumulation Unit Income and Capital Changes
Year Ended December 31,
----------------------------------------
1999 1998* 1997* 1996* 1995*
---- ---- ---- ---- ----
INVESTMENT INCOME AND EXPENSES:
Investment Income $.1603 $.3370 $.3284 $.2817 $.2163
Operating Expenses .0541 .3141 .2576 .1882 .1364
----- ----- ----- ----- -----
Net Investment Income .1062 .0229 .0708 .0935 .0799
CAPITAL CHANGES:
Net realized and unrealized
gains(losses) from
securities 1.7406 4.8468 4.0535 3.0468 3.0251
------ ------ ------ ------ ------
Net increase(decrease) in
accumulation unit value 1.8468 4.8697 4.1242 3.1403 3.1050
Accumulation unit value,
beginning of period 10.0000 19.4632 15.3389 12.1986 9.0936
------- ------- ------- ------- ------
Accumulation unit value,
end of period $11.8468 $24.3329 $19.4632 $15.3389 $12.1986
======= ======= ======= ======= =======
NUMBER OF ACCUMULATION
UNITS OUTSTANDING,
END OF PERIOD* 7,584,332 7,043,575 6,443,056 5,996,795
========= ========= ========= =========
Net Assets outstanding
end of period 229,253,412
RATIOS:
Ratio of expenses to
average net assets .5000% 1.4603% 1.4603% 1.3777% 1.2880%
Ratio of net investment income
to average net assets .9840% 0.1070% 0.4042% 0.6850% 0.7542%
Portfolio turnover rate 37.5% 40.1% 26.6% 36.9% 66.1%
See accompanying notes to financial statements.
*1995-1998 reflects financial highlights of American Fidelity Variable Annuity
Fund A. (Note 1)
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
American Fidelity Dual Strategy Fund (the Fund) is
registered as an open-end, diversified management investment
company under the Investment Company Act of 1940, as
amended. The assets of the Fund were formerly held by
American Fidelity Variable Annuity Fund A (Variable Annuity
Fund A), which operated as an open-ended diversified
management investment company from 1968 to 1998, and was a
separate account of American Fidelity Assurance Company
(AFA). Effective January 1, 1999, Variable Annuity Fund A
was converted to a unit investment trust, known as American
Fidelity Separate Account A (Account A), a separate account
of AFA. Also effective January 1, 1999, the Fund was
established and Separate Account A transferred its
investment portfolio to the Fund in exchange for shares of
the Fund.
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.
Shares of the Fund are only available to separate accounts
of AFA or other insurance companies to fund the benefits of
variable annuity contracts.
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
Bloomberg L.P. 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 using the specific identification method on a
first in, first out basis. Security transactions are
accounted for on a trade-date 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 experience (gains or losses) incurred by
investment in such securities are paid by the Fund and are
recorded as reductions of dividend income. The Fund does not
expect these costs to be significant.
The Fund intends to make income and capital gains
distributions, if any, on an annual basis. All distributions
will be reinvested in additional shares of the portfolio at
net assets value.
In 1999, the cost of purchases and proceeds from sales of
securities, other than short-term securities, were
$264,958,361 and $73,672,594, respectively.
At December 31, 1999, the cost basis of investments for
financial reporting purposes equaled the cost basis for
federal income tax purposes. The gross unrealized
appreciation and depreciation on investments at December 31,
1999, were $42,760,541 and ($10,697,167), respectively.
Income Taxes
Management of the Fund believes that the Fund will continue
to qualify as a "regulated investment company" under
subchapter M of the Internal Revenue Code. 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.
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.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
The Fund receives investment management and advisory
services under a management agreement with AFA that provides
for fees to be paid to AFA at an annual rate of 0.50% of the
Fund's average daily net assets. AFA has engaged two sub-
advisors who receive fees equal to 0.30% and 0.38%,
respectively, of the Fund's daily net assets. The sub-
advisors' fees are paid by AFA.
AFA pays all other expenses of the Fund except investment
advisory fees and investment transactions costs. The Fund
will not reimburse AFA at a later time for any such amounts.
Certain officers and directors of the Fund are also officers
and directors of AFA.
Year 2000 Risks (unaudited)
Like other variable annuity funds, financial and business
organizations and individuals around the world, the Fund
could be adversely affected if the computer systems used by
AFA 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." AFA 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 AFA's
computer systems to four digits instead of two digits. At
the same time, all relationships with systems outside AFA
must be checked for the same change and all must be tested
to determine that relationships continue to be compatible.
Conversion efforts were complete at December 31, 1999. AFA
and the Fund have not experienced any significant
difficulties to date relating to Year 2000 issues, and
management does not expect Year 2000 issues to have a
significant impact on AFA's or the Fund's operations
subsequent to December 31, 1999.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
American Fidelity Dual Strategy Fund:
We have audited the accompanying statement of assets and
liabilities of American Fidelity Dual Strategy Fund (the
Fund), including the Schedule of Portfolio Investments, as
of December 31, 1999, and the related statements of
operations, changes in net assets, and the financial
highlights for the year then ended. 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 audit.
We conducted our audit 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,
1999, by correspondence with the custodian. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of American Fidelity Dual Strategy Fund as of
December 31, 1999, and the results of its operations,
changes in its net assets, and its financial highlights for
the year then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
January 17, 2000
PARTICIPANTS' BENEFITS
As a participant of American Fidelity Dual Strategy Fund,
Inc., you benefit from a number of valuable and helpful
services which help you meet your investment needs. Some of
the services you currently enjoy are the following:
RE-INVESTMENT WITHOUT CHARGE
Dividends and interest from investment income as well as
capital gain contributions are automatically re-invested
without charge.
PROFESSIONAL MANAGEMENT
Knowledgeable, full-time management constantly monitors
market opportunities for your fund.
CAPITAL FULLY INVESTED
Accumulation units are issued in full and fractional amounts
so that your net payments are immediately available for
investment purposes.
STATEMENT OF ACCOUNT
You will receive statements of account each year. These
statements are a valuable, permanent, personal record. In
the event that you should have occasion to redeem some of
your accumulation units, you are also provided with the
proper tax form for your convenience in filing your income
tax return.
SYSTEMATIC RETIREMENT OPTIONS
At your retirement a range of pay out options is available
in order to tailor your retirement income payments as
closely as possible to your needs.
PERSONAL SERVICE
Continuous personal service is available to you through the
team of American Fidelity trained salaried representatives
or directly from the Annuity Services Department in our Home
Office.
Board of Directors JOHN W. REX, Chairman
American Fidelity President and Director
Dual Strategy American Fidelity Assurance
Fund, Inc. Company
DANIEL D. ADAMS, JR., Secretary
Vice President and Investment
Officer
American Fidelity Assurance Company
JEAN G. GUMERSON
President and Chief Executive
Officer
Presbyterian Health Foundation
GREGORY M. LOVE
President and Chief Operating
Officer
Love's Country Stores, Inc.
J. DEAN ROBERTSON, D.D.S., M. Ed.
Pediatric Dentistry
Private Practice
G. RAINEY WILLIAMS, JR.
President and Chief Operating
Officer, Marco Holding Corporation
- -----------------------------------------------------------
Safekeeping of
Securities InvestTrust, N.A.
Oklahoma City, Oklahoma
- -----------------------------------------------------------
Independent Auditors KPMG, LLP
Oklahoma City, Oklahoma
- -----------------------------------------------------------
Investment Manager American Fidelity Assurance Company
Oklahoma City, Oklahoma
- -----------------------------------------------------------
Investment Sub-
Advisors Lawrence W. Kelly & Associates, Inc.
Pasadena, California
Todd Investment Advisors, Inc.
Louisville, Kentucky
- -----------------------------------------------------------
Board of Directors LYNDA L. CAMERON
American Fidelity President
Assurance Company Cameron Equestrian Centers, Inc.
WILLIAM M. CAMERON
Chairman of the Board and Chief
Executive Officer
American Fidelity Assurance Company
WILLIAM E. DURRETT
Senior Chairman of the Board
American Fidelity Assurance Company
WILLIAM A. HAGSTROM
Chairman and Chief Executive
Officer
The Women's Care Network
DAVID R. LOPEZ
President, Texas Operations
Southwestern Bell Telephone
PAULA MARSHALL-CHAPMAN
Chief Executive Officer
The Bama Companies, Inc.
JOHN W. REX
President and Chief Operating
Officer
American Fidelity Assurance Company
GALEN P. ROBBINS, M.D.
Physician
JOHN D. SMITH
Director and President
John D. Smith Developments, Inc.
FOR MORE INFORMATION
To obtain information:
By telephone
Call 1-800-662-1106
By mail Write to:
American Fidelity
Dual Strategy Fund, Inc.
P.O. Box 25520
Oklahoma City, OK 73125-0520
By E-mail Send your request to:
[email protected]
On the Internet Text-only versions of fund documents can be
viewed online or downloaded from the SEC's web site:
//www.sec.gov
You may also obtain copies of fund documents by visiting the
SEC's Public Reference Room in Washington, DC (phone 1-800-
SEC-0330) or by sending your request and a duplicating fee
to the SEC's Public Reference Section, Washington, DC 20549-
6009.
2000 N. Classen Boulevard
Oklahoma City, Oklahoma 73106
1-800-654-8489
GVA-276-0200
