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TORCHMARK GOVERNMENT SECURITIES FUND, INC.
6300 Lamar Avenue
P. O. Box 2995
Shawnee Mission, Kansas 66201-1395
(913) 236-2050
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April 15, 1994
PROSPECTUS
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Torchmark Government Securities Fund, Inc. (the "Fund") is an open-end
management investment company popularly known as a "mutual fund." It seeks to
provide current income by investing primarily in securities issued or guaranteed
as to the timely payment of principal and interest by the U.S. Government. The
United States does not guarantee, sponsor or approve the Fund.
You may purchase shares of the Fund at their net asset value. There is no
sales charge and no redemption fee. Torchmark Corporation guarantees, at least
for the first three years of operations, that the Fund's expenses will not
exceed 1% annualized of its average net asset value.
This Prospectus contains concise information you should know before
investing. Please retain this Prospectus for future reference. Additional
information is available in the Fund's Statement of Additional Information
("SAI") dated April 15, 1994. For a free copy call the service number or write
to the address on the inside back cover of this Prospectus. The SAI has been
filed with the Securities and Exchange Commission and is incorporated herein by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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SUMMARY OF EXPENSES
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases .......... None
Maximum Sales Load Imposed on Reinvested
Dividends ........................................ None
Deferred Sales Load .............................. None
Redemption Fee ................................... None
Exchange Fee ..................................... None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees (net of waivers and/or
refunds) ................................. 0.00%*
12b-1 Fees (net of waivers and/or
refunds)** ............................... 0.00%*
Other Expenses (net of waivers and/or
refunds) ................................. 1.00%*
Total Operating Expenses (net of waivers
and/or refunds) .......................... 1.00%*
Example: The following expenses would be paid on a $1,000 investment, assuming
(i) the operating expenses shown above, (ii) 5% annual return and (iii)
redemption at the end of each time period: 1 year -- $10; 3 years -- $32; 5
years -- $55; 10 years -- $122.***
*During at least the first three years of operations certain expenses will be
waived and/or refunded to the extent necessary to hold the Fund's operating
expenses to 1% or less on an annualized basis of average net assets. See
"Torchmark Corporation's Guarantee." Without the waiver and/or refund,
"Management Fees" would have been 0.40%, "12b-1 Fees" would have been 0.25%,
"Other Expenses" would have been 3.42% and "Total Operating Expenses" would
have been 4.07%
**During at least the first three years of operations the maximum 12b-1 fee of
0.25% will be waived and/or refunded to the extent necessary to hold the
Fund's operating expenses to 1% or less on an annualized basis of average net
assets. See "Management and Services" and "Torchmark Corporation's
Guarantee." It is possible that long-term shareholders of the Fund may bear
12b-1 fees which are more than the economic equivalent of the maximum front-
end sales charge permitted under the rules of the National Association of
Securities Dealers, Inc.
***Use of assumed annual return of 5% is for illustration purposes only and not
a representation of the Fund's future performance, which may be greater or
less. The example assumes use of the percentage amounts listed in the Annual
Fund Operating Expenses table above. Without the waiver and/or refund,
amounts in the example would have been $41, $124, $208 and $426.
You would pay the same expenses on the same investment, assuming no
redemption.
The purpose of this example is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear indirectly.
Investors do not bear any of these expenses directly. The Fund pays these
expenses before distributing net investment income to shareholders. The example
should not be considered a representation of past or future expenses. Actual
expenses may be greater or less than those shown. For the first three years of
operations Torchmark Corporation guarantees that all the Fund's expenses,
excluding brokerage and extraordinary expenses, will not exceed 1% on an
annualized basis of the Fund's average net assets. Certain expenses of the Fund
during the period February 26, 1993, the date of the Fund's initial public
offering, to December 31, 1993 were refunded or waived as described above. For
discussion of certain costs and expenses, see "Management and Services" and
"Torchmark Corporation's Guarantee."
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TORCHMARK GOVERNMENT SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
(Audited)
For a Share of Capital Stock Outstanding
Throughout the Period February 26, 1993 through December 31, 1993:
The following information has been audited by KPMG Peat Marwick,
independent accountants, and should be read in conjunction with the financial
statements and notes thereto, together with the report of KPMG Peat Marwick
included in the SAI.
Net asset value,
beginning of period ................................ $10.00
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Income from investment operations:
Net investment income .............................. .45
Net realized and unrealized gain on investments .... .19
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Total from investment operations ...................... .64
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Less distributions:
Dividends from net investment income ............... (0.45)
Distribution from capital gains .................... (0.03)
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Total distributions ................................... (0.48)
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Net asset value,
end of period ...................................... $10.16
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Total return .......................................... 7.73%*
Net assets, end of period (000 omitted) ............... $1,556
Ratio of expenses to average net assets ............... 1.00%*
Ratio of net investment income to average net assets .. 5.21%*
Portfolio turnover rate ............................... 79.58%*
*Annualized.
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THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income by investing
primarily in securities issued or guaranteed as to the timely payment of
principal and interest by the U.S. Government. There is no assurance that the
Fund will achieve this objective. This objective is a fundamental policy. A
fundamental policy may not be changed without approval of Fund shareholders.
Unless otherwise indicated below, the types of securities in which the Fund may
invest and other policies are operating policies that may be changed by the
Board of Directors without shareholder approval.
Under ordinary circumstances, the Fund will invest at least 65% of the
value of its total assets in U.S. Government Securities (as further described in
the SAI). The Fund invests principally in U.S. Treasury Bills, Notes and Bonds
and other securities issued or backed by the full faith and credit of the U.S.
Government. These include Government National Mortgage Association (GNMA)
securities. GNMA's mortgage-backed securities represent part ownership of a
pool of U.S. Government-guaranteed mortgage loans. Each mortgage loan in the
pool is either insured by the Federal Housing Administration or guaranteed by
the Veteran's Administration. Once approved by GNMA, each pool of mortgages is
additionally guaranteed by GNMA as to timely payment of principal and interest
(regardless of whether the mortgagors actually make the payments). The
guarantee by GNMA represents the full faith and credit of the U.S. Government.
However, this guarantee is not related to the Fund's yield or the value of the
shareholder's interest, which fluctuates daily.
The value of the U.S. Government Securities in which the Fund may invest
will fluctuate depending in large part on changes in prevailing interest rates.
If these rates go up after the Fund buys a security, its value may go down; if
these rates go down, its value may go up. Changes in value and yield based on
changes in prevailing rates may have different effects on short-term debt
obligations than on long-term debt obligations. Long-term obligations (which
often have higher yields) may fluctuate more in value than short-term
obligations. Although there is no policy limiting the maturity of the
securities in which the Fund may invest, the Fund will seek to reduce price
fluctuation by generally maintaining the dollar weighted average maturity of its
portfolio at no more than ten years, and at times it may have most of its assets
in short-term and intermediate-term U.S. Government securities as a means of
attempting to reduce fluctuation in the value of its shares.
Securities issued or guaranteed by the U.S. Government include a variety of
Treasury securities that differ only in their interest rates, maturities and
dates of issuance. More information about the characteristics of Treasury
securities is contained in the SAI.
For the purpose of increasing income, the Fund may purchase securities
subject to repurchase agreements (which can be considered as collateralized
loans by the Fund). The majority of the repurchase transactions in which the
Fund would engage run from day to day, and the delivery pursuant to the resale
typically will occur within one to five days of the purchase. The Fund's risk
is limited to the ability of the vendor to pay the agreed-upon sum upon the
delivery date. The Fund's investments in repurchase agreements not terminable
within seven days are subject to the limitation of 15% of net assets on
investment in illiquid securities as described in the SAI.
The Fund may also lend its securities for the purpose of realizing income.
As a fundamental policy, the Fund will not loan more than 30% of its assets at
any one time. Such loans will be fully collateralized in accordance with
certain regulatory requirements. If a material event affecting the investment
is to be voted on the Fund will take such action as may be appropriate in order
to vote its shares. There are certain risks associated with lending securities
in that the Fund may experience delay in recovering the collateral or even loss
of the collateral. See the SAI for more information about these risks.
The Fund may purchase U.S. Government Securities on a when-issued or
delayed delivery basis or sell them on a delayed delivery basis in order to
secure what is considered to be an advantageous price and yield at the time of
entering into the transaction. From the time of entering into the transaction
until the transaction is completed, the U.S. Government securities so purchased
or sold are subject to market fluctuation. See the SAI for further information
about these instruments.
The Fund may buy and write (sell) put and call options on U.S. Government
Securities subject to certain limitations which are set forth in the SAI. Calls
written by the Fund must be covered (i.e., the Fund must own the securities
which are subject to the call or have the right to acquire them without
additional payment). The Fund may write options on securities for the purpose
of increasing its income by receiving premiums paid by the purchaser of the
options. It may purchase puts to hedge against major price declines in the
value of its portfolio securities or purchase calls to take advantage of an
expected rise in the market value of securities which the Fund does not hold in
its portfolio.
The Fund may purchase puts on securities it owns ("protective puts") or on
securities it does not own ("nonprotective puts"). Buying a protective put
permits the Fund to protect itself during the put period against a decline in
the value of the underlying security below the exercise price by selling them
through the exercise of the put. Buying a nonprotective put permits the Fund,
if the market price of the related investments is below the put price during the
put period, either to resell the put or to buy the related investments and sell
them at the exercise price. Options offer large amounts of leverage which may
result in the Fund's net asset value being more sensitive to changes in the
value of the underlying security.
The primary risks associated with the use of options are: (i) loss of the
increase in the value of the securities owned by the Fund, if a call option sold
by the Fund is exercised thereby requiring the Fund to deliver the securities at
a price which is lower than the market value of the securities; (ii) incurring
higher costs to purchase securities which are subject to a put option sold by
the Fund if the put is exercised and the option is higher than the market value
of the security; (iii) loss of premiums paid by the Fund on options it
purchases; (iv) imperfect correlation between the change in the market value of
the U.S. Government securities held in the Fund's portfolio and the prices of
options thereon relating to U.S. Government securities purchased or sold by the
Fund; (v) incorrect forecasts by Waddell & Reed Investment Management Company
(the "Manager"), the Fund's investment manager, concerning interest rates which
may result in the hedge being ineffective; (vi) possible lack of a liquid
secondary market for any option contract; and (vii) the resulting inability to
close an option position could have an adverse impact on the Fund's ability to
hedge or increase income. For a hedge to be completely effective, the price
change of the hedging instrument should equal the price change of the security
being hedged. Such equal price changes are not always possible because the
investment underlying the hedging instrument may not be the same investment that
is being hedged. See the SAI for further information about these instruments
and their risks.
Although the Fund has no present intent to do so, it reserves the right to
engage in transactions involving futures contracts and options on futures
contracts. See the SAI for considerations relating to futures contracts and
options on futures contracts and also for further description of the policies
summarized above and the Fund's other investment policies.
The Fund may have a high portfolio turnover. See the Financial Highlights
table. A high turnover rate will increase transaction costs that will be borne
by the Fund and could generate taxable income or loss. See the SAI for
additional information with respect to portfolio transactions and portfolio
turnover.
YIELD AND TOTAL RETURN
From time to time the Fund may quote various performance measures in
advertisements, sales literature and shareholder reports. These performance
measures include yield, total return and performance rankings. Yield is a
measure of the net investment income earned over a specified one-month or 30-day
period expressed as a percentage of the maximum offering price of the Fund's
shares at the end of the period. Yield is an annualized figure, which means
that it is assumed that the Fund generates the same level of net investment
income over a one-year period.
Average annual total return and cumulative total return figures for a
specified period measure both the net investment income generated by, and the
effect of any realized and unrealized appreciation or depreciation of, an
investment in the Fund, assuming the reinvestment of all dividends and capital
gains distributions. Thus, the figures reflect the change in the value of an
investment in the Fund during that period. Average annual total return figures
are annualized and, therefore, represent the average annual percentage change
over those periods. The Fund's cumulative total return for a specific period is
typically calculated by taking a hypothetical initial investment in Fund shares
on the first day of the period and computing the "redeemable value" of that
investment at the end of the period. Cumulative total return figures are not
annualized and represent the cumulative percentage or dollar value change over
the period specified.
The Fund may also provide non-standardized performance information which is
for periods other than those required to be presented or which differs otherwise
from standardized performance information.
The Fund's yield, return and net asset value will fluctuate. Any given
performance quotation or performance comparison for the Fund is based on
historical earnings and should not be considered as representative of the
performance of the Fund for any future period. The value of the Fund's shares
when redeemed may be more or less than their original cost. See the SAI for
further information concerning the Fund's performance. For information as to
current yield and other performance information regarding the Fund, call the
toll-free service number on the inside back cover of this Prospectus.
A comparison of the current yield or historic performance of the Fund to
those of other investments is one element to consider in making an informed
investment decision. The Fund may from time to time in its advertising and
sales materials compare its current yield or total return with the yield or
total return on such investments as corporate bonds, bank certificates of
deposit ("CD's") or money market funds. These investments may have investment
characteristics that differ from those of the Fund. Bank CD's, for example, are
generally short-term, FDIC-insured investments, which pay fixed principal and
interest but are subject to fluctuating rollover rates. Money market funds are
short-term investments with stable net asset values, fluctuating yields and
special features enhancing liquidity. Additionally, the Fund may compare its
current yield or total return history with selected recognized market
indicators, including the Consumer Price Index, Standard & Poor's 500 Stock
Index or the Dow Jones Industrial Average or widely followed, unmanaged market
indexes such as the Lehman Brothers Government Bond Index and make other
comparisons as further discussed in the SAI. It may also discuss its
performance rankings as published by selected recognized mutual fund statistical
services or publications of general interest such as Barron's, Fortune, Forbes
and Money Magazine. The Fund may also compare its performance to that of other
selected mutual funds.
Information regarding the performance of the Fund is contained in the
Fund's report to shareholders which may be obtained without charge by request to
the Fund at the address or phone number shown on the cover of this Prospectus.
MANAGEMENT AND SERVICES
Waddell & Reed Investment Management Company is investment manager to the
Fund. It is a wholly-owned subsidiary of Waddell & Reed, Inc. Waddell & Reed,
Inc. and its predecessors served as investment manager to each of the registered
investment companies in the United Group of Mutual Funds since 1940 or the
inception of the investment company, whichever was later, and to TMK/United
Funds, Inc. since its inception. On January 8, 1992, Waddell & Reed, Inc.
assigned its investment management duties (and assigned its professional staff
for investment management services) to Waddell & Reed Investment Management
Company. The Manager has also served as investment manager for Waddell & Reed
Funds, Inc. since its inception in September 1992 and Torchmark Insured Tax-Free
Fund, Inc. since it commenced operations in February 1993. Waddell & Reed, Inc.
is an indirect subsidiary of Torchmark Corporation, a holding company, and
United Investors Management Company, a holding company, and a direct subsidiary
of Waddell & Reed Financial Services, Inc., a holding company. As of December
31, 1993 the Manager managed the portfolios of twenty-eight mutual funds and
through its affiliate, Waddell & Reed Asset Management Company, the accounts of
institutional investors with combined assets of $14.5 billion.
Subject to authority of the Fund's Board of Directors, the Manager provides
investment advice and supervises investments for the Fund for which services it
is paid a fee at the annual rate of .40% of the Fund's net asset value accrued
and paid daily. Management fees for the period February 26, 1993, the date of
the Fund's initial public offering, to December 31, 1993, were 0.40% of the
Fund's average net assets. However, such fees were refunded to the Fund due to
Torchmark Corporation's guarantee.
The Torchmark Division of Waddell & Reed Services Company ("Torchmark
Services"), a subsidiary of Waddell & Reed, Inc., acts as transfer agent
("Shareholder Servicing Agent") for the Fund and processes the payments of
dividends to Fund shareholders. Inquiries concerning shareholder accounts
should be made to it at the telephone number or address shown on the inside back
cover of this Prospectus. See the SAI for the fees payable for these services.
Torchmark Services also acts as agent ("Accounting Services Agent") in providing
bookkeeping and accounting services and assistance to the Fund and pricing daily
the value of shares of the Fund. For these services the Fund pays the
Accounting Services Agent a monthly fee of 1/12th of the annual fee shown in the
following table:
Average Net Asset Level Annual Fee
(dollars in millions) Rate for Each Level
From $ 0 to $ 25 $ 10,000
From $ 25 to $ 100 $ 25,000
From $ 100 to $ 500 $ 50,000
From $ 500 to $1,000 $ 75,000
Above $1,000 $100,000
The total expenses for the Fund for the period February 26, 1993, the date
of the Fund's initial public offering, to December 31, 1993, were 1.00% of the
Fund's average net assets.
John E. Sundeen, Jr. is primarily responsible for the day-to-day management
of the portfolio of the Fund. Mr. Sundeen is Vice President of the Manager and
Vice President of the Fund. He is also Vice President of other investment
companies for which the Manager serves as investment manager. Mr. Sundeen has
held his Fund responsibilities since the inception of the Fund. He has been an
employee of the Manager since January 8, 1992. Prior to that date, Mr. Sundeen
was an employee of Waddell & Reed, Inc. and served as the portfolio manager for
other investment companies managed by Waddell & Reed, Inc. He has been Vice
President of Waddell & Reed Asset Management Company, an affiliate of the
Manager, since August 1992. Other members of the Manager's investment
management department provide input on market outlook, economic conditions,
investment research and other considerations relating to the Fund's investments.
Service Fee--12b-1 Plan
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay a fee to Torchmark
Distributors, Inc. ("Torchmark Distributors"), the principal underwriter for the
Fund, and to Torchmark Services in an aggregate amount not to exceed .25% per
annum of the Fund's net asset value accrued and paid daily to reimburse them for
amounts expended in preparing, printing and distributing informational material
to investors and Fund shareholders, providing yield and performance information
and in answering telephone or written inquiries of investors concerning the Fund
or shareholders concerning their accounts. See the SAI for additional
information and terms of the plan under which the fee may be paid.
TORCHMARK CORPORATION'S GUARANTEE
Torchmark Corporation guarantees that for at least three years commencing
on February 26, 1993, the date the Fund commenced operations, the total expenses
of the Fund, excluding brokerage commissions and extraordinary expenses, will
not exceed 1% annualized of the Fund's daily net asset value. To ensure that
the Fund's daily expenses do not exceed this limit, first the Manager, Torchmark
Distributors and Torchmark Services will waive or refund fees payable to them
commencing with the service fee; then, if such reductions or refunds are
inadequate to reduce the daily expenses below the 1% annualized limit, Torchmark
Corporation will immediately pay to the Fund the amount by which the Fund's
expenses computed daily exceed the 1% limit.
Torchmark Corporation is an insurance and financial services holding
company whose shares are listed on the New York Stock Exchange. Its principal
operating companies include Liberty National Life Insurance Company, United
American Insurance Company and Globe Life and Accident Insurance Company. As of
December 31, 1993 it had consolidated assets in excess of $7.6 billion. As of
December 1993, the ratings assigned for these companies by Best were A++, A+ and
A++, respectively, and the ratings assigned for these companies by S&P were AAA.
Through its operating companies, Torchmark Corporation is the nation's largest
writer of individual Medicare supplement insurance.
PURCHASING AND REDEEMING
To Open an Account
You must initially invest at least $1,000. If you are opening an
individual retirement account ("IRA") or Keogh Plan account, you must initially
invest at least $250. The Fund does not issue certificates for Fund shares.
Shares are sold at the net asset value (no sales charge) next determined after
receipt and acceptance of your order and check. You can open an account,
including an IRA, by mail by completing the Application and mailing it with a
check payable to the Fund. The address appears on the inside back cover of this
Prospectus. If you wish to open an IRA rollover or Keogh Plan account, first
contact Torchmark Services for details.
To Add to Your Fund Account
Additional investments may be made to your existing Fund account by (a)
mail by sending a check with a personalized investment slip or with a letter
indicating your account number. A $100 minimum is required; (b) wire after
first contacting Torchmark Services at the toll-free number printed on the
inside back cover of this Prospectus. A $100 minimum is required; (c) direct
deposit pursuant to which your Social Security, U.S. Government or certain
regular income checks (pension, dividend, interest or payroll) may be
automatically deposited into your account. A $25 minimum for each deposit is
required; or (d) an automatic investment plan pursuant to which you may make
regular investments in your account through automatic deductions from your bank
checking account. Call or write Torchmark Distributors for details. A $25
minimum per investment is required.
The Fund reserves the right to suspend the sale (but not the redemption) of
Fund shares after appropriate notice to shareholders if the Fund determines that
it is in the best interest of the Fund to do so.
Free Exchange with Torchmark Insured Tax-Free Fund, Inc.
You may by telephone or letter exchange some or all of the shares of
Torchmark Insured Tax-Free Fund, Inc. you own for shares of the Fund (and vice
versa) provided you have been furnished with a current prospectus of that fund.
The minimum value of the shares you may exchange is $100. To make an exchange
either call the toll-free service number on the inside back cover of this
Prospectus or write to Torchmark Services at the address on the inside back
cover of this Prospectus. Be sure to include your account number and advise of
the dollar amount or number of shares to be exchanged, if less than all. The
exchange will be made at the net asset value next determined after receipt and
acceptance of your exchange request in good order. See "Share Price." There is
no charge for this service. The Fund reserves the right to cancel or modify
this exchange privilege. The privilege to effect an exchange by telephone is
automatically available to all shareholders. This exchange privilege is
available only in states where the exchange is permissible under applicable law.
To Sell (Redeem) Your Shares
You may redeem without cost (no redemption fees) by selling shares at the
current share price next determined after receipt of your redemption request.
Shares will be redeemed at their net asset value next computed after receipt of
request for redemption as provided below. Except as specified below, payment
will be made within seven days unless delayed because of emergency conditions
determined by the Securities and Exchange Commission, when the New York Stock
Exchange is closed (other than weekends and holidays), or when trading on that
Exchange is restricted. Payment will normally be in cash, although under
extraordinary conditions redemptions may be made in portfolio securities.
If you purchase shares by check and redeem them by letter within seven
business days of purchase, the Fund may hold redemption proceeds until the
purchase check has cleared the banking system, which may take up to seven
business days. In any event, the Fund will mail redemption proceeds promptly
upon confirmation of payment. Redemption requests by telephone before the
expiration of the seven-day period will not be accepted. You can avoid this
delay by purchasing shares by wire or cashier's check. For information
concerning redemptions from the IRA or Keogh Plan accounts, call Torchmark
Services.
By Telephone Redemption: If you elected the telephone redemption option,
you can redeem shares by telephone by calling Torchmark Services between the
hours of 8:00 a.m. and 4:30 p.m. central time, Monday through Friday, except
holidays. Telephone redemption is an optional feature. To take advantage of
this important feature, you must complete the appropriate section of the
Application when opening an account. This may also be added to an established
account at any time; but this addition must be done in writing with a signature
guarantee before exercising this feature. For details, call Torchmark Services
To Your Bank: You may call Torchmark Services and request that a
specified amount be sent to your bank by check or wire. If your bank cannot
receive Federal Reserve wires, a check will be mailed to your bank. Currently,
there is no charge imposed by the Fund for redemptions sent to your bank.
Redemption checks requested by telephone will be sent to your authorized bank
account only. Telephone redemption is not available for IRA or Keogh Plan
accounts.
To the Address of Record: You may request that a specific amount up
to $50,000 be redeemed from your account, and a check will be made payable to
the registered owner of the account and mailed to the address of record. This
service is not available to IRA or Keogh Plan accounts and may only be used if
the shareholder's account registration address has not been changed within the
last 30 days.
By Mail: You may redeem shares by writing to the Fund or Torchmark
Services. Include the name(s) and address under which the account is
registered, your account number, and the dollar amount or number of shares you
wish to redeem. Indicate whether the redemption should be sent by check to your
address, your bank account, to another address of your choice or sent by wire
directly to your bank account. The letter must be signed by each person in
whose name the account is registered exactly as the account is registered.
A signature guarantee is also required on written redemption requests of
any amount if the check is made payable to someone other than the registered
shareholder, if the proceeds are forwarded to an address other than the address
of record or if the address of record has changed in the last 30 days. A
guarantee may be obtained from a national bank, a federally chartered savings
and loan or a member firm of a national stock exchange or other eligible
guarantor in accordance with procedures of Torchmark Services. Notarization
from a notary public is not acceptable. Up to $50,000 may be redeemed by
telephone redemption to the address of record and redemption to the address of
record by mail without a signature guarantee. These are automatic features of
your Fund account unless one or both of these features have been declined by you
in writing. Any shareholder who has declined either feature may later establish
a feature with a written request containing a signature guarantee. This request
must be made before utilizing this feature.
By the Flexible Withdrawal Plan: With a minimum qualifying balance of
$10,000 you may have a monthly or quarterly check of $50 or more paid directly
to you to cover your everyday spending needs. If you qualify, call or write
Torchmark Services for information.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identification and providing written
confirmations of transactions effected pursuant to such instructions.
CHECK WRITING PRIVILEGE
The Shareholder Servicing Agent (see inside back cover of this Prospectus)
will, upon request, provide you with forms of checks drawn on United Missouri
Bank, n.a. (the "Bank"). These checks may be made payable by you to the order
of anyone in any amount of not less than $250. If you wish to avail yourself of
this check writing redemption procedure, you should notify the Shareholder
Servicing Agent or so indicate on your Application. There are no charges for
the maintenance of the privilege or for processing checks. This privilege is
not available for most retirement plan accounts. Contact Torchmark Services for
further information.
When a check is presented to the Bank for payment, the Bank will request
that the Fund redeem a sufficient number of full and fractional shares in your
account to cover the amount of the check. You will continue to receive
dividends on those shares equaling the amount being redeemed until such time as
the check is presented to the Bank for payment. No "stop-payment" order can be
placed against these checks. Note that checks may be dishonored if shares were
recently purchased as discussed under "Purchasing and Redeeming" above or if the
net asset value per share has declined so that there are insufficient shares to
be redeemed to cover the amount of the check. Accounts may not be closed
through the writing of a check. See the SAI for additional information.
As with any redemption of shares, redemption by check writing will, for
federal income tax purposes, result in a capital gain or loss on shares
redeemed.
MINIMUM BALANCES
Shareholders must maintain a minimum balance of $500 for non-retirement
plan accounts. The Fund reserves the right to redeem sub-minimum accounts and
return the proceeds to the shareholder if an account is not increased above the
minimum within 60 days after notice of intention to redeem from the Fund.
Reductions in value that result solely from market activity will not trigger an
involuntary redemption.
SHARE PRICE
The share price is based on the Fund's net assets. Net asset value per
share is calculated by dividing the current market value of total Fund assets,
less all liabilities, by the total number of shares outstanding. The Fund
determines net asset value per share as of the later of the close of regular
trading on the New York Stock Exchange (the "Exchange"), normally 4:00 p.m.
Eastern time on each day the Exchange is open for trading, or the close of the
regular session of any commodities exchange or other exchange on which a futures
contract or option held by the Fund is traded on each day the Exchange is open,
up to 4:15 p.m. Eastern time. The Fund's portfolio securities are valued
according to the prices quoted by a dealer in U.S. Government Securities which
offers a pricing service or, if not available, at their fair value in a manner
determined in good faith by the Board of Directors. Short-term securities are
valued at amortized cost which approximates market value. Other assets are
valued at their fair value. The share price so determined applies to
transactions requested prior to the close of the Exchange. Requests received
after the close will be treated as if received the next business day. The Fund
reserves the right to suspend the sale (but not the redemption) of Fund shares
after appropriate notice to shareholders if the Fund determines it is in the
best interest of the Fund to do so.
SHORT-TERM TRADING
Purchases and sales should be made for long-term investment purposes only.
A pattern of frequent purchases and sales made in response to short-term
fluctuations in share price is not advisable. Torchmark Distributors reserves
the right to restrict purchases of Fund shares by an individual purchaser or a
group of related purchasers when a pattern of frequent purchases and redemptions
appears evident.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends are declared daily from net investment income, which includes
accrued interest, earned discount and other income earned on portfolio
securities less expenses. Ordinarily, dividends are paid on the 27th day of
each month or on the last business day before the 27th if the 27th falls on a
weekend or a holiday. When shares are redeemed, any declared but unpaid
dividends on those shares are paid with the next regular dividend payment and
not at the time of redemption. The Fund also distributes substantially all of
its net capital gains (the excess of net long-term capital gains over net short-
term capital loss) and net short-term capital gains, if any, after deducting any
available capital loss carryovers, with its regular dividend at the end of the
calendar year. The Fund may make additional distributions if necessary to avoid
Federal income or excise taxes on certain undistributed income and capital
gains.
Dividends and distributions are ordinarily paid in additional Fund shares.
However, you may instead receive dividends and distributions in cash, or receive
dividends in cash and distributions in additional Fund shares, as you may
instruct. Without instructions, dividends and other distributions will be paid
in additional Fund shares.
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986, as amended ("Code"),
so that it will be relieved of Federal income tax on that part of its investment
company taxable income (consisting generally of net investment income and net
short-term capital gains) and net capital gains that is distributed to its
shareholders.
Dividends from the Fund's investment company taxable income are taxable to
you as ordinary income, to the extent of the Fund's earnings and profits,
whether received in cash or reinvested in additional Fund shares. Distributions
of the Fund's realized net capital gains, when designated as such, are taxable
to you as long-term capital gains, whether received in cash or reinvested in
additional Fund shares and regardless of the length of time you have owned your
shares. None of the dividends paid by the Fund are expected to be eligible for
the dividends-received deduction allowed to corporations. The Fund notifies you
after each calendar year-end as to the amounts and status of dividends and
distributions paid (or deemed paid) to you for that year.
The Fund is required to withhold 31% of all dividends, distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not furnish the Fund with a correct taxpayer identification
number. Withholding at that rate from dividends and distributions also is
required for such shareholders who otherwise are subject to backup withholding.
Your redemption of Fund shares will result in taxable gain or loss to you,
depending on whether the redemption proceeds are more or less than your adjusted
basis for the redeemed shares. An exchange of Fund shares for shares of
Torchmark Government Securities Fund, Inc. generally will have similar tax
consequences. In addition, if you purchase Fund shares within 30 days after
redeeming other Fund shares at a loss, part or all of that loss will not be
deductible and will increase the basis of the newly purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for a further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor; for example, a portion of
the dividends paid by the Fund represent income received on direct obligations
of the U.S. Government and, accordingly, are not subject to income taxation in
most states and localities. You are urged to consult your own tax advisor.
OTHER INFORMATION
The Fund is a corporation organized under Maryland law on September 9,
1992. The Fund has a Board of Directors that has overall responsibility for the
management of its affairs. For the names of the directors and other information
about them, see the SAI. The Fund is a diversified fund. Each share of the
Fund has the same rights to dividends and to vote as other shares in the Fund.
Shares are fully paid and nonassessable when bought. The Fund does not
hold annual meetings of shareholders; however, certain significant corporate
matters, such as the approval of a new investment advisory agreement or a change
in a fundamental investment policy, which require shareholder approval, will be
presented to shareholders at an annual or special meeting called by the Board of
Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt
by the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the Bylaws of the Fund are met. There will normally be no meeting of
shareholders for the purpose of electing directors until such time as less than
a majority of directors holding office have been elected by shareholders, at
which time the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the Investment
Company Act of 1940, as amended, applies to the Fund, the directors are required
to call a meeting of shareholders for the purpose of voting upon the question of
removal of any director when requested in writing to do so by the shareholders
of record of not less than 10% of the Fund's outstanding shares. As of December
31, 1993, United Investors Life Insurance Company, an affiliate of Waddell &
Reed, Inc., owned of record and beneficially 68.44% of the Fund's outstanding
shares. See the SAI for further information regarding Fund shares.
Information concerning exchange privileges, Flexible Withdrawal Service,
IRAs, Code section 403(b) plans, Keogh plans, Code section 401(k) plans, Code
section 457 plans and other employee benefit plans sponsored by the Distributor
is contained in the SAI.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
Shareholder Servicing Agent and Accounting Services Agent
Torchmark Services, a division of Waddell & Reed Services Company
Distributor
Torchmark Distributors, Inc.
Investment Manager
Waddell & Reed Investment Management Company
Addresses and Telephones
The Fund, Torchmark Services, the Distributor and the Investment Manager
P. O. Box 2995
Shawnee Mission, KS 66201-1395
Overnight Mail
6300 Lamar Avenue
Overland Park, KS 66202-4200
Telephone (913) 236-2050
Toll-Free Service Number
1-800-733-3863
(1-800-733-FUND)
Legal Counsel Custodian
Kirkpatrick & Lockhart United Missouri Bank, n.a.
Washington, D. C. Kansas City, Missouri
Independent Accountants
Price Waterhouse
Kansas City, Missouri
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
PROSPECTUS
April 15, 1994
TABLE OF CONTENTS
SUMMARY OF EXPENSES .............................. 2
FINANCIAL HIGHLIGHTS ............................. 4
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES ..... 5
YIELD AND TOTAL RETURN ........................... 7
MANAGEMENT AND SERVICES .......................... 9
Service Fee--12b-1 Plan ..................... 10
TORCHMARK CORPORATION'S GUARANTEE ................ 11
PURCHASING AND REDEEMING ......................... 11
To Open an Account .......................... 11
To Add to Your Fund Account ................. 12
Free Exchange with Torchmark Insured
Tax-Free Fund, Inc. .................... 12
To Sell (Redeem) Your Shares ................ 12
CHECK WRITING PRIVILEGE .......................... 14
MINIMUM BALANCES ................................. 15
SHARE PRICE ...................................... 15
SHORT-TERM TRADING ............................... 16
DIVIDENDS, DISTRIBUTIONS AND TAXES ............... 16
OTHER INFORMATION ................................ 18
F000298
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
6300 Lamar Avenue
P. O. Box 2995
Shawnee Mission, Kansas 66201-1395
(913) 236-2050
April 15, 1994
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus (the
"Prospectus") of Torchmark Government Securities Fund, Inc. (the "Fund") dated
April 15, 1994, which may be obtained from the Fund or its principal underwriter
and distributor, Torchmark Distributors, Inc., at the address or telephone
number shown above.
TABLE OF CONTENTS
PERFORMANCE INFORMATION .......................... 3
INVESTMENT OBJECTIVE AND POLICIES ................ 5
INVESTMENT POLICIES AND PORTFOLIO ................ 5
Investment Policies ......................... 5
Portfolio Turnover .......................... 7
U.S. Government Securities .................. 7
Lending Securities .......................... 7
Repurchase Agreements ....................... 8
Illiquid Investments ........................ 8
Put and Call Options ........................ 9
Futures Contracts ........................... 12
When-issued and Delayed Delivery
Transactions ........................... 14
INVESTMENT MANAGEMENT AND OTHER SERVICES ......... 15
The Management Agreement .................... 15
Torchmark Corporation and United Investors
Management Company ..................... 15
Shareholder Services ........................ 16
Accounting Services ......................... 16
Payments for Management and
Shareholder Services ................... 16
Services - 12b-1 Plan ....................... 17
Distribution Arrangement .................... 18
Custodial and Auditing Services ............. 19
PURCHASE, REDEMPTION AND PRICING OF SHARES ....... 19
Determination of Offering Price ............. 20
Exchange Privilege .......................... 20
Retirement Plans ............................ 20
Redemptions ................................. 21
Additional Information on Check Writing ..... 22
Flexible Withdrawal Service ................. 22
DIRECTORS AND OFFICERS ........................... 23
Shareholdings ............................... 27
TAXES ............................................ 27
PORTFOLIO TRANSACTIONS ........................... 29
DIVIDENDS AND DISTRIBUTIONS ...................... 30
OTHER INFORMATION ................................ 30
INITIAL INVESTMENT AND ORGANIZATIONAL EXPENSES ... 30
FINANCIAL STATEMENTS ............................. 31
<PAGE>
PERFORMANCE INFORMATION
As explained in the Prospectus, the historical investment performance of
the Fund may be shown in the form of "yield," "average annual total return," and
"cumulative total return" figures. The Fund's yield is computed according to a
standardized method prescribed by rules of the Securities and Exchange
Commission ("SEC"). The Fund's yield is computed by dividing the net investment
income per share earned during the specified one-month or 30-day period by the
maximum offering price per share on the last day of the period, according to the
following formula:
6
Yield = 2((((a - b)/cd)+1) -1)
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The yield computed according to the formula for the 30-day period ended on
December 31, 1993, the date of the most recent balance sheet included in this
SAI, is 4.85%.
In computing its yield, the Fund follows certain standardized accounting
practices specified by SEC rules. These practices are not necessarily
consistent with those that the Fund uses to prepare its annual and interim
financial statements in conformity with generally accepted accounting
principles. Thus the Fund's yield may not equal the income paid to shareholders
or the income reported in the Fund's financial statements.
Torchmark Corporation guarantees that for at least the first three years
commencing on February 26, 1993, the date the Fund commenced operations, total
expenses of the Fund, excluding brokerage commissions and extraordinary
expenses, will not exceed 1% annualized of the Fund's daily net asset value.
See the Prospectus for further information. If such limitation had not been in
place, the yield for the period indicated would have been 3.70%.
The Fund's average annual total return quotation is computed according to a
standardized method prescribed by SEC rules. The average annual total return
for the Fund for a specific period is found by taking a hypothetical $1,000
investment in Fund shares on the first day of the period and computing the
"redeemable value" of that investment at the end of the period. The redeemable
value is then divided by the initial investment, and this quotient is taken to
the Nth root (N representing the number of years in the period) and 1 is
subtracted from the result, which is then expressed as a percentage. The
calculation assumes that all income and capital gains distributions have been
reinvested at net asset value on the reinvestment dates during the period.
The average annual total return quotation as of December 31, 1993, the date
of the most recent balance sheet included in this SAI, for the period from
February 26, 1993, the date of initial public offering, to December 31, 1993, is
7.73%.
Calculation of cumulative total return is not subject to a prescribed
formula. The Fund's cumulative total return for a specific period is calculated
by first taking a hypothetical initial investment in Fund shares on the first
day of the period and computing the "redeemable value" of that investment at the
end of the period. The cumulative total return percentage is then determined by
subtracting the initial investment from the redeemable value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The calculation assumes that all income and capital gains distributions of the
Fund have been reinvested at net asset value on the reinvestment dates during
the period. Cumulative total return may also be shown as the increased dollar
value of the hypothetical investment over the period.
The cumulative total return quotation as of December 31, 1993, the date of
the most recent balance sheet included in this SAI, for the period from February
26, 1993, the date of initial public offering, to December 31, 1993 is 6.49%.
The Fund may also present non-standardized performance information.
In reports or other communications to shareholders or in advertising and
sales literature, the Fund may compare its performance with that of the Consumer
Price Index, market indicators such as the Standard & Poor's 500 Stock Index and
the Dow Jones Industrial Average and fixed income or mutual fund indexes as
reported by Lipper Analytical Services, Inc. ("Lipper"), Wiesenberger Investment
Companies Service ("Wiesenberger") and CDA Investment Technologies, Inc. ("CDA")
or similar independent services that monitor the performance of mutual funds, or
other industry or financial publications such as Barron's, Fortune, Forbes and
Money Magazine. Performance comparisons by these indexes, services or
publications may rank mutual funds over different periods of time by means of
aggregate, average, year-by-year, or other types of total return and performance
figures. Any given performance quotation or performance comparison should not
be considered as representative of the performance of the Fund for any future
period. There are differences and similarities between the investments that the
Fund may purchase and the investments measured by the indexes and reporting
services described herein. The Consumer Price Index is generally considered to
be a measure of inflation. Lipper, Wiesenberger and CDA are widely recognized
mutual fund reporting services whose performance calculations are based on
changes in net asset value with all dividends reinvested and which do not
include the effect of any sales charges.
All performance information which the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of the Fund's shares when redeemed may be more or
less than their original cost.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are described in the
Prospectus, which refers to the Fund's investment methods and practices.
Additional information regarding certain methods and practices are included
below.
INVESTMENT POLICIES AND PORTFOLIO
Investment Policies
The investment objective and certain investment policies of the Fund are
described in the Prospectus. In addition, the Fund, as a fundamental policy,
may not:
(1) Borrow money, except from banks for temporary or emergency purposes and
not for investment purposes and then only in an amount not exceeding 1/3
of the value of the Fund's total assets including the amount borrowed,
to meet redemption requests that might otherwise require the untimely
disposition of securities. While any such borrowings exceed 5% of the
Fund's total assets, no additional purchases of investment securities
will be made by the Fund. The Fund has no intention of borrowing in the
foreseeable future an amount exceeding 5% of the Fund's total assets.
If, due to market fluctuations or other reasons, the value of the Fund's
assets falls below 300% of its borrowings, the Fund will reduce its
borrowings within three business days. To do this, the Fund may have to
sell a portion of its investments at a time when it may be
disadvantageous to do so;
(2) Pledge, mortgage or hypothecate its assets, except to secure borrowings
permitted by item (1) above;
(3) Issue senior securities as defined in the Investment Company Act of
1940, except to the extent such issuance might be involved concerning
borrowings described under item (1) above or concerning transactions
involving the writing of options within the limits described in the
Prospectus and this SAI;
(4) Underwrite any issue of securities except to the extent that the
purchase of securities in accordance with its investment objective,
policies and limitations, or the disposition of its portfolio
securities, may be deemed to be an underwriting;
(5) Purchase or sell real estate;
(6) Make loans, other than by lending its portfolio securities and entering
into repurchase agreements and through the purchase of securities in
accordance with its investment objective, policies and limitations;
(7) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for clearance of
transactions;
(8) Purchase or sell commodities or commodity contracts, except for
transactions involving options and futures contracts within the limits
described in the Prospectus and in this SAI;
(9) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those directors of
the Fund or those officers and directors of Waddell & Reed Investment
Management Company (the "Manager"), who individually own beneficially
more than 1/2 of 1% of the outstanding securities of such issuer,
together own beneficially more than 5% of such outstanding securities;
(10) Invest in interests in oil, gas or mineral leases or mineral development
programs, including oil and gas limited partnerships; and
(11) Invest in a security if, as a result, it would own more than 10% of the
outstanding voting securities of an issuer, or if more than 5% of the
Fund's total assets would be invested in securities of that issuer,
provided that U.S. Government Securities are not subject to this
limitation and up to 25% of the Fund's total assets may be invested
without regard to these restrictions.
The restrictions and limitations stated in the Prospectus and this SAI will
apply only at the time of purchase of securities, and the percentage limitations
will not be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of an acquisition of securities.
The fundamental investment policies cannot be changed without approval by
holders of a "majority of the Fund's outstanding voting shares." As defined in
the Investment Company Act of 1940, this means the vote of (i) 67% or more of
the Fund's shares present at a meeting, if the holders of more than 50% of the
Fund's shares are present or represented by proxy, or (ii) more than 50% of the
Fund's shares, whichever is less.
As an operating policy, the Fund may not invest more than 5% of its assets,
taken at market value at the time of investment, in companies, including
predecessors, with less than three years continuous operation.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities for a year and dividing
it by the monthly average of the market value of such securities during the
year, excluding certain short-term securities. The Fund's turnover rate may
vary greatly from year to year as well as within a particular year and may be
affected by cash requirements for the redemption of its shares.
The Fund's portfolio turnover rate for the fiscal year ended December 31,
1993 is set forth in the Financial Highlights table in the Prospectus. A high
turnover rate would increase transaction costs and commission costs that will be
borne by the Fund.
U.S. Government Securities
The term "U.S. Government Securities" as used in the Prospectus and this
SAI includes only those debt securities issued by the United States Treasury
(bills, notes and bonds) and securities issued by government agencies, the
timely payment of principal and interest on which is guaranteed (i.e., backed
by) the full faith and credit of the U.S. Government. The latter include, but
are not limited to, Government National Mortgage Association mortgage-backed
securities and Merchant Marine Bank obligations guaranteed by the Maritime
Administration. It is not anticipated that more than five percent of the Fund's
assets will be invested in Merchant Marine Bank.
Lending Securities
The Fund may lend its portfolio securities to attempt to increase income.
If the Fund does this, the borrower pays the Fund an amount equal to the
dividends or interest on the securities that the Fund would have received if it
had not loaned the securities. The Fund also receives additional compensation.
Any securities loans which the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). Under
the present Guidelines, the collateral must consist of cash, letters of credit
or U.S. Government Securities at least equal in value to the market value of the
securities loaned on each day that the loan is outstanding. If the market value
of the loaned securities exceeds the value of the collateral, the borrower must
add more collateral so that it at least equals the market value of the
securities loaned. If the market value of the securities decreases, the
borrower is entitled to the return of the excess collateral.
Under the Fund's current securities lending procedures, the Fund will lend
securities only to creditworthy broker-dealers and financial institutions.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned goes up, risks of delay in
recovering the securities loaned or even loss of rights in the collateral should
the borrower of the securities fail financially.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
agrees to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed upon repurchase price determines the
yield during the Fund's holding period. Repurchase agreements are considered to
be loans collateralized by the underlying security that is the subject of the
repurchase contract. The Fund will only enter into repurchase agreements with
dealers, domestic banks or recognized financial institutions that in the opinion
of the Manager present minimal credit risk. The risk to the Fund is limited to
the ability of the issuer to pay the agreed-upon repurchase price on the
delivery date; however, although the value of the underlying collateral at the
time the transaction is entered into always equals or exceeds the agreed-upon
repurchase price, if the value of the collateral declines, there is a risk of
loss of both principal and interest. If there is default, the collateral may be
sold, but the Fund might incur a loss if the value of the collateral declines,
and might incur disposition costs or experience delays with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced concerning the
seller of the security, realization upon the collateral by the Fund may be
delayed or limited. The Manager will monitor the value of collateral at the
time the transaction is entered into and at all times subsequent during the term
of the repurchase agreement to determine that the value always equals or exceeds
the agreed upon price. In the event the value of the collateral declined below
the repurchase price, the Manager will demand additional collateral from the
issuer to increase the value of the collateral to at least that of the
repurchase price. The Fund will not invest more than 15% of its assets in
repurchase agreements not terminable within seven days.
Illiquid Investments
Due to their possible limited liquidity, the Fund may not make certain
illiquid investments if as a result more than 15% of its net assets would
consist of such investments. Some of the investments which are included in this
15% limit are: (i) repurchase agreements not terminable within seven days; (ii)
securities for which market quotations are not readily available; and (iii)
unlisted options and their underlying collateral.
Put and Call Options
The Fund may write (i.e. sell) and purchase call options and put options
(puts) only if the investments to which the call or put relates are U.S.
Government Securities.
The Fund may purchase a put or call option (including any straddles or
spreads) only if the value of its premium, when aggregated with the premiums on
all other options held by the Fund, does not exceed 5% of the Fund's total
assets.
The Fund may write options on securities for the purpose of increasing its
income by receiving premiums from the purchases of the options. The Fund may
purchase puts on securities to protect against major price declines in the value
of its portfolio securities. The Fund may purchase calls on securities to take
advantage of an expected rise in the market value of securities it does not hold
in its portfolio (or in a "closing purchase transaction" as discussed below).
When the Fund writes a call, it receives a premium and agrees to sell the
related investments to a purchaser of a call during the call period (usually not
more than nine months) at a fixed exercise price (which may differ from the
market price of the related investments) regardless of market price changes
during the call period. If the call is exercised, the Fund foregoes any gain
from an increase in the market price over the exercise price.
To terminate its obligation on a call which it has written, the Fund may
purchase a call in a "closing purchase transaction." A profit or loss will be
realized depending on the amount of options transaction costs and whether the
premium previously received is more or less than the price of the call
purchased. A profit may also be realized if the call lapses unexercised,
because the Fund retains the related investments (except in the case of
uncovered calls) and the premium received.
When the Fund buys a call, it pays a premium and has the right to buy the
related investments from a seller of a call during the call period at a fixed
exercise price. The Fund benefits only if the market price of the related
investments is above the call price during the call period and the call is
either exercised or sold at a profit. If the call is not exercised or sold
(whether or not at a profit), it will become worthless at its expiration date
and the Fund will lose its premium payment and the right to purchase the related
investments.
When the Fund buys a put, it pays a premium and has the right to sell the
related investments to a seller of a put during the put period at a fixed
exercise price. Buying a protective put (as defined above) permits the Fund to
protect itself during the put period against a decline in the value of the
related investments below the exercise price by selling them through the
exercise of the put. Buying a nonprotective put (as defined above) permits the
Fund, if the market price of the related investments is below the put price
during the put period, either to resell the put or to buy the related
investments and sell them at the exercise price. If the market price of the
related investments is above the exercise price and as a result, the put is not
exercised or resold (whether or not at a profit), the put will become worthless
at its expiration date.
When the Fund writes a put, it receives a premium and agrees to purchase
the related investments from a purchaser of a put during the put period at a
fixed exercise price (which may differ from the market price of the related
investments) regardless of market price changes during the put period. If the
put is exercised, the Fund must purchase the related investments at the exercise
price, regardless of how much the market price of the related investments has
declined below the exercise price. The Fund's cost of purchasing the
investments will be adjusted by the amount of the premium it has received.
To terminate its obligation on a put which it has written, the Fund may
purchase a put in a "closing purchase transaction." (As discussed above, the
Fund may also purchase puts other than as part of such closing transactions.) A
profit or loss will be realized depending on the amount of option transaction
costs and whether the premium previously received is more or less than the cost
of the put purchased. A profit will also be realized if the put lapses
unexercised because the Fund retains the premium received.
When the Fund writes a put it will, until it enters into a closing purchase
transaction as to that put, segregate and maintain designated cash or readily
marketable assets adequate to purchase the related investments should the put be
exercised.
An option position on a listed option may be closed out only on an exchange
which provides a secondary market for options of the same series, and there is
no assurance that a liquid secondary market will exist for any particular
option. On options on U.S. Government Securities which are not listed on an
exchange, the Fund must rely on the creditworthiness of the party with whom it
has entered into the options transaction. The Manager evaluates the
creditworthiness of all such parties and intends to enter into unlisted option
transactions only with major dealers in such unlisted options. The market for
these options may be less active than the market for exchange-listed options.
The Manager evaluates the ability to enter into closing purchase transactions on
unlisted options prior to investing in them.
The Fund's put and call activities may affect its turnover rate and
brokerage commission payments. The exercise of calls or puts written by the
Fund may cause it to sell or purchase related investments, thus adversely
increasing its turnover rate in a manner beyond its control. The exercise of
puts may also cause the sale of related investments, also increasing turnover;
although such exercise is within the Fund's control, holding a protective put
might cause the Fund to sell the related investments for reasons which would not
exist in the absence of the put. Holding a nonprotective put might cause the
purchase of the related investments to permit the Fund to exercise the put. The
Fund will pay a brokerage commission each time it buys or sells a put or call or
buys or sells an underlying investment in connection with the exercise of a put
or call. Such commissions may be higher than those which would apply to direct
purchases or sales.
The Fund's Custodian bank, or a securities depository acting for it, will
act as the Fund's escrow agent as to the related investments on which the Fund
has written calls, or as to other assets acceptable for such escrow, so that
pursuant to the rules of the Option Clearing Corporation and certain exchanges,
no margin deposit will be required of the Fund on such calls. Until the related
investments or other investments held in escrow are released from escrow, they
cannot be sold by the Fund; this release will take place on the expiration of
the call or the Fund's entering into a closing purchase transaction.
Option premiums paid to control an amount of related investments are small
in relation to the market value of related investments and consequently, put and
call options offer large amounts of leverage. The leverage offered by trading
in debt options will result in the Fund's net asset value being more sensitive
to changes in the value of the related investment. Markets for options on debt
instruments and options on futures contracts are in their initial stages so it
is not possible to predict the amount of trading interest which may exist in
debt options or whether viable exchange markets will develop or continue over
time.
As indicated under "Taxes," to continue to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), the Fund must derive less than 30% of its gross income from the
disposition of securities or options held for less than three months. Due to
this limitation, the Fund will limit the extent to which it engages in the
following activities, but will not be precluded from them: (i) selling
investments held for less than three months, whether or not they were purchased
on the exercise of a call held by the Fund or a put written by the Fund; (ii)
writing calls on investments held for less than three months; (iii) writing or
purchasing puts or calls which expire in less than three months; (iv) effecting
closing transactions with respect to puts or calls written or purchased less
than three months previously; and (v) exercising puts or calls held by the Fund
for less than three months.
Futures Contracts
Although the Fund has no present intent to do so, the Fund may purchase and
sell financial futures contracts and options on financial futures contracts for
the purpose of hedging its portfolio securities against declines in the value of
such securities, and to hedge against increases in the cost of securities the
Fund intends to purchase. To accomplish such hedging, the Fund may take an
investment position in a futures contract that is expected to move in the
opposite direction from the position being hedged. Futures utilized for hedging
purposes would relate to debt securities whose prices are anticipated by the
Manager to correlate with the prices of the obligations owned by the Fund. The
sale of financial futures or the purchase of put options on financial futures or
on debt securities is a means of hedging against the risk that the value of
securities owned by the Fund may decline because of an increase in interest
rates, and the purchase of financial futures or of call options on financial
futures or on debt securities is a means of hedging against increases in the
cost of the securities the Fund intends to purchase as a result of a decline in
interest rates. Writing a call option on a futures contract or on debt
securities may serve as a partial hedge against an increase in the value of
obligations the Fund intends to acquire. The writing of such options provides a
hedge to the extent of the premium received in the writing transaction.
Regulations of the Commodity Futures Trading Commission ("CFTC") applicable to
the Fund require that no such transactions may be entered into by the Fund if
the aggregate initial margin deposits and premiums paid by the Fund exceed 5% of
the market value of the Fund's assets. The Fund will not purchase futures
unless it has segregated cash, government securities or high grade liquid debt
equal to the contract price of the futures less any margin on deposit, or unless
the long futures position is covered by the sale of a put option. The Fund will
not sell futures unless the Fund owns the instruments underlying the futures or
owns options on such instruments or owns a portfolio security whose market price
may be expected to move in tandem with the market price of the instruments
underlying the futures.
A futures contract is a contract between a seller and a buyer for the sale
and purchase of specified property at a specified future date for a specified
price. An option is a contract that gives the holder of the option the right,
but not the obligation, to buy (in the case of a call option) specified property
from, or to sell (in the case of a put option) specified property to, the writer
of the option for a specified price during a specified period before the
option's expiration. Financial futures contracts and options cover specified
debt securities designed to correlate with price movements in certain categories
of debt securities. Financial futures contracts and options on financial
futures contracts are traded on exchanges regulated by the CFTC. Options on
certain financial instruments and financial indexes are traded in securities
markets regulated by the Securities and Exchange Commission. Although futures
contracts and options on specified financial instruments calls for settlement by
delivery of the financial instruments covered by the contracts, in most cases
positions in these contracts are closed out in cash by entering into offsetting
liquidating or closing transactions.
There are risks associated with the use of futures contracts and options on
futures contracts for hedging purposes. Investment in futures contracts and
options involves the risk of imperfect correlation between movements in the
price of the futures contract and options and the price of the security being
hedged. The hedge will not be fully effective where there is imperfect
correlation between the movements in the two financial instruments. For
example, if the price of the futures contract moves more than the price of the
hedged security, the Fund will experience either a loss or gain on the future
that is not completely offset by movements in the price of the hedged
securities. Further, even where perfect correlation between the price movements
does occur, the Fund will sustain a loss at least equal to the commissions on
the financial futures transaction. To compensate for imperfect correlations,
the Fund may purchase or sell futures contracts in a greater dollar amount than
the hedged securities if the volatility of the hedged securities is historically
greater than the volatility of the futures contracts. Conversely, the Fund may
purchase or sell fewer futures contracts if the volatility of the price of the
hedged securities is historically less than that of the futures contracts.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. Because the Fund may engage in the
purchase and sale of financial futures contracts solely for hedging purposes,
however, any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset in whole or in part by increases in the value
of securities held by the Fund or decreases in the price of securities the Fund
intends to acquire.
The Fund expects to liquidate a majority of the financial futures contracts
it enters into through offsetting transactions on the applicable contract
market. There can be no assurance, however, that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may
not be possible to close a futures position. If there are adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. In such situations, if the Fund has sufficient cash, it may
be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability
to close out futures positions also could have an adverse impact on the Fund's
ability to hedge its portfolio effectively and may expose the Fund to risk of
loss. The Fund will enter into a futures position only if, in the judgment of
the Manager, there appears to be an actively traded secondary market for such
futures contracts.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
that limit the amount of fluctuation in futures contract prices during a single
trading day. Once the daily limit has been reached in the contract, no trades
may be entered into at a price beyond the limit, thus preventing the liquidation
of open futures positions. Prices have in the past moved the daily limit on a
number of consecutive trading days.
The successful use of transactions in futures also depends on the ability
of the Manager to forecast the direction and extent of interest rate movements
within a given period. To the extent these prices remain stable during the
period in which a futures contract is held by the Fund or moves in a direction
opposite to that anticipated, the Fund may realize a loss on the hedging
transaction that is not fully or practically offset by an increase in the value
of portfolio securities. As a result, the Fund's total return for such period
may be less than if it had not engaged in the hedging transaction.
When-Issued and Delayed Delivery Transactions
The Fund may also purchase U.S. Government Securities on a when-issued or
delayed delivery basis or sell them on a delayed delivery basis. For example,
delivery to the Fund and payment by the Fund in the case of a purchase by it, or
delivery by the Fund and payment to it in the case of a sale by the Fund, may
take place a month or more after the date of the transaction. The purchase or
sale price are fixed on the transaction date. The Fund will enter into when-
issued or delayed delivery transactions in order to secure what is considered to
be an advantageous price and yield at the time of entering into the transaction.
The U.S. Government Securities so purchased by the Fund are subject to market
fluctuation; their value may be less when delivered than the purchase price
paid. No interest accrues to the Fund until delivery and payment is completed.
When the Fund makes a commitment to purchase securities on a when-issued or
delayed delivery basis the Fund will record the transaction and thereafter
reflect the value of the securities in determining its net asset value per
share. The U.S. Government Securities sold by the Fund on a delayed delivery
basis are also subject to market fluctuation; their value when the Fund delivers
them may be more than the purchase price the Fund receives. When the Fund makes
a commitment to sell securities on a delayed basis, it will record the
transaction and thereafter value the securities at the sales price in
determining the Fund's net asset value per share.
Ordinarily the Fund purchases U.S. Government Securities on a when-issued
or delayed delivery basis with the intention of actually taking delivery of the
securities. However, before the securities are delivered to the Fund and before
it has paid for them, (the "settlement date") the Fund could sell the securities
if the Manager decided it was advisable to do so for investment reasons. The
Fund will hold aside or segregate cash or other U.S. Government Securities,
other than those purchased on a when-issued or delayed delivery basis, at least
equal to the amount it will have to pay on the settlement date; these other U.S.
Government Securities will be sold at or before the settlement date.
The Fund will not make a commitment to purchase a security on a when-issued
or delayed delivery basis if the commitments in the aggregate exceed 5% of the
total assets of the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Fund was organized on September 9, 1992.
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed Investment Management Company. Under the
Management Agreement, the Manager is employed to supervise the investments of
the Fund and provide investment advice to the Fund. The address of the Manager
is 6300 Lamar, P.O. Box 2995, Shawnee Mission, Kansas 66201-1395.
Torchmark Corporation and United Investors Management Company
The Manager and Torchmark Distributors, Inc. (the "Distributor") are
wholly-owned subsidiaries of Waddell & Reed, Inc., a Delaware corporation.
Waddell & Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed Financial
Services, Inc., a holding company. Waddell & Reed Financial Services, Inc. is a
wholly-owned subsidiary of United Investors Management Company. United
Investors Management Company is a wholly-owned subsidiary of Torchmark
Corporation. Torchmark Corporation is a publicly held company. The address of
Torchmark Corporation and United Investors Management Company is 2001 Third
Avenue South, Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the company's inception date, whichever was later, and to
TMK/United Funds, Inc. since that fund's inception, until January 8, 1992 when
it assigned its duties as investment manager for these funds (and the related
professional staff) to the Manager. The Manager has also served as investment
manager for Waddell & Reed Funds, Inc. since its inception in September 1992 and
Torchmark Insured Tax-Free Fund, Inc. since it commenced operations in February
1993. Waddell & Reed, Inc. serves as principal underwriter for the investment
companies in the United Group of Mutual Funds, TMK/United Funds, Inc. and
Waddell & Reed Funds, Inc.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between Waddell &
Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed, Inc., and
the Fund, the Agent through its Torchmark Division performs shareholder
servicing functions, including the maintenance of shareholder accounts, the
issuance, transfer and redemption of shares, distribution of dividends and
payment of redemptions, the furnishing of related information to the Fund and
handling of shareholder transactions. A new Shareholder Servicing Agreement, or
amendments to the existing one, may be approved by the Fund's directors without
shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's directors without
shareholder approval.
Payments for Management and Shareholder Services
Under the Management Agreement, for the Manager's management services, the
Fund pays the Manager a fee as described in the Prospectus. The management fees
for the period February 26, 1993, the date of initial public offering, to
December 31, 1993 would have been $4,220; however, during this period, the Fund
did not pay any management fees due to Torchmark Corporation's Guarantee, as
described in the Prospectus. The Fund accrues and pays this fee daily. For
purposes of calculating the daily fee, the Fund does not include money owed to
it by the Distributor for shares that it has sold but not yet paid to the Fund.
Under the Shareholder Servicing Agreement the Fund pays the Agent a monthly
fee of $1.0208 for each shareholder account that was in existence at any time
during the prior month, plus $0.30 for each account on which a dividend or
distribution, of cash or shares, had a record date in that month. It also pays
certain out-of-pocket expenses of the Agent, including long distance telephone
communications costs; microfilm and storage costs for certain documents; forms,
printing and mailing costs; and costs of legal and special services not provided
by the Distributor, the Manager or the Agent.
Under the Accounting Services Agreement the Fund pays the Agent a fee as
described in the Prospectus. The accounting services fees for the period
February 26, 1993, the date of initial public offering, to December 31, 1993
would have been $8,333; however, during this period, the Fund did not pay any
accounting services fees due to Torchmark Corporation's Guarantee, as described
in the Prospectus.
The Management Agreement requires the Manager to reduce its fee if the
amount of the Fund's operating and management expenses exceeds the lowest of the
expense limitations of any state in which the Fund's shares are qualified for
sale.
Because the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services, the Manager and the Agent pay
all of their own expenses in providing these services. The Manager or its
affiliates (excluding the Fund) pay the Fund's directors and officers who are
employed by the Manager or its affiliates. The Fund pays the fees and expenses
of the Fund's other directors.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation. See the Prospectus as to Torchmark
Corporation's guarantee of maximum Fund's expenses during the first three years
of operations.
Services -- 12b-1 Plan
Under a Service Plan (the "Plan") adopted by the Fund pursuant to Rule 12b-
1 under the Investment Company Act of 1940, the Fund may pay the Distributor
and/or the Agent an aggregate fee at the annual rate of up to .25% of the Fund's
net asset value, calculated and paid daily.
The Plan and a related Services Agreement, as well as the Underwriting
Agreement, contemplate that the Distributor and the Agent may be compensated for
providing materials (including sales literature) and information to investors
and shareholders through the fee payable under the Plan.
The Distributor and the Agent may prepare and print brochures, pamphlets,
booklets and similar materials relevant to an investor's consideration of an
investment in Fund shares and distribute such to investors by mail. They may
furnish Fund yield and performance information to investors by advertisements
and telephone including an 800 number service and answer inquiries by telephone
or in writing of investors and shareholders concerning investing in the Fund or,
in the case of shareholders, concerning their accounts.
The amounts actually paid by the Distributor and/or the Agent in providing
these services to shareholders are reimbursed by the fees paid under the Plan,
subject to limitations set forth in the Plan. Fees are not payable, however,
unless the amounts have actually been expended by the Distributor and/or the
Agent in providing these services. The service fees for the period February 26,
1993, the date of initial public offering, to December 31, 1993, would have been
$2,657; however, during this period, the Fund did not pay any service fees due
to Torchmark Corporation's guarantee, as described in the Prospectus. The Fund
did not pay fees under the Plan to the Distributor and/or Agent for the period
February 26, 1993, the date of the Fund's initial public offering, to December
31, 1993. The expenses incurred by the Distributor and/or Agent were reimbursed
or waived pursuant to Torchmark Corporation's Guarantee.
The Plan and the Services Agreement were approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter the "Plan Directors").
The Plan and the Services Agreement were also approved by Waddell & Reed, Inc.
as the sole shareholder of the shares of the Fund at the time. The Plan will be
submitted for approval by shareholders at the first meeting of shareholders
following the commencement of the public distribution of the Fund's shares.
Among other things, the Plan provides that (i) the Distributor and the
Agent will submit to the Directors at least quarterly, and the Directors will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (ii) the Plan will continue in effect
only so long as it is approved at least annually, and any material amendments
thereto are approved by the Directors including the Plan Directors acting in
person at a meeting called for that purpose, (iii) payments by the Fund under
the Plan shall not be materially increased without the affirmative vote of the
holders of a majority of the outstanding shares of the Fund, and (iv) while the
Plan remains in effect, the selection and nomination of the Directors who are
Plan Directors shall be committed to the discretion of the Plan Directors.
Distribution Arrangement
The Distributor is the principal underwriter and distributor of the Fund's
shares pursuant to an Underwriting Agreement. This agreement requires the
Distributor to use its best efforts to sell the shares of the Fund but is not
exclusive and permits and recognizes that the Distributor may distribute shares
of other investment companies and other securities. Shares are sold on a
continuous basis. The Distributor receives no compensation for its services
either from the Fund or from investors in Fund shares, except to the extent it
receives payments, if any, pursuant to the Plan as described above.
Custodial and Auditing Services
The custodian for the Fund is United Missouri Bank, n.a., Kansas City,
Missouri. In general, the custodian is responsible for holding the Fund's cash
and securities. Price Waterhouse, Kansas City, Missouri, the Fund's independent
accountants, audits the Fund's financial statements. For the fiscal year ended
December 31, 1993, KPMG Peat Marwick audited the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of one of the shares of the Fund is the value of its
assets, less its liabilities, divided by the total number of shares. For
example, if on a particular day the Fund owned securities worth $100 and had
cash of $15, the total value of the assets would be $115. If it owed $5, the
net asset value would be $110 ($115 minus $5). If it had 11 shares outstanding,
the net asset value of one share would be $10 ($110 divided by 11).
The offering price of a share is its net asset value next determined
following acceptance of a purchase order. The number of shares an investor
receives for his purchase depends on the next offering price after the
Distributor receives and accepts the order at its principal business office at
the address shown on the cover of this SAI. Investors will be sent a
confirmation after a purchase that will indicate how many shares were purchased.
Shares are normally issued for cash only.
The Distributor need not accept any purchase order, and it or the Fund may
determine to discontinue offering the shares for purchase. See the Prospectus
concerning discontinuing offering to certain investors who engage in short-term
trading.
The net asset value per share is computed once each day that the New York
Stock Exchange is open for trading at the time discussed in the Prospectus.
That Exchange annually announces the days on which it will not be open for
trading. The most recent announcement indicates that it will not be open on the
following days: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However, it is
possible that the Exchange may close on other days. The net asset value will
change every business day, since the value of the assets changes every business
day and so does the number of shares.
The Board of Directors authorized the use of prices quoted by a dealer in
U.S. Government Securities that offers a pricing service for these securities.
The Board has determined that such a service does quote the obligations' fair
value. The Board, however, may hereafter determine to use another service or
use the bid price quoted by dealers if it should determine that such service or
quotes more accurately reflect the fair value of U.S. Government Securities held
by the Fund.
Short-term debt securities are valued at amortized cost, which approximates
market. Securities or other assets that are not valued by either of the
foregoing methods and for which market quotations are not readily available
would be valued by appraisal at their fair value as determined in good faith
under procedures established by and under the general supervision and
responsibility of the Board of Directors.
Exchange Privilege
A shareholder may exchange shares of the Fund for shares of Torchmark
Insured Tax-Free Fund, Inc. and vice versa without charge. The exchange will be
made at the net asset value next determined after receipt and acceptance of the
shareholder's telephone or written request by Torchmark Services. On exchange
of shares, the total shares received will have the same aggregate net asset
value as the total shares exchanged.
These exchange rights may be eliminated or modified at any time by the
Fund, generally upon at least 60 days' written notice.
Retirement Plans
For individual taxpayers meeting certain requirements, the Distributor
offers four retirement plan arrangements that provide tax deferral and
contribute to retirement assets. All four of them involve investment in shares
of the Fund.
First. A self-employed person may set up a plan that is commonly called a
Keogh Plan. As a general rule, an investor under a defined contribution Keogh
Plan can contribute each year up to 25% of his or her annual earned income, with
a maximum of $30,000.
Second. Investors having earned income may set up a plan that is commonly
called an IRA. Under an IRA, an investor can contribute each year up to 100% of
his or her earned income with a maximum of $2,000. The maximum is $2,250 if the
investor's spouse has no earned income in a taxable year. If the investor's
spouse has at least $2,000 in earned income in a taxable year, the maximum is
$4,000 ($2,000 for each spouse).
These contributions are deductible unless the investor (or, if married,
either spouse) is an active participant in a qualified retirement plan or if,
notwithstanding such participation, the adjusted gross income does not exceed
certain levels.
An investor may also use an IRA to receive a rollover contribution which is
either (i) a direct rollover from an employer's plan or (ii) a rollover of an
eligible distribution paid to the investor from an employer's plan or another
IRA. To the extent a rollover contribution is made to an IRA, the distribution
will not be subject to Federal income tax until distributed from the IRA. A
direct rollover generally applies to any distribution from an employer's plan
(including a custodial account under Section 403(b)(7) of the Code but not an
IRA) other than certain periodic payments, required minimum distributions and
other specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor received payment of an eligible rollover distribution, all or a portion
of the distribution generally may be rolled over to an IRA within 60 days after
receipt of the distribution. Because mandatory Federal income tax withholding
applies to any eligible rollover distribution which is not paid in a direct
rollover, investors should consult their tax advisors or pension consultants as
to the applicable tax rules.
Third. If the investor is an employee of a public school system or of
certain types of charitable organizations, he or she may be able to enter into a
deferred compensation arrangement through a custodial account under Section
403(b)(7) of the Code.
Fourth. If an investor is an employee of a state or local government or of
certain types of charitable organizations, he or she may be able to enter into a
deferred compensation arrangement according to Section 457 of the Code.
The Distributor also offers to businesses prototype employee benefit plans
qualified under Section 401 of the Code. Investments may be made in shares of
the Fund according to the terms of the plans.
More detailed information about these arrangements is in the applicable
forms that are available from the Distributor. These plans involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax advisor or pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures. The
emergency or other extraordinary conditions there indicated under which payment
may be delayed beyond seven days are certain emergency conditions determined by
the Securities and Exchange Commission when the New York Stock Exchange (the
"Exchange") is closed other than for weekends or holidays, or when trading on
the Exchange is restricted. The extraordinary conditions under which payment
for redemptions of shares of the Fund may be made in portfolio securities are
that the Fund's Board of Directors has determined make cash payments
undesirable. Redemptions made in securities will be made only in readily
marketable securities, and the investor will incur commission or other
transaction charges in order to convert these securities into cash. Securities
used for payment of redemptions are valued at the value used in figuring net
asset value. The Fund, however, has elected to be governed by Rule 18f-1 under
the Investment Company Act, pursuant to which it is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of its net asset value during
any 90-day period for any one shareholder.
Additional Information on Check Writing
Checks may not be presented for payment at the office of the bank upon
which the checks are drawn because rules under the Investment Company Act of
1940 provide that redemptions may be effected only at the next price determined
after the redemption request is presented to the Fund's transfer agent. If a
shareholder is subject to income tax withholding for failure to comply with the
Interest and Dividend Tax Compliance Act of 1983, no checks will be honored.
This privilege is not available for most retirement plan accounts. Contact the
Agent for further information.
Flexible Withdrawal Service
Shareholders may arrange to receive regular monthly or quarterly payments.
This can be done by redeeming shares on a regular basis. This service is called
Flexible Withdrawal Service (the "Service"). To qualify for the Service, the
shareholder must have invested at least $10,000 in shares of the Fund that are
still owned; or must own shares having a value of at least $10,000. For the
purpose of determining the minimum, the value of shares of Torchmark Insured
Tax-Free Fund, Inc. may be included.
To start the Service, a shareholder must fill out a form (available from
Torchmark Services Division of the Agent), advising the Fund of one of the
following three choices:
First. Select a monthly or quarterly payment of $50 or more;
Second. Select a monthly or quarterly payment, which will change each
month or quarter, equal to a percentage of the value of the shares in your
account; or
Third. Select a monthly or quarterly payment, which will change each month
or quarter, by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment is to
be made (or on the prior business day if the 20th day is not a business day).
Payments are usually made within 5 days of the redemption.
The Fund pays the costs of the Service.
The dividends and distributions on shares of the Fund subject to the
Service are paid in additional shares of the Fund. All payments are made by
redeeming shares, which may involve a gain or loss for tax purposes. If
payments exceed dividends and distributions, the number of shares owned will
decrease. When all the shares in the shareholder's account are redeemed,
payments cease. Thus, the payments are not an annuity or income or return on
the investment.
A shareholder may, at any time, change the manner in which he has chosen to
have shares redeemed. Any of the other choices originally available may be
selected. For example, if a shareholder started out with a $50 monthly payment,
he could change to a $200 quarterly payment. A shareholder can at any time
redeem part or all the shares of the Fund in his account. If all the shares are
redeemed, the Service is terminated. The Fund can also terminate the Service by
notifying the shareholder in writing.
After the end of each calendar year, information on shares redeemed will be
sent to the shareholder to assist him in completing his Federal income tax
return.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors.
Each of the Fund's directors is also a director of each of the registered
investment companies in the United Group of Mutual Funds, TMK/United Funds,
Inc., Waddell & Reed Funds, Inc. and Torchmark Insured Tax-Free Fund, Inc., and
each of the Fund's officers is also an officer of one or more of these other
companies. The principal occupation of each director and officer during at
least the past five years is given below. Each of the persons listed through
and including Mr. Wright is a member of the Fund's Board of Directors. The
other persons are officers but not members of the Board of Directors.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund; Chairman of the Board of
Directors of Waddell & Reed Financial Services, Inc., United Investors
Management Company and United Investors Life Insurance Company; Chairman of the
Board of Directors and Chief Executive Officer of Torchmark Corporation;
formerly, Chairman of the Board of Directors of Waddell & Reed, Inc.
KEITH A. TUCKER*
President of the Fund; President, Chief Executive Officer and Director of
Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors of
the Manager, Waddell & Reed, Inc., Waddell & Reed Services Company, Waddell &
Reed Asset Management Company and Torchmark Distributors, Inc., an affiliate of
Waddell & Reed, Inc.; Vice Chairman of the Board of Directors, Chief Executive
Officer and President of United Investors Management Company; Vice Chairman of
the Board of Directors of Torchmark Corporation; formerly, partner in Trivest, a
private investment concern; formerly, Director of Atlantis Group, Inc., a
diversified company.
HENRY L. BELLMON
Route 1
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the funds in the United
Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc., he served in
such capacity for the funds in the United Group and TMK/United Funds, Inc.
DODDS I. BUCHANAN
University of Colorado
Campus Box 419
Boulder, Colorado 80309
Professor of Marketing, College of Business, University of Colorado;
Advisory Director, The Hand Companies; President, Buchanan Ranch Corp.;
formerly, Senior Vice President and Director of Marketing Services, The Meyer
Group of Management Consultants; formerly, Chairman, Department of Marketing,
Transportation and Tourism, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Partner in Dillingham Farms, a farming operation; formerly, President and
Director of Kansas City Stock Yards Company.
JOHN F. HAYES*
335 N. Washington
P.O. Box 2977
Hutchinson, Kansas 67504-2977
President of Gilliland & Hayes, P.A., a law firm; Director of Central Bank
and Trust.
GLENDON E. JOHNSON
7300 Corporate Center Drive
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Life Insurance Company.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund, each Fund in the United Group, TMK/United Funds, Inc., Waddell & Reed
Funds, Inc., Torchmark Government Securities Fund, Inc. and Torchmark Insured
Tax-Free Fund, Inc. (Mr. Morgan retired as Chairman of the Board of Directors
and President of these Funds on April 30, 1993); formerly, President, Director
and Chief Executive Officer of the Manager and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company, United Investors Management
Company and United Investors Life Insurance Company, affiliates of Waddell &
Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management and
investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.
FREDERICK VOGEL, III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Formerly, President and Director of Univest Corporation, a real estate
investment company; formerly, Director of Classified Financial Corp., an
insurance company.
PAUL S. WISE
P.O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
Samford University
800 Lakeshore Drive
Birmingham, Alabama 35209
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.
Robert L. Hechler
Vice President of the Fund; Vice President, Chief Operations Officer,
Director and Treasurer of Waddell & Reed Financial Services, Inc.; Executive
Vice President, Principal Financial Officer, Director and Treasurer of the
Manager; President, Chief Executive Officer, Principal Financial Officer,
Director and Treasurer of Waddell & Reed, Inc.; Director and Treasurer of
Waddell & Reed Asset Management Company; President, Director and Treasurer of
Waddell & Reed Services Company; Vice President, Treasurer and Director of
Torchmark Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund; Vice President, Chief Investment Officer and
Director of Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed,
Inc.; President, Chief Executive Officer, Chief Investment Officer and Director
of the Manager and Waddell & Reed Asset Management Company; Senior Vice
President and Chief Investment Officer of United Investors Management Company.
Theodore W. Howard
Vice President and Treasurer of the Fund; Vice President of Waddell & Reed
Services Company.
Rodney O. McWhinney
Vice President, Assistant Secretary and General Counsel of the Fund; Vice
President, Secretary and General Counsel of Waddell & Reed Financial Services,
Inc.; Senior Vice President, Secretary and General Counsel of the Manager and
Waddell & Reed, Inc.; Director, Senior Vice President, Secretary and General
Counsel of Waddell & Reed Services Company; Director, Secretary and General
Counsel of Waddell & Reed Asset Management Company; Vice President, Secretary
and General Counsel of Torchmark Distributors, Inc.; Director of ICI Mutual
Insurance Company.
Sharon K. Pappas
Vice President, Secretary and Assistant General Counsel of the Fund;
Assistant Secretary and Assistant General Counsel of the Manager; Assistant
General Counsel of Waddell & Reed Financial Services, Inc., Waddell & Reed,
Inc., Waddell & Reed Asset Management Company and Waddell & Reed Services
Company; formerly, an associate with Stinson, Mag & Fizzell, a law firm.
John E. Sundeen, Jr.
Vice President of the Fund; Vice President of the Manager and Waddell &
Reed Asset Management Company.
The address of each person is 6300 Lamar, P. O. Box 2995, Shawnee Mission,
Kansas 66201-1395 unless a different address is given.
As of the date of this SAI, four of the Fund's directors may be deemed to
be "interested persons" of the Distributor and the Manager, and as such, also of
the Fund. The directors who may be deemed to be "interested persons" as defined
in the Investment Company Act of 1940 are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a Director may elect after resignation from the Board
of Directors, provided the Director has attained the age of 75 and has served as
a Director of the Fund for a total of at least five years. A Director Emeritus
receives fees in recognition of his past services whether services are rendered
in his capacity as Director Emeritus, but will have no authority or
responsibility regarding management of the Fund.
The Fund intends to pay annual fees to each Director, other than Directors
who are affiliates of Waddell & Reed, Inc., in an amount to be determined by the
Board of Directors at a later date. The officers are paid by the Manager or its
affiliates.
Shareholdings
As of February 28, 1994, all the Fund's directors and officers as a group
owned less than 1% of the outstanding shares of the Fund. As of such date,
United Investors Life Insurance Company, an affiliate of Waddell & Reed, Inc.,
owned of record and beneficially 68.71% of the Fund's outstanding shares. As of
such date, Waddell & Reed, Inc., a Delaware corporation, owned of record and
beneficially 6.87% of the Fund's outstanding shares. United Investors Life
Insurance Company is a Missouri corporation whose address is 2001 Third Avenue
South, Birmingham, Alabama 35233. The address of Waddell & Reed, Inc. is the
same as the Fund's address.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Code, the Fund must distribute to its shareholders for
each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income and net short-term capital
gains) and must meet several additional requirements. These requirements
include the following: (1) the Fund must derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of securities, or
other income (including gains from options) derived with respect to its business
of investing in securities ("Income Requirement"); (2) the Fund must derive less
than 30% of its gross income each taxable year from the sale or other
disposition of securities or options that were held for less than three
months("Short-Short Limitation"); (3) at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. Government Securities, securities of other RICs and
other securities that are limited, in respect of any one issuer, to an amount
that does not exceed 5% of the value of the Fund's total assets; and (4) at the
close of each quarter of the Fund's taxable year, not more than 25% of the value
of its total assets may be invested in securities (other than U.S. Government
Securities or the securities of other RICs) of any one issuer.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gains distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for a dividend or other distribution, the purchaser will receive
some portion of the purchase price back as a taxable distribution.
The use of hedging strategies, such as writing (selling) and purchasing
options, involves complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses the Fund realizes in
connection therewith. Income from transactions in options derived by the Fund
with respect to its business of investing in securities will qualify as
permissible income under the Income Requirement. However, income from the
disposition of options will be subject to the Short-Short Limitation if they are
held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all of the Fund's hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of certain options beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gains net income for the one-year
period ending October 31 of that year, plus certain other amounts.
If in any year the Fund failed to qualify for treatment as a RIC, the Fund
would incur regular corporate Federal income tax on its taxable income for that
year, and all distributions to its shareholders, including those from net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), would be taxable as ordinary dividend income for Federal income
tax purposes to the extent of the Fund's earnings and profits.
PORTFOLIO TRANSACTIONS
The Manager, in effecting purchases and sales of portfolio securities for
the account of the Fund, places orders in such manner as, in the opinion of
management, will offer the best price and market for the execution of each
transaction. Portfolio securities are normally purchased directly from issuers,
banks or in the over-the-counter market from the principal dealers in such
securities, unless it appears that a better price or execution may be obtained
elsewhere.
The Fund expects that all portfolio transactions will be effected on a
principal (as opposed to an agency) basis and, accordingly, does not expect to
pay any brokerage commissions. During the period February 26, 1993, the date of
the Fund's initial public offering, to December 31, 1993, the Fund did not pay
any brokerage commissions. Purchases from dealers include the spread between
the bid and asked price. Given the best price and execution obtainable, it will
be the practice of the Fund to select dealers that, in addition, furnish
research information (primarily credit analyses of issuers) and statistical and
other services to the Manager, or furnish directly or through others a pricing
service. See "Determination of Offering Price". Since such research
information is only supplementary to the Manager's own research efforts, the
receipt of research information is not expected to reduce significantly the
Manager's expenses. While the Manager is primarily responsible for the
placement of the business of the Fund, the policies and practices of the Manager
in this regard must be consistent with the foregoing and are subject to review
by the directors.
The Manager and its affiliate adviser, Waddell & Reed Asset Management
Company ("WRAMCO") reserve the right to, and do, manage other investment
accounts and investment companies for other clients that may have investment
objectives similar to the Fund. Subject to applicable laws and regulations, the
Manager attempts to allocate equitably portfolio transactions among the Fund,
the other investment companies managed by the Manager and the portfolios of
WRAMCO's nonaffiliated clients purchasing or selling securities whenever
decisions are made to purchase or sell securities by the Fund and one or more of
such other companies or clients simultaneously. In making such allocations, the
main factor to be considered is the size of the respective Fund and other orders
to purchase or sell the security. While this practice could have a detrimental
effect on the price or amount of the securities available to the Fund from time
to time, it is the opinion of the directors that the benefits available from the
Manager's organization will outweigh any disadvantage that may arise from
exposure to simultaneous transactions.
DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions are paid in additional shares unless the
Application or by subsequent written instruction to the Fund the shareholder
elects to have 1) dividends and distributions paid in cash, or 2) dividends paid
in cash and distributions paid in additional shares. The net asset value used
for this purpose is that computed as of the record date for the dividend or
distribution, although this could be changed by the Board of Directors. The
record date is the date used to determine which shareholders are entitled to
receive a dividend or distribution. The tax treatment of dividends and
distributions is the same whether you receive them in cash or in additional
shares. See "Taxes" above.
OTHER INFORMATION
The shares of the Fund represent an interest in the Fund's securities and
other assets and in its profits or losses. Each share has the same rights to
dividends and to receive assets if the Fund liquidates (winds-up) as every other
share of the Fund. Each fractional share has the same rights, in proportion, as
a full share. All shares of each Fund are fully paid and nonassessable. Each
share is entitled to one vote.
Shares held by Waddell & Reed, Inc. or its corporate affiliates will be
voted in proportion to the voting instructions that are received on any matter.
Voting instructions to abstain on any item to be voted upon will be applied to
reduce the votes eligible to be cast by Waddell & Reed, Inc. and its corporate
affiliates.
INITIAL INVESTMENT AND ORGANIZATIONAL EXPENSES
On February 17, 1993, Waddell & Reed, Inc. purchased for investment 10,000
shares of the Fund at a net asset value of $10.00 per share. The Fund's
organizational expenses, in the amount of $38,220, have been advanced by Waddell
& Reed, Inc. and are an obligation to be paid by the Fund. These expenses are
being amortized over the 60-month period following the date of the initial
public offering of the Fund's shares. If all or part of Waddell & Reed, Inc.'s
initial investment in the Fund's shares is redeemed before the full
reimbursement of the organizational expenses, the Fund's obligation to make
reimbursement will cease.
<PAGE>
THE INVESTMENTS OF
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
DECEMBER 31, 1993
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association:
6.95%, 9-10-2002 ...................... $100 $ 104,250
7.0%, 7-25-2017 ....................... 100 103,343
Total ................................. 207,593
Government National Mortgage
Association:
6.0%, 5-15-2017 ....................... 94 90,441
7.5%, 9-15-2022 ....................... 94 97,195
7.5%, 3-15-2023 ....................... 90 93,137
7.0%, 5-15-2023 ....................... 97 98,778
7.5%, 7-15-2023 ....................... 42 43,693
Total ................................. 423,244
United States Treasury:
5.75%, 8-15-2003 ...................... 225 224,226
10.75%, 8-15-2005 ..................... 115 160,515
0.0%, 5-15-2008 ....................... 120 46,954
14.0%, 11-15-2011 ..................... 100 169,828
9.25%, 2-15-2016 ...................... 125 164,395
Total.................................. 765,918
Miscellaneous United States Government
Backed Securities,
Agency for International Development
for the State of Israel,
8.5%, 4-1-2006 ........................ 40 46,296
TOTAL UNITED STATES GOVERNMENT SECURITIES - 92.74% $1,443,051
(Cost: $1,429,324)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 7.26% 112,937
NET ASSETS - 100.00% $1,555,988
Notes to Schedule of Investments
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 4 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1993
Assets
Investment securities - at value
(Notes 1 and 4) ................................. $1,443,051
Cash ............................................ 89,583
Receivables:
Interest ........................................ 21,806
Fund shares sold ................................ 6,985
Unamortized organization expenses (Note 2) ....... 31,850
Prepaid insurance premium ........................ 260
----------
Total assets .................................. 1,593,535
----------
Liabilities
Organization expenses payable .................... 31,850
Payable for Fund shares redeemed ................. 3,146
Accrued accounting services fee .................. 833
Accrued transfer agency and dividend disbursing .. 322
Distribution fee payable ......................... 11
Other ............................................ 1,385
----------
Total liabilities ............................. 37,547
----------
Total net assets.............................. $1,555,988
==========
Net Assets
$0.01 par value capital stock, authorized --
200,000,000; shares outstanding -- 153,131
Capital stock ................................... $ 1,531
Additional paid-in capital ...................... 1,540,730
Accumulated undistributed gain:
Net unrealized appreciation in value of
investments at end of period ................... 13,727
----------
Net assets applicable to outstanding units
of capital ................................... $1,555,988
==========
Net asset value per share (net assets divided by
shares outstanding) .............................. $10.16
======
See notes to financial statements.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
For the Period from February 26, 1993 through December 31, 1993
Investment Income
Interest ......................................... $65,922
-------
Expenses (Notes 2 and 3):
Accounting services fee ......................... 8,333
Transfer agency and dividend disbursing ......... 6,799
Amortization of organization expenses ........... 6,370
Report expense .................................. 6,358
Investment management fee ....................... 4,220
Audit fees ...................................... 4,000
Legal fees ...................................... 3,084
Distribution fee ................................ 2,657
Custodian fees .................................. 580
Registration fees ............................... 549
Other ........................................... 360
-------
Total ......................................... 43,310
Less expenses in excess of limitation ......... (32,724)
-------
Total expenses ............................... 10,586
-------
Net investment income ...................... 55,336
-------
Realized and Unrealized Gain on Investments
Realized net gain on investments ................. 4,868
Unrealized appreciation in value of investments
during the period ............................... 13,727
-------
Net gain on investments ......................... 18,595
-------
Net increase in net assets resulting
from operations .............................. $73,931
=======
See notes to financial statements.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the period from February 26, 1993 through December 31, 1993
Increase in Net Assets
Operations:
Net investment income ........................... $ 55,336
Realized net gain on investments ................ 4,868
Unrealized appreciation ......................... 13,727
----------
Net increase in net assets
resulting from operations .................... 73,931
----------
Dividends to shareholders from:*
Net investment income ........................... (55,336)
Realized net gain from
investment transactions ....................... (4,868)
----------
(60,204)
----------
Capital share transactions:
Proceeds from sale of shares
(147,533 shares) .............................. 1,487,589
Proceeds from reinvestment of
dividends and/or capital gains
distribution (5,839 shares) ................... 59,501
Payments for shares redeemed
(10,241 shares) ............................... (104,829)
----------
Net increase in net assets
resulting from capital
share transactions ........................... 1,442,261
----------
Total increase ............................... 1,455,988
Net Assets
Beginning of period .............................. 100,000
----------
End of period .................................... $1,555,988
==========
Undistributed net investment
income ........................................ $---
====
*See "Financial Highlights" on page 35.
See notes to financial statements.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout the Period from February 26, 1993
through December 31, 1993
Net asset value, beginning
of period .......................................... $10.00
------
Income from investment operations:
Net investment income .............................. 0.45
Net realized and unrealized gain on investments .... 0.19
------
Total from investment operations ...................... 0.64
------
Less distributions:
Dividends from net investment income ............... (0.45)
Distribution from capital gains .................... (0.03)
------
Total distributions ................................... (0.48)
------
Net asset value, end of period ........................ $10.16
======
Total return .......................................... 7.73%*
Net assets, end of period (000 omitted) ............... $1,556
Ratio of expenses to average net assets ............... 1.00%*
Ratio of net investment income to average net assets .. 5.21%*
Portfolio turnover rate ............................... 79.58%*
*Annualized
See notes to financial statements.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE 1 -- Significant Accounting Policies
Torchmark Government Securities Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- The Fund invests in securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities and in options
and futures contracts on those securities. Government debt securities are
valued using a pricing system provided by a major dealer in bonds. Other
securities are valued at the latest sale price thereof on the last business
day of the fiscal period as reported by the principal securities exchange
on which the issue is traded or, if no sale is reported, the average of the
latest bid and asked prices. Short-term debt securities are valued at
amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Interest income is recorded on the accrual basis
and includes differences between cost and face amount on principal
reductions of securities. See Note 4 -- Investment Security Transactions.
C. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under the Internal Revenue Code. In
addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes. See Note 5 -- Federal Income Tax Matters.
D. Dividends and distributions -- All of the Fund's net investment income is
declared and recorded by the Fund as dividends payable on each day to
shareholders of record at the time of the previous determination of net
asset value.
NOTE 2 -- Organization
The Fund was incorporated in Maryland on September 9, 1992 and was inactive
(except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and registration of
shares under the Securities Act of 1933) until February 26, 1993 (the date of
the initial public offering).
On February 17, 1993, Waddell & Reed, Inc. ("W&R") purchased for investment
10,000 shares of the Fund at their net asset value of $10.00 per share. On
February 26, 1993, United Investors Life Insurance Company ("UILIC"), an
affiliate of W&R, purchased 100,000 shares of the Fund. As of December 31,
1993, UILIC owned 104,808 shares.
The Fund's organizational expenses in the amount of $38,220 were advanced
to the Fund by W&R and are an obligation to be paid by the Fund. These expenses
are being amortized and are payable evenly over 60 months following the date of
the initial public offering. In the event that all or any part of W&R's initial
investment in the Fund's shares is redeemed before the full reimbursement of
these organizational expenses, the Fund's obligation to make further
reimbursement will cease.
NOTE 3 -- Investment Management and Payments to Affiliated Persons
Waddell & Reed Investment Management Company ("WRIMCO"), a wholly-owned
subsidiary of W&R, acts as investment manager to the Fund and, as such, receives
a fee for such services. The fee is accrued and paid daily at the annual rate
of .40% of the Fund's net asset value.
The Torchmark Division of Waddell & Reed Services Company ("Torchmark
Services"), another wholly-owned subsidiary of W&R, acts as transfer agent for
the Fund and processes the payments of dividends to Fund shareholders. The Fund
pays Torchmark Services a monthly fee of $1.0208 for each shareholder account
that was in existence at any time during the prior month, plus $0.30 for each
account on which a dividend or distribution of cash or shares had a record date
in that month. The Fund also pays for certain out-of-pocket costs.
Torchmark Services also acts as agent ("Accounting Services Agent") in
providing bookkeeping and accounting services and assistance to the Fund and
pricing daily the value of shares of the Fund. For these services the Fund pays
the Accounting Services Agent a monthly fee of 1/12th of the annual fee shown in
the following table:
Accounting Services Fee
Average Net Asset Level Annual Fee
(dollars in millions) Rate for Each Level
----------------------- -------------------
From $ 0 to $ 25 $ 10,000
From $ 25 to $ 100 $ 25,000
From $ 100 to $ 500 $ 50,000
From $ 500 to $1,000 $ 75,000
Above $1,000 $100,000
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay a fee to Torchmark
Distributors, Inc. ("Torchmark Distributors"), another wholly-owned subsidiary
of W&R, the principal underwriter for the Fund, and to Torchmark Services in an
aggregate amount not to exceed .25% per annum of the Fund's net asset value
accrued and paid daily to reimburse them for amounts expended in preparing,
printing and distributing informational material to investors and Fund
shareholders, providing yield and performance information and in answering
telephone or written inquiries of investors concerning the Fund or shareholders
concerning their accounts.
Torchmark Corporation guarantees that for at least three years commencing
on February 26, 1993, the total expenses of the Fund, excluding brokerage
commissions and extraordinary expenses, will not exceed 1% annualized of the
Fund's daily net asset value. To ensure that the Fund's daily expenses do not
exceed this limit, first WRIMCO, Torchmark Distributors and Torchmark Services
will waive or refund fees payable to them commencing with the service fee; then,
if such reductions or refunds are inadequate to reduce the daily expenses below
the 1% annualized limit, Torchmark Corporation will immediately pay to the Fund
the amount by which the Fund's expenses computed daily exceed the 1% limit.
W&R is an indirect subsidiary of Torchmark Corporation, a publicly held
company whose address is 2001 Third Avenue South, Birmingham, Alabama 35233.
Torchmark Corporation is an insurance and financial services holding company
whose shares are listed on the New York Stock Exchange. W&R is also an indirect
subsidiary of United Investors Management Company, a holding company, and a
direct subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 4 -- Investment Security Transactions
Purchases of U.S. Government securities, other than short-term securities,
aggregated $2,250,937 while proceeds from maturities and sales aggregated
$824,215. Purchases of short-term securities aggregated $249,917 while proceeds
from maturities and sales aggregated $250,000. There was a net gain of $4,868
on the sale of U.S. Government securities.
For Federal income tax purposes, cost of investments owned at December 31,
1993 was $1,429,324, resulting in net unrealized appreciation of $13,727, of
which $20,392 related to appreciated securities and $6,665 related to
depreciated securities.
NOTE 5 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gains net income
of $4,868 during the year ended December 31, 1993, and the entire amount of
capital gains net income was distributed to shareholders within the year ended
December 31, 1993.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Torchmark Government Securities Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Torchmark Government Securities Fund, Inc. (the "Fund"), including the schedule
of investments, as of December 31, 1993, and the related statements of
operations and changes in net assets and financial highlights (hereafter
referred to as "financial statements") for the period February 26, 1993 through
December 31, 1993. These financial statements are the responsibility of Fund
management. Our responsibility is to express an opinion on these financial
statements 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 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, 1993, 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 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 Torchmark Government Securities
Fund, Inc. as of December 31, 1993, the results of its operations and changes in
its net assets and financial highlights for the period February 26, 1993 through
December 31, 1993 in conformity with generally accepted accounting principles.
KPMG Peat Marwick
Kansas City, Missouri
February 18, 1994
