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Torchmark
Government
Securities
Fund, Inc.
ANNUAL
REPORT
--------------------------------------
for the period ended December 31, 1993
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FUND MANAGER'S LETTER
- -----------------------------------------------------------------
DECEMBER 31, 1993
Dear Shareholder:
This report relates to the operation of the Torchmark Government Securities
Fund from its inception on February 26, 1993, through the end of its first
fiscal year on December 31, 1993. The following discussion, graphs and tables
provide you with information regarding the Fund's performance during that
period.
During the past fiscal year, the Federal Reserve Bank maintained a steady
monetary policy. As a result, the bond markets focused on economic growth and
inflationary pressures. There were few signs of inflation, in spite of economic
strength which developed toward the end of the fiscal year. From the inception
of the Fund to the end of the fiscal year, interest rates for long-term bonds
declined and the market yield of ten-year Treasury Notes fell. However,
interest rates increased for Treasury Notes with maturities of less than ten
years. These events resulted in significant appreciation in longer-term bond
prices, slight appreciation in ten-year note prices, and depreciation in
shorter-term note prices.
The Fund was well positioned for the varied movements in interest rates.
The Fund held a significant amount of securities with long maturities, which
out-performed the overall market in 1993. In addition, the Fund purchased fewer
mortgage-backed securities with high-stated rates of interest, which
underperformed during the year due to large prepayments of principal. The Fund
successfully availed itself of lower-coupon, mortgage-backed securities that
were subject to less risk of prepayment.
The strategies and techniques we applied resulted in the direction of the
Fund's performance from its inception to the end of the fiscal year remaining
fairly consistent with that of the indexes charted on the following page. Those
indexes reflect the performance of securities that generally represent the U.S.
government securities market (the Lehman Brothers Government Bond Index) and the
universe of mutual funds with similar investment objectives (the Lipper
Intermediate U.S. Government Fund Universe Average). The Fund's performance,
which bettered the depicted indexes, was impacted positively during the period
by its increased investments in longer maturity securities and lower-coupon,
mortgage-backed securities.
In 1994, we anticipate continuation of the moderate growth in the economy
that characterized most of 1993. As always, we will carefully analyze the
economic data to watch for signs of economic acceleration which would lead to
interest rate changes. We will also monitor the economy for any signs of
increases in inflation that would impact the Fund. In general, we expect to
continue to pursue the same strategies we have recently employed by continuing
to invest in securities with long-term maturities, as well as recently issued
mortgage-backed securities.
We appreciate your continued confidence.
Respectfully,
John E. Sundeen, Jr.
Manager, Torchmark Government Securities Fund, Inc.
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COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
TORCHMARK GOVERNMENT SECURITIES FUND, INC.,
The line graph which appears here in the paper version was filed on Form SE on
March 1, 1994.
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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.
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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
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Total assets .................................. 1,593,535
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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
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Total liabilities ............................. 37,547
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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
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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.
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TORCHMARK GOVERNMENT SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
For the Period from February 26, 1993 through December 31, 1993
Investment Income
Interest ......................................... $65,922
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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
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Total ......................................... 43,310
Less expenses in excess of limitation ......... (32,724)
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Total expenses ............................... 10,586
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Net investment income ...................... 55,336
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Realized and Unrealized Gain on Investments
Realized net gain on investments ................. 4,868
Unrealized appreciation in value of investments
during the period ............................... 13,727
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Net gain on investments ......................... 18,595
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Net increase in net assets resulting
from operations .............................. $73,931
=======
See notes to financial statements.
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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
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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)
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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)
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Net increase in net assets
resulting from capital
share transactions ........................... 1,442,261
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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 8.
See notes to financial statements.
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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
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Income from investment operations:
Net investment income .............................. 0.45
Net realized and unrealized gain on investments .... 0.19
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Total from investment operations ...................... 0.64
------
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
See notes to financial statements.
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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
<PAGE>
INCOME TAX INFORMATION
Dividends are declared and recorded by the Fund on each day the New York
Stock Exchange is open for business. Dividends are paid monthly on the 27th of
the month or on the preceding business day if the 27th is a weekend or holiday.
The dividends are not eligible for the dividend received deduction.
The tax status of dividends paid will be reported to you on Form 1099-DIV
after the close of the applicable calendar year.
Shareholders are advised to consult with their tax adviser concerning the
tax treatment of dividends and distributions from the Fund.
<PAGE>
DIRECTORS
Ronald K. Richey, Birmingham, Alabama, Chairman of the Board
Henry L. Bellmon, Red Rock, Oklahoma
Dodds I. Buchanan, Boulder, Colorado
Jay B. Dillingham, Kansas City, Missouri
John F. Hayes, Hutchinson, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Los Angeles, California
Doyle Patterson, Kansas City, Missouri
Keith A. Tucker, Overland Park, Kansas
Frederick Vogel, III, Milwaukee, Wisconsin
Paul S. Wise, Carefree, Arizona
Leslie S. Wright, Birmingham, Alabama
OFFICERS
Keith A. Tucker, President
Robert L. Hechler, Vice President
Henry J. Herrmann, Vice President
Theodore W. Howard, Vice President and Treasurer
Rodney O. McWhinney, Vice President
Sharon K. Pappas, Vice President and Secretary
John E. Sundeen, Jr., Vice President
<PAGE>
To all IRA Planholders:
As required by law, income tax will automatically be withheld from any
distribution or withdrawal from a retirement plan unless you make a written
election not to have taxes withheld. The election may be made by submitting
forms provided by Torchmark Services or by submitting Internal Revenue Service
form W-4P. Once made, an election can be revoked by providing written notice to
Torchmark Services. If you elect not to have tax withheld you may be required
to make payments of estimated tax. Penalties may be imposed by the IRS if
withholding and estimated tax payments are not adequate.
<PAGE>
This space available for your notes and calculations.
<PAGE>
This report is submitted for the general information of the shareholders of
Torchmark Government Securities Fund, Inc. It is not authorized for
distribution to prospective investors in the Fund unless accompanied with or
preceded by the Torchmark Government Securities Fund, Inc. current prospectus.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
DECEMBER 31, 1993
FOR MORE INFORMATION:
TORCHMARK SERVICES
6300 Lamar Avenue
P.O. Box 2995
Shawnee Mission, KS 66201-1395
(800) 733-3863
FOOO298A(12-93)
