Torchmark
Government
Securities
Fund, Inc.
ANNUAL
REPORT
-------------------------------------------
For the fiscal year ended December 31, 1994
<PAGE>
FUND MANAGER'S LETTER
- -----------------------------------------------------------------
DECEMBER 31, 1994
Dear Shareholder:
This report relates to the operation of the Torchmark Government Securities
Fund for the fiscal year ended December 31, 1994. The following discussion,
graphs and tables provide you with information regarding the Fund's performance
during that period.
Over the past fiscal year, the Federal Reserve Bank raised interest rates
six times as it sought to slow economic growth for the purpose of alleviating
inflationary pressures. As interest rates rose, bonds of all kinds, including
U.S. Government securities, declined considerably in value. The rate of
inflation remained low during the year and, therefore, bond yields relative to
inflation reached unusually high levels by year end.
To protect against the erosion in bond principal values caused by rising
interest rates, we reduced the average maturity of the Fund's bond holdings in
the first half of 1994. We also increased the proportion of the Fund's holdings
in mortgage-backed securities, which by their nature are more defensive than
Treasury notes and bonds. The Fund avoided investments in the riskier
derivative segment of the mortgage-backed securities market. This strategy was
in keeping with our philosophy of seeking sound, long-term investment returns.
The strategies and techniques we applied resulted in the direction of the
Fund's performance 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 funds with similar investment
objectives (the Lipper Intermediate U.S. Government Fund Universe Average). The
Fund's performance relative to the indexes was impacted by the comparatively
longer average maturity of the Fund's portfolio.
In 1995 we anticipate that the Federal Reserve Bank will raise interest
rates again to assure that inflation remains restrained. We expect the supply
of Treasury securities to diminish if the new Republican Congress acts to reduce
the federal budget deficit. An increasing demand for government securities
relative to supply, combined with low inflation and slowing economic growth,
should allow for positive returns in the year ahead. Therefore, we plan to
extend the average maturity of the Fund's holdings as the economy slows and
inflation fears dwindle. As always, we will carefully monitor economic, market,
monetary and political conditions in seeking to make investment decisions that
will achieve the Fund's objectives.
Thank you very much for your continued support and confidence.
Respectfully,
John E. Sundeen, Jr.
Manager, Torchmark Government Securities Fund, Inc.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
TORCHMARK GOVERNMENT SECURITIES FUND, INC.,
THE LEHMAN BROTHERS GOVERNMENT BOND INDEX,
AND THE LIPPER INTERMEDIATE U. S. GOVERNMENT FUND UNIVERSE AVERAGE
Average Annual Total Return*
1 year 1+ years**
- -6.67% -0.34%
Lipper
Lehman Intermediate
Torchmark BrothersU.S. Government
Government Government Fund
Securities Bond Universe
Fund, Inc. Index Average
---------- -------------------------
02/26/93 Purchase 10,000 10,000 10,000
03/31/93 10,010 10,033 10,032
06/30/93 10,383 10,323 10,258
09/30/93 10,727 10,658 10,495
12/31/93 10,649 10,622 10,477
03/31/94 10,094 10,302 10,196
06/30/94 9,907 10,184 10,067
09/30/94 9,919 10,228 10,105
12/31/94 9,938 10,264 10,096
- ----- Lehman Bros Gov't Bond Index -- $10,264
+++++ Lipper Intermediate U.S. Gov't Fund Universe Avg -- $10,096
===== Torchmark Government Securities Fund, Inc.*** -- $9,938
Past performance is not predictive of future performance. Indexes are
unmanaged.
*Performance data quoted represents past performance. Investment return and
principal value will fluctuate and an investor's shares, when redeemed, may
be worth more or less than their original cost.
**2-26-93 (the date the Fund commenced operations) through 12-31-94. Torchmark
Corporation guarantees that Fund expenses will not exceed one percent of net
assets for at least the first three years of operation (beginning 2-26-93).
The returns shown above would have been lower without this assumption of
expenses.
***The value of the investment in the Fund is impacted by the ongoing expenses
of the Fund.
<PAGE>
THE INVESTMENTS OF
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association:
6.95%, 9-10-2002 ...................... $100 $ 91,562
7.0%, 7-25-2017 ....................... 100 92,468
11.0%, 10-15-2020 ..................... 50 55,111
Total ................................. 239,141
Government National Mortgage
Association:
6.0%, 5-15-2017 ....................... 92 76,829
7.5%, 9-15-2022 ....................... 88 81,929
7.0%, 1-15-2023 ....................... 23 20,649
7.5%, 3-15-2023 ....................... 80 74,209
7.0%, 5-15-2023 ....................... 96 85,913
7.5%, 7-15-2023 ....................... 38 35,629
7.0%, 9-15-2023 ....................... 29 26,123
6.5%, 12-15-2023 ...................... 134 115,931
6.5%, 1-15-2024 ....................... 35 30,008
6.5%, 2-15-2024 ....................... 125 108,097
Total ................................. 655,317
United States Treasury:
6.5%, 4-30-99 ......................... 130 123,540
10.75%, 8-15-2005 ..................... 85 102,106
14.0%, 11-15-2011 ..................... 100 145,562
Total.................................. 371,208
Miscellaneous United States Government
Backed Securities,
Agency for International Development
for the State of Israel,
8.5%, 4-1-2006 ...................... 40 40,627
TOTAL UNITED STATES GOVERNMENT SECURITIES - 98.12% $1,306,293
(Cost: $1,463,469)
Number of
Contracts
OPTIONS - 0.18%
March 98 Put Options on Treasury
Note Futures:
Expires 2-18-95 ....................... 6 $ 2,437
(Cost: $5,606)
TOTAL INVESTMENT SECURITIES - 98.30% $1,308,730
(Cost: $1,469,075)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.70% 22,621
NET ASSETS - 100.00% $1,331,351
See Notes to Schedule of Investments on page 5.
<PAGE>
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, 1994
Assets
Investment securities - at value
(Notes 1 and 4) ................................. $1,308,730
Cash ............................................ 14,332
Receivables:
Interest ........................................ 15,013
Fund shares sold ................................ 120
Unamortized organization expenses (Note 2) ....... 24,206
----------
Total assets .................................. 1,362,401
----------
Liabilities
Organization expenses payable .................... 24,206
Payable for Fund shares redeemed ................. 1,931
Accrued accounting services fee ................... 833
Dividends payable ................................ 285
Other ............................................ 3,795
----------
Total liabilities ............................. 31,050
----------
Total net assets.............................. $1,331,351
==========
Net Assets
$0.01 par value capital stock, authorized --
200,000,000; shares outstanding -- 149,012
Capital stock ................................... $ 1,490
Additional paid-in capital ...................... 1,505,596
Accumulated undistributed loss:
Accumulated net realized loss on investment
transactions .................................. (15,390)
Net unrealized depreciation in value of
investments at end of period ................... (160,345)
----------
Net assets applicable to outstanding units
of capital ................................... $1,331,351
==========
Net asset value, redemption and offering price
per share (net assets divided by
shares outstanding) .............................. $8.93
=====
See notes to financial statements.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1994
Investment Income
Interest ......................................... $ 99,853
---------
Expenses (Notes 2 and 3):
Registration fees ............................... 15,374
Accounting services fee ......................... 10,000
Amortization of organization expenses ........... 7,644
Transfer agency and dividend disbursing ......... 6,841
Investment management fee ....................... 5,708
Distribution fee ................................ 3,575
Taxes............................................ 2,700
Legal fees ...................................... 2,148
Audit fees ...................................... 2,000
Shareholder reports ............................. 1,744
Custodian fees .................................. 1,264
Other ........................................... 87
---------
Total ......................................... 59,085
Less expenses in excess of limitation ......... (44,756)
---------
Total expenses ............................... 14,329
---------
Net investment income ...................... 85,524
---------
Realized and Unrealized Loss on Investments
Realized net loss on investments ................. (15,390)
Unrealized depreciation in value of investments
during the period ............................... (174,072)
---------
Net loss on investments ......................... (189,462)
---------
Net decrease in net assets resulting
from operations .............................. $(103,938)
=========
See notes to financial statements.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the For the
fiscal period from
year February 26,
ended 1993 through
December December
31, 1994 31, 1993
----------- ----------
Increase (Decrease) in Net Assets
Operations:
Net investment income ............... $ 85,524 $ 55,336
Realized net gain (loss)
on investments .................... (15,390) 4,868
Unrealized appreciation
(depreciation) .................... (174,072) 13,727
---------- ----------
Net increase (decrease) in net assets
resulting from operations ........ (103,938) 73,931
---------- ----------
Dividends to shareholders from:*
Net investment income ............... (85,524) (55,336)
Realized net gain from
investment transactions ........... --- (4,868)
---------- ----------
(85,524) (60,204)
---------- ----------
Capital share transactions:
Proceeds from sale of shares
(18,607 and 147,533
shares, respectively) ............. 180,340 1,487,589
Proceeds from reinvestment of
dividends and/or capital
gains distribution (8,896 and
5,839 shares, respectively) ....... 82,920 59,501
Payments for shares redeemed
(31,622 and 10,241
shares, respectively) ............. (298,435) (104,829)
---------- ----------
Net increase (decrease) in net assets
resulting from capital
share transactions ............... (35,175) 1,442,261
---------- ----------
Total increase (decrease) ........ (224,637) 1,455,988
Net Assets
Beginning of period .................. 1,555,988 100,000
---------- ----------
End of period ........................ $1,331,351 $1,555,988
========== ==========
Undistributed net investment
income ............................ $--- $---
==== ====
*See "Financial Highlights" on page 9.
See notes to financial statements.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the
period
For the from
fiscal February
year 26, 1993
ended through
December December
31, 1994 31, 1993
-------- -------
Net asset value, beginning
of period ........ $10.16 $10.00
------ ------
Income from investment
operations:
Net investment
income .......... 0.56 0.45
Net realized and
unrealized gain
(loss) on
investments ..... (1.23) 0.19
------ ------
Total from investment
operations ....... (0.67) 0.64
------ ------
Less distributions:
Dividends declared
from net investment
income .......... (0.56) (0.45)
Distribution from
capital gains ... 0.00 (0.03)
------ ------
Total distributions (0.56) (0.48)
------ ------
Net asset value, end
of period ........ $ 8.93 $10.16
====== ======
Total return ....... -6.67% 7.73%*
Net assets, end of
period (000 omitted) $1,331 $1,556
Ratio of expenses to
average net assets** 1.00% 1.00%*
Ratio of net investment
income to average
net assets ....... 5.98% 5.21%*
Portfolio turnover rate 43.26% 79.58%*
*Annualized.
**See note 3 for voluntary assumption of Fund expenses by Torchmark Corporation.
The ratios of expenses to average net assets shown in the table would have
been 4.13% and 3.42%, respectively.
See notes to financial statements.
<PAGE>
TORCHMARK GOVERNMENT SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
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.
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.
E. Options -- See Note 6 -- Options.
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. As of
December 31, 1994, W&R owned 11,128 shares. 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, 1994, UILIC owned 111,279
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 one-twelfth 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 $656,601 while proceeds from maturities and sales aggregated
$602,697. Purchases of options aggregated $5,606. There were no purchases or
sales of short-term securities.
For Federal income tax purposes, cost of investments owned at December 31,
1994 was $1,469,075, resulting in net unrealized depreciation of $160,345, all
of which related to depreciated securities.
NOTE 5 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized net capital losses in
the amount of $15,390 during the year ended December 31, 1994. This amount is
available to offset future realized capital gain net income through December 31,
2002.
NOTE 6 -- Options
Options purchased by the Fund are accounted for in the same manner as
marketable portfolio securities. The cost of portfolio securities acquired
through the exercise of call options is increased by the premium paid to
purchase the call. The proceeds from securities sold through the exercise of
put options are decreased by the premium paid to purchase the put.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Torchmark Government Securities Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Torchmark Government Securities
Fund, Inc. (the "Fund") at December 31, 1994, the results of its operations for
the year then ended and the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at December 31, 1994 by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above. The
financial statements and financial highlights of the Fund for the period ended
December 31, 1993 were audited by other independent accountants whose report
dated February 18, 1994 expressed an unqualified opinion on those statements.
PRICE WATERHOUSE LLP
Kansas City, Missouri
January 31, 1994
<PAGE>
INCOME TAX INFORMATION
Dividends are declared and reported 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 advisor 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
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.
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, 1994
FOR MORE INFORMATION:
TORCHMARK SERVICES
6300 Lamar Avenue
P.O. Box 2995
Shawnee Mission, KS 66201-1395
(800) 733-3863
FOOO298A(12-94)
