<PAGE>
File No. 811-7045
File No. 33-49071
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. _____
Post-Effective Amendment No. __2__
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 2
TORCHMARK INSURED TAX-FREE FUND, INC.
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(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2050
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Rodney O. McWhinney, P. O. Box 2995, Shawnee Mission, Kansas 66201-1395
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
__X__ on April 15, 1994 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)
_____ on (date) pursuant to paragraph (a) of Rule 485
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DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the
Registrant's fiscal year ending December 31, 1993 was filed on February 24,
1994.
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TORCHMARK INSURED TAX-FREE FUND, INC.
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Cross Reference Sheet
=====================
Part A of
Form N-1A
Item No. Prospectus Caption
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1 ........................ Cover Page
2(a) ..................... Summary of Expenses
(b) ..................... *
(c) ..................... *
3(a) ..................... Financial Highlights
(b) ..................... Financial Highlights
(c) ..................... Yield and Total Return
(d)...................... Yield and Total Return
4(a) ..................... The Fund's Investment Objective and Policies;
........................... Other Information
(b) ..................... The Fund's Investment Objective and Policies
(c) ..................... The Fund's Investment Objective and Policies
5(a) ..................... Other Information
(b)...................... Management and Services; Inside Back Cover
(c) ..................... Management and Services
(d) ..................... Management and Services; Inside Back Cover
(e) ..................... Management and Services; Inside Back Cover
(f) ..................... Management and Services; Torchmark Corporation's
Guarantee
(g)(i)................... *
(g)(ii).................. *
5A........................ *
6(a) ..................... Other Information
(b) ..................... Other Information
(c) ..................... *
(d) ..................... *
(e) ..................... Management and Services
(f)...................... Dividends, Distributions and Taxes
(g) ..................... Dividends, Distributions and Taxes
7(a) ..................... Management and Services; Inside Back Cover
(b) ..................... Share Price
(c) ..................... Purchasing and Redeeming
(d) ..................... Purchasing and Redeeming; Minimum Balances
(e) ..................... *
(f) ..................... Management and Services
8(a) ..................... Purchasing and Redeeming
(b) ..................... *
(c) ..................... Minimum Balances
(d) ..................... Purchasing and Redeeming
9 ........................ *
Part B of
Form N-1A
Item No. SAI Caption
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10(a) ..................... Cover Page
(b) ..................... *
11 ........................ Cover Page
12 ........................ *
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*Not Applicable or Negative Answer
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13(a) ..................... Investment Objective and Policies; Investment
Policies and Portfolio
(b) ..................... Investment Objective and Policies; Investment
Policies and Portfolio
(c) ..................... Investment Objective and Policies; Investment
Policies and Portfolio
(d) ..................... Investment Objective and Policies; Investment
Policies and Portfolio
14(a) ..................... Directors and Officers
(b) ..................... Directors and Officers
(c) ..................... *
15(a) ..................... Directors and Officers; Other Information
(b) ..................... Directors and Officers; Other Information
(c) ..................... Directors and Officers
16(a)(i) .................. Investment Management and Other Services
(a)(ii) ................. Investment Management and Other Services;
Directors and Officers
(a)(iii) ................ Investment Management and Other Services
(b) ..................... Investment Management and Other Services
(c) ..................... Investment Management and Other Services
(d) ..................... Investment Management and Other Services
(e) ..................... *
(f) ..................... Investment Management and Other Services
(g) ..................... *
(h) ..................... Investment Management and Other Services
(i) ..................... Investment Management and Other Services
17(a) ..................... Portfolio Transactions
(b) ..................... *
(c) ..................... Portfolio Transactions
(d) ..................... Portfolio Transactions
(e) ..................... *
18(a) ..................... Other Information
(b) ..................... *
19(a) ..................... Purchase, Redemption and Pricing of Shares
(b) ..................... Purchase, Redemption and Pricing of Shares
(c) ..................... Purchase, Redemption and Pricing of Shares
20 ........................ Taxes
21(a) ..................... Investment Management and Other Services
(b) ..................... *
(c) ..................... *
22(a) ..................... *
(b)(i) .................. Performance Information
(b)(ii) ................. Performance Information
(b)(iii) ................ Performance Information
(b)(iv) ................. Performance Information
23 ........................ Financial Statements
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*Not Applicable or Negative Answer
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TORCHMARK INSURED TAX-FREE FUND, INC.
6300 Lamar Avenue
P. O. Box 2995
Shawnee Mission, Kansas 66201-1395
(913) 236-2050
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April 15 , 199 4
PROSPECTUS
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Torchmark Insured Tax-Free Fund, Inc. (the "Fund") is an open-end
management investment company popularly known as a "mutual fund." It seeks to
provide current income exempt from federal income tax by investing in a
portfolio of insured municipal obligations. At least 65% of its net assets will
be invested in municipal obligations that are covered by insurance guaranteeing
the timely payment of principal and interest. FOR A DETAILED DISCUSSION OF THE
NATURE AND LIMITATION OF THE INSURANCE, SEE PAGE 6 OF THIS PROSPECTUS.
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 , 199 4 . 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.
The value of the Fund's shares are not insured or guaranteed by any entity.
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.
<PAGE>
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 0.50%, "12b-1 Fees" would
have been 0.25%, "Other Expenses" would have been 1.99% and "Total Operating
Expenses" would have been 2.74%.
**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 $28, $85, $145 and $307.
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 reimbursed 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 INSURED TAX-FREE 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
------
Income from investment operations:
Net investment income .............................. .38
Net realized and unrealized gain (loss) on investments .41
------
Total from investment operations ...................... .79
------
Less dividends from net investment income ............. (0.38)
------
Net asset value,
end of period ...................................... $10.41
======
Total return* ......................................... 9.62%*
Net assets, end of period (000 omitted) ............... $2,338
Ratio of expenses to average net assets ............... 1.00%*
Ratio of net investment income to average net assets .. 4.46%*
Portfolio turnover rate ............................... 79.14%*
*Annualized
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THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from
federal income tax by investing in a portfolio of insured municipal obligations
(as hereinafter defined). There can be no assurance that the investment
objective will be achieved. 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 its
total assets in municipal obligations which are covered by insurance
guaranteeing the timely payment of principal and interest. As a fundamental
policy, under ordinary circumstances, the Fund will invest at least 80% of its
net assets in obligations the interest on which is not subject to federal income
tax and is not an item of tax preference for purposes of the federal alternative
minimum tax ("Tax-Exempt Obligations").
"Municipal obligations," as the term is used in this Prospectus, are
debt obligations issued by states, cities and local authorities and by certain
U.S. possessions or territories to obtain funds for various public purposes,
such as the construction of public facilities, the payment of general operating
expenses and the refunding of outstanding debt. They may also be issued to
obtain funding for various private activities, including loans to finance the
construction of housing, educational and medical facilities or privately owned
industrial development and pollution control projects.
The Fund may only invest in municipal obligations rated investment grade at
the time of purchase, Baa or BBB or better by Moody's Investors Service, Inc.
("Moody's") or Standard and Poor's Corporation ("S&P"), respectively, or, if
unrated, municipal obligations of investment grade quality in the opinion of
Waddell & Reed Investment Management Company (the "Manager"). There is no fixed
percentage limitations on these unrated securities. Municipal obligations rated
Baa are considered by Moody's to be medium-grade obligations that lack
outstanding investment characteristics and in fact have speculative
characteristics as well, while municipal obligations rated BBB are regarded by
S&P as having an adequate capacity to pay principal and interest. Subsequent to
its purchase by the Fund, an issue may cease to be rated, or its rating may be
reduced below the minimum required for purchase by the Fund. Such obligations
may involve additional risks to the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but the Manager will
consider such an event in its determination of whether the Fund should continue
to hold such obligation.
Each insured municipal obligation held by the Fund will either be (1)
covered by an insurance policy applicable to a specific security and obtained by
the issuer of the security or a third party at the time of original issuance
("original issue insurance"), (2) covered by an insurance policy applicable to a
specific security and obtained by the Fund or a third party subsequent to the
time of original issuance ("secondary market insurance"), or (3) covered by a
master municipal insurance policy purchased by the Fund ("portfolio insurance").
The Fund may maintain a policy of portfolio insurance with Financial Guaranty
Insurance Company, and may also obtain other policies of portfolio insurance
depending on the availability of these policies on terms favorable to the Fund.
However, the Fund may determine not to obtain portfolio insurance and to
emphasize investments in municipal obligations insured under original issue
insurance or secondary market insurance. The Fund may only obtain policies of
portfolio insurance issued by insurers specializing in insuring municipal debt,
whose claims-paying ability is rated Aaa by Moody's or AAA by S&P or Fitch
Investors Service Inc. In determining whether to insure the municipal
obligations held by the Fund, an insurer will apply its own standards, which
correspond generally to the standards it has established for determining the
insurability of new issues of municipal obligations. See the SAI for further
information about each type of insurance described above.
One or more policies of portfolio insurance or related contracts may
provide, pursuant to an irrevocable commitment of the insurer, the option to
exercise the right to obtain permanent insurance concerning a municipal
obligation that is to be sold by the Fund. The Fund would exercise the right to
obtain permanent insurance upon payment of a single, predetermined insurance
premium payable from the proceeds of the sale of that municipal obligation. The
Fund will exercise the right to obtain permanent insurance for a municipal
obligation only if, in the opinion of the Manager, upon exercise the net
proceeds from the sale by the Fund of that obligation, as insured, would exceed
the proceeds from the sale of that obligation without insurance.
If a portfolio insurance policy is obtained, premiums will be paid by the
Fund monthly, and will be adjusted for purchases and sales of municipal
obligations covered by the policy during the month. The Fund's yield will be
reduced by the amount of the insurance premiums. Depending upon the
characteristics of the municipal obligations to be held by the Fund, the annual
premium rate for the policies of portfolio insurance is estimated to range from
.10% to .25% of the value of the municipal obligations covered under the
policies. The Fund does not intend to obtain a portfolio insurance policy
within the next year. Accordingly, premiums for such a policy are not reflected
in the Summary of Expenses.
The two principal classifications of municipal obligations are
general obligation and revenue bonds. General obligation bonds are secured by
the issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source.
Industrial development and pollution control bonds are in most cases revenue
bonds and do not generally constitute the pledge of the credit or taxing power
of the issuer of these bonds.
Municipal obligations in which the Fund may invest also include municipal
lease obligations and participations in lease obligations (collectively, "lease
obligations") of municipal authorities or entities. The Manager determines
liquidity of lease obligations in accordance with guidelines established by the
Fund's Board of Directors. Unrated municipal lease obligations will be
considered to be illiquid. In determining the credit quality of unrated
municipal lease obligations, one of the factors, among others, to be considered
will be the likelihood that the lease will not be canceled. Certain "non-
appropriation" lease obligations may present special risks because the
municipality's obligation to make future lease or installment payments depends
on money being appropriated each year for this purpose. The Fund will seek to
minimize these risks by not investing more than 10% of its assets in uninsured,
non-appropriation lease obligations that meet certain criteria of the Fund. See
the SAI for further information about lease obligations.
The yields on municipal obligations depend on a variety of factors,
including the condition of financial markets in general and the municipal market
in particular, as well as the size of a particular offering, the maturity of the
obligation and the rating of the issue. Certain municipal obligations may pay
variable or floating rates of interest based upon certain market rates or
indexes such as a bank prime rate or a tax-exempt money market index. The
ratings of Moody's and S&P represent their opinions as to the quality of those
municipal obligations that they undertake to rate. The ratings are general and
are not absolute standards of quality. Consequently, municipal obligations
with the same maturity, coupon and rating may have different yields, while those
having the same maturity and coupon with different ratings may have the same
yield. The market value of municipal obligations will vary with changes in
prevailing interest rate levels and as a result of changing evaluations of the
ability of their issuers to meet interest and principal payments.
The market value of the Fund's assets and, therefore, the net asset value
of shares of the Fund will change in response to interest rate changes. They
will tend to decrease when interest rates rise and increase when interest rates
fall. Insurance of portfolio scurities does not guarantee against fluctuations
in interest rates. Long-term obligations (which normally have higher yields)
may fluctuate more in value than short-term obligations. Although there is no
policy limiting the maturity of the municipal obligations in which the Fund may
invest, the Fund will seek to reduce price fluctuation by emphasizing
investments in municipal obligations with maturities of less than ten years, and
at times may have most of its assets in short-term and intermediate-term
municipal obligations as a means of attempting to reduce fluctuation in the
value of its shares.
Under ordinary circumstances the Fund may invest up to 20% of its net
assets in obligations the interest on which is subject to federal income tax or
is an item of tax preference for purposes of the federal alternative minimum
tax, or a combination thereof ("Taxable Obligations"), but may invest without
limit in Taxable Obligations during temporary defensive periods to limit the
exposure of its portfolio to market risk from temporary imbalances of supply and
demand or other temporary circumstances affecting the municipal market. For
these temporary defensive purposes, the Fund will seek to make temporary
investments in short-term securities which are Tax-Exempt Obligations; however,
if suitable temporary Tax-Exempt Obligations are not available at reasonable
prices and yields, the Fund may make temporary investments in Taxable
Obligations. The Fund will invest only in those Taxable Obligations that are
either U.S. Government securities or are rated within the highest grade by
Moody's or S&P, and mature within one year from the date of purchase or carry a
variable or floating rate of interest. The Fund may not be able to achieve its
investment objective of providing current tax-exempt income to the extent
it invests in Taxable Obligations. See the SAI for further information about
the types of obligations in which the Fund may invest.
The Fund may, but is not expected to, have a high portfolio turnover.
See the Financial Highlights table.
The Fund may purchase and sell municipal obligations on a when-issued or
delayed delivery basis, which calls for the Fund to make payment or take
delivery at a future date. The commitment to purchase securities on a when-
issued or delayed delivery basis may involve an element of risk because the
value of the securities is subject to market fluctuation, no interest accrues to
the purchaser before settlement of the transaction, and at the time of delivery
the market value may be less than cost. The Fund may engage in when-issued
transactions to purchase or sell newly issued municipal obligations, and may
engage in delayed delivery transactions to manage its operations more
effectively. See the SAI for further information about when-issued and delayed
delivery transactions.
The Fund has adopted certain other fundamental policies intended to limit
the risk of its investment portfolio. In accordance with these policies, the
Fund may not (1) with respect to 75% of the Fund's assets invest more than 5% of
its assets in securities of any one issuer, except that this limitation shall
not apply to securities of the U.S. Government, its agencies or
instrumentalities and does not apply to the investment of the other 25% of the
Fund's assets; or (2) invest more than 25% of its assets in securities of
issuers in any one industry. In applying these policies, the "issuer" of a
security is deemed to be the entity whose assets and revenues are committed to
the payment of principal and interest on that security, provided that the
guarantee of an instrument may be considered a separate security. See the SAI
for further information regarding the issuers of guaranteed securities.
Although the Fund has no present intent to do so, it reserves the right to
engage in transactions involving futures contracts, options on futures contracts
and related options. See the SAI for considerations relating to future s
contracts and options and also for further description of the
policies summarized above and the Fund's other investment policies.
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, the taxable equivalent thereof 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.
Taxable equivalent yield is the yield that a taxable investment would need
to generate to equal the Fund's yield for an investor in a stated tax bracket.
A taxable equivalent yield will consequently be higher than the Fund's yield.
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 taxable equivalent total return of the Fund represents the total return
that would be generated by a taxable income fund that produced the same amount
of net asset value appreciation or depreciation and after-tax income as the Fund
in each year, assuming a specified tax rate. The taxable equivalent total
return of the Fund will, therefore, be higher than its total return over the
same period. Comparing the taxable equivalent total return of a tax-exempt fund
with the total return of a taxable fund may help you compare their investment
performance.
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 taxable investments such as corporate or U.S. Government bonds,
bank certificates of deposit ("CD's") or money market funds. These taxable
investments may have investment characteristics that differ from those of the
Fund. U.S. Government bonds, for example, are long-term investments backed by
the full faith and credit of the U.S. Government, and bank CD's 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 or widely followed, unmanaged municipal
market indexes such as the Bond Buyer 20 -Bond Index, the Merrill Lynch
500 Municipal Bond Index, the Salomon Brothers High Grade Corporate Bond
Index or the Lehman Brothers Municipal Bond Index. It may also discuss
its performance rankings as published by recognized independent mutual fund
statistical services or by 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 front 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
Government Securities 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 .50% 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 0.50% 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 M. Holliday is primarily responsible for the day-to-day management of
the portfolio of the Fund. Mr. Holliday is Senior 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. Holliday has
held his Fund responsibilities since the Fund's inception. He has been an
employee of the Manager since January 8, 1992. Prior to that date, Mr. Holliday
was an employee of Waddell & Reed, Inc. and served as the portfolio manager of
other investment companies managed by Waddell & Reed, Inc. He has been Senior
Vice President of Waddell & Reed Asset Management Company, an affiliate of the
Manager, since January 1983 and Vice President since June 1978. 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. 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 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.
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 Government Securities Fund, Inc.
You may by telephone or letter exchange some or all of the shares of
Torchmark Government Securities 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.
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.
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 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.
MINIMUM BALANCES
Shareholders must maintain a minimum balance of $500. 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,
normally up to 4:15 p.m. Eastern time. The Fund's portfolio securities are
valued according to the prices quoted by a dealer in bonds which offers a
pricing service for valuation of municipal bonds 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
applicable 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 that 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 (both original issue discount and, if the Fund
so elects, market discount on municipal securities purchased after April 30,
1993) 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
losses) 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 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 taxable net investment income
and net short-term capital gains) and net capital gain s that is
distributed to its shareholders. In addition, the Fund intends to continue
to qualify to pay "exempt-interest" dividends, which requires, among other
things, that at the close of each calendar quarter at least 50% of the value of
its total assets must consist of obligations the interest on which is excludable
from gross income under section 103(a) of the Code.
Most of the distributions by the Fund are designated by it as exempt-
interest dividends, which generally may be excluded by you from your gross
income. 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.
If you have a gain on a redemption of Fund shares , the entire
gain will be taxable even though a portion of the gain may represent municipal
bond interest earned but not yet paid out as a dividend. If the redemption is
not made until after record date, however, that interest will be received by
you as a dividend that is mostly tax-exempt rather than as part of a
taxable gain. Dividends exempt from Federal income tax may be subject to
income taxation under state and local tax laws.
Interest on indebtedness incurred or continued to purchase or carry Fund
shares will not be deductible for Federal income tax purposes to the extent the
Fund's dividends consist of exempt-interest dividends.
Entities or other persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by private activity bonds
("PABs") should consult their tax advisors before purchasing Fund shares
because, for users of certain of these facilities, the interest on PABs is not
exempt from Federal income tax. For these purposes, the term "substantial user"
is defined generally to include a "non-exempt person" who regularly uses in
trade or business a part of a facility financed from the proceeds of PABs.
Proposals may be introduced before Congress for the purpose of restricting
or eliminating the Federal income tax exemption for interest on municipal
obligations. If such a proposal were enacted, the availability of municipal
obligations for investment by the Fund and the value of its portfolio would be
affected. In such event, the Fund would reevaluate its investment objective and
policies.
Interest earned on certain bonds in which the Fund may invest will be
treated as a tax preference item for purposes of determining your
liability for the alternative minimum tax . If you may be
subject to that tax , you should consult with your tax
advisor concerning investment in the Fund. The Fund anticipates that no
more than 20% of the dividends it will pay will be subject to treatment
as a preference item. The Fund provide s you with
information concerning the portion of distributions that is a
preference item after the end of each calendar year.
The Fund is required to withhold 31% of all taxable 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 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
considerations applicable to a particular investor; for example, exempt-interest
dividends paid by the Fund may be partially or wholly taxable under some state
and local laws. 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
February 28, 1994 , United Investors Life Insurance Company, an affiliate
of Waddell & Reed, Inc., owned of record and beneficially 91.55 % of the
Fund's outstanding shares. See the SAI for further information regarding Fund
shares.
Information concerning exchange privileges and the Flexible Withdrawal
Service is contained in the SAI.
<PAGE>
TORCHMARK INSURED TAX-FREE 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 INSURED TAX-FREE FUND, INC.
PROSPECTUS
April 15 , 199 4
TABLE OF CONTENTS
SUMMARY OF EXPENSES .............................. 2
FINANCIAL HIGHLIGHTS ............................. 4
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES ..... 5
YIELD AND TOTAL RETURN ........................... 9
MANAGEMENT AND SERVICES .......................... 11
Service Fee--12b-1 Plan ..................... 12
TORCHMARK CORPORATION'S GUARANTEE ................ 13
PURCHASING AND REDEEMING ......................... 13
To Open an Account .......................... 13
To Add to Your Fund Account ................. 13
Free Exchange with Torchmark Government
Securities Fund, Inc. .................. 14
To Sell (Redeem) Your Shares ................ 14
MINIMUM BALANCES ................................. 16
SHARE PRICE ...................................... 16
SHORT-TERM TRADING ............................... 17
DIVIDENDS, DISTRIBUTIONS AND TAXES ........ 17
OTHER INFORMATION ................................ 20
F000299
<PAGE>
TORCHMARK INSURED TAX-FREE FUND, INC.
6300 Lamar Avenue
P. O. Box 2995
Shawnee Mission, Kansas 66201-1395
(913) 236-2050
April 15 , 199 4
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 Insured Tax-Free Fund, Inc. (the "Fund") dated
April 15 , 199 4 , 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 ................ 6
INVESTMENT POLICIES AND PORTFOLIO ................ 6
Investment Policies ......................... 6
Portfolio Securities - Insurance ............ 10
Portfolio Trading and Turnover .............. 18
When-issued and Delayed Delivery Transactions 18
Illiquid Investments ........................ 19
Considerations Relating to Financial Futures
Contracts and Options ... 19
Taxable Obligations ......................... 22
Ratings of Investments ...................... 25
INVESTMENT MANAGEMENT AND OTHER SERVICES ......... 26
The Management Agreement .................... 26
Torchmark Corporation and United Investors
Management Company ..................... 27
Shareholder Services ........................ 27
Accounting Services ......................... 27
Payments for Management and
Shareholder Services ................... 28
Services - 12b-1 Plan ....................... 29
Distribution Arrangement .................... 29
Custodial and Auditing Services ............. 30
PURCHASE, REDEMPTION AND PRICING OF SHARES ....... 30
Determination of Offering Price ............. 30
Exchange Privilege .......................... 31
Redemptions ................................. 32
Flexible Withdrawal Service ................. 32
DIRECTORS AND OFFICERS ........................... 33
Shareholdings ............................... 37
TAXES ............................................ 37
PORTFOLIO TRANSACTIONS ........................... 41
DIVIDENDS AND DISTRIBUTIONS ............... 42
OTHER INFORMATION ................................ 42
INITIAL INVESTMENT AND ORGANIZATIONAL EXPENSES ... 42
FINANCIAL STATEMENTS ............................. 44
<PAGE>
PERFORMANCE INFORMATION
As explained in the Prospectus, the historical investment performance of
the Fund may be shown in the form of "yield," "taxable equivalent yield,"
"average annual total return," "cumulative total return" and "taxable equivalent
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 4.35 %.
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.
The Fund's taxable equivalent yield is computed by dividing that portion of
the Fund's yield that is tax-exempt by the remainder of one minus the stated
combined Federal and state income tax rate, taking into account the
deductibility of state income taxes for Federal income tax purposes, and adding
the product to that portion, if any, of the yield of the Fund that is not tax-
exempt.
The tax equivalent 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 5.11 %, 6.02 %, 6.28%, 6.76% and
7.16% for marginal tax brackets of 15%, 28% , 31%, 36% and
39.6%, respectively.
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 and tax equivalent yields for the period indicated would have
been 3.64%, 4.27%, 5.03%, 5.25%, 5.65% and 5.99 %, respectively.
For additional information concerning tax-exempt yields, see the Taxable
Equivalent Yield Tables in the Prospectus.
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 9.62 %.
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 8.06 %.
Calculation of taxable equivalent total return is also not subject to a
prescribed formula. The Fund's taxable equivalent total return for a specific
period is calculated by first taking a hypothetical initial investment in the
Fund's shares on the first day of the period, computing the Fund's total return
for each calendar year in the period in the manner described above, and
increasing the total return for each such calendar year by the amount of
additional income that a taxable fund would need to have generated to equal the
income of the Fund on an after-tax basis, at a specified income tax rate
(usually the highest marginal Federal tax rate), calculated as described above
under the discussion of taxable equivalent yield. The resulting amount for the
calendar year is then divided by the initial investment amount to arrive at a
total return factor ("taxable equivalent total return factor") for the calendar
year. The taxable equivalent total return factors for all the calendar years
are then multiplied together, and the result is then annualized by taking its
Nth root (N representing the number of years in the period) and subtracting 1,
which provides a taxable equivalent total return expressed as a percentage.
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 also compare its performance with that of: (1)
the Consumer Price Index or various unmanaged bond indexes such as the Lehman
Brothers Municipal Market Index and the Salomon Brothers High Grade Corporate
Bond Index, (2) other mutual funds, including fixed income or municipal bond
mutual funds, and (3) 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 that are described herein. The Consumer Price Index is generally
considered to be a measure of inflation. The CDA Mutual Fund-Municipal Bond
Index is a weighted performance average of other mutual funds with a Federal
tax-exempt income objective. The Salomon Brothers High Grade Corporate Bond
Index is an unmanaged index that generally represents the performance of high
grade long-term taxable bonds during various market conditions. The Lehman
Brothers Municipal Market Index is an unmanaged index that generally represents
the performance of high grade intermediate and long-term municipal bonds during
various market conditions. Lipper, Wiesenberger and CDA are widely recognized
mutual fund reporting services whose performance calculations are based upon
changes in net asset value with all dividends reinvested and which do not
include the effect of any sales charges. The market prices and yields of
taxable and tax-exempt bonds will fluctuate. The Fund primarily invests in
investment grade municipal obligations in pursuing its objective of providing
current income exempt from Federal income tax.
The Fund may also compare its taxable equivalent return performance to the
total return performance of taxable income funds such as treasury securities
funds, corporate bond funds (either investment grade or high yield), or Ginnie
Mae funds. These types of funds, because of the character of their underlying
securities, differ from municipal bond funds in several respects. The
susceptibility of the price of treasury bonds to credit risk is far less than
that of municipal bonds, but the price of treasury bonds tends to be slightly
more susceptible to change resulting from changes in market interest rates. The
susceptibility of the price of investment grade corporate bonds and municipal
bonds to market interest rate changes and general credit changes is similar.
High yield bonds are subject to a greater degree of price volatility than
municipal bonds resulting from changes in market interest rates and are
particularly susceptible to volatility from credit changes. Ginnie Mae bonds
are generally subject to less price volatility than municipal bonds from credit
concerns, due primarily to the fact that the timely payment of monthly
installments of principal and interest are backed by the full faith and credit
of the U.S. Government, but Ginnie Maes of equivalent coupon and maturity are
generally more susceptible to price volatility resulting from market interest
rate changes. In addition, the volatility of Ginnie Mae bonds due to changes in
market interest rates may differ from municipal bonds of comparable coupon and
maturity because of the sensitivity of Ginnie Mae prepayment experience to
change in interest rates.
All performance information which the Fund advertises or includes in sales
material is historical in nature and 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 futures contracts or the writing of options within the limits
described in this SAI;
(4) Underwrite any issue of securities, except to the extent that the
purchase of municipal obligations 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, but this shall not prevent the Fund from
investing in municipal obligations secured by real estate or interests
therein or foreclosing upon and selling such security;
(6) Purchase or sell commodities or commodities contracts, except for
transactions involving options and futures contracts within the limits
described in this SAI;
(7) Make loans, other than by entering into repurchase agreements and
through the purchase of municipal obligations, temporary investments or
taxable investments in accordance with its investment objective,
policies and limitations;
(8) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions;
(9) Write or purchase put or call options, except if the purchase of a
stand-by commitment may be considered the purchase of a put, and except
for transactions involving options within the limits described in this
SAI;
(10) 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;
and
(11) Invest in interests in oil, gas or mineral leases or mineral development
programs, including oil and gas limited partnerships.
For the purpose of applying the limitations set forth in the Prospectus and
this SAI, an issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities, and its
securities are backed only by its assets and revenues. Similarly, in the case
of a non-governmental user, such as an industrial corporation or a privately
owned or operated hospital, if the security is backed only by the assets and
revenues of the non-governmental user, then such non-governmental user would be
deemed to be the sole issuer. Subject to its fundamental policy not to invest
more than 25% of its total assets in securities of issuers in any one industry,
the Fund may invest at times more than 25% of its assets in industrial revenue
municipal obligations (obligations of which the non-governmental user is deemed
to be the sole issuer.) Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental entity or other entity (other
than a bond insurer), it shall also be included in the computation of securities
owned that are issued by such governmental or other entity.
As an operating policy, which may be changed by the Fund's Board of
Directors, the Fund will not invest 25% or more of its assets in municipal
obligations whose issuers are located in the same state nor in securities,
interest upon which is paid from revenues of similar types of projects.
Where a security is guaranteed by a governmental entity or some other
facility, such as a bank guarantee or letter of credit, such a guarantee or
letter of credit would be considered a separate security and would be treated as
an issue of such government, other entity or bank. For purposes of determining
whether or not the Fund is a diversified investment company, however, a
guarantee of a municipal obligation shall not be deemed to be a security issued
by the guarantor, provided that the value of all securities issued or guaranteed
by the guarantor, and owned by the Fund does not exceed 10% of the value of the
total assets of the Fund. Where a security is insured by bond insurance, it
shall not be considered a security issued or guaranteed by the insurer; instead,
the issuer of such security will be determined according to the principles set
forth above. The foregoing restrictions do not limit the percentage of the
Fund's assets that may be invested in securities insured by a single insurer.
It is a fundamental policy of the Fund that the Fund will not hold securities of
a single bank, including securities backed by a letter of credit of such bank,
if such holdings would exceed 10% of the total assets of the Fund.
As an operating policy, (i) 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, and (ii) may not
purchase restricted securities, which are securities not registered under the
Securities Act of 1933, as amended.
As described in the Prospectus, the Fund may invest in municipal
obligations that constitute participations in a lease obligation or installment
purchase contract obligation (hereafter collectively called "lease obligations")
of a municipal authority or entity. Although lease obligations do not
constitute general obligations of the municipality for which the municipality's
taxing power is pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses that provide that the municipality has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although non-appropriation
lease obligations are secured by the leased property, disposition of the
property if there is foreclosure might prove difficult. The factors to be
considered in determining whether or not any rated lease obligations are liquid
include (i) the frequency of trades and quotes for the obligations; (ii) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (iii) the willingness of dealers to undertake to make a
market in the securities; (iv) the nature of marketplace trades, including the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer; (v) the likelihood that the marketability of the
obligation will be maintained through the time the instrument is held; (vi) the
credit quality of the issuer and the lessee; and (vii) the essentiality to the
lessee of the property covered by the lease. The Fund will seek to minimize the
special risks associated with such securities by not investing more than 10% of
its assets in uninsured lease obligations that contain non-appropriation
clauses, and by only investing in those non-appropriation leases where (1) the
nature of the leased equipment or property is such that its ownership or use is
essential to a governmental function of the municipality, (2) the lease payments
will commence amortization of principal at an early date resulting in an average
life of seven years or less for the lease obligation, (3) appropriate covenants
will be obtained from the municipal obligor prohibiting the substitution or
purchase of similar equipment if lease payments are not appropriated, (4) the
lease obligor has maintained good market acceptability in the past, (5) the
investment is of a size that will be attractive to institutional investors, and
(6) the underlying leased equipment has elements of portability and/or use that
enhance its marketability in the event foreclosure on the underlying equipment
were ever required. Lease obligations provide a premium interest rate which
along with regular amortization of the principal may make them attractive for a
portion of the assets of the Fund.
Obligations of issuers of municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Reform Act of 1978. In
addition, the obligations of such issuers may become subject to the laws enacted
in the future by Congress, state legislatures or referenda extending the time
for payment of principal and/or interest, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that, as a result of legislation or other conditions, the
power or ability of any issuer to pay, when due, the principal of and interest
on its municipal obligations may be materially affected.
The restrictions and limitations stated in the Prospectus and this SAI,
including the Fund's policies as to ratings of portfolio investments, 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.
Portfolio Securities - Insurance
Municipal obligations covered by original issue insurance (as hereinafter
described) or secondary market insurance (as hereinafter described) are
themselves assigned a rating of Aaa by Moody's Investors Service, Inc.
("Moody's") or AAA by Standard and Poor's Corporation ("S&P"), as the case may
be, because of the Aaa or AAA claims-paying ability of the issuer. These
obligations would generally be assigned a lower rating if the rating were based
primarily upon the credit characteristics of the issuers without regard to the
insurance feature, and would generally carry a rating that is below Aaa or AAA.
While in the portfolio of the Fund, however, a municipal obligation backed by
portfolio insurance (as hereinafter described) will effectively be of the same
quality as a municipal obligation issued by an issuer of comparable credit
characteristics that is backed by original issue insurance or secondary market
insurance.
The Fund's policy of investing in municipal obligations insured by insurers
whose claims-paying ability is rated Aaa or AAA by Moody's, S&P or Fitch
Investors Service Inc. ("Fitch") will apply only at the time of the purchase of
a security, and the Fund will not be required to dispose of securities in the
event Moody's, S&P and/or Fitch downgrades its assessment of the claims-paying
ability of a particular insurer or the credit characteristics of a particular
issuer. In the event Moody's, S&P and/or Fitch downgrades its assessment of the
claims-paying ability of a particular insurer, it could also be expected to
downgrade the ratings, if any, assigned to municipal obligations insured under
original issue insurance or secondary market insurance issued by such insurer,
and municipal obligations insured under portfolio insurance issued by such
insurer would also be of reduced quality in the portfolio of a the Fund.
Moody's, S&P and Fitch continually assess the claims-paying ability of insurers
and the credit characteristics of issuers, and there can be no assurance that
they will not downgrade their assessments subsequent to the time the Fund
purchases securities. There is no limitation on the percentage of the Fund's
assets that may be invested in municipal obligations insured by any given
insurer.
Original issue insurance is purchased regarding a particular issue of
municipal obligations by the issuer thereof or a third party in conjunction with
the original issuance of such municipal obligations. Under such insurance the
insurer unconditionally guarantees to the holder of the municipal obligation the
timely payment of principal and interest on such obligation when and as such
payments shall become due but not paid by the issuer except that in the event of
any acceleration of the due date of the principal by reason of mandatory or
optional redemption (other than acceleration by reason of mandatory sinking fund
redemption), default or otherwise, the payments guaranteed may be made in such
amounts and at such times as they would have been due had there not been such
acceleration. The insurer is responsible for such payments less any amounts
received by the holder from any trustee for the municipal obligation issuers or
from any other source.
Original issue insurance does not guarantee payment on an accelerated
basis, the payment of any redemption premium (except concerning certain premium
payments in the case of certain small issue industrial development and pollution
control municipal obligations), the value of the shares of the Fund, the market
value of municipal obligations, or payments of any tender purchase price upon
the tender of the municipal obligations. Original issue insurance also does not
insure against nonpayment of principal or of interest on municipal obligations
resulting from insolvency, negligence or any other act or omission of the
trustee or other paying agent for such obligations.
If there is interest on or principal of a municipal obligation covered by
insurance that is due for payment but is unpaid by the issuer thereof, the
applicable insurer will make payments to its fiscal agent equal to such unpaid
amounts of principal and interest not later than the business day after the
insurer has been notified that such nonpayment has occurred (but not earlier
than the date such payment is due). The fiscal agent will disburse to the Fund
the amount of principal and interest that is then due for payment but is unpaid
upon receipt by the fiscal agent of (i) evidence of the Fund's right to receive
payment of such principal and interest and (ii) evidence, including any
appropriate instruments of assignment, that all the rights to payment of such
principal or interest then due for payment shall thereupon vest in the insurer.
Upon payment by the insurer of any principal or interest payments concerning any
municipal obligations, the insurer shall succeed to the rights of the Fund
concerning such payment.
Original issue insurance remains in effect as long as the municipal
obligations covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such municipal
obligations. Consequently, original issue insurance may be considered to
represent an element of market value concerning the municipal obligations so
insured, but the exact effect, if any, of this insurance on such market value
cannot be estimated.
Subsequent to the time of original issuance of a municipal obligation, the
Fund or a third party may, upon the payment of a single premium, purchase
insurance (secondary market insurance) on such municipal obligation. Secondary
market insurance generally provides the same type of coverage as is provided by
original issue insurance and remains in effect as long as the municipal
obligation covered thereby remains outstanding, the holder of such municipal
obligation does not voluntarily relinquish the secondary market insurance and
the insurer remains in business, regardless of whether the Fund ultimately
disposes of such municipal obligation.
One of the purposes of acquiring secondary market insurance concerning a
particular municipal obligation is to enable the Fund to enhance the value of
such municipal obligation. The Fund, for example, might seek to purchase a
particular municipal obligation and obtain secondary market insurance with
respect thereto if, in the opinion of the Manager, the market value of such
municipal obligation, as insured, would exceed the current value of the
municipal obligation without insurance plus the cost of the secondary market
insurance. Similarly, if the Fund owns but wishes to sell a municipal
obligation that is then covered by portfolio insurance, the Fund might seek to
obtain secondary market insurance with respect thereto if, in the opinion of the
Manager, the net proceeds of a sale by the Fund of such obligation, as insured,
would exceed the current value of such obligation plus the cost of the secondary
market insurance.
Portfolio insurance guarantees the payment of principal and interest on
specified eligible municipal obligations purchased by the Fund. Except as
described below, portfolio insurance generally provides the same type of
coverage as is provided by original issue insurance or secondary market
insurance. Municipal obligations insured under one portfolio insurance policy
would generally not be insured under any other policy purchased by the Fund. A
municipal obligation is eligible for coverage under a policy if it meets certain
requirements of the insurer. Portfolio insurance is intended to reduce
financial risk, but the cost thereof and compliance with investment restrictions
imposed under the policy will reduce the yield to shareholders of the Fund.
If a municipal obligation is already covered by original issue insurance or
secondary market insurance, then such municipal obligation is not required to be
additionally insured under any policy of portfolio insurance that the Fund may
purchase. All premiums respecting municipal obligations covered by original
issue insurance or secondary market insurance are paid in advance by the issuer
or other party obtaining the insurance.
Portfolio insurance policies are effective only as to municipal obligations
owned by and held by the Fund, and do not cover municipal obligations for which
the contract for purchase fails. A "when-issued" municipal obligation will be
covered under a portfolio insurance policy upon the settlement date of the issue
of such "when-issued" municipal obligation. In determining whether to insure
municipal obligations held by the Fund, an insurer will apply its own standards,
which correspond generally to the standards it has established for determining
the insurability of new issues of municipal obligations.
Each portfolio insurance policy is non-cancelable and remains in effect so
long as the Fund is in existence, the municipal obligations covered by the
policy continue to be held by the Fund, the Fund pays the premiums for the
policy and the insurer stays in business. An insurer may reserve the right upon
written notice to refuse to insure any additional securities purchased by the
Fund after the effective date of such notice. The Fund reserves the right to
terminate each policy upon written notice to an insurer if it determines that
the cost of such policy is not reasonable in relation to the value of the
insurance to the Fund.
Each portfolio insurance policy terminates as to any municipal obligation
that has been redeemed or sold by the Fund on the date of such redemption or the
settlement date of such sale, and an insurer shall not have any liability
thereafter under a portfolio insurance policy as to any such municipal
obligation, except that if the date of such redemption or the settlement date of
such sale occurs after a record date and before the related payment date
concerning any such municipal obligation, the policy terminates as to such
municipal obligation on the business day immediately following such payment
date. Each policy terminates as to all municipal obligations covered thereby on
the date on which the last of the covered municipal obligations mature, are
redeemed or are sold by the Fund.
Pursuant to an irrevocable commitment of the insurer, a policy of portfolio
insurance may provide the Fund with the option to exercise the right to obtain
permanent insurance concerning a municipal obligation. The Fund may exercise
the right to obtain permanent insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
obligation. It is expected that the Fund will exercise the right to obtain
permanent insurance for a municipal obligation only if, in the opinion of the
Manager upon such exercise, the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance.
The permanent insurance premium concerning each such obligation is
determined based upon the insurability of each such obligation as of the date of
purchase by the Fund and will not be increased or decreased for any change in
the creditworthiness of such obligation unless such obligation is in default as
to payment of principal or interest, or both. In such event, the permanent
insurance premium shall be subject to an increase predetermined at the date of
purchase by the Fund.
The Fund generally intends to retain any insured securities covered by
portfolio insurance that are in default or in significant risk of default and to
place a value on the insurance, which ordinarily will be difference between the
market value of the defaulted security and the market value of similar
securities of minimum investment grade (i.e., rated BBB) that are not in
default. In certain circumstances, however, the Manager may determine that an
alternative value for the insurance, such as the difference between the market
value of the defaulted security and either its par value or the market value of
securities of a similar nature that are not in default or in significant risk of
default, is more appropriate. If the Fund holds such defaulted securities, it
may be limited in its ability to manage its investment portfolio and to purchase
other municipal obligations.
Except as described above concerning securities covered by portfolio
insurance that are in default or subject to significant risk of default, the
Fund will not place any value on the insurance in valuing the municipal
obligations that it holds.
Because each portfolio insurance policy terminates as to municipal
obligations sold by the Fund on the date of sale, in which event the insurer
will be liable only for those payments of principal and interest that are then
due and owing (unless permanent insurance is obtained by the Fund), this
insurance does not enhance the marketability of securities held by the Fund,
whether or not the securities are in default or in significant risk of default.
On the other hand, since original issue insurance and secondary market insurance
generally will remain in effect as long as municipal obligations covered thereby
are outstanding, such insurance may enhance the marketability of such
securities, even when such securities are in default or in significant risk of
default, but the exact effect, if any, on marketability cannot be estimated.
Accordingly, the Fund may determine to retain or, alternatively, to sell
municipal obligations covered by original issue insurance or secondary market
insurance that are in default or in significant risk of default.
Premiums for a portfolio insurance policy are paid monthly, and are
adjusted for purchases and sales of municipal obligations covered by insurance
during the month. The yield on the Fund is reduced to the extent of the
insurance premiums allocated to it. Depending upon the characteristics of the
municipal obligation held by the Fund, the annual premium rate for policies of
portfolio insurance is estimated to range from .10% to .25% of the value of the
municipal obligation covered under the policy.
Set forth below is a brief description of Financial Guaranty Insurance
Company ("Financial Guaranty"), from whom the Fund may purchase a portfolio
insurance policy (the "Portfolio Insurance Policy") securing certain municipal
securities (the "Insured Bonds") held in the Fund.
The Portfolio Insurance Policy is noncancelable except for failure to pay
premium. The premium rate for each purchase of a security covered by the
Portfolio Insurance Policy is fixed for the life of the Insured Bond. The
insurance premiums are payable monthly by the Fund and are adjusted for
purchases, sales and payments prior to maturity of Insured Bonds during the
month. In the event of a sale of any Insured Bond by the Fund or payment
thereof prior to maturity, the Portfolio Insurance Policy terminates as to such
Insured Bond.
Under the provisions of the Portfolio Insurance Policy, Financial Guaranty
unconditionally and irrevocably agrees to pay to State Street Bank and Trust
Company, N.A., or its successor, as its agent (the "Fiscal Agent"), that portion
of the principal of and interest on the Insured Bonds which shall become due for
payment but shall be unpaid by reason of nonpayment by the issuer of the Insured
Bonds. The term "due for payment" means, when referring to the principal of an
Insured Bond, its stated maturity date or the date on which it shall have been
called for mandatory sinking fund redemption and does not refer to any earlier
date on which payment is due by reason of call for redemption (other than by
mandatory sinking fund redemption), acceleration or other advancement of
maturity and means, when referring to interest on an Insured Bond, the stated
date for payment of interest. In addition, the Portfolio Insurance Policy
covers nonpayment by the issuer that results from any payment of principal or
interest made by such issuer on the Insured Bond to the Fund which has been
recovered from the Fund or its shareholders pursuant to the United States
Bankruptcy Code by a trustee in bankruptcy in accordance with a final,
nonappealable order of a court having competent jurisdiction.
Financial Guaranty will make such payments to the Fiscal Agent on the date
such principal or interest becomes due for payment or on the business day next
following the day on which Financial Guaranty shall have received notice of
nonpayment, whichever is later. The Fiscal Agent will disburse to the Fund the
face amount of principal and interest which is then due for payment but is
unpaid by reason of nonpayment by the issuer but only upon receipt by the Fiscal
Agent of (i) evidence of the Fund's right to receive payment of the principal or
interest due for payment and (ii) evidence, including any appropriate
instruments of assignment, that all of the rights to payment of such principal
or interest due for payment thereupon shall vest in Financial Guaranty. Upon
such disbursement, Financial Guaranty shall become the owner of the Insured
Bond, appurtenant coupon or right to payment of principal or interest on such
Insured Bond and shall be fully subrogated to all of the Fund's rights
thereunder, including the right to payment thereof.
In determining whether to insure municipal securities held in the Fund,
Financial Guaranty will apply its own standards which are not necessarily the
same as the criteria used in regard to the selection of securities by the Fund
or its Board of Directors.
Certain of the municipal securities insured under the Portfolio Insurance
Policy may also be insured under an insurance policy obtained by the issuer of
such municipal securities. The premium for any insurance policy or policies
obtained by an issuer of Insured Bonds has been paid in advance by such issuer
and any such policy or policies are noncancelable and will continue in force so
long as the Insured Bonds so insured are outstanding. Financial Guaranty has
also agreed, if requested by the Fund, to insure to maturity Insured Bonds. The
premium for any such insurance to maturity provided by Financial Guaranty is
paid by the Fund and any such insurance is noncancelable and will continue in
force so long as the Bonds so insured are outstanding.
Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation (the
"Corporation"), a Delaware holding company. The Corporation is a subsidiary of
General Electric Capital Corporation ("GE Capital"). Neither the Corporation
nor GE Capital is obligated to pay the debts of or the claims against Financial
Guaranty. Financial Guaranty is a monoline financial guaranty insurer domiciled
in the State of New York and subject to regulation by the State of New York
Insurance Department. As of December 31, 1993, the total capital and
surplus of Financial Guaranty was approximately $ 777,000,000 . Financial
Guaranty prepares financial statements on the basis of both statutory accounting
principles and generally accepted accounting principles. Copies of such
financial statements may be obtained by writing to Financial Guaranty at 115
Broadway, New York, New York 10006, Attention: Communications Department
(telephone number: (212) 312-3000) or to the New York State Insurance Department
at 160 West Broadway, 18th Floor, New York, New York 10013, Attention: Property
Companies Bureau (telephone number: (212) 602-0389).
The policies of insurance obtained by the Fund from Financial Guaranty and
the negotiations in respect thereof represent the only relationship between
Financial Guaranty and the Fund. Otherwise neither Financial Guaranty nor its
parent, FGIC Corporation, or any affiliate thereof has any significant
relationship, director or indirect, with the Fund or its Board of Directors.
Financial Guaranty has insurance claims-paying ability ratings of AAA from
Fitch, AAA from S&P and Aaa from Moody's.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is adjudged by S&P to be extremely strong
and highly likely to remain so over a long period of time. A Moody's insurance
claims-paying ability rating is an opinion of the ability of an insurance
company to repay punctually senior policyholder obligations and claims. An
insurer with an insurance claims-paying ability rating of Aaa is judged by
Moody's to be of the best quality. In the opinion of Moody's the policy
obligations of an insurance company with an insurance claims-paying ability
rating of Aaa carry the smallest degree of credit risk and, while the financial
strength of these companies is likely to change, such changes as can be
visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating by Fitch, S&P or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by Fitch, S&P or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts, or guarantees is
a separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
Fitch's, Moody's and S&P's ratings are not recommendations to buy, sell or
hold the securities insured by policies issued by Financial Guaranty and such
ratings may be subject to revision or withdrawal at any time by the rating
agencies. Any downward revision or withdrawal of any or all ratings may have an
adverse effect on the market price of the securities insured by policies issued
by Financial Guaranty.
Each rating of Financial Guaranty should be evaluated independently. Any
further explanation as to the significance of the ratings may be obtained only
from the applicable rating agency.
The information relating to Financial Guaranty set forth above has been
furnished by Financial Guaranty. No representation is made herein as to the
accuracy or adequacy of such information or as to the absence of material
adverse changes in such information subsequent to the date thereof.
Portfolio Trading and Turnover
The Fund will make changes in its investment portfolio from time to time to
take advantage of opportunities in the municipal market and to limit exposure to
market risk. The Fund may also engage to a limited extent in short-term trading
consistent with its investment objective, but the Fund will not trade securities
solely to realize a profit. Securities may be sold in anticipation of market
decline or purchased in anticipation of market rise and later sold, but the Fund
will not engage in trading solely to recognize a gain. In addition, a security
may be sold and another of comparable quality purchased at approximately the
same time to take advantage of what the Manager believes to be a temporary
disparity in the normal yield relationship between the two securities.
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 transactions costs and commission costs that will be borne by the
Fund.
When-issued and Delayed Delivery Transactions
As described in the Prospectus, the Fund may purchase and sell municipal
obligations on a when-issued or delayed delivery basis. When-issued and delayed
delivery transactions arise when securities are purchased or sold with payment
and delivery beyond the regular settlement date. These transactions normally
settle within 15-45 days. On such transactions the payment obligation and the
interest rate are fixed at the time the buyer enters into the commitment. The
commitment to purchase securities on a when-issued or delayed delivery basis may
involve an element of risk because the value of the securities is subject to
market fluctuation, no interest accrues to the purchaser before settlement of
the transaction, and at the time of delivery the market value may be less than
cost. At the time the Fund makes the commitment to purchase a municipal bond on
a when-issued or delayed delivery basis, it will record the transaction and
reflect the amount due and the value of the security in determining its net
asset value. Likewise, at the time the Fund makes the commitment to sell a
municipal obligation on a delayed delivery basis, it will record the transaction
and include the proceeds to be received in determining its net asset value;
accordingly, any fluctuations in the value of the municipal obligation sold
pursuant to a delayed delivery commitment are ignored in calculating net asset
value so long as the commitment remains in effect. The Fund will maintain
designated readily marketable assets at least equal in value to commitments to
purchase when-issued or delayed delivery securities, such assets to be
segregated by the Custodian for the Fund specifically for the settlement of such
commitments. The Fund will only make commitments to purchase municipal
obligations on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities, but the Fund reserves the right to sell these
securities before the settlement date if it is deemed advisable. If a when-
issued security is sold before delivery, any gain or loss would not be tax-
exempt. The Fund may engage in when-issued transactions to purchase or sell
newly issued municipal obligations, and may engage in delayed delivery
transactions to manage its operations more effectively. The Fund will not make
a commitment to purchase a municipal obligation on a when-issued or delayed
delivery basis if the commitments in the aggregate exceed 5% of the total assets
of the Fund.
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.
Considerations Relating to Financial Futures Contracts and Options
Although the Fund has no present intent to do so, the Fund may purchase and
sell financial futures contracts, options on financial futures or related
options 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 or in an option that is
expected to move in the opposite direction from the position being hedged.
Futures or options utilized for hedging purposes would either be based on an
index of long-term municipal obligations (i.e., those with remaining maturities
averaging 20-30 years) or relate to debt securities whose prices are anticipated
by the Manager to correlate with the prices of the municipal obligations owned
by the Fund. The sale of financial futures or the purchase of put options on
financial futures or on debt securities or indexes 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 or indexes 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 or indexes may serve as a partial hedge
against an increase in the value of municipal 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
transactions in futures and options on futures be engaged in only for bona fide
hedging purposes, and 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 or
index underlying the futures. Concerning its engaging in transactions
involving the purchase or writing of put and call options on debt securities or
indexes, the Fund will not purchase such options if more than 5% of its assets
would be invested in the premiums for such options, and it will only write
"covered" or "secured" options, wherein the securities or cash required to be
delivered upon exercise are held by the Fund, with such cash being maintained in
a segregated account. These requirements and limitations may limit a Fund's
ability to engage in hedging transactions.
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 (such as U.S. Treasury securities) or indexes designed to
correlate with price movements in certain categories of debt securities. At
least one exchange trades future contracts on an index designed to correlate
with the long-term municipal bond market. 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. Index futures and
options are designed for cash settlement only.
There are risks associated with the use of futures contracts and options
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 will 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 is 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 price 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.
Taxable Obligations
The Prospectus discusses briefly the ability of the Fund to invest a
portion of its assets in Tax-Exempt Obligations or in Taxable Obligations, or a
combination thereof. Under ordinary circumstances, the Fund may invest up to
20% of its net assets in Taxable Obligations, and it may invest without limit in
Taxable Obligations during temporary defensive periods. The Fund will invest
only in Taxable Obligations that are either U.S. Government securities or are
rated within the highest grade by Moody's or S&P, and mature within one year
from the date of purchase or carry a variable or floating rate of interest.
In addition to those obligations described in the Prospectus, the Fund may
invest in the following Tax-Exempt Obligations:
Bond Anticipation Notes ("BANs") are usually general obligations of state
and local governmental issuers that are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local governments
to finance the current operations of such governments. Repayment is generally
to be derived from specific future tax revenues. Tax anticipation notes are
usually general obligations of the issuer. A weakness in an issuer's capacity
to raise taxes due to, among other things, a decline in its tax base or a rise
in delinquencies, could adversely affect the issuer's ability to meet its
obligations on outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general, they also constitute
general obligations of the issuer. A decline in the receipt of projected
revenues, such as anticipated revenues from another level of government, could
adversely affect an issuer's ability to meet its obligations on outstanding
RANs. In addition, the possibility that the revenues would, when received, be
used to meet other obligations could affect the ability of the issuer to pay the
principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained
from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied, but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("Municipal Paper") represents very short-term
unsecured, negotiable promissory notes, issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available
therefrom. Maturities of municipal paper generally will be shorter than the
maturities of TANs, BANs, or RANs. There is a limited secondary market for
issues of municipal paper.
While these various types of notes as a group represent the major portion
of the tax-exempt note market, other types of notes are occasionally available
in the marketplace, and the Fund may invest in such other types of notes to the
extent permitted under its investment objective, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
The Fund may also invest in the following Taxable Obligations:
U.S. Government Direct Obligations -- These obligations are issued by the
United States Treasury and include bills, notes and bonds.
-- Treasury bills are issued with maturities of up to one year. They are
issued in bearer form, are sold on a discount basis and are payable at par
value at maturity.
-- Treasury notes are longer-term interest bearing obligations with original
maturities of one to seven years.
-- Treasury bonds are longer-term interest-bearing obligations with original
maturities from five to thirty years.
U.S. Government Agencies Securities -- Certain Federal agencies have been
established as instrumentalities of the United States Government to supervise
and finance certain types of activities. These agencies include, but are not
limited to, the Federal Housing Administration, Federal National Mortgage
Association, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
General Services Administration, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Farm Credit Banks, Maritime
Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association. Issues of these
agencies, while not direct obligations of the United States Government, are
either backed by the full faith and credit of the United States or are
guaranteed by the Treasury or supported by the issuing agencies' right to borrow
from the Treasury. There can be no assurance that the United States Government
itself will pay interest and principal on securities as to which it is not
legally obligated to do so.
Certificates of Deposit ("CDs") -- A certificate of deposit is a negotiable
interest bearing instrument with a specific maturity. CDs are issued by banks
in exchange for the deposit of funds and normally can be traded in the secondary
market, before maturity. The Fund may only invest in U.S. dollar denominated
CDs issued by U.S. banks with assets of $1 billion or more.
Commercial Paper -- Commercial paper is the term used to designate
unsecured short-term promissory notes issued by corporations. Maturities on
these issues vary from a few days to nine months. Commercial paper may be
purchased only from U.S. corporations.
Other Corporate Obligations -- The Fund may purchase notes, bonds and
debentures issued by corporations if at the time of purchase there is less than
one year remaining until maturity, or if they carry a variable or floating rate
of interest.
Repurchase Agreements -- A repurchase agreement is a contractual agreement
whereby the seller of securities (U.S. Government or municipal obligations)
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.
Ratings of Investments
The four highest ratings of Moody's for municipal obligations are Aaa, Aa,
A and Baa. Municipal obligations rated Aaa are judged to be of the "best
quality." The rating of Aa is assigned to municipal obligations that are of
"high quality by all standards," but as to which margins of protection or other
elements make long-term risks appear somewhat larger than in Aaa rated municipal
obligations. The Aaa and Aa rated municipal obligations comprise what are
generally known as "high grade bonds." Municipal obligations that are rated A
by Moody's possess many favorable investment attributes and are considered upper
medium grade obligations. Factors giving security principal and interest of A
rated municipal obligations are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Municipal
obligations rated Baa by Moody's are considered medium grade obligations (i.e.,
they are neither highly protected nor poorly secured). Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Moody's bond rating symbols may contain numerical
modifiers of a generic rating classification. The modifier 1 indicates that the
bond ranks at the high end of its category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
The four highest ratings of S&P for municipal obligations are AAA, AA, A
and BBB. Municipal obligations rated AAA have a strong capacity to pay
principal and interest. The rating of AA indicates that capacity to pay
principal and interest is very strong, and such bonds differ from AAA issues
only in small degree. The category of A describes bonds that have a strong
capacity to pay principal and interest, although such bonds are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions. The BBB rating is the lowest "investment grade" security rating by
S&P. Municipal obligations rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas such bonds normally exhibit
adequate protection parameters, adverse economic conditions are more likely to
lead to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
The "Other Corporate Obligations" category of investments are corporate (as
opposed to municipal) debt obligations rated AAA by S&P or Aaa by Moody's.
Corporate debt obligations rated AAA by S&P have an extremely strong capacity to
pay principal and interest. The Moody's corporate rating of Aaa is comparable
to that set forth above for municipal obligations.
Subsequent to its purchase by the Fund, an issue may cease to be rated, or
its rating may be reduced below the minimum required for purchase by the Fund.
Neither event requires the elimination of such obligation from the Fund's
portfolio, but the Manager will consider such an event in its determination of
whether the Fund should continue to hold such obligation.
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 Government Securities 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 $9,201; 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 initial public offering date, 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
exceed s 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 (including premiums for portfolio
insurance), 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 $4,603; 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 has authorized the use of prices quoted by a dealer
in bonds that offers a pricing service to value municipal obligations. 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 municipal obligations 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.
Debt futures and municipal bond index futures purchased and held by the
Fund are valued at the last sales price thereof on the commodities exchange on
which they are traded, or, if there are no transactions, at the mean between bid
and asked prices. Ordinarily, the close of the regular session of the
commodities exchanges is 4:15 p.m. Eastern time. Net asset value per share will
be computed on each day on which it is computed (see above) as of the last close
of the regular session of any such exchange.
Futures contracts are valued with reference to established futures
exchanges. The value of a futures contract purchased by the Fund will be either
the closing price of that contract or the bid price. Conversely, the value of a
futures contract sold by the Fund is either the closing price or the asked
price.
Exchange Privilege
A shareholder may exchange shares of the Fund for shares of Torchmark
Government Securities 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.
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.
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 Government
Securities 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 Government Securities 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 M. Holliday
Vice President of the Fund; Senior Vice President of the Manager and
Waddell & Reed Asset Management Company; formerly, Senior Vice President of
Waddell & Reed, Inc.
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 , 199 4 , 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 91.55 % 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 taxable net investment income and net short-term
capital gains) plus its net interest income excludable from gross income under
section 103(a) of the Code, 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 or futures) 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, options or futures 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.
The aggregate dividends that qualify as exempt-interest dividends, and thus
are excludable from all Fund shareholders' gross income, may not exceed the
Fund's net tax-exempt income. The shareholders' treatment of dividends from the
Fund under state and local income tax laws may differ from the treatment thereof
under the Code.
Insurance proceeds received by the Fund under any insurance policies in
respect of scheduled interest payments on defaulted municipal obligations will
be excludable from gross income under section 103(a) of the Code.
If in any year the Fund fail ed to qualify for
treatment as a RIC, it would incur regular corporate
Federal income tax on its taxable income for that year ( i.e.,
interest income from municipal obligations would be excluded ), and
all distributions to its shareholders , including distributions
attributable to such interest income and net capital gains (the excess of net
long-term capital gain over net short-term capital loss) would be taxable
as ordinary dividend income for Federal income tax purposes to the extent
of the Fund's earnings and profits.
If the Fund has both tax-exempt and taxable interest income, it will use
the "actual earned method" for determining the percentage that is taxable
income and designate the use of that method within 60 days after the end
of its taxable year. Under this method the ratio of ( i ) taxable
income earned during the period for which a distribution was made to ( ii )
total income earned during the period determines the percentage of the
distribution that is designated taxable. The percentage of income, if
any, designated as taxable will under this method vary from distribution to
distribution.
As described in the Prospectus, any part of the exempt-interest
dividends paid by the Fund that is attributable to interest on certain bonds is
subject to the alternative minimum tax. Exempt-interest dividends received by a
corporate shareholder also may be indirectly subject to that tax, without regard
to whether the Fund's tax-exempt interest was attributable to those bonds.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from the Fund still are
tax-exempt; they are only included in the calculation of whether a recipient's
income exceeds the established amounts.
Although dividends generally are treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a date in one of those months and paid during the following
January, will be treated as having been distributed by the Fund (and received by
the shareholders) on December 31.
The redemption or exchange of Fund shares normally result in
capital gain or loss to the shareholders. Generally, a shareholder's gain or
loss will be long-term gain or loss if the shares have been held for more than
one year; however, losses realized by a shareholder on the redemption or
exchange of Fund shares held for six months or less will be
disallowed to the extent of any distribution s of exempt-interest
dividends received on those shares and any losses that are not
disallowed will be treated as long-term capital losses to the extent of
any distributions of net capital gain s on those shares.
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 (taxable) income for that year and capital gain net income for the one-
year period ending October 31 of that year, plus certain other amounts.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, 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 and futures contracts 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 and futures
contracts 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 a 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 and futures contracts beyond the time when it
otherwise would be advantageous to do so, in order for the Fund to continue to
qualify as a RIC.
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 an
underwriter 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 underwriters include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers include the spread between the bid and asked price. Given the best
price and execution obtainable, it is 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 OTHER DISTRIBUTIONS
Dividends and other distributions are paid in additional Fund shares
unless in the Application or by subsequent written instruction to the
Fund the shareholder elects to have 1) dividends and other distributions paid in
cash or 2) dividends paid in cash and other 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 other 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 other
distribution. The tax treatment of dividends and other distributions is the
same whether you receive them in cash or in additional shares.
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 INSURED TAX-FREE FUND, INC.
DECEMBER 31, 1993
Principal
Amount in
Thousands Value
MUNICIPAL BONDS
ALABAMA - 4.35%
The DCH Health Care Authority, Health
Care Facilities Revenue Bonds,
Series 1993-A,
5.5%, 6-1-2013 ........................ $100 $ 101,625
ARIZONA - 3.16%
Paradise Valley Unified School District
No. 69 of Maricopa County, Arizona,
Refunding Bonds, Second Series 1993,
0.0%, 7-1-2007 ........................ 150 73,875
CONNECTICUT - 4.44%
Connecticut Housing Finance Authority,
Housing Mortgage Finance Program Bonds,
1993 Series B,
6.0%, 5-15-2009 ....................... 100 103,750
FLORIDA - 4.81%
City of Jacksonville, Florida, Excise
Taxes Revenue Bonds, Series 1993,
0.0%, 10-1-2011 ....................... 300 112,500
ILLINOIS - 17.35%
Illinois Health Facilities Authority:
Revenue Refunding Bonds, Series 1993A
(Elmhurst Memorial Hospital),
5.5%, 1-1-2013 ........................ 100 100,375
Hospital Revenue Refunding Bonds,
Series 1993 (Delnor-Community Hospital),
5.5%, 5-15-2013 ....................... 100 99,250
Northwest Suburban Municipal Joint Action
Water Agency (Cook, DuPage and Kane
Counties, Illinois), Water Supply
System Revenue Bonds, Series 1993A,
5.9%, 5-1-2013 ........................ 100 105,250
City of Chicago, Wastewater Transmission
Revenue Bonds, Refunding Series 1993,
5.375%, 1-1-2013 ...................... 100 100,750
Total ................................. 405,625
IOWA - 4.43%
City of Ames, Iowa, Hospital Revenue
Bonds (Mary Greeley Medical Center
Project), Series 1993,
5.7%, 8-15-2012 ....................... 100 103,625
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
TORCHMARK INSURED TAX-FREE FUND, INC.
DECEMBER 31, 1993
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MICHIGAN - 7.44%
Huron School District, Counties of Wayne
and Monroe, State of Michigan, 1992
Refunding Bonds (General Obligation -
Unlimited Tax),
0.0%, 5-1-2013 ........................ $340 $ 123,250
Godfrey-Lee Public Schools, County of
Kent, State of Michigan, 1993 Refunding
Bonds (General Obligation - Unlimited Tax),
5.5%, 5-1-2013 ........................ 50 50,750
Total ................................. 174,000
NEBRASKA - 4.57%
City of Lincoln, Nebraska, Lincoln General
Hospital Revenue and Refunding Bonds,
Series 1993A,
6.2%, 12-1-2014 ....................... 100 106,750
NEVADA - 9.34%
Clark County School District, Las Vegas,
Nevada, General Obligation (Limited Tax)
Refunding Bonds, Series 1991B,
0.0%, 3-1-2009 ........................ 250 111,250
Clark County Nevada, Las Vegas - McCarran
International Airport, Passenger Facility
Charge Revenue Bonds, 1992 Series B,
6.25%, 7-1-2011 ....................... 100 107,125
Total ................................. 218,375
OHIO - 4.37%
Ohio Water Development Authority, State
of Ohio, Water Development Revenue
Refunding Bonds, Pure Water Refunding
and Improvement Series,
5.5%, 12-1-2011 ....................... 100 102,250
PENNSYLVANIA - 8.62%
County of Allegheny, Pennsylvania, Airport
Revenue Bonds, Series 1993C (Pittsburgh
International Airport),
5.625%, 1-1-2013 ...................... 100 101,625
Berks County Municipal Authority,
Berks County, Pennsylvania, College
Revenue Bonds, Series of 1993
(Albright College),
5.1%, 10-1-2008 ....................... 100 99,875
Total ................................. 201,500
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
TORCHMARK INSURED TAX-FREE FUND, INC.
DECEMBER 31, 1993
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
SOUTH DAKOTA - 4.40%
Sioux Falls School District 49-5,
Sioux Falls, South Dakota, Refunding
Capital Outlay Certificates of 1992,
Series 1992B (Limited Tax Obligation),
5.75%, 7-1-2012 ....................... $100 $ 102,875
TEXAS - 9.08%
Tarrant County Water Control and
Improvement District Number One
(Tarrant County, Texas), Water Revenue
Refunding and Improvement Bonds,
Series 1992,
5.75%, 3-1-2013 ....................... 100 108,500
City of Austin, Texas, Combined Utility
Systems Revenue Refunding Bonds, Series 1992A,
5.75%, 11-15-2014 ..................... 100 103,875
Total ................................. 212,375
UTAH - 4.45%
Salt Lake City, Salt Lake County, Utah,
Airport Revenue Bonds, Series 1993A (AMT),
6.0%, 12-1-2012 ....................... 100 104,000
WASHINGTON - 4.53%
Public Utility District No. 1 of Snohomish
County, Washington, Generation System
Revenue Bonds, Series 1993,
6.0%, 1-1-2013 ........................ 100 106,000
TOTAL MUNICIPAL BONDS - 95.34% $2,229,125
(Cost: $2,138,007)
TOTAL SHORT-TERM SECURITIES - 2.78% $ 65,000
(Cost: $65,000)
TOTAL INVESTMENT SECURITIES - 98.12% $2,294,125
(Cost: $2,203,007)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.88% 43,842
NET ASSETS - 100.00% $2,337,967
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 INSURED TAX-FREE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1993
Assets
Investment securities - at value
(Notes 1 and 4) ................................. $2,294,125
Cash ............................................ 16,211
Receivables:
Interest ........................................ 29,625
Fund shares sold ................................ 25
Unamortized organization
expenses (Note 2) ............................... 31,850
Prepaid insurance premium ........................ 260
----------
Total assets .................................. 2,372,096
----------
Liabilities
Organization expenses payable .................... 31,850
Accrued accounting services fee .................. 833
Accrued transfer agency and dividend disbursing .. 122
Distribution fee payable ......................... 16
Other ............................................ 1,308
----------
Total liabilities ............................. 34,129
----------
Total net assets.............................. $2,337,967
==========
Net Assets
$0.01 par value capital stock, authorized --
200,000,000; shares outstanding -- 224,518
Capital stock ................................... $ 2,245
Additional paid-in capital ...................... 2,244,821
Accumulated undistributed gain (loss):
Accumulated undistributed net realized loss on
investment transactions ....................... (217)
Net unrealized appreciation in value of
investments at end of period ................... 91,118
----------
Net assets applicable to outstanding units
of capital ................................... $2,337,967
==========
Net asset value per share (net assets divided by
shares outstanding) .............................. $10.41
======
See notes to financial statements.
<PAGE>
TORCHMARK INSURED TAX-FREE FUND, INC.
STATEMENT OF OPERATIONS
For the Period from February 26, 1993 through December 31, 1993
Investment Income
Interest ......................................... $100,480
--------
Expenses (Notes 2 and 3):
Investment management fee ....................... 9,201
Accounting services fee ......................... 8,333
Amortization of organization expenses ........... 6,370
Report expenses.................................. 6,358
Transfer agency and dividend disbursing ......... 5,274
Legal fees ...................................... 5,254
Distribution fee ................................ 4,603
Audit fees ...................................... 4,000
Custodian fees .................................. 401
Other ........................................... 724
--------
Total ......................................... 50,518
Less expenses in excess of limitation ......... (32,170)
--------
Total expenses ............................... 18,348
--------
Net investment income ...................... 82,132
--------
Realized and Unrealized Gain (Loss) on Investments
Realized net loss on investments ................. (217)
Unrealized appreciation in value of investments
during the period ............................... 91,118
--------
Net gain on investments ......................... 90,901
--------
Net increase in net assets resulting
from operations .............................. $173,033
========
See notes to financial statements.
<PAGE>
TORCHMARK INSURED TAX-FREE 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 ............... $ 82,132
Realized net loss on investments .... (217)
Unrealized appreciation ............. 91,118
----------
Net increase in net assets
resulting from operations ........ 173,033
----------
Dividends to shareholders from
net investment income* .............. (82,132)
----------
Capital share transactions:
Proceeds from sale of shares
(206,433 shares) .................. 2,065,047
Proceeds from reinvestment of
dividends (8,085 shares) .......... 82,019
----------
Net increase in net assets
resulting from capital
share transactions ............... 2,147,066
----------
Total increase ................... 2,237,967
Net Assets
Beginning of period .................. 100,000
----------
End of period ........................ $2,337,967
==========
Undistributed net investment
income ............................ $---
====
*See "Financial Highlights" on page .
See notes to financial statements.
<PAGE>
TORCHMARK INSURED TAX-FREE 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 .............................. .38
Net realized and unrealized gain on investments .... .41
------
Total from investment operations ...................... .79
------
Less dividends from net investment income ............. (0.38)
------
Net asset value,
end of period ...................................... $10.41
======
Total return .......................................... 9.62%*
Net assets, end of period (000 omitted) ............... $2,338
Ratio of expenses to average net assets ............... 1.00%*
Ratio of net investment income to average net assets .. 4.46%*
Portfolio turnover rate ............................... 79.14%*
*Annualized
See notes to financial statements.
<PAGE>
TORCHMARK INSURED TAX-FREE FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE 1 -- Significant Accounting Policies
Torchmark Insured Tax-Free 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 -- Municipal bonds and the taxable obligations in the
Fund's investment portfolio are not listed or traded on any securities
exchange. Therefore, municipal bonds are valued using prices quoted by
Muller and Company, a dealer in bonds which offers a pricing service.
Short-term debt securities, whether taxable or nontaxable, 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. Original issue discount (as defined by the Internal
Revenue Code) and premiums on the purchase of bonds are amortized for both
financial and tax reporting purposes over the remaining lives of the bonds.
Interest income is recorded on the accrual basis. See Note 4 -- Investment
Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under the Internal Revenue Code.
The Fund intends to pay distributions as required to avoid imposition of
excise tax. Accordingly, provision has not been made for Federal income
taxes. In addition, the Fund intends to meet requirements of the Internal
Revenue Code which will permit it to pay dividends from net investment
income, substantially all of which will be exempt from Federal income tax.
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 200,000 shares of the Fund. As of December 31,
1993, UILIC owned 207,612 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 .50% 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 the first three years
commencing 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 investment securities, other than U.S. Government and short-
term securities, aggregated $3,531,255 while proceeds from maturities and sales
aggregated $1,410,518. Purchases of short-term securities aggregated $665,000
while proceeds from maturities and sales aggregated $601,426. There was no gain
or loss on the sale of short-term securities. No U.S. Government securities
were bought or sold during the period ended December 31, 1993.
For Federal income tax purposes, cost of investments owned at December 31,
1993 was $2,203,625, resulting in net unrealized appreciation of $90,500, of
which $90,755 related to appreciated securities and $255 related to depreciated
securities.
NOTE 5 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $400 during the fiscal period ended December 31, 1993, which is available for
future distribution.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Torchmark Insured Tax-Free Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Torchmark Insured Tax-Free 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 Insured Tax-Free
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>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements -- Torchmark Insured Tax-Free Fund, Inc.
Included in Part B:
-------------------
As of December 31, 1993
Statement of Assets and Liabilities
For the period ended December 31, 1993
Statement of Operations
For the period ended December 31, 1993
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of December 31, 1993
Report of Independent Accountants
Included in Part C:
-------------------
Consent of Independent Accountants
Other schedules prescribed by Regulation S-X are not filed because the
required matter is not present or is insignificant.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A of our report dated February 18, 1994 relating to the
financial statements and financial highlights of Torchmark Insured Tax-Free
Fund, Inc., which appears in such Statement of Additional Information. We
further consent to the references to us under the headings "Financial
Highlights" in the Prospectus and "Custodial and Auditing Services" in the
Statement of Additional Information constituting part of this Post-Effective
Amendment.
KPMG Peat Marwick
Kansas City, Missouri
April 13, 1994
<PAGE>
(b) Exhibits:
(1) (a) Articles of Incorporation filed September 29, 1992 as Exhibit
(b)(1) to the initial Registration Statement on Form N-1A*
(b) Articles of Amendment filed February 17, 1993 as Exhibit
(b)(1)(b) to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-1A*
(2) By-Laws filed September 29, 1992 as Exhibit (b)(2) to the initial
Registration Statement on Form N-1A*
(3) Not applicable
(4) Article FIFTH and Article ELEVENTH of the Articles of Incorporation of
Registrant, filed through EDGAR on September 29, 1992 as Exhibit
(b)(1) to the initial Registration Statement on Form N-1A*; Article
II, Article III, Article VIII and Article XI of the Bylaws of the
Registrant filed September 29, 1992 as Exhibit (b)(2) to the initial
Registration Statement on Form N-1A*
(5) Investment Management Agreement filed September 29, 1992 as Exhibit
(b)(5) to the initial Registration Statement on Form N-1A*
(6) Underwriting Agreement filed September 29, 1992 as Exhibit (b)(6) to
the initial Registration Statement on Form N-1A*
(7) Not applicable
(8) Custodian Agreement filed January 6, 1993 as Exhibit (b)(8) on Form SE
to Pre-Effective Amendment No. 1 to the initial Registration Statement
on Form N-1A*
Amendment to the Custodian Agreement dated February 17, 1993 filed
August 24, 1993 as Exhibit (b)(8) to Post-Effective Amendment No. 1 to
the Registration Statement on Form N-1A*
(9) (a) Shareholder Servicing Agreement filed January 13, 1993 as Exhibit
(b)(9)(a) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A*
(b) Accounting Services Agreement filed September 29, 1992 as Exhibit
(b)(9)(b) to the initial Registration Statement on Form N-1A*
(c) Fund application filed February 17, 1993 as Exhibit (b)(9)(d) on
Form SE to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-1A*
(d) Guarantee of Expense Limit filed January 13, 1993 as Exhibit
(b)(9)(e) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A*
(10) Opinion and Consent of Counsel filed September 29, 1992 as Exhibit
(b)(10) on Form SE to the initial Registration Statement on Form N-1A*
(11) Not applicable
(12) Not applicable
(13) Agreement with initial shareholder, Waddell & Reed, Inc., filed
February 17, 1993 as Exhibit (b)(13) to Pre-Effective Amendment No. 2
to the Registration Statement on Form N-1A*
(14) Not Applicable
- ---------------------------------
*Incorporated herein by reference
(15) (a) Service Plan filed September 29, 1992 as Exhibit (b)(15) to the
initial Registration Statement on Form N-1A*
(b) Services Agreement filed September 29, 1992 as Exhibit (b)(9)(c)
to the initial Registration Statement on Form N-1A*
(16) (a) Schedule for computation of yield performance quotation filed
August 24, 1993 as Exhibit (b)(16)(a) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A*
(b) Schedule for computation of tax-equivalent yield performance
quotations filed August 24, 1993 as Exhibit (b)(16)(b) to Post-
Effective Amendment No. 1 to the Registration Statement on Form
N-1A*
(c) Schedule for average annual total return performance quotation
filed August 24, 1993 as Exhibit (b)(16)(c) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A*
(d) Schedule for computation of cumulative total return performance
quotation filed August 24, 1993 as Exhibit (b)(16)(d) to Post-
Effective Amendment No. 1 to the Registration Statement on Form
N-1A*
(17) Not applicable
25. Persons Controlled by or under common control with Registrant
------------------------------------------------------------
91.33% of Registrant's outstanding shares are owned by United Investors
Life Insurance Company, a Missouri corporation and an affiliate of Waddell
& Reed, Inc. United Investors Life Insurance Company and Waddell & Reed,
Inc. are indirect subsidiaries of Torchmark Corporation, a Delaware
corporation and the ultimate controlling corporation as described below
(see "Torchmark Corporation and United Investors Management Company" in the
Statement of Additional Information of the Registrant). United Investors
Life Insurance Company is a direct subsidiary of United Investors
Management Company, a holding company. 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. United Investors Life
Insurance Company and the Registrant have no subsidiaries.
26. Number of Holders of Securities
-------------------------------
Number of Record Holders as of
Title of Class December 31, 1993
-------------- -------------------------------
Common 26
27. Indemnification
---------------
Reference is made to Article 10.2 of the Articles of Incorporation of
Registrant filed September 29, 1992 as Exhibit (b)(1) to the initial
Registration Statement on Form N-1A*, Article IX of the By-Laws filed
September 29, 1992 as Exhibit (b)(2) to the initial Registration Statement
on Form N-1A* and to Article IV of the Underwriting Agreement filed
September 29, 1992 as Exhibit (b)(6) to the initial Registration Statement
on Form N-1A*, each of which provides indemnification. Also refer to
Section 2-418 of the Maryland General Corporation Law regarding
indemnification of directors, officers, employees and agents.
- ---------------------------------
*Incorporated herein by reference
28. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the Investment Manager of
the Registrant under the terms of an Investment Management Agreement
whereby it provides investment management services to the Registrant.
Waddell & Reed Investment Management Company is a corporation which is not
engaged in any business other than the provision of investment management
services to those registered investment companies as described in Part A
and Part B of this Post-Effective Amendment.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to Part A and Part B of this Post-Effective
Amendment.
29. Principal Underwriter and Distributor
-------------------------------------
(a) Torchmark Distributors, Inc. is the principal underwriter and
distributor of the Registrant's shares. It is also the principal
underwriter and distributor of the shares of Torchmark Government
Securities Fund, Inc.
(b) The information contained in the underwriter's application on form BD,
under the Securities Exchange Act of 1934, is herein incorporated by
reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or an
affiliated person of such affiliated person.
30. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940
and rules promulgated thereunder are under the possession of Mr. Rodney O.
McWhinney and Mr. Robert L. Hechler, as officers of the Registrant, each of
whose business address is Post Office Box 2995, Shawnee Mission, Kansas
66201-1395.
31. Management Services
-------------------
There are no service contracts other than as discussed in Part A and B of
this Post-Effective Amendment and listed in response to Items (b)(9) and
(b)(15) hereof.
32. Undertakings
------------
(a) Not applicable
(b) Not applicable
(c) The Fund agrees to furnish to each person to whom a prospectus is
delivered a copy of the Fund's latest annual report to shareholders
upon request and without charge.
(d) To the extent that Section 16(c) of the Investment Company Act of
1940, as amended, applies to the Fund, the Fund agrees, if requested
in writing by the shareholders of record of not less than 10% of the
Fund's outstanding shares, to call a meeting of the shareholders of
the Fund for the purpose of voting upon the question of removal of any
director.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940 the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Overland Park, and State of Kansas,
on the 13th day of April, 1994.
TORCHMARK INSURED TAX-FREE FUND, INC.
(Registrant)
By /s/ Keith A. Tucker*
------------------------
Keith A. Tucker, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signatures Title
- ---------- -----
/s/Ronald K. Richey* Chairman of the Board April 13, 1994
- ---------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker* President and Director April 13, 1994
- ---------------------- (Principal Executive Officer) ----------------
Keith A. Tucker
/s/Theodore W. Howard* Vice President, Treasurer April 13, 1994
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler* Vice President and April 13, 1994
- ---------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon* Director April 13, 1994
- ---------------------- ----------------
Henry L. Bellmon
/s/Dodds I. Buchanan* Director April 13, 1994
- --------------------- ----------------
Dodds I. Buchanan
/s/Jay B. Dillingham* Director April 13, 1994
- -------------------- ----------------
Jay B. Dillingham
/s/John F. Hayes* Director April 13, 1994
- ------------------- ----------------
John F. Hayes
Director
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director April 13, 1994
- ------------------- ----------------
William T. Morgan
/s/Doyle Patterson* Director April 13, 1994
- ------------------- ----------------
Doyle Patterson
/s/Frederick Vogel, III* Director April 13, 1994
- ------------------- ----------------
Frederick Vogel, III
/s/Paul S. Wise* Director April 13, 1994
- ------------------- ----------------
Paul S. Wise
/s/Leslie S. Wright* Director April 13, 1994
- ------------------- ----------------
Leslie S. Wright
*By
Rodney O. McWhinney
Attorney-in-Fact
ATTEST:
Sharon K. Pappas
Vice President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED FUNDS,
INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND, INC.,
UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., TMK/UNITED FUNDS, INC., WADDELL & REED
FUNDS, INC., TORCHMARK INSURED TAX-FREE FUND, INC. AND TORCHMARK GOVERNMENT
SECURITIES FUND, INC. (each hereinafter called the "Corporation"), and certain
directors and officers for the Corporation, do hereby constitute and appoint
KEITH A. TUCKER, ROBERT L. HECHLER, and RODNEY O. MCWHINNEY, and each of them
individually, their true and lawful attorneys and agents to take any and all
action and execute any and all instruments which said attorneys and agents may
deem necessary or advisable to enable each Corporation to comply with the
Securities Act of 1933 and/or the Investment Company Act of 1940, as amended,
and any rules, regulations, orders or other requirements of the United States
Securities and Exchange Commission thereunder, in connection with the
registration under the Securities Act of 1933 and/or the Investment Company Act
of 1940, as amended, including specifically, but without limitation of the
foregoing, power and authority to sign the names of each of such directors and
officers in his behalf as such director or officer has indicated below opposite
his signature hereto, to any amendment or supplement to the Registration
Statement filed with the Securities and Exchange Commission under the Securities
Act of 1933 and/or the Investment Company Act of 1940, as amended, and to any
instruments or documents filed or to be filed as a part of or in connection with
such Registration Statement; and each of the undersigned hereby ratifies and
confirms all that said attorneys and agents shall do or cause to be done by
virtue hereof.
Date: May 1, 1993 /s/Keith A. Tucker*
---------------------
Keith A. Tucker, President
/s/Ronald K. Richey* Chairman of the Board May 1, 1993
- -------------------- ---------------
Ronald K. Richey
/s/Keith A. Tucker* President and Director May 1, 1993
- -------------------- (Principal Executive Officer) ---------------
Keith A. Tucker
/s/Theodore W. Howard* Vice President, Treasurer May 1, 1993
- -------------------- and Principal Accounting ---------------
Theodore W. Howard Officer
/s/Robert L. Hechler* Vice President and May 1, 1993
- -------------------- Principal Financial ---------------
Robert L. Hechler Officer
/s/Henry L. Bellmon* Director May 1, 1993
- -------------------- ---------------
Henry L. Bellmon
/s/Dodds I. Buchanan* Director May 1, 1993
- -------------------- ---------------
Dodds I. Buchanan
/s/Jay B. Dillingham* Director May 1, 1993
- -------------------- ---------------
Jay B. Dillingham
/s/John F. Hayes* Director May 1, 1993
- -------------------- ---------------
John F. Hayes
Director
- -------------------- ---------------
Glendon E. Johnson
/s/William T. Morgan* Director May 1, 1993
- -------------------- ---------------
William T. Morgan
/s/Doyle Patterson* Director May 1, 1993
- -------------------- ---------------
Doyle Patterson
/s/Frederick Vogel, III* Director May 1, 1993
- -------------------- ---------------
Frederick Vogel, III
/s/Paul S. Wise* Director May 1, 1993
- -------------------- ---------------
Paul S. Wise
/s/Leslie S. Wright* Director May 1, 1993
- -------------------- ---------------
Leslie S. Wright
Attest:
/s/Sharon K. Pappas*
- --------------------
Sharon K. Pappas, Vice President
and Secretary
April 13, 1994
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N. W.
Judiciary Plaza
Washington, D. C. 20549
Re: Torchmark Insured Tax-Free Fund, Inc.
Post-Effective Amendment No. 2
Dear Sir or Madam:
In connection with the filing of the above-referenced Post-Effective Amendment,
I hereby represent that the Amendment does not contain disclosures which would
render it ineligible to become effective pursuant to paragraph (b) of Rule 485.
Yours truly,
Rodney O. McWhinney
General Counsel
ROM/sw
