<PAGE>
Torchmark
Insured
Tax-Free
Fund, Inc.
ANNUAL
REPORT
--------------------------------------
For the period ended December 31, 1993
<PAGE>
FUND MANAGER'S LETTER
- -----------------------------------------------------------------
DECEMBER 31, 1993
Dear Shareholder:
This report relates to the operation of the Torchmark Insured Tax-Free Fund
from the date of its inception on February 26, 1993, to the end of its fiscal
year on December 31, 1993. The following discussion, graphs and tables provide
you with information regarding the Fund's performance during that period.
During the past fiscal year, the United States' economy experienced slow
growth, low inflation and declines in interest rates, although some upward
fluctuations in interest rates occurred in the fourth quarter of the year. The
past year saw an increase in new issuances of municipal securities as many
municipalities took advantage of opportunities to refinance their debt at lower
interest rates.
The Fund was managed with the objective of maximizing yield while investing
mostly in medium-term insured municipal bonds. We diversified the Fund's
investments as much as possible, but we were restricted somewhat by size
constraints associated with the Fund's start-up phase. Thus far, the Fund has
been able to invest in bonds issued by fifteen different states and representing
eight different categories of bonds, including water and sewer revenues, school
district general obligations and hospital revenues.
The strategies and techniques we applied resulted in the direction of the
Fund's performance during the period from its inception to the end of the fiscal
year remaining fairly consistent with that of the indexes charted on the
following page. Those indexes reflect the performance of securities that
generally represent the municipal bond market (the Lehman Brothers Municipal
Bond Index) and the universe of funds with similar investment objectives (the
Lipper Insured Municipal Debt Fund Universe Average). The Fund's strategies
resulted in performance that bettered the depicted indexes.
In 1994, we anticipate that interest rates and inflation will remain
generally stable. Consequently, we expect to continue the same strategies we
have recently employed. In essence, we plan to diversify the Fund's holdings by
location, type of municipal project and credit. We also expect to increase the
Fund's holdings in bonds with longer maturities.
We appreciate your continued confidence.
Respectfully,
John M. Holliday
Manager, Torchmark Insured Tax-Free Fund, Inc.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
TORCHMARK INSURED TAX-FREE FUND, INC.,
The line graph which appears here in the paper version was filed on Form SE on
March 1, 1994.
<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 6.
<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 6.
<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 10.
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>
INCOME TAX INFORMATION
Dividends are declared and recorded by the Fund on each day the New York Stock
Exchange is open for business. Dividends are paid monthly on the 27th of the
month or on the preceding business day if the 27th is a weekend or holiday.
Exempt Interest Dividends - The exempt interest portion of dividends paid
represents the distribution of state and municipal bond interest and is exempt
from Federal income taxation.
The table below shows the taxability of dividends paid during the fiscal year
ended December 31, 1993:
PERCENTAGE AMOUNTS REPORTABLE AS:
- -------------------------------------------------------------------------------
For Individuals For Corporations
- --------------------------------------------------------------------------
RecordOrdinary Exempt Long-Term Non- Exempt Long-Term
Date IncomeInterest Capital GainQualifyingInterestCapital Gain
- ------------------------------------------------------------------------
Inception
through
12-31-93 1.5877% 98.4123% 0.0000% 1.5877% 98.4123% 0.0000%
NON-QUALIFYING DIVIDENDS - The non-qualifying portion of distributions
represents the taxable portion of dividends paid and does not qualify for the
dividends received deduction for corporations.
The actual taxable amounts of dividends will be reported to you on Form 1099-DIV
after the close of the applicable calendar year.
Income from the Fund may be subject to the alternative minimum tax.
Shareholders are advised to consult with their tax advisors concerning the tax
treatment of dividends and distributions from the Fund.
<PAGE>
DIRECTORS
Ronald K. Richey, Birmingham, Alabama, Chairman of the Board
Henry L. Bellmon, Red Rock, Oklahoma
Dodds I. Buchanan, Boulder, Colorado
Jay B. Dillingham, Kansas City, Missouri
John F. Hayes, Hutchinson, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Los Angeles, California
Doyle Patterson, Kansas City, Missouri
Keith A. Tucker, Overland Park, Kansas
Frederick Vogel, III, Milwaukee, Wisconsin
Paul S. Wise, Carefree, Arizona
Leslie S. Wright, Birmingham, Alabama
OFFICERS
Keith A. Tucker, President
Robert L. Hechler, Vice President
Henry J. Herrmann, Vice President
John M. Holliday, Vice President
Theodore W. Howard, Vice President and Treasurer
Rodney O. McWhinney, Vice President
Sharon K. Pappas, Vice President and Secretary
<PAGE>
This space available for your notes and calculations.
<PAGE>
This report is submitted for the general information of the shareholders of
Torchmark Insured Tax-Free Fund, Inc. It is not authorized for distribution to
prospective investors in the Fund unless accompanied with or preceded by the
Torchmark Insured Tax-Free Fund, Inc. current prospectus.
<PAGE>
TORCHMARK INSURED TAX-FREE FUND, INC.
December 31, 1993
FOR MORE INFORMATION:
TORCHMARK SERVICES
6300 Lamar Avenue
P.O. Box 2995
Shawnee Mission, KS 66201-1395
(800) 733-3863
FOOO299A(12-93)
