TMK/UNITED FUNDS, INC.
ANNUAL
REPORT
-------------------------------------------
For the fiscal year ended December 31, 1997
<PAGE>
GROWTH PORTFOLIO
MANAGER'S LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report relates to the operation of the Growth Portfolio for the fiscal
year ended December 31, 1997. The following discussion, graphs and tables
provide you with information regarding the Portfolio's performance during
that period.
During the past year, the domestic economy was characterized by strong
growth, lower interest rates, low inflation, increased currency volatility
and generally rising financial market prices. The low inflation rates
resulted primarily from intense national and worldwide competition and, in
turn, contributed to lower interest rates and strong equity market returns.
The strong U.S. economy has created increased federal tax receipts and the
real possibility of a balanced federal budget next year for the first time
in thirty years. These trends have increasingly attracted international
investments in U.S. markets and strengthened the U.S. Dollar.
With the Portfolio Manager change this year, we have shifted the
Portfolio's investment philosophy to focus on companies that manage their
businesses based upon economic return on investment parameters. We began
the process of altering the Portfolio's holdings in favor of companies that
are in what we feel are solid business sectors, based upon our analysis of
long-term sustainable earnings power. This approach is consistent with our
belief that, over the long-term, the best businesses, as defined by high
sustainable return on investment ratios, tend to be the best stock market
performers. Good businesses get better valuations in the stock market and
tend to grow earnings faster and at more sustainable levels. Investments
that we believe fit these criteria include Phillip Morris Companies, Inc.,
Colgate-Palmolive Company, Harley-Davidson, Inc., Lilly and Company (Eli
Lilly), MGIC Investment Corp., Home Depot, Inc., Wells Fargo & Company,
PepsiCo, Inc., Schering Plough Corp. and securities issued by the Federal
National Mortgage Association (Fannie Mae). We attempted to make these
investments at times when the stocks were reasonably priced. We favored
large dominant multinational companies (U.S. companies that generate a
significant part of their sales and earnings outside of the country).
The strategies and techniques we applied resulted in the Portfolio
underperforming the S&P 500 Index charted on the following page. The S&P
500 Index reflects the performance of securities that generally represent
the stock market. The Portfolio's underperformance relative to the indexes
resulted primarily from its large cash position.
We anticipate that economic growth and corporate earnings growth will
remain moderate as the new year begins. While equity investments should
continue to provide attractive long-term returns, such returns are
increasingly uncertain during the short term and we are skeptical that the
recent extraordinary performance of the equity market will continue
indefinitely. We are committed to continuing our effort to identify
attractive investment opportunities in multinational growth companies which
are positioned in highly profitable business sectors.
Thank you very much for your continued support and confidence.
Respectfully,
Daniel P. Becker
Manager, Growth Portfolio
<PAGE>
Comparison of Change in Value of $10,000 Investment in
TMK/United Growth Portfolio
and The S&P 500 Index
TMK/UNITED S&P
GROWTH 500
PORTFOLIO INDEX
---------- -----
07/13/87 Purchase $10,000 $10,000
12/31/88 11,355 11,661
12/31/89 14,490 15,356
12/31/90 13,717 14,880
12/31/91 18,669 19,413
12/31/92 22,560 20,893
12/31/93 25,723 22,998
12/31/94 26,338 23,301
12/31/95 36,494 32,058
12/31/96 41,021 39,419
12/31/97 49,818 52,541
----- TMK/United Growth Portfolio* -- $49,818
+++++ S&P 500 Index -- $52,541
*The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund and assumes reinvestment of dividends and
distributions.
Annual Average Total Return+
----------------------------
Year Ended
12/31/97 21.45%
5 Years Ended
12/31/97 17.17%
10 Years Ended
12/31/97 17.42%
+Performance data quoted represents past performance. Investment return
and principal value will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
Past performance is not predictive of future performance. Indexes are
unmanaged. Performance data quoted does not take into account any
expenses or charges associated with owning a variable life or annuity
policy invested in the TMK/United Funds, Inc.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Apparel and Accessory Stores - 3.93%
Kohl's Corporation* .................... 140,000 $ 9,537,500
Nordstrom, Inc. ........................ 114,100 6,874,525
Payless ShoeSource, Inc.* .............. 130,000 8,726,250
Total ................................. 25,138,275
Building Materials and Garden Supplies - 2.12%
Home Depot, Inc. (The) ................. 230,000 13,541,250
Business Services - 1.33%
BMC Software, Inc.* .................... 18,000 1,180,116
Manpower Inc. .......................... 208,200 7,339,050
Total ................................. 8,519,166
Chemicals and Allied Products - 9.79%
Bristol-Myers Squibb Company ........... 70,000 6,623,750
Colgate-Palmolive Company .............. 197,000 14,479,500
Lilly (Eli) and Company ................ 120,000 8,355,000
Novartis AG (A) ........................ 4,600 7,461,502
Pfizer Inc. ............................ 131,000 9,767,622
Schering-Plough Corporation ............ 167,200 10,387,300
Warner-Lambert Company ................. 44,300 5,493,200
Total ................................. 62,567,874
Communication - 1.38%
AT&T Corporation ....................... 144,200 8,832,250
Depository Institutions - 9.34%
BankAmerica Corporation* ............... 165,400 12,074,200
Comerica Incorporated .................. 116,300 10,496,075
MBNA Corp. ............................. 289,000 7,893,168
Wells Fargo & Company .................. 86,200 29,259,469
Total ................................. 59,722,912
Electronic and Other Electric Equipment - 5.93%
Emerson Electric Co. ................... 101,900 5,750,930
General Electric Company ............... 152,000 11,153,000
Intel Corporation ...................... 79,300 5,568,288
Linear Technology Corporation .......... 33,100 1,905,302
Philips Electronics N.V. NY Shs ........ 130,000 7,865,000
Telefonaktiebolaget LM Ericsson, ADR,
Class B ............................... 152,400 5,691,073
Total ................................. 37,933,593
Food and Kindred Products - 4.73%
ConAgra, Inc. .......................... 200,000 6,562,400
Dean Foods Company ..................... 66,400 3,950,800
PepsiCo, Inc. .......................... 334,900 12,202,751
Wm. Wrigley Jr. Company ................ 95,000 7,558,390
Total ................................. 30,274,341
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Furniture and Home Furnishings Stores - 0.49%
CompUSA Inc.* .......................... 101,800 $ 3,155,800
General Merchandise Stores - 1.95%
Dollar General Corporation ............. 173,000 6,271,250
Wal-Mart Stores, Inc. .................. 157,200 6,199,496
Total ................................. 12,470,746
Health Services - 2.51%
Health Management Associates, Inc.,
Class A* .............................. 373,500 9,430,875
Tenet Healthcare Corporation* .......... 200,000 6,625,000
Total ................................. 16,055,875
Industrial Machinery and Equipment - 7.28%
Applied Materials, Inc.* ............... 263,300 7,923,487
Cisco Systems, Inc.* ................... 112,650 6,287,222
EMC Corporation* ....................... 396,600 10,881,514
Eaton Corporation ...................... 47,300 4,221,525
Parker Hannifin Corporation ............ 375,900 17,244,413
Total ................................. 46,558,161
Instruments and Related Products - 2.55%
Input/Output, Inc.* .................... 250,000 7,421,750
Medtronic, Inc. ........................ 170,000 8,893,040
Total ................................. 16,314,790
Insurance Carriers - 9.18%
Allstate Corporation (The) ............. 150,700 13,694,862
American International Group, Inc. ..... 97,800 10,635,750
MBIA Inc. .............................. 175,100 11,698,781
MGIC Investment Corporation ............ 222,200 14,776,300
Provident Companies .................... 203,700 7,867,913
Total ................................. 58,673,606
Miscellaneous Retail - 1.07%
Walgreen Co. ........................... 218,300 6,849,163
Motion Pictures - 1.38%
Walt Disney Company (The) .............. 89,000 8,816,518
Nondepository Institutions - 5.42%
Fannie Mae ............................. 319,000 18,202,778
Freddie Mac ............................ 160,000 6,709,920
SLM Holding Corporation ................. 69,800 9,737,100
Total ................................. 34,649,798
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Petroleum and Coal Products - 2.85%
Exxon Corporation ...................... 147,000 $ 8,994,489
Royal Dutch Petroleum Company .......... 170,000 9,211,790
Total ................................. 18,206,279
Printing and Publishing - 2.39%
Gannett Co., Inc. ...................... 151,400 9,358,337
Tribune Company ........................ 95,400 5,938,650
Total ................................. 15,296,987
Security and Commodity Brokers - 0.86%
Franklin Resources, Inc. ............... 63,000 5,488,875
Tobacco Products - 5.28%
Philip Morris Companies Inc. ........... 744,700 33,743,846
Transportation Equipment - 3.71%
Harley-Davidson, Inc. .................. 601,800 16,474,275
Sundstrand Corporation ................. 143,600 7,233,850
Total ................................. 23,708,125
Transportation Services - 0.52%
Dial Corporation (The) ................. 160,500 3,345,302
Water Transportation - 1.36%
Carnival Corporation, Class A .......... 156,800 8,682,800
Wholesale Trade -- Durable Goods - 1.24%
Johnson & Johnson ...................... 120,200 7,918,175
Wholesale Trade -- Nondurable Goods - 1.80%
Unilever N.V. .......................... 184,000 11,488,408
TOTAL COMMON STOCKS - 90.39% $577,952,915
(Cost: $490,175,285)
PREFERRED STOCK - 0.41%
Holding and Other Investment Offices
LTC Properties, Inc., 9.5% ............. 100,000 $ 2,600,000
(Cost: $2,500,000)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITY - 0.40%
Business Services
Adaptec Inc., Convertible,
4.75%, 2-1-2004 (B) ................... $2,500 $ 2,593,750
(Cost: $2,495,507)
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES
Commercial Paper
Chemicals and Allied Products - 0.93%
Abbott Laboratories,
5.77%, 1-14-98 ........................ $ 5,920 $ 5,907,665
Depository Institutions - 0.60%
J.P. Morgan & Co., Incorporated,
5.8%, 2-5-98 .......................... 3,880 3,858,121
Electric, Gas and Sanitary Services - 2.44%
Baltimore Gas and Electric Company,
5.8%, 1-8-98 .......................... 2,495 2,492,186
Bay State Gas Co.,
5.85%, 1-15-98 ........................ 3,117 3,109,909
Commonwealth Edison Co.,
6.15%, 1-15-98 ........................ 10,000 9,976,083
Total ................................. 15,578,178
Electronic and Other Electric Equipment - 1.01%
Whirlpool Corp.,
6.5%, 1-5-98 .......................... 6,460 6,455,335
Fabricated Metal Products - 0.24%
Danaher Corporation,
5.7227%, Master Note .................. 1,510 1,510,000
Food and Kindred Products - 0.01%
General Mills, Inc.,
5.5777%, Master Note .................. 67 67,000
Insurance Carriers - 0.92%
USAA Capital Corp.,
5.8%, 1-29-98 ......................... 5,900 5,873,384
Nondepository Institutions - 1.34%
Caterpillar Financial Services Corp.,
5.93%, 1-23-98 ........................ 8,615 8,583,780
Petroleum and Coal Products - 0.60%
BP America Inc.,
5.9%, 1-21-98 ......................... 3,860 3,847,348
Security and Commodity Brokers - 0.56%
Merrill Lynch & Co. Inc.,
5.82%, 1-16-98 ........................ 3,580 3,571,319
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Textile Mill Products - 0.13%
Sara Lee Corporation,
5.5727%, Master Note .................. $ 852 $ 852,000
Total Commercial Paper - 8.78% 56,104,130
Commercial Paper (Backed by Irrevocable Letter
of Credit) - 1.37%
Electric, Gas and Sanitary Services
AES Hawaii Inc. (Bank of America NT & SA),
5.85%, 1-30-98 ........................ 8,810 8,768,483
TOTAL SHORT-TERM SECURITIES - 10.15% $ 64,872,613
(Cost: $64,872,613)
TOTAL INVESTMENT SECURITIES - 101.35% $648,019,278
(Cost: $560,043,405)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (1.35%) (8,659,941)
NET ASSETS - 100.00% $639,359,337
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
INCOME PORTFOLIO
MANAGERS' LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report relates to the operation of the Income Portfolio for the fiscal
year ended December 31, 1997. The following discussion, graphs and tables
provide you with information regarding the Portfolio's performance during
that period.
1997 was the third consecutive year of very positive returns in the major
U.S. stock indexes. The U.S. economy continued to enjoy a remarkable
period of moderate economic growth, strong corporate earnings, low
unemployment, high levels of consumer confidence, declining interest rates
and low inflation. Although sharp currency devaluations and economic
turmoil rocked several nations in Southeast Asia late in the year, the
ramifications were not yet clear as 1997 came to a close.
The investment strategy employed in the management of the Portfolio
remained unchanged. We have continued to focus on large, well-managed U.S.
corporations that enjoy dominant positions in their markets on a global
basis. While some changes in the Portfolio's holdings do occur frequently,
the overall turnover rate is generally very low relative to other large cap
equity income mutual funds. Throughout 1997, the Portfolio was
overweighted in automotive, chemicals, machinery, household products,
retailing and technology stocks. The Portfolio carried below average
holdings in energy, financial services and utilities.
The strategies and techniques we applied resulted in the Portfolio's
performance remaining below that of the S&P 500 Index as charted on the
following page. That index reflects the performance of securities that
generally represent the stock market. The Portfolio's underperformance
relative to the S&P 500 can be attributed primarily to the Portfolio's
investments in areas such as HMOs, semiconductors, semiconductor equipment,
software and paper, all of which came under pressure in the final quarter
of the year.
We expect that many U.S. companies will see meaningful downward earnings
revisions for 1998 as a result of ongoing events in Asia. The perception
of a subdued global economic growth rate dominates the investment outlook
as we enter the new year. We expect economic growth in 1998 to remain
moderate and inflation to remain low. However, we think the concerns
regarding economic difficulties in emerging markets in Asia will serve to
reinforce the position of strength enjoyed by major U.S. corporations. Our
strategy remains one of investing in U.S. companies which represent
stability and market leadership. Although we anticipate slowing global
growth in the new year, many powerful positives remain intact for U.S.
stock investments. We will adjust the Portfolio as the markets evolve;
however, our basic emphasis on large cap U.S. stocks will remain unchanged.
Thank you very much for your continued support and confidence.
Respectfully,
Russell E. Thompson
James D. Wineland
Managers, Income Portfolio
<PAGE>
Comparison of Change in Value of $10,000 Investment in
TMK/United Income Portfolio
and The S&P 500 Index
TMK\UNITED S&P
INCOME 500
PORTFOLIO INDEX
---------- -----
07/16/91 Purchase $10,000 $ ----
07/31/91 10,054 10,000
12/31/91 10,767 10,910
12/31/92 12,251 11,742
12/31/93 14,371 12,924
12/31/94 14,207 13,095
12/31/95 18,692 18,016
12/31/96 22,383 22,153
12/31/97 28,238 29,528
----- TMK/United Income Portfolio* -- $28,238
+++++ S&P 500 Index** -- $29,528
*The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund and assumes reinvestment of dividends and
distributions.
**Because the Fund commenced operations on a date other than at the end of
a month, and partial month calculations of the performance of the S&P
500 Index (including income) are not available, investment in the index
was effected as of July 31, 1991.
Annual Average Total Return+
----------------------------
Year Ended
12/31/97 26.16%
5 Years Ended
12/31/97 18.18%
6+ Years Ended
12/31/97++ 17.42%
+Performance data quoted represents past performance. Investment return
and principal value will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
++7-16-91 (the initial offering date) through 12-31-97.
Past performance is not predictive of future performance. Indexes are
unmanaged. Performance data quoted does not take into account any
expenses or charges associated with owning a variable life or annuity
policy invested in the TMK/United Funds, Inc.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Apparel and Accessory Stores - 3.48%
Gap, Inc. (The) ........................ 265,950 $ 9,424,470
Kohl's Corporation* .................... 88,300 6,015,438
Payless ShoeSource, Inc.* .............. 100,300 6,732,637
Total ................................. 22,172,545
Building Materials and Garden Supplies - 0.87%
Home Depot, Inc. (The) ................. 93,600 5,510,700
Business Services - 1.39%
ABM Industries Incorporated ............ 24,600 751,825
Microsoft Corporation* ................. 62,900 8,127,812
Total ................................. 8,879,637
Chemicals and Allied Products - 17.85%
Air Products and Chemicals, Inc. ....... 93,800 7,709,141
Avon Products, Inc. .................... 42,100 2,583,888
BetzDearborn Inc. ...................... 53,000 3,236,286
Colgate-Palmolive Company .............. 97,800 7,188,300
Crompton & Knowles Corporation ......... 98,500 2,610,250
Dow Chemical Company (The) ............. 46,900 4,760,350
du Pont (E.I.) de Nemours and Company .. 163,200 9,802,118
Geon Company (The) ..................... 100,600 2,351,525
Gillette Company (The) ................. 158,711 15,940,457
Lilly (Eli) and Company ................ 116,200 8,090,425
Merck & Co., Inc. ...................... 60,200 6,396,250
Monsanto Company ....................... 156,300 6,564,600
Novartis AG (A) ........................ 1,200 1,946,479
PPG Industries, Inc. ................... 101,900 5,821,037
Pfizer Inc. ............................ 109,400 8,157,083
Praxair, Inc. .......................... 40,800 1,836,000
Procter & Gamble Company (The) ......... 97,800 7,805,614
Solutia Inc. ........................... 12,840 342,661
Union Carbide Corporation .............. 71,400 3,065,702
Warner-Lambert Company ................. 60,400 7,489,600
Total ................................. 113,697,766
Communication - 3.63%
AirTouch Communications* ............... 86,600 3,599,269
Cox Communications, Inc.* .............. 118,100 4,731,322
Grupo Televisa, S.A., GDR* ............. 50,300 1,945,956
SBC Communications Inc. ................ 40,300 2,951,975
Teleport Communications Group Inc.* .... 94,400 5,186,053
360. Communications Company* ........... 85,800 1,732,045
WorldCom, Inc.* ........................ 99,100 3,000,847
Total ................................. 23,147,467
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Depository Institutions - 5.20%
BankAmerica Corporation* ............... 87,400 $ 6,380,200
Chase Manhattan Corporation (The) ...... 48,300 5,288,850
Citicorp ............................... 47,200 5,967,826
Credit Suisse Group, Registered
Shares (A)............................. 20,700 3,201,834
Norwest Corporation .................... 199,000 7,686,375
U. S. Bancorp. ......................... 40,800 4,567,030
Total ................................. 33,092,115
Eating and Drinking Places - 0.07%
TRICON Global Restaurants, Inc.* ....... 16,320 474,292
Electric, Gas and Sanitary Services - 1.05%
Duke Energy Corp. ...................... 120,600 6,678,225
Electronic and Other Electric Equipment - 9.81%
Aeroquip-Vickers Inc. .................. 32,800 1,609,234
Analog Devices, Inc.* .................. 386,400 10,698,257
Emerson Electric Co. ................... 65,200 3,679,692
General Electric Company ............... 195,800 14,366,825
Harman International Industries,
Incorporated .......................... 24,150 1,026,375
Intel Corporation ...................... 160,200 11,248,924
Lucent Technologies Inc. ............... 40,900 3,266,887
Maytag Corporation ..................... 103,700 3,869,254
Molex Incorporated, Class A ............ 122,166 3,519,847
NextLevel Systems, Inc.* ............... 173,200 3,095,950
Telefonaktiebolaget LM Ericsson, ADR,
Class B ............................... 163,100 6,090,643
Total ................................. 62,471,888
Food and Kindred Products - 2.61%
CPC International Inc. ................. 65,900 7,117,200
Coca-Cola Company (The) ................ 53,900 3,591,088
PepsiCo, Inc. .......................... 163,200 5,946,518
Total ................................. 16,654,806
Food Stores - 0.54%
Kroger Co. (The)* ...................... 92,600 3,420,366
Forestry - 0.93%
Georgia-Pacific Corporation ............ 34,700 2,108,025
Georgia-Pacific Corporation, Timber
Group* ................................ 34,700 787,239
Weyerhaeuser Company ................... 61,200 3,002,594
Total ................................. 5,897,858
Furniture and Fixtures - 0.10%
Lear Corporation* ...................... 13,400 636,500
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Furniture and Home Furnishings Stores - 0.73%
Circuit City Stores, Inc. .............. 130,500 $ 4,640,841
General Building Contractors - 0.49%
Pulte Corporation ...................... 74,600 3,119,175
General Merchandise Stores - 3.28%
Dayton Hudson Corporation .............. 113,700 7,681,799
Federated Department Stores, Inc.* ..... 70,700 3,044,484
Wal-Mart Stores, Inc. .................. 258,000 10,174,746
Total ................................. 20,901,029
Health Services - 0.67%
Tenet Healthcare Corporation* .......... 128,600 4,259,875
Industrial Machinery and Equipment - 10.65%
Applied Materials, Inc.* ............... 181,700 5,467,898
Case Corporation ....................... 146,200 8,835,890
Caterpillar Inc. ....................... 214,000 10,392,268
Cisco Systems, Inc.* ................... 108,900 6,077,927
Compaq Computer Corporation* ........... 109,550 6,182,673
Deere & Company ........................ 167,600 9,773,091
Eaton Corporation ...................... 40,800 3,641,400
Hewlett-Packard Company ................ 20,200 1,262,500
Ingersoll-Rand Company ................. 48,900 1,977,369
International Business Machines
Corporation ........................... 54,400 5,688,173
Parker Hannifin Corporation ............ 73,350 3,364,931
United Technologies Corporation ........ 70,800 5,155,090
Total ................................. 67,819,210
Instruments and Related Products - 4.39%
General Motors Corporation, Class H .... 63,400 2,341,806
Guidant Corporation .................... 167,400 10,420,650
Medtronic, Inc. ........................ 130,400 6,821,485
Raytheon Company, Class A .............. 42,754 2,108,273
Xerox Corporation ...................... 84,500 6,237,114
Total ................................. 27,929,328
Insurance Carriers - 0.85%
American International Group, Inc. .... 49,500 5,383,125
Miscellaneous Retail - 0.75%
Costco Companies, Inc.* ................ 74,400 3,317,719
OfficeMax, Inc.* ....................... 104,625 1,490,906
Total ................................. 4,808,625
Motion Pictures - 0.89%
Walt Disney Company (The) .............. 57,100 5,656,440
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Nondepository Institutions - 3.67%
Associates First Capital Corporation ... 47,400 $ 3,409,814
Fannie Mae ............................. 163,400 9,323,931
Freddie Mac ............................ 253,600 10,635,223
Total ................................. 23,368,968
Paper and Allied Products - 1.12%
Champion International Corporation ..... 47,400 2,147,789
International Paper Company ............ 55,600 2,397,750
Willamette Industries, Inc. ............ 81,200 2,613,584
Total ................................. 7,159,123
Petroleum and Coal Products - 2.66%
British Petroleum Company p.l.c.
(The), ADR ............................ 39,200 3,123,730
Exxon Corporation ...................... 48,100 2,943,095
Mobil Corporation ...................... 72,200 5,211,901
Royal Dutch Petroleum Company .......... 104,800 5,678,798
Total ................................. 16,957,524
Primary Metal Industries - 0.62%
Aluminum Company of America ............ 56,000 3,941,000
Railroad Transportation - 0.45%
Burlington Northern Santa Fe Corporation 30,700 2,853,166
Rubber and Miscellaneous Plastics Products - 0.82%
Goodyear Tire & Rubber Company (The) ... 81,600 5,191,800
Transportation By Air - 1.28%
AMR Corporation* ....................... 32,600 4,189,100
Delta Air Lines, Inc. .................. 33,500 3,988,577
Total ................................. 8,177,677
Transportation Equipment - 7.36%
AlliedSignal Inc. ...................... 123,800 4,820,401
Boeing Company (The) ................... 103,600 5,069,873
Chrysler Corporation ................... 263,700 9,278,812
Dana Corporation ....................... 62,000 2,945,000
Ford Motor Company ..................... 142,000 6,913,554
General Motors Corporation ............. 111,300 6,747,563
Northrop Grumman Corporation ........... 78,300 9,004,500
Sundstrand Corporation ................. 42,000 2,115,750
Total ................................. 46,895,453
Wholesale Trade -- Durable Goods - 0.68%
Motorola, Inc. ......................... 76,100 4,342,418
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Wholesale Trade -- Nondurable Goods - 0.49%
Safeway Inc.* .......................... 49,700 $ 3,137,313
TOTAL COMMON STOCKS - 89.38% $569,276,255
(Cost: $344,668,244)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Chemicals and Allied Products - 1.33%
Abbott Laboratories,
5.77%, 1-14-98 ........................ $ 8,490 8,472,310
Communication - 0.75%
BellSouth Telecommunications, Inc.,
5.95%, 1-7-98 ......................... 4,790 4,785,250
Electric, Gas and Sanitary Services - 2.19%
Bay State Gas Co.,
5.85%, 1-15-98 ........................ 3,900 3,891,127
Western Resources Inc.,
6.0%, 1-14-98 ......................... 10,050 10,028,225
Total ................................. 13,919,352
Fabricated Metal Products - 0.02%
Danaher Corporation,
5.7227%, Master Note .................. 145 145,000
Food and Kindred Products - 0.99%
ConAgra, Inc.,
6.0%, 1-15-98 ......................... 5,470 5,457,237
General Mills, Inc.,
5.5777%, Master Note .................. 830 830,000
Total ................................. 6,287,237
General Merchandise Stores - 0.47%
May Department Stores Company (The),
5.74%, 1-12-98 ........................ 2,990 2,984,756
Insurance Agents, Brokers and Service - 1.23%
Aon Corp.,
5.9%, 1-30-98 ......................... 7,905 7,867,429
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Insurance Carriers - 1.64%
USAA Capital Corp.:
5.8%, 1-29-98 ......................... $ 2,770 $ 2,757,504
5.72%, 2-3-98 ......................... 7,740 7,699,417
Total ................................. 10,456,921
Nondepository Institutions - 0.96%
Caterpillar Financial Services Corp.,
5.93%, 1-23-98 ........................ 6,125 6,102,804
Textile Mill Products - 0.01%
Sara Lee Corporation,
5.5727%, Master Note .................. 60 60,000
Transportation Equipment - 0.50%
Dana Credit Corp.,
6.08%, 2-5-98 ......................... 3,205 3,186,055
TOTAL SHORT-TERM SECURITIES - 10.09% $ 64,267,114
(Cost: $64,267,114)
TOTAL INVESTMENT SECURITIES - 99.47% $633,543,369
(Cost: $408,935,358)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.53% 3,360,950
NET ASSETS - 100.00% $636,904,319
See Notes to Schedules of Investments on pages 84- 87.
<PAGE>
SCIENCE AND TECHNOLOGY PORTFOLIO
MANAGER'S LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report relates to the operation of the Science and Technology
Portfolio for the fiscal year ended December 31, 1997. The following
discussion, graphs and tables provide you with information regarding the
Portfolio's performance during that period.
1997 presented an economic picture of above average growth and lower than
normal inflation. Politically, the President and Congress were successful
in enacting tax relief legislation, including lower capital gains taxes,
but went from two capital gains tax rates to three. The markets did well,
specifically index funds and large cap funds. Sector funds, including mid
cap and small cap funds, did substantially worse because most of the
positive price action was concentrated in fewer, larger stocks. In the
fourth quarter, a currency crisis affected many Asian markets and economies
and the International Monetary Fund (IMF) was called into action to aid
many of these large economies in restructuring debt obligations. This had
a negative impact on Asian, U.S. and European securities markets and on
technology funds in general. Many technology-based companies export large
quantities of goods and services to Asian countries. The currency crisis
stopped the flow of goods and services, therefore sales and profits of
those exposed companies declined and/or the fear of such a decline brought
stocks down.
The Portfolio commenced operations during the fiscal year at a time when
the markets were at all-time historical highs and, as a result, made its
initial investments slowly as opportunities presented themselves. The
Portfolio avoided some of the decline in technology stock prices resulting
from the Asian crisis by having previously sold or reduced positions in
companies that were more at risk, notably semiconductor and personal
computer related issues. The Portfolio was overweighted in Internet-
content-related stocks. Our thought was that low-cost personal computers
enable consumers and businesses easier access to the Internet. The
Portfolio maintained large positions in the drug industry and related drug
distribution, medical devices and hospital software and systems.
The strategies and techniques we applied resulted in the Portfolio
underperforming the S&P 400 Index charted on the following page. The S&P
400 Index reflects the performance of securities that generally represent
the non-financial institution portion of the stock market.
We believe that the Asian crisis will continue to impact the U.S. economy
and markets into 1998. Although the economy appears robust, the underlying
trend of deflation remains a threat to lead to slowing. Corporate profits
growth, in our opinion, will see slowing also. Current low and declining
interest rates counter these effects. In light of the anticipated
conditions, we plan to diversify more into U.S. based companies, with less
foreign exposure. However, this is difficult in technology and health care
since many of those products and services are exported. We plan to
maintain a cash position and to protect shareholder profits by selling
appreciated stocks or by putting cash to work in market declines to capture
lower stock prices in those companies the Portfolio views as valuable
investments. Over the long-term, the Portfolio should benefit from the
dramatic increases in productivity brought about by new software, computer,
networking devices, biology, drug development and health care improvements.
Thank you very much for your continued support and confidence.
Respectfully,
Abel Garcia
Manager, Science and Technology Portfolio
<PAGE>
Comparison of Change in Value of $10,000 Investment in
TMK/United Science and Technology Portfolio
and The S&P 400 Index
TMK/United
Science and S&P
Technology 400
Portfolio Index
--------- ---------
4/4/97 Purchase 10,000 10,000
06/30/97 11,145 11,781
09/30/97 12,298 12,577
12/31/97 11,623 12,770
===== TMK/United Science and Technology Portfolio* -- $11,623
+++++ S&P 400 Index** -- $12,770
*The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund and assumes reinvestment of dividends and
distributions.
**Because the Fund commenced operations on a date other than at the end
of a month, and partial month calculations of the performance of the
S&P 400 Index are not available, investment in the index was effected
as of March 31, 1997.
Aggregate Total Return +
-----------------------------
For the period
ended 12/31/97++ 16.24%
+Performance data quoted represents past performance. Investment return
and principal value will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
++4-4-97 (the initial offering date) through 12-31-97.
Past performance is not predictive of future performance. Indexes are
unmanaged. Performance data quoted does not take into account any
expenses or charges associated with owning a variable life or annuity
policy invested in the TMK/United Funds, Inc.
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Building Materials and Garden Supplies - 1.13%
Fastenal Company ....................... 3,000 $ 115,311
Business Services - 39.48%
America Online, Inc.* .................. 3,000 267,561
At Home Corporation, Series A* ......... 5,500 137,841
Autodesk, Inc. ......................... 3,000 110,625
CKS Group, Inc.* ....................... 3,000 42,468
Cendant Corporation* ................... 6,000 206,250
Checkfree Corporation* ................ 4,000 108,748
E*TRADE Group, Inc.* ................... 5,000 115,155
HBO & Company .......................... 2,280 109,367
HCIA Inc.* ............................. 4,200 50,925
HNC Software Inc.* ..................... 4,000 172,748
i2 Technologies, Inc.* ................. 3,000 158,343
IDX Systems Corporation* ............... 2,500 92,655
Intuit Inc.* ........................... 6,000 247,872
J. D. Edwards* ......................... 7,000 207,809
Networks Associates, Inc.* ............. 4,000 211,124
Parametric Technology Corporation* ..... 4,000 189,248
Primark Corporation* ................... 6,900 280,740
Security Dynamics Technologies, Inc.* .. 3,000 107,436
Simulation Sciences, Inc.* ............. 6,300 101,588
TMP Worldwide Inc.* .................... 10,000 228,750
Transaction Systems Architects, Inc.* .. 5,000 189,685
Vantive Corporation (The)* ............. 5,000 125,625
Visio Corporation* ..................... 6,000 231,372
Wind River Systems, Inc.* .............. 5,000 197,500
Yahoo! Inc.* ........................... 2,000 138,686
Total ................................. 4,030,121
Communication - 7.12%
ACC Corp.* ............................. 3,000 151,875
AirTouch Communications* ............... 3,000 124,686
Intermedia Communications of Florida,
Inc.* ................................. 4,000 242,748
Paging Network, Inc.* .................. 8,000 86,248
WorldCom Inc.* ......................... 4,000 121,124
Total ................................. 726,681
Electronic and Other Electric Equipment - 16.92%
ADC Telecommunications, Inc.* .......... 2,000 83,624
ADE Corporation* ....................... 3,000 52,500
Advanced Fibre Communications, Inc.* ... 6,000 175,500
ANADIGICS, Inc.* ....................... 2,000 60,750
Ascend Communications, Inc.* ........... 2,500 61,482
Ciena Corp.* ........................... 3,000 183,750
Concord Communications, Inc.* .......... 8,000 164,496
Excel Switching Corporation* ........... 6,000 107,622
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Electronic and Other Electric Equipment (Continued)
Linear Technology Corporation .......... 3,000 $ 172,686
Newbridge Networks Corporation* ........ 5,000 174,375
Nokia Corporation, Series A, ADR ....... 2,000 140,000
Novellus Systems, Inc.* ................ 3,000 97,029
Silicon Valley Group, Inc.* ............ 3,000 68,250
Tellabs* ............................... 3,500 184,734
Total ................................. 1,726,798
Engineering and Management Services - 5.12%
Incyte Pharmaceuticals, Inc.* .......... 4,000 178,500
Paychex, Inc. .......................... 3,000 152,436
Quintiles Transnational Corp.* ......... 5,000 191,875
Total ................................. 522,811
Food and Kindred Products - 0.93%
J. M. Smucker Company (The) ............ 4,000 94,500
Furniture and Fixtures - 1.63%
Lear Corporation* ...................... 3,500 166,250
Health Services - 2.78%
American Healthcorp, Inc.* ............. 14,000 98,868
Amsurg Corp., Class A* ................. 1,290 9,755
Amsurg Corp., Class B* ................. 8,313 64,941
Vencor, Incorporated* .................. 4,500 109,966
Total ................................. 283,530
Industrial Machinery and Equipment _ 3.27%
Culligan Water Technologies, Inc.* ..... 3,000 150,750
Kulicke & Soffa Industries, Inc.* ...... 3,500 65,405
Lam Research Corporation* .............. 4,000 117,248
Total ................................. 333,403
Instruments and Related Products - 2.59%
STERIS Corporation* .................... 2,900 140,650
Uniphase Corporation* .................. 3,000 123,561
Total ................................. 264,211
Miscellaneous Repair Services - 0.94%
World Access, Inc.* .................... 4,000 96,500
Wholesale Trade -- Durable Goods - 2.15%
OmniCare, Inc. ......................... 5,000 155,000
Peerless Systems Corporation* .......... 5,000 64,685
Total ................................. 219,685
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Wholesale Trade -- Nondurable Goods - 2.71%
Cardinal Health, Inc. .................. 2,000 $ 150,250
800_JR. CIGAR Inc.* .................... 5,000 126,250
Total ................................. 276,500
TOTAL COMMON STOCKS - 86.77% $ 8,856,301
(Cost: $8,614,356)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES - 12.78%
Repurchase Agreement
J. P. Morgan Securities, 5.9%
Repurchase Agreement dated
12-31-97 to be repurchased
at $1,305,428 on 1-2-98 (C)............ $1,305 $ 1,305,000
(Cost: $1,305,000)
TOTAL INVESTMENT SECURITIES - 99.55% $10,161,301
(Cost: $9,919,356)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.45% 45,876
NET ASSETS - 100.00% $10,207,177
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
INTERNATIONAL PORTFOLIO
MANAGER'S LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report relates to the operation of the International Portfolio during
the fiscal year ended December 31, 1997. The following discussion, graphs
and tables provide you with information regarding the Portfolio's
performance during that period.
During 1997, global inflation remained low. Economic growth was strong in
Great Britain and began to pick up in Continental Europe and Latin America.
The trend of corporate and financial restructuring continued. Japan's
economic recovery was again restrained by unresolved structural problems
and a tighter fiscal policy. Asian economies plunged into financial crisis
late in 1997.
The Portfolio's heavy concentration in European equities continued to
positively contribute to our performance. Particular attention was given
to companies involved in corporate restructuring and privatizations in both
Europe and Latin America. We remained significantly underweighted in
Japanese equities. Our emerging Asian holdings were quickly reduced in
response to the financial crisis occurring in that region, and we
implemented a defensive posture in response to the rapidly deteriorating
events in Asia. We reduced our exposure to Asia, emerging markets in
general, and vulnerable industries.
The strategies and techniques we applied resulted in the Portfolio
significantly outperforming the Morgan Stanley E.A.FE. Index (Europe,
Australia, Far East Index) charted on the following page. That index
reflects the performance of securities that generally represent the
international stock market. The Portfolio's performance was positively
impacted by its proportionately greater exposure to investments in Europe
and Latin America, and lower exposure to Japanese investments.
Global markets will remain cautious in coming months as Asia struggles to
rebuild its financial structure. The current financial crisis will
eventually force reforms in this important region. We intend to maintain a
defensive posture as Asia's crisis unfolds.
Thank you very much for your continued support and confidence.
Respectfully,
Thomas A. Mengel
Manager, International Portfolio
<PAGE>
Comparison of Change in Value of $10,000 Investment in
TMK/United International Portfolio
and The Morgan Stanley E.A.FE. Index
MORGAN
TMK/UNITED STANLEY
INTERNATIONAL E.A.FE.
PORTFOLIO INDEX
--------- ---------
05/03/94 Purchase $10,000 $10,000
12/31/94 10,026 9,990
12/31/95 10,756 11,110
12/31/96 12,381 11,782
12/31/97 14,448 11,991
----- TMK/United International Portfolio* -- $14,448
+++++ Morgan Stanley E.A.FE. Index** -- $11,991
*The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund and assumes reinvestment of dividends and
distributions.
**Because the Fund commenced operations on a date other than at the end
of a month, and partial month calculations of the performance of the
Morgan Stanley E.A.FE. Index (including income) are not available,
investment in the index was effected as of April 30, 1994.
Annual Average Total Return+
----------------------------
Year Ended
12/31/97 16.70%
3+ Years Ended
12/31/97++ 10.56%
+Performance data quoted represents past performance. Investment return
and principal value will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
++5-3-94 (the initial offering date) through 12-31-97.
Past performance is not predictive of future performance. Indexes are
unmanaged. Performance data quoted does not take into account any
expenses or charges associated with owning a variable life or annuity
policy invested in the TMK/United Funds, Inc.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS AND RIGHTS
Argentina _ 0.29%
Capex S.A., Class A (A) ................ 50,000 $ 332,500
Australia _ 0.91%
Reinsurance Australia Corporation
Limited (A) ........................... 400,000 1,042,720
Brazil _ 0.62%
CompanLia de Saneamento Desico do
Estado De Sao Paulo (A) ............... 3,000,000 712,366
Denmark _ 2.09%
Neurosearch A/S (A)* ................... 20,000 1,340,029
Sydbank A/S (A) ........................ 18,500 1,053,192
Total ................................. 2,393,221
Finland _ 0.94%
Nokia Corporation, Series K (A) ........ 15,000 1,073,749
France _ 7.03%
Accor S.A. (A) ......................... 5,500 1,022,648
Atos SA (A)* ........................... 5,044 650,385
Business Objects S.A., ADR* ............ 31,000 319,672
Coflexip Stena Offshore SA, ADR ........ 25,000 1,399,200
GEA Grenobloise d'Electronique et
d'Automatismes (A) .................... 6,000 171,480
Generale de Geophysique S.A. (A)* ...... 8,000 1,023,562
Societe Generale (A) .................... 10,000 1,362,534
Societe Industrielle de Transports
Automobiles S.A. (A) .................. 3,500 668,805
Suez Lyonnaise des Eaux (A) ............ 13,000 1,438,636
Total ................................. 8,056,922
Germany _ 6.71%
Altana AG (A) .......................... 9,000 617,946
Bayer Group (A) ........................ 29,000 1,083,449
Depfa Bank (A) ......................... 19,500 1,155,668
Hoechst AG (A) ......................... 53,100 1,859,843
Schering AG (A) ........................ 8,500 819,898
Siemens AG (A) ......................... 20,000 1,184,189
VEBA AG (A) ............................ 14,300 973,898
Total ................................. 7,694,891
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS AND RIGHTS (Continued)
Italy _ 5.75%
Alleanza Assicurazioni (A) ............. 114,000 $ 1,134,843
CSP International Industria
Calze S.p.A. (A)* ..................... 50,000 564,037
Credito Italiano S.p.A. (A) ............ 412,000 1,270,828
Instituto Nazionale delle
Assicurazioni (A) ..................... 630,000 1,312,723
Istituto Bancario San Paolo di
Torino S.p.A. (A) ..................... 126,000 1,204,071
Telecom Italia Mobile S.p.A., Risp (A) . 250,000 1,102,629
Total ................................. 6,589,131
Mexico _ 1.59%
Empresas ICA Sociedad Controladora,
S.A. de C.V., ADS ..................... 50,000 821,850
Gruma, S.A., Class B (A)* .............. 71,400 283,193
Grupo Financiero Inbursa, S.A. de
C.V., Class B (A) ..................... 175,234 714,576
Total ................................. 1,819,619
Netherlands _ 9.38%
Akzo Nobel N.V. (A) .................... 8,000 1,379,569
Benckiser N.V., B Shares (A)* ........... 30,000 1,241,553
Fugro N.V. (A) ......................... 43,355 1,321,629
Internatio-Muller N.V. (A) ............. 30,750 967,716
Koninklijke Boskalis
Westminster N.V. (A) .................. 47,900 850,589
Ordina N.V. (A)* ....................... 81,000 1,114,734
Smit Internationale N.V. (A) ........... 42,000 1,139,447
Stork N.V. (A) ......................... 10,000 345,287
Verenigd Bezit VNU (A) ................. 85,000 2,398,264
Total ................................. 10,758,788
Norway _ 2.43%
Merkantildata A/S (A) .................. 61,000 2,101,309
Schibsted AS (A) ....................... 40,000 686,241
Total ................................. 2,787,550
Portugal _ 2.06%
Portugal Telecom, S.A., ADS ............ 27,500 1,292,500
Telecel-Comunicacaoes Pessoais, SA (A)* 10,000 1,065,703
Total ................................. 2,358,203
Russian Federation _ 1.30%
Open Joint Stock Company
Vimpel-Communications, ADR* ........... 41,805 1,489,303
Spain _ 0.88%
Aldeasa, S.A. (A)* ..................... 47,500 1,006,858
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS AND RIGHTS (Continued)
Sweden _ 4.46%
Biacore International AB, ADR* ......... 25,000 $ 217,175
Biora AB, ADR* ......................... 20,000 421,240
Bure Investment AB (A) ................. 65,000 856,439
Frontec AB, Class B (A)* ............... 54,900 481,087
Munters AB (A)* ........................ 89,000 768,683
Skandia Group Insurance Company Ltd. (A) 50,200 2,370,403
Total ................................. 5,115,027
Switzerland _ 11.40%
AFG Arbonia-Forster Holding AG (A)* .... 975 480,460
Brauerei Eichhof AG (A) ................ 280 843,200
Choco Lindt & Spru AG, Registered (A) .. 50 965,026
Credit Suisse Group, Registered Shares (A) 26,000 4,021,628
Julius Baer Holding AG (A) ............. 500 927,383
Novartis AG (A) ........................ 1,500 2,433,098
SWISS BANK CORPORATION, BASLE (A) ...... 5,200 1,615,769
Swisslog Holding AG (A)* ............... 24,250 1,784,187
Total ................................. 13,070,751
Thailand _ 0.02%
Srithai Superware Public Company
Limited, F (A) ........................ 130,000 19,187
United Kingdom _ 20.03%
British Petroleum Company
p.l.c. (The) (A) ...................... 85,000 1,124,163
COLT Telecom Group plc, ADR* ........... 40,800 1,726,330
Corporate Services Group plc (A) ....... 575,000 2,011,407
Freepages Group plc (A)* ............... 2,000,000 1,075,707
General Electric Company plc (A) ........ 350,000 2,267,606
Hays plc (A) ........................... 100,000 1,331,084
Imperial Tobacco (A) ................... 250,000 1,572,503
Ionica Group plc (A)* .................. 184,000 420,035
Johnson Matthey plc (A) ................ 140,000 1,253,075
Misys plc (A) .......................... 94,545 2,856,992
Newsquest plc (A)* ..................... 230,000 1,004,759
Rentokil Initial plc (A) ............... 254,500 1,126,124
Royal and Sun Alliance Insurance
Group plc (A).......................... 112,500 1,141,809
Siebe plc (A) .......................... 63,000 1,240,544
Vodafone Group Plc (A) ................. 250,000 1,806,533
Williams plc (A) ....................... 185,000 1,002,624
Total ................................. 22,961,292
United States _ 1.17%
ESG Re Limited* ........................ 31,000 724,625
Rofin-Sinar Technologies Inc.* ......... 51,000 618,375
Total ................................. 1,343,000
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1997
Shares Value
TOTAL COMMON STOCKS AND RIGHTS _ 79.06% $ 90,625,078
(Cost: $79,621,262)
PREFERRED STOCKS
Brazil - 1.16%
Telebras S.A., ADR, Convertible ........ 11,400 1,327,382
Germany _ 4.10%
Marschollek, Lautenschlager und
Partner AG, Convertible (A) ........... 12,890 $ 3,260,660
Moebel Walther AG, Convertible (A) ..... 10,000 274,643
Porsche AG, Convertible (A) ............ 700 1,167,510
Total ................................. 4,702,813
Portugal _ 1.20%
Lusomundo-SGPS, S.A., Convertible (A) .. 150,000 1,373,567
TOTAL PREFERRED STOCKS _ 6.46% $ 7,403,762
(Cost: $4,974,111)
Face
Amount in
Thousands
UNREALIZED GAIN ON OPEN FORWARD CURRENCY CONTRACTS _ 0.33%
Deutsche Marks, 6-4-98 (D) ............. DM3,293 142,270
Deutsche Marks, 7-29-98 (D) ............ DM5,105 33,460
French Francs, 6-4-98 (D) .............. F19,522 206,149
Total ................................. $ 381,879
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Electric, Gas and Sanitary Services - 2.38%
Northern Illinois Gas Co.,
5.75%, 1-21-98 ........................ $2,740 2,731,247
Fabricated Metal Products - 0.76%
Danaher Corporation,
5.7227%, Master Note .................. 865 865,000
Food and Kindred Products - 2.83%
ConAgra, Inc.,
6.0%, 1-15-98 ......................... 3,175 3,167,592
General Mills, Inc.,
5.5777%, Master Note .................. 80 80,000
Total ................................. 3,247,592
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Petroleum and Coal Products - 4.89%
BP America Inc.,
5.9%, 1-21-98 ......................... $5,625 $ 5,606,562
Textile Mill Products - 0.73%
Sara Lee Corporation,
5.5727%, Master Note .................. 836 836,000
Transportation Equipment - 2.35%
Dana Credit Corp.,
6.08%, 2-5-98 ......................... 2,715 2,698,951
TOTAL SHORT-TERM SECURITIES _ 13.94% $ 15,985,352
(Cost: $15,985,352)
TOTAL INVESTMENT SECURITIES - 99.79% $114,396,071
(Cost: $100,580,725)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.21% 235,234
NET ASSETS - 100.00% $114,631,305
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
SMALL CAP PORTFOLIO
MANAGER'S LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report relates to the operation of the Small Cap Portfolio during the
fiscal year ended December 31, 1997. The following discussion, graphs and
tables provide you with information regarding the Portfolio's performance
during that period.
Unlike 1996, this year's market performance was more broadly based,
resulting in better performance for both small and mid cap stocks. Many
industries continued to consolidate, providing economies of scale, broader
product and service offerings and geographic expansion. Further advances
in technology led to improved productivity and profitability. Low
inflation, falling interest rates, and a lack of major geopolitical or
economic unrest for much of the year provided a favorable backdrop for
financial markets.
In 1997 the Portfolio focused on fewer stocks comprising a larger
percentage of holdings. This narrowing of focus played an important role
in this year's performance. Cash positions, on balance, were larger than
in the past. Cash reserves were held not only as a defensive move, but to
provide added flexibility in managing the Portfolio. The Portfolio's
holdings were significantly overweighted in technology, particularly in
semiconductors and semiconductor capital equipment, during the first three
quarters of the year. In the fourth quarter, we moved to a significant
underweighting in technology while at the same time increasing cash
reserves.
The strategies and techniques we applied resulted in the Portfolio
outperforming the Nasdaq Industrials Index during the fiscal year, as
charted on the following page. That index reflects the performance of
securities that generally represent the small companies sector of the stock
market.
Economic and political turmoil in Japan and Southeast Asia, computer system
preparation for the year 2000 and the uniting of European nations in a
common market are just a few of the factors which could result in earnings
disappointments and make 1998 a difficult year for the equity markets. As
a result, we anticipate pursuing a more defensive position similar to that
pursued in late 1997. This strategy may include a larger cash position and
limited and selective exposure to technology stocks.
Thank you very much for your continued support and confidence.
Respectfully,
Zachary H. Shafran
Manager, Small Cap Portfolio
<PAGE>
Comparison of Change in Value of $10,000 Investment in
TMK/United Small Cap Portfolio
and The Nasdaq Industrials Index
TMK/UNITED Nasdaq
SMALL CAP INDUSTRIALS
PORTFOLIO INDEX
---------- -----------
05/03/94 Purchase $10,000 $10,000
12/31/94 12,091 9,862
12/31/95 15,999 12,620
12/31/96 17,360 14,517
12/31/97 22,834 15,974
----- TMK/United Small Cap Portfolio* -- $22,834
+++++ Nasdaq Industrials Index** -- $15,974
*The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund and assumes reinvestment of dividends and
distributions.
**Because the Fund commenced operations on a date other than at the end
of a month, and partial month calculations of the performance of the
Nasdaq Industrials Index is not available, investment in the index was
effected as of April 30, 1994.
Annual Average Total Return+
----------------------------
Year Ended
12/31/97 31.53%
3+ Years Ended
12/31/97++ 25.26%
+Performance data quoted represents past performance. Investment return
and principal value will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
++5-3-94 (the initial offering date) through 12-31-97.
Past performance is not predictive of future performance. Indexes are
unmanaged. Performance data quoted does not take into account any
expenses or charges associated with owning a variable life or annuity
policy invested in the TMK/United Funds, Inc.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Amusement and Recreation Services - 1.26%
American Skiing Company* ............... 126,000 $ 1,874,250
Auto Repair, Services and Parking - 2.69%
Avis Rent A Car, Inc.* ................. 125,000 3,992,125
Business Services - 10.51%
Cerner Corporation* .................... 140,000 2,983,680
FORE Systems, Inc.* .................... 100,000 1,525,000
Freepages Group plc (A)* ............... 4,500,000 2,420,340
Intuit Inc.* ........................... 125,000 5,164,000
PMT Services, Inc.* .................... 250,000 3,492,000
Total ................................. 15,585,020
Chemicals and Allied Products - 5.71%
Carson, Inc. ........................... 84,500 565,051
Genzyme Corporation - General Division* 125,000 3,460,875
OSI Pharmaceuticals, Inc.* ............. 150,000 1,003,050
Spiros Development Corporation II,
Inc., Dura Pharmaceuticals,
Inc., Units (E)* ...................... 200,000 3,437,400
Total ................................. 8,466,376
Communication - 3.71%
COLT Telecom Group plc, ADR* ........... 130,000 5,500,560
Eating and Drinking Places - 2.17%
G B Foods Corp.* ....................... 114,000 1,246,818
WSMP Inc.* ............................. 72,000 1,971,000
Total ................................. 3,217,818
Electric, Gas and Sanitary Services - 6.19%
Allied Waste Industries, Inc., New* .... 200,000 4,668,600
Casella Waste Systems, Inc., Class A* .. 120,000 3,127,440
Waste Industries, Inc.* ................ 75,000 1,373,400
Total ................................. 9,169,440
Electronic and Other Electric Equipment - 0.50%
Tegal Corp.* ........................... 150,600 748,181
Engineering and Management Services - 4.61%
AHL Services* .......................... 134,000 3,299,750
Cornell Corrections, Inc.* ............. 170,000 3,527,500
Total ................................. 6,827,250
Health Services - 7.80%
Alternative Living Services, Inc.* ..... 68,900 2,032,550
American Retirement Corporation* ....... 115,000 2,300,000
Centennial HealthCare Corporation* ..... 146,000 3,294,052
Quorum Health Group, Inc.* ............. 150,000 3,937,500
Total ................................. 11,564,102
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Industrial Machinery and Equipment - 2.92%
RADCOM LTD.* ........................... 150,000 $ 1,031,250
Waterlink, Inc.* ....................... 200,000 3,300,000
Total ................................. 4,331,250
Instruments and Related Products - 6.87%
ESC Medical Systems Ltd.* .............. 130,000 5,029,310
Maxxim Medical, Inc.* .................. 125,000 2,718,750
St. Jude Medical, Inc.* ................ 80,000 2,440,000
Total ................................. 10,188,060
Insurance Carriers - 1.58%
ESG Re Limited* ........................ 100,000 2,337,500
Paper and Allied Products - 2.10%
IVEX Packaging Corporation* ............ 129,500 3,108,000
Personal Services - 6.13%
Carriage Services, Inc.* ............... 125,000 2,351,500
Equity Corporation International* ...... 135,000 3,121,875
Loewen Group Inc. (The) ................ 140,000 3,613,680
Total ................................. 9,087,055
Social Services - 0.57%
Capital Senior Living Corporation* ..... 80,400 839,135
Transportation Services - 1.15%
C. H. Robinson Worldwide, Inc. ......... 75,300 1,698,919
TOTAL COMMON STOCKS - 66.47% $ 98,535,041
(Cost: $87,270,641)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Health Services - 2.07%
Alternative Living Services, Inc., Convertible,
5.25%, 12-15-2002 ..................... $2,650 3,060,750
Holding and Other Investment Offices - 0.82%
LTC Properties, Inc., Convertible,
8.25%, 7-1-2001 ....................... 1,000 1,221,250
TOTAL CORPORATE DEBT SECURITIES - 2.89% $4,282,000
(Cost: $3,650,000)
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES
Commercial Paper
Communication - 4.64%
BellSouth Telecommunications, Inc.,
5.92%, 1-13-98 ........................ $6,890 $ 6,876,404
Depository Institutions - 1.08%
J.P. Morgan & Co. Incorporated,
5.8%, 2-5-98 .......................... 1,615 1,605,893
Electric, Gas and Sanitary Services - 9.96%
Northern Illinois Gas Co.,
5.75%, 1-21-98 ........................ 2,930 2,920,640
Western Resources Inc.,
6.0%, 1-14-98 ......................... 6,590 6,575,722
Wisconsin Electric Power Co.,
5.77%, 2-10-98 ........................ 5,310 5,275,957
Total ................................. 14,772,319
Fabricated Metal Products - 0.93%
Danaher Corporation,
5.7227%, Master Note .................. 1,379 1,379,000
Food and Kindred Products - 0.99%
ConAgra, Inc.,
6.0%, 1-15-98 ......................... 1,000 997,667
General Mills, Inc.,
5.5777%, Master Note .................. 468 468,000
Total ................................. 1,465,667
Insurance Carriers - 2.99%
USAA Capital Corp.,
5.72%, 2-3-98 ......................... 4,450 4,426,667
Nondepository Institutions - 7.10%
Caterpillar Financial Services Corp.,
5.93%, 1-23-98 ........................ 4,930 4,912,134
General Motors Acceptance Corporation,
6.25%, 1-14-98 ........................ 5,625 5,612,305
Total ................................. 10,524,439
Petroleum and Coal Products - 1.12%
BP America Inc.,
5.9%, 1-21-98 ......................... 1,665 1,659,542
Security and Commodity Brokers - 1.08%
Merrill Lynch & Co. Inc.,
5.82%, 1-16-98 ........................ 1,605 1,601,108
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Textile Mill Products - 0.73%
Sara Lee Corporation,
5.5727%, Master Note .................. $1,089$ 1,089,000
Transportation Equipment - 0.96%
Dana Credit Corp.,
6.08%, 2-5-98 ......................... 1,430 1,421,547
TOTAL SHORT-TERM SECURITIES - 31.58% $ 46,821,586
(Cost: $46,821,586)
TOTAL INVESTMENT SECURITIES - 100.94% $149,638,627
(Cost: $137,742,227)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.94%) (1,400,369)
NET ASSETS - 100.00% $148,238,258
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
BALANCED PORTFOLIO
MANAGER'S LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report relates to the operation of the Balanced Portfolio for the
fiscal year ended December 31, 1997. The discussion, graphs and tables
contained in this report will provide you with information regarding the
Portfolio's performance during that period.
1997 was a turbulent year on a variety of fronts. The year started with
the Federal Reserve raising interest rates over inflation concerns and
ended with a possibility of an interest rate cut. Most of the swing
resulted from significant currency devaluations in Asian economies late in
the year. The volatility became more dramatic as many of the Asian markets
were on the brink of financial crisis.
As these events unfolded, we took the opportunity to reduce our exposure to
companies and industries facing the possibility of either a significant
slowdown in their business outside the U.S. or the possibility of falling
commodity prices. It was feared that such factors would have a detrimental
impact on those companies' earnings. As a result, cash on hand increased
and our bond position also increased as inflation fears declined rapidly.
The strategies and techniques we applied resulted in the Portfolio
outperforming the bond market index and underperforming the stock market
index charted on the following page. Those indexes reflect the performance
of securities that generally represent the stock market (the S&P 500 Index)
and the bond market (the Salomon Brothers Treasury/Government-
Sponsored/Corporate Index). A variety of indexes is presented because the
Portfolio invests in stocks and bonds. The Portfolio's fixed income
investments and cash position throughout the year contributed to the
underperformance of the Portfolio as compared to the S&P 500 Index. We
have chosen to use the Salomon Brothers Index beginning with this year's
Annual Report to reflect the performance of the bond market, instead of the
Lehman Brothers Government/Corporate Bond Index that had been presented in
prior years. We believe that the Salomon Brothers Index provides a more
accurate basis for comparing the Fund's performance to the performance of
the types of fixed income securities in which the Fund invests. Both
indexes are presented on the following page in this year's Annual Report
for comparison purposes.
The Asian financial crisis will likely have a significant effect on the
markets, both in the short and long term. The Asian crisis will likely
cause a drag on corporate profits, but the magnitude is unknown at this
time. Inflation should remain in check, keeping interest rates at low
levels. As a result, we will keep a defensive posture until we gain a
better understanding of how the Asian economies will be structured going
forward. We will also maintain a cash position to take advantage of
investment opportunities as they develop.
Thank you for your continued confidence.
Respectfully,
Cynthia P. Prince-Fox
Manager, Balanced Portfolio
<PAGE>
Comparison of Change in Value of $10,000 Investment in
TMK/United Balanced Portfolio,
The S&P 500 Index,
The Lehman Brothers Government/Corporate Bond Index, and
The Salomon Brothers Treasury/Government Sponsored/Corporate Index
Salomon
Lehman Brothers
Brothers Treasury/
Standard Government/ Government
TMK/United & Poor's Corporate Sponsored/
Balanced 500 Bond Corporate
Portfolio Index Index Index
---------- -------- ----------- ----------
05/03/94 Purchase $10,000 $10,000 $10,000 10,000
12/31/94 9,963 10,398 10,046 10,046
12/31/95 12,373 14,306 11,979 11,978
12/31/96 13,758 17,591 12,327 12,327
12/31/97 16,301 23,447 13,529 13,535
===== TMK/United Balanced Portfolio* -- $16,301
----- S&P 500 Index** -- $23,447
+++++ Lehman Bros Gov't/Corp Bond Index** -- $13,529
..... Salomon Brothers Treasury/Government Sponsored/Corporate Index** --
$13,535
*The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund and assumes reinvestment of dividends and
distributions.
**Because the Fund commenced operations on a date other than at the end
of a month, and partial month calculations of the performance of the
above indexes (including income) are not available, investment in the
indexes was effected as of April 30, 1994.
Annual Average Total Return+
----------------------------
Year Ended
12/31/97 18.49%
3+ Years Ended
12/31/97++ 14.26%
+Performance data quoted represents past performance. Investment return
and principal value will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
++5-3-94 (the initial offering date) through 12-31-97.
Past performance is not predictive of future performance. Indexes are
unmanaged. Performance data quoted does not take into account any
expenses or charges associated with owning a variable life or annuity
policy invested in the TMK/United Funds, Inc.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Agricultural Production -- Crops - 0.81%
Dole Food Company, Inc. ................ 12,000 $ 549,000
Apparel And Accessory Stores - 1.80%
Kohl's Corporation* .................... 8,000 545,000
Payless ShoeSource, Inc.* .............. 10,000 671,250
Total ................................. 1,216,250
Building Materials and Garden Supplies - 0.82%
Sherwin-Williams Company (The) ......... 20,000 555,000
Chemicals and Allied Products - 7.69%
A. Schulman, Inc. ...................... 25,000 631,250
American Home Products Corporation ..... 4,000 306,000
Avon Products, Inc. .................... 4,300 263,913
Crompton & Knowles Corporation ......... 14,300 378,950
Dow Chemical Company (The) ............. 3,500 355,250
du Pont (E.I.) de Nemours and Company .. 4,800 288,298
Hoechst AG (A) ......................... 16,100 563,907
International Flavors & Fragrances Inc. 6,000 309,000
Monsanto Company ....................... 14,800 621,600
Pfizer Inc. ............................ 11,000 820,182
Warner-Lambert Company ................. 5,400 669,600
Total ................................. 5,207,950
Communication - 2.47%
AT&T Corporation ....................... 15,000 918,750
SBC Communications Inc. ................ 10,300 754,475
Total ................................. 1,673,225
Depository Institutions - 2.07%
BankAmerica Corporation* ............... 9,000 657,000
Wells Fargo & Company .................. 2,200 746,761
Total ................................. 1,403,761
Electric, Gas and Sanitary Services - 2.94%
Baltimore Gas and Electric Company ..... 7,600 258,400
Houston Industries Incorporated ........ 12,000 320,244
PECO Energy Company .................... 14,000 339,500
Southern Company (The) ................. 13,000 336,375
Unicom Corporation ..................... 24,000 738,000
Total ................................. 1,992,519
Electronic and Other Electric Equipment - 2.50%
Emerson Electric Co. ................... 12,500 705,463
Intel Corporation ...................... 4,000 280,872
U. S. Industries, Inc. ................. 23,500 707,937
Total ................................. 1,694,272
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Food and Kindred Products - 5.53%
Beringer Wine Estates
Holdings, Inc.,........................ 12,500 $ 476,562
CPC International Inc. ................. 4,500 486,000
ConAgra, Inc. .......................... 11,800 387,182
General Mills, Inc. .................... 8,000 573,000
Heinz (H. J.) Company .................. 12,000 609,744
Hormel Foods Corporation ............... 20,000 655,000
Ralston Purina Co. ..................... 6,000 557,622
Total ................................. 3,745,110
General Merchandise Stores - 2.07%
Penney (J.C.) Company, Inc. ............ 13,500 814,212
Wal-Mart Stores, Inc. .................. 15,000 591,555
Total ................................. 1,405,767
Health Services - 0.96%
Tenet Healthcare Corporation* .......... 19,600 649,250
Holding and Other Investment Offices - 2.22%
Equity Office Properties Trust ......... 20,000 631,240
LTC Properties, Inc. ................... 18,000 373,500
National Health Investors, Inc. ........ 12,000 502,500
Total ................................. 1,507,240
Industrial Machinery and Equipment - 1.02%
Deere & Company ........................ 6,000 349,872
Parker Hannifin Corporation ............ 7,400 339,475
Total ................................. 689,347
Instruments and Related Products - 0.64%
St. Jude Medical, Inc.* ................ 14,200 433,100
Insurance Carriers - 1.59%
Chubb Corporation (The) ................ 9,200 695,750
Hartford Financial Services Group Inc. (The) 4,100 383,604
Total ................................. 1,079,354
Metal Mining - 0.45%
Homestake Mining Company ............... 34,000 301,750
Miscellaneous Retail - 1.56%
Costco Companies, Inc.* ................ 15,000 668,895
Paper Warehouse, Inc.* ................. 50,000 390,600
Total ................................. 1,059,495
Nondepository Institutions - 0.89%
Freddie Mac ............................ 14,400 603,893
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Oil and Gas Extraction - 2.48%
Anadarko Petroleum Corporation ......... 9,300 $ 564,389
Noble Affiliates, Inc. ................. 8,500 299,625
Santa Fe International Corp. ........... 9,000 365,625
Schlumberger Limited ................... 5,600 450,800
Total ................................. 1,680,439
Paper and Allied Products - 1.42%
Champion International Corporation ..... 10,800 489,370
Union Camp Corporation ................. 8,800 472,445
Total ................................. 961,815
Petroleum and Coal Products - 3.62%
British Petroleum Company p.l.c.
(The), ADR ............................ 5,000 398,435
Mobil Corporation ...................... 9,600 692,995
Royal Dutch Petroleum Company .......... 15,400 834,480
Tosco Corporation ...................... 14,000 529,368
Total ................................. 2,455,278
Primary Metal Industries - 0.54%
British Steel plc, ADR ................. 17,000 364,429
Printing and Publishing - 4.23%
Gannett Co., Inc. ...................... 12,000 741,744
McGraw-Hill Companies, Inc. (The) ...... 5,200 384,800
Meredith Corporation ................... 20,000 713,740
New York Times Company (The), Class A .. 9,200 608,350
Viacom Inc., Class B* .................. 10,000 414,370
Total ................................. 2,863,004
Railroad Transportation - 1.60%
Burlington Northern Santa Fe Corporation 6,300 585,503
Union Pacific Corporation .............. 8,000 499,496
Total ................................. 1,084,999
Stone, Clay, and Glass Products - 1.08%
USG Corporation* ....................... 15,000 735,000
Transportation Equipment - 2.75%
Chrysler Corporation ................... 15,700 552,436
Echlin Inc. ............................ 17,000 615,179
TRW Inc. ............................... 13,000 693,875
Total ................................. 1,861,490
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Transportation Services - 1.08%
Dial Corporation (The) ................. 35,000 $ 729,505
Wholesale Trade -- Durable Goods - 0.84%
Motorola, Inc. ......................... 10,000 570,620
TOTAL COMMON STOCKS - 57.67% $39,072,862
(Cost: $32,729,412)
PREFERRED STOCK - 0.89%
Communication
Telebras S.A., ADR, Convertible ........ 5,200 $ 605,473
(Cost: $494,927)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Building Materials and Garden Supplies - 0.78%
Home Depot, Inc. (The), Convertible,
3.25%, 10-1-2001 ...................... $ 400 525,500
Electronic and Other Electric Equipment - 0.51%
Cooper Industries, Inc.,
6.0%, 1-1-99 (Exchangeable) ........... 257 346,750
Nondepository Institutions - 1.48%
National Rural Utilities Cooperative Finance Corp.,
6.1%, 12-22-2000 ...................... 1,000 1,001,250
Oil and Gas Extraction - 0.37%
Enron Corp.,
6.25%, 12-13-98 (Exchangeable) ........ 261 247,500
Security and Commodity Brokers - 0.60%
Salomon Inc.,
7.625%, 5-15-99 (Exchangeable) ........ 266 410,000
TOTAL CORPORATE DEBT SECURITIES - 3.74% $ 2,531,000
(Cost: $2,183,750)
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association,
7.0%, 9-1-2025 ........................ $4,033 $ 4,061,977
United States Treasury:
5.5%, 2-28-99 ......................... 1,000 998,440
6.875%, 8-31-99 ....................... 250 254,687
7.75%, 11-30-99 ....................... 1,500 1,555,545
7.125%, 2-29-2000 ..................... 500 514,455
5.25%, 1-31-2001 ...................... 2,000 1,975,620
6.375%, 8-15-2002 ..................... 1,100 1,128,358
7.5%, 2-15-2005 ....................... 2,250 2,472,885
6.25%, 8-15-2023 ...................... 250 257,500
6.75%, 8-15-2026 ...................... 3,000 3,302,820
TOTAL UNITED STATES GOVERNMENT SECURITIES - 24.38% $16,522,287
(Cost: $15,970,311)
SHORT-TERM SECURITIES
Commercial Paper
Fabricated Metal Products - 0.32%
Danaher Corporation,
5.7227%, Master Note .................. 216 216,000
Food and Kindred Products - 1.93%
General Mills, Inc.,
5.5777%, Master Note .................. 1,311 1,311,000
General Merchandise Stores - 3.78%
May Department Stores Company (The),
5.74%, 1-12-98 ........................ 2,565 2,560,501
Petroleum and Coal Products - 6.44%
BP America Inc.,
5.9%, 1-21-98 ......................... 4,375 4,360,660
Textile Mill Products - 1.19%
Sara Lee Corporation,
5.5727%, Master Note .................. 810 810,000
TOTAL SHORT-TERM SECURITIES - 13.66% $ 9,258,161
(Cost: $9,258,161)
TOTAL INVESTMENT SECURITIES - 100.34% $67,989,783
(Cost: $60,636,561)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.34%) (231,047)
NET ASSETS - 100.00% $67,758,736
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
ASSET STRATEGY PORTFOLIO
MANAGERS' LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report relates to the operation of the Asset Strategy Portfolio for
the fiscal year ended December 31, 1997. The discussion, graphs and tables
contained in this report will provide you with information regarding the
Portfolio's performance during that period.
Relatively strong economic growth during much of the year, low inflation
and a large flow of money into U.S. equity mutual funds positively impacted
the market in 1997. Uncertainty regarding Federal Reserve policy injected
some volatility into the market. Late in the year, a currency crisis in
Southeast Asia attracted most of the market's attention, as investors
assessed the chances of a short-term solution and the impact of the crisis
on Asian demand for U.S. products.
Early in the year, the Portfolio switched from having one manager to having
two managers; one to focus on equity investments and one to concentrate on
fixed income investments. In July, the shareholders voted to remove the
restrictions regarding the maximum percentage of the Portfolio's assets
that were permitted to be invested in stocks and bonds. Following the
change of managers, the Portfolio's exposure to stocks was greatly
increased based upon the expectation that the equity market would
outperform the other asset classes in 1997. In late October, equity
exposure was reduced and cash was increased to reflect our concerns
regarding stock valuations and anticipated lower profit growth. On the
fixed income side, we reduced the Portfolio's longer-term Treasury bond
holdings and replaced them with lower-rated domestic and foreign bonds
(including those in emerging markets) with shorter maturities and higher
yields in an effort to generate income and to protect against interest rate
increases.
The strategies and techniques we applied resulted in the Portfolio's
overall performance, and the performance of its holdings in the various
categories of securities in which the Portfolio invests, remaining below
that of the S&P 500 Index, but above the other indexes charted on the
following page. The S&P 500 Index reflects the performance of securities
that generally represent the stock market. The other indexes reflect the
performance of one-month certificates of deposit (Salomon Brothers Short-
Term Index for 1 Month Certificates of Deposit) and the bond market (the
Salomon Brothers Broad Investment Grade Bond Index). A variety of indexes
is presented because the Portfolio invests in stocks, bonds and other
instruments. We have chosen to use the Salomon Brothers Index beginning
with this year's Annual Report to reflect the performance of the bond
market, instead of the Lehman Brothers Aggregate Bond Index that had been
presented in prior years. We believe that the Salomon Brothers Index
provides a more accurate basis for comparing the Fund's performance to the
performance of the types of fixed income securities in which the Fund
invests. Both indexes are presented in this year's Annual Report for
comparison purposes.
The Asian crisis should continue to be the market focal point until Japan,
South Korea and the Southeast Asian nations make economic policy moves that
are acceptable to the International Monetary Fund, the U.S. and other major
economic powers and investors. It is now possible that the Federal Reserve
may lower interest rates in order to boost Asian currencies. It is widely
expected that domestic economic growth will be lower in 1998 than
originally projected as a result of the Asian problem. Uncertainty
regarding the resolution of the Asian crisis, the shift to a single
European currency and slower U.S. growth promise to create a substantial
volatility in the market in 1998. In light of anticipated conditions, we
are maintaining our equity exposure between 30% and 40% of total assets and
searching for fixed income investment opportunities with shorter durations
and in higher-yielding emerging markets.
Thank you for your continued confidence.
Respectfully,
Michael L. Avery
Daniel J. Vrabac
Managers, Asset Strategy Portfolio
<PAGE>
Comparison of Change in Value of $10,000 Investment in
TMK/United Asset Strategy Portfolio,
The S&P 500 Index,
The Lehman Brothers Aggregate Bond Index,
The Salomon Brothers Broad Investment Grade Index and
The Salomon Brothers Short-Term Index for 1 Month Certificates of Deposit
Salomon
Salomon Brothers
TMK/ Lehman Brothers Short-Term
United Brothers Broad Index
Asset S&P AggregateInvestment for 1 month
Strategy 500 Bond GradeCertificates
Portfolio Index Index Index of Deposit
--------- --------- ---------- -------- ----------
05/01/95Purchase $10,000 $10,000 $10,000 $10,000 $10,000
12/31/95 10,180 12,179 11,123 11,130 10,401
12/31/96 10,795 14,975 11,525 11,533 10,976
12/31/97 12,307 19,961 12,641 12,644 11,599
====TMK/United Asset Strategy Portfolio* -- $12,307
++++ S&P 500 Index** -- $19,961
****Lehman Brothers Aggregate Bond Index** -- $12,641
....Salomon Brothers Broad Investment Grade Index** -- $12,644
*-*-Salomon Brothers Short-Term Index for 1 Month Certificates of
Deposit** -- $11,599
*The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund and assumes reinvestment of dividends and
distributions.
**Because the Fund commenced operations on a date other than at the end
of a month, and partial month calculations of the performance of the
above indexes (including income) are not available, investment in the
indexes was effected as of April 30, 1995.
Annual Average Total Return+
----------------------------
Year Ended
12/31/97 14.01%
2+ Years Ended
12/31/97++ 8.08%
+Performance data quoted represents past performance. Investment return
and principal value will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
++5-1-95 (the initial offering date) through 12-31-97.
Past performance is not predictive of future performance. Indexes are
unmanaged. Performance data quoted does not take into account any
expenses or charges associated with owning a variable life or annuity
policy invested in the TMK/United Funds, Inc.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Agricultural Production -- Crops - 1.03%
Dole Food Company, Inc. ................ 2,200 $ 100,650
Apparel and Accessory Stores - 1.71%
Payless ShoeSource, Inc.* .............. 2,500 167,813
Business Services - 3.90%
BISYS Group, Inc. (The)* ............... 2,200 73,425
BMC Software, Inc.* .................... 2,700 177,017
Intuit Inc.* ........................... 3,200 132,199
Total ................................. 382,641
Chemicals and Allied Products - 2.65%
Warner-Lambert Company ................. 2,100 260,400
Depository Institutions - 6.40%
BankAmerica Corporation* ............... 2,000 146,000
Norwest Corporation .................... 4,600 177,675
U. S. Bancorp .......................... 900 100,744
Wells Fargo & Company .................. 600 203,662
Total ................................. 628,081
Electric, Gas and Sanitary Services - 1.64%
Duke Energy Corp. ...................... 2,900 160,587
Food and Kindred Products - 0.55%
CPC International Inc. ................. 500 54,000
General Merchandise Stores - 1.17%
Wal-Mart Stores, Inc. .................. 2,900 114,367
Health Services - 0.80%
Centennial HealthCare Corporation* ..... 3,500 78,967
Miscellaneous Retail - 1.41%
Costco Companies, Inc.* ................ 3,100 138,238
Oil and Gas Extraction - 1.28%
Tom Brown, Inc.* ....................... 6,500 125,937
Personal Services - 1.70%
Equity Corporation International* ...... 7,200 166,500
Petroleum and Coal Products - 4.19%
British Petroleum Company p.l.c.
(The), ADR ............................ 2,500 199,218
Royal Dutch Petroleum Company .......... 3,900 211,329
Total ................................. 410,547
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Transportation Equipment - 0.86%
Chrysler Corporation .................. 2,400 $ 84,449
Wholesale Trade - Nondurable Goods - 1.07%
Fresh Del Monte Produce N.V.* .......... 7,200 105,300
TOTAL COMMON STOCKS - 30.36% $2,978,477
(Cost: $2,704,013)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 2.02%
BOC Group, Inc., (The)
5.875%, 1-29-2001 ..................... $200 197,800
Communication - 0.99%
Comtel Brasileira Ltd.,
10.75%, 9-26-2004 (B) ................. 100 97,000
Depository Institutions - 4.06%
Banco de Inversion y Comercio
Exterior S.A.,
9.375%, 12-27-2000 (B) ................ 200 199,000
Banco Nacional de Comercio Exterior, S.N.C.,
7.5%, 7-1-2000 ........................ 200 199,500
Total ................................. 398,500
Electric, Gas and Sanitary Services - 1.95%
Companhia Paranaense de Energia-COPEL,
9.75%, 5-2-2005 (B).................... 200 191,500
Food and Kindred Products - 3.48%
JG Summit Holdings, Inc.,
8.0%, 5-6-2002 (B) .................... 200 159,000
Cervejarias Kaiser S.A.,
8.875%, 9-26-2005 (B) ................. 200 182,000
Total ................................. 341,000
Industrial Machinery and Equipment - 2.05%
Tyco International Ltd.,
6.5%, 11-1-2001 ....................... 200 201,106
Textile Mill Products - 0.46%
Polysindo International Finance Company B.V.,
13.0%, 6-15-2001 ...................... 50 45,500
TOTAL CORPORATE DEBT SECURITIES - 15.01% $1,472,406
(Cost: $1,531,334)
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
OTHER GOVERNMENT SECURITY - 2.07%
Argentina
Republic of Argentina (The),
9.25%, 2-23-2001 ...................... $ 200 $ 203,300
(Cost: $201,617)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Banks:
7.0%, 6-30-2005 ....................... 200 199,656
7.275%, 3-20-2006 ..................... 250 250,077
7.17%, 8-20-2007 ...................... 200 200,000
6.5%, 2-15-2023 ....................... 1,873 372,784
United States Treasury:
7.25%, 2-15-98 ........................ 60 60,103
7.125%, 2-29-2000 ..................... 60 61,735
7.5%, 2-15-2005 ....................... 130 142,878
6.25%, 2-15-2007 ...................... 400 412,748
TOTAL UNITED STATES GOVERNMENT SECURITIES - 17.33% $1,699,981
(Cost: $1,728,492)
SHORT-TERM SECURITIES
Commercial Paper
Depository Institutions - 5.07%
J.P. Morgan & Co. Incorporated,
5.8%, 2-5-98 ........................... 500 497,181
Electric, Gas and Sanitary Services - 5.68%
Companhia Paranaense de Energia- COPEL,
0.0%, 3-24-98 ......................... 100 98,003
Northern Illinois Gas Co.,
5.75%, 1-21-98 ........................ 460 458,530
Total ................................. 556,533
Fabricated Metal Products - 4.78%
Danaher Corporation,
5.7227%, Master Note .................. 469 469,000
Food and Kindred Products - 3.29%
General Mills, Inc.,
5.5777%, Master Note .................. 323 323,000
General Merchandise Stores - 4.58%
May Department Stores Company (The),
5.74%, 1-12-98 ........................ 450 449,211
Insurance Carriers - 4.06%
USAA Capital Corp.,
5.8%, 1-29-98 ......................... 400 398,195
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Security and Commodity Brokers - 4.07%
Merrill Lynch & Co. Inc.,
5.84%, 1-16-98 ........................ $400 $ 399,027
Textile Mill Products - 2.79%
Sara Lee Corporation,
5.5727%, Master Note .................. 274 274,000
TOTAL SHORT-TERM SECURITIES - 34.32% $3,366,147
(Cost: $3,366,147)
TOTAL INVESTMENT SECURITIES - 99.09% $9,720,311
(Cost: $9,531,603)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.91% 89,189
NET ASSETS - 100.00% $9,809,500
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
MONEY MARKET PORTFOLIO
MANAGER'S LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report covers the operation of the Money Market Portfolio for the
fiscal year ended December 31, 1997. The following discussion and tables
provide you with information regarding the Portfolio's performance during
that period.
In the first quarter of 1997, the Federal Reserve raised short-term
interest rates slightly. This was in response to perceived inflationary
pressure due to tightening labor markets.
During 1997, the Portfolio maintained its position in floating rate
securities which adjust to changes in short-term interest rates and reset
at, or slightly above, current market rates at frequent intervals. We also
extended the maturities on a small portion of the Portfolio's holdings to
take advantage of the higher rates on instruments with longer maturities.
We anticipate continued moderate economic growth in 1998. The inflationary
pressures that the Federal Reserve anticipated at the beginning of 1997
have not materialized and a tightening by the Federal Reserve no longer
seems imminent. The short-term yield curve has flattened in anticipation
of a slower economy and a possible easing of monetary policy by the Federal
Reserve. In response, we plan to begin extending maturities to lock in
higher yields on a portion of the Portfolio's holdings.
Thank you very much for your continued support and confidence.
Respectfully,
Richard K. Poettgen
Manager, Money Market Portfolio
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
BANK OBLIGATIONS
Certificates of Deposit
Domestic _ 2.31%
Morgan Guaranty Trust Company of New York,
5.8%, 7-28-98 ......................... $1,000 $ 998,973
Yankee _ 4.61%
Canadian Imperial Bank of Commerce,
5.95%, 6-29-98 ........................ 1,000 998,809
Societe Generale - New York,
5.85%, 3-3-98 ......................... 1,000 999,458
Total ................................. 1,998,267
Total Certificates of Deposit _ 6.92% 2,997,240
Commercial Paper - 3.23%
Deutsche Bank Financial Inc.,
5.84%, 1-6-98 ......................... 1,400 1,398,864
TOTAL BANK OBLIGATIONS _ 10.15% $ 4,396,104
(Cost: $4,396,104)
CORPORATE OBLIGATIONS
Commercial Paper
Chemicals and Allied Products _ 9.97%
Abbott Laboratories,
5.77%, 1-14-98 ........................ 1,500 1,496,875
BOC Group Inc.,
5.6%, 2-13-98 ......................... 1,335 1,326,070
PPG Industries, Inc.,
5.63%, 1-29-98 ........................ 1,500 1,493,432
Total ................................. 4,316,377
Communication - 4.15%
BellSouth Telecommunications Inc.,
5.95%, 1-7-98 ......................... 1,800 1,798,215
Electric, Gas and Sanitary Services _ 12.11%
Bay State Gas Co.,
5.62%, 1-5-98 ......................... 1,555 1,554,029
Florida Power Corp.,
5.8%, 1-6-98 .......................... 1,360 1,358,904
Northern Illinois Gas Co.,
5.52%, 1-9-98 ......................... 1,400 1,398,283
Questar Corp.,
5.72%, 1-20-98 ........................ 935 932,177
Total ................................. 5,243,393
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
Commercial Paper (Continued)
Fabricated Metal Products - 3.75%
Danaher Corporation,
5.7227%, Master Note .................. $1,625 $ 1,625,000
Food and Kindred Products _ 7.01%
General Mills, Inc.,
5.5777%, Master Note .................. 1,542 1,542,000
Seagram (Joseph E.) & Sons Inc.,
5.9%, 1-20-98 ......................... 1,500 1,495,329
Total ................................. 3,037,329
General Merchandise Stores - 1.27%
Dillard Investment Co. Inc.,
5.7%, 1-27-98 ......................... 550 547,736
Industrial Machinery and Equipment - 6.74%
Hewlett-Packard Co.,
5.95%, 1-21-98 ........................ 1,500 1,495,042
Minnesota Mining and Manufacturing Co.,
5.8%, 1-9-98 .......................... 1,425 1,423,163
Total ................................. 2,918,205
Insurance Carriers - 2.39%
USAA Capital Corp.,
5.72%, 2-3-98 ......................... 1,040 1,034,547
Metal Mining _ 3.45%
BHP Finance (USA) Inc.,
5.71%, 2-4-98 ......................... 1,500 1,491,911
Nondepository Institutions _ 3.45%
Caterpillar Financial Services Corp.,
5.93%, 1-23-98 ........................ 1,500 1,494,564
Personal Services - 3.69%
Block Financial Corp.,
5.82%, 2-19-98 ........................ 1,610 1,597,246
Textile Mill Products - 4.15%
Sara Lee Corp.,
5.5727%, Master Note .................. 1,797 1,797,000
Total Commercial Paper _ 62.13% 26,901,523
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
Notes
Auto Repair, Services and Parking - 2.31%
PHH Corporation,
5.9314%, 6-24-98 ...................... $ 1,000 $ 1,000,000
Electric, Gas and Sanitary Services _ 4.63%
Baltimore Gas and Electric Company,
5.8089%, 3-2-98 ....................... 1,000 1,000,000
PacifiCorp,
8.75%, 2-12-98 ........................ 1,000 1,003,319
Total ................................. 2,003,319
Food and Kindred Products _ 2.31%
PepsiCo Inc.,
6.125%, 1-15-98 ....................... 1,000 1,000,180
Security and Commodity Brokers - 3.46%
Merrill Lynch & Co., Inc.,
5.9288%, 2-27-98 ...................... 1,500 1,500,011
Total Notes _ 12.71% 5,503,510
TOTAL CORPORATE OBLIGATIONS _ 74.84% $32,405,033
(Cost: $32,405,033)
MUNICIPAL OBLIGATIONS
New Jersey _ 0.61%
New Jersey Economic Development Authority,
Federally Taxable Variable Rate Demand/
Fixed Rate Revenue Bonds (The Morey
Organization, Inc. Project), Series of 1997
(CoreStates Bank, N.A.),(#)
5.9%, 1-7-98 .......................... 265 265,000
Pennsylvania _ 4.13%
Schuylkill County Industrial Development
Authority, Commercial Development Revenue
Bonds (Midway Supermarket, Inc. Project),
Taxable Series of 1995 (CoreStates Bank, N.A.),
5.9%, 1-7-98 .......................... 1,590 1,590,000
Montgomery County Industrial Development
Authority, Taxable Fixed Rate/Variable
Rate Demand Revenue Bonds (410 Horsham
Associates Project), Series of 1995
(CoreStates Bank, N.A.),
5.9%, 1-7-98 .......................... 200 200,000
Total ................................. 1,790,000
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL OBLIGATIONS (Continued)
Texas _ 4.61%
Gulf Coast Waste Disposal Authority, Pollution
Control Revenue Bonds (Amoco Oil Company
Project), Taxable Series 1995,
5.64%, 1-12-98 ........................ $ 1,000 $ 1,000,000
Metrocrest Hospital Authority, Series 1989A
(The Bank of New York),
5.6376%, 2-3-98........................ 1,000 994,832
Total ................................. 1,994,832
TOTAL MUNICIPAL OBLIGATIONS _ 9.35% $ 4,049,832
(Cost: $4,049,832)
UNITED STATES GOVERNMENT OBLIGATION - 2.31%
Student Loan Marketing Association,
5.729%, 2-17-98........................ 1,000 $ 1,000,000
(Cost: $1,000,000)
TOTAL INVESTMENT SECURITIES _ 96.65% $41,850,969
(Cost: $41,850,969)
CASH AND OTHER ASSETS, NET OF LIABILITIES _ 3.35% 1,449,180
NET ASSETS - 100.00% $43,300,149
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
LIMITED-TERM BOND PORTFOLIO
MANAGER'S LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report relates to the operation of the Limited-Term Bond Portfolio for
the fiscal year ended December 31, 1997. The following discussion, graphs
and tables provide you with information regarding the Portfolio's
performance during that period.
The U.S. economy experienced another year of moderate inflation in 1997,
despite a seventh year of expansion and a twenty-four year low unemployment
rate. A combination of factors helped restrain inflation, including high
business investment, increased competition from imports and increased labor
productivity. Inflation continues to trend lower and is at its smallest
rate of increase since the mid 1960s. Low inflation contributed
substantially to the excellent performance of fixed income investments last
year.
Our investment strategy was to maintain a longer duration than our
benchmark index in order to more fully participate in the appreciation of
bond prices resulting from lower interest rates. We have also overweighted
mortgage-backed securities and corporate bonds in order to increase the
Portfolio's yield.
The strategies and techniques we applied resulted in the Portfolio's
performance remaining slightly below the Salomon Brothers
Treasury/Government-Sponsored/Corporate 1-5 Year Index charted on the
following page. That index reflects the performance of securities that
generally represent the short-maturity sector of the bond market. We have
chosen to use the Salomon Brothers Index beginning with this year's Annual
Report to reflect the performance of the short-maturity sector of the bond
market, instead of the Lehman Brothers Mutual Fund Short Investment Grade
Debt Index that had been presented in prior years. We believe that the
Salomon Brothers Index provides a more accurate basis for comparing the
Fund's performance to the performance of the types of fixed income
securities in which the Fund invests. Both indexes are presented on the
following page in this year's Annual Report for comparison purposes.
Economic growth is widely expected to slow in 1998, due in large part to
the problems in Asia. The full effects of the currency devaluations,
resulting banking problems and slower economic growth in Asia have yet to
be seen, but are sure to dampen U.S. export growth. In addition, lower
priced imports from the area should restrain inflationary pressures. The
continuing sharp drop in the prices of gold, oil and many industrial
commodities are fully consistent with slowing global growth and downward
pressures on inflation. Given these trends, there is a negligible chance
that the Federal Reserve will decide to raise interest rates in the near
run. The next move in rates is likely to be down, although no such action
should occur before economic growth slows markedly. On balance, we feel
the economy remains on track with somewhat slower growth and continuing low
inflation. This is positive for the fixed income markets long-term;
however, a period of consolidation and volatility lies ahead as
international developments unfold. We expect to continue our strategy of
seeking relative value opportunities in securities offering superior yield
characteristics. Over the near term we will maintain a neutral duration
with the intention of lengthening maturity as market conditions warrant.
Thank you very much for your continued support and confidence.
Respectfully,
W. Patrick Sterner
Manager, Limited-Term Bond Portfolio
<PAGE>
Comparison of Change in Value of $10,000 Investment in
TMK/United Limited-Term Bond Portfolio,
The Lehman Brothers Mutual Fund Short Investment Grade Debt Index and The
Salomon Brothers Treasury/Government Sponsored/Corporate 1 - 5 Year Index
Salomon
Brothers
Lehman Treasury/
TMK/United Brothers Government
Limited-Term MF Short Sponsored/
Bond Inv Grade Corporate
Portfolio Debt Index 1-5 Yr Index
--------- ----------- ------------
05/03/94 Purchase $10,000 $10,000 $10,000
12/31/94 10,026 10,142 10,105
12/31/95 11,458 11,605 11,404
12/31/96 11,892 12,200 11,938
12/31/97 12,707 13,086 12,791
+++++ TMK/United Limited-Term Bond Portfolio* -- $12,707
----- Lehman Bros MF Short Inv Grade Debt Index** -- $13,086
..... Salomon Brothers Treasury/Government Sponsored/Corporate 1 - 5 Year
Index** -- $12,791
*The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund and assumes reinvestment of dividends and
distributions..
**Because the Fund commenced operations on a date other than at the end
of a month, and partial month calculations of the performance of the
above indexes (including income) are not available, investment in the
indexes was effected as of April 30, 1994.
Annual Average Total Return+
----------------------------
Year Ended
12/31/97 6.85%
3+ Years Ended
12/31/97++ 6.75%
+Performance data quoted represents past performance. Investment return
and principal value will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
++5-3-94 (the initial offering date) through 12-31-97.
Past performance is not predictive of future performance. Indexes are
unmanaged. Performance data quoted does not take into account any
expenses or charges associated with owning a variable life or annuity
policy invested in the TMK/United Funds, Inc.
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 6.71%
American Home Products Corporation,
7.7%, 2-15-2000 ....................... $100 $ 102,937
ICI Wilmington, Inc.,
9.5%, 11-15-2000 ...................... 75 81,187
Praxair, Inc.,
6.7%, 4-15-2001 ....................... 100 101,322
Total ................................. 285,446
Depository Institutions - 9.77%
Ahmanson (H.F.),
6.35%, 9-1-98 ......................... 100 100,177
BankAmerica Corporation,
9.7%, 8-1-2000 ........................ 100 108,078
NationsBank Corporation,
5.125%, 9-15-98 ....................... 100 99,442
Wells Fargo & Company,
8.375%, 5-15-2002 ..................... 100 107,764
Total ................................. 415,461
Electric, Gas and Sanitary Services - 2.38%
UtiliCorp United,
6.875%, 10-1-2004 ..................... 100 101,391
Electronic and Other Electric Equipment - 2.46%
Black & Decker Corp.,
7.5%, 4-1-2003 ........................ 100 104,416
Furniture and Fixtures - 2.37%
Masco Corporation,
6.625%, 9-15-99 ....................... 100 100,648
General Merchandise Stores - 2.37%
Sears, Roebuck and Co.,
9.25%, 4-15-98 ........................ 100 100,838
Instruments and Related Products - 4.52%
Baxter International Inc.,
7.625%, 11-15-2002 .................... 100 105,497
Polaroid Corporation,
8.0%, 3-15-99 ......................... 85 86,591
Total ................................. 192,088
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Nondepository Institutions - 8.46%
Associates Corporation of North America,
7.875%, 9-30-2001 ..................... $100 $ 105,415
Ford Motor Credit Company,
8.0%, 1-15-99 ......................... 150 152,753
General Motors Acceptance Corporation,
7.75%, 1-15-99 ........................ 100 101,570
Total ................................. 359,738
Paper and Allied Products - 2.39%
International Paper Company,
6.875%, 7-10-2000 ..................... 100 101,461
Petroleum and Coal Products - 3.75%
Chevron Corporation,
8.11%, 12-1-2004 ...................... 100 106,717
Texaco Capital Inc.,
9.0%, 12-15-99 ........................ 50 52,540
Total ................................. 159,257
Railroad Transportation - 2.48%
Union Pacific Corporation,
7.875%, 2-15-2002 ..................... 100 105,295
Security and Commodity Brokers - 2.43%
Salomon Inc.,
7.75%, 5-15-2000 ...................... 100 103,197
Textile Mill Products - 2.40%
Fruit of the Loom, Inc.,
7.875%, 10-15-99 ...................... 100 102,242
Transportation by Air - 2.41%
Federal Express Corporation,
10.0%, 9-1-98 ......................... 100 102,576
Wholesale Trade -- Durable Goods - 2.46%
Westinghouse Electric Corporation,
8.875%, 6-1-2001 ...................... 100 104,772
TOTAL CORPORATE DEBT SECURITIES - 57.36% $2,438,826
(Cost: $2,408,058)
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation,
7.0%, 5-15-2005 ....................... $100 $ 101,343
Federal National Mortgage Association:
6.0%, 11-1-2000 ....................... 61 60,067
7.27%, 4-24-2003 ...................... 100 100,187
7.95%, 3-7-2005 ....................... 100 103,828
7.15%, 9-21-2005 ...................... 100 100,281
7.5%, 11-15-2006 ...................... 100 101,969
6.5%, 12-1-2010 ....................... 89 89,483
6.0%, 1-1-2011 ........................ 82 81,006
6.5%, 2-1-2011 ........................ 85 85,048
7.0%, 5-1-2011 ........................ 86 87,267
7.0%, 7-1-2011 ........................ 87 88,332
7.0%, 9-1-2012 ........................ 98 99,755
6.0%, 9-25-2014 ....................... 79 78,399
11.0%, 10-1-2020 ...................... 26 30,085
7.0%, 4-1-2026 ........................ 93 93,476
Government National Mortgage Association,
7.0%, 9-15-2008 ....................... 61 61,572
TOTAL UNITED STATES GOVERNMENT SECURITIES - 32.03% $1,362,098
(Cost: $1,350,153)
SHORT-TERM SECURITIES
Commercial Paper
Fabricated Metal Products - 3.03%
Danaher Corporation,
5.7227%, Master Note .................. 129 129,000
Food and Kindred Products - 1.91%
General Mills, Inc.,
5.5777%, Master Note .................. 81 81,000
Textile Mill Products - 3.95%
Sara Lee Corporation,
5.5727%, Master Note .................. 168 168,000
TOTAL SHORT-TERM SECURITIES - 8.89% $ 378,000
(Cost: $378,000)
TOTAL INVESTMENT SECURITIES - 98.28% $4,178,924
(Cost: $4,136,211)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.72% 73,183
NET ASSETS - 100.00% $4,252,107
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
BOND PORTFOLIO
MANAGER'S LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report relates to the operation of the Bond Portfolio for the fiscal
year ended December 31, 1997. The following discussion, graphs and tables
provide you with information regarding the Portfolio's performance during
that period.
Interest rates declined materially in 1997, rising in the first quarter and
declining for most of the rest of the year. The overall decline in rates
for the year was attributable to a significant decline in inflation in the
U.S. and financial problems in Asia, as foreign investors sought a safe
haven for their capital in a rising U.S. Dollar Treasury Bond. Corporate
bonds performed well. Corporate cash flows were healthy and, with rising
stock prices and lower interest rates, many corporations tendered for
existing debt and substituted lower yield debt or issued equity, both of
which improved credit quality and compressed the spread between corporate
and Treasury debt.
The Portfolio maintained an above average weighting in corporate bonds
relative to its peers and relevant indexes. These holdings, and an
interest rate sensitivity higher than its peers in a declining interest
rate market, helped the Portfolio's relative performance. One technique
that we continued is the use of so-called putable bonds (bonds that give
the owner the right to sell them back to the issuing corporation at a
stated time prior to maturity). This has the effect of increasing the
sensitivity of bond prices to declining interest rates, and conversely
muting a bond's sensitivity to increasing rates. During periods in which
rates are more volatile, the "imbedded option" in these bonds becomes more
valuable.
The strategies and techniques we applied resulted in the Portfolio's
performance remaining fairly consistent with the Salomon Brothers Broad
Investment Grade Bond Index charted on the following page. That index
reflects the performance of securities that generally represent the bond
market. The Portfolio's low exposure to Asian bonds aided relative
performance late in the year. We have chosen to use the Salomon Brothers
Index beginning with this year's Annual Report to reflect the performance
of the bond market, instead of the Lehman Brothers Government/Corporate
Bond Index that had been presented in prior years. We believe that the
Salomon Brothers Index provides a more accurate basis for comparing the
Fund's performance to the performance of the types of fixed income
securities in which the Fund invests. Both indexes are presented on the
following page in this year's Annual Report for comparison purposes.
We expect several factors to favorably affect the Portfolio's near-term
performance. The Asian financial crisis should slow the U.S. economy.
This, in turn, should dampen any inflationary pressure, which could
encourage the Federal Reserve to ease short-term interest rates. The
extent to which interest rates will decline depends on how the Asian crisis
plays out. With respect to less extraordinary factors, such as U.S. fiscal
policy and world commodity prices, the government seems to be on a route
toward a balanced budget and commodity disruptions, like oil embargoes, do
not appear imminent. Only the overhang of longer-term fiscal problems like
Social Security funding and Medicare financing seems to be keeping rates
from falling to a "normal" relationship to very low levels of inflation.
Given our outlook for a slowing economy, we intend to further increase the
average credit quality of the Portfolio, maintain a longer than normal
sensitivity to interest rates, and maintain a relatively liquid portfolio
of corporate bonds. We will keep a close eye on opportunities abroad as
the disruptions in the Far East may present opportunities for higher yield
and greater total return.
Thank you very much for your continued support and confidence.
Respectfully,
James C. Cusser
Manager, Bond Portfolio
<PAGE>
Comparison of Change in Value of $10,000 Investment in
TMK/United Bond Portfolio,
The Lehman Brothers Government/Corporate Bond Index and
The Salomon Brothers Broad Investment Grade Index
Lehman
Brothers Salomon
Government/ Brothers
TMK/United Corporate Broad
Bond Bond Investment
Portfolio Index Grade Index
---------- ----------- -----------
12/31/87 Purchase $10,000 $10,000 $10,000
12/31/88 10,760 10,759 10,799
12/31/89 12,033 12,290 12,358
12/31/90 12,880 13,309 13,482
12/31/91 14,965 15,455 15,635
12/31/92 16,113 16,625 16,821
12/31/93 18,104 18,464 18,485
12/31/94 17,036 17,816 17,959
12/31/95 20,537 21,244 21,291
12/31/96 21,241 21,861 22,061
12/31/97 23,317 23,994 24,184
+++++ TMK/United Bond Portfolio* -- $23,317
----- Lehman Bros Gov't/Corp Bond Index -- $23,994
..... The Salomon Brothers Broad Investment Grade Index -- $24,184
*The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund and assumes reinvestment of dividends and
distributions.
Annual Average Total Return+
----------------------------
Year Ended
12/31/97 9.77%
5 Years Ended
12/31/97 7.57%
10 Years Ended
12/31/97 8.83%
+Performance data quoted represents past performance. Investment return
and principal value will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
Past performance is not predictive of future performance. Indexes are
unmanaged. Performance data quoted does not take into account any
expenses or charges associated with owning a variable life or annuity
policy invested in the TMK/United Funds, Inc.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 4.99%
Dow Capital BV,
9.0%, 5-15-2010 ....................... $ 500 $ 591,195
Dow Chemical Company (The),
8.55%, 10-15-2009 ..................... 1,000 1,153,860
Procter & Gamble Company (The),
8.0%, 9-1-2024 ........................ 2,000 2,401,740
Rohm & Haas,
9.375%, 11-15-2019 .................... 750 818,437
Total ................................. 4,965,232
Communication - 6.97%
Bell Telephone Company of Pennsylvania (The),
8.35%, 12-15-2030 ..................... 1,000 1,245,710
BellSouth Telecommunications, Inc.,
5.85%, 11-15-2045 ..................... 1,000 1,006,450
Brooks Fiber Properties, Inc.,
0.0%, 3-1-2006 (F) .................... 250 207,500
Centel Capital Corporation,
9.0%, 10-15-2019 ...................... 1,000 1,231,260
Jones Intercable, Inc.,
9.625%, 3-15-2002 ..................... 500 536,250
Tele-Communications, Inc.,
6.58%, 2-15-2005 ...................... 1,000 1,065,050
Turner Broadcasting System, Inc.,
8.375%, 7-1-2013 ...................... 1,000 1,122,020
U S WEST, Inc.,
8.4%, 9-15-99 ......................... 500 518,555
Total ................................. 6,932,795
Depository Institutions - 10.42%
AmSouth Bancorporation,
6.75%, 11-1-2025 ...................... 1,500 1,536,945
Chevy Chase Savings Bank, F.S.B.,
9.25%, 12-1-2005 ...................... 500 515,000
Citicorp,
9.5%, 2-1-2002 ........................ 500 556,870
J.P. Morgan & Co. Incorporated,
7.54%, 1-15-2027 ...................... 1,500 1,523,790
Kansallis-Osake-Pankki,
10.0%, 5-1-2002 ....................... 1,000 1,136,390
NBD Bank, National Association,
8.25%, 11-1-2024 ...................... 1,000 1,213,900
NationsBank Corporation,
8.57%, 11-15-2024 ..................... 1,000 1,242,290
Riggs National Corporation,
8.5%, 2-1-2006 ........................ 1,500 1,573,290
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Depository Institutions (Continued)
SouthTrust Bank of Alabama, N.A.:
5.58%, 2-6-2006 ....................... $ 500 $ 493,130
7.69%, 5-15-2025 ...................... 500 575,850
Total ................................. 10,367,455
Electric, Gas and Sanitary Services - 6.95%
Cajun Electric Power Cooperative, Inc.,
8.92%, 3-15-2019 ...................... 1,000 1,077,510
California Infrastructure and Economic
Development Bank, Special Purpose
Trust:
PG&E-1,
6.42%, 9-25-2008 ...................... 500 505,080
SCE-1,
6.38%, 9-25-2008 ...................... 750 756,952
Cleveland Electric Illuminating Co. (The),
9.5%, 5-15-2005 ....................... 678 751,916
Consolidated Edison Company of New York, Inc.,
8.05%, 12-15-2027 ..................... 500 526,790
El Paso Electric Company,
7.25%, 2-1-99 ......................... 500 502,345
Kansas Gas and Electric Company,
7.6%, 12-15-2003 ...................... 1,000 1,056,370
Niagara Mohawk Power,
9.5%, 6-1-2000 ........................ 500 529,020
Pacific Gas & Electric Co.,
6.875%, 12-1-99 ....................... 500 501,390
Pennsylvania Power & Light Co.,
9.25%, 10-1-2019 ...................... 656 709,536
Total ................................. 6,916,909
Food and Kindred Products - 3.14%
Anheuser-Busch,
7.0%, 9-1-2005 ........................ 500 508,970
Coca-Cola Enterprises Inc.,
0.0%, 6-20-2020 ....................... 10,000 2,266,800
Nabisco, Inc.,
6.8%, 9-1-2001 ........................ 345 351,669
Total ................................. 3,127,439
Food Stores - 0.54%
Kroger Co. (The),
7.65%, 4-15-2007 ...................... 500 534,355
Health Services - 1.03%
Tenet Healthcare Corporation:
7.875%, 1-15-2003 ..................... 500 506,250
8.625%, 12-1-2003 ..................... 500 521,250
Total ................................. 1,027,500
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Hotels and Other Lodging Places - 1.67%
Marriott International, Inc.,
7.875%, 4-15-2005 ..................... $1,000 $ 1,087,990
RHG Finance Corporation,
8.875%, 10-1-2005 ..................... 500 568,175
Total ................................. 1,656,165
Instruments and Related Products - 0.76%
Raytheon Company,
6.45%, 8-15-2002 ...................... 750 753,683
Insurance Carriers - 0.53%
Reliance Group Holdings, Inc.,
9.0%, 11-15-2000 ...................... 500 524,170
Lumber and Wood Products - 0.24%
Doman Industries Limited,
8.75%, 3-15-2004 ...................... 250 238,750
Nondepository Institutions - 10.53%
Associates Corporation of North America,
7.95%, 2-15-2010 ...................... 500 561,255
CHYPS CBO 1997-1 Ltd.,
6.72%, 1-15-2010 (B) .................. 1,500 1,451,250
CWMBS, Inc.,
6.5%, 4-25-2024 ....................... 2,000 1,993,440
Chrysler Financial Corporation,
12.75%, 11-1-99 ....................... 1,000 1,110,320
General Electric Capital Corporation,
8.3%, 9-20-2009 ....................... 250 289,045
General Motors Acceptance Corporation,
8.875%, 6-1-2010 ...................... 1,000 1,193,970
IMC Home Equity Loan Trust 1997-5 A7,
6.9%, 1-20-2022 ....................... 1,000 1,007,500
National Rural Utilities Cooperative
Finance Corp., Series C,
6.1%, 12-22-2000 ...................... 500 500,625
Residential Asset Securities Corporation,
Mortgage Pass-Through Certificates,
1995-KS3 Class D,
8.0%, 10-25-2024 ...................... 1,000 1,042,890
U S WEST Communications Group, Inc.,
6.95%, 1-15-2037 ...................... 750 772,553
Westinghouse Electric Corporation,
8.875%, 6-14-2014 ..................... 500 555,410
Total ................................. 10,478,258
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Oil and Gas Extraction - 3.17%
Anadarko Petroleum Corporation,
7.25%, 3-15-2025 ...................... $1,000 $ 1,091,440
Louis Dreyfus Natural Gas Corp.,
9.25%, 6-15-2004 ...................... 500 560,000
Mitchell Energy & Development Corp.,
9.25%, 1-15-2002 ...................... 27 29,337
Oryx Energy Company,
10.0%, 4-1-2001 ....................... 400 439,428
YPF Sociedad Anoima,
8.0%, 2-15-2004 ....................... 1,000 1,032,670
Total ................................. 3,152,875
Paper and Allied Products - 1.61%
Boise Cascade Office Products Corporation,
9.875%, 2-15-2001 ..................... 500 518,890
Canadian Pacific Forest Products Ltd.,
9.25%, 6-15-2002 ...................... 1,000 1,077,220
Total ................................. 1,596,110
Printing and Publishing - 0.55%
Viacom International Inc.,
10.25%, 9-15-2001 ..................... 500 550,480
Security and Commodity Brokers - 1.00%
Salomon Inc.,
3.65%, 2-14-2002 ...................... 1,000 997,610
Stone, Clay and Glass Products - 1.61%
Owens-Corning Fiberglas Corporation,
8.875%, 6-1-2002 ...................... 500 544,065
Owens-Illinois, Inc.,
7.85%, 5-15-2004 ...................... 500 525,270
USG Corporation,
9.25%, 9-15-2001 ...................... 500 535,000
Total ................................. 1,604,335
United States Postal Service - 0.25%
Postal Square Limited Partnership,
6.5%, 7-15-2022 ....................... 250 250,625
Wholesale Trade -- Durable Goods- 2.72%
Fisher Scientific International Inc.,
7.125%, 12-15-2005 .................... 900 842,103
Motorola, Inc.,
8.4%, 8-15-2031 ....................... 1,500 1,858,905
Total ................................. 2,701,008
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
TOTAL CORPORATE DEBT SECURITIES - 58.68% $58,375,754
(Cost: $55,601,683)
OTHER GOVERNMENT SECURITIES
Canada - 5.15%
Hydro-Quebec:
8.05%, 7-7-2024 ....................... $ 1,000 1,151,270
7.4%, 3-28-2025 ....................... 1,000 1,215,850
Province de Quebec:
5.67%, 2-27-2026 ...................... 500 527,015
6.29%, 3-6-2026 ....................... 1,000 1,031,020
Province of Nova Scotia,
8.25%, 11-15-2019...................... 1,000 1,192,530
Total ................................. 5,117,685
Supranational - 1.19%
Inter-American Development Bank,
8.4%, 9-1-2009 ........................ 1,000 1,187,540
TOTAL OTHER GOVERNMENT SECURITIES - 6.34% $6,305,225
(Cost: $5,729,703)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
7.5%, 2-15-2007 ....................... 2,000 2,053,120
7.5%, 11-15-2017 ...................... 1,538 1,561,547
7.5%, 4-15-2019 ....................... 1,490 1,531,405
7.95%, 12-15-2020 ..................... 3,000 3,082,500
Federal National Mortgage Association:
7.0%, 9-25-2020 ....................... 500 510,000
6.5%, 11-25-2020 ...................... 819 819,400
Government National Mortgage Association:
7.5%, 7-15-2023 ....................... 1,924 1,980,127
7.5%, 12-15-2023 ...................... 2,052 2,111,935
8.0%, 9-15-2025 ....................... 1,727 1,814,573
7.0%, 7-20-2027 ....................... 653 656,325
7.0%, 8-20-2027 ....................... 1,318 1,324,449
7.75%, 10-15-2031 ..................... 319 330,301
United States Treasury:
6.75%, 5-31-99 ........................ 1,000 1,014,690
5.75%, 10-31-2000 ..................... 6,000 6,007,500
5.25%, 1-31-2001 ...................... 1,000 987,810
0.0%, 2-15-2019 ....................... 2,000 561,060
United States Department of Veterans Affairs,
Guaranteed Remic Pass-Through Certificates,
Vendee Mortgage Trust, 1997-2 Class C,
7.5%, 8-15-2017 ....................... 2,000 2,081,860
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
TOTAL UNITED STATES GOVERNMENT SECURITIES - 28.57% $28,428,602
(Cost: $27,828,923)
SHORT-TERM SECURITIES
Commercial Paper
Fabricated Metal Products - 2.17%
Danaher Corporation,
5.7227%, Master Note .................. $2,156 2,156,000
Food and Kindred Products - 0.52%
General Mills, Inc.,
5.5777%, Master Note .................. 517 517,000
General Merchandise Stores - 1.08%
May Department Stores Company (The),
5.74%, 1-12-98 ........................ 1,075 1,073,115
Textile Mill Products - 1.42%
Sara Lee Corporation,
5.5727%, Master Note .................. 1,417 1,417,000
TOTAL SHORT-TERM SECURITIES - 5.19% $ 5,163,115
(Cost: $5,163,115)
TOTAL INVESTMENT SECURITIES - 98.78% $98,272,696
(Cost: $94,323,424)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.22% 1,216,573
NET ASSETS - 100.00% $99,489,269
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
HIGH INCOME PORTFOLIO
MANAGER'S LETTER
DECEMBER 31, 1997
---------------------------------------------------------------------------
Dear Policyholder:
This report relates to the operation of the High Income Portfolio for the
fiscal year ended December 31, 1997. The following discussion, graphs and
tables provide you with information regarding the Portfolio's performance
during that period.
Market conditions this year ranged from investors throwing their money at
the high yield market in search of yield and a record new issuance of paper
to meet the increased demand, to the negative October effect of 1997 and
the "Asian flu" during the final quarter. 1997 started with heavy cash
flows into the high yield market which caused prices to be bid up. The
spread between yields of the Merrill Lynch High Yield Index and the ten
year Treasury bonds went from 2.9% on January 2, 1997, to 2.31% by October
17, 1997. The next two weeks were ones of turmoil in the equity market
because of the Asian crisis as the Dow traded down and then bounced back.
The effect on the high yield market was for the spread to widen back out to
2.89%.
Our investment strategy during the past year was to stay fully invested.
We did this primarily by buying new issues. In doing so, we were also able
to further reduce our exposure to higher rated non-investment grade debt
securities ("BB paper"), a goal we had been working on for some time. We
were benefited during this time by having a number of these BB credits
upgraded to investment grade before we sold them out of the Portfolio,
which increased performance. The largest industry sector, by weighting,
was telecommunications, which was a strong performing sector for the year.
The strategies and techniques we applied resulted in the performance of the
Portfolio remaining consistent with the Salomon Brothers High Yield
Composite Index, charted on the following page. The Salomon Brothers Index
reflects the performance of securities that generally represent the high-
yield bond market. We have chosen to use the Salomon Brothers Index
beginning with this year's Annual Report to reflect the performance of the
high-yield bond market, instead of the First Boston Index that had been
presented in prior years. We believe that the Salomon Brothers Index
provides a more accurate basis for comparing the Fund's performance to the
performance of the types of fixed income securities in which the Fund
invests. Both indexes are presented on the following page in this year's
Annual Report for comparison purposes.
Our current outlook is more cautious for 1998. The events in Asia and the
resulting potential for slower growth in the U.S. are the main causes for
concern. We intend to stress credit quality, which hopefully will provide
satisfactory performance in good and choppy markets.
Thank you very much for your continued support and confidence.
Respectfully,
Louise D. Rieke
Manager, High Income Portfolio
<PAGE>
Comparison of Change in Value of $10,000 Investment in
TMK/United High Income Portfolio,
The First Boston High Yield Index and
The Salomon Brothers High Yield Composite Index
Salomon
First Brothers
Boston High
TMK/United High Yield
High Income Yield Composite
Portfolio Index Index
----------- ------ ---------
12/31/87 Purchase $10,000 $10,000 $10,000
12/31/88 11,495 11,366 11,524
12/31/89 11,013 11,410 11,753
12/31/90 10,194 10,682 10,759
12/31/91 13,679 15,356 15,410
12/31/92 15,825 17,914 18,228
12/31/93 18,659 21,302 21,571
12/31/94 18,183 21,097 21,022
12/31/95 21,489 24,765 25,737
12/31/96 24,167 27,841 28,630
12/31/97 27,559 31,356 32,715
+++++ TMK/United High Income Portfolio* -- $27,559
----- First Boston High Yield Index -- $31,356
..... The Salomon Brothers High Yield Composite Index --$32,715
*The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund and assumes reinvestment of dividends and
distributions.
Annual Average Total Return+
----------------------------
Year Ended
12/31/97 14.04%
5 Years Ended
12/31/97 11.73%
10 Years Ended
12/31/97 10.67%
+Performance data quoted represents past performance. Investment return
and principal value will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
Past performance is not predictive of future performance. Indexes are
unmanaged. Performance data quoted does not take into account any
expenses or charges associated with owning a variable life or annuity
policy invested in the TMK/United Funds, Inc.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS AND WARRANTS
Communication - 0.28%
Heartland Wireless Communications,
Inc., Warrants (B)* ................... 3,000 $ 30
Iridium LLC, Warrants (B)* ............. 500 61,250
Microcell Telecommunications Inc.,
Conditional Warrants (B)* ............. 5,000 5
Microcell Telecommunications Inc.,
Warrants(B)* .......................... 5,000 69,150
Primus Telecommunications Group,
Incorporated, Warrants* ............... 500 5,000
Young Broadcasting Inc.* ............... 5,000 195,935
Total ................................. 331,370
Electronic and Other Electric Equipment - 0.02%
Electronic Retailing Systems
International, Inc., Warrants* ........ 500 10,000
Powertel, Inc., Warrants* .............. 2,400 17,700
Total ................................ 27,700
Furniture and Fixtures - 0.32%
Lear Corporation* ...................... 8,000 380,000
General Building Contractors - 0.40%
Walter Industries, Inc.* ............... 23,272 479,985
TOTAL COMMON STOCKS AND WARRANTS - 1.02% $ 1,219,055
(Cost: $925,842)
PREFERRED STOCKS
Communication - 0.50%
IXC Communications, Inc., 12.5% (B)* ... 514 601,380
Depository Institutions - 0.73%
California Federal Bank,
F.S.B., 10.625% ....................... 5,000 552,500
California Federal Preferred Capital
Corporation, 9.125% ................... 12,500 325,000
Total ................................. 877,500
Printing and Publishing - 0.44%
PRIMEDIA Inc., 10.0%* .................. 5,000 522,500
TOTAL PREFERRED STOCKS - 1.67% $ 2,001,380
(Cost: $1,827,444)
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Agricultural Production -- Crops - 0.47%
Hines Horticulture, Inc.,
11.75%, 10-15-2005 .................... $ 500 $ 556,875
Agricultural Production -- Livestock - 0.26%
Pilgrim's Pride Corporation,
10.875%, 8-1-2003 ..................... 300 313,500
Amusement and Recreation Services - 2.39%
American Skiing Company,
12.0%, 7-15-2006 ...................... 1,000 1,105,000
Showboat Marina Casino Partnership,
13.5%, 3-15-2003 ...................... 500 602,500
Trump Hotels & Casino Resorts
Holdings, L.P.,
15.5%, 6-15-2005 ...................... 1,000 1,145,000
Total ................................. 2,852,500
Apparel and Accessory Stores - 0.42%
Wilsons The Leather Experts Inc.,
11.25%, 8-15-2004 (B) ................. 500 498,750
Apparel and Other Textile Products - 3.05%
CONSOLTEX GROUP INC.,
11.0%, 10-1-2003 ...................... 1,000 1,040,000
Pillowtex Corporation:
10.0%, 11-15-2006 ..................... 500 532,500
9.0%, 12-15-2007 (B) .................. 1,000 1,023,750
WestPoint Stevens Inc.,
9.375%, 12-15-2005 .................... 1,000 1,050,000
Total ................................. 3,646,250
Automotive Dealers and Service Stations - 0.83%
Chief Auto Parts Inc.,
10.5%, 5-15-2005 ...................... 1,000 990,000
Business Services - 4.32%
Adams Outdoor Advertising Limited Partnership,
10.75%, 3-15-2006 ..................... 750 821,250
Coinmach Laundry Corporation,
11.75%, 11-15-2005 (B) ................ 500 553,750
DecisionOne Holdings Corp., Units,
0.0%, 8-1-2008 (F) (G) ................ 1,750 1,137,500
Federal Data Corporation,
10.125%, 8-1-2005 (B) ................. 500 507,500
Lamar Advertising Company,
9.625%, 12-1-2006 ..................... 1,000 1,080,000
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Business Services (Continued)
UNICCO Service Company,
9.875%, 10-15-2007 (B) ................ $ 500 $ 501,875
Universal Outdoor, Inc.,
9.75%, 10-15-2006 ..................... 500 561,250
Total ................................. 5,163,125
Chemicals and Allied Products - 3.32%
Carson, Inc.,
10.375%, 11-01-2007 (B) ............... 500 500,000
Dade International Inc.,
11.125%, 5-1-2006 ..................... 500 556,250
Freedom Chemical Company,
10.625%, 10-15-2006 ................... 1,250 1,375,000
Sovereign Specialty Chemicals, Inc.,
9.5%, 8-1-2007 (B) .................... 500 513,750
Spinnaker Industries, Inc.,
10.75%, 10-15-2006 .................... 1,000 1,026,250
Total ................................. 3,971,250
Coal Mining - 0.52%
AEI Holding Company, Inc.,
10.0%, 11-15-2007 (B) ................. 600 616,500
Communication - 20.18%
Adelphia Communications Corporation:
10.25%, 7-15-2000 ..................... 500 517,500
12.5%, 5-15-2002 ...................... 175 185,500
9.25%, 10-1-2002 ...................... 500 510,000
10.5%, 7-15-2004 ...................... 500 540,000
9.875%, 3-1-2007 ...................... 500 526,250
Allbritton Communications Company,
9.75%, 11-30-2007 ..................... 500 511,250
American Radio Systems Corporation,
9.0%, 2-1-2006 ........................ 750 795,000
Argyle Television Operations, Inc.,
9.75%, 11-1-2005 ...................... 700 784,000
Cablevision Systems Corporation,
9.875%, 2-15-2013 ..................... 1,450 1,598,625
Comcast Corporation,
9.5%, 1-15-2008 ....................... 350 370,986
Concentric Network Corporation,
12.75%, 12-15-2007 (B) ................ 750 770,625
Crown Castle International Corp.,
0.0%, 11-15-2007 (B)(F) ............... 1,000 631,250
Diamond Cable Communications Plc,
0.0%, 12-15-2005 (F) .................. 500 388,750
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
GST Telecommunications,
0.0%, 11-15-2007 (F) .................. $1,000 $ 1,042,500
Intermedia Communications of Florida, Inc.,
0.0%, 5-15-2006 (F) ................... 750 596,250
Iridium LLC:
11.25%, 7-15-2005 (B) ................. 500 492,500
13.0%, 7-15-2005 ...................... 1,000 1,050,000
Marcus Cable Co.,
0.0%, 12-15-2005 (F) .................. 500 432,500
Marcus Cable Operating Company, L.P.,
0.0%, 8-1-2004 (F) .................... 1,500 1,387,500
Microcell Telecommunications Inc.,
0.0%, 6-1-2006 (F) .................... 1,750 1,181,250
Nextel Communications, Inc.:
0.0%, 8-15-2004 (F) ................... 1,000 890,000
0.0%, 10-31-2007 (B)(F) ............... 1,000 613,750
NEXTLINK Communications, Inc.,
9.625%, 10-1-2007 ..................... 900 929,250
Primus Telecommunications Group, Incorporated,
11.75%, 8-1-2004 ...................... 500 535,000
Rogers Cantel Inc.,
9.375%, 6-1-2008 ...................... 500 527,500
Rogers Communications Inc.,
8.875%, 7-15-2007 ..................... 500 500,000
Salem Communications Corporation,
9.5%, 10-1-2007 (B) ................... 500 511,250
Sprint Spectrum L.P.,
0.0%, 8-15-2006 (F) ................... 1,000 775,000
Teleport Communications Group Inc.,
0.0%, 7-1-2007 (F)..................... 1,250 1,018,750
Vanguard Cellular Systems, Inc.,
9.375%, 4-15-2006 ..................... 500 520,000
Videotron Plc,
0.0%, 8-15-2005 (F) ................... 500 442,245
WinStar Communications, Inc.:
0.0%, 10-15-2005 (Convertible) (B)(F) . 500 523,750
0.0%, 10-15-2005 (F) .................. 500 641,250
Wireless One, Inc., Units,
0.0%, 8-1-2006 (F)(H) ................. 500 125,000
WorldCom, Inc.:
9.375%, 1-15-2004...................... 435 460,565
8.875%, 1-15-2006 ..................... 737 792,953
Total ................................. 24,118,499
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Depository Institutions - 1.34%
First Nationwide Holdings Inc.:
9.125%, 1-15-2003 ..................... $1,000 $ 1,040,000
12.5%, 4-15-2003 ...................... 500 567,500
Total ................................. 1,607,500
Eating and Drinking Places - 0.43%
SC International Services, Inc.,
9.25%, 9-1-2007 (B) ................... 500 516,250
Electric, Gas and Sanitary Services - 1.23%
Allied Waste Industries, Inc.,
0.0%, 6-1-2007 (B)(F) ................. 1,000 702,500
Allied Waste North America, Inc.,
10.25%, 12-1-2006 ..................... 700 768,250
Electronic and Other Electric Equipment - 1.96%
Communications Instruments, Inc.,
10.0%, 9-15-2004 (B) .................. 450 459,000
Electronic Retailing Systems
International, Inc.,
0.0%, 2-1-2004 (F) .................... 500 340,000
Omnipoint Corporation,
11.625%, 8-15-2006 .................... 500 531,875
Telex Communications, Inc.,
10.5%, 5-1-2007 ....................... 500 493,750
Viasystems, Inc.,
9.75%, 6-1-2007 ....................... 500 516,250
Total ................................. 2,340,875
Engineering and Management Services - 0.68%
United International Holdings, Inc.,
0.0%, 11-15-99 ........................ 1,000 810,000
Fabricated Metal Products - 3.25%
Neenah Corporation:
11.125%, 5-1-2007 ..................... 500 550,000
11.125%, 5-1-2007 ..................... 1,000 1,100,000
Nortek, Inc.,
9.875%, 3-1-2004 ...................... 500 511,250
Safety Components International, Inc.,
10.125%, 7-15-2007 .................... 1,150 1,188,812
U.S. Can Corporation,
10.125%, 10-15-2006 ................... 500 528,750
Total ................................. 3,878,812
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Food and Kindred Products - 1.28%
B & G Foods, Inc.,
9.625%, 8-1-2007 (B) .................. $ 500 $ 505,000
Southern Foods Group, L.P.,
9.875%, 9-1-2007 (B) .................. 500 519,375
Tom's Foods Inc.,
10.5%, 11-1-2004 (B) .................. 500 500,000
Total ................................. 1,524,375
Food Stores - 1.78%
Big V Supermarkets, Inc.,
11.0%, 2-15-2004 ...................... 500 522,500
Pueblo Xtra International, Inc.,
9.5%, 8-1-2003 ........................ 500 476,250
Ralphs Grocery Company,
11.0%, 6-15-2005 ...................... 1,000 1,135,000
Total ................................. 2,133,750
Furniture and Fixtures - 1.27%
Lear Seating Corporation,
8.25%, 2-1-2002 ....................... 1,500 1,518,750
General Building Contractors - 0.91%
NVR L.P.,
11.0%, 4-15-2003 ...................... 1,000 1,085,000
Health Services - 3.62%
Genesis ElderCare Acquisition Corp.,
9.0%, 8-1-2007 (B) .................... 750 735,938
Magellan Health Services, Inc.,
11.25%, 4-15-2004 ..................... 1,500 1,665,000
Paragon Health Network, Inc.,
9.5%, 11-1-2007 (B) ................... 900 902,250
Tenet Healthcare Corporation:
8.0%, 1-15-2005 ....................... 500 508,750
8.625%, 1-15-2007 ..................... 500 516,250
Total ................................. 4,328,188
Holding and Other Investment Offices - 2.11%
Grupo Industrial Durango, S.A. de C.V.,
12.625%, 8-1-2003 ..................... 1,000 1,117,500
LTC Properties, Inc., Convertible,
8.5%, 1-1-2000 ........................ 1,000 1,403,750
Total ................................. 2,521,250
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Hotels and Other Lodging Places - 3.99%
CapStar Hotel Company,
8.75%, 8-15-2007 ...................... $ 500 $ 518,750
HMC Acquisition Properties, Inc.,
9.0%, 12-15-2007 ...................... 500 522,500
Prime Hospitality Corp.:
9.25%, 1-15-2006 ...................... 1,500 1,595,625
9.75%, 4-1-2007 ....................... 500 535,000
Showboat, Inc.,
9.25%, 5-1-2008 ....................... 1,000 1,070,000
Station Casinos, Inc.,
10.125%, 3-15-2006 .................... 500 527,500
Total ................................. 4,769,375
Industrial Machinery and Equipment - 3.02%
American Standard Inc.,
9.875%, 6-1-2001 ...................... 1,000 1,041,250
Falcon Building Products, Inc.,
0.0%, 6-15-2007 (F) ................... 2,000 1,320,000
National Equipment Services, Inc.,
10.0%, 11-30-2004 (B) ................. 750 744,375
Walbro Corporation,
10.125%, 12-15-2007 (B) ............... 500 510,000
Total ................................. 3,615,625
Instruments and Related Products - 2.27%
Cole National Group, Inc.,
9.875%, 12-31-2006 .................... 500 532,500
InterCel, Inc.,
0.0%, 2-1-2006 (F) .................... 750 550,312
Maxxim Medical, Inc.,
10.5%, 8-1-2006 ....................... 1,500 1,627,500
Total ................................. 2,710,312
Lumber and Wood Products - 0.89%
Triangle Pacific Corp.,
10.5%, 8-1-2003 ....................... 1,000 1,070,000
Miscellaneous Manufacturing Industries - 0.85%
Amscan Holdings Inc.,
9.875%, 12-15-2007 (B) ................ 500 511,250
Hedstrom Corporation,
10.0%, 6-1-2007 ....................... 500 505,000
Total ................................. 1,016,250
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Miscellaneous Retail - 0.93%
Michaels Stores, Inc.,
10.875%, 6-15-2006 .................... $1,000 $ 1,107,500
Motion Pictures - 2.29%
AMC Entertainment, Inc.,
9.5%, 3-15-2009 ....................... 500 512,500
Hollywood Theaters, Inc.,
10.625%, 8-1-2007 (B) ................. 1,000 1,065,000
MacAndrews & Forbes Group, Incorporated,
13.0%, 3-1-99 ......................... 81 81,000
Plitt Theatres, Inc.,
10.875%, 6-15-2004 .................... 1,000 1,081,250
Total ................................. 2,739,750
Nondepository Institutions - 0.84%
Delta Financial Corporation,
9.5%, 8-1-2004 ........................ 1,000 1,000,000
Oil and Gas Extraction - 1.79%
Cross Timbers Oil,
8.75%, 11-1-2009 (B) .................. 500 510,000
Flores & Rucks, Inc.,
9.75%, 10-1-2006 ...................... 1,000 1,097,500
Pride Petroleum Services, Inc.,
9.375%, 5-1-2007 ...................... 500 537,500
Total ................................. 2,145,000
Paper and Allied Products - 2.85%
Container Corporation of America,
11.25%, 5-1-2004 ...................... 1,500 1,635,000
Fort Howard Corporation,
11.0%, 1-2-2002 ....................... 436 456,569
Huntsman Packaging Corporation,
9.125%, 10-1-2007 (B) ................. 750 774,375
Mail-Well Corporation,
10.5%, 2-15-2004 ...................... 500 536,250
Total ................................. 3,402,194
Personal Services - 0.46%
Prime Succession Acquisition Corp.,
10.75%, 8-15-2004 ..................... 500 550,000
Primary Metal Industries - 0.43%
Weirton Steel Corporation,
11.375%, 7-1-2004 ..................... 500 520,000
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Printing and Publishing - 2.67%
American Media Operations, Inc.,
11.625%, 11-15-2004 ................... $1,000 $ 1,085,000
K-III Communications Corporation,
8.5%, 2-1-2006 ........................ 500 508,750
Perry-Judd's Incorporated,
10.625%, 12-15-2007 (B) ............... 650 669,500
TransWestern Publishing Company LLC,
9.625%, 11-15-2007 (B) ................ 900 931,500
Total ................................. 3,194,750
Real Estate - 0.42%
Delco Remy International, Inc.,
8.625%, 12-15-2007 .................... 500 506,250
Rubber and Miscellaneous Plastics Products - 0.89%
Burke Industries, Inc.,
10.0%, 8-15-2007 (B) .................. 500 520,000
LDM Technologies, Inc.,
10.75%, 1-15-2007 ..................... 500 542,500
Total ................................. 1,062,500
Textile Mill Products - 2.44%
Avondale Mills, Inc.,
10.25%, 5-1-2006 ...................... 500 537,500
Collins & Aikman Products Co.,
11.5%, 4-15-2006 ...................... 500 561,875
Delta Mills, Inc.,
9.625%, 9-1-2007 (B) .................. 1,250 1,275,000
Glenoit Corporation,
11.0%, 4-15-2007 (B) .................. 500 538,750
Total ................................. 2,913,125
Transportation Equipment - 1.23%
Advanced Accessory Systems, LLC.,
9.75%, 10-1-2007 (B) .................. 500 493,750
Aetna Industries, Inc.,
11.875%, 10-1-2006 .................... 500 455,000
Westinghouse Air Brake Company,
9.375%, 6-15-2005 ..................... 500 521,250
Total ................................. 1,470,000
Transportation Services _ 0.63%
Transportacion Maritima Mexicana,
S.A. de C.V.,
10.0%, 11-15-2006 ..................... 750 755,625
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Trucking and Warehousing - 0.46%
Iron Mountain Incorporated,
10.125%, 10-1-2006 .................... $ 500 $ 550,000
Wholesale Trade -- Durable Goods - 2.67%
Alvey Systems, Inc.,
11.375%, 1-31-2003 .................... 1,000 1,090,000
Exide Corporation,
10.0%, 4-15-2005 ...................... 1,500 1,590,000
Sealy Mattress Company,
9.875%, 12-15-2007 (B) ................ 500 507,500
Total ................................. 3,187,500
Wholesale Trade -- Nondurable Goods - 2.87%
Color Spot Nurseries Inc.,
10.5%, 12-15-2007 ..................... 500 507,500
Corporate Express, Inc.,
9.125%, 3-15-2004 ..................... 1,000 1,017,500
Fleming Companies, Inc.,
10.5%, 12-1-2004 (B) .................. 500 527,500
LaRoche Industries Inc.,
9.5%, 9-15-2007 (B) ................... 500 497,500
Richmont Marketing Specialists Inc.,
10.125%, 12-15-2007 (B) ............... 500 508,750
United Stationers Supply Co.,
12.75%, 5-1-2005 ...................... 333 370,879
Total ................................. 3,429,629
TOTAL CORPORATE DEBT SECURITIES - 90.51% $108,178,134
(Cost: $102,857,217)
TOTAL SHORT-TERM SECURITIES - 4.91% $ 5,871,189
(Cost $5,871,189)
TOTAL INVESTMENT SECURITIES - 98.11% $117,269,758
(Cost: $111,481,692)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.89% 2,253,852
NET ASSETS - 100.00% $119,523,610
See Notes to Schedules of Investments on pages 84 - 87.
<PAGE>
TMK/UNITED FUNDS, INC.
Notes to Schedules of Investments
*No dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside of the United States.
(B) As of December 31, 1997, the following restricted securities were
owned: Shares/
Principal
Acquisition Amount Acquisition Market
Security Date in 000's Cost Value
---------------- --------------------------------------------
Growth Portfolio
Adaptec Inc., Convertible,
4.75%, 2-1-2004 1/28/97 $1,500$1,500,000$1,556,250
2/28/97 1,000 995,000 1,037,500
--------------------
$2,495,000$2,593,750
====================
Asset Strategy Portfolio
Banco de Inversion y Comercio
Exterior S.A.,
9.375%, 12-27-2000 2/18/97 $200$ 208,000 $199,000
Cervejarias Kaiser S.A.,
8.875%, 9-26-2005 9/16/97 200 199,380 182,000
Companhia Paranaense de Energia-COPEL,
9.75%, 5-2-2005 4/22/97 200 199,236 191,500
Comtel Brasileira Ltd.,
10.75%, 9-26-2004 11/12/97 100 89,000 97,000
JG Summit Holdings, Inc.,
8.0%, 5-6-2002 5/19/97 200 197,750 159,000
-------- --------
$893,366 $828,500
======== ========
Bond Portfolio
CHYPS CBO 1997-1 Ltd.,
6.72%, 1-15-2010 11/25/97 $1,500$1,444,062$1,451,250
====================
High Income Portfolio
Heartland Wireless Communications,
Inc., Warrants 4/20/95 3,000$ 18,500$ 30
IXC Communications, Inc.,
12.5% Preferred Stock 8/15/97 500 500,000 585,000
11/3/97 14 --- 16,380
Iridium LLC, Warrants 7/15/97 500 28,414 61,250
Microcell Telecommunications Inc.,
Conditional Warrants 6/13/96 5,000 --- 5
Microcell Telecommunications Inc.,
88
Warrants 6/13/96 5,000 61,247 69,150
AEI Holding Company, Inc.,
10.0%, 11-15-2007 11/6/97 $ 600 600,000 616,500
Advanced Accessory Systems, LLC.,
9.75%, 10-1-2007 9/25/97 500 498,115 493,750
Allied Waste Industries, Inc.,
0.0%, 6-1-2007 5/1/97 1,000 574,360 702,500
Amscan Holdings Inc.,
9.875%, 12-15-200712/15/97 500 500,000 511,250
B & G Foods, Inc.,
9.625%, 8-1-2007 8/18/97 500 499,375 505,000
Burke Industries, Inc.,
10.0%, 8-15-2007 8/14/97 500 500,000 520,000
Carson, Inc.,
10.375%, 11-01-2007 10/31/97 500 500,000 500,000
Coinmach Laundry Corporation,
11.75%, 11-15-2005 10/1/97 500 549,375 553,750
Communications Instruments, Inc.,
10.0%, 9-15-2004 9/12/97 450 450,000 459,000
Concentric Network Corporation,
12.75%, 12-15-2007 12/15/97 750 750,000 770,625
Cross Timbers Oil,
8.75%, 11-1-2009 10/21/97 500 500,000 510,000
Crown Castle International Corp.,
0.0%, 11-15-2007 11/20/97 1,000 597,650 631,250
Delta Mills, Inc.,
9.625%, 9-1-2007 8/20/97 to
8/21/97 1,250 1,259,375 1,275,000
Federal Data Corporation,
10.125%, 8-1-2005 7/18/97 500 500,000 507,500
Fleming Companies, Inc.,
10.5%, 12-1-2004 7/18/97 500 497,095 527,500
Genesis ElderCare Acquisition Corp.,
9.0%, 8-1-2007 8/4/97 500 497,225 490,625
9/10/97 250 246,875 245,313
Glenoit Corporation,
11.0%, 4-15-2007 3/26/97 500 499,045 538,750
Hollywood Theaters, Inc.,
10.625%, 8-1-2007 7/31/97 1,000 1,013,750 1,065,000
Huntsman Packaging Corporation,
9.125%, 10-1-2007 9/19/97 750 750,000 774,375
Iridium LLC,
11.25%, 7-15-2005 10/9/97 500 500,000 492,500
LaRoche Industries Inc.,
9.5%, 9-15-2007 9/18/97 500 497,760 497,500
National Equipment Services, Inc.,
10.0%, 11-30-2004 11/20/97 750 740,753 744,375
Nextel Communications, Inc.,
0.0%, 10-31-2007 10/15/97 1,000 619,960 613,750
Paragon Health Network, Inc.,
9.5%, 11-1-2007 10/30/97 900 895,986 902,250
Perry-Judd's Incorporated,
10.625%, 12-15-2007 12/10/97 650 650,000 669,500
Pillowtex Corporation:
9.0%, 12-15-2007 12/15/97 750 750,000 767,813
12/16/97 250 254,375 255,937
Richmont Marketing Specialists Inc.,
10.125%, 12-15-2007 12/16/97 500 500,000 508,750
SC International Services, Inc.,
9.25%, 9-1-2007 8/21/97 500 499,340 516,250
Salem Communications Corporation,
9.5%, 10-1-2007 9/17/97 500 500,000 511,250
Sealy Mattress Company,
9.875%, 12-15-2007 12/11/97 500 500,000 507,500
Southern Foods Group, L.P.,
9.875%, 9-1-2007 8/27/97 500 500,000 519,375
Sovereign Specialty Chemicals, Inc.,
9.5%, 8-1-2007 7/31/97 500 500,000 513,750
Tom's Foods Inc.,
10.5%, 11-1-2004 10/8/97 500 500,000 500,000
TransWestern Publishing Company LLC,
9.625%, 11-15-2007 11/6/97 900 900,000 931,500
UNICCO Service Company,
9.875%, 10-15-2007 10/14/97 500 497,650 501,875
Walbro Corporation,
10.125%, 12-15-2007 12/11/97 500 500,000 510,000
Wilsons The Leather Experts Inc.,
11.25%, 8-15-2004 8/14/97 500 500,000 498,750
WinStar Communications, Inc.,
0.0%, 10-15-2005 10/14/97 500 467,500 523,750
----------------------
$23,663,725$24,415,878
======================
The total market value of restricted securities represents
approximately 0.41%, 8.45%, 1.46% and 20.43%, respectively, of the
total net assets in the Growth Portfolio, Asset Strategy Portfolio,
Bond Portfolio and High Income Portfolio at December 31, 1997.
<PAGE>
TMK/UNITED FUNDS, INC.
Notes to Schedules of Investments
(C) Collateralized by $967,000 U.S. Treasury Notes, 8.875% due 2-15-2019,
market value and accrued interest aggregate $1,328,248.
(D)Principal amounts are denominated in the indicated foreign currencywhere
applicable (DM _ Deutsche Mark, F _ French Franc).
(E) Each unit consists of one share of callable common stock, par value
$0.001 per share, of Spiros Development Corporation II, Inc. and one
warrant to purchase one-fourth of one share of common stock, par value
$0.001 per share, of Dura Pharmaceuticals, Inc.
(F) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(G)Each Unit consists of $1,000 principal amount at maturity of 11.5% senior
discount debentures due 2008 and one warrant to purchase 1.9 shares of
common stock, par value $0.01 per share, of Quaker Holding Co.
(H) Each Unit consists of $1,000 principal amount of 13.5% senior discount
notes due 2006 and one warrant to purchase 2.274 shares of common stock.
See Note 1 to financial statements for security valuation and other
significant accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Science and
Growth Income Technology
Portfolio Portfolio Portfolio
Assets ----------- ---------- -----------
Investment securities--at
value (Notes 1 and 3) $648,019,278 $633,543,369 $10,161,301
Cash ................. 7,958 7,831 5,040
Receivables:
Investment securities
sold ............... 2,511,450 2,982,115 ---
Fund shares sold ..... 258,651 176,197 42,185
Dividends and interest 705,270 424,564 310
Prepaid insurance
premium .............. 4,290 3,344 104
------------ ------------ -----------
Total assets ....... 651,506,897 637,137,420 10,208,940
Liabilities ------------ ------------ -----------
Payable for investment
securities purchased . 12,016,701 83,648 ---
Payable to Fund
shareholders ......... 103,916 124,327 322
Accrued accounting
services fee (Note 2). 5,833 5,833 ---
Accrued management
fee (Note 2) ......... 12,150 12,105 193
Due to custodian ...... --- --- ---
Other ................. 8,960 7,188 1,248
------------ ------------ -----------
Total liabilities .. 12,147,560 233,101 1,763
------------ ------------ -----------
Total net assets .. $639,359,337 $636,904,319 $10,207,177
Net Assets ============ ============ ===========
$0.01 par value capital stock
Capital stock ........ $ 844,829 $ 532,462 $ 17,682
Additional paid-in
capital ............ 550,538,635 411,763,927 9,947,550
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized gain (loss)
on investment
transactions ....... --- --- ---
Net unrealized appreciation
of investments ..... 87,975,873 224,607,930 241,945
------------ ------------ -----------
Net assets applicable to
outstanding units
of capital ........ $639,359,337 $636,904,319 $10,207,177
============ ============ ===========
Net asset value, redemption
and offering price per share $7.5679 $11.9615 $5.7726
======= ======== =======
Capital shares outstanding 84,482,949 53,246,205 1,768,200
Capital shares authorized 100,000,000 100,000,000 100,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
International Small Cap Balanced
Portfolio Portfolio Portfolio
Assets ------------ ------------ -----------
Investment securities--at
value (Notes 1 and 3) $114,396,071 $149,638,627 $67,989,783
Cash ................. --- 6,529 4,114
Receivables:
Investment securities
sold ............... --- --- 539,925
Fund shares sold ..... 42,985 317,456 47,187
Dividends and interest 258,081 63,014 382,584
Prepaid insurance
premium .............. 952 1,016 584
------------ ------------ -----------
Total assets ....... 114,698,089 150,026,642 68,964,177
Liabilities ------------ ------------ -----------
Payable for investment
securities purchased . --- 1,740,000 1,190,370
Payable to Fund
shareholders ......... 37,405 39,983 10,375
Accrued accounting
services fee (Note 2). 3,333 3,333 2,500
Accrued management
fee (Note 2) ......... 2,493 3,420 1,102
Due to custodian ...... 1,106 --- ---
Other ................. 22,447 1,648 1,094
------------ ------------ -----------
Total liabilities .. 66,784 1,788,384 1,205,441
------------ ------------ -----------
Total net assets .. $114,631,305 $148,238,258 $67,758,736
Net Assets ============ ============ ===========
$0.01 par value capital stock
Capital stock ........ $ 179,554 $ 177,924 $ 100,107
Additional paid-in
capital ............ 100,642,966 136,163,934 60,305,422
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized gain (loss)
on investment
transactions ....... --- --- ---
Net unrealized appreciation
of investments ..... 13,808,785 11,896,400 7,353,207
------------ ------------ -----------
Net assets applicable to
outstanding units
of capital ........ $114,631,305 $148,238,258 $67,758,736
============ ============ ===========
Net asset value, redemption
and offering price per share $6.3842 $8.3316 $6.7686
======= ======== =======
Capital shares outstanding 17,955,429 17,792,352 10,010,749
Capital shares authorized 100,000,000 100,000,000 50,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Asset
Strategy Money Market Limited-Term
Portfolio Portfolio Bond Portfolio
Assets ------------- ------------ -----------
Investment securities--at
value (Notes 1 and 3) $9,720,311 $41,850,969 $4,178,924
Cash ................. 2,583 12,242 4,523
Receivables:
Investment securities
sold ............... --- --- ---
Fund shares sold ..... 2,481 1,318,167 3,231
Dividends and interest 85,182 219,912 65,668
Prepaid insurance
premium .............. 224 1,011 168
---------- ----------- ----------
Total assets ....... 9,810,781 43,402,301 4,252,514
Liabilities ---------- ----------- ----------
Payable for investment
securities purchased . --- --- ---
Payable to Fund
shareholders ......... 418 99,137 25
Accrued accounting
services fee (Note 2). --- 1,667 ---
Accrued management
fee (Note 2) ......... 213 569 63
Due to custodian ...... --- --- ---
Other ................. 650 779 319
---------- ----------- ----------
Total liabilities .. 1,281 102,152 407
---------- ----------- ----------
Total net assets .. $9,809,500 $43,300,149 $4,252,107
Net Assets ========== =========== ==========
$0.01 par value capital stock
Capital stock ........ $ 18,876 $ 433,001 $ 8,196
Additional paid-in
capital ............ 9,601,916 42,867,148 4,201,198
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized gain (loss)
on investment
transactions ....... --- --- ---
Net unrealized appreciation
of investments ..... 188,708 --- 42,713
---------- ----------- ----------
Net assets applicable to
outstanding units
of capital ........ $9,809,500 $43,300,149 $4,252,107
========== =========== ==========
Net asset value, redemption
and offering price per share $5.1969 $1.0000 $5.1882
======= ======== =======
Capital shares outstanding 1,887,561 43,300,149 819,569
Capital shares authorized 100,000,000 100,000,000 50,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Bond High Income
Portfolio Portfolio
Assets ------------- -------------
Investment securities--at
value (Notes 1 and 3) $98,272,696 $117,269,758
Cash ................. 1,553 6,190
Receivables:
Investment securities
sold ............... --- ---
Fund shares sold ..... 2,585 63,019
Dividends and interest 1,257,325 2,272,690
Prepaid insurance
premium .............. 1,265 1,581
----------- ------------
Total assets ....... 99,535,424 119,613,238
Liabilities ----------- ------------
Payable for investment
securities purchased . --- ---
Payable to Fund
shareholders ......... 41,032 82,890
Accrued accounting
services fee (Note 2). 2,500 3,333
Accrued management
fee (Note 2) ......... 1,428 2,109
Due to custodian ...... --- ---
Other ................. 1,195 1,296
----------- ------------
Total liabilities .. 46,155 89,628
----------- ------------
Total net assets .. $99,489,269 $119,523,610
Net Assets =========== ============
$0.01 par value capital stock
Capital stock ........ $ 185,317 $ 252,151
Additional paid-in
capital ............ 97,543,751 113,483,393
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- ---
Accumulated undistributed
net realized gain (loss)
on investment
transactions ....... (2,189,071) ---
Net unrealized appreciation
of investments ..... 3,949,272 5,788,066
----------- ------------
Net assets applicable to
outstanding units
of capital ........ $99,489,269 $119,523,610
=========== ============
Net asset value, redemption
and offering price per share $5.3686 $4.7402
======= ========
Capital shares outstanding 18,531,708 25,215,109
Capital shares authorized 100,000,000 100,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1997
Science and
Growth Income Technology
Portfolio Portfolio Portfolio
---------- ---------- ----------
Investment Income
Income (Note 1B):
Interest and
amortization ........ $ 1,655,394 $ 1,969,475 $ 59,712
Dividends ............ 7,101,007 6,692,701 3,398
------------ ------------ --------
Total income ....... 8,756,401 8,662,176 63,110
------------ ------------ --------
Expenses (Note 2):
Investment management
fee ................ 4,150,034 3,955,628 27,836
Accounting services
fee ................ 67,500 65,833 ---
Custodian fees ....... 43,358 31,249 4,771
Audit fees ........... 7,510 7,781 5
Legal fees ........... 13,228 12,906 4,832
Other ................ 29,126 26,832 85
------------ ------------ --------
Total expenses ..... 4,310,756 4,100,229 37,529
------------ ------------ --------
Net investment income 4,445,645 4,561,947 25,581
------------ ------------ --------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain
on securities ........ 48,743,868 36,637,583 42,856
Realized net gain (loss)
on foreign currency
transactions ......... (31,059) (6,197) ---
------------ ------------ --------
Realized net gain
on investments ..... 48,712,809 36,631,386 42,856
Unrealized appreciation
in value of investments
during the period .... 58,033,780 84,101,888 241,945
------------ ------------ --------
Net gain on
investments ....... 106,746,589 120,733,274 284,801
------------ ------------ --------
Net increase
in net assets
resulting from
operations ...... $111,192,234 $125,295,221 $310,382
============ ============ ========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1997
International Small Cap Balanced
Portfolio Portfolio Portfolio
---------- ---------- ----------
Investment Income
Income (Note 1B):
Interest and
amortization ........ $ 489,202 $ 1,417,093 $1,411,832
Dividends ............ 1,287,808 52,710 619,377
----------- ----------- ----------
Total income ....... 1,777,010 1,469,803 2,031,209
----------- ----------- ----------
Expenses (Note 2):
Investment management
fee ................ 799,824 1,018,984 324,830
Accounting services
fee ................ 35,833 38,333 25,833
Custodian fees ....... 128,317 7,519 5,334
Audit fees ........... 7,443 6,100 6,097
Legal fees ........... 2,230 2,682 1,356
Other ................ 5,486 6,359 3,111
----------- ----------- ----------
Total expenses ..... 979,133 1,079,977 366,561
----------- ----------- ----------
Net investment income 797,877 389,826 1,664,648
----------- ----------- ----------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain
on securities ........ 10,587,500 30,671,427 3,625,975
Realized net gain (loss)
on foreign currency
transactions ......... (39,365) 5,985 367
----------- ----------- ----------
Realized net gain
on investments ..... 10,548,135 30,677,412 3,626,342
Unrealized appreciation
in value of investments
during the period .... 3,438,868 2,772,025 3,878,221
----------- ----------- ----------
Net gain on
investments ....... 13,987,003 33,449,437 7,504,563
----------- ----------- ----------
Net increase
in net assets
resulting from
operations ...... $14,784,880 $33,839,263 $9,169,211
=========== =========== ==========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1997
Asset Strategy Money Market Limited-Term
Portfolio Portfolio Bond Portfolio
--------------- ---------- ----------
Investment Income
Income (Note 1B):
Interest and
amortization ........ $ 343,988 $2,177,530 $267,023
Dividends ............ 60,402 --- ---
---------- ---------- --------
Total income ....... 404,390 2,177,530 267,023
---------- ---------- --------
Expenses (Note 2):
Investment management
fee ................ 71,899 192,321 21,919
Accounting services
fee ................ --- 20,000 ---
Custodian fees ....... 4,587 4,472 1,552
Audit fees ........... 5,503 3,604 4,897
Legal fees ........... 689 2,342 305
Other ................ 944 2,531 729
---------- ---------- --------
Total expenses ..... 83,622 225,270 29,402
---------- ---------- --------
Net investment income 320,768 1,952,260 237,621
---------- ---------- --------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain
on securities ........ 825,129 --- 16,019
Realized net gain (loss)
on foreign currency
transactions 693 --- ---
---------- ---------- --------
Realized net gain
on investments ..... 825,822 --- 16,019
Unrealized appreciation
in value of investments
during the period .... 31,343 --- 17,360
---------- ---------- --------
Net gain on
investments ....... 857,165 --- 33,379
---------- ---------- --------
Net increase
in net assets
resulting from
operations ...... $1,177,933 $1,952,260 $271,000
========== ========== ========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1997
Bond High Income
Portfolio Portfolio
------------- -------------
Income (Note 1B):
Interest and
amortization ........ $6,468,986 $ 9,991,894
Dividends ............ --- 149,013
---------- -----------
Total income ....... 6,468,986 10,140,907
---------- -----------
Expenses (Note 2):
Investment management
fee ................ 491,520 690,862
Accounting services
fee ................ 30,000 38,333
Custodian fees ....... 5,622 6,505
Audit fees ........... 6,276 6,529
Legal fees ........... 2,120 2,472
Other ................ 5,608 5,957
---------- -----------
Total expenses ..... 541,146 750,658
---------- -----------
Net investment income 5,927,840 9,390,249
---------- -----------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain
on securities ........ 430,660 1,776,299
Realized net gain (loss)
on foreign currency
transactions ......... --- ---
---------- -----------
Realized net gain
on investments ..... 430,660 1,776,299
Unrealized appreciation
in value of investments
during the period .... 2,382,091 2,903,364
---------- -----------
Net gain on
investments ....... 2,812,751 4,679,663
---------- -----------
Net increase
in net assets
resulting from
operations ...... $8,740,591 $14,069,912
========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
Science and
Growth Income Technology
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 4,445,645 $ 4,561,947 $ 25,581
Realized net gain
on investments ..... 48,712,809 36,631,386 42,856
Unrealized
appreciation ....... 58,033,780 84,101,888 241,945
------------ ------------ -----------
Net increase
in net assets
resulting from
operations......... 111,192,234 125,295,221 310,382
------------ ------------ -----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (4,414,586) (4,555,750) (25,581)
From realized gains on
security transactions (48,743,868) (36,637,583) (42,856)
------------ ------------ -----------
(53,158,454) (41,193,333) (68,437)
------------ ------------ -----------
Capital share
transactions** ....... 68,162,867 90,411,011 9,965,232
------------ ------------ -----------
Total increase .... 126,196,647 174,512,899 10,207,177
Net Assets
Beginning of period ... 513,162,690 462,391,420 ---
------------ ------------ -----------
End of period ......... $639,359,337 $636,904,319 $10,207,177
============ ============ ===========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 8,757,287 8,155,958 1,872,760
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 7,024,201 3,443,827 11,856
Shares redeemed ......... (6,800,077) (3,966,432) (116,416)
--------- --------- ---------
Increase in outstanding
capital shares ......... 8,981,411 7,633,353 1,768,200
========= ========= =========
Value issued from sale
of shares ............. $68,063,304 $96,368,125 $10,541,546
Value issued from reinvest-
ment of dividends and/or
distributions ......... 53,158,454 41,193,333 68,438
Value redeemed .......... (53,058,891) (47,150,447) (644,752)
----------- ----------- ----------
Increase in
outstanding capital ... $68,162,867 $90,411,011 $9,965,232
=========== =========== ==========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
International Small Cap Balanced
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 797,877 $ 389,826 $ 1,664,648
Realized net gain
on investments ..... 10,548,135 30,677,412 3,626,342
Unrealized
appreciation ....... 3,438,868 2,772,025 3,878,221
------------ ------------ -----------
Net increase
in net assets
resulting from
operations......... 14,784,880 33,839,263 9,169,211
------------ ------------ -----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (758,512) (395,811) (1,665,015)
From realized gains on
security transactions (9,339,198) (30,671,427) (3,625,975)
------------ ------------ -----------
(10,097,710) (31,067,238) (5,290,990)
------------ ------------ -----------
Capital share
transactions** ....... 30,094,682 48,057,943 21,453,457
------------ ------------ -----------
Total increase .... 34,781,852 50,829,968 25,331,678
Net Assets
Beginning of period ... 79,849,453 97,408,290 42,427,058
------------ ------------ -----------
End of period ......... $114,631,305 $148,238,258 $67,758,736
============ ============ ===========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 4,424,820 3,274,112 3,058,976
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 1,581,672 3,728,844 781,696
Shares redeemed ......... (1,361,494) (1,359,852) (676,618)
----------- ----------- ----------
Increase in outstanding
capital shares ......... 4,644,998 5,643,104 3,164,054
=========== =========== ==========
Value issued from sale
of shares ............. $29,100,530 $29,239,471 $20,762,070
Value issued from reinvest-
ment of dividends and/or
distributions ......... 10,097,710 31,067,237 5,290,991
Value redeemed .......... (9,103,558) (12,248,765) (4,599,604)
----------- ----------- -----------
Increase in
outstanding capital ... $30,094,682 $48,057,943 $21,453,457
=========== =========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
Asset Strategy Money Market Limited-Term
Portfolio Portfolio Bond Portfolio
-------------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 320,768 $ 1,952,260 $ 237,621
Realized net gain
on investments ..... 825,822 --- 16,019
Unrealized
appreciation ....... 31,343 --- 17,360
---------- ----------- ----------
Net increase
in net assets
resulting from
operations......... 1,177,933 1,952,260 271,000
---------- ----------- ----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (321,461) (1,952,260) (237,621)
From realized gains on
security transactions (778,557) --- (16,019)
---------- ----------- ----------
(1,100,018) (1,952,260) (253,640)
---------- ----------- ----------
Capital share
transactions** ....... 1,257,387 6,042,547 519,323
---------- ----------- ----------
Total increase ... 1,335,302 6,042,547 536,683
Net Assets
Beginning of period ... 8,474,198 37,257,602 3,715,424
---------- ----------- ----------
End of period ......... $9,809,500 $43,300,149 $4,252,107
========== =========== ==========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 282,151 208,969,939 161,256
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 211,668 1,952,260 48,888
Shares redeemed ......... (256,770) (204,879,652) (110,075)
--------- ------------ --------
Increase in outstanding
capital shares ......... 237,049 6,042,547 100,069
========= ============ ========
Value issued from sale
of shares ............. $1,516,838 $208,969,939 $856,618
Value issued from reinvest-
ment of dividends and/or
distributions ......... 1,100,019 1,952,260 253,640
Value redeemed .......... (1,359,470) (204,879,652) (590,935)
----------- ------------ -----------
Increase in
outstanding capital ... $1,257,387 $ 6,042,547 $519,323
=========== ============ ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
Bond High Income
Portfolio Portfolio
----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 5,927,840 $ 9,390,249
Realized net gain
on investments ..... 430,660 1,776,299
Unrealized
appreciation ....... 2,382,091 2,903,364
------------ ------------
Net increase
in net assets
resulting from
operations......... 8,740,591 14,069,912
------------ ------------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (5,927,840) (9,390,249)
From realized gains on
security transactions --- (1,538,783)
------------ ------------
(5,927,840) (10,929,032)
------------ ------------
Capital share
transactions** ....... 4,309,732 18,976,659
------------ ------------
Total increase .... 7,122,483 22,117,539
Net Assets
Beginning of period ... 92,366,786 97,406,071
------------ ------------
End of period ......... $99,489,269 $119,523,610
============ ============
Undistributed net
investment income .. $--- $---
==== ====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 2,087,123 4,093,165
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 1,104,169 2,305,606
Shares redeemed ......... (2,421,031) (2,474,500)
--------- ---------
Increase in outstanding
capital shares ......... 770,261 3,924,271
========= =========
Value issued from sale
of shares ............. $11,323,689 $20,074,987
Value issued from reinvest-
ment of dividends and/or
distributions ......... 5,927,840 10,929,032
Value redeemed .......... (12,941,797) (12,027,360)
----------- -----------
Increase in
outstanding capital ... $4,309,732 $18,976,659
=========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1996
Growth Income International
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 6,619,255 $ 3,809,484 $ 909,905
Realized net gain (loss)
on investments ..... 51,961,378 7,401,806 (1,037,336)
Unrealized appreciation
(depreciation) ..... (3,365,641) 60,154,057 9,364,785
------------ ------------ -----------
Net increase
in net assets
resulting from
operations......... 55,214,992 71,365,347 9,237,354
------------ ------------ -----------
Distributions to shareholders (Note 1E):*
From net investment
income ............. (6,621,032) (3,809,484) (845,962)
From realized gains
on securities
transactions ....... (51,959,601) (7,400,042) (169,132)
In excess of realized
gains .............. --- --- ---
------------ ------------ -----------
(58,580,633) (11,209,526) (1,015,094)
------------ ------------ -----------
Capital share
transactions** ....... 97,702,647 71,041,567 21,430,848
------------ ------------ -----------
Total increase .... 94,337,006 131,197,388 29,653,108
Net Assets
Beginning of period ... 418,825,684 331,194,032 50,196,345
------------ ------------ -----------
End of period ......... $513,162,690 $462,391,420 $79,849,453
============ ============ ===========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 10,798,375 9,532,901 4,545,608
Shares issued from reinvest-
ment of dividends and/or
distributions .......... 8,618,982 1,105,770 169,211
Shares redeemed ......... (5,273,088) (3,201,312) (913,129)
---------- --------- ---------
Increase in outstanding
capital shares ......... 14,144,269 7,437,359 3,801,690
========== ========= =========
Value issued from sale
of shares ............. $76,770,633 $90,220,484 $25,545,695
Value issued from reinvest-
ment of dividends and/or
distributions .......... 58,580,633 11,209,526 1,015,094
Value redeemed .......... (37,648,619) (30,388,443) (5,129,941)
----------- ----------- -----------
Increase in
outstanding capital ... $97,702,647 $71,041,567 $21,430,848
=========== =========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1996
Small Cap Balanced Asset Strategy
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 198,002 $ 1,028,296 $ 289,259
Realized net gain (loss)
on investments ..... 3,641,030 1,316,721 (46,700)
Unrealized appreciation
(depreciation) ..... 172,785 1,209,473 211,346
----------- ----------- ----------
Net increase
in net assets
resulting from
operations......... 4,011,817 3,554,490 453,905
----------- ----------- ----------
Distributions to shareholders (Note 1E):*
From net investment
income ............. (198,002) (1,029,586) (289,131)
From realized gains
on securities
transactions ....... (3,641,030) --- ---
In excess of realized
gains .............. --- (1,315,431) ---
----------- ----------- ----------
(3,839,032) (2,345,017) (289,131)
----------- ----------- ----------
Capital share
transactions** ....... 41,644,058 17,614,713 3,965,482
----------- ----------- ----------
Total increase .... 41,816,843 18,824,186 4,130,256
Net Assets
Beginning of period ... 55,591,447 23,602,872 4,343,942
----------- ----------- ----------
End of period ......... $97,408,290 $42,427,058 $8,474,198
=========== =========== ==========
Undistributed net
investment income . $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 5,458,630 2,884,829 1,038,946
Shares issued from reinvest-
ment of dividends and/or
distributions .......... 478,826 378,430 56,314
Shares redeemed ......... (1,014,254) (417,037) (311,169)
--------- --------- ---------
Increase in outstanding
capital shares ......... 4,923,202 2,846,222 784,091
========= ========= =========
Value issued from sale
of shares ............. $46,147,982 $17,870,938 $5,287,460
Value issued from reinvest-
ment of dividends and/or
distributions .......... 3,839,032 2,345,016 289,131
Value redeemed .......... (8,342,956) (2,601,241) (1,611,109)
----------- ----------- ----------
Increase in
outstanding capital ... $41,644,058 $17,614,713 $3,965,482
=========== =========== ==========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1996
Money Market Limited-Term Bond
Portfolio Bond Portfolio Portfolio
-------------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 1,758,102 $ 193,799 $ 5,629,686
Realized net gain (loss)
on investments ..... --- 848 33,713
Unrealized appreciation
(depreciation) ..... --- (66,484) (2,694,467)
----------- ---------- -----------
Net increase
in net assets
resulting from
operations......... 1,758,102 128,163 2,968,932
----------- ---------- -----------
Distributions to shareholders (Note 1E):*
From net investment
income ............. (1,758,102) (193,799) (5,680,095)
From realized gains
on securities
transactions ....... --- (848) ---
In excess of realized
gains .............. --- --- ---
----------- ---------- -----------
(1,758,102) (194,647) (5,680,095)
----------- ---------- -----------
Capital share
transactions** ....... 385,358 928,429 6,508,442
----------- ---------- -----------
Total increase .... 385,358 861,945 3,797,279
Net Assets
Beginning of period ... 36,872,244 2,853,479 88,569,507
----------- ---------- -----------
End of period ......... $37,257,602 $3,715,424 $92,366,786
=========== ========== ===========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 217,565,342 223,662 2,284,864
Shares issued from reinvest-
ment of dividends and/or
distributions .......... 1,758,186 37,694 1,092,242
Shares redeemed ......... (218,938,170) (85,156) (2,142,176)
----------- ------- ---------
Increase in outstanding
capital shares ......... 385,358 176,200 1,234,930
=========== ======= =========
Value issued from sale
of shares ............. $217,565,342 $1,180,216 $12,180,349
Value issued from reinvest-
ment of dividends and/or
distributions .......... 1,758,186 194,647 5,680,095
Value redeemed .......... (218,938,170) (446,434) (11,352,002)
------------ ---------- -----------
Increase in
outstanding capital ... $ 385,358 $ 928,429 $ 6,508,442
============ ========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1996
High Income
Portfolio
-----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 8,219,559
Realized net gain (loss)
on investments ..... 2,951,518
Unrealized appreciation
(depreciation) ..... (486,973)
----------
Net increase
in net assets
resulting from
operations......... 10,684,104
----------
Distributions to shareholders (Note 1E):*
From net investment
income ............. (8,219,559)
From realized gains
on securities
transactions ....... ---
In excess of realized
gains .............. ---
-----------
(8,219,559)
-----------
Capital share
transactions** ....... 8,255,333
-----------
Total increase .... 10,719,878
Net Assets
Beginning of period ... 86,686,193
-----------
End of period ......... $97,406,071
===========
Undistributed net
investment income .. $---
====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 2,475,713
Shares issued from reinvest-
ment of dividends and/or
distributions .......... 1,796,625
Shares redeemed ......... (2,484,538)
---------
Increase in outstanding
capital shares ......... 1,787,800
=========
Value issued from sale
of shares ............. $11,575,727
Value issued from reinvest-
ment of dividends and/or
distributions .......... 8,219,560
Value redeemed .......... (11,539,954)
-----------
Increase in
outstanding capital ... $ 8,255,333
===========
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE GROWTH PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $6.7967 $6.8260 $5.8986 $6.1962 $6.1505
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0574 0.0990 0.0903 0.1211 0.0537
Net realized and
unrealized gain
on investments .. 1.4003 0.7478 2.1842 0.0268 0.8087
------- ------- ------- ------- -------
Total from investment
operations ....... 1.4577 0.8468 2.2745 0.1479 0.8624
------- ------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.0570)(0.0990) (0.0903)(0.1211) (0.0537)
From capital
gains ........... (0.6295)(0.7771) (1.2568)(0.3244) (0.7569)
In excess of
capital gains ... (0.0000)(0.0000) (0.0000)(0.0000) (0.0061)
------- ------- ------- ------- -------
Total distributions. (0.6865)(0.8761) (1.3471)(0.4455) (0.8167)
------- ------- ------- ------- -------
Net asset value,
end of period .... $7.5679 $6.7967 $6.8260 $5.8986 $6.1962
======= ======= ======= ======= =======
Total return ....... 21.45% 12.40% 38.57% 2.39% 14.02%
Net assets, end of
period (000
omitted) ......... $639,359$513,163 $418,826$276,737 $220,590
Ratio of expenses
to average net
assets ............ 0.72% 0.73% 0.75% 0.77% 0.78%
Ratio of net investment
income to average
net assets ....... 0.75% 1.44% 1.35% 2.07% 1.01%
Portfolio turnover
rate ............. 162.41% 243.00% 245.80% 277.36% 297.81%
Average commission
rate paid ........ $0.0592$0.0572
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE INCOME PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $10.1373$ 8.6756 $6.7689 $6.9180 $5.9530
---------------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0916 0.0856 0.0839 0.0703 0.0651
Net realized and
unrealized gain (loss)
on investments .. 2.5598 1.6280 2.0525 (0.1491) 0.9650
---------------- ------- ------- -------
Total from investment
operations ....... 2.6514 1.7136 2.1364 (0.0788) 1.0301
---------------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.0915)(0.0856) (0.0839)(0.0703) (0.0651)
From capital
gains............ (0.7357)(0.1663) (0.1457)(0.0000) (0.0000)
In excess of
capital gains ... (0.0000)(0.0000) (0.0001)(0.0000) (0.0000)
---------------- ------- ------- -------
Total distributions. (0.8272)(0.2519) (0.2297)(0.0703) (0.0651)
---------------- ------- ------- -------
Net asset value,
end of period .... $11.9615$10.1373 $8.6756 $6.7689 $6.9180
================ ======= ======= =======
Total return........ 26.16% 19.75% 31.56% -1.14% 17.30%
Net assets, end of
period (000
omitted) ......... $636,904$462,391 $331,194$218,774 $155,092
Ratio of expenses
to average net
assets ............ 0.72% 0.73% 0.77% 0.77% 0.79%
Ratio of net investment
income to average
net assets ....... 0.80% 0.97% 1.13% 1.16% 1.36%
Portfolio turnover
rate ............. 36.61% 22.95% 15.00% 23.32% 18.38%
Average commission
rate paid ........ $0.0602$0.0586
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE SCIENCE AND TECHNOLOGY PORTFOLIO
For a Share of Capital Stock Outstanding Throughout The Period:
For the
period
ended
12/31/97*
----------
Net asset value,
beginning of
period ........... $5.0000
-------
Income from investment
operations:
Net investment
income .......... 0.0146
Net realized and
unrealized gain
on investments .. 0.7971
-------
Total from investment
operations ....... 0.8117
-------
Less distributions:
From net
investment
income .......... (0.0146)
From capital
gains............ (0.0245)
-------
Total distributions (0.0391)
-------
Net asset value,
end of period .... $5.7726
=======
Total return........ 16.24%
Net assets, end of
period (000
omitted) .........$10,207
Ratio of expenses
to average net
assets ............ 0.94%
Ratio of net investment
income to average
net assets ....... 0.64%
Portfolio turnover
rate ............. 15.63%
Average commission
rate paid ........ $0.0361
*The Science and Technology Portfolio's inception date is March 13, 1997;
however, since this Portfolio did not have any investment activity or
incur expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from April
4, 1997 (initial offering) through December 31, 1997. Ratios have been
annualized.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE INTERNATIONAL PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended For the
December 31, period
------------------------- ended
1997 1996 1995 12/31/94*
------ ------- -------- ----------
Net asset value,
beginning of
period ........... $5.9990 $5.2790 $4.9926 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0485 0.0644 0.0846 0.0207
Net realized and
unrealized gain (loss)
on investments... 0.9534 0.7329 0.2790 (0.0074)
------- ------- ------- -------
Total from investment
operations ....... 1.0019 0.7973 0.3636 0.0133
------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.0463)(0.0644) (0.0772) (0.0207)
From capital
gains ........... (0.5704)(0.0129) (0.0000) (0.0000)
------- ------- ------- -------
Total distributions. (0.6167)(0.0773) (0.0772) (0.0207)
------- ------- ------- -------
Net asset value,
end of period .... $6.3842 $5.9990 $5.2790 $4.9926
======= ======= ======= =======
Total return........ 16.70% 15.11% 7.28% 0.26%
Net assets, end of
period (000
omitted) ......... $114,631 $79,849 $50,196 $26,020
Ratio of expenses
to average net
assets ............ 0.98% 1.00% 1.02% 1.26%
Ratio of net investment
income to average
net assets ....... 0.79% 1.42% 1.99% 1.36%
Portfolio turnover
rate ............. 117.37% 75.01% 34.93% 23.23%
Average commission
rate paid ........ $0.0093$0.0217
*The International Portfolio's inception date is April 28, 1994; however,
since this Portfolio did not have any investment activity or incur
expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May
3, 1994 (initial offering) through December 31, 1994. Ratios and the
portfolio turnover rate have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE SMALL CAP PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended For the
December 31, period
-------------------------- ended
1997 1996 1995 12/31/94*
------- -------- -------- ----------
Net asset value,
beginning of
period ........... $8.0176 $7.6932 $5.9918 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0279 0.0170 0.0900 0.0376
Net realized and
unrealized gain
on investments .. 2.5004 0.6367 1.8470 1.0086
------- ------- ------- -------
Total from investment
operations ....... 2.5283 0.6537 1.9370 1.0462
------- ------- ------- -------
Less distributions:
From net
investment income (0.0282)(0.0170) (0.0900) (0.0376)
From capital
gains............ (2.1861)(0.3123) (0.1456) (0.0168)
------- ------- ------- -------
Total distributions (2.2143)(0.3293) (0.2356) (0.0544)
------- ------- ------- -------
Net asset value,
end of period .... $8.3316 $8.0176 $7.6932 $5.9918
======= ======= ======= =======
Total return........ 31.53% 8.50% 32.32% 20.92%
Net assets, end of
period (000
omitted) ......... $148,238 $97,408 $55,591 $16,080
Ratio of expenses
to average net
assets ............ 0.90% 0.91% 0.96% 1.08%
Ratio of net investment
income to average
net assets ....... 0.32% 0.25% 1.77% 2.35%
Portfolio turnover
rate ............. 211.46% 133.77% 43.27% 21.61%
Average commission
rate paid ........ $0.0521$0.0448
*The Small Cap Portfolio's inception date is April 28, 1994; however,
since this Portfolio did not have any investment activity or incur
expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May
3, 1994 (initial offering) through December 31, 1994. Ratios and the
portfolio turnover rate have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE BALANCED PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended For the
December 31, period
---------------------------- ended
1997 1996 1995 12/31/94*
-------- -------- -------- ----------
Net asset value,
beginning of
period ........... $6.1967 $5.9000 $4.9359 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.1805 0.1594 0.1333 0.0460
Net realized and
unrealized gain (loss)
on investments .. 0.9650 0.5003 1.0611 (0.0641)
------- ------- ------- -------
Total from investment
operations ....... 1.1455 0.6597 1.1944 (0.0181)
------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.1805)(0.1594) (0.1333) (0.0460)
From capital
gains............ (0.3931)(0.2036) (0.0970) (0.0000)
------- ------- ------- -------
Total distributions (0.5736)(0.3630) (0.2303) (0.0460)
------- ------- ------- -------
Net asset value,
end of period .... $6.7686 $6.1967 $5.9000 $4.9359
======= ======= ======= =======
Total return........ 18.49% 11.19% 24.19% -0.37%
Net assets, end of period
(000 omitted) .... $67,759 $42,427 $23,603 $8,671
Ratio of expenses
to average net
assets ............ 0.67% 0.70% 0.72% 0.95%
Ratio of net investment
income to average
net assets ....... 3.06% 3.18% 3.22% 3.14%
Portfolio turnover
rate ............. 55.66% 44.23% 62.87% 19.74%
Average commission
rate paid ........ $0.0546$0.0579
*The Balanced Portfolio's inception date is April 28, 1994; however,
since this Portfolio did not have any investment activity or incur
expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May
3, 1994 (initial offering) through December 31, 1994. Ratios and the
portfolio turnover rate have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE ASSET STRATEGY PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended For the
December 31, period
-------------------------- ended
1997 1996 12/31/95*
--------- -------- ---------
Net asset value,
beginning of
period ........... $5.1343 $5.0137 $5.0000
------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.1915 0.1814 0.0717
Net realized and
unrealized gain
on investments .. 0.5277 0.1206 0.0193
------- ------- -------
Total from investment
operations ....... 0.7192 0.3020 0.0910
------- ------- -------
Less distributions:
From net
investment
income .......... (0.1919) (0.1814) (0.0713)
From capital
gains............ (0.4647) (0.0000) (0.0060)
------- ------- -------
Total distributions (0.6566) (0.1814) (0.0773)
------- ------- -------
Net asset value,
end of period .... $5.1969 $5.1343 $5.0137
======= ======= =======
Total return........ 14.01% 6.05% 1.80%
Net assets, end of
period (000
omitted) ......... $9,810 $8,474 $4,344
Ratio of expenses
to average net
assets ............ 0.93% 0.93% 0.91%
Ratio of net investment
income to average
net assets ....... 3.55% 3.92% 4.42%
Portfolio turnover
rate ............. 222.50% 49.92% 149.17%
Average commission
rate paid ........ $0.0400 $0.0375
*The Asset Strategy Portfolio's inception date is February 14, 1995;
however, since this Portfolio did not have any investment activity or
incur expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May
1, 1995 (initial offering) through December 31, 1995. Ratios have been
annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE MONEY MARKET PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Net investment
income ........... 0.0503 0.0486 0.0542 0.0368 0.0260
Less dividends
declared ......... (0.0503)(0.0486) (0.0542)(0.0368) (0.0260)
------- ------- ------- ------- -------
Net asset value,
end of period .... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total return ....... 5.13% 5.01% 5.56% 3.72% 2.63%
Net assets, end of
period (000
omitted) ......... $43,300 $37,258 $36,872 $30,812 $26,000
Ratio of expenses
to average net
assets ............ 0.58% 0.61% 0.62% 0.65% 0.65%
Ratio of net investment
income to average
net assets ....... 5.04% 4.87% 5.42% 3.72% 2.61%
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE LIMITED-TERM BOND PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended
For the
December 31, period
-------------------------- ended
1997 1996 1995 12/31/94*
------- ------- ------- ----------
Net asset value,
beginning of
period ........... $5.1639 $5.2521 $4.8611 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.3086 0.2842 0.2841 0.1507
Net realized and
unrealized gain (loss)
on investments .. 0.0451 (0.0870) 0.4122 (0.1375)
------- ------- ------- -------
Total from investment
operations ....... 0.3537 0.1972 0.6963 0.0132
------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.3086)(0.2842) (0.2841) (0.1507)
From capital
gains ........... (0.0208)(0.0012) (0.0212) (0.0014)
------- ------- ------- -------
Total distributions (0.3294)(0.2854) (0.3053) (0.1521)
------- ------- ------- -------
Net asset value,
end of period .... $5.1882 $5.1639 $5.2521 $4.8611
======= ======= ======= =======
Total return........ 6.85% 3.79% 14.29% 0.26%
Net assets, end of
period (000
omitted) ......... $4,252 $3,715 $2,853 $1,645
Ratio of expenses
to average net
assets ............ 0.73% 0.76% 0.71% 0.93%
Ratio of net investment
income to average
net assets ....... 5.93% 5.92% 6.22% 5.89%
Portfolio turnover
rate ............. 35.62% 15.81% 18.16% 93.83%
*The Limited-Term Bond Portfolio's inception date is April 28, 1994;
however, since this Portfolio did not have any investment activity or
incur expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May
3, 1994 (initial offering) through December 31, 1994. Ratios and the
portfolio turnover rate have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE BOND PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $5.2004 $5.3592 $4.7393 $5.4045 $5.2626
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.3400 0.3407 0.3556 0.3507 0.3334
Net realized and
unrealized gain
(loss) on
investments ..... 0.1682 (0.1588) 0.6202 (0.6652) 0.3046
------- ------- ------- ------- -------
Total from investment
operations ....... 0.5082 0.1819 0.9758 (0.3145) 0.6380
------- ------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.3400)(0.3407) (0.3559)(0.3507) (0.3334)
From capital
gains ........... (0.0000)(0.0000) (0.0000)(0.0000) (0.1627)
------- ------- ------- ------- -------
Total distributions. (0.3400)(0.3407) (0.3559)(0.3507) (0.4961)
------- ------- ------- ------- -------
Net asset value,
end of period .... $5.3686 $5.2004 $5.3592 $4.7393 $5.4045
======= ======= ======= ======= =======
Total return ....... 9.77% 3.43% 20.56% -5.90% 12.37%
Net assets, end of
period (000
omitted) ......... $99,489 $92,367 $88,570 $74,017 $81,727
Ratio of expenses
to average net
assets ............ 0.58% 0.59% 0.60% 0.62% 0.62%
Ratio of net investment
income to average
net assets ....... 6.35% 6.39% 6.73% 6.73% 6.01%
Portfolio turnover
rate ............. 36.81% 64.02% 71.17% 135.82% 68.75%
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE HIGH INCOME PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $4.5750 $4.4448 $4.1118 $4.6373 $4.2886
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.4098 0.4216 0.4165 0.4106 0.3899
Net realized and
unrealized gain
(loss) on
investments ..... 0.2324 0.1302 0.3330 (0.5255) 0.3487
------- ------- ------- ------- -------
Total from investment
operations ....... 0.6422 0.5518 0.7495 (0.1149) 0.7386
------- ------- ------- ------- -------
Less distributions:
From net investment
income .......... (0.4098)(0.4216) (0.4165)(0.4106) (0.3899)
From capital
gains............ (0.0672)(0.0000) (0.0000)(0.0000) (0.0000)
------- ------- ------- ------- -------
(0.4770)(0.4216) (0.4165)(0.4106) (0.3899)
------- ------- ------- ------- -------
Net asset value,
end of period .... $4.7402 $4.5750 $4.4448 $4.1118 $4.6373
======= ======= ======= ======= =======
Total return ....... 14.04% 12.46% 18.19% -2.55% 17.90%
Net assets, end of
period (000
omitted) ......... $119,524 $97,406 $86,686 $72,644 $71,265
Ratio of expenses
to average net
assets ............ 0.70% 0.71% 0.72% 0.74% 0.75%
Ratio of net investment
income to average
net assets ....... 8.79% 9.10% 9.25% 9.03% 8.66%
Portfolio turnover
rate ............. 65.28% 58.91% 41.78% 37.86% 54.22%
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- Significant Accounting Policies
TMK/United Funds, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment
company. Capital stock is currently divided into the eleven classes that
are designated the Growth Portfolio, the Income Portfolio, the Science and
Technology Portfolio, the International Portfolio, the Small Cap Portfolio,
the Balanced Portfolio, the Asset Strategy Portfolio, the Money Market
Portfolio, the Limited-Term Bond Portfolio, the Bond Portfolio and the High
Income Portfolio. The assets belonging to each Portfolio are held
separately by the Custodian. The capital shares of each Portfolio
represent a pro rata beneficial interest in the principal, net income, and
realized and unrealized capital gains or losses of its respective
investments and other assets. 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 -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal
period as reported by the principal securities exchange on which the
issue is traded or, if no sale is reported for a stock, the average of
the latest bid and asked prices. Bonds, other than convertible bonds,
are valued using a pricing system provided by a pricing service or
dealer in bonds. Convertible bonds are valued using this pricing
system only on days when there is no sale reported. Stocks which are
traded over-the-counter are priced using the Nasdaq Stock Market,
which provides information on bid and asked or closing prices quoted
by major dealers in such stocks. Securities for which quotations are
not readily available are valued as determined in good faith in
accordance with procedures established by and under the general
supervision of the Fund's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to
buy or sell is executed). Securities gains and losses are calculated
on the identified cost basis. Original issue discount (as defined in
the Internal Revenue Code), premiums on the purchase of bonds and
post-1984 market discount are amortized for both financial and tax
reporting purposes over the remaining lives of the bonds. Dividend
income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date. Interest income is recorded on the
accrual basis. For International Portfolio, dividend income is net of
foreign withholding taxes of $104,902. See Note 3 -- Investment
Securities Transactions.
C. Foreign currency translations -- All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars
daily. Purchases and sales of investment securities and accruals of
income and expenses are translated at the rate of exchange prevailing
on the date of the transaction. For assets and liabilities other than
investments in securities, net realized and unrealized gains and
losses from foreign currency translations arise from changes in
currency exchange rates. The Fund combines fluctuations from currency
exchange rates and fluctuations in market value when computing net
realized and unrealized gain or loss from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of
its taxable income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under the Internal Revenue
Code. In addition, the Fund intends to pay distributions as required
to avoid imposition of excise tax. Accordingly, provision has not
been made for Federal income taxes. See Note 4 -- Federal Income Tax
Matters.
E. Dividends and distributions -- Dividends and distributions to
shareholders are recorded by each Portfolio on the record date. Net
investment income distributions and capital gains distributions are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
due to differing treatments for items such as deferral of wash sales
and post-October losses, foreign currency transactions, net operating
losses and expiring capital loss carryforwards.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management And Payments To Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The
fee consists of two elements: (i) a "Specific" fee computed on net asset
value as of the close of business each day at the following annual rates:
Growth Portfolio - .20% of net assets; Income Portfolio - .20% of net
assets; Science and Technology Portfolio - .20% of net assets;
International Portfolio - .30% of net assets; Small Cap Portfolio - .35% of
net assets; Balanced Portfolio - .10% of net assets; Asset Strategy
Portfolio - .30% of net assets; Money Market Portfolio - none; Limited-Term
Bond Portfolio - .05% of net assets; Bond Portfolio - .03% of net assets;
High Income Portfolio - .15% of net assets and (ii) a base fee computed
each day on the combined net asset values of all of the Portfolios
(approximately $1.9 billion of combined net assets at December 31, 1997)
and allocated among the Portfolios based on their relative net asset size
at the annual rates of .51% of the first $750 million of combined net
assets, .49% on that amount between $750 million and $1.5 billion, .47%
between $1.5 billion and $2.25 billion, and .45% of that amount over $2.25
billion. The Fund accrues and pays this fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. (W&R), Waddell & Reed Investment
Management Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as
the Fund's investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of each
Portfolio. For these services, each Portfolio pays WARSCO a monthly fee of
one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Portfolio
-------------------------- -----------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The Fund paid Directors' fees of $59,483, which are included in other
expenses.
W&R 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.
NOTE 3 -- Investment Security Transactions
Investment securities transactions for the period ended December 31,
1997 are summarized as follows:
Science and
Growth Income Technology
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $911,403,778 $207,970,111 $ 9,251,523
Purchases of U.S. Government
securities --- --- ---
Purchases of short-term
securities 619,477,625 454,752,009 254,221,781
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 929,787,678 192,303,394 681,399
Proceeds from maturities
and sales of U.S.
Government securities --- --- ---
Proceeds from maturities
and sales of short-term
securities 573,674,979 423,334,448 252,922,000
International Small Cap Balanced
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $120,650,379 $203,114,312 $32,410,931
Purchases of U.S. Government
securities --- --- 6,127,983
Purchases of short-term
securities 164,613,921 365,698,150 75,285,497
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 106,747,225 211,526,393 22,748,054
Proceeds from maturities
and sales of U.S.
Government securities --- --- 3,254,493
Proceeds from maturities
and sales of short-term
securities 158,462,677 339,528,507 69,548,000
Limited-
Asset Strategy Term Bond Bond
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $14,515,889 $1,054,925 $21,702,984
Purchases of U.S. Government
securities 2,292,787 705,104 14,619,038
Purchases of short-term
securities 20,964,150 2,036,000 37,328,619
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 14,251,720 864,182 19,802,535
Proceeds from maturities
and sales of U.S.
Government securities 3,866,398 449,602 13,143,750
Proceeds from maturities
and sales of short-term
securities 19,172,423 1,959,000 36,168,682
High
Income
Portfolio
-----------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $80,322,299
Purchases of U.S. Government
securities ---
Purchases of short-term
securities 89,125,063
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 65,732,792
Proceeds from maturities
and sales of U.S.
Government securities ---
Proceeds from maturities
and sales of short-term
securities 88,028,637
For Federal income tax purposes, cost of investments owned at December
31, 1997, and the related unrealized appreciation (depreciation) were as
follows:
Aggregate
CostAppreciationDepreciationAppreciation
------------------------------------------------
Growth Portfolio $560,205,176 $96,017,694$(8,203,592) $87,814,102
Income Portfolio 408,937,122 227,039,227 (2,432,980) 224,606,247
Science and Technology
Portfolio 9,919,356 1,127,354 (885,409) 241,945
International Portfolio100,580,725 18,586,963 (5,153,496) 13,433,467
Small Cap Portfolio 137,742,227 18,084,082 (6,187,682) 11,896,400
Balanced Portfolio 60,636,561 8,619,367 (1,266,145) 7,353,222
Asset Strategy Portfolio9,531,603 374,370 (185,662) 188,708
Money Market Portfolio 41,850,969 --- --- ---
Limited-Term Bond Portfolio4,136,211 45,172 (2,459) 42,713
Bond Portfolio 94,323,424 3,995,141 (45,869) 3,949,272
High Income Portfolio 111,481,692 6,193,340 (405,274) 5,788,066
NOTE 4 -- Federal Income Tax Matters
The Fund's income and expenses attributed to each Portfolio and the
gains and losses on security transactions of each Portfolio have been
attributed to that Portfolio for Federal income tax purposes as well as
accounting purposes. For Federal income tax purposes, Growth, Income,
Science and Technology, Balanced, and Limited-Term Bond Portfolios realized
capital gain net income of $48,833,675, $36,637,583, $42,856, $3,625,975
and $16,019, respectively, during the year ended December 31, 1997. For
Federal income tax purposes, Small Cap Portfolio realized capital gain net
income of $25,739,086 for the year ended December 31, 1997, which included
the effect of certain losses deferred into the next fiscal year, as well as
the effect of losses recognized from the prior year (see discussion below).
For Federal income tax purposes, International Portfolio realized capital
gain net income of $9,721,076 during the year ended December 31, 1997,
which included utilization of capital loss carryforwards of $1,248,303.
For Federal income tax purposes, Asset Strategy Portfolio realized capital
gain net income of $778,557 during the year ended December 31, 1997, which
included utilization of capital loss carryforwards of $46,572. For Federal
income tax purposes, High Income Portfolio realized capital gain net income
of $1,538,783 for the year ended December 31, 1997, which included
utilization of capital loss carryforwards of $237,516. For Federal income
tax purposes, Bond Portfolio realized capital gains of $430,660 during the
year ended December 31, 1997, which were entirely offset by capital loss
carryforwards. In addition, prior year capital loss carryforwards of Bond
Portfolio aggregated $2,189,071 as of December 31, 1997, and are available
to offset future realized capital gain net income as follows: $2,172,375
through December 31, 2002, and $16,696 through December 31, 2003. The
capital gain net income of Growth, Income, Science and Technology,
International, Small Cap, Balanced, Asset Strategy, Limited-Term Bond and
High Income Portfolios was paid to shareholders during the year ended
December 31, 1997.
Internal Revenue Code regulations permit each Portfolio to defer into
its next fiscal year net capital losses or net long-term capital losses
incurred between each November 1 and the end of its fiscal year ("post-
October losses"). From November 1, 1997 through December 31, 1997, Small
Cap Portfolio incurred net capital losses of $352,811, which have been
deferred to the fiscal year ending December 31, 1998. In addition, during
the year ended December 31, 1997, the Portfolio recognized post-October
losses of $5,285,152 that had been deferred from the year ended December
31, 1996.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
TMK/United Funds, Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of Growth Portfolio, Income
Portfolio, Science and Technology Portfolio, International Portfolio, Small
Cap Portfolio, Balanced Portfolio, Asset Strategy Portfolio, Money Market
Portfolio, Limited-Term Bond Portfolio, Bond Portfolio and High Income
Portfolio (collectively the "Portfolios") of TMK/United Funds, Inc., as of
December 31, 1997, and the related statements of operations for the period
then ended, and changes in net assets for each of the periods in the two-
year period then ended, and the financial highlights for each of the
periods in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Portfolios'
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits 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 and the
financial highlights 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 at December 31, 1997 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 audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of each of the
respective Portfolios of TMK/United Funds, Inc. as of December 31, 1997,
the results of their operations, the changes in their net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 6, 1998
<PAGE>
Shareholder Meeting Results
A special meeting of TMK/United Funds, Inc. High Income Portfolio, Money
Market Portfolio, Bond Portfolio, Income Portfolio, Growth Portfolio,
Balanced Portfolio, International Portfolio, Limited-Term Bond Portfolio,
Small Cap Portfolio, Asset Strategy Portfolio and Science and Technology
Portfolio was held on July 24, 1997. The matters voted upon by the
shareholders and the resulting votes for each matter are presented below.
Item 1. To elect the Board of Directors;
For Withheld
Henry L. Bellmon 647,791,07310,115,010
Dodds I. Buchanan 650,207,873 7,698,210
James M. Concannon 650,191,714 7,714,369
John A. Dillingham 649,844,013 8,062,070
Linda Graves 649,764,357 8,141,726
John F. Hayes 649,621,413 8,284,670
Glendon E. Johnson 649,605,719 8,300,364
William T. Morgan 650,084,004 7,822,079
Ronald K. Richey 648,000,233 9,905,850
William L. Rogers 650,267,410 7,638,673
Frank J. Ross, Jr. 650,100,709 7,805,374
Eleanor B. Schwartz 650,171,751 7,734,332
Keith A. Tucker 650,118,925 7,787,158
Frederick Vogel III 650,060,8371 7,845,252
Paul S. Wise 649,118,577 8,787,506
Item 2. To ratify the selection of Deloitte & Touche LLP as the
Fund's independent accountants for its current fiscal year;
For Against Abstain
635,822,736 14,437,387 7,645,960
Item 3. To approve or disapprove changes to certain of the
Portfolios' fundamental investment policies and restrictions:
3.1 Modification of Fundamental Restriction Regarding
Diversification of Assets (all Portfolios except Asset
Strategy Portfolio)
For Against Abstain
High Income Portfolio 40,385,376 662,273 2,224,770
Money Market Portfolio25,152,077 759,093 1,005,967
Bond Portfolio 41,380,445 822,701 1,681,005
Income Portfolio 208,510,885 3,556,548 10,581,841
Growth Portfolio 132,843,661 2,679,865 5,805,723
Balanced Portfolio 33,401,960 175,326 1,383,183
International Portfolio68,307,032 1,622,513 3,158,450
Limited-Term Bond Portfolio2,158,305 -0- 126,070
Small Cap Portfolio 57,786,779 1,570,699 2,096,362
Science and Technology Portfolio 160,803 -0- -0-
3.2 Modification and/or Elimination of Fundamental Restrictions
Regarding Options, Commodities, Forward Contracts and/or
Futures Contracts (all Portfolios except Money Market
Portfolio)
For Against Abstain
High Income Portfolio 40,385,376 662,273 2,224,770
Bond Portfolio 41,380,445 822,701 1,681,005
Income Portfolio 208,328,187 3,739,246 10,581,841
Growth Portfolio 132,678,375 2,761,825 5,889,049
Balanced Portfolio 33,401,960 175,326 1,383,183
International Portfolio68,202,237 1,664,009 3,221,749
Limited-Term Bond Portfolio2,158,305 -0- 126,070
Small Cap Portfolio 57,713,653 1,643,825 2,096,362
Asset Strategy Portfolio7,619,652 40,118 246,602
Science and Technology Portfolio 160,803 -0- -0-
3.3 Elimination of Fundamental Restriction Regarding Mortgaging or
Pledging Securities (all Portfolios except Money Market
Portfolio and Asset Strategy Portfolio)
For Against Abstain
High Income Portfolio 40,370,297 677,352 2,224,770
Bond Portfolio 41,362,583 840,563 1,681,005
Income Portfolio 208,413,011 3,654,422 10,581,841
Growth Portfolio 132,636,028 2,887,498 5,805,723
Balanced Portfolio 33,431,125 146,161 1,383,183
International Portfolio68,204,348 1,725,197 3,158,450
Limited-Term Bond Portfolio2,158,305 -0- 126,070
Small Cap Portfolio 57,761,809 1,595,669 2,096,362
Science and Technology Portfolio 160,803 -0- -0-
3.4 Modification of Fundamental Restriction Regarding Margin
Purchases of Securities (All Portfolios except Money Market
Portfolio)
For Against Abstain
High Income Portfolio 40,385,376 662,273 2,224,770
Bond Portfolio 41,374,916 828,230 1,681,005
Income Portfolio 208,410,836 3,656,597 10,581,841
Growth Portfolio 132,672,910 2,850,616 5,805,723
Balanced Portfolio 33,431,125 146,161 1,383,183
International Portfolio68,165,666 1,763,879 3,158,450
Limited-Term Bond Portfolio2,158,305 -0- 126,070
Small Cap Portfolio 57,676,792 1,680,686 2,096,362
Asset Strategy Portfolio7,619,652 40,118 246,602
Science and Technology Portfolio 160,803 -0- -0-
3.5 Modification of Fundamental Restriction Regarding Short Sales
of Securities (All Portfolios except Money Market Portfolio)
For Against Abstain
High Income Portfolio 40,385,376 662,273 2,224,770
Bond Portfolio 41,368,537 834,609 1,681,005
Income Portfolio 208,615,283 3,452,150 10,581,841
Growth Portfolio 132,876,445 2,647,081 5,805,723
Balanced Portfolio 33,435,194 142,092 1,383,183
International Portfolio68,342,198 1,587,347 3,158,450
Limited-Term Bond Portfolio2,158,305 -0- 126,070
Small Cap Portfolio 57,870,607 1,486,871 2,096,362
Asset Strategy Portfolio7,659,770 -0- 246,602
Science and Technology Portfolio 160,803 -0- -0-
3.6 Elimination of Fundamental Restriction Regarding Arbitrage
Transactions(All Portfolios except Money Market Portfolio and
Asset Strategy Portfolio)
For Against Abstain
High Income Portfolio 40,385,376 662,273 2,224,770
Bond Portfolio 41,368,537 834,609 1,681,005
Income Portfolio 208,628,333 3,439,100 10,581,841
Growth Portfolio 132,810,877 2,629,323 5,889,049
Balanced Portfolio 33,435,194 142,092 1,383,183
International Portfolio68,280,305 1,585,941 3,221,749
Limited-Term Bond Portfolio2,158,305 -0- 126,070
Small Cap Portfolio 57,872,985 1,484,493 2,096,362
Science and Technology Portfolio 160,803 -0- -0-
3.7 Elimination of Fundamental Restriction Regarding Investments
in Issuers Whose Securities are Owned by Certain Persons
(Asset Strategy Portfolio only)
For Against Abstain
Asset Strategy Portfolio7,653,954 5,816 246,602
3.8 Modification of Fundamental Policy Regarding Loans (All
Portfolios)
For Against Abstain
High Income Portfolio 40,368,622 679,027 2,224,770
Money Market Portfolio25,152,077 759,093 1,005,967
Bond Portfolio 41,395,329 807,817 1,681,005
Income Portfolio 208,985,028 3,082,405 10,581,841
Growth Portfolio 133,073,149 2,450,377 5,805,723
Balanced Portfolio 33,435,194 142,092 1,383,183
International Portfolio68,349,213 1,580,314 3,158,450
Limited-Term Bond Portfolio2,158,305 -0- 126,070
Small Cap Portfolio 57,887,254 1,470,224 2,096,362
Asset Strategy Portfolio7,659,770 -0- 246,602
Science and Technology Portfolio 160,803 -0- -0-
<PAGE>
DIRECTORS
Ronald K. Richey, Birmingham, Alabama, Chairman of the Board
Henry L. Bellmon, Red Rock, Oklahoma
James M. Concannon, Topeka, Kansas
John A. Dillingham, Kansas City, Missouri
Linda Graves, Topeka, Kansas
John F. Hayes, Hutchinson, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Coronado, California
William L. Rogers, Los Angeles, California
Frank J. Ross, Jr., Kansas City, Missouri
Eleanor B. Schwartz, Kansas City, Missouri
Keith A. Tucker, Overland Park, Kansas
Frederick Vogel III, Milwaukee, Wisconsin
Paul S. Wise, Carefree, Arizona
OFFICERS
Keith A. Tucker, President
Michael L. Avery, Vice President
Daniel P. Becker, Vice President
James C. Cusser, Vice President
Abel Garcia, Vice President
Robert L. Hechler, Vice President
Henry J. Herrmann, Vice President
Theodore W. Howard, Vice President and Treasurer
Thomas A. Mengel, Vice President
Sharon K. Pappas, Vice President and Secretary
Richard K. Poettgen, Vice President
Cynthia P. Prince-Fox, Vice President
Louise D. Rieke, Vice President
Zachary H. Shafran, Vice President
W. Patrick Sterner, Vice President
Carl E. Sturgeon, Vice President
Russell E. Thompson, Vice President
Daniel J. Vrabac, Vice President
James D. Wineland, Vice President
This report is submitted for the general information of the shareholders of
TMK/United Funds, Inc. It is not authorized for distribution to
prospective investors in the Fund unless accompanied with or preceded by
the TMK/United Funds, Inc. current prospectus.
<PAGE>
Advantage I. A flexible premium variable life insurance policy.
Advantage II. A deferred variable annuity policy.
Advantage Plus. A flexible premium variable life insurance policy.
All three offer you the investment flexibility of positioning your
investment in one or more of the following professionally managed
portfolios:
GROWTH Portfolio
Objective: Capital growth with income as a secondary goal.
Invested In: Mainly common stocks of large, well-known companies
representing major sectors of the economy.
INCOME Portfolio
Objective: Maintain current income, subject to market conditions, with
capital growth
as a secondary goal.
Invested In: Primarily common stocks or securities convertible into common
stocks.
SCIENCE AND TECHNOLOGY Portfolio
Objective: Long-term capital growth.
Invested in: Common stocks of companies whose products, processes or
services are expected to benefit from scientific or
technological discoveries or developments.
INTERNATIONAL Portfolio
Objective: Long-term appreciation of capital with a secondary goal of
current income.
Invested in: Securities issued by companies or governments of any nation.
SMALL CAP Portfolio
Objective: Capital growth.
Invested in: Common stocks of relatively new or unseasoned companies, or
smaller companies positioned in new and emerging industries.
BALANCED Portfolio
Objective: Current income with a secondary goal of long-term
appreciation of capital.
Invested in: A variety of securities including debt securities, common
stocks and preferred stocks.
ASSET STRATEGY Portfolio
Objective: High total return over the long term.
Invested In: An allocation of its assets among stocks, bonds, and short-
term instruments.
MONEY MARKET Portfolio
Objective: Maximum income consistent with stability of principal.
Invested In: Short-term securities including bank CD's, government
securities, investment grade commercial paper and other
corporate debt securities.
LlMITED-TERM BOND Portfolio
Objective: High level of current income consistent with the preservation
of capital.
Invested in: Debt securities of investment grade, including debt
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities; the portfolio will maintain a
dollar weighted average maturity of two to five years.
BOND Portfolio
Objective: Income with an emphasis on preservation of capital.
Invested In: High-quality bonds issued by companies in a variety of
industries; government securities.
HIGH INCOME Portfolio
Objective: High level of income with a secondary objective of capital
appreciation when consistent with its primary objective.
Invested In: Corporate bonds offering higher rates of return than
investment-grade bonds.
FOR MORE INFORMATION:
Contact your representative, or your local office as listed on your Account
Statement, or contact:
United Investors Life
Variable Products Division
P.O. Box 156
Birmingham, AL 35201-0156
(205)325-4300
NUR1016A(12-97)
printed on recycled paper
