-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BPgtuo4IVuBiERNabhsDv1jDXl7X5eu0MSNKhN5zbD+Z+V020jeo42n+bqmGvgW3 VBxGdfln4weH3lMn1lM2/A== 0000810016-97-000004.txt : 19970227 0000810016-97-000004.hdr.sgml : 19970227 ACCESSION NUMBER: 0000810016-97-000004 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970226 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TMK UNITED FUNDS INC CENTRAL INDEX KEY: 0000810016 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05017 FILM NUMBER: 97543858 BUSINESS ADDRESS: STREET 1: 6300 LAMAR AVE STREET 2: PO BOX 29217 CITY: SHAWNEE MISSION STATE: KS ZIP: 66201 BUSINESS PHONE: 9132362000 MAIL ADDRESS: STREET 1: P O BOX 29217 CITY: SHAWNEE MISSION STATE: KS ZIP: 66201-9217 N-30D 1 ANNUAL REPORT DATED DECEMBER 31, 1996 TMK/UNITED FUNDS, INC. ANNUAL REPORT ------------------------------------------- For the fiscal year ended December 31, 1996 GROWTH PORTFOLIO MANAGER'S LETTER DECEMBER 31, 1996 - --------------------------------------------------------------------------- Dear Policyholder: This report relates to the operation of the Growth Portfolio for the fiscal year ended December 31, 1996. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. The U.S. economy experienced moderate growth, low inflation and declining unemployment during 1996. Corporate profits increased, although at a slower rate than in the past few years, and interest rates rose modestly. The equity market, although highly valued as 1996 began, gained substantial additional ground. Large inflows of cash into mutual funds and the continuing favorable political drift of the federal government contributed to the gains. While the major market indexes experienced significant advances in 1996, the gains were largely attributable to a limited number of well-capitalized companies that are heavily weighted in the indexes. Based upon our belief that a majority of stocks were fully valued at the beginning of the year, combined with rising interest rates and slower growth in corporate profits, we pursued a fairly defensive investment strategy throughout much of 1996. This involved maintaining cash positions at different points during the year, awaiting more attractive investment opportunities. During 1996, we decreased the Portfolio's holdings in the basic services sector and increased its emphasis on investments in companies in the financial services industries and in the public utilities and energy sectors. 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 performance was negatively impacted, relative to the indexes, by its underweighting in the securities that contributed most to the superior gains experienced by the major market indexes. For 1997, we anticipate continued moderate economic growth and low inflation. The historically high profit margins experienced by corporations in 1996, combined with relatively low price flexibility, have the potential to result in lower returns in the equity market. In light of anticipated economic conditions, we expect to continue a strategy of pursuing attractive investment opportunities in the health care, energy, technology and financial services industries. Thank you very much for your continued support and confidence. Respectfully, Antonio Intagliata Manager, Growth Portfolio 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 $ ---- 07/31/87 10,237 10,000 12/31/87 9,674 7,860 12/31/88 10,985 9,166 12/31/89 14,018 12,070 12/31/90 13,269 11,696 12/31/91 18,060 15,259 12/31/92 21,824 16,423 12/31/93 24,884 18,077 12/31/94 25,479 18,316 12/31/95 35,304 25,199 12/31/96 39,164 30,984 - ----- TMK/United Growth Portfolio* -- $39,164 +++++ S&P 500 Index** -- $30,984 *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, 1987. Annual Average Total Return+ ---------------------------- Year Ended 12/31/96 10.94% 5 Years Ended 12/31/96 16.74% 9+ Years Ended 12/31/96++ 15.49% +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. ++7-13-87 (the initial offering date) through 12-31-96. 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. THE INVESTMENTS OF THE GROWTH PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS Building Materials and Garden Supplies - 1.22% Home Depot, Inc. (The) ................. 125,000 $ 6,265,625 Business Services - 4.46% Automatic Data Processing, Inc. ........ 135,000 5,788,125 Broderbund Software, Inc.* ............. 75,000 2,226,525 Cerner Corporation* .................... 300,000 4,612,500 Computer Associates International, Inc. 100,000 4,975,000 Intuit Inc.* ........................... 50,000 1,587,500 Physician Computer Network* ............ 130,000 1,105,000 Shared Medical Systems Corporation ..... 40,000 1,970,000 Summit Medical Systems, Inc.* .......... 84,000 624,708 Total ................................. 22,889,358 Chemicals and Allied Products - 13.68% American Home Products Corporation ..... 275,000 16,121,875 Amgen Inc.* ............................ 100,000 5,443,700 Astra AB, Class A, ADR ................. 124,900 6,120,100 Lilly (Eli) and Company ................ 100,000 7,300,000 Liposome Company, Inc. (The)* .......... 200,000 3,837,400 Pfizer Inc. ............................ 75,000 6,215,625 Schering-Plough Corporation ............ 125,000 8,093,750 SmithKline Beecham plc, ADR ............ 175,000 11,900,000 Warner-Lambert Company ................. 69,000 5,175,000 Total ................................. 70,207,450 Communication - 2.63% Intermedia Communications of Florida, Inc.* ................................ 155,000 3,981,485 Nokia Corporation, Series A, ADS ....... 75,000 4,321,875 360 Communications Company* ............ 225,000 5,203,125 Total ................................. 13,506,485 Depository Institutions - 19.63% AmSouth Bancorporation ................. 100,000 4,837,500 Banc One Corporation ................... 125,000 5,375,000 Bank of New York Company, Inc. (The) ... 185,000 6,243,750 Barnett Banks, Inc. .................... 150,000 6,168,750 Chase Manhattan Corporation (The) ...... 175,000 15,618,750 Dime Bancorp, Inc.* .................... 250,000 3,687,500 First American Corporation ............. 75,000 4,331,250 First Bank System, Inc. ................ 75,000 5,118,750 Glendale Federal Bank, Federal Savings Bank* ......................... 71,100 1,653,075 Hibernia Corporation, Class A ......... 175,000 2,318,750 KeyCorp ................................ 110,000 5,555,000 Long Island Bancorp, Inc. .............. 145,400 5,089,000 Mercantile Bancorporation Inc. ......... 100,000 5,137,500 Northern Trust Corporation ............. 100,000 3,631,200 Norwest Corporation .................... 125,000 5,437,500 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE GROWTH PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Depository Institutions (Continued) Roosevelt Financial Group, Inc. ........ 300,000 $ 6,262,500 SouthTrust Corporation ................. 75,000 2,615,625 U.S. Trust Corporation ................. 20,000 1,577,500 Wells Fargo & Company .................. 30,000 8,092,500 Wilmington Trust Corporation ........... 50,000 1,987,500 Total ................................. 100,738,900 Electric, Gas and Sanitary Services - 3.63% Columbia Gas System, Inc. (The) ........ 50,000 3,181,250 PanEnergy Corporation .................. 200,000 9,000,000 Sonat Inc. ............................. 125,000 6,437,500 Total ................................. 18,618,750 Engineering and Management Services - 1.50% Fluor Corporation ...................... 75,000 4,706,250 Neurex Corporation* .................... 175,000 2,985,850 Total ................................. 7,692,100 Food and Kindred Products - 2.61% ConAgra, Inc. .......................... 125,000 6,218,750 Heinz (H. J.) Company .................. 200,000 7,150,000 Total ................................. 13,368,750 General Merchandise Stores - 3.72% Federated Department Stores, Inc.* ..... 150,000 5,118,750 May Department Stores Company (The) .... 175,000 8,181,250 Sears, Roebuck and Co. ................. 125,000 5,765,625 Total ................................. 19,065,625 Health Services - 2.58% Beverly Enterprises, Inc.* ............. 235,000 2,996,250 Columbia/HCA Healthcare Corporation .... 200,000 8,150,000 MedPartners, Inc.* ..................... 100,000 2,100,000 Total ................................. 13,246,250 Holding and Other Investment Offices - 3.34% Conseco, Inc. .......................... 175,000 11,156,250 Duke Realty Investments, Inc. .......... 75,000 2,887,500 Equity Residential Properties .......... 75,000 3,093,750 Total ................................. 17,137,500 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE GROWTH PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Instruments and Related Products - 7.52% Baxter International Inc. .............` 350,000 $ 14,350,000 General Signal Corporation ............. 125,000 5,343,750 Raytheon Company ....................... 200,000 9,625,000 St. Jude Medical, Inc.* ................ 100,000 4,262,500 Target Therapeutics, Inc.* ............. 119,000 4,990,503 Total ................................. 38,571,753 Insurance Carriers - 13.20% Allstate Corporation (The) ............. 250,000 14,468,750 American International Group, Inc. ..... 120,500 13,044,125 Berkley (W. R.) Corporation ............ 111,000 5,667,882 Berkshire Hathaway Inc.* ............... 165 5,626,500 Chartwell Re Corporation ............... 20,000 535,000 Chubb Corporation (The) ................ 50,000 2,687,500 Guarantee Life Companies Inc. (The) .... 250,000 4,656,250 NAC Re Corporation ..................... 140,000 4,742,500 TIG Holdings, Inc. ..................... 245,000 8,299,375 Trenwick Group Inc. .................... 110,000 5,115,000 Western National Corporation ........... 150,000 2,887,500 Total ................................. 67,730,382 Nondepository Institutions - 2.54% Federal National Mortgage Association .. 350,000 13,037,500 Oil and Gas Extraction - 0.49% Enron Oil & Gas Company ................ 100,000 2,525,000 Petroleum and Coal Products - 4.69% Coastal Corporation (The) .............. 125,000 6,109,375 Exxon Corporation ...................... 125,000 12,250,000 Valero Energy Corporation .............. 200,000 5,725,000 Total ................................. 24,084,375 Railroad Transportation - 1.09% Illinois Central Corporation, Class A ............................... 175,000 5,600,000 Security and Commodity Brokers - 1.16% Lehman Brothers Holdings Inc. .......... 100,000 3,137,500 Paine Webber Group Inc. ................ 100,000 2,812,500 Total ................................. 5,950,000 Transportation by Air - 0.96% Southwest Airlines Co. ................. 223,200 4,938,300 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE GROWTH PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Transportation Equipment - 1.77% AlliedSignal Inc. ...................... 135,300 $ 9,065,100 Wholesale Trade -- Durable Goods - 4.00% Johnson & Johnson ...................... 275,000 13,681,250 Lockheed Martin Corporation ............ 75,000 6,862,500 Total ................................. 20,543,750 TOTAL COMMON STOCKS - 96.42% $494,782,953 (Cost: $464,840,860) TOTAL SHORT-TERM SECURITIES - 3.44% $ 17,665,498 (Cost: $17,665,498) TOTAL INVESTMENT SECURITIES - 99.86% $512,448,451 (Cost: $482,506,358) CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.14% 714,239 NET ASSETS - 100.00% $513,162,690 See Notes to Schedules of Investments on page 75. INCOME PORTFOLIO MANAGER'S LETTER DECEMBER 31, 1996 - --------------------------------------------------------------------------- Dear Policyholder: This report relates to the operation of the Income Portfolio for the fiscal year ended December 31, 1996. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. In 1996, the U.S. economy was characterized by modest and uneven growth. While the major market indexes experienced significant advances in 1996, the gains were largely attributable to a limited number of well-capitalized companies that are heavily weighted in the indexes. A relatively small group of stocks in the technology sector enjoyed above-average performance, while cyclical issues generally experienced poor returns. The Portfolio maintained a management style during the past fiscal year consistent with prior years. During 1996, the Portfolio invested in companies in the technology industry which tend to have better prospects for growth in a slowing economy. Notably, the Portfolio stressed issues of selected companies with innovative products for improving corporate communications and networking. The strategies and techniques we applied resulted in the direction of the Portfolio's performance remaining fairly consistent with 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. We anticipate that economic growth in 1997 will be moderate, but possibly stronger than that experienced during the past two years. As a result, we expect to invest in cyclical stocks and continue to search for attractive investment opportunities in companies with prospects for sustained growth. Thank you very much for your continued support and confidence. Respectfully, Russell E. Thompson Manager, Income Portfolio 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 22,370 22,153 - ----- TMK/United Income Portfolio* -- $22,370 +++++ S&P 500 Index** -- $22,153 *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 12/31/96 19.68% 5 Years Ended 12/31/96 15.75% 5+ Years Ended 12/31/96++ 15.87% +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 12-31-96. 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. THE INVESTMENTS OF THE INCOME PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS Apparel and Accessory Stores - 1.15% Gap, Inc. (The) ........................ 177,300 $ 5,341,162 Apparel and Other Textile Products - 1.17% Tommy Hilfiger Corporation* ............ 113,200 5,433,600 Building Materials and Garden Supplies - 0.68% Home Depot, Inc. (The) ................. 62,400 3,127,800 Business Services - 4.45% Computer Associates International, Inc. 45,825 2,279,794 Electronic Data Systems Corporation .... 88,200 3,814,650 Manpower Inc. .......................... 13,200 429,000 Microsoft Corporation* ................. 69,200 5,721,940 Oracle Systems Corporation* ............ 134,550 5,608,986 3Com Corporation* ...................... 31,400 2,301,997 White Pine Software, Inc.* ............. 61,400 437,475 Total ................................. 20,593,842 Chemicals and Allied Products - 14.86% Abbott Laboratories .................... 93,900 4,765,425 Air Products and Chemicals, Inc. ....... 93,800 6,483,925 Amgen Inc.* ............................ 36,000 1,959,732 BetzDearborn Inc. ...................... 40,700 2,380,950 Colgate-Palmolive Company .............. 48,900 4,511,025 Crompton & Knowles Corporation ......... 98,500 1,896,125 Dow Chemical Company (The) ............. 46,900 3,675,787 du Pont (E.I.) de Nemours and Company .. 81,600 7,701,000 Geon Company (The) ..................... 100,600 1,974,275 IMC Global, Inc. ....................... 51,500 2,014,937 Lilly (Eli) and Company ................ 27,200 1,985,600 Merck & Co., Inc. ...................... 60,200 4,770,850 PPG Industries, Inc. ................... 101,900 5,719,137 Pfizer Inc. ............................ 54,700 4,533,263 Praxair, Inc. .......................... 81,600 3,763,800 Procter & Gamble Company (The) ......... 48,900 5,256,750 Union Carbide Corporation .............. 71,400 2,918,475 Warner-Lambert Company ................. 31,800 2,385,000 Total ................................. 68,696,056 Communication - 2.34% AT&T Corporation ....................... 40,800 1,774,800 MCI Communications Corporation ......... 152,900 4,997,842 SBC Communications Inc. ................ 40,300 2,085,525 360 Communications Company* ............ 85,800 1,984,125 Total ................................. 10,842,292 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE INCOME PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Depository Institutions - 4.49% BankAmerica Corporation ................ 43,700 $ 4,359,075 Chase Manhattan Corporation (The) ...... 48,300 4,310,775 Citicorp ............................... 48,300 4,974,900 First Bank System, Inc. ................ 40,800 2,784,600 Norwest Corporation .................... 99,500 4,328,250 Total ................................. 20,757,600 Electric, Gas and Sanitary Services - 0.34% WMX Technologies, Inc. ................. 48,900 1,595,363 Electronic and Other Electric Equipment - 13.21% AMP Incorporated ....................... 89,700 3,442,237 Analog Devices, Inc.* .................. 289,800 9,816,975 Duracell International Inc. ............ 85,300 5,960,337 Emerson Electric Co. ................... 32,600 3,154,050 General Electric Company ............... 97,900 9,679,862 Harman International Industries, Incorporated .......................... 24,150 1,343,344 Intel Corporation ...................... 124,800 16,340,938 LSI Logic Corporation* ................. 134,400 3,595,200 Molex Incorporated, Class A ............ 78,187 2,780,486 Rival Company (The) .................... 130,300 3,200,429 TRINOVA Corporation .................... 48,900 1,778,737 Total ................................. 61,092,595 Engineering and Management Services - 0.44% Fluor Corporation ...................... 32,600 2,045,650 Food and Kindred Products - 1.72% CPC International Inc. ................. 40,800 3,162,000 PepsiCo, Inc. .......................... 163,200 4,773,600 Total ................................. 7,935,600 Food Stores - 0.47% Kroger Co. (The)* ...................... 46,300 2,152,950 Forestry - 1.17% Georgia-Pacific Corporation ............ 34,700 2,498,400 Weyerhaeuser Company ................... 61,200 2,899,350 Total ................................. 5,397,750 Furniture and Home Furnishings Stores - 0.85% Circuit City Stores, Inc. .............. 130,500 3,931,312 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE INCOME PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) General Building Contractors - 0.50% Pulte Corporation ...................... 74,600 $ 2,293,950 General Merchandise Stores - 3.58% Dayton Hudson Corporation .............. 113,700 4,462,725 Kmart Corporation* ..................... 357,600 3,710,100 May Department Stores Company (The) .... 81,600 3,814,800 Penney (J.C.) Company, Inc. ............ 55,100 2,686,125 Wal-Mart Stores, Inc. .................. 81,600 1,866,600 Total ................................. 16,540,350 Health Services - 1.77% Columbia/HCA Healthcare Corporation .... 108,200 4,409,150 Tenet Healthcare Corporation* .......... 81,600 1,785,000 Vencor, Incorporated* .................. 62,800 1,986,050 Total ................................. 8,180,200 Heavy Construction, Excluding Building - 0.26% Foster Wheeler Corporation ............. 32,600 1,210,275 Hotels and Other Lodging Places - 0.88% ITT Corporation* ....................... 93,600 4,059,900 Industrial Machinery and Equipment - 12.22% Applied Materials, Inc.* ............... 141,100 5,070,711 Case Corporation ....................... 146,200 7,967,900 Caterpillar Inc. ....................... 107,000 8,051,750 cisco Systems, Inc.* ................... 147,700 9,406,570 Compaq Computer Corporation* ........... 31,700 2,353,725 Deere & Company ........................ 167,600 6,808,750 Eaton Corporation ...................... 40,800 2,845,800 Harnischfeger Industries, Inc. ......... 49,000 2,358,125 Hewlett-Packard Company ................ 72,000 3,618,000 Ingersoll-Rand Company ................. 32,600 1,450,700 Parker Hannifin Corporation ............ 48,900 1,894,875 United Technologies Corporation ........ 70,800 4,672,800 Total ................................. 56,499,706 Instruments and Related Products - 1.74% General Motors Corporation, Class H .... 14,400 810,000 Guidant Corporation .................... 49,600 2,827,200 Medtronic, Inc. ........................ 65,200 4,433,600 Total ................................. 8,070,800 Insurance Carriers - 0.49% Aetna Life & Casualty Company .......... 28,100 2,248,000 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE INCOME PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Miscellaneous Manufacturing Industries - 1.10% Armstrong World Industries, Inc. ....... 73,400 $ 5,101,300 Miscellaneous Retail - 0.24% OfficeMax, Inc.* ....................... 104,625 1,111,641 Motion Pictures - 0.86% Walt Disney Company (The) .............. 57,100 3,975,587 Nondepository Institutions - 2.83% Federal Home Loan Mortgage Corporation . 63,400 6,981,925 Federal National Mortgage Association .. 163,400 6,086,650 Total ................................. 13,068,575 Paper and Allied Products - 1.66% Champion International Corporation ..... 41,300 1,786,225 International Paper Company ............ 97,900 3,952,713 Union Camp Corporation ................. 40,800 1,948,200 Total ................................. 7,687,138 Petroleum and Coal Products - 2.44% Mobil Corporation ...................... 36,100 4,413,225 Royal Dutch Petroleum Company .......... 26,200 4,473,650 Tosco Corporation ...................... 30,100 2,381,663 Total ................................. 11,268,538 Primary Metal Industries - 1.04% Aluminum Company of America ............ 56,000 3,570,000 Nucor Corporation ...................... 24,500 1,249,500 Total ................................. 4,819,500 Railroad Transportation - 0.53% Union Pacific Corporation .............. 40,800 2,453,100 Rubber and Miscellaneous Plastics Products - 0.91% Goodyear Tire & Rubber Company (The) ... 81,600 4,192,200 Special Trade Contractors - 1.06% Telefonaktiebolaget LM Ericsson, Class B, ADR ......................... 163,100 4,923,500 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE INCOME PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Transportation by Air - 2.25% AMR Corporation* ....................... 32,600 $ 2,872,875 Southwest Airlines Co. ................. 90,000 1,991,250 USAir Group, Inc.* ..................... 236,500 5,528,188 Total ................................. 10,392,313 Transportation Equipment - 7.22% AlliedSignal Inc. ...................... 61,900 4,147,300 Boeing Company (The) ................... 51,800 5,510,225 Chrysler Corporation ................... 179,400 5,920,200 Dana Corporation ....................... 62,000 2,022,750 Ford Motor Company ..................... 92,600 2,951,625 General Motors Corporation ............. 81,600 4,549,200 Northrop Grumman Corporation ........... 78,300 6,479,325 Sundstrand Corporation ................. 42,000 1,785,000 Total ................................. 33,365,625 Wholesale Trade -- Durable Goods - 0.86% Motorola, Inc. ......................... 65,100 3,995,513 Wholesale Trade -- Nondurable Goods - 1.83% Gillette Company (The) ................. 81,600 6,344,400 Safeway Inc.* .......................... 49,700 2,124,675 Total ................................. 8,469,075 TOTAL COMMON STOCKS - 93.61% $432,870,358 (Cost: $292,364,327) Principal Amount in Thousands SHORT-TERM SECURITIES Commercial Paper Depository Institutions - 0.03% U.S. Bancorp, Master Note............................ $ 129 129,000 Electric, Gas and Sanitary Services - 0.88% Pacificorp, 5.45%, 2-3-97 ......................... 1,925 1,915,383 Western Resources Inc., 5.6%, 1-16-97 ......................... 2,165 2,159,948 Total ................................. 4,075,331 Food and Kindred Products - 0.04% General Mills, Inc., Master Note............................ 196 196,000 Food Stores - 0.77% Albertson's Inc., 5.45%, 2-7-97 ......................... 3,560 3,540,059 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE INCOME PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value SHORT-TERM SECURITIES (Continued) Commercial Paper (Continued) Instruments and Related Products - 1.46% Baxter International Inc., 5.5%, 1-17-97 ......................... 6,780 6,763,427 Metal Mining - 1.17% BHP Finance (USA) Inc., 5.35%, 1-28-97 ........................ 5,425 5,403,232 Textile Mill Products - 0.19% Sara Lee Corporation, Master Note............................ 902 902,000 Total Commercial Paper - 4.54% 21,009,049 Municipal Obligations - 2.19% Louisiana Industrial Development Board of the Parish of Calcasieu, Inc., Environmental Revenue Bonds (CITGO Petroleum Corporation Project), Series 1996 (Taxable), (ABN AMRO Bank N.V.), 5.48%, 1/9/97 ......................... 10,100 10,100,000 TOTAL SHORT-TERM SECURITIES - 6.73% $ 31,109,049 (Cost: $31,109,049) TOTAL INVESTMENT SECURITIES - 100.34% $463,979,407 (Cost: $323,473,376) LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.34%) (1,587,987) NET ASSETS - 100.00% $462,391,420 See Notes to Schedules of Investments on page 75. INTERNATIONAL PORTFOLIO MANAGER'S LETTER DECEMBER 31, 1996 - --------------------------------------------------------------------------- Dear Policyholder: This report relates to the operation of the International Portfolio during the fiscal year ended December 31, 1996. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. During 1996, inflation remained subdued and global economic growth continued to slow, especially in Continental Europe, despite generally declining worldwide interest rates. The Japanese economy experienced strong growth during the first half of the year, but slowed during the remainder of 1996 due primarily to lower domestic demand. The U.S. Dollar remained strong against most major world currencies in 1996, rising roughly 7% against Continental European currencies and nearly 12% against the Japanese Yen. During the past year, the Portfolio emphasized investments in European companies engaged in corporate restructuring, primarily in Scandinavia, Germany and Great Britain. In the Pacific Basin, we concentrated on Hong Kong companies in the banking and real estate sectors and those with significant activities in China. As the value of the U.S. Dollar rose throughout the year, we focused on exporters and hedged a part of our currency exposure to protect the value of our foreign assets. We limited our exposure in Japan to blue chip issues that may benefit from the current devaluation of the Yen. Infrastructure stocks were preferred for emerging economies with strong government spending plans. 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 Scandinavia, Mexico and Hong Kong, and lower exposure to Japanese investments. We expect global inflation to remain subdued in 1997. The value of the U.S. Dollar may continue to rise, but it should be at a slower pace than that experienced in 1996. Latin American countries should continue their gradual recoveries, as their governments take steps to privatize and deregulate various industries. European economies may show signs of recovery later in the year, driven primarily by exports. Japan's economic outlook remains clouded by fiscal tightening and continued structural problems. We anticipate that Hong Kong's economy will strengthen during the transition to Chinese rule, driven by higher property prices and increased private consumption. We expect to continue our investment strategy of focusing on quality growth stocks in areas of the world experiencing economic growth and in emerging markets experiencing deregulation and privatization. Thank you very much for your continued support and confidence. Respectfully, Thomas A. Mengel Manager, International Portfolio 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 12,378 11,782 - ----- TMK/United International Portfolio* -- $12,378 +++++ Morgan Stanley E.A.FE. Index** -- $11,782 *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 12/31/96 15.09% 2+ Years Ended 12/31/96++ 8.33% +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 12-31-96. 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. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS Argentina - 1.65% Disco S.A., Sponsored ADR* ............. 46,700 $ 1,319,275 Australia - 2.34% Publishing & Broadcasting PBL (A) ...... 150,000 729,718 Westpac Banking Corporation Limited (A) 200,000 1,138,297 Total ................................. 1,868,015 Brazil - 0.96% Telebras S.A., ADR ...................... 10,000 765,000 Denmark - 2.34% Bang & Olufsen Holding A/S, Class B (A) 20,000 972,607 Neurosearch A/S (A)* ................... 20,000 893,064 Total ................................. 1,865,671 Finland - 1.09% Nokia Corporation, Series K (A) ........ 15,000 868,241 France - 4.01% Business Objects S.A., ADR* ............ 31,000 422,375 But S.A. (A) ........................... 8,000 470,434 Compagnie Generale des Eaux (A) ........ 7,500 929,782 Elf Aquitaine S.A. (A) ................. 7,000 637,419 Societe Industrielle de Transports Automobiles S.A. (A) .................. 3,500 742,283 Total ................................. 3,202,293 Germany - 9.67% CKAG Colonia Konzern AG (A) ............ 11,000 908,027 Commerzbank AG (A) ..................... 30,000 762,431 Daimler-Benz AG (A)* ................... 31,500 2,170,296 GILDEMEISTER Aktiengesellschaft (A)* ... 8,750 383,897 Herlitz International Trading AG (A) ... 1,500 382,190 Mannesmann AG (A) ...................... 4,300 1,864,218 Metallgesellschaft AG (A)* ............. 20,000 409,490 Schering AG (A) ........................ 10,000 844,329 Total ................................. 7,724,878 Hong Kong - 11.12% Amoy Properties Ltd. (A) ............... 500,000 720,796 Cheung Kong Holdings Ltd. (A) .......... 100,000 888,875 Cheung Kong Infrastructure Holdings Limited (A)* .......................... 254,000 673,217 First Pacific Company Limited (A) ...... 750,000 974,530 Guangdong Corporation Limited (A) ...... 1,000,000 963,217 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Hong Kong (Continued) Guangdong Tannery Ltd.(A)* ............. 50,000 $ 12,606 Guangnan Holdings Limited (A) .......... 800,000 687,827 HSBC Holdings plc (A) .................. 60,000 1,283,858 Hysan Development Company Limited (A) .. 150,000 597,324 JCG Holdings Ltd. (A) .................. 650,000 634,495 National Mutual Asia Ltd. (A) .......... 800,000 760,230 Wing Hang Bank Limited (A) ............. 150,000 680,716 Total ................................. 8,877,691 Indonesia - 2.81% PT Bank NISP, F (A) .................... 500,000 566,018 PT Matahari Putra Prima, F (A) ......... 573,750 667,716 PT Steady Safe Transportation Service, F (A) ........................ 453,333 580,335 PT United Tractors, F (A) .............. 205,000 429,433 Total ................................. 2,243,502 Italy - 2.63% Istituto Mobiliare Italiano SpA (A)* .... 69,500 593,225 Mediolanum S.p.A. (A)* ................. 70,000 662,507 STET - Societa Financiaria Telefonica p.a. (A) ................... 250,000 844,657 Total .................................. 2,100,389 Japan - 6.20% Aloka Co. Ltd. (A) ..................... 13,000 148,174 Daiichi Corporation (A) ................ 30,000 606,165 Eisai Co., Ltd. (A) .................... 30,000 590,623 Matsushita Electric Industrial (A) ..... 40,000 652,793 NEC Corporation (A) .................... 60,000 725,326 Nintendo Corp., Ltd. (A) ............... 13,000 930,576 Promise Co., Ltd. (A) .................. 16,000 787,497 Xebio Co., Ltd. (A) .................... 17,000 506,433 Total ................................. 4,947,587 Mexico - 5.80% Corporacion Industrial Sanluis, S.A. de C.V., CPO (A) ...................... 75,500 468,039 Desc-Sociedad de Fomento Industrial, S.A. de C.V., Class B (A)* ............ 200,000 1,092,480 Empresas ICA Sociedad Controladora, S.A. de C.V., ADS* .................... 50,000 731,250 Gruma, S.A., Class B (A)* .............. 70,000 426,829 Grupo Financiero Bancomer, S.A. de C.V., B, CPO Shares (A)* .............. 2,000,000 800,305 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Mexico (Continued) Grupo Financiero Inbursa S.A. de C.V., Class B (A) ..................... 175,234 $ 598,805 Grupo Televisa, S.A., GDR* ............. 20,100 515,062 Total ................................. 4,632,770 Netherlands - 3.23% Internatio-Muller NV (A) ............... 25,000 628,439 Koninklijke Boskalis Westminster N.V. (A) .................. 35,000 709,528 Ordina Beheer N.V. (A)* ................ 10,000 448,885 Vendex International N.V. (A) .......... 18,500 791,862 Total ................................. 2,578,714 Norway - 2.32% Merkantildata A/S (A) .................. 61,000 1,115,976 Schibsted AS (A) ....................... 40,000 734,915 Total ................................. 1,850,891 Portugal - 0.80% Telecel-Comunicacaoes Pessoais, SA (A)* 10,000 638,504 Spain - 1.04% Sociedad General de Aquas de Barcelona, S.A. (A) ................... 20,000 833,526 Sweden - 9.72% Althin Medical AB, Class B (A) ......... 13,000 280,180 Astra AB, Class A (A) .................. 35,000 1,717,635 Biacore International AB, ADR* ......... 25,000 546,875 Celsius Industrier AB, Class B (A)* .... 20,000 313,092 Diligentia AB (A)* ..................... 15,000 234,819 Enator AB (A)* ......................... 30,000 762,342 Frontec AB, Class B (A)* ............... 54,900 943,381 Kinnevik AB, B Shares (A) .............. 21,500 588,612 Skandia Enskilda Banken, Class A (A) ... 150,000 1,529,052 Skandia Group Insurance Company Ltd. (A) 30,000 843,163 Total ................................. 7,759,151 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Switzerland - 6.56% Brauerei Eichhof AG (A) ................ 280 $ 564,896 CS Holding, Registered Shares (A) ...... 7,000 719,196 Choco Lindt & Spru AG, Registered (A) .. 50 912,538 Novartis AG (A)* ....................... 907 1,038,565 SMH Swiss Corporation for Microelectronics and Watchmaking Industries Ltd.(A) .... 1,000 616,453 Zurich Insurance Company (A) ........... 5,000 1,389,823 Total ................................. 5,241,471 Thailand - 1.42% Bank of Ayudhya Public Company Limited, F (A) ........................ 150,000 353,732 Srithai Superware Public Company Limited, F (A) ........................ 130,000 780,355 Total ................................. 1,134,087 United Kingdom - 8.29% Corporate Services Group plc (A) ....... 575,000 1,698,984 Dr Solomon's Group PLC, ADR* ........... 25,000 423,425 Michael Page Group plc (A) ............. 100,000 710,854 Professional Staff plc, ADR* ........... 55,000 467,500 Storehouse PLC (A) ..................... 150,000 664,177 Tomkins plc (A) ........................ 200,000 924,966 Vodafone Group Plc (A) ................. 250,000 1,057,716 Whitbread and Company, Public Limited Company (A) ........................... 50,000 674,026 Total ................................. 6,621,648 United States - 0.73% Rofin-Sinar Technologies Inc.* ......... 50,000 581,250 TOTAL COMMON STOCKS - 84.73% $67,654,554 (Cost: $58,433,029) PREFERRED STOCKS Brazil - 0.81% Banco Itau S.A., (A) ................... 1,500,000 649,976 Germany - 3.07% Marschollek, Lautenschlager und Partner AG (A) ........................ 12,890 1,792,954 Moebel Walther AG (A) .................. 10,000 656,484 Total ................................. 2,449,438 TOTAL PREFERRED STOCKS - 3.88% $ 3,099,414 (Cost: $1,946,091) See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value SHORT-TERM SECURITIES Communication - 2.81% Bell Atlantic Financial Services Inc., 5.33%, 1-24-97......................... $2,250 $ 2,242,338 Depository Institutions - 1.29% U.S. Bancorp, Master Note............................ 1,030 1,030,000 Food and Kindred Products - 0.43% General Mills, Inc., Master Note............................ 343 343,000 Food Stores - 2.81% Albertson's Inc., 5.35%, 1-21-97 ........................ 2,250 2,243,312 Forestry - 3.72% Weyerhaeuser Co., 5.45%, 2-24-97 ........................ 3,000 2,975,475 Textile Mill Products - 0.80% Sara Lee Corporation, Master Note............................ 637 637,000 TOTAL SHORT-TERM SECURITIES - 11.86% $ 9,471,125 (Cost: $9,471,125) TOTAL INVESTMENT SECURITIES - 100.47% $80,225,093 (Cost: $69,850,245) LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.47%) (375,640) NET ASSETS - 100.00% $79,849,453 See Notes to Schedules of Investments on page 75. SMALL CAP PORTFOLIO MANAGER'S LETTER DECEMBER 31, 1996 - --------------------------------------------------------------------------- Dear Policyholder: This report relates to the operation of the Small Cap Portfolio during the fiscal year ended December 31, 1996. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. The U.S. economy was characterized by moderate growth and low inflation in 1996. Government intervention in economic affairs was minimal during the year, paving the way for continued free market based reforms. We began 1996 by concentrating on small emerging companies in the areas of healthcare, technology and consumer services. This strategy proved successful during the first half of the year. However, the summer market correction was particularly hard on these sectors and they remained in a downward trend through the end of the year. While the major market indexes experienced significant advances in 1996, the gains were largely attributable to a limited number of companies with large market capitalizations that are heavily weighted in the indexes. The strategies and techniques we applied resulted in the Portfolio underperforming the Naddaq Industrials Index charted on the following page. That index reflects the performance of securities that generally represent the small companies sector of the stock market. The Portfolio's performance was negatively impacted, relative to the Nasdaq Industrials Index, by its lack of ownership of the mid to large cap issues that contributed most to the superior gains experienced by the index. In 1997, we anticipate continued moderate economic growth and a broadening of performance in the small cap sector due to the growing valuation disparity between comparable companies. We expect the consolidation trend of the past several years to continue, and possibly even accelerate, particularly in the technology and healthcare sectors. Further, we expect to continue our focus on companies with strong growth potential, especially those that can benefit from new products, geographic expansion and industry consolidation. Thank you very much for your continued support and confidence. Respectfully, Zachary H. Shafran Manager, Small Cap Portfolio 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 17,332 14,517 ----- TMK/United Small Cap Portfolio* -- $17,332 +++++ Nasdaq Industrials Index** -- $14,517 *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 12/31/96 8.33% 2+ Years Ended 12/31/96++ 22.91% +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 12-31-96. 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. THE INVESTMENTS OF THE SMALL CAP PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS Business Services - 24.45% America Online, Inc.* .................. 60,000 $ 1,995,000 Cerner Corporation* .................... 183,100 2,815,162 Dr Solomon's Group PLC, ADR* ........... 50,000 846,850 Health Systems Design Corporation* ..... 140,000 1,190,000 IMNET Systems, Inc.* ................... 90,000 2,160,000 Intelligroup, Inc.* .................... 45,000 511,875 Intuit Inc.* ........................... 50,000 1,587,500 Mechanical Dynamics, Inc.* ............. 105,500 1,443,979 Netscape Communications Corporation* ... 20,000 1,137,500 Object Design, Inc.* ................... 100,000 1,156,200 Parametric Technology Corporation* ..... 36,000 1,851,732 PHAMIS, Inc.* .......................... 110,000 1,430,000 Pure Atria Corporation* ................ 45,000 1,105,290 Segue Software, Inc.* .................. 60,000 1,083,720 Summit Medical Systems, Inc.* .......... 160,000 1,189,920 Sync Research, Inc.* ................... 120,000 1,627,440 Synopsys, Inc.* ........................ 15,000 690,000 Total ................................. 23,822,168 Chemicals and Allied Products - 1.28% Carson, Inc.* .......................... 90,000 1,248,750 Communication - 4.31% Intermedia Communications of Florida, Inc.* ................................ 100,000 2,568,700 MFS Communications Company, Inc.* ...... 30,000 1,631,250 Total ................................. 4,199,950 Eating and Drinking Places - 2.00% Longhorn Steaks, Inc.* ................. 90,000 1,710,000 Pizza Inn, Inc.* ....................... 50,000 234,350 Total ................................. 1,944,350 Electronic and Other Electric Equipment - 2.91% Etec Systems, Inc.* .................... 64,000 2,416,000 XeTel Corporation* ..................... 105,000 413,385 Total ................................. 2,829,385 Engineering and Management Services - 4.18% Owen Healthcare, Inc.* ................. 70,000 1,855,000 Transition Systems, Inc.* .............. 160,000 2,220,000 Total ................................. 4,075,000 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE SMALL CAP PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Health Services - 11.15% American Healthcorp, Inc.* ............. 100,000 $ 1,137,500 Emeritus Corporation* .................. 50,000 675,000 Inphynet Medical Management Inc.* ...... 115,000 2,026,875 Physicians Resource Group, Inc.* ....... 85,000 1,508,750 Quorum Health Group, Inc.* ............. 100,000 2,962,500 Renal Care Group, Inc.* ................ 66,000 2,107,842 Sterling House Corporation* ............ 50,000 437,500 Total ................................. 10,855,967 Industrial Machinery and Equipment - 2.30% Integrated Process Equipment Corp.* .... 125,000 2,242,125 Instruments and Related Products - 15.76% Cymer, Inc.* ........................... 102,000 4,915,074 DePuy, Inc.* ........................... 100,000 2,025,000 Hologic, Inc.* ......................... 65,000 1,608,750 LUNAR CORPORATION* ..................... 40,000 1,385,000 St. Jude Medical, Inc.* ................ 40,000 1,705,000 Ventritex, Inc.* ....................... 65,000 1,588,405 Waters Corporation* .................... 70,000 2,126,250 Total ................................. 15,353,479 Insurance Agents, Brokers and Service - 0.92% CRA Managed Care, Inc.* ................ 20,000 892,500 Insurance Carriers - 1.96% CMAC Investment Corporation ............ 52,000 1,911,000 Personal Services - 3.45% Carriage Services, Inc.* ............... 85,000 1,885,895 Equity Corporation International* ...... 75,000 1,471,875 Total ................................. 3,357,770 Real Estate - 2.09% Stewart Enterprises, Inc., Class A ..... 60,000 2,040,000 Wholesale Trade -- Durable Goods - 0.92% OmniCare, Inc. ......................... 28,000 899,500 TOTAL COMMON STOCKS - 77.68% $75,671,944 (Cost: $66,660,069) Principal Amount in Thousands CORPORATE DEBT SECURITIES - 2.17% Holding and Other Investment Offices LTC Properties, Inc., Convertible: 8.25%, 7-1-2001 ....................... $1,000 1,037,500 7.75%, 1-1-2002 ....................... 1,000 1,075,000 Total ................................. 2,112,500 (Cost: $2,000,000) See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE SMALL CAP PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value SHORT-TERM SECURITIES Auto Repair, Services and Parking - 3.79% PHH Corporation, 5.57%, 1-31-97 ........................ $3,705 $ 3,687,802 Depository Institutions - 3.75% U.S. Bancorp, Master Note............................ 3,655 3,655,000 Food and Kindred Products - 4.74% General Mills, Inc., Master Note...........................z 4,620 4,620,000 Food Stores - 3.16% Albertson's Inc., 5.35%, 1-21-97 ........................ 3,085 3,075,831 Nondepository Institutions - 1.67% Island Finance Puerto Rico Inc., 5.55%, 1-31-97 ........................ 1,635 1,627,438 Textile Mill Products - 2.94% Sara Lee Corporation, Master Note............................ 2,865 2,865,000 TOTAL SHORT-TERM SECURITIES - 20.05% $19,531,071 (Cost: $19,531,071) TOTAL INVESTMENT SECURITIES - 99.90% $97,315,515 (Cost: $88,191,140) CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.10% 92,775 NET ASSETS - 100.00% $97,408,290 See Notes to Schedules of Investments on page 75. BALANCED PORTFOLIO MANAGER'S LETTER DECEMBER 31, 1996 - --------------------------------------------------------------------------- Dear Policyholder: This report relates to the operation of the Balanced Portfolio for the fiscal year ended December 31, 1996. The discussion, graphs and tables contained in this report will provide you with information regarding the Portfolio's performance during that period. During 1996, the economy experienced modest growth with continuing low interest and inflation rates. However, perceptions regarding the direction and strength of the economy varied widely during the past fiscal year, contributing to volatility and uncertainty in both the equity and fixed income markets. Inflation concerns, prompted by upward wage pressures and increased energy prices, affected the performance of both the equity and fixed income markets and caused investors to gravitate towards growth companies that enjoy a perception of stability regardless of economic strength. In 1996, we continued to pursue a strategy of attempting to increase total return while striving to preserve capital. In an attempt to reduce investment risk, we continued to diversify the Portfolio's investments across a broad section of industries. We maintained a cash position during the past fiscal year to enable us to react to interest rate changes and take advantage of investment opportunities we perceived as being attractive. 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 Lehman Brothers Government/Corporate Bond Index). A variety of indexes is presented because the Portfolio invests in stocks and bonds. The Portfolio's fixed income investments and our strategy of maintaining a cash position contributed to the underperformance of the Portfolio as compared to the S&P 500 Index. We anticipate moderate economic growth during 1997. High current levels of household debt and weak export markets, particularly in Europe, should hinder economic growth during the first half of the year. Intimations from the Federal Reserve and prevailing economic conditions make us cautious that steps may be taken to raise interest rates in the event signs of inflation appear. Market reaction to such an increase could be swift and significant. Accordingly, we expect to maintain a diversified and defensive position, while continuing to invest in securities that present the opportunity for positive long-term returns consistent with the Portfolio's objectives. Thank you very much for your continued support and confidence. Respectfully, Cynthia P. Prince-Fox Manager, Balanced Portfolio Comparison of Change in Value of $10,000 Investment in TMK/United Balanced Portfolio, The S&P 500 Index and The Lehman Brothers Government/Corporate Bond Index Lehman Brothers Standard Government/ TMK/United & Poor's Corporate Balanced 500 Bond Portfolio Index Index ---------- -------- ----------- 05/03/94 Purchase $10,000 $10,000 $10,000 12/31/94 9,963 10,398 10,046 12/31/95 12,373 14,306 11,979 12/31/96 13,715 17,591 12,327 ===== TMK/United Balanced Portfolio* -- $13,715 - ----- S&P 500 Index** -- $17,591 +++++ Lehman Bros Gov't/Corp Bond Index** -- $12,327 *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 and the Lehman Brothers Government/Corporate Bond Index (including income) are not available, investment in the indexes was effected as of April 30, 1994. Annual Average Total Return+ ---------------------------- Year Ended 12/31/96 10.84% 2+ Years Ended 12/31/96++ 12.58% +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 12-31-96. 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. THE INVESTMENTS OF THE BALANCED PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS Apparel and Accessory Stores - 1.38% Gap, Inc. (The) ........................ 10,000 $ 301,250 Talbots, Inc. (The) .................... 10,000 286,250 Total ................................. 587,500 Apparel and Other Textile Products - 0.82% Liz Claiborne, Inc. .................... 9,000 347,625 Building Materials and Garden Supplies - 1.32% Sherwin-Williams Company (The) ......... 10,000 560,000 Business Services - 0.60% Broderbund Software, Inc.* ............. 6,300 187,028 Electronic Data Systems Corporation .... 1,548 66,951 Total ................................. 253,979 Chemicals and Allied Products - 10.30% American Home Products Corporation ..... 7,000 410,375 Avon Products, Inc. .................... 8,300 474,138 Crompton & Knowles Corporation ......... 14,300 275,275 Dow Chemical Company (The) ............. 5,500 431,063 du Pont (E.I.) de Nemours and Company .. 2,400 226,500 IMC Global, Inc. ....................... 13,000 508,625 Merck & Co., Inc. ...................... 6,600 523,050 Nalco Chemical Company ................. 7,000 252,875 Pfizer Inc. ............................ 5,500 455,812 Praxair, Inc. .......................... 8,800 405,900 Warner-Lambert Company ................. 5,400 405,000 Total ................................. 4,368,613 Communication - 2.79% AT&T Corporation ....................... 7,300 317,550 GTE Corporation ........................ 5,300 241,150 Nokia Corporation, Series A, ADS ....... 1,600 92,200 SBC Communications Inc. ................ 10,300 533,025 Total ................................. 1,183,925 Depository Institutions - 2.99% BankAmerica Corporation ................ 4,500 448,875 Comerica Incorporated .................. 5,900 309,013 Wells Fargo & Company .................. 1,900 512,525 Total ................................. 1,270,413 Electric, Gas and Sanitary Services - 1.81% Baltimore Gas and Electric Company ..... 7,600 203,300 Houston Industries Incorporated ........ 12,000 271,500 Southern Company (The) ................. 13,000 294,125 Total ................................. 768,925 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE BALANCED PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Electronic and Other Electric Equipment - 6.51% AMP Incorporated ....................... 10,800 $ 414,450 Duracell International Inc. ............ 7,500 524,062 Emerson Electric Co. ................... 4,500 435,375 General Electric Company ............... 7,500 741,563 LSI Logic Corporation* ................. 20,000 535,000 Lucent Technologies Inc. ............... 2,365 109,381 Total ................................. 2,759,831 Food and Kindred Products - 1.55% ConAgra, Inc. .......................... 5,900 293,525 PepsiCo, Inc. .......................... 12,400 362,700 Total ................................. 656,225 Forestry - 1.15% Georgia-Pacific Corporation ............ 6,800 489,600 General Merchandise Stores - 0.60% May Department Stores Company (The) .... 5,400 252,450 Health Services - 1.01% Tenet Healthcare Corporation* .......... 19,600 428,750 Heavy Construction, Excluding Building - 1.23% bufete industrial, s.a., ADR* .......... 15,000 318,750 Foster Wheeler Corporation ............. 5,500 204,187 Total ................................. 522,937 Holding and Other Investment Offices - 2.84% LTC Properties, Inc. ................... 18,000 333,000 National Health Investors, Inc. ........ 12,000 454,500 Zurich Insurance Company (A) ........... 1,500 416,947 Total ................................. 1,204,447 Industrial Machinery and Equipment - 2.12% Applied Materials, Inc.* ............... 13,000 467,181 Deere & Company ........................ 6,000 243,750 York International Corporation ......... 3,400 189,975 Total ................................. 900,906 Instruments and Related Products - 1.60% General Motors Corporation, Class H .... 6,600 371,250 St. Jude Medical, Inc.* ................ 7,200 306,900 Total ................................. 678,150 Insurance Carriers - 1.90% Chubb Corporation (The) ................ 6,200 333,250 ITT Hartford Group, Inc. ............... 4,100 276,750 United HealthCare Corporation .......... 4,400 198,000 Total ................................. 808,000 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE BALANCED PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS (Continued) Nondepository Institutions - 2.11% Associates First Capital Corporation* .. 8,600 $ 379,475 Federal Home Loan Mortgage Corporation . 4,700 517,587 Total ................................. 897,062 Nonmetallic Minerals, Except Fuels - 1.20% Potash Corporation of Saskatchewan Inc. 6,000 510,000 Oil and Gas Extraction - 1.85% Noble Affiliates, Inc. ................. 8,500 406,937 Schlumberger Limited ................... 3,800 379,525 Total ................................. 786,462 Paper and Allied Products - 0.79% Champion International Corporation ..... 5,800 250,850 Union Camp Corporation ................. 1,800 85,950 Total ................................. 336,800 Petroleum and Coal Products - 2.18% Mobil Corporation ...................... 2,800 342,300 Royal Dutch Petroleum Company .......... 3,400 580,550 Total ................................. 922,850 Primary Metal Industries - 1.20% Nucor Corporation ...................... 10,000 510,000 Printing and Publishing - 2.29% Belo (A. H.) Corporation, Class A ...... 11,000 383,625 McGraw-Hill, Inc. ...................... 5,200 239,850 Viacom Inc., Class B* .................. 10,000 348,750 Total ................................. 972,225 Railroad Transportation - 0.29% Conrail Inc. ........................... 1,224 121,941 Textile Mill Products - 1.56% Sara Lee Corporation ................... 9,700 361,325 Unifi, Inc. ............................ 9,300 298,763 Total ................................. 660,088 Transportation by Air - 0.29% Delta Air Lines, Inc. .................. 456 32,319 Southwest Airlines Co. ................. 4,000 88,500 Total ................................. 120,819 Wholesale Trade -- Nondurable Goods - 0.73% Nu Skin Asia Pacific, Inc. - A* ........ 10,000 308,750 TOTAL COMMON STOCKS - 57.01% $24,189,273 (Cost: $20,873,288) See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE BALANCED PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES Building Materials and Garden Supplies - 0.92% Home Depot, Inc. (The), Convertible, 3.25%, 10-1-2001 ...................... $ 400 $ 390,000 Electronic and Other Electric Equipment - 0.87% Cooper Industries, Inc., 6.0%, 1-1-99 (Exchangeable) ........... 257 368,125 Oil and Gas Extraction - 0.68% Enron Corp., 6.25%, 12-13-98 (Exchangeable) ........ 261 288,000 Security and Commodity Brokers - 0.71% Salomon Inc., 7.625%, 5-15-99 (Exchangeable) ........ 266 302,500 TOTAL CORPORATE DEBT SECURITIES - 3.18% $ 1,348,625 (Cost: $1,183,750) UNITED STATES GOVERNMENT SECURITIES - 31.03% United States Treasury: 5.625%, 8-31-97 ....................... 1,000 1,000,310 5.125%, 2-28-98 ....................... 1,000 993,590 5.5%, 2-28-99 ......................... 1,000 991,560 6.875%, 8-31-99 ....................... 250 255,235 7.75%, 11-30-99 ....................... 1,500 1,567,260 7.125%, 2-29-2000 ..................... 500 514,765 6.375%, 8-15-2002 ..................... 1,100 1,107,216 7.5%, 2-15-2005 ....................... 3,250 3,475,973 6.25%, 8-15-2023 ...................... 250 234,375 6.75%, 8-15-2026 ...................... 3,000 3,022,500 Total ................................. $13,162,784 (Cost: $13,168,658) SHORT-TERM SECURITIES Depository Institutions - 4.04% U.S. Bancorp, Master Note............................ 1,712 1,712,000 Electric, Gas and Sanitary Services - 2.70% Commonwealth Edison Co., 5.67%, 1-24-97 ........................ 1,150 1,145,834 Food and Kindred Products - 0.68% General Mills, Inc., Master Note............................ 288 288,000 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE BALANCED PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value SHORT-TERM SECURITIES (Continued) Textile Mill Products - 0.42% Sara Lee Corporation, Master Note............................ $ 180 $ 180,000 TOTAL SHORT-TERM SECURITIES - 7.84% $ 3,325,834 (Cost: $3,325,834) TOTAL INVESTMENT SECURITIES - 99.06% $42,026,516 (Cost: $38,551,530) CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.94% 400,542 NET ASSETS - 100.00% $42,427,058 See Notes to Schedules of Investments on page 75. ASSET STRATEGY PORTFOLIO MANAGER'S LETTER DECEMBER 31, 1996 - --------------------------------------------------------------------------- Dear Policyholder: This report relates to the operation of the Asset Strategy Portfolio for the fiscal year ended December 31, 1996. The discussion, graphs and tables contained in this report will provide you with information regarding the Portfolio's performance during that period. 1996 was characterized by modest economic growth, low inflation and slowing growth rates for U.S. corporate earnings. Interest rates rose modestly for the year, but experienced substantial volatility. The U.S. equity market achieved another positive year, while investor confidence ranged from fear in July to euphoria by year end. Our management style remained unchanged during the past fiscal year. We continued to focus on value and confined our investments to stocks and bonds in sectors and asset groups that have been out of favor, permitting us to limit risk to the Portfolio. Unfortunately, the prevailing investment environment in 1996 did not favor such a low risk value-oriented approach. 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 fairly consistent with 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 Lehman Brothers Aggregate Bond Index). A variety of indexes is presented because the Portfolio invests in stocks, bonds and other instruments. The Portfolio underperformed the S&P 500 Index primarily due to its conservative positioning away from exposure to U.S. stocks. In 1997, the prevailing trend during much of the past six years could be challenged as valuations for U.S. stocks continue to break records. We anticipate maintaining a relatively low exposure to U.S. stocks as 1997 begins, awaiting more reasonable prices. We will continue to have a meaningful exposure to U.S. government bonds, U.S. industrial bonds and foreign stocks. We will also maintain a cash position to take advantage of attractive investment opportunities as they develop. Thank you very much for your continued support and confidence. Respectfully, James D. Wineland Manager, Asset Strategy Portfolio 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, and The Salomon Brothers Short-Term Index for 1 Month Certificates of Deposit Salomon Brothers Lehman Short-Term United Brothers Index Asset S&P Aggregate for 1 month Strategy 500 Bond Certificates Portfolio Index Index of Deposit --------- --------- ---------- ---------- 05/01/95Purchase $10,000 $10,000 $10,000 $10,000 12/31/95 10,180 12,179 11,123 10,401 12/31/96 10,783 14,975 11,525 10,976 ====TMK/United Asset Strategy Portfolio* -- $10,785 ++++ S&P 500 Index** -- $14,975 ****Lehman Brothers Aggregate Bond Index** -- $11,525 *-*-Salomon Brothers Short-Term Index for 1 Month Certificates of Deposit** - - - $10,976 *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 12/31/96 5.92% 1+ Years Ended 12/31/96++ 4.61% +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 12-31-96. 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. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS Business Services - 4.66% Broderbund Software, Inc.* ............. 8,000 $ 237,496 Maxis, Inc.* ........................... 13,000 157,625 Total ................................. 395,121 Chemicals and Allied Products - 4.19% IMC Global, Inc. ....................... 4,000 156,500 Nalco Chemical Company ................. 5,500 198,688 Total ................................. 355,188 Communication - 5.59% Cox Communications, Inc.* .............. 9,000 208,125 Nokia Corporation, Series A, ADS ....... 2,400 138,300 360 Communications Company* ............ 5,500 127,187 Total ................................. 473,612 Eating and Drinking Places - 2.12% Sonic Corp.* ........................... 7,100 179,275 Food and Kindred Products - 4.52% Seagram Company Ltd. (The) ............. 4,500 174,375 Whitbread and Company, Public Limited Company (A) ................... 15,500 208,948 Total ................................. 383,323 Heavy Construction, Excluding Building - 1.98% Koninklijke Boskalis Westminster N.V. (A) 8,288 168,016 Holding and Other Investment Offices - 0.98% LTC Properties, Inc. ................... 4,500 83,250 Oil and Gas Extraction - 2.98% Kerr-McGee Corporation ................. 3,500 252,000 Textile Mill Products - 0.98% Polymer Group, Inc.* .................... 6,000 83,250 TOTAL COMMON STOCKS - 28.00% $2,373,035 (Cost: $2,228,144) See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES Amusement and Recreation Services - 2.34% Trump Atlantic City Associates, 11.25%, 5-1-2006 ...................... $200 $ 198,000 Communication - 1.93% MFS Communications Company, Inc., 0.0%, 1-15-2006 (B) ................... 225 163,688 Electronic and Other Electric Equipment - 1.53% VLSI Technology, Inc., Convertible, 8.25%, 10-1-2005 ...................... 130 129,432 Paper and Allied Products - 3.68% Buckeye Cellulose Corporation, 9.25%, 9-15-2008 ...................... 300 312,000 Printing and Publishing - 1.81% Viacom International Inc., 9.125%, 8-15-99 ....................... 150 153,375 Security and Commodity Brokers - 2.00% Salomon Inc., 7.625%, 5-15-99 (Exchangeable) ........ 149 169,400 TOTAL CORPORATE DEBT SECURITIES - 13.29% $1,125,895 (Cost: $1,079,703) UNITED STATES GOVERNMENT SECURITIES United States Treasury: 6.875%, 2-28-97 ....................... 40 40,100 6.125%, 5-31-97 ....................... 400 401,124 7.25%, 2-15-98 ........................ 60 60,984 6.375%, 7-15-99 ....................... 1,050 1,059,513 7.125%, 2-29-2000 ..................... 60 61,772 7.5%, 2-15-2005 ....................... 130 139,039 5.875%, 11-15-2005 .................... 1,050 1,012,431 9.125%, 5-15-2018 ..................... 450 570,024 TOTAL UNITED STATES GOVERNMENT SECURITIES - 39.47% $3,344,987 (Cost: $3,378,749) See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value SHORT-TERM SECURITIES Depository Institutions - 1.85% U.S. Bancorp, Master Note ........................... $157 $ 157,000 Food and Kindred Products - 3.49% General Mills, Inc., Master Note ........................... 296 296,000 Food Stores - 3.82% Albertson's Inc., 5.45%, 2-7-97 ......................... 325 323,180 Personal Services - 4.71% Block Financial Corp., 5.43%, 1-22-97 ........................ 400 398,733 Textile Mill Products - 4.32% Sara Lee Corporation, Master Note ........................... 366 366,000 TOTAL SHORT-TERM SECURITIES - 18.19% $1,540,913 (Cost: $1,540,913) TOTAL INVESTMENT SECURITIES - 98.95% $8,384,830 (Cost: $8,227,509) CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.05% 89,368 NET ASSETS - 100.00% $8,474,198 See Notes to Schedules of Investments on page 75. MONEY MARKET PORTFOLIO MANAGER'S LETTER DECEMBER 31, 1996 - --------------------------------------------------------------------------- Dear Policyholder: This report covers the operation of the Money Market Portfolio for the fiscal year ended December 31, 1996. The following discussion and tables provide you with information regarding the Portfolio's performance during that period. During the beginning of 1996, the U.S. economy experienced slow growth and little inflationary pressure. In response to the slow economy, the Federal Reserve took action in the early part of 1996 to ease short-term interest rates. The Federal Reserve made no additional interest rate changes throughout the remainder of the year. Due to a positively sloped yield curve, we extended the average maturity on a portion of the Portfolio's holdings to between six months and one year to take advantage of higher yields. We also maintained a large position in floating- rate securities which reset at, or slightly above, current market rates at frequent intervals. We anticipate continued moderate economic growth in 1997. We also expect unemployment rates to remain at historically low levels. If these economic conditions prevail, increasing wage pressures may prompt the Federal Reserve to tighten its monetary policies in an effort to prevent inflationary tendencies. In response, the Fund would shorten the average maturity of its fixed-rate holdings to take advantage of the higher interest rates. In any event, the Fund will continue to respond to changing economic and market conditions. Thank you very much for your continued support and confidence. Respectfully, Richard K. Poettgen Manager, Money Market Portfolio THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value BANK OBLIGATIONS Certificates of Deposit Domestic - 2.68% Bankers Trust New York Corp., 5.47%, 1-7-97 ......................... $1,000 $ 999,753 Yankee - 5.37% Creditanstalt - Bankverein, 5.38%, 3-7-97 ......................... 1,000 1,000,000 Societe Generale - New York, 5.3%, 2-21-97 ......................... 1,000 1,000,000 Total ................................. 2,000,000 Total Certificates of Deposit - 8.05% 2,999,753 Notes - 5.37% Comerica Bank, 5.5855%, 2-14-97....................... 1,000 1,000,000 PNC Bank, N.A., 5.5037%, 1-13-97 ...................... 1,000 999,696 Total ................................. 1,999,696 TOTAL BANK OBLIGATIONS - 13.42% $ 4,999,449 (Cost: $4,999,449) CORPORATE OBLIGATIONS Commercial Paper Electric, Gas and Sanitary Services - 2.03% Carolina Power & Light Co., 5.4%, 2-12-97 ......................... 760 755,212 Food and Kindred Products - 4.19% General Mills, Inc., Master Note ........................... 1,559 1,559,000 Forestry - 3.39% Weyerhaeuser Co., 5.45%, 2-20-97 ........................ 1,272 1,262,372 Insurance Carriers - 2.67% Transamerica Finance Corporation, 5.38%, 1-28-97 ........................ 1,000 995,965 Metal Mining - 3.08% BHP Finance (USA) Inc., 5.4%, 2-5-97 .......................... 1,155 1,148,936 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE OBLIGATIONS (Continued) Commercial Paper (Continued) Nondepository Institutions - 2.68% General Electric Capital Corporation, 5.47%, 1-17-97 ........................ $1,000 $ 997,569 Personal Services - 2.67% Block Financial Corp., 5.55%, 1-27-97 ........................ 1,000 995,992 Textile Mill Products - 1.62% Sara Lee Corporation, Master Note ........................... 602 602,000 Tobacco Products - 2.68% B.A.T. Capital Corp., 5.4%, 1-17-97 ......................... 1,000 997,600 Transportation Equipment - 2.66% Echlin, Inc., 5.55%, 2-18-97 ........................ 1,000 992,600 Total Commercial Paper - 27.67% 10,307,246 Notes Auto Repair, Services and Parking - 2.68% PHH Corporation, 5.8105%, 3-26-97 ...................... 1,000 999,864 Nondepository Institutions - 5.37% Caterpillar Financial Services Corp., 5.9585%, 1-1-97 ....................... 1,000 1,000,000 Deere (John) Capital Corp., 5.95%, 6-30-97 ........................ 1,000 999,475 Total ................................. 1,999,475 Security and Commodity Brokers - 2.68% Merrill Lynch & Co., Inc., 5.6541%, 5-29-97 ...................... 1,000 1,000,000 Total Notes - 10.73% 3,999,339 TOTAL CORPORATE OBLIGATIONS - 38.40% $14,306,585 (Cost: $14,306,585) See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value MUNICIPAL OBLIGATIONS California - 8.05% California Pollution Control Financing Authority, Environmental Improvement Revenue Bonds (Shell Martinez Refining Company Project), Series 1996 (Taxable), 5.52%, 1-2-97 ......................... $1,000 $ 1,000,000 City of Anaheim, California, Certificates of Participation (1993 Arena Financing Project), Municipal Adjustable Rate Taxable Securities (Credit Suisse), 5.56%, 5-1-97 ......................... 1,000 1,000,000 Oakland-Alameda County Coliseum Lease Revenue Bonds (Oakland Coliseum Project),1995 Series B-1 (Canadian Imperial Bank of Commerce), 5.42%, 1-3-97 ......................... 1,000 1,000,000 Total ................................. 3,000,000 Indiana - 2.68% City of Whiting, Indiana, Industrial Sewage and Solid Waste Disposal Revenue Bonds (Amoco Oil Company Project), Taxable Series 1995, 5.55%, 1-13-97 ........................ 1,000 1,000,000 Louisiana - 2.68% Industrial District No. 3 of the Parish of West Baton Rouge, State of Louisiana, Variable Rate Demand Revenue Bonds (The Dow Chemical Company Project), Series 1995 (Taxable), 5.45%, 1-17-97 ........................ 1,000 1,000,000 New York - 4.57% Health Insurance Plan of Greater New York (Morgan Guaranty Trust Company of New York), 5.8%, 1-1-97 .......................... 1,700 1,700,000 Pennsylvania - 3.37% Monroe County Industrial Development Authority, Manufacturing Facilities Revenue Bonds (United Steel Enterprises, Inc., Project), Taxable Variable Rate Demand/ Fixed Rate Revenue Bonds, Series B of 1996 (CoreStates Bank, N.A.), 5.75%, 1-1-97 ......................... 165 165,000 Montgomery County Industrial Development Authority, Taxable Fixed Rate/Variable Rate Demand Revenue Bonds (410 Horsham Associates Project), Series of 1995 (Meridian Bank), 5.75%, 1-1-97 ......................... 200 200,000 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value MUNICIPAL OBLIGATIONS (Continued) Pennsylvania (Continued) Schuylkill County Industrial Development Authority, Commercial Development Revenue Bonds (Midway Supermarket, Inc. Project), Taxable Series of 1995 (Meridian Bank), 5.75%, 1-1-97 ......................... $ 890 $ 890,000 Total ................................. 1,255,000 South Dakota - 2.68% Central Plains Clinic Ltd., Floating Rate Taxable Bonds, Series 1996 (Cooperatieve Centrale Raiffeisen-Borenleenbank B.A., "Rabobank Nederland," New York Branch), 5.55%, 1-21-97 ........................ 1,000 1,000,000 Texas - 6.19% City of Brownsville, Texas, Utilities System, Taxable Commercial Paper Notes, Series A (The Toronto-Dominion Bank), 5.48%, 1-15-97 ........................ 1,316 1,313,195 Metrocrest Hospital Authority, Series 1989A (The Bank of New York), 5.406%, 3-3-97 ........................ 1,000 990,840 Total ................................. 2,304,035 TOTAL MUNICIPAL OBLIGATIONS - 30.22% $11,259,035 (Cost: $11,259,035) UNITED STATES GOVERNMENT OBLIGATIONS Federal Farm Credit Banks, 4.95%, 3-3-97.......................... 1,000 999,285 Federal Home Loan Banks, 5.82%, 11-6-97 ........................ 1,000 1,000,074 Federal National Mortgage Association, 5.15%, 6-20-97......................... 1,000 999,540 Student Loan Marketing Association, 5.52%, 1-7-97.......................... 1,000 1,000,000 TOTAL UNITED STATES GOVERNMENT OBLIGATIONS - 10.73% $ 3,998,899 (Cost: $3,998,899) TOTAL INVESTMENT SECURITIES - 92.77% $34,563,968 (Cost: $34,563,968) CASH AND OTHER ASSETS, NET OF LIABILITIES - 7.23% 2,693,634 NET ASSETS - 100.00% $37,257,602 See Notes to Schedules of Investments on page 75. LIMITED-TERM BOND PORTFOLIO MANAGER'S LETTER DECEMBER 31, 1996 - --------------------------------------------------------------------------- Dear Policyholder: This report relates to the operation of the Limited-Term Bond Portfolio for the fiscal year ended December 31, 1996. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. During the beginning of 1996, the U.S. economy experienced a strong upturn in activity, prompting inflation concerns among a majority of market participants and an expectation that the Federal Reserve would take steps to raise short-term interest rates. These concerns caused a sell off in the bond market, with the yield on the five year Treasury note increasing from a low of 5.13% in February to a high of 6.84% in June. With the increased yields, the total return for bonds was negative through the first half of 1996, as measured by most indexes. As the third quarter of 1996 began, economic growth began to slow. As a result, the Federal Reserve took no action with respect to short- term rates and the bond market responded by rallying during much of the remainder of the year. In response to the prevailing economic conditions, the Portfolio increased its exposure to mortgage-backed and corporate bonds. Mortgage-backed bonds tend to provide attractive yield and total return characteristics in an environment of rising interest rates. Corporate bonds typically provide superior yield and are attractive during periods of economic growth. We also attempted to maintain an average maturity for the Portfolio's holdings near the mid-point of the two to five year range. The strategies and techniques we applied resulted in the Portfolio underperforming the Lehman Brothers Mutual Fund Short Investment Grade Debt Index as charted on the following page. That index reflects the performance of securities that generally represent the short-maturity sector of the bond market. As 1997 begins, we anticipate continued moderate economic growth, with periods of stronger than expected growth balanced by periods of weaker growth. We also expect inflation to remain relatively low during 1997. If anticipated economic conditions prevail, the Federal Reserve can be expected to maintain short-term interest rates at current levels and interest rates in general should remain stable. In such an environment, we will look to lengthen somewhat the maturities of the Portfolio's holdings to take advantage of yield opportunities. We will continue our strategy of seeking investments in securities that offer superior yield characteristics. Thank you very much for your continued support and confidence. Respectfully, W. Patrick Sterner Manager, Limited-Term Bond Portfolio Comparison of Change in Value of $10,000 Investment in TMK/United Limited-Term Bond Portfolio and The Lehman Brothers Mutual Fund Short Investment Grade Debt Index Lehman Brothers Mutual Fund TMK/United Short Limited-Term Investment Bond Grade Debt Portfolio Index --------- --------- 05/03/94 Purchase $10,000 $10,000 12/31/94 10,026 10,142 12/31/95 11,458 11,605 12/31/96 11,860 12,200 +++++ TMK/United Limited-Term Bond Portfolio* -- $11,860 - ----- Lehman Bros MF Short Inv Grade Debt Index** -- $12,200 *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 Lehman Brothers Mutual Fund Short Investment Grade Debt Index (including income) are not available, investment in the index was effected as of April 30, 1994. Annual Average Total Return+ ---------------------------- Year Ended 12/31/96 3.51% 2+ Years Ended 12/31/96++ 6.61% +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 12-31-96. 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. THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES Chemicals and Allied Products - 7.71% American Home Products Corporation, 7.7%, 2-15-2000 ....................... $100 $ 103,693 ICI Wilmington, Inc., 9.5%, 11-15-2000 ...................... 75 82,520 Praxair, Inc., 6.7%, 4-15-2001 ....................... 100 100,314 Total ................................. 286,527 Depository Institutions - 10.82% BankAmerica Corporation, 9.7%, 8-1-2000 ........................ 100 109,914 Boatmen's Bancshares, Inc., 9.25%, 11-1-2001 ...................... 50 55,192 First Chicago Corporation, 7.625%, 1-15-2003 ..................... 125 130,212 Wells Fargo & Company, 8.375%, 5-15-2002 ..................... 100 106,633 Total ................................. 401,951 Electric, Gas and Sanitary Services - 1.41% Consolidated Natural Gas Company, 8.75%, 6-1-99 ......................... 50 52,585 General Merchandise Stores - 5.57% Penney (J.C.) Company, Inc., 10.0%, 10-15-97 ....................... 100 103,035 Sears, Roebuck and Co., 9.25%, 4-15-98 ........................ 100 103,853 Total ................................. 206,888 Instruments and Related Products - 2.35% Polaroid Corporation, 8.0%, 3-15-99 ......................... 85 87,246 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Nondepository Institutions - 15.31% American General Finance Corporation, 8.25%, 1-15-98 ........................ $ 50 $ 51,086 Associates Corporation of North America, 7.875%, 9-30-2001 ..................... 100 104,885 Ford Motor Credit Company, 8.0%, 1-15-99 ......................... 150 154,884 General Motors Acceptance Corporation, 7.75%, 1-15-99 ........................ 100 102,825 Household Finance Corporation, 7.75%, 6-15-97 ........................ 50 50,417 Norwest Financial, Inc., 7.75%, 8-15-2001 ...................... 50 52,145 Transamerica Finance Corporation, 8.75%, 10-1-99 ........................ 50 52,680 Total ................................. 568,922 Oil and Gas Extraction - 3.59% Burlington Resources Inc., 8.5%, 10-1-2001 ....................... 125 133,360 Paper and Allied Products - 2.72% International Paper Company, 6.875%, 7-1-2000 ...................... 100 101,258 Petroleum and Coal Products - 4.30% Chevron Corporation, 8.11%, 12-1-2004 ...................... 100 106,159 Texaco Capital Inc., 9.0%, 12-15-99 ........................ 50 53,537 Total ................................. 159,696 Railroad Transportation - 2.82% Union Pacific Corporation, 7.875%, 2-15-2002 ..................... 100 104,778 Transportation by Air - 2.85% Federal Express Corporation, 10.0%, 9-1-98 ......................... 100 105,821 Transportation Equipment - 1.35% General Motors Corporation, 7.625%, 2-15-97 ....................... 50 50,104 TOTAL CORPORATE DEBT SECURITIES - 60.80% $2,259,136 (Cost: $2,237,770) See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value UNITED STATES GOVERNMENT SECURITIES Federal National Mortgage Association: 6.0%, 11-1-2000 ....................... $ 72 $ 69,982 5.0%, 12-25-2001 ...................... 29 29,258 6.5%, 12-1-2010 ....................... 99 96,820 6.0%, 1-1-2011 ........................ 93 88,925 6.5%, 2-1-2011 ........................ 94 92,465 7.0%, 5-1-2011 ........................ 97 96,660 7.0%, 7-1-2011 ........................ 96 96,462 11.0%, 10-1-2020 ...................... 33 37,585 7.0%, 4-1-2026 ........................ 99 97,150 Government National Mortgage Association, 7.0%, 9-15-2008 ....................... 75 75,529 United States Treasury: 6.375%, 8-15-2002 ..................... 100 100,656 6.25%, 2-15-2003....................... 100 99,875 7.25%, 5-15-2004....................... 100 105,219 TOTAL UNITED STATES GOVERNMENT SECURITIES - 29.25% $1,086,586 (Cost: $1,082,599) SHORT-TERM SECURITIES Depository Institutions - 4.74% U.S. Bancorp, Master Note ........................... 176 176,000 Food and Kindred Products - 1.53% General Mills, Inc., Master Note ........................... 57 57,000 Textile Mill Products - 1.83% Sara Lee Corporation, Master Note ........................... 68 68,000 TOTAL SHORT-TERM SECURITIES - 8.10% $ 301,000 (Cost: $301,000) TOTAL INVESTMENT SECURITIES - 98.15% $3,646,722 (Cost: $3,621,369) CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.85% 68,702 NET ASSETS - 100.00% $3,715,424 See Notes to Schedules of Investments on page 75. BOND PORTFOLIO MANAGER'S LETTER DECEMBER 31, 1996 - --------------------------------------------------------------------------- Dear Policyholder: This report relates to the operation of the Bond Portfolio for the fiscal year ended December 31, 1996. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. Fluctuating interest rates throughout much of 1996 had a significant impact on the fixed income market. Although rates were generally only slightly higher at the end of the year than they were at the beginning, interest rate volatility had varying effects on different sectors of the fixed income market. Various domestic political events during 1996 played important roles in the interest rate volatility, including the presidential election, welfare reform legislation and tax reform proposals. Interest rates were also affected during the latter part of the year by foreign investment in U.S. markets and a rise in the value of the U.S. dollar relative to the currency of Japan, Germany and other industrialized nations. During 1996, we maintained investment strategies implemented during the prior year designed to respond to prevailing interest rate volatility. The Portfolio's holdings included exposure to a variety of bonds that may be sold back to the issuer prior to maturity at par value. Yields of these bonds tend to be lower than bonds that do not have the _put_ feature, but their prices typically react more favorably to changing interest rates. To balance the effects of these lower yielding bonds, we maintained a material position in higher yielding corporate bonds. The strategies and techniques we applied resulted in the Portfolio slightly outperforming the Lehman Brothers Government/Corporate Bond Index charted on the following page. That index reflects the performance of securities that generally represent the bond market. In 1997, we expect the volatility in the fixed income market to continue. Declining federal budget deficits and a conservative fiscal outlook at the federal level point towards increased national savings and a continuing revaluation of financial assets. Internationally, free market initiatives should provide increased economic opportunities worldwide for market penetration. We anticipate moderate economic growth and relatively low inflation during 1997. We expect to continue our present strategies in light of the projected market volatility and to search for investments in companies with strong credit experience. Thank you very much for your continued support and confidence. Respectfully, James C. Cusser Manager, Bond Portfolio Comparison of Change in Value of $10,000 Investment in TMK/United Bond Portfolio and The Lehman Brothers Government/Corporate Bond Index Lehman Brothers Government/ TMK/United Corporate Bond Bond Portfolio Index ---------- ----------- 07/13/87 Purchase $10,000 $ --- 07/31/87 10,070 10,000 12/31/87 10,331 10,298 12/31/88 11,131 11,079 12/31/89 12,449 12,656 12/31/90 13,325 13,705 12/31/91 15,482 15,916 12/31/92 16,670 17,121 12/31/93 18,730 19,014 12/31/94 17,624 18,347 12/31/95 21,246 21,877 12/31/96 21,892 22,512 +++++ TMK/United Bond Portfolio* -- $21,892 - ----- Lehman Bros Gov't/Corp Bond Index** -- $22,512 *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 Lehman Brothers Government/Corporate Bond Index (including income) are not available, investment in the index was effected as of July 31, 1987. Annual Average Total Return+ ---------------------------- Year Ended 12/31/96 3.04% 5 Years Ended 12/31/96 7.44% 9+ Years Ended 12/31/96++ 8.62% +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. ++7-13-87 (the initial offering date) through 12-31-96. 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. THE INVESTMENTS OF THE BOND PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES Amusement and Recreation Services - 2.26% MGM Grand Hotel Finance Corp., 11.75%, 5-1-99......................... $2,000 $ 2,087,500 Chemicals and Allied Products - 4.28% Dow Capital BV, 9.0%, 5-15-2010 ....................... 500 572,970 Dow Chemical Company (The), 8.55%, 10-15-2009 ..................... 1,000 1,113,840 Procter & Gamble Company (The), 8.0%, 9-1-2024 ........................ 2,000 2,265,020 Total ................................. 3,951,830 Communication - 10.67% Bell Telephone Company of Pennsylvania (The), 8.35%, 12-15-2030 ..................... 1,000 1,175,140 BellSouth Telecommunications, Inc., 5.85%, 11-15-2045 ..................... 1,000 984,930 Cablevision Industries Corporation, 9.25%, 4-1-2008 ....................... 1,000 1,060,610 Centel Capital Corporation, 9.0%, 10-15-2019 ...................... 1,000 1,185,140 Continental Cablevision, Inc., 8.5%, 9-15-2001 ....................... 1,000 1,065,470 Infinity Broadcasting Corporation, 10.375%, 3-15-2002 .................... 250 263,750 Jones Intercable, Inc., 9.625%, 3-15-2002 ..................... 500 525,000 Southwestern Bell Telephone Company, 7.0%, 8-26-2002 ....................... 1,000 1,016,440 Tele-Communications, Inc., 6.58%, 2-15-2005 ...................... 1,000 1,034,210 Turner Broadcasting System, Inc., 8.375%, 7-1-2013 ...................... 1,000 1,020,810 U S WEST, Inc., 8.4%, 9-15-99 ......................... 500 523,955 Total ................................. 9,855,455 Depository Institutions - 10.47% AmSouth Bancorporation, 6.75%, 11-1-2025 ...................... 1,500 1,478,130 BarclaysAmerican Corporation, 9.125%, 12-1-97 ....................... 225 230,760 Chevy Chase Savings Bank, F.S.B., 9.25%, 12-1-2005 ...................... 500 510,000 Deutsche Bank Financial Inc., 6.7%, 12-13-2006 ...................... 750 736,020 J.P. Morgan & Co. Incorporated, 7.54%, 1-15-2027 ...................... 750 732,968 Kansallis-Osake-Pankki, 10.0%, 5-1-2002 ....................... 1,000 1,134,900 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE BOND PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Depository Institutions (Continued) NBD Bank, National Association, 8.25%, 11-1-2024 ...................... $1,000 $ 1,126,190 NationsBank Corporation, 8.57%, 11-15-2024 ..................... 1,000 1,144,510 Riggs National Corporation, 8.5%, 2-1-2006 ........................ 1,500 1,567,500 SouthTrust Bank of Alabama, N.A.: 5.58%, 2-6-2006 ....................... 500 483,340 7.69%, 5-15-2025 ...................... 500 528,215 Total ................................. 9,672,533 Electric, Gas and Sanitary Services - 2.57% Arkla, Inc., 10.0%, 11-15-2019 ..................... 975 1,086,111 El Paso Electric Company, 7.25%, 2-1-99 ......................... 250 249,385 Kansas Gas and Electric Company, 7.6%, 12-15-2003 ...................... 1,000 1,037,650 Total ................................. 2,373,146 Fabricated Metal Products - 1.12% Mark IV Industries, Inc., 8.75%, 4-1-2003 ....................... 1,000 1,030,000 Food and Kindred Products - 3.58% Coca-Cola Enterprises Inc.: 0.0%, 6-20-2020 ....................... 10,000 1,946,700 6.7%, 10-15-2036 ..................... 1,000 1,009,200 Nabisco, Inc., 6.8%, 9-1-2001 ........................ 345 352,659 Total ................................. 3,308,559 General Building Contractors - 0.89% Del Webb Corporation, 10.875%, 3-31-2000 .................... 800 824,000 Health Services - 0.57% Tenet Healthcare Corporation, 8.625%, 12-1-2003 ..................... 500 527,500 Hotels and Other Lodging Places - 1.70% Marriott International, Inc., 7.875%, 4-15-2005 ..................... 1,000 1,038,710 RHG Finance Corporation, 8.875%, 10-1-2005 ..................... 500 528,560 Total ................................. 1,567,270 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE BOND PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Industrial Machinery and Equipment - 1.19% Joy Technologies Inc., 10.25%, 9-1-2003 ...................... $ 1,000 $ 1,102,500 Insurance Carriers - 1.76% Penn Central Corporation (The), 10.625%, 4-15-2000 .................... 1,000 1,105,780 Reliance Group Holdings, Inc., 9.0%, 11-15-2000 ...................... 500 515,000 Total ................................. 1,620,780 Lumber and Wood Products - 0.25% Doman Industries Limited, 8.75%, 3-15-2004 ...................... 250 233,750 Metal Mining - 0.53% Noranda Inc., 7.0%, 7-15-2005 ....................... 500 493,630 Nondepository Institutions - 7.60% Associates Corporation of North America, 7.95%, 2-15-2010 ...................... 500 547,385 Chrysler Financial Corporation, 12.75%, 11-1-99 ....................... 1,000 1,157,770 Countrywide Mortgage Backed Securities, Inc., 6.5%, 4-25-2024 ....................... 2,000 1,950,460 DLJ Mortgage Acceptance Corp., 6.5%, 4-25-2024 ....................... 960 913,281 General Electric Capital Corporation, 8.3%, 9-20-2009 ....................... 250 278,760 General Motors Acceptance Corporation, 8.875%, 6-1-2010 ...................... 1,000 1,157,220 Residential Asset Securities Corporation, Mortgage Pass-Through Certificates, 1995-KS3 Class D, 8.0%, 10-25-2024 ...................... 1,000 1,007,910 Total ................................. 7,012,786 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE BOND PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Oil and Gas Extraction - 4.03% Anadarko Petroleum Corporation, 7.25%, 3-15-2025 ...................... $ 1,000 $ 1,036,330 Oryx Energy Company: 10.0%, 4-1-2001 ....................... 400 439,076 8.375%, 7-15-2004 ..................... 500 518,765 Seagull Energy Corporation, 7.875%, 8-1-2003 ...................... 500 504,375 Union Texas Petroleum Holdings, Inc., 8.25%, 11-15-99 ....................... 250 257,777 YPF Sociedad Anoima, 8.0%, 2-15-2004 ....................... 1,000 965,000 Total ................................. 3,721,323 Paper and Allied Products - 1.67% Boise Cascade Office Products Corporation, 9.875%, 2-15-2001 ..................... 500 529,395 Canadian Pacific Forest Products Ltd., 9.25%, 6-15-2002 ...................... 1,000 1,015,980 Total ................................. 1,545,375 Petroleum and Coal Products - 0.61% Coastal Corporation (The), 10.375%, 10-1-2000 .................... 500 561,245 Printing and Publishing - 1.72% News America Holdings Incorporated, 9.125%, 10-15-99 ...................... 500 533,520 Viacom International Inc.: 9.125%, 8-15-99 ....................... 500 511,250 10.25%, 9-15-2001 ..................... 500 545,000 Total ................................. 1,589,770 Stone, Clay and Glass Products - 1.16% Owens-Corning Fiberglas Corporation, 8.875%, 6-1-2002 ...................... 500 542,195 USG Corporation, 9.25%, 9-15-2001 ...................... 500 532,500 Total ................................. 1,074,695 Transportation Equipment - 1.53% General Motors Corporation, 8.8%, 3-1-2021 ........................ 750 854,857 McDonnell Douglas Corporation, 9.25%, 4-1-2002 ....................... 500 558,450 Total ................................. 1,413,307 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE BOND PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Wholesale Trade -- Durable Goods- 2.86% Fisher Scientific International Inc., 7.125%, 12-15-2005 .................... $ 900 $ 885,564 Motorola, Inc., 8.4%, 8-15-2031 ....................... 1,500 1,757,085 Total ................................. 2,642,649 TOTAL CORPORATE DEBT SECURITIES - 63.02% $58,209,603 (Cost: $57,018,774) OTHER GOVERNMENT SECURITIES Canada - 3.63% Hydro Quebec: 8.05%, 7-7-2024 ....................... 1,000 1,099,520 7.4%, 3-28-2025 ....................... 1,000 1,118,440 Province of Nova Scotia, 8.25%, 11-15-2019...................... 1,000 1,132,270 Total ................................. 3,350,230 Supranational - 1.23% Inter-American Development Bank, 8.4%, 9-1-2009 ........................ 1,000 1,141,330 TOTAL OTHER GOVERNMENT SECURITIES - 4.86% $ 4,491,560 (Cost: $4,270,754) UNITED STATES GOVERNMENT SECURITIES Federal Home Loan Mortgage Corporation: 6.83%, 7-3-2002 ....................... 500 497,030 7.5%, 2-15-2007 ....................... 2,000 2,048,120 7.5%, 11-15-2017 ...................... 1,538 1,573,559 7.5%, 4-15-2019 ....................... 1,383 1,354,979 7.95%, 12-15-2020 ..................... 3,000 3,070,290 Federal National Mortgage Association, 7.09%, 4-1-2004 ....................... 500 495,470 Government National Mortgage Association: 7.5%, 7-15-2023 ....................... 2,168 2,181,916 7.5%, 12-15-2023 ...................... 2,279 2,293,496 8.0%, 9-15-2025 ....................... 1,945 2,010,268 7.75%, 10-15-2031 ..................... 320 324,423 Tennessee Valley Authority, 5.98%, 4-1-2036 ....................... 1,000 1,015,640 United States Treasury: 5.5%, 2-28-99 ......................... 5,000 4,957,800 6.75%, 5-31-99 ........................ 1,000 1,017,030 0.0%, 5-15-2007 ....................... 3,000 1,531,770 TOTAL UNITED STATES GOVERNMENT SECURITIES - 26.39% $24,371,791 (Cost: $24,216,245) See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE BOND PORTFOLIO DECEMBER 31, 1996 Value TOTAL SHORT-TERM SECURITIES - 4.28% $ 3,950,934 (Cost: $3,950,934) TOTAL INVESTMENT SECURITIES - 98.55% $91,023,888 (Cost: $89,456,707) CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.45% 1,342,898 NET ASSETS - 100.00% $92,366,786 See Notes to Schedules of Investments on page 75. HIGH INCOME PORTFOLIO MANAGER'S LETTER DECEMBER 31, 1996 - --------------------------------------------------------------------------- Dear Policyholder: This report relates to the operation of the High Income Portfolio for the fiscal year ended December 31, 1996. The following discussion, graphs and tables provide you with information regarding the Portfolio's performance during that period. 1996 was characterized by modest, but steady, economic growth and modest increases in interest rates, but more volatility. The Federal Reserve lowered the discount rate in January of 1996, but did not change interest rates during the remainder of the year. Strong demand for higher yielding securities throughout much of the year positively impacted the Fund. With the relatively low rates available in the high grade bond market, investors turned to the high yield market in increasing numbers. Growing demand resulted in total returns for high yield bonds surpassing those for high grade bonds and a narrowing of the spread between high yield securities and U.S. Treasury securities. During the past fiscal year, we lengthened the duration and average maturity of the Portfolio's investments. We also reduced the Portfolio's holdings in the _BB_ rating sector due to the tendency of such investments to underperform during periods when investors are reaching for yield. We reinvested the proceeds in the lower rated _B_ and, occasionally, _CCC_ sectors. Continued economic growth should help companies issuing these securities. The strategies and techniques we applied resulted in the performance of the First Boston High Yield Index, charted on the following page, slightly exceeding that of the Portfolio. The First Boston index reflects the performance of securities that generally represent the high-yield bond market. In 1997, we expect modest economic growth to continue. While no strong evidence points towards increasing inflation as the year begins, the Federal Reserve has intimated that inflationary signals may be combated with increased interest rates. Apprehension of such a move may lead to volatility in the high yield market, perhaps, however, to a lesser degree than might occur in the U.S. Treasury and high grade bond markets. We will continue to monitor the demand for, and available supply of, high yield instruments and attempt to respond accordingly. Thank you very much for your continued support and confidence. Respectfully, Louise D. Rieke Manager, High Income Portfolio Comparison of Change in Value of $10,000 Investment in TMK/United High Income Portfolio and The First Boston High Yield Index First Boston TMK/United High High Income Yield Portfolio Index ----------- ------ 07/13/87 Purchase $10,000 $ --- 07/31/87 10,041 10,000 12/31/87 9,954 10,087 12/31/88 11,461 11,465 12/31/89 10,980 11,509 12/31/90 10,164 10,775 12/31/91 13,639 15,489 12/31/92 15,779 18,070 12/31/93 18,605 21,488 12/31/94 18,130 21,280 12/31/95 21,426 24,980 12/31/96 23,925 28,083 +++++ TMK/United High Income Portfolio* -- $23,925 - ----- First Boston High Yield Index** -- $28,083 *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 First Boston High Yield Index (including income) are not available, investment in the index was effected as of July 31, 1987. Annual Average Total Return+ ---------------------------- Year Ended 12/31/96 11.66% 5 Years Ended 12/31/96 11.90% 9+ Years Ended 12/31/96++ 9.64% +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. ++7-13-87 (the initial offering date) through 12-31-96. 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. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO DECEMBER 31, 1996 Shares Value COMMON STOCKS AND WARRANTS Chemicals and Allied Products - 0.24% Carson, Inc.* .......................... 16,500 $ 228,938 Communication - 0.07% Heartland Wireless Communications, Inc., Warrants (C)* ................... 3,000 3,000 Microcell Telecommunications Inc., Conditional Warrants (C)* ............. 5,000 3,125 Microcell Telecommunications Inc., Warrants(C)* .......................... 5,000 62,500 Total ................................. 68,625 General Building Contractors - 0.33% Walter Industries, Inc.* ............... 23,272 325,808 Hotels and Other Lodging Places - 0.71% Trump Hotels & Casino Resorts, Inc.* ... 6,250 75,000 Wyndham Hotel Corporation* ............. 25,000 615,625 Total ................................. 690,625 Industrial Machinery and Equipment - 0.15% Bell & Howell Company* ................. 6,250 148,437 Printing and Publishing - 0.44% Knight-Ridder, Inc. .................... 5,000 191,250 Tribune Company ........................ 3,000 236,625 Total ................................. 427,875 TOTAL COMMON STOCKS AND WARRANTS - 1.94%.. $ 1,890,308 (Cost: $1,643,743) PREFERRED STOCKS Depository Institutions - 0.57% California Federal Bank, F.S.B. ........ 5,000 555,000 Printing and Publishing - 0.48% K-III Communications Corporation ....... 5,000 465,000 TOTAL PREFERRED STOCKS - 1.05% $ 1,020,000 (Cost: $1,000,000) Principal Amount in Thousands CORPORATE DEBT SECURITIES Agricultural Production -- Crops - 0.54% Hines Horticulture, Inc., 11.75%, 10-15-2005 .................... $ 500 530,000 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Agricultural Production -- Livestock - 0.31% Pilgrim's Pride Corporation, 10.875%, 8-1-2003 ..................... $ 300 $ 300,000 Amusement and Recreation Services - 5.49% American Skiing Company, 12.0%, 7-15-2006 (C) .................. 500 528,750 California Hotel Finance Corporation, 11.0%, 12-1-2002 ...................... 1,500 1,567,500 Rio Hotel & Casino, Inc., 10.625%, 7-15-2005 .................... 1,000 1,067,500 Showboat Marina Casino Partnership, 13.5%, 3-15-2003 ...................... 500 551,250 Trump Atlantic City Associates, 11.25%, 5-1-2006 ...................... 500 495,000 Trump Hotels & Casino Resorts Holdings, L.P., 15.5%, 6-15-2005 ...................... 1,000 1,140,000 Total ................................. 5,350,000 Apparel and Other Textile Products - 2.62% CONSOLTEX GROUP INC., 11.0%, 10-1-2003 ...................... 1,000 1,006,250 Pillowtex Corporation, 10.0%, 11-15-2006 (C) ................. 500 515,000 WestPoint Stevens Inc., 9.375%, 12-15-2005 .................... 1,000 1,030,000 Total ................................. 2,551,250 Business Services - 4.93% Adams Outdoor Advertising Limited Partnership, 10.75%, 3-15-2006 ..................... 750 803,437 Alvey Systems, Inc., 11.375%, 1-31-2003 .................... 1,000 1,042,500 Heritage Media Corporation, 8.75%, 2-15-2006 ...................... 500 480,000 Lamar Advertising Company, 9.625%, 12-1-2006 ..................... 1,000 1,032,500 Scotsman Group, Inc., 9.5%, 12-15-2000 ...................... 500 512,500 Shared Technologies Fairchild Communications Corp., 0.0%, 3-1-2006 (B) .................... 500 417,500 Universal Outdoor, Inc., 9.75%, 10-15-2006 ..................... 500 516,250 Total ................................. 4,804,687 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Chemicals and Allied Products - 3.22% Dade International Inc., 11.125%, 5-1-2006 ..................... $ 500 $ 542,500 Freedom Chemical Company, 10.625%, 10-15-2006 (C) ............... 750 787,500 Revlon Worldwide Corporation, 0.0%, 3-15-98 ......................... 1,500 1,290,000 Spinnaker Industries, Inc., 10.75%, 10-15-2006 (C) ................ 500 517,500 Total ................................. 3,137,500 Communication - 16.52% Adelphia Communications Corporation, 12.5%, 5-15-2002 ...................... 1,000 1,025,000 Allbritton Communications Company, 9.75%, 11-30-2007 ..................500 485,000 American Radio Systems Corporation, 9.0%, 2-1-2006 ........................ 750 735,000 Arch Communications Group, Inc., 0.0%, 3-15-2008 (B) ................... 1,000 570,000 Argyle Television Operations, Inc., 9.75%, 11-1-2005 ...................... 1,000 1,015,000 Cablevision Systems Corporation, 9.875%, 2-15-2013 ..................... 1,450 1,428,250 COMCAST CELLULAR CORPORATION, 0.0%, 3-5-2000 ........................ 500 360,000 Comcast Corporation, 9.5%, 1-15-2008 ....................... 350 362,250 Diamond Cable Communications Plc, 0.0%, 12-15-2005 (B) .................. 500 360,000 Heartland Wireless Communications, Inc., 13.0%, 4-15-2003 ...................... 500 497,500 Infinity Broadcasting Corporation, 10.375%, 3-15-2002 .................... 500 527,500 Intermedia Communications of Florida, Inc., 0.0%, 5-15-2006 (B) ................... 750 510,000 MFS Communications Company, Inc.: 0.0%, 1-15-2004 (B) ................... 500 433,750 0.0%, 1-15-2006 (B) ................... 1,000 727,500 Marcus Cable Operating Company, L.P., 0.0%, 8-1-2004 (B) .................... 1,500 1,230,000 Metrocall, Inc., 10.375%, 10-1-2007 .................... 500 430,000 Microcell Telecommunications Inc., 0.0%, 6-1-2006 (B) .................... 1,250 696,875 RSL Communications, Ltd., Units, 12.25%, 11-15-2006 (C)(D) ............. 500 502,500 Rogers Cantel Inc., 9.375%, 6-1-2008 ...................... 500 525,000 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Communication (Continued) Sprint Spectrum L.P., 0.0%, 8-15-2006 (B) ................... $1,000 $ 682,500 Teleport Communications Group Inc., 0.0%, 7-1-2007 (B)..................... 1,250 856,250 USA Mobile Communications, Inc. II, 9.5%, 2-1-2004 ........................ 500 475,000 Vanguard Cellular Systems, Inc., 9.375%, 4-15-2006 ..................... 500 507,500 Videotron Plc, 0.0%, 8-15-2005 (B) ................... 1,000 805,000 Wireless One, Inc., Units, 0.0%, 8-1-2006 (B)(E) ................. 750 341,250 Total ................................. 16,088,625 Depository Institutions - 0.58% First Nationwide Holdings Inc., 12.5%, 4-15-2003 ...................... 500 560,000 Eating and Drinking Places - 0.53% Foodmaker, Inc., 9.25%, 3-1-99 ......................... 500 511,250 Electronic and Other Electric Equipment - 1.09% Advanced Micro Devices, Inc., 11.0%, 8-1-2003 ....................... 500 542,500 Rayovac Corporation, 10.25%, 11-1-2006 (C) ................. 500 516,250 Total ................................. 1,058,750 Engineering and Management Services - 0.74% United International Holdings, Inc., 0.0%, 11-15-99 ........................ 1,000 725,000 Fabricated Metal Products - 2.79% Mark IV Industries, Inc., 8.75%, 4-1-2003 ....................... 1,500 1,545,000 Nortek, Inc., 9.875%, 3-1-2004 ...................... 500 505,000 Silgan Corporation, 13.25%, 12-15-2002 .................... 139 139,869 U.S. Can Corporation, 10.125%, 10-15-2006 (C) ............... 500 525,625 Total ................................. 2,715,494 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Food and Kindred Products - 2.41% Dr Pepper Bottling Holdings, Inc., 0.0%, 2-15-2003 (B) ................... $ 500 $ 470,000 Specialty Foods Corporation: 10.25%, 8-15-2001 ..................... 1,000 925,000 11.125%, 10-1-2002 .................... 1,000 950,000 Total ................................. 2,345,000 Food Stores - 5.70% Big V Supermarkets, Inc., 11.0%, 2-15-2004 ...................... 500 462,500 Bruno's, Inc., 10.5%, 8-1-2005 ....................... 1,500 1,590,000 Kroger Co. (The), 9.75%, 2-15-2004 ...................... 1,000 1,060,000 Penn Traffic Company (The), 10.375%, 10-1-2004 .................... 1,000 837,500 Ralphs Grocery Company, 11.0%, 6-15-2005 ...................... 1,000 1,050,000 Smith's Food & Drug Centers, Inc., 11.25%, 5-15-2007 ..................... 500 552,500 Total ................................. 5,552,500 Furniture and Fixtures - 1.55% Lear Seating Corporation, 8.25%, 2-1-2002 ....................... 1,500 1,511,250 General Building Contractors - 1.82% Beazer Homes USA, Inc., 9.0%, 3-1-2004 ........................ 750 723,750 NVR L.P., 11.0%, 4-15-2003 ...................... 1,000 1,050,000 Total ................................. 1,773,750 Health Services - 2.63% Abbey Healthcare Group Incorporated, 9.5%, 11-1-2002 ....................... 500 522,500 Quorum Health Group, Inc., 8.75%, 11-1-2005 ...................... 1,000 1,025,000 Regency Health Services, Inc., 9.875%, 10-15-2002 .................... 1,000 1,015,000 Total ................................. 2,562,500 Holding and Other Investment Offices - 2.40% Grupo Industrial Durango, S.A. de C.V., 12.625%, 8-1-2003 ..................... 1,000 1,095,000 LTC Properties, Inc., Convertible, 8.5%, 1-1-2000 ........................ 1,000 1,240,000 Total ................................. 2,335,000 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Hotels and Other Lodging Places - 5.88% Boyd Gaming Corporation, 9.25%, 10-1-2003 ...................... $ 500 $ 490,000 Casino America, Inc., 12.5%, 8-1-2003 ....................... 750 710,625 HMC Acquisition Properties, Inc., 9.0%, 12-15-2007 ...................... 500 507,500 Prime Hospitality Corp., 9.25%, 1-15-2006 ...................... 1,500 1,530,000 Red Roof Inns, Inc., 9.625%, 12-15-2003 .................... 500 500,000 Showboat, Inc., 9.25%, 5-1-2008 ....................... 1,000 982,500 Station Casinos, Inc., 10.125%, 3-15-2006 .................... 1,000 1,005,000 Total ................................. 5,725,625 Industrial Machinery and Equipment - 2.44% American Standard Inc., 9.875%, 6-1-2001 ...................... 1,000 1,060,000 Bell & Howell Company, 10.75%, 10-1-2002 ..................... 750 798,750 Walbro Corporation, 9.875%, 7-15-2005 ..................... 500 515,000 Total ................................. 2,373,750 Instruments and Related Products - 2.58% Cole National Group, Inc., 9.875%, 12-31-2006 (C) ................ 500 515,000 IMED Corporation, 9.75%, 12-1-2006 (C) .................. 500 508,750 InterCel, Inc., Units, 0.0%, 2-1-2006 (B)(F) ................. 8 444,375 Maxxim Medical, Inc., 10.5%, 8-1-2006 ....................... 1,000 1,047,500 Total ................................. 2,515,625 Lumber and Wood Products - 1.08% Triangle Pacific Corp., 10.5%, 8-1-2003 ....................... 1,000 1,055,000 Miscellaneous Retail - 0.50% Michaels Stores, Inc., 10.875%, 6-15-2006 .................... 500 487,500 Motion Pictures - 1.14% MacAndrews & Forbes Group, Incorporated, 13.0%, 3-1-99 ......................... 100 101,125 Plitt Theatres, Inc., 10.875%, 6-15-2004 .................... 1,000 1,007,500 Total ................................. 1,108,625 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Oil and Gas Extraction - 1.62% Flores & Rucks, Inc., 9.75%, 10-1-2006 ...................... $1,000 $ 1,060,000 Kelley Oil & Gas Corporation, 10.375%, 10-15-2006 (C) ............... 500 521,250 Total ................................. 1,581,250 Paper and Allied Products - 4.57% Asia Pulp & Paper Company Ltd, 11.75%, 10-1-2005 ..................... 1,000 1,072,500 Container Corporation of America, 11.25%, 5-1-2004 ...................... 1,500 1,627,500 Fort Howard Corporation, 11.0%, 1-2-2002 ....................... 453 477,611 Mail-Well Corporation, 10.5%, 2-15-2004 ...................... 500 495,000 Sweetheart Cup Company, Inc., 10.5%, 9-1-2003 ....................... 750 780,000 Total ................................. 4,452,611 Personal Services - 0.56% Prime Succession Acquisition Corp., 10.75%, 8-15-2004 (C) ................. 500 542,500 Primary Metal Industries - 1.05% Essex Group, Inc., 10.0%, 5-1-2003 ....................... 1,000 1,025,000 Printing and Publishing - 5.83% American Media Operations, Inc., 11.625%, 11-15-2004 ................... 1,000 1,075,000 Big Flower Press, Inc., 10.75%, 8-1-2003 ...................... 666 700,965 Jordan Industries, Inc., 10.375%, 8-1-2003 ..................... 1,500 1,477,500 K-III Communications Corporation, 8.5%, 2-1-2006 ........................ 500 491,250 Viacom International, Inc., 8.0%, 7-7-2006 ........................ 2,000 1,935,000 Total ................................. 5,679,715 Rubber and Miscellaneous Plastics Products - 0.46% RBX Corporation, 11.25%, 10-15-2005 .................... 500 450,000 See Notes to Schedules of Investments on page 75. THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO DECEMBER 31, 1996 Principal Amount in Thousands Value CORPORATE DEBT SECURITIES (Continued) Textile Mill Products - 1.09% Avondale Mills, Inc., 10.25%, 5-1-2006 ..................... $ 500 $ 515,000 Collins & Aikman Products Co., 11.5%, 4-15-2006 ...................... 500 545,000 Total ................................. 1,060,000 Transportation Equipment - 1.62% Aetna Industries, Inc., 11.875%, 10-1-2006 .................... 500 535,000 Greenwich Air Services, Inc., 10.5%, 6-1-2006 ....................... 500 532,500 Westinghouse Air Brake Company, 9.375%, 6-15-2005 ..................... 500 510,000 Total ................................. 1,577,500 Trucking and Warehousing - 0.54% Iron Mountain Incorporated, 10.125%, 10-1-2006 .................... 500 530,000 Wholesale Trade -- Durable Goods - 2.80% E&S Holdings Corporation, 10.375%, 10-1-2006 (C) ................ 500 523,750 Exide Corporation: 0.0%, 12-15-2004 (B) .................. 500 460,000 10.0%, 4-15-2005 ...................... 500 518,750 General Medical Corporation, 12.125%, 8-15-2005 .................... 1,264 1,223,439 Total ................................. 2,725,939 Wholesale Trade -- Nondurable Goods - 0.57% United Stationers Supply Co., 12.75%, 5-1-2005 ...................... 500 556,250 TOTAL CORPORATE DEBT SECURITIES - 90.20% $87,859,446 (Cost: $85,241,309) TOTAL SHORT-TERM SECURITIES - 4.74% $ 4,619,233 (Cost: $4,619,233) TOTAL INVESTMENT SECURITIES - 97.93% $95,388,987 (Cost: $92,504,285) CASH AND OTHER ASSETS, NET OF LIABILITIES - 2.07% 2,017,084 NET ASSETS - 100.00% $97,406,071 See Notes to Schedules of Investments on page 75. TMK/UNITED FUNDS, INC. Notes to Schedules of Investments *No income dividends were paid during the preceding 12 months. (A) Listed on an exchange outside of the United States. (B) The security does not bear interest for an initial period of time and subsequently becomes interest bearing. (C) As of December 31, 1996, the following restricted securities were owned in the High Income Portfolio: Shares/ Principal Acquisition Amount Acquisition Market Security Date (in 000's) Cost Value ---------------- -------------------------------------------- Heartland Wireless Communications, Inc., Warrants 4/20/95 3,000$ 18,500 $3,000 Microcell Telecommunications Inc., Conditional Warrants 6/13/96 5,000 --- 3,125 Microcell Telecommunications Inc., Warrants 6/13/96 5,000 61,247 62,500 American Skiing Company, 12.0%, 7-15-2006 6/25/96 $ 500 485,825 528,750 Cole National Group, Inc., 9.875%, 12-31-2006 11/13/96 500 496,250 515,000 E&S Holdings Corporation, 10.375%, 10-1-2006 9/24/96 250 250,000 261,875 9/25/96 250 254,375 261,875 Freedom Chemical Company, 10.625%, 10-15-2006 10/10/96 500 500,000 525,000 10/15/96 250 253,438 262,500 IMED Corporation, 9.75%, 12-1-2006 11/19/96 500 500,000 508,750 Kelley Oil & Gas Corporation, 10.375%, 10-15-2006 10/25/96 500 498,750 521,250 Pillowtex Corporation, 10.0%, 11-15-2006 11/6/96 500 500,000 515,000 Prime Succession Acquisition Corp., 10.75%, 8-15-2004 8/13/96 500 500,000 542,500 RSL Communications, Ltd., Units, 12.25%, 11-15-2006 9/30/96 500 500,000 502,500 Rayovac Corporation, 10.25%, 11-1-2006 10/17/96 500 500,000 516,250 Spinnaker Industries, Inc., 10.75%, 10-15-200610/18/96 500 500,000 517,500 U.S. Can Corporation, 10.125%, 10-15-2006 10/10/96 500 500,000 525,625 -------------------- $6,318,385$6,573,000 ==================== The total market value of restricted securities represents approximately 6.75% of the total net assets in the High Income Portfolio at December 31, 1996. TMK/UNITED FUNDS, INC. Notes to Schedules of Investments (D) Each Unit consists of one 12.25% senior note due 2006 and one warrant to purchase Class A common stock. (E) 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. (F) Each Unit consists of 10 senior discount notes due 2-1-2006 and 32 warrants. 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. TMK/UNITED FUNDS, INC. STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996 Growth Income International Portfolio Portfolio Portfolio Assets ----------- ---------- ----------- Investment securities--at value (Notes 1 and 3) $512,448,451 $463,979,407 $80,225,093 Cash ................. 13,765 5,243 5,496 Receivables: Investment securities sold ............... --- --- --- Fund shares sold ..... 199,072 167,322 61,374 Dividends and interest 578,733 431,588 100,691 Prepaid insurance premium .............. 3,137 2,095 575 ------------ ----------- ---------- Total assets ....... 513,243,158 464,585,655 80,393,229 Liabilities ------------ ------------ ----------- Payable for investment securities purchased . --- 2,141,771 525,759 Payable for Fund shares redeemed ............. 60,077 34,968 3,217 Accrued accounting services fee (Note 2). 5,000 5,000 2,500 Other ................. 15,391 12,496 12,300 ------------ ------------ ----------- Total liabilities .. 80,468 2,194,235 543,776 ------------ ------------ ----------- Total net assets .. $513,162,690 $462,391,420 $79,849,453 Net Assets ============ ============ =========== $0.01 par value capital stock Capital stock ........ $ 755,015 $ 456,129 $ 133,104 Additional paid-in capital ............ 482,465,582 321,429,249 70,594,734 Accumulated undistributed gain (loss): Accumulated undistributed net investment income --- --- --- Accumulated undistributed net realized loss on investment transactions ....... --- --- (1,248,302) Net unrealized appreciation of investments at end of period .......... 29,942,093 140,506,042 10,369,917 ------------ ------------ ----------- Net assets applicable to outstanding units of capital ........ $513,162,690 $462,391,420 $79,849,453 ============ ============ =========== Net asset value, redemption and offering price per share $6.7967 $10.1373 $5.9990 ======= ======== ======= Capital shares outstanding 75,501,538 45,612,852 13,310,431 Capital shares authorized 100,000,000 100,000,000 100,000,000 See notes to financial statements. TMK/UNITED FUNDS, INC. STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996 Asset Small Cap Balanced Strategy Portfolio Portfolio Portfolio Assets ------------ ------------ ----------- Investment securities--at value (Notes 1 and 3). $97,315,515 $42,026,516 $8,384,830 Cash ................. 4,758 2,272 5,737 Receivables: Investment securities sold ............... 782,167 --- --- Fund shares sold ..... 92,768 60,098 439 Dividends and interest 103,602 348,272 83,492 Prepaid insurance premium .............. 600 350 145 ----------- ----------- ---------- Total assets ....... 98,299,410 42,437,508 8,474,643 Liabilities ----------- ------------ ---------- Payable for investment securities purchased . 881,250 --- --- Payable for Fund shares redeemed ............. 4,188 7,152 --- Accrued accounting services fee (Note 2) 2,500 1,667 --- Other ................. 3,182 1,631 445 ----------- ----------- ---------- Total liabilities .. 891,120 10,450 445 ----------- ----------- ---------- Total net assets .. $97,408,290 $42,427,058 $8,474,198 Net Assets =========== =========== ========== $0.01 par value capital stock Capital stock ........ $ 121,492 $ 68,467 $ 16,505 Additional paid-in capital ............ 88,162,423 38,883,605 8,346,900 Accumulated undistributed gain (loss): Accumulated undistributed net investment income --- --- --- Accumulated undistributed net realized loss on investment transactions ....... --- --- (46,572) Net unrealized appreciation of investments at end of period .......... 9,124,375 3,474,986 157,365 ----------- ----------- ---------- Net assets applicable to outstanding units of capital ........ $97,408,290 $42,427,058 $8,474,198 =========== =========== ========== Net asset value, redemption and offering price per share $8.0176 $6.1967 $5.1343 ======= ======= ======= Capital shares outstanding 12,149,248 6,846,695 1,650,512 Capital shares authorized 100,000,000 50,000,000 100,000,000 See notes to financial statements. TMK/UNITED FUNDS, INC. STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996 Money Market Limited-Term Bond Portfolio Bond Portfolio Portfolio Assets ------------- ------------ ----------- Investment securities--at value (Notes 1 and 3). $34,563,968 $3,646,722 $91,023,888 Cash ................. 3,157 2,548 4,462 Receivables: Investment securities sold ............... --- --- --- Fund shares sold ..... 2,671,382 --- 59,499 Dividends and interest 227,123 66,241 1,348,197 Prepaid insurance premium .............. 968 145 1,111 ----------- ---------- ---------- Total assets ....... 37,466,598 3,715,656 92,437,157 Liabilities ----------- ---------- ----------- Payable for investment securities purchased . --- --- --- Payable for Fund shares redeemed ............. 206,275 --- 65,440 Accrued accounting services fee (Note 2). 1,667 --- 2,500 Other ................. 1,054 232 2,431 ----------- ---------- ----------- Total liabilities .. 208,996 232 70,371 ----------- ---------- ----------- Total net assets .. $37,257,602 $3,715,424 $92,366,786 Net Assets =========== ========== =========== $0.01 par value capital stock Capital stock ........ $ 372,576 $ 7,195 $ 177,614 Additional paid-in capital ............ 36,885,026 3,682,876 93,241,722 Accumulated undistributed gain (loss): Accumulated undistributed net investment income --- --- --- Accumulated undistributed net realized loss on investment transactions ....... --- --- (2,619,731) Net unrealized appreciation of investments at end of period .......... --- 25,353 1,567,181 ----------- ---------- ----------- Net assets applicable to outstanding units of capital ........ $37,257,602 $3,715,424 $92,366,786 =========== ========== =========== Net asset value, redemption and offering price per share $1.0000 $5.1639 $5.2004 ======= ======= ======= Capital shares outstanding 37,257,602 719,500 17,761,447 Capital shares authorized 200,000,000 50,000,000 100,000,000 See notes to financial statements. TMK/UNITED FUNDS, INC. STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996 High Income Portfolio Assets ------------- Investment securities--at value (Notes 1 and 3). $95,388,987 Cash ................. 3,557 Receivables: Investment securities sold ............... --- Fund shares sold ..... 81,991 Dividends and interest 2,035,604 Prepaid insurance premium .............. 1,281 ----------- Total assets ....... 97,511,420 Liabilities ----------- Payable for investment securities purchased . --- Payable for Fund shares redeemed ............. 100,021 Accrued accounting services fee (Note 2) 2,500 Other ................. 2,828 ----------- Total liabilities .. 105,349 ----------- Total net assets .. $97,406,071 Net Assets =========== $0.01 par value capital stock Capital stock ........ $ 212,908 Additional paid-in capital ............ 94,545,977 Accumulated undistributed gain (loss): Accumulated undistributed net investment income --- Accumulated undistributed net realized loss on investment transactions ....... (237,516) Net unrealized appreciation of investments at end of period .......... 2,884,702 ----------- Net assets applicable to outstanding units of capital ........ $97,406,071 =========== Net asset value, redemption and offering price per share $4.5750 ======= Capital shares outstanding 21,290,838 Capital shares authorized 100,000,000 See notes to financial statements. TMK/UNITED FUNDS, INC. STATEMENT OF OPERATIONS For the Fiscal Year Ended DECEMBER 31, 1996 Growth Income International Portfolio Portfolio Portfolio ---------- ---------- ---------- Investment Income Income (Note 1B): Interest ............. $ 2,967,518 $ 1,189,162 $ 768,107 Dividends ............ 7,032,017 5,508,654 778,353 ----------- ----------- ---------- Total income 9,999,535 6,697,816 1,546,460 ----------- ----------- ---------- Expenses (Note 2): Investment management fee ................ 3,238,802 2,772,236 513,923 Accounting services fee ................ 60,000 59,167 30,000 Custodian fees ....... 37,764 19,618 82,193 Audit fees ........... 12,608 10,257 5,240 Legal fees ........... 10,474 9,018 2,024 Other ................ 20,632 18,036 3,175 ----------- ----------- ---------- Total expenses ..... 3,380,280 2,888,332 636,555 ----------- ----------- ---------- Net investment income 6,619,255 3,809,484 909,905 ----------- ----------- ---------- Realized and Unrealized Gain (Loss) on Investments (Notes 1 and 3) Realized net gain (loss) on securities ........ 51,959,601 7,401,806 (973,393) Realized net gain (loss) on foreign currency transactions ......... 1,777 --- (63,943) ----------- ----------- ---------- Realized net gain (loss) on investments ..... 51,961,378 7,401,806 (1,037,336) Unrealized appreciation (depreciation) in value of investments during the period ........... (3,365,641) 60,154,057 9,364,785 ----------- ----------- ---------- Net gain (loss) on investments ....... 48,595,737 67,555,863 8,327,449 ----------- ----------- ---------- Net increase in net assets resulting from operations ...... $55,214,992 $71,365,347 $9,237,354 =========== =========== ========== See notes to financial statements. TMK/UNITED FUNDS, INC. STATEMENT OF OPERATIONS For the Fiscal Year Ended DECEMBER 31, 1996 Small Cap Balanced Asset Strategy Portfolio Portfolio Portfolio ---------- ---------- ---------- Investment Income Income (Note 1B): Interest ............. $ 928,415 $ 870,557 $339,073 Dividends ............ 6,825 383,567 18,744 ---------- ---------- -------- Total income ....... 935,240 1,254,124 357,817 ---------- ---------- -------- Expenses (Note 2): Investment management fee ................ 689,578 194,884 59,397 Accounting services fee ................ 30,000 19,167 --- Custodian fees ....... 6,755 4,259 3,647 Audit fees ........... 5,303 5,093 4,982 Legal fees ........... 1,902 722 207 Other ................ 3,700 1,703 325 ---------- ---------- -------- Total expenses ..... 737,238 225,828 68,558 ---------- ---------- -------- Net investment income 198,002 1,028,296 289,259 ---------- ---------- -------- Realized and Unrealized Gain (Loss) on Investments (Notes 1 and 3) Realized net gain (loss) on securities ........ 3,641,030 1,315,431 (46,572) Realized net gain (loss) on foreign currency transactions ......... --- 1,290 (128) ---------- ---------- -------- Realized net gain (loss) on investments ..... 3,641,030 1,316,721 (46,700) Unrealized appreciation (depreciation) in value of investments during the period ........... 172,785 1,209,473 211,346 ---------- ---------- -------- Net gain (loss) on investments ....... 3,813,815 2,526,194 164,646 ---------- ---------- -------- Net increase in net assets resulting from operations ...... $4,011,817 $3,554,490 $453,905 ========== ========== ======== See notes to financial statements. TMK/UNITED FUNDS, INC. STATEMENT OF OPERATIONS For the Fiscal Year Ended DECEMBER 31, 1996 Money Market Limited-Term Bond Portfolio Bond Portfolio Portfolio --------------- ---------- ---------- Investment Income Income (Note 1B): Interest ............. $1,980,105 $218,628 $6,148,572 Dividends ............ --- --- --- ---------- -------- ---------- Total income ....... 1,980,105 218,628 6,148,572 ---------- -------- ---------- Expenses (Note 2): Investment management fee ................ 181,734 18,112 469,708 Accounting services fee ................ 20,000 --- 30,000 Custodian fees ....... 5,502 1,361 6,481 Audit fees ........... 5,136 4,965 5,874 Legal fees ........... 7,482 75 1,984 Other ................ 2,149 316 4,839 ---------- -------- ---------- Total expenses ..... 222,003 24,829 518,886 ---------- -------- ---------- Net investment income 1,758,102 193,799 5,629,686 ---------- -------- ---------- Realized and Unrealized Gain (Loss) on Investments (Notes 1 and 3) Realized net gain (loss) on securities ........ --- 848 (16,696) Realized net gain (loss) on foreign currency transactions ......... --- --- 50,409 ---------- -------- ---------- Realized net gain (loss) on investments ..... --- 848 33,713 Unrealized appreciation (depreciation) in value of investments during the period ........... --- (66,484) (2,694,467) ---------- -------- ---------- Net gain (loss) on investments ....... --- (65,636) (2,660,754) ---------- -------- ---------- Net increase in net assets resulting from operations ...... $1,758,102 $128,163 $2,968,932 ========== ======== =========== See notes to financial statements. TMK/UNITED FUNDS, INC. STATEMENT OF OPERATIONS For the Fiscal Year Ended DECEMBER 31, 1996 High Income Portfolio --------------- Investment Income Income (Note 1B): Interest ............. $ 8,733,322 Dividends ............ 125,386 ---------- Total income ....... 8,858,708 ---------- Expenses (Note 2): Investment management fee ................ 590,009 Accounting services fee ................ 30,000 Custodian fees ....... 6,361 Audit fees ........... 5,875 Legal fees ........... 2,042 Other ................ 4,862 ---------- Total expenses ..... 639,149 ---------- Net investment income 8,219,559 ---------- Realized and Unrealized Gain (Loss) on Investments (Notes 1 and 3) Realized net gain (loss) on securities ........ 2,951,518 Realized net gain (loss) on foreign currency transactions ......... --- ---------- Realized net gain (loss) on investments ..... 2,951,518 Unrealized appreciation (depreciation) in value of investments during the period ........... (486,973) ---------- Net gain (loss) on investments ....... 2,464,545 ---------- Net increase in net assets resulting from operations ...... $10,684,104 =========== See notes to financial statements. 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 ------------ ------------ ----------- Dividends 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 84 - 93. **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. 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 ----------- ----------- ---------- Dividends 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 84 - 93. **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. 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 ----------- ---------- ----------- Dividends 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 84 - 93. **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. 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 ---------- Dividends 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 84 - 93. **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. TMK/UNITED FUNDS, INC. STATEMENT OF CHANGES IN NET ASSETS For the Period Ended DECEMBER 31, 1995 Growth Income International Portfolio Portfolio Portfolio ----------- ----------- ----------- Increase in Net Assets Operations: Net investment income ............. $ 4,620,896 $ 3,112,227 $ 791,682 Realized net gain (loss) on investments ..... 64,283,233 5,870,913 (155,262) Unrealized appreciation (depreciation) ..... 42,925,336 63,977,939 1,669,228 ------------ ------------ ----------- Net increase in net assets resulting from operations.... 111,829,465 72,961,079 2,305,648 ------------ ------------ ----------- Dividends to shareholders (Note 1E):* From net investment income ............. (4,621,508) (3,112,674) (721,188) From realized gains on securities transactions ....... (64,282,621) (5,407,615) --- In excess of realized gains .............. ---- (1,764) --- ------------ ------------ ----------- (68,904,129) (8,522,053) (721,188) ------------ ------------ ----------- Capital share transactions** ....... 99,163,713 47,981,404 22,592,251 ------------ ------------ ----------- Total increase .... 142,089,049 112,420,430 24,176,711 Net Assets Beginning of period ... 276,736,635 218,773,602 26,019,634 ------------ ------------ ----------- End of period ......... $418,825,684 $331,194,032 $50,196,345 ============ ============ =========== Undistributed net investment income .. $--- $--- $--- ==== ==== ==== *See "Financial Highlights" on pages 84 - 93. **Shares issued from sale of shares ............. 8,244,920 7,529,946 5,011,325 Shares issued from reinvest- ment of dividends and/or distributions ......... 10,094,216 982,290 136,620 Shares redeemed ......... (3,897,735) (2,657,368) (850,796) ---------- --------- --------- Increase in outstanding capital shares ......... 14,441,401 5,854,868 4,297,149 ========== ========= ========= Value issued from sale of shares ............. $57,245,750 $60,548,279 $26,298,441 Value issued from reinvest- ment of dividends and/or distributions ......... 68,904,129 8,522,053 721,188 Value redeemed .......... (26,986,166) (21,088,928) (4,427,378) ----------- ----------- ----------- Increase in outstanding capital ... $99,163,713 $47,981,404 $22,592,251 =========== =========== =========== See notes to financial statements. TMK/UNITED FUNDS, INC. STATEMENT OF CHANGES IN NET ASSETS For the Period Ended DECEMBER 31, 1995 Small Cap Balanced Asset Strategy Portfolio Portfolio Portfolio ----------- ----------- ----------- Increase in Net Assets Operations: Net investment income $ 625,470 $ 511,312 $ 60,277 Realized net gain (loss) on investments ..... 1,011,622 375,170 4,660 Unrealized appreciation (depreciation) ..... 7,643,311 2,500,947 (53,981) ----------- ----------- ---------- Net increase in net assets resulting from operations.... 9,280,403 3,387,429 10,956 ----------- ----------- ---------- Dividends to shareholders (Note 1E):* From net investment income ............. (625,470) (511,312) (59,911) From realized gains on securities transactions ....... (1,011,622) (371,952) (5,026) In excess of realized gains .............. ---- --- --- ----------- ----------- ---------- (1,637,092) (883,264) (64,937) ----------- ----------- ---------- Capital share transactions** ....... 31,867,974 12,427,639 4,397,923 ----------- ----------- ---------- Total increase .... 39,511,285 14,931,804 4,343,942 Net Assets Beginning of period ... 16,080,162 8,671,068 --- ----------- ----------- ---------- End of period ......... $55,591,447 $23,602,872 $4,343,942 =========== =========== ========== Undistributed net investment income .. $--- $--- $--- ==== ==== ==== *See "Financial Highlights" on pages 84 - 93. **Shares issued from sale of shares ............. 4,818,197 2,264,439 876,052 Shares issued from reinvest- ment of dividends and/or distributions ......... 212,809 149,718 12,955 Shares redeemed ......... (488,640) (170,404) (22,586) --------- --------- ------- Increase in outstanding capital shares........ 4,542,366 2,243,753 866,421 ========= ========= ======= Value issued from sale of shares ............. $33,624,752 $12,476,652 $4,448,147 Value issued from reinvest- ment of dividends and/or distributions ......... 1,637,092 883,263 64,938 Value redeemed .......... (3,393,870) (932,276) (115,162) ----------- ----------- ---------- Increase in outstanding capital ... $31,867,974 $12,427,639 $4,397,923 =========== =========== ========== See notes to financial statements. TMK/UNITED FUNDS, INC. STATEMENT OF CHANGES IN NET ASSETS For the Period Ended DECEMBER 31, 1995 Money Market Limited-Term Bond Portfolio Bond Portfolio Portfolio -------------- ----------- ----------- Increase in Net Assets Operations: Net investment income $ 1,574,075 $ 144,743 $ 5,511,692 Realized net gain (loss) on investments ..... --- 10,804 882,169 Unrealized appreciation (depreciation) ..... --- 139,524 8,857,982 ----------- ---------- ----------- Net increase in net assets resulting from operations.... 1,574,075 295,071 15,251,843 ----------- ---------- ----------- Dividends to shareholders (Note 1E):* From net investment income ............. (1,574,075) (144,743) (5,517,200) From realized gains on securities transactions ....... --- (10,804) --- In excess of realized gains .............. ---- --- --- ----------- ---------- ----------- (1,574,075) (155,547) (5,517,200) Capital share transactions**........ 6,059,981 1,068,809 4,818,014 ----------- ---------- ----------- Total increase ..... 6,059,981 1,208,333 14,552,657 Net Assets Beginning of period ... 30,812,263 1,645,146 74,016,850 ----------- ---------- ----------- End of period ......... $36,872,244 $2,853,479 $88,569,507 =========== ========== =========== Undistributed net investment income .. $--- $--- $--- ==== ==== ==== *See "Financial Highlights" on pages 84 - 93. **Shares issued from sale of shares ............. 169,760,641 294,605 1,918,955 Shares issued from reinvest- ment of dividends and/or distributions ......... 1,573,890 29,626 1,029,828 Shares redeemed ......... (165,274,550) (119,359) (2,040,023) ----------- ------- --------- Increase in outstanding capital shares ........ 6,059,981 204,872 908,760 =========== ======= ========= Value issued from sale of shares ............. $169,760,641 $1,551,139 $9,976,902 Value issued from reinvest- ment of dividends and/or distributions ......... 1,573,890 155,548 5,517,200 Value redeemed .......... (165,274,550) (637,878) (10,676,088) ------------ ---------- ---------- Increase in outstanding capital ... $ 6,059,981 $1,068,809 $4,818,014 ============ ========== ========== See notes to financial statements. TMK/UNITED FUNDS, INC. STATEMENT OF CHANGES IN NET ASSETS For the Period Ended DECEMBER 31, 1995 High Income Portfolio ----------- Increase in Net Assets Operations: Net investment income $ 7,429,973 Realized net gain (loss) on investments ..... (1,443,930) Unrealized appreciation (depreciation) ..... 7,364,701 ----------- Net increase in net assets resulting from operations.... 13,350,744 ----------- Dividends to shareholders (Note 1E):* From net investment income ............. (7,429,973) From realized gains on securities transactions ....... --- In excess of realized gains .............. --- ----------- (7,429,973) ----------- Capital share transactions**........ 8,121,747 ----------- Total increase ..... 14,042,518 Net Assets Beginning of period ... 72,643,675 ----------- End of period ......... $86,686,193 =========== Undistributed net investment income .. $--- ==== *See "Financial Highlights" on pages 84 - 93. **Shares issued from sale of shares ............. 2,353,273 Shares issued from reinvest- ment of dividends and/or distributions ......... 1,672,287 Shares redeemed ......... (2,189,523) ................. --------- Increase in outstanding capital shares ........ 1,836,037 ................. ========= Value issued from sale of shares ............. $10,517,788 Value issued from reinvest- ment of dividends and/or distributions ......... 7,429,973 Value redeemed .......... (9,826,014) ................. ----------- Increase in outstanding capital ... $ 8,121,747 ................. =========== See notes to financial statements. FINANCIAL HIGHLIGHTS OF THE GROWTH PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $6.8260 $5.8986 $6.1962 $6.1505 $5.5973 ------- ------- ------- ------- ------- Income from investment operations: Net investment income .......... 0.0877 0.0903 0.1211 0.0537 0.1013 Net realized and unrealized gain on investments .. 0.6589 2.1842 0.0268 0.8087 1.0653 ------- ------- ------- ------- ------- Total from investment operations ....... 0.7466 2.2745 0.1479 0.8624 1.1666 ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income .......... (0.0877)(0.0903) (0.1211)(0.0537) (0.1013) Distribution from capital gains ... (0.6882)(1.2568) (0.3244)(0.7569) (0.5121) Distribution in excess of capital gains ........... (0.0000)(0.0000) (0.0000)(0.0061) (0.0000) ------- ------- ------- ------- ------- Total distributions. (0.7759)(1.3471) (0.4455)(0.8167) (0.6134) ------- ------- ------- ------- ------- Net asset value, end of period .... $6.7967 $6.8260 $5.8986 $6.1962 $6.1505 ======= ======= ======= ======= ======= Total return ....... 10.94% 38.57% 2.39% 14.02% 20.84% Net assets, end of period (000 omitted) ......... $513,163$418,826 $276,737$220,590 $122,363 Ratio of expenses to average net assets ............ 0.73% 0.75% 0.77% 0.78% 0.80% Ratio of net investment income to average net assets ....... 1.44% 1.35% 2.07% 1.01% 2.00% Portfolio turnover rate ............. 243.00% 245.80% 277.36% 297.81% 225.87% Average commission rate paid ........ $0.0572 See notes to financial statements. FINANCIAL HIGHLIGHTS OF THE INCOME PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $ 8.6756 $6.7689 $6.9180 $5.9530 $5.3158 -------- ------- ------- ------- ------- Income from investment operations: Net investment income .......... 0.0835 0.0839 0.0703 0.0651 0.0803 Net realized and unrealized gain (loss) on investments .. 1.6239 2.0525 (0.1491) 0.9650 0.6496 -------- ------- ------- ------- ------- Total from investment operations ....... 1.7074 2.1364 (0.0788) 1.0301 0.7299 -------- ------- ------- ------- ------- Less distributions: Dividends from net investment income .......... (0.0835)(0.0839) (0.0703)(0.0651) (0.0803) Distribution from capital gains.... (0.1622)(0.1457) (0.0000)(0.0000) (0.0124) Distribution in excess of capital gains (0.0000)(0.0001) (0.0000)(0.0000) (0.0000) -------- ------- ------- ------- ------- Total distributions. (0.2457)(0.2297) (0.0703)(0.0651) (0.0927) -------- ------- ------- ------- ------- Net asset value, end of period .... $10.1373 $8.6756 $6.7689 $6.9180 $5.9530 ======== ======= ======= ======= ======= Total return........ 19.68% 31.56% -1.14% 17.30% 13.78% Net assets, end of period (000 omitted) ......... $462,391$331,194 $218,774$155,092 $65,027 Ratio of expenses to average net assets ............ 0.73% 0.77% 0.77% 0.79% 0.85% Ratio of net investment income to average net assets ....... 0.97% 1.13% 1.16% 1.36% 1.78% Portfolio turnover rate ............. 22.95% 15.00% 23.32% 18.38% 15.74% Average commission rate paid ........ $0.0586 See notes to financial statements. 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 1996 1995 12/31/94* ---------- ---------- ---------- Net asset value, beginning of period ........... $5.2790 $4.9926 $5.0000 ------- ------- ------- Income from investment operations: Net investment income .......... 0.0663 0.0846 0.0207 Net realized and unrealized gain (loss) on investments... 0.7300 0.2790 (0.0074) ------- ------- ------- Total from investment operations ....... 0.7963 0.3636 0.0133 ------- ------- ------- Less distributions: Dividends from net investment income .......... (0.0636) (0.0772) (0.0207) Distributions from capital gains ... (0.0127) (0.0000) (0.0000) ------- ------- ------- Total distributions. (0.0763) (0.0772) (0.0207) Net asset value, end of period .... $5.9990 $5.2790 $4.9926 ======= ======= ======= Total return........ 15.09% 7.28% 0.26% Net assets, end of period (000 omitted) ......... $79,849 $50,196 $26,020 Ratio of expenses to average net assets ............ 1.00% 1.02% 1.26% Ratio of net investment income to average net assets ....... 1.42% 1.99% 1.36% Portfolio turnover rate ............. 75.01% 34.93% 23.23% Average commission rate paid ........ $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. **Annualized. See notes to financial statements. 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 1996 1995 12/31/94* ---------- ---------- ---------- Net asset value, beginning of period ........... $7.6932 $5.9918 $5.0000 ------- ------- ------- Income from investment operations: Net investment income .......... 0.0163 0.0900 0.0376 Net realized and unrealized gain on investments .. 0.6241 1.8470 1.0086 ------- ------- ------- Total from investment operations ....... 0.6404 1.9370 1.0462 ------- ------- ------- Less distributions: Dividends from net investment income (0.0163) (0.0900) (0.0376) Distribution from capital gains.... (0.2997) (0.1456) (0.0168) ------- ------- ------- Total distributions (0.3160) (0.2356) (0.0544) ------- ------- ------- Net asset value, end of period .... $8.0176 $7.6932 $5.9918 ======= ======= ======= Total return........ 8.33% 32.32% 20.92% Net assets, end of period (000 omitted) ......... $97,408 $55,591 $16,080 Ratio of expenses to average net assets ............ 0.91% 0.96% 1.08% Ratio of net investment income to average net assets ....... 0.25% 1.77% 2.35% Portfolio turnover rate ............. 133.77% 43.27% 21.61% Average commission rate paid ........ $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. 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 1996 1995 12/31/94* ---------- ---------- ---------- Net asset value, beginning of period ........... $5.9000 $4.9359 $5.0000 ------- ------- ------- Income from investment operations: Net investment income .......... 0.1502 0.1333 0.0460 Net realized and unrealized gain (loss) on investments .. 0.4890 1.0611 (0.0641) ------- ------- ------- Total from investment operations ....... 0.6392 1.1944 (0.0181) ------- ------- ------- Less distributions: Dividends from net investment income .......... (0.1504) (0.1333) (0.0460) Distribution from capital gains.... (0.1921) (0.0970) (0.0000) ------- ------- ------- Total distributions (0.3425) (0.2303) (0.0460) ------- ------- ------- Net asset value, end of period .... $6.1967 $5.9000 $4.9359 ======= ======= ======= Total return........ 10.84% 24.19% -0.37% Net assets, end of period (000 omitted) .... $42,427 $23,603 $8,671 Ratio of expenses to average net assets ............ 0.70% 0.72% 0.95% Ratio of net investment income to average net assets ....... 3.18% 3.22% 3.14% Portfolio turnover rate ............. 44.23% 62.87% 19.74% Average commission rate paid ........ $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. FINANCIAL HIGHLIGHTS OF THE ASSET STRATEGY PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the For the fiscal year period ended ended 12/31/96 12/31/95* ---------- ---------- Net asset value, beginning of period ........... $5.0137 $5.0000 ------- ------- Income from investment operations: Net investment income .......... 0.1755 0.0717 Net realized and unrealized gain on investments .. 0.1203 0.0193 ------- ------- Total from investment operations ....... 0.2958 0.0910 ------- ------- Less distributions: Dividends from net investment income .......... (0.1752) (0.0713) Distribution from capital gains.... (0.0000) (0.0060) ------- ------- Total distributions (0.1752) (0.0773) ------- ------- Net asset value, end of period .... $5.1343 $5.0137 ======= ======= Total return........ 5.92% 1.80% Net assets, end of period (000 omitted) ......... $8,474 $4,344 Ratio of expenses to average net assets ............ 0.93% 0.91% Ratio of net investment income to average net assets ....... 3.92% 4.42% Portfolio turnover rate ............. 49.92% 149.17% Average commission rate paid ........ $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. FINANCIAL HIGHLIGHTS OF THE MONEY MARKET PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 ------- ------- ------- ------- ------- Net investment income .......... 0.0486 0.0542 0.0368 0.0260 0.0324 Less dividends declared ......... (0.0486)(0.0542) (0.0368)(0.0260) (0.0324) ------- ------- ------- ------- ------- Net asset value, end of period .... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 ======= ======= ======= ======= ======= Total return ....... 5.01% 5.56% 3.72% 2.63% 3.29% Net assets, end of period (000 omitted) ......... $37,258 $36,872 $30,812 $26,000 $23,995 Ratio of expenses to average net assets ............ 0.61% 0.62% 0.65% 0.65% 0.65% Ratio of net investment income to average net assets ....... 4.87% 5.42% 3.72% 2.61% 3.17% See notes to financial statements. 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 1996 1995 12/31/94* ---------- ---------- ---------- Net asset value, beginning of period ........... $5.2521 $4.8611 $5.0000 ------- ------- ------- Income from investment operations: Net investment income .......... 0.2694 0.2841 0.1507 Net realized and unrealized gain (loss) on investments .. (0.0870) 0.4122 (0.1375) ------- ------- ------- Total from investment operations ....... 0.1824 0.6963 0.0132 ------- ------- ------- Less distributions: Dividends from net investment income .......... (0.2694) (0.2841) (0.1507) Distribution from capital gains ... (0.0012) (0.0212) (0.0014) ------- ------- ------- Total distributions (0.2706) (0.3053) (0.1521) ------- ------- ------- Net asset value, end of period .... $5.1639 $5.2521 $4.8611 ======= ======= ======= Total return........ 3.51% 14.29% 0.26% Net assets, end of period (000 omitted) ......... $3,715 $2,853 $1,645 Ratio of expenses to average net assets ............ 0.76% 0.71% 0.93% Ratio of net investment income to average net assets ....... 5.92% 6.22% 5.89% Portfolio turnover rate ............. 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. FINANCIAL HIGHLIGHTS OF THE BOND PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $5.3592 $4.7393 $5.4045 $5.2626 $5.2661 ------- ------- ------- ------- ------- Income from investment operations: Net investment income .......... 0.3170 0.3556 0.3507 0.3334 0.3643 Net realized and unrealized gain (loss) on investments ..... (0.1560) 0.6202 (0.6652) 0.3046 0.0216 ------- ------- ------- ------- ------- Total from investment operations ....... 0.1610 0.9758 (0.3145) 0.6380 0.3859 ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income .......... (0.3198)(0.3559) (0.3507)(0.3334) (0.3643) Distribution from capital gains ... (0.0000)(0.0000) (0.0000)(0.1627) (0.0251) ------- ------- ------- ------- ------- Total distributions. (0.3198)(0.3559) (0.3507)(0.4961) (0.3894) ------- ------- ------- ------- ------- Net asset value, end of period .... $5.2004 $5.3592 $4.7393 $5.4045 $5.2626 ======= ======= ======= ======= ======= Total return ....... 3.04% 20.56% -5.90% 12.37% 7.67% Net assets, end of period (000 omitted) ......... $92,367 $88,570 $74,017 $81,727 $49,428 Ratio of expenses to average net assets ............ 0.59% 0.60% 0.62% 0.62% 0.64% Ratio of net investment income to average net assets ....... 6.39% 6.73% 6.73% 6.01% 6.91% Portfolio turnover rate ............. 64.02% 71.17% 135.82% 68.75% 44.32% See notes to financial statements. FINANCIAL HIGHLIGHTS OF THE HIGH INCOME PORTFOLIO For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended December 31, ----------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $4.4448 $4.1118 $4.6373 $4.2886 $4.0770 ------- ------- ------- ------- ------- Income from investment operations: Net investment income .......... 0.3861 0.4165 0.4106 0.3899 0.4050 Net realized and unrealized gain (loss) on investments ..... 0.1302 0.3330 (0.5255) 0.3487 0.2116 ------- ------- ------- ------- ------- Total from investment operations ....... 0.5163 0.7495 (0.1149) 0.7386 0.6166 ------- ------- ------- ------- ------- Less dividends from net investment income ........... (0.3861)(0.4165) (0.4106)(0.3899) (0.4050) ------- ------- ------- ------- ------- Net asset value, end of period .... $4.5750 $4.4448 $4.1118 $4.6373 $4.2886 ======= ======= ======= ======= ======= Total return ....... 11.66% 18.19% -2.55% 17.90% 15.70% Net assets, end of period (000 omitted) ......... $97,406 $86,686 $72,644 $71,265 $41,456 Ratio of expenses to average net assets ............ 0.71% 0.72% 0.74% 0.75% 0.77% Ratio of net investment income to average net assets ....... 9.10% 9.25% 9.03% 8.66% 9.48% Portfolio turnover rate ............. 58.91% 41.78% 37.86% 54.22% 60.79% See notes to financial statements. TMK/UNITED FUNDS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 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 ten classes that are designated the Growth Portfolio, the Income 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 Nasdaq (National Association of Securities Dealers Automated Quotations System) 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 $88,163. 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; 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 $1.4 billion of combined net assets at December 31, 1996) 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 $31,861. 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, 1996 are summarized as follows: Growth Income International Portfolio Portfolio Portfolio ----------- --------- --------- Purchases of investment securities, excluding short- term and U.S. Government securities $1,040,870,797 144,181,555 64,556,283 Purchases of U.S. Government securities --- --- --- Purchases of short-term securities 846,781,140 291,692,250 150,382,170 Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government securities 996,546,863 85,178,243 37,686,374 Proceeds from maturities and sales of U.S. Government securities --- --- --- Proceeds from maturities and sales of short-term securities 853,465,387 285,255,891 155,764,432 Small Cap BalancedAsset Strategy Portfolio Portfolio Portfolio ----------- --------- --------- Purchases of investment securities, excluding short- term and U.S. Government securities $125,946,580 19,355,388 4,751,742 Purchases of U.S. Government securities --- 9,060,547 3,389,069 Purchases of short-term securities 198,792,126 38,737,849 28,537,937 Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government securities 88,715,672 12,036,780 2,150,271 Proceeds from maturities and sales of U.S. Government securities --- --- --- Proceeds from maturities and sales of short-term securities 198,541,634 39,071,000 30,702,807 Limited- High Term Bond Bond Income Portfolio Portfolio Portfolio ----------- --------- --------- Purchases of investment securities, excluding short- term and U.S. Government securities $ 573,045 31,828,950 59,299,135 Purchases of U.S. Government securities 748,694 27,115,480 --- Purchases of short-term securities 1,638,000 46,484,023 59,031,704 Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government securities 350,401 32,735,705 50,300,654 Proceeds from maturities and sales of U.S. Government securities 126,135 21,038,550 --- Proceeds from maturities and sales of short-term securities 1,525,000 45,108,954 59,733,061 For Federal income tax purposes, cost of investments owned at December 31, 1996 and the related unrealized appreciation (depreciation) were as follows: Aggregate CostAppreciationDepreciationAppreciation ------------------------------------------------ Growth Portfolio $482,578,321$ 42,625,397$(12,755,267)$ 29,870,130 Income Portfolio 323,475,140 141,809,541 (1,305,274) 140,504,267 International Portfolio69,850,245 12,334,759 (1,959,911) 10,374,848 Small Cap Portfolio 88,191,140 13,864,367 (4,739,992) 9,124,375 Balanced Portfolio 38,551,530 4,064,071 (589,085) 3,474,986 Asset Strategy Portfolio8,227,509 249,550 (92,229) 157,321 Money Market Portfolio 34,563,968 -- -- -- Limited-Term Bond Portfolio3,621,369 41,817 (16,464) 25,353 Bond Portfolio 89,456,707 1,857,614 (290,433) 1,567,181 High Income Portfolio 92,504,285 3,928,471 (1,043,769) 2,884,702 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, Balanced, and Limited-Term Bond Portfolios realized capital gain net income of $51,622,358, $7,401,806, $1,315,431 and $848, respectively, during the year ended December 31, 1996. For Federal income tax purposes, Small Cap Portfolio realized capital gain net income of $8,896,601 for the year ended December 31, 1996, which included the effect of certain losses deferred into the next fiscal year (see discussion below). For Federal income tax purposes, High Income Portfolio realized capital gain net income of $2,951,518 for the year ended December 31, 1996, which was entirely offset by utilization of capital loss carryforwards. Remaining prior year capital loss carryforwards of High Income Portfolio aggregated $237,516 as of December 31, 1996, and are available to offset future capital gain net income through December 31, 2003. For Federal income tax purposes, International Portfolio, Asset Strategy Portfolio and Bond Portfolio realized capital losses of $1,145,948, $46,572 and $16,696, respectively, during the year ended December 31, 1996. These amounts are available to offset future realized capital gain net income through December 31, 2004. In addition, prior year capital loss carryforwards of Bond Portfolio aggregated $2,603,035 as of December 31, 1996, and are available to offset future realized capital gain net income through December 31, 2002. The capital gain net income of Growth, Income, Balanced and Limited-Term Bond Portfolios was paid to shareholders during the year ended December 31, 1996. A portion of the capital gain net income of Small Cap Portfolio was paid to shareholders during the period ended December 31, 1996. Remaining capital gain net income will be distributed to shareholders. 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, 1996 through December 31, 1996, Small Cap Portfolio incurred net capital losses of $5,285,152, which have been deferred to the calendar year ending December 31, 1997. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, TMK/United Funds, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of the Growth Portfolio, Income 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, 1996, the related statements of operations and changes in net assets for the year then ended, and the financial highlights for the year 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. The financial statements and the financial highlights of the Portfolios for each of the years in the four- year period ended December 31, 1995 were audited by other auditors whose report, dated February 8, 1996, expressed an unqualified opinion on those statements and financial highlights. 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, 1996 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, 1996, the results of their operations, the changes in their net assets, and their financial highlights for the year then ended in conformity with generally accepted accounting principles. Deloitte & Touche LLP Kansas City, Missouri January 31, 1997 DIRECTORS Ronald K. Richey, Birmingham, Alabama, Chairman of the Board Henry L. Bellmon, Red Rock, Oklahoma Dodds I. Buchanan, Boulder, Colorado 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 James C. Cusser, Vice President Robert L. Hechler, Vice President Henry J. Herrmann, Vice President Theodore W. Howard, Vice President and Treasurer Antonio Intagliata, Vice President 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 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. Advantage I. A flexible premium variable life insurance policy. Advantage II. A deferred variable annuity policy. Both 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. Invested In: Primarily common stocks or securities convertible into common stocks. 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 with reduced risk 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(12-96) printed on recycled paper -----END PRIVACY-ENHANCED MESSAGE-----