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As filed with the Securities and Exchange Commission
on February 20, 1997
Registration No. 33-15881 811-07917
____________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. __ [_]
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 1 [X]
(Check appropriate box or boxes)
HORACE MANN MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
ONE HORACE MANN PLAZA
SPRINGFIELD, ILLINOIS 62715
(Address of Principal Executive Offices, including Zip Code)
(217)789-2500
(Registrant's Telephone Number, including Area Code)
ANN M. CAPARROS
ONE HORACE MANN PLAZA
SPRINGFIELD, ILLINOIS 62715
(Name and Address of Agent for Service)
COPY TO:
CATHY G. O'KELLY
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 N. LASALLE
CHICAGO, ILLINOIS 60601
APPROXIMATE DATE OF PROPOSED OFFERING: As soon as practicable after the
effective date of this Registration Statement.
Pursuant to Reg. (S)270.24f-2 under the Investment Company Act of 1940,
Registrant hereby declares that an indefinite number or amount of shares are
being registered under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
<PAGE>
HORACE MANN MUTUAL FUNDS
Cross Reference Sheet
(As Required by Rule 495)
<TABLE>
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Item Number in Form N-1A Caption
- ------------------------ -------
PART A - PROSPECTUS
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1. Cover Page Cover Page
2. Synopsis Cover Page
3. Condensed Financial Information Investment Return
4. General Description of the Registrant The Trust, the Funds, and Their Investment Objectives and
Policies; Types of Investments and Associated Risks
5. Management of the Fund Management
5A. Management's Discussion of Fund Performance Not Applicable
6. Capital Stock and other Securities Voting Rights, Purchases and Redemptions; Shareholder
Inquiries; Dividends, Distributions and Federal Taxes
7. Purchase of Securities Being Offered Purchases and Redemptions
Dividends, Distributions and Federal Taxes
8. Redemption or Repurchase Purchases and Redemptions
9. Pending Legal Proceedings Not Applicable
</TABLE>
<PAGE>
Horace Mann Mutual Funds
Cross Reference Sheet (continued)
<TABLE>
<CAPTION>
Item Number in Form N-1A Caption
- ------------------------ -------
PART B - STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information
13. Investment Objectives and Policies Investment Restrictions
14. Management of the Fund Management of the Funds
15. Control Persons and Principal Holders of Securities Control Persons and Principal Holders of Securities
Management of the Funds
16. Investment Advisory and Other Securities Investment Advisory Agreements; Types of Investments and
Associated Risks; Other Services
17. Brokerage Allocation Brokerage Allocation
18. Capital Stock and Other Securities Control Persons and Principal Holders of Securities
19. Purchase, Redemption and Pricing of Securities Being Purchase, Redemption and Pricing of Fund Shares
Offered
20. Tax Status Tax Status
21. Underwriters Not applicable
22. Calculations of Performance Data Investment Performance
23. Financial Statements Independent Auditors Report, Statement of Net Assets
</TABLE>
PART C
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Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
HORACE MANN MUTUAL FUNDS
SMALL CAP GROWTH FUND
INTERNATIONAL EQUITY FUND
SOCIALLY RESPONSIBLE FUND
The Horace Mann Mutual Funds (the "Trust") is an open-end, diversified,
management investment company registered under the Investment Company Act of
1940, which offers units of beneficial ownership ("shares") in three separate
diversified investment portfolios: the Small Cap Growth Fund, the International
Equity Fund and the Socially Responsible Fund. These funds collectively are
referred to as the "Funds." The Funds issue shares that are continually offered
for sale and are available exclusively as funding vehicles for the variable
annuity contracts of Horace Mann Insurance Company. Fund shares may be
purchased or redeemed at net asset value.
The investment objective of the Small Cap Growth Fund is long-term capital
appreciation. The Small Cap Growth Fund invests primarily in a portfolio of
equity securities of small cap companies with earnings growth potential.
The investment objective of the International Equity Fund is long-term
growth of capital primarily through a diversified portfolio of marketable
foreign equity securities.
The investment objectives of the Socially Responsible Fund are long-term
growth of capital, current income and growth of income. The Socially
Responsible Fund invests primarily in a portfolio of equity securities of United
States based companies, which are determined to be socially responsible pursuant
to criteria set forth in this prospectus.
As a result of the market risk inherent in any investment, there is no
assurance that any Fund will meet its investment objectives.
This Prospectus sets forth concisely the information a prospective investor
should know before investing. Additional information about the Funds has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information, dated March 3, 1997, which is incorporated herein by reference and
may be amended from time to time. The Statement of Additional Information is
available upon request, without charge, by writing to the Horace Mann Funds,
P.O. Box 4657, Springfield, Illinois 62708-4657, by sending a telefacsimile
(FAX) transmission to (217) 527-2307, or by telephoning (217) 789-2500 or (800)
999-1030 (toll-free). The Table of Contents of the Statement of Additional
Information appears on page __ of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
__________________
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
__________________
The date of this Prospectus is March 3, 1997.
<PAGE>
TABLE OF CONTENTS
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Page
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The Trust, the Funds, and Their
Investment Objectives and Policies.............................. 1
Small Cap Growth Fund........................................ 1
International Equity Fund.................................... 1
Socially Responsible Fund.................................... 2
Fundamental Investment Limitations.............................. 3
Types of Investments and Associated
Risks........................................................... 3
Management...................................................... 7
Investment Adviser and Manager, Horace Mann Investors, Inc... 7
The Sub-Advisers............................................. 8
Small Cap Growth Fund.................................... 8
International Equity Fund................................ 8
Socially Responsible Fund................................ 9
General.................................................. 9
Custodian and Fund Accounting Agent:......................... 9
Transfer Agent and Dividend Paying Agent:.................... 9
Investment Return............................................ 9
Purchases and Redemptions....................................... 12
Dividends, Distributions and
Federal Taxes................................................... 12
Voting Rights................................................... 12
Shareholders Inquiries.......................................... 13
Additional Information.......................................... 13
</TABLE>
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THE TRUST, THE FUNDS, AND THEIR INVESTMENT OBJECTIVES AND POLICIES
The Trust was organized as a Delaware business trust under a Declaration of
Trust dated November 7, 1996. The Declaration of Trust permits the Trust to
offer shares of separate funds. All consideration received by the Trust for
shares of any fund and all assets of such fund belong to that fund and would be
subject to liabilities related thereto. The Trust reserves the right to create
and issue shares of funds in addition to the Funds described herein.
Horace Mann Investors, Inc. ("Investors") serves as each Fund's investment
adviser and manager. Investors has entered into an agreement with PNC Equity
Advisors Company to act as the subadviser for the Small Cap Growth Fund and has
entered into an agreement with Scudder, Stevens & Clark, Inc. to act as the
subadviser for the International Equity Fund and the Socially Responsible Fund.
Additional information about each adviser is under "Management."
The investment objective and policies of each Fund are described below.
Prospective purchasers should recognize that there are risks in the ownership of
any security and that there can be no assurance that the objectives of the Funds
will be realized.
Each Fund seeks to attain its objective by pursuing investment policies
that call for investments in certain types of securities and by employing
various investment strategies. These investment policies and strategies may be
changed without shareholder approval. However, each Fund will not, as a matter
of policy, change its investment policies without notice to its
shareholders.
Supplemental information on the investment policies as well as a
description of the investment restrictions of each Fund are contained in the
Statement of Additional Information.
SMALL CAP GROWTH FUND
The Small Cap Growth Fund seeks long-term capital appreciation. The Fund
ordinarily invests substantially all of its assets in small cap equity
securities with earnings growth potential. Such securities would be considered
by the sub-adviser to have favorable and above-average earnings growth
prospects, that is, securities with growth rate estimates in excess of the
average for the Fund's benchmark (Russell 2000 Growth Index) and a
capitalization below $1 billion.
The Small Cap Growth Fund may make interim investments in short-term debt
instruments in order to generate a return on otherwise idle cash. If a market
decline is expected, the Fund may sell its portfolio securities and invest all
or part of the proceeds in investment grade corporate bonds, debentures,
preferred stock and U.S. Government securities; or it may retain funds in the
form of cash or cash equivalents.
INTERNATIONAL EQUITY FUND
The International Equity Fund seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments. The Fund
invests in companies, wherever organized, which do business primarily outside
the United States. The Fund intends to diversify investments among several
countries and to have represented in its holdings business activities in not
less than three different countries. The Fund does not intend to concentrate
investments in any particular industry.
The International Equity Fund invests primarily in equity securities of
established companies that the sub-adviser believes have favorable
characteristics, listed on foreign exchanges. It may also invest in fixed
income securities of foreign governments and companies. However, management
intends to maintain a portfolio consisting primarily of equity securities.
Investing in foreign securities may involve a greater degree of risk than
investing in domestic securities due to the possibility of exchange rate
fluctuations and exchange controls, less publicly available information, more
volatile markets, less securities regulation, less favorable tax provisions, war
and expropriation. The net asset value of the shares of the Fund will increase
or decrease with changes in the market price of the Fund's investments and
changes in foreign currency exchange rates. (See "Types of Investments and
Associated Risks -- Foreign Securities").
The International Equity Fund has no present intention of altering its
general policy of being primarily invested under normal conditions in foreign
securities. However, in the event of exceptional conditions abroad, the Fund
may temporarily invest
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all or a portion of its assets in Canadian or U.S. Government obligations or
currencies, or securities of companies incorporated in and having their
principal activities in Canada or the United States.
The International Equity Fund may, for hedging purposes, purchase forward
foreign currency exchange contracts, foreign currency options and futures
contracts and foreign currencies in the form of bank deposits. The Fund may
also purchase other foreign money market instruments, including, but not limited
to, bankers' acceptances, certificates of deposit, commercial paper, short-term
government and corporate obligations and repurchase agreements.
SOCIALLY RESPONSIBLE FUND
The Socially Responsible Fund seeks long-term growth of capital, current
income and growth of income. It pursues these objectives through a diversified
portfolio composed primarily of marketable equity securities. The Socially
Responsible Fund seeks to achieve these objectives by investing in socially
responsive companies which the sub-adviser determines:
(a) Do not produce tobacco products;
(b) Do not produce alcoholic beverages;
(c) Do not own and/or operate casinos or manufacture gaming devices;
(d) Do not produce pornographic materials;
(e) Do not produce nuclear weapons or guidance and/or delivery systems
specifically for nuclear weapons;
(f) By popular standards, maintain non-discriminatory employment practices
throughout a company's facilities; and
(g) By popular standards, maintain environmental policies, practices and
procedures which are currently acceptable, or which are exhibiting
improvement.
In addition, except during the initial start-up period or pending the
reinvestment of proceeds from the sale or disposition of the Fund's portfolio
securities or the distribution of assets upon termination of the Fund,
substantially all and at least 85% of the Fund's total assets will, under normal
circumstances, be invested in equity securities of companies which are, in the
opinion of the subadvisor, of at least average financial quality but which are
currently undervalued relative to either their peer group, the markets or their
fundamental outlook, and whose dividend yields at the time of initial purchase
are at least 20% higher than the dividend yield of the S&P 500 Index.
While the Fund emphasizes investments in U.S. chartered companies, it can
commit up to 25% of the Fund's total assets to equity securities issued by non-
U.S. chartered companies which meet the criteria applicable to domestic
investments.
The above investment limitations or policies are applied at the time
investment securities are purchased.
In the course of pursuing its investment objectives, the Socially
Responsible Fund may engage in so-called "strategic transactions," and in this
regard, the Fund may purchase and sell exchange-listed and over-the-counter put
and call options on securities, on securities indices and on other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars, enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures, purchase and sell derivatives and other similar
instruments, and engage in other similar or related investment techniques or
strategies. Any or all of these investment techniques or strategies may be used
at any time and there is no particular technique or strategy that dictates the
use of one technique or strategy rather than another, as use of any "strategic
transaction" is a function of numerous variables including market conditions.
Although certain "strategic transactions" may be used to enhance potential
gain, the Socially Responsible Fund will not enter into any "strategic
transactions" for non-hedging purposes, if, as a result of entering into any
such transactions, more than 5% of the Fund's total assets would then be
committed
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for non-hedging purposes. "Strategic transactions" involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes, and with respect to transactions which do not qualify as
hedging transactions within the meaning of applicable regulations of the
Commodity Futures Trading Commission, the Fund will not enter into futures
contracts or related options, if, as a result of entering into such futures
contracts or related options, the aggregate initial margin and premiums for
establishing all such positions exceed 5% of the fair market value of the Fund's
net assets, not including any in-the-money amount on any such options in
computing such 5%. The Fund will comply with applicable regulatory requirements
when implementing these "strategic transactions."
FUNDAMENTAL INVESTMENT LIMITATIONS
A Fund's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be
provided that a Fund will achieve its investment objective.
Each Fund has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Fund" which are set forth in the Statement of Additional Information.
TYPES OF INVESTMENTS AND ASSOCIATED RISKS
Investments in any type of security are subject to varying degrees of
market risk, financial risk, and in some cases, reinvestment risk. Although the
Funds are subject to these risks, their investment policies and restrictions are
designed to reduce such risk.
MARKET RISK is the potential for fluctuations in the price of the security
because of market factors. For equity securities, market risk is the
possibility of change in price caused by stock market price changes; for debt
securities, market risk is the possibility that the price will fall because of
changing interest rates. In general, debt securities' prices vary inversely with
changes in interest rates. If interest rates rise, bond prices generally fall;
if interest rates fall, bond prices generally rise. In addition, for a given
change in interest rates, longer-maturity bonds fluctuate more in price (gaining
or losing more in value) than shorter-maturity bonds.
FINANCIAL RISK is based on the financial situation of the issuer. For
equity securities, financial risk is the possibility that the price of the
security will fall because of poor earnings performance by the issuer. For debt
securities, financial risk is the possibility that a bond issuer will fail to
make timely payments of interest or principal to a fund. The financial risk of
a fund depends on the credit quality of its underlying securities. In general,
the lower the credit quality of a fund's securities, the higher a fund's yield,
all other factors such as maturity being equal.
REINVESTMENT RISK is the possibility that, during periods of falling
interest rates, a debt security with a high stated interest rate will be prepaid
(or "called") prior to its expected maturity date. If during periods of falling
interest rates a debt security with a high stated interest rate is called away,
the unanticipated proceeds would likely be invested at lower interest rates, and
the fund's income may decline. Call provisions, which may lead to reinvestment
risk, are most common for intermediate and long-term municipal, corporate and
mortgage-backed securities. To the extent securities subject to call were
acquired at a premium, the potential for appreciation in the event of a decline
in interest rates may be limited and may even result in losses.
In addition to the risks generally associated with investing, there are
risks particular to certain types of investments. The following provides
additional information on various types of instruments in which the Funds may
invest and their associated risks. A Fund may not buy all these instruments to
the extent permitted unless it believes that doing so will help the Fund achieve
its objectives.
EQUITY SECURITIES -- During normal market conditions each Fund will invest
primarily in equity securities. The Funds will invest primarily in equity
securities of U.S. issuers, except the International Equity Fund, which will
invest primarily in foreign issuers. Equity securities include common stock and
preferred stock (including convertible preferred stock); bonds, notes and
debentures convertible into
3
<PAGE>
common or preferred stock; stock purchase warrants and rights; equity interests
in trusts and partnerships; and depositary receipts of companies. Under normal
market conditions the Small Cap Growth Fund will invest at least 90% of its
total assets in equity securities of smaller-capitalized organizations (less
than $1 billion at the time of investment). These organizations will normally
have more limited product lines, market and financial resources and will be
dependent upon a more limited management group than larger capitalized
companies. Under normal market conditions the Socially Responsible Fund will
invest at least 85% of the value of its total assets in equity securities.
U.S. GOVERNMENT OBLIGATIONS -- U.S. Government obligations are direct
obligations of the U.S. Government and are supported by the full faith and
credit of the U.S. Government. U.S. Government agency securities are issued or
guaranteed by U.S. Government sponsored enterprises and federal agencies. Some
of these securities are backed by the full faith and credit of the U.S.
Government; others are backed by the agency's right to borrow a specified amount
from the U.S. Treasury; and still others, while not guaranteed directly or
indirectly by the U.S. Government, are backed with collateral in the form of
cash, Treasury securities or debt instruments that the lending institution has
acquired through its lending activities.
ADRS, EDRS, AND GDRS -- Each Fund may invest in both sponsored and
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs") and other similar global
instruments. ADRs typically are issued by an American bank or trust company and
evidence ownership of underlying securities issued by a foreign corporation.
EDRs, which are sometimes referred to as Continental Depository Receipts, are
receipts issued in Europe, typically by foreign banks and trust companies, that
evidence ownership of either foreign or domestic underlying securities. GDRs
are depository receipts structured like global debt issues to facilitate trading
on an international basis. Unsponsored ADR, EDR and GDR programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuer may not be
as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored
ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored
by the issuer. Investments in ADRs, EDRs and GDRs present additional investment
considerations as described below under "Foreign Investments."
OPTIONS AND FUTURES CONTRACTS -- To the extent consistent with its
investment objective, each Fund may write covered call options, buy put options,
buy call options and write secured put options for the purpose of hedging or
earning additional income, which may be deemed speculative or, with respect to
the International Equity Fund, cross-hedging. These options may relate to
particular securities, financial instruments, foreign currencies, stock or bond
indices or the yield differential between two securities, and may or may not be
listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. Options trading is a highly specialized activity that
entails greater than ordinary investment risks. In addition, unlisted options
are not subject to the protections afforded purchasers of listed options issued
by the Options Clearing Corporation, which performs the obligations of its
members if they default.
To the extent consistent with its investment objective, each Fund may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or for other hedging
purposes. The value of a Fund's contracts may equal or exceed 100% of the
Fund's total assets, although a Fund will not purchase or sell a futures
contract unless immediately afterwards the aggregate amount of margin deposits
on its existing futures positions plus the amount of premiums paid for related
futures options entered into for other than bona fide hedging purposes is 5% or
less of its net assets.
Futures contracts obligate a Fund, at maturity, to take or make delivery of
securities, the cash value of a securities index or a stated quantity of a
foreign currency. A Fund may sell a futures contract in order to offset an
expected decrease in the value of its portfolio positions that might otherwise
result from a market decline or currency exchange fluctuation. A Fund may do so
either to hedge the
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value of its securities portfolio as a whole, or to protect against declines
occurring prior to sales of securities in the value of the securities to be
sold. In addition, a Fund may utilize futures contracts in anticipation of
changes in the composition of its holdings or in currency exchange rates.
A Fund may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or a
seller of a futures contract at a specified exercise price during the option
period. When a Fund sells an option on a futures contract, it becomes obligated
to sell or buy a futures contract if the option is exercised. In connection
with a Fund's position in a futures contract or related option, the Fund will
create a segregated account of liquid assets or will otherwise cover its
position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options
are (a) the imperfect correlation between the change in market value of the
instruments held by a Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; and (d) a
sub-adviser's inability to predict correctly the direction of securities prices,
interest rates, currency exchange rages and other economic factors.
The Funds intend to comply with the regulations of the Commodity Futures
Trading Commission exempting the Funds from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT -- Pending investment, to meet anticipated redemption
requests, or as a temporary defensive measure if its sub-adviser determines that
market conditions warrant, a Fund may also invest without limitation in high
quality money market instruments.
High quality money market instruments include U.S. government obligations,
U.S. government agency obligations, dollar denominated obligations of foreign
issuers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and
obligations of supranational organizations. Generally, such obligations will
mature within one year from the date of settlement, but may mature within two
years from the date of settlement.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS -- Each Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Fund
to purchase or sell particular securities with payment and delivery taking place
at a future date (perhaps one or two months later), and permit a Fund to lock in
a price or yield on a security it owns or intends to purchase, regardless of
future changes in interest rates. When-issued and forward commitment
transactions involve the risk, however, that the price or yield obtained in a
transaction may be less favorable than the price or yield available in the
market when the securities delivery takes place. Each Fund's when-issued
purchases and forward commitments are not expected to exceed 25% of the value of
its total assets absent unusual market conditions. The Funds do not intend to
engage in when-issued purchases and forward commitments for speculative purposes
but only in furtherance of their investment objectives.
REPURCHASE AGREEMENTS -- Repurchase agreements are instruments under which
a Fund acquires ownership of a security and the seller agrees, at the time of
the sale, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during a Fund's holding period. A Fund entering
into a repurchase agreement is exposed to the risk that the other party to the
agreement may be unable to keep its commitment to repurchase. In that event, a
Fund may incur disposition costs in connection with liquidating the collateral
(i.e., the underlying security). Moreover, if bankruptcy proceedings are
commenced with respect to the selling party, receipt of the value of the
collateral may be delayed or substantially limited and a loss may be incurred if
the collateral securing the repurchase agreement declines in value during the
bankruptcy proceedings. The Funds believe that these risks are not material
inasmuch as each Fund will evaluate the credit worthiness of all entities with
which it proposes to enter into repurchase agreements, and will seek to assure
that each arrangement is adequately collateralized.
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REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS -- The Small Cap Growth
Fund is authorized to borrow money. If the securities held by the Fund should
decline in value while borrowings are outstanding, the net asset value of the
Fund's outstanding shares will decline in value by proportionately more than the
decline in value suffered by the Fund's securities. Borrowings may be made by
the Small Cap Growth Fund through reverse repurchase agreements under which the
Fund sells portfolio securities to financial institutions such as banks and
broker-dealers and agrees to repurchase them at a particular date and price.
The Fund may use the proceeds of reverse repurchase agreements to purchase other
securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds will
be less than the interest expense, that the market value of the securities sold
by the Fund may decline below the price of the securities the Fund is obligated
to repurchase and that the securities may not be returned to the Fund. During
the time a reverse repurchase agreement is outstanding, the Fund will maintain a
segregated account with the Fund's custodian containing cash, U.S. Government or
other appropriate liquid securities having a value at least equal to the
repurchase price. The Fund's reverse repurchase agreements, together with any
other borrowings, will not exceed, in the aggregate, 331/3% of the value of its
total assets. In addition, whenever borrowings exceed 5% of the Fund's total
assets, the Fund will not make any investments.
INVESTMENT COMPANIES -- In connection with the management of its daily cash
position, the Small Cap Growth Fund may invest in securities issued by other
investment companies which invest in short-term debt securities and which seek
to maintain a $1.00 net asset value per share. The Small Cap Growth Fund may
also invest in securities issued by other investment companies with similar
objectives. The International Equity Fund may purchase shares of investment
companies investing primarily in foreign securities, including so-called
"country funds." Country funds have portfolios consisting exclusively of
securities of issuers located in one foreign country. Securities of other
investment companies will be acquired within limits prescribed by the Investment
Company Act of 1940. As a shareholder of another investment company, a Fund
would bear, along with other shareholders, its pro rata portion of the other
company's expenses, including advisory fees. These expenses would be in addition
to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING -- A Fund may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, U.S. Government
securities or irrevocable bank letters of credit maintained on a current basis
equal in value to at least the market value of the loaned securities. A Fund
may not make such loans in excess of 331/3% of the value of its total assets.
Securities loans involve risks of delay in receiving additional collateral or in
recovering the loaned securities, or possibly loss of rights in the collateral
if the borrower of the securities becomes insolvent.
ILLIQUID SECURITIES -- No Fund will knowingly invest more than 15% of the
value of its net assets in securities that are illiquid. Variable and floating
rate instruments that cannot be disposed of within seven days, and repurchase
agreements and time deposits that do not provide for payment within seven days
after notice, without taking a reduced price, are subject to these limits. Each
Fund may purchase securities which are not registered under the Securities Act
of 1933 (the "1933 Act") but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. These securities will
not be considered illiquid so long as it is determined by the adviser or
subadviser that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers become
uninterested in purchasing these restricted securities.
FOREIGN SECURITIES -- Global investing involves economic and political
considerations not typically found in U.S. markets. These considerations, which
may favorably or unfavorably affect the International Fund's performance,
include changes in exchange rates and exchange rate controls (which may include
suspension of the ability to transfer currency from a given country), costs
incurred in conversions between currencies, non-negotiable brokerage
commissions, different
6
<PAGE>
accounting standards, lower trading volume and greater market volatility, the
difficulty of enforcing obligations in other countries, less securities
regulation, different tax provisions (including withholding on interest and
dividends paid to the Fund), war, expropriation, political and social
instability, and diplomatic developments. Further, the settlement period of
securities transactions in foreign markets may be longer than in domestic
markets. These considerations generally are more of a concern in developing
countries. For example, the possibility of political upheaval and the
dependence on foreign economic assistance may be greater in these countries than
in developed countries. The Adviser and subadviser seek to mitigate the risks
associated with these considerations through diversification and active
professional management.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The International Equity
Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to the extent of 15% of the value of its total assets, for hedging
purposes. A forward contract is a contract individually negotiated and
privately traded by currency traders and their customers. A forward contract
involves an obligation to purchase or sell a specific currency for an agreed
price at a future date, which may be any fixed number of days from the date of
the contract. The agreed price may be fixed or with a specified range of
prices.
The International Equity Fund may also enter into foreign currency futures
contracts and foreign currency options to the extent of 15% of the value of its
total assets, for hedging purposes. Foreign currency futures contracts are
standardized contracts traded on commodities exchanges which involve an
obligation to purchase or sell a predetermined amount of currency at a
predetermined date at a specified price. The purpose of entering into these
contracts is to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. The Fund may
purchase and sell options on foreign currencies for hedging purposes in a manner
similar to that of transactions in forward contracts. Unanticipated changes in
currency prices may result in poorer overall performance for the Fund than if it
had not engaged in forward contracts, foreign currency futures contracts and
foreign currency options.
PORTFOLIO TURNOVER RATES -- Under normal market conditions, it is expected
that the annual portfolio turnover rate for each Fund will not exceed 150%. A
Fund's annual portfolio turnover rate will not, however, be a factor preventing
a sale or purchase when the adviser or sub-adviser believes investment
considerations warrant such sale or purchase. A Fund's portfolio turnover may
vary greatly from year to year as well as within a particular year. High
portfolio turnover in any year may make it more difficult to comply with the
requirements of Subchapter M of the Internal Revenue Code, and may generate
additional dealer mark-ups or underwriting commissions as well as other
transaction costs, including correspondingly higher annual brokerage
commissions.
MANAGEMENT
The overall responsibility for the supervision of the affairs of the Funds
vests in the Board of Trustees. As described below, the Board has contracted
with others to provide certain services to the Funds.
INVESTMENT ADVISER AND MANAGER, HORACE MANN INVESTORS, INC.
The Trust employs Horace Mann Investors, Inc. ("Investors") to manage the
investment and reinvestment of the assets of the Funds and to continuously
review, supervise and administer the Funds' investment programs. Additionally,
Investors provides for the management of the business affairs of each Fund
including, but not limited to, office space, secretarial and clerical services,
bookkeeping services, wire and telephone communications services and other
services of this nature necessary for the proper management of each Fund's
business affairs.
Investors, located at One Horace Mann Plaza, Springfield, Illinois 62715-
0001, is registered with the Securities and Exchange Commission as a broker-
dealer and is a member of the National Association of Securities Dealers, Inc.
(NASD). Investors and Allegiance Life Insurance Company ("ALIC") are wholly-
owned subsidiaries of Horace Mann Educators Corporation ("HMEC"). Horace Mann
Life Insurance Company ("HMLIC"), which sponsors HMLIC's separate accounts, is a
wholly-owned subsidiary of ALIC.
7
<PAGE>
Investors is a newly registered investment adviser and has not previously
advised a registered investment company, however, its personnel are responsible
for overseeing the investment of Horace Mann Life Insurance Company's over $2.8
billion of assets. Further, each Fund is advised by a sub-adviser that, as
noted below, has substantial experience in managing the assets of registered
investment companies.
Each Fund pays Investors advisory fees at the end of each month. These
fees are accrued daily and are calculated by applying the following annual
percentage rate to the Fund's average daily net assets for the respective month.
Small Cap Growth Fund 1.4% of Net
Assets
International Equity Fund 1.1% of Net
Assets
Socially Responsible Fund .95% of Net
Assets
These advisory fees are higher than the fees charged by most mutual funds.
The Investment Advisory Agreement authorizes Investors (subject to the
discretion and control of the Funds' Board of Trustees) to select the brokers or
dealers that will execute the purchases and sales of portfolio securities and
requires Investors to use its best efforts to obtain the best available price
and most favorable execution.
The Funds will bear the expenses related to their legal, custodial,
independent accounting and auditing, transfer agent, registrars' and other
agents' services; costs related to reports, notices and proxy material;
compensation and expenses of independent trustees; stock issuance expenses;
brokers' commissions' taxes and fees payable to governmental agencies; and
expenses of shareholders' and trustees' meetings.
THE SUBADVISERS
SMALL CAP GROWTH FUND. PNC Equity Advisors Company ("PEAC"), a registered
---------------------
investment adviser, serves as the investment sub-adviser of the Small Cap Growth
Fund pursuant to a Sub-Advisory Agreement with Investors. PEAC is responsible
for managing the Fund, subject to the discretion of the Board of Trustees and
the Adviser. PEAC has approximately $2.4 billion under management and manages,
among other accounts, four other investment company portfolios and three bank
common trust funds.
For such services, Investors pays PEAC at the annual rate of up to 1.00% of
the Fund's average daily net assets for the respective month.
William J. Wykle will manage the Small Cap Growth Fund. He has been an
investment manager with PEAC since 1995 and has been an investment manager with
PNC Bank, National Association since 1986.
INTERNATIONAL EQUITY FUND. Scudder, Stevens & Clark, Inc. ("SSC"), a
-------------------------
registered investment adviser, serves as the investment sub-adviser of the
International Equity Fund pursuant to a Sub-Advisory Agreement with Investors.
SSC is responsible for managing the Fund, subject to the discretion of the Board
of Trustees and the Adviser. SSC has over $100 billion under management and
manages over 50 mutual fund portfolios, including 10 non-U.S. investment
companies.
For such services, Investors pays SSC at the annual rate of up to .70% of
the Fund's average daily net assets for the respective month.
The International Equity Fund is managed by a team of SSC investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by SSC's large staff of
economists, research analysts, traders and other investment specialists who work
in SSC's offices across the United States and abroad. SSC believes its team
approach benefits Fund investors by bringing together many disciplines and
leveraging SSC's extensive resources.
Lead Portfolio Manager Carol L. Franklin joined Scudder's international
portfolio management team in 1986 and is responsible for setting the Fund's
investment strategy and overseeing security selection for the Fund's portfolio.
Ms. Franklin, who has 19 years of experience in finance and investing, joined
Scudder in 1981.
Joan Gregory, Portfolio Manager, focuses on stock selection, a role she has
played since she joined
8
<PAGE>
Scudder in 1992. Ms. Gregory, who joined the team in 1994, has been involved
with investment in global and international stocks as an assistant portfolio
manager since 1989.
SOCIALLY RESPONSIBLE FUND.
-------------------------
SSC also serves as the investment sub-adviser of the Socially Responsible
Fund. For such services, Investors pays SSC at the annual rate of up to .55% of
the Fund's average daily net assets for the respective month.
The Socially Responsible Fund also is managed by a team of SSC investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by SSC's large staff of
economists, research analysts, traders and other investment specialists who work
in SSC's offices across the United States and abroad. SSC also believes its
team approach benefits Fund investors by bringing together many disciplines and
leveraging SSC's extensive resources.
Lori J. Ensinger and Robert T. Hoffman will manage the portfolio.
Lori J. Ensinger joined SSC in 1993 as a member of the portfolio team of
the Growth & Income Equity Management Group. Lori is a co-manager of the
Scudder and AARP Growth & Income funds, manager of the Socially Responsive
Equity Trust, and also contributes to the investment decision making for
institutional portfolios. She also has primary client service responsibilities
for institutional clients. Prior to joining SSC, Lori was a Senior Portfolio
Manager at Prudential Securities Investment Management where she managed
portfolios for institutions and individuals.
Robert T. Hoffman joined Scudder in 1990. Since then he has been involved
in all aspects of investment decision-making for the Growth and Income Equity
Management Group, and currently directs the investment management of all assets
managed under the Growth and Income approach.
GENERAL. Under the terms of each Sub-Advisory Agreement, the subadviser
-------
manages its respective Funds, selects investments and places all orders for
purchases and sales of the Fund's securities, subject to the general supervision
of the Board of Trustees and Investors.
CUSTODIAN AND FUND ACCOUNTING AGENT:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT AND DIVIDEND PAYING AGENT:
Horace Mann Service Corporation
One Horace Mann Plaza
Box 4657
Springfield, Illinois 62715-4657
INVESTMENT RETURN
The total return from an investment in a Fund is measured by the
distributions received (assuming reinvestment), plus or minus the change in the
net asset value per share for a given period. A total return percentage may be
calculated by dividing the value of a share at the end of the period (including
reinvestment of distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual total return
may be calculated by finding the average annual compounded rate that would
equate a hypothetical $1,000 investment to the ending redeemable value.
Comparison of a Fund's total return with alternative investments should
consider differences between the Fund and the alternative investments, the
periods and methods used in calculation of the return being compared, and the
impact of taxes on alternative investments. Purchasers should also understand
that Fund shares may not be purchased directly and are available only to fund
variable annuity contracts issued by Horace Mann Life Insurance Company, which
include contract charges that are not reflected in the Funds' total return
calculation. Therefore, the actual investment return to an annuity contract
owner, after deduction of annuity contract changes, will be less than the
investment return of the Fund. In addition, past performance is not indicative
of future results.
9
<PAGE>
Other Information On The Performance Of PNC Equity Advisors Company
The table below sets forth performance information relating to the Compass
Capital Small Cap Growth Equity Portfolio ("Compass Capital Portfolio") that is
also managed by PEAC. The Compass Capital Portfolio is a portfolio of an open-
end management investment company registered under the Investment Company Act of
1940, as amended, and which has investment objectives, policies, strategies and
risks substantially similar to those of the Horace Mann Small Cap Growth Fund.
The performance of the Compass Capital Portfolio has been restated as set forth
in footnote 1 to the table.
The performance data for the Compass Capital Portfolio is included to provide
investors with the performance record for an account substantially similar to
the Horace Mann Small Gap Growth Fund. In addition, performance information from
the Russell 2000 Growth Index (the "Russell 2000") has been included for
comparison. The Compass Capital Portfolio performance data does not represent
the past, present or future performance of the Horace Mann Small Cap Growth
Fund. Past performance is no guarantee of future results; investors should not
consider this performance data as an indication of future performance of the
Horace Mann Small Cap Growth Fund or of PEAC. Share prices and investment
returns will fluctuate reflecting market conditions and cash flows, as well as
changes in company-specific fundamentals of portfolio securities. Consequently,
investments in either the Compass Capital Portfolio or the Horace Mann Small Cap
Growth Fund may be worth more or less than their original cost at the time of
redemption. The performance presentation is not audited.
All returns presented were calculated on a total return basis and include all
dividends and interest, accrued income and realized and unrealized gains and
losses. All returns also reflect the brokerage costs borne by the Compass
Capital Portfolio for all periods presented. The use of a different methodology
to calculate performance could result in different performance data.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
YEAR OR PERIODS COMPASS CAPITAL
ENDED 12/31/96 PORTFOLIO/(1)/ RUSSELL 2000/(2)/
--------------- --------- -----------------
<S> <C> <C>
One Year.................. _____ 13.13%
Three Years............... _____ 12.73%
Five Years................ N/A 15.76%
From Inception (9/14/93).. _____ 10.07%(3)
- --------------------
</TABLE>
(1)
(2) Total return data is presented for each period. The Russell 2000 Growth
Index is an unmanaged securities index composed of those Russell 2000
securities with a greater-than-average growth orientation. The Russell 2000
Growth Index reflects the investment of income dividends and capital gain
distributions, if any, but does not reflect fees,
10
<PAGE>
brokerage commissions or other expenses of investing. The Russell 2000
Growth Index is an unmanaged securities index, and an investment cannot be
made directly in the Russell 2000 Growth Index.
(3) Reflects the average annual total return of the Russell 2000 Growth Index
from __/__/__.
Other Information On The Performance Of Scudder, Stevens & Clark
The table below sets forth performance information relating to the International
Portfolio of the Scudder Variable Life Investment Fund ("Scudder International
Portfolio") that is also managed by SSC. The Scudder International Portfolio is
a portfolio of an open-end management investment company registered under the
1940 Act, and which has investment objectives, policies, strategies and risks
substantially similar to those of the Horace Mann International Equity Fund. The
performance of the Scudder International Portfolio has been restated as set
forth in footnote 1 to the table.
The performance data for the Scudder International Portfolio is included to
provide investors with the performance record for an account substantially
similar to the Horace Mann International Equity Fund. In addition, performance
information from the Morgan Stanley Capital International Europe, Australia, Far
East Index ("MSCI EAFE Index") has been included for comparison. The Scudder
International Portfolio performance data does not represent the past, present or
future performance of the Horace Mann International Equity Fund. Past
performance is no guarantee of future results; investors should not consider
this performance data as an indication of future performance of the Horace Mann
International Equity Fund or of SSC. Share prices and investment returns will
fluctuate reflecting market conditions and cash flows, as well as changes in
company-specific fundamentals of portfolio securities. Consequently, investments
in either the Scudder International Portfolio or the Horace Mann International
Equity Fund may be worth more or less than their original cost at the time of
redemption. The performance presentation is not audited.
All returns presented were calculated on a total return basis and include all
dividends and interest, accrued income and realized and unrealized gains and
losses. All returns also reflect the brokerage costs borne by the Scudder
International Portfolio for all periods presented. The use of a different
methodology to calculate performance could result in different performance data.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
SCUDDER
YEAR OR PERIODS INTERNATIONAL MSCI EAFE
ENDED 12/31/96 PORTFOLIO/(1)/ INDEX/(2)/
--------------- -------------- ----------
<S> <C> <C>
One Year.................. % %
Three Years............... % %
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Five Years................ % %
From Inception (5/14/87).. % %(3)
- ----------------------
</TABLE>
(1)
(2) Total return data is presented for each period. The Morgan Stanley Capital
International (MSCI) Europe, Australia, the Far East (EAFE) Index is an
unmanaged capitalization weighted measure of stock markets in Europe,
Australia, and the Far East. Index returns assume dividends reinvested net
of withholding tax, and unlike Fund returns, do not reflect fees or
expenses. Returns reflect the investment of income dividends and capital
gain distributions, if any, but does not reflect fees, brokerage
commissions or other expenses of investing. Investment cannot be made
directly into the index.
(3) Reflects the average annual total return of the MSCI EAFE Index from
_/_/87.
The table below sets forth performance information relating to the Scudder
Socially Responsible ____________ Composite. The Scudder Socially Responsible
______________ Composite ____________ is a composite of __[#]__ separately
managed accounts that are managed by SCC. The Scudder Socially Responsible
______________ Composite is not registered under the 1940 Act, and thus, was not
subject to certain investment and operational restrictions imposed by the 1940
Act. If the product had been registered under the 1940 Act, the performance
noted below might have been lower. The Scudder Socially Responsible
_____________ Composite has investment objectives, policies, strategies and
risks substantially similar to those of the Horace Mann Socially Responsible
Fund. However, the Horace Mann Socially Responsible Fund differs from the
Scudder Socially Responsible ______________ Composite in certain ways, none of
which Investors or SSC believe would cause a significant change in investment
results. Please note the following differences. _____________________________
______________________________________________________________________________.
The performance of the Scudder Socially Responsible _____________ Composite has
been restated as set forth in footnote 1 to the table.
The performance data for the Scudder Socially Responsible _____________
Composite is included to provide investors with the performance record for a
composite of accounts substantially similar to the Horace Mann Socially
Responsible Fund. In addition, performance information from the Standard & Poors
500 Stock Index (the "S&P 500") has been included for comparison. The Scudder
Socially Responsible ____________ Composite performance data does not represent
the past, present or future performance of the Horace Mann Socially Responsible
Fund. Past performance is no guarantee of future results; investors should not
consider this performance data as an indication of future performance of the
Socially Responsible Fund or of SSC. Share prices and investment returns will
fluctuate reflecting market conditions and cash flows, as well as changes in
company-specific fundamentals of portfolio securities. Consequently, investments
in either the Scudder Socially Responsible _____________ Composite
12
<PAGE>
or the Horace Mann Socially Responsible Fund may be worth more or less than
their original cost at the time of redemption. The performance presentation is
not audited.
All returns presented were calculated on a total return basis and include all
dividends and interest, accrued income and realized and unrealized gains and
losses. All returns also reflect the brokerage costs borne by the Scudder
Socially Responsible _____________ Composite for all periods presented. The use
of a different methodology to calculate performance could result in different
performance data.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
SCUDDER SOCIALLY
RESPONSIBLE
YEAR OR PERIODS --------------
ENDED 12/31/96 COMPOSITE/(1)/ S&P 500/(2)/
-------------- ------------- ------------
<S> <C> <C>
One Year................... % %
Three Years................ % %
Five Years................. % %
From Inception (__/__/__).. % %(3)
- ---------------------
</TABLE>
(1)
(2) Total return data is presented for each period. The Standard & Poors 500
Stock Index is an unmanaged index considered to be generally representative
of the U.S. stock market. Index returns assume dividends reinvested net of
withholding tax, and unlike the Fund, returns do not reflect fees or
expenses. Investment cannot be made directly into the index.
(3) Reflects the average annual total return of the S&P 500 Index from
__/__/__.
13
<PAGE>
PURCHASES AND REDEMPTIONS
Shares of each Fund are currently sold only to HMLIC separate accounts. In
the event that HMLIC establishes additional separate accounts, shares of these
Funds may be made available for purchase by such additional separate accounts.
Each Fund sells and redeems its shares at net asset value per share,
without a sales or redemption charge. The net asset value of each Fund's shares
is determined on each day the New York Stock Exchange ("NYSE") is open for
trading at the close of the NYSE (normally 3:00 p.m. Central Time). The
computation is made by dividing the net assets by the number of outstanding
shares. Net assets are equal to the total assets of the Fund less its
liabilities. A purchase is effected at the price based on the next calculation
of net asset value per share after receipt of a request. A security listed or
traded on an exchange is valued at its last sales price on the exchange where it
is principally traded. In the absence of a current quotation, the security is
valued at the mean between the last bid and asked prices on the exchange.
Securities traded over-the-counter are valued at the last current bid price.
Debt securities that have a remaining maturity of 60 days or less are valued at
cost, plus or minus any amortized discount or premium. When market quotations
are not available, securities are valued at fair value as determined in good
faith by the Board of Trustees.
Except in extraordinary circumstances and as permissible under the
Investment Company Act of 1940, redemption proceeds are paid on or before the
fifth business day following the date the request for redemption is received.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
Each Fund normally follows the practice of declaring and distributing
substantially all its net investment income and any net short-term and long-term
capital gains at least annually. All dividends or distributions paid on Fund
shares held by a separate account, net of separate account contract charges, are
automatically reinvested in shares of the respective Fund at the net asset value
determined on the dividend payment date.
Under the Internal Revenue Code ("Code"), Horace Mann Insurance Company is
taxed as a life insurance company and the operations of its separate accounts
are taxed as part of its total operations. Under current interpretations of
existing federal income tax law, investment income and capital gains of separate
accounts are not subject to federal income tax to the extent applied to increase
the value of variable annuity contracts. Tax consequences to variable annuity
contract holders are described in a separate prospectus issued by the Horace
Mann Life Insurance Company.
Each Fund intends to qualify as a regulated investment company under
subchapter M of the Code. As a result, with respect to any fiscal year in which
a Fund distributes all its net investment income and net realized capital gains,
that Fund will not be subject to federal income tax. Subchapter M includes
requirements relating to the diversification of investments, which are in
addition to the diversification requirements contained in Section 817(h) of the
Code and the 1940 Act. Each applicable law's diversification requirement could
require the sale of assets of a Fund, at a time when it would not otherwise be
advisable to do so.
The preceding is a brief summary of certain of the relevant federal income
tax considerations. The Statement of Additional Information includes a more
detailed discussion. This discussion is not intended, even as supplemented by
the Statement of Additional Information, as a complete explanation or a
substitute for careful tax planning and consultation with individual tax
advisers.
VOTING RIGHTS
Each Fund is authorized by the Declaration of Trust to issue an unlimited
number of shares. Shares of each Fund are of the same class with equal rights
and privileges. Each share is entitled to vote on all matters submitted to a
vote of shareholders. The shares of each Fund are fully paid and non-assessable
and have no preference as to conversion, exchange, dividends, retirement or
other features. The shares of each Fund have no pre-exemptive rights. The
shares of each Fund have noncumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of trustees can
elect 100% of the trustees if they choose to do so.
14
<PAGE>
Each person with voting rights will be provided with reports and proxy
materials relating to the applicable Fund(s). To be entitled to vote, a
shareholder (an insurance company separate account) must have been a shareholder
on the record date. The number of Fund shares for which a shareholder may vote
is determined by dividing the value of an interest in a Fund by the net asset
value of one share of the Fund, as of the same date.
As of March 1, 1997, Horace Mann Life Insurance Company Separate Account
owned 100% of the outstanding shares of each Fund. Since these separate
accounts' voting rights are passed through to contract owners and participants,
HMLIC itself does not exercise voting control.
SHAREHOLDERS INQUIRIES
For questions concerning investments in the Funds through HMLIC's annuity
contracts, call HMLIC's toll free customer service number, (800) 999-1030.
Written questions should be sent by mail to Horace Mann Life Insurance Company
at P.O. Box 4657, Springfield, Illinois 62708-4657 or by telefacsimile (FAX)
transmission to (217) 527-2307.
ADDITIONAL INFORMATION
A copy of the Statement of Additional Information providing more detailed
information about the Funds is available, without charge, upon request. The
Table of Contents of this Statement follows:
<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
Investment Restrictions
Management of the Funds
Board of Trustees
Officers
Investment Advisory Agreements
Brokerage Allocation
Types of Investments and
Associated Risks
Other Services
Purchase, Redemption and Pricing of Fund
Shares
Tax Status
General Information
Control Persons and Principal Holders of
Securities............................................
Report of Independent Auditors.........................
Statement of Net Assets................................
</TABLE>
To receive, without charge, a copy of the 1996 Annual Report of the Horace
Mann Life Insurance Company Separate Account and/or a copy of the Statement of
Additional Information for Horace Mann Life Insurance Company Separate Account,
please complete the following request form and mail it to the address indicated
below, or send it by telefacsimile (FAX) transmission to (217) 527-2307 or
telephone (217) 789-2500 or (800) 999-1030 (toll-free).
HORACE MANN LIFE INSURANCE COMPANY
P.O. BOX 4657
SPRINGFIELD, ILLINOIS 62708-4657
________________________________________________________________________________
- -----------------------------------------------------------------------------
Please provide free of charge the following information:
_____ 1996 Annual Report of the Horace Mann Life Insurance Company Separate
Account.
_____ Statement of Additional Information dated March 3, 1997 for the Horace
Mann Mutual Funds.
_____ Statement of Additional Information dated May 1, 1996 for the Horace
Mann Life Insurance Company Separate Account.
Please mail the above documents to:
__________________________________________________________________________
(Name)
__________________________________________________________________________
Address)
__________________________________________________________________________
(City/State/Zip)
- ----------------------------------------------------------------------------
________________________________________________________________________________
15
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
HORACE MANN MUTUAL FUNDS
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the current Prospectus, dated March 3, 1997. A copy of the
Prospectus may be obtained by writing to the Horace Mann Mutual Funds, P.O. Box
4657, Springfield, Illinois 62708-4657, by sending a telefacsimile (FAX)
transmission to (217) 527-2307, or by telephoning (217) 789-2500 or (800) 999-
1030 (toll-free).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Restrictions......................................... 2
Management of the Funds......................................... 3
Board of Trustees............................................... 3
Officers........................................................ 4
Investment Advisory Agreements.................................. 5
Brokerage Allocation............................................ 6
Other Services.................................................. 6
Types of Investments and Associated Risks....................... 7
Purchase, Redemption and Pricing of Fund Shares................. 16
Tax Status...................................................... 16
Control Persons and Principal Holders of Securities............. 18
General Information............................................. 18
Report of Independent Auditors.................................. 19
Statement of Net Assets......................................... 20
</TABLE>
March 3, 1997
1
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund operates under the following fundamental investment restrictions
which cannot be changed without the approval of a "majority of the outstanding
voting securities," which is defined in the Investment Company Act of 1940 to
mean the lesser of (i) 67% of the Fund's shares present at a meeting where more
than 50% of the outstanding shares are present in person or by proxy or (2) more
than 50% of the Fund's outstanding shares. A Fund may not:
(1) act as an underwriter of securities, except insofar as it may be
deemed an underwriter for purposes of the Securities Act of 1933 on
disposition of securities acquired subject to legal or contractual
restrictions on resale;
(2) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by
companies which invest in real estate or interests therein), commodities,
or commodity contracts, except that it may enter into (a) futures and
options on futures and (b) forward currency contracts;
(3) make loans, but this restriction shall not prevent the Fund from
(a) buying a part of an issue of bonds, debentures, or other obligations,
(b) investing in repurchase agreements, or (c) lending portfolio
securities, provided that it may not lend securities if, as a result, the
aggregate value of all securities loaned would exceed 33 1/3% of its total
assets (taken at market value at the time of such loan);
(4) borrow, except that it may (a) borrow up to 33 1/3% of its total
assets, taken at market value at the time of such borrowing, as a temporary
measure for extraordinary or emergency purposes, but not to increase
portfolio income (the total of reverse repurchase agreements and such
borrowings will not exceed 33 1/3% of its total assets, and the Fund will
not purchase additional securities when its borrowings, less proceeds
receivable from sales of portfolio securities, exceed 5% of its total
assets) and (b) enter into transactions in options, futures, and options on
futures;
(5) invest in a security if 25% or more of its total assets (taken at
market value at the time of a particular purchase) would be invested in the
securities of issuers in any particular industry, except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; or
(6) issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
Each Fund is also subject to the following non-fundamental restrictions and
policies, which may be changed by the Board of Trustees. The Fund may not:
(a) invest in companies for the purpose of exercising control or
management;
(b) purchase, except for securities acquired as part of a merger,
consolidation or acquisition of assets more than 3% of the stock of another
investment company or purchase stock of other investment companies equal to
more than 5% of the Fund's total assets (valued at time of purchase) in the
case of any one other investment company and 10% of such assets (valued at
time of purchase) in the case of all other investment companies in the
aggregate;
(c) mortgage, pledge, or hypothecate its assets, except as may be
necessary in connection with permitted borrowings or in connection with
options, futures, and options on futures;
(d) purchase securities on margin (except for use of short-term
credits as are necessary for the clearance of transactions), or sell
securities short unless (i) the Fund owns or has the right to obtain
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securities equivalent in kind and amount to those sold short at no added
cost or (ii) the securities sold are "when issued" or "when distributed"
securities which the Fund expects to receive in a recapitalization,
reorganization, or other exchange for securities the Fund contemporaneously
owns or has the right to obtain and provided that transactions in options,
futures, and options on futures are not treated as short sales; and
(e) invest more than 15% of its net assets (taken at market value at
the time of a particular investment) in illiquid securities, including
repurchase agreements maturing in more than seven days.
(f) hedge by purchasing put and call options, futures, contracts, or
derivative instruments on securities, in an aggregate amount equivalent to
more than 10% of its total assets.
MANAGEMENT OF THE FUNDS
A listing of the Trustees and Officers of the Trust, their ages, principal
occupations for the past five years and their affiliation with other companies
affiliated with Horace Mann Life Insurance Company is presented below.
Correspondence with any Trustee or Officer may be addressed to the offices of
the Funds at P.O. Box 4657, Springfield, Illinois 62708-4657.
BOARD OF TRUSTEES
*A. THOMAS ARISMAN (Age 50) (1, 2, 3), -- Trustee; Director, Horace Mann Growth
Fund, Inc., Horace Mann Income Fund, Inc., Horace Mann Balanced Fund, Inc. and
Horace Mann Short-Term Investment Fund, Inc.; Senior Vice President, Horace Mann
Life Insurance Company and Horace Mann Service Corporation; Director and
President, Horace Mann Investors, Inc.; and positions with Horace Mann Educators
Corporation and its subsidiaries.
*LARRY K. BECKER (Age 48) (1, 3, 4), -- Trustee and Chairman of the Board;
Director, Horace Mann Growth Fund, Inc., Horace Mann Income Fund, Inc., Horace
Mann Balanced Fund, Inc. and Horace Mann Short-Term Investment Fund, Inc.;
Director, Vice Executive President, and Chief Financial Officer, Horace Mann
Life Insurance Company and Horace Mann Service Corporation; Director, Horace
Mann Investors, Inc.; and positions with Horace Mann Educators Corporation and
its subsidiaries.
A.L. GALLOP (Age 71) (2), -- Trustee; Director, Horace Mann Growth Fund, Inc.,
Horace Mann Income Fund, Inc., Horace Mann Balanced Fund, Inc. and Horace Mann
Short-Term Investment Fund, Inc.; Executive Director (Retired), Minnesota
Education Association; formerly Director, Horace Mann Educators Corporation
(1968-1983).
RICHARD D. LANG (Age ___), Trustee; Executive Director, Vermont National
Education Association.
*EDWARD L. NAJIM (Age 53), Trustee; Director and Executive Vice President,
Horace Mann life Insurance Company and Horace Mann Service Corporation; and
positions with Horace Mann Educators Corporation and its subsidiaries.
HARRIET A. RUSSELL (Age 55) (4), -- Trustee; Director, Horace Mann Growth Fund,
Inc., Horace Mann Income Fund, Inc., Horace Mann Balanced Fund, Inc. and Horace
Mann Short-Term Investment Fund, Inc.; member, Cincinnati Board of Education;
Director and Vice President, Greater Cincinnati School Employer Credit Union;
teacher (Retired), Walnut Hills High School; former Director, Horace Mann Growth
Fund, 1974 to 1983.
*GEORGE J. ZOCK (Age 46) (1, 2, 3), -- Trustee and President; Director and
President, Horace Mann Growth Fund, Inc., Horace Mann Income Fund, Inc., Horace
Mann Balanced Fund, Inc. and Horace Mann Short-Term Investment Fund, Inc.;
Director, Senior Vice President and Treasurer, Horace Mann Life Insurance
Company and Horace Mann Service Corporation; Director, Horace Mann Investors,
Inc.; and positions with Horace Mann Educators Corporation and its
subsidiaries.
_____
* Trustee is considered an "interested person" as that term is defined in the
Investment Company Act of 1940.
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(1) Member of Executive Committee - Unless otherwise provided by resolution of
the Board, this committee may exercise all of the powers of the Board when
the Board is not in session, except as otherwise stated in the Trust's By-
Laws.
(2) Member of Audit/Insurance Committee - This committee serves as the Board's
liaison with the Trust's independent auditors, reviews the financial
operation of the Trust, and makes periodic reports of these reviews to the
Board, along with appropriate recommendations regarding the proper and
efficient financial operation of the Trust. Additional responsibilities
include the review and assurance of the adequacy of insurance coverage for
the Trust.
(3) Member of Securities Committee - This committee coordinates and
communicates with the Trust's investment adviser and sub-advisers on behalf
of the Board, reviews and oversees investment management activities, makes
recommendations to the Board on changes in the investment guidelines,
recommends changes or adjustments to the investment advisory agreement,
creates and revises standards of investment performance, and advises the
Board on investment issues.
(4) Member of Nominating Committee - This committee is responsible for the
selection of appropriate, qualified persons as nominees to be presented to
Trust shareholders for their consideration. The committee has no formal
policy with respect to prospective director nominees recommended by
shareholders, but shareholders are free to make recommendations.
OFFICERS
ANN M. CAPARROS (Age 44), -- Secretary and Ethics Compliance Officer; Secretary
and Ethics Compliance Officer, Horace Mann Growth Fund, Inc., Horace Mann Income
Fund, Inc., Horace Mann Balanced Fund, Inc. and Horace Mann Short-Term
Investment Fund, Inc.; Director, Vice President and Corporate Secretary, Horace
Mann Life Insurance Company and Horace Mann Service Corporation, Secretary,
Horace Mann Investors, Inc. and positions with Horace Mann Educators Corporation
and its subsidiaries; prior to 1994, was associated with John Deere Insurance
Group and Affiliates serving as Vice President and General Counsel.
ROGER W. FISHER (Age 44), -- Controller; Controller, Horace Mann Growth Fund,
Inc., Horace Mann Income Fund, Inc., Horace Mann Balanced Fund, Inc. and Horace
Mann Short-Term Investment Fund, Inc.; Vice President and Controller, Horace
Mann Life Insurance Company and Horace Mann Service Company; Controller, Horace
Mann Investors, Inc. and positions with Horace Mann Educators corporation and
its subsidiaries.
WILLIAM J. KELLY (Age 50), -- Treasurer and Regulatory Compliance Officer;
Treasurer, Horace Mann Growth Fund, Inc., Horace Mann Income Fund, Inc., Horace
Mann Balanced Fund, Inc., Horace Mann Short-Term Investment Fund, Inc. and
Horace Mann Investors, Inc.; Vice President, Horace Mann Life Insurance Company;
Vice President-Transfer Agent, Horace Mann Service Corporation.
The Officers of the Trust receive remuneration from Horace Mann Service
Corporation. The Trust does not pay any remuneration to officers. The Trust
pays each independent Trustee a $1,000 annual retainer, $1,000 for each meeting
of the Trust, $200 for each committee meeting, $500 for each telephonic meeting
and reimbursement for travel expenses.
The following table sets forth the estimated compensation to be earned from the
Trust for the fiscal year ended December 31, 1997 by trustees who are not
affiliated with Horace Mann Investors, Inc., the adviser.
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<TABLE>
<CAPTION>
Pension
Retirement
Aggregate Benefits Accrued Estimated Annual Total
Compensation as Part of Fund Benefits Upon Compensation
Trustee from the Trust Expenses Retirement For The Complex
-------- -------------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
A.L. Gallop $5,200 N/A N/A $5,200
Richard D. Lang $4,200 N/A N/A $4,200
Harriet A. Russell $5,200 N/A N/A $5,200
</TABLE>
INVESTMENT ADVISORY AGREEMENTS
INVESTMENT ADVISER. As stated in the Prospectus, Horace Mann Investors, Inc.
("Adviser") is the Trust's investment adviser and manager. Pursuant to an
investment advisory and management agreement, the Adviser acts as the Trust's
adviser, manages its investments, administers its business affairs, furnishes
office facilities and equipment, provides clerical, bookkeeping and
administrative services, provides shareholder and information services and
permits any of its principals or employees to serve without compensation as
trustees or officers of the Trust if elected to such positions. In addition to
the management advisory fee, each portfolio pays the expenses of its operations,
including a portion of the Trust's general administrative expenses, allocated on
the basis of the Fund's net asset value. Expenses that will be borne directly
by the Funds include, but are not limited to, the following: the fees and
expenses of independent auditors, counsel, custodian and transfer agent, costs
of reports and notices to shareholders, stationery, printing, postage, costs of
calculating net asset value, brokerage commissions or transaction costs, taxes,
registration fees, the fees and expenses of qualifying the Trust and its shares
for distribution under Federal and state securities laws and membership dues in
the Investment Company Institute or any similar organization.
The advisory agreement continues in effect for each Fund from year to year
for so long as its continuation is approved at least annually (a) by a majority
of the trustees who are not parties to such agreement or interested persons of
any such party except in their capacity as trustees of the Fund and (b) by the
shareholders of the Fund or the Board of Trustees. The agreement may be
terminated at any time upon 60 days notice by either party; the Trust may so
terminate the agreement either by vote of the Board of Trustees or by majority
vote of the outstanding shares of the affected Fund. The agreement may also be
terminated at any time either by vote of the Board of Trustees or by majority
vote of the outstanding voting shares of the subject Fund if the Adviser were
determined to have breached the agreement. The agreement would terminate
automatically upon assignment.
The advisory agreement provides that neither the Adviser nor any of its
directors, officers, stockholders, agents or employees shall have any liability
to the Trust or any shareholder of the Trust for any error of judgment, mistake
of law, or any loss arising out of any investment, or for any other act or
omission in the performance by the Adviser of its duties under the agreement
except for liability resulting from willful misfeasance, bad faith, or
negligence on their part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Agreement.
For the services and facilities furnished to each portfolio, the Trust pays
the Adviser an advisory fee, which is computed daily and paid monthly. The
Small Cap Growth Fund pays an advisory fee at a rate of 1.4% of the Fund's
average daily net assets. The International Growth Fund pays an advisory fee at
a rate of 1.1% of the Fund's average daily net assets. The Socially Responsible
Fund pays an advisory fee at a rate of .95% of the Fund's average daily net
assets.
SUBADVISERS. Each of the Investment Sub-Advisory Agreements continue for the
same term as the advisory agreement and are subject to the same requirements for
renewal. Each of the Investment Sub-Advisory Agreements
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<PAGE>
provide that neither the Sub-Adviser nor any of its directors, officers,
stockholders, agents or employees shall have any liability to the Trust or any
shareholder of the Trust for any error of judgment, mistake of law, or any loss
arising out of any investment, or for any other act or omission in the
performance by the Sub-Adviser of its duties under the Agreement except for
liability resulting from willful misfeasance, bad faith, or negligence on their
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under the Agreement.
For the services provided the Adviser pays each Sub-Adviser a monthly fee
at an annual rate based on average daily net assets of each Fund in accordance
with the following schedule:
Small Cap Growth Fund
1.00% on the first $25 million
.75% on assets over $25 million
International Equity Fund
(during the first six months of operations)
.35% of the first $40 million
.25% on assets over $40 million
(after the first six months of operations)
.70% of the first $40 million
.50% on assets over $40 million
Socially Responsible Fund
.55% of the first $20 million
.45% of the next $20 million
.30% on assets over $40 million
BROKERAGE ALLOCATION
The Investment Advisory Agreement and the Investment Sub-Advisory Agreements
authorize Investors and the Sub-Advisers, respectively (collectively the
"Advisers") (subject to the discretion and control of the Trust's Board of
Trustees) to select the brokers or dealers that will execute the purchases and
sales of portfolio securities and direct the Advisers to use their best efforts
to obtain the best available price and most favorable execution. Subject to
policies established by the Trustees of the Trust, the Advisers may also be
authorized to effect individual securities transactions at commission rates in
excess of the minimum commission rates available, if the Adviser determines in
good faith that such amount of commission is reasonable in relation to the value
of the brokerage or research services provided, viewed in terms of either the
particular transaction or the Adviser's overall responsibilities with respect to
the Fund and other clients.
In placing portfolio transactions, each of the Advisers will use its best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain best available price and most favorable execution. The full
range and quality of brokerage services available will be considered in making
these determinations. In those instances where it is reasonably determined that
more than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and other services in addition to
execution services. Such services may include factual and statistical
information or other items of supplementary research assistance. Each of the
Advisers consider such information useful in the performance of its obligations
under the advisory agreements, but is unable to determine the amount by which
such services may reduce the expenses. In addition, within the parameters of
achieving best
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<PAGE>
price and execution, brokerage services may be used to generate commission
credits which are used to pay for pricing agent and custodial services. See,
Other Services -- Fund Pricing Agreements and Custodial Agreement."
Some securities considered for investment by a Fund may also be appropriate for
other funds and/or clients served by an Adviser. To assure fair treatment of
each Fund and all clients of the Adviser in situations in which two or more
clients' accounts participate simultaneously in a buy or sell program involving
the same security, such transactions will be allocated among the funds and
clients in a manner deemed equitable by the Adviser.
OTHER SERVICES
FUND PRICING AGREEMENTS -- The Trust has entered into an agreement with State
Street Bank and Trust Company ("State Street"), a national banking association
located at 225 Franklin Street, Boston, Massachusetts 02110, to calculate the
daily net asset value per share for each Fund and to maintain certain required
accounting records.
CUSTODIAL AGREEMENT -- State Street serves as custodian of the assets of the
Trust, including foreign securities through a sub-custodian relationship. Under
the Custodial Agreement, State Street maintains the Funds' portfolio securities,
administers the purchases and sales of portfolio securities, collects interest
and dividends and other distributions made on portfolio securities, and performs
such other ministerial duties outlined in the Custodial Agreement.
TRANSFER AND DIVIDEND PAYING AGENT -- Horace Mann Service Corporation ("HMSC"),
One Horace Mann Plaza, Springfield, Illinois 62715-0001, acts as the transfer
agent and dividend disbursing agent for and is paid a fee based on the number of
accounts outstanding. HMSC is a wholly-owned subsidiary of Horace Mann
Educators Corporation ("HMEC"). "Horace Mann" is a registered service mark of
HMEC. The Trust has been given limited permission to use that service mark in
their names, subject to HMEC's right to revoke that permission.
INDEPENDENT AUDITORS -- KPMG Peat Marwick LLP, 303 East Wacker Drive, Chicago,
Illinois 60601, serves as the Trust's independent auditors. KPMG Peat Marwick
LLP performs an annual audit of the financial statements of the Fund and
provides accounting advice and services related to Securities and Exchange
Commission filings throughout the year.
TYPES OF INVESTMENTS AND ASSOCIATED RISKS
INTERNATIONAL EQUITY FUND AND SOCIALLY RESPONSIBLE FUND
FOREIGN SECURITIES. The Fund is intended to provide individual and
institutional investors with an opportunity to invest a portion of their assets
in a diversified group of securities of companies, wherever organized, which do
business primarily outside the U.S., and foreign governments. The Adviser
believes that diversification of assets on an international basis decreases the
degree to which events in any one country, including the U.S., will affect an
investor's entire investment holdings. In certain periods since World War II,
many leading foreign economies and foreign stock market indices have grown more
rapidly than the U.S. economy and leading U.S. stock market indices, although
there can be no assurance that this will be true in the future. Because of the
Fund's investment policy, the Fund is not intended to provide a complete
investment program for an investor.
Investors should recognize that investing in foreign securities involves
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. securities and which may favorably
or unfavorably affect the Fund's performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity
in most foreign bond markets is less than in the U.S. and, at times, volatility
of price can be greater than in the U.S. Fixed commissions on some foreign
securities
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<PAGE>
exchanges and bid to asked spreads in foreign bond markets are generally higher
than commissions or bid to asked spreads on U.S. markets, although the Fund will
endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers and listed companies than in the U.S. It may be
more difficult for the Fund's agents to keep currently informed about corporate
actions which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., thus increasing the risk of delayed settlements of portfolio transactions
or loss of certificates for portfolio securities. Payment for securities
without delivery may be required in certain foreign markets. In addition, with
respect to certain foreign countries, there is the possibility of expropriation
or confiscatory taxation, political or social instability, or diplomatic
developments which could affect U.S. investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The management of the fund seeks to mitigate the risks associated
with the foregoing considerations through continuous professional
management.
FOREIGN CURRENCIES. Because investments in foreign securities usually will
involve currencies of foreign countries, and because the Fund may hold foreign
currencies and forward contracts, futures contracts and options on foreign
currencies and foreign currency futures contracts, the value of the assets of
the Fund as measured in U.S. dollars may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations, and
the Fund may incur costs in connection with conversions between various
currencies. Although the Fund values its assets daily in terms of U.S. dollars,
it does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate or exchange should the
Fund desire to resell that currency to the dealer. The Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into options or forward or futures contracts to purchase or sell
foreign currencies.
STRATEGIC TRANSACTIONS AND DERIVATIVES. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, and broad or specific equity or fixed-
income market movements), to manage the effective maturity or duration of fixed-
income securities in the Fund's portfolio, or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transactions is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory
8
<PAGE>
requirements when implementing these strategies, techniques and instruments.
Strategic Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk management or
portfolio management purposes and not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks associated
with them-including possible default by the other party to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures
and options markets may not be liquid in all circumstances and certain over-the-
counter options may have no markets. As a result, in certain markets, the Fund
might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts..
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market-value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options
and over-the-counter options ("OTC options"). Exchange listed options are
issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties to
such options. The discussion below uses the OCC as an example, but is also
applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or
9
<PAGE>
making delivery of the underlying instrument through the process of exercising
the option, listed options are closed by entering into offsetting purchase or
sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-l from S&P or P-l from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Adviser. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 10% of its net assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide
income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered. (i.e., the Fund must
own the securities or futures contract subject to the call) or must meet the
asset segregation requirements
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described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50%
of the Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Fund, as seller, to deliver to the
buyer the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of
a premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of the Fund's total assets (taken at current value); however, in
the case of an option that is in-the-money at the time of the purchase, the in-
the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is
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<PAGE>
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an
option on an index depends on price movements in the instruments making up the
market, market segment, industry or other composite on which the underlying
index is based, rather than price movements in individual securities, as is the
case with respect to options on securities.
CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-l or P-l by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or are determined to be of
equivalent credit quality by the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar.
Proxy hedging entails entering into a commitment or option to sell a currency
whose changes in value are generally considered to be correlated to a currency
or currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers
that the Austrian schilling is correlated to the German deutschemark (the "D-
mark"), the Fund holds securities denominated in schillings and the Adviser
believes that the value of schillings will decline against the U.S. dollar, the
Adviser may enter into a commitment or option to sell D-marks and buy dollars.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, there is the risk that the
perceived correlation between various currencies may not be present or may not
be present during the particular time that the Fund is engaging in proxy
hedging. If the Fund enters into a currency hedging transaction, the Fund will
comply with the asset segregation requirements described below.
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RISKS OF CURRENCY TRANSACTIONS. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the Fund may enter are interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specific index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the Investment Company Act of 1940, as amended (the "1940 Act"), and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The Fund will not enter into any swap, cap, floor or collar transaction unless,
at the time of entering into such transaction, the unsecured long-term debt of
the Counterparty, combined with any credit enhancements, is rated at least A by
S&P or Moody's or has an equivalent rating from a NRSRO or is determined to be
of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a
result, the swap market
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has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
EURODOLLAR INSTRUMENTS. The Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE U.S. When conducted outside
the U.S., Strategic Transactions may not be regulated as rigorously as in the
U.S., may not involve a clearing mechanism and related guarantees, and are
subject to the risk of governmental actions affecting trading in, or the prices
of, foreign securities, currencies and other instruments. The value of such
positions also could be adversely affected by: (i) other complex foreign
political legal and economic factors, (ii) lesser availability than in the U.S.
of data on which to make trading decisions, (iii) delays in the Fund's ability
to act upon economic events occurring in foreign markets during non-business
hours in the U.S., (iv) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the U.S., and (v) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions
in addition to other requirements, require that the Fund segregate liquid, high
grade assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid, high grade securities at
least equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid,
high grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid, high grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires
the Fund to segregate liquid, high grade assets equal to the exercise
price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate liquid high grade assets equal to the amount of the Fund's
obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when
the Fund sells these instruments it will only segregate an amount of assets
equal to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sellback formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
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In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligations in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), for qualification as a regulated investment company. (See "TAX
STATUS").
REPURCHASE AGREEMENTS - Repurchase agreements are agreements under which the
purchaser (i.e., a Fund) acquires ownership of an obligation (debt instrument or
----
time deposit) and the seller agrees, at the time of the sale, to repurchase the
obligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period. If the seller of
a repurchase agreement fails to repurchase this obligation in accordance with
the terms of the agreement, the investing Fund will incur a loss to the extent
that the proceeds on the sale are less than the repurchase price. Repurchase
agreements usually involve United States Government or federal agency securities
and, as utilized by the Funds, include only those securities in which the Funds
may otherwise invest. Repurchase agreements are for short periods, most often
less than 30 days and usually less than one week. The Funds intend to enter
into repurchase agreements only with domestic commercial and savings banks and
savings and loan associations with total assets of at least one billion dollars,
or with primary dealers in United States Government securities. In addition,
the Funds will not enter into repurchase agreements unless (a) the agreement
specifies that the securities purchased, and interest accrued thereon, will have
an aggregate value in excess of the price paid; and (b) the Funds take delivery
of the underlying instruments pending repurchase. In entering into a repurchase
agreement, a Fund is exposed to the risk that the other party to the agreement
may be unable to keep its commitment to repurchase. In that event, the Fund may
incur disposition costs in connection with liquidating the collateral (i.e., the
----
underlying security). Moreover, if bankruptcy proceedings are commenced with
respect to the selling party, receipt of the value of the collateral may be
delayed or substantially limited. The Funds believe that these risks are not
material inasmuch as the Funds will evaluate the credit worthiness of all
entities with which it proposes to enter into repurchase agreements, and will
seek to assure that each such arrangement is adequately collateralized.
REVERSE REPURCHASE AGREEMENTS - Reverse repurchase agreements involve the sale
of money market securities held by a Fund, with an agreement to repurchase the
securities at an agreed upon price, date and interest payment. If it employs
reverse repurchase agreements, a Fund will use the proceeds to purchase other
money market securities and instruments eligible for purchase by that Fund
either maturing, or under an agreement to resell, at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement. At the time it
enters into a reverse repurchase agreement, a Fund will place in a segregated
custodial account securities having a value equal to the repurchase price. A
Fund will generally utilize reverse repurchase agreements when the interest
income to be
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earned from the investment of the proceeds of the transactions is greater than
the interest expense incurred as a result of the reverse repurchase
transactions. Reverse repurchase agreements involve the risk that the market
value of securities purchased by the Fund with the proceeds of the transaction
may decline below the repurchase price of the securities by the Fund which it is
obligated to repurchase. As a matter of operating policy, the aggregate amount
of illiquid repurchase and reverse repurchase agreements will not exceed 10% of
any of the Fund's total net assets at the time of initiation.
WARRANTS - Warrants are instruments that provide the owner with the right to
purchase a specified security, usually an equity security such as common stock,
at a specified price (usually representing a premium over the applicable market
value of the underlying equity security at the time of the warrant's issuance)
and usually during a specified period of time. Moreover, they are usually
issued by the issuer of the security to which they relate. While warrants may
be traded, there is often no secondary market for them. The Funds will invest
in publicly traded warrants only. Warrants do not have any inherent value. To
the extent that the market value of the security that may be purchased upon
exercise of the warrant rises above the exercise price, the value of the warrant
will tend to rise. To the extent that the exercise price equals or exceeds the
market value of such security the warrants will have little or no market value.
If warrants remain unexercised at the end of the specified exercise period, they
lapse and the investing Fund's investment in them will be lost. In view of the
highly speculative nature of warrants, as a matter of operating policy, no Fund
will invest more than 5% of its total net assets in warrants.
CONVERTIBLE PREFERRED STOCKS AND DEBT SECURITIES - Certain preferred stocks and
debt securities include conversion features allowing the holder to convert
securities into another specified security (usually common stock) of the same
issuer at a specified conversion ratio (e.g., two shares of preferred for one
----
share of common stock) at some specified future date or period. The market
value of convertible securities generally includes a premium that reflects the
conversion right. That premium may be negligible or substantial. To the extent
that any preferred stock or debt security remains unconverted after the
expiration of the conversion period, the market value will fail to the extent
represented by that premium.
PREFERRED EQUITY REDEMPTION CUMULATIVE STOCK - Preferred Equity Redemption
Cumulative Stock (PERCS) are a form of convertible preferred stock which
automatically convert into shares of common stock on a predetermined conversion
date. PERCS pay a fixed annual dividend rate which is higher than the annual
dividend rate of the issuing company's common stock. However, the terms of
PERCS limit an investor's ability to participate in the appreciation of the
common stock (usually capped at approximately 40%). Predetermined redemption
dates and prices set by the company upon the issuance of the securities provide
the mechanism for limiting the price appreciation of PERCS.
SMALL CAP GROWTH FUND.
REVERSE REPURCHASE AGREEMENTS. Each Fund may invest in reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held
by a Fund pursuant to a Fund's agreement to repurchase the securities at an
agreed upon price, date and interest rate. Such agreements are considered to be
borrowings under the Investment Company Act of 1940 (the "1940 Act"). While
reverse repurchase transactions are outstanding, a Fund will maintain in a
segregated account liquid assets in an amount at least equal to the market value
of the securities, plus accrued interest, subject to the agreement.
VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to purchasable
variable and floating rate instruments, the adviser or sub-adviser will consider
the earning power, cash flows and liquidity ratios of the issuers and guarantors
of such instruments and, if the instruments are subject to a demand feature,
will monitor their financial status to meet payment on demand. Such instruments
may include variable amount mast demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. The absence of an active secondary market with respect to
particular variable and floating rate instruments could make it difficult for a
Fund to dispose of a variable or floating rate note if the issuer defaulted on
its payment obligation or during periods that the Fund is not entitled to
exercise its demand rights, and the Fund could, for these
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or other reasons, suffer a loss with respect to such instruments. In
determining average-weighted Fund maturity, an instrument will be deemed to have
a maturity equal to either the period remaining until the next interest rate
adjustment or the time the Fund involved can recover payment of principal as
specified in the instrument, depending on the type of instrument involved.
MONEY MARKET OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN
BRANCHES OF U.S. BANKS. Each Fund may purchase bank obligations, such as
certificates of deposit, bankers' acceptances and time deposits, including
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions having total assets at the time of purchase in excess of $1
billion. The assets of a bank or savings institution will be deemed to include
the assets of its domestic and foreign branches for purposes of each Fund's
investment policies. Investments in short-term bank obligations may include
obligations of foreign banks and domestic branches of foreign banks, and also
foreign branches of domestic banks.
MORTGAGE-RELATED SECURITIES. There are a number of important differences
among the agencies and instrumentalities of the U.S. Government that issue
mortgage-related securities and among the securities that they issue. Mortgage-
related securities guaranteed by the Government National Mortgage Association
("GNMA") include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrower funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA, are not backed by or entitled to the full faith and
credit of the United States and are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA. Mortgage-related securities issued
by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitled the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage-related securities. Like other fixed-income securities,
when interest rates rise the value of an asset-backed security generally will
decline; however, when interest rates decline, the value of an asset-backed
security with prepayment features may not increase as much as that of other
fixed-income securities.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations which the Funds may hold include U.S. Treasury bills, Treasury
instruments and Treasury bonds and the obligations of Federal Home Loan Banks,
Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, the Farmers Home Administration, the Export-Import Bank of the
United States, the Small Business Administration, FNMA, GNMA, the General
Services Administration, the Student Loan Marketing Association, the Central
Bank for Cooperatives, FHLMC, the Federal Intermediate Credit Banks, the
Maritime Administration, the International
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<PAGE>
Bank of Reconstruction and Development (the "World Bank"), the Asian-American
Development Bank and the Inter-American Development Bank.
SUPRANATIONAL ORGANIZATION OBLIGATIONS. The Funds may purchase debt
securities of supranational organizations such as the European Coal and Steel
Community, the European Economic Community and the World Bank, which are
chartered to promote economic development.
LEASE OBLIGATIONS. The Funds may hold participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations").
The Sub-Adviser will monitor the credit standing of each municipal borrower
and each entity providing credit support and/or a put option relating to lease
obligations. In determining whether a lease obligation is liquid, the Sub-
Adviser will consider, among other factors, the following: (i) whether the
lease can be cancelled; (ii) the degree of assurance that assets represented by
the lease could be sold; (iii) the strength of the lessee's general credit
(e.g., its debt, administrative, economic, and financial characteristics); (iv)
the likelihood that the municipality would discontinue appropriating funding for
the lease property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
nonappropriation"); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit enhancement such as insurance;
and (vii) any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services other than those covered by the lease
obligation.
Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a
reduction of income to a Fund, and could result in a reduction in the value of
the municipal lease experiencing non-payment and a potential decrease in the net
asset value of a Fund. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, a Fund
could experience delays and limitations with respect to the collection of
principal and interest on such municipal leases and a Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in lease payments,
the Fund might take possession of an manage the assets securing the issuer's
obligations on such securities, which may increase a Fund's operating expenses
and adversely affect the net asset value of a Fund. When the lease contains a
non-appropriation clause, however, the failure to pay would not be a default and
a Fund would not have the right to take possession of the assets. Any income
derived from a Fund's ownership or operation of such assets may not be tax-
exempt. In addition, a Fund's intention to qualify as a "regulated investment
company" under the Internal Revenue code of 1986, as amended, may limit the
extent to which a Fund may exercise its rights by taking possession of such
assets, because as a regulated investment company a Fund is subject to certain
limitations on its investments and on the nature of its income.
COMMERCIAL PAPER. The Funds may purchase commercial paper rated (at the
time of purchase) "A-1" by S&P or "Prime-1" by Moody's or, when deemed advisable
by a Fund's adviser or sub-adviser, "high quality" issues rated "A-2" or "Prime-
2" by S&P or Moody's, respectively. These ratings symbols are described in
Appendix A.
Commercial paper purchasable by each Fund includes "Section 4(2) paper," a
term that includes debt obligations issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) paper is restricted as to disposition
under the Federal securities laws, and is frequently sold (and resold) to
institutional investors such as the Fund through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. Certain transactions in Section 4(2) paper may qualify for
the registration exemption provided in Rule 144A under the Securities Act of
1933.
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements. The
repurchase price under the repurchase agreements described in the Prospectuses
generally equals the price paid by a Fund involved plus
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<PAGE>
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on securities underlying the repurchase agreement). The
financial institutions with which a Fund may enter into repurchase agreements
will be banks and non-bank dealers of U.S. Government securities that are listed
on the Federal Reserve Bank of New York's list of reporting dealers, if such
banks and non-bank dealers are deemed creditworthy by the Fund's adviser or sub-
adviser. A Fund's adviser or sub-adviser will continue to monitor
creditworthiness of the seller under a repurchase agreement, and will require
the seller to maintain during the term of the agreement the value o the
securities subject to the agreement to equal at least the repurchase price
(including accrued interest). In addition, the Fund's adviser or sub-adviser
will require that the value of this collateral, after transaction costs
(including loss of interest) reasonably expected to be incurred on a default, be
equal to or greater than the repurchase price (including accrued premium)
provided in the repurchase agreement. The accrued premium is the amount
specified in the repurchase agreement or the daily amortization of the
difference between the purchase price and the repurchase price specified in the
repurchase agreement. The Fund's adviser or sub-adviser will mark-to-market
daily the value of the securities. Securities subject to repurchase agreements
will be held by the Fund's custodian (or sub-custodian) in the Federal
Reserve/Treasury book-entry system or by another authorized securities
depository. Repurchase agreements are considered to be loans by the Funds under
the 1940 Act.
INVESTMENT GRADE DEBT OBLIGATIONS. Each of the Funds may invest in
"investment grade securities," which are securities rated in the four highest
rating categories of an NRSRO. It should be noted that debt obligations rated
in the lowest of the top four ratings (i.e., "Baa" by Moody's or "BBB" by S&P)
are considered to have some speculative characteristics and are more sensitive
to economic change than higher rated securities.
See Appendix A to this Statement of Additional Information for a
description of applicable securities ratings.
WHEN-ISSUED PURCHASE AND FORWARD COMMITMENTS. The Funds may enter into
"when-issued" and "forward" commitments, including "TBA" (to be announced)
purchase commitments, to purchase or sell securities at a fixed price at a
future date. When a Fund agrees to purchase securities on this basis, the
custodian will set aside liquid assets equal to the amount of the commitment in
a separate account. Normally, the custodian will set aside Fund securities to
satisfy a purchase commitment, and in such a case the Fund may be required
subsequently to place additional assets in the separate account in order to
ensure that the value of the account remains equal to the amount of the Fund's
commitments. It may be expected that the market value of a Fund's net assets
will fluctuate to a greater degree when it sets aside Fund securities to cover
such purchase commitments than when it sets aside cash. Because a Fund's
liquidity and ability to manage its Fund might be affected when it sets aside
cash or Fund securities to cover such purchase commitments, each Fund expects
that its forward commitments and commitments to purchase when-issued or TBA
securities will not exceed 25% of the value of its total assets absent unusual
market conditions.
If deemed advisable as a matter of investment strategy, a Fund may dispose
of or renegotiate a commitment after it has been entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss.
When a Fund engages in when-issued, TBA or forward commitment transactions,
it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of a Fund starting on the day the Fund
agrees to purchase the securities. The Fund does not earn interest on the
securities it has committed to purchase until they are paid for and delivered on
the settlement date.
RIGHTS OFFERINGS AND WARRANTS TO PURCHASE. Each Fund may participate in
rights offerings and may purchase warrants, which are privileges issued by
corporations enabling the owners to subscribe to and purchase a specified number
of shares of the corporation at a specified price during a specified period of
time. Subscription
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<PAGE>
rights normally have a short life span to expiration. The purchase of rights or
warrants involves the risk that a Fund could lose the purchase value of a right
or warrant if the right to subscribe to additional shares is not exercised prior
to the rights' and warrants' expiration. Also, the purchase of rights and/or
warrants involves the risk that the effective price paid for the right and/or
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security.
FOREIGN CURRENCY TRANSACTIONS. Forward foreign currency exchange contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of Fund securities but rather allow a Fund
to establish a rate of exchange for a future point in time. A Fund may use
forward foreign currency exchange contracts to hedge against movements in the
value of foreign currencies (including the "ECU" used in the European Community)
relative to the U.S. dollar in connection with specific Fund transactions or
with respect to Fund positions. A Fund may enter into forward foreign currency
exchange contracts when deemed advisable by its adviser or sub-adviser under two
circumstances. First, when entering into a contract for the purchase or sale of
a security, a Fund may enter into a forward foreign currency exchange contract
for the amount of the purchase or sale price to protect against variations,
between the date the security is purchased or sold and the date on which payment
is made or received, in the value of the foreign currency relative to the U.S.
dollar or other foreign currency.
Second, when a Fund's adviser or sub-adviser anticipates that a particular
foreign currency may decline relative to the U.S. dollar or other leading
currencies, in order to reduce risk, the Fund may enter into a forward contract
to sell, for a fixed amount, the amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. With respect to any forward foreign currency contract, it will not
generally be possible to match precisely the amount covered by that contract and
the value of the securities involved due to the changes in the values of such
securities resulting from market movements between the date the forward contract
is entered into and the date it matures. In addition, while forward contracts
may offer protection from losses resulting from declines in the value of a
particular foreign currency, they also limit potential gains which might result
from increases in the value of such currency. A Fund will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
A Fund may also engage in proxy hedging transactions to reduce the effect
of currency fluctuations on the value of existing or anticipated holdings of
Fund securities. Proxy hedging is often used when the currency to which the
Fund is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's securities are, or are expected to
be, denominated, and to buy U.S. dollars. Proxy hedging involves some of the
same risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Fund if the currency being
hedge fluctuates in value to a degree or in a direction that is not anticipated.
In addition, there is the risk that the perceived linkage between various
currencies may not be present or may not be present during the particular time
that a Fund is engaging in proxy hedging. A Fund may also cross-hedge
currencies by entering into forward contracts to sell one or more currencies
that are expected to decline in value relative to other currencies to which the
Fund has or in which the Fund expects to have Fund exposure. For example, a
Fund may hold both French government bonds and German government bonds, and the
Adviser or Sub-Adviser may believe that French francs will deteriorate against
German marks. The Fund would sell French francs to reduce its exposure to that
currency and buy German marks. This strategy would be a hedge against a decline
in the value of French francs, although it would expose the Fund to declines in
the value of the German mark relative to the U.S. dollar.
In general, currency transactions are subject to risks different from those
of other Fund transactions, and can result in greater losses to a Fund than
would otherwise be incurred, even when the currency transactions are used for
hedging purposes.
A separate account of a Fund consisting of liquid assets equal to the
amount of the Fund's assets that could be required to consummate forward
contracts entered into under the second circumstances, as set forth above, will
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<PAGE>
be established with the Fund's custodian. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
Fund.
OPTIONS. Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Options on particular securities may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in the underlying securities themselves. A Fund will write
call options only if they are "covered." In the case of a call option on a
security, the option is "covered" if a Fund owns the security underlying the
call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
liquid assets in such amount as are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Fund maintains with its
custodian liquid assets equal to the contract value. A call option is also
covered if a Fund holds a call on the same security or index as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written provided the difference is maintained by the Fund in liquid
assets in a segregated account with its custodian.
When a Fund purchases a put option, the premium paid by it is recorded as
an asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently market-to-market to reflect the current value of the option
purchased or written. The current value of the traded option purchased or
written. The current value of the traded option is the last sale price or, in
the absence of sale, the mean between the last bid and asked price. If an
option purchased by a Fund expires unexercised the Fund realizes a loss equal to
the premium paid. If the Fund enters into a closing sale transaction on an
option purchased by it, the Fund will realize a gain if the premium received by
the Fund on the closing transaction is more than the premium paid to purchase
the option, or a loss if it is less. If an option written by a Fund expires on
the stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by a Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Fund may invest in futures
contracts and options thereon (interest rate futures contracts or index futures
contracts, as applicable). These instruments are described in Appendix B to
this Statement of Additional Information.
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<PAGE>
STAND-BY COMMITMENTS. Under a stand-by commitment for a Municipal
Obligation, a dealer agrees to purchase at the Fund's option a specified
Municipal Obligation at a specified price. Stand-by commitments for Municipal
Obligations may be exercisable by a Fund at any time before the maturity of the
underlying Municipal Obligations and may be sold, transferred or assigned only
with the instruments involved. It is expected that such stand-by commitments
will generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, a Fund may pay for such a
stand-by commitment either separately in cash or by paying a higher price for
Municipal Obligations which are acquired subject to the commitment for Municipal
Obligations (thus reducing the yield to maturity otherwise available for the
same securities). The total amount paid in either manner for outstanding stand-
by commitments for Municipal Obligations held by a Fund will not exceed 1/2 of
1% of the value of such Fund's total assets calculated immediately after each
stand-by commitment is acquired.
Stand-by commitments will only be entered into with dealers, banks and
broker-dealers which, in a Sub-Adviser's opinion, present minimal credit risks.
A Fund will acquire stand-by commitments solely to facilitate Fund liquidity and
not to exercise its rights thereunder for trading purposes. Stand-by
commitments will be valued at zero in determining net asset value. Accordingly,
where a Fund pays directly or indirectly for a stand-by commitment, its cost
will be reflected as an unrealized loss for the period during which the
commitment is held by such Fund and will be reflected as a realized gain or loss
when the commitment is exercised or expires.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Each Fund sells and redeems its shares at net asset value per share, without a
sales or redemption charge. No minimum purchase or redemption amounts apply.
The daily net asset value of the Fund's shares is determined by dividing the net
assets by the number of outstanding shares. Net assets are equal to the total
assets of the Fund less its liabilities. The price at which a purchase is
effected is based on the next calculated net asset value after the order is
received at the home office, One Horace Mann Plaza, Springfield, Illinois 62715-
0001. A security listed or traded on an exchange is valued at its last sales
price on the exchange where it is principally traded. In the absence of a
current quotation, the security is valued at the mean between the last bid and
asked prices on the exchange. Securities traded over-the-counter are valued at
the last current bid price. Trading in securities on exchanges and over-the-
counter markets in Europe and the Far East is normally completed at various
times prior to 3:00 p.m. Chicago time, the current closing time of the New York
Stock Exchange. Trading on foreign exchanges may not take place on every day
the New York Stock Exchange is open. Conversely, trading in various foreign
markets may take place on days when the New York Stock Exchange is not open and
on other days when the International Equity Fund's net asset value is not
calculated. Consequently, calculation of the net asset value for the
International Equity Fund may not occur at the same time as determination of the
most current market prices of the securities included in the calculation; and
the value of the net assets held by the International Equity Fund may be
significantly affected on days when shares are not available for purchase or
redemption.
Debt securities that have a remaining maturity of 60 days or less are
valued at cost, plus or minus any amortized discount or premium. Under the
amortized cost method of valuation, the security is initially valued at cost.
Then, the Fund assumes a constant proportionate amortization in value until
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the security. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price that would be
received upon the sale of the security. When market quotations are not
available, securities are valued at fair value as determined in good faith by
the Board of Trustees.
TAX STATUS
It is intended that each of the Funds will qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended ("Code"). In order
to qualify as a regulated investment company under the Code, each of the Funds
must, among other things, (a) derive at least 90% of its gross income from
dividends, interest,
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payments with respect to securities loans, gains from the sale or other
disposition of stocks, securities, or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in these stocks, securities or
foreign currencies; (b) derive less than 30% of its gross income from the sale
or other disposition of stocks, securities or certain options, futures, or
forward contracts held less than three months, (c) distribute at least 90% of
its net investment income which includes short-term capital gains and (d)
diversify its holdings so that, at the end of each fiscal quarter, (i) at least
50% of the market value of the Fund's assets is represented by cash and cash
items, Government securities, the securities of other regulated investment
companies, and other securities limited in respect of any one issuer to 5% of
the Fund's total assets and to not more than 10% of the voting securities of
that issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than Government securities
or the securities of other regulated investment companies).
The Funds are investment vehicles for the variable contracts of Horace Mann Life
Insurance Company. The separate accounts which maintain the variable contracts
must satisfy quarterly diversification requirements under Section 817(h) of the
Code. These diversification requirements, which apply in addition to the
diversification requirements imposed on the Funds by the Investment Company Act
of 1940, place limitations on the investments of each Fund that can be made in
the securities of certain issuers. If Fund investments are not adequately
diversified under Section 817(h), the earnings of all variable contracts
invested, in whole or in part, in the Fund will be currently taxable to the
variable contract owners.
As a regulated investment company, a Fund is not subject to federal income tax
on its net investment income (including short-term capital gains) if it
distributes all net investment income to its shareholders. A Fund will not be
subject to federal income tax on any net capital gains (the excess of net long-
term capital gains or net short-term capital losses) that are distributed as
capital gain dividends. If, however, shares of a Fund are sold at a loss after
being held six months or less, such loss will be considered a long-term capital
loss to the extent of any capital gains distributions on such shares.
A Fund's options, futures and foreign currency transactions are subject to
special tax provisions that may accelerate or defer recognition of certain gains
or losses, change the character of certain gains or losses, or alter the holding
periods of certain of a Fund's securities.
The mark-to-market rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options and futures held by the Fund at the end of
the fiscal year. Under these provisions, 60% of any capital gain net income or
loss recognized will generally be treated as long-term and 40% as short-term.
However, although certain forward contracts and futures contracts on foreign
currency are marked-to-market, the gain or loss is generally ordinary under
Section 988 of the Code. In addition, the straddle rules of the Code would
require deferral of certain losses realized on positions of a straddle to the
extent that a Fund had unrealized gains in offsetting positions at year end.
Foreign exchange gains and losses realized by the International Equity Fund in
connection with certain transactions that involve foreign currency-denominated
debt securities, certain foreign currency options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing, and character of distributions to shareholders. For
example, if the Fund sold a foreign stock or bond and part of the gain or loss
on the sale was attributable to an increase or decrease in the value of a
foreign currency, then the currency gain or loss may be treated as ordinary
income or loss. If such transactions result in higher net ordinary income, the
dividends paid by the Fund will be increased; if the result of such transactions
is lower net ordinary income, a portion of dividends paid could be classified as
a return of capital.
The International Equity Fund may qualify for and make an election permitted
under the "pass through" provisions of Section 853 of the Code, which allows a
regulated investment company to have its foreign tax credit taken by its
shareholders instead of on its own tax return. To be eligible for this credit,
more than 50% of the value of the
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Fund's total assets at the close of its taxable year must consist of stock or
other securities in foreign corporations, and the Fund must have distributed at
least 90% of its taxable income.
If the International Equity Fund makes this election, it may not take any
foreign tax credit, and may not take a deduction for foreign taxes paid.
However, the Fund is allowed to include the amount of foreign taxes paid in a
taxable year in its dividends paid deduction. Each shareholder would then
include in its gross income, and treat as paid by it, his proportionate share of
the foreign taxes paid by the Fund.
Investment income derived from foreign securities may be subject to foreign
income taxes withheld at the source. Because the amount of a Fund's investments
in various countries will change from time to time, it is not possible to
determine the effective rate of such taxes in advance.
If the U.S. government were to impose any restrictions, through taxation or
other means, on foreign investments by U.S. investors such as those to be made
through the portfolio, the Board of Trustees of the Fund will promptly review
the policies of the International Equity Fund to determine whether significant
changes in its investments are appropriate.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the International Equity Fund is effectively connected will be
subject to U.S. federal income tax treatment that is different from that
described above and in the prospectus. Such investors may be subject to
nonresident alien withholding tax at the rate of 30% (or a lower rate under an
applicable tax treaty) on amounts treated as ordinary dividends from the Fund
and, unless an effective IRS Form W-8 or authorized substitute for Form W-8 is
on file, to 31% backup withholding on certain other payments from the Fund.
Non-U.S. investors should consult their tax advisers regarding such treatment
and the application of foreign taxes to an investment in the Fund.
The above discussion is only an abbreviated summary of the applicable provisions
of the Code and is not intended as tax advice.
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CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth, as of February 14, 1997, the holdings of the
shares of each of the Funds known by the respective Fund to own, control or hold
with power to vote 5% or more of its outstanding securities. Since the listed
insurance company registered separate accounts' voting rights are passed through
to contract owners, the insurance companies themselves do not exercise voting
control over the shares held in those accounts.
<TABLE>
<CAPTION>
Small Cap Growth Fund: Type of Ownership Shares Owned % of Shares Outstanding
- ---------------------- ----------------- ------------ ------------------------
<S> <C> <C> <C>
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
Horace Mann Life Insurance
Company Separate Account........ Record 4,000 100%
International Equity Fund:
- --------------------------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
Horace Mann Life Insurance
Company Separate Account........ Record 4,000 100%
Socially Responsible Fund:
- --------------------------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
Horace Mann Life Insurance
Company Separate Account........ Record 4,000 100%
</TABLE>
Horace Mann Life Insurance Company is organized under the laws of the State of
Illinois and is a wholly-owned subsidiary of Allegiance Life Insurance Company,
and Illinois-domiciled life insurance company. One hundred percent of the stock
of Allegiance Life Insurance Company is held by Horace Mann Educators
Corporation, an insurance holding company in Delaware.
GENERAL INFORMATION
As a business trust, the Trust is not required to hold annual shareholder
meetings. However, special meetings may be called for purposes such as electing
or removing trustees, changing fundamental policies, or approving an investment
advisory contract. If requested to do so by the holders of at least 10% of the
Trust's outstanding shares, the Trust will call a special meeting for the
purpose of voting upon the question of removal of a trustee or trustees and will
assist in the communications with other shareholders as if the Trust were
subject to Section 16(c) of the Investment Company Act of 1940. All shares of
all series of the Trust are voted together in the election of trustees. On any
other matter submitted to a vote of shareholders, shares are voted in the
aggregate and not by individual series, except that shares are voted by
individual series when required by the Investment Company Act of 1940 or other
applicable law, or when the Board of Trustees determines that the matter affects
only the interests of one or more series, in which case shareholders of the
unaffected series are not entitled to vote on such matters.
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Trustees and Shareholders of
Horace Mann Mutual Funds:
We have audited the accompanying statements of net assets for the Small Cap
Growth Fund, International Equity Fund and the Socially Responsible Fund (the
portfolios comprising the Horace Mann Mutual Funds) (the "Fund") as of December
27, 1996. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements 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 the cash balance as of December 27, 1996, by
correspondence with the custodian. 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, the financial statements referred to above present fairly, in
all material respects, the financial positions of the Portfolios as of December
27, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
December 30, 1996
26
<PAGE>
HORACE MANN MUTUAL FUNDS
STATEMENT OF NET ASSETS
December 27, 1996
<TABLE>
<CAPTION>
Small Cap International Socially
Growth Equity Responsible
Fund Fund Fund
---------------------------------------
<S> <C> <C> <C>
Assets-
Cash....................................... $40,000 $40,000 $40,000
Total Assets............................ 40,000 40,000 40,000
Net Assets.................................... $40,000 $40,000 $40,000
======= ======= =======
Net Assets Consist of:
Paid in Surplus............................ $40,000 $40,000 $40,000
======= ======= =======
Maximum Offering Price per Share:
Net Assets Value and Redemption Price
per Share (based upon net assets of
$40,000 and 4,000 shares of beneficial
interest issued and outstanding for each
Fund). $ 10.00 $ 10.00 $ 10.00
======= ======= =======
</TABLE>
Note 1: The Horace Mann Mutual Funds was organized as a Delaware Business Trust
on November 7, 1996. The Trust is comprised of the following portfolios: Small
Cap Growth Fund, International Equity Fund and the Socially Responsible Fund
(the "Portfolios"). None of the portfolios have had operations since that date
other than relating to the issuance of 4,000 no par value shares of beneficial
interest for $40,000 to Horace Mann Life Insurance Company, an affiliated
company. An unlimited number of shares are authorized.
27
<PAGE>
HORACE MANN MUTUAL FUNDS
FORM N-1A
PART C: OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
A. FINANCIAL STATEMENTS:
(i) Financial Statements included in Part A of the Registration
Statement: None
(ii) Financial Statements included in Part B of the Registration
Statement:
Statement of Net Assets at December 27, 1996
Report of Independent Auditors
Schedules I, II, III, IV and V have been omitted as the required
information is not present.
B. EXHIBITS:
(1) Declaration of Trust and Certificate of Trust of
Registrant./1/
-
(2) Bylaws of Registrant./1/
-
(3) None.
(4) None.
(5) *(a) Management Agreement
*(b) Investment Sub-Advisory Agreement between Horace Mann
Investors, Inc. and Scudder, Stevens & Clark, Inc.
*(c) Investment Sub-Advisory Agreement between Horace Mann
Investors, Inc. and PNC Equity Advisors Company
(6) None
(7) None
(8) *Custodian Services Agreement
(9) *(a) Transfer Agent Agreement
*(b) Fund Accounting Services Agreement
*(c) Money Transfer Services Agreement
(10) *Legal Opinion and Consent of Vedder, Price, Kaufman &
Kammholz
(11) *Consent of independent accountants.
(12) Not applicable.
(13) *Investment Letter of initial investor in Registrant.
(14) None.
(15) None
(16) Not applicable.
(18) Not applicable.
(19) *Horace Mann Educators Corporation and Its Subsidiaries.
(20) *Powers of Attorney
(27) Not applicable.
*Filed herewith
_____________________________
/1/Incorporated by reference to the initial Registration Statement filed on
November 8, 1996.
C-1
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is directly controlled by Horace Mann Mutual Funds. Companies
under common control include Horace Mann Educators Corporation, its subsidiaries
and Horace Mann Balanced Fund, Inc., Horace Mann Growth Fund, Inc., Horace Mann
Income Fund, Inc., and Horace Mann Short-Term Investment Fund, Inc. See Exhibit
#19.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of February 14, 1997, there were the following holders of record of
the Shares of Registrant.
<TABLE>
<CAPTION>
Fund Number of Shares
---- ----------------
<S> <C>
Small Cap Growth Fund 4,000
International Equity Fund 4,000
Socially Responsible Fund 4,000
</TABLE>
ITEM 27. INDEMNIFICATION.
Article V of Registrant's Declaration of Trust, filed herewith as
Exhibit 1, provides for the indemnification of Registrant's trustees, officers,
employees and agents against liabilities incurred by them in connection with the
defense or disposition of any action or proceeding in which they may be involved
or with which they may be threatened, while in office or thereafter, by reason
of being or having been in such office, except with respect to matters as to
which it has been determined that they acted with willful misfeasance, bad
faith, gross negligence or reckless disregard of he duties involved in the
conduct of their office ("Disabling Conduct").
Registrant will obtain from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to trustees,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a trustee, officer
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer, or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND INVESTMENT
SUB-ADVISERS
Registrant's investment adviser is Horace Mann Investors, Inc. In
addition to its services to Registrant as investment adviser, Horace Mann
Investors, Inc. is a registered securities broker-dealer and acts as distributor
for the Variable Annuity Products of Horace Mann Life Insurance Company. The
Adviser has entered into investment sub-advisory agreements with Scudder,
Stevens & Clark, Inc. and PNC Equity Advisors Company for the management of the
assets of the Fund.
Name Business and Other Connections of Board of Directors and
Officers of Registrant's Investment Adviser, Horace Mann
Investors, Inc.
C-2
<PAGE>
Thomas A. Arisman Director, Chairman of the Board and President, Horace Mann
Investors, Inc.**
Trustee, Horace Mann Mutual Funds**
Senior Vice President, Horace Mann Life Insurance Company,
Horace Mann Service Corporation and related insurance
companies*
Director, Horace Mann Growth Fund, Inc., Horace Mann
Income Fund, Inc., Horace Mann Balanced Fund, Inc. and
Horace Mann Short-Term Investment Fund, Inc.
Larry K. Becker Director, Horace Mann Investors, Inc.**
Trustee and Chairman of the Board, Horace Mann Mutual
Funds**
Director, Executive Vice President and Chief Financial
Officer, Horace Mann Life
Insurance Company, Horace Mann Service Corporation and
related insurance companies**
Director, Horace Mann Growth Fund, Inc., Horace Mann
Income Fund, Inc., Horace Mann
Balanced Fund, Inc. and Horace Mann Short-Term Investment
Fund, Inc.
George J. Zock Director, Horace Mann Investors, Inc.**
Trustee and President, Horace Mann Mutual Funds**
Senior Vice President and Treasurer, Horace Mann Life
Insurance Company, Horace
Mann Service Corporation and related insurance companies**
Director, Horace Mann Growth Fund, Inc., Horace Mann
Income Fund, Inc., Horace Mann
Balanced Fund, Inc. and Horace Mann Short-Term Investment
Fund, Inc.
William J. Kelly Treasurer, Horace Mann Investors, Inc.**
Treasurer and Regulatory Compliance Officer, Horace Mann
Mutual Funds**
Vice President, Horace Mann Life Insurance Company, Horace
Mann Service Corporation and related insurance
companies**
Treasurer and Regulatory Compliance Officer, Horace Mann
Growth Fund, Inc., Horace
Mann Income Fund, Inc., Horace Mann Balanced Fund, Inc.,
Horace Mann Short-Term
Investment Fund, Inc. and Horace Mann Mutual Funds
Ann M. Caparros Secretary, Horace Mann Investors, Inc.**
Director, Vice President, Corporate Secretary, Horace
Mann Life Insurance Company,
Horace Mann Service Corporation, and related insurance
companies**
Secretary and Ethics Compliance Officer, Horace Mann
Growth Fund, Inc., Horace Mann
Income Fund, Inc., Horace Mann Balanced Fund, Inc.,
Horace Mann Short-Term
Investment Fund, Inc. and Horace Mann Mutual Funds
Roger W. Fisher Controller, Horace Mann Investors, Inc.**
Controller, Horace Mann Growth Fund, Inc., Horace Mann
Income Fund, Inc., Horace
Mann Balanced Fund, Inc., Horace Mann Short-Term
Investment Fund, Inc. and Horace Mann Mutual Funds**
Vice President and Controller, Horace Mann Service
Corporation, Horace Mann Life
Insurance Company and related insurance companies**
**One Horace Mann Plaza, Springfield, IL
C-3
<PAGE>
Business and Other Connections of Board of Directors
of Registrant's Investment Sub-Adviser, Scudder,
Name Stevens & Clark, Inc. ("SSC")/1/
- ---- ----------------------------------------------------
Stephen R. Beckwith Director, Vice President, Assistant Treasurer, Chief
Operating Officer & Chief
Financial Officer, Scudder, Stevens & Clark, Inc.
(investment adviser)**
Lynn S. Birdsong Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
Supervisory Director, The Latin America Income and
Appreciation Fund N.V. (investment company)/+/
Supervisory Director, The Venezuela High Income Fund
N.V. (investment company)/xx/
Supervisory Director, Scudder Mortgage Fund
(investment company)/+/
Supervisory Director, Scudder Floating Rate Funds for
Fannie Mae Mortgage
Securities I & II (investment company)/+/
Director, Scudder, Stevens & Clark (Luxembourg) S.A.
(investment manager)/#/
Trustee, Scudder Funds Trust (investment company)*
President & Director, The Latin America Dollar Income
Fund, Inc. (investment company)**
President & Director, Scudder World Income
Opportunities Fund, Inc. (investment company)**
Director, Canadian High Income Fund (investment
company)/#/
Director, Hot Growth Companies Fund (investment
company)/#/
President, The Japan Fund, Inc. (investment
company)**
Director, Sovereign High Yield Investment Company
(investment company)/+/
Nicholas Bratt Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
President & Director, Scudder New Europe Fund, Inc.
(investment company)**
President & Director, The Brazil Fund, Inc.
(investment company)**
President & Director, The First Iberian Fund, Inc.
(investment company)**
President & Director, Scudder International Fund, Inc.
(investment company)**
President & Director, Scudder Global Fund, Inc.
(President on all series except
Scudder Global Fund) (investment company)**
President & Director, The Korea Fund, Inc.
(investment company)**
President & Director, Scudder New Asia Fund, Inc.
(investment company)**
President, The Argentina Fund, Inc. (investment
company)**
Vice President Scudder, Stevens & Clark Corporation
(Delaware) (investment adviser)**
Vice President, Scudder, Stevens & Clark Japan, Inc.
(investment adviser)/###/
Vice President, Scudder, Stevens & Clark of Canada
Ltd.
(Canadian investment adviser) Toronto, Ontario, Canada
Vice President, Scudder, Stevens & Clark Overseas
Corporation/oo/
E. Michael Brown Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
Trustee, Scudder GNMA Fund (investment company)*
Trustee, Scudder U.S. Treasury Fund (investment
company)*
Trustee, Scudder Tax Free Money Fund (investment
company)*
Assistant Treasurer, Scudder Investor Services, Inc.
(broker/dealer)*
Director & President, Scudder Realty Holding
Corporation (a real estate holding company)*
Director & President, Scudder Trust Company (a trust
company)/+++/
Director, Scudder Trust (Cayman) Ltd.
C-4
<PAGE>
Mark S. Casady Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
Director & Vice President, Scudder Investor Services,
Inc. (broker/dealer)* Vice
President Scudder Service Corporation (in-house
transfer agent)*
Director, SFA, Inc. (advertising agency)*
Linda C. Coughlin Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
Director & Senior Vice President, Scudder Investor
Services, Inc. (broker/dealer)*
President & Trustee, AARP Cash Investment Funds
(investment company)**
President & Trustee, AARP Growth Trust (investment
company)** President & Trustee, AARP Income Trust
(investment company)**
President & Trustee, AARP Tax Free Income Trust
(investment company)**
Director, SFA, Inc. (advertising agency)*
Margaret D. Hadzima Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
Assistant Treasurer, Scudder Investor Services, Inc.
(broker/dealer)*
Jerard K. Hartman Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
Vice President, Scudder California Tax Free Trust
(investment company)*
Vice President, Scudder Equity Trust (investment
company)**
Vice President, Scudder Cash Investment Trust
(investment company)*
Vice President, Scudder Fund, Inc. (investment
company)**
Vice President, Scudder Global Fund, Inc. (investment
company)**
Vice President, Scudder GNMA Fund (investment company)*
Vice President, Scudder Portfolio Trust (investment
company)*
Vice President, Scudder Institutional Fund, Inc.
(investment company)**
Vice President, Scudder International Fund, Inc.
(investment company)**
Vice President, Scudder Investment Trust (investment
company)*
Vice President, Scudder Municipal Trust (investment
company)*
Vice President, Scudder Mutual Funds, Inc..
(investment company)**
Vice President, Scudder New Asia Fund, Inc.
(investment company)**
Vice President, Scudder New Europe Fund, Inc.
(investment company)**
Vice President, Scudder Securities Trust (investment
company)*
Vice President, Scudder State Tax Free Trust
(investment company)*
Vice President, Scudder Funds Trust (investment
company)**
Vice President, Scudder Tax Free Money Fund
(investment company)*
Vice President, Scudder Tax Free Trust (investment
company)*
Vice President, Scudder U.S. Treasury Money Fund
(investment company)*
Vice President, Scudder Variable Life Investment Fund
(investment company)*
Vice President, The Brazil Fund, Inc. (investment
company)**
Vice President, The Korea Fund, Inc. (investment
company)**
Vice President, The Argentina Fund, Inc. (investment
company)**
Vice President & Director, Scudder, Stevens & Clark of
Canada, Ltd. (Canadian
investment adviser) Toronto, Ontario, Canada
Vice President, The First Iberian Fund, Inc.
(investment company)**
Vice President, The Latin America Dollar Income Fund,
Inc. (investment company)**
Vice President, Scudder World Income Opportunities
Fund, Inc. (investment company)**
Richard A. Holt Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
Vice President, Scudder Variable Life Investment Fund
(investment company)*
C-5
<PAGE>
Dudley H. Ladd Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
Director, Scudder Global Fund, Inc. (investment
company)**
Director, Scudder International Fund, Inc. (investment
company)**
Senior Vice President & Director, Scudder Investor
Services, Inc. (broker/dealer)*
President & Director, SFA, Inc. (advertising agency)*
Vice President & Trustee, Scudder Cash Investment
Trust (investment company)*
Trustee, Scudder Investment Trust (investment company)*
Trustee, Scudder Portfolio Trust (investment company)*
Trustee, Scudder Municipal Trust (investment company)*
Trustee, Scudder Securities Trust (investment company)*
Trustee, Scudder State Tax Free Trust (investment
company)*
Trustee, Scudder Equity Trust (investment company)**
Vice President, Scudder U.S. Treasury Money Fund
(investment company)*
John T. Packard Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
President, Montgomery Street Income Securities, Inc.
(investment company)/o/
Director, Scudder Realty Advisers, Inc. (realty
investment adviser)/x/
C-6
<PAGE>
Daniel Pierce Chairman & Director, Scudder, Stevens & Clark, Inc.
(investment adviser)**
Chairman & Director, Scudder New Europe Fund, Inc.
(investment company)**
Trustee, Scudder California Tax Free Trust (investment
company)*
President & Trustee, Scudder Equity Trust (investment
company)**
Director, The First Iberian Fund, Inc. (investment
company)**
President & Trustee, Scudder GNMA Fund (investment
company)*
President & Trustee, Scudder Portfolio Trust
(investment company)*
President & Trustee, Scudder Funds Trust (investment
company)**
President & Director, Scudder Institutional Fund, Inc.
(investment company)**
President & Director, Scudder Fund, Inc. (investment
company)**
Chairman & Director, Scudder International Fund, Inc.
(investment company)**
President & Trustee, Scudder Investment Trust
(investment company)*
Vice President & Trustee, Scudder Municipal Trust
(investment company)*
President & Director, Scudder Mutual Funds, Inc.
(investment company)**
Director, Scudder New Asia Fund, Inc. (investment
company)**
President & Trustee, Scudder Securities Trust
(investment company)*
Trustee, Scudder State Tax Free Trust (investment
company)*
Vice President & Trustee, Scudder Variable Life
Investment Fund (investment company)*
Director, The Brazil Fund, Inc. (until 7/94)
(investment company)**
Vice President & Assistant Treasurer, Montgomery
Street Income Securities, Inc. (investment company)/o/
Chairman, Vice President & Director, Scudder Global
Fund, Inc. (investment
company)**
Vice President, Director & Assistant Treasurer,
Scudder Investor Services, Inc. (broker/dealer)*
President & Director, Scudder Service Corporation
(in-house transfer agent)*
Chairman & President, Scudder, Stevens & Clark of
Canada, Ltd. (Canadian investment adviser), Toronto,
Ontario, Canada
President & Director, Scudder Precious Metals,
Inc./xxx/
Chairman & Director, Scudder Global Opportunities
Funds (investment company) Luxembourg
Chairman, Scudder, Stevens & Clark, Ltd. (investment
adviser) London, England
Director, Scudder Fund Accounting Corporation
(in-house fund accounting agent)*
Director, Vice President & Assistant Secretary,
Scudder Realty Holdings Corporation (a real estate
holding company)*
Director, Scudder Latin America Investment Trust PLC
(investment company)/@/
Incorporator, Scudder Trust Company (a trust
company)/+++/
Director, Fiduciary Trust Company (banking & trust
company) Boston, MA
Director, Fiduciary Company Incorporated (banking &
trust company) Boston, MA
Trustee, New EnglanD Aquarium, Boston MA
C-7
<PAGE>
Kathryn L. Quirk Director & Secretary, Scudder, Stevens & Clark, Inc.
(investment adviser)**
Vice President, Scudder Fund, Inc. (investment
company)**
Vice President, Scudder Institutional Fund, Inc.
(investment company)**
Vice President & Assistant Secretary, Scudder World
Income Opportunities Fund, Inc. (investment company)**
Vice President & Assistant Secretary, The Korea Fund,
Inc. (investment company)**
Vice President & Assistant Secretary, The Argentina
Fund, Inc. (investment company)**
Vice President & Assistant Secretary, The Brazil Fund,
Inc. (investment company)**
Vice President & Assistant Secretary, Scudder
International Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder Equity
Trust (investment company)**
Vice President & Assistant Secretary, Scudder
Securities Trust (investment company)*
Vice President & Assistant Secretary, Scudder Funds
Trust (investment company)**
Vice President & Assistant Secretary, Scudder Global
Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Montgomery
Street Income Securities, Inc. (investment company)/o/
Vice President & Assistant Secretary, Scudder Mutual
Funds, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder New
Europe Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder
Variable Life Investment Fund (investment company)*
Vice President & Assistant Secretary, The First
Iberian Fund, Inc. (investment company)**
Vice President & Assistant Secretary, The Latin
America Dollar Income Fund, Inc. (investment company)**
Vice President & Secretary, AARP Growth Trust
(investment company)**
Vice President & Secretary, AARP Income Trust
(investment company)**
Vice President & Secretary, AARP Tax Free Income
Trust (investment company)**
Vice President & Secretary, AARP Cash Investment Funds
(investment company)**
Vice President, Scudder GNMA Fund (investment company)*
Vice President & Secretary, The Japan Fund, Inc.
(investment company)**
Director, Vice President & Secretary, Scudder Fund
Accounting Corporation (in-house fund accounting
agent)*
Senior Vice President, Scudder Investor Services, Inc.
(broker/dealer)*
Director, Vice President & Secretary, Scudder Realty
Holdings Corporation (a real estate holding company)*
Vice President & Assistant Secretary, Scudder Precious
Metals, Inc./xxx/
Comelia M. Small Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
Vice President, Scudder Global Fund, Inc. (investment
company)**
Vice President, AARP Cash Investment Funds (investment
company)**
Vice President, AARP Growth Trust (investment
company)**
Vice President, AARP Income Trust (investment
company)**
Vice President, AARP Tax Free Income Trust (investment
company)**
C-8
<PAGE>
Edmond D. Villani Director, President & Chief Executive Officer,
Scudder, Stevens & Clark, Inc. (investment adviser)**
Chairman & Director, Scudder New Asia Fund, Inc.
(investment company)**
Chairman & Director, The Argentina Fund, Inc.
(investment company)**
Director, Scudder Realty Advisors, Inc. (realty
investment adviser)/x/
Supervisory Director, Scudder Mortgage Fund
(investment company)/+/
Chairman & Director, The Latin America Dollar Income
Fund, Inc. (investment company)**
Director, Scudder, Stevens & Clark Japan, Inc.
(investment adviser)/###/
Chairman & Director, Scudder World Income
Opportunities Fund, Inc. (investment company)**
Supervisory Director, Scudder Floating Rate Funds for
Fannie Mae Mortgage Securities I & II (investment
company)/+/
Director, The Brazil Fund, Inc. (investment company)**
Director, Indosuez High Yield Bond Fund (investment
company) Luxembourg
President & Director, Scudder, Stevens & Clark
Overseas Corporation/oo/
President & Director, Scudder, Stevens & Clark
Corporation (Delaware) (investment adviser)**
Director, IBJ Global Investment Management S.A.
(Luxembourg investment management company) Luxembourg,
Grand-Duchy of Luxembourg
Stephen A. Wohler Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
Vice President, Montgomery Street Income Securities,
Inc. (investment company)/o/
SSC has stockholders and employees who are denominated officers but do
not as such have corporation-wide responsibilities. Such persons are not
considered officers for purpose of this Item 28.
* Two International Place, Boston, MA
/X/ 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
/++/ Two Prudential Plaza, 180 N. Stetson Avenue, Chicago, IL
/+++/ 5 Industrial Way, Salem, NH
/o/ 101 California Street, San Francisco, CA
/#/ Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
/+/ John B. Gorsiraweg 6, Willemstad Curacao, Netherlands Antilles
/xx/ De Ruyterkade 62, P.O. Box 812, Willemstad Curacao, Netherlands
Antilles
/##/ 2 Boulevard Royal, Luxembourg
*** BI 2F3F 248 Section 3, Nan King East Road, Taipei, Taiwan
/xxx/ Grand Cayman, Cayman Islands, British West Indies
/oo/ 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
/###/ 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
/@/ c/o Sinclair Hendersen Limited, 23 Cathedral Yard, Exeter, Devon
Business and Other Connections of Board Of Directors and Officers of
Registrant's Investment Sub-Adviser, PNC Equity Advisors Company
("PEAC").
The list required by this Item 28 of directors and officers of PEAC,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV, filed by PEAC pursuant to the Investment Advisers Act of 1940. (SEC
File No. 801-47711).
C-9
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All such accounts, books and other documents are maintained (i) at the
offices of the Registrant, (ii) at the offices of Registrant's investment
adviser, Horace Mann Investors, Inc., One Horace Mann Plaza, Springfield,
Illinois 62715, (iii) at the offices of Registrant's investment sub-advisers,
Scudder, Stevens & Clark, Inc., Two International Place, Boston, Massachusetts
02110 and PNC Equity Advisors Company, 1600 Market Street, 27th Floor,
Philadelphia, Pennsylvania 19103, or (iv) at the offices of Registrant's
custodian, State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
ITEM 31. MANAGEMENT SERVICES.
Not Applicable.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) The Registrant undertakes to file a Post-Effective Amendment using
financial statements of Registrant, which need not be certified, within four to
six months from the effective date of the Registration Statement.
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
C-10
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit
Number Title
- ------ -----
<S> <C>
(1) Declaration of Trust and Certificate of Trust of Registrant./1/
(2) Bylaws of Registrant./1/
(3) None.
(4) None.
(5) *(a) Management Agreement
*(b) Investment Sub-Advisory Agreement between Horace Mann
Investors, Inc. and Scudder, Stevens & Clark, Inc.
*(c) Investment Sub-Advisory Agreement between Horace Mann
Investors, Inc. and PNC Equity Advisors Company
(6) None
(7) None
(8) *Custodian Services Agreement
(9) *(a) Transfer Agent Agreement
*(b) Money Transfer Services Agreement
(10) *Legal Opinion and Consent of Vedder, Price, Kaufman & Kammholz
(11) *Consent of independent accountants.
(12) Not applicable.
(13) *Investment Letter of initial investor in Registrant.
(14) None.
(15) None
(16) Not applicable.
(18) Not applicable.
(19) *Horace Mann Educators Corporation and Its Subsidiaries.
(20) *Powers of Attorney
(27) Not applicable.
</TABLE>
*Filed herewith
_____________________________
/1/Incorporated by reference to the initial Registration Statement filed on
November 8, 1996.
C-11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Springfield, State of Illinois, on the 18th day of
February, 1997.
HORACE MANN MUTUAL FUNDS
By: /s/ George J. Zock
------------------
George J. Zock, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on February 18, 1997 on behalf of
the following persons in the capacities indicated.
<TABLE>
<S> <C>
/s/ George J. Zock President (Principal Executive
- -------------------------------------- Officer) and Trustee
George J. Zock
/s/ William J. Kelly Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William J. Kelly
/s/ A. Thomas Arisman* Trustee
A. Thomas Arisman
- --------------------------------------
/s/ Larry K. Becker* Trustee
- --------------------------------------
Larry K. Becker
/s/ A. L. Gallop* Trustee
- --------------------------------------
A. L. Gallop
Trustee
- --------------------------------------
Richard D. Lang
Trustee
/s/ Edward L. Najim*
- --------------------------------------
Edward L. Najim
/s/ Harriet A. Russell* Trustee
- --------------------------------------
Harriet A. Russell
</TABLE>
* George J. Zock signs this document pursuant to powers of attorney file
herewith.
/s/ George J. Zock
- ------------------
George J. Zock
<PAGE>
Exhibit 5(a)
MANAGEMENT AGREEMENT
--------------------
This Management Agreement is made as of this ___________, 199_ between
HORACE MANN MUTUAL FUNDS, a Delaware business trust (herein called the
"Company"), and HORACE MANN INVESTORS, INC., a Delaware corporation (herein
called the "Manager").
WHEREAS, the Company is registered as an open-end management investment
company under the Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, the Company wishes to retain the Manager under this Agreement to
render investment advisory and management services to the portfolios of the
Company known as Small Cap Growth Fund, International Equity Fund and Socially
Responsible Fund (the "Initial Fund(s)", together with any other Company
portfolios which may be established later and served by the Manager hereunder,
being herein referred to collectively as the "Funds" and individually as a
"Fund"); and
WHEREAS, the Company desires to retain the Manager to provide management
and administrative services for the Funds, and the Manager is willing to render
such services;
NOW THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties hereto agree as follows:
1. Appointment of Manager
(A) The Company hereby appoints the Manager as manager of each Fund on
the terms and for the period set forth in this Agreement and the Manager hereby
accepts such appointment and agrees to perform the services and duties set forth
herein on the terms herein provided. The Manager may, in its discretion, provide
such services through its own employees or the employees of one or more
affiliated companies that are qualified to provide such services to the Trust
under applicable law and are under common control with the Manager provided (i)
that all persons, when providing services hereunder, are functioning as part of
an organized group of persons, and (ii) that such organized group of persons is
managed at all times by authorized officers of the Manager.
(B) In the event that the Company establishes one or more portfolios
other than the Initial Fund(s) with respect to which it desires to retain the
Manager to render investment advisory and management services hereunder, it
shall notify the Manager in writing. If the Manager is willing to render such
services, it shall notify the Company in writing whereupon such portfolio or
portfolios shall become a Fund or Funds hereunder.
2. Administrative Services and Duties. Subject to the supervision and
control of the Company's Board of Trustees, the Manager shall provide to the
Company facilities, equipment, statistical and research data, clerical,
accounting and bookkeeping services, internal auditing and legal services, and
personnel to carry out all management services required for operation of the
1
<PAGE>
business and affairs of the Funds other than those services to be performed by a
distributor of the Funds' shares pursuant to a Distribution Agreement, those
services to be performed by the Funds' custodian pursuant to the Company's
Custody Agreement, those services to be performed by the Funds' transfer agent
pursuant to the Company's Transfer Agency Agreement, those accounting services
to be provided pursuant to an accounting agreement or custody agreement and
those services normally performed by the Company's counsel and auditors.
(A) The Manager's oversight responsibilities shall include:
(1) Overseeing the performance of the Custodian under the Custody
Agreement with respect to the Funds; and
(2) Overseeing the performance of the Transfer Agent under the
Transfer Agency Agreement with respect to the Funds.
(B) The Manager shall participate in the periodic updating of the Funds'
prospectuses and statements of additional information and shall accumulate
information for and, subject to approval by the Company's Treasurer and legal
counsel, coordinate the preparation, filing, printing and dissemination of
reports to the Funds' shareholders and the Securities and Exchange Commission
(the "Commission"), including but not limited to annual reports and semi-annual
reports on Form N-SAR, notices pursuant to Rule 24f-2 and proxy materials
pertaining to the Funds.
(C) The Manager shall calculate dividends and capital gain distributions to
be paid by each Fund in conformity with subchapter M of the Internal Revenue
Code of 1986, as amended.
(D) The Manager shall pay all costs and expenses of maintaining the offices
of the Company, wherever located, and shall arrange for payment by the Company
of all expenses payable by the Company.
(E) The Manager shall maintain such other books and records with respect to
the Funds as may be required by law or may be required for the proper operation
of the business and affairs of the Funds, other than those required to be
maintained under the Fund Accounting Agreement and by the Manager under Section
3 of this Agreement. Without limiting the foregoing, the Manager shall be
responsible for the proper maintenance of the records to be maintained by it,
throughout the term of this Agreement.
(F) The Manager shall prepare the Funds' federal, state and local income
tax returns.
(G) The Manager shall prepare and, subject to approval of the Company's
Treasurer, disseminate to the Company's trustees each Fund's quarterly financial
statements and schedules of investments, and shall prepare such other reports
relating to the business and affairs
2
<PAGE>
of the Funds (not otherwise appropriately prepared by the Company's counsel,
auditors or other Company service providers) as the officers and trustees of the
Company may from time to time reasonably request in connection with performance
of their duties.
(H) The Manager shall assist the Custodian, Transfer Agent, counsel
and auditors as required to carry out the business and operations of the Funds.
3. Investment Services and Duties. Subject to the supervision of the
Company's Board of Trustees, the Manager shall provide a continuous investment
program for the Funds, including investment, research and management with
respect to all securities and investments and cash equivalents in the Funds.
The Manager shall determine from time to time what securities and other
investments will be purchased, retained or sold by the Company with respect to
each Fund. The Manager shall provide the services under this Section 3 in
accordance with the Funds' investment objectives, policies and restrictions as
stated in the Funds' then current registration statement and resolutions of the
Company's Board of Trustees.
(A) The Manager shall place all orders for the purchase and sale of
portfolio securities for the account of each Fund with brokers or dealers
selected by the Manager. In executing portfolio transactions and selecting
brokers or dealers, the Manager will use its best efforts to seek on behalf of
each Fund the best overall terms available. In assessing the best overall terms
available for any transaction the Manager shall consider all facts it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. In evaluating the best overall terms
available, and in selecting the broker or dealer to execute a particular
transaction, the Manager may also consider the brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) provided to the Fund and/or other accounts over which the Manager or any
affiliate of the Manager exercise investment discretion. The Manager is
authorized to pay to a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for any Fund which
is in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if, but only if, the Manager determines
in good faith that such commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of that particular transaction or in terms of the overall responsibilities
of the Manager to that Fund and to the Company. In no instance may portfolio
securities be purchased from or sold to the Manager, any sub-adviser, or an
affiliated person of any of them acting as principal or as broker, except as
permitted by law. In executing portfolio transactions for the Funds the Manager
may, to the extent permitted by applicable laws and regulations, but shall not
be obligated to, aggregate the securities to be sold or purchased with those of
other investment portfolios and its other clients where such aggregation is not
inconsistent with the policies set forth in the Company's registration
statement. In such event, the Manager shall allocate the securities so
purchased or sold, and the expenses incurred in the transaction, in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Funds and such other clients.
3
<PAGE>
(B) In performing the investment advisory services hereunder, the
Manager is authorized to purchase, sell or otherwise deal with securities or
other instruments for which (i) the Manager, (ii) any affiliate of the Manager,
(iii) an entity in which the Manager has a direct or indirect interest, and (iv)
another member of a syndicate or other intermediary (where an entity referred to
in (i), (ii) or (iii) above was a member of the syndicate), has acted, now acts
or in the future will act as an underwriter, syndicate member, market-maker,
dealer, broker or in any other similar capacity, whether the purchase, sale or
other dealing occurs during the life of the syndicate or after the close of the
syndicate, provided such purchase, sale or dealing is permitted under the 1940
Act and the rules thereunder. Insofar as permitted by law, any rules of or
under applicable law prohibiting or restricting in any way an agent or fiduciary
from dealing with itself or from dealing with respect to any matter in which it
may or does have a personal interest shall not apply to the Manager, to the
extent its actions are authorized under this paragraph.
(C) The Manager shall maintain books and records with respect to the
securities transactions of the Fund, and furnish the Company's Board of Trustees
such periodic special reports as the Board may request.
(D) The Manager shall review, monitor and report to the Board of
Trustees regarding the performance and investment procedures of any sub-adviser
appointed by the Board of Trustees, and shall assist and consult with any sub-
adviser in connection with the Fund's continuous investment program.
4. Compliance with Governing Instruments and Laws. In performing its
duties as Manager for the Funds, the Manager shall act in conformity with the
Company's Declaration of Trust, Bylaws, prospectuses and statements of
additional information, and the instructions and directions of the Board of
Trustees of the Company. In addition, the Manager shall conform to and comply
with the requirements of the 1940 Act, the Rules and Regulations of the
Commission, the requirements of subchapter M and Section 817(h) of the Internal
Revenue Code of 1986, as amended, and all other applicable federal or state laws
and regulations.
5. Services Not Exclusive. The Manager shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees from time to time, have
no authority to act for or represent the Company in any way or otherwise be
deemed its agent. The services furnished by the Manager hereunder are not
deemed exclusive, and the Manager shall be free to furnish similar services to
others so long as its services under this Agreement are not impaired thereby.
6. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Manager hereby agrees that all records which it
maintains for the Company are the property of the Company and further agrees to
surrender promptly to the Company any such records upon the Company's request.
The Manager further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
4
<PAGE>
7. Subcontractors. It is understood that the Manager may from time to
time employ or associate with itself such person or persons as the Manager may
believe to be particularly fitted to assist in the performance of this
Agreement; provided, however, that the compensation of such person or persons
shall be paid by the Manager and that the Manager shall be as fully responsible
to the Company for the acts and omissions of any subcontractor as it is for its
own acts and omissions. Without limiting the generality of the foregoing, it is
understood that the Manager and the Company intend to enter into an agreement
with the Fund Accountant under which said institution will provide certain
accounting, bookkeeping, pricing and dividend and distribution calculation
services with respect to the Funds at the expense of the Funds.
8. Expenses Assumed as Manager. Except as otherwise stated in this
Agreement, the Manager shall pay all expenses incurred by it in performing its
services and duties hereunder as Manager (other than the cost of securities
purchased for the Company). The Company shall bear other expenses incurred in
the operation of the Funds, including without limitation taxes, interest,
brokerage fees and commissions, if any, fees of trustees who are not officers,
directors, partners, employees or holders of 5 percent or more of the
outstanding voting securities of the Manager or any of its affiliates,
Commission fees and state blue sky registration and qualification fees, charges
of custodians, transfer and dividend disbursing agents' fees, certain insurance
premiums, outside auditing and legal expenses, costs of maintaining the trust
existence, costs of preparing and printing prospectuses or any supplements or
amendments thereto necessary for the continued effective registration of the
Shares under federal or state securities laws, costs of printing and
distributing any prospectus, supplement or amendment thereto for existing
shareholders of the Funds described therein, costs of shareholders' reports and
meetings, and any extraordinary expenses. It is understood that certain
advertising, marketing, shareholder servicing, administration and/or
distribution expenses to be incurred in connection with the Shares may be paid
by the Company as provided in any plan which may in the sole discretion of the
Company be adopted in accordance with Rule 12b-1 under the 1940 Act, and that
such expenses shall be paid apart from any fees paid under this Agreement.
9. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Company shall pay the Manager a fee, computed
daily and payable monthly, at the annual rate as set forth in the attached fee
schedule based on the average net assets of each Fund. Such fee as is
attributable to each Fund shall be a separate (and not joint or joint and
several) obligation of each such Fund. Notwithstanding anything to the contrary
herein, if in any fiscal year the aggregate expenses of any Fund (as defined
under the securities regulations of any state having jurisdiction over such
Fund) exceed the expense limitations of any such state, the Company may deduct
from the fees to be paid pursuant to this Agreement, or the Manager shall bear
such excess, to the extent required by state law. Such deduction or payment, if
any, will be estimated and accrued daily and paid on a monthly basis. The
Company shall reduce the advisory fee to be paid to the Manager by the amount of
any advisory fees paid to other investment companies relating to the Funds'
investment in such investment companies' securities.
10. Confidentiality. The Manager shall treat confidentially and as
proprietary information of the Company all records and other information
relative to the Company and prior
5
<PAGE>
or present shareholders or those persons or entities who respond to the
Distributor's inquiries concerning investment in the Company, and shall not use
such records and information for any purpose other than performance of its
responsibilities and duties hereunder or under any other agreement with the
Company except after prior notification to and approval in writing by the
Company, which approval shall not be unreasonably withheld and may not be
withheld where the Manager may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Company. Nothing
contained herein, however, shall prohibit the Manager from advertising to or
soliciting the public generally with respect to other products or services,
including, but not limited to, any advertising or marketing via radio,
television, newspapers, magazines or direct mail solicitation, regardless of
whether such advertisement or solicitation may coincidentally include prior or
present Company shareholders or those persons or entities who have responded to
inquiries with respect to the Funds.
11. Limitations of Liability. Subject to the provisions of Section 7
hereof concerning the Manager's responsibility for the acts and omissions of
persons employed or associated with the Manager, the Manager shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Company or by any Fund in connection with the matters to which this Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement. Any person, even though also an officer, director, employee or agent
of the Manager, who may be or become an officer, director, employee or agent of
the Company, shall be deemed when rendering services to the Company or to any
Fund, or acting on any business of the Company or of any Fund (other than
services or business in connection with the Manager's duties as Manager
hereunder or under any other agreement with the Company) to be rendering such
services to or acting solely for the Company or Fund and not as an officer,
director, employee or agent or one under the control or direction of the Manager
even though paid by the Manager.
The Manager acknowledges and agrees that the Declaration of Trust of
the Company provides that the Trustees of the Company and the officers of the
Company executing this Agreement on behalf of the Company shall not be
personally bound hereby or liable hereunder, nor shall resort be had to their
private property or the private property of the shareholders of the Company for
the satisfaction of any claim or obligation under this Agreement.
12. Duration or Termination. This Agreement shall become effective as of
the date first written above and, unless sooner terminated as provided herein,
shall continue until October 31, 1998. Thereafter, this Agreement will be
extended with respect to a particular Fund for successive one-year periods
ending on October 31st of each year provided each such extension is specifically
approved at least annually (a) by vote of a majority of those members of the
Company's Board of Trustees who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the
6
<PAGE>
Company's Board of Trustees or by vote of a majority of the outstanding voting
securities of such Fund. This Agreement may be terminated by the Company at any
time with respect to any Fund, without the payment of any penalty, by vote of a
majority of the entire Board of Trustees of the Company or by a vote of a
majority of the outstanding voting securities of such Fund on 60 days' written
notice to the Manager, or by the Manager at any time, without payment of
penalty, on 60 days' written notice to the Company. This Agreement will
immediately terminate in the event of its assignment. As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the same meanings as such terms
have in the 1940 Act.
13 . Names. The name "Horace Mann Mutual Funds" refers to the trust
created and the trustees, as trustees but not individually or personally, acting
from time to time under a Declaration of Trust dated November 7, 1996, as
amended, which is hereby referred to and a copy of which is on file at the
principal office of the Company. The trustees, officers, employees and agents
of the Company shall not personally be bound by or liable under any written
obligation, contract, instrument, certificate or other interest or undertaking
of the Company made by the trustees or by any officer, employee or agent of the
Company, in his or her capacity as such, nor shall resort be had to their
private property for the satisfaction of any obligation or claim thereunder.
All persons dealing with any series or class of shares of the Company may
enforce claims against the Company only against the assets belonging to such
series or class.
14. Notices. Notices of any kind to be given to the Company hereunder by
the Manager shall be in writing and shall be duly given if mailed or delivered
to the Company at the following:
With a copy to:
Cathy G. O'Kelly, Esq.
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street, 26th Floor
Chicago, Illinois 60601
7
<PAGE>
or at such other address or to such individual as shall be so specified by the
Company to the Manager. Notices of any kind to be given to the Manager
hereunder by the Company shall be in writing and shall be duly given if mailed
or delivered to the Manager at:
or at such other address or to such individual as shall be so specified by the
Manager to the Company.
15. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Section 12 hereof, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and shall be governed by Delaware law
(without regard to principles of conflicts of law); provided, however, that
nothing herein shall be construed in a manner inconsistent with the 1940 Act or
any rule or regulation of the Commission thereunder.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
HORACE MANN MUTUAL FUNDS
By: _________________________________________
(name)_______________________________________
(title)______________________________________
Attest: _____________________________
(name)_______________________
(title)______________________
HORACE MANN INVESTORS, INC.
By: ________________________________________
(name)______________________________________
(title)_____________________________________
Attest: ____________________________
(name)______________________
(title)_____________________
9
<PAGE>
FEE SCHEDULE
SMALL CAP GROWTH FUND 1.4% OF NET ASSETS
INTERNATIONAL EQUITY FUND 1.1% OF NET ASSETS
SOCIALLY RESPONSIBLE FUND .95% OF NET ASSETS
10
<PAGE>
Exhibit 5(b)
INVESTMENT SUB-ADVISORY AGREEMENT
This Agreement (Agreement) made this ____day of _____________, 1996 by and
between Horace Mann Investor's Inc., a registered investment adviser (Adviser)
and Scudder Investor Services, Inc., a ______________ corporation and registered
investment adviser (Sub-Adviser).
WHEREAS Adviser is the investment adviser and business manager for the
Horace Mann Mutual Funds (the Funds), an open-end diversified, management
investment company registered under the Investment Company Act of 1940, as
amended (1940 Act), currently consisting of three separate series or
portfolios including the Horace Mann Socially Responsible Fund, the Horace
Mann International Equity Fund, and the Horace Mann Small-Cap Growth Fund;
WHEREAS Adviser desires to retain the Sub-Adviser to furnish investment
advisory services for the Horace Mann Socially Responsible Fund and the
Horace Mann International Equity Fund (the Fund Portfolios), upon the terms
and conditions set forth;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties agree as follows:
1. APPOINTMENT Adviser hereby appoints Sub-Adviser to provide certain sub-
investment advisory services to the Fund Portfolios for the period and on the
terms set forth in this Agreement. Sub-Adviser accepts such appointment and
agrees to furnish the services set forth for the compensation herein provided.
Sub-Adviser represents the it is registered as an Investment Adviser under
federal laws and any applicable state laws.
2. SUB-ADVISER SERVICES Subject always to the supervision of the Fund's Board
of Trustees and the Adviser, Sub-Adviser will furnish an investment program in
respect of, and make investment decisions for, all assets of the Fund Portfolios
and place all orders for the purchase and sale of securities, all on behalf of
the Fund Portfolios. In the performance of its duties, Sub-Adviser will satisfy
its fiduciary duties to the Fund and Fund Portfolios and will monitor the Fund
Portfolios' investments, and will comply with the provisions of the Fund's
Declaration of Trust and By-laws, as amended from time to time, and the stated
investment objectives, policies and restrictions of the Fund Portfolios as set
forth in the prospectus and Statement of Additional Information for the Fund
Portfolios, as amended from time to time, as well as any other objectives,
policies or limitations provided by the Adviser from time to time.
Sub-Adviser will provide reports at least quarterly to the Board of Trustees and
to Adviser. Sub-Adviser will make its officers and employees available to
Adviser and the Board of Trustees from time to time at reasonable times to
review investment policies of the Fund Portfolios and to consult with Adviser
regarding the investment affairs of the Fund Portfolios.
<PAGE>
Sub-Adviser agrees that it:
(a) will use the same skill and care in providing such services as it uses
in providing services to fiduciary accounts for which it has investment
responsibilities;
(b) will conform with all applicable Rules and Regulations of the
Securities and Exchange Commission in all material respects and in addition
will conduct its activities under this Agreement in accordance with any
applicable regulations of any governmental authority pertaining to its
investment advisory activities, including all requirements necessary for
the Fund Portfolios to comply with subchapter M and section 817(h) of the
Internal Revenue Code;
(c) is authorized to and will select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the Fund
Portfolios and is directed to use its best efforts to obtain best
execution, which includes most favorable net results and execution of the
Fund Portfolios' orders, taking into account all appropriate factors,
including price, dealer spread or commission, size and difficulty of the
transaction and research or other services provided. It is understood that
the Sub-Adviser will not be deemed to have acted unlawfully, or to have
breached a fiduciary duty to the Fund or in respect of any Fund Portfolio,
or be in breach of any obligation owing to the Fund or in respect of any
Fund Portfolio under this Agreement, or otherwise, solely by reason of its
having caused the Fund to pay a member of a securities exchange, a broker
or a dealer a commission for effecting a securities transaction of the Fund
in excess of the amount of commission another member of an exchange, broker
or dealer would have charged if the Sub-Adviser determined in good faith
that the commission paid was reasonable in relation to the brokerage and
research services provided by such member, broker, or dealer, viewed in
terms of that particular transaction or the Sub-Adviser's overall
responsibilities with respect to its accounts, including the Fund, as to
which it exercises investment discretion. Some securities considered for
investment by the Fund Portfolios may also be appropriate for other funds
and or clients served by the Sub-Adviser. To assure fair treatment of the
Fund Portfolios and all clients of the Sub-Adviser in situations in which
two or more clients' accounts participate simultaneously in a buy or sell
program involving the same security, such transactions will be allocated
among the Fund Portfolios and clients in a manner deemed equitable by the
Sub-Adviser;
(d) will report regularly to Adviser and to the Board of Trustees and will
make appropriate persons available for the purpose of reviewing with
representatives of Adviser and the Board of Trustees on a regular basis at
reasonable times the management of the Fund Portfolios, including without
limitation, review of the general investment strategies of the Fund
Portfolios, the performance of the Fund Portfolios in relation to standard
industry indices, interest rate considerations and general conditions
affecting the marketplace and will provide various other reports from time
to time as reasonably requested by Adviser;
(e) will prepare such books and records with respect to the Fund
Portfolios' securities transactions as requested by the Adviser and will
furnish Adviser and Fund's Board of Trustees such periodic and special
reports as the Board or Adviser may reasonably request;
(f) will act upon instructions from Adviser which, in the reasonable
determination of Sub-Adviser, are not inconsistent with Sub-Adviser's
fiduciary duties under this Agreement;
<PAGE>
3. EXPENSES During the terms of this Agreement, Sub-Adviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commission, if any),
purchased for the Fund Portfolios.
4. COMPENSATION For the services provided and the expenses assumed under this
Agreement for each Fund Portfolio, Adviser will pay Sub-Adviser, and Sub-Adviser
agrees to accept as full compensation therefor, at the end of each calendar
quarter a sub-advisory fee computed at the annual rate set forth in Exhibit 1 -
Fee Schedule, applied to the average daily net assets of the Fund Portfolio
during that calendar quarter.
5. SERVICES TO OTHERS Adviser understands and has advised Fund's Board of
Trustees, that Sub-Adviser acts as an investment adviser or sub-investment
adviser to other investment companies and other advisory clients.
7. LIMITATION OF LIABILITY Neither the Sub-Adviser nor any of its directors,
officers, stockholders, agents or employees shall have any liability to the
Adviser, the Fund or any shareholder of the Fund for any error of judgment,
mistake of law, or any loss arising out of any investment, or for any other act
or omission in the performance by the Sub-Adviser of its duties hereunder except
for liability resulting from willful misfeasance, bad faith, or negligence on
the Sub-Adviser's part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
8. TERM, TERMINATION, AMENDMENT This Agreement shall become effective with
respect to the Fund Portfolios on _______________, provided that it has been
approved by a vote of a majority of the outstanding voting securities of each
Fund Portfolio in accordance with the requirement of the 1940 Act and shall
remain in full force until, ______________, unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter with respect to each Fund Portfolio, but only as long as such
continuance is specifically approved for each Fund Portfolio at least annually
in the manner required by the 1940 Act and the rules and regulations thereunder,
provided, however, that if the continuation of this Agreement is not approved
for a Fund Portfolio, the Sub-Adviser may continue to service in such capacity
for such Fund Portfolio in the manner and to the extent permitted by the 1940
Act and the rules and regulations thereunder.
This Agreement shall automatically terminate in the event of its assignment and
may be terminated at any time without the payment of any penalty by the Adviser
or by the Sub-Adviser on sixty days written notice to the other party. This
Agreement may also be terminated by the Fund with respect to any Fund Portfolio
by action of the Board of Trustees or by a vote of a majority of the outstanding
voting securities of such Fund Portfolio on sixty days written notice to Sub-
Adviser by the Fund.
This Agreement may be terminated with respect to any Fund Portfolio any time
without the payment of any penalty by the Adviser, the Board of Trustees or by a
vote of majority of the outstanding voting securities of such Fund Portfolio in
the event the Sub-Adviser or any officer or director of the Sub-Adviser has
taken any action which results in a material breach of the covenants of the Sub-
Adviser under this Agreement.
<PAGE>
Termination of this Agreement shall not affect the right of the Sub-Adviser to
receive payments on any unpaid balance of the compensation described in Section
4 earned prior to such termination.
This Agreement shall automatically terminate with respect to a Fund Portfolio in
the event the Investment Management Agreement between Adviser and that Fund
Portfolio is terminated, assigned or not renewed.
9. NOTICE Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notice.
10. LIMITATIONS ON LIABILITY All parties are expressly put on notice of the
Fund's Agreement and Declaration of Trust and all amendment thereto, all of
which are on file with the Secretary of the State of Delaware, and the
limitation of shareholder and trustee liability contained therein. The
obligations of the Fund entered in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not individually but only in such
capacities and are not binding upon any of the Trustees, officers, or
shareholders of the Fund individually but are binding upon only the assets and
property of the Fund, and persons dealing with the Fund must look solely to the
assets of the Fund and those assets belonging to the subject Fund Portfolio for
the enforcement of any claims.
11. ADVISER RESPONSIBILITY Adviser will provide Sub-Adviser with copies of the
Fund's Declaration of Trust, By-laws, prospectus, and Statement of Additional
Information and any amendment thereto, and any objectives, policies or
limitations not appearing therein as they may be relevant to Sub-Adviser's
performance under this Agreement.
12. MISCELLANEOUS The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement is held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement will not be affected thereby. This
Agreement will be binding upon and shall inure to the benefit of the parties and
their respective successors.
12. APPLICABLE LAW This Agreement shall be construed in accordance with
applicable federal law and (except as to Section 10 above which will be
construed in accordance with Delaware law) the laws of the state of Illinois.
The Adviser and the Sub-Adviser have caused this Agreement to be executed as of
the date and year first above written.
HORACE MANN INVESTORS INC. SCUDDER INVESTOR SERVICES, INC.
By______________________________ By___________________________________
Title___________________________ Title________________________________
<PAGE>
Exhibit 5(c)
INVESTMENT SUB-ADVISORY AGREEMENT
This Agreement (Agreement) made this ____day of _____________, 1996 by and
between Horace Mann Investor's Inc., a registered investment adviser (Adviser)
and PNC Equity Advisors Company, a ______________ corporation and registered
investment adviser (Sub-Adviser).
WHEREAS Adviser is the investment adviser and business manager for the
Horace Mann Mutual Funds (the Funds), an open-end diversified, management
investment company registered under the Investment Company Act of 1940, as
amended (1940 Act), currently consisting of three separate series or
portfolios including the Horace Mann Socially Responsible Fund, the Horace
Mann International Equity Fund, and the Horace Mann Small-Cap Growth Fund;
WHEREAS Adviser desires to retain the Sub-Adviser to furnish investment
advisory services for the Horace Mann Small-Cap Growth Fund (the Fund
Portfolio), upon the terms and conditions set forth;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties agree as follows:
1. APPOINTMENT Adviser hereby appoints Sub-Adviser to provide certain sub-
investment advisory services to the Fund Portfolio for the period and on the
terms set forth in this Agreement. Sub-Adviser accepts such appointment and
agrees to furnish the services set forth for the compensation herein provided.
Sub-Adviser represents the it is registered as an Investment Adviser under
federal laws and any applicable state laws.
2. SUB-ADVISER SERVICES Subject always to the supervision of the Fund's Board
of Trustees and the Adviser, Sub-Adviser will furnish an investment program in
respect of, and make investment decisions for, all assets of the Fund Portfolio
and place all orders for the purchase and sale of securities, all on behalf of
the Fund Portfolio. In the performance of its duties, Sub-Adviser will satisfy
its fiduciary duties to the Fund and the Fund Portfolio and will monitor the
Fund Portfolio's investments, and will comply with the provisions of the Fund's
Declaration of Trust and By-laws, as amended from time to time, and the stated
investment objectives, policies and restrictions of the Fund Portfolio as set
forth in the prospectus and Statement of Additional Information for the Fund
Portfolio, as amended from time to time, as well as any other objectives,
policies or limitations provided by the Adviser from time to time.
Sub-Adviser will provide reports at least quarterly to the Board of Trustees and
to Adviser. Sub-Adviser will make its officers and employees available to
Adviser and the Board of Trustees from time to time at reasonable times to
review investment policies of the Fund Portfolio and to consult with Adviser
regarding the investment affairs of the Fund Portfolio.
<PAGE>
Sub-Adviser agrees that it:
(a) will use the same skill and care in providing such services as it uses
in providing services to fiduciary accounts for which it has investment
responsibilities.
(b) will conform with all applicable Rules and Regulations of the
Securities and Exchange Commission in all material respects and in addition
will conduct its activities under this Agreement in accordance with any
applicable regulations of any governmental authority pertaining to its
investment advisory activities, including all requirements necessary for
the Fund Portfolio to comply with subchapter M and section 817(h) of the
Internal Revenue Code;
(c) is authorized to and will select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the Fund
Portfolio and is directed to use its best efforts to obtain best execution,
which includes most favorable net results and execution of the Fund
Portfolio's orders, taking into account all appropriate factors, including
price, dealer spread or commission, size and difficulty of the transaction
and research or other services provided. It is understood that the Sub-
Adviser will not be deemed to have acted unlawfully, or to have breached a
fiduciary duty to the Fund or in respect of the Fund Portfolio, or be in
breach of any obligation owing to the Fund or in respect of the Fund
Portfolio under this Agreement, or otherwise, solely by reason of its
having caused the Fund to pay a member of a securities exchange, a broker
or a dealer a commission for effecting a securities transaction of the Fund
in excess of the amount of commission another member of an exchange, broker
or dealer would have charged if the Sub-Adviser determined in good faith
that the commission paid was reasonable in relation to the brokerage and
research services provided by such member, broker, or dealer, viewed in
terms of that particular transaction or the Sub-Adviser's overall
responsibilities with respect to its accounts, including the Fund, as to
which it exercises investment discretion. Some securities considered for
investment by the Fund Portfolio may also be appropriate for other funds
and or clients served by the Sub-Adviser. To assure fair treatment of the
Fund Portfolio and all clients of the Sub-Adviser in situations in which
two or more clients' accounts participate simultaneously in a buy or sell
program involving the same security, such transactions will be allocated
among the Fund Portfolio and clients in a manner deemed equitable by the
Sub-Adviser;
(d) will report regularly to Adviser and to the Board of Trustees and will
make appropriate persons available for the purpose of reviewing with
representatives of Adviser and the Board of Trustees on a regular basis at
reasonable times the management of the Fund Portfolio, including without
limitation, review of the general investment strategies of the Fund
Portfolio, the performance of the Fund Portfolio in relation to standard
industry indices, interest rate considerations and general conditions
affecting the marketplace and will provide various other reports from time
to time as reasonably requested by Adviser;
(e) will prepare such books and records with respect to the Fund
Portfolio's securities transactions as requested by the Adviser and will
furnish Adviser and Fund's Board of Trustees such periodic and special
reports as the Board or Adviser may reasonably request;
(f) will act upon instructions from Adviser which, in the reasonable
determination of Sub-Adviser, are not inconsistent with Sub-Adviser's
fiduciary duties under this Agreement;
<PAGE>
3. EXPENSES During the terms of this Agreement, Sub-Adviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commission, if any),
purchased for the Fund Portfolio.
4. COMPENSATION For the services provided and the expenses assumed under this
Agreement, Adviser will pay Sub-Adviser, and Sub-Adviser agrees to accept as
full compensation therefor, at the end of each calendar quarter, a sub-advisory
fee computed at the annual rate as set forth in Exhibit 1 - Fee Schedule,
applied to the average daily net assets of the Fund Portfolio during the
calendar quarter.
5. SERVICES TO OTHERS Adviser understands and has advised Fund's Board of
Trustees, that Sub-Adviser acts as an investment adviser or sub-investment
adviser to other investment companies and other advisory clients.
7. LIMITATION OF LIABILITY Neither the Sub-Adviser nor any of its directors,
officers, stockholders, agents or employees shall have any liability to the
Adviser, the Fund or any shareholder of the Fund for any error of judgment,
mistake of law, or any loss arising out of any investment, or for any other act
or omission in the performance by the Sub-Adviser of its duties hereunder except
for liability resulting from willful misfeasance, bad faith, or negligence on
the Sub-Adviser's part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
8. TERM, TERMINATION, AMENDMENT This Agreement shall become effective with
respect to the Fund Portfolio on _______________, provided that it has been
approved by a vote of a majority of the outstanding voting securities of the
Fund Portfolio in accordance with the requirement of the 1940 Act and shall
remain in full force until, ______________, unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter with respect to the Fund Portfolio, but only as long as such
continuance is specifically approved for the Fund Portfolio at least annually in
the manner required by the 1940 Act and the rules and regulations thereunder,
provided, however, that if the continuation of this Agreement is not approved
for the Fund Portfolio, the Sub-Adviser may continue to service in such capacity
for the Fund Portfolio in the manner and to the extent permitted by the 1940 Act
and the rules and regulations thereunder.
This Agreement shall automatically terminate in the event of its assignment and
may be terminated at any time without the payment of any penalty by the Adviser
or by the Sub-Adviser on sixty days written notice to the other party. This
Agreement may also be terminated by the Fund with respect to the Fund Portfolio
by action of the Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Fund Portfolio on sixty days written notice to Sub-
Adviser by the Fund.
This Agreement may be terminated with respect to the Fund Portfolio any time
without payment of any penalty by the Adviser, the Board of Trustees or by a
vote of majority of the outstanding voting securities of the Fund Portfolio in
the event that the Sub-Adviser or any officer or director of the Sub-Adviser has
taken any action which results in a material breach of the covenants of the Sub-
Adviser under this Agreement.
<PAGE>
Termination of this Agreement shall not affect the right of the Sub-Adviser to
receive payments on any unpaid balance of the compensation described in Section
4 earned prior to such termination.
This Agreement shall automatically terminate in the event the Investment
Management Agreement between Adviser and the Fund Portfolio is terminated,
assigned or not renewed.
9. NOTICE Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notice.
10. LIMITATIONS ON LIABILITY All parties are expressly put on notice of the
Fund's Agreement and Declaration of Trust and all amendment thereto, all of
which are on file with the Secretary of the State of Delaware, and the
limitation of shareholder and trustee liability contained therein. The
obligations of the Fund entered in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not individually but only in such
capacities and are not binding upon any of the Trustees, officers, or
shareholders of the Fund individually but are binding upon only the assets and
property of the Fund, and persons dealing with the Fund must look solely to the
assets of the Fund and those assets belonging to the Fund Portfolio for the
enforcement of any claims.
11. ADVISER RESPONSIBILITY Adviser will provide Sub-Adviser with copies of the
Fund's Declaration of Trust, By-laws, prospectus, and Statement of Additional
Information and any amendment thereto, and any objectives, policies or
limitations not appearing therein as they may be relevant to Sub-Adviser's
performance under this Agreement.
12. MISCELLANEOUS The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement is held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement will not be affected thereby. This
Agreement will be binding upon and shall inure to the benefit of the parties and
their respective successors.
12. APPLICABLE LAW This Agreement shall be construed in accordance with
applicable federal law and (except as to Section 10 above which will be
construed in accordance with Delaware law) the laws of the state of Illinois.
The Adviser and the Sub-Adviser have caused this Agreement to be executed as of
the date and year first above written.
HORACE MANN INVESTORS INC. PNC EQUITY ADVISORS COMPANY
By_______________________________ By____________________________________
Title____________________________ Title________________________________
<PAGE>
EXHIBIT 1
SUB-ADVISORY FEE SCHEDULE FOR HORACE MANN MUTUAL FUNDS
SMALL CAP GROWTH FUND
1.00% on the First $25,000,000
.75% on the assets over $25,000,000
There is no minimum annual fee.
<PAGE>
EXHIBIT 1
SUB-ADVISORY FEE SCHEDULE FOR HORACE MANN MUTUAL FUNDS
INTERNATIONAL EQUITY FUND
DURING THE FIRST 6 MONTHS
.35% of the First $40,000,000
.25% on assets over $40,000,000
DURING THE SECOND 6 MONTHS
.525% on First $40,000,000
.375% on assets over $40,000,000
THEREAFTER
.70% of the First $40,000,000
.50% on assets over $40,000,000
There is no minimum annual fee.
SOCIALLY RESPONSIBLE FUND
.55% on the First $20,000,000
.45% on the Next $20,000,000
.30% on the assets over $40,000,000
There is no minimum annual fee.
<PAGE>
Exhibit 8
CUSTODIAN CONTRACT
Between
EACH OF THE FUNDS LISTED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
Global/Corporation
21D
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C> <C>
1. Employment of Custodian and Property to be
Held By It......................................................... 1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States................ 1
2.1 Holding Securities.......................................... 1
2.2 Delivery of Securities...................................... 2
2.3 Registration of Securities.................................. 4
2.4 Bank Accounts............................................... 4
2.5 Availability of Federal Funds............................... 4
2.6 Collection of Income........................................ 4
2.7 Payment of Fund Monies...................................... 5
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased............................. 6
2.9 Appointment of Agents....................................... 6
2.10 Deposit of Securities in U.S. Securities System............. 6
2.11 Fund Assets Held in the Custodian's Direct
Paper System................................................ 8
2.12 Segregated Account.......................................... 8
2.13 Ownership Certificates for Tax Purposes..................... 9
2.14 Proxies..................................................... 9
2.15 Communications Relating to Fund Portfolio Securities........ 9
2.16 Reports to Fund by Independent Public Accountants........... 9
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States........................ 10
3.1 Appointment of Foreign Sub-Custodians...................... 10
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
3.2 Assets to be Held.......................................... 10
3.3 Foreign Securities Systems................................. 10
3.4 Holding Securities......................................... 10
3.5 Agreements with Foreign Banking Institutions............... 11
3.6 Access of Independent Accountants of the Fund.............. 11
3.7 Reports by Custodian....................................... 11
3.8 Transactions in Foreign Custody Account.................... 11
3.9 Liability of Foreign Sub-Custodians........................ 12
3.10 Liability of Custodian..................................... 12
3.11 Reimbursement for Advances................................. 12
3.12 Monitoring Responsibilities................................ 12
3.13 Branches of U.S. Banks..................................... 13
3.14 Tax Law.................................................... 13
4. Payments for Repurchases or Redemptions and Sales
of Shares of the Fund............................................. 13
5. Proper Instructions............................................... 14
6. Actions Permitted Without Express Authority....................... 14
7. Evidence of Authority............................................ 14
8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income........................................................ 15
9. Records........................................................... 15
10. Opinion of Fund's Independent Accountant.......................... 15
11. Compensation of Custodian......................................... 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
12. Responsibility of Custodian.......................... 16
13. Effective Period, Termination and Amendment.......... 17
14. Successor Custodian.................................. 18
15. Interpretive and Additional Provisions............... 18
16. Massachusetts Law to Apply........................... 19
17. Prior Contracts...................................... 19
18. Reproduction of Documents............................ 19
19. Shareholder Communications Election.................. 19
20. Additional Funds..................................... 20
</TABLE>
4
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between each of the mutual funds listed on Exhibit A hereto,
on behalf, as applicable, of itself or each of its series, which evidences its
agreement to be bound hereby by executing a copy of this Contract (each such
fund or series of a fund is individually hereinafter referred to as a "Fund"),
and State Street Bank and Trust Company, a Massachusetts trust company, having
its principal place of business at 225 Franklin Street, Boston, Massachusetts,
02110, hereinafter called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of its Articles of
Incorporation. The Fund agrees to deliver to the Custodian all securities and
cash owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of capital stock ("Shares") of the Fund as may be issued or sold
from time to time. The Custodian shall not be responsible for any property of
the Fund held or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors of the Fund, and provided that the Custodian shall have no
more or less responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed than any such sub-custodian has to
the Custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in accordance
with the provisions of Article 3.
1
<PAGE>
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic investments owned by the Fund,
other than (a) securities which are maintained pursuant to Section 2.10
in a clearing agency which acts as a securities depository or in a book-
entry system authorized by the U.S. Department of the Treasury and
certain federal agencies (each, a "U.S. Securities System") and (b)
commercial paper of an issuer for which the Custodian acts as issuing and
paying agent ("Direct Paper") which is deposited and/or maintained in the
Direct Paper System of the Custodian (the "Direct Paper System") pursuant
to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund held by the Custodian or in a U.S.
Securities System account of the Custodian or in the Custodian's Direct
Paper book-entry system account ("Direct Paper System Account") only upon
receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in
any such case, the cash or other consideration is to be delivered
to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any
2
<PAGE>
agent appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or for
exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities are to be
delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund, to the
broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with any
loans for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S. Department of
the Treasury, the Custodian will not be held liable or responsible for
the delivery of securities owned by the Fund prior to the receipt of
such collateral;
3
<PAGE>
11) For delivery as security in connection with any borrowings by the Fund
requiring a pledge of assets by the Fund, but only against receipt of
amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a member of
The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the Fund's currently effective
prospectus and statement of additional information ("prospectus"), in
satisfaction of requests by holders of Shares for repurchase or
redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of
the Board of Directors or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant
Secretary, specifying the securities to be delivered, setting
forth the purpose for which such delivery is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee
to be used in common with other
4
<PAGE>
registered investment companies having the same investment adviser as the
Fund, or in the name or nominee name of any agent appointed pursuant to
Section 2.9 or in the name or nominee name of any sub-custodian appointed
pursuant to Article 1. All securities accepted by the Custodian on behalf
of the Fund under the terms of this Contract shall be in "street name" or
other good delivery form. If, however, the Fund directs the Custodian to
maintain securities in "street name", the Custodian shall utilize its
best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of
relevant corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account
established and used in accordance with Rule 17f-3 under the Investment
Company Act of 1940. Funds held by the Custodian for the Fund may be
deposited by it to its credit as Custodian in the Banking Department of
the Custodian or in such other banks or trust companies as it may in its
discretion deem necessary or desirable; provided, however, that every
such bank or trust company shall be qualified to act as a custodian under
the Investment Company Act of 1940 and that each such bank or trust
company and the funds to be deposited with each such bank or trust
company shall be approved by vote of a majority of the Board of Directors
of the Fund. Such funds shall be deposited by the Custodian in its
capacity as Custodian and shall be withdrawable by the Custodian only in
that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to United States registered securities held hereunder to
which the Fund shall be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely basis all income
and other payments with respect to United States bearer securities if, on
the date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's custodian
5
<PAGE>
account. Without limiting the generality of the foregoing, the Custodian
shall detach and present for payment all coupons and other income items
requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder. Income due the Fund on
United States securities loaned pursuant to the provisions of Section 2.2
(10) shall be the responsibility of the Fund. The Custodian will have no
duty or responsibility in connection therewith, other than to provide the
Fund with such information or data as may be necessary to assist the Fund
in arranging for the timely delivery to the Custodian of the income to
which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of the
Fund but only (a) against the delivery of such securities, or
evidence of title to such options, futures contracts or options on
futures contracts, to the Custodian (or any bank, banking firm or
trust company doing business in the United States or abroad which
is qualified under the Investment Company Act of 1940, as amended,
to act as a custodian and has been designated by the Custodian as
its agent for this purpose) registered in the name of the Fund or
in the name of a nominee of the Custodian referred to in Section
2.3 hereof or in proper form for transfer; (b) in the case of a
purchase effected through a U.S. Securities System, in accordance
with the conditions set forth in Section 2.10 hereof; (c) in the
case of a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.11; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a member of
NASD, (i) against delivery of the securities either in certificate
form or through an entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii) against delivery
of the receipt evidencing purchase by the Fund of securities owned
by the Custodian along with written evidence of the agreement by
the Custodian to repurchase such securities from the Fund or (e)
for transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected prior to
receipt of a confirmation from a broker and/or the applicable bank
pursuant to Proper Instructions from the Fund as defined in Article
5;
6
<PAGE>
2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Fund as
set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account
of the Fund: interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated
as deferred expenses;
5) For the payment of any dividends declared pursuant to the governing
documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition
to Proper Instructions, a certified copy of a resolution of the
Board of Directors or of the Executive Committee of the Fund signed
by an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made, declaring
such purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of the Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions from
the Fund to so pay in advance, the Custodian shall be absolutely liable
to the Fund for such securities to the same extent as if the securities
had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out
7
<PAGE>
such of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in U.S. Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "U.S. Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and regulations,
if any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a U.S.
Securities System provided that such securities are represented in
an account ("Account") of the Custodian in the U.S. Securities
System which shall not include any assets of the Custodian other
than assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to domestic securities of
the Fund which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the U.S.
Securities System that such securities have been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the account of
the Fund. The Custodian shall transfer domestic securities sold for
the account of the Fund upon (i) receipt of advice from the U.S.
Securities System that payment for such securities has been
transferred to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the U.S.
Securities System of transfers of domestic securities for the
account of the Fund shall identify the Fund, be maintained for the
Fund by the Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund in the form of a
written advice or notice and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's transactions in the
U.S. Securities System for the account of the Fund.
8
<PAGE>
4) The Custodian shall provide the Fund with any report obtained by
the Custodian on the U.S. Securities System's accounting system,
internal accounting control and procedures for safeguarding
domestic securities deposited in the U.S. Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the U.S. Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from failure
of the Custodian or any such agent to enforce effectively such
rights as it may have against the U.S. Securities System; at the
election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim against the U.S.
Securities System or any other person which the Custodian may have
as a consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian may
deposit and/or maintain securities owned by the Fund in the Direct Paper
System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the Fund
which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Fund;
9
<PAGE>
4) The Custodian shall pay for securities purchased for the account of
the Fund upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Fund. The Custodian shall transfer securities sold
for the account of the Fund upon the making of an entry on the
records of the Custodian to reflect such transfer and receipt of
payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund, in the form of a written advice
or notice, of Direct Paper on the next business day following such
transfer and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transaction in the U.S. Securities
System for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its system
of internal accounting control as the Fund may reasonably request
from time to time;
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in an
account by the Custodian pursuant to Section 2.10 hereof, (i) in accordance
with the provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD
(or any futures commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract market), or
of any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii) for purposes
of segregating cash or government securities in connection with options
purchased, sold or written by the Fund or commodity futures contracts or
options thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment Company
Act Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other
proper corporate purposes, but only, in the case of clause (iv), upon
receipt of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or
10
<PAGE>
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in the
name of the Fund or a nominee of the Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly
deliver to the Fund such proxies, all proxy soliciting materials and all
notices relating to such securities.
2.15 Communications Relating to Fund Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund all written information (including, without limitation, pendency of
calls and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased or sold
by the Fund) received by the Custodian from issuers of the domestic
securities being held for the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the domestic
securities whose tender or exchange is sought and from the party (or his
agents) making the tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall notify the Custodian at least three
business days prior to the date on which the Custodian is to take such
action.
2.16 Reports to Fund by Independent Public Accountants The Custodian shall
provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system,
internal accounting control and procedures for safeguarding securities,
futures contracts and options on futures contracts, including domestic
securities deposited and/or maintained in a U.S. Securities System,
relating to the services provided by the Custodian under this Contract;
such reports shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there
are no such inadequacies, the reports shall so state.
11
<PAGE>
3. Duties of the Custodian with Respect to Property of the Fund Held
-----------------------------------------------------------------
Outside of the United States
----------------------------
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated
on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", as defined in Section 5 of this Contract, together with a
certified resolution of the Fund's Board of Directors, the Custodian and
the Fund may agree to amend Schedule A hereto from time to time to
designate additional foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of Proper Instructions,
the Fund may instruct the Custodian to cease the employment of any one or
more such sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Fund shall be
maintained in a clearing agency which acts as a securities depository or in
a book-entry system for the central handling of securities located outside
the United States (each, a "Foreign Securities System") only through
arrangements implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof (Foreign Securities Systems and
U.S. Securities Systems are collectively referred to herein as the
"Securities System"). Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5
hereof.
3.4 Holding Securities. The Custodian may hold securities and other non-
cash property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash
property of the Fund which are maintained in such account shall identify by
book-entry those securities
12
<PAGE>
and other non-cash property belonging to the Fund and (ii) the Custodian
shall require that securities and other non-cash property so held by the
foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that: (a) the Fund's assets will
not be subject to any right, charge, security interest, lien or claim of
any kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to the Fund; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for the
Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Custodian;
and (e) assets of the Fund held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books and
records of any foreign banking institution employed as a foreign sub-
custodian insofar as such books and records relate to the performance of
such foreign banking institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the securities
and other assets of the Fund held by foreign sub-custodians, including but
not limited to an identification of entities having possession of the
Fund's securities and other assets and advices or notifications of any
transfers of securities to or from each custodial account maintained by a
foreign banking institution for the Custodian on behalf of the Fund
indicating, as to securities acquired for the Fund, the identity of the
entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of Sections
2.2 and 2.7 of this Contract shall apply, mutatis mutandis to the foreign
securities of the Fund held outside the United States by foreign sub-
custodians. (b) Notwithstanding any provision of this Contract to the
contrary, settlement and payment for
13
<PAGE>
securities received for the account of the Fund and delivery of securities
maintained for the account of the Fund may be effected in accordance with
the customary established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to
the purchaser thereof or to a dealer therefor (or an agent for such
purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer. (c)
Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign sub-
custodian shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear
14
<PAGE>
incident or other losses under circumstances where the Custodian and State
Street London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase or sale
of foreign exchange or of contracts for foreign exchange, or in the event
that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall
be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian will promptly inform
the Fund in the event that the Custodian learns of a material adverse
change in the financial condition of a foreign sub-custodian or any
material loss of the assets of the Fund or in the case of any foreign sub-
custodian not the subject of an exemptive order from the Securities and
Exchange Commission is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity will
decline below $200 million (U.S. dollars or the equivalent thereof) or that
its shareholders' equity has declined below $200 million (in each case
computed in accordance with generally accepted U.S. accounting principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of the
Fund assets are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the Investment Company
Act of 1940 meeting the qualification set forth in Section 26(a) of said
Act. The appointment of any such branch as a sub-custodian shall be
governed by paragraph 1 of this Contract. (b) Cash held for the Fund in
the United Kingdom shall be maintained in an interest bearing account
established for the Fund with the Custodian's London branch, which account
shall be subject to the direction of the Custodian, State Street London
Ltd. or both.
15
<PAGE>
3.14 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or any
state or political subdivision thereof. It shall be the responsibility of
the Fund to notify the Custodian of the obligations imposed on the Fund or
the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility of the
Custodian with regard to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such information.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
-----------------------------------------------------------------------
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation and any applicable votes of the
Board of Directors of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the
redemption or repurchase of Shares of the Fund, the Custodian shall honor checks
drawn on the Custodian by a holder of Shares, which checks have been furnished
by the Fund to the holder of Shares, when presented to the Custodian in
accordance with such procedures and controls as are mutually agreed upon from
time to time between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions
-------------------
Proper Instructions as used herein means a writing signed or initialed by
one or more person or persons as the Board of Directors shall have from time to
time authorized. Each such writing shall set forth the specific transaction or
type of transaction involved, including a specific statement of the purpose
16
<PAGE>
for which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing. Upon receipt of a certificate of the Secretary or an Assistant
Secretary as to the authorization by the Board of Directors of the Fund
accompanied by a detailed description of procedures approved by the Board of
Directors, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Directors and the Custodian are satisfied that such procedures afford adequate
safeguards for the Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.12.
6. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as
otherwise directed by the Board of Directors of the Fund.
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Directors pursuant
17
<PAGE>
to the Articles of Incorporation as described in such vote, and such vote may be
considered as in full force and effect until receipt by the Custodian of written
notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors of the Fund to keep the
books of account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent daily of the total amounts of such net
income and, if instructed in writing by an officer of the Fund to do so, shall
advise the Transfer Agent periodically of the division of such net income among
its various components. The calculations of the net asset value per share and
the daily income of the Fund shall be made at the time or times described from
time to time in the Fund's currently effective prospectus.
9. Records
-------
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-1A, and Form N-SAR or
18
<PAGE>
other annual reports to the Securities and Exchange Commission and with respect
to any other requirements of such Commission.
11. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
12. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled
to rely on and may act upon advice of counsel (who may be counsel for the Fund)
on all matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls or
restrictions, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications disruptions, acts
of war or terrorism, riots, revolutions, work stoppages, natural disasters or
other similar events or acts; (ii) errors by the Fund or the Investment Advisor
in their instructions to the Custodian provided such instructions have been in
accordance with this Contract; (iii) the insolvency of or acts or omissions by a
Securities System; (iv) any delay or failure of any broker,
19
<PAGE>
agent or intermediary, central bank or other commercially prevalent payment or
clearing system to deliver to the Custodian's sub-custodian or agent securities
purchased or in the remittance or payment made in connection with securities
sold; (v) any delay or failure of any company, corporation, or other body in
charge of registering or transferring securities in the name of the Custodian,
the Fund, the Custodian's sub-custodians, nominees or agents or any
consequential losses arising out of such delay or failure to transfer such
securities including non-receipt of bonus, dividends and rights and other
accretions or benefits; (vi) delays or inability to perform its duties due to
any disorder in market infrastructure with respect to any particular security or
Securities System; and (vii) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of competent
jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to sub-
custodians generally in this Contract.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund assets to
the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
13. Effective Period, Termination and Amendment
-------------------------------------------
20
<PAGE>
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
Custodian shall not act under Section 2.10 hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary that the Board
of Directors of the Fund has approved the initial use of a particular U.S.
Securities System, as required by Rule 17f-4 under the Investment Company Act of
1940, as amended and that the Custodian shall not act under Section 2.11 hereof
in the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors has approved the initial use of
the Direct Paper System; provided further, however, that the Fund shall not
amend or terminate this Contract in contravention of any applicable federal or
state regulations, or any provision of the Articles of Incorporation, and
further provided, that the Fund may at any time by action of its Board of
Directors (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or receiver for
the Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
-------------------
If a successor custodian shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
21
<PAGE>
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
16. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
---------------
22
<PAGE>
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
18. Reproduction of Documents
-------------------------
This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or other similar process. The parties hereto
all/each agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
19. Shareholder Communications Election
-----------------------------------
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the
Fund's name, address, and share positions.
NO [ ] The Custodian is not authorized to release the
Fund's name, address, and share positions.
20. Additional Funds
----------------
23
<PAGE>
In the event that the Horace Mann Life Insurance Company establishes any
funds in addition to the Funds listed on Exhibit A with respect to which it
desires to have the Custodian render services as custodian under the terms
hereof, it shall so notify the Custodian in writing, and if the Custodian agrees
in writing to provide such services, such fund shall become a Fund hereunder,
subject to the delivery by the new Fund of resolutions authorizing the
appointment of the Custodian and such other supporting or related documentation
as the Custodian may request. All references herein to the "Fund" are to each
of the Funds listed on Appendix A individually, as if this Contract were between
each such individual Fund and the Custodian. With respect to any Fund which
issues shares in separate classes or series, each class or series of such Fund
shall be treated as a separate Fund hereunder.
24
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of ,
199 .
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A HERETO
______________ By______________________________________
ATTEST STATE STREET BANK AND TRUST COMPANY
______________ By______________________________________
Senior Vice President
<PAGE>
APPENDIX A
----------
Horace Mann Growth Fund, Inc.
Horace Mann Income Fund, Inc.
Horace Mann Balanced Fund, Inc.
Horace Mann Short-Term Investment Fund, Inc.
2
<PAGE>
Schedule A
----------
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of for
use as sub-custodians for the Fund's securities and other assets:
(Insert banks and securities depositories)
<PAGE>
Certified:
__________________________________________
Fund's Authorized Officer
Date:_____________________________________
4
<PAGE>
Exhibit 9(a)
TRANSFER AGENT AGREEMENT
BETWEEN
HORACE MANN MUTUAL FUNDS
AND
HORACE MANN SERVICE CORPORATION
AGREEMENT made this ______ day of ____________, 199_ by and between the
Horace Mann Mutual Funds, which is currently comprised of three portfolios, (the
"Fund"), a Delaware business trust, which is registered as an open-end
investment company under the Investment Company Act of 1940 and Horace Mann
Service Corporation ("HMSC"), an Illinois corporation registered as a Transfer
Agent.
WITNESSETH
----------
1. Employment as Transfer Agent. The Fund hereby employs HMSC and HMSC
hereby accepts such employment as its Transfer Agent. In that capacity, HMSC
will provide the Fund with recording services, redemption and repurchase
services, and such other related services as the Fund and HMSC may mutually
agree upon from time to time.
2. Documents. In connection with this Agreement and within a reasonable
time after the execution of this Agreement, the Fund will deliver to HMSC
certified or otherwise authenticated copies of the following documents:
(a) The Declaration of Trust and Certificate of Trust of the Fund,
together with all amendments thereto;
(b) The Bylaws of the Fund as in force on the day this Agreement is
executed;
(c) Copies of the latest Prospectus of the Fund;
(d) A certified copy of a resolution of the Board of Trustees of the
Fund appointing HMSC as Transfer Agent;
<PAGE>
(e) Specimen signatures of Officers of the Fund or other individuals
who are authorized to give instructions to HMSC on behalf of the Fund; and
(f) Any other document, certificates, or instructions that HMSC may
reasonably require relating to the services it shall provide under this
Agreement.
From time to time as appropriate, the Fund shall also promptly furnish
to HMSC the following additional documentation:
(a) A copy of the Fund's registration statement or amendment thereto,
filed with the United States Securities and Exchange Commission subsequent to
the date of this Agreement, together with a copy of the order of effectiveness
relating to that registration statement;
(b) A certified copy of each resolution of the Fund's Board of
Trustees authorizing certain Fund Officers or other individuals to give
instructions to HMSC;
(c) A copy of any amendment to the Fund's Declaration of Trust
subsequent to the date hereof; and
(d) A copy of any amendment to the Bylaws of the Fund subsequent to
the date of this Agreement.
3. Authorized Shares. The Fund certifies to HMSC that, as of the date of
this Agreement, it has authorized an unlimited number of units of interest in
the Fund ("Shares") with no par value.
4. Capacity to Perform. In order to provide the services required to be
performed by it, HMSC represents that it is duly registered as a Transfer Agent
and has the capital, equipment and personnel sufficient to enable it to perform
the functions of this Agreement.
2
<PAGE>
5. General Duties of HMSC. Subject to written instructions from the Fund
and subject to events and conditions beyond HMSC's control, and subject to
receiving reasonable cooperation from the Fund, the underwriter and the dealers,
HMSC shall perform the duties of Transfer Agent for the Fund and shall maintain
Shareholders' accounts in a competent, efficient, timely and accurate manner.
Without limiting the scope of the foregoing, HMSC shall maintain the accounts,
books and other required documents maintained by it hereunder in compliance with
the Investment Company Act of 1940 (the "Act") and the rules and regulations
under the Act (the "Rules"), including without limitation Section 31(a) of the
Act and Rule 31a-1 under the Act. HMSC and the Fund each agree further that it
shall promptly give written notice to the other if it discovers that the
accounts, books or other required documents are not in compliance with the Act
and Rules of the Securities and Exchange Commission.
At the Fund's request, HMSC shall:
(a) calculate dividends and capital gains distributions payable to the
Fund's Shareholders; and
(b) print and mail to Shareholders
(i) applicable Tax Form 1099,
(ii) confirmation of reinvestment of dividends and
distributions,
(iii) proxy materials and proxies, and
(iv) other communication to Shareholders as the Fund may
request.
HMSC shall be reimbursed by the Fund for the costs of printing, paper,
envelopes and postage, if any, incurred in the above distributions to
Shareholders.
3
<PAGE>
6. Compensation. The Fund agrees to compensate HMSC for its services
hereunder in accordance with the Fee Schedule annexed to this Agreement and
incorporated herein by reference as Schedule A. This Fee Schedule may be
periodically revised and adjusted by mutual agreement of the Parties. The Fund
and HMSC agree that services performed in accordance with this Fee Schedule are,
in effect, provided at HMSC's cost.
From the execution date of this Agreement, fees will be charged at a
monthly rate that will not exceed that rate which is stated in Schedule A.
7. Payment. HMSC will bill the Fund within ten (10) days after the end
of each calendar month, and said billings will be detailed in accordance with
the Fee Schedule. HMSC may require advance payment of postage cost, if any,
incurred in connection with general mailings to all Shareholders of the Fund.
The Fund shall promptly pay HMSC the amount of such billings. At the end of
each calendar year, all payments will be compared to HMSC's actual costs. If
the Fund has overpaid fees when compared to actual costs, HMSC will refund the
excess payment. If the Fund has underpaid fees when compared to actual costs,
no reimbursement will be required to compensate for the shortage; however, upon
the mutual agreement of the Board of Trustees of the Fund and HMSC, the Fee
Schedule may be adjusted for the following year.
8. Delegation of Signature Authority. By resolution of its Board of
Trustees, the Fund may delegate to HMSC, or to HMSC Officers, authority to
execute as agent for the Fund, dividend distribution, redemption and repurchase
checks, and such other documents as may from time to time be required to be
executed in the course of providing the services called for under this
Agreement.
4
<PAGE>
9. Lost Certificates. The Fund hereby appoints HMSC as their agent for
the purpose of processing lost certificate claims in accordance with an
established Plan, or such other plan or procedure as the parties hereto may
agree upon. HMSC will provide the Secretary of the Fund with a complete record
of all claims so processed.
10. Issuance of Shares. HMSC agrees to issue shares of the Fund in
accordance with the instructions of the Fund, and to inform the Fund should any
proposed issuance in accordance with such instructions exceed the authorized
capitalization and/or the registered shares of the Fund. In the event the
issuance of such shares would exceed the authorized capitalization, HMSC agrees
that it will not issue such shares unless and until it is expressly authorized
to do so by the Fund. In the event the issuance will exceed the registered
shares, HMSC will issue the required shares and the Fund will be responsible for
filing the registration for the additional shares.
11. Transfers in General. HMSC is authorized to transfer shares of the
Fund's recorded capital stock as follows:
(a) if outstanding certificates are surrendered in proper form, HMSC
will cancel these certificates and issue shares in deposit form; or
(b) if an order is properly made by or on behalf of the registered
holder of shares in deposit form, HMSC will credit the same shares of capital
stock to the transferee in deposit form.
12. Redemption and Repurchases. At the request of the Fund, HMSC agrees
to:
(a) receive and stamp with the time and date of receipt all
certificates delivered to it which are identified as being delivered for
redemption or repurchase;
5
<PAGE>
(b) receive and stamp with the time and date of receipt all requests
for redemption or repurchase of shares in plan accounts; and
(c) process and confirm said redemptions and repurchase requests in
accordance with established procedures approved by, or with instructions
provided by, the Fund.
13. Notice of Distribution. The Fund or its designees will promptly
notify HMSC of the Fund's declaration of any dividend or distribution and will
provide HMSC with such information in respect of such distribution or dividend
as HMSC may reasonably require to perform its functions.
HMSC will promptly notify the Shareholders of the amount of the net
investment income and capital gains dividends awarded to each account.
14. Tax Reports and Withholdings. At the Fund's request, HMSC will: (a)
prepare and file in accordance with the Fund's written instructions, such tax
reports or returns for reporting dividends and distributions paid as the Fund is
required to make; and (b) withhold such sums as the Fund is required to withhold
under applicable federal or foreign income tax laws, rules and regulations,
including amounts withheld by any agent to the extent that said withholdings
have been identified by HMSC; and (c) withhold such sums under state tax laws to
the extent instructed by the Fund in writing.
HMSC will prepare and mail to Shareholders such reports as may be
required by applicable state and federal tax laws or regulations. HMSC will
forward to the Fund any requests or notices from state and federal tax
authorities received by HMSC pertaining to such reporting or withholding
requirements.
6
<PAGE>
15. Shareholder Records. HMSC agrees to maintain on behalf of the Fund
those records of Shareholder accounts required by the Fund, including records
showing for each Shareholder account the following:
(a) Name, address and tax identifying number;
(b) Number of shares held with certificate numbers of, and
denominations of, any outstanding certificates;
(c) Historical information regarding the account, including dividends
paid and date and price for all account transactions;
(d) Any restraining order placed against the account;
(e) Information with respect to withholdings on foreign accounts;
(f) Any dividend reinvestment order, monthly payment order, dividend
address and correspondence relating to the current maintenance of the account.
All records maintained by HMSC on behalf of the Fund shall be
maintained in accordance with the requirements of the Investment Company Act of
1940, the rules and regulations under the Act, and other applicable statutes,
rules, or regulations. Such records will be retained by HMSC on behalf of the
Fund for the periods required by the Investment Company Act of 1940, or for such
longer period or periods as the Fund may specify.
16. Confirmations and Statements. HMSC agrees to provide to the Fund's
Shareholder confirmations and reports with respect to the Fund's share
transactions, and such other statements of account as specified by the Fund or
by state or federal laws.
7
<PAGE>
17. Inquiries. HMSC will research and respond to proper inquiries
relating to transactions in Shareholder accounts.
18. Information to be Furnished to the Fund. When reasonably requested,
HMSC will furnish the Fund with information which is in HMSC's possession and
which the Fund requires for the conduct of its business. HMSC will also provide
any information or records in its possession or otherwise known to it and
required by the Fund to respond to inquiries received from regulatory agencies.
19. Availability of Records. Upon request for inspection by the Fund, its
directors, Officers, and authorized representatives, HMSC will make available
all records, memoranda, operating procedures, forms, correspondence, and other
materials received or produced by HMSC in the course of the performance of any
of its obligations under this Agreement. The Fund may copy such materials other
than any computer programs which HMSC is required to maintain as confidential.
20. Reports. HMSC will provide the Fund with reports regarding HMSC's
performance under this Agreement in accordance with, and at the times specified
by, a schedule of reports to be mutually agreed upon by the Fund and HMSC.
21. Prospectus. HMSC agrees to perform its duties under this Agreement in
conformity with the terms of the Fund's currently effective prospectuses, copies
of which will be provided to HMSC by the Fund. The Fund assumes full
responsibility for the contents of each prospectus of the Fund, and for
prospectus compliance with applicable requirements of the laws and regulations
governing the offering and sale of securities, except to the extent such
responsibilities are expressly assumed by HMSC.
8
<PAGE>
22. Indemnification. HMSC will not be responsible for, and the Fund will
indemnify and hold HMSC harmless from and against, any and all losses, costs,
damages and expenses (including reasonable expenses of outside counsel) if such
expenses and liabilities are incurred by HMSC, its directors, officers,
employees or agents and arise out of or are attributable to:
(a) any action taken by HMSC pursuant to this Agreement, provided that
such actions are taken in good faith and without HMSC's negligence or willful
misconduct;
(b) the Fund's lack of good faith, negligence or willful misconduct or
any breach of the Fund's representation or warranties made pursuant to this
Agreement;
(c) HMSC's reliance on or use of information, records and documents
which (i) have been furnished to HMSC by the Fund and (ii) have been prepared
and/or maintained by the Fund (unless such information or records arise from
HMSC's negligence, willful misconduct or failure with respect to such reliance
upon or use of such information);
(d) HMSC's reliance on any instructions or orders believed by it to
have been executed by a duly authorized Officer or representative of the Fund
(unless the liability arises from HMSC's failure to properly perform such
instructions or orders).
HMSC shall indemnify and hold the Fund harmless from any acts taken or
omitted by HMSC as Transfer Agent for the Fund which result in any losses,
damages, costs, expenses (including reasonable expenses of outside counsel) and
liabilities and which arise out of or are attributed to HMSC's lack of good
faith, negligence or willful misconduct in providing services hereunder.
If any Party to this Agreement is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage
9
<PAGE>
reasonably beyond its control or because of any other cause(s) beyond its
control, that Party shall not be liable to the other for any damages resulting
from such failure to perform.
No Party to this Agreement shall be liable to another Party for
Consequential Damages under any provision of this Agreement or for any act or
failure to act under this Agreement. "Consequential Damages" shall mean damages
that are not natural and probable consequences of the particular breach of this
Agreement.
For this provision to apply, a Party seeking indemnification must
promptly notify the other Party of its assertion and keep the other Party
advised of all developments relating to its claim. The Party who may be
required to indemnify shall have the option to participate with the Party
seeking indemnification in the defense of its alleged liability. The Party
seeking indemnification shall, in no case, confess to any claim or make any
compromise in any case in which the other Party may be required to indemnify it,
unless the indemnifying Party authorizes such actions in writing.
23. Further Assurances. Each Party agrees to perform such further acts
and execute such further documents as shall be necessary to effectuate the
purposes of this Agreement.
24. Term. This Agreement shall be in effect until October 31, 1998, and,
unless sooner terminated in accordance with the provisions hereof, shall renew
year to year upon the resolution of the Boards of the Fund and HMSC to do so.
Either the Fund or HMSC may terminate this Agreement at any time by giving
written notice to the other Party at least sixty (60) days prior to the date on
which such termination is to be effective. Any fees or reimbursable expenses
payable to HMSC (incurred or accrued) and as yet unpaid shall be due
10
<PAGE>
and payable upon the date of such termination. Upon termination, HMSC agrees to
cooperate with the Fund and any successor Transfer Agent in accomplishing an
orderly transition.
25. Amendment. The terms of this Agreement may be amended at any time
upon the approval and written authorization of the Fund's and HMSC's Boards of
Directors.
26. Notices. All instructions, notices, information and payments provided
or required to be provided under this Agreement shall be sent to the respective
addresses as indicated below, or to such other addresses as either Party may
designate to the other in writing from time to time:
TO THE FUND:
Horace Mann Mutual Funds
P.O. Box 4657
Springfield, Illinois 62708-4657
TO HORACE MANN SERVICE CORPORATION:
Horace Mann Service Corporation
1 Horace Mann Plaza
Attention: Mail No. E206
Springfield, Illinois 62715
27. Governing Law. The provisions of this Agreement shall be governed by
and interpreted under the laws of the State of Illinois
11
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their duly authorized Officers on this ____ day of ____________,
199_.
HORACE MANN MUTUAL FUNDS
By:____________________________
Witness:
____________________________
HORACE MANN SERVICE CORPORATION
By:____________________________
Witness:
____________________________
12
<PAGE>
SCHEDULE "A"
TRANSFER AGENT'S FEE SCHEDULE
HORACE MANN MUTUAL FUNDS
------------------------
Fee Schedule
- ------------
Monthly maintenance - $1.00/account
The monthly maintenance charge includes the processing of all transactions
and correspondence.
13
<PAGE>
Exhibit 9(b)
STATE STREET
MONEY TRANSFER SERVICES AGREEMENT
STATE STREET BANK and TRUST COMPANY
P.O. Box 351
BOSTON, MASSACHUSETTS 02101
<PAGE>
The undersigned has been duly empowered to take all necessary steps on
behalf of (the "Company") including the execution of this Agreement, to
implement procedures for the transfer of any of the Company's funds on deposit
with State Street Bank and Trust Company (the "Bank") in the manner described
below. The following provisions shall govern such transfers:
1. The Company has listed on Exhibit A those persons who are authorized to
order such transfers ("Authorized Representatives"). Such transfers will be
effected, in accordance with this Agreement, upon the receipt by the Bank of
any telephonic, telegraphic, electronic, data communications, magnetic media,
fax, oral or written instruction other than a check, draft, or similar
negotiable instrument ("Order") from an Authorized Representative. The Order
shall include instructions with respect to any intermediary bank to be used by
the Bank in carrying out the Order. The Bank is authorized to rely on any Order
believed by it in good faith to have been given by an Authorized
Representative, The Bank may electronically record any Orders given by
telephone, and any other telephone discussions with respect to the transfer
services.
2. The Company shall specify in Exhibit A any desired instructions relating
to Orders, including any limitations on the authority of the Authorized
Representatives of accounts to be charged. Failure to specify any limitations
shall mean that there are no such limitations. These instructions may be
amended in writing by the Company from time to time effective upon receipt by
the Bank of a new duly authenticated Exhibit A, provided such notice is
received in a timely manner so as to offer the Bank a reasonable opportunity to
act on such notice.
3. (a) Upon the receipt of any Order, the Bank shall charge the account
designated. The Bank reserves the right to charge any other account of the
Company in the event no account is designated or if designated, such account
contains insufficient collected balances.
(b) The Company agree that the Bank reserves the right to decline to
process or delay in processing any Order (i) which is in excess of the
collected funds balance in the account to be charged as of the time of the
Bank's receipt of the order, or (ii) if initiating such Order, would cause the
Bank, in the Bank's sole judgment, to exceed any volume, aggregate dollar,
network, time, or similar limits upon wire transfers which are applicable to
the Bank, or (iii) if the Bank, in good faith, is unable to satisfy itself that
the transaction has been properly authorized by the applicable Company.
4. (a) In performing the transfer services which are the subject of this
Agreement, the Bank shall exercise reasonable care and shall be liable to the
Company only for losses which are caused directly by the Bank's failure to
exercise such care. In no event shall the Bank be liable for special, indirect
or consequential damages, even if advised of the possibility of such damages
and even for failure to execute an Order. The Bank shall be kept indemnified
and be without liability for any action taken or thing done by it in carrying
out the terms of this Agreement, including reasonable attorneys fees, provided
that the Bank has acted in good faith and has not been guilty of negligence.
(b) In carrying out an Order, the Bank may rely only upon the identifying
number of a credit party even if it identifies a person different from the
credit party. The Company assumes full responsibility for any inconsistency
between name and identifying number in all Orders sent to the Bank. In the
event of any inconsistency between the name and identifying number of a credit
party in an Order, the Company shall be responsible to the Bank for any loss,
liability, expense or damage the Bank may incur, including reasonable
attorneys' fees.
5. In connection with the money transfer services, the Bank shall prepare and
provide to the Company reports of daily activity within the account. Reports
and advices shall be deemed to have been accepted by the Company as correct
unless the Bank is notified in writing by the Company of any errors, omissions
or irregularities within thirty (30) days of the receipt of such reports and
services.
6. The Company agrees to abide by the Bank's security procedures specified in
Exhibit B, and to regard and preserve as confidential all information obtained
with respect to such security procedures. The use of an agreed upon security
procedure shall be conclusive evidence that the Order has been duly authorized
by the Company. The Company is responsible for the accuracy of any confirmatory
reading of a callback of the Order made on the part of the Bank. The Company
will immediately notify the Bank of any termination of employees who have
access to such information.
7. Orders must be received by the Bank in accordance with its applicable
cutoff times established from time to time (Exhibit C). The Bank will use
reasonable efforts to act on all authorized requests to cancel or amend Orders
<PAGE>
received, but the Bank cannot guarantee that requests received will become
effective. If the cancellation or amendment request is received subsequent to
the Bank's ability to alter the Order, a request to cancel or amend the Order
will be forwarded to the next party. Cancellation or amendment of the Order
will become effective upon agreement of the next party in the chain of the
transaction.
8. Either party may terminate this Agreement by giving written notice by
regular mail to the other party, such notice not affecting rights and duties
accrued prior to such time.
9. The Bank shall not be responsible for delays or failures in performance
resulting from acts beyond its control. Such acts shall include but not be
limited to acts of God, strikes, lockouts, riots, acts of war, epidemics,
governmental regulations superimposed after the fact, fire, communication line
failures, power failures, earthquakes or other disasters.
10. This Agreement and all documents relating thereto including, without
limitation, confirmations and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic or other
microfilm, optical disk, micro-card, miniature photographic or other similar
process. The parties agree that any such reproduction shall be admissible in
evidence as the original itself in any judicial or administrative proceeding,
whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that
any enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
<PAGE>
11. This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts, applicable Federal laws and regulations, and funds transfer
system rules.
EACH OF THE FUNDS LISTED ON SCHEDULE A
By:
-----------------------------------
Title:
--------------------------------
By:
-----------------------------------
Title:
--------------------------------
STATE STREET BANK AND TRUST COMPANY
By:
-----------------------------------
Title:
--------------------------------
Date:
---------------------------------
Effective Date:
-----------------------
<PAGE>
MONEY TRANSFER SERVICES AGREEMENT
WIRE TRANSFER INSTRUCTION - DELIVERY ALTERNATIVES
CUSTOMER SELECTION FORM
Please select one or more of the wire transfer instruction delivery
alternatives and associated Security Procedures indicated below. An
explanation of each security procedure is outlined in Exhibit B.
DELIVERY ALTERNATIVES
The alternatives for delivering funds transfer instructions are listed
below. Please note that instructions received via phone, facsimile, or mail
require clients to select a telephone call back procedure.
________ Funds Transfer System (FTS) - a proprietary State
Street Bank micorcomputer based wire transfer system that
enables a customer to electronically transmit authenticated
repetitive and random FedWire, CHIPS or internal bank transfer
instructions to the Bank.
________ Phone, Facsimile Transmission or Mail with telephone callback.
________ Pre-established authorized transfers with telephone callback.
<PAGE>
EXHIBIT A
AUTHORIZED REPRESENTATIVE LIST
CUSTOMER NAME: ___________
ACCOUNT NUMBER(S):
ADDRESS: _____________
__________
_____________
DOLLAR ALL REPETITIVE
LIMITS TRANSFERS TRANSFERS
AUTHORIZED REPRESENTATIVES ( ) ONLY ( )
____________________________________________________
_____________
APPROVAL (FOR STATE STREET BANK USE ONLY) DATE
Please type all documentation.
<PAGE>
EXHIBIT B
MONEY TRANSFER SERVICES AGREEMENT
DELIVERY METHODS AND SECURITY PROCEDURES
DESCRIPTIONS
The following is a list of wire transfer instruction delivery methods and
related security alternatives. State Street Bank (Bank) prefers to receive wire
transfer instructions via transmission over secured networks.
FUNDS TRANSFER SYSTEM
Funds Transfer System (FTS) is a proprietary microcomputer based wire transfer
system. FTS enables customers to electronically transmit authenticated
repetitive and random Fedwire, CHIPS or internal book transfer instructions to
the Bank. The authentication process occurs when a transaction is transmitted
to the Bank. This product also features a number of security features resident
on the microcomputer program. These include:
. assignment of unique user identification code and password for
product access
. segregation of input and verify functions by user
. establishment of dollar limits for payment files
. bank monitoring of files above established dollar limits
. availability of transaction audit and status reports
. data residing on the microcomputer is encrypted.
FTS is the most secure method of wire transfer instruction origination available
from State Street Bank. Current cut-off time is 4:15 PM EST/EDT.
TELEPHONE, FACSIMILE TRANSMISSION OR MAIL WITH TELEPHONE CALLBACK
Customers may initiate wire transfer requests through their authorized
representative(s), as noted on Exhibit A of this agreement, by telephone,
facsimile transmission or mail. The authenticity of such request will be
verified by a telephone callback to another authorized representative, as noted
on Exhibit A of this agreement. Current cut-off time for non-repetitive
transfers is 2:30 PM EST/ETD and for repetitive transfers is 3:30 PM EST/EDT.
PRE-ESTABLISHED AUTHORIZED TRANSFERS
Pre-established transfers are repetitive wire transfers which are
originated by a client with a certain degree of frequency (at least once a
quarter) and with no change from transfer to transfer in the debit DDA account
at State Street Bank, the destination institution, and the beneficiary account
name and number at the destination institution. Only value date and currency
amount vary from instruction to instruction. The currency amount is allowed to
change, but should be limited by a defined "not to exceed" amount which is set
at the time the pre-established transfer is requested.
Note: For customers selecting pre-established authorized transfers, until the
pre-authorized transfers are set up, initially transfer instructions will be
initiated by telephone, facsimile transmission or mail with telephone callback
as security procedure.
<PAGE>
EXHIBIT B
SECURITY PROCEDURES
TELEPHONE CALL BACK
AUTHORIZED REPRESENTATIVE LIST
The authenticity of the caller for all phone transfers will be verified using
a list of authorized individuals provided by the customer in Exhibit A.
VERIFICATION
I. All voice initiated, repetitive, non-repetitive and/or third party
transfers will be verified by a telephone call back procedure by State
Street Bank. All instructions received via mail or facsimile transfer will
also be verified by a telephone call back procedure by State Street Bank.
II. Call beck verification for repetitive, non-repetitive and/or third
party wires will be accomplished by a State Street Bank employee other than
the individual who received the original request.
III. The call back will be placed to the switchboard telephone number at
the customer location, or a direct line that has been previously
authorized, in writing.
IV. The State Street employee verifying the transfer will ask to speak
with an authorized customer employee other than the one who placed the
initial call to State Street.
V. The State Street employee will read back all information contained in
the transfer so that the customer can identify the message being verified.
VI. The State Street employee will release the message for processing once
the customer has verbally approved the callback verification.
VII. Transfers which are incorrect will be canceled or repaired and will
result in a second callback for verification.
ONE TIME PAD (OR RANDOM DAILY TEST KEY)
A ONE TIME PAD IS A RANDOMLY GENERATED NUMBER UNIQUE TO EACH PAYMENT
INSTRUCTION. ITS NAME DERIVES FROM THE FACT THAT IT IS COMMONLY IMPLEMENTED BY
ISSUING A "PAD" OF NUMBERS TO EACH USER, WITH EACH PAGE OF THE PAD CONTAINING A
SET OF RANDOM NUMBERS. THE RANDOM NUMBERS, IN SEQUENCE, ARE APPLIED TO THE WIRE
TRANSFER INSTRUCTION(S). THE AUTHENTICITY OF THE INSTRUCTION IS VERIFIED BY THE
BANK THROUGH COMPARISON OF THE RANDOM NUMBER AGAINST THE PAD MAINTAINED BY THE
BANK. PAYMENT WILL NOT BE MADE AGAINST INSTRUCTIONS FAILING THIS TEST.
<PAGE>
Exhibit 10
[VPKK Letterhead]
February 18, 1997
Horace Mann Mutual Funds
One Horace Mann Plaza
Springfield, Illinois 62715
Board of Trustees:
Reference is made to the Registration Statement on Form N-1A under the
Securities Act of 1933 being filed by Horace Mann Mutual Funds (the "Fund") in
connection with the proposed public offering of an indefinite number of units of
beneficial interest, no par value ("Shares"), in three authorized series: Small
Cap Growth Fund, International Equity Fund and Socially Responsible Fund (the
"Portfolios").
We have acted as counsel for the Fund since its inception and in such
capacity have assisted in supervising its organization and have counseled the
Fund regarding subsequent legal matters.
Based upon the foregoing, we advise you and opine that (a) the Fund is a
legally organized and validly existing business trust under the laws of the
State of Delaware (commonly known as a Delaware business trust) which, unless
terminated as provided in its Declaration of Trust, shall continue in existence
without limitation of time; and (b) the Fund is authorized to issue an unlimited
number of Shares of the Portfolios and upon the issue of any thereof for cash at
net asset value and receipt by the Fund of the authorized consideration
therefor, the Shares of the Portfolios so issued will be validly issued, fully
paid, and nonassessable by the Fund.
We hereby consent to the use of this opinion in connection with said
Registration Statement relating to said Shares and to the listing of our name as
legal counsel therein.
Very truly yours,
/s/ Vedder, Price, Kaufman & Kammholz
-------------------------------------
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE>
Exhibit 11
[KPMG Letterhead]
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of
Horace Mann Mutual Funds:
We consent to the use of our report included herein and to the reference to our
Firm as independent auditors under the heading "Other Services" in the Statement
of Additional Information.
/s/ KPMG Peat Marwick LLP
- -------------------------
Chicago, Illinois
February 14, 1997
<PAGE>
Exhibit 13
December 20, 1996
Board of Trustees
Horace Mann Mutual Funds
One Horace Mann Plaza
Springfield, Illinois
Re: Subscription Agreement for Shares of
Horace Mann Mutual Funds (the "Fund")
Dear Trustees:
Horace Mann Life Insurance Company offers to purchase from the Fund 4,000
shares of beneficial interest in each portfolio of the Fund: the Small Cap
Growth Fund, the International Equity Fund and The Socially Responsible Fund; at
$10.00 per share for an aggregate purchase price of $120,000 in cash, all such
shares to be validly issued, fully paid and non-assessable upon issuance of such
shares and receipt by the Fund of said payment.
These shares are not being purchased with any present intent of
distributing or reselling the same to the public and will be held for the
investment of Horace Mann Life Insurance Company.
Sincerely,
HORACE MANN LIFE INSURANCE COMPANY
By: /s/ Larry K. Becker
-------------------
LARRY K. BECKER
Accepted and agreed to this
20th day of December, 1996.
HORACE MANN MUTUAL FUNDS
By: /s/ George J. Zock
------------------
GEORGE J. ZOCK
<PAGE>
Exhibit 19
<TABLE>
<S> <C>
--------------
HORACE MANN
EDUCATORS
CORPORATION
Delaware
--------------
- ------------------------------------------------------------------------------------------------------------------------------------
EDUCATORS ASSOCIATION & HORACE HORACE
ALLEGIANCE LIFE CONSUMER MANN WELL-CARE, INC. HORACE MANN MANN
ALLEGIANCE LIFE INSURANCE MARKETING SERVICE Illinois INVESTORS, INC. INSURANCE
INSURANCE INSURANCE COMPANY SERVICES CORP. CORPORATION Maryland COMPANY
COMPANY COMPANY OF AMERICA Illinois Illinois Illinois
California Illinois Arizona
- ------------------------------------------------------------------------------------------------------------------------------------
-------------
HORACE
MANN LIFE
INSURANCE
COMPANY
Illinois
-------------
</TABLE>
<PAGE>
Exhibit 20
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints George J. Zock, Ann M. Caparros, Cathy G. O'Kelly, or any of them, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign the Registration Statement of Horace Mann Mutual Funds, a
Delaware business trust, on Form N-1A under the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully as all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: December 20, 1996
/s/ A. Thomas Arisman
-----------------------
A. THOMAS ARISMAN
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints George J. Zock, Ann M. Caparros, Cathy G. O'Kelly, or any of them, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign the Registration Statement of Horace Mann Mutual Funds, a
Delaware business trust, on Form N-1A under the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully as all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: December 20, 1996
/s/ Larry K. Becker
--------------------
LARRY K. BECKER
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints George J. Zock, Ann M. Caparros, Cathy G. O'Kelly, or any of them, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign the Registration Statement of Horace Mann Mutual Funds, a
Delaware business trust, on Form N-1A under the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully as all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: December 20, 1996
/s/ A.L. Gallop
------------------
A. L. GALLOP
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints George J. Zock, Ann M. Caparros, Cathy G. O'Kelly, or any of them, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign the Registration Statement of Horace Mann Mutual Funds, a
Delaware business trust, on Form N-1A under the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully as all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: December 20, 1996
/s/ Harriet A. Russell
------------------------
HARRIET A. RUSSELL
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints George J. Zock, Ann M. Caparros, Cathy G. O'Kelly, or any of them, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign the Registration Statement of Horace Mann Mutual Funds, a
Delaware business trust, on Form N-1A under the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully as all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: December 20, 1996
/s/ George J. Zock
---------------------
GEORGE J. ZOCK
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints George J. Zock, Ann M. Caparros, Cathy G. O'Kelly, or any of them, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign the Registration Statement of Horace Mann Mutual Funds, a
Delaware business trust, on Form N-1A under the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully as all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: February 11, 1997
/s/ Edward L. Najim
---------------------
EDWARD L. NAJIM
