<PAGE>
As filed with the Securities and Exchange Commission
on March 19, 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. [ ]
Post-Effective Amendment No. 1 [X]
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 2 [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
It is proposed that this filing will become effective:
__Immediately upon filing pursuant to paragraph (b) of Rule 485
__On (date) pursuant to paragraph (b) of Rule 485
__60 days after filing pursuant to paragraph (a)(i) of Rule 485
__On (date) pursuant to paragraph (a)(i) of Rule 485
X 75 days after filing pursuant to paragraph (a)(ii) of Rule 485
- --
If appropriate, check the following box:
__this post-effective amendment designates a new effective date for a previously
filed post-effective amendment.
The Registrant has registered an indefinite amount of securities in accordance
with Rule 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice
for the fiscal year ending December 31, 1997, will be filed before February 28,
1998.
<PAGE>
Note:
The primary purpose of this Post-Effective Amendment No. 1 on Form N-1A is to
add four new series to Horace Mann Mutual Funds, which currently has three
series. Each of the new series will be created as a result of the reorganization
of the following mutual funds into a corresponding series: Horace Mann Growth
Fund, Inc. (2-13450 and 811-778); Horace Mann Balanced Fund, Inc. (2-81826 and
811-3665); Horace Mann Income Fund, Inc. (2-81831 and 811-3664); and Horace
Mann Short-Term Investment Fund, Inc. (2-81830 and 811-3666). The reorganization
will be subject to the vote of shareholder of each fund on or about April 23,
1997. It is anticipated that a Notice and Proxy Statement will be filed with the
Securities and Exchange Commission on or about March 11, 1997.
<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
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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;
Appendix A.
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>
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Item Number in Form N-1A Caption
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PART B - STATEMENT OF ADDITIONAL INFORMATION
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<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; Appendix A; Appendix B;
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 amended Registration Statement.
<PAGE>
The Horace Mann Mutual Funds
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 seven separate
investment portfolios: the Balanced Fund, the Growth Fund, the Income Fund, the
International Equity Fund, the Short-Term Investment Fund, the Small Cap Growth
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 primary investment objective of the Growth Fund is long-term capital growth;
conservation of principal and production of income are secondary objectives.
The Growth Fund invests primarily in common stocks.
The primary investment objective of the Income Fund is to achieve a long-term
total rate of return in excess of the U.S. bond market over a full market cycle.
The Income Fund invests primarily in debt securities.
The investment objective of the Balanced Fund is to realize high long-term total
rate of return consistent with prudent investment risks. The Balanced Fund's
assets are invested in a mix of common stocks, debt securities and money market
instruments.
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 primary investment objective of the Short-Term Investment Fund is to realize
maximum current income to the extent consistent with liquidity. Preservation of
principal is a secondary objective. The Short-Term Investment Fund attempts to
realize its objectives through investments in short-term debt instruments; it is
not a money market fund and does not maintain a constant net asset value per
share.
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 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 diversified 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 May 1, 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 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). 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 May 1, 1997.
<PAGE>
TABLE OF CONTENTS
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TOPIC PAGE
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THE TRUST, THE FUNDS, THEIR INVESTMENT OBJECTIVES AND POLICIES......... 2
Growth Fund.......................................................... 2
Income Fund.......................................................... 3
Balanced Fund........................................................ 4
Short-Term Investment Fund........................................... 5
Small Cap Growth Fund................................................ 6
International Equity Fund............................................ 6
Socially Responsible Fund............................................ 7
TYPES OF INVESTMENTS AND ASSOCIATED RISKS.............................. 8
MANAGEMENT............................................................. 16
Investment Adviser and Manager, Horace Mann Investors, Inc........... 16
The Subadvisers...................................................... 18
Growth Fund....................................................... 18
Income Fund....................................................... 18
Balanced Fund..................................................... 19
Short-Term Investment Fund........................................ 19
Small Cap Growth Fund............................................. 20
International Equity Fund......................................... 20
Socially Responsible Fund......................................... 21
General........................................................... 21
Transfer Agent and Dividend Paying Agent............................. 21
Custodian and Fund Accounting Agent.................................. 21
Investment Return.................................................... 21
Other Information On The Performance Of PNC Equity Advisors Company.. 22
Other Information On The Performance Of Scudder, Stevens & Clark..... 23
PURCHASES AND REDEMPTIONS.............................................. 26
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................. 27
VOTING RIGHTS.......................................................... 28
PUBLIC SHAREHOLDER COMMUNICATIONS...................................... 29
SHAREHOLDERS INQUIRIES................................................. 29
ADDITIONAL INFORMATION................................................. 30
APPENDIX A.............................................................
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CONDENSED FINANCIAL INFORMATION
The condensed financial information for the Growth Fund, Income Fund, Balanced
Fund and Short-Term Investment Fund under the heading "Financial Highlights" in
the Fund's Annual Report for the year ended December 31, 1996 and the Report of
Independent Auditors thereon, is incorporated herein by reference. Additional
information about the Funds' performance, including Management's Discussion and
Analysis, is also contained in the 1996 Annual Report which accompanies this
Prospectus. Additional copies of the Annual Report may be obtained without
charge by writing to the Horace Mann Mutual Funds, P.O. Box 4657, Springfield,
Illinois 62708-4657, by sending a request by telefacsimile (FAX) transmission to
(217) 527-2307, or by telephoning (217) 789-2500 or (800) 999-1030 (toll-free).
Financial information for the Small Cap Growth Fund, International Equity Fund
and Socially Responsible Fund is located in the Statement of Additional
Information under the Section entitled "Financial Statements."
<PAGE>
THE TRUST, THE FUNDS, 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 agreements with Wellington
Management Company, LLP to act as the subadviser for the Growth Fund, Income
Fund, Balanced Fund and Short-Term Investment Fund, PNC Equity Advisors Company
to act as the subadviser for the Small Cap Growth Fund and 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 objectives 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.
Each Fund has also adopted certain fundamental investment limitations that,
along with its objective, may be changed only with the approval of a "majority
of the outstanding shares of a Fund."
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.
GROWTH FUND
The investment objective of the Growth Fund is long-term capital growth.
Secondary objectives are conservation of principal and production of income.
The Growth Fund ordinarily invests substantially all of its assets in common
stocks of domestic companies of various sizes and operating histories, both
listed and non-listed, in a variety of industries. The Growth Fund may also
invest in preferred stocks. Additionally, up to 10% of the Growth Fund's assets
may be invested in U.S. dollar-denominated securities of foreign issuers,
including common stock, preferred stock, convertible debentures, and American
Depository Receipts. The Fund will not invest in securities subject to
restrictions on disposition under the Securities Act of 1933 or purchase
securities not freely marketable.
To achieve its objectives of long-term capital growth, conservation of principal
and production of income, the Growth Fund employs a "Value-Yield" strategy in
making investments. "Value-Yield" investing concentrates on stocks which sell
at low prices relative to certain measures of company value such as the
price/earnings ratio and the price/book ratio. These stocks also tend to have
above-average dividend yields.
<PAGE>
The Growth Fund may also invest a portion of its assets in fixed income
securities. The investment policies of the Growth Fund limit fixed-income
investments to those debt securities described below for the Income Fund except
(a) the debt securities in which the Growth Fund may invest must be (i) rated
within the four highest ratings as determined by Moody's Investors Service, Inc.
or by Standard and Poor's Corporation and (ii) are U.S. dollar denominated and
(b) the Growth Fund may invest up to 10% of its total assets in category 1.(d)
in under "Income Fund" below.
The 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 Growth 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.
INCOME FUND
The investment objective of the Income Fund is to achieve a long-term total rate
of return in excess of the U.S. bond market over a full market cycle. The Fund
will use the Lehman Brothers Aggregate Bond Index (the "Index") to represent the
U.S. bond market. The Index covers the U.S. investment grade fixed rate bond
market, including government and corporate securities, agency mortgage
pass-through securities and asset-backed securities. The index includes only
investment grade instruments, while the Income Fund may invest up to 25% of its
assets in non-investment grade instruments.
The Income Fund seeks to attain its objective through the following investment
policies:
1. At least 75% of the Income Fund's total assets are invested in:
(a) publicly offered debt securities, including mortgage-backed and other
asset-backed securities, within the four highest ratings as determined
by Moody's Investors Service, Inc. ("Moody's") or by Standard and Poor's
Corporation ("S&P");
(b) securities issued or guaranteed by the U.S. Government or its agencies;
(c) publicly offered debt securities issued or guaranteed by a national or
state bank or bank holding company within the four highest ratings as
determined by both Moody's and S&P;
(d) U.S. dollar-denominated debt obligations of foreign governments, foreign
corporations, foreign branches of U.S. banks, and foreign banks limited to
the three highest ratings as determined by Moody's or S&P at the time of
purchase and that do not exceed 15% of the Income Fund's total asset;
(e) Non U.S. dollar-denominated debt obligations of foreign issuers limited to
the highest rating as determined by Moody's or S&P at the time of
purchase, are fully hedged back into U.S. dollars, and do not exceed 15%
of the Income Fund's total assets;
(f) commercial paper having a rating within the two highest grades as
determined by both Moody's and S&P.
(g) repurchase and reverse repurchase agreements involving any of the above
instruments, provided that the market value of the underlying security is
at least 102% of the price of the repurchase agreement;
(h) time deposits with maturities less than seven days; or
2
<PAGE>
(i) cash or cash equivalents.
2. Up to 25% of the Income Fund's total assets may be invested in preferred
stocks and obligations not described above, including convertible securities,
securities carrying warrants to purchase equity securities and U.S. dollar
denominated non-investment grade debt obligations of U.S. and non-U.S.
issuers.
The Income Fund will not invest in common stocks directly, but may retain up to
25% of its total assets in common stocks acquired upon conversion of debt
securities or preferred stock, or upon exercise of warrants acquired with debt
securities.
At least 75% of the Income Fund's total assets are normally invested in
investment-grade debt obligations of U.S. and non-U.S. issuers. Generally, the
average duration of the U.S. portion of the portfolio will range between +/-25%
of the Index's duration. There are no maximum maturity limits on individual
securities. The average quality of the overall portfolio will always be A or
better, with the specific rating at any particular time reflective of relative
valuations among the quality sectors. To the extent the Fund invests in non-U.S.
dollar debt securities, these obligations will be fully hedged. For a more
complete description of the considerations involved with foreign investing and
related currency hedging strategies, see "Foreign Securities" and "Forward
Foreign Currency Exchange Contracts." For a more complete description of ratings
of debt securities, see Appendix A of the Statement of Additional Information.
During periods of volatility or when an unusual decline in the value of long-
term obligations is anticipated, for defensive purposes, however, the Income
Fund will place a larger portion of its assets in cash and short-term
obligations. The Income Fund's holdings of short-term obligations and equity
securities during such periods may temporarily exceed an aggregate total of 25%
of the Income Fund's total assets. Moreover, as a matter of investment policy,
the Income Fund will not invest more than 10% of its net assets in illiquid
securities or invest in restricted securities, except securities subject to
resale under Rule 144A under the Securities Act of 1933. Instead of holding its
entire portfolio to maturity, the Income Fund will engage in portfolio trading
when trading will help achieve its investment objectives.
BALANCED FUND
The investment objective of the Balanced Fund is to realize high long-term total
rate of return consistent with prudent investment risks. Total rate of return
consists of current income including dividends, interest, discount accruals and
capital appreciation.
The Balanced Fund seeks to attain this objective through a selective mix of
investments in common stocks, bonds, and other debt instruments. The Balanced
Fund holds the same kinds of stocks and bonds held separately by the Growth Fund
and Income Fund. For a description of the types of stocks in which the Balanced
Fund is permitted to invest, see -- "The Funds, Their Investment Objectives and
Policies -- Growth Fund" and for a description of the types of bonds in which
the Balanced Fund is permitted to invest, see "The Funds, Their Investment
Objectives and Policies -- Income Fund," above.
The mix of investments in the Balanced Fund is regularly adjusted between stocks
and bonds to capitalize on perceived variations in return potential produced by
the changing financial market and economic conditions. This mixture of stocks
and bonds reduces the volatility of investment returns while still providing the
potential for higher long-term total returns that can only be achieved by
including some exposure to stocks. As a matter of investment policy, 50% to 75%
of the Balanced
3
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Fund's total assets will be invested in stocks and 25% to 50% of the value of
its assets will be invested in bonds or other types of fixed income securities,
such as mortgage-backed securities. The policies with regard to credit quality,
duration and maturity, as well as the percentage limitations on investments,
associated with the Income Fund apply to the portion of the Balanced Fund's
assets that are invested in fixed-income securities.
Up to 100% of the Balanced Fund's total assets may be invested temporarily in
short-term debt instruments for defensive purposes, such as responding to
adverse securities market or economic conditions. Additionally, no more than 10%
of the Fund's net assets may be invested in illiquid securities or invested in
restricted securities, except securities subject to resale under Rule 144A under
the Securities Act of 1933. Major changes in investment mix may occur several
times within a year or over several years, depending upon market and economic
conditions.
SHORT-TERM INVESTMENT FUND
The investment objective of the Short-Term Investment Fund is to realize maximum
current income to the extent consistent with liquidity. Preservation of
principal is a secondary objective. The Short-Term Investment Fund is not a
money market fund and does not maintain a stable net asset value per share.
The Short-Term Investment Fund seeks to attain its objectives by investing in
the following types of short-term debt instruments with maturities generally not
exceeding one year. The Short-Term Investment Fund invests in:
1. U.S. Treasury Bills and other obligations of or guaranteed by the U.S.
Government or its agencies;
2. obligations (including certificates of deposit, time deposits with maturities
less than seven days, or bankers' acceptances) of major U.S. banks;
3. commercial paper within the two highest ratings as determined by Moody's
or S&P;
4. U.S. dollar-denominated debt obligations of foreign governments, foreign
corporations, foreign branches of U.S. banks, and foreign banks limited to
the three highest ratings as determined by Moody's or S&P and that do not
exceed 10% of the Short-Term Investment Fund's total assets;
5. publicly traded bonds, debentures and notes with a rating within the four
highest grades as determined by Moody's or S&P;
6. repurchase and reverse repurchase agreements involving any of the above
instruments; or
7. cash or cash equivalents.
For a more complete description of ratings of commercial paper, see Appendix A
of the Statement of Additional Information.
4
<PAGE>
The Short-Term Investment Fund attempts to maximize return of its portfolio by
trading to take advantage of changing money market conditions and trends. The
Short-Term Investment Fund also trades to take advantage of disparities in yield
relationships between money market instruments. This procedure may increase or
decrease the portfolio yield depending on the Investment Adviser's ability to
correctly time and execute these transactions. The Short-Term Investment Fund
intends generally to purchase securities that mature within one year, but will
not purchase securities with maturities that exceed two years except for
securities subject to repurchase agreements and reverse repurchase agreements.
The Short-Term Investment Fund will not invest in securities subject to
restriction on disposition under the Securities Act of 1933 or purchase
securities not freely marketable.
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 (less than $1 billion at the time of investment) with earnings growth
potential. Such securities would be considered by the subadviser 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, the
Russell 2000 Growth Index. Under normal market conditions, the Fund will invest
at least 90% of its assets in equity securities of smaller-capitalized
organizations. 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.
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 subadviser 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 new 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.")
5
<PAGE>
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 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 to achieve 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 subadviser 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 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 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.
6
<PAGE>
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 wraps, 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
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."
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. Further, each Fund exercises due care in the
selection of its portfolio securities.
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 a change in price caused by stock market price changes;
7
<PAGE>
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.
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."
EQUITY SECURITIES -- During normal market conditions the Growth Fund,
International Equity Fund, Small Cap Growth Fund and Socially Responsible 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 common or preferred stock; stock purchase
warrants and rights; equity interests in trusts and partnerships; and depositary
receipts of companies.
8
<PAGE>
FOREIGN SECURITIES -- Global investing involves economic and political
considerations not typically found in U.S. markets. These considerations, which
may favorably or unfavorably affect a 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
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 subadvisers seek to mitigate the risks
associated with these considerations through diversification and active
professional management.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The International Equity Fund,
Income Fund and the Balanced Fund may each 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, Income Fund and Balanced Fund also may each 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 a Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
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 a Fund
than if it had not engaged in forward contracts, foreign currency futures
contracts and foreign currency options.
HIGH-YIELD (HIGH-RISK) SECURITIES -- The Income Fund and Balanced Fund may
invest in high yield (high-risk) securities. High-yield (high-risk) securities,
also referred to as "junk bonds", are those securities that are rated lower than
investment-grade and unrated securities of comparable quality. Although these
securities generally offer higher yields than investment-grade securities with
similar maturities, lower-quality securities involve greater risks, including
the possibility of default or bankruptcy. In general, they are regarded to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. Other potential risks associated with investing in high-
yield securities include:
. substantial market-price volatility resulting from changes in interest
rates, changes in or uncertainty about economic conditions, and changes in
the actual or perceived ability of the issuer to meet its obligations;
. greater sensitivity of highly-leveraged issuers to adverse economic changes
and individual-issuer developments;
. subordination to the prior claims of other creditors; and
. adverse publicity and changing investor perceptions about these securities.
As with any other asset in a Fund's portfolio, any reduction in the value of
such securities as a result of the factors listed above would be reflected in
the net asset value of a Fund. In addition, a Fund that invests in lower-quality
securities may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal and interest on its
holdings. As a result of the associated risks, successful investments in high-
yield (high-risk) securities will be more dependent on the Adviser's and Sub-
Adviser's credit analysis than generally would be the case with investments in
investment-grade securities. Lower-quality securities tend to be less liquid
than higher-quality debt securities because the market for them is not as broad
or active. The lack of a liquid secondary market may have an adverse effect on
market price and a Fund's ability to sell particular securities.
9
<PAGE>
ILLIQUID SECURITIES -- The Income Fund and Balanced Fund each may invest up to
10% 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. The
Income Fund, Balanced Fund, Small Cap Growth Fund, International Equity Fund and
Socially Responsible 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 if they
are determined to be liquid. Any such security will not be considered liquid so
long as it is determined by the 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. The Growth Fund and Short-Term Investments Fund may not invest in
restricted securities not fully marketable.
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 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.
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.
10
<PAGE>
LIQUIDITY MANAGEMENT -- Pending investment, to meet anticipated redemption
requests, or as a temporary defensive measure if its subadviser 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
issued in the U.S., 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.
MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities represent interests in
pools of mortgage loans made by lenders such as commercial banks and savings and
loan institutions. Pools of mortgage loans are assembled for sale to investors
by various government-related organizations. The principal government guarantor
of mortgage-backed securities is the Government National Mortgage Association
("GNMA"). GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on GNMA
securities. Mortgage loans are pooled by various other governmental entities
including the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA"). FHLMC is a corporate instrumentality of
the U.S. Government and FNMA is a government-sponsored corporation owned
entirely by private stockholders.
Mortgage-backed securities differ from traditional debt securities. Among the
major differences are that interest and principal payments are made more
frequently, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans generally may be prepaid at any time.
Since prepayment rates vary widely, it is not possible to accurately predict the
average maturity of a particular mortgage-backed pool; however, statistics
published by the Federal Housing Authority indicate that the average life of
mortgages with 25- to 30-year maturities (the type of mortgages backing the vast
majority of mortgage-backed securities) is approximately 12 years. Mortgage-
backed securities may decrease in value as a result of increases in interest
rates and may benefit less than other fixed income securities from declining
interest rates because of the risk of prepayment.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND MULTICLASS PASS-THROUGH
SECURITIES -- CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically,
11
<PAGE>
CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities
("Mortgage Assets"). Multiclass pass-through securities are equity interests
held in a trust composed of Mortgage Assets. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the capital to pay debt service on the CMOs or make scheduled distributions on
the multiclass pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates. Interest is paid or
accrues on all classes of CMOs on a monthly, quarterly or semi-annual basis.
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of a CMO series in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to the individual class than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow to a particular CMO the lower the anticipated yield will be on that
class at the time of issuance relative to prevailing market yields on mortgage-
backed securities.
A portfolio also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
ASSET-BACKED SECURITIES -- Through the use of trusts and special purpose
corporations, various types of assets, primarily automobile and credit card
receivables, are being pooled in pass-through structures similar to the mortgage
pass-through structures described above. Asset-backed securities generally do
not have the benefit of the same security interest in the related collateral as
is the case with mortgage-backed securities. There is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, the securities interest in the
underlying automobiles are often not transferred when the pool is created, with
the resulting possibility that the collateral could be resold. In general,
these types of loans are of shorter average life than mortgage loans and are
less likely to have substantial prepayments.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES -- The yield characteristics of mortgage-backed and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a portfolio purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if a fund purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Asset-
backed securities, although less likely to experience the same prepayment rates
as mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-backed securities and asset-backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because of
the risk of prepayment.
ADJUSTABLE RATE MORTGAGE SECURITIES -- Adjustable rate mortgage securities
are pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates. A description of these instruments is contained in
Appendix B of the Funds' Statement of Additional Information.
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.
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<PAGE>
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 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 high grade 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 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
subadviser's inability to predict correctly the direction of securities prices,
interest rates, currency exchange rates 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."
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 subadviser 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.
13
<PAGE>
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. For a more detailed
description of Repurchase Agreements, see the Statement of Additional
Information -- Appendix B.
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 the 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 high-grade debt 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, 33 1/3%
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.
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 33 1/3% 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.
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<PAGE>
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.
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.
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<PAGE>
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.
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 $2.8
billion of assets. Further, each Fund is advised by a subadviser that, as noted
below, has substantial experience in managing the assets of registered
investment companies.
As compensation for its services, the Small Cap Growth Fund, International
Equity Fund and Socially Responsible Fund each pay Investors a monthly
management fee. 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.
As compensation for its services, the Growth Fund, Income Fund, Balanced Fund
and Short-Term Investment Fund each pay Investors a two-part advisory fee at the
end of each month. Under part one, each Fund's fee is accrued daily and is
calculated on a pro rata basis by applying the following annual percentage rates
to the aggregate of all four Funds' daily net assets for the respective month:
<TABLE>
<CAPTION>
Part 1:
NET ASSETS RATE
---------- ----
<S> <C> <C>
Growth Fund
Income Fund On initial $100 million .250%
Balanced Fund Over $100 million .200%
Short-Term Investment Fund
</TABLE>
Part 2:
For part two, each Fund's advisory fee is accrued daily and is calculated by
applying the following annual percentage rates to the average daily net assets
of each Fund for the respective month.
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ----
<S> <C> <C>
Growth Fund On initial $100 million 0.400%
On next $100 million 0.300%
Over $200 million 0.250%
Income Fund On initial $100 million 0.250%
On next $100 million 0.200%
Over $200 million 0.150%
Balanced Fund On initial $100 million 0.325%
On next $100 million 0.275%
On next $300 million 0.225%
Over $500 million 0.200%
Short-Term Investment Fund On initial $100 million 0.125%
On next $100 million 0.100%
Over $200 million 0.075%
</TABLE>
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
16
<PAGE>
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
GROWTH FUND. Wellington Management Company, LLP ("Wellington Management"), a
- -----------
registered investment adviser, serves as the investment subadviser of the Growth
Fund pursuant to a Sub-Advisory Agreement with Investors. Wellington Management
is responsible for managing the Fund, subject to the direction of the Board of
Trustees and the Adviser. Wellington Management has approximately $140
billion under management and manages over 80 investment companies.
For such services, Investors pays Wellington Management a percentage rate based
on the Fund's average daily net assets for the respective month. The rates are
as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------------- ------
<S> <C>
On initial $100 million 0.400%
On next $100 million 0.300%
Over $200 million 0.250%
</TABLE>
INCOME FUND. Wellington Management Company, LLP ("Wellington Management"), a
- -----------
registered investment adviser, serves as the investment subadviser of the Income
Fund pursuant to a Sub-Advisory Agreement with Investors. Wellington Management
is responsible for managing the Fund, subject to the direction of the Board of
Trustees and the Adviser. Wellington Management has approximately $140
billion under management and manages over 80 investment companies.
For such services, Investors pays Wellington Management a percentage rate based
on the Fund's average daily net assets for the respective month. The rates are
as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------------- ------
<S> <C>
On initial $100 million 0.250%
On next $100 million 0.200%
Over $200 million 0.150%
</TABLE>
17
<PAGE>
BALANCED FUND. Wellington Management Company, LLP ("Wellington Management"), a
- -------------
registered investment adviser, serves as the investment subadviser of the
Balanced Fund pursuant to a Sub-Advisory Agreement with Investors. Wellington
Management is responsible for managing the Fund, subject to the direction of the
Board of Trustees and the Adviser. Wellington Management has approximately
$140 billion under management and manages over 80 investment companies.
For such services, Investors pays Wellington Management a percentage rate based
on the Fund's average daily net assets for the respective month. The rates are
as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------------- ------
<S> <C>
On initial $100 million 0.325%
On next $100 million 0.275%
On next $300 million 0.225%
Over $500 million 0.200%
</TABLE>
SHORT-TERM INVESTMENT FUND. Wellington Management Company, LLP ("Wellington
- --------------------------
Management"), a registered investment adviser, serves as the investment
subadviser of the Short-Term Investment Fund pursuant to a Sub-Advisory
Agreement with Investors. Wellington Management is responsible for managing the
Fund, subject to the direction of the Board of Trustees and the Adviser.
Wellington Management has approximately $140 billion under management and
manages over 80 investment companies.
For such services, Investors pays Wellington Management a percentage rate based
on the Fund's average daily net assets for the respective month. The rates are
as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------------- ------
<S> <C>
On initial $100 million 0.125%
On next $100 million 0.100%
Over $200 million 0.075%
</TABLE>
John R. Ryan, CFA, Senior Vice President and Managing Partner of Wellington
Management, began providing investment advice to the Growth Fund and stock
portion of the Balanced Fund on November 1, 1989, and assumed primary
responsibility for the day-to-day investment management of the Growth Fund and
stock portion of the Balanced Fund on December 1, 1992. Mr. Ryan has been a
portfolio manager with Wellington Management's Value/Yield investment team since
1981 and has held the position of Senior Vice President of Wellington Management
since 1987. Mr. Ryan became a Managing Partner of the firm on January 1, 1996.
18
<PAGE>
Robert D. Payne, CFA, Senior Vice President of Wellington Management, assumed
primary responsibility for the day-to-day investment management of the Income
Fund and the bond portion of the Balanced Fund on _______________, 1997. Mr.
Payne has been a portfolio manager with Wellington Management's fixed income
group since 1972 and held the position of Vice President from 1972 until he was
promoted to Senior Vice President of Wellington Management in January 1996.
SMALL CAP GROWTH FUND. PNC Equity Advisors Company ("PEAC"), a registered
- ---------------------
investment adviser, serves as the investment subadviser of the Small Cap Growth
Fund pursuant to a Sub-Advisory Agreement with Investors. PEAC is responsible
for managing the Fund, subject to the direction of the Board of Trustees and the
Adviser. PEAC has approximately $________ billion under management and manages
_____ investment companies.
For such services, Investors pays PEAC at the annual rate of 1.00% of the Fund's
average daily net assets for the respective month.
William J. Wykle manages the portfolio. 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 subadviser of the International
Equity Fund pursuant to a Sub-Advisory Agreement with Investors. SSC is
responsible for managing the Fund, subject to the direction 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 .70% of the Fund's
average daily net assets for the respective month.
The International Equity Fund is managed by a team of SCC 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 SCC's large staff of
economists, research analysts, traders and other investment specialists who work
in SCC's offices across the United States and abroad. SCC believes its team
approach benefits Fund investors by bringing together many disciplines and
leveraging SCC's extensive resources.
Lead Portfolio Manager Carol L. Franklin joined SCC'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.
19
<PAGE>
Joan Gregory, Portfolio Manager, focuses on stock selection, a role she has
played since she joined SCC in 1992. Ms. Gregory, who joined the team in
1994, has been involved in investment in global and international stocks as an
assistant portfolio manager since 1989.
SOCIALLY RESPONSIBLE FUND. SSC also serves as the investment subadviser of the
- -------------------------
Socially Responsible Fund. For such services, Investors pays SSC at the annual
rate of .55% of the Fund's average daily net assets for the respective
month.
Lori J. Ensinger and Robert T. Hoffman will manage the portfolio.
Lori J. Ensinger joined SCC in 1993 as a member of the portfolio team of the
Growth & Income Equity Management Group. Lori is a co-manager of the SCC 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 SCC, Lori was a Senior Portfolio Manager at Prudential
Securities Investment Management where she managed portfolios for institutions
and individuals.
Robert T. Hoffman joined SCC 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.
TRANSFER AGENT AND DIVIDEND PAYING AGENT
Horace Mann Service Corporation
One Horace Mann Plaza
P.O. Box 4657
Springfield, Illinois 62708-4657
CUSTODIAN AND FUND ACCOUNTING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
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
20
<PAGE>
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 a Fund's total return calculation.
Therefore, the actual investment return to an annuity contract owner, after
deduction of annuity contract charges, will be less than the investment return
of the Fund. Of course, past performance is not necessarily indicative of
future results.
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-Investor A Shares ("Compass Capital
Portfolio"), which 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 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 Cap Growth Fund. In addition, performance information
from the Russell 2000 Growth Index ("Russell 2000") has been included for
comparison. The actual total operating expenses of the Compass Capital
Portfolio were 1.33% for the fiscal year ended September 30, 1996, and vary from
year to year. The maximum total operating expenses for the Horace Mann Small
Cap Growth Fund are estimated to be 1.425%. However, from time to time,
Investors may voluntarily waive fees and reimburse certain expenses. For the
first year of operations, the annual total operating expenses are estimated to
be 1.007%. Had the maximum total operating expenses for the Horace Mann Small
Cap Fund been used to calculate the performance, the performance of the Compass
Capital Portfolio would have been lower.
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. Performance does not reflect the deduction of a 4.5% front end sales
charge for the Compass Capital Portfolio. The Horace Mann Small Cap Growth Fund
does not have a front-end sales charge. All returns also reflect the
brokerage
21
<PAGE>
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/(1)/
YEAR OR PERIODS COMPASS CAPITAL
ENDED 3/31/97 PORTFOLIO RUSSELL 2000/(2)/
-------------- ---------------- ------------------
<S> <C> <C>
One Year.................. % %
Three Years............... % %
From Inception (9/14/93).. % N/A
</TABLE>
_________________________
/(1)/ Service providers for the Compass Capital Portfolio have voluntarily
waived certain expenses of the portfolio; without such waivers the
portfolio's total operating expenses would have been 1.69% for the fiscal
year ended 9/30/96 and the performance quoted would have been lower.
/(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, 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.
OTHER INFORMATION ON THE PERFORMANCE OF SCUDDER, STEVENS & CLARK
INTERNATIONAL EQUITY PERFORMANCE. 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 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 actual
total operating expenses of the Scudder International Portfolio were 1.05% in
1996, and vary from year to year. The maximum total operating expenses for the
Horace Mann International Equity Fund are estimated to be 1.129%. However, from
time to time, Investors may voluntarily waive fees and reimburse certain
expenses. For the first year of operations, the annual total operating expenses
are estimated to be .711%. Had the maximum total operating expenses for the
Horace Mann International Equity Fund been used to calculate performance,
performance would have been lower.
22
<PAGE>
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.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
SCUDDER
YEAR OR PERIODS INTERNATIONAL MSCI EAFE
ENDED 3/31/97 PORTFOLIO INDEX/(1)/
--------------- -------------- -----------
<S> <C> <C>
One Year................. % %
Three Years.............. % %
Five Years............... % %
From Inception (5/1/87).. % %
</TABLE>
_____________
/(1)/ 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.
SOCIALLY RESPONSIBLE GROWTH AND INCOME PERFORMANCE. The table below sets forth
performance information relating to the Scudder Socially Responsive Growth &
Income Equity Only Composite ("Socially Responsive Composite"). The performance
data for the Scudder Socially Responsive Composite is included to provide
investors with the performance record for a composite of accounts managed in a
similar manner as the Horace Mann Socially Responsible Fund. In addition,
performance information from the Standard & Poor's 500 Stock Index ("S&P 500")
has been included for comparison. The Scudder Socially Responsive Composite
currently is a composite of eight separately managed accounts that are managed
by SSC. The Scudder Socially Responsive 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
23
<PAGE>
Responsive Composite is composed of accounts with investment objectives,
policies, strategies and risks similar to those of the Horace Mann Socially
Responsible Fund. However, the Horace Mann Socially Responsible Fund differs
from the accounts in the Scudder Socially Responsive Composite in certain ways,
none of which Investors or SSC believe would cause a significant change in
investment results. While the eight accounts in the composite are managed
following SSC's growth and income investment style, each account has socially
responsible screens that are used to exclude certain types of industries as
investment options. Each account uses screens that are somewhat modified from
those used by the Horace Mann Socially Responsible Fund. The performance of the
Scudder Socially Responsive Composite is presented net of the estimated
maximum total operating expenses for the Horace Mann Socially Responsible Fund
of .975%. However, from time to time, Investors may voluntarily waive fees and
reimburse certain expenses. For the first year of operations, the annual total
operating expenses are estimated to be .557%.
The Scudder Socially Responsive 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. Principal value and investment returns
will fluctuate reflecting market conditions and cash flows, as well as changes
in company-specific fundamentals of portfolio securities. Consequently, the
account value of accounts in the Scudder Socially Responsive Composite or
investments in 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 accounts
within the Scudder Socially Responsive Composite for all periods presented.
The use of a different methodology to calculate performance could result in
different performance data.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
SCUDDER SOCIALLY
YEAR OR PERIODS RESPONSIVE
ENDED 3/31/97 COMPOSITE S&P 500/(1)/
--------------- ---------------- -------------
<S> <C> <C>
One Year................... % %
Three Years................ % %
Five Years................. % %
From Inception (12/31/89).. % %
</TABLE>
_________________
24
<PAGE>
/(1)/ Total return data is presented for each period. The Standard & Poor's 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. Investment cannot be made directly into
the index.
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.
Previously, shares of the Growth Fund were available to the public. While
Growth Fund shares may no longer be purchased by the general public, existing
public shareholders may acquire additional shares through the automatic
reinvestment of dividends and distributions in accordance with Revenue Ruling
82-55.
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.
REDEMPTION OF GROWTH FUND SHARES BY EXISTING PUBLIC SHAREHOLDERS -- The Growth
Fund will redeem shares from public shareholders at the net asset value per
share next determined after receipt of a redemption request. If stock
certificates have been issued, the signature of each party must be guaranteed by
an officer of a commercial bank, trust company, or a member of the New York
Stock Exchange. If certificates are lost, the shareholder will need to submit
an Affidavit of Loss form with the signature(s) notarized if 100 or less shares
are surrendered, and a Lost Instrument Bond will be required if over 100 shares
are surrendered. A Lost Instrument Bond can be obtained from an insurance
carrier. The cost for this bond must be paid by the shareholder.
If no certificates have been issued to the shareholder, redemption may be
accomplished by signing a written request. The request should be sent to the
Horace Mann Growth Fund, Inc. P.O. Box 4657, Springfield, Illinois 62708-4657
and should identify the account by number and the name(s) in which
25
<PAGE>
the account is registered. The request must be signed exactly as the account is
registered. On a jointly held account, all owners must sign.
All redemption requests by mail should be sent certified with return receipt
requested. Provided the request is received in good form, payment for shares
redeemed will be made by the Fund within three business days of the receipt.
SYSTEMATIC CASH WITHDRAWAL PLAN -- When a Growth Fund public shareholder has
accumulated $5,000 or more of Growth Fund shares in his or her account, shares
may be withdrawn automatically through the Systematic Cash Withdrawal Plan (the
"Plan"). A shareholder may receive checks monthly, quarterly, semiannually or
annually in any amount requested, but not less than $25. A Plan application is
available, upon request, from the transfer agent. The value of a public
shareholder's account is determined at the net asset value on the date a Plan
application is received by the Growth Fund. Payments under the Plan will be
made either on the 1st or 15th of the month as selected by the shareholder. A
sufficient number of shares will be redeemed from the shareholder's account to
provide funds for payments made under the Plan, thus reducing the shareholder's
account value. Depending on the amount and frequency of withdrawals, payments
under the Plan may exhaust the shareholder's account. There is no redemption
charge with respect to the shares redeemed from the shareholder's account. A
Plan may be terminated upon written request.
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.
26
<PAGE>
Public shareholders of the Growth Fund may elect to receive cash dividends and
will be notified of the amount and type of distribution. If a shareholder
elects to receive a cash dividend and the dividend check is returned by the
postal service, attempts will be made to locate the shareholder. If the
attempts to locate are unsuccessful, the shareholders dividend option will be
changed to reinvestment. When new shares are added to a Growth Fund public
shareholder's account through the reinvestment of dividends or when
distributions occur (which dividends will be taxable to the shareholder whether
paid in cash or reinvested in additional shares), a confirmation statement is
sent to the public shareholder showing the number of shares that were credited
or debited to the account, the net asset value per share and the total number of
shares in the account. A dividend or capital gains distribution will reduce the
per share net asset value by the amount of the dividend or distribution.
Shortly after the end of each year, Growth Fund shareholders will be informed of
the amount of and the federal income tax treatment of all distributions made
during the year. If not otherwise subject to tax on their income, public
shareholders will not be required to pay tax on amounts distributed to them.
Shareholders must determine for themselves the applicability of state and local
taxes to dividends and distributions received on Growth Fund shares.
The Growth Fund may be required to withhold federal income tax at a rate of 31%
from dividend and redemption payments made to any public shareholder who fails
to furnish a certified taxpayer identification number ("TIN") or when the
Internal Revenue Service notifies the Growth Fund that the shareholder has
provided the Growth Fund with an incorrect TIN or failed to properly report
certain income for federal income tax purposes. Any withheld amount can be
credited against the shareholder's federal income tax obligation.
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.
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
(either a public shareholder of the Growth Fund or 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.
27
<PAGE>
As of April 1, 1997, Horace Mann Life Insurance Company Separate Account owned
approximately ___%, ___%, and ___% of the outstanding shares of the Growth Fund,
Income Fund, Balanced Fund, Small Cap Growth Fund, International Equity Fund,
Socially Responsible Fund and Short-Term Investment Fund, respectively. Horace
Mann Life Insurance Company Separate Account B held approximately ___% of the
Growth Fund. Horace Mann Life Insurance Company Allegiance Separate Account A
held approximately ___% of the Growth Fund. Since these separate accounts'
voting rights are passed through to contract owners and participants, HMLIC
itself does not exercise voting control.
PUBLIC SHAREHOLDER COMMUNICATIONS
To ensure receipt of communications related to investments in the Growth Fund,
public shareholders must notify the Growth Fund of address changes. Notice of a
change in address may be sent to the Horace Mann Growth Fund, Inc., P.O. Box
4657, Springfield, Illinois 62708-4657. Shareholders may also provide notice of
an address change by sending a telefacsimile (FAX) transmission to (217) 527-
2307 or by calling (217) 789-2500 or (800) 999-1030 (toll free).
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.
Growth Fund public shareholders may contact the Growth Fund by calling (800)
999-1030 or (217) 789-2500. Written questions concerning a Growth Fund public
shareholder's account may be sent by mail to Horace Mann Growth Fund, Inc., P.O.
Box 4657, Springfield, Illinois 62708-4657 or by telefacsimile (FAX)
transmission to (217) 527-2307.
28
<PAGE>
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 Policies............................................
Growth Fund...................................................
Income Fund...................................................
Balanced Fund.................................................
Short-Term Investment Fund....................................
Small Cap Growth Fund.........................................
International Equity Fund.....................................
Socially Responsible Fund.....................................
Investment Restrictions........................................
Income Fund--Benchmark.........................................
Management of the Funds........................................
Board of Trustees.............................................
Officers......................................................
Investment Advisory Agreements.................................
Investment Sub-advisory Agreements.............................
Brokerage Allocation...........................................
Business Management Agreements and Other Services..............
Purchase, Redemption and Pricing of Fund Shares................
Tax Status.....................................................
Control Persons and Principal Holders of Securities............
Financial Statements...........................................
Appendix A - Description of Commercial Paper and Bond Ratings.. A-1
Appendix B - Description of Securities and Risks............... B-1
</TABLE>
29
<PAGE>
To receive, without charge, a copy of the 1996 Annual Report of the Horace Mann
Family of Funds and/or a copy of the Statement of Additional Information for the
Horace Mann Family of Funds, 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 FUNDS
P.O. BOX 4657
SPRINGFIELD, ILLINOIS 62708-4657
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Please provide free of charge the following information:
____ 1996 Annual Report of the Horace Mann Family of Funds
____ Statement of Additional Information dated May 1, 1997 for the Horace
Mann Family of Funds.
Please mail the above documents to:
________________________________________________________
(Name)
________________________________________________________
(Address)
________________________________________________________
(City/State/Zip)
APPENDIX A
RATINGS OF DEBT OBLIGATIONS:
<TABLE>
<CAPTION>
Moody's Standard &
Investors Poor's Ratings
Service, Inc. Group Definition
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM Aaa AAA Highest quality
Aa AA High quality
A A Upper medium grade
Baa BBB Medium grade
Ba BB Low Grade
B B Sepeculative
Caa,Ca C CCC,CC,C Submarginal
D D Probably in default
- -----------------------------------------------------------------------------------------------------------------
Moody's S&P
- -----------------------------------------------------------------------------------------------------------------
SHORT-TERM MIG1/VMIG1 Best quality SP-1+ Very strong quality
---------------------------------------------------------------------------------------------
MIG2/VMIG2 High quality SP-1 Strong quality
---------------------------------------------------------------------------------------------
MIG3/VMIG3 Favorable quality SP-2 Satisfactory grade
---------------------------------------------------------------------------------------------
MIG4/VMIG4 Adequate quality
---------------------------------------------------------------------------------------------
SG Speculative grade SP-3 Speculative grade
- -----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER P-1 Superior quality A-1+ Extremely strong quality
---------------------------------------------------------------------------------------------
A-1 Strong quality
---------------------------------------------------------------------------------------------
P-2 Strong quality A-2 Satisfactory quality
---------------------------------------------------------------------------------------------
P-3 Acceptable quality A-3 Adequate quality
---------------------------------------------------------------------------------------------
B Speculative quality
---------------------------------------------------------------------------------------------
Not Prime C Doubtful quality
---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
DRAFT
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 May 1, 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).
<PAGE>
May 1, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Topic Page
- ----- ----
<S> <C>
Investment Policies........................................... 1
Growth Fund.............................................. 1
Income Fund.............................................. 1
Balanced Fund............................................ 1
Short-Term Fund.......................................... 1
International Equity Fund................................ 1
Small Cap Growth Fund.................................... 1
Socially Responsible Fund................................ 2
Investment Restrictions....................................... 2
Income Fund - Benchmark.......................................
Management of the Funds....................................... 5
Board of Trustees........................................ 5
Officers 6
Compensation Table............................................ 6
Investment Advisory Agreements................................ 7
Sub-Advisors............................................. 8
Brokerage Allocation.......................................... 9
Other Services................................................ 10
Business Management Agreements........................... 10
Fund Pricing Agreements.................................. 10
Custodial Agreement...................................... 10
Transfer and Dividend Paying Agent....................... 11
Independent Auditors..................................... 11
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES............... 11
TAX STATUS.................................................... 11
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES........... 14
GENERAL INFORMATION........................................... 15
FINANCIAL STATEMENTS.......................................... 15
APPENDIX A: DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS.. A-1
APPENDIX B: DESCRIPTION OF SECURITIES AND RISKS............... B-1
</TABLE>
<PAGE>
INVESTMENT POLICIES
GROWTH FUND
The portfolio investments of the Growth Fund are not concentrated in any one
industry or group of industries but are varied according to what is judged
advantageous under varying economic conditions. While the portfolio is
diversified by investment in a cross-section of businesses and industries, the
Growth Fund follows a policy of flexibility. The Growth Fund does not invest in
companies for the purpose of exercising control of management. Moreover, the
Growth Fund purchases only marketable securities.
It is the policy of the Growth Fund to purchase and hold securities believed to
have potential for long-term capital growth. Investment income is a secondary
consideration in the selection of portfolio securities. The Growth Fund does
not buy and sell for short-term trading profits. Therefore, portfolio changes
usually are accomplished gradually. However, Fund management is not restricted
and may effect short-term transactions when subsequent events make an investment
undesirable for long-term holding.
For 1995 and 1996, the Growth Fund's portfolio turnover rates were 64.59% and
67.63%, respectively. Although it is impossible to predict with certainty the
Growth Fund's ongoing portfolio turnover rate, the investment adviser expects
that under normal circumstances it will be less than 100% each year.
INCOME FUND
During 1995 and 1996, the Income Fund's portfolio turnover rates were 74.53%
and 112.60%, respectively. Although it is impossible to predict with certainty
the Income Fund's ongoing portfolio turnover rate, the investment adviser
expects that under normal circumstances it will be less than 100% each year.
During periods of rapidly changing interest rates, however, the turnover rate
may be greater than 100%. This results from the investment adviser's desire to
optimize rates of return during such periods.
BALANCED FUND
During 1995 and 1996, the Balanced Fund's portfolio turnover rates were 64.80%
and 72.10%, respectively. The annual turnover rates of the common stock portion
of the Balanced Fund's portfolio for 1995 and 1996 were 64.27% and 67.80%,
respectively, and for the bond portion for 1995 and 1996 were 65.81% and
81.24%, respectively. Although it is impossible to predict with certainty the
Balanced Fund's ongoing portfolio turnover rate, the investment adviser expects
that under normal circumstances it will be less than 100% each year. During
periods of rapidly changing interest rates, however, the turnover rate may be
greater than 100%. This results from the investment adviser's desire to
optimize rates of return during such periods.
SHORT-TERM INVESTMENT FUND
There is no turnover information for the Short-Term Fund as it holds its
securities for less than one year.
INTERNATIONAL EQUITY FUND
There is no turnover information for the International Fund as it has been in
existence less than one year.
SMALL CAP GROWTH FUND
There is no turnover information for the Small Cap Growth Fund as it has been in
existence less than one year.
<PAGE>
SOCIALLY RESPONSIBLE FUND
There is no turnover information for the Socially Responsible Fund as it has
been in existence less than one year.
INVESTMENT RESTRICTIONS
Each Fund operates under the following fundamental investment restrictions
which, along with each Fund's objective, 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 (ii) more than 50% of the Fund's outstanding
shares. The Growth Fund, Balanced Fund, Income Fund and Short-Term Investment
Fund each may not:
(1) purchase securities other than the securities in which a Fund is authorized
to invest;
(2) issue senior securities except that a Fund may borrow money or enter into
reverse repurchase agreements in an amount not to exceed 15% of its total
assets taken at market value and then only for short-term credits as may be
necessary for the clearance of transactions and from banks as a temporary
measure for extraordinary or emergency purposes (moreover, in the event
that the asset coverage for such borrowings may fall below 300%, the Fund
will reduce, within three days, the amount of its borrowings in order to
provide for 300% asset coverage); a Fund will not borrow to increase income
(leveraging) but only to facilitate redemption requests that might
otherwise require untimely dispositions of the Fund's portfolio securities;
a Fund will repay all borrowings before making additional investments, and
interest paid on borrowings will reduce net income;
(3) make loans to other persons (except by the purchase of obligations in which
the Fund is authorized to invest); provided, however, that the Fund will
not enter into repurchase agreements if, as a result thereof, more than 10%
of the total assets of the Fund (taken at current value) would be subject
to repurchase agreements maturing in more than seven (7) days;
(4) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the Government of the United
States, its agencies or instrumentalities) if, as a result, (a) more than
5% of the Fund's total assets (taken at current value) would be invested in
the securities of that issuer, or (b) a Fund would hold more than 10% of
any class of securities of that issuer (for this purpose, all debt
obligations of an issuer maturing in less than one year are treated as a
single class of securities);
(5) write, or invest in, straddle or spread options or invest in interests in
oil, gas or other mineral exploration or development programs;
(6) purchase securities on margin or sell any securities short;
(7) invest in the securities of any issuer, any of whose officers, directors or
security holders is an officer of a Fund if at the time of or after such
purchase any officer or director of that Fund would own more than l/2 of 1%
of the securities of that issuer or if that Fund's officers and directors
together would own more than 5% of the securities of that issuer;
2
<PAGE>
(8) purchase any securities that would cause more than 25% of the value of a
Fund's total net assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that there is no limitation with
respect to investments in U.S. Treasury Bills, other obligations issued or
guaranteed by the federal government, its agencies and instrumentalities,
certificates of deposit, commercial paper and bankers' acceptances, or any
obligations of U.S. branches of foreign banks and foreign branches of U.S.
banks, except as these investments may be limited by the Treasury
regulations under section 817(h) of the Internal Revenue Code;
(9) invest more than 5% of the value of the Fund's total assets at the time of
investment in the securities of any issuer or issuers which have records of
less than three years continuous operation, including the operation of any
predecessor, but this limitation does not apply to securities issued or
guaranteed as to interest and principal by the United States Government or
its agencies or instrumentalities;
(10) mortgage, pledge or hypothecate its assets except in an amount up to 15%
(10% so long as the Fund's shares are registered for sale in certain
states) of the value of the Fund's total assets but only to secure
borrowings for temporary or emergency purposes;
(11) purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts;
(12) invest in companies for the purpose of exercising control; or
(13) invest in securities of other investment companies, except as they may be
acquired as part of a merger, consolidation or acquisition of assets;
The Growth Fund and Short-Term Investment Fund each may not:
(14) underwrite the securities of other issuers, purchase securities subject to
restrictions on disposition under the Securities Act of 1933 (so called
"restricted securities") or purchase securities not freely marketable.
The Balanced Fund and Income Fund each may not:
(15) Underwrite the securities of other issuers, invest more than 10% of its net
assets in illiquid securities or invest in securities subject to
restriction on disposition under the Securities Act of 1933, except for
securities eligible for resale pursuant to Rule 144A under the Securities
Act of 1933.
The Small Cap Growth Fund, International Growth Fund and Socially Responsible
Funds each 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
3
<PAGE>
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.
The Small Cap Growth Fund, International Growth Fund and Socially Responsible
Funds are also subject to the following non-fundamental restrictions and
policies, which may be changed by the Board of Trustees. Each 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 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.
4
<PAGE>
For the Balanced Fund and Income Fund, the Board has adopted guidelines
regarding investment in derivatives (such as CMOs), which among other things,
establish certain minimum criteria for the types of derivative securities that
may be purchased. Under such guidelines, fixed income derivatives purchased for
the Funds must have low to moderate volatility and must perform consistently
across a wide range of interest rate scenarios. They also must exhibit little
excess interest rate risk relative to Treasuries of comparable duration.
Income Fund - Benchmark
The Lehman Brothers Aggregate Index covers the U.S. investment grade fixed rate
bond market, including government and corporate securities, agency mortgage
pass-through securities, and asset-backed securities. These major sectors are
subdivided into more specific indices that are calculated and reported on a
regular basis.
To qualify for inclusion in the Aggregate Index, a bond or
security must meet certain criteria:
* It must have at least one year to final maturity regardless of call
features. Asset-backed securities must have a remaining average life of at
least one year while mortgages must have a weighted aveage maturity (WAM) of
at least one year. There is no limit on final maturity; bonds with 50- and
100-year maturities may be included in the Aggregate Index.
* It must have at least $100 million par amount outstanding. The amount
outstanding may differ from the original issue size due to various factors,
including reopenings, sinking schedules, partial calls, and prepayments.
* It must be rated investment grade (Baa3 or better) by Moody's Investors
Service (unless it is a U.S. government or agency security, which are
generally not formally rated). If a Moody's rating is unavailable, then the
Standard and Poor's Corporation rating is used. If neither is available,
then the Fitch Investor's Service rating is used. This implies that the
index may include bonds that are split-rated. A bond rated Baa3 by Moody's
and BB+ by S & P would be included; however, if Moody's assigns a rating
below investment grade the bond will be excluded even if the S&P or Fitch
rating is BBB- or better.
* It must be fixed rate, although it can carry a coupon that steps up or
changes according to a predetermined schedule. Adjustable or floating rate
securities with periodic coupon changes based on changes in market rates are
excluded. Stripped securities created from coupon securities are excluded,
while the underlying coupon security is included. Zero coupon bonds may be
included. Medium-term notes are included only if they were underwritten
issues and meet other eligibility criteria.
* It must be dollar-denominated and nonconvertible. All corporate and asset-
backed securities must be registered with the Securities and Exchange
Commission (SEC).
* It must be publicly issued. Private placement securities including 144A
securities are excluded.
Generally speaking, the Aggregate Index does not include securities with
esoteric or one-of-a-kind features such as structured notes or range notes with
coupons that depend on movements in market rates.
MANAGEMENT OF THE FUNDS
A listing of the Trustees and Officers of the Trust, their ages, their 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 (1, 2, 3), Age 50, Trustee; 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 (1, 3, 4), Age 48, Trustee and Chairman of the Board; Director,
Executive Vice 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 (2), Age 71, Trustee; Executive Director (Retired), Minnesota
Education Association; formerly Director, Horace Mann Educators Corporation
(1968-1983).
RICHARD D. LANG, Age 59, 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 (4), Age 54, Trustee; 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 (1, 2, 3), Age 46, Trustee and President; 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.
5
<PAGE>
(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 Funds, and makes periodic reports of these reviews to the
Board, along with appropriate recommendations regarding the proper and
efficient financial operation of the Funds. 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 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 director 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, 44, Secretary and Ethics Compliance Officer; 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
March 1994, was associated with John Deere Insurance Group and Affiliates
serving as Vice President and General Counsel.
ROGER W. FISHER, 44, Controller; Vice President and Controller, Horace Mann Life
Insurance Company and Horace Mann Service Corporation; Controller, Horace Mann
Investors, Inc.; and positions with Horace Mann Educators Corporation and its
subsidiaries.
WILLIAM J. KELLY, 50, Treasurer and Regulatory Compliance Officer; Treasurer,
Horace Mann Investors, Inc.; Vice President, Horace Mann Life Insurance Company;
and 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 its 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 and $500 for each telephonic
meeting. For the fiscal year ended December 31, 1996, the Independent Trustees
fees totaled $________ for each Fund.
COMPENSATION TABLE
6
<PAGE>
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.
<TABLE>
<CAPTION>
Aggregate Pension Retirement Estimated Total
Compensation Benefits Accrued as Annual Benefits Compensation
Trustee from the Trust Part of Fund Expenses Upon For The Complex
------- -------------- ---------------------
Retirement
---------
<S> <C> <C> <C> <C>
A.L. Gallop $------- N/A N/A $-------
Richard D. $------- N/A N/A $-------
Lang
Harriet A. $------- N/A N/A $-------
Russell
</TABLE>
As of the date of this Statement of Additional Information, the Trustees and
Officers of the Trust held in the aggregate directly and beneficially less than
1% of the outstanding shares of Growth Fund. Trustees and Officers do not
directly own any shares of Income Fund, Balanced Fund or Short-Term Fund;
however, they may invest indirectly in the Growth Fund, Income Fund, Balanced
Fund and/or Short-Term Fund through annuity contracts issued by Horace Mann Life
Insurance Company and the 401(k) plan of Horace Mann Service Corporation.
INVESTMENT ADVISORY AGREEMENTS
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 share of distribution under
Federal and state securities laws and membership dues in the Investment Company
Institute or any similar organization.
The investment advisory and management 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 a 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.
7
<PAGE>
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 judgement, 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 its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Agreement.
As compensation for its services, the Small Cap Growth Fund, International
Equity Fund and Socially Responsible Fund each pay Investors a management fee
that is computed daily and paid monthly based on a percentage of each Fund's
average daily net assets as follows:
<TABLE>
<CAPTION>
% of average daily net assets
-----------------------------
<S> <C>
International Fund 1.1%
Small Cap Growth Fund 1.4%
Socially Responsible Fund .95%
</TABLE>
<TABLE>
<CAPTION>
% of average daily net assets
-----------------------------
<S> <C>
International Fund 1.1%
Small Cap Growth Fund 1.4%
Socially Responsible Fund .95%
</TABLE>
As compnesation for its services, the Growth Fund, Income Fund, Balanced Fund
and Short-Term Investment Fund each pay Investors a two-part advisory fee at the
end of each month.
Part 1:
Under part one, each Fund's fee is accrued daily and is calculated on a pro rata
basis by applying the following annual percentage rates to the aggregate of all
four Funds' daily net assets for the respective month:
Net Assets Rate
---------- ----
Growth Fund
Income Fund On initial $100 million .250%
Balanced Fund Over $100 million .200%
Short-Term Investment Fund
Part 2:
Under part two, each Fund's advisory fee is accrued daily and is calculated by
applying the following annual percentage rates to the average daily net assets
of each Fund for the respective month:
<TABLE>
<CAPTION>
Net Assets Rate
---------- ----
<S> <C> <C>
Growth Fund On initial $100 million .400%
On next $100 million .300%
Over $200 million .250%
Balanced Fund On initial $100 million .325%
On next $100 million .275%
On next $300 million .225%
Over $500 million .200%
Income Fund On initial $100 million .250%
On next $100 million .200%
Over $200 million .150%
Short-Term Fund On initial $100 million .125%
On next $100 million .100%
Over $200 million .075%
</TABLE>
For the fiscal year ended December 31, 1996, the Growth Fund, Income Fund,
Balanced Fund and Short-Term Investment Fund paid the Adviser $__________,
$___________, $___________ and $____________, respectively, for its services as
busness manager. The Small Cap Growth Fund, International Equity Fund and
Socially Responsible Fund commenced operations on March 10, 1996.
SUB-ADVISORS--Each of the Investment Sub-Advisory Agreements provides that
neither the subadviser nor any of its directors, officers, stockholders, agents
or employees shall have any liability to 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
subadviser of its duties under the Agreement except for liability 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 the Agreement. 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.
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:
<TABLE>
<CAPTION>
Net Assets Rate
---------- ----
<S> <C> <C>
Small Cap Growth Fund
On the first $25 million 1.00%
On assets over $25 million .75%
International Equity Fund
(during the first six months of operations)
On the first $40 million .35%
On assets over $40 million .25%
(after the first six months of operations) .70%
On the first $40 million .50%
On assets over $40 million
Socially Responsible Fund
</TABLE>
8
<PAGE>
<TABLE>
NET ASSETS RATE
---------- ----
<S> <C> <C>
On the first $20 million .55%
On the next $20 million .45%
On assets over $40 million .30%
Growth Fund On initial $100 million .400%
On next $100 million .300%
Over $200 million .250%
Balanced Fund On initial $100 million .325%
On next $100 million .275%
On next $300 million .225%
Over $500 million .200%
Income Fund On initial $100 million .250%
On next $100 million .200%
Over $200 million .150%
Short-Term Fund On initial $100 million .125
On next $100 million .100%
Over $200 million .075%
</TABLE>
For the fiscal year ended December 31, 1996, the Growth Fund, Income Fund,
Balanced Fund and Short-Term Investment Fund paid Wellington Management $______,
$______, $______ and $______, respectively, for its investment management
services. The Small Cap Growth Fund, International Equity Fund and Socially
Responsible Fund commenced operations on March 10, 1996.
BROKERAGE ALLOCATION
The Investment Advisory Agreements 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 an Advisor 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 considers 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 its expenses. In addition, within the parameters of
achieving best price and execution, brokerage services may be used to generate
commission credits which are used to pay for pricing agent and custodial
services. See, "Business Management Agreements and 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.
The Growth Fund paid brokerage fees of $, $_______, $_______ and $_______ in the
fiscal years ended December 31, 1994, 1995 and 1996, respectively; the Balanced
Fund paid brokerage fees of $_______, $_______ and $_______ for those same
respective periods. The Short-Term Fund paid no brokerage fees.
9
<PAGE>
Substantially all of the brokerage fees were allocated to brokers who provided
research, statistical or other services. Total brokerage fees paid during a year
will vary with turnover rates.
OTHER SERVICES
FUND PRICING AGREEMENTS - Effective _________, 1997, the Trust 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.
The Growth and Balanced Funds may compensate State Street Bank for these
services directly or through a commission credit arrangement with Frank Russell
Securities, Inc. The Adviser places trades for the Growth and Balanced Funds
with Frank Russell Securities, Inc., subject to its obligation to obtain best
available price and most favorable execution. Investors directly compensates
State Street for pricing and accounting services provided to the Short-Term
Investment Fund.
CUSTODIAL AGREEMENT - State Street Bank also serves as custodian of the assets
of each Fund, including foreign securities through a sub-custodian relationship.
Under the Custodial Agreement, State Street maintains each Fund's 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.
The Growth and Balanced Funds may compensate State Street for these services
directly or through a commission credit arrangement with Frank Russell
Securities, Inc. The Adviser places trades for the Growth and Balanced Funds
with Frank Russell Securities, Inc., subject to its obligation to obtain best
available price and most favorable execution.
10
<PAGE>
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 each Fund 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 Funds have been given limited permission to use that service mark
in its name, 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 each Fund and
provides accounting advice and services related to Securities and Exchange
Commission filings throughout the year.
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 each 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 date
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,
11
<PAGE>
each of the Funds must, among other things, (a) derive at least 90% of its gross
income from dividends, interest, 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
12
<PAGE>
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 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.
13
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth, as of April 1, 1997, the holdings of the capital
stock 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.
Growth Fund: Type of Shares % of shares
- ------------ Ownership Owned Outstanding
--------- --------- -----------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account......................... Record
(b) Horace Mann Life Insurance Company
Separate Account B....................... Record
Income Fund:
- -----------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account....................... Record
Balanced Fund:
- --------------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance
Company Separate Account................. Record
Short-Term Fund:
- ----------------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account......... Record
(b) Horace Mann Life Insurance Company
(depositor)........................... Record
Small Cap Growth Fund;
- ----------------------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account......... Record
14
<PAGE>
(b) Horace Mann Life Insurance Company
(depositor) Record
International Equity Fund:
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account......... Record
(b) Horace Mann Life Insurance Company
(depositor) Record
Socially Responsible Fund:
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account Record
(b) Horace Mann Life Insurance Company
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,
an 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 incorporated in Delaware.
GENERAL INFORMATION
As a business trust, the Trust is not required to hold annual shareholder
meeting. 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 the individual series, except that shares are voted by the
individual series when required by the Investment Company Act of 940 or other
applicable law, or then 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.
FINANCIAL STATEMENTS
The financial statements for the Growth Fund, Income Fund, Balanced Fund and
Short-Term Investments Fund for the year ended December 31, 1996, and the Report
of Independent Auditors thereon, are incorporated herein by reference from the
Funds' Annual Report dated December 31, 1996. A copy of the Annual Report must
be accompanied by or preceded by the prospectus. Additional copies of the Annual
Report and/or the Reports of Independent Auditors may be obtained, upon request
and without charge, by contacting the offices of the Funds at 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 Small Cap Growth Fund, International Equity Fund and Socially Responsible
are new funds. The Statements of Net Assets for these Funds are on the following
pages.
15
<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 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.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
December 30, 1996
16
<PAGE>
HORACE MANN MUTUAL FUNDS
STATEMENTS 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.
17
<PAGE>
APPENDIX A
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
COMMERCIAL PAPER RATINGS - Moody's Investors Service, Inc., employs the
designations "Prime-1", "Prime-2" and "Prime-3" to indicate commercial paper
having the highest capacity for timely repayment. Issuers rated PRIME-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
Issues rated PRIME-2 have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Standard & Poor's Corporation's ratings of commercial paper are graded into four
categories ranging from "A" for the highest quality obligations to "D" for the
lowest. A - Issues assigned its highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with numbers 1, 2 and 3 to indicate the relative degree of safety. A-1 - This
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics will be denoted with a plus (+) sign
designation. A-2 - Capacity for timely payments on issues with this designation
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
CORPORATE DEBT SECURITIES - Moody's Investors Service, Inc., rates the long-term
debt securities issued by various entities from "Aaa " to "D." AAA - Best
quality. These securities carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large, or by an exceptionally stable, margin and principal is secure. While the
various protective elements are likely to change, these changes are most
unlikely to impair the fundamentally strong position of such issues. AA - High
quality by all standards. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make the long-term risks appear somewhat greater. A - Upper medium
grade obligations. These bonds possess many favorable investment attributes.
Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. BAA - Medium grade obligations. Interest payments and principal
security appear adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Standard & Poor's Corporation also rates the long-term securities debt of
various entities in categories ranging from "AAA" to "D" according to quality.
AAA - Highest grade. They possess the ultimate degree of protection as to
principal and interest. Marketwise, they move with interest
A-1
<PAGE>
rates and provide the maximum safety on all counts. AA - High grade. Generally,
these bonds differ from AAA issues only in a small degree. Here, too, prices
move with the long-term money market. A - Have a strong capacity to pay interest
and repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions. BBB - Regarded as
having adequate capacity to pay interest and repay principal. These bonds
normally exhibit adequate protection parameters, but adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal than for debt in higher rated categories.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES AND RISKS
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 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 Funds' total net assets at the time of initiation.
HIGH-YIELD (HIGH-RISK) SECURITIES -- High-yield (high-risk) securities
(hereinafter referred to as "lower-quality securities") include (i) bonds rated
as low as C by Moody's Investors Service, Inc. ("Moody's), Standard & Poor's
Ratings Group ("S&P"), or Fitch Investors Service, Inc. ("Fitch"), or CCC by
Duff & Phelps, Inc. ("D&P"); (ii) commercial paper rated as low as C by S&P, Not
Prime by Moody's, or Fitch 4 by Fitch; and (iii) unrated debt obligations of
comparable quality. Lower-quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES -- All interest-bearing securities
typically experience appreciation when interest rates decline and depreciation
when interest rates rise. The market values of lower-quality and comparable
unrated securities tend to reflect individual corporate developments to a
greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality and
comparable unrated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. As a result, they generally involve
more credit risks than securities in the higher-rated categories. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower-quality and comparable unrated securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts or the unavailability of
additional financing. The risk of loss due to default by an issuer of these
securities is significantly greater than issuers of higher-rated securities
because such securities are generally unsecured and are often subordinated to
other creditors. Further, if the issuer of a lower-quality or comparable unrated
security defaulted, a Fund might incur additional expenses to seek recovery.
Periods of economic uncertainty and changes would also generally result in
increased volatility in the market prices of these securities and thus in a
Fund's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market and accordingly, so will
a Fund's net asset value. If a Fund experiences unexpected net redemptions in
such a market, it may be forced to liquidate a portion of its portfolio
securities without regard to their investment merits. Due to the limited
liquidity of lower-quality and comparable unrated securities (discussed below),
a Fund may be forced to liquidate these securities at a substantial discount.
Any such liquidation would force a Fund to sell the more liquid portion of its
portfolio.
PAYMENT EXPECTATIONS -- Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, a Fund may have
to replace the securities with a lower yielding security, which would result in
a lower return for a Fund.
CREDIT RATINGS -- Credit ratings issued by credit rating agencies are
designed to evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of lower-
quality securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in lower-quality and comparable unrated obligations will be more
dependent on the Advisor's and Sub-Advisor's credit analysis than would be the
case with investments in investment-grade debt obligations. The Advisor and Sub-
Advisor employ its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Advisor and Sub-Advisor continually monitors the
investments in each Fund's portfolio and carefully evaluates whether to dispose
of or to retain lower-quality and comparable unrated securities whose credit
ratings or credit quality may have changed.
LIQUIDITY AND VALUATION -- A Fund may have difficulty disposing of certain
lower-quality and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
all lower-quality and comparable unrated securities, there is no established
retail secondary market for many of these securities. The Funds anticipate that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does exist, it
is generally not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market may have an adverse impact on the market
price of the security. As a result, a Fund's net asset value and ability to
dispose of particular securities, when necessary to meet a Fund's liquidity
needs or in response to a specific economic event, may be impacted. The lack of
a liquid secondary market for certain securities may also make it more difficult
for a Fund to obtain accurate market quotations for purposes of valuing a Fund's
portfolio. Market quotations are generally available on many lower-quality and
comparable unrated issues only from a limited number of dealers and may not
necessarily represent firm binds of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and investor
perception, whether or not based on fundamental analysis, may decease the values
and liquidity of lower-quality and comparable unrated securities, especially in
a thinly traded market.
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
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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 B-1 B-1 While warrants may be traded, there is often no secondary
market for them. The Funds will time. Moreover, they are usually issued by the
issuer of the security to which they relate. 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 fall 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.
ADJUSTABLE RATE MORTGAGE SECURITIES - Adjustable rate mortgage securities
(ARMs), are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest rate
may not vary over the lifetime of the security. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMs
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for
such an instrument exceeds the sum of the interest accrued at the applicable
mortgage interest rate and the principal payment required at such point to
amortize the outstanding principal balance over the remaining
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term of the loan, the excess is utilized to reduce the then outstanding
principal balance of the ARM.
TYPES OF CREDIT ENHANCEMENT - Mortgage backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligers on
underlying assets to make payments, these securities may contain elements of
credit support which fall into two categories: (I) liquidity protection and
(ii) protection against losses resulting from ultimate default by an obligor on
the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to seek to
ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting from default seeks to ensure
ultimate payment of the obligations on at least a portion of the assets in the
pool. This protection may be provided through guarantees, insurance policies,
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquencies or losses in excess of
those anticipated could adversely affect the return on an investment in a
security. A Fund will not pay any additional fees for credit support, although
the existence of credit support may increase the price of a security.
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. 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
B-3
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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 lass 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.
investment sin 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 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, which offering a lesser rate or exchange should the Fund desire to
resell that currency tot he dealer. The Fund will conduct its foreign currency
exchange transactions either on ta 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 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
B-4
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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 Transacting 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 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,
liquidity 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 transacting 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.
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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 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 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 out 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 restricting 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 for 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.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contract 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-1 from S&P or P-1 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 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.
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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 (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 contracts 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.
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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 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 amount 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-1 or P-1 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
extend greater, after 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.
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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.
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
in to based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio
B-10
<PAGE>
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 change 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 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
B-11
<PAGE>
borrowing. 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 contracts 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
B-12
<PAGE>
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 or 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.
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 obligations, 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").
B-13
<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:
--Audited condensed financial information for the Growth Fund,
Income Fund, Balanced Fund and Short-Term Investment Fund
for the twelve months ended December 31, 1996 (all of which
are incorporated by reference from the Funds' Annual Report
dated December 31, 1996)
(ii) Financial Statements included in Part B of the Registration
Statement:
Audited financial statements for each of the following Funds are
incorporated by reference from the Funds' Annual Report dated
December 31, 1996 which was filed with the Securities and
Exchange Commission on or about March 5, 1997: Growth Fund (811-
778); Income Fund (811-3664); Balanced Fund (811-3665); and
Short-Term Investment Fund (811-3666), including:
--Report of Independent Auditors dated January 23,1997
--Statements of Investments at December 31, 1996
--Statements of assets and liabilities at December 31, 1996
--Statements of operations for the year ended December 31, 1996
--Statements of changes in net assets for the years ended
December 31, 1995 and 1996
--Notes to financial statements at December 31, 1996
--Financial Highlights for each of the fiscal years since 1986
for the Growth Fund, Income Fund, Balanced Fund and Short-
Term Investment Fund
Small Cap Growth Fund, International Equity Fund and Socially
Responsible Fund:
Statement of Net Assets at December 27, 1996
Report of Independent Auditors
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/2/
*(a.1) Letter Agreement
(b) Investment Sub-Advisory Agreement between Horace Mann
Investors, Inc. and Scudder, Stevens & Clark, Inc./2/
(c) Investment Sub-Advisory Agreement between Horace Mann
Investors, Inc. and PNC Equity Advisors Company/2/
*(d) Investment Sub-Advisory Agreement between Horace Mann
Investors, Inc. and Wellington Capital Management, LLP.
(6) None
(7) None
(8) Custodian Services Agreement/2/
(9) (a) Transfer Agent Agreement/2/
(b) Money Transfer Services Agreement/2/
(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./2/
(14) None.
(15) None
(16) Not applicable.
(18) Not applicable.
(19) Horace Mann Educators Corporation and Its Subsidiaries./2/
(20) Powers of Attorney/2/
(27) *Financial Data Schedule.
*Filed herewith.
_____________________________
/1/Incorporated by reference to the initial Registration Statement filed on
November 8, 1996.
/2/Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 filed
on Form N-1A on or about February 20, 1997.
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 March 1, 1997, there were the following holders of record of
the Shares of Registrant.
<TABLE>
<CAPTION>
Fund Number of Shares
---- ----------------
<S> <C>
Growth Fund 0
Balanced Fund 0
Income Fund 0
Short-Term Investments Fund 0
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, 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 subadvisory agreements with Wellington
Management Company, LLP, Scudder, Stevens & Clark, Inc. and PNC Equity Advisors
Company for the management of the assets of the Funds.
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*
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**
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**
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**
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**
Roger W. Fisher Controller, Horace Mann Investors, Inc.**
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, Wellington
Management Company, LLP. Wellington Management Company,
LLP is an investment adviser registered under the
Investment Advisers Act of 1940, as amended (the
"Advisers Act").
------------------------------------------------------
The list required by this Item 28 of officers and
partners of Wellington Management Company, together
with information as to any business profession,
vocation or employment of sustantial nature engaged in
by such officers and partners during the past two
fiscal years, is incorporated herein by reference to
Schedules B and D of Form ADV filed by Wellington
Management Company pursuant to the Advisers Act (SEC
File No. 801-15908).
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 subadvisers,
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) Not applicable.
(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/2/
*(a.1) Letter Agreement
(b) Investment Sub-Advisory Agreement between Horace Mann
Investors, Inc. and Scudder, Stevens & Clark, Inc./2/
(c) Investment Sub-Advisory Agreement between Horace Mann
Investors, Inc. and PNC Equity Advisors Company/2/
*(d) Investment Sub-Advisory Agreement between Horace Mann
Investors, Inc. and Wellington Capital Management, LLP.
(6) None
(7) None
(8) Custodian Services Agreement/2/
(9) (a) Transfer Agent Agreement/2/
(b) Money Transfer Services Agreement/2/
(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./2/
(14) None.
(15) None
(16) Not applicable.
(18) Not applicable.
(19) Horace Mann Educators Corporation and Its Subsidiaries./2/
(20) Powers of Attorney/2/
(27) *Financial Data Schedule
</TABLE>
*Filed herewith
_____________________________
/1/Incorporated by reference to the initial Registration Statement filed on
November 8, 1996.
/2/Incorporated by reference to Registrant's Pre-Effective Amendment No. 1
filed on or about February 20, 1997.
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 21st day of
March, 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 March 21, 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 filed as
Exhibit 20 to Registrant's Pre-Effective Amendment No. 1 as filed on or about
February 20, 1997.
/s/ George J. Zock
- ------------------
George J. Zock
<PAGE>
Letter Agreement EXHIBIT 5A.1
________, 1997
Horace Mann Investors, Inc.
One Horace Mann Plaza
Springfield, Illinois 62715-0001
This Letter Agreement is made as of this ____ day of ______ 1997 between
HORACE MANN MUTUAL FUNDS, a Delaware business trust (the "Company"), and HORACE
MANN INVESTORS, INC., a Delaware corporation (the "Manager").
WHEREAS, the Company and the Manager entered into a Management Agreement
dated __________ __, 1997 (the "Management Agreement") under which the Company
agreed to retain the Manager 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 Funds")
together with any other Company portfolios that may be established later and
served by the Manager under the Management Agreement (collectively, the "Funds"
and individually, a "Fund");
WHEREAS, pursuant to Paragraph 1(B) of the Management Agreement, the
Company hereby notifies the Manager of its desire to retain the Manager to
provide management and administrative services for four additional portfolios of
the Company known as Growth Fund, Income Fund, Balanced Fund and Short-Term
Investment Fund (the "New Portfolios"); and
WHEREAS, by signing this Letter Agreement below, Manager agrees to render
such services whereupon the New Portfolios shall become Funds under the
Management Agreement;
NOW THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties hereto agree as follows:
1. The Company hereby appoints the Manager as manager of the New Portfolios
for the terms set forth in the Management Agreement and the Manager hereby
accepts
<PAGE>
such appointment and agrees to perform the services and duties set forth in
the Management Agreement on the terms set forth therein, except as
otherwise provided in this Letter Agreement.
2. This Letter Agreement shall become effective as of the date first above
written and, unless sooner terminated as provided in Paragraph 12 of the
Management Agreement, shall continue until __________ __, 1999.
Thereafter, this Letter Agreement will be extended with respect to a
particular New Portfolio for successive one-year periods ending on
__________ ___ of each year, subject to the provisions of Paragraph 12 of
the Management Agreement.
3. For the services provided and the expenses assumed pursuant to this Letter
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 daily net assets of each New Portfolio,
unless otherwise noted.
4. All the other terms and conditions of the Management Agreement shall remain
in full effect.
5. This Letter Agreement and the attached fee schedule are hereby incorporated
into the Management Agreement by reference thereto and made a part thereof.
In case of a conflict between the terms of this Letter Agreement and the
terms of the Management Agreement, the Management Agreement is controlling.
<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) _________________________
<PAGE>
FEE SCHEDULE
As compensation for its services, the Growth Fund, Income Fund, Balanced Fund
and Short-Term Investment Fund each pay Investors a two-part advisory fee at the
end of each month.
Part 1:
Under part one, each Fund's fee is accrued daily and is calculated on a pro rata
basis by applying the following annual percentage rates to the aggregate of all
four Funds' daily net assets for the respective month:
<TABLE>
<CAPTION>
Net Assets Rate
---------- ----
<S> <C> <C>
Growth Fund
Income Fund On initial $100 million .250%
Balanced Fund Over $100 million .200%
Short-Term Investment Fund
</TABLE>
Part 2:
Under part two, each Fund's advisory fee is accrued daily and is calculated by
applying the following annual percentage rates to the average daily net assets
of each Fund for the respective month:
<TABLE>
<CAPTION>
Net Assets Rate
---------- ----
<S> <C> <C>
Growth Fund On initial $100 million .400%
On next $100 million .300%
Over $200 million .250%
Balanced Fund On initial $100 million .325%
On next $100 million .275%
On next $300 million .225%
Over $500 million .200%
Income Fund On initial $100 million .250%
On next $100 million .200%
Over $200 million .150%
Short-Term Investment Fund On initial $100 million .125%
On next $100 million .100%
Over $200 million .075%
</TABLE>
<PAGE>
EXHIBIT 5(d)
INVESTMENT SUB-ADVISORY AGREEMENT
This Agreement (Agreement) made this _____ day of _____ 1997 by and between
Horace Mann Investors Inc., a Delaware corporation and a registered investment
adviser (Adviser) and Wellington Management Company, LLP, a Massachusetts
limited liability partnership 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 seven separate series or
portfolios including the Growth Fund, the Income Fund, the Balanced Fund,
and the Short-Term Investment Fund.
Whereas Adviser desires to retain the Sub-Adviser to furnish investment
advisory services for the Growth Fund, the Income Fund, the Balanced Fund
and the Short-Term Investment 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 that 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.
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;
<PAGE>
Page 2 - Wellington Agreement
(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 reasonable instructions from Adviser which, in the
reasonable determination of Sub-Adviser, are not inconsistent with Sub-
Adviser's fiduciary duties under this Agreement;
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
month 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 month.
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.
<PAGE>
Page 3 - Wellington Agreement
6. 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
Sub-Adviser's part in the performance of its duties or from reckless disregard
by it of its obligations and duties under this Agreement.
7. Term, Termination, Amendment. This Agreement shall become effective with
respect to the Fund Portfolios on May 1, 1997, 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 November 30, 1998, 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 serve 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.
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.
8. 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.
9. 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.
<PAGE>
Page 4 - Wellington Agreement
10. 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.
11. 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 9 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. WELLINGTON MANAGEMENT COMPANY
By _____________________________ By ______________________________
Title __________________________ Title ___________________________
By _____________________________ By ______________________________
Title __________________________ Title ___________________________
<PAGE>
Exhibit 1
SUB-ADVISORY FEE SCHEDULE
Growth Fund
.400% on the First $100,000,000
.300% on the Next $100,000,000
.250% on all assets over $200,000,000
Income Fund
.250% on the First $100,000,000
.200% on the Next $100,000,000
.150% on all assets over $200,000,000
Balanced Fund
.325% on the First $100,000,000
.275% on the Next $100,000,000
.225% on the Next $300,000,000
.200% on all assets over $500,000,000
Short-Term Investment Fund
.125% on the First $100,000,000
.100% on the Next $100,000,000
.075% on all assets over $200,000,000
<PAGE>
Exhibit 10
[VPKK LETTERHEAD]
March 18, 1997
Horace Mann Mutual Funds
One Horace Mann Plaza
Springfield, Illinois 62715
Board of Trustees:
Reference is made to the Post-Effective Amendment No. 1 to Registrant's
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 four newly authorized series: Growth Fund, Income Fund, Balanced
Fund and Short-Term Investment 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 Post-
Effective Amendment No. 1 to Registrant's 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>
[LOGO OF KPMG]
Peat Marwick LLP
Exhibit 11
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Il 60601-9973
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of
Horace Mann Mutual Funds:
We consent to the use of our reports included herein and incorporated by
reference and to the reference to our Firm as independent auditors under the
heading "Other Services--Independent Auditors" in the Statement of Additional
Information.
/s/ KPMG Peat Marwick, LLP
Chicago, Illinois
March 18, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> Balanced Fund
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 263,921
<INVESTMENTS-AT-VALUE> 299,558
<RECEIVABLES> 1,563
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 301,347
<PAYABLE-FOR-SECURITIES> 435
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<OTHER-ITEMS-LIABILITIES> 361
<TOTAL-LIABILITIES> 796
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<PAID-IN-CAPITAL-COMMON> 1,587
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<SHARES-COMMON-PRIOR> 12,680
<ACCUMULATED-NII-CURRENT> 118
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 64
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 35,646
<NET-ASSETS> 300,551
<DIVIDEND-INCOME> 3,881
<INTEREST-INCOME> 5,739
<OTHER-INCOME> 0
<EXPENSES-NET> 1,401
<NET-INVESTMENT-INCOME> 8,219
<REALIZED-GAINS-CURRENT> 25,467
<APPREC-INCREASE-CURRENT> 11,169
<NET-CHANGE-FROM-OPS> 44,855
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8,167
<DISTRIBUTIONS-OF-GAINS> 25,427
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 55,024
<NUMBER-OF-SHARES-REDEEMED> 24,368
<SHARES-REINVESTED> 30,441
<NET-CHANGE-IN-ASSETS> 72,358
<ACCUMULATED-NII-PRIOR> 66
<ACCUMULATED-GAINS-PRIOR> 24
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 767
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,465
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<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> 2.70
<PER-SHARE-DIVIDEND> .57
<PER-SHARE-DISTRIBUTIONS> 1.79
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<PER-SHARE-NAV-END> 18.94
<EXPENSE-RATIO> .56
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 04
<NAME> Growth Fund
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 360,956
<INVESTMENTS-AT-VALUE> 430,780
<RECEIVABLES> 1,080
<ASSETS-OTHER> 85
<OTHER-ITEMS-ASSETS> 0
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<PAYABLE-FOR-SECURITIES> 880
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 509
<TOTAL-LIABILITIES> 1,389
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,118
<SHARES-COMMON-STOCK> 18,118
<SHARES-COMMON-PRIOR> 13,718
<ACCUMULATED-NII-CURRENT> 123
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 119
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 69,844
<NET-ASSETS> 430,556
<DIVIDEND-INCOME> 7,565
<INTEREST-INCOME> 912
<OTHER-INCOME> 0
<EXPENSES-NET> 2,024
<NET-INVESTMENT-INCOME> 6,453
<REALIZED-GAINS-CURRENT> 48,202
<APPREC-INCREASE-CURRENT> 27,601
<NET-CHANGE-FROM-OPS> 82,256
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,378
<DISTRIBUTIONS-OF-GAINS> 48,129
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 88,561
<NUMBER-OF-SHARES-REDEEMED> 33,668
<SHARES-REINVESTED> 50,814
<NET-CHANGE-IN-ASSETS> 133,456
<ACCUMULATED-NII-PRIOR> 48
<ACCUMULATED-GAINS-PRIOR> 46
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,130
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,098
<AVERAGE-NET-ASSETS> 356,477
<PER-SHARE-NAV-BEGIN> 21.66
<PER-SHARE-NII> .43
<PER-SHARE-GAIN-APPREC> 5.08
<PER-SHARE-DIVIDEND> .40
<PER-SHARE-DISTRIBUTIONS> 3.01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.76
<EXPENSE-RATIO> .59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> Income Fund
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 10,614
<INVESTMENTS-AT-VALUE> 10,662
<RECEIVABLES> 147
<ASSETS-OTHER> 60
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,869
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21
<TOTAL-LIABILITIES> 10,848
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 86
<SHARES-COMMON-STOCK> 855
<SHARES-COMMON-PRIOR> 809
<ACCUMULATED-NII-CURRENT> 7
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 47
<NET-ASSETS> 10,848
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 717
<OTHER-INCOME> 0
<EXPENSES-NET> 76
<NET-INVESTMENT-INCOME> 641
<REALIZED-GAINS-CURRENT> 59
<APPREC-INCREASE-CURRENT> (325)
<NET-CHANGE-FROM-OPS> 375
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 640
<DISTRIBUTIONS-OF-GAINS> 3
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,898
<NUMBER-OF-SHARES-REDEEMED> 2,836
<SHARES-REINVESTED> 523
<NET-CHANGE-IN-ASSETS> 317
<ACCUMULATED-NII-PRIOR> 5,639
<ACCUMULATED-GAINS-PRIOR> (55,408)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 28
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 99
<AVERAGE-NET-ASSETS> 10,900
<PER-SHARE-NAV-BEGIN> 13.03
<PER-SHARE-NII> .76
<PER-SHARE-GAIN-APPREC> (.31)
<PER-SHARE-DIVIDEND> .79
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.69
<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> Short-Term Fund
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1,218
<INVESTMENTS-AT-VALUE> 1,218
<RECEIVABLES> 12
<ASSETS-OTHER> 4
<OTHER-ITEMS-ASSETS> 0
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<PAYABLE-FOR-SECURITIES> 0
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<OTHER-ITEMS-LIABILITIES> 5
<TOTAL-LIABILITIES> 5
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12
<SHARES-COMMON-STOCK> 122
<SHARES-COMMON-PRIOR> 101
<ACCUMULATED-NII-CURRENT> 1
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,229
<DIVIDEND-INCOME> 01
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<EXPENSES-NET> 6
<NET-INVESTMENT-INCOME> 55
<REALIZED-GAINS-CURRENT> 0
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<NET-CHANGE-FROM-OPS> 55
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 54
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,548
<NUMBER-OF-SHARES-REDEEMED> 4,365
<SHARES-REINVESTED> 40
<NET-CHANGE-IN-ASSETS> 223
<ACCUMULATED-NII-PRIOR> 1
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<GROSS-ADVISORY-FEES> 2
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<GROSS-EXPENSE> 27
<AVERAGE-NET-ASSETS> 1,113
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .50
<PER-SHARE-GAIN-APPREC> (.01)
<PER-SHARE-DIVIDEND> .46
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<PER-SHARE-NAV-END> 10.03
<EXPENSE-RATIO> .53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
