HORACE MANN MUTUAL FUNDS, 497, 2000-08-09

HORACE MANN MUTUAL FUNDS
497, 2000-08-09

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<PAGE>

HORACE MANN MUTUAL FUNDS

Supplement to the Prospectus Dated May 1, 2000 as amended August 9, 2000

Information about the Income Fund, the Balanced Fund and the Short-Term
Investment Fund is supplemented as follows:

On approximately August 25, 2000, Wellington Management Company, LLP
("Wellington Management") will cease to be a subadviser to the Income Fund
(and thus indirectly the Balanced Fund) and the Short-Term Investment Fund.
Western Asset Management Company ("Western Asset") will become the sole
subadviser to the Short-Term Investment Fund and will manage 100% of the
assets in the Income Fund with its affiliate, Western Asset Management
Company Limited ("WAML"), who will manage the assets of the Income Fund
invested in foreign securities.

Until such time as the transition to Western Asset is completed,
Wellington Management will continue to act as a subadviser to the Income
Fund and Short-Term Investment Fund. For the Income Fund, Wellington
Management will continue to manage 50% of the Income Fund's assets by
emphasizing sector analysis, which focuses on relative value and yield
spread among security types and among quality, issuer and industry sectors,
as well as credit research and call protection. Credit research on
corporate bonds is based on both quantitative and qualitative criteria
established by Wellington Management, such as an issuer's industry,
operating and financial profiles, business strategy, management quality,
and projected financial and business conditions. Robert D. Payne, CFA and
Senior Vice President of Wellington Management, will continue to serve as
the portfolio manager of the Income Fund until the transition to Western
Asset is completed. 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.

Until such time as the transition to Western Asset is completed,
Wellington Management will continue to manage the assets of the Short-Term
Investment Fund in accordance with the philosophy outlined in the
prospectus summary. John C. Keogh, Senior Vice President of Wellington
Management, will continue to serve as the portfolio manager for the Short-
Term Investment Fund. Mr. Keogh has been a portfolio manager with
Wellington Management's fixed income group since 1985 and held the position
of Vice President from 1984 until he was promoted to Senior Vice President
of Wellington Management in January 1994.

Dated: August 9, 2000
<PAGE>

Prospectus

May 1, 2000 as amended August 9, 2000
Horace Mann Mutual Funds
Equity Fund
Balanced Fund
Income Fund
Short-Term Investment Fund
Small Cap Growth Fund
International Equity Fund
Socially Responsible Fund

Shares of the Horace Mann Mutual Funds are sold only as the underlying
investment for variable annuity contracts issued by Horace Mann Life Insurance
Company.

Horace Mann Mutual Funds
One Horace Mann Plaza
Springfield, Illinois 62715-0001

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>

Table of Contents
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................... 2
Equity Fund............................................................. 2
Balanced Fund........................................................... 4
Income Fund............................................................. 6
Short-Term Investment Fund.............................................. 8
Small Cap Growth Fund................................................... 9
International Equity Fund............................................... 10
Socially Responsible Fund............................................... 11
More About Risk........................................................... 12
Types of Investments and Associated Risks................................. 13
Management................................................................ 16
Investment Adviser...................................................... 16
The Subadvisers......................................................... 17
Administrator........................................................... 20
Support Services Agreement.............................................. 20
Transfer Agent and Dividend Paying Agent................................ 20
Custodian and Fund Accounting Agent..................................... 20
Additional Performance Information........................................ 20
Other Information on the Performance of Alliance, Mellon Equity and
Wellington Management.................................................. 20
Other Information on the Performance of BlackRock....................... 21
Other Information on the Performance of Scudder Kemper.................. 21
Purchases and Redemptions................................................. 23
Redemption of Equity Fund Shares by Existing Public Shareholders........ 23
Systematic Cash Withdrawal Plan......................................... 23
Dividends, Distributions and Federal Taxes................................ 24
Financial Highlights...................................................... 25
Equity Fund............................................................. 25
Balanced Fund........................................................... 26
Income Fund............................................................. 27
Short-Term Investment Fund.............................................. 28
Small Cap Growth Fund................................................... 29
International Equity Fund............................................... 30
Socially Responsible Fund............................................... 31
Other Information......................................................... 32
Public Shareholder Communications....................................... 32
Ratings of Debt Obligations............................................. 32
Statement of Additional Information..................................... 33
</TABLE>

1
<PAGE>

Summary
-------------------------------------------------------------------------------

Equity Fund
Investment Objective: The Equity Fund seeks long-term capital growth. As a
secondary objective, the Equity Fund seeks conservation of principal and
production of income.

Main Investment Strategies: The Equity Fund, formerly the Growth Fund,
ordinarily invests substantially all its assets in common stocks of domestic
companies. These companies vary in size and operating history, they may or may
not be listed on a stock exchange, and they may be in any industry. On
average, the Fund will have a value-bias, generally exhibiting an average
price to earnings ratio lower than, and an average dividend yield higher than,
that of the market (as measured by the S&P 500). The Equity Fund may also
invest in preferred stocks. Additionally, up to 10% of the Equity Fund's
assets may be invested in U.S. dollar-denominated securities of foreign
issuers, including common stock, preferred stock, convertible securities and
American Depository Receipts. Included within the definition of "domestic
companies" are companies that are not incorporated in the U.S. but have one or
more of the following attributes: principal place of business in the U.S.,
substantial portion of income derived from activities in the U.S., equity
securities traded on a major U.S. stock exchange or included in a recognized
index of U.S. stocks, or complies with U.S. accounting standards. Thus,
securities of such issuers are not subject to the 10% limitation on securities
of foreign issuers.

Wilshire Associates Incorporated ("Wilshire") serves as the investment
adviser to the Equity Fund. In its oversight of the investment program of the
Equity Fund, Wilshire selects investment managers as subadvisers to manage the
funds in the portfolio, and determines the allocation of the Equity Fund's
assets among those selected subadvisers. Wilshire has discretion to select,
retain, and discharge the subadvisers for the Equity Fund with approval from
the Fund's Board of Trustees. Wilshire may take these actions at any time
without shareholder approval.

Wilshire selects subadvisers to manage the assets of the Equity Fund based
upon a due diligence process that focuses on, but is not limited to, the
managers' philosophy and process, people and organization, resources, and
performance. Currently, Wilshire has retained Alliance Capital Management,
L.P. ("Alliance") successor of Sanford C. Bernstein & Co., Inc. ("Sanford
Bernstein"), Mellon Equity Associates, LLP ("Mellon Equity") and Wellington
Management Company, LLP ("Wellington Management") to manage the Equity Fund.
The basic investment philosophy of each subadviser is described below:

In managing its portion of the Equity Fund, Alliance uses traditional
methods of stock selection--research and analysis--to identify undervalued
stocks. In addition, Alliance employs quantitative valuation tools to identify
attractive stocks and the most opportune time to purchase them.

Mellon Equity believes that stock returns are a function of a security's
exposure to numerous fundamental factors that move in and out of favor over
time. By emphasizing those stocks with favorable attributes and de-emphasizing
those without, Mellon Equity seeks to purchase the better performing stocks
within a sector and attempts to neutralize risk through a well diversified
portfolio construction.

Wellington Management employs a conservative, long-term approach to
investing in high quality equity securities. Using a top-down, bottom-up
process, the firm's growth and income style emphasizes fundamental analysis in
security selection, and attempts to identify long lasting broad themes based
on demographic trends, technological changes and political and social
developments.

Main Risks of Investing: Since the Fund invests most of its assets in
common stocks, one of the primary risks is that the value of the stocks it
holds might decrease in response to the activities of the company that issued
the stock or general economic and market conditions. More information about
the risks of investing in the Fund is located in the sections entitled "More
About Risks" and "Types of Investments and Associated Risks" below. The Fund's
returns will vary, and you could lose money by investing in the Fund. There
can be no assurance that the Fund will meet its investment objectives.

Fund Performance History: The information below provides an illustration of
how the Equity Fund's performance has varied over time. The bar chart and
table provide some indication of the risks of investing in the Equity Fund by
showing the changes in the Equity Fund's performance from year to year during
the periods indicated and by showing how the Equity Fund's average annual
total returns for the periods indicated compare with a broad-based securities
market index. The total return figures do not reflect expenses that apply to
the separate account or related policies. The inclusion of these charges would
reduce the total return figures for all periods shown. The performance
information after March 1, 1999 reflects the Fund's current multi-manager
approach. The Equity Fund's past performance does not necessarily indicate how
it will perform in the future.

2
<PAGE>

Annual Total Returns

[LINE CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-5.48 26.50 9.59 19.74 -0.35 33.67 25.28 23.45 7.64

<TABLE>
<CAPTION>
Best Quarter Worst Quarter
------------ -------------
<S> <C>
13.12 (2Q97) -11.71 (3Q99)
</TABLE>

Average Annual Total Returns
(periods ended December 31, 1999)

<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Equity Fund............................................. -2.54% 16.67% 12.98%
S&P 500*................................................ 20.99% 28.56% 18.21%
</TABLE>

* The Standard and Poor's 500 Stock Index (the "S&P 500"). The S&P 500 is an
unmanaged index that is generally considered to be representative of the
United States equity market.

3
<PAGE>

Balanced Fund
Investment Objective: The Balanced Fund seeks to realize a high long-term
total rate of return consistent with prudent investment risks. Total rate of
return consists of current income, which includes dividends, interest,
discount accruals and capital appreciation.

Main Investment Strategies: The Balanced Fund operates under a "fund of
funds" structure. The Balanced Fund invests substantially all of its assets in
shares of the Equity Fund and Income Fund. In addition, the Balanced Fund may
also invest in certain individual securities, including money market
instruments and U.S. government securities.

The summaries for the Equity Fund and Income Fund have a description of the
types of stocks and bonds in which those Funds are permitted to invest.

The investment adviser will allocate the Balanced Fund's assets between
shares of the Equity Fund and Income Fund. This mixture reduces the volatility
of investment returns while still providing the potential for higher long-term
total returns that can be achieved only by including some exposure to stocks.
As a matter of investment policy, 50% to 75% of the Balanced Fund's total
assets will be invested in the Equity Fund and 25% to 50% of the value of its
assets will be invested in the Income Fund. Under normal circumstances, the
target asset mix is 60% to the equity sector and 40% to the fixed income
sector. The mix of assets is regularly adjusted between the equity sector and
the fixed income sector to maintain policy targets. Major changes in the
investment mix may occur several times within a year or over several years,
depending upon market and economic conditions. In general, however, the
investment adviser does not anticipate making frequent changes in asset
allocation and will not attempt to time the market.

Pending investment to meet anticipated redemption requests, or as a
temporary defensive measure if its subadviser determines that market
conditions warrant, the Fund may also invest, without limitation, in high
quality, U.S. dollar denominated money market instruments. To the extent the
Fund is in a defensive position, its ability to achieve its investment
objective may be limited.

An investor in the Balanced Fund should understand that alternatively he or
she could allocate investments directly to the Equity Fund and Income Fund. By
investing indirectly in these Funds through the Balanced Fund, an investor
bears not only his or her proportionate share of certain expenses of the
Balanced Fund (such as operating costs), but also, indirectly, similar expense
of the underlying Funds. However, shareholders of the Balanced Fund will not
be subject to duplicative advisory or administrative service fees as a result
of the "fund of funds" arrangement, as discussed below in "Management."

Main Risks of Investing: By investing in the Balanced Fund, an investor
assumes the same types of risks, either directly or indirectly, as investing
in the Equity Fund and Income Fund, which are described in this prospectus.
For assets allocated to the Equity Fund, the primary risk is that the value of
stocks it holds might decrease in response to the activities of the company
that issued the stock or general economic and market conditions. For assets
allocated to the Income Fund, the primary risk is interest rate risk. The
assets allocated to the Income Fund are also subject to credit risk. More
information about the risks of investing in the Fund is located in the
sections entitled "More About Risks" and "Types of Investments and Associated
Risks" below. There can be no assurance that the Fund will meet its investment
objective. The Fund's returns will vary, and you could lose money.

Fund Performance History: The information below provides an illustration of
how the Balanced Fund's performance has varied over time. The bar chart and
table provide some indication of the risks of investing in the Balanced Fund
by showing the changes in the Balanced Fund's performance from year to year
during the periods indicated and by showing how the Balanced Fund's average
annual total returns for the periods indicated compare with a broad-based
securities market index. The total return figures do not reflect expenses that
apply to the separate account or related policies. The inclusion of these
charges would reduce the total return figures for all periods shown. The
performance information after March 1, 1999 reflects the Fund's current multi-
manager approach. The Balanced Fund's past performance does not necessarily
indicate how it will perform in the future.

4
<PAGE>

Annual Total Returns

[LINE CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-------------------------------------------------------------------------------
-0.41 21.57 8.37 15.46 -1.12 27.12 18.27 19.04 7.68

<TABLE>
<CAPTION>
Best Worst
Quarter Quarter
----------- ------------
<S> <C>
9.82 (2Q97) -7.01 (3Q99)
</TABLE>

Average Annual Total Returns
(periods ended December 31, 1999)

<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Balanced Fund........................................... -1.11% 13.71% 11.05%
S&P 500*................................................ 20.99% 28.56% 18.21%
Lehman Intermediate/ Aggregate**........................ -0.83% 7.47% 7.46%
Stock/Bond Composite***................................. 12.00% 19.88% 13.97%
</TABLE>

* The Standard and Poor's 500 Stock Index (the "S&P 500"). The S&P 500 is an
unmanaged index that is generally considered to be representative of the
United States equity market.

** Lehman Brothers Intermediate Government/Corporate Bond Index through April
30, 1997, Lehman Brothers Aggregate Bond Index thereafter.

***Sixty percent S&P 500, forty percent Lehman Brothers Intermediate
Government/Corporate Bond Index through April 30, 1997, forty percent Lehman
Brothers Aggregate Bond Index thereafter.

5
<PAGE>

Income Fund
Investment Objective: The Income Fund seeks to achieve a long-term total
rate of return in excess of the U.S. bond market over a full market cycle.

Main Investment Strategies: The Income Fund invests primarily in U.S.
investment-grade fixed income securities, including government and corporate
securities, agency mortgage pass-through securities and asset-backed
securities.

The Income Fund invests at least 75% of its total assets in:

. investment grade publicly offered debt securities, including mortgage-
backed and other asset-backed securities (within the four highest ratings
as determined by Moody's or by S&P at the time of purchase).

. securities issued or guaranteed by the U.S. Government or its agencies.

. high quality commercial paper (within the two highest grades as determined
by both Moody's and S&P), repurchase and reverse repurchase agreements,
time deposits with maturities less than seven days, and cash or cash
equivalents.

. high grade 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 to 15% of the Income Fund's
total assets).

. highest quality 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) which are fully hedged back into U.S. dollars and do
not exceed 15% of the Income Fund's total assets.

Generally, the average duration of the U.S. portion of the portfolio will
range between +/-25% of the Lehman Brothers Aggregate Bond Index's duration.
There are no maximum maturity limits on individual securities. For defensive
purposes, the duration and maturity of the Fund may be shortened. The Fund
will maintain a high grade average quality for the portfolio (third highest
rating as determined by Moody's or S&P).

Up to 25% of the Income Fund's total assets may be invested in securities
not described above, including, but not limited to, preferred stock,
convertible securities, securities carrying warrants to purchase equity
securities, noninvestment-grade debt obligations of U.S. and non-U.S. issuers
(commonly referred to as "junk bonds") and derivatives.

Wilshire Associates Incorporated ("Wilshire") serves as the investment
adviser to the Income Fund. In its oversight of the investment program of the
Income Fund, Wilshire selects investment managers as subadvisers to manage the
funds in the portfolio, and determines the allocation of the Income Fund's
assets among those selected subadvisers. Wilshire has discretion to select,
retain, and discharge the subadvisers for the Income Fund with approval from
the Fund's Board of Trustees. Wilshire may take these actions at any time
without shareholder approval.

Wilshire selects subadvisers to manage the assets of the Income Fund based
upon a due diligence process that focuses on, but is not limited to, the
managers' philosophy and process, people and organization, resources, and
performance. Currently, Wilshire has retained Western Asset Management Company
("Western Asset") and its affiliate Western Asset Management Company Limited
("WAML") to manage the Income Fund. The basic investment philosophy of each
subadviser is described below:

The Western Asset Core Plus strategy seeks to provide investment results
that exceed the performance of the Lehman Brothers Aggregate Index. This Index
is a widely recognized measure of the aggregate U.S. bond market. The Western
Asset Core Plus strategy seeks to maximize total return by investing primarily
in U.S. dollar-denominated fixed income securities and other debt instruments
of domestic and foreign entities, including corporate bonds, securities issued
or guaranteed as to principal and interest by the U.S. government, its
agencies and instrumentalities, mortgage-related securities and money market
instruments. Western Asset will determine the relative portion of the Fund's
assets allocated to foreign securities. These foreign assets will be invested
at the discretion of WAML. WAML will select the foreign country and currency
composition based on its evaluation of relative interest rates, inflation
rates, exchange rates, monetary and fiscal policies, trade and current account
balances, and any other specific factors WAML believes relevant.

6
<PAGE>

In normal circumstances, the Income Fund intends to be fully invested.
Pending investment, to meet anticipated redemption requests, or as a temporary
defensive measure if its subadviser determines that market conditions warrant,
the Fund may also invest, without limitation, in high quality, U.S. dollar
denominated money market instruments. To the extent the Fund is in a defensive
position, its ability to achieve its investment objective may be limited.

Main Risks of Investing: The primary risk of investing in the Fund is
interest rate risk. The yield paid by the Fund will vary with changes in
interest rates. Changes in interest rates may cause changes in the Fund's
yield, net asset value and total return. Investments with longer maturities,
which are typically more sensitive to changes in interest rates, may subject
the Fund to increased price changes resulting from market yield fluctuations.
The Fund is also subject to credit risk. The Fund's net asset value and total
return may be adversely affected by the inability of the issuers of the Fund's
securities to make payment at maturity. More information about the risks of
investing in the Fund is located in the sections entitled "More About Risks"
and "Types of Investments and Associated Risks" below. There can be no
assurance that the Fund will meet its investment objective. The Fund's returns
will vary, and you could lose money by investing in the Fund.

Fund Performance History: The information below provides an illustration of
how the Income Fund's performance has varied over time. The bar chart and table
provide some indication of the risks of investing in the Income Fund by showing
the changes in the Income Fund's performance from year to year during the
periods indicated and by showing how the Income Fund's average annual total
returns for the periods indicated compare with a broad-based securities market
index. The total return figures do not reflect expenses that apply to the
separate account or related policies. The inclusion of these charges would
reduce the total return figures for all periods shown. The performance
information reflects the performance of the Income Fund as managed solely by
Wellington Management Company, L.L.C. ("Wellington Management"). On January 26,
2000 the Income Fund was managed by Wellington Management and Western Asset. On
March 24, 2000, the Income Fund was managed by Wellington Management, Western
Asset and WAML. Effective on approximately August 25, 2000 the Income Fund is
managed by Western Asset and WAML. The Income Fund's past performance does not
necessarily indicate how it will perform in the future.

Annual Total Returns

FINACT:[EFT.TEMPL]00001.EDG
[LINE CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-------------------------------------------------------------------------------
7.58 14.93 7.20 8.07 -2.21 14.93 3.50 9.42 8.09

<TABLE>
<CAPTION>
Best Worst
Quarter Quarter
----------- ------------
<S> <C>
4.90 (4Q91) -2.30 (1Q94)
</TABLE>

Average Annual Total Returns
(periods ended December 31, 1999)

<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Income Fund............................................. -1.57% 6.75% 6.84%
Lehman Intermediate/Aggregate*.......................... -0.83% 7.47% 7.46%
</TABLE>

* Lehman Brothers Intermediate Government/Corporate Bond Index through April
30, 1997, Lehman Brothers Aggregate Bond Index thereafter.

7
<PAGE>

Short-Term Investment Fund
Investment Objective: The Short-Term Investment Fund seeks 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.

Main Investment Strategies: The Short-Term Investment Fund primarily invests
in the following types of short-term debt instruments with maturities generally
not exceeding one year:

. U.S. Treasury Bills and other obligations of or guaranteed by the U.S.
Government or its agencies.
. commercial paper (within the two highest ratings as determined by Moody's
or S&P).
. 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 to 10% of
the Short-Term Investment Fund's total assets).
. publicly traded bonds, debentures and notes (with a rating within the four
highest ratings as determined by Moody's or S&P).
. repurchase and reverse repurchase agreements.
. cash or cash equivalents.

In seeking to achieve the Fund's investment objective, the subadviser uses a
multi-stage process. In the first stage, the subadviser analyzes general
economic and market factors, such as interest rate forecasts and anticipated
interest rate spreads among various sectors of money market instruments, and
sets broad strategies for the Fund. In the second stage, the subadviser
evaluates individual securities. The subadviser uses proprietary quantitative
and qualitative techniques to create and maintain a list of issuers whose
securities are approved for purchase. In the third stage, the subadviser
determines the structure and composition of the portfolio. In doing so, the
subadviser seeks to minimize exposure to credit risk and market risk. Market
risk is measured by the price volatility of securities. The Fund attempts to
maximize return to take advantage of changing money market conditions and
trends. The Fund also trades to take advantage of disparities in yield
relationships between money market instruments.

Main Risks of Investing: The primary risk of investing in the Fund is
interest rate risk. The yield paid by the Fund will vary with changes in
interest rates. Changes in interest rates may cause changes in the Fund's
yield, net asset value and total return. The Fund is also subject to credit
risk. The Fund's net asset value and total return may be adversely affected by
the inability of the issuers of the Fund's securities to make payment at
maturity. More information about the risks of investing in the Fund is located
in the sections entitled "More About Risks" and "Types of Investments and
Associated Risks" below. There can be no assurance that the Fund will meet its
investment objectives. The Fund's returns will vary and you could lose money by
investing in the Fund.

Fund Performance History: The information below provides an illustration of
how the Short-Term Investment Fund's performance has varied over time. The bar
chart and table provide some indication of the risks of investing in the Short-
Term Investment Fund by showing the changes in the Short-Term Investment Fund's
performance from year to year during the periods indicated and by showing how
the Short-Term Investment Fund's average annual total returns for the periods
indicated compare with a broad-based securities market index. The Short-Term
Investment Fund's past performance does not necessarily indicate how it will
perform in the future.

Annual Total Returns

[BAR CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
7.89 5.93 3.3 2.53 3.89 5.25 5.02 5.09 4.97 4.77

<TABLE>
<CAPTION>
Best Worst
Quarter Quarter
----------- ----------
<S> <C>
1.97 (3Q90) .60 (3Q93)
</TABLE>

Average Annual Total Returns
(periods ended December 31, 1999)

<TABLE>
<CAPTION>
Year 5 Years 10 Years
----- ------- --------
<S> <C> <C> <C>
Short-Term Investment Fund............................... 4.77% 5.00% 4.84%
90-Day Treasury Bills.................................... 4.56% 5.37% 5.29%
</TABLE>

8
<PAGE>

Small Cap Growth Fund
Investment Objective: The Small Cap Growth Fund seeks long-term capital
appreciation.

Main Investment Strategies: The Fund ordinarily invests substantially all of
its assets in small cap equity securities (less than $2 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. The Russell
2000 Growth Index is composed of those Russell 2000 securities with a greater-
than-average growth orientation. Securities in this index generally have higher
price-to-book and price-to-earnings ratios than those in the Russell 2000 Value
Index. Under normal market conditions, the Fund will invest at least 80% of its
assets in equity securities of smaller-capitalization organizations.

The investment subadviser uses proprietary screens to identify growth stocks
with market capitalizations under $2 billion. The investment subadviser
conducts fundamental research on a company and technical analysis on a
company's stock before making purchase decisions.

The Fund generally will sell a stock when, in the investment subadviser's
opinion, the fundamentals deteriorate, when the stock's relative price momentum
declines, or upon an earnings disappointment.

In normal circumstances, the Fund intends to be fully invested. Pending
investment to meet anticipated redemption requests, or as a temporary defensive
measure if its subadviser determines that market conditions warrant, the Fund
may also invest, without limitation, in high quality, U.S. dollar-denominated
money market instruments. To the extent the Fund is in a defensive position,
its ability to achieve its investment objective may be limited. The reason for
acquiring money market securities would be to avoid market losses. However, if
market conditions improve, this strategy could result in reducing the potential
gains from market upswing, thus reducing the Fund's opportunity to achieve its
investment objective.

Main Risks of Investing: Since the Fund invests most of its assets in common
stocks, the primary risk is that value of the stocks it holds might decrease in
response to the activities of the company that issued the stock or general
economic and market conditions. Investments in securities of companies with
small- and medium-sized market capitalizations generally involve greater risk
than investment in larger, more established companies. This is because small
companies may be in an earlier stage of development, may be dependent on a
small number of products or services, may lack substantial capital reserves
and/or do not have proven track records. Smaller companies may be more
adversely affected by poor economic or market conditions. In addition, small
companies may be traded in low volumes, which can increase volatility and
liquidity risks. More information about the risks of investing in the Fund is
located in the sections entitled "More About Risks" and "Types of Investments
and Associated Risks" below. There can be no assurance that the Fund will meet
its investment objective. The Fund's returns will vary, and you could lose
money by investing in the Fund.

Fund Performance History: The information below provides an illustration of
how the Fund's performance has varied in each of the calendar years since its
inception. The table provides some indication of the risks of an investment in
the Fund by comparing the Fund's average annual total returns for the periods
indicated to a broad-based securities market index. The total return figures do
not reflect expenses that apply to the separate account or related policies.
The inclusion of these charges would reduce the total return figures for all
periods shown. The Fund's past performance does not necessarily indicate how it
will perform in the future.

Annual Total Returns

[BAR CHART]

<TABLE>
<CAPTION>
Best Quarter Worst Quarter
------------- --------------
<S> <C>
44.56% (4Q99) -18.77% (3Q98)
</TABLE>

Average Annual Total Returns
(periods ended December 31, 1999)

<TABLE>
<CAPTION>
Since
Inception
1 Year (3/10/97)
------ ---------
<S> <C> <C>
Small Cap Growth Fund.......................................... 71.55% 30.45%
Russell 2000 Growth*........................................... 43.10% 20.57%
</TABLE>

* The Russell 2000 Growth Index (the "Russell 2000 Growth") is an unmanaged
securities index composed of those Russell 2000 securities with a greater than
average growth orientation.

9
<PAGE>

International Equity Fund
Investment Objective: The International Equity Fund seeks long-term growth
of capital primarily through diversified holdings of marketable foreign equity
investments.

Main Investment Strategies: 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 Fund invests primarily in equity securities of
established companies that the subadviser believes have favorable
characteristics and that are 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.

The 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. To the extent the Fund is
in a defensive position, its ability to achieve its investment objective may be
limited.

For hedging purposes, the Fund may 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.

Main Risks of Investing: Because the Fund invests most of its assets in
common stocks, the primary risk is that the value of the stocks it holds might
decrease in response to the activities of those companies or market and
economic conditions. Foreign investments often involve additional risks,
including political instability, differences in financial reporting standards,
and less stringent regulation of securities markets. These risks are magnified
in less-established, emerging markets. Because the securities held by the Fund
usually will be denominated in currencies other than the U.S. dollar, changes
in foreign currency exchange rates may adversely affect the value of the Fund's
investments. In addition, the Fund may invest in the securities of small
companies, which may be more volatile and less liquid than securities of large
companies. More information about the risks of investing in the Fund is located
in the sections entitled "More About Risks" and "Types of Investments and
Associated Risks" below. There can be no assurance that the Fund will meet its
investment objective. The Fund's returns will vary, and you could lose money by
investing in the Fund.

Annual Total Returns

[LINE CHART]
1998 1999
----- ----
18.95

<TABLE>
<CAPTION>
Best Quarter Worst Quarter
------------ -------------
<S> <C>
28.45 (4Q99) -13.52 (3Q98)
</TABLE>

Average Annual Total Returns
(periods ended December 31, 1999)

<TABLE>
<CAPTION>
Since
Inception
1 Year (3/10/97)
------ ---------
<S> <C> <C>
International Equity Fund...................................... 51.83% 24.71%
MSCI EAFE*..................................................... 26.97% 17.53%
</TABLE>

* The Morgan Stanley Capital International Europe, Australia, Far East Index.

10
<PAGE>

Socially Responsible Fund
Investment Objective: The Socially Responsible Fund seeks long-term growth
of capital, current income and growth of income.

Main Investment Strategies: The Socially Responsible Fund pursues its
objectives through a diversified portfolio composed primarily of marketable
equity securities. The Socially Responsible Fund seeks to achieve its
objectives by investing in socially responsive companies which the subadviser
determines:

. do not produce tobacco products;

. do not produce alcoholic beverages;

. do not own and/or operate casinos or manufacture gaming devices;

. do not produce pornographic materials;

. do not produce nuclear weapons or guidance and/or delivery systems
specifically for nuclear weapons;

. by popular standards, maintain nondiscriminatory employment practices
throughout a company's facilities; and

. by popular standards, maintain environmental policies, practices and
procedures that are currently acceptable, or that are exhibiting
improvement.

Dividends are emphasized in the management of the portfolio, as stock
portfolios with high relative dividend yields may provide above average returns
with below average volatility in the long run. Although the Fund intends to
maintain a premium yield (versus the S&P 500 Index and a value-oriented
benchmark like the Russell 1000 Value Index) not every stock in the Fund will
have a premium yield. The investment process employs a three-factor screen
combining relative dividend yield, price/earnings and price/cash flow ratios to
identify attractive investment ideas among the largest 1000 U.S. companies and
100 ADR's that constitute the investible universe. This process allows for
consideration of an ivestment in value-oriented companies and cheap cyclical
growth companies that pay little or no dividends.

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 that meet the criteria applicable to domestic
investments.

In addition, from time to time, for temporary defensive purposes, when the
Fund's subadviser determines such a position is advisable in light of economic
or market conditions, the Fund may invest a portion of its assets in cash and
cash equivalents. Pending investment to meet anticipated redemption requests,
or as a temporary defensive measure if its subadviser determines that market
conditions warrant, the Fund may also invest, without limitation, in high
quality, U.S. dollar-denominated money market instruments. To the extent the
Fund is in a defensive position, its ability to achieve its investment
objective may be limited.

Main Risks of Investing: The Fund only invests in companies that meet its
criteria for socially responsible investing. Because of this restriction, the
investments that the Fund's portfolio managers may choose from may be more
limited than those of a fund that is not restricted to investing in companies
that meet social criteria. More information about the risks of investing in the
Fund is located in the sections entitled "More About Risks" and "Types of
Investments and Associated Risks" below. There can be no assurance that the
Fund will meet its investment objective. The Fund's returns will vary, and you
could lose money by investing in the Fund.

Fund Performance History: The bar chart below provides an illustration of
how the Fund's performance has varied in each of the calendar years since its
inception. The table provides some indication of the risks of an investment in
the Fund by comparing the Fund's average annual total returns for the periods
indicated to a broad-based securities market index. The total return figures do
not reflect expenses that apply to the separate account or related policies.
The inclusion of these charges would reduce the total return figures for all
periods shown. The Fund's past performance does not necessarily indicate how it
will perform in the future.

Annual Total Returns

1998 1999
---- ----
9.8

<TABLE>
<CAPTION>
Best Quarter Worst Quarter
------------ -------------
<S> <C>
13.22 (1Q98) -12.06 (3Q98)
</TABLE>

Average Annual Total Returns
(periods ended December 31, 1999)

<TABLE>
<CAPTION>
Since
Inception
1 Year (3/10/97)
------ ---------
<S> <C> <C>
Socially Responsible Fund...................................... 8.39% 14.42%
S&P 500*....................................................... 20.99% 25.69%
</TABLE>

* The Standard and Poor's 500 Stock Index (the "S&P 500"). The S&P 500 is an
unmanaged index that is generally considered to be representative of the
United States equity market.

11
<PAGE>

More About Risk

The Funds have principal investment strategies that come with inherent
risks. The following is a list of the principal risks associated with those
strategies. Because the Balanced Fund invests in the shares of the Equity Fund
and Income Fund, the Balanced Fund will be subject to the risks of those
Funds. The following table summarizes the types of risks described below that
each Fund may experience:

<TABLE>
<CAPTION>
Invest- Port-
Deriva- Finan- Interest ment Liqui- Oppor- folio Prepay- Reinvest- Valu-
Credit Currency tives cial Rate Style dity Market tunity Strategy ment ment ation
Risk Risk Risk Risk Risk Risk Risk Risk Risk Risk Risk Risk Risk
------ -------- ------- ------ -------- ------- ------ ------ ------ -------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity X X X X X X X
Balanced X X X X X X X X X X X X X
Income X X X X X X X X X X X X X
Short-term X X X X X X X X
Small Cap Growth X X X X X X X
International Equity X X X X X X
Socially Responsible X X X X X X X
</TABLE>
Credit Risk. Debt securities are subject to the risk that the issuer of a
security, or the counterparty to a contract, will default or otherwise become
unable to honor a financial obligation. In general, the lower the credit
quality of a fund's securities, the higher a fund's risk, all other factors
such as maturity being equal.

Currency Risk. Non-U.S. dollar-denominated securities are subject to
fluctuations in the exchange rates between the U.S. dollar and foreign
currencies which may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign currency
denominated investments, and may widen any losses.

Derivatives Risk. When a Fund uses derivatives (securities whose value is
based upon the value of another security or an index) to hedge positions in
the portfolio, any loss generated by the derivative security should be
substantially offset by gains on the hedged investment and vice versa. While
hedging can reduce or eliminate losses, it can also reduce or eliminate gains.
To the extent that a derivative is not used as a hedge (i.e., for
speculation), the Fund is directly exposed to the potential gains and losses
of that derivative. Gains and losses from non-hedging derivative positions may
be substantially greater than the derivative's original cost.

Financial Risk. For equity securities held in a Fund, financial risk is the
possibility that the price of the security will fall because the market
perceives that there is or will be a deterioration in the fundamental value of
the issuer of poor earnings performance by the issuer. For debt securities
held in a Fund, 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.

Interest Rate Risk. For debt securities held in a Fund, interest rate 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.

Investment-Style Risk. During certain market conditions, Funds with more
specific investment styles may perform less well than funds that allow greater
flexibility in the investment of assets.

Liquidity Risk. A Fund may invest in certain securities that may be
difficult or impossible to sell at a certain time and at a price that the Fund
finds to be favorable. A Fund may have to accept an unfavorable price, sell
other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance.

Market Risk. For equity securities, stock market movements will affect a
Fund's share price on a daily basis. Declines in value are possible because of
declines in the stock market in general or because of a decline in the
specific securities held by a Fund. Market risk may affect a single company,
industry, sector or the market as a whole. For debt securities, the market
value of a security may move up and down, sometimes rapidly and unpredictably.
Market risk may affect a single issuer, an industry, a sector or the bond
market as a whole.

Opportunity Risk. Because each Fund is normally fully invested, each Fund
may defer an investment opportunity because the assets that would be necessary
to purchase that security or act on that opportunity are invested in other
securities. At the subadviser's direction, securities may be sold if
opportunities warrant.

Portfolio Strategy Risk. The performance of each Fund is in part dependent
upon the investment subadviser's skill in making appropriate investments. To
the extent that the sub-adviser's investments differ from the portfolio
represented by the

12
<PAGE>

benchmark, there exists the potential for volatility of the return of the Fund
relative to its index. As the industry and sector composition of the market or
index changes over time, the implementation of Fund strategy can lead to
substantial differences in the sector or industry allocation of the Fund
relative to the market or index.

Prepayment Risk. Mortgage-backed securities are subject to the risk of
unanticipated prepayments of principal with respect to mortgages in the
security's underlying pool of assets. While principal pre-payments are passed
through to the holders of the securities, prepayments also reduce the future
payments on such securities and may reduce their value. Mortgage-backed
securities are subject to the risk that an unexpected rise in interest rates
will extend the life of a mortgage-backed security beyond the expected
prepayment time, typically reducing the security's value. Mortgage-backed
securities are subject to the risk that an unexpected decline in interest
rates will contract the life of a mortgage-backed security, thereby affecting
its prepayment schedule, which may affect the value of the security.

Reinvestment Risk. During periods of falling interest rates, debt
securities with a high stated interest rate may 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, the unanticipated
proceeds would likely be invested at lower interest rates, and the Fund's
income or yield 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.

Valuation Risk. A Fund may invest in securities that are difficult to value
and may value certain of its securities at a higher price than the market will
bear.

Types of Investments and Associated Risks

The following provides additional information on various types of
instruments in which the Funds may invest and their associated risks. Because
the Balanced Fund invests in shares of the Equity Fund and Income Fund, the
Balanced Fund indirectly invests in the same investments as listed for the
Equity Fund and Income Fund. For a more detailed description of the various
types of instruments in which the Funds may invest and their associated risks,
please see the section entitled "Description of Securities and Risks" in the
Statement of Additional Information ("SAI").

ADRs, EDRs and GDRs. The Small Cap Growth Fund, International Equity Fund
and Socially Responsible 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. The
Equity Fund may invest in ADRs. 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 Securities Risk."

Foreign Securities. The Equity Fund, International Equity Fund, Small Cap
Growth Fund, Socially Responsible Fund, Income Fund and Short-Term Investment
Fund may invest in foreign securities. Global investing involves economic and
political considerations not typically applicable to U.S. markets. These
considerations, which may favorably or unfavorably affect a Fund's
performance, include, but are not limited to, 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 heightened 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. For
a more detailed description of foreign securities, see the SAI.

Forward Foreign and Currency Exchange Contracts. The Small Cap Growth Fund
and International Equity Fund may invest in foreign currencies. The Income
Fund may enter into forward foreign currency exchange contracts ("forward
contracts") up to 15% of the value of its total assets, for hedging purposes
only. 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 within a specified range of prices.

13
<PAGE>

The Income Fund also may enter into foreign currency futures contracts and
foreign currency options up to 15% of the value of total assets, for hedging
purposes only. Foreign currency futures contracts are standardized contracts
traded on commodities exchanges that 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.
For a more detailed description of foreign currencies, see the SAI.

High Yield (High Risk) Securities. The Income Fund may invest in fixed
income or convertible securities rated lower than "Baa" by Moody's or "BBB" by
S&P, or unrated securities of comparable quality, which are commonly referred
to as "junk bonds" or "high yield/high risk" securities. These securities are
considered speculative and generally involve a higher risk of loss of
principal and income than higher-rated, investment grade securities. The value
of these securities generally fluctuate more than those of higher-rated
securities. The value of high-yield, high-risk securities may also be
influenced by the bond market's perception of an issuer's credit quality or
its outlook for economic growth. In times when economic conditions appear to
be deteriorating, lower-rated securities may decline in market value primarily
due to investors' heightened concern over an issuer's credit quality and its
ability to make timely interest and principal payments. Other potential risks
associated with investing in high-yield/high risk 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
subadviser'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. For
a description of ratings, see Appendix A. For a more detailed description of
high-yield (high-risk) securities, see the SAI.

Illiquid Securities. The Income Fund may invest up to 10% of its respective
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
Small Cap Growth Fund, International Equity Fund, Socially Responsible Fund
and Income 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 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. As a matter of operating policy, each Fund will invest only in
Rule 144A securities that are deemed to be liquid, and will limit its
investment in Rule 144A securities to 20% of each Fund's net assets.
The Equity Fund and Short-Term Investment Fund may not invest in restricted
securities or 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.

Mortgage- and Asset-backed Securities. The Income Fund may invest in
mortgage- and asset-backed securities which represent shares in a pool of
mortgages or other debt. These securities are generally pass-through
securities, which means that principal and interest payments on the underlying
securities (less servicing fees) are passed through to shareholders on a pro
rata basis. These securities involve prepayment risk, which is the risk that
the underlying mortgages or other debt may be refinanced or paid off before
they mature, particularly during periods of declining interest rates. In that
case, a portfolio
14
<PAGE>

manager may have to reinvest the proceeds from the securities at a lower rate.
This could lower a fund's return and result in losses to the fund if some
securities were acquired at a premium. Potential market gains on a security
subject to prepayment risk may be more limited than potential market gains on
a comparable security that is not subject to prepayment risk. The Income Fund
may also invest in collateralized mortgage obligations ("CMOs"). In a CMO, a
series of bonds or certificates is issued in multiple classes, which have
varying levels of risks. For a more detailed description of mortgage- and
asset-backed securities, see the SAI.

Adjustable Rate Mortgage Securities. The Income Fund may invest in
adjustable rate mortgage securities. Adjustable rate mortgage securities are
pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates. For a more detailed description of adjustable rate
mortgage securities, see the SAI.

Options and Futures Contracts. Options are the right, but not the
obligation to buy or sell a specified amount of securities or other assets on
or before a fixed date. Futures contracts are contracts that obligate the
buyer to receive and the seller to deliver an instrument or money at a
specified price on a specified date. The Funds 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.
The Funds may also invest in financial futures contracts and options on
futures contracts to commit funds awaiting investment in securities or
maintain cash liquidity or for other risk management purposes. 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 Fund 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.

Securities Lending. The Small Cap Growth Fund, International Equity Fund
and Socially Responsible 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. These Funds may
not make such loans in excess of 33 1/3 of the value of its total assets,
including collateral received. Loaned securities 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. The Equity Fund, Balanced Fund, Income Fund and Short-Term
Investment Fund may not make loans to other persons, except by the purchase of
obligations in which the Fund is authorized to invest.

Strategic Transactions. The International Equity Fund and Socially
Responsible Fund may engage in so-called "strategic transactions," and in this
regard, the Funds may purchase and sell exchange-listed and over-the-counter
put and call options on securities, on securities indices and on other
financial instruments, purchase and sell financial futures contracts and
options thereon, enter into various interest rate transactions such as swaps,
caps, floors or collars, enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures, purchase and sell derivatives and
other similar instruments, and engage in other similar or related investment
techniques or strategies. Any or all of these investment techniques or
strategies may be used at any time and there is no particular technique or
strategy that dictates the use of one technique or strategy rather than
another, as use of any "strategic transaction" is a function of numerous
variables, including market conditions.

Although certain "strategic transactions" may be used to enhance potential
gain, the Funds 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 a 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 Funds 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 such Fund's net
assets, not including any in-the-money amount on any such options in computing
such 5%. The Funds will comply with applicable regulatory requirements when
implementing these "strategic transactions." For a more detailed description
of strategic transactions, see the SAI.

When-Issued Purchases and Forward Commitments. The Small Cap Growth Fund,
International Equity Fund, Socially Responsible Fund and Income Fund each 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,

15
<PAGE>

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. 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. For a more detailed description of
when-issued purchases and forward commitments, see the SAI.

Management

The overall responsibility for the supervision of the affairs of the Funds
rests with the Board of Trustees. As described below, the Board has contracted
with others to provide certain services to the Funds.

Investment Adviser. Since March 1, 1999, the Horace Mann Mutual Funds (the
"Trust") employs Wilshire Associates Incorporated (the "Adviser") to manage
the investment and reinvestment of the assets of the Funds and to continuously
review, supervise and administer the Funds' investment programs under an
Investment Advisory Agreement dated March 1, 1999 (the "Investment Advisory
Agreement"). The Adviser's principal office is located at 1299 Ocean Avenue,
Santa Monica, California 90401-1085.

The Adviser's duties under the Investment Advisory Agreement include
recommending to the Board of Trustees one or more unaffiliated subadvisers to
provide a continuous investment program for each Fund or a portion of such
Fund's assets designated from time to time by the Adviser, including
investment, research, and management with respect to all securities and
investments and cash equivalents for the Fund or a designated portion of such
Fund's assets. The Adviser also reviews, monitors, and reports to the Board of
Trustees regarding the performance and investment procedures of each
subadviser and assists and consults with each subadviser in connection with
the Fund's continuous investment program. In addition, the Adviser maintains
books and records with respect to its services under the Investment Advisory
Agreement and furnishes the Board of Trustees with such periodic special
reports as the Board may request.

The Adviser selects investment subadvisers based on a continuing
quantitative and qualitative evaluation of their skills and proven abilities
in managing assets pursuant to a particular investment style. Short-term
performance is not by itself a significant factor in selecting or terminating
investment subadvisers, and therefore the Adviser does not anticipate frequent
changes in the investment subadvisers. Criteria for employment of investment
subadvisers includes, but is not limited to, the managers' philosophy and
process, people and organization, resources and performance. Investment
subadvisers may have different investment styles and security selection
disciplines.

The Adviser monitors the performance of each investment subadviser and of
the Funds and, to the extent it deems appropriate to achieve the Funds'
investment objective, reallocates assets among individual subadvisers or
recommends that the Funds employ or terminate particular investment
subadvisers.

Pursuant to an exemptive order from the SEC, the Adviser, without
shareholder approval, as normally would be required under the 1940 Act, may
replace or add subadvisers and enter into sub-advisory agreements with these
subadvisers upon approval of the Board of Trustees. Within sixty days of the
hiring of any new subadviser or the implementation of any proposed material
change to a sub-advisory agreement, shareholders will be furnished with an
information statement that contains all information that would be included in
a proxy statement regarding the new subadviser or sub-advisory agreement,
except as modified by exemptive relief. Moreover, the Adviser will not enter
into a sub-advisory agreement with any subadviser that is an "affiliated
person," as defined in the 1940 Act, of the Trust or the Adviser, other than
by reason of serving as a subadviser to one or more of the Funds, without
shareholder approval. In addition, whenever a subadviser is hired or fired,
the Adviser will provide the Board of Trustees with information showing the
expected impact on the Adviser's profitability and will report such impact
quarterly.

Each subadviser's fees will be paid by the Adviser out of the advisory fees
that it receives from each of the Funds. Fees paid to a subadviser of a Fund
with multiple subadvisers will depend upon the fee rate negotiated with the
Adviser and upon the percentage of the Fund's assets allocated to that
subadviser by the Adviser, which may vary from time to time. Thus, the basis
for fees paid to any such subadviser will not be constant, and the relative
amounts of fees paid to the various subadvisers of a Fund will fluctuate.
These internal fluctuations, however, will not affect the total advisory fees
paid by a Fund, which will remain fixed on the terms described above. The
Adviser may, however, determine in its discretion to waive a portion of its
fee if internal fluctuations in the fee to be paid to the subadvisers results
in excess profit to the Adviser. Because the Adviser will pay each
subadviser's fees out of its own fees from the Funds, there will not be any
"duplication" of advisory fees paid by the Funds.

Shareholders should recognize, however, that in engaging new subadvisers
and entering into sub-advisory agreements, the Adviser will negotiate fees
with those subadvisers and, because these fees are paid by the Adviser and not
directly by each Fund, any fee reduction negotiated by the Adviser may inure
to the Adviser's benefit and any increase may inure to its detriment. However,
the Adviser has voluntarily agreed to waive its fee to the extent any fee
reduction is negotiated with a subadviser. The fees paid to the Adviser by the
Funds and the fees paid to the subadvisers by the Adviser are considered by
the Board in approving the Funds' advisory and sub-advisory arrangements. Any
change in fees paid by a Fund to the Adviser would require shareholder
approval.

16
<PAGE>

For the services provided and the expenses assumed pursuant to the
Investment Advisory Agreement, the Adviser receives a fee based on each Fund's
average daily net assets, computed daily and payable monthly, at the following
annual rates:

<TABLE>
<CAPTION>
Fund Rate
---- ------
<S> <C>
Equity Fund............................................................. 0.400%
Balanced Fund........................................................... 0.400%*
Income Fund............................................................. 0.400%
Short-Term Investment Fund.............................................. 0.125%
Small Cap Growth Fund................................................... 1.150%
International Equity Fund............................................... 0.850%
Socially Responsible Fund............................................... 0.700%
</TABLE>

* The Balanced Fund operates under a fund of funds structure, primarily
investing in shares of the Equity Fund and the Income Fund. Under the fund
of funds arrangement, the Adviser receives directly from the Balanced Fund a
fee of 0.400% of the average daily net assets of the Balanced Fund that are
not invested in another Fund.

Through consulting arrangements, the Adviser has also provided the same
types of services to registered investment companies as are provided under the
Investment Advisory Agreement. As of December 31, 1999, the Adviser's
consulting division had approximately 220 clients with approximately $1
trillion in assets, for which the Adviser provides a variety of services, very
often including evaluation, selection, and monitoring of investment advisers,
as well as negotiating investment advisory contracts for the management of
clients' assets.

Prior to March 1, 1999, Horace Mann Investors, Inc. ("HM Investors") was
the investment adviser to the Small Cap Growth, International Equity and
Socially Responsible Funds since the beginning of operations of the Trust on
March 10, 1997, and the Equity, Income, Balanced and Short-Term Investment
Funds since the beginning of their operations as portfolios of the Trust on
May 1, 1997.

Under the prior investment management relationship, HM Investors was
compensated for both investment advisory and administrative services. HM
Investors continues to be compensated for administrative services under an
Administration Agreement described below. For the investment advisory and
administration services and facilities furnished to the Small Cap Growth Fund,
the International Equity Fund, and the Socially Responsible Fund, HM Investors
received, under the prior Management Agreement with the Trust, a monthly
management fee based upon each Fund's average daily net assets. This fee was
equal, on an annual basis, to 1.40% for the Small Cap Growth Fund, 1.10% for
the International Equity Fund, and 0.95% for the Socially Responsible Fund.

For the investment advisory and administration services and facilities
furnished to the Equity Fund, Balanced Fund, Income Fund, and Short-Term
Investment Fund, HM Investors received under the prior Management Agreement
with the Trust a two-part fee at the end of each month, as follows:

For part one, each Fund's management fee was accrued daily and calculated
on a pro rata basis by applying the following percentage rates to the
aggregate of all four Funds' daily net assets for the respective month: On the
first $100 million of assets, 0.250%; on assets over $100 million, 0.200%.

For part two, each Fund's management fee was accrued daily and calculated
by applying the following annual percentage rates to the average daily net
assets of each Fund for the respective month:

<TABLE>
<CAPTION>
Fund Net Assets Rate
---- ---------- ------
<S> <C> <C>
Equity Fund On initial $100 million 0.400%
On next $100 million 0.300%
Over $200 million 0.250%

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%

Income Fund On initial $100 million 0.250%
On next $100 million 0.200%
Over $200 million 0.150%

Short-Term On initial $100 million 0.125%
Investment Fund On next $100 million 0.100%
Over $200 million 0.075%
</TABLE>

The Subadvisers. Each subadviser serves pursuant to a subadvisory agreement
with the Adviser. The Adviser uses a "manager of managers" approach for the
Equity Fund and Income Fund (and indirectly the Balanced Fund) by which the
Adviser allocates each Fund's assets among one or more "specialist" investment
subadvisers. The assets of the Equity Fund are managed in part by Alliance
Capital Management, L.P. ("Alliance") successor of Sanford C. Bernstein & Co.,
Inc. ("Sanford Bernstein"), in part by Mellon Equity Associates, LLP ("Mellon
Equity") and in part by Wellington Management Company, LLP ("Wellington
Management"). The assets of the Income Fund are managed by Western Asset
Management Company ("Western Asset") and its affiliate Western Asset
Management Limited ("WAML"). Western Asset also serves as the subadviser for
the Short-Term Investment Fund. BlackRock Financial Management, Inc.
("BlackRock") serves as the subadviser for the Small Cap Growth Fund. Scudder
Kemper Investments, Inc., ("Scudder Kemper") serves as the subadviser for the
International Equity Fund and the Socially Responsible Fund.

The following chart summarizes who the subadvisers are for each Fund
(except the Balanced Fund*) and the current percentage of asset allocation to
each subadviser. The asset allocations for each subadviser are as of May 1,
2000, and are

17
<PAGE>

expected to deviate occasionally from these levels, but not significantly.

<TABLE>
<CAPTION>
% of Asset
Fund Subadviser Allocation
---- ---------- ----------
<S> <C> <C>
Equity Fund Alliance 40%
Mellon Equity 30%
Wellington Management 30%

Income Fund Western Asset and WAML** 100%

Short-Term Western Asset 100%
Investment Fund

Small Cap BlackRock 100%
Growth Fund

International Scudder Kemper 100%
Equity Fund

Socially Scudder Kemper 100%
Responsible Fund
</TABLE>

* Substantially all of the Balanced Fund's assets are allocated between shares
of the Equity Fund and Income Fund. See the Equity Fund and Income Fund in
the chart above, for the relevant subadvisers of the Balanced Fund.

** WAML will manage the Income Funds assets allocated by Western Asset to
foreign securities.

Sanford Bernstein's parent company, Sanford C. Bernstein Inc., a Delaware
holding company, entered into an agreement on June 20, 2000 with Alliance
pursuant to which Sanford Bernstein will combine with Alliance. No changes in
people or investment process by either firm are contemplated. Sanford
Bernstein brokerage will continue to be available through Sanford C. Bernstein
& Co., LLC, a successor broker-dealer and commodity trading advisor that will
be a subsidiary of Alliance. The transaction is in the form of an acquisition
by Alliance and is expected to close at the end of the third quarter or early
fourth quarter 2000.

Alliance, with assets under management totaling $394 billion at March 31,
2000, manages retirement assets for public and private employee benefit plans,
public employee retirement funds, foundations, endowments, banks, and
insurance companies worldwide. It is also a mutual fund sponsor with a family
of diversified portfolios distributed globally. At June 30, 2000,
approximately 35.3% of Alliance was owned by Alliance Capital Management
Holding L.P., and approximately 62.5% of Alliance was owned directly and
indirectly by AXA Financial, Inc. AXA Financial's indirect wholly-owned
subsidiary, Alliance Capital Management Corporation, is the general partner of
Alliance. AXA, a French insurance holding company owned, as of June 30, 2000,
approximately 60.3% of the issued and outstanding shares of the common stock
of AXA Financial.

Prior to the acquisition by Alliance, Sanford Bernstein, 767 Fifth Avenue,
New York, New York 10153, was an investment advisory firm founded in 1967. As
of October 31, 1999, Bernstein managed about $85.6 billion in assets. Two
managers are primarily responsibile for overseeing Sanford Bernstein's portion
of the Equity Fund and will also continue to be responsible for managing
Alliance portions after the acquisition. Marilyn G. Fedak, Chief Investment
Officer and Chairman of the U.S. Equity Investment Polciy Group at Sanford
Bernstein since 1993; has worked in investment management since 1972; has
managed portfolio investments since 1976; joined Sanford Bernstein in 1984;
B.A., Smith College; M.B.A., Harvard Business School. Steven Pisarkiewicz,
with Sanford Bernstein since 1989; Senior Portfolio Manager since 1997; B.S.,
University of Missouri; M.B.A., University of California at Berkeley.

Mellon Equity, 500 Grant Street, Suite 4200, Pittsburgh, Pennsylvania
15258, is a Pennsylvania limited liability partnership founded in 1987. Mellon
Bank, N.A., is the 99% limited partner and MMIP, Inc. is the 1% general
partner. MMIP, Inc. is a wholly owned subsidiary of Mellon Bank, N.A., which
itself is a wholly-owned subsidiary of the Mellon Financial Corporation.
Mellon Equity is a professional investment counseling firm that provides
investment management services to the equity and balanced pension, public fund
and profit-sharing investment management markets, and is an investment adviser
registered under the Investment Advisers Act of 1940. Mellon Equity has
discretionary management authority with respect to approximately $35 billion
of assets as of December 31, 1999.

Robert A. Wilk, CFA, Senior Vice President and Senior Portfolio Manager of
Mellon Equity, assumed the primary responsibility for the day-to-day
investment management of the portion of the Equity Fund's assets managed by
Mellon Equity on March 1, 1999. Mr. Wilk joined Mellon Equity in 1990 and
began his investment experience in 1971. Prior to joining Mellon Equity, Mr.
Wilk founded and was the Head of Equity Management at Triangle Portfolio
Associates, a former Mellon Bank subsidiary, which provided aggressive,
quantitatively managed portfolios. Mr. Wilk earned a B.S. in Management and
Electrical Engineering from M.I.T. and an M.S. in Finance from M.I.T.'s Sloan
School of Management. He is a member of the Association for Investment
Management and Research and of the Pittsburgh Society of Financial Analysts.

Wellington Management, 75 State Street, Boston, Massachusetts 02109, is a
registered investment adviser and has over $235 billion under management and
manages over 100 investment company portfolios as of December 31, 1999.

Matthew E. Megargel, CFA and Senior Vice President of Wellington
Management, serves as the portfolio manager for the portion of the Equity
Fund's assets managed by Wellington Management. Mr. Megargel began providing
investment advice to the Equity Fund on March 1, 1999. Mr. Megargel has been a
portfolio manager with Wellington Management since 1991 and has 17 years of
professional experience. He is supported by the

18
<PAGE>

U.S. Core Equity team and Wellington Management's 33 global industry analysts,
along with specialized fundamental, quantitative, and technical analysts,
macroanalysts and traders.

Western Asset, a wholly owned subsidiary of Legg Mason, Inc., acts as
investment adviser to institutional accounts, such as corporate pension plans,
mutual funds, and endowment funds. Total assets under management were
approximately $58.5 billion as of September 30, 1999. Western Asset is located
at 117 East Colorado Blvd., Pasadena, CA 91105.

Western Asset uses a strategy group comprised of professionals who are
expert in various investment disciplines to determine the investments for the
Short-Term Investment Fund and its portion of the Income Fund.

WAML, 155 Bishopsgate, London, EC2M 3XG, is a registered investment adviser
founded in 1984 by the American Express organization. In 1992, the firm became
a wholly-owned indirect subsidiary of Lehman Brothers Holdings, Inc. In 1996,
the firm was acquired by Legg Mason, Inc., on behalf of Western Asset
Management Company. WAML is responsible for the management of global and
international fixed income mandates including the non-US portion of Western
Asset's US domestic clients' portfolios. WAML has approximately $3 billion
under management as of December 31, 1999. WAML uses a strategy group comprised
of professionals who are expert in various investment diciplines to determine
the investments for its portion of the Income Fund.

BlackRock, 345 Park Avenue, New York, New York 10154, is a subsidiary of
PNC Bank and a registered investment adviser. BlackRock has approximately $165
billion under management as of December 31, 1999.

The Small Cap Growth Fund is managed by BlackRock's Small Cap Growth Team.
The team is supported by BlackRock's Small Cap Growth research analysts along
with quantitative analysts and traders. The Small Cap Growth team includes the
following individuals:

William J. Wykle is the Fund's lead portfolio manager. Mr. Wykle, who has
over 32 years of investment experience, has been a portfolio manager at
BlackRock since 1995 and had been a portfolio manager with PNC Asset
Management Group since 1986.

Thomas P. Callan, Portfolio Manager, has been with BlackRock since 1995 and
had been with PNC Bank since 1988. Mr. Callan has over 10 years of investment
experience.

Michael D. Carey, CFA, Vice President and investment manager, has primary
responsibility for the coverage of stocks in the business and commercial
services sector. Mr. Carey has been with BlackRock since 1992 and has over 8
years of investment experience.

Scudder Kemper, 345 Park Avenue, New York, New York, a registered
investment adviser, serves as the investment subadviser of the International
Equity Fund and Socially Responsible Fund. Zurich Financial Services, a
leading internationally recognized provider of insurance and financial
services in property/casualty and life insurance, reinsurance and structured
financial solutions, as well as asset management, owns approximately 70% of
Scudder Kemper with the balance owned by Scudder Kemper officers and
employees. Scudder Kemper is responsible for managing the Funds, subject to
the direction of the Board of Trustees and the Adviser. Scudder Kemper is one
of the largest and most experienced management organizations worldwide,
managing in excess of $280 billion in assets globally as of December 31, 1999.

The International Equity Fund and Socially Responsible Fund are managed by
teams of investment professionals who individually represent different areas
of expertise and who together develop investment strategies and make buy and
sell decisions. Supporting the fund managers are Scudder Kemper's many
economists, research analysts, traders and other investment specialists
located in offices across the United States and around the world.

The International Equity Fund's team includes the following individuals:

Effective August 1, 1997, Irene Cheng became the team's Lead Portfolio
Manager. Ms. Cheng, who has over 13 years of industry experience and joined
Scudder Kemper in 1993, focuses on portfolio management and equity strategy
for Scudder Kemper's international equity investments.

Nicholas Bratt, Portfolio Manager, leader of the global equity group,
directs Scudder Kemper's overall global equity investment strategies. Mr.
Bratt joined Scudder Kemper and the team in 1976.

Carol L. Franklin, Portfolio Manager, a member of the international equity
team, joined Scudder Kemper International Fund's portfolio management team in
1986. Ms. Franklin, who has over 20 years of experience in finance and
investing, joined Scudder Kemper in 1981.

Marc Slendebroek, Portfolio Manager, a member of the international equity
team, joined Scudder Kemper in 1994. Mr. Slendebroek began his investment
career in 1989.

The Socially Responsible Fund's team includes the following individuals:

Lori Ensinger, Lead Portfolio Manager, joined Scudder Kemper and the
portfolio management team in 1993. Ms. Ensinger focuses on stock selection and
investment strategy. She has worked as a portfolio manager since 1983.

Diane Sobin, Portfolio Manager, is the Fund's chief analyst and strategist
for convertible securities. Ms. Sobin, who has 15 years of investment
experience, joined Scudder Kemper in 2000 as a portfolio manager.

19
<PAGE>

Administrator. Horace Mann Investors, Inc. ("HM Investors"), a wholly owned
subsidiary of Horace Mann Educators Corporation which is the indirect owner of
Horace Mann Life Insurance Company ("HMLIC"), serves as administrator to the
Funds pursuant to an Administration Agreement dated March 1, 1999 with the
Trust (the "Administration Agreement"). HM 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 similar services
necessary for the proper management of each Fund's business affairs. Under the
current administration agreement, the Funds agree to assume and pay the
charges and expenses of its operations, including, by way of example, the
compensation of Trustees other than those affiliated with HM Investors,
charges and expenses of independent auditors, of legal counsel, of any
transfer or dividend disbursing agent, of the custodian, all costs of
acquiring and disposing of portfolio securities, interest, if any, on
obligations incurred by the Funds, reports and notices to shareholders, other
like miscellaneous expenses, and all taxes and fees to federal, state, or
other governmental agencies.

For the services and facilities furnished to the Funds, HM Investors
receives a fee based upon the combined assets of the Funds as follows: 0.25%
of the first $1 billion of assets and 0.20% of assets in excess of $1 billion.
An administration fee is charged directly against all assets in the Balanced
Fund. However, in order to avoid duplication of charges, under the fund of
funds structure, HM Investors has indicated that it intends to waive the
majority of the administrative fees charged to the Balanced Fund directly. In
addition, Balanced Fund shareholders will indirectly pay the administration
fee of the assets invested in the Equity Fund and Income Fund under the fund
of funds structure. Therefore, the aggregate administration fee directly and
indirectly borne by shareholders of the Balanced Fund will be higher than the
fees shareholders would bear if they invested directly in the Equity Fund and
Income Fund.

Support Services Agreement. The Trust has a support services agreement (the
"Support Services Agreement") with HMLIC under which the Trust has retained
HMLIC to provide certain administrative services to the Trust. As the Trust's
servicer, HMLIC will provide those administrative and support services
reasonably necessary to coordinate the activities of the Funds with those of
the separate account of HMLIC (for which the Funds serve as the underlying
investment medium) other than the administrative services provided by HM
Investors under the Administration Agreement. As compensation for its
services, HMLIC will receive a fee equal to 0.15% on the first $1 billion in
net assets and 0.10% on all assets over $1 billion.

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

Additional Performance Information

Other Information on the Performance of Alliance, Mellon Equity and Wellington
Management

The table below sets forth information relating to prior performance by
Alliance, Mellon Equity and Wellington Management, each for an AIMR
(Association for Investment Management and Research) compliant composite of
accounts managed in a similar manner as the Equity Fund and the equity portion
of the Balanced Fund. The performance data is included to provide investors
with the performance record for accounts managed by the subadvisers in a
substantially similar manner as the Equity Fund and the equity portion of the
Balanced Fund.

The table below shows its performance record for each subadviser over the
specified time periods. Each of the subadvisers' composites included in the
following performance composites have an investment objective and investment
policies, strategies and risks substantially similar to those of the Equity
Fund and the equity portion of the Balanced Fund.

The performance data included for Alliance, Mellon Equity and Wellington
Management does not represent the past, present or future performance of the
Equity Fund or the equity portion of the Balanced Fund. The actual past
performance of the Equity Fund and Balanced Fund is shown on pages 3 and 5,
respectively, of this prospectus, and shows performance for the Funds prior to
the change in advisers, which became effective March 1, 1999. Past performance
is no guarantee of future results. 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 the Funds may be worth more or less than their original cost at
the time of redemption. The performance presentation is not audited.

In addition, performance information for the Wilshire Large Value Index and
the Lipper Variable Annuity Growth & Income Index has been included for
comparison. 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 for all periods presented. The use of a different methodology to
calculate performance could result in different performance data.

20
<PAGE>

Average Annual Total Returns

<TABLE>
<CAPTION>
Wilshire Lipper Variable
Wellington Large Annuity Growth
Mellon Equity Management Value Income
Years Ended 12/31/99 Alliance(/1/) Associates(/2/) Company(/3/) Index(/4/) Index(/5/)
------------------------ ------------- --------------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
One Year................ 8.20% 5.64% 19.80% 8.27% 11.61%
Three Years............. 18.48 19.89 26.82 18.36 18.12
Five Years.............. 23.17 23.68 26.82 23.34 20.91
</TABLE>

(1) Alliance composite is presented gross of fees for the Diversified Equity
Value Product.

(2) Mellon Equity Associates composite is presented gross of fees for their
Russell 1000 Value product.

(3) Wellington Management composite is presented gross of fees for their Core
Growth and Income product.

(4) The Wilshire Large Value Index is an unmanaged, capitalization-weighted
index of large-capitalization, value oriented securities. Index returns
reflect dividends reinvested net of withholding tax. Investments cannot be
made directly into the Wilshire Large Value Index.

(5) The Lipper Variable Annuity Growth & Income Index is a representation of
average returns for select growth and income subaccounts in various
variable annuity programs. Index returns reflect dividends reinvested net
of withholding tax. Investments cannot be made directly into the Lipper
Variable Annuity Growth & Income Index.

Other Information on the Performance of BlackRock

The table below sets forth performance information relating to the
BlackRock Small Cap Growth Equity Portfolio-Investor A Shares ("BlackRock
Portfolio"), which is also managed by BlackRock. The BlackRock Portfolio is a
portfolio of an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), and which has an
investment objective, and investment policies, strategies and risks
substantially similar to those of the Small Cap Growth Fund.

The performance data for the BlackRock Portfolio is included to provide
investors with the performance record for an account substantially similar to
the Small Cap Growth Fund. Although BlackRock manages additional accounts in a
similar fashion, performance for those accounts has not been included because
the gross performance record would not be materially changed by inclusion of
such other accounts. In addition, performance information from the Russell
2000 Growth Index ("Russell 2000 Growth") has been included for comparison.
The actual total operating expenses of the BlackRock Portfolio were 1.23% for
the fiscal year ended September 30, 1999, and vary from year to year. The
gross operating expenses for the Small Cap Growth Fund were 1.71% for the
fiscal year ended December 31, 1999. HM Investors voluntarily waived fees and
reimbursed certain expenses. For the fiscal year ended December 31, 1999, the
net operating expenses were 1.62%.

The BlackRock Portfolio performance data does not represent the past,
present or future performance of the 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 Small Cap
Growth Fund or of BlackRock. 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 BlackRock Portfolio or the 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 reflects the deduction of a 4.5% front-end sales
charge for the BlackRock Portfolio. The Small Cap Growth Fund does not have a
front-end sales charge. All returns also reflect the brokerage costs borne by
the BlackRock Portfolio for all periods presented. The use of a different
methodology to calculate performance could result in different performance
data.

Average Annual Total Returns(/1/)

<TABLE>
<CAPTION>
BlackRock Russell
Portfolio(/2/) 2000 Growth(/3/)
-------------- ----------------
<S> <C> <C>
Year or Periods Ended 12/31/99
One Year.......................................... 64.16% 43.10%
Five Years........................................ 29.60% 18.99%
From Inception (9/14/93)............................ 24.61% 15.46%
</TABLE>

(1) Total Return Calculation--The Fund commenced operations on September 14,
1993. Class A shares were introduced on September 15, 1993. In accordance
with Securities and Exchange Commission policy, performance information
presented for Class A shares prior to their introduction date does not
reflect service and distribution fees and certain other expenses borne by
Class A shares which, if reflected, would reduce the performance quoted.
HM Investors should note that the information presented for Class A shares
prior to their introduction is based upon historical expenses of the
predecessor class, which do not reflect the actual expenses that an
investor would incur as a holder of Class A shares of the Fund.

(2) Had the sales charge not been reflected, the performance figures for the
one year, five years and since inception periods would have been 71.89%,
30.80% and 25.53%, respectively.

(3) Total return data is presented for each period. The Russell 2000 Growth is
an unmanaged securities index composed of those Russell 2000 Growth
securities with a greater-than-average growth orientation. The Russell
2000 Growth reflects the reinvestment of dividends and capital gain
distributions, if any, but does not reflect fees, brokerage commissions or
other expenses of investing. The Russell 2000 Growth is an unmanaged
securities index, and an investment cannot be made directly in the Russell
2000 Growth.

Other Information on the Performance of Scudder Kemper

International Equity Performance. The table below sets forth performance
information relating to the International Portfolio of the Scudder Kemper
Variable Life Investment Fund ("Scudder Kemper International Portfolio") that
is also managed by Scudder Kemper. The Scudder Kemper International Portfolio
is a portfolio of an open-end management investment

21
<PAGE>

company registered under the 1940 Act, and is the only other account managed
by Scudder Kemper that has investment objectives, policies, strategies and
risks substantially similar to those of the International Equity Fund.

The performance data for the Scudder Kemper International Portfolio is
included to provide investors with the performance record for an account
substantially similar to the 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 Kemper
International Portfolio were 1.03% in 1999, and vary from year to year. The
gross operating expenses for the International Equity Fund were 1.76% for the
fiscal year ended December 31, 1999. HM Investors voluntarily waived fees and
reimbursed certain expenses. For the fiscal year ended December 31, 1999, the
net operating expenses were 1.37%.

The Scudder Kemper International Portfolio performance data does not
represent the past, present or future performance of the 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
International Equity Fund or of Scudder Kemper. 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 Kemper International Portfolio
or the 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
Kemper 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
Kemper
International MSCI EAFE
Portfolio Index(/1/)
------------- ----------
<S> <C> <C>
Year or Periods Ended 12/31/99
One Year............................................... 54.51% 25.96%
Five Years............................................. 20.56 12.83
Ten Years.............................................. 13.25 7.01
From Inception (5/1/87)................................ 13.52 7.68
</TABLE>

(1) Total return data is presented for each period. The MSCI 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 do not reflect fees, brokerage commissions
or other expenses of investing. Investment cannot be made directly into
the MSCI EAFE Index.

Socially Responsible Growth and Income Performance. The table below sets
forth performance information relating to the Scudder Kemper Socially
Responsive Growth & Income Equity Only Composite ("Scudder Kemper Socially
Responsive Composite"). The performance data for the Scudder Kemper Socially
Responsive Composite is included to provide investors with the performance
record for a composite of accounts managed in a similar manner as the 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 Kemper Socially Responsive Composite currently is a composite of nine
separately managed accounts that are managed by Scudder Kemper. The Scudder
Kemper 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
or subject to certain restrictions imposed by the Internal Revenue Code, the
performance noted below might have been lower. The Scudder Kemper Socially
Responsive Composite is composed of accounts with investment objectives,
policies, strategies and risks substantially similar to those of the Socially
Responsible Fund. However, the Socially Responsible Fund differs from the
accounts in the Scudder Kemper Socially Responsive Composite in certain ways,
none of which HM Investors or Scudder Kemper believe would cause a material
change in investment results. While the nine accounts in the composite are
managed following Scudder Kemper'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 Socially Responsible Fund. The
performance of the Scudder Kemper Socially Responsive Composite is presented
net of the gross operating expenses for the Socially Responsible Fund which is
1.16%. HM Investors voluntarily waived fees and reimbursed certain expenses.
For the fiscal year ending December 31, 1999, the net operating expenses were
1.10%.

22
<PAGE>

The Scudder Kemper Socially Responsive Composite performance data does not
represent the past, present or future performance of the 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 Scudder Kemper. 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 Kemper Socially
Responsive Composite or investments in the 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 Kemper 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 Kemper
Socially Responsive
Composite S&P 500(/1/)
------------------- ------------
<S> <C> <C>
Year or Periods
Ended 12/31/99
One Year....................................... 5.33% 21.04%
Five Years..................................... 20.13 28.56
Ten Years...................................... 15.40 18.21
From Inception (12/31/89) 15.40 18.21
</TABLE>

(1) Total return data is presented for each period. The S&P 500 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 S&P 500.

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 Equity Fund were available to the public. While
Equity 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.

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). No
valuations are made for any day that the NYSE is closed, and for 2000, no
valuations are made for the day after Thanksgiving. 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 1940
Act, redemption proceeds are paid on or before the third business day
following the date the request for redemption is received.

Redemption of Equity Fund Shares by Existing Public Shareholders--The
Equity 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 or 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 Equity Fund, P.O. Box 4657, Springfield, Illinois 62708-4657, and
should identify the account by number and the name(s) in which 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 mail 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 an Equity Fund public shareholder has
accumulated $5,000 or more of Equity 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,

23
<PAGE>

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 Equity 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 distributes substantially all its net investment income and net
capital gains to shareholders each year. 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"), HMLIC 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
HMLIC.

Public shareholders of the Equity 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 shareholder's dividend option will be
changed to reinvestment. When new shares are added to an Equity 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, Equity 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 Equity Fund shares.

By law, a Fund must withhold 31% of your distributions and proceeds if you
do not provide your correct taxpayer identification number, or certify that
such number is correct, or if the IRS instructs the Fund to do so.

The tax discussion set forth above is included for general information
only. Prospective investors should consult their own tax advisers concerning
the federal, state, local or foreign tax consequences of an investment in a
Fund.

Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the SAI.

24
<PAGE>

Equity Fund Financial Highlights
-------------------------------------------------------------------------------

The financial highlights tables are intended to help you understand each
Fund's financial performance for the past 5 years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in each Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with each Fund's financial statements, are included in the annual
report, which is available upon request.

<TABLE>
<CAPTION>
Years Ended December 31

1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $ 24.34 $ 25.66 $ 23.76 $ 21.66 $ 17.64
Income From Investment
Operations:
Net Investment Income/1./. 0.26 0.41 0.40 0.43 0.52
Net Gains or Losses on
Securities (both realized
and unrealized)/1....../. (0.91) 1.51 5.09 5.08 5.41
-------- -------- -------- -------- --------
Total From Investment
Operations................. (0.65) 1.92 5.49 5.51 5.93
Less Distributions:
Dividends (from net
investment income)....... 0.25 0.41 0.39 0.40 0.49
Distributions (from
capital gains)........... 1.52 2.83 3.20 3.01 1.42
Returns of Capital........ 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total Distributions......... 1.77 3.24 3.59 3.41 1.91
-------- -------- -------- -------- --------
Net Asset Value, End of
Period..................... $ 21.92 $ 24.34 $ 25.66 $ 23.76 $ 21.66
======== ======== ======== ======== ========
Total Return (%)/2/,/3..../. (2.54)% 7.64% 23.45% 25.28% 33.67%
Ratios/Supplemental Data:
Net Assets, End of Period
($000s).................. $625,133 $670,731 $598,502 $430,556 $297,100
Ratio of Expenses to
Average Net Assets/4/,/5/
......................... 0.73 % 0.51% 0.53% 0.59% 0.63%
Ratio of Net Income to
Average Net Assets/4.../. 1.09 % 1.57% 1.50% 1.79% 2.50%
Portfolio Turnover Rate
(%)...................... 205.70 % 59.63% 54.56% 67.63% 64.59%
Ratio of Expenses to
Average Net Assets
(before waived and
reimbursed expenses)..... 0.79 % -- -- -- --
Ratio of Net Income to
Average Net Assets
(before waived and
reimbursed expenses...... 1.04 % -- -- -- --
</TABLE>

/1/The "Net investment income" per share and the "Net realized and unrealized
gains (losses)" per share represent a proportionate share respective to the
increase in net assets as presented in the Statement of Operations of the
Horace Mann Mutual Funds' Annual Report for the respective year.

/2/The total return is determined by the ratio of ending net asset value to
beginning net asset value, adjusted for reinvestment of dividends from net
investment income and net realized capital gains.

/3/If you are an annuity contract owner, the above total return does not
reflect expenses that apply to the separate account or related policies. The
inclusion of these charges would reduce the total return figures for all
periods shown.

/4/Ratios of Expenses and Net Investment Income to Average Net Assets do not
reflect commission credits and earnings credits on cash balances.

/5/Certain expenses for the Growth Fund were assumed or waived during 1999.

25
<PAGE>

Balanced Fund Financial Highlights
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Years Ended December 31

1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $ 18.90 $ 19.82 $ 18.94 $ 18.00 $ 15.26
Income From Investment
Operations:
Net Investment Income/1./. 0.62 0.73 0.65 0.60 0.67
Net Gains or Losses on
Securities (both realized
and unrealized)/1....../. (0.84) 0.77 2.92 2.70 3.46
-------- -------- -------- -------- --------
Total From Investment
Operations................. (0.22) 1.50 3.57 3.30 4.13
Less Distributions:
Dividends (from net
investment income)....... 0.63 0.74 0.62 0.57 0.61
Distributions (from
capital gains)........... 0.78 1.68 2.07 1.79 0.78
Returns of Capital........ 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total Distributions......... 1.41 2.42 2.69 2.36 1.39
-------- -------- -------- -------- --------
Net Asset Value, End of
Period..................... $ 17.27 $ 18.90 $ 19.82 $ 18.94 $ 18.00
======== ======== ======== ======== ========
Total Return (%)/2/,/3..../. (1.11)% 7.68% 19.04% 18.27% 27.12%
Rations/Supplemental Data:
Net Assets, End of Period
($000s).................. $402,539 $427,920 $387,110 $300,551 $228,193
Ratio of Expenses to
Average Net Assets/4.../. 0.75 % 0.50% 0.51% 0.56% 0.59%
Ratio of Net Income to
Average Net
Assets/4/,/5.........../. 3.30 % 3.60% 3.12% 3.12% 3.79%
Portfolio Turnover Rate
(%)...................... 155.53 % 63.69% 77.54% 72.10% 64.80%
Ratio of Expenses to
Average Net Assets
(before waived and
reimbursed expenses)..... 0.77 % -- -- -- --
Ratio of Net Income to
Average Net Assets
(before waived and
reimbursed expenses...... 3.28 % -- -- -- --
</TABLE>

/4/Ratio of expenses to average net assets do not reflect commission credits.

/5/Certain expenses for the Balanced Fund were assumed or waived during 1999.

26
<PAGE>

Income Fund Financial Highlights
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Years Ended December 31

1999 1998 1997 1996 1995
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $ 13.24 $ 13.00 $12.69 $ 13.03 $ 12.02
Income From Investment Operations:
Net Investment Income/1......./. 0.76 0.78 0.81 0.76 0.80
Net Gains or Losses on
Securities (both realized and
unrealized)/1................/. (0.97) 0.27 0.39 (0.31) 0.99
------- ------- ------ ------- -------
Total From Investment Operations.. (0.21) 1.05 1.20 0.45 1.79
Less Distributions:
Dividends (from net investment
income)........................ 0.79 0.69 0.85 0.79 0.78
Distributions (from capital
gains)......................... -- 0.12 0.04 -- --
Returns of Capital.............. 0.00 0.00 0.00 0.00 0.00
------- ------- ------ ------- -------
Total Distributions............... 0.79 0.81 0.89 0.79 0.78
------- ------- ------ ------- -------
Net Asset Value, End of Period.... $ 12.24 $ 13.24 $13.00 $ 12.69 $ 13.03
======= ======= ====== ======= =======
Total Return (%)/2/,/3........../. (1.57)% 8.09% 9.42% 3.50% 14.93%
Ratios/Supplemental Data:
Net Assets, End of Period
($000s)........................ $13,175 $13,959 $9,658 $10,848 $10,532
Ratio of Expenses to Average Net
Assets/4/,/5................./. .99% 0.88% 0.92% 0.70% 0.62%
Ratio of Net Income to Average
Net Assets..................... 5.83% 5.85% 6.09% 5.88% 6.16%
Portfolio Turnover Rate (%)..... 33.09% 46.60% 96.80% 112.60% 74.53%
Ratio of Expenses to Average Net
Assets (before waived and
reimbursed expenses)........... 1.03% -- -- 0.91% 0.88%
Ratio of Net Income to Average
Net Assets (before waived and
reimbursed expenses)........... 5.79% -- -- 5.67% 5.89%
</TABLE>

/4/Ratios of Expenses and Net Investment Income to Average Net Assets do not
reflect Commission Credits and earnings credit on asset balances.

/5/Certain expenses for the Income Fund were assumed or waived by Horace Mann
Investors, Inc. through December 31, 1996.

27
<PAGE>

Short-Term Investment Fund Financial Highlights
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Years Ended December 31

1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 9.98 $ 9.99 $10.03 $10.00 $10.08
Income From Investment Operations:
Net Investment Income/1............/. 0.47 0.49 0.51 0.50 0.53
Net Gains or Losses on Securities
(both realized and unrealized)/1../. 0.01 0.01 -- (0.01) --
------ ------ ------ ------ ------
Total From Investment Operations....... 0.48 0.50 0.51 0.49 0.53
Less Distributions:
Dividends (from net investment
income)............................. 0.56 0.51 0.55 0.46 0.61
Distributions (from capital gains)... 0.01 -- -- -- --
Returns of Capital................... 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions.................... 0.57 0.51 0.55 0.46 0.61
------ ------ ------ ------ ------
Net Asset Value, End of Period......... $ 9.89 $ 9.98 $ 9.99 $10.03 $10.00
====== ====== ====== ====== ======
Total Return (%)/2/,/3.............../. 4.77% 4.97% 5.09% 5.02% 5.25%
Ratios/Supplemental Data:
Net Assets, End of Period ($000s).... $1,743 $1,331 $1,151 $1,229 $1,006
Ratio of Expenses to Average Net
Assets/4........................../. 0.32% 0.69% 0.50% 0.53% 0.84%
Ratio of Net Income to Average Net
Assets.............................. 4.71% 4.78% 4.98% 4.93% 5.11%
Portfolio Turnover Rate (%).......... 0.00% 0.00% 0.00% 0.00% 0.00%
Ratio of Expenses to Average Net
Assets (before waived and reimbursed
expenses)........................... 1.90% 2.59% 2.52% 2.44% 2.35%
Ratio of Net Income to Average Net
Assets (before waived and reimbursed
expenses)........................... 3.13% 2.88% 2.96% 3.02% 3.60%
</TABLE>

/4/Certain expenses for the Short-Term Investment Fund were assumed or waived
by Horace Mann Investors, Inc. through December 31, 1999.

28
<PAGE>

Small Cap Growth Fund Financial Highlights
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Periods Ended December 31

1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $ 12.38 $ 11.70 $ 10.00
Income From Investment Operations:
Net Investment Income/1.................../. (0.15) (0.07) (0.02)
Net Gains or Losses on Securities (both
realized and unrealized)/1.............../. 8.96 0.75 1.72
-------- -------- --------
Total From Investment Operations.............. 8.81 0.68 1.70
Less Distributions:
Dividends (from net investment income)...... -- -- --
Distributions (from capital gains).......... 1.43 -- --
Returns of Capital.......................... 0.00 0.00 0.00
-------- -------- --------
Total Distributions........................... 1.43 -- --
-------- -------- --------
Net Asset Value, End of Period................ $ 19.76 $ 12.38 $ 11.70
======== ======== ========
Total Return (%)/2/,/3/,/4................../. 71.55 % 5.81 % 17.01 %
Ratios/Supplemental Data:
Net Assets, End of Period ($000s)........... $ 60,497 $ 28,655 $ 16,525
Ratio of Expenses to Average Net Assets/5./. 1.50 % 1.11 % 0.78 %
Ratio of Net Income to Average Net Assets... (1.03)% (0.59)% (0.19)%
Portfolio Turnover Rate (%)................. 172.20 % 168.31 % 91.49 %
Ratio of Expenses to Average Net Assets
(before waived and reimbursed expenses).... 1.64 % 1.75 % 1.44 %
Ratio of Net Income to Average Net Assets
(before waived and reimbursed expenses).... (1.17)% (1.23)% (0.85)%
</TABLE>

/4/The return for 1997 is not annualized.

/5/Certain expenses for the Fund were assumed and/or waived by Horace Mann
Investors, Inc. since its inception of investment operations, March 10, 1997.

29
<PAGE>

International Equity Fund Financial Highlights
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Periods Ended December 31

1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 12.13 $ 10.27 $ 10.00
Income From Investment Operations:
Net Investment Income/1...................../. 0.08 0.11 0.08
Net Gains or Losses on Securities (both
realized and unrealized)/1/ ................. 6.18 1.84 0.27
-------- -------- -------
Total From Investment Operations................ 6.26 1.95 0.35
Less Distributions:
Dividends (from net investment income)........ 0.03 0.09 0.08
Distributions (from capital gains)............ 0.84 -- --
Return of Capital............................. 0.00 0.00 0.00
-------- -------- -------
Total Distributions............................. 0.87 0.09 .08
-------- -------- -------
Net Asset Value, End of Period.................. $ 17.52 $ 12.13 $ 10.27
======== ======== =======
Total Return (%)/2/,/3/,/4/,.................... 51.83% 18.95% 3.46%
Ratios/Supplemental Data:
Net Assets, End of Period ($000s)............. $ 26,403 $ 10,311 $ 5,214
Ratio of Expenses to Average Net Assets/5.../. 1.30% 1.03% 0.46%
Ratio of Net Income to Average Net Assets..... 0.53% 0.99% 1.29%
Portfolio Turnover Rate (%)................... 77.74% 57.71% 31.99%
Ratio of Expenses to Average Net Assets
(before waived and reimbursed expenses)...... 1.69% 2.06% 1.82%
Ratio of Net Income to Average Net Assets (be-
fore waived and reimbursed expenses)......... 0.14% (0.04)% (0.07)%
</TABLE>

/4/The return for 1997 is not annualized.

/5/Certain expenses for the Fund were assumed and/or waived by Horace Mann
Investors, Inc. since its inception of investment operations, March 10, 1997.

30
<PAGE>

Socially Responsible Fund Financial Highlights
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Periods Ended December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................ $12.99 $12.10 $10.00
Income From Investment Operations:
Net Investment Income/1........................./. 0.17 0.27 0.10
Net Gains or Losses on Securities (both realized
and unrealized)/1............................../. 0.91 0.91 2.20
-------- -------- --------
Total From Investment Operations.................... 1.08 1.18 2.30
Less Distributions:
Dividends (from net investment income)............ 0.14 0.17 0.10
Distributions (from capital gains)................ 0.12 0.12 0.10
Returns of Capital................................ 0.00 0.00 0.00
-------- -------- --------
Total Distributions................................. 0.26 0.29 0.20
-------- -------- --------
Net Asset Value, End of Period...................... $13.81 $12.99 $12.10
======== ======== ========
Total Return (%)/2/,/3/,/4......................../. 8.39% 9.80% 23.04%
Ratios/Supplemental Data:
Net Assets, End of Period ($000s)................. $59,533 $35,564 $9,213
Ratio of Expenses to Average Net Assets/5......./. 1.00% 0.64% 0.49%
Ratio of Net Income to Average Net Assets......... 1.28% 2.10% 1.65%
Portfolio Turnover Rate (%)....................... 60.46% 41.63% 20.85%
Ratio of Expenses to Average Net Assets (before
waived and reimbursed expenses).................. 1.12% 1.12% 1.16%
Ratio of Net Income to Average Net Assets (before
waived and reimbursed expenses).................. 1.16% 1.62% 0.98%
</TABLE>

/4/The return for 1997 is not annualized.

/5/Certain expenses for the Fund were assumed and/or waived by Horace Mann
Investors, Inc. since its inception of investment operations, March 10, 1997.

31
<PAGE>

Other Information

Public Shareholder Communications
To ensure receipt of communications related to investments in the Equity
Fund, public shareholders must notify the Equity Fund of address changes.
Notice of a change in address may be sent to the Horace Mann Equity Fund, 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) 535-7123 or by calling (217) 789-2500 or (800) 999-1030 (toll-free).

Ratings of Debt Obligations

<TABLE>
<CAPTION>
Standard &
Moody's Investors Poor's Ratings
Definition Service, Inc Group
-------------------------------------------------------------------------------
<S> <C> <C>
Long-term Aaa AAA
Highest quality

High quality Aa AA

Upper medium grade A A

Medium grade Baa BBB

Low Grade Ba BB

Speculative B B

Submarginal Caa, Ca, C CCC, CC, C

Probably in default D D
-------------------------------------------------------------------------------
<CAPTION>
Moody's S&P

<S> <C> <C>
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>

32
<PAGE>

Statement of Additional Information.
A copy of the Statement of Additional Information providing more detailed
information about the Fund is available, without charge upon request. The
Table of Contents of this statement follows:

<TABLE>
<CAPTION>
Topic Page
----- ----

<S> <C>
The Trust And The Funds.................................................... B-1

Additional Investment Policies............................................. B-1
Equity Fund............................................................ B-1
Balanced Fund.......................................................... B-2
Income Fund............................................................ B-2
Short-term Investment Fund............................................. B-2
Small Cap Growth Fund.................................................. B-2
International Equity Fund.............................................. B-2
Socially Responsible Fund.............................................. B-2

Investment Restrictions.................................................... B-3

Description of Securities and Risks........................................ B-5

Income Fund--Benchmark..................................................... B-22

Management of The Funds.................................................... B-22

Investment Advisory Agreements............................................. B-24

Brokerage Allocation....................................................... B-26

Other Services............................................................. B-27

Voting Rights.............................................................. B-27

Purchase, Redemption And Pricing of Fund Shares............................ B-28

Tax Status................................................................. B-29

Control Persons And Principal Holders of Securities........................ B-30

General Information........................................................ B-32

Financial Statements....................................................... B-32

Appendix A: Description of Commercial Paper And Bond Ratings............... A-1
</TABLE>

33
<PAGE>

Horace Mann Life Insurance Company
P.O. Box 4657
Springfield IL 62708-4657
(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) 535-7123.

Equity Fund public shareholders may contact the Equity Fund by calling (800)
999-1030 or (217) 789-2500. Written questions concerning a Equity Fund public
shareholder's account may be sent by mail to Horace Mann Equity Fund, P.O. Box
4657, Springfield, Illinois 62708-4657 or by telefacsimile (FAX) transmission
to (217) 535-7123.

Additional Information
Additional Information about the Fund's investments is available in the
Fund's annual and semi-annual report to Shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. The shareholder reports are incorporated by reference into this
Prospectus, which means that they are part of this Prospectus for legal
purposes.

The SAI contains more detailed information about the Fund and the Portfolios.
The current SAI has been filed with the Securities and Exchange Commission and
is incorporated by reference into this Prospectus, which means that it is part
of this Prospectus for legal purposes.

To receive, without charge, a copy of the annual and/or semi-annual reports
of the Horace Mann Family of Funds and/or a copy of the Statement of Additional
Information for the Horace Mann Mutual Funds, please complete the following
request form and mail it to the address indicated below, or send it by
telefacsimile (FAX) transmission to (217) 535-7123 or telephone (217) 789-2500
or (800) 999-1030 (toll-free).

Horace Mann Mutual Funds
P.O. Box 4657
Springfield, Illinois 62708-4657

Please provide free of charge the following information:

1999 Annual Report of the Horace Mann Mutual Funds

Statement of Additional Information dated May 1, 2000, as supplemented from
time to time, for the Horace Mann Mutual Funds.

Please mail the above documents to:

--------------------------------------------------------------------------------
(Name)

--------------------------------------------------------------------------------
(Address)

--------------------------------------------------------------------------------
(City/State/Zip)

Information about the Fund (including the SAI) can be reviewed and copied at
the SEC's Public Reference Room in Washington, D.C. Also, information on the
operation of the public reference room may be obtained by calling the
Commission at 1-800-SEC-0330. Reports and other information about the Fund are
available on the SEC's Internet site at http://www.sec.gov and copies of this
information may be obtained, upon payment of a duplicating fee, by writing the
Public Reference Section of the SEC Washington, D.C. 20549-0102.

No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Fund or its distributor. The Prospectus does not constitute
an offering by the Fund or its distributor in any jurisdiction in which such
offering may not lawfully be made.

Investment Company Act File No.: 811-07917

IA-004389(05/00)
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

HORACE MANN MUTUAL FUNDS

May 1, 2000

This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the current Prospectus, dated May 1, 2000, as supplemented
from time to time. The financial statements for the Equity Fund, Balanced Fund,
Income Fund, Short-Term Investment Fund, Small Cap Growth Fund, International
Equity Fund and Socially Responsible Fund for the year ended December 31, 1999,
and the Report of Independent Auditors thereon, are incorporated herein by
reference from the Funds' Annual Report dated December 31, 1999. Copies of the
Prospectus and the Funds' financial statements 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) 535-7123, or by telephoning
(217) 789-2500 or (800) 999-1030 (toll-free).

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
The Trust and the Funds............................................. B-1
Additional Investment Policies...................................... B-1
Equity Fund.................................................... B-1
Balanced Fund.................................................. B-2
Income Fund.................................................... B-2
Short-Term Investment Fund..................................... B-2
Small Cap Growth Fund.......................................... B-2
International Equity Fund...................................... B-2
Socially Responsible Fund...................................... B-2

Investment Restrictions............................................. B-3
Description of Securities and Risks................................. B-5
Income Fund - Benchmark............................................. B-22
Management of the Funds............................................. B-22
Investment Advisory Agreements...................................... B-24
Brokerage Allocation................................................ B-26
Other Services...................................................... B-27
Voting Rights....................................................... B-27
Purchase, Redemption and Pricing of Fund Shares..................... B-28
Tax Status.......................................................... B-29
Control Persons and Principal Holders of Securities................. B-30
General Information................................................. B-32
Financial Statements................................................ B-32
Appendix A Description of Commercial Paper and Bond Ratings......... A-1
</TABLE>
<PAGE>

THE TRUST AND THE FUNDS

The Trust is an open-end, diversified management investment company 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.

The Trust employs Wilshire Associates Incorporated (the "Adviser") to manage the
investment and reinvestment of the assets of the Funds and to continuously
review, supervise and administer the Funds' investment programs. The Adviser has
entered into agreements with Sanford Bernstein Co., Inc., Mellon Equity
Associates, LLP and Wellington Management Company, LLP to act as subadvisers for
the Equity Fund and the equity portion of the Balanced Fund, with Wellington
Management Company, LLP, Western Asset Management Company and Western Asset
Management Company Limited to act as the subadviser for the Income Fund, the
fixed income portion of the Balanced Fund; with Wellington Management Company,
LLP to act as the subadviser for the Short-Term Investment Fund, with BlackRock
Financial Management, Inc. to act as the subadviser for the Small Cap Growth
Fund and with Scudder Kemper Investments, Inc. to act as the subadviser for the
International Equity Fund and the Socially Responsible Fund. Under the fund of
funds structure the Adviser allocates the Balanced Fund's assets between the
Equity Fund and Income Fund.

The investment objectives and policies of each Fund are described in the
prospectus. 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" as defined in the Investment Company Act of
1940 (the "1940 Act").

ADDITIONAL INVESTMENT POLICIES

The following is a discussion of additional investment policies not discussed in
the Trust's Prospectus.

Equity Fund. The portfolio investments of the Equity 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
Equity Fund follows a policy of flexibility. The Equity Fund does not invest in
companies for the purpose of exercising control of management. Moreover, the
Fund will not invest in securities subject to restrictions on disposition under
the Securities Act of 1933 (the "1933 Act") or purchase securities not freely
marketable.

It is the policy of the Equity 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 Equity 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.

The Equity Fund may invest a portion of its assets in U.S. dollar-denominated
investment grade fixed-income securities. Debt securities must be rated within
the four highest ratings as determined by Moody's Investors Service, Inc.
("Moody's") or by Standard and Poor's Corporation ("S&P") except that up to 10%
of the Fund's assets may be invested in U.S. dollar-denominated foreign debt
securities within the three highest ratings as determined by Moody's or
S&P.

B-1
<PAGE>

For 1998 and 1999, the Equity Fund's portfolio turnover rates were 59.63% and
205.70%, respectively. The high portfolio turnover rate for 1999 was primarily
due to the transition to a multi-manager approach for the Equity Fund in March
of 1999. To a lesser extent, the higher portfolio turnover rate was due to the
extreme volatility in the market as portfolio managers used individual security
price fluctuations as opportunities to buy or sell. Although it is impossible to
predict with certainty the Equity Fund's ongoing portfolio turnover rate, the
subadviser expects that, under normal circumstances, it will be less than 100%
each year.

Balanced Fund. During 1998 and 1999, the Balanced Fund's portfolio turnover
rates were 63.69% and 155.53%, respectively. The annual turnover rates of the
common stock portion of the Balanced Fund's portfolio for 1998 and 1999 were
63.25% and 226.63%, respectively, and for the fixed income portion for 1998 and
1999 were 64.37% and 42.15%, respectively. The high portfolio turnover rate for
1999 was primarily due to the transition to a multi-manager approach for the
Equity Fund in March of 1999. To a lesser extent, the higher portfolio turnover
rate was due to the extreme volatility in the market as portfolio managers used
individual security price fluctuations as opportunities to buy or sell.
Although it is impossible to predict with certainty the Balanced Fund's ongoing
portfolio turnover rate, the subadvisers expect 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 subadvisers' desire to optimize rates of return during
such periods.

Income Fund. 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 eligible for resale under Rule 144A under the 1933
Act.

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 convertible
debt securities or preferred stock, or upon exercise of warrants acquired with
debt securities. Currently, the Fund intends to limit its investment in
derivatives pursuant to guidelines adopted by the Fund's Trustees.

The Income Fund may invest in repurchase and reverse repurchase agreements,
provided that the market value of the underlying security is at least 102% of
the price of the repurchase agreement.

Instead of holding its entire portfolio to maturity, the Income Fund will engage
in portfolio trading when trading will help achieve its investment objective.
Portfolio turnover is expected to be moderate.

During 1998 and 1999, the Income Fund's portfolio turnover rates were 46.60% and
33.09%, respectively. Although it is impossible to predict with certainty the
Income Fund's ongoing portfolio turnover rate, the subadvisers expect 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 subadviser's desire to optimize rates of return
during such periods.

Short-Term Investment Fund. The Short-Term Investment Fund will not invest in
securities subject to restriction on disposition under the 1933 Act nor purchase
securities not freely marketable. 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 reserve repurchase agreements. There is no
turnover information for the Short-Term Fund as it holds its securities for less
than one year.

Small Cap Growth Fund. During 1998 and 1999, the Small Cap Growth Fund's
portfolio turnover rate was 168.31% and 172.20%, respectively. Although it is
impossible to predict with certainty the Small Cap Growth Fund's turnover rate,
the subadviser expects that under normal circumstances it will be less than 150%
each year.

International Equity Fund. The International Equity Fund may engage in so-called
"strategic transactions" as described in the prospectus under the heading "Types
of Investments and Associated Risks" and below in the SAI under the heading of
"Description of Securities and Risks." During 1998 and 1999, the International
Equity Fund's portfolio turnover rate was 57.71% and 77.74%, respectively.
Although it is impossible to predict with certainty the International Equity
Fund's ongoing portfolio turnover rate, the subadviser expects that under normal
circumstances it will be less than 150% each year.

Socially Responsible Fund. The Socially Responsible Fund may engage in so-called
"strategic transactions" as described in the prospectus under the heading "Types
of Investments and Associated Risks" and below in the SAI under the heading of
"Description of Securities and Risks." During 1998 and 1999, the Socially
Responsible Fund's portfolio turnover rate was 41.63% and 60.46%, respectively.
Although it is impossible to predict with certainty the Socially

B-2
<PAGE>

Responsible Fund's ongoing portfolio turnover rate, the subadviser expects that
under normal circumstances it will be less than 150% each year.

INVESTMENT RESTRICTIONS

Each Fund operates under its respective fundamental investment
restrictions, set forth below, which, along with each Fund's objective, cannot
be changed without the approval of a "majority of the outstanding voting
securities." A "majority of the outstanding voting securities" of a Fund is
defined in the 1940 Act 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 Equity 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, or, for the Balanced Fund only,
any security issued by an investment company or series thereof) 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 1/2 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;

(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;

B-3
<PAGE>

(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, and
except that during any period in which the Balanced Fund operates as a
"fund of funds" in accordance with the Prospectus and applicable law, the
Balanced Fund may purchase without limit shares of the Equity Fund, the
Income Fund, and any other mutual fund currently existing or hereafter
created whose investment adviser is the Balanced Fund's adviser or an
affiliate thereof, or the respective successors in interest of any such
mutual fund or adviser.

Dollar rolls are not considered borrowing and therefore are not subject to
investment restriction 2 above. For the purposes of investment restriction 9
above, the entity sponsoring a mortgage or asset backed security will be
considered the issuer. For the purposes of investment restriction 11 above,
commodities and commodity contracts are interpreted as physical commodities and
therefore financial futures contracts and related options will not be considered
commodities or commodity contracts under the restriction.

The Equity 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 1933 Act (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 1933 Act, except for securities
eligible for resale pursuant to Rule 144A under the 1933 Act.

The Small Cap Growth Fund, International Equity Fund and Socially Responsible
Fund each may not:

(1) act as an underwriter of securities, except insofar as it may be deemed an
underwriter for purposes of the 1933 Act on disposition of securities
acquired subject to legal or contractual restrictions on resale;

(2) purchase or sell real estate (although it may purchase securities secured
by real estate or interests therein, or securities issued by companies
which invest in real estate or interests therein), commodities, or
commodity contracts, except that it may enter into (a) futures and options
on futures and (b) forward currency contracts;

(3) make loans, but this restriction shall not prevent the Fund from (a) buying
a part of an issue of bonds, debentures, or other obligations, (b)
investing in repurchase agreements, or (c) lending portfolio securities,
provided that it may not lend securities if, as a result, the aggregate
value of all securities loaned would exceed 33 1/3% of its total assets
(taken at market value at the time of such loan);

(4) borrow, except that it may (a) borrow up to 33 1/3% of its total assets,
taken at market value at the time of such borrowing, as a temporary measure
for extraordinary or emergency purposes, but not to increase portfolio
income (the total of reverse repurchase agreements and such borrowings will
not exceed 33 1/3% of its total assets, and the Fund will not purchase
additional securities when its borrowings, less proceeds receivable from
sales of portfolio securities, exceed 5% of its total assets) and (b) enter
into transactions in options, futures, and options on futures;

B-4
<PAGE>

(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 1940
Act.

The Small Cap Growth Fund, International Equity Fund and Socially Responsible
Funds are also subject to the following nonfundamental restrictions and
policies, which may be changed by the Board of Trustees. Each Fund may not:

(1) invest in companies for the purpose of exercising control or
management;

(2) 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;

(3) 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;

(4) 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;

(5) 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; and

(6) hedge by purchasing put and call options, futures contracts, or derivative
instruments on securities, in an aggregate amount equivalent to more than
10% of its total assets.

(7) 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.

DESCRIPTION OF SECURITIES AND RISKS

This section should be read in conjunction with each Fund's description in the
Prospectus and each Fund's fundamental and nonfundamental investment
policies. Because the Balanced Fund invests in shares of the Equity Fund and
Income Fund, the Balanced Fund indirectly invests in the same investments as
listed for the Equity Fund and Income Fund.

Repurchase Agreements. Each Fund may invest in repurchase agreements. The Equity
Fund, Income Fund and Short-Term Investment Fund will not enter into repurchase
agreements if, as a result, more than 10 % of the Fund's total assets would be
subject to repurchase agreements maturing in more than seven days. Repurchase
agreements are agreements under which 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

B-5
<PAGE>

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, 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 a Fund will evaluate the creditworthiness 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 and Other Borrowings. Each Fund is authorized to
borrow money and may invest in reverse repurchase agreements. If the securities
held by a 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. Each Fund may borrow through reverse repurchase agreements under
which a Fund sells portfolio securities to financial institutions such as banks
and broker-dealers and agrees to repurchase them at a particular date and price.
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 maintain a segregated account with its
custodian containing cash, U.S. Government or other appropriate liquid high-
grade debt securities having a value at least 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 that the Fund 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. For the Small Cap
Growth Fund, International Equity Fund and Socially Responsible Fund, 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 a Fund's total assets, these Funds will not make any
additional investments. For the Equity Fund, Balanced Fund, Income Fund and
Short-Term Investment Fund, repurchase agreements, together with other
borrowings, will not exceed 15% of a Fund's total assets taken at market value.
If the asset coverage for such borrowings falls below 300%, these Funds will
reduce, within three days, the amount of its borrowings to provide for 300%
asset coverage. The Equity Fund, Balanced Fund, Income Fund and Short-Term
Investment Fund will repay all borrowings before making additional investments.

High-Yield (High-Risk) Securities. To the extent a Fund can invest in high-yield
(high-risk) securities, the following sections are applicable. 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 by 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. Interest-bearing securities
typically experience appreciation when interest rates decline and depreciation
when interest rates rise. The market values of lower-quality and comparable

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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 funds 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 by 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 generally 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 in the
marketplace (discussed below in "Liquidity and Valuation"), 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 Subadvisers' credit
analysis than would be the case with investments in investment-grade debt
obligations. The Advisers employ their 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 Subadvisers continually
monitor the investments in each Fund's portfolio and carefully evaluate 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 bids 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.

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Warrants. Each Fund may invest in warrants. Warrants are instruments that
provide the owner with the right to purchase a specified security, usually an
equity security such as common stock, at a specified price (usually representing
a premium over the applicable market value of the underlying equity security at
the time of the warrant's issuance) and usually during a specified period of
time. While warrants may be traded, there is often no secondary market for them.
Moreover, they are usually issued by the issuer of the security to which they
relate. The Funds will invest in publicly traded warrants only. Warrants do not
have any inherent value. To the extent that the market value of the security
that may be purchased upon exercise of the warrant rises above the exercise
price, the value of the warrant will tend to rise. To the extent that the
exercise price equals or exceeds the market value of such security, the warrants
will have little or no market value. If warrants remain unexercised at the end
of the specified exercise period, they lapse and the investing Fund's investment
in them will be lost. In view of the highly speculative nature of warrants, as a
matter of operating policy, the Equity Fund, International Equity Fund, Socially
Responsible Fund, Income Fund and Short-Term Investment Fund will not invest
more than 5% of their total net assets in warrants.

Rights Offerings. The Small Cap Fund may participate in rights offerings, which
are privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. Subscription rights normally have a short
life span to expiration. The purchase of rights involves the risk that the Fund
could lose the purchase value of a right if the right to subscribe to additional
shares is not exercised prior to the rights' expiration. Also, the purchase of
rights involves the risk that the effective price paid for the right added to
the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security.

Convertible Preferred Stocks and Debt Securities. The Equity Fund, International
Equity Fund, Socially Responsible Fund, Income Fund and Short-Term Investment
Fund may invest in convertible preferred stock 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. The Equity Fund, International
Equity Fund, Socially Responsible Fund, Income Fund and Short-Term Investment
Fund may invest in preferred equity redemption cumulative stock. Preferred
Equity Redemption Cumulative Stock (PERCS) is a form of convertible preferred
stock which automatically converts into shares of common stock on a
predetermined conversion date. PERCS pays 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. The Equity Fund, International Equity Fund,
Socially Responsible Fund, Income Fund and Short-Term Investment Fund may invest
in 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

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balance over the remaining 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 obligors 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. 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 a Fund's performance. As foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
securities markets, while growing in volume of trading activity, have
substantially less volume than the U.S. market, and securities of some foreign
issuers are less liquid and more volatile than securities of domestic issuers.
Similarly, volume and liquidity in most foreign bond markets is less than in the
U.S. and, at times, volatility of prices can be greater than in the U.S. Fixed
commissions on some foreign securities 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 a 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 a Fund's agents
to keep currently informed about corporate actions which may affect the prices
of portfolio securities. Communications between the U.S. and foreign countries
may be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. Payment for securities without delivery may be required in certain
foreign markets. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The management of the Fund
seeks to mitigate the risks associated with the foregoing considerations through
continuous professional management.

Forward Foreign Currency Exchange Contracts. The Small Cap Growth Fund and
International Equity Fund may invest in foreign currencies. The Income Fund may
each enter into forward foreign currency exchange contracts to the extent of 15%
of the value of their respective total assets for hedging purposes. Forward
foreign currency exchange contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of Fund
securities but rather allow the Fund to establish a rate of exchange for a
future point in time. A Fund may use forward foreign currency exchange contracts
to hedge against movements in the value of foreign currencies (including the
"ECU" used in the European Community) relative to the U.S. dollar in connection
with specific Fund transactions or with respect to Fund positions.

The Small Cap Growth Fund may enter into forward foreign currency exchange
contracts when deemed advisable by its subadviser under two circumstances.
First, when entering into a contract for the purchase or sale of a security, the
Fund may enter into a forward foreign currency exchange contract for the amount
of the purchase or sale price to protect against variations, between the date
the security is purchased or sold and the date on which payment is made or
received,

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in the value of the foreign currency relative to the U.S. dollar or other
foreign currency. Second, when the Fund's adviser or subadviser anticipates that
a particular foreign currency may decline relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Fund may enter into a forward
contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. With respect to any forward foreign currency contract, it
will not generally be possible to match precisely the amount covered by that
contract and the value of the securities involved due to the changes in the
values of such securities resulting from market movements between the date the
forward contract is entered into and the date it matures. In addition, while
forward contracts may offer protection from losses resulting from declines in
the value of a particular foreign currency, they also limit potential gains
which might result from increases in the value of such currency. The Fund will
also incur costs in connection with forward foreign currency exchange contracts
and conversions of foreign currencies and U.S. dollars.

The Small Cap Growth Fund may also engage in proxy hedging transactions to
reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of Fund securities. Proxy hedging is often used when the
currency to which the Fund is exposed is difficult to hedge or to hedge against
the dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the Fund's securities are, or are
expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Fund if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. In addition, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. The Fund may also
cross hedge currencies by entering into forward contracts to sell one or more
currencies that are expected to decline in value relative to other currencies to
which the Fund has or in which the Fund expects to have Fund exposure. For
example, the Fund may hold both French government bonds and German government
bonds, and the subadviser may believe that French francs will deteriorate
against German marks. The Fund would sell French francs to reduce its exposure
to that currency and buy German marks. This strategy would be a hedge against a
decline in the value of French francs, although it would expose the Fund to
declines in the value of the German mark relative to the U.S. dollar. In
general, currency transactions are subject to risks different from those of
other Fund transactions, and can result in greater losses to the Fund than would
otherwise be incurred, even when the currency transactions are used for hedging
purposes. Because investments in foreign securities usually will involve
currencies of foreign countries and to the extent a 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
such Fund as measured in 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 each 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 a Fund at one rate, while offering a lesser rate or exchange should the Fund
desire to resell that currency to the dealer. Each Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into options or forward or futures contracts to purchase or sell foreign
currencies.

A separate account of the Fund consisting of liquid assets equal to the amount
of the Fund's assets that could be required to consummate forward contracts
entered into under the second circumstances, as set forth above, will be
established with the Fund's custodian. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
Fund.

Strategic Transactions and Derivatives. The International Equity Fund and
Socially Responsible Fund may, but are 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 such
Fund's portfolio, or to enhance potential gain. These strategies may be

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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 Funds 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 securities in a 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 a 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 Transaction is a
function of numerous variables including market conditions. The ability of a
Fund to utilize these Strategic Transactions successfully will depend on the
Subadviser'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,
illiquidity and, to the extent the Subadviser'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 a 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 a 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 a 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 a
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, a Fund
might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.

General Characteristics of Options. To the extent consistent with their
investment objectives, the Small Cap Growth Fund, International Equity Fund and
Socially Responsible Fund may invest in options. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instruments 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.

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

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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. A 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. A 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.

A Fund's ability to close out its position as a purchaser or seller of an OCC or
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. Among the possible reasons for the absence of a liquid option
market on an exchange are: (i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities including reaching daily price
limits; (iv) interruption of the normal operations of the OCC or an exchange;
(v) inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options 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.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contracts 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. A 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 Funds expect
generally to enter into OTC options that have cash settlement provisions,
although they are 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 a 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 Subadviser 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. A 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

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("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 a Fund, and portfolio securities
"covering" the amount of a 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 15%
of its net assets in illiquid securities.

If a 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 Funds 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 a 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 a Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.

The Funds 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 they hold the above securities in their
portfolios), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Funds will not sell put options if, as a result, more than 50% of a 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.

When a Fund purchases a put option, the premium paid by it is recorded as an
asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked to market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of sale, the mean between the last bid and asked price.
If an option purchased by a Fund expires unexercised, the Fund realizes a loss
equal to the premium paid. If a Fund enters into a closing sale transaction on
an option purchased by it, the Fund will realize a gain if the premium received
by the Fund on the closing transaction is more than the premium paid to purchase
the option, or a loss if it is less. If an option written by a Fund expires on
the stipulated expiration date or if a Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by a Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.

There are several risks associated with transactions in options on securities
and indexes. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange"), may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the OCC may not at all times be adequate to handle
current trading volume; or one or more Exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that Exchange (or in that class or series of options)
would

B-13
<PAGE>

cease to exist, although outstanding options that had been issued by the OCC as
a result of trades on that Exchange would continue to be exercisable in
accordance with their terms.

General Characteristics of Futures. To the extent consistent with their
investment objectives, the Equity Fund, Small Cap Growth Fund, International
Equity Fund and Socially Responsible 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 a 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 Funds' 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 a 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 Funds.
If a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.

The Funds 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 a Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the in-the-
money amount may be excluded in calculating the 5% limitation. The segregation
requirements with respect to futures contracts and options thereon are described
below.

Options on Securities Indices and Other Financial Indices. The Funds 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 Funds 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

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<PAGE>

the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows based on
the notional difference among two or more currencies and operates similarly to
an interest rate swap, which is described below. The Funds 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 by S&P or
Moody's, respectively, or that have an equivalent rating from an NRSRO or are
determined to be of equivalent credit quality by the adviser.

The Funds' 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 a 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 Funds will not enter into a transaction to hedge currency exposure to an
extent 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.

The Funds 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 a 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 Funds 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 a 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 a Fund's securities
denominated in correlated currencies. For example, if the Subadviser considers
that the Austrian schilling is correlated to the German Deutsche mark (the
"D-mark"), a Fund holds securities denominated in schillings; and if the
Subadviser believes that the value of schillings will decline against the U.S.
dollar, the Subadviser 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 a 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 a Fund is engaging in proxy hedging.
If a 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 a 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
currency futures contracts 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 Funds 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"

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<PAGE>

transactions), instead of a single Strategic Transaction, as part of a single or
combined strategy when, in the opinion of the Subadviser, it is in the best
interests of a Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the
Subadviser's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase such risks or hinder achievement of
the portfolio management objective.

Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Funds may enter are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Funds expect 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 Funds intend 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 Funds 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
Subadviser and the Funds 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 the 1940 Act's
borrowing restrictions. The Funds 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 an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Funds may have
contractual remedies pursuant to the agreements related to the transaction.

Eurodollar Instruments. The Funds 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
borrowing. The Funds 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 Funds 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

B-16
<PAGE>

the full amount of any obligation by a 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 a 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 a 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 a Fund requires the Fund to segregate liquid high-grade assets
equal to the exercise price.

Except when the Funds enter into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates a 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 Funds, 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 a 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 a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC-issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement, and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.

In the case of a futures contract or an option thereon, the Funds 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 Funds 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. Each 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, a Fund could purchase a put option if the strike
price of that option is the same as or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if a 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 Funds' 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").

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<PAGE>

Variable and Floating Rate Instruments. The Income Fund and Small Cap Growth
Fund may invest in variable and floating rate instruments. With respect to
purchasable variable and floating rate instruments, the Subadvisers will
consider the earning power, cash flows and liquidity ratios of the issuers and
guarantors of such instruments and, if the instruments are subject to a demand
feature, will monitor their financial status to meet payment on demand. Such
instruments may include variable amount demand notes that permit the
indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. The absence of an active secondary market with
respect to particular variable and floating rate instruments could make it
difficult for a Fund to dispose of a variable or floating rate note if the
issuer defaulted on its payment obligation or during periods that a Fund is not
entitled to exercise its demand rights, and a Fund could, for these or other
reasons, suffer a loss with respect to such instruments. In determining average-
weighted Fund maturity, an instrument will be deemed to have a maturity equal to
either the period remaining until the next interest rate adjustment or the time
a Fund involved can recover payment of principal as specified in the instrument,
depending on the type of instrument involved.

Money Market Obligations of Domestic Banks, Foreign Banks and Foreign Branches
of U.S. Banks. The Short Term Investment Fund, Income Fund and Small Cap Growth
Fund may purchase bank obligations, such as certificates of deposit, bankers'
acceptances and time deposits, including instruments issued or supported by the
credit of U.S. or foreign banks or savings institutions having total assets at
the time of purchase in excess of $1 billion. The assets of a bank or savings
institution will be deemed to include the assets of its domestic and foreign
branches for purposes of the Fund's investment policies. Investments in short-
term bank obligations may include obligations of foreign banks and domestic
branches of foreign banks, and also foreign branches of domestic banks.

Mortgage-Backed Securities. The Small Cap Growth Fund and Income Fund may invest
in 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. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government that
issue mortgage-backed securities and among the securities that they issue.
Mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA-guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA, are not backed by or entitled to the full faith and
credit of the United States and are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA. Mortgage-backed securities issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.

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.

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<PAGE>

Collateralized Mortgage Obligations (CMOs) and Multiclass Pass-through
Securities. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, 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 and of 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 accrued
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.

The Income Fund 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. The Small Cap Growth Fund and Income Fund may invest in
asset-backed securities. Asset-backed securities are generally issued as pass-
through certificates, which represent undivided fractional ownership interests
in an underlying pool of assets, or as debt instruments, which are also known as
collateralized obligations, and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. Through the use
of trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables, are pooled and securitized. 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 security interest in the
underlying automobiles is 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.

In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage-related securities. Like other fixed-income securities,
when interest rates rise, the value of an asset-backed security generally will
decline; however, when interest rates decline, the value of an asset-backed
security with prepayment features may not increase as much as that of other
fixed-income securities.

U.S. Government Obligations. Each Fund may invest in 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

B-19
<PAGE>

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. Examples of the types
of U.S. Government obligations which the Funds may hold include U.S. Treasury
bills, Treasury instruments and Treasury bonds and the obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, the Farmers Home Administration, the Export-Import Bank
of the United States, the Small Business Administration, FNMA, GNMA, the General
Services Administration, the Student Loan Marketing Association, the Central
Bank for Cooperatives, FHLMC, the Federal Intermediate Credit Banks, the
Maritime Administration, the International Bank of Reconstruction and
Development (the "World Bank"), the Asian-American Development Bank and the
Inter-American Development Bank.

Supranational Organization Obligations. The Small Cap Growth Fund and Socially
Responsible Fund may purchase debt securities of supranational organizations
such as the European Coal and Steel Community, the European Economic Community
and the World Bank, which are chartered to promote economic development.

Lease Obligations. The Small Cap Growth Fund may hold participation certificates
in a lease, an installment purchase contract or a conditional sales contract
("Lease Obligations"). The Subadviser will monitor the credit standing of each
municipal borrower and each entity providing credit support and/or a put option
relating to lease obligations. In determining whether a lease obligation is
liquid, the Subadviser will consider, among other factors, the following: (i)
whether the lease can be canceled; (ii) the degree of assurance that assets
represented by the lease could be sold; (iii) the strength of the lessee's
general credit (e.g., its debt, administrative, economic, and financial
characteristics); (iv) the likelihood that the municipality would discontinue
appropriating funding for the lease property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an "event of nonappropriation"); (v) legal recourse in the event of failure to
appropriate; (vi) whether the security is backed by a credit enhancement such as
insurance; and (vii) any limitations which are imposed on the lease obligor's
ability to utilize substitute property or services other than those covered by
the lease obligation.

Municipal leases, like other municipal debt obligations, are subject to the risk
of non-payment. The ability of issuers of municipal leases to make timely lease
payments may be adversely impacted in general economic downturns and as relative
governmental cost burdens are allocated and reallocated among federal, state and
local governmental units. Such non-payment would result in a reduction of income
to the Fund, and could result in a reduction in the value of the municipal lease
experiencing non-payment and a potential decrease in the net asset value of the
Fund. Issuers of municipal securities might seek protection under the bankruptcy
laws. In the event of bankruptcy of such an issuer, the Fund could experience
delays and limitations with respect to the collection of principal and interest
on such municipal leases and the Fund may not, in all circumstances, be able to
collect all principal and interest to which it is entitled. To enforce its
rights in the event of a default in lease payments, the Fund might take
possession of and manage the assets securing the issuer's obligations on such
securities, which may increase the Fund's operating expenses and adversely
affect the net asset value of the Fund. When the lease contains a non-
appropriation clause, however, the failure to pay would not be a default and the
Fund would not have the right to take possession of the assets. Any income
derived from the Fund's ownership or operation of such assets may not be tax-
exempt. In addition, the Fund's intention to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended, may limit the
extent to which the Fund may exercise its rights by taking possession of such
assets, because as a regulated investment company the Fund is subject to certain
limitations on its investments and on the nature of its income.

Commercial Paper. The Small Cap Growth Fund, Socially Responsible Fund, Income
Fund and Short-Term Investment Fund may purchase commercial paper rated (at the
time of purchase) A-1 by S&P or Prime-1 by Moody's or, when deemed advisable by
the Fund's adviser or subadviser, "high quality" issues rated A-2 or Prime-2 by
S&P or Moody's, respectively. These ratings symbols are described in Appendix A.

Commercial paper purchasable by the Fund includes "Section 4(2) paper," a term
that includes debt obligations issued in reliance on the "private placement"
exemption from registration afforded by Section 4(2) of the Securities Act of
1933. Section 4(2) paper is restricted as to disposition under the Federal
securities laws, and is frequently sold (and resold) to institutional investors
such as the Fund through or with the assistance of investment dealers who make
a

B-20
<PAGE>

market in the Section 4(2) paper, thereby providing liquidity. Certain
transactions in Section 4(2) paper may qualify for the registration exemption
provided in Rule 144A under the Securities Act of 1933.

Investment Grade Debt Obligations. The Equity Fund, Income Fund and Short-Term
Investment Fund may invest in "investment grade securities," which are
securities rated in the four highest rating categories of an NRSRO. It should be
noted that debt obligations rated in the lowest of the top four ratings (i.e.,
Baa by Moody's or BBB by S&P) are considered to have some speculative
characteristics and are more sensitive to economic change than higher rated
securities. See Appendix A to this Statement of Additional Information for a
description of applicable securities ratings.

When-Issued Purchase and Forward Commitments. The Small Cap Growth Fund,
International Equity Fund, Socially Responsible Fund, and Income Fund may enter
into "when-issued" and "forward" commitments, including, for the Small Cap
Growth Fund only, "TBA" (to be announced) purchase commitments, to purchase or
sell securities at a fixed price at a future date. When a Fund agrees to
purchase securities on this basis, the custodian will set aside liquid assets
equal to the amount of the commitment in a separate account. Normally, the
custodian will set aside Fund securities to satisfy a purchase commitment, and
in such a case a Fund may be required subsequently to place additional assets in
the separate account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitments. It may be expected that the
market value of a Fund's net assets will fluctuate to a greater degree when it
sets aside Fund securities to cover such purchase commitments than when it sets
aside cash. Because a Fund's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or Fund securities to cover such purchase
commitments, each Fund expects that its forward commitments and commitments to
purchase when-issued or, in the case of the Small Cap Growth Fund, TBA
securities will not exceed 25% of the value of its total assets absent unusual
market conditions.

If deemed advisable as a matter of investment strategy, a Fund may dispose of or
renegotiate a commitment after it has been entered into and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, a Fund may realize a taxable capital
gain or loss. When a Fund engages in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in a Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous. The market value of
the securities underlying a commitment to purchase securities, and any
subsequent fluctuations in their market value, is taken into account when
determining the market value of each Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.

Stand-By Commitments. The Small Cap Growth Fund may invest in stand-by
commitments. Under a stand-by commitment for a Municipal Obligation, a dealer
agrees to purchase at the Fund's option a specified Municipal Obligation at a
specified price. Stand-by commitments for Municipal Obligations may be
exercisable by the Fund at any time before the maturity of the underlying
Municipal Obligations and may be sold, transferred or assigned only with the
instruments involved. It is expected that such stand-by commitments will
generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Fund may pay for such a
stand-by commitment either separately in cash or by paying a higher price for
Municipal Obligations which are acquired subject to the commitment for Municipal
Obligations (thus reducing the yield to maturity otherwise available for the
same securities). The total amount paid in either manner for outstanding stand-
by commitments for Municipal Obligations held by the Fund will not exceed 1/2 of
1% of the value of the Fund's total assets calculated immediately after each
stand-by commitment is acquired.

Stand-by commitments will only be entered into with dealers, banks and broker-
dealers which, in a subadviser's opinion, present minimal credit risks. The Fund
will acquire stand-by commitments solely to facilitate Fund liquidity and not to
exercise its rights thereunder for trading purposes. Stand-by commitments will
be valued at zero in determining net asset value. Accordingly, where the Fund
pays directly or indirectly for a stand-by commitment, its cost will be
reflected as an unrealized loss for the period during which the commitment is
held by the Fund and will be reflected as a realized gain or loss when the
commitment is exercised or expires.

Standard & Poor's Depository Receipts (SPDR's). The Socially Responsible Fund
may, consistent with its investment objectives, purchase Standard & Poor's
Depository Receipts ("SPDRs"). SPDRs are American Stock Exchange-traded
securities that represent ownership in the SPDR Trust, a trust which has been
established to accumulate and hold a portfolio of common stocks that is intended
to track the price performance and dividend yield of the S&P 500. The trust is a
regulated investment company that is sponsored by a subsidiary of the American
Stock Exchange. SPDRs may be used for several reasons, including but not limited
to: facilitating the handling of cash flows or trading, or reducing costs.

B-21
<PAGE>

INCOME FUND - BENCHMARK

The Lehman Brothers Aggregate Bond 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 average 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 (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 Rule
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 birthdates,
their addresses, their principal occupations for the past five years and their
affiliation with other companies affiliated with Horace Mann Life Insurance
Company is presented below.

<TABLE>
<CAPTION>
Name, Birthdate and Address Position with Company Principal Occupations
--------------------------- --------------------- ---------------------
<S> <C> <C>
*A. Thomas Arisman (12/20/46)/(1)/ Trustee Senior Vice President, Horace Mann Life
P.O. Box 4657 Insurance Company and Horace Mann Service
Springfield, IL 62708-4657 Corporation; Director and President,
Horace Mann Investors, Inc.; positions with
Horace Mann Educators Corporation and its
subsidiaries; former Trustee, Horace Mann Mutual
Funds (1996-1997); and former Director, Horace
Mann Growth Fund, Inc. (1989-1997), Horace Mann
Balanced Fund, Inc. (1989-1997), Horace Mann Income
Fund, Inc. (1989-1997) and Horace Mann Short-Term
Investment Fund, Inc. (1989-1997).
</TABLE>

B-22
<PAGE>

<TABLE>
<CAPTION>
Name, Birthdate and Address Position with Company Principal Occupations
--------------------------- --------------------- ---------------------
<S> <C> <C>
A.L. Gallop (9/5/25) Trustee Executive Director (Retired), Minnesota Education Association;
P.O. Box 4657 formerly Director, Horace Mann Educators Corporation (1968-
Springfield, IL 62708-4657 1983); and former Director Horace Mann Growth Fund, Inc.
(1957-1997), Horace Mann Balanced Fund, Inc. (1983-1997),
Horace Mann Income Fund, Inc. (1983-1997), and Horace
Mann Short-Term Investment Fund, Inc. (1983-1997).

Richard A. Holt (11/17/41)/(2)/ Trustee Senior Relationship Manager (Retired), Scudder Insurance
P.O. Box 4657 Asset Management.
Springfield, IL 62708-4657

Richard D. Lang (9/15/31)/(3)/ Trustee Executive Director (Retired), Vermont National Education
P.O. Box 4657 Association; formerly member of Horace Mann Educators
Springfield, IL 62708-4657 Corporation Educator Advisory Board; and former Director,
Horace Mann Growth Fund, Inc. (1997), Horace Mann
Balanced Fund, Inc. (1997), Horace Mann Income Fund, Inc.
(1997) and Horace Mann Short-Term Investment Fund, Inc.
(1997).

Harriet A. Russell (5/3/41) Trustee Member and Vice President, Cincinnati Board of Education; Director
P.O. Box 4657 and President, Greater Cincinnati School Employer Credit Union;
Springfield, IL 62708-4657 teacher (Retired), Walnut Hills High School; formerly Director,
Horace Mann Growth Fund (1974-1983 and 1992-1997),
Horace Mann Balanced Fund, Inc. (1992-1997), Horace Mann
Investment Fund, Inc. (1992-1997), and Horace Mann Short-
Term Investment Fund, Inc. (1992-1997).

*George J. Zock (11/13/50)/(1)/ Trustee and President Director, Executive Vice President, Horace Mann Life
P.O. Box 4657 Insurance Company and Horace Mann Service Corporation;
Springfield, IL 62708-4657 Director, Horace Mann Investors, Inc.; and positions with
Horace Mann Educators Corporation and its subsidiaries;
former Director, Horace Mann Growth Fund, Inc. (1995-1997),
Horace Mann Balanced Fund, Inc. (1995-1997), Horace Mann
Income Fund, Inc. (1995-1997), and Horace Mann Short-Term
Investment Fund, Inc. (1995-1997).

Ann M. Caparros (8/31/52) Secretary and Ethics Director, Vice President, and Corporate Secretary, Horace
P.O. Box 4657 Compliance Officer Mann Life Insurance Company and Horace Mann Service
Springfield, IL 62708-4657 Corporation; Secretary, Horace Mann Investors, Inc.; and
positions with Horace Mann Educators Corporation and its
subsidiaries; prior to March 1994, was associated with John
Dear Insurance Group and Affiliates serving as Vice President
and General Counsel.

William J. Kelly (9/7/46) Treasurer and Regulatory Treasurer, Horace Mann Investors, Inc.; Vice President, Horace
P.O. Box 4657 Compliance Officer Mann Life Insurance Company; and Vice President-Transfer
Springfield, IL 62708-4657 Agent, Horace Mann Service Corporation.
</TABLE>

___________________
* Interested person as defined by the 1940 Act by reason of a position as a
director of a broker-dealer or an officer of the Fund.

(1) Messrs. Arisman and Zock are employees and shareholders of an affiliate of
the Administrator of the Trust and, therefore, are considered an affiliate
of the Administrator.

B-23
<PAGE>

(2) From 1972-1997, Mr. Holt was an employee of Scudder Kemper Investments,
Inc. (and of its predecessor, Scudder, Stevens & Clark, Inc.), the
subadviser to the International Equity Fund and the Socially Responsible
Fund. Mr. Holt and his family participate in Scudder Kemper's medical and
benefit plans available to former employees. Mr. Holt does not have an
ongoing relationship with Scudder Kemper.

(3) Mr. Lang is a shareholder of an affiliate of the Administrator of the
Trust.

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 who is not an officer, director, employee or
holder of 5% or more of the outstanding voting securities of the Administrator
or any of its affiliates 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, 1999, the Independent Trustees fees
totaled $23,200.

Compensation Table

The following table sets forth the compensation earned from the Trust for the
fiscal year ended December 31, 1999 by trustees entitled to receive compensation
from the Trust.

<TABLE>
<CAPTION>
Aggregate Pension Retirement Estimated Annual
Compensation Benefits Accrued as Benefits Upon Total Compensation
Trustee From the Trust Part of Fund Expenses Retirement from the Trust
------- -------------- --------------------- ---------- --------------
<S> <C> <C> <C> <C>
A.L. Gallop $5,800 N/A N/A $5,800
Richard A. Holt 5,800 N/A N/A 5,800
Richard D. Lang 5,800 N/A N/A 5,800
Harriet A. Russell 5,800 N/A N/A 5,800
</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 Equity Fund. Trustees and Officers do not
directly own any shares of Balanced Fund, Income Fund, Short-Term Fund, Small
Cap Growth Fund, International Equity Fund or Socially Responsible Fund;
however, they may invest indirectly in the Equity Fund, Balanced Fund, Income
Fund, Short-Term Fund, Small Cap Growth Fund, International Equity Fund and/or
Socially Responsible Fund through annuity contracts issued by Horace Mann Life
Insurance Company and the 401(k) plan of Horace Mann Service Corporation of
which no one person beneficially owns more than 1%.

INVESTMENT ADVISORY AGREEMENTS

Investment Advisory Agreement. As stated in the Prospectus, the Trust employs
Wilshire Associates Incorporated (the "Adviser") to manage the investment and
reinvestment of the assets of the Funds and to continuously review, supervise
and administer the Funds' investment programs under an Investment Advisory
Agreement dated March 1, 1999 (the "Investment Advisory Agreement"). The Adviser
is controlled by Dennis A. Tito who beneficially owns a majority of the
outstanding shares of the Adviser. The Adviser's duties under the Investment
Advisory Agreement include recommending to the Board of Trustees one or more
unaffiliated subadvisers to provide a continuous investment program for each
Fund or a portion of such Fund's assets designated from time to time by the
Adviser, including investment, research, and management with respect to all
securities and investments and cash equivalents for the Fund or a designated
portion of such Fund's assets. The Adviser also reviews, monitors, and reports
to the Board of Trustees regarding the performance and investment procedures of
each subadviser and assists and consults with each subadviser in connection with
the Fund's continuous investment program. In addition, the Adviser maintains
books and records with respect to its services under the Investment Advisory
Agreement and furnishes the Board of Trustees with such periodic special reports
as the Board may request.

The Adviser selects investment subadvisers based on a continuing quantitative
and qualitative evaluation of their skills and proven abilities in managing
assets pursuant to a particular investment style. Short-term performance is not
by itself a significant factor in selecting or terminating investment
subadvisers, and therefore the Adviser does not anticipate frequent changes in
the investment subadvisers. These managers have been selected upon the basis of
a due diligence

B-24
<PAGE>

process which focuses upon, but is not limited to, the managers' philosophy and
process, people and organization, resources, and performance.

The Adviser monitors the performance of each investment subadviser of the Funds
and, to the extent it deems appropriate to achieve the Funds' investment
objective, reallocates assets among individual subadvisers or recommends that
the Funds employ or terminate particular investment subadvisers.

Each subadviser's fees will be paid by the Adviser out of the advisory fees that
it receives from each of the Funds. Fees paid to a subadviser of a Fund with
multiple subadvisers will depend upon the fee rate negotiated with the Adviser
and upon the percentage of the Fund's assets allocated to that subadviser by the
Adviser, which may vary from time to time. Thus, the basis for fees paid to any
such subadviser will not be constant, and the relative amounts of fees paid to
the various subadvisers of a Fund will fluctuate. These internal fluctuations,
however, will not affect the total advisory fees paid by a Fund, which will
remain fixed on the terms described above. The Adviser may, however, determine
in its discretion to waive a portion of its fee if internal fluctuations in the
fee to be paid to the subadvisers results in excess profit to the Adviser.
Because the Adviser will pay each subadviser's fees out of its own fees from the
Funds, there will not be any "duplication" of advisory fees paid by the Funds.

The Investment Advisory Agreement continues in effect for each Fund from year to
year for so long as its continuation is approved at least annually (a) by a
majority of the trustees who are not parties to such agreement or interested
persons of any such party except in their capacity as trustees of the Fund and
(b) by the shareholders of the Fund or the Board of Trustees. The agreement may
be terminated at any time upon 60 days' notice by either party; the Trust may so
terminate the agreement either by vote of the Board of Trustees or by 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.

For the services provided and the expenses assumed pursuant to the Investment
Advisory Agreement, the Adviser would receive a fee based on each Fund's average
daily net assets, computed daily and payable monthly, at the following annual
rates:

<TABLE>
<CAPTION>
Fund Rate
---- ----
<S> <C>
Equity Fund........................... 0.400%
Balanced Fund......................... 0.400%*
Income Fund........................... 0.400%
Short-Term Investment Fund............ 0.125%
Small Cap Growth Fund................. 1.150%
International Equity Fund............. 0.850%
Socially Responsible Fund............. 0.700%
</TABLE>

__________________

* As discussed in the Prospectus, the Balanced Fund operates under a fund of
funds structure, primarily investing in shares of the Equity Fund and the
Income Fund. The Adviser will only receive directly from the Balanced Fund
a fee of 0.400% of the average daily net assets of the Balanced Fund that
are not invested in another Fund.

For the period ended December 31, 1998, the Equity Fund, Balanced Fund, Income
Fund, Short-Term Investment Fund, Small Cap Growth Fund, International Equity
Fund and Socially Responsible Fund paid Horace Mann Investors ("HM Investors"),
the former manager of the Funds, $3,119,207, $1,918,958, $51,426, $4,501,
$297,498, $83,098 and $195,348, respectively, for advisory and administrative
services under a Management Agreement with the Trust. From these amounts, HM
Investors paid the subadvisers for the subadvisory services provided to the
Funds $1,804,368, $1,076,027, $28,297, $4,501, $297,498, $83,098, and $195,348,
respectively, and HM Investors retained $1,314,839, $842,931, $23,129, $0, $0,
$0 and $0 for the Equity Fund, Balanced Fund, Income Fund, Short-Term Investment
Fund, Small Cap Growth Fund, International Equity Fund and Socially Responsible
Fund, respectively.

For the fiscal year ended December 31, 1999, the Equity Fund, Balanced Fund,
Income Fund, Short-Term Investment Fund, Small Cap Growth Fund, International
Equity Fund and Socially Responsible Fund paid HM Investors $4,090,113,
$2,608,543, $85,971, $6,444, $488,897, $167,442 and $450,371

B-25
<PAGE>

respectively, for its advisory and administrative services under a Management
Agreement with the Trust. From these amounts, HM Investors paid the subadvisers
for the subadvisory services provided to the Funds $2,524,097, $1,605,127,
$52,927, $1965, $397,591, $127,913, and $325,132 respectively, and HM
Investors retained $1,566,016, $1,003,416, $33,044, $4479, $91,306, $39,529 and
$125,239 for the Equity Fund, Balanced Fund, Income Fund, Short-Term Investment
Fund, Small Cap Growth Fund, International Equity Fund and Socially Responsible
Fund, respectively.

Subadvisers. Each of the Investment Subadvisory 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 Subadvisory Agreements continues for the
same term as the advisory agreement and is subject to the same requirements for
renewal.

Code of Ethics. The Trust, the Adviser and the Subadvisers have adopted Codes of
Ethics (the "Codes") which substantially comply with Rule 17j-l under the
Investment Company Act of 1940 (the "1940 Act"). The Codes permit personnel who
are subject to the Codes to make personal securities transactions, subject to
the requirements and restrictions set forth in such Codes. The Codes contain
provisions and requirements designed to identify and address certain conflicts
of interest between personal investment activities and the interests of
investment advisory clients such as those of the Trust.

BROKERAGE ALLOCATION

The Investment Advisory Agreement and the Investment Subadvisory Agreements
authorize the Adviser and the subadvisers, 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 Adviser determines in
good faith that such amount of commission is reasonable in relation to the value
of the brokerage or research services provided, viewed in terms of either the
particular transaction or the Adviser's overall responsibilities with respect to
the Fund and other clients.

In placing portfolio transactions, each of the Advisers will use its best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain the 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, "Other Services--Fund Pricing Agreements and Custodial
Agreement."

Each of the Advisers is authorized to consider for investment by a Fund
securities that may also be appropriate for other funds and/or clients served by
the Advisers. To assure fair treatment of each fund and all clients of the
Advisers 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 Advisers.

To the extent directed by management of the Funds in writing, the Adviser will
direct one or more Subadvisers to execute purchases and sales of portfolio
securities for a fund through brokers or dealers designated by management of the
Fund to the Adviser for the purpose of providing direct benefits to the Fund,
provided that the Subadviser determines that such brokers or dealers will
provide reasonable execution in view of such other benefits. Brokerage
commissions or transaction costs in such transactions may be higher, and the
Fund may receive less favorable prices, than those which a Subadviser could
obtain from another broker or dealer, in order to obtain such benefits for the
Fund.

The following table describes the brokerage fees paid by each Fund during its
three most recent fiscal years ended December 31.

B-26
<PAGE>

Name of Fund 1997 1998 1999
------------ ---- ---- ----
<S> <C> <C> <C>
Equity Fund................... $807,563 $1,019,513 $1,747,779
Balanced Fund................. 364,698 398,985 638,139
Income Fund................... -- -- --
Short-Term Fund............... -- -- --
Small Cap Growth Fund......... 10,574 25,715 39,807
International Equity Fund..... 19,510 25,907 54,420
Socially Responsible Fund..... 6,429 33,889 64,990
</TABLE>

Where multiple brokers are deemed to be able to provide best execution,
brokerage commissions may be allocated to such brokers on the basis of their
ability to provide research. For the fiscal year ended December 31, 1999, the
Equity Fund and Balanced Fund paid commissions dollars to such brokers in the
amount of $94,947 and $96,511, respectively. Total brokerage fees paid during a
year will vary with turnover rates.

OTHER SERVICES

Fund Pricing Agreements. Effective January 1, 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 Equity 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 Equity and Balanced Funds
with Frank Russell Securities, Inc., subject to its obligation to obtain the
best available price and most favorable execution. HM 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 subcustodian 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 Equity 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 Equity and Balanced Funds
with Frank Russell Securities, Inc., subject to its obligation to obtain the
best available price and most favorable execution.

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. Each Fund has been given limited permission to use that service mark in
its name, subject to HMEC's right to revoke that permission.

Independent Auditors. KPMG, LLP, 303 East Wacker Drive, Chicago, Illinois 60601,
serves as the Trust's independent auditors. KPMG, 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.

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

B-27
<PAGE>

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 Equity 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.

As of March 31, 2000, Horace Mann Life Insurance Company Separate Account owned
approximately 82.1%, 96.4%, 96.0%, 86.8%, 91.7%, 83.8%, and 88.1% of the
outstanding shares of the Equity Fund, Balanced Fund, Income Fund, Short-Term
Investment Fund, Small Cap Growth Fund, International Equity Fund and Socially
Responsible Fund, respectively. Horace Mann Life Insurance Company Separate
Account B held approximately 3.4% of the Equity Fund. Horace Mann Life Insurance
Company Allegiance Separate Account A held approximately 1.0% of the Equity
Fund. Since these separate accounts' voting rights are passed through to
contract owners and participants, HMLIC itself does not exercise voting control.

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. If there are no such bid and ask quotations, the
most recent bid quotation is used. Securities quoted on the National Association
of Securities Dealers Automatic Quotation (NASDAQ) System, for which there have
been sales, are valued at the most recent sale price reported on such system. If
there are no such sales, the value is the high or "inside" bid quotation.
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. Foreign securities are converted
to United States dollars using exchange rates at the close of the New York Stock
Exchange. In the event market quotations would not be available, securities
would be valued at fair value as determined in good faith by the Board of
Trustees; no such securities were owned by the Funds as of December 31,
1999.

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.

B-28
<PAGE>

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, a Fund 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) distribute at least 90% of its net investment income
which includes short-term capital gains, and (c) diversify its holdings so that,
at the end of each fiscal quarter, (i) at least 50% of the market value of the
Fund's assets is represented by cash and cash items, Government securities, the
securities of other regulated investment companies, and other securities limited
in respect of any one issuer to 5% of the Fund's total assets and to not more
than 10% of the voting securities of that issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than Government securities or the securities of other regulated
investment companies).

The Funds are investment vehicles for the variable contracts of Horace Mann Life
Insurance Company. The separate accounts which maintain the variable contracts
must satisfy quarterly diversification requirements under Section 817(h) of the
Code. These diversification requirements, which apply in addition to the
diversification requirements imposed on the Funds by the Investment Company Act
of 1940, place limitations on the investments of each Fund that can be made in
the securities of certain issuers. If Fund investments are not adequately
diversified under Section 817(h), the earnings of all variable contracts
invested, in whole or in part, in the Fund will be currently taxable to the
variable contract owners.

As a regulated investment company, a Fund is not subject to federal income tax
on its net investment income (including short-term capital gains) if it
distributes all net investment income to its shareholders. A Fund will not be
subject to federal income tax on any net capital gains (the excess of net long-
term capital gains or net short-term capital losses) that are distributed as
capital gain dividends. If, however, shares of a Fund are sold at a loss after
being held six months or less, such loss will be considered a long-term capital
loss to the extent of any capital gains distributions on such shares.

A Fund's options, futures and foreign currency transactions are subject to
special tax provisions that may accelerate or defer recognition of certain gains
or losses, change the character of certain gains or losses, or alter the holding
periods of certain of a Fund's securities.

The mark-to-market rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options and futures held by the Fund at the end of
the fiscal year. Under these provisions, 60% of any capital gain net income or
loss recognized will generally be treated as long-term and 40% as short-term.
However, although certain forward contracts and futures contracts on foreign
currency are marked to market, the gain or loss is generally ordinary under
Section 988 of the Code. In addition, the straddle rules of the Code would
require deferral of certain losses realized on positions of a straddle to the
extent that a Fund had unrealized gains in offsetting positions at year end.

Foreign exchange gains and losses realized by the International Equity Fund in
connection with certain transactions that involve foreign currency-denominated
debt securities, certain foreign currency options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing, and character of distributions to shareholders. For example,
if the Fund sold a foreign stock or bond and part of the gain or loss on the
sale was attributable to an increase or decrease in the value of a foreign
currency, then the currency gain or loss may be treated as ordinary income or
loss. If such transactions result in higher net ordinary income, the dividends
paid by the Fund will be increased; if the result of such transactions is lower
net ordinary income, a portion of dividends paid could be classified as a return
of capital.

The International Equity Fund may qualify for and make an election permitted
under the "pass through" provisions of Section 853 of the Code, which allows a
regulated investment company to have its foreign tax credit taken by its
shareholders instead of on its own tax return. To be eligible for this credit,
more than 50% of the value of the Fund's

B-29
<PAGE>

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, its 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.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

The following table sets forth, as of March 31, 2000, 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.

<TABLE>
<CAPTION>
Type of Ownership Shares Owned % of Shares Outstanding
--------------------------------------------------------------------------------- ------------ -----------------------
<S> <C> <C>
EQUITY FUND:

Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............. Record 22,094,594 82.1

BALANCED FUND:

Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............. Record 20,857,608 96.4

INCOME FUND:

Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
</TABLE>

B-30
<PAGE>

SHORT-TERM FUND:

Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............ Record 142,403 86.8
(b) Horace Mann Life Insurance Company (depositor)................. Record 10,000 6.1
(c) Horace Mann Service Corporation 401(k)......................... Record 11,613 7.1

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 3,616,087 88.1
(b) Horace Mann Service Corporation 401(k)......................... Record 387,333 9.4

INTERNATIONAL EQUITY FUND:

Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............ Record 2,026,917 83.8
(c) Horace Mann Service Corporation 401(k)......................... Record 290,837 12.0
</TABLE>

B-31
<PAGE>

Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............ Record 4,614,148 91.7
(b) Horace Mann Service Corporation 401(k)......................... Record 315,391 6.3
</TABLE>

Horace Mann Life Insurance Company is organized under the laws of the State of
Illinois and is a wholly-owned subsidiary of Allegiance Life Insurance Company,
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
meetings. However, special meetings may be called for purposes such as electing
or removing trustees, changing fundamental policies, or approving an investment
advisory contract. If requested to do so by the holders of at least 10% of the
Trust's outstanding shares, the Trust will call a special meeting for the
purpose of voting upon the question of removal of a trustee or trustees and will
assist in the communications with other shareholders as if the Trust were
subject to Section 16(C) of the Investment Company Act of 1940. All shares of
all series of the Trust are voted together in the election of trustees. On any
other matter submitted to a vote of shareholders, shares are voted in the
aggregate and not by the individual series, except that shares are voted by the
individual series when required by the Investment Company Act of 1940 or other
applicable law or when the Board of Trustees determines that the matter affects
only the interests of one or more series, in which case shareholders of the
unaffected series are not entitled to vote on such matters.

FINANCIAL STATEMENTS

The financial statements for the Equity Fund, Balanced Fund, Income Fund, Short-
Term Investment Fund, Small Cap Growth Fund, International Equity Fund and
Socially Responsible Fund for the year ended December 31, 1999, and the Report
of Independent Auditors thereon, are incorporated herein by reference from the
Funds' Annual Report dated December 31, 1999. 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) 535-7123, or by telephoning (217) 789-2500 or (800) 999-1030 (toll-
free).

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<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.

A-1
<PAGE>

AAA - Highest grade. They possess the ultimate degree of protection as to
principal and interest. Marketwise, they move with interest 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