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[LOGO] Horace Mann Life Insurance Company
Separate Account Prospectus
Horace Mann Family of Funds Prospectus
May 1, 1996
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PROSPECTUS
VARIABLE TAX DEFERRED ANNUITY CONTRACTS
QUALIFIED AND NON-QUALIFIED PLANS
HORACE MANN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT
MAY 1, 1996
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INDIVIDUAL AND GROUP FLEXIBLE PAYMENT AND INDIVIDUAL SINGLE PAYMENT
VARIABLE TAX DEFERRED ANNUITY CONTRACTS ISSUED BY
HORACE MANN LIFE INSURANCE COMPANY SEPARATE ACCOUNT
This Prospectus offers combination fixed and variable annuity contracts to
individuals and groups, as flexible payment contracts, and to individuals as
single payment contracts, issued by Horace Mann Life Insurance Company in
connection with retirement plans or arrangements some of which may qualify for
special tax treatment under the Internal Revenue Code as amended. Amounts
transferred to Horace Mann Life Insurance Company Separate Account as directed
by a Participant or Contract Owner are invested in one or more of four Account
Divisions. Each Account Division in turn purchases shares of one of the
following open-end diversified management investment companies:
Horace Mann Growth Fund, Inc. - a fund investing primarily in common stocks.
Horace Mann Income Fund, Inc. - a fund investing primarily in debt securities.
Horace Mann Balanced Fund, Inc. - a fund investing in common stocks, debt
securities and money market instruments.
Horace Mann Short-Term Investment Fund, Inc. - a fund investing in short-term
debt instruments.
The funds listed above collectively are referred to as the "Funds."
This Prospectus sets forth concisely the information a prospective investor
should know before investing. Additional information about the Horace Mann Life
Insurance Company Separate Account has been filed with the Securities and
Exchange Commission in a Statement of Additional Information, dated May 1, 1996,
which may be amended from time to time, and is incorporated herein by reference.
The Statement of Additional Information is available upon request, without
charge, by writing to Horace Mann Life Insurance Company, P.O. Box 4657,
Springfield, Illinois 62708-4657, by sending a telefacsimile (FAX) transmission
to (217) 527-2307, or by telephoning (217) 789-2500 or (800) 999-1030 (toll-
free). The Table of Contents of the Statement of Additional Information appears
on page 17 of this Prospectus.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE
FUNDS.*
BOTH PROSPECTUSES SHOULD BE READ CAREFULLY BEFORE INVESTING
AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1996.
*The Funds' Prospectus follows page 17 of the Horace Mann Life Insurance Company
Separate Account Prospectus.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
DEFINITIONS.............................................................. 1
SYNOPSIS................................................................. 2
CONDENSED FINANCIAL INFORMATION.......................................... 6
HORACE MANN LIFE INSURANCE COMPANY, THE ACCOUNT AND THE HORACE MANN
FUNDS................................................................... 8
Horace Mann Life Insurance Company..................................... 8
The Account............................................................ 8
The Horace Mann Funds.................................................. 8
THE CONTRACT............................................................. 8
Contract Owners' Rights................................................ 8
Purchasing the Contract................................................ 8
Purchase Payments...................................................... 9
Amount and Frequency of Purchase Payments........................... 9
Allocation of Purchase Payments..................................... 9
Accumulation Units and Accumulation Unit Value...................... 9
Transactions........................................................... 9
Transfers........................................................... 9
Changes in Allocation Instructions.................................. 9
Surrender Before Commencement of Annuity Period..................... 10
Deferment........................................................... 10
Confirmations....................................................... 10
Deductions and Expenses................................................ 11
Annual Maintenance Charge........................................... 11
Asset Charge for Mortality, Expense and Distribution Expense Risks.. 11
Operating Expenses of the Horace Mann Funds......................... 11
Premium Taxes...................................................... 11
Death Benefit Proceeds................................................. 11
Mandatory Minimum Distribution......................................... 12
Income Payments........................................................ 12
Income Payment Options.............................................. 12
Amount of Fixed and Variable Income Payments........................ 13
Misstatement of Age.................................................... 14
Modification of the Contract........................................... 14
TAX CONSEQUENCES......................................................... 14
Separate Account....................................................... 14
Contract Owners........................................................ 14
Contributions....................................................... 14
Distributions Under Qualified Contracts............................. 15
Distributions Under Non-Qualified Contracts......................... 15
Penalty Tax......................................................... 16
VOTING RIGHTS............................................................ 16
OTHER INFORMATION........................................................ 16
ADDITIONAL INFORMATION................................................... 17
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF, OR SOLICITATION OF AN OFFER
TO ACQUIRE, ANY INTEREST OR PARTICIPATION IN THE CONTRACTS OFFERED BY THIS
PROSPECTUS IN ANY STATE TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION IN SUCH STATE.
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DEFINITIONS
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ACCOUNT: Horace Mann Life Insurance Company Separate Account, a segregated
investment account consisting of four Account Divisions, established by Horace
Mann Life Insurance Company under Illinois law and registered as a unit
investment trust under the Investment Company Act of 1940.
ACCOUNT DIVISION: A division of the Account. The assets of an Account
Division consist of the shares of one of the four Horace Mann Funds.
ACCUMULATION UNIT: A unit of measurement used to determine the value of a
Contract Owner's interest in an Account Division before Income Payments begin.
ANNUITANT: The recipient of Income Payments.
ANNUITY PERIOD: The period beginning on the Maturity Date and ending on the
death of the Annuitant or the last surviving Joint Annuitant, if any, or a
specified period.
ANNUITY UNIT: A unit of measurement used in determining the amount of variable
Income Payments.
CERTIFICATE: Each Participant under a group Contract is issued a Certificate
summarizing the provisions of the Contract and showing participation in the
retirement plan adopted by the Contract Owner.
CONTRACT: This Prospectus offers combination fixed and variable annuity
Contracts to individuals and groups as flexible payment Contracts and to
individuals as single payment Contracts. The term "Contract" in this Prospectus
generally will be used to describe Contracts issued to individuals and
Certificates issued to Participants in a group plan.
CONTRACT OWNER: The individual or entity to whom the Contract is issued.
Under a group contract, all references to the Contract Owner refer to the
Participant in a group plan.
CONTRACT YEAR: A year measured from the date a Contract (or a Certificate) was
issued to an individual Contract Owner (or a Participant) and each anniversary
of this date.
FUNDS: The four Horace Mann Funds: Horace Mann Growth Fund, Inc. ("Growth
Fund"), Horace Mann Income Fund, Inc. ("Income Fund"), Horace Mann Balanced
Fund, Inc. ("Balanced Fund"), and Horace Mann Short-Term Investment Fund, Inc.
("Short-Term Fund"). Each Fund is an open-end, diversified, management
investment company registered under the Investment Company Act of 1940.
INCOME PAYMENTS: A series of payments that may be for life; for life with a
minimum number of payments; for the joint lifetimes of the Annuitant and another
person, and thereafter, during the lifetime of the survivor; or for some fixed
period. A fixed annuity provides a series of payments that will be
substantially equal in amount throughout the annuity payout period. A fixed
annuity does not participate in the investment experience of any Account
Division. A variable annuity provides a series of payments that vary in amount
depending upon the investment experience of the Account Divisions selected by
the Contract Owner.
MATURITY DATE: The date Income Payments begin. The individual Contracts
offered by this Prospectus describe the criteria for determining Maturity Dates.
In addition, tax qualified plans often place certain limitations upon election
of a Maturity Date. Generally, distributions under tax qualified plans must
begin by April 1 following the calendar year in which the Contract Owner or
Participant reaches age 70 1/2. See "The Contract - Mandatory Minimum
Distribution."
NET PURCHASE PAYMENT: The balance of each Purchase Payment received by Horace
Mann Life Insurance Company after deducting any applicable premium taxes, or the
balance of any transfer amount from other Account Divisions after applicable
charges, or dividends reinvested after applicable charges.
PARTICIPANT: A person to whom a Certificate showing participation under a
group Contract has been issued.
PURCHASE PAYMENT: An amount paid to Horace Mann Life Insurance Company, the
amount transferred from other Account Divisions, and any dividends reinvested to
provide benefits under a Contract.
QUALIFIED PLAN: A tax-sheltered annuity as defined in Section 403(b) or a
simplified employee pension plan as defined in Section 408(k) of the Internal
Revenue Code.
SURRENDER CHARGE: (a contingent deferred sales charge) An amount kept by
Horace Mann Life Insurance Company if a withdrawal is made or if the Contract is
surrendered and is intended to compensate Horace Mann Life Insurance Company for
the cost of selling the product.
VALUATION DATE: The Valuation Date ends at the earlier of 3:00 p.m. central
time or at the closing of the New York Stock Exchange. No valutions are made for
any day that the New York Stock Exchange is closed and for 1996 no valuations
are made for July 5 or the day after Thanksgiving.
VALUATION PERIOD: The period from the end of a Valuation Date to the end of
the next Valuation Date, excluding the day the period begins and including the
day it ends.
1
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SYNOPSIS
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The Contracts offered by this Prospectus are individual and group flexible
payment and individual single payment combination fixed and variable annuity
Contracts. The Contracts may be used in connection with various types of
retirement plans or arrangements qualifying for special deferred tax treatment
under the Internal Revenue Code, as amended ("IRC"). See "Tax Consequences."
This Prospectus is intended to serve as a disclosure document for the variable
portion of the Contracts only. As used in this Prospectus, "variable" means
that value depends on the investment performance of the Horace Mann Fund(s)
selected. For information regarding the fixed portion, refer to the Contract.
Subject to various state insurance laws, generally the Contract Owner may
return the Contract to Horace Mann Life Insurance Company ("HMLIC") within 30
days of receipt of the Contract and will receive the market value of the assets
purchased by payments paid to the Account, less any taxes.
HMLIC established the Horace Mann Life Insurance Company Separate Account (the
"Account") to segregate assets dedicated to the variable portion of the
combination fixed and variable Contracts offered herein. The Account is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940 as a unit investment trust. The Account is divided into
four Account Divisions, each investing solely in shares of one of the Horace
Mann Funds: Growth Fund, Income Fund, Balanced Fund, or Short-Term Fund.
Detailed information about the Funds is contained in the Funds' Prospectus
which immediately follows this Prospectus for the Horace Mann Life Insurance
Company Separate Account. Each Fund receives investment advice from Wellington
Management Company and is managed by Horace Mann Investors, Inc. ("Investors").
The Funds' expenses, including advisory and management fees, are found in the
Table of Annual Operating Expenses shown on page 4 of this Synopsis.
The minimum annual Purchase Payment under a flexible payment Contract during
any Contract Year is $225. The minimum Purchase Payment under a single payment
Contract is $5,000. No Purchase Payments are required after the first Contract
Year. Contract Owners may elect to allocate all or part of the Purchase
Payments to one or more Account Divisions. The minimum Purchase Payment
allocated to any Account Division within any given Contract Year must equal or
exceed $100.
Contracts are subject to deductions for applicable state or local government
premium taxes. Premium taxes presently range from 0 to 3.5%. No deduction for
sales expense is charged on Purchase Payments, but a surrender charge is
assessed against certain withdrawals and surrenders. An asset charge, computed
weekly, is deducted from the account value for mortality risk, expense risk, and
distribution risk. This charge will not exceed 1.35% of the Contract Owner's
average value in an Account Division(s), on an annual basis. A fixed annual
maintenance charge of $25 is assessed against the Contract on each anniversary,
unless the Contract value equals or exceeds $10,000, in which case such charge
is waived.
Unless restricted by his or her retirement plan or by the IRC, a Contract
Owner may surrender his or her Contract in whole or withdraw in part for cash at
any time before the Maturity Date. Partial withdrawals are subject to a $100
minimum. Each surrender or partial withdrawal is processed on the basis of the
net asset value(s) of an accumulation unit of the Account Division(s) from which
the value is being surrendered or withdrawn. Surrenders and withdrawals
generally are subject to the following Surrender Charges:
<TABLE>
<CAPTION>
DURING FLEXIBLE PAYMENT SINGLE PAYMENTS
CONTRACT YEAR CONTRACTS CONTRACTS
- ------------- ----------------- ----------------
<S> <C> <C>
1 8% 5%
2 8% 4%
3 6% 3%
4 4% 2%
5 2% 1%
Thereafter 0% 0%
</TABLE>
The charges shown above are taken from the Contract Owner's value in the
Account Division(s) from which the withdrawal is made. In no event will the
charges exceed 8.5% of the Net Purchase Payments to the Account Division(s).
In addition, the IRC provides penalties for premature distributions under
various retirement plans. Values may not be withdrawn from Section 403(b)
Contracts except under certain circumstances. See "Tax Consequences." This
Contract might not be suitable for short-term investment. See "The Contract-
Transactions-Surrender Before Commencement of Annuity Period."
Prior to the Maturity Date, amounts may be transferred from one Account
Division to another, and to and from the fixed portion of the Contract.
(Transfers from the fixed portion of the Contract into an Account Division are
treated like any other partial withdrawal from the fixed portion of the
Contract, except that no surrender charge is imposed.) The minimum amount that
can be transferred is $100 or the entire dollar value of the Account
Division(s), whichever is less. See "The Contract-Transactions-Transfers."
2
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Income Payments may be fixed or variable or a combination of fixed and
variable payments. Payments will begin on the Maturity Date selected by the
Contract Owner. Variable Income Payments are made in monthly installments. A
lump sum payment may be made, however, if the total Contract value is less than
$2,000 or if monthly Income Payments at the Maturity Date would be less than
$20. An optional Maturity Date and various income payment options are available
under the Contract. See "The Contract-Income Payments-Income Payment Options."
The Contract is offered and sold by HMLIC through its licensed life insurance
sales personnel, who are registered representatives of Investors. HMLIC has
entered into a distribution agreement with Investors, an affiliated broker-
dealer registered under the Securities and Exchange Act of 1934. Investors is a
member of the National Association of Securities Dealers, Inc. (NASD).
3
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TABLE OF ANNUAL OPERATING EXPENSES
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The following is a summary of costs and expenses borne by the Contract Owner
in connection with an investment in the Account.
HORACE MANN LIFE INSURANCE COMPANY SEPARATE ACCOUNT
Contract Owner Transaction Expenses:/1/
Maximum Surrender Charge as a percentage of redemption proceeds/2/
- for Single Payment Contracts.................................... 5.00%
- for Flexible Payment Contracts.................................. 8.00%
Annual Maintenance Charge/3/................................................ $25
Separate Account Annual Asset Charge, as a percentage of average account value:
Mortality Risk........................................................ 0.45%
Expense Risk.......................................................... 0.15%
Distribution Expense Risk............................................. 0.75%
Total Separate Account Annual Asset Charge................................ 1.35%
Annual Operating Expenses of the Horace Mann Funds, as a percentage of average
daily net assets for the December 31, 1995 fiscal year (net of reimbursements
and fee waivers):
<TABLE>
<CAPTION>
GROWTH INCOME BALANCED SHORT-TERM
FUND FUND FUND FUND
------- ------- --------- -----------
<S> <C> <C> <C> <C>
Investment Advisory Fees 0.34% 0.26% 0.31% 0.14%
Business Management Fees 0.21% 0.21% 0.21% 0.21%
Other Expenses:
Fund Pricing Fee 0.01% 0.06% 0.01% 0.42%
Custodian Fees 0.02% 0.12% 0.03% 0.53%
Misc. (audit, lgl, etc.) 0.05% 0.23% 0.03% 1.05%
Total Fund Gross Operating Expense 0.63% 0.88%/4/ 0.59% 2.35%/5/
Minus Expense Reimbursements and
Fee Waivers 0.02% 0.26%/4/ 0.00% 1.51%/5/
Net Fund Operating Expenses 0.61% 0.62% 0.59% 0.84%
</TABLE>
/1/Premium taxes, currently ranging between 0 and 3.5%, are not included. The
rate of the premium tax varies depending upon the state of residence, and not
all states impose premium taxes. Also, depending on the state, taxes are taken
from Purchase Payments or are levied at annuitization.
/2/In some cases, the Surrender Charge does not apply. See "The Contract-
Transactions-Surrender Before Commencement of Annuity Period."
/3/The annual maintenance charge equals $25 per year, unless the Contract value
equals or exceeds $10,000 at each anniversary. The annual maintenance charge
is not deducted after the Maturity Date.
/4/Total Fund Operating Expenses of the Income Fund for the year ended 1995,
without any waivers or expense reimbursements, were 0.88%. Net operating
expenses of the Income Fund, adjusted for business management and fund pricing
fees waived or paid by Investors, were 0.62%.
/5/Fund Operating Expenses of the Short-Term Fund for the year ended 1995,
without any waivers or expense reimbursements, were 2.35%. Net operating
expenses of the Short-Term Fund, adjusted for business management and fund
pricing fees waived or paid by Investors, were 0.84%.
4
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EXAMPLE/1/
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<TABLE>
<CAPTION>
GROWTH INCOME BALANCED SHORT-TERM
FUND FUND FUND FUND
------ ------ -------- ----------
<S> <C> <C> <C> <C>
FOR FLEXIBLE PAYMENT CONTRACTS
- ------------------------------
If you surrender your Contract at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment, assuming
5% annual return on assets:
1 year $104 $104 $103 $106
3 years $131 $131 $131 $138
5 years $113 $113 $112 $125
10 years $243 $244 $241 $267
If you do not surrender your Contract:
You would pay the following expenses on a $1,000 investment, assuming
5% annual return on assets:
1 year $ 21 $ 21 $ 21 $ 24
3 years $ 66 $ 66 $ 65 $ 73
5 years $113 $113 $112 $125
10 years $243 $244 $241 $267
FOR SINGLE PAYMENT CONTRACTS
- ----------------------------
If you surrender your Contract at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment, assuming
5% annual return on assets:
1 year $ 73 $ 73 $ 73 $ 75
3 years $ 98 $ 99 $ 98 $105
5 years $113 $113 $112 $125
10 years $243 $244 $241 $267
If you do not surrender your Contract:
You would pay the following expenses on a $1,000 investment, assuming
5% annual return on assets:
1 year $ 21 $ 21 $ 21 $ 24
3 years $ 66 $ 66 $ 65 $ 73
5 years $113 $113 $112 $125
10 years $243 $244 $241 $267
</TABLE>
/1/The EXAMPLE should not be considered a representation of past or future
expenses. Amounts shown are based on the "Other Expenses" shown on the fee
table and average cash value of the average number of annuity Contracts in the
accumulation phase during the 1995 calendar year. Actual expenses may be
greater or less than those shown. There is no assumption for premium taxes,
applicable in certain states, in these examples.
THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING THE
VARIOUS
COSTS AND EXPENSES THAT THEY BEAR DIRECTLY OR INDIRECTLY. THE TABLE REFLECTS
EXPENSES OF THE SEPARATE ACCOUNT AS WELL AS THOSE OF THE UNDERLYING
FUNDS. SEE "THE CONTRACT-DEDUCTIONS AND EXPENSES."
5
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CONDENSED FINANCIAL INFORMATION
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The following information is taken from the Separate Account financial
statements. Please read the financial statements in conjunction with this
information and the Statement of Additional Information. Accumulation Unit
Values shown below are reduced annually for dividend distributions from each
underlying mutual fund. Dividend distributions are used to purchase additional
Accumulation Units.
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION # UNITS
UNIT VALUE UNIT VALUE OUTSTANDING
BEGINNING OF END OF END OF
YEAR ENDED PERIOD PERIOD PERIOD
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
GROWTH FUND 12/31/95 $17.64 $21.66 9,499,642
12/31/94 19.85 17.64 7,444,937
12/31/93 19.49 19.85 5,271,528
12/31/92 19.15 19.49 3,847,269
12/31/91 16.64 19.15 3,244,626
12/31/90 18.88 16.64 2,748,244
12/31/89 17.30 18.88 2,349,405
12/31/88 16.00 17.30 2,110,447
12/31/87 21.29 16.00 1,959,967
12/31/86 25.85 21.29 1,217,096
INCOME FUND 12/31/95 $12.02 $13.03 776,272
12/31/94 13.06 12.02 746,535
12/31/93 12.95 13.06 694,843
12/31/92 12.92 12.95 566,223
12/31/91 12.26 12.92 473,423
12/31/90 12.35 12.26 415,716
12/31/89 11.64 12.35 346,639
12/31/88 11.59 11.64 279,341
12/31/87 13.96 11.59 207,215
12/31/86 13.04 13.96 70,273
BALANCED FUND 12/31/95 $15.26 $18.00 12,085,917
12/31/94 16.72 15.26 10,010,131
12/31/93 16.22 16.72 7,470,133
12/31/92 15.91 16.22 5,352,185
12/31/91 14.19 15.91 4,274,088
12/31/90 15.10 14.19 3,528,857
12/31/89 13.48 15.10 2,697,026
12/31/88 12.71 13.48 2,142,638
12/31/87 14.91 12.71 1,644,390
12/31/86 13.71 14.91 451,067
SHORT-TERM FUND 12/31/95 $10.08 $10.00 95,982
12/31/94 10.07 10.08 103,526
12/31/93 10.09 10.07 106,595
12/31/92 10.10 10.09 99,345
12/31/91 10.37 10.10 94,194
12/31/90 10.73 10.37 106,548
12/31/89 10.49 10.73 96,997
12/31/88 10.25 10.49 98,300
12/31/87 11.17 10.25 72,271
12/31/86 11.44 11.17 14,322
</TABLE>
6
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Financial statements of the Account and of HMLIC are available with the
Statement of Additional Information. A copy of the Statement of Additional
Information and of the financial statements may be obtained without charge by
mailing a written request to Horace Mann Life Insurance Company, P.O. Box 4657,
Springfield, Illinois 62708-4657, by sending a telefacsimile (FAX) transmission
request to (217) 527-2307, or by telephoning (217) 789-2500 or (800) 999-1030
(toll-free).
From time to time the Account may advertise total return for the Account
Divisions. Total return may be used for all four Account Divisions. Total
return performance figures represent past performance and are not intended to
indicate future performance. Investment return and the principal value of an
investment may fluctuate. A Contract Owner's shares, when redeemed, may be worth
more or less than their original cost. Total return is computed by finding the
average annual compounded rate of return that would equate the initial amount
invested to the ending redeemable value.
All recurring charges shown in the Table of Annual Operating Expenses are
reflected in the calculations of the performance figures. Total return may be
calculated to reflect the fact that certain expenses have been reimbursed or
waived. In addition, total return calculations assume redemption at the end of
the stated period and, therefore, reflect the applicable Surrender Charge.
However, comparative figures may be presented that do not assume redemption and
do not reflect the Surrender Charge.
7
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY, THE ACCOUNT AND THE HORACE MANN FUNDS
HORACE MANN LIFE INSURANCE COMPANY
Horace Mann Life Insurance Company ("HMLIC") located at One Horace Mann Plaza,
Springfield, Illinois 62715-0001, is an Illinois stock life insurance company
organized in 1949. HMLIC is licensed to do business in 48 states and in the
District of Columbia. HMLIC writes group health insurance, individual and group
life insurance and annuity contracts on a nonparticipating basis.
HMLIC is an indirect wholly-owned subsidiary of Horace Mann Educators
Corporation ("HMEC"), a publicly-held insurance holding company traded on the
New York Stock Exchange.
THE ACCOUNT
On October 9, 1965, HMLIC established the Account under Illinois law. The
Account is registered with the Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940. The Account and each
Account Division are administered and accounted for as a part of the business of
HMLIC. However, the income gains and losses, whether or not realized, of each
Account Division are credited to or charged against the amounts allocated to
that Account Division in accordance with the terms of the Contracts without
regard to other income, gains or losses of the remaining Account Divisions or of
HMLIC. The assets of the Account may not be charged with liabilities arising
out of any other business of HMLIC. All obligations arising under the
Contracts, including the promise to make Income Payments, are general corporate
obligations of HMLIC. Accordingly, all of HMLIC's assets are available to meet
its obligations and expenses under the Contracts. While HMLIC is obligated to
make payments under the Contracts, the amount of variable Income Payments are
not guaranteed since the payment amounts fluctuate in accordance with the
performance of the Account Divisions.
THE HORACE MANN FUNDS
Each Fund is an open-end, diversified, management investment company
registered under the Investment Company Act of 1940. The Funds issue shares of
common stock that are continually offered for sale. The Funds, advised by
Wellington Management Company, invest in securities of different issuers and
industry classifications in an attempt to spread and reduce the risks inherent
in all investing.
The primary investment objective of the GROWTH FUND is long-term capital
growth; conservation of principal and production of income are secondary
objectives. The Growth Fund invests primarily in common stocks.
The primary investment objective of the INCOME FUND is to maximize current
income consistent with prudent investment risk. A secondary objective is
preservation of capital. The Income Fund invests primarily in debt securities.
The investment objective of the BALANCED FUND is to realize high long-term
total rate of return consistent with prudent investment risks. The Balanced
Fund's assets are invested in a mix of common stocks, debt securities and money
market instruments.
The primary investment objective of the SHORT-TERM FUND is to realize maximum
current income to the extent consistent with liquidity. Preservation of
principal is a secondary objective. The Short-Term Fund attempts to realize its
objectives through investments in short-term debt instruments; it is not a money
market fund and does not maintain a stable net asset value per share.
Detailed information on the Funds is contained in the Funds' Prospectus which
accompanies this Prospectus.
THE CONTRACT
CONTRACT OWNERS RIGHTS
A Contract may be issued under a retirement plan on a qualified basis as
defined in the IRC or on a non-qualified basis. Qualified and non-qualified
contracts receive different tax treatment. See "Tax Consequences."
To participate in a qualified plan, the Contract Owner may be required to
forego certain rights granted by the Contract and should refer to the provisions
of his or her Contract, the provisions of the plan or trust instrument, and/or
applicable provisions of the IRC.
Unless otherwise provided by law, and subject to the terms of any governing
plan or trust, the Contract Owner may exercise all privileges of ownership, as
defined in the Contract, without the consent of any other person. These
privileges include the right during the period specified in the Contract to
change the beneficiary designated in the Contract, to designate a payee and to
agree to a modification of the Contract terms.
This Prospectus describes only the variable portions of the Contract. On the
Maturity Date, the Contract Owner has limited rights to acquire fixed annuity
payout options. See the Contract for details regarding fixed Income Payments.
PURCHASING THE CONTRACT
The Contract is offered and sold by HMLIC through its licensed life insurance
sales personnel who are also registered representatives of Investors. HMLIC has
entered into a distribution agreement with Investors, principal underwriter of
the Account. Investors, located at One Horace Mann Plaza, Springfield, Illinois
62715-0001, is a broker-dealer registered under the Securities Exchange Act of
1934. Investors is a member of the
8
<PAGE>
NASD and is a wholly-owned subsidiary of Horace Mann Educators Corporation.
In order to purchase a Contract offered by this Prospectus, an applicant must
complete an application bearing all requested signatures and a properly endorsed
suitability questionnaire. For a Contract issued pursuant to Section 403(b) of
the IRC, the applicant must also submit a signed acknowledgment of the IRC
restrictions on withdrawals applicable to such contracts. For an Individual
Retirement Annuity ("IRA") or a Contract issued under a simplified employee
pension plan, the applicant must also sign an IRA disclosure form.
Applications for Contracts are to be sent to HMLIC's Home Office. If an
incomplete application is received, HMLIC will promptly request that the
applicant furnish additional information needed to process the application. The
initial Purchase Payment will be held in a suspense account, without interest,
for a period not exceeding five business days. If the necessary information is
not received within these five business days HMLIC will return the initial
Purchase Payment, unless otherwise directed by the applicant.
Sales commissions are paid by HMLIC. Sales commissions typically range from
1% to 6% of Purchase Payments received.
PURCHASE PAYMENTS
AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS - The minimum acceptable annual
Purchase Payment under a flexible payment Contract is $225. No Purchase
Payments are required after the first Contract Year. Payments may be made in
lump sum or installments. The minimum acceptable monthly Purchase Payment is
$25. The minimum acceptable Purchase Payment under a single payment Contract is
$5,000.
The IRC limits the amounts which may be contributed to qualified plans. See
"Tax Consequence--Contract Owners Contributions."
ALLOCATION OF PURCHASE PAYMENTS - All or part of the Purchase Payments made
may be allocated to one or more Account Divisions. The minimum Purchase Payment
amount allocated to any Account Division in any given Contract Year must equal
or exceed $100.
ACCUMULATION UNITS AND ACCUMULATION UNIT VALUE - The number of Accumulation
Units purchased by Purchase Payments is determined by dividing the dollar amount
credited to each Account Division by the applicable accumulation unit value next
determined following receipt of the payment by HMLIC.
Accumulation Units are valued on each Valuation Date. The accumulation unit
value of each Account Division is equal to the net asset value of the underlying
Fund (computed by dividing the net assets of a mutual fund by the outstanding
number of mutual fund shares on each Valuation Date). Dividends declared by the
underlying Fund of each Account Division, net of applicable deductions and
charges, are used to purchase additional Accumulation Units. To the extent that
deductions and charges exceed dividends, Accumulation Units will be surrendered.
The accumulation unit value of each Account Division other than the Growth Fund
Account Division was established at $10.00 on February 1, 1983. The
accumulation unit value of the Growth Fund Account Division was established at
$16.87 on October 9, 1965.
TRANSACTIONS
TRANSFERS - Amounts may be transferred from one Account Division to another,
and to and from the fixed portion of the Contract, prior to the Maturity Date.
(Transfers from the fixed portion of the Contract into an Account Division are
treated like any other partial withdrawal from the fixed portion, except that no
charges are imposed). The minimum amount that can be transferred is $100 or the
entire dollar value of the Account Division(s), whichever is less.
A Contract Owner may elect to transfer funds between Account Divisions by
submitting a written request to Horace Mann Life Insurance Company at P.O. Box
4657, Springfield, Illinois 62708-4657. Telefacsimile (FAX) transmissions of
the request also will be accepted if sent to (217) 527-2307. The request must:
(1) be signed by the Contract Owner, (2) include the name of the Contract Owner
and the Contract number, and (3) specifically state either the dollar amount or
the number of accumulation units to be transferred. The request also must
specify the Account Divisions from which and to which the transfer is to be
made. Transfers are effective either on a date specified in the request,
provided that date falls on or after receipt of the request at the Home Office,
or on the first Valuation Date following receipt of the request by the Home
Office.
Up to twelve transfers may be pre-scheduled at any point in time. A signed
written request or form must be completed. See "Other Information--Forms
Availability." If a Contract Owner decides to cancel a pre-scheduled transfer
arrangement, he or she should notify the Home Office in writing prior to the
next designated transfer date.
CHANGES IN ALLOCATION INSTRUCTIONS - A Contract Owner may elect to change the
allocation of future Purchase Payments at any time by mailing a written request
to Horace Mann Life Insurance Company at P.O. Box 4657, Springfield, Illinois
62708-4657 or by sending a telefacsimile (FAX) transmission to (217) 527-2307.
The request must: (1) be signed by the Contract Owner, (2) include the Contract
Owner's name and Contract number, and (3) specify the new allocation percentage
for each Account Division. If allocations are made to the fixed portion of the
Contract or to one or more Account Divisions, the percentages must total 100%.
Changes in
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allocation instructions are effective either on a date specified in the
request, provided that date falls on or after receipt of the request in the Home
Office, or on the first Valuation Date following receipt of the request by the
Home Office. See "Other Information--Forms Availability."
SURRENDER BEFORE COMMENCEMENT OF ANNUITY PERIOD - Values may not be withdrawn
from Section 403(b) Contracts except under certain circumstances. (See "Tax
Consequences.") However, if not restricted by the IRC or applicable retirement
plan under which the Contract is issued, a Contract Owner may surrender the
Contract in whole or withdraw in part for cash before Income Payments begin.
The surrender or partial withdrawal value is determined on the basis of the
accumulation unit value next computed following the receipt of the request for
surrender or partial withdrawal. A surrender or partial withdrawal may result
in adverse federal income tax consequences to the Contract Owner. These
consequences include current taxation of payments received, and may include
penalties resulting from premature distribution. See "Tax Consequences."
A Contract Owner eligible to surrender or request a partial withdrawal may
elect to do so by submitting a signed, written request to Horace Mann Life
Insurance Company at its Home Office at P.O. Box 4657, Springfield, Illinois
62708-4657. A surrender or partial withdrawal request must be in a form
acceptable to HMLIC; telefacsimile (FAX) transmissions of the request will not
be accepted. See "Tax Consequences and Other Information--Forms
Availability."
Partial withdrawals and surrenders will be processed either on a date
specified by you in a request, provided the date specified occurs on or after
receipt of the request at the Home Office, or on the first Valuation Date
following receipt of the request at the Home Office.
Any partial withdrawal is subject to a $100 minimum and may not reduce the
Contract Owner's interest in an Account Division to less than $100. A complete
surrender may be made at any time, unless otherwise restricted by the retirement
plan or the IRC.
Surrenders and partial withdrawals from any variable Account Division are
subject to the following Surrender Charges:
<TABLE>
<CAPTION>
DURING FLEXIBLE SINGLE
CONTRACT PAYMENT PAYMENT
YEAR CONTRACTS CONTRACTS
<S> <C> <C>
1 8% 5%
2 8% 4%
3 6% 3%
4 4% 2%
5 2% 1%
Thereafter 0% 0%
</TABLE>
Partial withdrawals may be made without charge if (1) the withdrawal does not
exceed 15% of the Contract value; (2) the Contract has been in force for two or
more Contract Years; and (3) more than twelve months have passed since the date
of the last partial withdrawal. Contract value is computed on the first
Valuation Date following receipt of the request in good form by the Home Office.
If all three conditions are not met, partial withdrawals are subject to
Surrender Charges.
Any request for partial withdrawal, where the withdrawal is subject to a
Surrender Charge, will be increased by the amount of the Surrender Charge. For
example, a request to withdraw $3,000 at a 4% Surrender Charge will require a
withdrawal of $3,125. This withdrawal represents a cash distribution of $3,000
and a Surrender Charge of $125. Any taxes withheld will reduce the dollar
amount of the distribution.
The Surrender Charge is assessed on the basis of the amount surrendered or
withdrawn from the Account Division(s), but will never exceed 8.5% of Net
Purchase Payment(s) to an Account Division during the lifetime of the Contract.
For example, if a Contract Owner's Account Division value is $12,000 and
Purchase Payments to date equal $10,000 and the Contract Owner withdraws $2,000
(i.e., one sixth of the Account Division value), then the Surrender Charge may
not exceed 8.5% of $1,666.66 (one sixth of the Purchase Payment(s) to which the
withdrawal relates).
If premium taxes are deducted prior to surrender or partial withdrawal, any
reduction of HMLIC's premium tax liability due to the surrender or partial
withdrawal will be to HMLIC's benefit.
DEFERMENT - HMLIC ordinarily completes a transaction within seven calendar
days after receipt of a proper request to transfer, surrender, partially
withdraw or commence Income Payments. The value of the Contract is determined
as of the Valuation Date on which the request is received. However,
determination of Contract value and processing the transaction may be deferred
for (1) any period during which the New York Stock Exchange is closed for other
than customary weekend or holiday closings or during which trading is restricted
by the Securities and Exchange Commission; (2) any emergency period when it is
not reasonably practicable to sell securities or fairly determine accumulation
unit values or annuity unit values; or (3) any other period designated by the
Securities and Exchange Commission to protect persons with interests in the
Account.
CONFIRMATIONS - HMLIC mails written confirmations of Purchase Payments to
Contract Owners on a quarterly basis within five business days following the end
of each calendar quarter. Written confirmations of transfers, changes in
allocations, partial withdrawals, and surrenders, are mailed to Contract Owners
within seven
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calendar days of the date the transaction occurred.
If a Contract Owner believes that the confirmation statement contains an
error, the Contract Owner should notify HMLIC within three months after receipt
of the confirmation statement. Notice may be provided by writing to HMLIC, P.O.
Box 4657, Springfield, Illinois 62708-4657, by sending a telefacsimile (FAX)
transmission to (217) 527-2307, or by telephoning (217) 789-2500 or (800) 999-
1030 (toll free).
DEDUCTIONS AND EXPENSES
ANNUAL MAINTENANCE CHARGE - An annual maintenance charge of $25 is deducted
from each Contract on the Contract anniversary date unless the contract value
equals or exceeds $10,000. The annual maintenance charge is deducted from the
Account Division containing the greatest dollar amount or from the fixed portion
of the Contract when none of the variable Account Divisions have any value.
Charges for annual maintenance cease once Income Payments begin. No annual
maintenance charge is taken, in whole or in part, in the event of a complete
surrender unless the surrender occurs on the Contract anniversary date.
The annual maintenance charge is intended to reimburse HMLIC for actual
expenses incurred in administering the Contract. HMLIC does not expect to
profit from such annual maintenance charge and assumes the risk that this annual
maintenance charge may be insufficient to cover the actual costs of
administering the Contract. See below "Charges for Mortality, Expense and
Distribution Expense Risks."
ASSET CHARGE FOR MORTALITY, EXPENSE AND DISTRIBUTION EXPENSE RISKS - For
assuming mortality, expense, and distribution risks, HMLIC applies an asset
charge to the account value of each Contract. The asset charge for mortality,
expense and distribution expense risks, may not exceed the annual rate of 1.35%
of the average net variable account value based on the date of calculation
(0.45% for mortality risks, 0.15% for expense risks and 0.75% for distribution
expense risks); however, HMLIC reserves the right to change the asset charge
(subject to the 1.35% ceiling) in the future. The asset charge accumulates on a
weekly basis at a rate of .0257205% of the net variable account value as of the
date of the calculation. The accumulated value of the asset charge is deducted
from each Account Division upon any surrender, partial withdrawal or transfer of
value or when dividends are paid, with the necessary number of units, at the
then current accumulation unit value, being redeemed to equal the dollar amount
of the charges owed. The accumulated asset charge for mortality, expense, and
distribution expense risks is assessed when a variable Income Payment is
elected. Thereafter, the asset charge is factored into the calculation of the
variable income payment.
OPERATING EXPENSES OF THE HORACE MANN FUNDS - There are deductions from and
expenses paid out of the assets of the Funds that are described in the Funds'
Prospectus which accompanies this Prospectus.
PREMIUM TAXES - Certain state and local governments levy a premium tax,
presently ranging from 0 to 3.5%, on the amount of Purchase Payments made under
this Contract. The premium tax, if any, is deducted either when payments are
received or when an amount is applied to provide an annuity at the Maturity
Date, depending upon the applicable law.
DEATH BENEFIT PROCEEDS
If a Contract Owner dies before the Maturity Date, the Contract value, or the
amount of Purchase Payments less any withdrawals, whichever is greater, will be
applied toward the purchase of an income payment option payable to the
beneficiary designated by the Contract Owner. The Contract value is determined
as of the date proof of death is received by HMLIC from the beneficiary. Proof
of death includes a certified death certificate and a completed claimant's
statement. The option purchased will be one elected by the Contract Owner. If
no option was elected, the beneficiary may elect an income payment option.
All or part of the death benefit proceeds may be paid to the beneficiary in a
lump sum or under one of the income payment options described under "Income
Payments--Income Payment Options." If the form of Income Payment selected
requires that payment be made by HMLIC after the death of the beneficiary,
payments will be made to a payee designated by the beneficiary or, if no
subsequent payee has been designated, to the beneficiary's estate.
For all Contracts issued in connection with this Prospectus, if the Contract
Owner dies before Income Payments begin and the designated beneficiary is not a
surviving spouse, the IRC requires the complete distribution of proceeds by
December 31 of the calendar year of the fifth anniversary of the death; i.e.,
"the five-year rule." This requirement can be satisfied by an annuity for life
or a period certain not exceeding the life expectancy of a designated
beneficiary, provided the Income Payments begin no later than December 31 of the
calendar year following the Contract Owner's death. Any part of a Contract
Owner's interest payable to a minor child will be paid to the child's legal
guardian for the benefit of the child.
If the designated beneficiary is the Contract Owner's surviving spouse,
Income Payments may be deferred until April 1 following the calendar year in
which the Annuitant would have reached age 70 1/2. For non-qualified annuities,
a designated beneficiary which is a surviving spouse may defer distributions
until he or she reaches age 70 1/2. However, if the surviving spouse dies
before distributions begin under any non-qualified
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Contract issued in connection with this Prospectus, the five-year rule and its
exceptions, explained in the preceding paragraph, will apply to his or her
beneficiary.
If the Contract Owner dies on or after the Maturity Date, the remaining
portion of the interest in the Contract undistributed at the time of the
Contract Owner's death must be distributed at least as rapidly as under the
method of distribution in force at the time of the Contract Owner's death.
MANDATORY MINIMUM DISTRIBUTION
Qualified plans are subject to distribution requirements of the IRC. A
distribution must occur each calendar year once a Contract Owner reaches age
70 1/2. The Contract Owner may elect to defer the first distribution until April
1 of the year following his or her attainment of age 70 1/2. Should the first
payment be deferred, the Contract Owner must take two distributions in the
calendar year following attainment of age 70 1/2.
Generally, the amount of the mandatory minimum distribution depends on the
Contract value and the life expectancy of the Contract Owner. Under Mandatory
Minimum Distribution requirements, distributions must be made for the life (or
lives) or a period not exceeding the life expectancy (or joint life expectancy)
of the Contract Owner (or the Contract Owner and a designated beneficiary). To
begin mandatory distributions the Contract Owner must contact the Home Office at
P. O. Box 4657, Springfield, Illinois 62708-4657.
The Internal Revenue Service has indicated that a Contract Owner who can
verify the December 31, 1986 balance in his or her Section 403(b) annuity, can
delay distribution of that amount until the end of the calendar year in which he
or she turns age 75. At that time, the December 31, 1986 balance is subject to
the minimum distribution requirements. The December 31, 1986 balance includes
deposits received and any interest earned as of December 31, 1986. Deposits
received after that date, interest on those deposits, and interest earned on the
December 31, 1986 balance are subject to the age 70 1/2 distribution
requirements.
Failure to take the required distributions results in the imposition of a
penalty tax equal to one-half (50%) of the difference between what was and what
should have been distributed. In addition, income tax is due on the full amount
that should have been distributed. Further, any distribution in excess of the
mandatory minimum distribution is subject to a 20% federal income tax
withholding. See "Tax Consequences."
INCOME PAYMENTS
INCOME PAYMENT OPTIONS
The Contract provides for fixed or variable income payment options or a
combination of both. The Contract Owner may elect to have Income Payments made
under any one or more of the options described below or may elect a lump sum
payment. To begin receiving Income Payments a properly completed request form
must be received in the Home Office. The request will be processed so that the
Income Payments begin on the first of the month following the month of receipt
unless a later date is requested and approved by the Company. If a fixed
payment option is elected, the variable account value will be transferred to the
fixed account on the date the request is received in the Home Office. In
addition, if a variable payment is elected, any money in the fixed account will
be transferred to the variable account on the date we received the request in
the Home Office. Generally, at the time an income payment option is selected, a
Contract Owner must elect whether to withhold for federal and state income
taxes. See "Other Information--Forms Availability" and "Tax Consequences."
In general, the longer Income Payments are guaranteed, the lower the amount of
each payment. Income Payments normally are made in monthly installments.
Variable Income Payments are paid only on a monthly basis. If the Contract
value to be applied under any one fixed or variable income payment option is
less than $2,000 or if the option chosen would provide Income Payments less
than $20 per month at the Maturity Date, then the Contract value may be paid in
a lump sum.
The following income payment options are available on a variable basis unless
otherwise stated.
LIFE ANNUITY WITH OR WITHOUT CERTAIN PERIOD - The life option guarantees
Income Payments for the lifetime of the Annuitant. If a certain period is
selected (5, 10, 15, 20 years) and the Annuitant dies before the end of the
period, Income Payments are guaranteed to the beneficiary until the end of the
period selected or the beneficiary may request the commuted value, if any, of
the remaining certain period payments. If no beneficiary is living at the time
of the Annuitant's death, the commuted value, if any, of the remaining certain
period payments will be paid in a single sum to the estate of the Annuitant.
Under the life without period certain option, it is possible that only one
Income Payment may be made if the Annuitant's death occurred before the due date
of the second Income Payment. This option usually provides the largest Income
Payments. The Annuitant cannot make unscheduled withdrawals or change to
another option after the first Income Payment has been made.
JOINT AND SURVIVOR LIFE ANNUITY - This life only option provides lifetime
Income Payments during the lifetimes of two Annuitants. After one annuitant
dies, the Income Payments will continue during the lifetime of the survivor in
an amount reduced to two-thirds of the monthly payments that would have been
paid had the joint lifetime of the two Annuitants continued. The
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Income Payments cease after the last payment paid prior to the survivor's
death. It could be possible for only one payment to be made under this option
if both Annuitants die before the due date of the second payment. The
Annuitants cannot make unscheduled withdrawals or change to another income
option after the first Income Payment has been made.
INCOME FOR FIXED PERIOD - This option provides Income Payments for a fixed
period not less than one year nor exceeding 30 years; however, payments may not
extend beyond the life expectancy of the Annuitant. Upon the Annuitant's death,
the beneficiary will be paid the remaining Income Payments due, if any, or the
beneficiary may request the commuted value, if any, of the remaining certain
period payments. If no beneficiary is living at the time of the Annuitant's
death, the commuted value, if any, of the remaining Income Payments will be paid
in a lump sum to the estate of the Annuitant. The Annuitant has the right to
change to another income option or make unscheduled withdrawals from the
remaining commuted value subject to IRC requirements. This option is available
on a fixed payment basis only.
INCOME FOR FIXED AMOUNT - This option provides payments of a fixed amount
until the account value, with interest, has been paid; however, payments may not
extend beyond the life expectancy of the Annuitant. Upon the Annuitant's death,
the beneficiary will be paid the remaining Income Payments due, if any, or the
beneficiary may request the commuted value, if any, of the remaining Income
Payments. If no beneficiary is living at the time of the Annuitant's death, the
commuted value, if any, of the remaining Income Payments will be paid in a lump
sum to the estate of the Annuitant. The Annuitant has the right to change to
another income option or make unscheduled withdrawals from the remaining
commuted value subject to IRC requirements. This option is available on a fixed
payment basis only.
INTEREST INCOME PAYMENTS - This option provides Income Payments based on
interest earned from the proceeds of the Contract, at a rate determined by
HMLIC, but never less than the annual guaranteed interest rate. Interest will be
credited at the end of each payment period. Once the Annuitant reaches age 70
1/2, mandatory minimum distribution requirements will not allow Interest Income
Payments to continue. The Annuitant may elect another income option at the end
of any payment period, or subject to IRC requirements, may withdraw the Contract
value in whole or in part upon written request. The request must be made prior
to the end of the period that the Annuitant agreed to receive Income Payments.
See "Mandatory Minimum Distribution." This option is available on a fixed
payment basis only.
OTHER INCOME OPTIONS - If the Annuitant does not wish to elect one or more
income payment options, the Annuitant may:
a) receive the proceeds in a lump sum, or
b) leave the Contract with HMLIC and receive the value under the mandatory
minimum distribution requirements of IRC Section 401(a)(9), see "Mandatory
Minimum Distribution," or
c) elect any other option that HMLIC makes available.
AMOUNT OF FIXED AND VARIABLE INCOME PAYMENTS
In general, the dollar amount of Income Payments under the Contract depends on
Contract value. Contract value equals the value of the fixed portion of the
Contract plus the value of each Account Division. The value of each Account
Division is determined by multiplying the number of Accumulation Units credited
to each Account Division by its respective accumulation unit value, less any
accumulated asset charge. Contract value may be more or less than the amount of
Net Purchase Payments allocated to the Contract.
FIXED INCOME PAYMENTS - The amount of each payment under a fixed income
payment option is determined from the income option tables in the Contract.
These tables show the monthly payment for each $1,000 of Contract value
allocated to provide a fixed Income Payment. Guaranteed fixed Income Payments
will not change regardless of investment, mortality or expense experience.
Higher Income Payments may be made at the sole discretion of HMLIC.
VARIABLE INCOME PAYMENTS - The amount of the first monthly variable Income
Payment is determined from the income option tables in the Contract. The tables
show the amount of the Income Payment for each $1,000 of value allocated to
provide Income Payments. The income option tables vary with the form of
income option payment selected and adjusted age of the Annuitant(s).
The first monthly variable Income Payment is used to calculate the number of
variable annuity units for each subsequent monthly Income Payment. The number
of variable annuity units remains constant over the payment period except when a
joint and survivor option is chosen. The number of variable annuity units will
be reduced upon the death of either Annuitant by one-third.
The amount of monthly Income Payments following the first variable Income
Payment varies from month to month to reflect the investment experience of each
Account Division funding those payments. Income Payments are determined each
month by multiplying the variable annuity units by the applicable variable
annuity unit value at the date of payment. The variable annuity unit value will
change between Valuation Dates to reflect the investment experience of each
Account Division.
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ASSUMED INTEREST RATE - The selection of an assumed interest rate affects both
the first monthly variable Income Payment and the pattern of subsequent
payments. The sum of the assumed interest rate and the mortality and expense
risk charge, adjusted to a monthly rate, is the investment multiplier. If the
investment performance of an Account Division funding variable Income Payments
is the same as the investment multiplier, the monthly payments will remain
level. If its investment performance exceeds the investment multiplier, the
monthly payments will increase. Conversely, if investment performance is less
than the investment multiplier, the payments will decrease. Unless otherwise
provided, the assumed interest rate is 4.0% per annum.
ANNUITY UNIT VALUE - The variable annuity unit value for the Growth,
Balanced, and Income Fund Account Divisions was set at $10.00 as of the date
amounts first were allocated to provide Income Payments. The variable annuity
unit value for the Short-Term Fund's Account Division also has been set at
$10.00, however, no Income Payments have been paid from this Account Division.
The current variable annuity unit value is equal to the prior variable annuity
unit value on the Valuation Date when payments were last determined, multiplied
by the applicable net investment factor. The net investment factor reflects the
investment performance of the Account Division during the current month plus the
value of any dividends and distributions during the current month. This factor
is computed by dividing the net asset value of a share of the underlying Fund on
the last business day of the current month, plus any dividends or other
distributions, by the net asset value of a share on the last business day of the
preceding month, and dividing this result by the sum of one plus the investment
multiplier (or multiplying this result by .995666).
MISSTATEMENT OF AGE
If the age of the Annuitant has been misstated, any Income Payment amount
shall be adjusted to reflect the correct age. If the Income Payments were too
large because of a misstatement of age, HMLIC will deduct the difference with
interest, at an effective annual interest rate of 6%, from future payments until
totally repaid. If the Income Payments were too small, HMLIC will add the
difference with interest, at an effective annual interest rate of 6%, to the
next payment.
MODIFICATION OF THE CONTRACT
The Contract provides that it may be modified by HMLIC to maintain continued
compliance with applicable state and federal laws. Contract Owners will be
notified of any modification. Only officers designated by HMLIC may modify the
terms of the Contract.
HMLIC reserves the right to offer Contract Owners, at some future date and in
accordance with the requirements of the Investment Company Act of 1940, the
option to direct that their Purchase Payments be allocated to a registered,
open-end, diversified, management investment company ("mutual fund") other than
one or more of the four currently offered Horace Mann Funds. If shares of a
Horace Mann Fund are not available for purchase by the Account, or if in the
judgment of HMLIC further investment in these shares is no longer appropriate in
view of the purposes of the Account or Account Division, then (i) shares of
another mutual fund may be substituted for existing Fund shares held in the
affected Account Division and/or (ii) payments received after a date specified
by HMLIC may be applied to the purchase of shares of another mutual fund. No
substitution will be made without prior approval of the Securities and Exchange
Commission. Any substitution would be for shares of a mutual fund with
investment objectives similar to those of the Fund it replaces.
TAX CONSEQUENCES
SEPARATE ACCOUNT
The operations of the Account form part of the operations of HMLIC; however,
the IRC provides that no federal income tax will be payable by HMLIC on the
investment income and capital gains of the Account if certain conditions are
met. Provided the investments of the underlying Funds continue to meet the
diversification requirements of IRC Section 817(h), the Contract Owner will not
pay federal income tax on the investment income and capital gains under a
Contract until Income Payments begin or a full or partial withdrawal is made.
CONTRACT OWNERS
CONTRIBUTIONS - Under IRC Section 403(b), Purchase Payments made by public
school systems, churches, or certain tax-exempt organizations to purchase
annuities for their employees are excludable from the gross income of the
employee to the extent that aggregate Purchase Payments for the employee do not
exceed certain limitations imposed by the IRC. Further, any amounts credited
to the Contract Owner's account are not taxable until such amounts are
distributed. If the Contract is used for a tax-sheltered annuity described in
IRC Section 403(b) or a simplified employee pension plan described in IRC
Section 408(k) ("qualified plans"), contributions made by an employer through a
salary reduction plan are permitted up to prescribed limits.
Generally, IRC Section 403(b) imposes a limitation on the amount of tax-
deferred Purchase Payments that may be made in a calendar year equal to 20% of
an employee's compensation includable in gross income for that year. Adjustments
to this limitation are made based upon the Contract Owner's years of service
with his or her employer and take into account the Contract Owner's prior and
current contributions to qualified plans. The Section 403(b) limitation also is
adjusted for any amounts deferred in prior taxable years under an eligible
deferred
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compensation plan as defined by IRC Section 457. In addition, IRC Section 415
imposes a 25% limitation on total pre-tax contributions to all tax-qualified
plans. No limitations are imposed on the amount of contributions made to a non-
qualified contract.
If the Contract is used as an IRA, subject to certain limitations, all or a
portion of the contribution up to $2,000 ($2,250 for a spousal IRA) may be
deducted from gross income. Contributions to a simplified employee pension plan
Contract generally may not exceed 15% of compensation or $30,000, whichever is
less. Until a taxable distribution occurs, no federal income tax is payable by
the Contract Owner on Purchase Payments and investment earnings of a Contract
purchased for a qualified plan or an IRA.
Effective January 1, 1989, the IRC imposes restrictions on distributions
(i.e., partial withdrawals or surrenders) from annuity contracts qualified under
IRC Section 403(b). IRC Section 403(b)(11) requires that for these annuity
contracts to receive tax-deferred treatment, the following distribution
restrictions must be applied to contributions and all earnings credited after
December 31, 1988.
Distributions may be paid only:
(1) When the employee attains age 59 1/2, separates from service, dies, or
becomes disabled (within the meaning of IRC Section 72(m)(7)), or
(2) In hardship cases and cannot exceed contributions made through a
salary reduction agreement. Distribution of any income attributable to these
contributions is prohibited.
DISTRIBUTIONS UNDER QUALIFIED CONTRACTS - The IRC subjects qualified plans to
certain mandatory minimum distribution requirements. See "The Contract-
Mandatory Minimum Distribution."
If certain requirements are met, full or partial distributions other than
mandatory minimum distributions, either may be rolled over or exchanged on a
tax-free basis from one plan to another in accordance with IRC Section 1035 or
Revenue Ruling 90-24. See "The Contract - Mandatory Minimum Distribution."
Distributions from an IRC Section 403(b) Contract may be rolled over to another
IRC Section 403(b) Contract or to an IRA. Distributions from an IRA may be
rolled over to another IRA or to an IRC Section 403(b) Contract if the IRA
contains only amounts rolled over from a 403(b) plan.
Effective January 1, 1993, federal tax law requires HMLIC to withhold for
ordinary income tax purposes, 20% of any distributions from annuity Contracts or
plans qualified under IRC Section 403 with the exception of the following:
(1) eligible rollover distributions made directly to another trustee,
(2) periodic payments received over the Contract Owner's lifetime,
(3) periodic payments received under the minimum required distribution
rules, or
(4) periodic payments received over a period of ten years or more.
The Contract Owner, after receiving a distribution that is subject to the 20%
withholding tax, may elect to rollover the distribution within 60 days of
receiving it. However, in order to qualify the entire distribution as a
rollover, the Contract Owner must replace the 20% withheld when making the
rollover payment. If the 20% is not replaced, the amount withheld will be
subject to ordinary income taxes and a possible 10% tax penalty if the
distribution occurred before age 59 1/2.
All distributions, with the exception of a return of nondeductible employee
contributions, received from a qualified plan or an IRA are includable in gross
income in the year paid. Once Income Payments begin, any nondeductible
contributions are recovered tax-free as a portion of each Income Payment.
Under certain limited circumstances, an individual may elect forward averaging
with respect to a lump sum distribution.
For any distribution not subject to the 20% withholding, HMLIC is required to
withhold federal income tax unless the Contract Owner elects not to have federal
income tax withheld. After an election is made with respect to Income Payments,
a Contract Owner may revoke the election at any time. HMLIC will notify the
Contract Owner at least annually of his or her right to revoke the election.
Contract Owners are required by law to provide their correct taxpayer
identification numbers ("TIN") to HMLIC. If the Contract Owner is an
individual, the TIN is his or her Social Security number.
If the designated beneficiary is not the Contract Owner's spouse, then at
least 50% of the present value of the amount available for distribution must be
paid within the life expectancy of the Contract Owner of an IRA or a qualified
plan. Each payment to the beneficiary must be no less than each payment to the
Contract Owner.
DISTRIBUTIONS UNDER NON-QUALIFIED CONTRACTS - Contract Owners of non-qualified
Contracts are not subject to federal income tax on earnings until Income
Payments are received under the Contract.
A distribution by surrender or partial withdrawal during the accumulation
period may subject the Contract Owner to federal income tax. For this purpose,
an assignment or pledge (or agreement to assign or pledge) is considered a
distribution.
15
<PAGE>
If the distribution is a full surrender, the Contract Owner is taxed on the
amount distributed, less Purchase Payments reduced by any prior partial
withdrawals which were not subject to income tax.
A distribution by partial withdrawal is deemed to come first from any
previously untaxed accumulation and then from principal. The Contract Owner is
subject to income tax on any previously untaxed accumulation which is
distributed.
Purchase Payments may be made by means of a full or partial tax free exchange
of annuity contracts under IRC Section 1035. Contracts exchanged under IRC
Section 1035 after January 18, 1985 will be subject to the annuity income tax
rules of IRC Section 72 in effect after that date, with exceptions set forth
below regarding the first-in first-out treatment of contracts issued prior to
August 14, 1982. See below "Penalty Tax."
If distributions are made pursuant to an income payment option, that portion
of each Income Payment which represents the Contract Owner's investment in the
Contract is excluded from gross income for federal income tax purposes. The
"investment in the Contract" is equal to total Purchase Payments to the Contract
less the portion of any periodic distributions that were excluded from the
individual's gross income. Once the Contract Owner's investment is returned in
full, the entire amount of each Income Payment is taxable as ordinary income.
PENALTY TAX - Distributions to a Contract Owner under a qualified plan are
subject to a 10% penalty tax unless the distributions are received:
(1) on or after age 59 1/2,
(2) on account of death,
(3) on account of disability, as defined in IRC Section 72(m)(7),
(4) pursuant to a qualified domestic relations order, as defined in IRC
414(p),
(5) for deductible medical expenses in excess of 7 1/2% of adjusted gross
income,
(6) on account of separation from service after age 55, or
(7) as a series of substantially equal payments for the life or a period
not exceeding life expectancy of the Contract Owner, or the lives or a period
not exceeding the joint life expectancy of the Contract Owner and a
designated beneficiary.
The 10% penalty tax also applies to distributions from IRAs before the
Contract Owner attains age 59 1/2, dies, or becomes disabled.
Taxable distributions from non-qualified Contracts received prior to age 59
1/2 are also subject to a 10% penalty tax unless the distribution is made after
the Contract Owner's death or disability, received as part of substantially
equal periodic payments for the Contract Owner's lifetime, or attributable to
Purchase Payments made prior to August 14, 1982. In addition, for non-qualified
Contracts issued during the period August 14, 1982 through January 18, 1985 and
for additional Purchase Payments to non-qualified Contracts issued prior to
August 14, 1982, the penalty tax will not apply to distributions attributable to
Purchase Payments paid ten years or more prior to the distribution. For this
purpose, distributions will be attributed to Purchase Payments on a "first-in
first-out" basis (i.e. to the earliest Purchase Payment which has not been fully
allocated to prior distributions.)
The preceding discussion is informational only and is not to be considered tax
advice. Contract Owners are urged to consult a competent tax adviser before
taking any action that could have tax consequences.
VOTING RIGHTS
Unless otherwise restricted by the plan under which a Contract is issued, each
Contract Owner has the right to instruct HMLIC with respect to voting his or her
interest in the shares of the Funds held by the Separate Account at all
shareholder meetings.
The number of votes that may be cast by a Contract Owner is based on the
number of units owned as of the record date of the meeting. Shares for which no
instructions are received are voted in the same proportion as the shares for
which instructions have been received. Any Fund shares attributable to
investment by HMLIC will be voted in proportion to the vote by Contract Owners
who have Separate Account units. Contract Owners receive various materials,
such as proxy materials and voting instruction forms, that relate to voting Fund
shares.
OTHER INFORMATION
LEGAL PROCEEDINGS - There are no legal proceedings to which the Separate
Account is a party or to which the assets of the Separate Account are subject.
HMLIC is engaged in various kinds of routine litigation that, in HMLIC's
judgment, are not material to its financial condition. None of this litigation
relates to the Separate Account.
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REGISTRATION STATEMENT - A registration statement has been filed with the
Securities and Exchange Commission under the Securities Act of 1933 with respect
to the Contract. This Prospectus does not contain all information set forth in
the registration statement, its amendments and exhibits. Statements contained in
this Prospectus as to the content of the Contract and other legal instruments
are summaries. For a complete statement of the terms thereof, reference is made
to these instruments as filed.
CONTRACT OWNER COMMUNICATIONS - To ensure receipt of communications, Contract
Owners must notify HMLIC of address changes. Notice of a change in address may
be sent to Horace Mann Life Insurance Company, Annuity Customer Service, P.O.
Box 4657, Springfield, Illinois 62708-4657. Contract Owners may also provide
notice of an address change by sending a telefacsimile (FAX) transmission to
(217) 527-2307 or by calling (217) 789-2500 or (800) 999-1030 (toll free).
HMLIC will attempt to locate Contract Owners for whom no current address is on
file. In the event HMLIC is unable to locate a Contract Owner, HMLIC may be
forced to surrender the value of the Contract to the Contract Owner's last known
state of residence in accordance with the state's abandoned property laws.
CONTRACT OWNER INQUIRIES - A toll free number, (800) 999-1030, is available to
telephone HMLIC's Annuity Customer Service Department. Written questions
should be sent to Horace Mann Life Insurance Company, Annuity Customer Service,
P.O. Box 4657, Springfield, Illinois 62708-4657.
FORMS AVAILABILITY - Specific forms are available from HMLIC to aid the
Contract Owner in affecting many transactions allowed under the Contract. These
forms may be obtained by calling the Annuity Customer Service Department toll
free at (800) 999-1030.
ADDITIONAL INFORMATION
A copy of the Statement of Additional Information providing more detailed
information about the Account is available, without charge, upon request. The
Table of Contents of this Statement follows:
<TABLE>
<CAPTION>
TOPIC PAGE
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<S> <C>
General Information and History.. 2
Investment Experience............ 2
Underwriter...................... 3
Financial Statements............. 3
</TABLE>
<PAGE>
PROSPECTUS
HORACE MANN GROWTH FUND, INC.
HORACE MANN INCOME FUND, INC.
HORACE MANN BALANCED FUND, INC.
HORACE MANN SHORT-TERM INVESTMENT FUND, INC.
MAY 1, 1996
<PAGE>
(This page intentionally left blank)
<PAGE>
Horace Mann Growth Fund, Inc.
Horace Mann Income Fund, Inc.
Horace Mann Balanced Fund, Inc.
Horace Mann Short-Term Investment Fund, Inc.
The Horace Mann Growth Fund, Inc. ("Growth Fund"), Horace Mann Income Fund,
Inc. ("Income Fund"), Horace Mann Balanced Fund, Inc. ("Balanced Fund"), and
Horace Mann Short-Term Investment Fund, Inc. ("Short-Term Fund"), are open-end,
diversified, management investment companies registered under the Investment
Company Act of 1940. These funds collectively are referred to as the "Funds."
The Funds issue shares of common stock that are continually offered for sale.
Fund shares may be purchased or redeemed at net asset value.
The primary investment objective of the Growth Fund is long-term capital
growth; conservation of principal and production of income are secondary
objectives. The Growth Fund invests primarily in common stocks.
The primary investment objective of the Income Fund is to maximize current
income consistent with prudent investment risk. A secondary objective is
preservation of capital. The Income Fund invests primarily in debt securities.
The investment objective of the Balanced Fund is to realize high long-term
total rate of return consistent with prudent investment risks. The Balanced
Fund's assets are invested in a mix of common stocks, debt securities and money
market instruments.
The primary investment objective of the Short-Term Fund is to realize maximum
current income to the extent consistent with liquidity. Preservation of
principal is a secondary objective. The Short-Term Fund attempts to realize its
objectives through investments in short-term debt instruments; it is not a money
market fund and does not maintain a constant net asset value per share.
As a result of the market risk inherent in any investment, there is no
assurance that these investment objectives will be realized.
In the opinion of the staff of the Securities and Exchange Commission, the use
of this combined Prospectus may make each Fund liable for any misstatement or
omission in this Prospectus regardless of the particular Fund to which it
pertains.
This Prospectus sets forth concisely the information a prospective investor
should know before investing. Additional information about the Funds has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information, dated May 1, 1996, which is incorporated herein by reference and
may be amended from time to time. The Statement of Additional Information is
available upon request, without charge, by writing to the Horace Mann Funds,
P.O. Box 4657, Springfield, Illinois 62708-4657, by sending a telefacsimile
(FAX) transmission to (217) 527-2307, or by telephoning (217) 789-2500 or (800)
999-1030 (toll-free). The Table of Contents of the Statement of Additional
Information appears on page 9 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
------------------
The date of this Prospectus is May 1, 1996.
<PAGE>
Table of Contents
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Topic Page
- ----- ----
<S> <C>
The Funds, Their Investment Objectives and Policies.....................................1
Growth Fund...........................................................................1
Income Fund...........................................................................1
Balanced Fund.........................................................................2
Short-Term Fund.......................................................................2
Types of Investments and Associated Risks...............................................3
Management..............................................................................5
Investment Adviser, Wellington Management Company.....................................6
Business Manager, Horace Mann Investors, Inc..........................................6
Transfer & Dividend Paying Agent, Horace Mann Service Corporation.....................7
Purchases and Redemptions...............................................................7
Dividends, Distributions and Federal Taxes..............................................8
Voting Rights...........................................................................8
Public Shareholder Communications.......................................................8
Shareholder Inquiries...................................................................9
Additional Information..................................................................9
</TABLE>
Condensed Financial Information
The condensed financial information for the Funds under the heading "Financial
Highlights" and the Report of Independent Auditors thereon, is incorporated
herein by reference from the Funds' Annual Report for the year ended December
31, 1995. Additional information about the Funds' performance, including
Management's Discussion and Analysis, is also contained in the 1995 Annual
Report which accompanies this Prospectus. Additional copies of the Annual
Report may be obtained without charge by writing to the Horace Mann Funds, P.O.
Box 4657, Springfield, Illinois 62708-4657, by sending a request by
telefacsimile (FAX) transmission to (217) 527-2307, or by telephoning (217) 789-
2500 or (800) 999-1030 (toll-free).
<PAGE>
The Funds, Their Investment Objectives And Policies
The Funds operate as open-end diversified management investment companies.
The Income Fund, the Balanced Fund and the Short-Term Fund each were
incorporated under Maryland law on September 22, 1982. The Growth Fund was
organized as a Maryland corporation on May 21, 1957.
The investment objectives and policies of each Fund are described below.
Prospective purchasers should recognize that there are risks in the ownership of
any security and that there can be no assurance that the objectives of the Funds
will be realized.
The investment objectives may not be changed without the approval of the
holders of a majority of a Fund's outstanding voting securities or 67% of the
shares represented at a meeting of shareholders at which the holders of 50% or
more of the outstanding shares are represented. (See "Voting Rights.")
Each Fund seeks to attain its objectives by pursuing investment policies that
call for investments in certain types of securities and by employing various
investment strategies. These investment policies and strategies may be changed
without shareholder approval. However, each Fund will not, as a matter of
policy, change its investment policies without notice to its shareholders.
Supplemental information on the investment policies as well as a description
of the investment restrictions of each Fund are contained in the Statement of
Additional Information.
Growth Fund
The investment objective of the Growth Fund is long-term capital growth.
Secondary objectives are conservation of principal and production of income.
The Growth Fund ordinarily invests substantially all of its assets in common
stocks of domestic companies of various sizes and operating histories, both
listed and non-listed, in a variety of industries. The Growth Fund may also
invest in preferred stocks or investment grade bonds or debentures of domestic
companies and U.S. Government securities. Additionally, up to 10% of the Growth
Fund's assets may be invested in U.S. dollar-denominated securities of foreign
issuers, including common stock, preferred stock, convertible debentures, and
American Depository Receipts.
To achieve its objectives of long-term capital growth, conservation of
principal and production of income, the Growth Fund employs a "Value-Yield"
strategy in making investments. "Value-Yield" investing concentrates on stocks
which sell at low prices relative to certain measures of company value such as
the price/earnings ratio and the price/book ratio. These stocks also tend to
have above-average dividend yields.
The Growth Fund may make interim investments in short-term debt instruments in
order to generate a return on otherwise idle cash. If a market decline is
expected, the Growth Fund may sell its portfolio securities and invest all or
part of the proceeds in investment grade corporate bonds, debentures, preferred
stock and U.S. Government securities; or it may retain funds in the form of cash
or cash equivalents.
The investment policies of the Growth Fund limit investments in debt
securities to those debt securities described below for the Income Fund.
Income Fund
The primary investment objective of the Income Fund is to maximize current
income consistent with prudent investment risk. A secondary objective is
preservation of capital.
The Income Fund seeks to attain its objectives through the following
investment policies:
1. At least 80% of the Income Fund's total assets are invested in:
(a) publicly offered debt securities, including mortgage-backed and other
asset-backed securities, within the four highest ratings (Aaa, Aa, A or Baa)
as determined by Moody's Investors Service, Inc. ("Moody's") or (AAA, AA, A or
BBB) by Standard and Poor's Corporation ("S&P"). For a more complete
description of ratings of debt securities, see Appendix A of the Statement of
Additional Information;
(b) securities issued or guaranteed by the U.S. Government or its agencies;
(c) publicly offered debt securities issued or guaranteed by a national or
state bank or bank holding company within the four highest ratings as
determined by both Moody's and S&P;
(d) U.S. dollar-denominated debt obligations of foreign governments,
foreign corporations, foreign branches of U.S. banks, and foreign banks
limited to the three highest ratings as determined by Moody's (Aaa, Aa or A)
or S&P (AAA, AA or A) and that do not exceed 10% of the Income Fund's total
assets;
(e) commercial paper having a rating within the two highest grades as
determined by both Moody's (Prime-1 or Prime-2) and S&P (A-1 or A-2). For a
more complete description of ratings of commercial paper, see Appendix A of
the Statement of Additional Information;
(f) repurchase and reverse repurchase agreements involving any of the above
instruments, provided that the market value of the underlying security is at
least 102% of the price of the repurchase agreement;
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(g) time deposits with maturities less than seven days; or
(h) cash or cash equivalents.
2. Up to 20% of the Income Fund's total assets may be invested in preferred
stocks and obligations not described above, including convertible securities and
securities carrying warrants to purchase equity securities.
The Income Fund will not invest in common stocks directly, but may retain up
to 20% of its total assets in common stocks acquired upon conversion of debt
securities or preferred stock, or upon exercise of warrants acquired with debt
securities.
To realize the objectives of maximizing current income consistent with prudent
investment risk and preservation of capital, at least 80% of the Income Fund's
total assets are normally invested in intermediate-term bonds and debentures
with effective maturities of two to ten years. Values of intermediate-term
bonds tend to be less volatile than bonds with maturities greater than ten years
but normally provide lower yields.
During periods of volatility or when an unusual decline in the value of long-
term obligations is anticipated, for defensive purposes, however, the Income
Fund will place a larger portion of its assets in cash and short-term
obligations. The Income Fund's holdings of short-term obligations and equity
securities during such periods may temporarily exceed an aggregate total of 20%
of the Income Fund's total assets.
Moreover, as a matter of investment policy, the Income Fund will not invest
more than 10% of its total assets in illiquid repurchase and reverse repurchase
agreements or any similar instruments that may be deemed to be illiquid.
Instead of holding its entire portfolio to maturity, the Income Fund will engage
in portfolio trading when trading will help achieve its investment objectives.
Balanced Fund
The investment objective of the Balanced Fund is to realize high long-term
total rate of return consistent with prudent investment risks. Total rate of
return consists of current income including dividends, interest, discount
accruals and capital appreciation.
The Balanced Fund seeks to attain this objective through a selective mix of
investments in common stocks, bonds, and other debt instruments. The Balanced
Fund holds the same kinds of stocks and bonds held separately by the Growth Fund
and Income Fund. For a description of the types of stocks and bonds in which
the Balanced Fund is permitted to invest, see - "The Funds, Their Investment
Objectives and Policies - Growth Fund and - Income Fund", above.
The mix of investments in the Balanced Fund is regularly adjusted between
stocks and bonds to capitalize on perceived variations in return potential
produced by the changing financial market and economic conditions. This mixture
of stocks and bonds reduces the volatility of investment returns while still
providing the potential for higher long-term total returns that can only be
achieved by including some exposure to stocks. As a matter of investment policy,
50% to 75% of the Balanced Fund's total assets will be invested in stocks and
25% to 50% of the value of its assets will be invested in bonds or other types
of fixed income securities, such as mortgage-backed securities.
Up to 100% of the Balanced Fund's total assets may be invested temporarily in
short-term debt instruments for defensive purposes, such as responding to
adverse securities market or economic conditions. Additionally, no more than
10% of the total assets may be invested in illiquid repurchase and reverse
repurchase agreements or any other instruments that may be deemed to be
illiquid. Major changes in investment mix may occur several times within a year
or over several years, depending upon market and economic conditions.
Short-Term Fund
The investment objective of the Short-Term Fund is to realize maximum current
income to the extent consistent with liquidity. Preservation of principal is a
secondary objective. The Short-Term Fund is not a money market fund and does
not maintain a stable net asset value per share.
The Short-Term Fund seeks to attain its objectives by investing in the
following types of short-term debt instruments with maturities generally not
exceeding one year. The Short-Term Fund invests in:
1. U.S. Treasury Bills and other obligations of or guaranteed by the U.S.
Government or its agencies;
2. obligations (including certificates of deposit, time deposits with
maturities less than seven days, or bankers' acceptances) of major U.S. banks;
3. commercial paper within the two highest ratings as determined by Moody's
(Prime-1 or Prime-2) or S&P (A-1 or A-2). For a more complete description of
ratings of commercial paper, see Appendix A of the Statement of Additional
Information;
4. U.S. dollar-denominated debt obligations of foreign governments, foreign
corporations, foreign branches of U.S. banks, and foreign banks limited to the
three highest ratings as determined by Moody's (Aaa, Aa or A) or S&P (AAA, AA or
A) and that do not exceed 10% of the Short-Term Fund's total assets. For a more
complete description of ratings of debt securities, see Appendix A of the
Statement of Additional Information;
2
<PAGE>
5. publicly traded bonds, debentures and notes with a rating within the four
highest grades as determined by Moody's or S&P;
6. repurchase and reverse repurchase agreements involving any of the above
instruments; or
7. cash or cash equivalents.
The Short-Term Fund attempts to maximize return of its portfolio by trading to
take advantage of changing money market conditions and trends. The Short-Term
Fund also trades to take advantage of disparities in yield relationships between
money market instruments. This procedure may increase or decrease the portfolio
yield depending on the Investment Adviser's ability to correctly time and
execute these transactions. The Short-Term Fund intends generally to purchase
securities that mature within one year, but will not purchase securities with
maturities that exceed two years except for securities subject to repurchase
agreements and reverse repurchase agreements. The Short-Term Fund will not
invest more than 10% of its total assets, however, in illiquid repurchase and
reverse repurchase agreements or any other instruments that may be deemed to be
illiquid.
Types of Investments and Associated Risks
Investments in any type of security are subject to varying degrees of market
risk, financial risk, and in some cases, reinvestment risk. Although the Funds
are subject to these risks, their investment policies and restrictions are
designed to reduce such risk. Further, each Fund exercises due care in the
selection of its portfolio securities.
MARKET RISK is the potential for fluctuations in the price of the security
because of market factors. For equity securities, market risk is the
possibility of change in price caused by stock market price changes; for debt
securities, market risk is the possibility that the price will fall because of
changing interest rates. In general, debt securities' prices vary inversely
with changes in interest rates. If interest rates rise, bond prices generally
fall; if interest rates fall, bond prices generally rise. In addition, for a
given change in interest rates, longer-maturity bonds fluctuate more in price
(gaining or losing more in value) than shorter-maturity bonds.
FINANCIAL RISK is based on the financial situation of the issuer. For equity
securities, financial risk is the possibility that the price of the security
will fall because of poor earnings performance by the issuer. For debt
securities, financial risk is the possibility that a bond issuer will fail to
make timely payments of interest or principal to a fund. The financial risk of
a fund depends on the credit quality of its underlying securities. In general,
the lower the credit quality of a fund's securities, the higher a fund's yield,
all other factors such as maturity being equal.
REINVESTMENT RISK is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid (or
"called") prior to its expected maturity date. If during periods of falling
interest rates a debt security with a high stated interest rate is called away,
the unanticipated proceeds would likely be invested at lower interest rates, and
the fund's income may decline. Call provisions, which may lead to reinvestment
risk, are most common for intermediate and long-term municipal, corporate and
mortgage-backed securities. To the extent securities subject to call were
acquired at a premium, the potential for appreciation in the event of a decline
in interest rates may be limited and may even result in losses.
In addition to the risks generally associated with investing, there are risks
particular to certain types of investments. The following provides additional
information on various types of instruments in which the Funds may invest and
their associated risks. A Fund may not buy all these instruments to the extent
permitted unless it believes that doing so will help the Fund achieve its
objectives.
U.S. GOVERNMENT OBLIGATIONS - U.S. Government obligations are direct
obligations of the U.S. Government and are supported by the full faith and
credit of the U.S. Government. U.S. Government agency securities are issued or
guaranteed by U.S. Government sponsored enterprises and federal agencies. Some
of these securities are backed by the full faith and credit of the U.S.
Government; others are backed by the agency's right to borrow a specified amount
from the U.S. Treasury; and still others, while not guaranteed directly or
indirectly by the U.S. Government, are backed with collateral in the form of
cash, Treasury securities or debt instruments that the lending institution has
acquired through its lending activities.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities represent interests in
pools of mortgage loans made by lenders such as commercial banks and savings and
loan institutions. Pools of mortgage loans are assembled for sale to investors
by various government-related organizations. The principal government guarantor
of mortgage-backed securities is the Government National Mortgage Association
("GNMA"). GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on GNMA
securities. Mortgage loans are pooled by various other governmental entities
including the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA"). FHLMC is a corporate instrumentality of
the U.S. Government and FNMA is a government-sponsored corporation owned
entirely by private stockholders.
3
<PAGE>
Mortgage-backed securities differ from traditional debt securities. Among the
major differences are that interest and principal payments are made more
frequently, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans generally may be prepaid at any time.
Since prepayment rates vary widely, it is not possible to accurately predict the
average maturity of a particular mortgage-backed pool; however, statistics
published by the Federal Housing Authority indicate that the average life of
mortgages with 25- to 30-year maturities (the type of mortgages backing the vast
majority of mortgage-backed securities) is approximately 12 years. Mortgage-
backed securities may decrease in value as a result of increases in interest
rates and may benefit less than other fixed income securities from declining
interest rates because of the risk of prepayment.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND MULTICLASS PASS-THROUGH
SECURITIES - CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC Certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities ("Mortgage Assets"). Multiclass pass-
through securities are equity interests held in a trust composed of Mortgage
Assets. Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the capital to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. CMOs
may be issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs is issued at a specific fixed or floating coupon rate and has
a stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates. Interest is paid or
accrues on all classes of CMOs on a monthly, quarterly or semi-annual basis.
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of a CMO series in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to the individual class than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow to a particular CMO the lower the anticipated yield will be on that
class at the time of issuance relative to prevailing market yields on mortgage-
backed securities.
A portfolio also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
ASSET-BACKED SECURITIES - Through the use of trusts and special purpose
corporations, various types of assets, primarily automobile and credit card
receivables, are being pooled in pass-through structures similar to the mortgage
pass-through structures described above. Asset-backed securities generally do
not have the benefit of the same security interest in the related collateral as
is the case with mortgage-backed securities. There is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, the securities interest in the
underlying automobiles are often not transferred when the pool is created, with
the resulting possibility that the collateral could be resold. In general,
these types of loans are of shorter average life than mortgage loans and are
less likely to have substantial prepayments.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES - The yield characteristics of mortgage-backed and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a portfolio purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if a fund purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
4
<PAGE>
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Asset-
backed securities, although less likely to experience the same prepayment rates
as mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-backed securities and asset-backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because of
the risk of prepayment.
ADJUSTABLE RATE MORTGAGE SECURITIES - Adjustable rate mortgage securities are
pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates. A description of these instruments is contained in
Appendix B of the Funds' Statement of Additional Information.
REPURCHASE AGREEMENTS - Repurchase agreements are instruments under which a
fund acquires ownership of a security and the seller agrees, at the time of the
sale, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during a fund's holding period. A fund entering
into a repurchase agreement is exposed to the risk that the other party to the
agreement may be unable to keep its commitment to repurchase. In that event, a
fund may incur disposition costs in connection with liquidating the collateral
(i.e., the underlying security). Moreover, if bankruptcy proceedings are
commenced with respect to the selling party, receipt of the value of the
collateral may be delayed or substantially limited and a loss may be incurred if
the collateral securing the repurchase agreement declines in value during the
bankruptcy proceedings. The Funds believe that these risks are not material
inasmuch as each Fund will evaluate the credit worthiness of all entities with
which it proposes to enter into repurchase agreements, and will seek to assure
that each arrangement is adequately collateralized. For a more detailed
description of Repurchase Agreements, see the Statement of Additional
Information - Appendix B.
FOREIGN SECURITIES - As described under "The Funds, Their Investment
Objectives and Policies," each Fund may invest up to 10% of its total assets in
certain U.S. dollar-denominated securities of foreign issuers.
For the Growth and Balanced Funds, the limitation with respect to foreign
securities includes investments in sponsored and unsponsored American Depository
Receipts ("ADRs"). ADRs are U.S. dollar-denominated securities backed by
foreign securities deposited in a U.S. securities depository. ADRs are created
for trading in the U.S. markets.
Sponsored ADRs trade on recognized U.S. stock exchanges and firms that sponsor
ADRs will supply shareholders with English translations of company information
made public in the home country. Unsponsored ADRs typically trade in the U.S.
"over-the-counter" market. Generally, less information is available on
unsponsored ADRs since foreign issuers of unsponsored ADRs are not obligated to
disclose material company information in the United States.
The value of an ADR will fluctuate with the value of the underlying foreign
security, reflect any changes in currency exchange rates and otherwise involve
risks associated with investing in foreign securities. The Growth Fund and
Balanced Funds' investments in ADRs will be limited solely to those that are
regularly traded on recognized U.S. exchanges or in the U.S. over-the-counter
market.
To the extent the Funds purchase Eurodollar certificates of deposit issued by
foreign branches of U.S. banks and foreign banks, or Eurobonds issued by foreign
branches of U.S. corporations, consideration will be given to their
marketability and possible restrictions on the flow of international currency
transactions.
There may be less publicly available information about a foreign issuer than
about a domestic issuer. Foreign issuers, including foreign branches of U.S.
banks, are subject to different accounting and reporting requirements which are
generally less extensive than the requirements applicable to domestic issuers.
Foreign stock markets (other than Japan) have substantially less volume than the
United States exchanges, and securities of foreign issuers are generally less
liquid and more volatile than those of comparable domestic issuers. There is
frequently less governmental regulation of exchanges, broker-dealers and issuers
than in the United States, and brokerage costs may be higher. In addition,
investments in foreign companies may be subject to the possibility of
nationalization, withholding of taxes on dividends at the source, expropriation
or confiscatory taxation, currency blockage, political or economic instability
or diplomatic developments that could adversely affect the value of those
investments. Finally, in the event of a default of any foreign obligation, it
may be difficult for the Funds to obtain or to enforce a judgment against the
issuer.
Management
The overall responsibility for the supervision of the
5
<PAGE>
affairs of the Funds vests in the Board of Directors. As described below, the
Board has contracted with others to provide certain services to the funds.
Investment Adviser, Wellington Management Company
The Funds employ Wellington Management Company ("Wellington Management") to
manage the investment and reinvestment of the assets of the Funds and to
continuously review, supervise and administer the Funds' investment programs.
Wellington Management, located at 75 State Street, Boston, Massachusetts 02109,
is a professional investment counseling firm which provides investment services
to investment companies, employee benefit plans, endowments, foundations, and
other institutions and individuals. As of December 31, 1995, Wellington
Management had discretionary management authority with respect to approximately
$109.2 billion of assets. Wellington Management and its predecessor
organizations have provided investment advisory services to investment companies
since 1933 and to investment counseling clients since 1960.
John R. Ryan, CFA, Senior Vice President and Managing Partner of Wellington
Management, began providing investment advice to the Growth Fund and stock
portion of the Balanced Fund on November 1, 1989, and assumed primary
responsibility for the day-to-day investment management of the Growth Fund and
stock portion of the Balanced Fund on December 1, 1992. Mr. Ryan has been a
portfolio manager with Wellington Management's Value/Yield investment team since
1981 and has held the position of Senior Vice President of Wellington Management
since 1988. Mr. Ryan became a Managing Partner of the firm on January 1, 1996.
John C. Keogh, Senior Vice President of Wellington Management, began providing
investment advice to the Income Fund, Short-Term Fund and bond portion of the
Balanced Fund on November 1, 1989, and assumed primary responsibility for the
day-to-day investment management of the Income Fund, Short-Term Fund and bond
portion of the Balanced Fund on September 1, 1991. 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.
Each Fund pays Wellington Management advisory fees at the end of each month.
These fees are accrued daily and are calculated by applying a rate, based on the
following annual percentage rate, to the Fund's average daily net assets for the
respective month:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------------- ------
<S> <C> <C>
Growth Fund On initial $100 million 0.400%
On Next $100 million 0.300%
Over $200 million 0.250%
Income Fund On Initial $100 million 0.250%
On Next $100 million 0.200%
Over $200 million 0.150%
Balanced Fund On Initial $100 million 0.325%
On Next $100 million 0.275%
On next $300 million 0.225%
Over $500 million 0.200%
Short-Term Fund On Initial $100 million 0.125%
On Next $100 million 0.100%
Over $200 million 0.075%
</TABLE>
For fiscal year ended December 31, 1995, the Growth Fund paid 0.33%, the
Income Fund paid 0.25% and the Balanced Fund paid 0.30% to Wellington Management
as a percentage of net assets. The Short-Term Fund's fee of 0.13% was paid to
Wellington Management by Horace Mann Investors, Inc.
The Investment Advisory Agreements authorize Wellington Management (subject to
the discretion and control of the Funds' Board of Directors) to select the
brokers or dealers that will execute the purchases and sales of portfolio
securities and require Wellington Management to use its best efforts to obtain
the best available price and most favorable execution.
Business Manager, Horace Mann Investors, Inc.
Horace Mann Investors, Inc. ("Investors"), serves as the business manager of
each Fund. Investors, located at One Horace Mann Plaza, Springfield, Illinois
62715-0001, is registered with the Securities and Exchange Commission as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. (NASD). Investors and Allegiance Life Insurance Company ("ALIC") are
wholly-owned subsidiaries of Horace Mann Educators Corporation ("HMEC"). Horace
Mann Life Insurance Company ("HMLIC"), which sponsors HMLIC's separate accounts,
is a wholly-owned subsidiary of ALIC.
Investors provides for the management of the business affairs of each Fund
including, but not limited, to office space, secretarial and clerical services,
bookkeeping services, wire and telephone communications services and other
services of this nature necessary for the proper management of each Fund's
business affairs.
6
<PAGE>
Investors charges each Fund a pro rata fee computed on the aggregate total net
assets of all Funds managed by Investors and sponsored by HMLIC equal to 0.25%
of the aggregate total net assets of all Funds up to $100 million and 0.20% of
aggregate total net assets exceeding that amount. The management fee is accrued
daily and paid monthly based upon the aggregate daily total net assets
determined as of the close of business on each day during the month. Investors
waives this fee for the Income and Short-Term Funds.
The Business Management Agreements with Investors do not cover the Funds'
expenses related to legal, custodial, independent accounting and auditing,
transfer agent, registrars' and other agents' services; costs related to
reports, notices and proxy material; compensation and expenses of independent
directors; stock issuance expenses; brokers' commissions; taxes and fees payable
to governmental agencies; and expenses of shareholders' and directors' meetings.
Transfer and Dividend Paying Agent, Horace Mann Service Corporation
Horace Mann Service Corporation, One Horace Mann Plaza, P.O. Box 4657,
Springfield, Illinois 62708-4657, acts as the transfer agent and dividend paying
agent.
Purchases and Redemptions
Shares of each Fund are currently sold only to HMLIC separate accounts. In the
event that HMLIC establishes additional separate accounts, shares of these Funds
may be made available for purchase by such additional separate accounts.
Previously, shares of the Growth Fund were available to the public. While Growth
Fund shares may no longer be purchased by the general public, existing public
shareholders may acquire additional shares through the automatic reinvestment of
dividends and distributions in accordance with Revenue Ruling 82-55.
Each Fund sells and redeems its shares at net asset value per share, without a
sales or redemption charge. The net asset value of each Fund's shares is
determined on each day the New York Stock Exchange ("NYSE") is open for trading
at the close of the NYSE (normally 3:00 p.m. Central Time). The computation is
made by dividing the net assets by the number of outstanding shares. Net assets
are equal to the total assets of the Fund less its liabilities. A purchase is
effected at the price based on the next calculation of net asset value per share
after receipt of a request. A security listed or traded on an exchange is
valued at its last sales price on the exchange where it is principally traded.
In the absence of a current quotation, the security is valued at the mean
between the last bid and asked prices on the exchange. Securities traded over-
the-counter are valued at the last current bid price. Debt securities that have
a remaining maturity of 60 days or less are valued at cost, plus or minus any
amortized discount or premium. When market quotations are not available,
securities are valued at fair value as determined in good faith by the Board of
Directors.
Except in extraordinary circumstances and as permissible under the Investment
Company Act of 1940, redemption proceeds are paid on or before the fifth
business day following the date the request for redemption is received.
REDEMPTION OF GROWTH FUND SHARES BY EXISTING PUBLIC SHAREHOLDERS - The Growth
Fund will redeem shares from public shareholders at the net asset value per
share next determined after receipt of a redemption request. If stock
certificates have been issued, the signature of each party must be guaranteed by
an officer of a commercial bank, trust company, or a member of the New York
Stock Exchange. If certificates are lost, the shareholder will need to submit
an Affidavit of Loss form with the signature(s) notarized if 100 or less shares
are surrendered, and a Lost Instrument Bond will be required if over 100 shares
are surrendered. A Lost Instrument Bond can be obtained from an insurance
carrier. The cost for this bond must be paid by the shareholder.
If no certificates have been issued to the shareholder, redemption may be
accomplished by signing a written request. The request should be sent to the
Horace Mann Growth Fund, Inc. P.O. Box 4657, Springfield, Illinois 62708-4657
and should identify the account by number and the name(s) in which the account
is registered. The request must be signed exactly as the account is registered.
On a jointly held account, all owners must sign.
All redemption requests by mail should be sent certified with return receipt
requested. Provided the request is received in good form, payment for shares
redeemed will be made by the Fund within three business days of the receipt.
SYSTEMATIC CASH WITHDRAWAL PLAN - When a Growth Fund public shareholder has
accumulated $5,000 or more of Growth Fund shares in his or her account, shares
may be withdrawn automatically through the Systematic Cash Withdrawal Plan (the
"Plan"). A shareholder may receive checks monthly, quarterly, semiannually or
annually in any amount requested, but not less than $25. A Plan application is
available, upon request, from the transfer agent. The value of a public
shareholder's account is determined at the net asset value on the date a Plan
application is received by the Growth Fund. Payments under the Plan will be
made either on the 1st or 15th of the month as selected by the shareholder. A
sufficient number of shares will be redeemed from the shareholder's account to
provide funds for payments made under the Plan, thus reducing the shareholder's
account value. Depending on the amount and frequency of withdrawals, payments
under
7
<PAGE>
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
It is intended that all Funds will continue to qualify as regulated investment
companies under the Internal Revenue Code and, therefore, will not be subject to
federal income taxes to the extent earnings are distributed to shareholders.
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.
Effective in December of each year, each Fund intends to declare and make
distributions representing not less than 98% of its net investment income and
98% of its net realized capital gains. The Income, Balanced, and Short-Term
Funds are exempt from the 4% excise tax levied against regulated investment
companies for failure to distribute at least 98% of their net investment income
and net realized capital gains.
Public shareholders of the Growth Fund may elect to receive cash dividends and
will be notified of the amount and type of distribution. If a shareholder
elects to receive a cash dividend and the dividend check is returned by the
postal service, attempts will be made to locate the shareholder. If the
attempts to locate are unsuccessful, the shareholders dividend option will be
changed to reinvestment. When new shares are added to a Growth Fund public
shareholder's account through the reinvestment of dividends or when
distributions occur (which dividends will be taxable to the shareholder whether
paid in cash or reinvested in additional shares), a confirmation statement is
sent to the public shareholder showing the number of shares that were credited
or debited to the account, the net asset value per share and the total number of
shares in the account. A dividend or capital gains distribution will reduce the
per share net asset value by the amount of the dividend or distribution.
Shortly after the end of each year, Growth Fund shareholders will be informed of
the amount of and the federal income tax treatment of all distributions made
during the year. If not otherwise subject to tax on their income, public
shareholders will not be required to pay tax on amounts distributed to them.
Shareholders must determine for themselves the applicability of state and local
taxes to dividends and distributions received on Growth Fund shares.
The Growth Fund may be required to withhold federal income tax at a rate of
31% from dividend and redemption payments made to any public shareholder who
fails to furnish a certified taxpayer identification number ("TIN") or when the
Internal Revenue Service notifies the Growth Fund that the shareholder has
provided the Growth Fund with an incorrect TIN or failed to properly report
certain income for federal income tax purposes. Any withheld amount can be
credited against the shareholder's federal income tax obligation.
Voting Rights
Each Fund has authorized capital of 50 million shares of common stock. Par
value is $.10 for the Income Fund, Balanced Fund and Short-Term Fund, and $1.00
for the Growth Fund. Shares of each Fund are of the same class with equal
rights and privileges. Each share is entitled to vote on all matters submitted
to a vote of shareholders. The shares of each Fund are fully paid and non-
assessable and have no preference as to conversion, exchange, dividends,
retirement or other features. The shares of each Fund have no pre-exemptive
rights. The shares of each Fund have noncumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so.
Each person with voting rights will be provided with reports and proxy
materials relating to the applicable Fund(s). To be entitled to vote, a
shareholder (either a public shareholder of the Growth Fund or an insurance
company separate account) must have been a shareholder on the record date. The
number of Fund shares for which a shareholder may vote is determined by dividing
the value of an interest in a Fund by the net asset value of one share of the
Fund, as of the same date.
As of April 1, 1996, Horace Mann Life Insurance Company Separate Account owned
approximately 70.67%, 96.04%, 95.43% and 84.16% of the outstanding shares of
the Growth Fund, Income Fund, Balanced Fund and Short-Term Fund, respectively.
Horace Mann Life Insurance Company Separate Account B held approximately 7.06%
of the Growth Fund. Horace Mann Life Insurance Company Allegiance Separate
Account A held approximately 2.22% of the Growth Fund. Since these separate
accounts' voting rights are passed through to contract owners and participants,
HMLIC itself does not exercise voting control.
Public Shareholder Communications
To ensure receipt of communications related to investments in the Growth Fund,
public shareholders must notify the Growth Fund of address changes. Notice of a
change in address may be sent to the Horace Mann Growth Fund, Inc., P.O. Box
4657, Springfield, Illinois 62708-4657. Shareholders may also provide notice of
an address change by sending a telefacsimile (FAX) transmission to (217) 527-
2307 or by calling (217) 789-2500 or (800) 999-1030 (toll free).
8
<PAGE>
Shareholders Inquiries
For questions concerning investments in the Funds through HMLIC's annuity
contracts, call HMLIC's toll free customer service number, (800) 999-1030.
Written questions should be sent by mail to Horace Mann Life Insurance Company
at P.O. Box 4657, Springfield, Illinois 62708-4657 or by telefacsimile (FAX)
transmission to (217) 527-2307.
Growth Fund public shareholders may contact the Growth Fund by calling (800)
999-1030 or (217) 789-2500. Written questions concerning a Growth Fund public
shareholder's account may be sent by mail to Horace Mann Growth Fund, Inc., P.O.
Box 4657, Springfield, Illinois 62708-4657 or by telefacsimile (FAX)
transmission to (217) 527-2307.
Additional Information
A copy of the Statement of Additional Information providing more detailed
information about the Funds is available, without charge, upon request. The
Table of Contents of this Statement follows:
<TABLE>
<CAPTION>
Topic Page
- ----- ----
<S> <C>
Investment Policies.............................................. 2
Growth Fund.................................................... 2
Income Fund.................................................... 3
Balanced Fund.................................................. 3
Short-Term Fund................................................ 3
Investment Restrictions.......................................... 3
Management of the Funds.......................................... 5
Board of Directors............................................. 5
Officers....................................................... 7
Investment Advisory Agreements................................... 8
Brokerage Allocation............................................. 9
Business Management Agreements and Other Services................ 10
Purchase, Redemption and Pricing of Fund Shares.................. 11
Tax Status....................................................... 12
Control Persons and Principal Holders of Securities.............. 14
Financial Statements............................................. 15
Appendix A - Description of Commercial Paper and Bond Ratings.... A-1
Appendix B - Description of Securities........................... B-1
</TABLE>
To receive, without charge, a copy of the 1995 Annual Report of the Horace
Mann Family of Funds and the Horace Mann Life Insurance Company Separate Account
and/or a copy of the Statement of Additional Information for Horace Mann Life
Insurance Company Separate Account and/or the Horace Mann Family of Funds,
please complete the following request form and mail it to the address indicated
below, or send it by telefacsimile (FAX) transmission to (217) 527-2307 or
telephone (217) 789-2500 or (800) 999-1030 (toll-free).
HORACE MANN LIFE INSURANCE COMPANY
P.O. Box 4657
SPRINGFIELD, ILLINOIS 62708-4657
- --------------------------------------------------------------------------------
Please provide free of charge the following information:
______ 1995 Annual Report of the Horace Mann Family of Funds and the Horace
Mann Life Insurance Company Separate Account.
______ Statement of Additional Information dated May 1, 1996 for the Horace
Mann Family of Funds.
______ Statement of Additional Information dated May 1, 1996 for the Horace
Mann Life Insurance Company Separate Account.
Please mail the above documents to:
_____________________________________________
(Name)
_____________________________________________
(Address)
_____________________________________________
(City/State/Zip)
9
<PAGE>
SUPPLEMENT TO PROSPECTUS
DATED MAY 1, 1996
HORACE MANN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT
FOR CONTRACTS ISSUED ON FORM 527 -- GC
MAY 1, 1996
The group variable annuity Contract issued by Horace Mann Life Insurance Company
on Form 527-GC is no longer offered or sold by Horace Mann Life Insurance
Company. This earlier Contract remains in effect but differs from the Contracts
described in the Prospectus in the following material respects. Please refer to
the Contract on Form 527-GC for a complete description of its provisions.
1. The Contract may be terminated or discontinued by the Group Contract Owner
upon written notice to Horace Mann Life Insurance Company. The written notice
must specify the date for termination which may not be earlier than 30 days
following the date such notice is received by Horace Mann Life Insurance
Company. The Contract may be discontinued by Horace Mann Life Insurance
Company upon 90 days written notice to the Group Contract Owner.
2. If the Contract is terminated or the Annuitant ceases to be in the class of
eligible Annuitants, the Annuitant may elect within 90 days thereafter to
purchase from Horace Mann Life Insurance Company the individual annuity
Contract most similar in benefits and provisions to those of the Annuitant's
Certificate.
3. At the end of each fiscal year Horace Mann Life Insurance Company may, in its
discretion, determine an experience credit to be equitably applied based on
the mortality experience and administration costs of the Contract.
4. The Contract's minimum Purchase Payment is $10. Minimum annual Purchase
Payments that may be allocated to the Account are $200. In lieu of the
Surrender Charge, 5% of each Purchase Payment plus $.50 is deducted for sales
and administrative expenses and death benefit charges. The $.50 charge may
not exceed $6.00 in any Contract Year. If Purchase Payments are allocated to
both the Fixed Accumulation Account and the Separate Account, the per payment
fee is $.75, not to exceed $9.00 in any Contract Year. It is estimated that
of the 5% deduction, 3.2% is for sales expenses, 0.2% is for the death
benefit risk and 1.6% is for administrative expenses. Premium taxes payable,
if applicable, are deducted from each payment. All Purchase Payments net of
applicable deductions, are invested by the Account in shares of Horace Mann
Growth Fund, Inc. There is no annual maintenance charge or transfer charge.
5. In lieu of the Asset Charge for mortality, expense and distribution expense
risk described in the Prospectus, a charge for mortality and expense risks,
computed weekly at the rate of .005575% of the net assets of the Account
(approximately .29% on an annual basis), will be deducted from dividends and
other distributions paid by Horace Mann Growth Fund, Inc. to the Account or
to the extent such distributions are accrued and unpaid, from the value of a
Participant's account upon withdrawal or transfer of the Participant's
interest out of the Account. It is estimated that .24% is for mortality risk
and .05% is for expense risk.
6. The "present value factor" used in calculating the actuarial liability of the
Variable Retirement Annuity Account is computed using the Progressive Annuity
Mortality Table with interest at 3.5%. Consequently, the interest rate used
to compute the value of a Variable Retirement Annuity Unit is 3.79% (of which
.29% represents the charge for mortality and expense risks).
(continued)
<PAGE>
FORM 527 -- GC CONTRACTS
Contract Owner Transaction Expenses,/1/ as a percentage of Purchase Payments:
Sales Expense Charge.................................................... 3.20%
Death Benefit Risk Charge............................................... 0.20%
Administration Expense Charge................................... $1.60 and $.50
per payment
plus $20.00
issuance fee
Separate Account Annual Asset Charge, as a percentage of total net assets:
Mortality Risk.................................................... 0.24%
Expense Risk...................................................... 0.05%
Total Separate Account Annual Asset Charge............................... 0.29%
Annual Operating Expenses of Growth Fund,/2/ as a percentage of average
net assets for the December 31, 1995 fiscal year:
Investment Advisory Fees................................................ 0.34%
Business Management Fees................................................ 0.21%
Other Expenses.......................................................... 0.08%
Fund Pricing Fee................................................ 0.01%
Custodian Fees.................................................. 0.02%
Miscellaneous (audit, legal, etc.).............................. 0.05%
Total Growth Fund Operating Expenses..................................... 0.63%
Minus Expense Reimbursements and Fee Waivers............................. 0.02%
Net Fund Operating Expenses.............................................. 0.61%
<TABLE>
<CAPTION>
EXAMPLE/3/
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of the applicable
time period:
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:........................... $79 $97 $117 $173
If you do not surrender your Contract:
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:........................... $79 $97 $117 $173
</TABLE>
/1/Premium taxes, currently ranging between 0 and 3.5%, are not included. The
rate varies depending upon state of residence, and not all states impose premium
taxes. Also, depending on the state, taxes are taken from Purchase Payments or
are levied at annuitization.
/2/The Operating Expenses of the Growth Fund are borne indirectly by Contract
Owners.
/3/The EXAMPLE, should not be considered a representation of past or future
expenses. Amounts shown are based on the average cash value of the average
number of annuity Contracts in the accumulation phase during the 1995 calendar
year. Actual expenses may be greater or less than those shown.
THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING
THE VARIOUS COSTS AND EXPENSES THAT THEY BEAR
DIRECTLY OR INDIRECTLY. THE TABLE REFLECTS EXPENSES OF THE
SEPARATE ACCOUNT AS WELL AS THOSE OF THE GROWTH FUND.
_______________
The date of this Supplement is May 1, 1996.
<PAGE>
SUPPLEMENT TO PROSPECTUS
DATED MAY 1, 1996
HORACE MANN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT
FOR CONTRACTS ISSUED ON FORM 529
MAY 1, 1996
The individual variable annuity Contract issued by Horace Mann Life Insurance
Company on Form 529 is no longer offered or sold by Horace Mann Life Insurance
Company. These earlier Contracts remain in effect but differ from the Contracts
described in the Prospectus in the following material respects. Please refer to
the Contract on Form 529 for a complete description of its provisions.
1. The Contract's minimum Purchase Payment (gross stipulated payment) is $10.
Minimum annual Purchase Payments that may be allocated to the Account are
$200. In lieu of the Surrender Charge, 5% of each Purchase Payment plus $.50
is deducted for sales and administrative expenses and death benefit charges.
The $.50 charge may not exceed $6.00 in any Contract Year. If Purchase
Payments are allocated to both the Fixed Accumulation Account and the
Separate Account, the per payment fee is $.75, not to exceed $9.00 per
Contract Year. It is estimated that of the 5% deduction, 3.2% is for sales
expenses, 0.2% is for the death benefit risk and 1.6% is for administrative
expenses. Premium taxes payable, if applicable, are deducted from each
Purchase Payment. All Purchase Payments, net of applicable deductions, are
invested by the Account in shares of Horace Mann Growth Fund, Inc. There is
no annual maintenance charge or transfer charge.
2. In lieu of the Asset Charge for mortality, expense and distribution expense
risk described in the Prospectus, a charge for mortality and expense risks,
computed weekly at the rate of .005575% of the net assets of the Account
(approximately .29% on an annual basis), will be deducted from dividends and
other distributions paid by Horace Mann Growth Fund, Inc. to the Account, or
to the extent such distributions are accrued and unpaid, from the value of a
Contract Owner's account upon withdrawal or transfer of the Contract Owner's
interest out of the Account. It is estimated that .24% of such charge is for
mortality risk and .05% is for expense risk.
3. The "present value factor" used in calculating the actuarial liability of the
Variable Retirement Annuity Account is computed using the Progressive Annuity
Mortality Table with interest at 3.5%. Consequently, the interest rate used
to compute the value of a Variable Retirement Annuity Unit is 3.79% (of which
.29% represents the charge for mortality and expense risks).
FORM 529 CONTRACTS
Contract Owner Transaction Expenses,/1/ as a percentage of Purchase Payments:
Sales Expense Charge................................................... 3.20%
Death Benefit Risk Charge.............................................. 0.20%
Administration Expense Charge................................... $1.60 and $.50
per payment
plus $20.00
issuance fee
Separate Account Annual Asset Charge, as a percentage of total net assets:
Mortality Risk................................................... 0.24%
Expense Risk..................................................... 0.05%
Total Separate Account Annual Asset Charge............................... 0.29%
Annual Operating Expenses of Growth Fund,/2/ as a percentage of average
net assets for the December 31, 1995 fiscal year:
Investment Advisory Fees............................................... 0.34%
Business Management Fees............................................... 0.21%
Other Expenses......................................................... 0.08%
Fund Pricing Fee............................................... 0.01%
Custodian Fees................................................. 0.02%
Miscellaneous (audit, legal, etc.)............................. 0.05%
Total Growth Fund Operating Expenses..................................... 0.63%
Minus Expense Reimbursements and Fee Waivers............................. 0.02%
Net Fund Operating Expenses.............................................. 0.61%
(continued)
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE/3/
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of the applicable
time period:
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:.......................... $79 $97 $117 $173
If you do not surrender your Contract:
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:.......................... $79 $97 $117 $173
</TABLE>
/1/Premium taxes, currently ranging between 0 and 3.5%, are not included. The
rate varies depending upon state of residence, and not all states impose premium
taxes. Also, depending on the state, taxes are taken from Purchase Payments or
are levied at annuitization.
/2/The Operating Expenses of the Growth Fund are borne indirectly by Contract
Owners.
/3/The EXAMPLE, should not be considered a representation of past or future
expenses. Amounts shown are based on the average cash value of the average
number of annuity Contracts in the accumulation phase during the 1995 calendar
year. Actual expenses may be greater or less than those shown.
THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN
UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT THEY BEAR
DIRECTLY OR INDIRECTLY. THE TABLE REFLECTS EXPENSES OF THE
SEPARATE ACCOUNT AS WELL AS THOSE OF THE GROWTH FUND.
_______________
The date of this Supplement is May 1, 1996.
<PAGE>
SUPPLEMENT TO PROSPECTUS
DATED MAY 1, 1996
HORACE MANN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT
FOR CONTRACTS ISSUED ON FORM 66 -- 2A
MAY 1, 1996
The variable annuity Contract issued by Horace Mann Life Insurance Company on
Form 66-2A is no longer offered or sold by Horace Mann Life Insurance Company.
This earlier Contract remains in effect but differs from the Contracts described
in the Prospectus in the following material respects. Please refer to the
Contract on Form 66-2A for a complete description of its provisions.
1. In lieu of the Surrender Charge, 6% of each Purchase Payment (gross
stipulated payment) plus $.50, without any yearly limitation, is deducted for
sales and administrative expenses and death benefit charges.
It is estimated that of the 6% deduction, 4% is for sales expenses and 2% for
the death benefit risk. The additional $.50 deduction is for administrative
expenses.
All Purchase Payments, net of applicable deductions, including premium taxes
if applicable, are invested by the Account in shares of Horace Mann Growth
Fund, Inc. There is no annual maintenance fee or transfer charge.
2. In lieu of the Asset Charge for mortality, expense and distribution expense
risks described in the Prospectus, a charge is deducted from distributions
paid by Horace Mann Growth Fund, Inc. to the Account or, if the charge is
accrued and unpaid, from the value of a Contract Owner's individual account
upon withdrawal or transfer from the Account. This charge is computed weekly
at the rate of .0075% of the net assets of the Account (.39% on an annual
basis). It is estimated that .31% is for mortality risk and .08% is for
expense risk.
FORM 66 -- 2A CONTRACTS
Contract Owner Transaction Expenses,/1/ as a percentage of Purchase Payments:
Sales Expense Charge.................................................... 4.00%
Death Benefit Risk Charge............................................... 2.00%
Administration Expense Charge................................. $.50 per payment
plus $10.00
issuance fee
Separate Account Annual Asset Charge, as a percentage of average account value:
Mortality Risk.................................................... 0.31%
Expense Risk...................................................... 0.08%
Total Separate Account Annual Asset Charge............................... 0.39%
Annual Operating Expenses of Growth Fund,/2/ as a percentage of average
net assets for the December 31, 1995 fiscal year:
Investment Advisory Fees................................................ 0.34%
Business Management Fees................................................ 0.21%
Other Expenses.......................................................... 0.08%
Fund Pricing Fee................................................ 0.01%
Custodian Fees.................................................. 0.02%
Miscellaneous (audit, legal, etc.).............................. 0.05%
Total Growth Fund Operating Expenses..................................... 0.63%
Minus Expense Reimbursements and Fee Waivers............................. 0.02%
Net Fund Operating Expenses.............................................. 0.61%
(continued)
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE/3/
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of the applicable
time period:
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:.......................... $80 $100 $122 $184
If you do not surrender your Contract:
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:.......................... $80 $100 $122 $184
</TABLE>
/1/Premium taxes, currently ranging between 0 and 3.5%, are not included. The
rate varies depending upon state of residence, and not all states impose premium
taxes. Also, depending on the state, taxes are taken from Purchase Payments or
are levied at annuitization.
/2/The Operating Expenses of the Growth Fund are borne indirectly by Contract
Owners.
/3/The EXAMPLE should not be considered a representation of past or future
expenses. Amounts shown are based on the average cash value of the average
number of annuity Contracts in the accumulation phase during the 1995 calendar
year. Actual expenses may be greater or less than those shown.
THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN
UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT THEY BEAR
DIRECTLY OR INDIRECTLY. THE TABLE REFLECTS EXPENSES OF THE
SEPARATE ACCOUNT AS WELL AS THOSE OF THE GROWTH FUND.
_______________
The date of this Supplement is May 1, 1996.
<PAGE>
SUPPLEMENT TO PROSPECTUS
DATED MAY 1, 1996
HORACE MANN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT
FOR CONTRACTS ISSUED ON FORM 66 -- 3A AND 66 -- 4A
MAY 1, 1996
The variable annuity Contracts issued by Horace Mann Life Insurance Company on
Forms 66-3A and 66-4A are no longer offered or sold by Horace Mann Life
Insurance Company. These earlier Contracts remain in effect but differ from the
Contracts described in the Prospectus in the following material respects. Please
refer to the Contracts on Forms 66-3A and 66-4A for a complete description of
their provisions.
1. In lieu of the Surrender Charge, 6% of each Purchase Payment (gross
stipulated payment) plus $.50, without any yearly limitation, is deducted for
sales and administrative expenses and death benefit charges. It is estimated
that of the 6% deduction, 4% is for sales expenses and 2% for the death
benefit risk. The additional $.50 deduction is for administrative expenses.
All Purchase Payments, net of applicable deductions, including premium taxes
if applicable, are invested by the Account in shares of Horace Mann Growth
Fund, Inc. There is no annual maintenance fee or transfer charge.
2. In lieu of the Asset Charge for mortality, expense and distribution expense
risks described in the Prospectus, a charge is deducted from all
distributions paid by Horace Mann Growth Fund, Inc. to the Account or, if the
charge is accrued and unpaid, from the value of a Participant's individual
account upon withdrawal or transfer from the Account. This charge is computed
weekly at the rate of .0075% of the net assets of the Account (.39% on an
annual basis). It is estimated that .31% is for mortality risk and .08% is
for expense risk.
3. The "present value factor" used in calculating the actuarial liability of the
Variable Retirement Annuity Account is computed using the Progressive Annuity
Mortality Table with interest at 4%.
4. With respect to the group Contract issued on Form 66-4A, if the Annuitant is
no longer in the class of eligible Participants or elects not to continue to
participate in the group Contract, the Annuitant may elect, within 31 days
after the date of termination, to purchase from Horace Mann Life Insurance
Company its individual annuity Contract most nearly similar in benefits and
provisions to the group Contract. The individual annuity Contract will be
issued at the then attained age of the Annuitant and at the same annual
Purchase Payment as the group Contract Certificate, unless otherwise agreed
to by Horace Mann Life Insurance Company.
FORM 66-3A AND 66-4A CONTRACTS
Contract Owner Transaction Expenses,/1/ as a percentage of Purchase Payments:
Sales Expense Charge.................................................... 4.00%
Death Benefit Risk Charge............................................... 2.00%
Administration Expense Charge................................. $.50 per payment
plus $10.00
issuance fee
Separate Account Annual Asset Charge, as a percentage of average account value:
Mortality Risk.................................................... 0.31%
Expense Risk...................................................... 0.08%
Total Separate Account Annual Asset Charge............................... 0.39%
Annual Operating Expenses of Growth Fund,/2/ as a percentage of average
net assets for the December 31, 1995 fiscal year:
Investment Advisory Fees................................................ 0.34%
Business Management Fees................................................ 0.21%
Other Expenses.......................................................... 0.08%
Fund Pricing Fee................................................ 0.01%
Custodian Fees.................................................. 0.02%
Miscellaneous (audit, legal, etc.).............................. 0.05%
Total Growth Fund Operating Expenses..................................... 0.63%
Minus Expense Reimbursements and Fee Waivers............................. 0.02%
Net Fund Operating Expenses.............................................. 0.61%
(continued)
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE/3/
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of the applicable
time period:
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:.......................... $80 $100 $122 $184
If you do not surrender your Contract:
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:.......................... $80 $100 $122 $184
</TABLE>
/1/Premium taxes, currently ranging between 0 and 3.5%, are not included. The
rate varies depending upon state of residence, and not all states impose premium
taxes. Also, depending on the state, taxes are taken from Purchase Payments or
are levied at annuitization.
/2/The Operating Expenses of the Growth Fund are borne indirectly by Contract
Owners.
/3/The EXAMPLE should not be considered a representation of past or future
expenses. Amounts shown are based on the average cash value of the average
number of annuity Contracts in the accumulation phase during the 1995 calendar
year. Actual expenses may be greater or less than those shown.
THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN
UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT THEY BEAR
DIRECTLY OR INDIRECTLY. THE TABLE REFLECTS EXPENSES OF THE
SEPARATE ACCOUNT AS WELL AS THOSE OF THE GROWTH FUND.
_______________
The date of this Supplement is May 1, 1996.
<PAGE>
Statement of Additional Information
Variable tax deferred annuity contracts
Qualified and non-qualified plans
Horace Mann Life Insurance Company
Separate Account
May 1, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
------------------------------
HORACE MANN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT
------------------------------
Individual and Group
Flexible Payment and Individual Single Payment Variable tax
Deferred Annuity Contracts
------------------------------
Horace Mann Life Insurance Company
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the Prospectus, dated May 1, 1996, for Horace Mann Life
Insurance Company Separate Account. A copy of the Prospectus may be obtained by
writing to Horace Mann Life Insurance Company, P.O. Box 4657, Springfield,
Illinois 62708-4657, by sending a telefacsimile (FAX) transmission to (217) 527-
2307, or by telephoning toll-free (800) 999-1030.
May 1, 1996
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Topic Page
----- ----
<S> <C>
General Information and History................................. 2
Investment Experience........................................... 2
Underwriter..................................................... 3
Financial Statements............................................ 4
</TABLE>
GENERAL INFORMATION AND HISTORY
Horace Mann Life Insurance Company ("HMLIC") sponsors the Horace Mann Life
Insurance Company Separate Account (the "Account"). HMLIC is an indirect
wholly-owned subsidiary of Horace Mann Educators Corporation ("HMEC"), a
publicly-held insurance holding company traded on the New York Stock Exchange.
INVESTMENT EXPERIENCE
(Applies to Annuity Alternative Contracts Only)
December 31, 1995
TOTAL RETURN DATA
<TABLE>
<CAPTION>
ACTUAL PERFORMANCE/1/
-------------------------
(Based on a $1,000
investment)/2/ 1 YR 5 YRS 10 YRS
-------------------------
<S> <C> <C> <C>
Growth Fund Account Division
With Redemption/3/ 21.20% 15.47% 11.94%
Without Redemption 31.75% 15.47% 11.94%
Income Fund Account Division
With Redemption/3/ 4.19% 6.82% 7.24%
Without Redemption 13.26% 6.82% 7.24%
Balanced Fund Account Division
With Redemption/3/ 15.25% 12.17% 10.26%
Without Redemption 25.29% 12.17% 10.26%
Short-Term Fund Account Division
With Redemption/3/ (4.60%) 2.64% 4.02%
Without Redemption 3.71% 2.64% 4.02%
</TABLE>
2
<PAGE>
- -----------
/1/In some cases, actual performance reflects subsidization where total return
has been enhanced due to expenses of each Fund being waived or paid by
affiliates of the Funds.
/2/The performance shown above is reduced by the $25 annual maintenance charge
as a percentage 0.14% of the average contract value as of December 31, 1995.
/3/With redemption reflects performance of a surrendered contract. Redemption
has no effect on return after the initial five-year contract period.
This performance data represents past performance. Investment return and the
principal value of an investment may fluctuate. An investor's shares, when
redeemed, may be worth more or less than their original cost. All charges as
shown in the Prospectus fee tables are reflected in this data, with the
exception of premium taxes.
The total return quotations are based on the average annual compounded rates of
return over one, five, and ten year periods ended December 31, 1995.
Total return is computed by finding the average annual compounded rates of
return that would equate the initial amount invested to the ending redeemable
value.
The performance data contained in this Statement of Additional Information is
based on the fees and charges for the flexible payment Contracts currently
offered by the Company. Prior Contracts have different fees and charges;
therefore these performance calculations are not valid for those contracts.
UNDERWRITER
HMLIC offers and sells the Contract on a continuous basis through its licensed
life insurance sales personnel who are also registered representatives of
Investors, a broker/dealer registered with the Securities and Exchange
Commission and a member of the National Association of Securities
Dealers, Inc. (NASD). HMLIC contracts with Horace Mann Investors, Inc.
("Investors"), principal underwriter of the Account, to distribute the variable
contracts of HMLIC. Investors, located at One Horace Mann Plaza, Springfield,
Illinois 62715-0001, is an affiliate of HMLIC and a wholly-owned subsidiary of
HMEC.
Commissions paid to Investors were $1,526,373, $2,019,137 and $2,657,025 for the
years ended 1993, 1994 and 1995, respectively. Investors does not retain any of
these commissions. Commissions received by Investors are paid to registered
representatives who sell contracts offered by this Prospectus.
3
<PAGE>
FINANCIAL STATEMENTS
KPMG Peat Marwick LLP, independent auditors for the Account and HMLIC, has
offices at 303 East Wacker Drive, Chicago, Illinois 60601. KPMG Peat Marwick LLP
representatives perform an audit of the financial statements of the Account
annually and provide accounting advice and services related to Securities and
Exchange Commission filings throughout the year and perform an annual audit of
the statutory financial statements of HMLIC.
The financial statements of the Account, including the auditors' reports
thereon, are incorporated herein by reference from the Annual Report for the
Account for the year ended December 31, 1995. A copy of this Annual
Report accompanied or proceeded the delivery of the Prospectus. Additional
copies may be obtained, upon request and without charge, by contacting Horace
Mann Life Insurance Company, P.O. Box 4657, Springfield, Illinois 62708-4657, or
by telephoning (217) 789-2500 or (800) 999-1030 (toll-free). The statutory
financial statements for HMLIC, including the auditors' reports thereon, are
presented herein, but should be considered only as bearing upon the ability of
HMLIC to meet its obligations under the Contracts.
4
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Financial Statements
December 31, 1995 and 1994
5
<PAGE>
KPMG Peat Marwick LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601-5255
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Horace Mann Life Insurance Company:
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital and surplus of Horace Mann Life Insurance Company as of
December 31, 1995 and 1994, and related statutory statements of operations,
capital and surplus, and cash flow for each of the years in the three year
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amount and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in note 1, the accompanying financial statements have been prepared
in conformity with accounting practices prescribed or permitted by the Insurance
Department of the State of Illinois. These practices differ in some respects
from generally accepted accounting principles (note 7). Accordingly, the
financial statements referred to above are not intended to present, and in our
opinion do not present fairly, the financial position, results of operations and
cash flow in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the admitted assets, liabilities, and capital and
surplus of Horace Mann Life Insurance Company as of December 31, 1995 and 1994,
and the results of its operations and its cash flow for each of the years in the
three year period ended December 31, 1995, on the basis of accounting described
in note 1.
/S/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
February 16, 1996
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Admitted Assets,
Liabilities and Capital and Surplus
December 31, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands)
- -----------------------------------------------------------------
ADMITTED ASSETS 1995 1994
- -----------------------------------------------------------------
Cash and investments:
<S> <C> <C>
Bonds $1,872,725 $1,772,407
Common stocks 1,691 2,101
Mortgage loans on real estate 80,486 111,674
Real estate 10,063 19,732
Policy loans 39,897 36,609
Cash 861 97
Short-term investments 27,277 7,878
Other invested assets 149 177
- -----------------------------------------------------------------
Total cash and investments 2,033,149 1,950,675
Life insurance premiums deferred
and uncollected 37,026 34,241
Accident and health premiums due
and unpaid 3,399 2,868
Investment income due and accrued 32,550 30,750
Federal income tax recoverable 2,923 4,342
Other assets 9,991 4,661
Variable annuity assets 487,543 334,145
- -----------------------------------------------------------------
Total admitted assets $2,606,581 $2,361,682
- -----------------------------------------------------------------
</TABLE>
See accompanying notes to statutory financial statements.
3
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Admitted Assets,
Liabilities and Capital and Surplus
December 31, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands, except share data)
- -----------------------------------------------------------------
Liabilities and Capital and Surplus 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Policy liabilities:
Aggregate reserves:
Life and annuity $1,781,435 $1,702,237
Accident and health 22,088 21,055
Unpaid benefits:
Life 6,092 6,370
Accident and health 7,864 8,591
Policyholder funds on deposit 106,557 106,698
Policyholder dividends payable
in the following year 1,293 1,336
Provision for accident and health
experience rating refunds 1,147 -
Remittances not allocated 269 3,162
- -----------------------------------------------------------------
Total policy liabilities 1,926,745 1,849,449
Accrued expenses 5,378 3,268
Asset valuation reserve 27,769 26,586
Interest maintenance reserve 17,622 17,633
Other liabilities 7,686 7,850
Variable annuity liabilities 487,543 334,145
- -----------------------------------------------------------------
Total liabilities 2,472,743 2,238,931
- -----------------------------------------------------------------
Capital and surplus:
Capital stock, $1 par value.
Authorized 5,000,000 shares,
2,500,000 shares outstanding 2,500 2,500
Additional paid-in and contributed surplus 22,704 22,704
Special surplus fund - contingent
variable annuity reserve 625 625
Unassigned surplus 108,009 96,922
- -----------------------------------------------------------------
Total capital and surplus 133,838 122,751
- -----------------------------------------------------------------
Total liabilities and capital and surplus $2,606,581 $2,361,682
- -----------------------------------------------------------------
</TABLE>
See accompanying notes to statutory financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Operations
Years ended December 31, 1995, 1994 and 1993
(In thousands)
==============================================================================
1995 1994 1993
==============================================================================
<S> <C> <C> <C>
Revenue:
Premiums, annuity and supplementary
contract considerations:
Life $ 97,837 $ 94,643 $ 92,785
Annuity 142,870 136,640 123,369
Accident and health 49,718 56,525 59,015
Supplementary contracts 26,329 22,476 26,091
==============================================================================
Total premiums, annuity and supplementary
contract considerations 316,754 310,284 301,260
Net investment income 149,997 140,852 142,210
Amortization of interest maintenance
reserve 2,903 3,580 3,213
Other 429 478 438
==============================================================================
Total revenue 470,083 455,194 447,121
==============================================================================
Benefits and expenses:
Provisions for claims and benefits:
Life 79,787 76,953 74,725
Annuity 199,982 190,302 183,145
Accident and health 41,394 47,143 47,460
Supplementary contracts 36,842 32,691 36,998
==============================================================================
Total claims and benefits 358,005 346,089 342,328
Commissions 23,263 21,982 20,704
General and other expenses 48,289 48,523 45,994
==============================================================================
Total benefits and expenses 429,557 416,594 409,026
==============================================================================
Net gain before dividends to policyholders
and federal income tax 40,526 38,600 38,095
Dividends to policyholders 1,385 1,445 1,586
==============================================================================
Net gain before federal income tax 39,141 37,155 36,509
Federal income tax expense 12,581 14,179 15,401
==============================================================================
Net gain from operations 26,560 22,976 21,108
Realized investment gains (losses)
net of tax and transfers to IMR (3,331) (441) 932
==============================================================================
Net income $ 23,229 $ 22,535 $ 22,040
==============================================================================
</TABLE>
See accompanying notes to statutory financial statements.
5
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Capital and Surplus
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Capital stock $ 2,500 $ 2,500 $ 2,500
- ------------------------------------------------------------------------
Additional paid-in capital and
contributed surplus 22,704 22,704 22,704
- ------------------------------------------------------------------------
Special surplus fund-
contingent variable annuity reserve 625 625 625
- ------------------------------------------------------------------------
Unassigned surplus :
Balance at beginning of year 96,922 98,549 85,884
Net income 23,229 22,535 22,040
Change in net unrealized capital
gains (losses) 4,564 (3,003) 457
Change in non-admitted assets 477 121 (472)
Change in asset valuation reserves (1,183) (280) (2,360)
Dividends to parent (16,000) (21,000) (7,000)
- ------------------------------------------------------------------------
Balance at end of year 108,009 96,922 98,549
- ------------------------------------------------------------------------
Total capital and surplus $133,838 $122,751 $124,378
- ------------------------------------------------------------------------
</TABLE>
See accompanying notes to statutory financial statements.
6
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Cash Flow
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided:
From operations:
Revenue received:
Premiums, considerations
and deposits $ 315,197 $309,335 $ 297,857
Investment income received 146,996 141,336 142,671
Other income received 428 478 437
- ------------------------------------------------------------------------------
Total revenue received 462,621 451,149 440,965
- ------------------------------------------------------------------------------
Benefits and expenses paid:
Claims, benefits and
net transfers paid 275,256 276,361 248,822
Expenses paid 72,952 70,522 66,927
Dividends to policyholders paid 1,436 1,516 2,855
Federal income taxes paid 16,713 14,683 12,602
Net increase in policy loans 3,288 2,296 1,747
- ------------------------------------------------------------------------------
Total benefits and expenses paid 369,645 365,378 332,953
- ------------------------------------------------------------------------------
Net cash from operations 92,976 85,771 108,012
- ------------------------------------------------------------------------------
From investments sold or matured:
Bonds 1,099,397 871,293 905,371
Common stock 566 1,436 256
Preferred stock - 1,967 -
Mortgage loans 32,724 24,024 32,424
Real estate and other 9,552 554 (5)
- ------------------------------------------------------------------------------
Total investment proceeds 1,142,239 899,274 938,046
Tax on capital gains (losses) 5,788 (2,526) (9,555)
- ------------------------------------------------------------------------------
Other cash provided 1,233 5,935 1,271
- ------------------------------------------------------------------------------
Total cash provided $1,242,236 $ 988,454 $1,037,774
- ------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Cash Flow
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash applied:
For investments acquired:
Bonds $1,195,111 $1,027,004 $967,562
Common stock - 26 441
Preferred stock - 981 -
Mortgage loans 495 2,027 4,371
Real estate 600 1,142 377
Other Invested Assets (28) - -
- ------------------------------------------------------------------------------
Total investments acquired 1,196,178 1,031,180 972,751
- ------------------------------------------------------------------------------
Dividends to parent 16,000 21,000 7,000
Other applications 9,895 2,740 4,880
- ------------------------------------------------------------------------------
Total cash applied 1,222,073 1,054,920 984,631
- ------------------------------------------------------------------------------
Net change in cash and
short-term investments 20,163 (66,466) 53,143
Cash and short-term investments
at beginning of year 7,975 74,441 21,298
- ------------------------------------------------------------------------------
Cash and short-term investments
at end of year $ 28,138 $ 7,975 $ 74,441
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes to statutory financial statements.
8
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
December 31, 1995, 1994 and 1993
(In thousands)
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Horace Mann Life Insurance Company (the Company), which operates in one industry
(life insurance), is a subsidiary of Horace Mann Educators Corporation (HMEC),
which indirectly owns 100% of the outstanding shares. The Company is a wholly
owned subsidiary of Allegiance Life Insurance Company (ALIC).
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Illinois and includes some amounts that are based upon management's
best estimates and judgements. Statutory accounting practices differ materially
in some respects from generally accepted accounting principles as more fully
discussed in note 7. The significant statutory accounting practices follow.
The company sells and underwrites tax-qualified retirement annuities, individual
life, group medical, group disability income, and group life insurance product
primarily to educators and other employees of public schools.
INVESTMENTS
Investments are valued in accordance with the requirements of the NAIC. Bonds
are generally carried at amortized cost. Common stocks are carried at market.
Mortgage loans are carried at the unpaid principal balance less unamortized
discount and were issued at the value of no more than 80% of the appraised value
of the mortgaged property. No material new commercial mortgage loans have been
issued since 1988. Real estate is carried at the lower of fair market value
cost. Policy loans are carried at the unpaid principal balance.
The Company does not have any investments in derivative financial instruments.
The Asset Valuation Reserve (AVR) was calculated as prescribed and required by
the NAIC. This reserve is maintained for the purpose of stabilizing surplus
against the effects of fluctuations in the value of certain bond, stock,
mortgage loan and real estate investments. Changes in the AVR reserve are
charged or credited to surplus.
The Interest Maintenance Reserve (IMR) was calculated as prescribed by the NAIC.
This reserve is designed to capture the realized capital gains and (losses)
which result from changes in the overall level of interest retes and amortize
them into income over the approximate remaining life of the investment sold.
9
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
December 31, 1995, 1994 and 1993
(In thousands)
- --------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS
Amounts represent cash and short-term securities having a maturity of 30 days or
less. Short-term investments are carried at cost which approximates market
value.
The balance of the AVR by components as of December 31, 1995 and 1994, is
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Bonds, preferred stock and
short-term investments $23,419 $19,859
Mortgage loans 3,058 6,097
Common stock 507 630
Real Estate and Other investments 785 -
- --------------------------------------------------------------------------------
Total AVR $27,769 $26,586
- --------------------------------------------------------------------------------
</TABLE>
The AVR is held at a level equal to 93% of the maximum reserve level
allowed by the NAIC.
10
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
VARIABLE ANNUITIES ASSETS AND LIABILITIES
Assets held in trust for purchasers of variable annuity contracts and the
related liabilities are included in the statutory statements of admitted
assets, liabilities and capital and surplus. Variable annuity assets,
carried at market value, and liabilities represent tax-qualified variable
annuity funds invested in the Horace Mann mutual funds. Variable annuity
assets were invested in the Horace Mann mutual funds as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Horace Mann Growth Fund $248,320 $163,569
Horace Mann Balanced Fund 227,705 160,242
Horace Mann Income Fund 10,513 9,250
Horace Mann Short-Term Fund 1,005 1,084
- --------------------------------------------------------------------------------
Total $487,543 $334,145
- --------------------------------------------------------------------------------
</TABLE>
The investment income, gains and losses of these accounts accrue directly
to the policyholders and are not included in the operations of the
Company.
AGGREGATE RESERVES
Applicable state insurance laws require that the Company set up reserves in
accordance with statutory regulations, carried as liabilities to meet
future obligations under outstanding policies. These reserves are the
amount that, with the additional premiums to be received and interest
thereon compounded annually at certain rates, is calculated to be
sufficient to meet the various policy and contract obligations as they
occur.
11
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Aggregate reserves for life policies, annuity contracts, and supplementary
contracts with life contingencies are based on statutory mortality tables
and interest assumptions using either the net level or commissioners'
reserve valuation method. The annuity reserves include the current declared
interest rates through the valuation date. The composition of these
liabilities at December 31 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Aggregate reserves Mortality Interest
1995 1994 table rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Life $ 292,680 $ 255,674 1980 CSO 4.0-7.0 %
6,170 5,919 1958 CET 2.5-5.5
171,165 170,609 1958 CSO 2.5-4.5
25,226 22,946 Various 2.5-5.5
10,922 11,363 1941 CSO 2.5-3.0
Annuity 1,054,357 1,006,923 1971 IAM 3.0-7.5
145,897 159,830 1949 PAT 3.0-5.5
1,878 2,016 1937 SAT 3.0
2,456 1,194 Various 3.0
Supplementary
contracts with
life contingencies 60,788 54,983 1983a 8.0-11.0
6,439 6,880 1971 IAM 4.5-11.25
3,457 3,900 1937 SAT 3.5
- --------------------------------------------------------------------------------
Total $1,781,435 $1,702,237
- --------------------------------------------------------------------------------
</TABLE>
Aggregate reserves for accident and health policies include the present
value of amounts not yet due on existing claims and unearned premiums at
December 31 as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Aggregate reserves
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Present value of amounts not yet
due on claims (3% interest rate) $16,543 $16,261
Reserve for rate credits 3,670 2,774
Additional contract reserves 1,353 1,420
Unearned premiums 552 631
Other (30) (31)
- --------------------------------------------------------------------------------
Aggregate accident and health reserves $22,088 $21,055
- --------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
UNPAID BENEFITS
Unpaid benefits consists of case basis reserves and estimates of losses
incurred but not reported. Estimates for losses incurred but not reported
are based on prior experience modified for current trends.
Accident and health claim reserves and liabilities include the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accident and Health Claim
Reserves and Liabilities
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Aggregate reserves for accident and health $22,088 $21,055
Unpaid benefits accident and health 7,864 8,591
Less: Reserve for rate credits (3,670) (2,774)
Additional contract reserves (1,353) (1,420)
Unearned premiums and other (522) (600)
- --------------------------------------------------------------------------------
Accident and health claim reserves
and liabilities $24,407 $24,852
- --------------------------------------------------------------------------------
</TABLE>
The following table sets forth an analysis of accident and health claim
reserves and liabilities and provides a reconciliation of beginning and
ending reserves for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Net balance at beginning of year $24,852 $25,095
- --------------------------------------------------------------------------------
Incurred related to:
Current year 41,367 47,510
Prior years (725) (1,904)
- --------------------------------------------------------------------------------
Total incurred 40,642 45,606
- --------------------------------------------------------------------------------
Paid related to:
Current year 30,025 35,293
Prior years 11,062 10,556
- --------------------------------------------------------------------------------
Total paid 41,087 45,849
- --------------------------------------------------------------------------------
Balance at December 31 24,407 $24,852
- --------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
_______________________________________________________________________________
RESERVES FOR SUPPLEMENTARY CONTRACTS
WITHOUT LIFE CONTINGENCIES
This reserve represents the present value of future payments discounted with
interest only. At December 31, 1995 and 1994 this liability was
$101,942 and $102,001, respectively, based on average credited interest
rates of 5.5% and 5.4% in 1995 and 1994, respectively and is
included in "policyholder funds on deposit."
POLICYHOLDER DIVIDENDS PAYABLE IN THE
FOLLOWING YEAR
Dividends expected to be paid on anniversary dates in the following year are
estimated and accrued based on current dividend scales approved by the Board of
Directors.
PREMIUMS
Life premiums are reflected as earned on the policy anniversary date. Annuity
and supplementary contract premiums are reflected as earned when collected.
Accident and health premiums are reported as revenue when due and earned on a
pro rata basis over the period covered by the policy.
Deferred life premiums represent modal premiums (other than annual) to be
billed in the year subsequent to the commencement of the policy year.
Uncollected premiums represent premiums due less accident and health premiums
over 90 days past due. Both deferred and uncollected premiums have been reduced
by the estimated cost of collection.
ACQUISITION EXPENSES
The cost of acquiring new business, principally commissions, underwriting
salaries, and related expenses, is charged to expense as incurred.
NON-ADMITTED ASSETS
Assets prescribed by the Illinois Insurance Code as "non-admitted" (principally
over 90-day accident and health due and unpaid premiums) are charged to
unassigned surplus.
14
<PAGE>
<TABLE>
<CAPTION>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
_____________________________________________________________________________
(2) INVESTMENTS
NET INVESTMENT INCOME
The components of net investment income are as follows:
_____________________________________________________________________________
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Interest on bonds $136,186 $126,446 $ 125,643
Interest on mortgage loans 10,782 11,645 15,235
Dividends from common stock - 3 1
Interest on short-term investments 1,620 1,302 1,256
Interest on policy loans 2,418 2,152 2,032
Real estate income 1,071 2,028 1,109
Miscellaneous investment income 287 176 (46)
_____________________________________________________________________________
Gross investment income 152,364 143,752 145,230
Investment expenses 2,367 2,900 3,020
_____________________________________________________________________________
Net investment income $149,997 $140,852 $142,210
_____________________________________________________________________________
REALIZED INVESTMENT GAINS (LOSSES) NET OF TAX AND TRANSFERS TO IMR
Realized investment gains and losses are determined on the basis of specific
identification. Realized investment gains on most fixed income securities are
transferred on an after tax basis to an (IMR) and amortized into income over the
average remaining lives of the assets sold. Only realized investment gains
(losses) which did result from changes in the overall level of interest rates
are transferred to IMR. These gains (losses) are not included in net income in
the year they occurred.
The IMR at December 31 is as follows:
_____________________________________________________________________________
1995 1994
------- -------
<S> <C> <C>
Reserve balance, beginning of year $17,633 $22,943
Current year capital gains (losses),
net of tax 2,892 (1,730)
Amortization of interest maintenance reserve (2,903) (3,580)
_____________________________________________________________________________
Reserve balance, end of year $17,622 $17,633
_____________________________________________________________________________
</TABLE>
15
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
________________________________________________________________________________
Realized investment gains reported in the statutory statement of operations net
of tax and transfers to IMR are as follows:
________________________________________________________________________________
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Bonds $4,450 $ 471 $ 20,656
Real estate (5,387) 1 -
Mortgage loans - (4,432) -
Common stock 262 974 -
Short-term investments - (340) -
Other - (14) 33
________________________________________________________________________________
(675) (3,340) 20,689
Less Federal income tax (236) (1,169) 7,236
Transferred to interest maintenance
reserve (2,892) 1,730 (12,521)
_______________________________________________________________________________
Realized investment gains (losses)
net of tax and transfers to IMR (3,331) $ (441) $ 932
_______________________________________________________________________________
</TABLE>
CHANGE IN NET UNREALIZED CAPITAL GAINS (LOSSES)
Certain investments are required to be carried at market. The resulting
unrealized gains or losses are reflected as credits or charges to unassigned
surplus.
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Unrealized capital losses
Beginning of period $(10,421) $(7,418) $(7,875)
End of period (5,857) (10,421) (7,418)
_______________________________________________________________________________
Decrease (increase) for the period $ 4,564 $(3,003) $ 457
_______________________________________________________________________________
</TABLE>
16
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
BONDS
The estimated market value of bonds at December 31, 1995 and 1994 was
$1,954,738 and $1,683,130, respectively. At December 31, 1995 and 1994,
approximately 2.7% and 1.5%, respectively, of the total bond portfolio (at
amortized cost) consisted of private placement bonds. The market value of
private placement bonds is estimated based upon factors including credit
quality, interest rates and maturity dates.
The carrying value and estimated market value of investments in bonds as of
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Excess of Excess of
market carrying
value over value over Estimated
Carrying carrying market market
December 31, 1995 value value value value
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
agency obligations:
Mortgage-backed
securities $ 519,473 $17,428 $ (398) $ 536,503
Other 208,365 9,453 (179) 217,639
Municipal bonds 16,413 1,080 - 17,493
Foreign government bonds 39,065 3,334 - 42,399
Corporate bonds 899,785 52,492 (6,691) 945,586
Other mortgage-backed
securities 189,624 7,007 (1,513) 195,118
- ------------------------------------------------------------------------------
Total $1,872,725 $ 90,794 $(8,781) $1,954,738
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Excess of Excess of
market carrying
value over value over Estimated
Carrying carrying market market
December 31, 1994 value value value value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
agency obligations:
Mortgage-backed
securities $ 537,178 $ 356 $(29,567) $ 507,967
Other 246,623 171 (10,239) 236,555
Municipal bonds 7,800 52 (77) 7,775
Foreign government bonds 38,444 16 1,603) 36,857
Corporate bonds 789,822 3,094 (45,410) 747,506
Other mortgage-backed
securities 152,540 747 (6,817) 146,470
- -------------------------------------------------------------------------------
Total $1,772,407 $ 4,436 $(93,713) $1,683,130
- -------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
At December 31, 1995, approximately 1.25% of the Company's investment portfolio
was invested in collateralized mortgage obligations ("CMOs") excluding mortgage
obligations of United States governmental agencies. At December 31, 1995, the
average credit quality rating of the Company's investment in CMOs was AAA and
NAIC 1 - the highest ratings. The market value of CMOs at December 31, 1995 was
$146,248 compared to a $141,199 carrying value. The average duration of the
Company's investment in CMOs was 3.1 years at December 31, 1995.
The carrying value and estimated market value of bonds at December 31, 1995, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Estimated
Carrying market
December 31, 1995 Value value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 87,411 $ 87,953
Due after one year through five years 592,463 604,562
Due after five years through ten years 583,589 612,116
Due after ten years 609,262 650,107
- --------------------------------------------------------------------------------
Total bonds $1,872,725 $1,954,738
- --------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of investments in bonds during 1995, 1994 and 1993 were
$965,703, $717,717 and $715,071, respectively. Gross gains of $11,646, $13,021
and $20,747 and gross losses of $7,869, $10,611 and $1,909 were realized on
those sales for 1995, 1994 and 1993, respectively.
MORTGAGE LOANS AND REAL ESTATE
The Company's investment in commercial mortgage loans has been declining since
1989 as a result of the Company's strategy to reduce its holdings in such
investments. The Company has made no new significant investments in commercial
mortgage loans since 1988.
18
<PAGE>
<TABLE>
<CAPTION>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
__________________________________________________________________________
The following table sets forth the geographic concentration of collateral
properties for mortgage loans (excluding a loan of $10,951 to HMEC on the
HMEC home office building) at December 31, 1995:
__________________________________________________________________________
Principal Percent
value at of
State Dec. 31, 1995 total
__________________________________________________________________________
<S> <C> <C>
New Jersey $13,903 20.0%
Texas 12,725 18.3
Georgia 10,616 15.3
Ohio 9,290 13.4
Massachusetts 8,485 12.2
Connecticut 3,487 5.0
All Others (1) 11,029 15.8
__________________________________________________________________________
Total $69,535 100.0%
__________________________________________________________________________
(1) No other state accounted for more than 5%.
All outstanding commercial mortgages are secured by completed, income-
producing properties. There were no past-due, renegotiated or non-accrual
mortgage loans as of December 31, 1995.
The following table sets forth the diversification of mortgage loans (ex-
cluding a loan of $10,951 to HMEC on the HMEC home office building) at
December 31, 1995 by type of collateral property:
________________________________________________________________________
Principal Percent
value at of
Property type Dec. 31, 1995 total
________________________________________________________________________
<S> <C> <C>
Office buildings $ 26,098 37.6%
Shopping centers/malls 19,615 28.2
Warehouses 5,001 7.1
Residential 6,474 9.3
Hotels/motels 12,347 17.8
________________________________________________________________________
Total $ 69,535 100.0%
________________________________________________________________________
</TABLE>
20
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
(IN THOUSANDS)
================================================================================
DEPOSITS
The carrying value of securities on deposit with governmental authorities, as
required by law, as of December 31 were as follows:
<TABLE>
<CAPTION>
================================================================================
1995 1994 1993
================================================================================
<S> <C> <C> <C>
Held for all policyholders $1,679 $1,687 $1,076
Held for policyholders in certain states 590 592 595
================================================================================
$2,269 $2,279 $1,671
================================================================================
</TABLE>
INVESTMENTS IN ENTITIES EXCEEDING 10% OF CAPITAL AND SURPLUS
The names of entities (other than the U.S. Government and government agencies
and authorities) in which the total amount invested exceeds 10% of total
capital and surplus at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
================================================================================
Standard & Poors Carrying
Bonds: Rating: Value
================================================================================
<S> <C> <C>
Green Tree Financial Corporation A/AA+/BBB- $35,085
Nations Bank Corporation A/A-/A+ 24,799
Golden West Financial A- 23,959
General Motors Corporation A- 21,824
Commercial Credit Group A+ 20,152
American General Finance Corporation A+ 20,039
Associates Corp. of North America AA- 19,208
Chemical Bank A 16,823
Ford Motor Credit/Capital A+/AAA 15,944
Cox Communications Inc. A- 15,149
Prime Credit Card Master Trust AAA 14,999
Boeing Company AA 14,962
Bank of New York A- 14,924
First Bank System A- 14,907
Dean Witter Discover A 14,848
Shawnut Bank A- 14,768
Mellon Financial A 14,440
Mid-State Trust AAA 13,643
Chevron Corporation Esop. AA 13,418
================================================================================
</TABLE>
21
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
================================================================================
(3) RELATED PARTIES
The Company has common management and shares office facilities with HMEC and
other affiliates and is a party to several intercompany service agreements.
Under these agreements, the Company paid $66,620, $66,684, and $62,478 for
management, administrative, data processing, commissions and agency
services, utilization of personnel, and investment advisory services in
1995, 1994 and 1993, respectively.
The Company had balances payable to affiliates of $1,422 and $1,558 at
December 31, 1995 and 1994, respectively included in "accrued expenses" and
"other liabilities" in the statutory statements of admitted assets,
liabilities and capital and surplus. Also, the Company had balances
receivable from affiliates of $396 and $607 at December 31, 1995 and 1994,
respectively, included in "other assets."
ALIC reinsures all of the Company's life insurance business in the state of
Arizona.
(4) FEDERAL INCOME TAXES
Beginning in 1995, the Company is included in the consolidated federal
income tax return of its parent, ALIC and its ultimate parent, HMEC and its
subsidiaries. Prior to 1995 the Company participated in a tax sharing
agreement with its parent, ALIC. Tax sharing agreements provide for tax
payments by the Company equal to the amount the Company would compute if it
filed a separate federal income tax return. In calculating the separate
federal income tax return amount, tax benefits resulting from the
acquisition of the Company by ALIC are realized by ALIC. Intercompany tax
balances are settled quarterly with a subsequent final annual
settlement.
The following is a reconciliation of federal income tax on reported gains
before federal income tax at the current corporate rate of 35% for
1995, 1994 and 1993:
<TABLE>
<CAPTION>
================================================================================
1995 1994 1993
================================================================================
<S> <C> <C> <C>
"Expected" federal income tax
on reported gain from operations $13,699 $13,004 $12,778
Add (deduct) tax effects of:
Reserve adjustments (1,442) 531 3,367
Policy acquisition costs 910 1,129 1,435
Other, net (586) (485) (1,670)
Utilization of net operating
loss carryforward - - (509)
================================================================================
Federal income tax $12,581 $14,179 $15,401
================================================================================
</TABLE>
22
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
================================================================================
Included in other assets in December 1995 and 1994 are federal income taxes
receivable of $2,923 and $4,342, respectively .
(5) RESTRICTIONS OF SURPLUS
The Company generates cash flow from premium and investment income well in
excess of its immediate needs for policy obligations, expenses, and other
requirements. Cash flow from operations is used to fund growth in the
business and maintain strong capital and surplus.
The amount of dividends which can be paid by Illinois insurance companies
without prior approval of the State Insurance Commissioner is subject to
restrictions relating to profitability and statutory surplus. Dividends
which may be paid by the Company during 1996 without prior approval are
approximately $23,200. Dividend payments were $16,000, $21,000 and $7,000 in
1995, 1994 and 1993, respectively.
The Company is required by the Maryland Insurance Department to provide a
minimum reserve of $625 for guaranteed minimum death benefits under variable
annuity contracts issued by the Company.
Under applicable Illinois insurance laws and regulations, the Company is
required to maintain a minimum capital and surplus of $1,500.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 107 (Disclosure about Fair Value of Financial Instruments)
requires the disclosure of estimated fair values for certain financial
instruments. Fair values of the Company's insurance contracts other than
annuity contracts are not required to be disclosed. However, the fair values
of liabilities under all insurance contracts are taken into consideration in
the Company's overall management of interest rate risk, through the matching
of investment maturities with amounts due under insurance contracts. The
following methods and assumptions were used to estimate the fair value of
financial instruments.
23
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
================================================================================
Investments - For fixed maturities and short-term investments, fair value equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities,
adjusted for differences between the quoted securities and the securities being
valued. The fair value of mortgage loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and the same remaining maturities. The
fair value of policy loans is based on estimates using discounted cash flow
analysis and current interest rates being offered for new loans. The carrying
value of real estate of $10,063 is a reasonable estimate of fair
value.
Annuity Contract Liabilities and Policyholder Account Balances on Interest-
sensitive Life Contracts - The fair values of annuity contract liabilities and
policyholder account balances on interest-sensitive life contracts are equal to
the discounted estimated future cash flows (using the Company's current interest
rates earned on its investments) including an adjustment for risk that the
timing or amount of cash flows will vary from management's estimate.
Other Policyholder Funds - Other policyholder funds are supplementary contract
reserves and dividend accumulations which represent deposits that do not have
defined maturities. The carrying value of these funds is used as a reasonable
estimate of fair value.
24
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
================================================================================
The carrying amounts and fair values of financial instruments at December 31,
1995 consisted of the following:
================================================================================
Carrying Fair
December 31, 1995 Amount Value
================================================================================
<TABLE>
<CAPTION>
Financial Assets
<S> <C> <C>
Investments and asset valuation reserve
Bonds $1,872,725 $1,954,738
Mortgage loans 80,486 82,305
Real estate 10,063 10,063
Short-term 27,277 27,277
Policy loans and other 41,737 41,737
================================================================================
Total investments $2,032,288 $2,116,120
Asset valuation reserve 27,769 -
================================================================================
Total investments less asset
valuation reserve 2,004,519 2,116,120
Cash 861 861
Financial Liabilities
Policyholder account
balances on interest-sensitive
life contracts 88,141 82,494
Annuity contract liabilities 1,275,271 1,132,742
Other policyholder funds 107,850 107,850
================================================================================
</TABLE>
Fair value estimates shown above are dependent upon subjective assumptions and
involve significant uncertainties resulting in variability in estimates with
changes in assumptions. Fair value assumptions are based upon subjective
estimates of market conditions and perceived risks of financial instruments at a
certain point in time. The disclosed fair values do not reflect any premium or
discount that could result from offering for sale at one time an entire holding
of a particular financial instrument. In addition, potential taxes and other
expenses that would be incurred in an actual sale or settlement are not
reflected in amounts disclosed.
25
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
================================================================================
(7) DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND STATUTORY ACCOUNTING PRACTICES
Statutory accounting practices differ in some respects from generally
accepted accounting principles. Under generally accepted accounting
principles, the following applies:
(a) Aggregate reserves for future life benefits are computed on the net
level premium method using estimates of future investment yield,
mortality, and withdrawal.
(b) Policyholder dividends, based on dividend scales in effect at the time
the policies were issued, are accrued ratably over the premium paying
period of the policies.
(c) Life premiums are reflected as earned when due. Annuity considerations
and other fund deposits are reflected as deposits rather than revenue.
(d) Acquisition costs are deferred and amortized generally over the premium
paying period for individual life contracts and the estimated contract
life for interest-sensitive life and investment contracts.
(e) Deferred income taxes are provided on all significant temporary
differences between values of assets and liabilities for book and tax
reporting purposes.
(f) Non-admitted assets less applicable allowance accounts are restored to
the balance sheet.
(g) Asset valuation and interest maintenance reserves are not provided.
(h) The assets and liabilities are revalued as of the date of acquisition
of HMEC and its subsidiaries in August, 1989.
(i) Realized investment gains (losses) resulting from changes in interest
rates are recognized in income when the related security is sold.
(j) Reinsurance ceded credits are recognized as assets in GAAP basis
financial statements.
(k) Fixed maturity investments (bonds) are categorized as available for
sale. Such investments are carried at market with changes in market
value charged or credited to unassigned surplus, net of deferred income
taxes.
The aggregate effect of the foregoing differences has not been determined
separately for the Company.
26
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
================================================================================
(8) REINSURANCE
Information with respect to reinsurance ceded and assumed by the Company is
set forth below.
<TABLE>
<CAPTION>
===============================================================================
1995 1994 1993
================================================================================
<S> <C> <C> <C>
Life insurance premiums ceded:
To ALIC $1,019 $1,001 $ 955
To other companies 807 792 659
Life insurance reserves ceded:
To ALIC 5,986 5,595 5,084
To other companies 1,366 1,249 922
Life insurance premiums assumed:
From other companies - - -
Group accident and health premiums ceded:
To other companies 943 1,251 1,253
Amounts recoverable from reinsurers
on paid losses 201 448 1,074
================================================================================
</TABLE>
The maximum amount of direct ordinary insurance retained on any standard
life is $200. Amounts in excess of $200 are ceded on a yearly renewable term
basis of reinsurance. The Company reinsures on a treaty basis for each
accident and health claim up to $1 million over a prescribed retention
amount. Although reinsurance agreements transfer risk for amounts over a
certain retention limit, the Company has not relieved its primary obligation
to the policyholders. For the years ended December 31, 1995 and 1994, the
accident and health retention amount was $300 each year.
(9) PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
PENSION PLANS
The Company is a member of the Horace Mann group of insurance companies. All
the Company's personnel are employees of Horace Mann Service Corporation, an
affiliated company. Salaries, pension and related benefits are allocated to
the Company for these services.
Employees are covered under a defined benefit plan and a defined
contribution plan, and certain employees participate in supplemental
retirement plans.
Benefits under the defined benefit and supplemental retirement plans are
based on employees' years of service and compensation for the highest 36
consecutive months of earnings under the plan. Under the defined
contribution plan, contributions are made to employees' accounts based on a
percentage of compensation that is determined by employees' years of
service. Retirement benefits to employees are paid first from their
accumulated accounts under the defined contribution plan with the balance
funded by the defined benefit and supplemental retirement plans.
27
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
________________________________________________________________________________
Employees are also eligible to participate in the Supplemental Retirement and
Savings Plan, a 401(k) plan, and may generally contribute up to 10% of eligible
compensation on a before tax basis. The employer contributes an amount equal to
50% of the first 6% of eligible compensation contributed each month by
participating employees.
Total allocated pension expense was $3,306, $3,402 and $3,083 for 1995, 1994 and
1993, respectively.
POSTEMPLOYMENT BENEFITS
In addition to providing pension benefits, the Company also provides certain
health care and life insurance benefits to retired employees and eligible
dependents. Employees with ten years of service are eligible to receive these
benefits upon retirement. The allocated cost of these benefits totaled $683,
$773, and $696 for the years ended December 31, 1995, 1994, and 1993,
respectively.
(10) RISK-BASED CAPITAL
The insurance departments of various states, including the Company's domiciliary
state of Illinois impose risk-based capital (RBC) requirements on insurance
enterprises. The RBC calculation serves as a benchmark for the regulation of
life insurance companies by state insurance regulators. The requirements apply
various weighted factors to financial balances or activity levels based on their
perceived degree of risk.
The RBC guidelines define specific capital levels where regulatory intervention
is required based on the ratio of the Company's actual total adjusted capital
(sum of capital and surplus and asset valuation reserve) to control levels
determined by the RBC formula. At December 31, 1995, the Company's actual total
adjusted capital was $162,253 and the authorized control level risk-based
capital was $25,724.
28
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
HORACE MANN GROWTH FUND, INC.
HORACE MANN INCOME FUND, INC.
HORACE MANN BALANCED FUND, INC.
HORACE MANN SHORT-TERM INVESTMENT FUND, INC.
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the current Prospectus, dated May 1, 1996, for the Horace
Mann Growth Fund, Inc. ("Growth Fund"), Horace Mann Income Fund, Inc. ("Income
Fund"), Horace Mann Balanced Fund, Inc. ("Balanced Fund"), and Horace Mann
Short-Term Investment Fund, Inc. ("Short-Term Fund"). These funds are referred
to collectively as the "Funds." A copy of the Prospectus may be obtained by
writing to the Horace Mann Funds, P.O. Box 4657, Springfield, Illinois 62708-
4657, by sending a telefacsimile (FAX) transmission to (217) 527-2307, or by
telephoning (217) 789-2500 or (800) 999-1030 (toll-free).
May 1, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Topic Page
- ----- ----
<S> <C>
Investment Policies.......................................... 2
Growth Fund............................................... 2
Income Fund............................................... 3
Balanced Fund............................................. 3
Short-Term Fund........................................... 3
Investment Restrictions...................................... 3
Management of the Funds...................................... 5
Board of Directors........................................ 5
Officers.................................................. 7
Investment Advisory Agreements............................... 8
Brokerage Allocation......................................... 9
Business Management Agreements
and Other Services........................................ 10
Purchase, Redemption and Pricing of Fund Shares.............. 11
Tax Status................................................... 12
Control Persons and Principal Holders of Securities.......... 14
Financial Statements......................................... 15
Appendix A - Description of Commercial Paper
and Bond Ratings.......................................... A-1
Appendix B - Description of Securities....................... B-1
</TABLE>
INVESTMENT POLICIES
The Prospectus defines the basic investment objectives, which are fundamental
policies, for each Fund. Other policies are described below.
GROWTH FUND
The portfolio investments of the Growth Fund are not concentrated in any one
industry or group of industries but are varied according to what is judged
advantageous under varying economic conditions. While the portfolio is
diversified by investment in a cross-section of businesses and industries, the
Growth Fund follows a policy of flexibility. The Growth Fund does not invest in
companies for the purpose of exercising control of management. Moreover, the
Growth Fund purchases only marketable securities.
It is the policy of the Growth Fund to purchase and hold securities believed to
have potential for long-term capital growth. Investment income is a secondary
consideration in the selection of portfolio securities. The Growth Fund does
not buy and sell for short-term trading profits. Therefore, portfolio changes
usually are accomplished gradually. However, Fund management is not restricted
and may effect short-term transactions when subsequent events make an investment
undesirable for long-term holding.
For 1994 and 1995, the Growth Fund's portfolio turnover rates were 69.42% and
64.59, respectively. Although it is impossible to predict with certainty the
Growth Fund's ongoing portfolio turnover rate, the investment adviser expects
that under normal circumstances it will be less than 100% each year.
2
<PAGE>
INCOME FUND
During 1994 and 1995, the Income Fund's portfolio turnover rates were 205.35%
and 74.53%, respectively. Most of the increase in the Fund's turnover during
1994 resulted from identifying undervalued or overvalued mortgage-backed
securities during this period of fluctuating perceptions. Although it is
impossible to predict with certainty the Income Fund's ongoing portfolio
turnover rate, the investment adviser expects that under normal circumstances it
will be less than 100% each year. During periods of rapidly changing interest
rates, however, the turnover rate may be greater than 100%. This results from
the investment adviser's desire to optimize rates of return during such periods.
BALANCED FUND
During 1994 and 1995, the Balanced Fund's portfolio turnover rates were 121.82%
and 64.80%, respectively. The annual turnover rates of the common stock portion
of the Balanced Fund's portfolio for 1994 and 1995 were 68.53% and 64.27%,
respectively, and for the bond portion for 1994 and 1995 were 220.87% and
65.81%, respectively. Although it is impossible to predict with certainty the
Balanced Fund's ongoing portfolio turnover rate, the investment adviser expects
that under normal circumstances it will be less than 100% each year. During
periods of rapidly changing interest rates, however, the turnover rate may be
greater than 100%. This results from the investment adviser's desire to optimize
rates of return during such periods.
SHORT-TERM FUND
There is no turnover information for the Short-Term Fund as it holds its
securities for less than one year.
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental policies of each Fund. A
Fund may not change its investment restrictions without approval of the holders
of a majority of the outstanding shares of that Fund or of 67% of the shares
represented at a meeting of shareholders at which the holders of 50% or more of
the outstanding shares are represented. A Fund may not under any circumstances:
(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
3
<PAGE>
event that the asset coverage for such borrowings may fall below 300%, the Fund
will reduce, within three days, the amount of its borrowings in order to provide
for 300% asset coverage); a Fund will not borrow to increase income (leveraging)
but only to facilitate redemption requests that might otherwise require untimely
dispositions of the Fund's portfolio securities; a Fund will repay all
borrowings before making additional investments, and interest paid on borrowings
will reduce net income;
(3) make loans to other persons (except by the purchase of obligations in which
the Fund is authorized to invest); provided, however, that the Fund will not
enter into repurchase agreements if, as a result thereof, more than 10% of the
total assets of the Fund (taken at current value) would be subject to repurchase
agreements maturing in more than seven (7) days;
(4) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the Government of the United States,
its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets (taken at current value) would be invested in the securities
of that issuer, or (b) a Fund would hold more than 10% of any class of
securities of that issuer (for this purpose, all debt obligations of an issuer
maturing in less than one year are treated as a single class of securities);
(5) write, or invest in, straddle or spread options or invest in interests in
oil, gas or other mineral exploration or development programs;
(6) purchase securities on margin or sell any securities short;
(7) invest in the securities of any issuer, any of whose officers, directors or
security holders is an officer or director 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;
(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;
4
<PAGE>
(10) mortgage, pledge or hypothecate its assets except in an amount up to 15%
(10% as 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) underwrite the securities of other issuers, purchase securities subject to
restrictions on disposition under the Securities Act of 1933 (so-called
"restricted securities") or purchase securities not freely marketable;
(12) purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts;
(13) invest in companies for the purpose of exercising control; or
(14) invest in securities of other investment companies, except as they may be
acquired as part of a merger, consolidation or acquisition of assets.
In addition to these investment restrictions, from time to time the Board of
Directors may establish investment guidelines to be followed by the investment
adviser in connection with the investment of Fund assets. These guidelines are
not fundamental policies and may be changed at any time without shareholder
vote. Currently, 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. Derivative securities may
not exceed 20% of the total assets of the Horace Mann Income Fund or 20% of the
fixed portion of the total assets of the Horace Mann Balanced Fund.
MANAGEMENT OF THE FUNDS
A listing of the Directors and Officers of each Fund, their age, their principal
occupations for the past five years and their affiliation with other companies
affiliated with Horace Mann Life Insurance Company is presented below.
Correspondence with any Director or Officer may be addressed to the offices of
the Funds at P.O. Box 4657, Springfield, Illinois 62708-4657.
BOARD OF DIRECTORS
*A. THOMAS ARISMAN (1, 2, 3), 49, Director; Senior Vice President, Allegiance
Life Insurance Company, Educators Life Insurance Company of America, Horace Mann
Life Insurance Company, and Horace Mann Service Corporation; Director and
President, Horace Mann Investors, Inc.; formerly held other officer and Director
positions of various subsidiaries of Horace Mann Educators Corporation.
5
<PAGE>
*LARRY K. BECKER (1, 3, 4), 47, Director and Chairman of the Board; Director,
Executive Vice President, and Chief Financial Officer, AIC Acquisition
Corporation, Allegiance Insurance Company, Allegiance Life Insurance Company,
Association & Consumer Marketing Services Corp., Educators Life Insurance
Company of America, Horace Mann Insurance Company, Horace Mann Life Insurance
Company, Horace Mann Service Corporation, Insuror Management Company, Senior
Marketing Insurance Service Corporation, Teachers Insurance Company, and Well-
Care, Inc.; Executive Vice President and Chief Financial Officer, Horace Mann
Educators Corporation; Director, Horace Mann Investors, Inc.; formerly held
other officer and Director positions of various subsidiaries of Horace Mann
Educators Corporation.
A. L. GALLOP (2), 70, Director; Executive Director (Retired), Minnesota
Education Association; formerly Director, Horace Mann Educators Corporation
(1968-1983).
HARRIET A. RUSSELL (4), 53, Director; member, Cincinnati Board of Education;
Director and Vice President, Greater Cincinnati School Employer Credit Union;
teacher (Retired), Walnut Hills High School; former Director, Horace Mann Growth
Fund, 1974 to 1983.
*GEORGE J. ZOCK (1, 2, 3), 45, Director and President; Director, Senior Vice
President and Treasurer, AIC Acquisition Corporation, Allegiance Insurance
Company, Allegiance Life Insurance Company, Association & Consumer Marketing
Services Corp., Educators Life Insurance Company of America, Horace Mann
Insurance Company, Horace Mann Life Insurance Company, Horace Mann Service
Corporation, Senior Marketing Insurance Service Corporation, Teachers Insurance
Company and Well-Care, Inc.; Senior Vice President and Treasurer, Horace Mann
Educators Corporation and Insuror Management Company; formerly held other
officer and Director positions of various subsidiaries of Horace Mann Educators
Corporation.
- ---------------------
*Director is considered an "interested person" as that term is defined in the
Investment Company Act of 1940.
(1) Member of Executive Committee - Unless otherwise provided by resolution of
the Board, this committee may exercise all of the powers of the Board when the
Board is not in session, except as otherwise stated in the Funds' By-Laws.
(2) Member of Audit/Insurance Committee - This committee serves as the Board's
liaison with the Funds' independent auditors, reviews the financial operation of
the Funds, and makes periodic reports of these reviews to the Board, along with
appropriate recommendations regarding the proper and efficient financial
operation of the Funds. Additional responsibilities
6
<PAGE>
include the review and assurance of the adequacy of insurance coverage for the
Funds.
(3) Member of Securities Committee - This committee coordinates and
communicates with the Funds' investment adviser on behalf of the Board, reviews
and oversees investment management activities, makes recommendations to the
Board on changes in the investment guidelines, recommends changes or adjustments
to the investment advisory agreement, creates and revises standards of
investment performance, and advises the Board on investment issues.
(4) Member of Nominating Committee - This committee is responsible for the
selection of appropriate, qualified persons as director nominees to be presented
to Fund shareholders for their consideration. The committee has no formal
policy with respect to prospective director nominees recommended by
shareholders, but shareholders are free to make recommendations.
OFFICERS
ANN M. CAPARROS, 43, Secretary and Ethics Compliance Officer; Director, Vice
President, General Counsel and Corporate Secretary, AIC Acquisition Corporation,
Allegiance Insurance Company, Allegiance Life Insurance Company, Association &
Consumer Marketing Services Corp., Educators Life Insurance Company of America,
Horace Mann Insurance Company, Horace Mann Life Insurance Company, Horace Mann
Service Corporation, Senior Marketing Insurance Service Corporation, Teachers
Insurance Company, and Well-Care, Inc.; Vice President, General Counsel and
Corporate Secretary, Horace Mann Educators Corporation and Insuror Management
Company; Secretary, Horace Mann Investors; prior to March 1994, was associated
with John Deere Insurance Group and Affiliates serving as Assistant Vice
President, Vice President, General Counsel, Corporate Secretary and Claims
Manager.
ROGER W. FISHER, 43, Controller; Vice President and Controller, AIC Acquisition
Corporation, Allegiance Insurance Company, Allegiance Life Insurance Company,
Association & Consumer Marketing Services Corp., Educators Life Insurance
Company of America, Horace Mann Educators Corporation, Horace Mann Insurance
Company, Horace Mann Service Corporation, Horace Mann Life Insurance Company,
Insuror Management Company, Senior Marketing Insurance Service Corporation,
Teachers Insurance Company, and Well-Care, Inc.; Controller, Horace Mann
Investors, Inc.
7
<PAGE>
WILLIAM J. KELLY, 49, Treasurer and Regulatory Compliance Officer; Treasurer,
Horace Mann Investors, Inc.; Vice President, Horace Mann Life Insurance Company;
Vice President-Transfer Agent, Horace Mann Service Corporation; formerly held
other officer and Director positions of various subsidiaries of Horace Mann
Educators Corporation.
The Officers of the Funds receive remuneration from Horace Mann Service
Corporation. The Funds do not pay any remuneration to their officers.
Independent Directors are paid a $150 per diem fee by each Fund for attendance
at Board meetings and receive reimbursement for travel expenses. For the fiscal
year ended December 31, 1995, the Independent Directors' per diem fees totaled
$1,500 for each Fund.
8
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Pension or Compensation
Aggregate Retirement Benefits From the
Name of Person, Compensation Accrued as Part Funds Paid
Position From Each Fund of Fund Expenses to Directors
- -------------------- ------------------- ---------------- ------------
<S> <C> <C> <C>
A. L. Gallop $750.00 -0- $3,000.00
Harriet A. Russell $750.00 -0- $3,000.00
</TABLE>
As of the date of this Statement of Additional Information, the Directors and
Officers of the Growth Fund held in the aggregate directly and beneficially less
than 1% of the outstanding shares of Growth Fund. Directors and Officers do not
directly own any shares of Income Fund, Balanced Fund or Short-Term Fund;
however, they may invest indirectly in the Growth Fund, Income Fund, Balanced
Fund and/or Short-Term Fund through annuity contracts issued by Horace Mann Life
Insurance Company and the 401(k) plan of Horace Mann Service Corporation.
INVESTMENT ADVISORY AGREEMENTS
Pursuant to Investment Advisory Agreements with Wellington Management Company
("Wellington Management"), Wellington Management manages the investment and
reinvestment of the assets of the Funds and continuously reviews, supervises and
administers the Funds' investment programs. Wellington Management discharges
its responsibilities with oversight by the Directors of the Funds.
Wellington Management is a professional investment counseling firm which
provides investment services to investment companies, employee benefit plans,
endowments, foundations, and other institutions and individuals. As of December
31, 1995, Wellington Management had discretionary management authority with
respect to approximately $109.2 billion of assets. Wellington Management and its
predecessor organizations have provided investment advisory services to
investment companies since 1933 and to investment counseling clients since 1960.
Wellington Management is a Massachusetts general partnership of which the
following persons are managing partners: Robert W. Doran, Duncan M. McFarland
and John R. Ryan.
Under these Agreements, the Growth Fund paid Wellington Management advisory fees
of $584,033, $685,599 and $817,246 for the fiscal years ended December 31, 1993,
1994, and 1995, respectively. The Income Fund paid Wellington Management
advisory fees of $21,637, $23,460 and $24,703 for the fiscal years ended
December 31, 1993, 1994 and 1995, respectively. The Balanced Fund paid
Wellington Management advisory fees of $384,398, $465,385 and $579,308 for the
fiscal years ended December 31, 1993, 1994, and 1995, respectively. The Short-
Term Fund's advisory fees of $1,465, $1,289 and $1,444 for the fiscal years
ended December 31, 1993, 1994, and 1995, respectively, were paid to Wellington
Management by Horace Mann Investors, Inc.
9
<PAGE>
BROKERAGE ALLOCATION
The Investment Advisory Agreements authorize Wellington Management (subject to
the discretion and control of the Funds' Board of Directors) to select the
brokers or dealers that will execute the purchases and sales of portfolio
securities and direct Wellington Management to use its best efforts to obtain
the best available price and most favorable execution. Subject to policies
established by the Directors of the Funds, Wellington Management may also be
authorized to effect individual securities transactions at commission rates in
excess of the minimum commission rates available, if Wellington Management
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 Wellington Management's overall
responsibilities with respect to the Funds and other clients.
In placing portfolio transactions, Wellington Management will use its best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain best available price and most favorable execution. The full
range and quality of brokerage services available will be considered in making
these determinations. In those instances where it is reasonably determined that
more than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and other services in addition to
execution services. Such services may include factual and statistical
information or other items of supplementary research assistance. Wellington
Management considers such information useful in the performance of its
obligations under the Advisory Agreements, but is unable to determine the amount
by which such services may reduce its expenses. In addition, within the
parameters of achieving best price and execution, brokerage services may be used
to generate commission credits which are used to pay for pricing agent and
custodial services. See, "Business Management Agreements and other Services -
Fund Pricing Agreements and Custodial Agreement."
Some securities considered for investment by the Funds may also be appropriate
for other funds and/or clients served by Wellington Management. To assure fair
treatment of each fund and all clients of Wellington Management 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 Wellington Management.
The Growth Fund paid brokerage fees of $303,053, $458,195 and $522,990 in the
fiscal years ended December 31, 1993, 1994 and 1995, respectively; the Balanced
Fund paid brokerage fees of $146,119, $237,952 and $269,217 for those same
respective periods. The Income Fund and Short-Term Fund paid no brokerage fees.
Substantially all of the brokerage fees were allocated to brokers who provided
research, statistical or other services. Total brokerage fees paid during a year
will vary with turnover rates.
10
<PAGE>
BUSINESS MANAGEMENT AGREEMENTS AND OTHER SERVICES
BUSINESS MANAGEMENT AGREEMENTS - As described in the Prospectus, "Management-
Business Manager," Horace Mann Investors, Inc. ("Investors") serves as the
business manager of each Fund. For providing these management services, each
Fund pays Investors a pro rata fee computed on the aggregate total net assets of
all Funds managed by Investors and sponsored by HMLIC equal to 0.25% of the
aggregate total net assets of all Funds up to $100,000,000; and 0.20% of
aggregate total net assets exceeding that amount. The management fee is accrued
daily and paid monthly and is based upon the average daily net assets.
Investors' management fee is reduced by the amount, if any, that total operating
expenses, including the Fund Pricing Agreement which follows, of each Fund
(exclusive of taxes, interest, extraordinary items and brokerage commissions and
other charges related to the purchase and sale of portfolio securities), exceed
0.50% of the first $30 million of average daily net assets, and 1% of the
average daily net assets in excess of that amount. The Growth Fund paid
Investors management fees in the amount of $351,071, $418,112 and $521,885 for
the fiscal years ended December 31, 1993, 1994, and 1995, respectively. The
Balanced Fund paid Investors management fees in the amount of $246,624, $323,198
and $408,591 for the fiscal years ended December 31, 1993, 1994 and 1995,
respectively. Investors waived the Income Fund's management fees of $18,834,
$20,029 and $20,885 and the Short-Term Fund's management fees of $2,538, $2,400
and $2,440 for the fiscal years ended December 31, 1993, 1994, and 1995,
respectively.
FUND PRICING AGREEMENTS - Effective July 1, 1994, the Funds entered into an
agreement with the First National Bank of Boston ("Bank of Boston"), a national
banking association located at 150 Royall Street, Canton, Massachusetts 02021,
to calculate the daily net asset value per share for each Fund and to maintain
certain required accounting records. The Funds pay the Bank of Boston $60,000
annually for these services as follows: Each Fund is charged a flat fee of
$5,000 with the remaining $40,000 allocated among the four Funds based upon the
average daily net assets of each Fund. This fee accrues daily and is paid
monthly to the Bank of Boston.
The Growth and Balanced Funds may compensate the Bank of Boston for these
services directly or through a commission credit arrangement with Frank Russell
Securities, Inc. Wellington Management places trades for the Growth and Balanced
Funds with Frank Russell Securities, Inc., subject to its obligation to obtain
best available price and most favorable execution. Investors directly
compensates Bank of Boston for pricing and accounting services provided to the
Income and Short-Term Funds. For the period July 1, 1994 to December 31, 1994,
fees charged to each Fund by the Bank of Boston for provision of these services
were as follows: $13,520, Growth Fund; $4,896, Income Fund; $11,110, Balanced
Fund; and $2,141, Short-Term Fund. The Bank of Boston charged the Growth Fund
$26,846, Balanced Fund $22,050, Income Fund $5,664 and the Short-Term Fund
$4,845 for 1995.
Prior to July 1, 1994, Investors provided these pricing and accounting services
to the Funds in exchange for an annual per Fund base fee of $6,000 and an asset
based charge of 0.02% of the first $50 million of net assets and
11
<PAGE>
0.01% of net assets in excess of $50 million. Investors fees for these services
for the Growth Fund were $27,134 in 1993 and $14,905 for the first six months
of 1994; for the Income Fund $7,731 in 1993, and $3,935 for the
first six months of 1994; for the Balanced Fund were $22,337 in 1993, and
$12,636 for the first six months of 1994; and for the Short-Term Fund $6,233
in 1993, and $3,110 for the first six months of 1994. Investors waived these
fees during these periods for the Income and Short-Term Funds.
CUSTODIAL AGREEMENT - Bank of Boston also serves as custodian of the assets of
each Fund, including foreign securities through a sub-custodian relationship.
Under the Custodial Agreement, the Bank of Boston maintains the Funds' portfolio
securities, administers the purchases and sales of portfolio securities,
collects interest and dividends and other distributions made on portfolio
securities, and performs such other ministerial duties outlined in the Custodial
Agreement.
The Bank of Boston charges each Fund an annual minimum administrative fee of
$3,000 for serving as custodian. The administrative fee is calculated according
to the following schedule: 1/66 of 1% for the first $100 million of assets,
1/80 of 1% for the next $100 million of assets; 1/200 of 1% for the next 800
million of assets, and 1/300 of 1% for assets in excess of $1 billion. In
addition, depending on the type of transaction, a charge ranging from $7.50 to
$12.00 is assessed for each individual portfolio transaction.
The Growth and Balanced Funds may compensate the Bank of Boston for these
services directly or through a commission credit arrangement with Frank Russell
Securities, Inc. Wellington Management places trades for the Growth and
Balanced Funds with Frank Russell Securities, Inc., subject to its obligation to
obtain best available price and most favorable execution.
TRANSFER AND DIVIDEND PAYING AGENT - Horace Mann Service Corporation ("HMSC"),
One Horace Mann Plaza, Springfield, Illinois 62715-0001, acts as the transfer
agent and dividend disbursing agent for each Fund and is paid a fee based on the
number of accounts outstanding. HMSC is a wholly-owned subsidiary of Horace
Mann Educators Corporation ("HMEC"). "Horace Mann" is a registered service mark
of HMEC. The Funds have been given limited permission to use that service mark
in their names, subject to HMEC's right to revoke that permission.
INDEPENDENT AUDITORS - KPMG Peat Marwick LLP, 303 East Wacker Drive, Chicago,
Illinois 60601, serves as the Funds' independent auditors. KPMG Peat Marwick
LLP performs an annual audit of the financial statements of the Funds and
provides accounting advice and services related to Securities and Exchange
Commission filings throughout the year.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Each Fund sells and redeems its shares at net asset value per share, without a
sales or redemption charge. No minimum purchase or redemption amounts
12
<PAGE>
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. 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 Directors.
TAX STATUS
It is intended that the Funds will continue to qualify as regulated investment
companies under the Internal Revenue Code ("IRC"). In order to qualify as a
regulated investment company under the IRC, 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)
derive less than 30% of its gross income from the sale or other disposition of
stocks, securities or certain options, futures, or forward contracts held less
than three months, (c) distributes at least 90% of its net investment income
which includes short-term capital gains and (d) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the Fund's assets is represented by cash and cash items,
Government securities, the securities of other regulated investment companies,
and other securities limited in respect of any one issuer to 5% of the Fund's
total assets and to not more than 10% of the voting securities of that
issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than Government securities
or the securities of other regulated investment companies).
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 its net investment income to its shareholders. The 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
13
<PAGE>
capital losses) that are distributed as capital gain dividends. The IRC
imposes a 4% nondeductible excise tax on a publicly-held mutual fund to the
extent such mutual fund does not distribute at least 98% of its ordinary income
and 98% of its capital gains (both long-term and short-term) each year by the
end of such year. Since shares of the Growth Fund are held in part by the
public, the Growth Fund intends to comply with these distribution requirements.
For the purpose of the 4% excise tax, any income or gain retained by the Growth
Fund subject to tax will be considered to have been distributed by year-end.
Dividends and distributions will be treated as paid when actually distributed,
except that dividends declared in December payable to shareholders of record on
a specified date in December, and paid before February 1 of the following year,
will be treated as having been (i) paid on December 31 of the current year in
which declared and (ii) received by each shareholder on that date.
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 IRC 817(h). These
diversification requirements, which apply in addition to the diversification
requirements imposed on the Fund 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
part, in that Fund will be currently taxable to the variable contract owners.
The above discussion is only an abbreviated summary of the applicable provisions
of the IRC and is not intended as tax advice.
14
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth, as of April 1, 1996, 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>
Growth Fund: Type of Shares % of Shares
- ------------ Ownership Owned Outstanding
----------- ---------- -----------
<S> <C> <C> <C>
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account......................... Record 10,085,036 70.67
(b) Horace Mann Life Insurance Company
Separate Account B....................... Record 1,007,638 7.06
Income Fund:
- -----------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account........................... Record 803,272 96.04
Balanced Fund:
- --------------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance
Company Separate Account................... Record 12,528,253 95.43
Short-Term Fund:
- ----------------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account......... Record 85,888 84.16
(b) Horace Mann Life Insurance Company
(depositor)................................ Record 10,000 9.80
</TABLE>
15
<PAGE>
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.
FINANCIAL STATEMENTS
The Funds audited financial statements for the year ended December 31, 1995, and
the Report of Independent Auditors thereon, are incorporated herein by reference
from the Funds' Annual Report dated December 31, 1995. The Report of Independent
Auditors for the eight years ended December 31, 1993 is included in the
Registration Statement. A copy of the Annual Report must be accompanied by or
preceded by the prospectus. Additional copies of the Annual Report and/or the
Reports of Independent Auditors may be obtained, upon request and without
charge, by contacting the offices of the Funds at P.O. Box 4657, Springfield,
Illinois 62708-4657, by sending a telefacsimile (FAX) transmission to
(217) 527-2307, or by telephoning (217) 789-2500 or (800) 999-1030 (toll-free).
16
<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.
A-1
<PAGE>
Standard & Poor's Corporation also rates the long-term securities debt of
various entities in categories ranging from "AAA" to "D" according to quality.
AAA - Highest grade. They possess the ultimate degree of protection as to
principal and interest. Marketwise, they move with interest rates and provide
the maximum safety on all counts. AA - High grade. Generally, these bonds differ
from AAA issues only in a small degree. Here, too, prices move with the long-
term money market. A - Have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions. BBB - Regarded as having
adequate capacity to pay interest and repay principal. These bonds normally
exhibit adequate protection parameters, but adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal than for debt in higher rated categories.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES
REPURCHASE AGREEMENTS - Repurchase agreements are agreements under which the
purchaser (i.e., a Fund) acquires ownership of an obligation (debt instrument or
time deposit) and the seller agrees, at the time of the sale, to repurchase the
obligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period. If the seller of a
repurchase agreement fails to repurchase this obligation in accordance with the
terms of the agreement, the investing Fund will incur a loss to the extent that
the proceeds on the sale are less than the repurchase price. Repurchase
agreements usually involve United States Government or federal agency securities
and, as utilized by the Funds, include only those securities in which the Funds
may otherwise invest. Repurchase agreements are for short periods, most often
less than 30 days and usually less than one week. The Funds intend to enter into
repurchase agreements only with domestic commercial and savings banks and
savings and loan associations with total assets of at least one billion dollars,
or with primary dealers in United States Government securities. In addition, the
Funds will not enter into repurchase agreements unless (a) the agreement
specifies that the securities purchased, and interest accrued thereon, will have
an aggregate value in excess of the price paid; and (b) the Funds take delivery
of the underlying instruments pending repurchase. In entering into a repurchase
agreement, a Fund is exposed to the risk that the other party to the agreement
may be unable to keep its commitment to repurchase. In that event, the Fund may
incur disposition costs in connection with liquidating the collateral (i.e., the
underlying security). Moreover, if bankruptcy proceedings are commenced with
respect to the selling party, receipt of the value of the collateral may be
delayed or substantially limited. The Funds believe that these risks are not
material inasmuch as the Funds will evaluate the credit worthiness of all
entities with which it proposes to enter into repurchase agreements, and will
seek to assure that each such arrangement is adequately collateralized.
REVERSE REPURCHASE AGREEMENTS - Reverse repurchase agreements involve the sale
of money market securities held by a Fund, with an agreement to repurchase the
securities at an agreed upon price, date and interest payment. If it employs
reverse repurchase agreements, a Fund will use the proceeds to purchase other
money market securities and instruments eligible for purchase by that Fund
either maturing, or under an agreement to resell, at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement. At the time it
enters into a reverse repurchase agreement, a Fund will place in a segregated
custodial account securities having a value equal to the repurchase price. A
Fund will generally utilize reverse repurchase agreements when the interest
income to be earned from the investment of the proceeds of the transactions is
greater than the interest expense incurred as a result of the reverse repurchase
transactions. Reverse repurchase agreements involve the risk that the market
value of securities purchased by the Fund with the proceeds of the transaction
may decline below the repurchase price of the securities by the Fund which it is
obligated to
B-1
<PAGE>
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.
WARRANTS - Warrants are instruments that provide the owner with the right to
purchase a specified security, usually an equity security such as common stock,
at a specified price (usually representing a premium over the applicable market
value of the underlying equity security at the time of the warrant's issuance)
and usually during a specified period of time. Moreover, they are usually issued
by the issuer of the security to which they relate. While warrants may be
traded, there is often no secondary market for them. The Funds will invest in
publicly traded warrants only. Warrants do not have any inherent value. To the
extent that the market value of the security that may be purchased upon exercise
of the warrant rises above the exercise price, the value of the warrant will
tend to rise. To the extent that the exercise price equals or exceeds the market
value of such security the warrants will have little or no market value. If
warrants remain unexercised at the end of the specified exercise period, they
lapse and the investing Fund's investment in them will be lost. In view of the
highly speculative nature of warrants, as a matter of operating policy, no Fund
will invest more than 5% of its total net assets in warrants.
CONVERTIBLE PREFERRED STOCKS AND DEBT SECURITIES - Certain preferred stocks and
debt securities include conversion features allowing the holder to convert
securities into another specified security (usually common stock) of the same
issuer at a specified conversion ratio (e.g., two shares of preferred for one
share of common stock) at some specified future date or period. The market value
of convertible securities generally includes a premium that reflects the
conversion right. That premium may be negligible or substantial. To the extent
that any preferred stock or debt security remains unconverted after the
expiration of the conversion period, the market value will fall to the extent
represented by that premium.
PREFERRED EQUITY REDEMPTION CUMULATIVE STOCK - Preferred Equity Redemption
Cumulative Stock (PERCS) are a form of convertible preferred stock which
automatically convert into shares of common stock on a predetermined conversion
date. PERCS pay a fixed annual dividend rate which is higher than the annual
dividend rate of the issuing company's common stock. However, the terms of
PERCS limit an investor's ability to participate in the appreciation of the
common stock (usually capped at approximately 40%). Predetermined redemption
dates and prices set by the company upon the issuance of the securities provide
the mechanism for limiting the price appreciation of PERCS.
ADJUSTABLE RATE MORTGAGE SECURITIES - Adjustable rate mortgage securities
(ARMs), are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
B-2
<PAGE>
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMs
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for
such an instrument exceeds the sum of the interest accrued at the applicable
mortgage interest rate and the principal payment required at such point to
amortize the outstanding principal balance over the remaining 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.
B-3
