<PAGE>
Up Close
Annual Report
December 31, 1997
[PHOTO APPEARS HERE]
Will your savings
measure up to your
long-term goals?
Making your investment
work hard for you
Our funds offer clear choices
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Horace Mann
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retirement annuities
Contents Savings
[PHOTO OF STOPWATCH APPEARS HERE]
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One-year performance ending 12/31/97
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Growth Fund 21.90%
Balanced Fund 17.54%
Income Fund 8.04%
Short-Term
Investment Fund 3.72%
Small Cap
Growth Fund* 15.83%
International
Equity Fund* 2.40%
Socially
Responsible Fund* 21.86%
For further information, see page 6.
*Since inception 3/10/97
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EDITOR'S NOTE: Nothing in these articles should be construed as a promise or
guarantee of future performance. Investment decisions are very personal and
should take into account many individual factors. More complete information on
the funds can be found in the current prospectuses.
This report must be preceded or accompanied by a current prospectus.
FEATURES
Will your savings measure
up to your long-term goals?.................................3
Horace Mann's funds
offer clear choices.........................................5
How the funds measure up....................................6
Making your investments
work hard for you...........................................8
Knowledge and professionalism
set our agents apart.......................................11
New legislation creates more
investment choices.........................................12
Take a closer look at how
your funds performed.......................................13
DEPARTMENTS
Portfolio manager letters..................................14
Financial statements.......................................21
LONG-TERM GOALS
investments
Horace Mann Family of Funds and Horace Mann Life Insurance Company Separate
Account Annual Report
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Horace Mann Investors, Inc.
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1 Horace Mann Plaza
Springfield, Illinois 62715
217-789-2500
Fellow Shareholders:
Horace Mann is pleased to report 1997 investment returns. Each of our seven
funds achieved positive returns for the year, and your assets increased in value
in excess of inflation. Both the Growth Fund and Balanced Fund have produced
performance in excess of the relevant Lipper averages over the most recent
three-year period. Although both funds underperformed their relevant benchmarks
over the last year, they produced very positive returns. You should be very
confident that the officers and trustees of the funds remain committed to
delivering to you appropriate returns for your investments over the long term.
In response to the need for additional fund options, we added three new funds
this year -- the Small Cap Growth Fund, the Socially Responsible Fund and the
International Equity Fund -- bringing the total number of Horace Mann funds
available to seven. The purpose of the new funds is to offer you the ability to
build a more diversified portfolio. The Small Cap Growth, International Equity
and Socially Responsible funds outpaced their relevant benchmarks for 1997.
MARKET REVIEW
1997 was a good year for both stock and bond markets in the United States.
Domestic stock prices continued their successful run over the past several
years, and the bond market benefited from an economy with low inflation and
moderate growth. Some international markets, however, especially those in Asia,
experienced market declines over the last half of 1997. Scudder Kemper
Investments Inc., manager of the Horace Mann International Equity Fund, remains
positive on international markets over the long term, but expects some near-term
volatility.
MARKET AND POLITICAL ISSUES
Wellington Management Company, LLP, one of the fund's investment advisors,
expects both unemployment and inflation to remain at moderate levels in the near
future. These two fundamental factors are expected to keep interest rates from
rising very much in the near term. The expansion of the domestic economy is
expected to continue in the next year, although the pace might slow somewhat as
Asian demand falls for U.S. goods.
PERSPECTIVE
At the Horace Mann Family of Funds, we are committed to providing our
shareholders with a long-term accumulation of assets in excess of inflation. We
hope that the new additions to our family of funds give you more options to
achieve your goal of a secure retirement. We appreciate the opportunity to serve
you.
Sincerely,
/s/George J. Zock
George Zock
Chairman & President
Horace Mann Mutual Funds
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INVESTMENT OBJECTIVES
Will your savings measure up to your long-term goals?
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[PHOTO APPEARS HERE]
They will if you put your savings in the right place
The types of investments you choose are the most critical decisions you'll make
when you're investing for the long term. When you're selecting an appropriate
mix of fund investments, your choices should be based on personal investment
objectives, your attitude toward investing and risk, and your expected time
until retirement or whenever you'll need to withdraw your money.
The first step toward allocating assets is determining your goals. What are you
saving for? A comfortable retirement? A vacation home? College education for the
kids? Your own business? When you have a goal in mind, set a realistic deadline,
then determine the amount of money you'll need to achieve that goal. Now you
know how much money you need and the time frame you have to save for it.
You'll also need to determine your attitude toward investments -- are you
aggressive, moderate or conservative? Aggressive investors don't mind the risks
associated with stock investments. They know that, historically, the stock
market has outperformed many other investments over the long term. Moderate
investors embrace both the potential of the stock market and the stability of
bonds -- they're willing to settle for perhaps less potential growth if their
exposure to risk is also decreased. Conservative investors want to minimize risk
- -- usually, they're close to their goal, and want to conserve the growth they've
already achieved through investments with less risk.
What type of investor are you?
Investors with 20 or more years to achieve their goals should be thinking about
their investment over the long term. Long-term investors are often able to more
easily tolerate the ups and downs of investment returns in exchange for greater
long-term growth. If you fall into this category, you should consider the growth
potential of growth stock funds, small cap growth funds and international funds.
Investors with between 10-20 years left to achieve their goals should be willing
to accept more risk in order to develop their nest egg. They may want to
consider allocating most of their contributions to growth stock funds, with some
more conservative investments mixed in, such as bond funds.
3
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Investors with less than 10 years to reach their goals often feel more
comfortable with more stable investments but may desire some exposure to
investments with higher return potential. These short-term investors should
probably consider having some reserve in short-term or guaranteed fixed
accounts, and a mix of growth and bond funds to help them meet their objectives.
For those who are about to retire or already in retirement (who want to preserve
what they have), year-to-year predictability of investment returns is important,
so a fixed account, an income fund and short-term investments should be a part
of their investments mix. However, depending on the amount of risk they're
willing to tolerate, it's important that their investments continue to grow, and
allocating some money to stocks and bonds will help offset the impact of
inflation on buying power.
So if you have some goals in mind for your future, you should sit down with your
Horace Mann agent. After evaluating your investment style and how much you'll
need, you can determine how to allocate your assets to achieve your goals.
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Now is the time to save for your goals
If you started an annuity but have stopped contributing to it, now is the best
time to start up again. Why now? Because the more you set aside now, the more
you'll have later when you'll need it. By setting dollars aside today, you give
your money more time to work for you. To restart your annuity contributions or
increase them, just talk to your Horace Mann agent, or call 1-800-999-1030.
If you've stopped contributing to a 403(b) tax-deferred annuity because you've
changed jobs or are no longer an educator, consider starting an IRA. The
important thing is that you continue to set aside money now for your retirement.
================================================================================
Continue your investment
[GRAPH APPEARS HERE]
Client 1 (stopped contributing)
Client 2 (continues contributing)
If you've stopped contributing to your Individual Retirement Account (IRA) or
Tax-deferred Annuity (TDA), you should strongly consider starting to contribute
again. Even small contributions can add substantially to your account over time.
The chart above illustrates the difference between continuing to contribute to
an IRA account versus stopping contributions. For the illustration, two clients
have IRA annuities, and both have $10,000 in their accounts. The first client
decides to stop contributing to the account. The second continues to contribute
just $50 per month at the beginning of each month. If we compare the accounts
after 20 years, assuming an 8 percent average annual rate of return, the client
who continued to contribute has 61 percent more in the account than the client
who stopped contributing.
This chart is a hypothetical illustration and does not represent an actual
investment in a Horace Mann annuity.
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4
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FUND OBJECTIVES
HORACE MANN'S funds
offer clear choices
================================================================================
When you're looking to invest, sometimes it's hard to see the forest for the
trees. With so many different funds to choose from, how do you make a choice?
Many companies offer such a variety of funds with overlapping investment styles
that it's hard to make a choice.
That's why, at Horace Mann, we give you a variety of investment choices without
overwhelming you with too many. Depending on your goals, your attitude toward
investments and investment strategies, you'll find clear choices within our
family of funds to meet your needs.
Our family of funds is diverse, and each fund has a different investment
strategy. You can choose an investment with more risk, but also more growth
potential. If you want less risk, we have several choices for you as well. By
choosing several different funds with varying degrees of risk, you can diversify
your investments and lessen the possibility that a market downturn would
adversely affect your returns. Here are the funds and a description of their
investment strategies.
SMALL CAP GROWTH FUND -- This fund's objective is long-term capital appreciation
through investment in stock of smaller, emerging U.S. companies.
INTERNATIONAL EQUITY FUND -- This fund seeks long-term capital growth and
preservation of capital by investing in common stock of large, well-managed
non-U.S. companies.
GROWTH FUND -- This fund seeks long-term capital growth and preservation of
capital by investing in the common stock of large U.S. companies.
SOCIALLY RESPONSIBLE FUND -- This fund seeks long-term capital growth with
current income and growth of income by investing in the stocks of large,
well-managed U.S. companies exhibiting socially responsible business practices.
BALANCED FUND -- This fund seeks high long-term rate of return consistent with
prudent investment risks by investing in common stocks, government and corporate
bonds and money-market instruments.
INCOME FUND -- This fund seeks long-term total rate of return in excess of the
U.S. bond market over a full market cycle. The Income Fund invests primarily in
debt securities.
SHORT-TERM INVESTMENT FUND -- This fund seeks maximization of current income
consistent with liquidity and preservation of principal by investing in Treasury
bills, negotiable certificates of deposit and commercial paper with maturities
of generally less than one year.
Most mutual fund families offer these investment options. Your choice of funds,
therefore, depends on how you want to allocate assets, your risk tolerance and
your investment time horizon.
5
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FUND PERFORMANCE
How the funds
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For Annuity Alternatives Contract Owners
Average annual total returns for the period ended December 31, 1997 for the
Annuity Alternatives contracts are shown in the following table. For
contributions which remained invested in an Annuity Alternatives contract,
returns are shown in the "Without Redemption" columns. For contracts which were
surrendered, returns are shown in the "With Redemption" columns. Redemption has
no affect on the variable account rates of return after the initial five-year
contract period. Returns are based on a $1,000 investment.
<TABLE>
<CAPTION>
5 Year
1 Year 1 Year 5 Years Lipper Variable 10 Years Since Inception/1/
Without With With or Without Annuity Index With or Without With or Without
Redemption Redemption Redemption Returns/3/ Redemption Redemption
<S> <C> <C> <C> <C> <C> <C>
Variable subaccount
Growth Fund 21.90 12.15 16.57 16.61 13.62 12.57
Balanced Fund 17.54 8.14 12.09 11.52 11.09 9.86
Income Fund 8.04 -0.60 3.24 5.34 4.29
Short-Term
Investment Fund 3.72 -4.58 0.96 1.96 1.23
</TABLE>
<TABLE>
<CAPTION>
Since Since
Inception/2/ Inception/2/ Annualized Annualized
Without With Without With
Redemption Redemption Redemption Redemption
<S> <C> <C> <C> <C>
Small Cap Growth Fund 15.83 6.56 19.28 10.78
International Equity Fund 2.40 -5.79 2.90 -5.33
Socially Responsible Fund 21.86 12.11 26.77 18.27
</TABLE>
================================================================================
The average annual total rates of return assume contributions were made on the
first business day of the period indicated.
Total return measures the past performance of each fund subaccount and does not
represent the actual experience of investments made by a particular contract
owner. The total return and principal value of the variable portion of an
account will fluctuate. The value of an account may be worth more or less than
its original cost when redeemed, depending on market fluctuations. Past
performance does not guarantee future results of the subaccounts.
Total returns for the variable portion of the Annuity Alternatives contracts
include a reduction for fund expenses and contract charges of 1.35 percent
annually for mortality and expense risk. Annuity contracts issued prior to
January 1984 have mortality and expense charges or sales fees that differ from
those of the Annuity Alternatives contracts. Such other charges and fees do not
exceed those reflected in the table above.
Annuity Alternatives contracts require a $25 annual maintenance charge on the
contract anniversary when the contract value is less than $10,000. This charge,
which is reflected in the returns above after the first contract year, has
reduced the total rates of return by 2.5 percent on a $1,000 investment or .5
percent on a $5,000 investment.
During the first five contract years, redemption charges range from 2 to 8
percent for the flexible premium contracts and 1 to 5 percent for single premium
contracts. The average annual total returns with redemption are calculated using
flexible premium redemption charges.
Commission credits were used to pay certain expenses of the Growth and Balanced
funds from 1994 through 1997. Certain Balanced Fund expenses were subsidized
(assumed and/or waived) through 1987. Certain Income Fund expenses have been
subsidized (assumed and /or waived) through 1996. Certain Short-Term Investment
Fund expenses have been subsidized (assumed and/or waived) since 1983. Certain
fund expenses have been subsidized (assumed and/or waived) for the Small Cap
Growth, International Equity and Socially Responsible funds since their
inception March 10, 1997. Subsidization and use of credits resulted in higher
actual returns of as much as 1 percent depending on the period subsidized for
each fund. There is no guarantee that subsidization and use of credits will
continue in the future.
/1/Since inception for the Growth, Balanced, Income, and Short-Term Investment
funds refers to Nov. 1, 1989, the date Wellington Management Company, LLP,
became their investment advisor. Effective May 1, 1997, Wellington Management
Company, LLP became the funds' subadvisor.
/2/Since inception for the Small Cap Growth, International Equity and Socially
Responsible funds refers to their beginning date March 10, 1997. The investment
subadvisors are PNC Equity Advisors Company for the Small Cap Growth Fund, and
Scudder Kemper Investments, Inc. for the International Equity and Socially
Responsible funds.
/3/Lipper Variable Annuity Index five-year returns through December 31, 1997.
6
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measure up
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For Growth Fund Public Shareholders and participants in the Horace Mann
Employee 401(k) Plan
Average annual total return Horace Mann Mutual Funds
Total average annualized returns for the period ended December 31, 1997 for the
Horace Mann Mutual Funds and their comparable benchmark indices are shown in the
following table:
<TABLE>
<CAPTION>
Annualized
1 Year 5 Years 10 Years Since Inception Since Inception
------ ------- -------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Growth Fund 23.45% 19.80% 16.66% 16.03%/1/ -
S&P 500 Stock Index 33.36 20.27 18.05 16.89 -
Balanced Fund 19.04 15.35 14.14 13.30/1/ -
Stock/Bond Composite/4/ 23.70 14.92 14.31 13.51 -
Income Fund 9.42 6.57 8.51 7.76/1/ -
Lehman Intermediate/
Aggregate/5/ 9.82 7.05 8.53 8.24 -
Short-Term Investment Fund 5.09 4.33 5.37 4.92/1/ -
90-day Treasury Bills 5.26 4.58 5.56 5.05 -
Small Cap Growth Fund - - - 17.01/2/ 20.98
Russell 2000 Growth - - - 15.32 -
International Equity Fund - - - 3.46/3/ 4.27
MSCI EAFE - - - 3.40/6/ -
Socially Responsible Fund - - - 23.04/3/ 28.41
S&P 500 Stock Index - - - 22.28 -
</TABLE>
================================================================================
Returns of the Horace Mann Mutual Funds in the above table are shown net of fund
expenses. Commission credits were used to pay certain expenses of the Growth and
Balanced funds from 1994 through 1997. Certain Balanced Fund expenses were
subsidized (assumed and/or waived) through 1987. Certain Income Fund expenses
have been subsidized (assumed and/or waived) through 1996. Certain Short-Term
Investment Fund expenses have been subsidized (assumed and/or waived) since
1983. Certain fund expenses have been subsidized (assumed and/or waived) for the
Small Cap Growth, International Equity and Socially Responsible funds since
their beginning March 10, 1997. Subsidization and use of credits resulted in
higher actual returns of as much as 1 percent, depending on the period
subsidized for each fund. There is no guarantee that subsidization and use of
credits will continue in the future.
The performance data quoted represents past performance, and does not guarantee
future results. The investment return and principal value of an investment will
fluctuate, and when redeemed, may be worth more or less than its original cost.
The indices listed are unmanaged industry benchmarks, not funds, and as such
they have no expenses.
/1/Since inception for the Growth, Balanced, Income, and Short-Term Investment
funds refers to Nov. 1, 1989, the date Wellington Management Company, LLP became
their investment advisor. Effective May 1, 1997, Wellington Management Company,
LLP became the subadvisor for these funds.
/2/Since inception for the Small Cap Growth Fund refers to its beginning date,
March 10, 1997. PNC Equity Advisors Company is this fund's investment
subadvisor.
/3/Since inception for the International Equity and Socially Responsible funds
refer to their beginning date, March 10, 1997. Scudder Kemper Investments, Inc.
is investment subadvisor for these funds.
/4/60 percent S&P 500, 40 percent Lehman Brothers Intermediate
Government/Corporate Bond Index through April 10, 1997, Lehman Brothers
Aggregate Bond Index thereafter.
/5/Lehman Brothers Intermediate Government/Corporate Bond Index through April
30, 1997, Lehman Brothers Aggregate Bond Index thereafter.
/6/The index reflects performance from February 28, 1997 through December 31,
1997.
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Rates of return
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7
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Fund Manager's Overview
Making your
investment work
================================================================================
Most of us worry about our own retirement savings. But just think if you were
entrusted with the retirement savings of thousands of people. What an enormous
responsibility!
Horace Mann's fund managers know many people are depending on them for sound
financial management and maximum return for their investment. They understand
their fund clients' satisfaction when the fund is doing well, as well as the
worry and disappointment clients experience should a fund perform poorly.
In recent interviews, some of Horace Mann's fund managers explained how they
view investing based on Horace Mann's customers and the fund objectives. They
outlined what kind of investor might consider their funds, and they also offered
advice in dealing with the ups and downs of stock investments.
Let's talk objectives
"We view our relationship with Horace Mann to be a team effort," says Senior
Vice President and Stock Portfolio Manager Jack Ryan of Wellington Management
Company, LLP, who oversees stock selection for Horace Mann's Growth Fund and the
equity portion of the Balanced Fund. Ryan says his company pays very close
attention to the fund and to shareholders.
[PHOTO OF JACK RYAN APPEARS HERE]
"The objective of the fund is to provide a total return to shareholders which
is equivalent or a little better than the market, and doing it in a way that
incurs slightly below-average risk and competitive return. I think the fund is
ideal for those who want to participate in the stock market. Some of our big
holdings are companies that are very well-known to people. These companies are
in good financial shape, and their stocks are selling at reasonable valuations
within the market. The fund provides an opportunity for people to invest in a
diversified portfolio of stocks."
Senior Vice President and Portfolio Manager Lori Ensinger and Vice President
and Product Specialist of International Equity Management Maureen Hayes of
Scudder Kemper Investments, Inc. are investment professionals assigned to Horace
Mann's Socially Responsible and International Equity funds, respectively. They
say Scudder Kemper has tailored both funds to adhere to the objectives outlined
by Horace Mann regarding each fund's strategy.
When describing the Socially Responsible Fund, Ensinger says this fund's
management uses a growth and income approach and a conservative style that, when
combined with seven screens to select socially responsible firms, yields a fund
that is designed to perform well in good markets and bad. "Our goal is to beat
the market," she says. "We want to outperform other growth and income funds with
less risk, and we seek to do that through our higher-yield approach to selecting
stocks combined with a socially responsible screening.
8
<PAGE>
hard FOR YOU [PHOTO OF MAUREEN HAYES [PHOTO OF LORI ENSINGER
APPEARS HERE] APPEARS HERE]
Maureen Hayes Lori Ensinger
================================================================================
"The ideal investor is one who's long-term oriented, who recognizes the need to
be invested in the U.S. market, who's not going to be making market-timing
decisions, and who recognizes this fund is managed to provide competitive
performance on the upside and protect capital on the downside. We take a
conservative approach to investing and hope to provide a smooth ride toward
meeting the fund's objectives. This fund is also going to attract investors who
are very concerned about matching their investment goals with their social
goals. We have chosen seven screens that capture the social issues most people
are concerned about," Ensinger says.
Hayes says the International Equity Fund is for investors looking toward
long-term global potential. "This fund is for any investor who would be
attracted to the international markets, who's looking for diversification, and
who wants to go outside their local boundaries to explore opportunities,
recognizing that the world is going to a global economy. We wouldn't expect
someone to have all their investment in an international equity, only a portion
of it, between 15 to 20 percent.
"Emerging markets are attractive to invest in because, over the next 10-15
years, they should have dynamic growth. We typically have a small exposure to
emerging markets, but we also tend to invest more in developed markets with more
developed economic and political systems, so some risk is diminished based on
those markets," Hayes says.
Volatility: dealing with the ups and downs of stock markets
Ensinger says investors, particularly recent investors, may have their
expectations a little high. "Investors have gotten used to 20 to 30 percent
returns each year, year-in and year-out. In terms of history, this is not going
to continue. If you make the assumption the U.S. market will return to its
average return, which is 10 to 12 percent per year, you have to assume we'll
have a down market in there somewhere. There's an increased likelihood of that
happening.
"This fund is positioned to do well even in comparison to non-screened growth
and income funds. So I would venture to say that even an investor who doesn't
care about the social screens could look at this fund from a total-return
standpoint.
"We're long-term investors. Market timing doesn't work. I think Scudder Kemper,
as a whole, is a conservative firm. We take these market downturns seriously. We
always keep our eyes on the markets, and we do independent research to help
protect our portfolios," Ensinger explains.
================================================================================
New funds off to a great start!
In March, Horace Mann's three newest funds -- the Socially Responsible Fund, the
Small Cap Growth Fund and the International Equity Fund -- will celebrate their
first anniversary as part of our portfolio. We're pleased with the first-year
performance of these funds and the opportunity for diversification they offer to
our annuity contract owners.
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9
<PAGE>
Hayes agrees. "The markets have been very volatile. What we try to reinforce to
clients is that we have a long-term investment horizon. We're buying stocks that
are undervalued and we hope will appreciate over a two-to-three-year horizon. We
don't encourage clients to look at returns on a monthly or quarterly basis. Look
on an annual basis. Continue to remember why you invested here, particularly in
the international markets. You're doing it to provide diversification as well as
to go into other markets not highly correlated to the U.S. stock market.
Appreciate why you invested in the funds in the first place," she says.
Ryan also focuses on why clients should be thinking about long-term investing.
"I would encourage investors to understand what their investment goals are, and
if they're interested in investing on a long-term basis, to look through those
short-term bouts of volatility which we've always had," he says. "Perhaps now
we're more focused on them because of the news media.
"Over a longer period of time, the volatility declines -- the volatility of a
one-year return is greater than the volatility of a five-year return.
Longer-term periodic investing and discipline -- staying with a schedule -- is
much easier than trying to look for particularly opportune times to get in the
market. They do appear periodically, but they don't last a long time," he says.
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The secret to stock market success is time, not timing
[BAR CHART APPEARS HERE]
S & P 500 annualized total returns, 1977-1996 (in U.S. dollars)
All 5,218 trading days 14.6%
Minus 10 Best days 12.0%
Minus 20 Best days 10.3%
Minus 30 Best days 8.9%
Minus 40 Best days 7.5%
90-Day Treasury Bill 7.5%
Although stocks can be volatile, patience is important
The ten worst performing quarters, 1960-1996, S & P Stock Index (percent)
[BAR CHART APPEARS HERE]
Worst performing One-year return following
quarters the down quarter
9/74 -25.2 38.4
12/87 -22.6 16.4
6/62 -20.6 31.2
6/70 -18.0 41.9
9/90 -13.8 31.3
9/75 -11.0 30.5
9/81 -10.2 10.0
12/73 -9.2 -26.5
9/66 -8.9 30.6
6/74 -7.6 16.1
Source: FactSet, WMC online Wellington Management Co., LLP
Given the up-and-down nature of the stock market these days, investors can be
forgiven for being a little hesitant to put money into stock funds. But history
has proven the stock market to be the best place to invest, especially if
investing for the long term.
The charts above illustrate how hard it is to know when to invest. Often, the
most volatile market periods can be good to investors. But it's difficult to
time the market -- investing before the market goes up, and selling the
investment before the market goes down. You can miss out on the market during
its good days, or be invested in the market during a downturn.
The best way to take advantage of stock investments is to become a long-term
investor. Make regular contributions to your investment, follow its progress,
and stay the course in down markets. History and time are on your side, and over
the long run, you'll probably be pleased with the results.
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10
<PAGE>
Value of education
Knowledge & Professionalism
SET OUR AGENTS APART
Your Horace Mann representative is more than just an insurance agent -- he or
she is a professional dedicated to serving you. And though you may not realize
how much, your Horace Mann agent has invested a lot of time in education and
training just to become a representative for our company.
At Horace Mann, we know the value of training and education for our agents.
After all, our namesake felt a good education should be provided to all
children. And our founders were two educators who wanted to help their
colleagues find low-cost auto insurance. Today, we market our insurance to
educators who know learning is a life-long endeavor. Learning is important to
insurance professionals because of the ever-changing world of insurance,
investments and tax laws.
Before being hired by Horace Mann, each agent is required to study and pass
examinations for state insurance licenses. After being hired, each agent travels
to our home office for Seminar I, an intense two-week training session about all
of Horace Mann's insurance products. Agents also receive months of training by
their agency managers. In fact, we invest tens of thousands of dollars in
training our new agents during their first 24 months of employment.
[PHOTO APPEARS HERE]
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Horace Mann tops
$4 billion in assets, one million customers and funds top
$1 billion
Horace Mann Educators Corp. reached $4 billion in assets for the first time in
company history while at the same time reaching $1 billion in assets in its
family of mutual funds.
- --------------------------------------------------------------------------------
Learning and training is a continuous process for all our agents. We employ
about 1,000 agents, and our agents continue their learning long after their
initial training period. We foster continuing professional growth by encouraging
agents and agency managers to enroll in industry courses. In fact, as of the
date of this publication, we have 222 agents with a Life Underwriter Training
Council Fellow (LUTCF) designation, 48 agents in our agency force with a
Chartered Life Underwriter (CLU) designation, and 35 agents with a Chartered
Financial Consultant (ChFC) designation. Many of our agents take courses toward
these designations or participate in other insurance industry classes. Forty-six
states also require agents to take industry coursework to achieve continuing
education requirements to maintain their licenses. To help our agents achieve
that, Horace Mann also offers training classes that meet the provisions for
continuing education credits.
Our company feels all this training and coursework is essential to developing
very knowledgeable insurance representatives. It keeps our agents up-to-date
with the latest information about the insurance industry. It helps them in their
day-to-day work with clients because their industry knowledge helps them provide
even better service. And it gives them the motivation to be the best insurance
professionals they can be.
11
<PAGE>
New Options
New legislation creates more investment choices
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[ART OF PIGGY BANK APPEARS HERE]
Important legislative changes to individual retirement accounts went into effect
this year. Part of this new legislation, the Tax-free (Roth) IRA, could be part
of your retirement plans in addition to your 403(b) annuity.
. Contributions to this IRA are not deductible, but your earnings can
build tax-free. The new IRA can provide tax-free retirement income if it has
been in effect for five years and you have reached age 59 1/2.
. The dollar amount of contributions to all your IRA accounts can total $2,000 a
year, and your contributions can range from as little as $25 up to $166.67 per
month, or a lump sum payment of $2,000.
. This IRA allows contributions after age 70 1/2 subject to the $2,000 limit and
the requirement to have earned income.
. This IRA also provides retirement planning opportunities for individuals who
do not have a retirement plan, such as a spouse who doesn't work outside the
home or who isn't covered by a pension plan.
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Insurance analysts rate Horace Mann highly
Insurance industry analysts have recognized Horace Mann's financial strength,
not only in our fund choices, but also for our outstanding insurance coverages
and underwriting.
Horace Mann and its subsidiaries are highly rated. All Horace Mann affiliates
are rated "Excellent" by A.M. Best, Standard & Poor's (S & P) and Duff & Phelps
Credit Rating Company. (These ratings do not apply to the Separate Account or
the underlying variable investment securities.)
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With more options available for retirement planning, it's important to determine
what choice is best for you. Your Horace Mann agent can help you review your
current retirement goals and provide more information about how this new
legislation may affect you. If you'd like to know more about what the new IRA
laws can do for you, contact your agent.
[PHOTO OF A FAMILY APPEARS HERE]
12
<PAGE>
FUND PERFORMANCE
[PICTURE OF MAGNIFYING
GLASS APPEARS HERE]
Take a closer look at how your funds performed
The following pages give you an overview of how your funds performed.
financial highlights
1. First, we list the financial highlights from each fund.
2. Then you'll find a breakdown of the assets owned by each fund.
ASSETS
3. The next section details the assets and liabilities of each fund with balance
sheets for these listings. We've included notes that explain some of the terms
of the financial statements.
4. Finally, Horace Mann Life Insurance Company's Separate Account financial
statements are provided.
Separate Account
We invite you to review these pages and note what you've invested in. We want
you to be happy with the quality of our fund choices.
13
<PAGE>
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Wellington Management Company, LLP 75 State Street
Boston, Massachusetts 02109
- --------------------------------------------------------------------------------
Telephone: Fax:
(617) 951-5000 (617) 951-5250
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Growth Fund and Balanced Fund (equity portion)
December 31, 1997
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Performance For the third straight year, the financial markets were very
strong in 1997, and we are happy to report that the Growth Fund
and the Balanced Fund have participated in the record stock
market rally by outperforming their Lipper categories, on
average, over the last three years. While many market analysts
expressed caution at the beginning of this past year following
the exceptionally strong returns of 1995 and 1996, lower
long-term interest rates, declining inflation expectations and
continued growth in the economy helped push equity returns over
20% for an unprecedented third consecutive year.
During the most recent year ending December 1997, the Horace Mann
Growth Fund returned 23.5%, but trailed the lofty performance of
the S&P 500 index. The Horace Mann Balanced Fund, which is made
up of between 50% and 75% equities managed in the same style as
the Horace Mann Growth Fund, and the remainder in fixed income
securities, returned 19.0% for the year, also below its market
index. The Growth Fund trailed the Lipper Growth & Income Fund
one-year average return of 27.1%, while the Balanced Fund equaled
the Lipper Balanced Fund average return of 19.0%. Over a full
market cycle, our investment objective is to outperform both the
Lipper averages and the market indexes.
Portfolio The stock market in 1997 rewarded investors who held large,
Review liquid, blue-chip names and disappointed those who held names
which missed analysts' estimates, had negative publicity, or
otherwise stumbled in investors' minds. As a result, the prices
of many of the most well regarded names, the so-called "New Nifty
Fifty," such as Gillette, Pfizer, and Proctor & Gamble, continued
their expansion into valuation territory which has not been
experienced since the early 1970s. Because the investment
philosophy employed in the Horace Mann Growth Fund and the equity
portion of the Horace Mann Balanced Fund is to invest primarily
in stocks which are considered inexpensive on a valuation basis,
we did not participate in the above-average moves in these
highly-priced stocks. We believe that investment in more
attractively valued stocks will be rewarded in the long term as
other investors begin to understand the potential of such
companies.
As value-oriented funds, the Horace Mann Growth and Balanced
Funds have a natural inclination to invest in sectors comprised
of companies that are reasonably priced relative to key earnings,
assets, and growth measures. The utilities sector, in general,
fits this description and proved to be a rewarding place for the
funds to invest in 1997. While the sector's performance was only
marginally greater than the S&P 500 for the year, the funds'
selections within the sector significantly outperformed the index
and contributed heavily to the funds' total return for the year.
The performance of the Growth Fund and the equity portion of the
Balanced Fund was negatively influenced by two sectors: materials
and health care. Materials sector stocks were hard hit by the
events which unfolded in Asia during the third and fourth
quarters as investors became worried Asian demand for raw
materials would slacken and, at the same time, Asian producers
would dump their production on the world market at reduced prices
in an effort to raise much-needed cash. In the health care
sector, the funds' investments in a diversified group of health
care companies performed in a lackluster fashion compared to the
large pharmaceuticals that led the sector.
14
<PAGE>
Growth Fund and Balanced Fund (continued)
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Economic Domestic economic fundamentals are sound, but the financial
Outlook markets in the fourth quarter were roiled by events within a
number of Asian economies. We expect the banking and currency
turmoil in the Far East will have a dampening effect on the U.S.
economy. Domestic GDP is estimated to expand approximately 2% in
1998, which is 50 basis points lower than our estimate in the
prior quarter. Specifically, the domestic net trade deficit will
widen which will modestly slow the domestic rate of growth. Asia
represents an estimated 30% of global GDP, but the serious
reversals are occurring in only about one third of Asia's GDP.
Global GDP is expected to expand 3% over the next 12 months.
The inflation outlook is expected to remain under control,
probably in the 1.5% range. Continued strength in the U.S. dollar
will limit pricing power for domestic producers as imported goods
become more price competitive. The tight labor market continues
to be a risk in our benign inflationary outlook and represents a
forgotten factor in an environment overly focused on developments
in Asian markets.
With inflation in check, slower growth in corporate profits, and
continued strength in the U.S. dollar, it appears the Federal
Open Market Committee (FOMC) will not increase interest rates at
this time. Short-term interest rates are expected to remain at
current levels during the first half of 1998. In response to a
slowing expansion, the FOMC is likely to ease rates in the latter
part of 1998, setting the stage for a further decline in short-
and long-term interest rates in the second half.
In response to international financial events, domestic economic
weakness may develop but not enough to initiate a recession. On
the margin, domestic markets should benefit if the Asian slowing
acts as an escape valve on our economy which had been gaining
momentum and approaching labor bottlenecks. With interest rates
moving lower, a serious retrenchment in the equity market should
be avoided even as corporate profitability is scaled back. At
this time, the largest risk to the economy would be a widespread
banking crisis developing throughout Asia, including Japan and
China, and spreading to South America. An equity price slide that
developed in this scenario likely would be tempered by the
reserve buying power in money market funds and deposit accounts
and the tendency for investors to buy equities on dips. Strong
corporate cash flows also will provide support, as acquisition
candidates become less expensive during market corrections. In
summary, while the equity environment in 1998 will experience a
number of cross currents and equity risk factors are more
substantial than one year ago, the stock selection opportunities
in the coming year should be numerous.
Respectfully,
Wellington Management Company, LLP
/s/ John R. Ryan
John R. Ryan, CFA
Senior Vice President
Stock Portfolio Manager
15
<PAGE>
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Wellington Management Company, LLP 75 State Street
Boston, Massachusetts 02109
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Telephone: Fax:
(617) 951-5000 (617) 951-5250
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Balanced Fund (bond portion), Income Fund, and Short-Term Investment Fund
December 31, 1997
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Performance The investment mandates of both the Income Fund and the fixed
portion of the Balanced Fund changed on May 1, 1997 from a focus
on intermediate-term government and corporate securities to a
longer-term, broad bond market mandate. The index used for the
Income Fund and the fixed portion of the Balanced Fund changed
from the Lehman Brothers Intermediate Government/Corporate Index
to the Lehman Brothers Aggregate Bond Index.
The investment climate for fixed-income securities was excellent
in 1997, as is reflected in the 9.4% 12-month total return for
the Income Fund. The fixed-income portion of the Balanced Fund,
which makes up approximately 40% of the fund, was not materially
different from the Income Fund. The funds outperformed the Lipper
Corporate Debt A Rated funds average return of 9.2% for the year.
In addition, the funds significantly outperformed the Lehman
Brothers Intermediate Government/Corporate index return of 7.9%,
but trailed the 9.7% return of the Lehman Aggregate Bond Index.
The blended return of the two indexes for the periods they were
used as the funds' benchmark was 9.8%.
Performance comparisons for the quarter were largely dependent on
the duration of the funds relative to that of the benchmark
index. Our longer-than-market duration stance was a positive
contributor to performance over the period as yields for longer
maturity (5- to 30-year) securities declined significantly more
than did the yields of the shorter maturity securities. The
benefit earned from our correct decision to be "long" duration
was eroded by both our exposure in the underperforming mortgage
sector and by our holding in U.S. dollar denominated Korea
Telecom.
The Short-Term Fund matched the 5.1% return of the average of all
of IBC/Donoghue's taxable money market funds for the year and
trailed slightly the 90-Day Treasury Bill average return of 5.3%.
Portfolio The U.S. bond market rallied powerfully over the past few months
Review as investors shifted their focus away from fears of higher
interest rates associated with continuing "excessive" domestic
economic strengths and toward the implications for potential
slowing economic growth stemming from a collapsing Asia.
This shifting sentiment caused investors to re-price bond assets
to reflect their more cautious U.S. economic outlook. Their
actions resulted in a "flattening" of the U.S. Treasury yield
curve as the yield level for 30-year Treasury bonds declined 50
basis points to 5.90% while the yield level for two-year Treasury
notes declined just 13 basis points to 5.65%.
We judge the front end of the yield curve will have a difficult
time breaking through the Fed Funds rate of 5.5% until such time
as the economic data is sufficiently weak to warrant anticipating
an easing by the Fed. In the meantime, the uncertainty about what
the effects of the turmoil in Southeast Asia might have on the
U.S. economy, combined with continued good news on inflation,
could result in an "inversion" of the yield curve as investors
buy longer maturity issues.
Sector performance for the quarter was led by U.S. governments
which were aided in no small measure by foreign inflows. The
mortgage sector returns trailed both governments and corporates
as heightened prepayment fears retarded upward price movement of
mortgage pools.
16
<PAGE>
Balanced Fund (bond portion), Income Fund, and Short-Term Investment Fund
(continued)
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Economic Outlook As 1998 begins, financial woes in Asia and the dormancy in
inflation are keeping market optimism high. Both the flight
to quality and the perception that Asian problems will
dampen economic activity are overwhelming the negative for
the market posed by increasing wage pressures. Investors are
growing more comfortable with the view that businesses have
little pricing power.
It is likely to be some time before the attempts to reflate
growth have enough of an impact to drive world interest
rates higher. Notwithstanding the prospect for a correction
along the way, if the U.S. economy slows as expected, 30-
year bond yields could fall somewhat further. We think the
30-year bond is likely to spend most of 1998 trading between
5.5% and 6.5%. With Fed policy on hold indefinitely, the
range in shorter-term bond yields is likely to be relatively
narrow, and short-medium-term issues could trade through the
Fed Funds rate.
We expect to maintain a longer-than-benchmark duration in
the Income Fund and the fixed portion of the Balanced Fund.
While the "jury is still out" on the effects of Asia on U.S.
markets, we judge those effects will act to lower both
economic growth and inflation to a degree that will permit
the Federal Reserve to abandon its "bias to tighten"
monetary policy and lower the Fed Funds rate sometime in the
second half of 1998.
To be sure, bond prices have rallied over the past few
weeks, which has carried yield levels down to the low end of
our expected trading range. We are, however, reluctant to
trim the portfolio relative duration as long as the economic
fundamentals and the technical momentum remain strong. At
these lower yield levels, we are more disposed to be sellers
than buyers, but we see the Asian deflation shock as an
extraordinary event which could carry U.S. yields lower than
we had originally thought likely. In short, we are looking
for good and sufficient reasons to lighten up, but we see no
compelling justification in the current environment. Should
our forecast prove correct and Treasury bonds trade within a
50-basis point range around 6%, we will look to use
Treasuries as a source of funds to add to mortgages and
corporates as the market trades toward the lower-yield end
of this range.
In the Short-Term Fund, we took advantage of year-end
funding pressures by investing through early 1998. As a
result, the average holding in the fund currently matures in
40 days. With steady-to-lower interest rates ahead, our
duration bias will be to remain neutral to longer than that
of the benchmark. We continue to favor agency securities for
their yield.
Respectfully,
Wellington Management Company, LLP
/s/ Robert Payne
Robert Payne
Senior Vice President
Bond Portfolio Manager
17
<PAGE>
PNC Equity Advisors Company
1600 Market Street, 27th Floor
Philadelphia, PA 19103
PNC EQUITY ADVISORS
Small Cap Growth Fund
December 31, 1997
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Performance Simply stated, the market for small capitalization growth stocks
during 1997 was extremely volatile.
Following an anxious drop of 10.49% for the first quarter, small
cap growth shares, as measured by the Russell 2000 Growth Index,
posted a net gain of 37.4% during the second and third quarters.
The fourth quarter again proved difficult as the Index plunged
8.19%.
The Horace Mann Small Cap Growth Fund, which commenced operations
on March 10, 1997, experienced a beneficial inaugural period as
it produced a total return of 17.0% from inception despite the
turbulent market conditions that prevailed. That result compares
favorably with the 15.3% gain of the Russell 2000 Growth Index
for the initial reporting period.
The second and third calendar quarters of 1997 provided the most
favorable backdrop for small capitalization growth issues. The
fund's investment philosophy and process is designed to identify
the most dynamic, fastest growing domestic small capitalization
growth companies -- truly, a "bottom-up" investment process.
The fund's positive showing versus the benchmark Russell 2000
Growth Index can be attributed to several specific factors during
the year: stock selection, price momentum and growth factors
(revenue and earnings). These three factors, not coincidentally,
are the key elements in the fund's investment process.
Specifically the fund's "bottom-up" investment process provided a
myriad of favorable stock specific "success stories" during the
year. The process led to a number of issues that produced stellar
results in the broadly-categorized service area. For example,
Caribiner International, a provider of various commercial
services, and Veritas Software, a provider of technology
services, were among the fund's superior performing stocks in
1997.
Respectfully,
PNC Equity Advisors Company
/s/ William J. Wykle
William J. Wykle
Senior Portfolio Manager
Horace Mann Small Cap Growth Fund
18
<PAGE>
Scudder Kemper Investments
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, NY 10154-0010
212 326 6200 telephone
International Equity Fund
December 31, 1997
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Performance From this fund's inception date on March 10, 1997, through
December 31, 1997, the International Equity Fund returned
3.46%. From March 31, 1997 through December 31, 1997 your
fund returned 6.17%, substantially outperforming the
benchmark EAFE index which gained only 3.40%. In the fourth
quarter we lost ground as the Asian crisis deepened and
began to send jitters into the global capital markets.
During the last three months, your portfolio lost 4.32%,
still outperforming the index which dropped 7.83%.
1997 was a year of sharply contrasting returns within the
international equity markets. Bourses (stock markets) in
Europe were all up strongly, advancing in aggregate 38% in
local terms. As U.S. dollar investors, we lost about a third
of these gains due to dollar strength against the local
currencies. At the other side of the world, the Japanese
market disappointed once again, dropping 24% in U.S. dollar
terms. The smaller markets in the rest of Asia fell even
more, experiencing dollar declines that ranged from 61-76%.
Portfolio Review The International Equity Fund outperformed the benchmark
index during the period from inception on March 10, 1997
through December 31, 1997, primarily due to its positioning
in Japan. The Japanese market overall was the worst
performing of the major exchanges, with stock prices and the
yen both weakening. We benefited from maintaining a
significant underweight stance, ending the year with an
exposure of 17%, versus an index weighting of 25%. Solid
security selection was also key, as the Japanese market
became progressively more polarized over the course of the
year. We focused on the more global, blue-chip companies,
whose performance continued to break away from the more
troubled, domestically-oriented sectors of the economy.
Our focus within the European stock markets also helped
boost performance. Overweight stances and stock selection
were particularly helpful in Germany, France, Sweden and
Switzerland. From a thematic viewpoint, we continued to
build positions around the extensive corporate and industry
restructuring underway. The dual forces of looming global
competition and European Monetary Union continued to push
companies towards further repositioning and consolidation.
In particular, the financial sector (both insurance and
banking) has witnessed heightened activity and expectations,
with stock prices rising sharply, accordingly.
The emerging markets were a volatile group over the course
of the year, although in aggregate they had a negligible
impact on the overall performance. Significant exposure to
Brazil contributed strongly to performance mid-year as the
portfolio held up to 8.75% in the region, but these gains
were more or less negated in the latter part of the year by
losses in the smaller Asian markets and sympathetic declines
in Latin America. We lightened up on positions early in the
summer and missed much of this downdraft. At the end of
1997, the total emerging markets exposure was just over 2%.
Economic Outlook In as much as the Asian economies have been at the center of
a growing storm through the latter part of 1997, so will
developments in Asia dictate much of the outlook for the
global capital markets as the current year unfolds. The
uncertainty is high, since the future course of the Asian
crisis depends on multiple government policy actions not yet
decided or taken. Policy responses may well differ widely
from country to country, and how the global capital flows
will react is unclear. The key wild cards lie in hands of
policymakers in the larger economies of Japan and China/Hong
Kong.
Respectively,
Scudder Kemper Investments, Inc.
/s/ Irene T. Cheng
Irene T. Cheng
Lead Portfolio Manager
International Equity Fund
19
<PAGE>
SCUDDER KEMPER INVESTMENTS
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, NY 10154-0010
212 326 6200 telephone
Socially Responsible Fund
December 31, 1997
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Performance The stock market posted yet again a spectacular return for
1997, albeit marked by increased volatility in the fourth
quarter, as concerns over Southeast Asia spilled into the
U.S. markets. From its inception on March 10, 1997, through
December 1997, the Horace Mann Socially Responsible Fund
provided a total return of 23.0%, outperforming the 22.3%
return of the S&P 500 Index for the same time period.
Portfolio Review The relative dividend yield discipline underlying the fund
requires the United States to focus exclusively on stocks
which pay dividends, buying stocks when their yields are
above the market yield, and selling them when they fall
below. This discipline, which is successful in identifying
when stocks are overvalued or undervalued, caused us to
modestly underweight the health care sector, but to focus
almost exclusively on pharmaceutical stocks rather than the
weaker-performing HMOs or medical device companies. This
strategy paid off, as the fund's pharmaceutical stocks were
exceptional performers during the year, outperforming the
sector and the broad market.
Electric and telephone utilities were also important
contributors to the fund's outperformance, as a "flight to
quality" later in the year, aided further by declining
interest rates and merger activity in the industry, led
these stocks to outperform the market. The fund is
overweight in both electrics and telephones and had superior
stock selection as well.
The largest sector exposure in the fund is in financial
stocks, representing about 22% of the portfolio and an
overweight versus the S&P 500 Index. This overweight added
value during the year, as finance stocks were one of the
best performing sectors of the market, returning
approximately 32% since March versus 25% for the broad
market.
Portfolio Outlook Given the fund's predominantly bottom-up focus on stock
selection, we do not structure the portfolio based upon a
macroeconomic outlook, but rather based upon the stocks and
sectors which our valuation analysis indicates are
undervalued. Currently we are finding opportunities in
electric utilities, real estate investment trusts, selected
banks, and manufacturing cyclicals. Consequently we are
overweight in these areas and adding on the margin. We
believe the health care and consumer staples sectors are
less attractive from a valuation perspective and maintain an
underweight there. Should the geopolitical uncertainty in
Asia continue to cause increased volatility in the U.S.
market, we anticipate this fund's focus on undervalued,
dividend-paying securities will provide it with a measure of
downside protection.
Respectfully,
Scudder Kemper Investments, Inc.
/s/ Lori Ensinger
Lori Ensinger
Senior Vice President and Portfolio Manager
Socially Responsible Fund
20
<PAGE>
Annual Report
December 31, 1997
Horace Mann Mutual Funds
Growth Fund
Balanced Fund
Income Fund
Short-Term Investment Fund
Small Cap Growth Fund
International Equity Fund
Socially Responsible Fund
Board of Trustees
A.L. Gallop
Donald G. Heth
Richard D. Lang
Harriet A. Russell
George J. Zock
Officers of the Funds
George J. Zock
President
Ann Caparros
Secretary and
Ethics Compliance Officer
William Kelly
Treasurer and Regulatory
Compliance Officer
Linda L. Sacco
Assistant Secretary
Roger Fisher
Controller
Diane M. Barnett
Tax Compliance Officer
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Investment Advisor and Manager
Horace Mann Investors, Inc.
#1 Horace Mann Plaza
Springfield, IL 62715
Investment Subadvisors
Wellington Management Company, LLP
75 State Street
Boston, MA 02109
PNC Equity Advisors Company
1600 Market Street
Philadelphia, PA 19103
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, NY 10154-0010
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Financial Highlights
December 31, 1997
PER SHARE DATA
<TABLE>
<CAPTION>
Less Distribution From:
Net Asset Total Income
Year Value Net Net Realized (Loss) From Net Net
Ended Beginning Investment and Unrealized Investment Investment Realized Total
12/31 of Period Income/1/ Gains (Losses)/1/ Operations/1/ Income Gains Distributions
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH FUND/8/
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1997 $ 23.76 $ 0.40 $ 5.09 $ 5.49 $ 0.39 $ 3.20 $ 3.59
1996 21.66 0.43 5.08 5.51 0.40 3.01 3.41
1995 17.64 0.52 5.41 5.93 0.49 1.42 1.91
1994 19.85 0.49 (0.57) (0.08) 0.45 1.68 2.13
1993 19.49 0.54 3.32 3.86 0.52 2.98 3.50
1992 19.15 0.53 1.31 1.84 0.51 0.99 1.50
1991 16.64 0.60 3.76 4.36 0.60 1.25 1.85
1990 18.88 0.70 (1.74) (1.04) 0.70 0.50 1.20
1989 17.30 0.56 4.58 5.14 0.62 2.94 3.56
1988 16.00 0.42 1.37 1.79 0.40 0.09 0.49
BALANCED FUND/7/8/
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1997 $ 18.94 $ 0.65 $ 2.92 $ 3.57 $ 0.62 $ 2.07 $ 2.69
1996 18.00 0.60 2.70 3.30 0.57 1.79 2.36
1995 15.26 0.67 3.46 4.13 0.61 0.78 1.39
1994 16.72 0.62 (0.81) (0.19) 0.55 0.72 1.27
1993 16.22 0.65 1.87 2.52 0.56 1.46 2.02
1992 15.91 0.66 0.68 1.34 0.59 0.44 1.03
1991 14.19 0.78 2.25 3.03 0.74 0.57 1.31
1990 15.10 0.86 (0.92) (0.06) 0.74 0.11 0.85
1989 13.48 0.77 2.77 3.54 0.70 1.22 1.92
1988 12.71 0.66 0.72 1.38 0.61 -- 0.61
INCOME FUND/6/8/
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1997 $ 12.69 $ 0.81 $ 0.39 $ 1.20 $ 0.85 $ 0.04 $ 0.89
1996 13.03 0.76 (0.31) 0.45 0.79 -- 0.79
1995 12.02 0.80 0.99 1.79 0.78 -- 0.78
1994 13.06 0.75 (1.04) (0.29) 0.75 -- 0.75
1993 12.95 0.82 0.23 1.05 0.75 0.19 0.94
1992 12.92 0.94 (0.01) 0.93 0.87 0.03 0.90
1991 12.26 1.12 0.71 1.83 1.17 -- 1.17
1990 12.35 1.14 (0.21) 0.93 1.02 -- 1.02
1989 11.64 1.04 0.75 1.79 0.96 0.12 1.08
1988 11.59 1.00 (0.11) 0.89 0.84 -- 0.84
</TABLE>
1 The "Net Investment Income" per share and the "Net realized and unrealized
gains (losses)" per share represent a proportionate share respective to the
increase in net assets as presented in the Statement of Operations.
2 The total return is determined by the ratio of ending net asset value to
beginning net asset value, adjusted for reinvestment of dividends from net
investment income and net realized capital gains.
3 If you are an annuity contract owner, the above total return does not reflect
expenses that apply to the separate account or related policies. The
inclusion of these charges would reduce the total return figures for all
periods shown.
4 "Average Commission Paid per Equity Shares Traded" represents the average
brokerage commission paid on equity transactions entered into during the
period for trades where commissions were applicable. This disclosure is not
applicable for years beginning prior to December 31, 1995. The Income and
Short-Term Funds do not have equity transactions.
See notes to the financial statements.
22
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
RATIO/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
Ratio to Average Net
Assets Before Waived &
Reimbursed Expenses
Ratio of Ratio of Average
Net Asset Net Assets Expenses Net Income Portfolio Commissions Ratio of
Value End Total/2/,/3/ End of Period to Average to Average Turnover Paid per Equity Ratio of Net Investment
of Period Return (in millions) Net Assets/5/ Net Assets Rate Shares Traded/4/ Expenses Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25.66 23.45% $598,502 0.53% 1.50% 54.56% $0.058 -- --
23.76 25.28 430,556 0.59 1.79 67.63 0.059 -- --
21.66 33.67 297,100 0.63 2.50 64.59 -- -- --
17.64 (0.35) 202,103 0.69 2.36 69.42 -- -- --
19.85 19.74 178,379 0.69 2.48 47.39 -- -- --
19.49 9.59 140,257 0.73 2.65 31.78 -- -- --
19.15 26.50 124,140 0.76 3.13 51.01 -- -- --
16.64 (5.48) 97,610 0.78 3.86 52.97 -- -- --
18.88 29.88 102,956 0.64 2.69 71.25 -- -- --
17.30 11.23 86,755 0.64 2.41 41.57 -- --
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$19.82 19.04% $387,110 0.51% 3.12% 77.54% $0.057 -- --
18.94 18.27 300,551 0.56 3.12 72.10 0.059 -- --
18.00 27.12 228,193 0.59 3.79 64.80 -- -- --
15.26 (1.12) 160,815 0.63 3.59 121.82 -- -- --
16.72 15.46 132,376 0.66 3.54 52.43 -- -- --
16.22 8.37 92,463 0.71 3.94 27.06 -- -- --
15.91 21.57 72,343 0.75 4.96 42.09 -- -- --
14.19 (0.41) 53,289 0.81 5.59 47.62 -- -- --
15.10 26.31 42,214 0.72 4.85 56.80 -- -- --
13.48 10.57 29,223 0.76 4.81 27.68 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$13.00 9.42% $ 9,658 0.92% 6.09% 96.80% -- -- --
12.69 3.50 10,848 0.70 5.88 112.60 -- 0.91% 5.67%
13.03 14.93 10,532 0.62 6.16 74.53 -- 0.88 5.89
12.02 (2.21) 9,259 0.61 5.85 205.35 -- 0.92 5.54
13.06 8.07 9,409 0.41 5.92 74.16 -- 0.87 5.46
12.95 7.20 7,668 0.19 6.94 35.11 -- 1.21 5.92
12.92 14.93 6,396 0.17 8.62 44.82 -- 1.49 7.30
12.26 7.58 5,552 0.20 8.86 62.40 -- 1.64 7.42
12.35 15.43 4,457 0.29 8.13 92.94 -- 1.52 6.90
11.64 7.64 3,390 0.24 7.97 174.32 -- 0.92 7.29
</TABLE>
5 Ratio of Expenses to Average Net Assets do not reflect commission credits.
6 Certain expenses for the Income and Short-Term Funds were assumed or waived
by Horace Mann Investors, Inc. through December 31, 1996 and through
December 31, 1997, respectively. The investment advisory expenses for the
Income and Short-Term Funds were waived by CIGNA Investments from January 1,
1984 through October 31, 1989.
7 Expenses for the Balanced Fund were assumed or waived by Horace Mann
Investors, Inc. and CIGNA Investments through 1987.
8 The Growth, Balanced, Income and Short-Term Funds' investment advisor was
changed effective November 1, 1989.
23
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Financial Highlights (concluded)
December 31, 1997
PER SHARE DATA
<TABLE>
<CAPTION>
Less Distribution From:
Net Asset Total Income
Year Value Net Net Realized (Loss) From Net Net
Ended Beginning Investment and Unrealized Investment Investment Realized Total
12/31 of Period Income/1/ Gains (Losses)/1/ Operations/1/ Income Gains Distributions
<S> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM FUND/6,8/
- -----------------------------------------------------------------------------------------------------------------------------------
1997 $10.03 $ 0.51 $ -- $0.51 $0.55 $ -- $0.55
1996 10.00 0.50 (0.01) 0.49 0.46 -- 0.46
1995 10.08 0.53 -- 0.53 0.61 -- 0.61
1994 10.07 0.39 -- 0.39 0.38 -- 0.38
1993 10.09 0.26 -- 0.26 0.28 -- 0.28
1992 10.10 0.33 -- 0.33 0.34 -- 0.34
1991 10.37 0.61 -- 0.61 0.88 -- 0.88
1990 10.73 0.85 0.01 0.86 1.22 -- 1.22
1989 10.49 0.85 -- 0.85 0.60 0.01 0.61
1988 10.25 0.69 -- 0.69 0.45 -- 0.45
SMALL CAP
GROWTH FUND/9/
- ----------------------------------------------------------------------------------------------------------------------------------
1997 $10.00 $(0.02) $1.72 $1.70 -- -- --
INTERNATIONAL
EQUITY FUND/9/
- ----------------------------------------------------------------------------------------------------------------------------------
1997 $10.00 $ 0.08 $0.27 $0.35 $0.08 -- $0.08
SOCIALLY
RESPONSIBLE FUND/9/
- ----------------------------------------------------------------------------------------------------------------------------------
1997 $10.00 $ 0.10 $2.20 $2.30 $0.10 $0.10 $0.20
</TABLE>
1 The "Net Investment Income" per share and the "Net realized and unrealized
gains (losses)" per share represent a proportionate share respective to the
increase in net assets as presented in the Statement of Operations.
2 The total return is determined by the ratio of ending net asset value to
beginning net asset value, adjusted for reinvestment of dividends from net
investment income and net realized capital gains.
3 If you are an annuity contract owner, the above total return does not
reflect expenses that apply to the separate account or related policies.
The inclusion of these charges would reduce the total return figures for
all periods shown.
4 "Average Commission Paid per Equity Shares Traded" represents the average
brokerage commission paid on equity transactions entered into during the
period for trades where commissions were applicable. This disclosure is not
applicable for years beginning prior to December 31, 1995. The Income and
Short-Term Funds do not have equity transactions.
See notes to the financial statements.
24
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
RATIO/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
Ratio of Ratio of
Year Net Asset Net Assets Expenses Net Income Portfolio
Ended Value End Total/2,3/ End of Period to Average to Average Turnover
12/31 of Period Return (in millions) Net Assets/5/ Net Assets Rate
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM FUND/6,8/
- -------------------------------------------------------------------------------------------------------------------
1997 $ 9.99 5.09% $ 1,151 0.50% 4.98% 0.00%
1996 10.03 5.02 1,229 0.53 4.93 0.00
1995 10.00 5.25 1,006 0.84 5.11 0.00
1994 10.08 3.89 1,114 0.49 3.78 0.00
1993 10.07 2.53 1,110 0.61 2.56 0.00
1992 10.09 3.30 1,131 0.51 3.16 0.00
1991 10.10 5.93 1,076 0.43 5.88 0.00
1990 10.37 7.89 1,195 0.38 7.57 0.00
1989 10.73 8.27 1,175 0.46 7.83 0.00
1988 10.49 6.74 1,140 0.37 6.50 0.00
SMALL CAP
GROWTH FUND/9/
- -------------------------------------------------------------------------------------------------------------------
1997 $11.70 17.01%/10/ $16,525 0.78% (0.19)% 91.49%
Annualized 20.98%
INTERNATIONAL
EQUITY FUND/9/
- -------------------------------------------------------------------------------------------------------------------
1997 $10.27 3.46%/10/ $ 5,214 0.46% 1.29% 31.99%
Annualized 4.27%
SOCIALLY
RESPONSIBLE FUND/9/
- -------------------------------------------------------------------------------------------------------------------
1997 $12.10 23.04%/10/ $ 9,213 0.49% 1.65% 20.85%
Annualized 28.41%
<CAPTION>
Ratio to Average Net
Assets Before Waived &
Reimbursed Expenses
Average
Year Commissions Ratio of
Ended Paid per Equity Ratio of Net Investment
12/31 Shares Traded/4/ Expenses Income
<S> <C> <C> <C>
SHORT-TERM FUND/6,8/
- -----------------------------------------------------------------------------
1997 -- 2.52% 2.96%
1996 -- 2.44 3.02
1995 -- 2.35 3.60
1994 -- 2.36 1.91
1993 -- 2.42 0.75
1992 -- 3.44 0.23
1991 -- 4.45 1.86
1990 -- 4.46 3.49
1989 -- 3.29 5.00
1988 -- 1.48 5.39
SMALL CAP
GROWTH FUND/9/
- -----------------------------------------------------------------------------
1997 $0.055 1.44% (0.85)%
INTERNATIONAL
EQUITY FUND/9/
- -----------------------------------------------------------------------------
1997 $0.116 1.82% (0.07)%
SOCIALLY
RESPONSIBLE FUND/9/
- -----------------------------------------------------------------------------
1997 $0.031 1.16% 0.98%
</TABLE>
5 Ratio of Expenses and Net Investment Income to Average Net Assets do not
reflect commission credits.
6 Certain expenses for the Income and Short-Term Funds were assumed or waived
by Horace Mann Investors, Inc. through December 31, 1996 and through
December 31, 1997, respectively. The investment advisory expenses for the
Income and Short-Term Funds were waived by CIGNA Investments from January
1, 1984 through October 31, 1989.
7 Expenses for the Balanced Fund were assumed or waived by Horace Mann
Investors, Inc. and CIGNA Investments through 1987.
8 The Growth, Balanced, Income and Short-Term Funds' investment advisor was
changed effective November 1, 1989.
9 Certain expenses for the Small Cap Growth, International Equity and
Socially Responsible Funds were assumed and/or waived by Horace Mann
Investors since their inception of investment operations, March 10, 1997.
10 The returns are not annualized.
25
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
[PIE CHART APPEARS HERE]
Common & Preferred Stock 97.3%
Cash & Other Net Assets 2.7%
Statement of Investments
Growth Fund
December 31, 1997
Number of Market
Shares (000)
- --------------------------------------------------------------------------------
COMMON STOCKS Aerospace/Defense 4.18%
Boeing Co. 83,000 $ 4,062
Gulfstream Aerospace Corp.* 85,000 2,486
Northrop Grumman Corp. 96,400 11,086
Precision Castparts Corp. 122,700 7,400
-------------------------------------------------------------
25,034
Auto/Accessories 2.99%
Goodyear Tire and Rubber Co. (The) 281,100 17,885
Banks/Financial Services 11.25%
BankAmerica Corp. 102,700 7,497
Chase Manhattan Corp. 24,000 2,628
Citicorp 67,365 8,517
Coast Savings Financial, Inc.* 89,400 6,130
Corestates Financial Corp. 37,100 2,970
Federal National Mortgage Assoc. 129,200 7,372
First Chicago NBD Corp. 49,100 4,100
First Union Corp. 190,200 9,748
Morgan Stanley, Dean Witter,
Discover & Co. 112,700 6,663
National City Corp. 177,800 11,690
-------------------------------------------------------------
67,315
Business Services 1.43%
Fluor Corp. 136,000 5,083
Foster Wheeler Corp. 113,600 3,074
Howmet International Inc.* 27,400 411
-------------------------------------------------------------
8,568
Chemicals 3.97%
Ferro Corp. 147,750 3,592
Geon Co. 59,700 1,395
IMC Global Inc. 358,400 11,738
Nalco Chemical Co. 177,900 7,038
-------------------------------------------------------------
23,763
Consumer Products 3.42%
Archer Daniels Midland Co. 305,165 6,618
Flowers Industries, Inc. 439,950 9,046
Kimberly-Clark Corp. 61,000 3,008
Universal Corp. 44,000 1,810
-------------------------------------------------------------
20,482
Energy 10.17%
Ashland Inc. 50,000 2,684
Chevron Corp. 42,100 3,242
Enron Oil & Gas Co. 243,300 5,155
Equitable Resources, Inc. 170,700 6,039
MCN Energy Group Inc. 213,900 8,636
Noble Drilling Corp.* 379,900 11,634
Texaco Inc. 77,600 4,220
Union Texas Petroleum Holdings Inc. 253,600 5,278
USX-Marathon Group 415,300 14,016
-------------------------------------------------------------
60,904
See notes to the financial statements.
26
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Growth Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS Entertainment Products 2.84%
(continued) Brunswick Corp. 258,100 $ 7,824
Eastman Kodak Co. 151,200 9,195
------------------------------------------------------------------------------------
17,019
Food Services 0.45%
Tricon Global Restaurants, Inc.* 92,500 2,688
Health Care/Pharmacueticals 7.13%
Baxter International Inc. 138,400 6,981
Columbia/HCA Healthcare Corp. 246,700 7,309
DePuy, Inc. 66,800 1,921
Mallinckrodt, Inc. 194,200 7,380
Pharmacia & Upjohn Inc. 237,800 8,709
Wellpoint Health Networks, Inc. - A* 245,800 10,385
------------------------------------------------------------------------------------
42,685
Information Technology/Equipment 3.83%
Advanced Micro Devices, Inc.* 188,200 3,376
Harris Corp. 171,600 7,872
International Business Machines Corp. 111,600 11,669
------------------------------------------------------------------------------------
22,917
Insurance 9.24%
Aetna Inc. 92,500 6,527
Allstate Corp. 258,590 23,499
CIGNA Corp. 48,400 8,376
Frontier Insurance Group, Inc. 27,200 622
NAC Re Corp. 115,300 5,628
Travelers Group, Inc. 197,550 10,643
------------------------------------------------------------------------------------
55,295
Manufacturing (Diversified) 7.24%
Chart Industries Inc. 90,400 2,062
Cincinnati Milacron Inc. 240,000 6,225
Cooper Industries Inc. 86,900 4,258
Deere & Co. 274,800 16,024
Eaton Corp. 46,000 4,106
Kennametal Inc. 64,700 3,352
New Holland N.V 277,200 7,329
------------------------------------------------------------------------------------
43,356
Metals & Mining 3.98%
Alcan Aluminum Ltd. 153,200 4,232
Alumax Inc.* 168,900 5,743
Aluminum Co. of America 196,700 13,843
------------------------------------------------------------------------------------
23,818
Paper & Forest Products 1.91%
Georgia Pacific Corp. (Timber Group)* 77,200 1,752
Mead Corp. 129,800 3,634
Sonoco Products Co. 104,300 3,618
Temple-Inland, Inc. 46,400 2,427
------------------------------------------------------------------------------------
11,431
</TABLE>
See notes to the financial statements
27
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Growth Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS Retail/Apparel 5.38%
(concluded) May Department Stores Co. 151,900 $ 8,003
Penney (J.C.) Co., Inc. 146,000 8,806
Sports Authority, Inc. (The)* 310,700 4,583
Tommy Hilfiger Corp.* 157,000 5,515
Toys "R" Us, Inc.* 167,800 5,275
-----------------------------------------------------------------------------------
32,182
Telecommunications 4.04%
Bell Atlantic Corp. 78,796 7,170
MCI Communications Corp. 144,000 6,165
SBC Communications Inc. 147,900 10,834
-----------------------------------------------------------------------------------
24,169
Transportation/Travel 6.15%
America West Holdings Corp. - B* 191,900 3,574
Canadian National Railway Co. 121,200 5,727
CSX Corp. 124,600 6,728
Delta Air Lines, Inc. 50,800 6,045
Pittston Burlington Group 110,650 2,905
Ryder Systems, Inc. 173,500 5,682
Union Pacific Corp. 98,100 6,125
-----------------------------------------------------------------------------------
36,786
Utilities 6.99%
American Electric Power Company, Inc. 38,000 1,962
Central & South West Corp. 204,000 5,521
Consolidated Edison Co. 29,700 1,218
Duke Energy Co. 196,900 10,903
GPU, Inc. 214,900 9,053
Illinova Corp. 168,400 4,536
New England Electric System 117,100 5,006
Pinnacle West Capital Corp. 85,700 3,632
-----------------------------------------------------------------------------------
41,831
-----------------------------------------------------------------------------------
Total Common Stocks 96.59% 578,128
(Cost $476,545)
- -------------------------------------------------------------------------------------------------------
PREFERRED STOCK Media 0.72%
News Corporation Limited (The) (ADR) 216,800 4,309
(Cost $3,355)
Total Common and Preferred Stock 97.31% 582,437
</TABLE>
See notes to the financial statements.
28
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (concluded)
Growth Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM Repurchase Agreement
INVESTMENT Paribas Corp.
6.75%, 01/02/98, (secured
by $15,995,911 US Treasury
Bond, 02/15/15) $ 15,656 $ 15,656
-----------------------------------------------------------------------------
Total Short-Term Investment 2.62% 15,656 15,656
(Cost $15,656)
=============================================================================
Total Investments 99.93% 598,093
(Cost $495,556)
Cash and Other Assets
in Excess of Liabilities 0.07% 409
-----------------------------------------------------------------------------
Net Assets 100.00% $ 598,502
=============================================================================
</TABLE>
* Non-income producing during the twelve months
ended December 31, 1997 as this security did not
pay dividends.
See notes to the financial statements.
29
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
[PIE CHART APPEARS HERE]
Common & Preferred Stock 61.8% Statement of Investments
U.S. & Foreign Government & Agency Balanced Fund
Obligations 25.1%
U.S. & Foreign Corporate December 31, 1997
Bonds/Notes 11.3%
Municipal Bonds 1.0%
Cash & Other Net Assets 0.8%
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS Aerospace/Defense 2.72%
Boeing Co. 29,500 $ 1,444
Gulfstream Aerospace Corp.* 33,500 980
Northrop Grumman Corp. 42,200 4,853
Precision Castparts Corp. 53,700 3,239
------------------------------------------------------------------------------------
10,516
Auto/Accessories 1.93%
Goodyear Tire & Rubber Co. (The) 117,300 7,463
Banks/Financial Services 7.36%
BankAmerica Corp. 44,700 3,263
Chase Manhattan Corp. 12,000 1,314
Citicorp 27,659 3,497
Coast Savings Financial, Inc.* 38,300 2,626
Corestates Financial Corp. 15,000 1,201
Federal National Mortgage Assoc. 56,400 3,218
First Chicago NBD Corp. 22,100 1,845
First Union Corp. 78,800 4,039
Morgan Stanley, Dean Witter, Discover & Co. 45,600 2,696
National City Corp. 72,800 4,787
------------------------------------------------------------------------------------
28,486
Business Services 0.76%
Fluor Corp. 50,800 1,899
Foster Wheeler Corp. 38,700 1,047
------------------------------------------------------------------------------------
2,946
Chemicals 2.69%
Ferro Corp. 67,400 1,639
Geon Co. 18,800 439
IMC Global Inc. 161,200 5,279
Nalco Chemical Co. 77,100 3,050
------------------------------------------------------------------------------------
10,407
Consumer Products 2.15%
Archer Daniels Midland Co. 133,045 2,885
Flowers Industries, Inc. 191,200 3,932
Kimberly-Clark Corp. 13,400 661
Universal Corp. 20,700 851
------------------------------------------------------------------------------------
8,329
Energy 6.85%
Ashland Inc. 20,000 1,074
Chevron Corp. 17,300 1,332
Enron Oil & Gas Co. 98,700 2,091
Equitable Resources, Inc. 76,600 2,710
MCN Energy Group Inc. 89,500 3,614
Noble Drilling Corp.* 167,500 5,130
Texaco Inc. 32,200 1,751
Union Texas Petroleum Holdings Inc. 107,100 2,229
USX-Marathon Group 195,400 6,595
------------------------------------------------------------------------------------
26,526
</TABLE>
See notes to the financial statements.
30
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Balanced Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS Entertainment Products 1.55%
(continued) Brunswick Corp. 103,900 $ 3,149
Eastman Kodak Co. 46,700 2,840
------------------------------------------------------------------------------------
5,989
Food Services 0.11%
Tricon Global Restaurants, Inc.* 15,000 436
Health Care/Pharmaceuticals 4.56%
Baxter International Inc. 54,800 2,764
Columbia/HCA Healthcare Corp. 116,300 3,445
DePuy, Inc.* 17,600 506
Mallinckrodt, Inc. 78,900 2,998
Pharmacia & Upjohn Inc. 94,400 3,457
Wellpoint Health Networks, Inc. - A* 106,400 4,495
------------------------------------------------------------------------------------
17,665
Information Technology/Equipment 2.31%
Advanced Micro Devices, Inc.* 80,300 1,440
Harris Corp. 60,800 2,789
International Business Machines Corp. 45,000 4,705
------------------------------------------------------------------------------------
8,934
Insurance 5.70%
Aetna Inc. 39,800 2,808
Allstate Corp. 104,002 9,451
CIGNA Corp. 14,200 2,457
Frontier Insurance Group, Inc. 6,200 142
NAC Re Corp. 57,200 2,792
Travelers Group, Inc. 81,650 4,399
------------------------------------------------------------------------------------
22,049
Manufacturing (Diversified) 4.74%
Chart Industries Inc. 39,300 897
Cincinnati Milacron Inc. 98,000 2,542
Cooper Industries Inc. 42,400 2,078
Deere & Co. 109,300 6,374
Eaton Corp. 21,500 1,919
Kennametal Inc. 29,400 1,523
New Holland NV 113,900 3,011
------------------------------------------------------------------------------------
18,344
Metals & Mining 2.62%
Alcan Aluminum Ltd. 61,000 1,685
Alumax Inc.* 67,600 2,298
Aluminum Co. of America 87,800 6,179
------------------------------------------------------------------------------------
10,162
Paper & Forest Products 1.20%
Georgia Pacific Corp. (Timber Group)* 30,700 697
Mead Corp. 53,400 1,495
Sonoco Products Co. 43,000 1,492
Temple-Inland, Inc. 18,600 973
------------------------------------------------------------------------------------
4,657
</TABLE>
See notes to the financial statements.
31
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Balanced Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS Retail/Apparel 3.49%
(concluded) May Department Stores Co. 65,300 $ 3,440
Penney (J.C.) Co., Inc. 58,800 3,546
Sports Authority, Inc. (The)* 128,000 1,888
Tommy Hilfiger Corp.* 63,300 2,223
Toys "R" Us, Inc.* 76,500 2,405
-----------------------------------------------------------------------------------------
13,502
Telecommunications 2.62%
Bell Atlantic Corp. 35,174 3,201
MCI Communications Corp. 57,800 2,475
SBC Communications Inc. 60,900 4,461
-----------------------------------------------------------------------------------------
10,137
Transportation/Travel 3.91%
America West Holdings Corp. - B* 85,400 1,591
Canadian National Railway Co. 49,500 2,339
CSX Corp. 49,900 2,695
Delta Air Lines, Inc. 19,700 2,344
Pittston Burlington Group 38,600 1,013
Ryder Systems, Inc. 77,600 2,541
Union Pacific Corp. 41,800 2,610
-----------------------------------------------------------------------------------------
15,133
Utilities 3.96%
American Electric Power Company, Inc. 2,000 103
Central & South West Corp. 89,000 2,409
Consolidated Edison Co. 12,500 513
Duke Energy Corp. 76,600 4,242
GPU, Inc. 80,600 3,395
Illinova Corp. 35,300 951
New England Electric System 53,300 2,279
Pinnacle West Capital Corp. 34,300 1,453
-----------------------------------------------------------------------------------------
15,345
-----------------------------------------------------------------------------------------
Total Common Stocks 61.23% 237,026
(Cost $192,560)
- --------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS Insurance 0.04%
Superior National Insurance Group, Inc.** 140 144
Media 0.50%
News Corporation Limited (The) (ADR) 97,100 1,930
------------------------------------------------------------------------------------------
Total Preferred Stocks 0.54% 2,074
(Cost $1,643)
------------------------------------------------------------------------------------------
Total Common and Preferred Stocks 61.77% 239,100
(Cost $194,203)
==========================================================================================
</TABLE>
See notes to the financial statements.
32
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Balanced Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. AND FOREIGN Treasury Bonds/Notes
GOVERNMENT 5.50%, 02/28/99 $ 1,000 $ 998
AND AGENCY 10.375%, 11/15/09 10,000 12,503
OBLIGATIONS 10.375%, 11/15/12 12,000 15,945
12.00%, 08/15/13 15,000 22,102
Federal Home Loan Mortgage Corporation
7.84%, 06/09/06 1,500 1,534
Federal National Mortgage Association
7.850%, 09/10/04 1,000 1,030
7.840%, 06/09/06 300 307
7.790%, 09/27/06 1,000 1,025
Federal Home Loan Mortgage Corporation
(Mortgage Backed Securities)
9.50%, 08/01/01 5 5
9.50%, 09/01/01 4 5
9.50%, 10/01/01 20 21
8.50%, 06/01/02 14 15
9.25%, 11/01/02 25 26
8.25%, 10/01/07 57 59
8.25%, 11/01/07 61 63
8.75%, 05/01/08 60 63
8.50%, 08/01/08 73 76
9.00%, 09/01/08 64 68
8.00%, 09/01/09 50 51
8.00%, 04/01/10 60 62
7.00%, 09/01/10 20 20
7.00%, 10/01/10 121 123
7.00%, 12/01/10 120 122
7.00%, 01/01/11 2,226 2,271
7.00%, 02/01/11 2,938 2,993
6.50%, 03/01/11 4,247 4,272
7.00%, 03/01/11 5,169 5,265
7.00%, 04/01/11 1,646 1,677
7.00%, 07/01/11 1,277 1,300
Federal National Mortgage Association
(Mortgage Backed Securities)
8.00%, 07/01/98 91 91
8.75%, 02/01/10 307 322
10.25%, 07/01/13 8 9
8.00%, 08/01/14 1,245 1,298
8.50%, 09/01/14 725 763
8.50%, 01/01/15 452 476
8.50%, 03/01/15 531 555
7.50%, 10/01/22 924 952
7.50%, 01/01/23 858 885
7.50%, 07/01/23 329 339
7.50%, 04/01/24 543 557
7.50%, 05/01/24 171 176
7.50%, 06/01/24 433 445
7.50%, 08/01/24 598 614
</TABLE>
See notes to the financial statements.
33
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Balanced Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S AND FOREIGN Federal National Mortgage Association
GOVERNMENT (Mortgage Backed Securities)
AND AGENCY 7.50%, 09/01/24 $ 717 $ 734
OBLIGATIONS 7.50%, 10/01/24 604 620
(concluded) 7.50%, 02/01/25 146 150
7.50%, 04/01/25 1,111 1,139
Government National Mortgage Association
(Mortgage Backed Securities)
11.00%, 12/15/00 30 31
9.50%, 08/20/01 36 37
9.50%, 10/20/01 33 34
9.50%, 07/20/02 44 45
9.50%, 12/20/02 45 46
9.50%, 01/20/03 24 24
9.50%, 02/20/03 32 33
9.50%, 05/20/03 57 59
9.50%, 08/20/03 53 55
9.50%, 09/20/03 81 84
9.50%, 11/20/03 38 39
9.50%, 09/20/04 23 24
8.25%, 05/15/06 106 111
12.00%, 03/15/15 26 31
8.50%, 01/15/20 34 36
8.50%, 02/15/21 243 258
8.50%, 06/15/21 138 147
8.50%, 08/15/21 20 21
8.00%, 05/20/22 444 463
8.50%, 04/15/23 227 240
Collateralized Mortgage Obligation
(Planned Amortization Class) (Note 3)
GE Cap Mortgage Services Inc.
6.00%, 04/25/09 1,000 967
FNMA 1993-182 Class H
5.00%, 09/25/23 1,709 1,601
Foreign (U.S. dollar denominated)
Australia Commonwealth
6.75%, 11/15/06 4,975 4,956
Germany (Fed Rep)
6.25%, 01/04/24 3,267 3,490
-----------------------------------------------------------------------------------------------
Total U.S. and Foreign Government and
Agency Obligations 25.05% 87,502 96,958
(Cost $94,698)
- --------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS California Hsg Fin Agy Rev
8.16%, 02/01/28 1,125 1,241
Horry Cnty SC Arpt Rev
7.38%, 07/01/12 1,450 1,558
Oxnard CA Un High Sch Dist
7.78%, 08/01/17 1,000 1,074
-----------------------------------------------------------------------------------------------
Total Municipal Bonds 1.00% 3,575 3,873
(Cost $3,650)
</TABLE>
See notes to the financial statements.
34
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Balanced Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. AND FOREIGN Advanced Micro Devices Inc.
CORPORATE 11.00%, 08/01/03 $ 300 $ 321
BOND/NOTES AK Steel Corp.
9.125%, 12/15/06 250 256
AMR Corp.
9.00%, 09/15/16 1,250 1,465
Amtrol Inc.
10.625%, 12/31/06 100 103
Argo-Tech Corp.
8.625%, 10/01/07 250 251
Argosy Gaming Co.
13.25%, 06/01/04 50 52
Armco Inc.
9.00%, 09/15/07 100 98
Aurora Foods Inc.
9.875%, 02/15/07 25 26
Bankers Trust NY Corp.
8.25%, 05/01/05 1,500 1,640
Banponce Corp.
6.75%, 12/15/05 1,460 1,478
Beneficial Corp.
12.875%, 08/01/13 261 284
Big Flower Press
8.875%, 07/01/07 300 299
Borden Chemicals & Plastics
9.50%, 05/01/05 50 53
Buckeye Technologies Inc.
8.50%, 12/15/05 150 153
BWay Corp.
10.25%, 04/15/07 85 92
Cablevision Systems Corp.
9.25%, 11/01/05 150 159
Cablevision Systems Corp.
8.125%, 08/15/09 100 103
Cabot Safety Corp.
12.50%, 07/15/05 250 281
Calmar Inc.
11.50%, 08/15/05 110 117
Capstar Hotel Co.
8.75%, 08/15/07 200 206
Chancellor Media Corp.
9.375%, 10/01/04 170 177
Chancellor Radio Broadcasting Co.
8.125%, 12/15/07 80 78
Chevy Chase Bank F.S.B.
9.25%, 12/01/08 150 154
Clark Schwebel Inc.
10.50%, 04/15/06 230 251
Collins & Aikman Products Co.
11.50%, 04/15/06 100 112
Comcast Corp.
9.375%, 05/15/05 100 107
Container Corp of America
9.75%, 04/01/03 170 183
</TABLE>
See notes to the financial statements.
35
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Balanced Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S AND FOREIGN Container Corp of America
CORPORATE 10.75%, 05/01/02 $ 80 $ 88
BOND/NOTES Cross Timbers Oil Co.
(continued) 9.25%, 04/01/07 300 312
Decision Holdings Corp.
0.00%, 08/01/08 50 32
Del Monte Foods Co.
0.00%, 12/15/07 100 57
Dime Cap Trust
9.33%, 05/06/27 1,500 1,697
Echostar DBS Corp.
12.50%, 07/01/02 150 162
Energy Corp of America
9.50%, 05/15/07 150 150
Fairchild Semiconductor Corp.
10.125%, 03/15/07 250 262
Falcon Building Products Inc.
9.50%, 06/15/07 150 153
Farmers Ins. Exch.**
8.625%, 05/01/24 1,500 1,735
Federal-Mogul Co.
8.80%, 04/15/07 200 213
First Financial Caribbean
7.84%, 10/10/06 665 699
First Nationwide Hldgs
12.50%, 04/15/03 100 113
First Republic Bancorp
7.75%, 09/15/12 1,500 1,534
Fitzgeralds Gaming Corp.
12.25%, 12/15/04 75 76
Flores & Rucks Inc.
9.75%, 10/01/06 250 274
Fonda Group Inc.
9.50%, 03/01/07 100 94
Freedom Chemicals Inc.
10.625%, 10/15/06 150 165
Frontiervision Holding LP
0.00%, 09/15/07 150 111
Globalstar LP/Capital Corp.
10.75%, 11/01/04 100 98
Granite Broadcasting Corp.
10.375%, 05/15/05 150 157
GS Technologies Inc.
12.25%, 10/01/05 200 224
GST Telecommunications Inc.
12.75%, 11/15/07 60 63
Hammon, John Q Hotels
8.875%, 02/15/04 250 256
Hayes Wheels International Inc.
9.125%, 07/15/07 150 155
Hollywood Casino Inc.
12.75%, 11/01/03 150 161
Huntsman Polymers Corp.
11.75%, 12/01/04 250 282
</TABLE>
See notes to the financial statements.
36
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Balanced Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. AND FOREIGN Hyperion Telecommunications Inc.
CORPORATE 12.25%, 09/01/04 $ 70 $ 77
BOND/NOTES Intermedia Communications Inc.
(continued) 8.875%, 11/01/07 50 51
Intermedia Communications Inc.
8.50%, 01/15/08 100 100
International Wire Group Inc.
11.75%, 06/01/05 250 274
Interpool Inc.
7.35%, 08/01/07 1,800 1,801
Iridium Cap Corp.**
11.25%, 07/15/05 150 148
Iron Mountain Inc.**
8.75%, 09/30/09 120 123
Jacor Communications Co.
9.75%, 12/15/06 60 65
JCAC Inc.
10.125%, 06/15/06 100 109
Johnstown America Inds Inc.
11.75%, 08/15/05 100 109
K & F Industries Inc.**
9.25%, 10/15/07 100 103
Kaufman & Broad Home Corp.
9.625%, 11/15/06 250 265
Key Plastics Inc.
10.25%, 03/15/07 250 265
Korea Telecom
7.625%, 04/15/07 1,750 1,251
LDM Technologies Inc.
10.75%, 01/15/07 100 109
Lear Corp.
9.50%, 07/15/06 100 110
Leiner Health Products Inc.
9.625%, 07/01/07 250 267
Lumbermans Mutual Casualty Co.**
9.15%, 07/01/26 2,000 2,313
Marcus Cable Operating Co.
0.00%, 08/01/04 75 69
McLeodUSA Inc.**
9.25%, 07/15/07 50 53
Muzak LP/Muzak Capital
10.00%, 10/01/03 250 262
Neenah Corp.
11.125%, 05/01/07 180 197
Newfield Exploration Co.**
7.45%, 10/15/07 1,550 1,569
News America Holdings Inc.
8.00%, 10/17/16 2,000 2,147
Nortek Inc.
9.125%, 09/01/07 250 254
NRG Energy Inc.**
7.50%, 06/15/07 1,550 1,605
</TABLE>
See notes to the financial statements.
37
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Balanced Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. AND FOREIGN NS Group Inc.
CORPORATE 13.50%, 07/15/03 $ 48 $ 56
BOND/NOTES Olympic Financial LTD
(continued) 11.50%, 03/15/07 150 152
Owens & Minor Inc.
10.875%, 06/01/06 250 277
Pierce Leahy Corp.
9.125%, 07/15/07 250 260
Pioneer Americas Acquisition Corp.
9.25%, 06/15/07 250 252
Plains Resources Inc.
10.25%, 03/15/06 300 323
Playtex Products Inc.
8.875%, 07/15/04 110 112
Pride Petroleum Services Inc.
9.375%, 05/01/07 100 107
Republic NY Corp.
9.30%, 06/01/21 1,700 2,166
Resource America Inc.**
12.00%, 08/01/04 150 153
Revlon Worldwide
0.00%, 03/15/01 150 105
Rifkin ACQ Partners LP
11.125%, 01/15/06 50 55
Scotsman Group Inc.
8.625%, 12/15/07 60 60
SD Warren Co.
12.00%, 12/15/04 100 112
Silgan Corp.
9.00%, 06/01/09 300 307
Southern Pacific Funding
11.50%, 11/01/04 150 150
Southwestern Bell Telephone Co.
5.55%, 03/10/98 400 400
Sovereign Specialty Chemicals**
9.50%, 08/01/07 250 257
Standard PAC Corp.
8.50%, 06/15/07 250 250
TCI Communications Inc.
8.00%, 08/01/05 2,000 2,143
Teleport Communications Group
0.00%, 07/01/07 150 122
Terra Industries
10.50%, 06/15/05 150 161
Texas Petrochemical Corp.
11.125%, 07/01/06 100 108
Toll Corp.
7.75%, 09/15/07 150 149
Unicco Services Co.**
9.875%, 10/15/07 250 249
Unisys Corp.
11.75%, 10/15/04 100 114
United Air Lines Inc.
10.67%, 05/01/04 672 805
</TABLE>
See notes to the financial statements.
38
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (concluded)
Balanced Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. AND FOREIGN Vencor Inc.
CORPORATE 8.625%, 07/15/07 $ 250 $ 250
BOND/NOTES Weirton Steel Corp.
(concluded) 11.375%, 07/01/04 250 260
Western Financial
8.875%, 08/01/07 150 144
World Color Press Inc.
9.125%, 03/15/03 50 52
Young Broadcasting Inc.
8.75%, 06/15/07 250 246
Zeta Consumer Products Corp.**
11.25%, 11/30/07 100 102
ASSET BACKED (Note 3)
Banc One Auto Grantor Trust 96-B A
6.55%, 02/15/03 570 573
Ford Credit Grantor Trust 95-B A
5.90%, 10/15/00 701 701
IBM Credit Rec. Lease Asset Trust
4.55%, 11/15/00 240 241
Premier Auto Trust 93-6 A2
4.65%, 11/02/99 96 96
Premier Auto Trust 94-1 A3
4.75%, 02/02/00 107 108
Premier Auto Trust 94-2 A3
6.35%, 05/02/00 162 163
--------------------------------------------------------------------------------------------------
Total U.S. and Foreign Corporate
Bonds/Notes 11.33% 41,692 43,859
(Cost $42,787)
- ----------------------------------------------------------------------------------------------------------------------
SHORT-TERM Repurchase Agreement
INVESTMENT Paribas Corp.
6.375%, 01/02/98, (secured
by $199,067 US Treasury
Bond, 04/30/99) 195 195
--------------------------------------------------------------------------------------------------
Total Short-Term Investment 0.05% 195 195
(Cost $195)
---------------------------------------------------------------------------------------------------
Total Investments 99.20% 383,985
(Cost $335,533)
Foreign Currency 0.05% (German Mark) 229 228
(Cost $229)
Cash and Other Assets in Excess
of Liabilities 0.75% 2,897
----------------------------------------------------------------------------------------------------
Net Assets 100.00% $387,110
====================================================================================================
</TABLE>
* Non-income producing during the twelve months ended
December 31, 1997 as this security did not pay dividends.
** Securities are registered pursuant to Rule 144A and may
be deemed restricted for resale.
See notes to the financial statements.
39
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
[PIE CHART APPEARS HERE]
U.S. & Foreign Government
& Agency Obligations 60.6%
U.S. & Foreign Corporate
Bonds/Notes 32.2%
Municipal Bonds 3.9%
Cash & Other Net Assets 3.3%
Statement of Investments
Income Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. AND FOREIGN Treasury Bonds/Notes
GOVERNMENT 10.375%, 11/15/12 $ 500 $ 664
AND AGENCY 12.00%, 08/15/13 1,000 1,473
OBLIGATIONS
Federal Home Loan Mortgage Corporation
7.84%, 06/09/06 150 153
Federal Home Loan Mortgage Corporation
(Mortgage Backed Securities)
9.50%, 03/01/01 25 26
9.50%, 06/01/01 11 12
9.50%, 08/01/01 10 10
9.50%, 10/01/01 10 10
7.00%, 11/01/03 37 38
7.00%, 01/01/11 342 348
7.00%, 03/01/11 640 653
7.00%, 04/01/11 733 746
7.00%, 07/01/11 162 165
8.00%, 12/01/11 12 13
Federal National Mortgage Association
(Mortgage Backed Securities)
8.00%, 11/01/09 18 18
8.00%, 10/01/14 77 80
8.00%, 01/01/17 107 112
7.75%, 04/01/17 179 187
Government National Mortgage Association
(Mortgage Backed Securities)
11.50%, 03/15/10 9 10
12.00%, 03/15/14 3 4
12.00%, 04/15/14 4 4
12.00%, 12/15/14 11 13
12.00%, 02/15/15 3 4
12.00%, 03/15/15 10 12
12.00%, 04/15/15 8 9
12.50%, 04/15/15 4 5
12.00%, 06/15/15 9 11
12.00%, 07/15/15 11 12
12.00%, 11/15/15 14 17
9.50%, 08/15/17 115 125
Collateralized Mortgage Obligation
(Planned Amortization Class) (Note 3)
FHLMC 1737-Class E
6.00%, 12/15/17 220 219
Foreign (U.S. dollar denominated)
Australia Commonwealth
6.75%, 11/15/06 399 397
Germany (Fed Rep)
6.25%, 01/04/24 287 307
---------------------------------------------------------------------------------------
Total U.S. and Foreign Government and
Agency Obligations 60.64% 5,539 5,857
(Cost $5,683)
</TABLE>
See notes to the financial statements.
40
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Income Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS California Hsg Fin Agy Rev
8.16%, 02/01/28 $ 125 $ 138
Horry Cnty SC Arpt Rev
7.38%, 07/01/12 120 129
Orange Cnty CA Pension Oblg Taxable Ref-A
7.16%, 09/01/06 100 106
----------------------------------------------------------------------------------------
Total Municipal Bonds 3.86% 345 373
(Cost $356)
- --------------------------------------------------------------------------------------------------------------
U.S. AND FOREIGN AMR Corp.
CORPORATE 9.00%, 09/15/16 126 148
BONDS/NOTES Banponce Corp.
6.75%, 12/15/05 200 203
Delta Air Lines Inc.
9.75%, 05/15/21 150 193
Dime Capital Trust
9.33%, 05/06/27 160 181
Farmers Ins. Exch.
8.625%, 05/01/24 150 174
First Financial Caribbean Corp.
7.84%, 10/10/06 100 105
First Republic BanCorp.
7.75%, 09/15/12 150 154
Interpool Inc.
7.35%, 08/01/07 150 150
Korea Telecom
7.625%, 04/15/07 200 143
Lumbermens Mutual Casualty Co.
9.15%, 07/01/26 200 231
NCNB Corp.
10.20%, 07/15/15 135 181
NRG Energy Inc.
7.50%, 06/15/07 150 155
Newfield Exploration Co.
7.45%, 10/15/07 150 152
News America Holdings Inc.
8.00%, 10/17/16 200 215
Republic NY Corp.
9.30%, 06/01/21 165 210
TCI Communications Inc.
8.00%, 08/01/05 150 161
United Air Lines Inc.
10.67%, 05/01/04 100 120
</TABLE>
See notes to the financial statements.
41
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (concluded)
Income Fund
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. AND FOREIGN ASSET BACKED (Note 3)
CORPORATE Banc One Auto Grantor Trust 96-B A
BONDS/NOTES 6.55%, 02/15/03 $ 76 $ 76
(concluded) Ford Credit Grantor Trust 95-B A
5.90%, 10/15/00 88 88
IBM Credit Trust 93-1 A
4.55%, 11/15/00 36 35
Premier Auto Trust 93-6 A2
4.65%, 11/02/99 19 19
Premier Auto Trust 94-1 A3
4.75%, 02/02/00 11 11
------------------------------------------------------------------------------------
Total U.S. and Foreign Corporate
Bonds/Notes 32.16% 2,866 3,105
(Cost $3,005)
- --------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT Repurchase Agreement
Paribas Corp.
6.75%, 01/02/98, (secured
by $271,548 US Treasury Bond,
6.375%, 04/30/99) 266 266
------------------------------------------------------------------------------------
Total Short-Term Investment 2.76% 266 266
(Cost $266)
------------------------------------------------------------------------------------
Total Investments 99.42% 9,601
(Cost $9,310)
Foreign Currency 0.20% (German Mark) 19
(Cost $20)
Cash and Other Assets in Excess
of Liabilities 0.38% 38
------------------------------------------------------------------------------------
Net Assets 100.00% $9,658
====================================================================================
</TABLE>
See notes to the financial statements.
42
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
[PIE CHART APPEARS HERE] Statement of Investments
Short-Term Investment Fund
U.S. Agency Obligations,
Cash & Other Net Assets December 31, 1997
100%
<TABLE>
<CAPTION>
Principal
Amount Market
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. AGENCY Federal Farm Credit Bank Discount Notes
OBLIGATIONS 5.70%, 01/30/98 $ 19 $ 19
5.62%, 02/13/98 35 35
5.50%, 02/18/98 110 109
Federal Home Loan Bank Discount Notes
5.47%, 02/06/98 255 254
Federal Home Loan Mortgage Corp. Discount Notes
5.70%, 01/30/98 100 99
5.52%, 02/17/98 260 258
Federal National Mortgage Assoc. Discount Notes
5.47%, 02/05/98 70 70
5.62%, 02/25/98 195 193
Tennessee Valley Authority Discount Note
5.50%, 01/16/98 165 165
------------------------------------------------------------------------------------
Total Investments 100.04% 1,209 1,202
(Cost $1,202)
Liabilities in Excess of Cash and Other Assets (0.04%) (51)
------------------------------------------------------------------------------------
Net Assets 100.00% $ 1,151
====================================================================================
</TABLE>
See notes to the financial statements.
43
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
[PIE CHART APPEARS HERE]
Cash & Other Net Assets 9.6% Statement of Investments
Common Stock 90.4% Small Cap Growth Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS Aerospace/Defense 0.41%
Kellstrom Industries, Inc.* 2,700 $ 67
Auto/Accessories 1.07%
Keystone Automotive Industries, Inc.* 7,400 176
Banks/Financial Services 0.42%
NCO Group, Inc.* 2,750 69
Biotechnology/Pharmacueticals 8.97%
Dura Pharmaceuticals, Inc.* 4,100 188
Incyte Pharmacueticals, Inc.* 4,900 214
Medicis Pharmacuetical Corp. - A* 3,850 197
Parexel International Corp.* 5,400 200
QIAGEN N.V.* 2,400 105
Quintiles Transnational Corp.* 4,100 158
Rexall Sundown, Inc.* 11,300 341
Serologicals Corp.* 3,200 80
------------------------------------------------------------------------------------
1,483
Building and Construction 1.34%
Oakwood Homes Corp. 6,700 222
Business Services 6.28%
Abacus Direct Corp.* 2,200 90
AccuStaff, Inc.* 3,500 81
Caribiner International, Inc.* 3,500 156
Hagler Bailly, Inc.* 1,300 29
Pre-Paid Legal Services, Inc.* 7,100 242
Robert Half International, Inc.* 6,600 264
Staff Leasing, Inc.* 400 8
Whittman-Hart, Inc.* 4,900 168
------------------------------------------------------------------------------------
1,038
Educational Services 4.88%
Apollo Group, Inc.* 3,800 180
Bright Horizons, Inc.* 3,700 68
Computer Learning Center* 2,400 147
Devry Inc.* 3,400 108
Strayer Education, Inc. 3,150 104
Sylvan Learning Systems, Inc.* 5,100 199
------------------------------------------------------------------------------------
806
Electrical Equipment/Electronics 2.22%
DII Group, Inc.* 2,400 64
DSP Group, Inc.* 600 12
Level One Communications, Inc.* 800 23
Orbotech, Ltd.* 700 22
QLogic Corp.* 800 24
Semtech Corp.* 300 12
Tekelec* 2,700 82
Vitesse Semiconductor Corp.* 3,400 128
------------------------------------------------------------------------------------
367
</TABLE>
See notes to the financial statements.
44
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Small Cap Growth Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS Energy 7.95%
(continued) Atwood Oceanics, Inc.* 3,600 $ 171
Core Laboratories N.V.* 9,000 162
Eagle Geophysical, Inc.* 1,500 20
Global Industries Ltd.* 8,800 150
Marine Drilling Companies, Inc.* 7,700 160
Patterson Energy, Inc.* 4,000 155
Petroleum Geo-Services ASA (ADR)* 3,300 214
Reading & Bates Corp.* 3,500 147
Trico Marine Services, Inc.* 4,600 135
------------------------------------------------------------------------------------
1,314
Food Services 5.19%
CKE Restaurants, Inc. 6,600 278
Papa John's International, Inc.* 7,100 248
The Cheesecake Factory* 1,500 45
Whole Foods Market, Inc.* 3,700 189
Wild Oats Inc.* 2,700 97
------------------------------------------------------------------------------------
857
Health Care/Services 10.98%
ATL Ultrasound Inc.* 1,700 78
American Oncology Resources, Inc.* 7,300 117
Capital Senior Living Corp.* 2,200 23
Concentra Managed Care Inc.* 6,786 228
Hanger Orthopedic Group, Inc.* 2,400 31
IDX Systems Corp.* 3,700 137
Molecular Dynamics, Inc.* 200 3
National Surgery Centers, Inc.* 6,400 167
Orthodontic Centers of America, Inc.* 4,400 73
Renal Care Group, Inc.* 1,850 59
Sabratek Corp.* 4,100 118
Safeskin Corp.* 5,900 336
Sunrise Assisted Living, Inc.* 4,600 196
Theragenics Corp.* 4,300 155
Transition Systems, Inc.* 4,200 93
------------------------------------------------------------------------------------
1,814
Hotels/Resorts 2.34%
CapStar Hotel Co.* 5,000 172
Signature Resorts, Inc.* 5,200 114
Vistana, Inc.* 4,500 101
------------------------------------------------------------------------------------
387
Information Technology/Services 17.23%
Aspect Development, Inc.* 3,300 172
Cambridge Technology Partners, Inc.* 5,300 221
Ciber, Inc.* 4,600 267
Complete Business Solutions, Inc.* 2,800 120
DAOU Systems, Inc.* 3,800 118
Engineering Animation, Inc.* 2,000 91
Flexinternational Software Inc.* 800 12
Hyperion Software Corp.* 3,400 122
</TABLE>
See notes to the financial statements.
45
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Small Cap Growth Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS Information Technology/Services (continued)
(continued) Industri-Matematik International Corp.* 5,700 $ 165
Information Management Associates, Inc.* 800 7
JDA Software Group, Inc.* 2,300 79
Manugistics Group, Inc.* 4,000 178
Mastech Corp.* 1,400 44
Mercury Interactive Corp.* 300 8
ONTRACK Data International, Inc.* 6,900 169
Radiant Systems, Inc.* 3,800 108
Sanchez Computer Associate Inc.* 700 20
Saville Systems Ireland PLC (ADR)* 8,000 332
Smallworldwide PLC (ADR)* 2,300 49
Systems & Computer Technology Corp.* 1,700 84
Technology Solutions Co.* 1,500 39
Veritas Software Corp.* 3,600 182
Visio Corp.* 6,800 261
------------------------------------------------------------------------------------
2,848
Insurance 0.79%
Vesta Insurance Group, Inc.* 2,200 131
Leisure 4.60%
Action Performance Companies, Inc.* 4,600 174
Cinar Films, Inc. - B* 5,500 211
Dover Downs Entertainment Inc. 3,500 80
Speedway Motorsports, Inc.* 7,000 174
T HQ Inc.* 5,300 121
------------------------------------------------------------------------------------
760
Publishing 2.53%
Applied Graphics Technologies, Inc.* 2,500 132
CBT Group PlC (ADR)* 3,500 287
------------------------------------------------------------------------------------
419
Retail/Apparel 5.26%
Coldwater Creek Inc.* 4,000 133
Cost Plus, Inc.* 2,700 78
dELiA*s Inc.* 2,200 48
Fossil Inc.* 3,300 83
Gadzooks Inc.* 2,000 42
Hot Topic, Inc.* 800 18
Linens `N Things, Inc.* 5,100 222
Pacific Sunwear of California* 5,800 171
Stein Mart, Inc.* 2,800 74
------------------------------------------------------------------------------------
869
Telecommunication/Services 5.80%
Anicom, Inc.* 5,500 87
Natural Microsystems Corp.* 4,200 194
NICE-Systems Ltd. (ADR)* 3,600 150
Pacific Gateway Exchange, Inc.* 4,500 242
STAR Telecommunications, Inc.* 4,900 157
Tel-Save Holdings, Inc.* 6,500 128
------------------------------------------------------------------------------------
958
</TABLE>
See notes to the financial statements.
46
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (concluded)
Small Cap Growth Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS Transportation 0.14%
(concluded) Expeditores International of Washington, Inc.* 600 $ 23
Waste Services 1.97%
American Disposal Services, Inc.* 5,000 182
Superior Services, Inc.* 5,000 144
------------------------------------------------------------------------------------
326
------------------------------------------------------------------------------------
Total Common Stocks 90.37% 14,934
(Cost $13,819)
====================================================================================
<CAPTION>
Principal
Amount Market
(000) (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM Federal Home Loan Mortgage Discount Note
INVESTMENT 5.50%, 01/02/98 $ 2,726 $ 2,726
------------------------------------------------------------------------------------
Total Short-Term Investment 16.50% 2,726 2,726
(Cost $2,726)
------------------------------------------------------------------------------------
Total Investments 106.87% 17,660
(Cost $16,545)
Liabilities in Excess of
Cash and Other Assets (6.87%) (1,135)
------------------------------------------------------------------------------------
Net Assets 100.00% $16,525
====================================================================================
</TABLE>
* Non-income producing during the period ended December 31, 1997
as this security did not pay dividends.
See notes to the financial statements.
47
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
[PIE CHART APPEARS HERE]
North America 1.3%
Latin America 1.6%
Cash & Other Net Assets 10.1%
Pacific 19.3%
Europe 67.7%
Statement of Investments
International Equity Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON AND Argentina 0.75%
PREFERRED YPF S.A. - D (ADR) (Oil Company) 1,153 $ 39
STOCK
Brazil 0.86%
Usiminas Siderurgicas de Minas Gerais S/A pfd.
(Steel & Metals)* 2,504 15
Vale Do Rio Doce - PN (Steel & Metals)* 1,482 30
------------------------------------------------------------------------------------
45
Canada 1.34%
Canadian National Railway Co. (Railroads) 1,495 70
China 0.48%
Anhui Expressway Co Ltd. - H (Traffic system)* 34,000 6
China Telecom - Local (Telephone communications)* 1,000 2
GZI Transport Limited (Trucking)* 1,000 1
Jiangsu Expressway (Industrial Specialty)* 28,000 6
Shenzhen Expressway (Consumer Service)* 23,000 4
Zhejiang Expressway (Financial)* 28,000 6
------------------------------------------------------------------------------------
25
Finland 2.07%
Nokia AB - A (Telecom Equipment) 810 57
PohJola Insurance Co., Ltd. - B (Insurance) 1,366 51
------------------------------------------------------------------------------------
108
France 14.06%
ACCOR SA (Hotels & Casinos) 296 55
AGF-Assur Gen De France (Insurance) 1,322 70
Alcatel Alsthom CGE (Telecom Equipment) 509 65
AXA UAP (Insurance) 693 54
Carrefour Supermarche SA (Food & Beverage) 76 40
Christian Dior (Apparel) 163 17
Cie Fin Paribas - A (Banking) 323 28
Credit Coml De France CCF (Banking) 467 32
CSF (Thomson) (Aerospace) 1,161 37
Lagardere Groupe (Diversified Manufacturer) 457 15
Renault SA (Automobiles) 147 44
Rhone-Poulenc SA - A (Chemicals) 1,331 60
Schneider SA (Electronic Components) 723 39
Societe Elf Aquitane SA (Oil Company) 686 80
Suez Lyonnaise Des Eaux (Water Supply) 574 64
Total Francaise Des Petroles - B (Oil & Gas Production) 304 33
------------------------------------------------------------------------------------
733
Germany 16.49%
Allianz AG (Insurance) 276 72
BASF AG (Chemicals) 965 34
Bayer AG (Chemicals) 682 25
Bayerische Vereinsbank AG (Banking) 1,063 70
Commerzbank AG (Banking) 1,962 77
Dresdner Bank AG (Banking) 1,649 76
Heidelberger Druckmaschinen (Printing/Publishing) 190 10
Hoechst AG (Chemicals) 939 33
</TABLE>
See notes to the financial statements.
48
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
International Equity Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C>
COMMMON AND Germany (continued)
PREFERRED STOCK Mannesmann AG (Diversified Manufacturer) 102 $ 52
(continued) Munich Reinsurance (Insurance) 199 75
Rhine Westphal-Nonvtg pfd.
(Diversified Manufacturer) 1,627 69
SAP AG pfd. (Computer Software) 181 59
Schering AG (Pharmaceuticals) 382 37
Siemens AG (Electrical Components) 610 36
Thyssen AG (Steel & Metals) 166 36
VEBA AG (Electric Utilities) 1,044 71
Viag AG (Diversified Manufacturer) 52 28
------------------------------------------------------------------------------------
860
Hong Kong 3.26%
Cheung Kong Hlds Ltd. (Real Estate) 3,000 20
Citic Pacific (Financial) 2,000 8
Cosco Pacific Ltd. (Investment) 11,000 9
Great Eagle Hldgs - Warrants (Real Estate)* 1,200 1
Great Eagle Holdings Ltd. (Real Estate) 6,000 8
HSBC Holdings Ltd. (Banking) 1,887 47
Hutchison Whampoa, Ltd. (Diversified Manufacturer) 4,000 25
Kerry Properties (Real Estate) 12,500 21
New World Development (Real Estate) 5,000 17
New World Infrastructure (Diversified Manufacturer)* 1,200 3
Television Broadcasts, Ltd. (Broadcasting & Ent.) 4,000 11
------------------------------------------------------------------------------------
170
Italy 3.32%
Gucci Group (Textiles) 315 13
Istituto Nazionale (Insurance) 28,900 59
Telecom Italia Mobile (Telephone Communications) 13,000 60
Telecom Italia SPA (Telephone Communications) 3,200 20
Telecom Italia SPA Di Risp
(Telephone Communications) 4,800 21
------------------------------------------------------------------------------------
173
Japan 15.32%
Advantest Corp. (Electronic Components) 600 34
Bridgestone Corp. (Automobiles) 1,000 22
Canon Inc. (Office Equipment & Supplies) 3,000 70
Daiwa Securities Co Ltd. (Financial) 8,000 28
Fujitsu Ltd. (Electronic Components) 4,000 43
Keyence Corp. (Precision Instruments) 300 44
Matsushita Electric Industrial Co., Ltd.
(Electronic Components) 2,000 17
Minebea Company Ltd. (Electronic Components)* 3,000 32
Nichiei Co. (Banking) 400 43
Nichiei Co. Ltd. (Financial)**/* 200 21
Nintendo Co. Ltd. Kyoto (Recreational Products) 600 59
Nippon Telephone & Telegraph
(Telephone Communications) 4 34
Nomura Securities (Financial) 3,000 40
Orix Corp. (Financial) 600 42
</TABLE>
See notes to the financial statements.
49
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
International Equity Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND Japan (continued)
PREFERRED STOCK Ricoh Co. (Office Equiment/Supplies) 3,000 $ 37
(continued) Secom Co. Ltd. (Electronic Components) 1,000 64
Shohkoh Fund & Co. (Financial) 100 31
SMC Corp. (Machinery/Components) 500 44
Sony Corp. (Consumer Electronic) 700 62
Tokyo Electron (Semiconductors) 1,000 32
----------------------------------------------------------------------------------------
799
Malaysia 0.23%
Arab Malaysian Corp. (Financial) 4,000 1
Arab Malaysian Finance (Banking) 6,000 1
Malayan Banking Berhad (Banking) 1,300 4
Malaysian Resources Corp. (Real Estate) 6,000 1
Multi-Purpose Hldgs (Real Estate) 6,000 2
United Engineers (Construction/Equipment) 3,300 3
-----------------------------------------------------------------------------------------
12
Netherlands 5.14%
AEGON NV (Insurance) 885 79
Akzo-Nobel NV (Chemicals) 200 35
Elsevier (Print Media) 1,560 25
Heineken Hldgs - A (Alcohol & Tobacco) 240 37
ING Groep NV pfd. (Insurance) 450 2
Philips Electronics (Diversified Manufacturer) 685 41
Royal Dutch Petrol (Oil Company) 480 26
Unilever NV (Food & Beverage) 380 23
----------------------------------------------------------------------------------------
268
Portugal 0.88%
Portugal Telecom (Telephone Communications) 1,000 46
Sweden 3.36%
AGA AB - B (Chemicals) 1,575 21
L.M. Ericsson Telephone Co. - B (ADR)
(Telecommunication Equipment) 1,680 63
Skandia Group Foersaekrings AB (Insurance) 1,740 82
SKF AB B (Machinery/Components) 410 9
------------------------------------------------------------------------------------------
175
Switzerland 8.06%
Ciba Specialty Chemicals (Chemicals)* 496 59
Clariant AG (Chemicals) 68 57
Credit Suisse Group (Banking) 481 74
Nestle SA (Food & Beverage) 43 64
Novartis AG (Pharmaceuticals) 48 78
Roche Holdings Basel AG (Pharmaceuticals) 5 50
Schw Bankgesellschaft (Banking) 26 38
------------------------------------------------------------------------------------------
420
</TABLE>
See notes to the financial statements.
50
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (concluded)
International Equity Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON AND United Kingdom 14.33%
PREFERRED STOCK BAT Industries PLC (Alcohol & Tobacco) 3,270 $ 30
(concluded) Barclays (Banking) 1,440 38
BOC Group PLC (Chemicals) 2,867 48
British Petroleum (Oil Companies) 3,410 45
Carlton Communications PLC (Broadcasting & Ent) 5,100 39
General Electric Co., PLC (Electrical Products) 7,980 53
Glaxo Wellcome PLC (Pharmaceuticals) 2,194 52
Granada Group PLC (Consumer Services) 1,735 27
Imperial Chemical Inds PLC (Chemicals) 2,790 43
Pearson PLC (Print Media) 3,000 39
Pilkington PLC (Home Furnishings) 12,740 27
PowerGen PLC (Electric Utilities) 3,642 48
Reuters Hldg PLC (Printing/Publishing) 3,970 44
Rio Tinto - Zinc Corp. PLC (Steel & Metals) 1,879 22
SmithKline Beecham PLC (Pharmaceuticals) 5,958 61
WPP Group PLC (Advertising) 14,220 63
Zeneca Group PLC (Pharmaceuticals) 1,920 68
------------------------------------------------------------------------------------
747
------------------------------------------------------------------------------------
Total Common and Preferred Stocks 89.95% 4,690
(Cost $4,665)
====================================================================================
<CAPTION>
Principal
Amount Market
(000) (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM Repurchase Agreement
INVESTMENT State Street Bank,
6.00%, 01/02/98 (secured by $521,313,
US Treasury Note 7.875%, 11/15/07) $ 507 $ 507
------------------------------------------------------------------------------------
Total Short-Term Investment 9.72% 507 507
------------------------------------------------------------------------------------
(Cost $507)
Total Investments 99.67% 5,197
(Cost $5,172)
Foreign Currency 0.02% (British Pound) 1
Cash and Other Assets in Excess
of Liabilities 0.31% 16
------------------------------------------------------------------------------------
Net Assets 100.00% $ 5,214
====================================================================================
</TABLE>
* Non-income producing during the period ended December 31,
1997 as this security did not pay dividends.
** Securities are registered pursuant to Rule 144A and may be
deemed restricted for resale.
See notes to the financial statements.
51
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
[PIE CHART APPEARS HERE]
Convertible Securities 0.6% Statement of Investments
Cash & Other Net Assets 1.8% Socially Responsible Fund
Common & Preferred Stocks 97.6%
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks Aerospace/Defense 1.28%
Rockwell International Corp. 2,250 $ 118
Auto/Accessories 6.62%
Dana Corp. 3,350 159
Echlin Inc. 2,600 94
Ford Motor Co. 3,800 185
Meritor Automotive, Inc. 3,416 72
PACCAR Inc. 1,900 100
------------------------------------------------------------------------------------
610
Banks/Financial Services 15.14%
Banc One Corp. 1,900 103
Bankers Trust New York Corp. 750 84
Chase Manhattan Corp. 1,750 192
Centura Banks, Inc. 650 45
Corestates Financial Corp. 1,550 124
Federal National Mortgage Assoc. 550 31
First American Corp. Tenn 800 40
First Tennessee National Corp. 600 40
First Union Corp. 1,900 97
Firststar Corp. 2,000 85
Fleet Financial Group, Inc. 900 68
KeyCorp 1,500 106
J.P. Morgan & Co. Inc. 750 85
NationsBank Corp. 2,250 137
Old Kent Financial Corp. 1,600 63
U.S. Bancorp 850 95
------------------------------------------------------------------------------------
1,395
Chemicals 9.91%
Akzo Nobel N.V. (ADR) 1,300 113
Betzdearborn, Inc. 1,800 110
Dow Chemical Co. 750 76
Eastman Chemical Co. 1,900 113
Geon Co. 4,200 98
Imperial Chemical Industries PLC (ADR) 3,650 237
Lyondell Petrochemical Co. 2,896 77
Olin Corp. 1,900 89
------------------------------------------------------------------------------------
913
Consumer Products 9.00%
Avon Products, Inc. 1,100 68
General Mills, Inc. 1,100 79
Heinz (H.J.) Co. 5,600 285
Kimberly-Clark Corp. 3,750 185
Unilever N.V. PLC 3,400 212
------------------------------------------------------------------------------------
829
Construction Materials 0.12%
Martin Marietta Materials, Inc. 300 11
</TABLE>
See notes to the financial statements.
52
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Socially Responsible Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS Energy 6.98%
(continued) Elf Aquitaine (ADR) 2,850 $ 167
MCN Energy Group Inc. 1,300 52
Pennzoil Corp. 300 20
Sonat, Inc. 2,150 98
Total SA (ADR) 2,025 114
Williams Companies, Inc. (The) 2,900 82
YPF SA Sociedad Anonima (ADR) 3,200 110
---------------------------------------------------------------------------------------
643
Health Care/Pharmacueticals 5.53%
American Home Products Corp. 1,500 115
Baxter International, Inc. 1,700 86
Bristol-Myers Squibb Co. 1,250 118
Schering-Plough Corp. 500 31
SmithKline Beecham PLC - A (ADR) 1,000 51
Zeneca Group PLC (ADR) 1,000 108
---------------------------------------------------------------------------------------
509
Index Security 2.11%
Standard & Poor's Depositary Receipts 2,000 194
Information Technology/Equipment 2.44%
AMP, Inc. 1,050 44
Xerox Corp. 2,450 181
---------------------------------------------------------------------------------------
225
Insurance 4.67%
Exel Limited 1,700 108
Lincoln National Corp. 1,800 141
Mid Ocean Ltd. 1,050 57
SAFECO Corp. 2,550 124
---------------------------------------------------------------------------------------
430
Manufacturing (Diversified) 2.85%
Boise Cascade Corp. 3,120 94
Thomas & Betts Corp. 1,400 66
Whirlpool Corp. 1,350 74
Witco Corp. 700 29
---------------------------------------------------------------------------------------
263
Metals & Mining 1.95%
J & L Specialty Steel, Inc. 5,400 54
Oregon Steel Mills, Inc. 4,300 92
Phelps Dodge Corp. 550 34
---------------------------------------------------------------------------------------
180
Paper & Forest Products 4.12%
Georgia Pacific Corp. 1,600 97
Georgia Pacific Corp. (Timber Group) 1,600 36
Westvaco Corp. 3,500 110
Weyerhaeuser Co. 2,800 137
---------------------------------------------------------------------------------------
380
</TABLE>
See notes to the financial statements.
53
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (continued)
Socially Responsible Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON Real Estate 2.68%
STOCKS Equity Residential Properties Trust 1,500 $ 76
(concluded) Health Care Property Investors, Inc. 250 9
Nationwide Health Properties, Inc. 2,500 64
Security Capital Industrial Trust 3,954 98
Security Capital Group - B (warrants) 30 --
------------------------------------------------------------------------------------
247
Retail/Apparel 5.06%
May Department Stores Co. 1,600 84
Mercantile Stores Co., Inc. 1,600 97
Penney (J.C.) Co., Inc. 2,100 127
Rite Aid Corp. 1,200 70
Sears, Roebuck and Co. 1,950 88
------------------------------------------------------------------------------------
466
Telecommunications 8.71%
AT & T Corp. 800 49
Alltel Corp. 3,400 140
Bell Atlantic Corp. 2,261 206
BellSouth Corp. 2,650 149
Frontier Corp. 4,400 106
Sprint Corp. 2,600 152
------------------------------------------------------------------------------------
802
Transportation/Travel 0.97%
CSX Corp. 1,650 89
Utilities 6.97%
Boston Edison Co. 200 8
CINergy Corp. 3,450 132
Duke Energy Corp. 3,025 168
Entergy Corp. 2,400 72
Pacificorp 2,500 68
PG & E Corp. 2,250 68
PowerGen PLC (ADR) 200 11
Southern Co. 700 18
Unicom Corp. 1,650 51
Wisconsin Energy Corp. 1,600 46
------------------------------------------------------------------------------------
642
Waste Services 0.16%
Browning Ferris Industries, Inc. 400 15
------------------------------------------------------------------------------------
Total Common Stocks 97.27% 8,961
(Cost $8,377)
</TABLE>
See notes to the financial statements.
54
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Investments (concluded)
Socially Responsible Fund
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares (000)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK Banks/Financial Services 0.30%
Kmart Financing 550 $ 28
------------------------------------------------------------------------------------
Total Preferred Stock 0.30% 28
(Cost $32)
------------------------------------------------------------------------------------
Total Common and Preferred Stock 97.57% 8,989
(Cost $8,409)
====================================================================================
<CAPTION>
Principal
Amount Market
(000) (000)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE SECURITY Loews Corp. $ 51 $ 52
3.125%, 09/15/07
------------------------------------------------------------------------------------
Total Convertible Security 0.57% 51 52
(Cost $51)
- ----------------------------------------------------------------------------------------------------------------
SHORT-TERM Repurchase Agreement
INVESTMENT State Street Bank,
6.00%, 01/02/98, (secured by $159,138,
US Treasury Bond, 7.875%, 11/15/07) 155 155
------------------------------------------------------------------------------------
Total Short-Term Investment 1.68% 155 155
(Cost $155)
------------------------------------------------------------------------------------
Total Investments 99.82% 9,196
(Cost $8,615)
Cash and Other Assets in
Excess of Liabilities 0.18% 17
------------------------------------------------------------------------------------
Net Assets 100.00% $ 9,213
====================================================================================
</TABLE>
* Non-income producing during the period ended
December 31, 1997 as this security did not pay
dividends.
See notes to the financial statements.
55
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statements of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
GROWTH BALANCED INCOME SHORT-TERM
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C>
Cash $ 354 $ 511,157 $ 505 $ 3,170
Investments at value* 598,093,430 383,985,164 9,601,467 1,201,719
Foreign currency at value* -- 228,144 19,473 --
Forward currency contracts -- 87,576 7,417 --
Dividends and interest receivable 556,737 2,732,054 160,287 --
Receivable-foreign taxes -- -- -- --
Receivable-fund shares sold 643,339 270,474 4,693 859
Receivable-investments sold -- -- -- --
Prepaid expenses 22,757 14,335 686 --
- -----------------------------------------------------------------------------------------------
Total Assets 599,316,617 387,828,904 9,794,528 1,205,748
- -----------------------------------------------------------------------------------------------
LIABILITIES
Forward currency contracts -- -- -- --
Payable-fund
shares redeemed 562,419 29,760 292 52,313
Payable-investments
purchased -- 510,587 106,714 --
Payable-management, advisor
and related fees 246,501 155,081 3,929 7
Accrued expenses 5,376 23,922 25,262 2,435
- -----------------------------------------------------------------------------------------------
Total Liabilities 814,296 719,350 136,197 54,755
- -----------------------------------------------------------------------------------------------
NET ASSETS $598,502,321 $387,109,554 $ 9,658,331 $ 1,150,993
===============================================================================================
NET ASSETS CONSIST OF:
- ----------------------
Par value of common shares 23,327,657 1,952,857 74,287 11,516
Paid in surplus 472,236,584 336,078,999 9,257,911 1,138,972
Accumulated undistributed
net investment income 10,797 416,092 27,269 507
Accumulated undistributed
net realized gain (loss)
from investments and foreign
currency transactions 389,471 124,624 (10) (2)
Net unrealized appreciation
on investments and translation
of assets and liabilitiies in
foreign currency 102,537,812 48,536,982 298,874 --
- -----------------------------------------------------------------------------------------------
NET ASSETS $598,502,321 $387,109,554 $9,658,331 $1,150,993
===============================================================================================
Number of shares outstanding: 23,327,657 19,528,567 742,876 115,164
(Authorized 50,000,000 shares
each)
Par Value $ 1.00 $ 0.10 $ 0.10 $ 0.10
===============================================================================================
NET ASSET VALUE
PER SHARE $ 25.66 $ 19.82 $ 13.00 $ 9.99
===============================================================================================
*Cost of Securities:
Investments $495,555,618 $335,533,260 $ 9,309,797 $ 1,201,719
Foreign currency -- 229,111 19,556 --
<CAPTION>
SMALL CAP INTERNATIONAL SOCIALLY
GROWTH EQUITY RESPONSIBLE
FUND FUND FUND
- ------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Cash $ 5,746 $ 842 $ 796
Investments at value* 17,659,664 5,197,375 9,196,284
Foreign currency at value* -- 616 --
Forward currency contracts -- -- --
Dividends and interest receivable -- 3,307 17,208
Receivable-foreign taxes -- 2,405 413
Receivable-fund shares sold 65,767 36,355 44,104
Receivable-investments sold 139,633 2,052 --
Prepaid expenses -- -- --
- ------------------------------------------------------------------------------------------
Total Assets 17,870,810 5,242,952 9,258,805
- ------------------------------------------------------------------------------------------
LIABILITIES
Forward currency contracts -- 218 --
Payable-fund
shares redeemed 5,019 8 --
Payable-investments
purchased 1,328,362 25,921 41,709
Payable-management, advisor
and related fees 12,262 2,390 3,911
Accrued expenses 275 505 313
- ------------------------------------------------------------------------------------------
Total Liabilities 1,345,918 29,042 45,933
- ------------------------------------------------------------------------------------------
NET ASSETS $ 16,524,892 $ 5,213,910 $ 9,212,872
==========================================================================================
NET ASSETS CONSIST OF:
- ----------------------
Par value of common shares -- -- --
Paid in surplus 15,905,687 5,257,958 8,637,578
Accumulated undistributed
net investment income -- -- 421
Accumulated undistributed
net realized gain (loss)
from investments and foreign
currency transactions (495,861) (68,520) (6,910)
Net unrealized appreciation
on investments and translation
of assets and liabilitiies in
foreign currency 1,115,066 24,472 581,783
- ------------------------------------------------------------------------------------------
NET ASSETS $ 16,524,892 $ 5,213,910 $ 9,212,872
==========================================================================================
Number of shares outstanding: 1,412,237 507,903 761,668
(Authorized 50,000,000 shares
each)
Par Value $ 0.00 $ 0.00 $ 0.00
==========================================================================================
NET ASSET VALUE
PER SHARE $ 11.70 $ 10.27 $ 12.10
==========================================================================================
*Cost of Securities:
Investments $ 16,544,598 $ 5,172,445 $ 8,614,501
Foreign currency -- 616 --
</TABLE>
See notes to the financial statements.
56
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
<TABLE>
<CAPTION>
Statements of Operations For the year ended
December 31, 1997
GROWTH BALANCED INCOME SHORT-TERM
FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 9,361,395 $ 4,259,584 $ -- $ --
Interest & amortization 1,270,244 8,381,043 703,427 69,284
- -------------------------------------------------------------------------------------------------------
10,631,639 12,640,627 703,427 69,284
Foreign taxes withheld (33,598) (20,033) (331) --
- -------------------------------------------------------------------------------------------------------
Total investment income 10,598,041 12,620,594 703,096 69,284
EXPENSES:
Management, advisor and
related fees (Note 5) 2,601,389 1,660,298 45,960 4,208
Fund pricing fees 12,001 11,001 14,382 10,434
Professional fees 17,802 17,801 13,301 9,200
Custodian fees 24,590 30,281 11,001 2,880
Transfer agent fee (Note 5) 32,475 24 24 24
Trustees' fees and expenses 3,400 3,400 3,400 3,400
Insurance expenses 25,941 20,498 1,905 1,445
Other expenses 62,003 38,768 2,718 307
- --------------------------------------------------------------------------------------------------------
Total expenses 2,779,601 1,782,071 92,691 31,898
Less management and related
fees waived (Note 5) -- -- -- (2,573)
Less expenses paid by Horace Mann
Investors, Inc. (Note 5) -- -- -- (23,021)
Less expenses paid by commission
credits (Note 3) (57,950) (59,208) -- --
- --------------------------------------------------------------------------------------------------------
Net expenses $ 2,721,651 $ 1,722,863 $ 92,691 $ 6,304
- --------------------------------------------------------------------------------------------------------
Net investment income (loss) 7,876,390 10,897,731 610,405 62,980
- --------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Realized gain (loss) from:
Investments 66,206,155 35,889,104 20,121 127
Foreign currency transactions (426) 138,839 11,463 --
- --------------------------------------------------------------------------------------------------------
Net realized gain (loss)
on investments and foreign
currency transactions 66,205,729 36,027,943 31,584 127
Change in unrealized
appreciation (depreciation)
on:
Investments 32,693,552 12,805,475 244,644 485
Translation of assets
and liabilities in
foreign currencies -- 85,078 7,204 --
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) from investments
and foreign currency
transactions 98,899,281 48,918,496 283,432 612
- --------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS
FROM OPERATIONS $ 106,775,671 $ 59,816,227 $ 893,837 $ 63,592
=======================================================================================================
<CAPTION>
For the period
March 10, 1997 to December 31, 1997
SMALL CAP INTERNATIONAL SOCIALLY
GROWTH EQUITY RESPONSIBLE
FUND FUND FUND
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,305 $ 32,755 $ 88,488
Interest & amortization 45,194 30,728 7,895
- -------------------------------------------------------------------------------------
46,499 63,483 96,383
Foreign taxes withheld -- (4,464) (896)
- -------------------------------------------------------------------------------------
Total investment income 46,499 59,019 95,487
EXPENSES:
Management, advisor and
related fees (Note 5) 81,785 22,648 31,879
Fund pricing fees 2,000 4,000 2,000
Professional fees 6,499 7,505 6,499
Custodian fees 18,829 23,627 7,580
Transfer agent fee (Note 5) 17 17 17
Trustees' fees and expenses 3,400 3,400 3,400
Insurance expenses 256 256 256
Other expenses -- -- --
- --------------------------------------------------------------------------------------
Total expenses 112,786 61,453 51,631
Less management and related
fees waived (Note 5) (23,530) (10,525) (13,471)
Less expenses paid by Horace Mann
Investors, Inc. (Note 5) (27,623) (35,424) (16,369)
Less expenses paid by commission
credits (Note 3) -- -- --
- ---------------------------------------------------------------------------------------
Net expenses $ 61,633 $ 15,504 $ 21,791
- ---------------------------------------------------------------------------------------
Net investment income (loss) (15,134) 43,515 73,696
- ---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Realized gain (loss) from:
Investments (495,861) (68,519) 72,720
Foreign currency transactions -- (2,425) --
- ---------------------------------------------------------------------------------------
Net realized gain (loss)
on investments and foreign
currency transactions (495,861) (70,944) 72,720
Change in unrealized
appreciation (depreciation)
on:
Investments 1,115,066 24,930 581,783
Translation of assets
and liabilities in
foreign currencies -- (458) --
- ---------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) from investments
and foreign currency
transactions 619,205 (46,472) 654,503
- ---------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS
FROM OPERATIONS $ 604,071 $ (2,957) $ 728,199
=======================================================================================
</TABLE>
See notes to the financial statements.
57
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Statement of Changes in Net Assets
For the Periods ended December 1997 and 1996
<TABLE>
<CAPTION>
GROWTH FUND BALANCED FUND
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS:
Net investment income (loss) $ 7,876,390 $ 6,452,684 $ 10,897,731 $ 8,219,408
Net realized short-term gain
(loss) on investments and
foreign currency transactions 21,364,681 27,750,104 10,725,081 13,881,249
Net realized long-term gain
(loss) on investments and
foreign currency transactions 44,841,048 20,451,849 25,302,862 11,586,155
Net unrealized appreciation/
(depreciation) on investments and
translation of assets and liabilities
in foreign currency 32,693,552 27,601,625 12,890,553 11,168,939
- --------------------------------------------------------------------------------------------------------
Change in net assets
from operations 106,775,671 82,256,262 59,816,227 44,855,751
- --------------------------------------------------------------------------------------------------------
FROM DISTRIBUTIONS
TO SHAREHOLDERS:
Net investment income (7,988,420) (6,377,641) (10,749,508) (8,167,501)
Net realized short-term gain
from investments and
foreign currency transactions (21,154,178) (27,699,455) (10,548,453) (13,856,450)
Net realized long-term gain
from investments and
foreign currency transactions (44,781,697) (20,429,320) (25,268,797) (11,570,771)
- --------------------------------------------------------------------------------------------------------
Total distributions
to shareholders (73,924,295) (54,506,416) (46,566,758) (33,594,722)
- --------------------------------------------------------------------------------------------------------
FROM FUND SHARE
TRANSACTIONS:
Proceeds from shares sold 117,493,277 88,560,885 66,288,140 55,024,353
Net asset value of shares issued
in reinvestment of dividends and
capital gains distributions 68,291,933 50,813,674 42,410,448 30,441,049
- --------------------------------------------------------------------------------------------------------
185,785,210 139,374,559 108,698,588 85,465,402
Cost of shares redeemed (50,690,435) (33,668,049) (35,389,537) (24,368,316)
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from fund
share transactions 135,094,775 105,706,510 73,309,051 61,097,086
- --------------------------------------------------------------------------------------------------------
TOTAL INCREASE
(DECREASE) IN NET ASSETS 167,946,151 133,456,356 86,558,520 72,358,115
NET ASSETS:
Beginning of period 430,556,170 297,099,814 300,551,034 228,192,919
- --------------------------------------------------------------------------------------------------------
End of period $ 598,502,321 $ 430,556,170 $ 387,109,554 $ 300,551,034
========================================================================================================
Undistributed net
investment income $ 10,797 $ 123,253 $ 416,092 $ 117,809
========================================================================================================
</TABLE>
See notes to the financial statements.
58
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
<TABLE>
<CAPTION>
INCOME FUND SHORT-TERM FUND
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS:
Net investment income (loss) $ 610,405 $ 641,435 $ 62,980 $ 54,797
Net realized short-term gain
(loss) on investments and
foreign currency transactions 67,503 (29,132) 127 20
Net realized long-term gain
(loss) on investments and
foreign currency transactions (35,919) 87,711 -- --
Net unrealized appreciation/
(depreciation) on investments and
translation of assets and liabilities
in foreign currency 251,848 (325,363) 485 (328)
- -----------------------------------------------------------------------------------------------------
Change in net assets
from operations 893,837 374,651 63,592 54,489
- -----------------------------------------------------------------------------------------------------
FROM DISTRIBUTIONS
TO SHAREHOLDERS:
Net investment income (598,770) (639,826) (63,479) (54,334)
Net realized short-term gain
from investments and
foreign currency transactions (23,198) -- (127) (23)
Net realized long-term gain
from investments and
foreign currency transactions -- (3,181) -- --
- -----------------------------------------------------------------------------------------------------
Total distributions
to shareholders (621,968) (643,007) (63,606) (54,357)
- -----------------------------------------------------------------------------------------------------
FROM FUND SHARE
TRANSACTIONS:
Proceeds from shares sold 2,109,144 2,897,949 3,660,289 4,547,550
Net asset value of shares issued
in reinvestment of dividends and
capital gains distributions 516,971 523,445 48,626 40,250
- -----------------------------------------------------------------------------------------------------
2,626,115 3,421,394 3,708,915 4,587,800
Cost of shares redeemed (4,087,751) (2,836,463) (3,786,735) (4,364,884)
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from fund
share transactions (1,461,636) 584,931 (77,820) 222,916
- -----------------------------------------------------------------------------------------------------
TOTAL INCREASE
(DECREASE) IN NET ASSETS (1,189,767) 316,575 (77,834) 223,048
NET ASSETS:
Beginning of period 10,848,098 10,531,523 1,228,827 1,005,779
- -----------------------------------------------------------------------------------------------------
End of period $ 9,658,331 $ 10,848,098 $ 1,150,993 $ 1,228,827
=====================================================================================================
Undistributed net
investment income $ 27,269 $ 7,248 $ 507 $ 1,006
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL SOCIALLY
GROWTH FUND EQUITY FUND RESPONSIBLE FUND
1997 1997 1997
Since Inception/1/ Since Inception/1/ Since Inception/1/
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS:
Net investment income (loss) $ (15,134) $ 43,515 $ 73,696
Net realized short-term gain
(loss) on investments and
foreign currency transactions (495,861) (70,944) 72,720
Net realized long-term gain
(loss) on investments and
foreign currency transactions -- -- --
Net unrealized appreciation/
(depreciation) on investments and
translation of assets and liabilities
in foreign currency 1,115,066 24,472 581,783
- ------------------------------------------------------------------------------------------------------
Change in net assets
from operations 604,071 (2,957) 728,199
- ------------------------------------------------------------------------------------------------------
FROM DISTRIBUTIONS
TO SHAREHOLDERS:
Net investment income -- (41,091) (73,275)
Net realized short-term gain
from investments and
foreign currency transactions -- -- (79,630)
Net realized long-term gain
from investments and
foreign currency transactions -- -- --
- ------------------------------------------------------------------------------------------------------
Total distributions
to shareholders -- (41,091) (152,905)
- ------------------------------------------------------------------------------------------------------
FROM FUND SHARE
TRANSACTIONS:
Proceeds from shares sold 17,210,060 5,781,865 8,945,404
Net asset value of shares issued
in reinvestment of dividends and
capital gains distributions -- 14,368 101,875
- ------------------------------------------------------------------------------------------------------
17,210,060 5,796,233 9,047,279
Cost of shares redeemed (1,329,239) (578,275) (449,701)
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from fund
share transactions 15,880,821 5,217,958 8,597,578
- ------------------------------------------------------------------------------------------------------
TOTAL INCREASE
(DECREASE) IN NET ASSETS 16,484,892 5,173,910 9,172,872
NET ASSETS:
Beginning of period 40,000 40,000 40,000
- ------------------------------------------------------------------------------------------------------
End of period $ 16,524,892 $ 5,213,910 $ 9,212,872
======================================================================================================
Undistributed net
investment income $ -- $ -- $ 421
======================================================================================================
</TABLE>
1 Since inception refers March 10, 1997, the day investment operations began.
59
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Notes to the Financial Statements
December 31, 1997
1. BUSINESS ORGANIZATION -- The Horace Mann Mutual Funds (the "Trust") is an
open-end, diversified management investment company registered under the
Investment Company Act of 1940, which offers units of beneficial ownership
("shares") in seven separate investment portfolios: Growth Fund, Balanced Fund,
Income Fund, Short-Term Investment Fund, Small Cap Growth Fund, International
Equity Fund and Socially Responsible Fund. These funds collectively are referred
to as the "Funds." On May 1, 1997, under an agreement and plan of
reorganization, the Growth Fund, Balanced Fund, Income Fund, and Short-Term
Investment Fund, each previously organized as a Maryland corporation,
transferred its assets into a new series of Horace Mann Mutual Funds. The Small
Cap Growth Fund, International Equity Fund and Socially Responsible Fund were
organized on November 7, 1996 and, on December 26, 1996, each sold 4,000 shares
of capital stock to Horace Mann Life Insurance Company ("HMLIC") for $40,000. On
March 10, 1997, these funds each sold an additional 96,000 shares to HMLIC for
$960,000 and began investment operations on this date. Shares are presently
offered to HMLIC Separate Account and the HMLIC 401(k) Separate Account. The
Growth Fund shares also may be purchased under the dividend reinvestment plans
by certain shareholders.
FUND INVESTMENT OBJECTIVES:
A. Growth Fund -- primary, long-term capital growth; secondary, conservation
of principal and production of income.
B. Balanced Fund -- realization of high long-term total rate of return
consistent with prudent investment risks.
C. Income Fund -- long-term total rate of return in excess of the U.S. bond
market over a full market cycle.
D. Short-Term Fund -- primary, realize maximum current income to the extent
consistent with liquidity; secondary, preservation of principal.
E. Small Cap Growth Fund -- long-term capital appreciation through investing
primarily in equity securities of small cap companies with earnings
growth potential.
F. International Equity Fund -- long-term growth of capital through a
diversified portfolio of marketable foreign equity securities.
G. Socially Responsible Fund -- long-term growth of capital, current income
and growth of income through investing primarily in a diversified
portfolio of equity securities of United States-based companies which are
determined to be socially responsible.
2. SIGNIFICANT ACCOUNTING POLICIES:
A. Security valuation -- A security listed or traded on U.S. or foreign
stock exchanges 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
that exchange. If there are no such bid and ask quotations the most
recent bid quotation is used. Securities quoted on the National
Association of Securities Dealers Automatic Quotation ("NASDAQ") System,
for which there have been sales, are valued at the most recent sale price
reported on such system. If there are no such sales, the value is the
high or "inside" bid quotation. 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 unamortized premium or discount. Foreign securities are converted to
United States dollars using exchange rates at the close of the New York
Stock Exchange. In the event market quotations would not be available,
securities would be valued at fair value as determined in good faith by
the Board of Trustees; no such securities were owned by the Funds at
December 31, 1997.
60
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Notes to the Financial Statements (continued)
December 31, 1997
B. Security transactions and investment income -- Security transactions are
recorded on the trade date. Dividend income is recorded on the ex-
dividend date or, for certain foreign dividends, as soon as they become
available. Interest income including level yield, premium and discount
amortization is recorded on the accrual basis. Securities gains and
losses are determined on the basis of identified cost.
C. Federal income taxes -- Since it is the Funds' policy to comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies and to distribute all taxable income to their
shareholders, no provision has been made for federal income or excise
taxes. Dividends and distributions payable to shareholders are recorded
by the Funds on the record date. Net investment income for federal income
tax purposes includes paydown gains and losses on mortgage backed
securities and gains and losses realized on foreign currency
transactions. These gains and losses are included as net realized gains
and losses for financial reporting purposes.
The International Equity Fund and Small Cap Growth Fund intend to utilize
provisions of the federal income tax laws which allow them to carry a
realized capital loss forward for eight years following the year of the
loss and offset such losses against any future realized capital gains. At
December 31, 1997, the International Equity Fund and Small Cap Growth
Fund had an accumulated capital loss carryforward for tax purposes of
$65,857, and $459,937, respectively, which will expire in fiscal year
ending December 31, 2005.
For federal income tax purposes, a net operating loss recognized in the
current year by the Small Cap Growth Fund cannot be used to offset future
years' net investment income. Therefore, $15,134 of net operating loss
generated by the Small Cap Growth Fund has been reclassified from
accumulated net investment loss to paid-in surplus.
Net realized gains or losses differ for financial reporting and tax
purposes as a result of losses from wash sales.
D. Dividends and distributions -- Dividends and distributions from net
investment income and net realized gains are paid out annually and are
recorded on the ex-dividend date.
E. Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the period. Actual results could differ from those
estimates.
3. OPERATING POLICIES:
A. Repurchase Agreements -- Securities pledged as collateral for repurchase
agreements are held by State Street Bank and Trust Company and are
designated as being held on each Fund's behalf by its custodian under a
book-entry system. Each Fund monitors the adequacy of the collateral on a
daily basis and can require the seller to provide additional collateral
in the event the market value of the securities pledged falls below the
carrying value of the repurchase agreement, including accrued interest.
Each Fund will only enter into repurchase agreements with banks and other
financial institutions which are deemed by the investment adviser to be
credit worthy pursuant to guidelines established by the Trustees.
B. Asset Backed Securities -- These securities are secured by installment
loans or leases or by revolving lines of credit. They often include
credit enhancements that help limit investors exposure to the underlying
credit. These securities are valued on the basis of the timing and
certainty of the cash flows compared to investments with similar
durations.
C. Collateralized Mortgage Obligations -- Planned Amortization Class (PAC),
-- These securities have a pre-determined schedule for principal
repayment coupled with an enhanced degree of cash-flow certainty. A PAC
security is a specific class of mortgages which usually carry the most
stable cash flows and the lowest amount of prepayment risk. These
securities are valued on the basis of the timing and certainty of the
cash flows compared to investments with similar durations.
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Notes to the Financial Statements (continued)
December 31, 1997
D. American Depository Receipts -- (ADR) - These securities are receipts for
the shares of a foreign listed corporation held in the vault of a U.S.
bank and entitles the shareholder to all dividends and capital gains.
E. Commission Credits -- Wellington Management Company, LLP, subadvisor for
the Growth and Balanced Funds, seeks the best price and execution on each
transaction and negotiates commission rates solely on the execution
requirements of each trade. Occasionally, they place, under a directed
brokerage arrangement, common stock trades with a broker/dealer who
credits to the Funds part of the commissions paid.
F. Foreign Currency Transactions -- The books and records of the Fund are
maintained in U.S. dollars. Foreign currency transactions are translated
into U.S. dollars on the following basis:
. market value of investment securities, other assets and other
liabilities at the daily rates of exchange, and
. purchases and sales of investment securities, dividend and
interest income and certain expenses at the rates of exchange
prevailing on the respective dates of such transactions.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex-divdend and payment dates on
dividends, interest and foreign withholding taxes. The effect of changes in
foreign exchange rates on realized and unrealized gains or losses is reflected
as a component of such gains or losses.
G. Forward Currency Contracts -- The Balanced Fund, Income Fund and
International Equity Fund may enter into forward currency contracts in
order to reduce their exposure to changes in foreign currency exchange
rates on their foreign portfolio holdings and to lock in the U.S. dollar
cost of assets and liabilities denominated in foreign currencies. A
forward currency exchange contract is a commitment to purchase or sell a
foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the differences between the U.S. dollar cost of the
original contract and the value of the foreign currency in U.S. dollars
upon closing of such contract is included in net realized gain or loss
from foreign currency transactions.
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Notes to the Financial Statements (continued)
December 31, 1997
At December 31, 1997 the Funds have the following open forward currency
contracts:
Current Unrealized
Foreign Value Appreciation/
Currency U.S. Dollar (Depreciation)
- --------------------------------------------------------------------------------
Balanced Fund
Short Contracts:
Australian Dollar,
7,599,000 expiring 02/27/98 $ 4,958,998 $ 36,128
German Mark,
6,338,000 expiring 02/27/98 3,535,118 51,448
----------- ---------
$ 8,494,116 $ 87,576
=========== =========
Income Fund
Short Contracts:
Australian Dollar,
609,000 expiring 02/27/98 $ 397,425 $ 2,896
German Mark,
557,000 expiring 02/27/98 310,675 4,521
----------- ---------
$ 708,100 $ 7,417
=========== =========
International Equity Fund
Long Contracts:
French Franc,
15,664 expiring 01/30/98 $ 2,603 $ (37)
Italian Lira,
7,683,942 expiring 01/02/98-01/08/98 23,054 (225)
----------- ---------
$ 25,657 $ (262)
=========== =========
Short Contracts:
Swedish Krona,
15,952 expiring 01/02/98 $ 2,009 $ 44
=========== =========
$ (218)
=========
63
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Notes to the Financial Statements (continued)
December 31, 1997
4. FUND SHARE TRANSACTIONS -- The Funds are each a series of a diversified,
open-end management investment company registered under the Investment Company
Act of 1940. Shares are presently offered to HMLIC Separate Account and the
HMLIC 401K Separate Account. The Growth Fund shares also may be purchased under
the dividend reinvestment plans by certain shareholders.
Transactions in capital stock for the years ended 1997 and 1996 were:
<TABLE>
<CAPTION>
Shares issued
to shareholders
in reinvestment
of dividends and Net increase
Shares sold distribution Shares redeemed (decrease)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund
12/31/97 $4,363,953 $2,722,964 $(1,877,395) $5,209,522
12/31/96 3,682,495 2,117,237 (1,400,207) 4,399,525
Balanced Fund
12/31/97 3,173,556 2,170,443 (1,685,163) 3,658,836
12/31/96 2,851,756 1,594,607 (1,256,381) 3,189,982
Income Fund
12/31/97 160,116 39,736 (312,085) (112,233)
12/31/96 222,424 41,119 (216,937) 46,606
Short-Term Fund
12/31/97 356,190 4,867 (368,415) (7,358)
12/31/96 441,345 4,017 (423,462) 21,900
Small Cap Growth Fund
12/31/97 1,527,761 -- (115,524) 1,412,237
International Equity Fund
12/31/97 561,643 1,402 (55,142) 507,903
Socially Responsible Fund
12/31/97 791,585 8,575 (38,492) 761,668
</TABLE>
64
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 ANNUAL REPORT
Notes to the Financial Statements (continued)
December 31, 1997
5. MANAGEMENT AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES -- Horace Mann
Educators Corporation ("HMEC") is the parent company of Horace Mann Investors,
Inc. ("Investors") and Horace Mann Service Corporation ("HMSC") and indirectly
owns HMLIC. Collectively these companies are referred to as Horace Mann.
As of May 1, 1997, Investors acts as the Trust's advisor, manages its
investments, and administers its business affairs pursuant to an investment
advisory and management agreement. Also on this date Wellington Management
Company, LLP, became the subadvisor to the Growth, Balanced, Income and
Short-Term Funds. Effective March 10, 1997, PNC Equity Advisors Company became
the subadvisor to the Small Cap Growth Fund, and Scudder, Stevens & Clark, Inc.
(Scudder Kemper Investments, Inc. as of December 31, 1997) became the subadvisor
to the International Equity and Socially Responsible Funds. Each subadvisor is
compensated by Investors (not the Trust) and bears all of its own expenses in
providing subadvisory services.
For the Growth, Balanced, Income and Short-Term Funds, Investors receives
separate management and advisory fees. The management agreement, the fee which
is accrued daily and paid monthly, is calculated on a pro rata basis by applying
the following annual percentage rates to the aggregate of all four Funds' daily
net assets for the respective month.
Net Assets Rate
On initial $100 million .250%
Over $100 million .200%
Under the advisory agreement, the fee is accrued daily and calculated by
applying the following annual percentage rates to the average daily net assets
of each Fund for the respective month:
Growth Fund Balanced Fund Income Fund Short-Term Fund Average Net Assets
0.400% 0.325% 0.250% 0.125% initial $100 million
0.300% 0.275% 0.200% 0.100% next $100 million
0.250% 0.225% 0.150% 0.075% next $300 million
0.250% 0.200% 0.150% 0.075% over $500 million
As compensation for its services, the Small Cap Growth, International Equity and
Socially Responsible Funds each pay Investors a combined monthly management and
advisory fee. The contractual fees are as follows:
Small Cap Growth Fund 1.40% of Net Assets
International Equity Fund 1.10% of Net Assets
Socially Responsible Fund 0.95% of Net Assets
For the first year of operations, Investors is voluntarily reducing these
management fees by 0.40%. The actual management fees are accrued daily and paid
monthly based on the following annual percentage rate to the Funds' average
daily net assets for the respective month. The fees during the first year of
operations net of waivers are:
Small Cap Growth Fund
1.00% on the first $25 million
0.75% on all assets over $25 million
International Equity Fund
Inception to September 3, 1997 September 4, 1997 and thereafter
0.35% on the first $40 million 0.525% on the first $40 million
0.25% on the next $60 million 0.375% on the next $60 million
0.225% on all assets over $100 million 0.3375% on all assets over $100
million
Socially Responsible Fund
0.55% on the first $20 million
0.45% on the next $20 million
0.30% on the next $60 million
65
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
Notes to the Financial Statements (Concluded)
December 31, 1997
Transfer and dividend disbursing agent services are provided by HMSC on a per
account basis. The transfer agent fees for the year ended December 31, 1997 were
$32,475 for the Growth Fund, $24 each for the Balanced, Income and Short-Term
Funds, and $17 each for the Small Cap Growth, International Equity and Socially
Responsible Funds.
The Trust pays each independent trustee a $1,000 annual retainer, $1,000 per
Board meeting attended, $200 for each committee meeting and $500 for each
telephonic meeting. Five meetings were held in 1997. For the year ended December
31, 1997, the fees, excluding travel expenses, for independent trustees totaled
$17,200. The Trust does not compensate interested officers and trustees (those
who are also officers and/or directors of Horace Mann).
6. SECURITY TRANSACTIONS -- Security transactions, excluding short-term
investments, for the period ended December 31, 1997 were:
Purchases Proceeds from Sales
--------- -------------------
Growth Fund $351,345,751 $273,669,131
Balanced Fund 311,352,148 263,223,850
Income Fund 9,398,656 10,141,566
Short-Term Fund -- 2,272,476
Small Cap Growth Fund 20,805,028 6,392,203
International Equity Fund 5,633,865 899,953
Socially Responsible Fund 9,381,671 907,333
The following table shows investments, excluding foreign currency, at cost and
unrealized appreciation (depreciation) for federal income tax purposes by Fund
at December 31, 1997.
<TABLE>
<CAPTION>
Cost for federal Aggregate gross Aggregate gross
income tax unrealized unrealized Net unrealized
purposes appreciation (depreciation) appreciation
-------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Growth Fund $495,598,317 $117,917,754 $(15,422,641) $102,495,113
Balanced Fund 335,550,145 55,170,274 (6,735,255) 48,435,019
Income Fund 9,309,797 348,871 (57,201) 291,670
Short-Term Fund 1,201,719 -- -- --
Small Cap Growth Fund 16,580,522 1,424,211 (343,067) 1,081,144
International Equity Fund 5,175,108 335,556 (313,289) 22,267
Socially Responsible Fund 8,621,590 720,623 (145,929) 574,694
</TABLE>
66
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
THE GROWTH FUND AND A STOCK INDEX/1/
[LINE GRAPH APPEARS HERE]
- -----------------------------------------------------
Growth Fund
Average Annual Total Return
- -----------------------------------------------------
1 year 5 year Since Inception/2/
- -----------------------------------------------------
23.45% 19.80% 16.03%
- -----------------------------------------------------
Growth S&P 500
------ -------
Nov 89 10,000 10,000
Dec 89 10,432 10,449
Mar 90 10,206 10,134
Jun 90 10,543 10,772
Sep 90 9,346 9,291
Dec 90 9,852 10,124
Mar 91 11,084 11,595
Jun 91 11,505 11,568
Sep 91 11,766 12,187
Dec 91 12,464 13,209
Mar 92 12,269 12,875
Jun 92 12,862 13,120
Sep 92 13,994 13,534
Dec 92 13,659 14,215
Mar 93 14,807 14,836
Jun 93 15,248 14,908
Sep 93 15,837 15,293
Dec 93 16,354 15,648
Mar 94 15,975 15,055
Jun 94 16,329 15,118
Sep 94 17,054 15,857
Dec 94 16,353 15,855
Mar 95 17,628 17,399
Jun 95 19,051 19,059
Sep 95 20,233 20,574
Dec 95 21,787 21,813
Mar 96 23,306 22,983
Jun 96 24,060 24,015
Sep 96 24,935 24,757
Dec 96 27,295 26,821
Mar 97 27,421 27,540
Jun 97 31,016 32,345
Sep 97 34,060 34,771
Dec 97 33,695 35,769
Past performance is not predictive of future performance.
Annuity contract fees are not reflected in Growth Fund returns. Returns under
the Annuity Alternatives contracts are shown on page 6.
/1/Stock: S&P 500 Standard and Poor's 500 Composite Index, an unmanaged index
consisting of 500 stocks. Rate of returns shown above for the unmanaged indices
have no expenses.
/2/Since inception refers to November 1, 1989, the date Wellington Management
Company began advising the Growth Fund. Wellington Management Company, LLP,
became the fund's subadvisor May 1, 1997. Previous periods during which the
Growth Fund received investment advice from CIGNA Investments, Inc., are not
shown.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
THE BALANCED FUND AND A STOCK/BOND INDICES/1/
[LINE GRAPH APPEARS HERE]
- -----------------------------------------------------
Balanced Fund
Average Annual Total Return
- -----------------------------------------------------
1 year 5 year Since Inception/2/
- -----------------------------------------------------
19.04% 15.35% 13.30%
- -----------------------------------------------------
Lehman Bros
Balanced S&P 500 Splice Index
-------- ------- ------------
Nov 89 10,000 10,000 10,000
Dec 89 10,358 10,449 10,123
Mar 90 10,146 10,134 10,109
Jun 90 10,454 10,772 10,443
Sep 90 9,803 9,291 10,616
Dec 90 10,309 10,124 11,052
Mar 91 11,138 11,595 11,330
Jun 91 11,480 11,568 11,532
Sep 91 11,858 12,187 12,088
Dec 91 12,534 13,209 12,668
Mar 92 12,392 12,875 12,552
Jun 92 12,904 13,120 13,049
Sep 92 13,204 13,534 13,625
Dec 92 13,583 14,215 13,576
Mar 93 14,496 14,836 14,115
Jun 93 14,873 14,908 14,419
Sep 93 15,342 15,293 14,744
Dec 93 15,683 15,648 14,768
Mar 94 15,327 15,055 14,469
Jun 94 15,496 15,118 14,382
Sep 94 15,975 15,857 14,499
Dec 94 15,539 15,855 14,483
Mar 95 16,566 17,399 15,117
Jun 95 17,704 19,059 15,872
Sep 95 18,557 20,574 16,134
Dec 95 19,704 21,813 16,700
Mar 96 20,591 22,983 16,562
Jun 96 21,051 24,015 16,665
Sep 96 21,698 24,757 16,961
Dec 96 23,305 26,821 17,377
Mar 97 23,428 27,540 17,358
Jun 97 25,729 32,348 17,940
Sep 97 27,772 34,771 18,538
Dec 97 27,741 35,769 19,085
Past performance is not predictive of future performance.
Annuity contract fees are not reflected in Balanced Fund returns. Returns under
the Annuity Alternatives contracts are shown on page 6.
/1/Stock/Bond Indices: S & P 500 Index and Lehman Bros. Intermediate
Government/Corporate Bond Index through April 30, 1997. Lehman Bros. Aggregate
Bond Index thereafter. Rates of return shown above for the unmanaged indices
have no expenses.
/2/Since inception refers to November 1, 1989, the date Wellington Management
Company began advising the Balanced Fund. Wellington Management Company, LLP,
became the fund's subadvisor May 1, 1997. Previous periods during which the
balanced Fund received investment advice from CIGNA Investment, Inc., are not
shown.
67
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
THE INCOME FUND AND BOND INDEX/1/
[LINE GRAPH APPEARS HERE]
- ------------------------------------------------
Income Fund
Average Annual Total Return
- ------------------------------------------------
1 year 5 year Since Inception/2/
- ------------------------------------------------
9.42% 6.57% 7.76%
- ------------------------------------------------
DATE INCOME FUND BOND INDEX
1989 100.00 100.00
101.10 101.23
1990 99.71 101.09
103.06 104.33
105.44 106.16
108.75 110.52
1991 110.96 113.30
113.63 115.32
119.13 120.88
124.99 126.68
1992 123.93 125.52
128.57 130.49
134.09 136.25
133.99 135.76
1993 138.55 141.15
141.43 144.19
144.43 147.44
144.80 147.68
1994 141.47 144.69
140.47 143.82
141.57 144.99
141.35 144.83
1995 147.47 151.18
154.30 158.73
157.13 161.35
162.59 166.98
1996 161.09 165.60
161.60 166.64
164.22 169.61
168.28 173.76
1997 168.15 173.58
173.72 179.40
179.68 185.38
184.12 190.85
Past performance is not predictive of future performance.
Annuity contract fees are not reflected in Income Fund returns. Returns under
the Annuity Alternatives contracts are shown on page 6.
/1/ Bond index; through April 30, 1997, Lehman Bros. Intermediate
Government/Corporate Bond index, an unmanaged index consisting of U.S. Treasury
bonds, U.S. agency bonds and investment grade corporate bonds with intermediate
maturities. Lehman Bros. Aggregate Bond Index thereafter. The rate of return
shown above for the unmanaged index has no expenses.
/2/ Since inception refers to November 1, 1989, the date Wellington Management
Company began advising the Income Fund. Wellington Management Company, LLP,
became the fund's subadvisor May 1, 1997. Previous periods during which the
Income Fund received investment advice from CIGNA Investments, Inc., are not
shown.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
THE SHORT-TERM INVESTMENT FUND AND A TREASURY BILL INDEX /1/
[LINE GRAPH APPEARS HERE]
- ------------------------------------------------
Short-Term Investment Fund
Average Annual Total Return
- ------------------------------------------------
1 year 5 year Since Inception/2/
- ------------------------------------------------
5.09% 4.33% 4.92%
- ------------------------------------------------
DATE SHORT TERM TREASURY
INVESTMENT FUND BILL INDEX
1989 100.00 100.00
101.41 101.30
1990 103.30 103.35
105.28 105.44
107.36 107.43
109.43 109.33
1991 111.22 111.00
112.91 112.60
114.50 114.15
115.92 115.41
1992 116.94 116.58
117.97 117.66
118.88 118.57
119.72 119.51
1993 120.44 120.41
121.28 121.32
122.00 122.24
122.78 123.21
1994 123.76 124.15
124.74 125.29
125.97 126.60
127.57 127.97
1995 129.22 129.64
130.87 131.44
132.52 133.24
134.16 135.10
1996 135.77 136.81
137.25 138.54
139.00 140.32
140.90 142.08
1997 142.58 143.87
144.40 145.68
146.22 147.57
148.05 149.52
Past performance is not predictive of future performance.
Annuity contract fees are not reflected in Short-Term Investment Fund returns.
Returns under the Annuity Alternatives contracts are shown on page 6.
/1/ Treasury Bill Index: An unmanaged index consisting of U.S. Treasury bills
with 90 - day maturities. The rate of return shown above for the unmanaged index
has no expenses.
/2/ Since inception refers to November 1, 1989, the date Wellington Management
Company began advising the Short-Term Investment Fund. Wellington Management
Company, LLP, became the fund's subadvisor May 1, 1997. Previous periods during
which the Short-Term Investment Fund received investment advice from CIGNA
Investments, Inc., are not shown.
68
<PAGE>
HORACE MANN MUTUAL FUNDS 1997 FUNDS ANNUAL REPORT
COMPARISON OF CHANGE IN VALUE OF $10,000
INVESTMENT IN THE SMALL CAP FUND AND A STOCK INDEX /1/
------------------------------------
Small Cap Fund Total Return
Since Inception/2/
------------------------------------
17.01%
------------------------------------
[LINE GRAPH APPEARS HERE]
Date Small Cap Growth Fund Stock Index
Mar 10, 97 100.0 100.00
90.4 91.39
105.5 107.44
127.4 125.62
Dec 31, 97 117.0 115.32
Past performance is not predictive of future performance.
Annuity contract fees are not reflected in the Small Cap Growth Fund returns.
Returns under the Annuity Alternatives contracts are shown on page 6.
/1/Stock Index: Russell 2000, an unmanaged index composed of those Russell 2000
securities with a greater-than-average growth orientation. The Russell 2000
return shown to the left reflects the reinvestment of dividends and capital gain
distributions, if any, but does not reflect fees, brokerage commissions or other
expenses of investing.
/2/Since inception refers to its inception of investment operations March 10,
1997. PNC Equity Advisors Company is the fund's subadvisor.
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000
INVESTMENT IN THE INTERNATIONAL EQUITY FUND
AND AN EQUITY INDEX /1/
------------------------------------
International Equity Fund
Total Return
------------------------------------
Since Inception/2/
------------------------------------
3.46%
------------------------------------
[LINE GRAPH APPEARS HERE]
Date International Equity Fund Equity Index
Mar 10, 97 100.00 100.00
97.50 100.36
105.40 112.97
108.20 112.18
Dec 31, 97 103.52 103.39
Past performance is not predictive of future performance.
Annuity contract fees are not reflected in the International Equity Fund
returns. Returns under the Annuity Alternatives contracts are shown on page 6.
/1/Equity Index: MSCI EAFE Index is an unmanaged capitalization-weighted measure
of stock markets in Europe, Australia and the Far East. The rate of return shown
to the left for the unmanaged index has no expenses.
The index reflects performance from February 28, 1997 through December 31, 1997.
/2/Since inception refers to its inception of investment operations March 10,
1997. Scudder Kemper Investments, Inc. is the fund's subadvisor.
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000
INVESTMENT IN THE SOCIALLY RESPONSIBLE FUND
AND A STOCK INDEX /1/
------------------------------------
Socially Responsible Fund
Total Return
------------------------------------
Since Inception/2/
------------------------------------
23.04%
------------------------------------
[LINE GRAPH APPEARS HERE]
Date Socially Responsible Fund Stock Index
Mar 10, 97 $10,000 $10,000
9,380 9,415
10,970 11,058
12,040 11,887
Dec 31, 97 12,308 12,228
Past performance is not predictive of future performance.
Annuity contract fees are not reflected in the Socially Responsible Fund
returns. Returns under the Annuity Alternatives contracts are shown on page 6.
/1/Stock Index: S & P 500, Standard & Poor's 500 Composite Index, an unmanaged
index consisting of 500 stocks. The rate of return shown to the left for the
unmanaged index has no expenses.
/2/Since inception refers to its inception of investment operations March 10,
1997. Scudder Kemper Investments, Inc. is the fund's subadvisor.
69
<PAGE>
Independent Auditors' Report
The Board of Trustees and Shareholders of
Horace Mann Mutual Funds:
We have audited the accompanying statements of assets and liabilities, including
the statements of investments, of the Horace Mann Mutual Funds (the Funds),
consisting of the Growth Fund, Balanced Fund, Income Fund, Short-Term Investment
Fund, Small Cap Growth Fund, International Equity Fund and Socially Responsible
Fund as of December 31, 1997, and the related statements of operations for the
period then ended, the statements of changes in net assets for each of the
periods presented in the two-year period then ended and financial highlights for
each of the periods presented in the four-year period ended December 31, 1997.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
accompanying financial highlights for the six years ended December 31, 1993 were
audited by other auditors whose report thereon dated January 21, 1994 expressed
an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned at
December 31, 1997, by correspondence with the custodian and brokers and by the
application of alternative auditing procedures where broker replies were not
received. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds as of December 31, 1997, the results of their operations for the
period then ended, the changes in their net assets for the periods presented in
the two-year period then ended and the financial highlights for each of the
periods presented in the four-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 28, 1998
70
<PAGE>
Annual Report
December 31, 1997
Horace Mann Life Insurance Company
Separate Account
Sponsor
Horace Mann Life Insurance Company
P.O. Box 4657
Springfield, IL 62708-4657
1-800-999-1030
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY 1997 ANNUAL REPORT
SEPARATE ACCOUNT
Statements of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
ACCOUNT DIVISION
-------------------------------------------------------------------------------------------------
SOCIALLY
GROWTH INCOME BALANCED SHORT-TERM RESPONSIBLE INTERNATIONAL SMALL CAP
FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Horace Mann
Funds at market value $470,039,495 $ 9,334,533 $370,821,953 $ 1,139,889 $ 8,380,109 $ 4,635,888 $ 14,263,751
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $470,039,495 $ 9,334,533 $370,821,953 $ 1,139,889 $ 8,380,109 $ 4,635,888 $ 14,263,751
====================================================================================================================================
NET ASSETS
Net Assets (Indefinite
units authorized)
Active Contract Owners 468,020,438 9,287,993 370,027,984 1,139,889 8,380,109 4,635,888 14,263,751
Retired Contract Owners 2,019,057 46,540 793,969 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $470,039,495 $ 9,334,533 $370,821,953 $ 1,139,889 $ 8,380,109 $ 4,635,888 $ 14,263,751
====================================================================================================================================
Total units 18,317,985 718,041 18,709,483 114,103 692,571 451,401 1,219,124
Net unit value
(Net assets divided by
total units held) $ 25.66 $ 13.00 $ 19.82 $ 9.99 $ 12.10 $ 10.27 $ 11.70
Investments
Cost of investments $420,898,039 $ 9,286,487 $337,319,389 $ 1,178,868 $ 7,822,116 $ 4,667,020 $ 13,710,620
Unrealized appreciation
(depreciation) of
investments $ 49,141,456 $ 48,046 $ 33,502,564 $ (38,979) $ 557,993 $ (31,132) $ 553,131
Number of shares held in
Horace Mann Funds 18,317,985 718,041 18,709,483 114,103 692,571 451,401 1,219,124
</TABLE>
See notes to the financial statements.
72
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY 1997 ANNUAL REPORT
SEPARATE ACCOUNT
Statements of Operations
For The Year Ended December 31, 1997
<TABLE>
<CAPTION>
ACCOUNT DIVISION
--------------------------------------------------------------------------------------
SOCIALLY INTER-
GROWTH INCOME BALANCED SHORT-TERM RESPONSIBLE NATIONAL SMALL CAP
FUND FUND FUND FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income distribution $ 6,300,470 $576,673 $10,343,200 $60,356 $ 67,408 $37,124 $ 0
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income $ 6,300,470 $576,673 $10,343,200 $60,356 $ 67,408 $37,124 $ 0
- -----------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Capital gain distribution 51,992,762 28,739 34,459,546 121 73,255 0 0
Net realized gain on investments 7,086,629 36,386 5,943,489 1,021 14,530 14,101 27,460
Net unrealized appreciation
(depreciation) on investments 16,621,055 211,980 6,570,732 (3,324) 557,993 (31,132) 553,131
- -----------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 75,700,446 277,105 46,973,767 (2,182) 645,778 (17,031) 580,591
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $82,000,916 $853,778 $57,316,967 $58,174 $713,186 $20,093 $580,591
=============================================================================================================================
</TABLE>
See notes to the financial statements.
73
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY 1997 ANNUAL REPORT
SEPARATE ACCOUNT
Statements of Changes in Net Assets
For The Year Ended December 31, 1997
<TABLE>
<CAPTION>
ACCOUNT DIVISION
-----------------------------------------------------------------
GROWTH INCOME BALANCED
FUND FUND FUND
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS
Net investment income $ 6,300,470 $ 576,673 $ 10,343,200
Capital gain distribution 51,992,762 28,739 34,459,546
Net realized gain on investments 7,086,629 36,386 5,943,489
Net unrealized appreciation
(depreciation) on investments 16,621,055 211,980 6,570,732
- -------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $ 82,000,916 $ 853,778 $ 57,316,967
- -------------------------------------------------------------------------------------------------------
CONTRACT OWNERS' TRANSACTIONS
Gross stipulated
payments received 60,603,245 967,382 39,195,593
Increase in seed shares 0 0 0
Sales and administrative
expenses (Note 1) (19,794) (249) (8,802)
- -------------------------------------------------------------------------------------------------------
Net consideration received
on annuity contracts 60,583,451 967,133 39,186,791
Net transfer from (to)
fixed accumulation account 28,809,157 (231,171) 16,191,702
Transfers from (to)
other Divisions 1,573,556 (1,460,415) (6,348,937)
Payments to contract owners (18,173,126) (1,036,070) (17,746,583)
Mortality and expense
risk charge (Note 1) (5,090,905) (128,196) (4,477,414)
Annual maintenance
charge (Note 1) (397,597) (4,500) (189,610)
Surrender charges (Note 1) (147,781) (4,303) (85,603)
Mortality guarantee adjustment 38,022 357 (168)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from
contract owners' transactions 67,194,777 (1,897,165) 26,530,178
- -------------------------------------------------------------------------------------------------------
Total increase
(decrease) in net assets 149,195,693 (1,043,387) 83,847,145
Net assets, beginning of year 320,843,802 10,377,920 286,974,808
- -------------------------------------------------------------------------------------------------------
Net assets, end of year $ 470,039,495 $ 9,334,533 $ 370,821,953
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ACCOUNT DIVISION
----------------------------------------------------------------------------
SOCIALLY
SHORT-TERM RESPONSIBLE INTERNATIONAL SMALL CAP
FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 60,356 $ 67,408 $ 37,124 $ 0
Capital gain distribution 121 73,255 0 0
Net realized gain on investments 1,021 14,530 14,101 27,460
Net unrealized appreciation
(depreciation) on investments (3,324) 557,993 (31,132) 553,131
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $ 58,174 $ 713,186 $ 20,093 $ 580,591
- ------------------------------------------------------------------------------------------------------------------------------------
CONTRACT OWNERS' TRANSACTIONS
Gross stipulated
payments received 66,883 2,199,943 966,858 2,945,958
Increase in seed shares 0 1,000,000 1,000,000 1,000,000
Sales and administrative
expenses (Note 1) (15) (548) (63) (381)
- ------------------------------------------------------------------------------------------------------------------------------------
Net consideration received
on annuity contracts 66,868 3,199,395 1,966,795 3,945,577
Net transfer from (to)
fixed accumulation account 1,966,389 3,373,630 1,882,230 5,715,223
Transfers from (to)
other Divisions 52,025 1,174,990 846,352 4,162,429
Payments to contract owners (2,101,039) (28,137) (51,721) (136,707)
Mortality and expense
risk charge (Note 1) (20,271) (51,902) (27,739) (1,680)
Annual maintenance
charge (Note 1) (525) (879) (75) (1,144)
Surrender charges (Note 1) (5,132) (174) (47) (538)
Mortality guarantee adjustment 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from
contract owners' transactions (41,685) 7,666,923 4,615,795 13,683,160
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase
(decrease) in net assets 16,489 8,380,109 4,635,888 14,263,751
Net assets, beginning of year 1,123,400 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year $ 1,139,889 $ 8,380,109 $ 4,635,888 $ 14,263,751
====================================================================================================================================
</TABLE>
See notes to the financial statements.
74
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY 1997 ANNUAL REPORT
SEPARATE ACCOUNT
Statements of Changes in Net Assets
For The Year Ended December 31, 1996
<TABLE>
<CAPTION>
ACCOUNT DIVISION
----------------------------------------------------------------------------------------------------
SOCIALLY INTER- SMALL
GROWTH INCOME BALANCED SHORT-TERM RESPONSIBLE NATIONAL CAP
FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 4,779,231 $ 612,558 $ 7,828,617 $ 45,861 $0 $0 $0
Capital gain distribution 36,028,769 3,042 24,350,075 18 0 0 0
Net realized gain on investments 2,651,655 20,208 3,218,666 1,178 0 0 0
Net unrealized appreciation
(depreciation) on investments 16,330,705 (278,078) 7,539,257 (423) 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $ 59,790,360 $ 357,730 $ 42,936,615 $ 46,634 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------------------------
CONTRACT OWNERS' TRANSACTIONS
Gross stipulated
payments received 42,594,385 1,145,206 33,980,802 122,775 0 0 0
Sales and administrative
expenses (Note 1) (13,529) (338) (8,274) (12) 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net consideration received
on annuity contracts 42,580,856 1,144,868 33,972,528 122,763 0 0 0
Net transfer from (to)
fixed accumulation account 23,673,552 717,292 12,201,480 1,180,650 0 0 0
Transfers from (to)
other Divisions 3,575,053 (744,792) (2,971,237) 140,976 0 0 0
Payments to contract owners (10,948,201) (1,062,633) (13,088,894) (1,309,998) 0 0 0
Mortality and expense
risk charge (Note 1) (3,168,991) (139,714) (3,340,727) (11,289) 0 0 0
Annual maintenance
charge (Note 1) (284,408) (4,873) (194,576) (700) 0 0 0
Surrender charges (Note 1) (105,435) (1,861) (83,377) (5,456) 0 0 0
Mortality guarantee adjustment (31,230) (2,921) (3,510) 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
contract owners' transactions 55,291,196 (94,634) 26,491,687 116,946 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase
(decrease) in net assets 115,081,556 263,096 69,428,302 163,580 0 0 0
Net assets, beginning of year 205,762,246 10,114,824 217,546,506 959,820 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year $ 320,843,802 $ 10,377,920 $ 286,974,808 $ 1,123,400 0 0 0
====================================================================================================================================
</TABLE>
See notes to the financial statements.
75
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY 1997 ANNUAL REPORT
SEPARATE ACCOUNT
Notes to the Financial Statements
December 31, 1997
1. NATURE OF SEPARATE ACCOUNT -- Horace Mann Life Insurance Company Separate
Account ("the Account"), registered as a unit investment trust under the
Investment Company Act of 1940, is used to fund variable annuity contracts. All
assets of the Account are invested in shares of the Horace Mann Growth Fund
("Growth Fund"), Horace Mann Income Fund ("Income Fund"), Horace Mann Balanced
Fund ("Balanced Fund"), Horace Mann Short-Term Investment Fund ("Short-Term
Fund"), Horace Mann Socially Responsible Fund ("Socially Responsible Fund"),
Horace Mann International Equity Fund ("International Fund"), and Horace Mann
Small Cap Growth Fund ("Small Cap Fund"). The funds collectively are referred to
as the "Funds".
Certain specified amounts, as described in the annuity contracts, are paid to
Horace Mann Life Insurance Company ("HMLIC") to cover death benefits, surrender
charges, sales and administrative expenses and maintenance charges. In addition,
an annual mortality risk charge up to .45% and expense risk charge up to .90% of
the net variable account value is deducted from the Contract Owner's account,
depending on the year of issue of the contract.
2. SIGNIFICANT ACCOUNTING POLICIES -- The investments in the funds are valued at
market (net asset value). The Account owns approximately 79%, 97%, 96%, 95%,
92%, 90% and 87% of the Growth Fund, Income Fund, Balanced Fund, Short-Term
Fund, Socially Responsible Fund, International Fund and Small Cap Fund,
respectively. Distributions from the Funds are recorded on the ex-dividend date.
Realized gains and losses are determined on the basis of average cost of shares
owned for each Contract Owner.
3. FEDERAL INCOME TAXES -- Investment income of the Account is included in the
tax return of HMLIC; however, no tax accrues on income attributable to
tax-deferred annuities which comprise the majority of the Account contracts.
Income attributable to non tax-deferred annuities is not significant.
4. INVESTMENTS OF THE SEPARATE ACCOUNTS -- In 1983, HMLIC, through the Account,
purchased 10,000 shares of the Short-Term Fund. The investment income and
unrealized appreciation/depreciation resulting from this investment inure to the
benefit of HMLIC. As of December 31, 1997, the shares have a net asset value of
$99,900. In 1997, HMLIC purchased 100,000 shares each from the Socially
Responsible Fund, the International Fund, and the Small Cap Fund. As of December
31, 1997, the shares have net asset values of $1,210,000, $1,027,000, and
$1,170,000, respectively.
5. PURCHASE AND SALES OF HORACE MANN FUND SHARES -- During the year ended
December 31, 1997, purchases and proceeds from sales of Horace Mann Fund shares
were as follows:
<TABLE>
<CAPTION>
ACCOUNT DIVISION
--------------------------------------------------------------------------------------------------------------------
SHORT-TERM SOC. RESP. INTERNATIONAL SMALL CAP
GROWTH FUND INCOME FUND BALANCED FUND FUND FUND FUND FUND
ACTIVE RETIRED ACTIVE RETIRED ACTIVE RETIRED ACTIVE ACTIVE ACTIVE ACTIVE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases $172,252,912 $354,628 $2,454,346 $11,683 $111,223,202 $152,476 $3,469,426 $8,220,743 $5,105,417 $14,994,750
Sales $39,838,979 $193,922 $3,718,281 $3,117 $34,045,202 $54,063 $3,449,613 $398,627 $438,397 $ 1,284,130
</TABLE>
76
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY 1997 ANNUAL REPORT
SEPARATE ACCOUNT
Notes to the Financial Statements (Concluded)
December 31, 1997
6. CHANGE IN CONTRACT OWNERS' ACCOUNT UNITS
<TABLE>
<CAPTION>
ACCOUNT DIVISION
------------------------------------------------------------------------
GROWTH FUND INCOME FUND BALANCED FUND
ACTIVE RETIRED ACTIVE RETIRED ACTIVE RETIRED
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Account units
outstanding
at 01/01/1996 9,428,142 71,500 773,080 3,192 12,054,607 31,310
Consideration
received 1,777,764 2,667 87,719 0 1,766,863 2,771
Dividend
distributions 1,563,400 9,230 38,746 171 1,515,269 3,901
Net transfers 1,135,533 0 (2,458) 0 480,686 0
Payments to
contract owners (475,479) (9,230) (82,219) (428) (701,137) (2,485)
- --------------------------------------------------------------------------------------------------
Account units
outstanding
at 12/31/96 13,429,360 74,167 814,868 2,935 15,116,288 35,497
Consideration
received 2,258,768 2,558 74,318 654 1,886,399 2,325
Dividend
distributions 2,118,257 9,852 37,957 228 2,071,527 4,842
Net transfers 1,178,853 0 (126,327) 0 501,659 0
Payments to
contract owners (745,938) (7,892) (86,355) (237) (906,449) (2,605)
- --------------------------------------------------------------------------------------------------
Account units
outstanding
at 12/31/97 18,239,300 78,685 714,461 3,580 18,669,424 40,059
==================================================================================================
<CAPTION>
SHORT-TERM SOC. RESP. INTERNATIONAL SMALL CAP
FUND FUND FUND FUND
ACTIVE ACTIVE ACTIVE ACTIVE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Account units
outstanding
at 01/01/1996 95,982 0 0 0
Consideration
received 12,016 0 0 0
Dividend
distributions 3,777 0 0 0
Net transfers 128,861 0 0 0
Payments to
contract owners (128,632) 0 0 0
- ----------------------------------------------------------------------------------------
Account units
outstanding
at 12/31/96 112,004 0 0 0
Consideration
received 6,532 288,896 192,863 356,834
Dividend
distributions 4,548 7,545 1,015 0
Net transfers 204,116 398,636 264,465 876,207
Payments to
contract owners (213,097) (2,506) (6,942) (13,917)
- ----------------------------------------------------------------------------------------
Account units
outstanding
at 12/31/97 114,103 692,571 451,401 1,219,124
========================================================================================
</TABLE>
77
<PAGE>
Independent Auditors' Report
The Contract Owners of Horace Mann
Life Insurance Company Separate
Account and the Board of Directors
of Horace Mann Life Insurance Company:
We have audited the accompanying statements of net assets of the Growth, Income,
Balanced, Short-Term, Socially Responsible, International, and Small Cap Growth
Fund Divisions within Horace Mann Life Insurance Company Separate Account as of
December 31, 1997, and the related statements of operations for the year then
ended and the statements of changes in net assets for each of the years in the
two-year period ended December 31, 1997. 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 amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1997 by correspondence with the
Horace Mann Funds. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Growth, Income, Balanced,
Short-Term, Socially Responsible, International, and Small Cap Growth Fund
Divisions within Horace Mann Life Insurance Company Separate Account as of
December 31, 1997, and the results of their operations for the year then ended
and changes in their net assets for each of the years in the two-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 23, 1998
78
<PAGE>
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Horace Mann has a history of serving the educational community -- now you can
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79
<PAGE>
If you have all your insurance with Horace Mann,
you don't have to read any further
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- --------------------------------------------------------------------------------
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[LOGO OF HORACE MANN APPEARS HERE]
----------------------------------------
Insuring America's Educational Community
The Horace Mann Companies
www.horacemann.com
80
<PAGE>
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Horace Mann(R)
----------------------------------------
Insuring America's Educational Community
The Horace Mann Companies
www.horacemann.com
