<PAGE>
PROSPECTUS
HORACE MANN GROWTH FUND, INC.
HORACE MANN INCOME FUND, INC.
HORACE MANN BALANCED FUND, INC.
HORACE MANN SHORT-TERM INVESTMENT FUND, INC.
MAY 1, 1996
<PAGE>
(This page intentionally left blank)
<PAGE>
Horace Mann Growth Fund, Inc.
Horace Mann Income Fund, Inc.
Horace Mann Balanced Fund, Inc.
Horace Mann Short-Term Investment Fund, Inc.
The Horace Mann Growth Fund, Inc. ("Growth Fund"), Horace Mann Income Fund,
Inc. ("Income Fund"), Horace Mann Balanced Fund, Inc. ("Balanced Fund"), and
Horace Mann Short-Term Investment Fund, Inc. ("Short-Term Fund"), are open-end,
diversified, management investment companies registered under the Investment
Company Act of 1940. These funds collectively are referred to as the "Funds."
The Funds issue shares of common stock that are continually offered for sale.
Fund shares may be purchased or redeemed at net asset value.
The primary investment objective of the Growth Fund is long-term capital
growth; conservation of principal and production of income are secondary
objectives. The Growth Fund invests primarily in common stocks.
The primary investment objective of the Income Fund is to maximize current
income consistent with prudent investment risk. A secondary objective is
preservation of capital. The Income Fund invests primarily in debt securities.
The investment objective of the Balanced Fund is to realize high long-term
total rate of return consistent with prudent investment risks. The Balanced
Fund's assets are invested in a mix of common stocks, debt securities and money
market instruments.
The primary investment objective of the Short-Term Fund is to realize maximum
current income to the extent consistent with liquidity. Preservation of
principal is a secondary objective. The Short-Term Fund attempts to realize its
objectives through investments in short-term debt instruments; it is not a money
market fund and does not maintain a constant net asset value per share.
As a result of the market risk inherent in any investment, there is no
assurance that these investment objectives will be realized.
In the opinion of the staff of the Securities and Exchange Commission, the use
of this combined Prospectus may make each Fund liable for any misstatement or
omission in this Prospectus regardless of the particular Fund to which it
pertains.
This Prospectus sets forth concisely the information a prospective investor
should know before investing. Additional information about the Funds has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information, dated May 1, 1996, which is incorporated herein by reference and
may be amended from time to time. The Statement of Additional Information is
available upon request, without charge, by writing to the Horace Mann Funds,
P.O. Box 4657, Springfield, Illinois 62708-4657, by sending a telefacsimile
(FAX) transmission to (217) 527-2307, or by telephoning (217) 789-2500 or (800)
999-1030 (toll-free). The Table of Contents of the Statement of Additional
Information appears on page 9 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
------------------
The date of this Prospectus is May 1, 1996.
<PAGE>
Table of Contents
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Topic Page
- ----- ----
<S> <C>
The Funds, Their Investment Objectives and Policies.....................................1
Growth Fund...........................................................................1
Income Fund...........................................................................1
Balanced Fund.........................................................................2
Short-Term Fund.......................................................................2
Types of Investments and Associated Risks...............................................3
Management..............................................................................5
Investment Adviser, Wellington Management Company.....................................6
Business Manager, Horace Mann Investors, Inc..........................................6
Transfer & Dividend Paying Agent, Horace Mann Service Corporation.....................7
Purchases and Redemptions...............................................................7
Dividends, Distributions and Federal Taxes..............................................8
Voting Rights...........................................................................8
Public Shareholder Communications.......................................................8
Shareholder Inquiries...................................................................9
Additional Information..................................................................9
</TABLE>
Condensed Financial Information
The condensed financial information for the Funds under the heading "Financial
Highlights" and the Report of Independent Auditors thereon, is incorporated
herein by reference from the Funds' Annual Report for the year ended December
31, 1995. Additional information about the Funds' performance, including
Management's Discussion and Analysis, is also contained in the 1995 Annual
Report which accompanies this Prospectus. Additional copies of the Annual
Report may be obtained without charge by writing to the Horace Mann Funds, P.O.
Box 4657, Springfield, Illinois 62708-4657, by sending a request by
telefacsimile (FAX) transmission to (217) 527-2307, or by telephoning (217) 789-
2500 or (800) 999-1030 (toll-free).
<PAGE>
The Funds, Their Investment Objectives And Policies
The Funds operate as open-end diversified management investment companies.
The Income Fund, the Balanced Fund and the Short-Term Fund each were
incorporated under Maryland law on September 22, 1982. The Growth Fund was
organized as a Maryland corporation on May 21, 1957.
The investment objectives and policies of each Fund are described below.
Prospective purchasers should recognize that there are risks in the ownership of
any security and that there can be no assurance that the objectives of the Funds
will be realized.
The investment objectives may not be changed without the approval of the
holders of a majority of a Fund's outstanding voting securities or 67% of the
shares represented at a meeting of shareholders at which the holders of 50% or
more of the outstanding shares are represented. (See "Voting Rights.")
Each Fund seeks to attain its objectives by pursuing investment policies that
call for investments in certain types of securities and by employing various
investment strategies. These investment policies and strategies may be changed
without shareholder approval. However, each Fund will not, as a matter of
policy, change its investment policies without notice to its shareholders.
Supplemental information on the investment policies as well as a description
of the investment restrictions of each Fund are contained in the Statement of
Additional Information.
Growth Fund
The investment objective of the Growth Fund is long-term capital growth.
Secondary objectives are conservation of principal and production of income.
The Growth Fund ordinarily invests substantially all of its assets in common
stocks of domestic companies of various sizes and operating histories, both
listed and non-listed, in a variety of industries. The Growth Fund may also
invest in preferred stocks or investment grade bonds or debentures of domestic
companies and U.S. Government securities. Additionally, up to 10% of the Growth
Fund's assets may be invested in U.S. dollar-denominated securities of foreign
issuers, including common stock, preferred stock, convertible debentures, and
American Depository Receipts.
To achieve its objectives of long-term capital growth, conservation of
principal and production of income, the Growth Fund employs a "Value-Yield"
strategy in making investments. "Value-Yield" investing concentrates on stocks
which sell at low prices relative to certain measures of company value such as
the price/earnings ratio and the price/book ratio. These stocks also tend to
have above-average dividend yields.
The Growth Fund may make interim investments in short-term debt instruments in
order to generate a return on otherwise idle cash. If a market decline is
expected, the Growth Fund may sell its portfolio securities and invest all or
part of the proceeds in investment grade corporate bonds, debentures, preferred
stock and U.S. Government securities; or it may retain funds in the form of cash
or cash equivalents.
The investment policies of the Growth Fund limit investments in debt
securities to those debt securities described below for the Income Fund.
Income Fund
The primary investment objective of the Income Fund is to maximize current
income consistent with prudent investment risk. A secondary objective is
preservation of capital.
The Income Fund seeks to attain its objectives through the following
investment policies:
1. At least 80% of the Income Fund's total assets are invested in:
(a) publicly offered debt securities, including mortgage-backed and other
asset-backed securities, within the four highest ratings (Aaa, Aa, A or Baa)
as determined by Moody's Investors Service, Inc. ("Moody's") or (AAA, AA, A or
BBB) by Standard and Poor's Corporation ("S&P"). For a more complete
description of ratings of debt securities, see Appendix A of the Statement of
Additional Information;
(b) securities issued or guaranteed by the U.S. Government or its agencies;
(c) publicly offered debt securities issued or guaranteed by a national or
state bank or bank holding company within the four highest ratings as
determined by both Moody's and S&P;
(d) U.S. dollar-denominated debt obligations of foreign governments,
foreign corporations, foreign branches of U.S. banks, and foreign banks
limited to the three highest ratings as determined by Moody's (Aaa, Aa or A)
or S&P (AAA, AA or A) and that do not exceed 10% of the Income Fund's total
assets;
(e) commercial paper having a rating within the two highest grades as
determined by both Moody's (Prime-1 or Prime-2) and S&P (A-1 or A-2). For a
more complete description of ratings of commercial paper, see Appendix A of
the Statement of Additional Information;
(f) repurchase and reverse repurchase agreements involving any of the above
instruments, provided that the market value of the underlying security is at
least 102% of the price of the repurchase agreement;
1
<PAGE>
(g) time deposits with maturities less than seven days; or
(h) cash or cash equivalents.
2. Up to 20% of the Income Fund's total assets may be invested in preferred
stocks and obligations not described above, including convertible securities and
securities carrying warrants to purchase equity securities.
The Income Fund will not invest in common stocks directly, but may retain up
to 20% of its total assets in common stocks acquired upon conversion of debt
securities or preferred stock, or upon exercise of warrants acquired with debt
securities.
To realize the objectives of maximizing current income consistent with prudent
investment risk and preservation of capital, at least 80% of the Income Fund's
total assets are normally invested in intermediate-term bonds and debentures
with effective maturities of two to ten years. Values of intermediate-term
bonds tend to be less volatile than bonds with maturities greater than ten years
but normally provide lower yields.
During periods of volatility or when an unusual decline in the value of long-
term obligations is anticipated, for defensive purposes, however, the Income
Fund will place a larger portion of its assets in cash and short-term
obligations. The Income Fund's holdings of short-term obligations and equity
securities during such periods may temporarily exceed an aggregate total of 20%
of the Income Fund's total assets.
Moreover, as a matter of investment policy, the Income Fund will not invest
more than 10% of its total assets in illiquid repurchase and reverse repurchase
agreements or any similar instruments that may be deemed to be illiquid.
Instead of holding its entire portfolio to maturity, the Income Fund will engage
in portfolio trading when trading will help achieve its investment objectives.
Balanced Fund
The investment objective of the Balanced Fund is to realize high long-term
total rate of return consistent with prudent investment risks. Total rate of
return consists of current income including dividends, interest, discount
accruals and capital appreciation.
The Balanced Fund seeks to attain this objective through a selective mix of
investments in common stocks, bonds, and other debt instruments. The Balanced
Fund holds the same kinds of stocks and bonds held separately by the Growth Fund
and Income Fund. For a description of the types of stocks and bonds in which
the Balanced Fund is permitted to invest, see - "The Funds, Their Investment
Objectives and Policies - Growth Fund and - Income Fund", above.
The mix of investments in the Balanced Fund is regularly adjusted between
stocks and bonds to capitalize on perceived variations in return potential
produced by the changing financial market and economic conditions. This mixture
of stocks and bonds reduces the volatility of investment returns while still
providing the potential for higher long-term total returns that can only be
achieved by including some exposure to stocks. As a matter of investment policy,
50% to 75% of the Balanced Fund's total assets will be invested in stocks and
25% to 50% of the value of its assets will be invested in bonds or other types
of fixed income securities, such as mortgage-backed securities.
Up to 100% of the Balanced Fund's total assets may be invested temporarily in
short-term debt instruments for defensive purposes, such as responding to
adverse securities market or economic conditions. Additionally, no more than
10% of the total assets may be invested in illiquid repurchase and reverse
repurchase agreements or any other instruments that may be deemed to be
illiquid. Major changes in investment mix may occur several times within a year
or over several years, depending upon market and economic conditions.
Short-Term Fund
The investment objective of the Short-Term Fund is to realize maximum current
income to the extent consistent with liquidity. Preservation of principal is a
secondary objective. The Short-Term Fund is not a money market fund and does
not maintain a stable net asset value per share.
The Short-Term Fund seeks to attain its objectives by investing in the
following types of short-term debt instruments with maturities generally not
exceeding one year. The Short-Term Fund invests in:
1. U.S. Treasury Bills and other obligations of or guaranteed by the U.S.
Government or its agencies;
2. obligations (including certificates of deposit, time deposits with
maturities less than seven days, or bankers' acceptances) of major U.S. banks;
3. commercial paper within the two highest ratings as determined by Moody's
(Prime-1 or Prime-2) or S&P (A-1 or A-2). For a more complete description of
ratings of commercial paper, see Appendix A of the Statement of Additional
Information;
4. U.S. dollar-denominated debt obligations of foreign governments, foreign
corporations, foreign branches of U.S. banks, and foreign banks limited to the
three highest ratings as determined by Moody's (Aaa, Aa or A) or S&P (AAA, AA or
A) and that do not exceed 10% of the Short-Term Fund's total assets. For a more
complete description of ratings of debt securities, see Appendix A of the
Statement of Additional Information;
2
<PAGE>
5. publicly traded bonds, debentures and notes with a rating within the four
highest grades as determined by Moody's or S&P;
6. repurchase and reverse repurchase agreements involving any of the above
instruments; or
7. cash or cash equivalents.
The Short-Term Fund attempts to maximize return of its portfolio by trading to
take advantage of changing money market conditions and trends. The Short-Term
Fund also trades to take advantage of disparities in yield relationships between
money market instruments. This procedure may increase or decrease the portfolio
yield depending on the Investment Adviser's ability to correctly time and
execute these transactions. The Short-Term Fund intends generally to purchase
securities that mature within one year, but will not purchase securities with
maturities that exceed two years except for securities subject to repurchase
agreements and reverse repurchase agreements. The Short-Term Fund will not
invest more than 10% of its total assets, however, in illiquid repurchase and
reverse repurchase agreements or any other instruments that may be deemed to be
illiquid.
Types of Investments and Associated Risks
Investments in any type of security are subject to varying degrees of market
risk, financial risk, and in some cases, reinvestment risk. Although the Funds
are subject to these risks, their investment policies and restrictions are
designed to reduce such risk. Further, each Fund exercises due care in the
selection of its portfolio securities.
MARKET RISK is the potential for fluctuations in the price of the security
because of market factors. For equity securities, market risk is the
possibility of change in price caused by stock market price changes; for debt
securities, market risk is the possibility that the price will fall because of
changing interest rates. In general, debt securities' prices vary inversely
with changes in interest rates. If interest rates rise, bond prices generally
fall; if interest rates fall, bond prices generally rise. In addition, for a
given change in interest rates, longer-maturity bonds fluctuate more in price
(gaining or losing more in value) than shorter-maturity bonds.
FINANCIAL RISK is based on the financial situation of the issuer. For equity
securities, financial risk is the possibility that the price of the security
will fall because of poor earnings performance by the issuer. For debt
securities, financial risk is the possibility that a bond issuer will fail to
make timely payments of interest or principal to a fund. The financial risk of
a fund depends on the credit quality of its underlying securities. In general,
the lower the credit quality of a fund's securities, the higher a fund's yield,
all other factors such as maturity being equal.
REINVESTMENT RISK is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid (or
"called") prior to its expected maturity date. If during periods of falling
interest rates a debt security with a high stated interest rate is called away,
the unanticipated proceeds would likely be invested at lower interest rates, and
the fund's income may decline. Call provisions, which may lead to reinvestment
risk, are most common for intermediate and long-term municipal, corporate and
mortgage-backed securities. To the extent securities subject to call were
acquired at a premium, the potential for appreciation in the event of a decline
in interest rates may be limited and may even result in losses.
In addition to the risks generally associated with investing, there are risks
particular to certain types of investments. The following provides additional
information on various types of instruments in which the Funds may invest and
their associated risks. A Fund may not buy all these instruments to the extent
permitted unless it believes that doing so will help the Fund achieve its
objectives.
U.S. GOVERNMENT OBLIGATIONS - U.S. Government obligations are direct
obligations of the U.S. Government and are supported by the full faith and
credit of the U.S. Government. U.S. Government agency securities are issued or
guaranteed by U.S. Government sponsored enterprises and federal agencies. Some
of these securities are backed by the full faith and credit of the U.S.
Government; others are backed by the agency's right to borrow a specified amount
from the U.S. Treasury; and still others, while not guaranteed directly or
indirectly by the U.S. Government, are backed with collateral in the form of
cash, Treasury securities or debt instruments that the lending institution has
acquired through its lending activities.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities represent interests in
pools of mortgage loans made by lenders such as commercial banks and savings and
loan institutions. Pools of mortgage loans are assembled for sale to investors
by various government-related organizations. The principal government guarantor
of mortgage-backed securities is the Government National Mortgage Association
("GNMA"). GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on GNMA
securities. Mortgage loans are pooled by various other governmental entities
including the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA"). FHLMC is a corporate instrumentality of
the U.S. Government and FNMA is a government-sponsored corporation owned
entirely by private stockholders.
3
<PAGE>
Mortgage-backed securities differ from traditional debt securities. Among the
major differences are that interest and principal payments are made more
frequently, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans generally may be prepaid at any time.
Since prepayment rates vary widely, it is not possible to accurately predict the
average maturity of a particular mortgage-backed pool; however, statistics
published by the Federal Housing Authority indicate that the average life of
mortgages with 25- to 30-year maturities (the type of mortgages backing the vast
majority of mortgage-backed securities) is approximately 12 years. Mortgage-
backed securities may decrease in value as a result of increases in interest
rates and may benefit less than other fixed income securities from declining
interest rates because of the risk of prepayment.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND MULTICLASS PASS-THROUGH
SECURITIES - CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC Certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities ("Mortgage Assets"). Multiclass pass-
through securities are equity interests held in a trust composed of Mortgage
Assets. Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the capital to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. CMOs
may be issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs is issued at a specific fixed or floating coupon rate and has
a stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates. Interest is paid or
accrues on all classes of CMOs on a monthly, quarterly or semi-annual basis.
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of a CMO series in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to the individual class than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow to a particular CMO the lower the anticipated yield will be on that
class at the time of issuance relative to prevailing market yields on mortgage-
backed securities.
A portfolio also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
ASSET-BACKED SECURITIES - Through the use of trusts and special purpose
corporations, various types of assets, primarily automobile and credit card
receivables, are being pooled in pass-through structures similar to the mortgage
pass-through structures described above. Asset-backed securities generally do
not have the benefit of the same security interest in the related collateral as
is the case with mortgage-backed securities. There is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, the securities interest in the
underlying automobiles are often not transferred when the pool is created, with
the resulting possibility that the collateral could be resold. In general,
these types of loans are of shorter average life than mortgage loans and are
less likely to have substantial prepayments.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES - The yield characteristics of mortgage-backed and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a portfolio purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if a fund purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
4
<PAGE>
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Asset-
backed securities, although less likely to experience the same prepayment rates
as mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-backed securities and asset-backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because of
the risk of prepayment.
ADJUSTABLE RATE MORTGAGE SECURITIES - Adjustable rate mortgage securities are
pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates. A description of these instruments is contained in
Appendix B of the Funds' Statement of Additional Information.
REPURCHASE AGREEMENTS - Repurchase agreements are instruments under which a
fund acquires ownership of a security and the seller agrees, at the time of the
sale, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during a fund's holding period. A fund entering
into a repurchase agreement is exposed to the risk that the other party to the
agreement may be unable to keep its commitment to repurchase. In that event, a
fund may incur disposition costs in connection with liquidating the collateral
(i.e., the underlying security). Moreover, if bankruptcy proceedings are
commenced with respect to the selling party, receipt of the value of the
collateral may be delayed or substantially limited and a loss may be incurred if
the collateral securing the repurchase agreement declines in value during the
bankruptcy proceedings. The Funds believe that these risks are not material
inasmuch as each Fund will evaluate the credit worthiness of all entities with
which it proposes to enter into repurchase agreements, and will seek to assure
that each arrangement is adequately collateralized. For a more detailed
description of Repurchase Agreements, see the Statement of Additional
Information - Appendix B.
FOREIGN SECURITIES - As described under "The Funds, Their Investment
Objectives and Policies," each Fund may invest up to 10% of its total assets in
certain U.S. dollar-denominated securities of foreign issuers.
For the Growth and Balanced Funds, the limitation with respect to foreign
securities includes investments in sponsored and unsponsored American Depository
Receipts ("ADRs"). ADRs are U.S. dollar-denominated securities backed by
foreign securities deposited in a U.S. securities depository. ADRs are created
for trading in the U.S. markets.
Sponsored ADRs trade on recognized U.S. stock exchanges and firms that sponsor
ADRs will supply shareholders with English translations of company information
made public in the home country. Unsponsored ADRs typically trade in the U.S.
"over-the-counter" market. Generally, less information is available on
unsponsored ADRs since foreign issuers of unsponsored ADRs are not obligated to
disclose material company information in the United States.
The value of an ADR will fluctuate with the value of the underlying foreign
security, reflect any changes in currency exchange rates and otherwise involve
risks associated with investing in foreign securities. The Growth Fund and
Balanced Funds' investments in ADRs will be limited solely to those that are
regularly traded on recognized U.S. exchanges or in the U.S. over-the-counter
market.
To the extent the Funds purchase Eurodollar certificates of deposit issued by
foreign branches of U.S. banks and foreign banks, or Eurobonds issued by foreign
branches of U.S. corporations, consideration will be given to their
marketability and possible restrictions on the flow of international currency
transactions.
There may be less publicly available information about a foreign issuer than
about a domestic issuer. Foreign issuers, including foreign branches of U.S.
banks, are subject to different accounting and reporting requirements which are
generally less extensive than the requirements applicable to domestic issuers.
Foreign stock markets (other than Japan) have substantially less volume than the
United States exchanges, and securities of foreign issuers are generally less
liquid and more volatile than those of comparable domestic issuers. There is
frequently less governmental regulation of exchanges, broker-dealers and issuers
than in the United States, and brokerage costs may be higher. In addition,
investments in foreign companies may be subject to the possibility of
nationalization, withholding of taxes on dividends at the source, expropriation
or confiscatory taxation, currency blockage, political or economic instability
or diplomatic developments that could adversely affect the value of those
investments. Finally, in the event of a default of any foreign obligation, it
may be difficult for the Funds to obtain or to enforce a judgment against the
issuer.
Management
The overall responsibility for the supervision of the
5
<PAGE>
affairs of the Funds vests in the Board of Directors. As described below, the
Board has contracted with others to provide certain services to the funds.
Investment Adviser, Wellington Management Company
The Funds employ Wellington Management Company ("Wellington Management") to
manage the investment and reinvestment of the assets of the Funds and to
continuously review, supervise and administer the Funds' investment programs.
Wellington Management, located at 75 State Street, Boston, Massachusetts 02109,
is a professional investment counseling firm which provides investment services
to investment companies, employee benefit plans, endowments, foundations, and
other institutions and individuals. As of December 31, 1995, Wellington
Management had discretionary management authority with respect to approximately
$109.2 billion of assets. Wellington Management and its predecessor
organizations have provided investment advisory services to investment companies
since 1933 and to investment counseling clients since 1960.
John R. Ryan, CFA, Senior Vice President and Managing Partner of Wellington
Management, began providing investment advice to the Growth Fund and stock
portion of the Balanced Fund on November 1, 1989, and assumed primary
responsibility for the day-to-day investment management of the Growth Fund and
stock portion of the Balanced Fund on December 1, 1992. Mr. Ryan has been a
portfolio manager with Wellington Management's Value/Yield investment team since
1981 and has held the position of Senior Vice President of Wellington Management
since 1988. Mr. Ryan became a Managing Partner of the firm on January 1, 1996.
John C. Keogh, Senior Vice President of Wellington Management, began providing
investment advice to the Income Fund, Short-Term Fund and bond portion of the
Balanced Fund on November 1, 1989, and assumed primary responsibility for the
day-to-day investment management of the Income Fund, Short-Term Fund and bond
portion of the Balanced Fund on September 1, 1991. Mr. Keogh has been a
portfolio manager with Wellington Management's fixed income group since 1985 and
held the position of Vice President from 1984 until he was promoted to Senior
Vice President of Wellington Management in January 1994.
Each Fund pays Wellington Management advisory fees at the end of each month.
These fees are accrued daily and are calculated by applying a rate, based on the
following annual percentage rate, to the Fund's average daily net assets for the
respective month:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------------- ------
<S> <C> <C>
Growth Fund On initial $100 million 0.400%
On Next $100 million 0.300%
Over $200 million 0.250%
Income Fund On Initial $100 million 0.250%
On Next $100 million 0.200%
Over $200 million 0.150%
Balanced Fund On Initial $100 million 0.325%
On Next $100 million 0.275%
On next $300 million 0.225%
Over $500 million 0.200%
Short-Term Fund On Initial $100 million 0.125%
On Next $100 million 0.100%
Over $200 million 0.075%
</TABLE>
For fiscal year ended December 31, 1995, the Growth Fund paid 0.33%, the
Income Fund paid 0.25% and the Balanced Fund paid 0.30% to Wellington Management
as a percentage of net assets. The Short-Term Fund's fee of 0.13% was paid to
Wellington Management by Horace Mann Investors, Inc.
The Investment Advisory Agreements authorize Wellington Management (subject to
the discretion and control of the Funds' Board of Directors) to select the
brokers or dealers that will execute the purchases and sales of portfolio
securities and require Wellington Management to use its best efforts to obtain
the best available price and most favorable execution.
Business Manager, Horace Mann Investors, Inc.
Horace Mann Investors, Inc. ("Investors"), serves as the business manager of
each Fund. Investors, located at One Horace Mann Plaza, Springfield, Illinois
62715-0001, is registered with the Securities and Exchange Commission as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. (NASD). Investors and Allegiance Life Insurance Company ("ALIC") are
wholly-owned subsidiaries of Horace Mann Educators Corporation ("HMEC"). Horace
Mann Life Insurance Company ("HMLIC"), which sponsors HMLIC's separate accounts,
is a wholly-owned subsidiary of ALIC.
Investors provides for the management of the business affairs of each Fund
including, but not limited, to office space, secretarial and clerical services,
bookkeeping services, wire and telephone communications services and other
services of this nature necessary for the proper management of each Fund's
business affairs.
6
<PAGE>
Investors charges each Fund a pro rata fee computed on the aggregate total net
assets of all Funds managed by Investors and sponsored by HMLIC equal to 0.25%
of the aggregate total net assets of all Funds up to $100 million and 0.20% of
aggregate total net assets exceeding that amount. The management fee is accrued
daily and paid monthly based upon the aggregate daily total net assets
determined as of the close of business on each day during the month. Investors
waives this fee for the Income and Short-Term Funds.
The Business Management Agreements with Investors do not cover the Funds'
expenses related to legal, custodial, independent accounting and auditing,
transfer agent, registrars' and other agents' services; costs related to
reports, notices and proxy material; compensation and expenses of independent
directors; stock issuance expenses; brokers' commissions; taxes and fees payable
to governmental agencies; and expenses of shareholders' and directors' meetings.
Transfer and Dividend Paying Agent, Horace Mann Service Corporation
Horace Mann Service Corporation, One Horace Mann Plaza, P.O. Box 4657,
Springfield, Illinois 62708-4657, acts as the transfer agent and dividend paying
agent.
Purchases and Redemptions
Shares of each Fund are currently sold only to HMLIC separate accounts. In the
event that HMLIC establishes additional separate accounts, shares of these Funds
may be made available for purchase by such additional separate accounts.
Previously, shares of the Growth Fund were available to the public. While Growth
Fund shares may no longer be purchased by the general public, existing public
shareholders may acquire additional shares through the automatic reinvestment of
dividends and distributions in accordance with Revenue Ruling 82-55.
Each Fund sells and redeems its shares at net asset value per share, without a
sales or redemption charge. The net asset value of each Fund's shares is
determined on each day the New York Stock Exchange ("NYSE") is open for trading
at the close of the NYSE (normally 3:00 p.m. Central Time). The computation is
made by dividing the net assets by the number of outstanding shares. Net assets
are equal to the total assets of the Fund less its liabilities. A purchase is
effected at the price based on the next calculation of net asset value per share
after receipt of a request. A security listed or traded on an exchange is
valued at its last sales price on the exchange where it is principally traded.
In the absence of a current quotation, the security is valued at the mean
between the last bid and asked prices on the exchange. Securities traded over-
the-counter are valued at the last current bid price. Debt securities that have
a remaining maturity of 60 days or less are valued at cost, plus or minus any
amortized discount or premium. When market quotations are not available,
securities are valued at fair value as determined in good faith by the Board of
Directors.
Except in extraordinary circumstances and as permissible under the Investment
Company Act of 1940, redemption proceeds are paid on or before the fifth
business day following the date the request for redemption is received.
REDEMPTION OF GROWTH FUND SHARES BY EXISTING PUBLIC SHAREHOLDERS - The Growth
Fund will redeem shares from public shareholders at the net asset value per
share next determined after receipt of a redemption request. If stock
certificates have been issued, the signature of each party must be guaranteed by
an officer of a commercial bank, trust company, or a member of the New York
Stock Exchange. If certificates are lost, the shareholder will need to submit
an Affidavit of Loss form with the signature(s) notarized if 100 or less shares
are surrendered, and a Lost Instrument Bond will be required if over 100 shares
are surrendered. A Lost Instrument Bond can be obtained from an insurance
carrier. The cost for this bond must be paid by the shareholder.
If no certificates have been issued to the shareholder, redemption may be
accomplished by signing a written request. The request should be sent to the
Horace Mann Growth Fund, Inc. P.O. Box 4657, Springfield, Illinois 62708-4657
and should identify the account by number and the name(s) in which the account
is registered. The request must be signed exactly as the account is registered.
On a jointly held account, all owners must sign.
All redemption requests by mail should be sent certified with return receipt
requested. Provided the request is received in good form, payment for shares
redeemed will be made by the Fund within three business days of the receipt.
SYSTEMATIC CASH WITHDRAWAL PLAN - When a Growth Fund public shareholder has
accumulated $5,000 or more of Growth Fund shares in his or her account, shares
may be withdrawn automatically through the Systematic Cash Withdrawal Plan (the
"Plan"). A shareholder may receive checks monthly, quarterly, semiannually or
annually in any amount requested, but not less than $25. A Plan application is
available, upon request, from the transfer agent. The value of a public
shareholder's account is determined at the net asset value on the date a Plan
application is received by the Growth Fund. Payments under the Plan will be
made either on the 1st or 15th of the month as selected by the shareholder. A
sufficient number of shares will be redeemed from the shareholder's account to
provide funds for payments made under the Plan, thus reducing the shareholder's
account value. Depending on the amount and frequency of withdrawals, payments
under
7
<PAGE>
the Plan may exhaust the shareholder's account. There is no redemption charge
with respect to the shares redeemed from the shareholder's account. A Plan may
be terminated upon written request.
Dividends, Distributions and Federal Taxes
It is intended that all Funds will continue to qualify as regulated investment
companies under the Internal Revenue Code and, therefore, will not be subject to
federal income taxes to the extent earnings are distributed to shareholders.
All dividends or distributions paid on Fund shares held by a separate account,
net of separate account contract charges, are automatically reinvested in shares
of the respective Fund at the net asset value determined on the dividend payment
date.
Effective in December of each year, each Fund intends to declare and make
distributions representing not less than 98% of its net investment income and
98% of its net realized capital gains. The Income, Balanced, and Short-Term
Funds are exempt from the 4% excise tax levied against regulated investment
companies for failure to distribute at least 98% of their net investment income
and net realized capital gains.
Public shareholders of the Growth Fund may elect to receive cash dividends and
will be notified of the amount and type of distribution. If a shareholder
elects to receive a cash dividend and the dividend check is returned by the
postal service, attempts will be made to locate the shareholder. If the
attempts to locate are unsuccessful, the shareholders dividend option will be
changed to reinvestment. When new shares are added to a Growth Fund public
shareholder's account through the reinvestment of dividends or when
distributions occur (which dividends will be taxable to the shareholder whether
paid in cash or reinvested in additional shares), a confirmation statement is
sent to the public shareholder showing the number of shares that were credited
or debited to the account, the net asset value per share and the total number of
shares in the account. A dividend or capital gains distribution will reduce the
per share net asset value by the amount of the dividend or distribution.
Shortly after the end of each year, Growth Fund shareholders will be informed of
the amount of and the federal income tax treatment of all distributions made
during the year. If not otherwise subject to tax on their income, public
shareholders will not be required to pay tax on amounts distributed to them.
Shareholders must determine for themselves the applicability of state and local
taxes to dividends and distributions received on Growth Fund shares.
The Growth Fund may be required to withhold federal income tax at a rate of
31% from dividend and redemption payments made to any public shareholder who
fails to furnish a certified taxpayer identification number ("TIN") or when the
Internal Revenue Service notifies the Growth Fund that the shareholder has
provided the Growth Fund with an incorrect TIN or failed to properly report
certain income for federal income tax purposes. Any withheld amount can be
credited against the shareholder's federal income tax obligation.
Voting Rights
Each Fund has authorized capital of 50 million shares of common stock. Par
value is $.10 for the Income Fund, Balanced Fund and Short-Term Fund, and $1.00
for the Growth Fund. Shares of each Fund are of the same class with equal
rights and privileges. Each share is entitled to vote on all matters submitted
to a vote of shareholders. The shares of each Fund are fully paid and non-
assessable and have no preference as to conversion, exchange, dividends,
retirement or other features. The shares of each Fund have no pre-exemptive
rights. The shares of each Fund have noncumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so.
Each person with voting rights will be provided with reports and proxy
materials relating to the applicable Fund(s). To be entitled to vote, a
shareholder (either a public shareholder of the Growth Fund or an insurance
company separate account) must have been a shareholder on the record date. The
number of Fund shares for which a shareholder may vote is determined by dividing
the value of an interest in a Fund by the net asset value of one share of the
Fund, as of the same date.
As of April 1, 1996, Horace Mann Life Insurance Company Separate Account owned
approximately 70.67%, 96.04%, 95.43% and 84.16% of the outstanding shares of
the Growth Fund, Income Fund, Balanced Fund and Short-Term Fund, respectively.
Horace Mann Life Insurance Company Separate Account B held approximately 7.06%
of the Growth Fund. Horace Mann Life Insurance Company Allegiance Separate
Account A held approximately 2.22% of the Growth Fund. Since these separate
accounts' voting rights are passed through to contract owners and participants,
HMLIC itself does not exercise voting control.
Public Shareholder Communications
To ensure receipt of communications related to investments in the Growth Fund,
public shareholders must notify the Growth Fund of address changes. Notice of a
change in address may be sent to the Horace Mann Growth Fund, Inc., P.O. Box
4657, Springfield, Illinois 62708-4657. Shareholders may also provide notice of
an address change by sending a telefacsimile (FAX) transmission to (217) 527-
2307 or by calling (217) 789-2500 or (800) 999-1030 (toll free).
8
<PAGE>
Shareholders Inquiries
For questions concerning investments in the Funds through HMLIC's annuity
contracts, call HMLIC's toll free customer service number, (800) 999-1030.
Written questions should be sent by mail to Horace Mann Life Insurance Company
at P.O. Box 4657, Springfield, Illinois 62708-4657 or by telefacsimile (FAX)
transmission to (217) 527-2307.
Growth Fund public shareholders may contact the Growth Fund by calling (800)
999-1030 or (217) 789-2500. Written questions concerning a Growth Fund public
shareholder's account may be sent by mail to Horace Mann Growth Fund, Inc., P.O.
Box 4657, Springfield, Illinois 62708-4657 or by telefacsimile (FAX)
transmission to (217) 527-2307.
Additional Information
A copy of the Statement of Additional Information providing more detailed
information about the Funds is available, without charge, upon request. The
Table of Contents of this Statement follows:
<TABLE>
<CAPTION>
Topic Page
- ----- ----
<S> <C>
Investment Policies.............................................. 2
Growth Fund.................................................... 2
Income Fund.................................................... 3
Balanced Fund.................................................. 3
Short-Term Fund................................................ 3
Investment Restrictions.......................................... 3
Management of the Funds.......................................... 5
Board of Directors............................................. 5
Officers....................................................... 7
Investment Advisory Agreements................................... 8
Brokerage Allocation............................................. 9
Business Management Agreements and Other Services................ 10
Purchase, Redemption and Pricing of Fund Shares.................. 11
Tax Status....................................................... 12
Control Persons and Principal Holders of Securities.............. 14
Financial Statements............................................. 15
Appendix A - Description of Commercial Paper and Bond Ratings.... A-1
Appendix B - Description of Securities........................... B-1
</TABLE>
To receive, without charge, a copy of the 1995 Annual Report of the Horace Mann
Family of Funds and/or a copy of the Statement of Additional Information for the
Horace Mann Family of Funds, please complete the following request form and mail
it to the address indicated below, or send it by telefacsimile (FAX)
transmission to (217) 527-2307 or telephone (217) 789-2500 or (800)999-1030
(toll-free).
Horace Mann Funds
P.O. Box 4657
Springfield, Illinois 62708-4657
- --------------------------------------------------------------------------------
Please provide free of charge the following information:
1995 Annual Report of the Horace Mann Family of Funds
- ------
Statement of Additional Information dated May 1, 1996 for the Horace Mann
- ------ Family of Funds.
Please mail the above documents to:
------------------------------------------------
(Name)
------------------------------------------------
(Address)
------------------------------------------------
(City/State/Zip)
9
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
HORACE MANN GROWTH FUND, INC.
HORACE MANN INCOME FUND, INC.
HORACE MANN BALANCED FUND, INC.
HORACE MANN SHORT-TERM INVESTMENT FUND, INC.
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the current Prospectus, dated May 1, 1996, for the Horace
Mann Growth Fund, Inc. ("Growth Fund"), Horace Mann Income Fund, Inc. ("Income
Fund"), Horace Mann Balanced Fund, Inc. ("Balanced Fund"), and Horace Mann
Short-Term Investment Fund, Inc. ("Short-Term Fund"). These funds are referred
to collectively as the "Funds." A copy of the Prospectus may be obtained by
writing to the Horace Mann Funds, P.O. Box 4657, Springfield, Illinois 62708-
4657, by sending a telefacsimile (FAX) transmission to (217) 527-2307, or by
telephoning (217) 789-2500 or (800) 999-1030 (toll-free).
May 1, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Topic Page
- ----- ----
<S> <C>
Investment Policies.......................................... 2
Growth Fund............................................... 2
Income Fund............................................... 3
Balanced Fund............................................. 3
Short-Term Fund........................................... 3
Investment Restrictions...................................... 3
Management of the Funds...................................... 5
Board of Directors........................................ 5
Officers.................................................. 7
Investment Advisory Agreements............................... 8
Brokerage Allocation......................................... 9
Business Management Agreements
and Other Services........................................ 10
Purchase, Redemption and Pricing of Fund Shares.............. 11
Tax Status................................................... 12
Control Persons and Principal Holders of Securities.......... 14
Financial Statements......................................... 15
Appendix A - Description of Commercial Paper
and Bond Ratings.......................................... A-1
Appendix B - Description of Securities....................... B-1
</TABLE>
INVESTMENT POLICIES
The Prospectus defines the basic investment objectives, which are fundamental
policies, for each Fund. Other policies are described below.
GROWTH FUND
The portfolio investments of the Growth Fund are not concentrated in any one
industry or group of industries but are varied according to what is judged
advantageous under varying economic conditions. While the portfolio is
diversified by investment in a cross-section of businesses and industries, the
Growth Fund follows a policy of flexibility. The Growth Fund does not invest in
companies for the purpose of exercising control of management. Moreover, the
Growth Fund purchases only marketable securities.
It is the policy of the Growth Fund to purchase and hold securities believed to
have potential for long-term capital growth. Investment income is a secondary
consideration in the selection of portfolio securities. The Growth Fund does
not buy and sell for short-term trading profits. Therefore, portfolio changes
usually are accomplished gradually. However, Fund management is not restricted
and may effect short-term transactions when subsequent events make an investment
undesirable for long-term holding.
For 1994 and 1995, the Growth Fund's portfolio turnover rates were 69.42% and
64.59, respectively. Although it is impossible to predict with certainty the
Growth Fund's ongoing portfolio turnover rate, the investment adviser expects
that under normal circumstances it will be less than 100% each year.
2
<PAGE>
INCOME FUND
During 1994 and 1995, the Income Fund's portfolio turnover rates were 205.35%
and 74.53%, respectively. Most of the increase in the Fund's turnover during
1994 resulted from identifying undervalued or overvalued mortgage-backed
securities during this period of fluctuating perceptions. Although it is
impossible to predict with certainty the Income Fund's ongoing portfolio
turnover rate, the investment adviser expects that under normal circumstances it
will be less than 100% each year. During periods of rapidly changing interest
rates, however, the turnover rate may be greater than 100%. This results from
the investment adviser's desire to optimize rates of return during such periods.
BALANCED FUND
During 1994 and 1995, the Balanced Fund's portfolio turnover rates were 121.82%
and 64.80%, respectively. The annual turnover rates of the common stock portion
of the Balanced Fund's portfolio for 1994 and 1995 were 68.53% and 64.27%,
respectively, and for the bond portion for 1994 and 1995 were 220.87% and
65.81%, respectively. Although it is impossible to predict with certainty the
Balanced Fund's ongoing portfolio turnover rate, the investment adviser expects
that under normal circumstances it will be less than 100% each year. During
periods of rapidly changing interest rates, however, the turnover rate may be
greater than 100%. This results from the investment adviser's desire to optimize
rates of return during such periods.
SHORT-TERM FUND
There is no turnover information for the Short-Term Fund as it holds its
securities for less than one year.
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental policies of each Fund. A
Fund may not change its investment restrictions without approval of the holders
of a majority of the outstanding shares of that Fund or of 67% of the shares
represented at a meeting of shareholders at which the holders of 50% or more of
the outstanding shares are represented. A Fund may not under any circumstances:
(1) purchase securities other than the securities in which a Fund is authorized
to invest;
(2) issue senior securities except that a Fund may borrow money or enter into
reverse repurchase agreements in an amount not to exceed 15% of its total assets
taken at market value and then only for short-term credits as may be necessary
for the clearance of transactions and from banks as a temporary measure for
extraordinary or emergency purposes (moreover, in the
3
<PAGE>
event that the asset coverage for such borrowings may fall below 300%, the Fund
will reduce, within three days, the amount of its borrowings in order to provide
for 300% asset coverage); a Fund will not borrow to increase income (leveraging)
but only to facilitate redemption requests that might otherwise require untimely
dispositions of the Fund's portfolio securities; a Fund will repay all
borrowings before making additional investments, and interest paid on borrowings
will reduce net income;
(3) make loans to other persons (except by the purchase of obligations in which
the Fund is authorized to invest); provided, however, that the Fund will not
enter into repurchase agreements if, as a result thereof, more than 10% of the
total assets of the Fund (taken at current value) would be subject to repurchase
agreements maturing in more than seven (7) days;
(4) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the Government of the United States,
its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets (taken at current value) would be invested in the securities
of that issuer, or (b) a Fund would hold more than 10% of any class of
securities of that issuer (for this purpose, all debt obligations of an issuer
maturing in less than one year are treated as a single class of securities);
(5) write, or invest in, straddle or spread options or invest in interests in
oil, gas or other mineral exploration or development programs;
(6) purchase securities on margin or sell any securities short;
(7) invest in the securities of any issuer, any of whose officers, directors or
security holders is an officer or director of a Fund if at the time of or after
such purchase any officer or director of that Fund would own more than 1/2 of 1%
of the securities of that issuer or if that Fund's officers and directors
together would own more than 5% of the securities of that issuer;
(8) purchase any securities that would cause more than 25% of the value of a
Fund's total net assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that there is no limitation with respect to investments
in U.S. Treasury Bills, other obligations issued or guaranteed by the federal
government, its agencies and instrumentalities, certificates of deposit,
commercial paper and bankers' acceptances, or any obligations of U.S. branches
of foreign banks and foreign branches of U.S. banks, except as these investments
may be limited by the Treasury regulations under section 817(h) of the Internal
Revenue Code;
(9) invest more than 5% of the value of the Fund's total assets at the time of
investment in the securities of any issuer or issuers which have records of less
than three years continuous operation, including the operation of any
predecessor, but this limitation does not apply to securities issued or
guaranteed as to interest and principal by the United States Government or its
agencies or instrumentalities;
4
<PAGE>
(10) mortgage, pledge or hypothecate its assets except in an amount up to 15%
(10% as long as the Fund's shares are registered for sale in certain states) of
the value of the Fund's total assets but only to secure borrowings for temporary
or emergency purposes;
(11) underwrite the securities of other issuers, purchase securities subject to
restrictions on disposition under the Securities Act of 1933 (so-called
"restricted securities") or purchase securities not freely marketable;
(12) purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts;
(13) invest in companies for the purpose of exercising control; or
(14) invest in securities of other investment companies, except as they may be
acquired as part of a merger, consolidation or acquisition of assets.
In addition to these investment restrictions, from time to time the Board of
Directors may establish investment guidelines to be followed by the investment
adviser in connection with the investment of Fund assets. These guidelines are
not fundamental policies and may be changed at any time without shareholder
vote. Currently, the Board has adopted guidelines regarding investment in
derivatives (such as CMOs), which among other things, establish certain minimum
criteria for the types of derivative securities that may be purchased. Under
such guidelines, fixed income derivatives purchased for the Funds must have low
to moderate volatility and must perform consistently across a wide range of
interest rate scenarios. They also must exhibit little excess interest rate
risk relative to Treasuries of comparable duration. Derivative securities may
not exceed 20% of the total assets of the Horace Mann Income Fund or 20% of the
fixed portion of the total assets of the Horace Mann Balanced Fund.
MANAGEMENT OF THE FUNDS
A listing of the Directors and Officers of each Fund, their age, their principal
occupations for the past five years and their affiliation with other companies
affiliated with Horace Mann Life Insurance Company is presented below.
Correspondence with any Director or Officer may be addressed to the offices of
the Funds at P.O. Box 4657, Springfield, Illinois 62708-4657.
BOARD OF DIRECTORS
*A. THOMAS ARISMAN (1, 2, 3), 49, Director; Senior Vice President, Allegiance
Life Insurance Company, Educators Life Insurance Company of America, Horace Mann
Life Insurance Company, and Horace Mann Service Corporation; Director and
President, Horace Mann Investors, Inc.; formerly held other officer and Director
positions of various subsidiaries of Horace Mann Educators Corporation.
5
<PAGE>
*LARRY K. BECKER (1, 3, 4), 47, Director and Chairman of the Board; Director,
Executive Vice President, and Chief Financial Officer, AIC Acquisition
Corporation, Allegiance Insurance Company, Allegiance Life Insurance Company,
Association & Consumer Marketing Services Corp., Educators Life Insurance
Company of America, Horace Mann Insurance Company, Horace Mann Life Insurance
Company, Horace Mann Service Corporation, Insuror Management Company, Senior
Marketing Insurance Service Corporation, Teachers Insurance Company, and Well-
Care, Inc.; Executive Vice President and Chief Financial Officer, Horace Mann
Educators Corporation; Director, Horace Mann Investors, Inc.; formerly held
other officer and Director positions of various subsidiaries of Horace Mann
Educators Corporation.
A. L. GALLOP (2), 70, Director; Executive Director (Retired), Minnesota
Education Association; formerly Director, Horace Mann Educators Corporation
(1968-1983).
HARRIET A. RUSSELL (4), 53, Director; member, Cincinnati Board of Education;
Director and Vice President, Greater Cincinnati School Employer Credit Union;
teacher (Retired), Walnut Hills High School; former Director, Horace Mann Growth
Fund, 1974 to 1983.
*GEORGE J. ZOCK (1, 2, 3), 45, Director and President; Director, Senior Vice
President and Treasurer, AIC Acquisition Corporation, Allegiance Insurance
Company, Allegiance Life Insurance Company, Association & Consumer Marketing
Services Corp., Educators Life Insurance Company of America, Horace Mann
Insurance Company, Horace Mann Life Insurance Company, Horace Mann Service
Corporation, Senior Marketing Insurance Service Corporation, Teachers Insurance
Company and Well-Care, Inc.; Senior Vice President and Treasurer, Horace Mann
Educators Corporation and Insuror Management Company; formerly held other
officer and Director positions of various subsidiaries of Horace Mann Educators
Corporation.
- ---------------------
*Director is considered an "interested person" as that term is defined in the
Investment Company Act of 1940.
(1) Member of Executive Committee - Unless otherwise provided by resolution of
the Board, this committee may exercise all of the powers of the Board when the
Board is not in session, except as otherwise stated in the Funds' By-Laws.
(2) Member of Audit/Insurance Committee - This committee serves as the Board's
liaison with the Funds' independent auditors, reviews the financial operation of
the Funds, and makes periodic reports of these reviews to the Board, along with
appropriate recommendations regarding the proper and efficient financial
operation of the Funds. Additional responsibilities
6
<PAGE>
include the review and assurance of the adequacy of insurance coverage for the
Funds.
(3) Member of Securities Committee - This committee coordinates and
communicates with the Funds' investment adviser on behalf of the Board, reviews
and oversees investment management activities, makes recommendations to the
Board on changes in the investment guidelines, recommends changes or adjustments
to the investment advisory agreement, creates and revises standards of
investment performance, and advises the Board on investment issues.
(4) Member of Nominating Committee - This committee is responsible for the
selection of appropriate, qualified persons as director nominees to be presented
to Fund shareholders for their consideration. The committee has no formal
policy with respect to prospective director nominees recommended by
shareholders, but shareholders are free to make recommendations.
OFFICERS
ANN M. CAPARROS, 43, Secretary and Ethics Compliance Officer; Director, Vice
President, General Counsel and Corporate Secretary, AIC Acquisition Corporation,
Allegiance Insurance Company, Allegiance Life Insurance Company, Association &
Consumer Marketing Services Corp., Educators Life Insurance Company of America,
Horace Mann Insurance Company, Horace Mann Life Insurance Company, Horace Mann
Service Corporation, Senior Marketing Insurance Service Corporation, Teachers
Insurance Company, and Well-Care, Inc.; Vice President, General Counsel and
Corporate Secretary, Horace Mann Educators Corporation and Insuror Management
Company; Secretary, Horace Mann Investors; prior to March 1994, was associated
with John Deere Insurance Group and Affiliates serving as Assistant Vice
President, Vice President, General Counsel, Corporate Secretary and Claims
Manager.
ROGER W. FISHER, 43, Controller; Vice President and Controller, AIC Acquisition
Corporation, Allegiance Insurance Company, Allegiance Life Insurance Company,
Association & Consumer Marketing Services Corp., Educators Life Insurance
Company of America, Horace Mann Educators Corporation, Horace Mann Insurance
Company, Horace Mann Service Corporation, Horace Mann Life Insurance Company,
Insuror Management Company, Senior Marketing Insurance Service Corporation,
Teachers Insurance Company, and Well-Care, Inc.; Controller, Horace Mann
Investors, Inc.
7
<PAGE>
WILLIAM J. KELLY, 49, Treasurer and Regulatory Compliance Officer; Treasurer,
Horace Mann Investors, Inc.; Vice President, Horace Mann Life Insurance Company;
Vice President-Transfer Agent, Horace Mann Service Corporation; formerly held
other officer and Director positions of various subsidiaries of Horace Mann
Educators Corporation.
The Officers of the Funds receive remuneration from Horace Mann Service
Corporation. The Funds do not pay any remuneration to their officers.
Independent Directors are paid a $150 per diem fee by each Fund for attendance
at Board meetings and receive reimbursement for travel expenses. For the fiscal
year ended December 31, 1995, the Independent Directors' per diem fees totaled
$1,500 for each Fund.
8
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Pension or Compensation
Aggregate Retirement Benefits From the
Name of Person, Compensation Accrued as Part Funds Paid
Position From Each Fund of Fund Expenses to Directors
- -------------------- ------------------- ---------------- ------------
<S> <C> <C> <C>
A. L. Gallop $750.00 -0- $3,000.00
Harriet A. Russell $750.00 -0- $3,000.00
</TABLE>
As of the date of this Statement of Additional Information, the Directors and
Officers of the Growth Fund held in the aggregate directly and beneficially less
than 1% of the outstanding shares of Growth Fund. Directors and Officers do not
directly own any shares of Income Fund, Balanced Fund or Short-Term Fund;
however, they may invest indirectly in the Growth Fund, Income Fund, Balanced
Fund and/or Short-Term Fund through annuity contracts issued by Horace Mann Life
Insurance Company and the 401(k) plan of Horace Mann Service Corporation.
INVESTMENT ADVISORY AGREEMENTS
Pursuant to Investment Advisory Agreements with Wellington Management Company
("Wellington Management"), Wellington Management manages the investment and
reinvestment of the assets of the Funds and continuously reviews, supervises and
administers the Funds' investment programs. Wellington Management discharges
its responsibilities with oversight by the Directors of the Funds.
Wellington Management is a professional investment counseling firm which
provides investment services to investment companies, employee benefit plans,
endowments, foundations, and other institutions and individuals. As of December
31, 1995, Wellington Management had discretionary management authority with
respect to approximately $109.2 billion of assets. Wellington Management and its
predecessor organizations have provided investment advisory services to
investment companies since 1933 and to investment counseling clients since 1960.
Wellington Management is a Massachusetts general partnership of which the
following persons are managing partners: Robert W. Doran, Duncan M. McFarland
and John R. Ryan.
Under these Agreements, the Growth Fund paid Wellington Management advisory fees
of $584,033, $685,599 and $817,246 for the fiscal years ended December 31, 1993,
1994, and 1995, respectively. The Income Fund paid Wellington Management
advisory fees of $21,637, $23,460 and $24,703 for the fiscal years ended
December 31, 1993, 1994 and 1995, respectively. The Balanced Fund paid
Wellington Management advisory fees of $384,398, $465,385 and $579,308 for the
fiscal years ended December 31, 1993, 1994, and 1995, respectively. The Short-
Term Fund's advisory fees of $1,465, $1,289 and $1,444 for the fiscal years
ended December 31, 1993, 1994, and 1995, respectively, were paid to Wellington
Management by Horace Mann Investors, Inc.
9
<PAGE>
BROKERAGE ALLOCATION
The Investment Advisory Agreements authorize Wellington Management (subject to
the discretion and control of the Funds' Board of Directors) to select the
brokers or dealers that will execute the purchases and sales of portfolio
securities and direct Wellington Management to use its best efforts to obtain
the best available price and most favorable execution. Subject to policies
established by the Directors of the Funds, Wellington Management may also be
authorized to effect individual securities transactions at commission rates in
excess of the minimum commission rates available, if Wellington Management
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage or research services provided, viewed in
terms of either the particular transaction or Wellington Management's overall
responsibilities with respect to the Funds and other clients.
In placing portfolio transactions, Wellington Management will use its best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain best available price and most favorable execution. The full
range and quality of brokerage services available will be considered in making
these determinations. In those instances where it is reasonably determined that
more than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and other services in addition to
execution services. Such services may include factual and statistical
information or other items of supplementary research assistance. Wellington
Management considers such information useful in the performance of its
obligations under the Advisory Agreements, but is unable to determine the amount
by which such services may reduce its expenses. In addition, within the
parameters of achieving best price and execution, brokerage services may be used
to generate commission credits which are used to pay for pricing agent and
custodial services. See, "Business Management Agreements and other Services -
Fund Pricing Agreements and Custodial Agreement."
Some securities considered for investment by the Funds may also be appropriate
for other funds and/or clients served by Wellington Management. To assure fair
treatment of each fund and all clients of Wellington Management in situations in
which two or more clients' accounts participate simultaneously in a buy or sell
program involving the same security, such transactions will be allocated among
the funds and clients in a manner deemed equitable by Wellington Management.
The Growth Fund paid brokerage fees of $303,053, $458,195 and $522,990 in the
fiscal years ended December 31, 1993, 1994 and 1995, respectively; the Balanced
Fund paid brokerage fees of $146,119, $237,952 and $269,217 for those same
respective periods. The Income Fund and Short-Term Fund paid no brokerage fees.
Substantially all of the brokerage fees were allocated to brokers who provided
research, statistical or other services. Total brokerage fees paid during a year
will vary with turnover rates.
10
<PAGE>
BUSINESS MANAGEMENT AGREEMENTS AND OTHER SERVICES
BUSINESS MANAGEMENT AGREEMENTS - As described in the Prospectus, "Management-
Business Manager," Horace Mann Investors, Inc. ("Investors") serves as the
business manager of each Fund. For providing these management services, each
Fund pays Investors a pro rata fee computed on the aggregate total net assets of
all Funds managed by Investors and sponsored by HMLIC equal to 0.25% of the
aggregate total net assets of all Funds up to $100,000,000; and 0.20% of
aggregate total net assets exceeding that amount. The management fee is accrued
daily and paid monthly and is based upon the average daily net assets.
Investors' management fee is reduced by the amount, if any, that total operating
expenses, including the Fund Pricing Agreement which follows, of each Fund
(exclusive of taxes, interest, extraordinary items and brokerage commissions and
other charges related to the purchase and sale of portfolio securities), exceed
0.50% of the first $30 million of average daily net assets, and 1% of the
average daily net assets in excess of that amount. The Growth Fund paid
Investors management fees in the amount of $351,071, $418,112 and $521,885 for
the fiscal years ended December 31, 1993, 1994, and 1995, respectively. The
Balanced Fund paid Investors management fees in the amount of $246,624, $323,198
and $408,591 for the fiscal years ended December 31, 1993, 1994 and 1995,
respectively. Investors waived the Income Fund's management fees of $18,834,
$20,029 and $20,885 and the Short-Term Fund's management fees of $2,538, $2,400
and $2,440 for the fiscal years ended December 31, 1993, 1994, and 1995,
respectively.
FUND PRICING AGREEMENTS - Effective July 1, 1994, the Funds entered into an
agreement with the First National Bank of Boston ("Bank of Boston"), a national
banking association located at 150 Royall Street, Canton, Massachusetts 02021,
to calculate the daily net asset value per share for each Fund and to maintain
certain required accounting records. The Funds pay the Bank of Boston $60,000
annually for these services as follows: Each Fund is charged a flat fee of
$5,000 with the remaining $40,000 allocated among the four Funds based upon the
average daily net assets of each Fund. This fee accrues daily and is paid
monthly to the Bank of Boston.
The Growth and Balanced Funds may compensate the Bank of Boston for these
services directly or through a commission credit arrangement with Frank Russell
Securities, Inc. Wellington Management places trades for the Growth and Balanced
Funds with Frank Russell Securities, Inc., subject to its obligation to obtain
best available price and most favorable execution. Investors directly
compensates Bank of Boston for pricing and accounting services provided to the
Income and Short-Term Funds. For the period July 1, 1994 to December 31, 1994,
fees charged to each Fund by the Bank of Boston for provision of these services
were as follows: $13,520, Growth Fund; $4,896, Income Fund; $11,110, Balanced
Fund; and $2,141, Short-Term Fund. The Bank of Boston charged the Growth Fund
$26,846, Balanced Fund $22,050, Income Fund $5,664 and the Short-Term Fund
$4,845 for 1995.
Prior to July 1, 1994, Investors provided these pricing and accounting services
to the Funds in exchange for an annual per Fund base fee of $6,000 and an asset
based charge of 0.02% of the first $50 million of net assets and
11
<PAGE>
0.01% of net assets in excess of $50 million. Investors fees for these services
for the Growth Fund were $27,134 in 1993 and $14,905 for the first six months
of 1994; for the Income Fund $7,731 in 1993, and $3,935 for the
first six months of 1994; for the Balanced Fund were $22,337 in 1993, and
$12,636 for the first six months of 1994; and for the Short-Term Fund $6,233
in 1993, and $3,110 for the first six months of 1994. Investors waived these
fees during these periods for the Income and Short-Term Funds.
CUSTODIAL AGREEMENT - Bank of Boston also serves as custodian of the assets of
each Fund, including foreign securities through a sub-custodian relationship.
Under the Custodial Agreement, the Bank of Boston maintains the Funds' portfolio
securities, administers the purchases and sales of portfolio securities,
collects interest and dividends and other distributions made on portfolio
securities, and performs such other ministerial duties outlined in the Custodial
Agreement.
The Bank of Boston charges each Fund an annual minimum administrative fee of
$3,000 for serving as custodian. The administrative fee is calculated according
to the following schedule: 1/66 of 1% for the first $100 million of assets,
1/80 of 1% for the next $100 million of assets; 1/200 of 1% for the next 800
million of assets, and 1/300 of 1% for assets in excess of $1 billion. In
addition, depending on the type of transaction, a charge ranging from $7.50 to
$12.00 is assessed for each individual portfolio transaction.
The Growth and Balanced Funds may compensate the Bank of Boston for these
services directly or through a commission credit arrangement with Frank Russell
Securities, Inc. Wellington Management places trades for the Growth and
Balanced Funds with Frank Russell Securities, Inc., subject to its obligation to
obtain best available price and most favorable execution.
TRANSFER AND DIVIDEND PAYING AGENT - Horace Mann Service Corporation ("HMSC"),
One Horace Mann Plaza, Springfield, Illinois 62715-0001, acts as the transfer
agent and dividend disbursing agent for each Fund and is paid a fee based on the
number of accounts outstanding. HMSC is a wholly-owned subsidiary of Horace
Mann Educators Corporation ("HMEC"). "Horace Mann" is a registered service mark
of HMEC. The Funds have been given limited permission to use that service mark
in their names, subject to HMEC's right to revoke that permission.
INDEPENDENT AUDITORS - KPMG Peat Marwick LLP, 303 East Wacker Drive, Chicago,
Illinois 60601, serves as the Funds' independent auditors. KPMG Peat Marwick
LLP performs an annual audit of the financial statements of the Funds and
provides accounting advice and services related to Securities and Exchange
Commission filings throughout the year.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Each Fund sells and redeems its shares at net asset value per share, without a
sales or redemption charge. No minimum purchase or redemption amounts
12
<PAGE>
apply. The daily net asset value of each Fund's shares is determined by
dividing the net assets by the number of outstanding shares. Net assets are
equal to the total assets of the Fund less its liabilities. The price at which
a purchase is effected is based on the next calculated net asset value after the
order is received at the home office, One Horace Mann Plaza, Springfield,
Illinois 62715-0001. A security listed or traded on an exchange is valued at
its last sales price on the exchange where it is principally traded. In the
absence of a current quotation, the security is valued at the mean between the
last bid and asked prices on the exchange. Securities traded over-the-counter
are valued at the last current bid price. Debt securities that have a remaining
maturity of 60 days or less are valued at cost, plus or minus any amortized
discount or premium. Under the amortized cost method of valuation, the security
is initially valued at cost. Then, the Fund assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price that would be received upon the sale of the security. When market
quotations are not available, securities are valued at fair value as determined
in good faith by the Board of Directors.
TAX STATUS
It is intended that the Funds will continue to qualify as regulated investment
companies under the Internal Revenue Code ("IRC"). In order to qualify as a
regulated investment company under the IRC, a Fund must, among other things, (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stocks,
securities, or foreign currencies, or other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in these stocks, securities or foreign currencies; (b)
derive less than 30% of its gross income from the sale or other disposition of
stocks, securities or certain options, futures, or forward contracts held less
than three months, (c) distributes at least 90% of its net investment income
which includes short-term capital gains and (d) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the Fund's assets is represented by cash and cash items,
Government securities, the securities of other regulated investment companies,
and other securities limited in respect of any one issuer to 5% of the Fund's
total assets and to not more than 10% of the voting securities of that
issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than Government securities
or the securities of other regulated investment companies).
As a regulated investment company, a Fund is not subject to federal income tax
on its net investment income, (including short-term capital gains), if it
distributes all its net investment income to its shareholders. The Fund will not
be subject to federal income tax on any net capital gains (the excess of net
long-term capital gains or net short-term
13
<PAGE>
capital losses) that are distributed as capital gain dividends. The IRC
imposes a 4% nondeductible excise tax on a publicly-held mutual fund to the
extent such mutual fund does not distribute at least 98% of its ordinary income
and 98% of its capital gains (both long-term and short-term) each year by the
end of such year. Since shares of the Growth Fund are held in part by the
public, the Growth Fund intends to comply with these distribution requirements.
For the purpose of the 4% excise tax, any income or gain retained by the Growth
Fund subject to tax will be considered to have been distributed by year-end.
Dividends and distributions will be treated as paid when actually distributed,
except that dividends declared in December payable to shareholders of record on
a specified date in December, and paid before February 1 of the following year,
will be treated as having been (i) paid on December 31 of the current year in
which declared and (ii) received by each shareholder on that date.
The Funds are investment vehicles for the variable contracts of Horace Mann Life
Insurance Company. The separate accounts which maintain the variable contracts
must satisfy quarterly diversification requirements under IRC 817(h). These
diversification requirements, which apply in addition to the diversification
requirements imposed on the Fund by the Investment Company Act of 1940, place
limitations on the investments of each Fund that can be made in the securities
of certain issuers. If Fund investments are not adequately diversified under
section 817(h), the earnings of all variable contracts invested, in whole or
part, in that Fund will be currently taxable to the variable contract owners.
The above discussion is only an abbreviated summary of the applicable provisions
of the IRC and is not intended as tax advice.
14
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth, as of April 1, 1996, the holdings of the capital
stock of each of the Funds known by the respective Fund to own, control or hold
with power to vote 5% or more of its outstanding securities. Since the listed
insurance company registered separate accounts' voting rights are passed through
to contract owners, the insurance companies themselves do not exercise voting
control over the shares held in those accounts.
<TABLE>
<CAPTION>
Growth Fund: Type of Shares % of Shares
- ------------ Ownership Owned Outstanding
----------- ---------- -----------
<S> <C> <C> <C>
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account......................... Record 10,085,036 70.67
(b) Horace Mann Life Insurance Company
Separate Account B....................... Record 1,007,638 7.06
Income Fund:
- -----------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account........................... Record 803,272 96.04
Balanced Fund:
- --------------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance
Company Separate Account................... Record 12,528,253 95.43
Short-Term Fund:
- ----------------
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company
Separate Account......... Record 85,888 84.16
(b) Horace Mann Life Insurance Company
(depositor)................................ Record 10,000 9.80
</TABLE>
15
<PAGE>
Horace Mann Life Insurance Company is organized under the laws of the State of
Illinois and is a wholly-owned subsidiary of Allegiance Life Insurance Company,
an Illinois-domiciled life insurance company. One hundred percent of the stock
of Allegiance Life Insurance Company is held by Horace Mann Educators
Corporation, an insurance holding company incorporated in Delaware.
FINANCIAL STATEMENTS
The Funds audited financial statements for the year ended December 31, 1995, and
the Report of Independent Auditors thereon, are incorporated herein by reference
from the Funds' Annual Report dated December 31, 1995. The Report of Independent
Auditors for the eight years ended December 31, 1993 is included in the
Registration Statement. A copy of the Annual Report must be accompanied by or
preceded by the prospectus. Additional copies of the Annual Report and/or the
Reports of Independent Auditors may be obtained, upon request and without
charge, by contacting the offices of the Funds at P.O. Box 4657, Springfield,
Illinois 62708-4657, by sending a telefacsimile (FAX) transmission to
(217) 527-2307, or by telephoning (217) 789-2500 or (800) 999-1030 (toll-free).
16
<PAGE>
APPENDIX A
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
COMMERCIAL PAPER RATINGS - Moody's Investors Service, Inc., employs the
designations "Prime-1", "Prime-2" and "Prime-3" to indicate commercial paper
having the highest capacity for timely repayment. Issuers rated PRIME-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
Issues rated PRIME-2 have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Standard & Poor's Corporation's ratings of commercial paper are graded into four
categories ranging from "A" for the highest quality obligations to "D" for the
lowest. A - Issues assigned its highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with numbers 1, 2 and 3 to indicate the relative degree of safety. A-1 - This
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics will be denoted with a plus (+) sign
designation. A-2 - Capacity for timely payments on issues with this designation
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
CORPORATE DEBT SECURITIES - Moody's Investors Service, Inc., rates the long-term
debt securities issued by various entities from "Aaa " to "D." AAA -Best
quality. These securities carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large, or by an exceptionally stable, margin and principal is secure. While the
various protective elements are likely to change, these changes are most
unlikely to impair the fundamentally strong position of such issues. AA - High
quality by all standards. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make the long-term risks appear somewhat greater. A - Upper medium
grade obligations. These bonds possess many favorable investment attributes.
Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. BAA - Medium grade obligations. Interest payments and principal
security appear adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
A-1
<PAGE>
Standard & Poor's Corporation also rates the long-term securities debt of
various entities in categories ranging from "AAA" to "D" according to quality.
AAA - Highest grade. They possess the ultimate degree of protection as to
principal and interest. Marketwise, they move with interest rates and provide
the maximum safety on all counts. AA - High grade. Generally, these bonds differ
from AAA issues only in a small degree. Here, too, prices move with the long-
term money market. A - Have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions. BBB - Regarded as having
adequate capacity to pay interest and repay principal. These bonds normally
exhibit adequate protection parameters, but adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal than for debt in higher rated categories.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES
REPURCHASE AGREEMENTS - Repurchase agreements are agreements under which the
purchaser (i.e., a Fund) acquires ownership of an obligation (debt instrument or
time deposit) and the seller agrees, at the time of the sale, to repurchase the
obligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period. If the seller of a
repurchase agreement fails to repurchase this obligation in accordance with the
terms of the agreement, the investing Fund will incur a loss to the extent that
the proceeds on the sale are less than the repurchase price. Repurchase
agreements usually involve United States Government or federal agency securities
and, as utilized by the Funds, include only those securities in which the Funds
may otherwise invest. Repurchase agreements are for short periods, most often
less than 30 days and usually less than one week. The Funds intend to enter into
repurchase agreements only with domestic commercial and savings banks and
savings and loan associations with total assets of at least one billion dollars,
or with primary dealers in United States Government securities. In addition, the
Funds will not enter into repurchase agreements unless (a) the agreement
specifies that the securities purchased, and interest accrued thereon, will have
an aggregate value in excess of the price paid; and (b) the Funds take delivery
of the underlying instruments pending repurchase. In entering into a repurchase
agreement, a Fund is exposed to the risk that the other party to the agreement
may be unable to keep its commitment to repurchase. In that event, the Fund may
incur disposition costs in connection with liquidating the collateral (i.e., the
underlying security). Moreover, if bankruptcy proceedings are commenced with
respect to the selling party, receipt of the value of the collateral may be
delayed or substantially limited. The Funds believe that these risks are not
material inasmuch as the Funds will evaluate the credit worthiness of all
entities with which it proposes to enter into repurchase agreements, and will
seek to assure that each such arrangement is adequately collateralized.
REVERSE REPURCHASE AGREEMENTS - Reverse repurchase agreements involve the sale
of money market securities held by a Fund, with an agreement to repurchase the
securities at an agreed upon price, date and interest payment. If it employs
reverse repurchase agreements, a Fund will use the proceeds to purchase other
money market securities and instruments eligible for purchase by that Fund
either maturing, or under an agreement to resell, at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement. At the time it
enters into a reverse repurchase agreement, a Fund will place in a segregated
custodial account securities having a value equal to the repurchase price. A
Fund will generally utilize reverse repurchase agreements when the interest
income to be earned from the investment of the proceeds of the transactions is
greater than the interest expense incurred as a result of the reverse repurchase
transactions. Reverse repurchase agreements involve the risk that the market
value of securities purchased by the Fund with the proceeds of the transaction
may decline below the repurchase price of the securities by the Fund which it is
obligated to
B-1
<PAGE>
repurchase. As a matter of operating policy, the aggregate amount of illiquid
repurchase and reverse repurchase agreements will not exceed 10% of any of the
Funds' total net assets at the time of initiation.
WARRANTS - Warrants are instruments that provide the owner with the right to
purchase a specified security, usually an equity security such as common stock,
at a specified price (usually representing a premium over the applicable market
value of the underlying equity security at the time of the warrant's issuance)
and usually during a specified period of time. Moreover, they are usually issued
by the issuer of the security to which they relate. While warrants may be
traded, there is often no secondary market for them. The Funds will invest in
publicly traded warrants only. Warrants do not have any inherent value. To the
extent that the market value of the security that may be purchased upon exercise
of the warrant rises above the exercise price, the value of the warrant will
tend to rise. To the extent that the exercise price equals or exceeds the market
value of such security the warrants will have little or no market value. If
warrants remain unexercised at the end of the specified exercise period, they
lapse and the investing Fund's investment in them will be lost. In view of the
highly speculative nature of warrants, as a matter of operating policy, no Fund
will invest more than 5% of its total net assets in warrants.
CONVERTIBLE PREFERRED STOCKS AND DEBT SECURITIES - Certain preferred stocks and
debt securities include conversion features allowing the holder to convert
securities into another specified security (usually common stock) of the same
issuer at a specified conversion ratio (e.g., two shares of preferred for one
share of common stock) at some specified future date or period. The market value
of convertible securities generally includes a premium that reflects the
conversion right. That premium may be negligible or substantial. To the extent
that any preferred stock or debt security remains unconverted after the
expiration of the conversion period, the market value will fall to the extent
represented by that premium.
PREFERRED EQUITY REDEMPTION CUMULATIVE STOCK - Preferred Equity Redemption
Cumulative Stock (PERCS) are a form of convertible preferred stock which
automatically convert into shares of common stock on a predetermined conversion
date. PERCS pay a fixed annual dividend rate which is higher than the annual
dividend rate of the issuing company's common stock. However, the terms of
PERCS limit an investor's ability to participate in the appreciation of the
common stock (usually capped at approximately 40%). Predetermined redemption
dates and prices set by the company upon the issuance of the securities provide
the mechanism for limiting the price appreciation of PERCS.
ADJUSTABLE RATE MORTGAGE SECURITIES - Adjustable rate mortgage securities
(ARMs), are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
B-2
<PAGE>
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMs
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for
such an instrument exceeds the sum of the interest accrued at the applicable
mortgage interest rate and the principal payment required at such point to
amortize the outstanding principal balance over the remaining term of the loan,
the excess is utilized to reduce the then outstanding principal balance of the
ARM.
TYPES OF CREDIT ENHANCEMENT - Mortgage backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, these securities may contain elements of
credit support which fall into two categories: (i) liquidity protection and
(ii) protection against losses resulting from ultimate default by an obligor on
the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to seek to
ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting from default seeks to ensure
ultimate payment of the obligations on at least a portion of the assets in the
pool. This protection may be provided through guarantees, insurance policies,
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquencies or losses in excess of
those anticipated could adversely affect the return on an investment in a
security. A Fund will not pay any additional fees for credit support, although
the existence of credit support may increase the price of a security.
B-3
