CONSECO FUND GROUP
Administrative Office: 11815 N. Pennsylvania Street, Carmel, Indiana 46032
(317) 817-6300
The Conseco Fund Group (the Trust ) is an open-end diversified
management investment company registered with the Securities and Exchange
Commission under the Investment Company Act of 1940. The Trust was
organized as a Massachusetts business trust on September 24, 1996. The
Trust is a series type of mutual fund which issues separate classes (or
series) of stock, each of which currently represents a separate diversified
portfolio of investments. This Prospectus offers shares of three series
( Funds ) of the Trust, each with its own investment objective or
objectives and investment policies. The Funds are divided into Class A and
Class Y shares. Class Y shares are offered to certain institutional
investors by a separate prospectus. Each class may have different expenses
which may affect performance.
The investment objectives of the Funds are as follows:
Equity Fund seeks to provide a high equity total return consistent
with preservation of capital and a prudent level of risk primarily by
investing in selected equity securities and other securities having the
investment characteristics of common stocks.
Asset Allocation Fund seeks a high total investment return,
consistent with the preservation of capital and prudent investment risk.
The Fund seeks to achieve this objective by pursuing an active asset
allocation strategy whereby investments are allocated, based upon thorough
investment research, valuation and analysis of market trends and the
anticipated relative total return available, among various asset classes
including debt securities, equity securities, and money market instruments.
Fixed Income Fund seeks the highest level of income as is consistent
with preservation of capital by investing primarily in investment grade
debt securities.
The various Funds may be used independently or in combination. You
may also purchase shares of a money market fund managed by Federated
Investors, which seeks current income consistent with stability of capital
and liquidity, the prospectus for which immediately follows this
prospectus.
The investment policies of the respective Funds are fundamental and
cannot be changed without a vote of their respective shareholders. There
is no assurance that any of the Funds will achieve their investment
objectives.
Conseco Capital Management, Inc. (the Adviser ) serves as the
Trust s investment adviser. The Adviser supervises the Trust s management
and investment program, performs a variety of administrative services on
behalf of the Trust, and pays all compensation of officers and Trustees of
the Trust who are affiliated persons of the Adviser or the Trust. The
Trust pays all other expenses incurred in the operation of the Trust,<PAGE>
including fees and expenses of Trustees who are unaffiliated persons of the
Adviser or the Trust.
This Prospectus sets forth concisely the information about the Trust
that an investor should know before investing. A Statement of Additional
Information ( SAI ) dated January 2, 1997, containing additional
information about the Trust and the Funds, has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
Prospectus in its entirety. You may obtain a copy of the SAI without
charge by calling or writing the Trust at the address and telephone number
above.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is January 2, 1997.
2<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> Page
<C>
Cover Page 1
Fee Table 3
Investment Objectives and Policies of the Funds 4
Investment Techniques and Other Investment Policies 8
Management 12
Purchase and Redemption of Shares 14
Dividends, Distributions and Taxes 20
The Advisors Investment Performance 22
Table of Contents of the Statement of
Additional Information 27
Appendix A Securities Ratings A-1
</TABLE>
3<PAGE>
FEE TABLE
The following fee table is provided to assist investors in
understanding the various costs and expenses which may be borne directly or
indirectly by an investment in Class A shares of the Funds.
<TABLE>
<CAPTION>
<S>
Asset Fixed
Shareholder Transaction Expenses Equity Allocation Income
<C> <C> <C>
Maximum Sales Charge Imposed on
Purchase (as a percentage of
offering price) 5% %5 5%
Maximum Sales Charge Imposed on
Reinvested
Dividends (as a percentage of
offering price) None None None
Deferred Sales Charge None None None
Redemption Fees None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees .70% .70% .45%
Administrative Fees .20% .20% .20%
12b-1 Distribution and Service Fees (1) .25% .25% .25%
Other Expenses (less voluntary fee
waivers and reimbursements) .35% .35% .35%
Total Operating Expenses
(after reimbursement)(2) 1.50% 1.50% 1.25%
</TABLE>
(1) The 12b-1 fees shown in the table reflect the amount to which the
Trustees currently limit payments under the Class A Distribution and
Service Plan. As a result of 12b-1 fees, a long-term shareholder in the
Funds may pay more than the economic equivalent of the maximum sales
charges permitted by the Rules of the National Association of Securities
Dealers, Inc.
4<PAGE>
(2) The Adviser has voluntarily agreed to waive its fees and/or reimburse
all expenses (exclusive of taxes, interest, brokerage and other transaction
expenses and other extraordinary expenses) through April 30, 1998,
including management fees, to the extent that the Class A expenses of the
Equity, Asset Allocation and Fixed Income Funds exceed 1.50%, 1.50% and
1.25%, respectively, of the Fund s average daily net assets. In the
absence of such reimbursements, it is estimated that the Total Operating
Expenses would be 1.85%, 1.85% and 1.60%, for the Equity, Asset Allocation
and Fixed Income Funds, respectively.
Example
Assuming a hypothetical investment of $1,000, a 5% annual return and
redemption at the end of each time period, an investor in Class A of each
of the Funds would have paid transaction and operating expenses at the end
of each year as follows:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Equity $65 $96
Asset Allocation $65 $96
Fixed Income $62 $88
</TABLE>
The same level of expenses would be incurred if the investments were held
throughout the period indicated.
These examples illustrate the effect of expenses, but are not meant
to suggest actual or expected costs or returns, all of which may vary.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
Each of the Funds has a different investment objective or objectives
as described below. Each Fund is managed by the Adviser. There can be no
assurance that any of the Funds will achieve their investment objective or
objectives. Each Fund is subject to the risk of changing economic
conditions, as well as the risk inherent in the ability of the Adviser to
make changes in a Fund s investments in anticipation of changes in
economic, business, and financial conditions.
The different types of securities and investment techniques common to
one or more Funds all have attendant risks of varying degrees. For
example, with respect to equity securities, there can be no assurance of
capital appreciation and there is a substantial risk of decline. With
respect to debt securities, there can be no assurance that the issuer of
such securities will be able to meet its obligations on interest or
5<PAGE>
principal payments in a timely manner. In addition, the value of debt
instruments generally rises and falls inversely with interest rates.
The investments and investment techniques common to one or more Funds
are described in greater detail, including the risks of each, in the
Description of Securities and Investment Techniques in the SAI.
The Funds are subject to investment restrictions that are described
under Investment Restrictions in the SAI. The investment restrictions
are fundamental policies, which means that they may not be changed
without a majority vote of shareholders of the affected Funds. The Trust
has certain fundamental policies, which prohibit each Fund, with respect
to 75 percent of its total assets, from (i) investing more than 5 percent
of its assets in the securities of any one issuer (except U.S. government
securities defined below); and (ii) investing more than 25 percent of its
assets in the securities of issuers in the same industry (except cash
equivalent items and U.S. government securities). Except for fundamental
policies imposed by the Trust s investment restrictions, all investment
policies and practices described in this Prospectus and in the SAI are not
fundamental, meaning that the Board of Trustees may change them without
shareholder approval. See Description of Securities and Investment
Techniques and Investment Restrictions in the SAI for further
information.
Equity Fund
In seeking its objective of providing a high equity total return, the
Equity Fund will attempt to achieve a total return (i.e., price
appreciation plus potential dividend yield) primarily through investment in
selected equities (i.e., common stocks and other securities having the
investment characteristics of common stocks, such as convertible debentures
and warrants). However, if market conditions indicate their desirability,
the Adviser may, for defensive purposes, temporarily invest all or a part
of the assets of the Equity Fund in money market instruments. See Debt
Securities below and in the SAI for further information.
The Adviser expects that the equity portion of the Fund will be
widely diversified by both industry and number of issuers. The Adviser s
stock selection methods will be based in part upon the analysis of
variables which it believes significantly relate to the future market
performance of a stock, such as recent changes in earnings per share and
their deviations from analysts expectations, past growth trends, price
action of the stock itself, publicly recorded trading transactions by
corporate insiders, and relative price-earnings ratios. The Adviser
expects that investment opportunities will often be sought among securities
of larger, established companies, although securities of smaller, less
well-known companies may also be selected.
By investing in securities that are subject to market risk, the
Equity Fund is also subject to greater fluctuations in its market value and
involves the assumption of a higher degree of risk as compared to a fund
seeking stability of principal, such as a money market fund or a fund
6<PAGE>
investing primarily in obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities (these obligations are
referred to in this Prospectus as U.S. government securities ). To
maximize potential return, the Adviser may utilize a variety of investment
techniques and strategies including but not limited to: writing covered
and secured listed put and call options, including options on stock
indices, and purchasing such options; purchasing and selling, for hedging
purposes, stock index, interest rate, and other futures contracts, and
purchasing options on such futures contracts; purchasing warrants and
preferred and convertible preferred stocks; borrowing from banks to
purchase securities; purchasing foreign securities in the form of American
Depository Receipts; purchasing securities of other investment companies;
entering into repurchase agreements; purchasing restricted securities;
investing in when-issued or delayed delivery securities; and selling
securities short against the box. See Description of Securities and
Investment Techniques in the SAI for further information. The Equity Fund
may also invest in high yield, high risk, lower-rated debt securities. See
Risks Associated With High Yield Debt Securities below and in the SAI for
further information.
Asset Allocation Fund
The investment objective of the Asset Allocation Fund is to seek a
high total investment return consistent with the preservation of capital
and prudent investment risk. The Fund seeks to achieve this objective by
pursuing an active asset allocation strategy whereby investments are
allocated based upon thorough investment research, valuation and analysis
of market trends and the anticipated relative total return available among
various asset classes, including debt securities, equity securities and
money market instruments. Total investment return consists of current
income, including dividends, interest, and discount accruals, and capital
appreciation. Achieving this Fund s objective depends on the Adviser s
ability to assess the effect of economic and market trends on different
sectors of the market. In seeking to maximize total return, the Asset
Allocation Fund will follow an asset allocation strategy contemplating
shifts (which may be frequent) among a wide range of investments and market
sectors. The Fund s investments will be designed to maximize total return
during all economic and financial environments, consistent with prudent
risk as determined by the Adviser.
The Asset Allocation Fund will invest in U.S. government securities,
intermediate and long- term debt securities and equity securities of
domestic and foreign issuers, including common and preferred stocks,
convertible debt securities, and warrants. If the Adviser deems stock
market conditions to be favorable or debt market conditions to be uncertain
or unfavorable, a substantially higher percentage of the Fund s total
assets may be invested in equity securities. If, however, the Adviser
believes that the equity environment is uncertain or unfavorable, the Fund
may decrease its investments in equity securities and increase its
investments in debt securities. Furthermore, if the Adviser believes that
inflationary or monetary conditions warrant a significant investment in
companies involved in precious metals, the Fund may invest up to 10% of
7<PAGE>
its total assets in the equity securities of companies exploring, mining,
developing, producing, or distributing gold or other precious metals.
Additionally, the Asset Allocation Fund may make temporary defensive
investments (i.e., money market instruments) without limit if it is
believed that market conditions warrant a more conservative investment
strategy.
The Asset Allocation Fund may use various investment strategies and
techniques when the Adviser determines that such use is appropriate in an
effort to meet the Fund s investment objective, including but not limited
to: writing covered and secured listed put and call options, including
options on stock indices, and purchasing such options; purchasing and
selling, for hedging purposes, stock index, interest rate, gold, and other
futures contracts, and purchasing options on such futures contracts;
purchasing warrants and preferred and convertible preferred stocks;
purchasing foreign securities; entering into foreign currency transactions
and options on foreign currencies; borrowing from banks to purchase
securities; purchasing securities of other investment companies; entering
into repurchase agreements; purchasing restricted securities; investing in
when-issued or delayed delivery securities; and selling securities short
against the box. See Description of Securities and Investment
Techniques below and in the SAI for further information.
The maturities of the debt securities in the Asset Allocation Fund
will vary based in large part on the Adviser s expectations as to future
changes in interest rates. However, the Adviser anticipates that the debt
component of the Fund will generally be invested primarily in intermediate
and/or long-term debt securities. The Adviser anticipates that the equity
portion of the Fund will be widely diversified by both industry and number
of issuers. The Adviser s stock selection methods will be based in part
upon variables which it believes significantly relate to the future market
performance of a stock, such as recent changes in earnings per share and
their deviations from analysts expectations, past growth trends, price
movement of the stock itself, publicly recorded trading transactions by
corporate insiders, and price-earnings ratios. The Adviser anticipates
that investment opportunities will often be sought among securities of
larger, established companies, although securities of smaller, less well
known companies may also be selected.
The Asset Allocation Fund may also invest in high yield, high risk,
lower-rated fixed income debt securities, which are not believed to involve
undue risk to income or principal. The Asset Allocation Fund does not
intend to invest more than 25% of its total assets (measured at the time of
investment) in high yield, high risk debt securities. Generally, higher
yielding bonds carry ratings assigned by Moody s Investor Service, Inc.
( Moody s ) or Standard & Poor s Corporation ( S&P ) that are lower than
those assigned to investment grade debt securities, or are unrated and the
Adviser does not determine such security is of comparable quality to
securities rated in one of the four highest rating categories. Such
securities carry higher investment risk than investment grade debt
securities. The market values of lower-rated securities generally
fluctuate more widely than those of higher-rated securities. In addition,
8<PAGE>
changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity for such securities to make principal and
interest payments than is generally the case for higher grade debt
securities. The lowest rating categories in which the Fund will invest are
CCC/Caa. Securities in these categories are considered to be of poor
standing and are predominantly speculative. The Adviser seeks to enhance
total return specifically through purchasing securities which the Adviser
believes are undervalued and selling, when appropriate, those securities
the Adviser believes are overvalued. In order to determine value, the
Adviser utilizes independent fundamental analysis of the issuer as well as
an analysis of the specific structure of the security. A debt security
will be considered investment grade if it is rated in one of the four
highest rating categories by at least one nationally recognized statistical
rating organization ( NRSRO ), or, in the case of an unrated security, if
the Adviser determines such security is of comparable quality to securities
rated in one of the four highest rating categories. See Appendix A to
this Prospectus for further discussion regarding securities ratings and
Risks Associated With High Yield Debt Securities below and under
Description of Securities and Investment Techniques in the SAI.
The Asset Allocation Fund may also invest in zero coupon securities
and payment-in-kind securities. A zero coupon security pays no interest to
its holders prior to maturity and a payment-in-kind security pays interest
in the form of additional securities. These securities will be subject to
greater fluctuation in market value in response to changing interest rates
than securities of comparable maturities that make periodic cash
distributions of interest.
The Asset Allocation Fund may also invest in equity and debt
securities of foreign issuers, including non-U.S. dollar denominated debt
securities, Eurodollar securities and securities issued, assumed or
guaranteed by foreign governments or political subdivisions or
instrumentalities thereof. As a non-fundamental operating policy, the
Asset Allocation Fund will not invest more than 50% of its total assets
(measured at the time of investment) in foreign securities. See Foreign
Securities under Description of Securities and Investment Techniques
below and in the SAI for further information.
Fixed Income Fund
In seeking its investment objective of providing the highest level of
income as is consistent with the preservation of capital, the Fixed Income
Fund invests primarily in investment grade debt securities. The Adviser
seeks to reduce risk, increase income, and preserve or enhance total return
by actively managing the Fund in light of market conditions and trends.
The Adviser seeks to enhance total return specifically through purchasing
securities which the Adviser believes are undervalued and selling, when
appropriate, those securities the Adviser believes are overvalued. In order
to determine value, the Adviser utilizes independent fundamental analysis
of the issuer as well as an analysis of the specific structure of the
security. A debt security will be considered investment grade if it is
rated in one of the four highest rating categories by at least one NRSRO,
9<PAGE>
or, in the case of an unrated security, if the Adviser determines such
security is of comparable quality to securities rated in one of the four
highest rating categories. See Appendix A to this Prospectus for further
discussion regarding securities ratings. The Fixed Income Fund may invest
in debt securities issued by publicly and privately held U.S. and foreign
companies, the U.S. government and agencies and instrumentalities thereof,
and foreign governments and their agencies and instrumentalities. The
Fixed Income Fund may also invest in mortgage-related debt securities,
other types of asset-backed debt securities, and other forms of debt
securities. See Debt Securities below and in the SAI. In addition, up
to 15% of the Fund may be invested directly in Mortgage-Backed Securities
and equity securities, including preferred and common stocks, convertible
debt securities and debt securities carrying warrants to purchase equity
securities, and up to 10% of the Fund may be invested in debt securities
rated below investment grade.
Debt securities purchased by the Fixed Income Fund may be of any
maturity. It is anticipated that the dollar weighted average life of the
debt portfolio will be between seven and 15 years, but may be shorter or
longer depending on market conditions. While the Fixed Income Fund intends
to invest in fixed income securities in order to achieve its investment
objective of obtaining the highest level of income consistent with
preservation of capital, it may from time to time invest in fixed income
securities which offer higher capital appreciation potential. Such
investments would be in addition to that portion of the Fund which may be
invested in common stocks and other types of equity securities.
With respect to the Fund s investment in fixed income securities,
such securities will be affected by changes in interest rates. When
interest rates decline, the market value of a Fund invested at higher
yields can be expected to rise. Conversely, when interest rates rise, the
market value of a Fund invested at lower yields can be expected to
decline. Therefore, the Fund may engage in portfolio trading to take
advantage of market developments and yield disparities; for example,
shortening the average maturity of the Fund in anticipation of a rise in
interest rates so as to minimize depreciation of principal, or lengthening
the average maturity of the Fund in anticipation of a decline in interest
rates so as to maximize appreciation of principal.
The Fixed Income Fund may use various investment strategies and
techniques when the Adviser determines that such use is appropriate in an
effort to meet the Fund s investment objective. Such strategies and
techniques include, but are not limited to, writing covered and secured
listed put and call options and purchasing such options; purchasing and
selling, for hedging purposes, interest rate and other futures contracts,
and purchasing options on such futures contracts; borrowing from banks to
purchase securities; investing in securities of other investment companies;
entering into repurchase agreements; investing in when-issued or delayed
delivery securities; and selling securities short against the box. See
Description of Securities and Investment Techniques in the SAI for
further information.
10<PAGE>
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES
Mortgage-Backed Securities
Each Fund may invest in mortgage-backed securities. Mortgage-backed
securities are interests in pools of mortgage loans made to residential
home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations (see Mortgage
Pass-Through Securities, below). The Funds may also invest in debt
securities which are secured with collateral consisting of mortgage-backed
securities (see Collateralized Mortgage Obligations, at page 9), and in
other types of mortgage-related securities.
Mortgage Pass-Through Securities. These are securities representing
interests in pools of mortgages in which periodic payments of both
interest and principal on the securities are made by passing through
periodic payments made by the individual borrowers on the residential
mortgage loans underlying such securities (net of fees paid to the issuer
or guarantor of the securities and possibly other costs). Early repayment
of principal on mortgage pass-through securities (arising from prepayments
of principal due to sale of the underlying property, refinancing, or
foreclosure, net of fees and costs which may be incurred) may expose a Fund
to a lower rate of return upon reinvestment of principal. Payment of
principal and interest on some mortgage pass-through securities may be
guaranteed by the full faith and credit of the U.S. government (in the case
of securities guaranteed by the Government National Mortgage Association,
GNMA ), or guaranteed by agencies or instrumentalities of the U.S.
government (in the case of securities guaranteed by the Federal National
Mortgage Association, FNMA, or the Federal Home Loan Mortgage
Corporation, FHLMC ). Mortgage pass-through securities created by non-
governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and
other secondary market issuers) may be uninsured or may be supported by
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance, and letters of credit, which may be issued by
governmental entities, private insurers, or the mortgage poolers.
GNMA Certificates. GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans on which timely
payment of interest and principal is guaranteed by the full faith and
credit of the U.S. Government. GNMA certificates differ from typical bonds
because principal is repaid monthly over the term of the loan rather than
returned in a lump sum at maturity. Although GNMA guarantees timely
payment even if homeowners delay or default, tracking the pass-through
payments may, at times, be difficult. Expected payments may be delayed due
to the delays in registering the newly traded paper securities. The
custodian s policies for crediting missed payments while errant receipts
are tracked down may vary. Other mortgage-backed securities, such as those
of FHLMC and FNMA, trade in book-entry form and are not subject to this
risk of delays in timely payment of income. Although the mortgage loans in
11<PAGE>
the pool will have maturities of up to 30 years, the actual average life of
the GNMA certificates typically will be substantially less because the
mortgages may be purchased at any time prior to maturity, will be subject
to normal principal amortization, and may be prepaid prior to maturity.
Reinvestment of prepayments may occur at higher or lower rates than the
original yield on the certificates.
FNMA and FHLMC Mortgage-Backed Obligations. FNMA, a federally
chartered and privately owned corporation, issues pass-through securities
representing interests in a pool of conventional mortgage loans. FNMA
guarantees the timely payment of principal and interest, but this guarantee
is not backed by the full faith and credit of the U.S. government. FNMA
also issues REMIC certificates, which represent interests in a trust funded
with FNMA certificates. REMIC certificates are guaranteed by FNMA and not
by the full faith and credit of the U.S. Government.
FHLMC, a corporate instrumentality of the U.S. government, issues
participation certificates which represent an interest in a pool of
conventional mortgage loans. FHLMC guarantees the timely payment of
interest and the ultimate collection of principal, and maintains reserves
to protect holders against losses due to default, but these securities are
not backed by the full faith and credit of the U.S. government. As is the
case with GNMA certificates, the actual maturity of and realized yield on
particular FNMA and FHLMC pass-through securities will vary based on the
prepayment experience of the underlying pool of mortgages.
Collateralized Mortgage Obligations. All Funds may purchase
mortgage-backed securities issued by financial institutions such as
commercial banks, savings and loan associations, mortgage banks, and
securities broker-dealers (or affiliates of such institutions established
to issue these securities) in the form of either collateralized mortgage
obligations ( CMOs ) or mortgage-backed bonds. CMOs are obligations fully
collateralized directly or indirectly by a pool of mortgages on which
payments of principal and interest are dedicated to payment of principal
and interest on the CMOs. Payments are passed through to the holders on
the same schedule as they are received. Mortgage-backed bonds are general
obligations of the issuer fully collateralized directly or indirectly by a
pool of mortgages. The mortgages serve as collateral for the issuer s
payment obligations on the bonds but interest and principal payments on the
mortgages are not passed through either directly (as with GNMA certificates
and FNMA and FHLMC pass-through securities) or on a modified basis (as with
CMOs). Accordingly, a change in the rate of prepayments on the pool of
mortgages could change the effective maturity of a CMO but not that of a
mortgage-backed bond (although, like many bonds, mortgage-backed bonds may
be callable by the issuer prior to maturity). Although the mortgage-
related securities securing these obligations may be subject to a
government guarantee or third-party support, the obligation itself is not
so guaranteed. Therefore, if the collateral securing the obligation is
insufficient to make payment on the obligation, a holder could sustain a
loss. It is expected that governmental, government-related, or private
entities may create mortgage loan pools and other mortgage-backed
securities offering mortgage pass-through and mortgage-backed securities.
12<PAGE>
If such securities are developed and offered to other types of investors,
investments in such new types of mortgage-related securities will be
considered.
Risks of Mortgage-Backed Securities. In the case of mortgage pass-
through securities, such as GNMA certificates or FNMA and FHLMC mortgage-
backed obligations, or modified pass-through securities, such as CMOs
issued by various financial institutions, early repayment of principal
arising from prepayments of principal on the underlying mortgage loans due
to the sale of the underlying property, the refinancing of the loan, or
foreclosure may expose a Fund to a lower rate of return upon reinvestment
of the principal. Prepayment rates vary widely and may be affected by
changes in market interest rates and other economic trends and factors. In
periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of the mortgage-backed
security. Conversely, when interest rates are rising, the rate of
prepayment tends to decrease, thereby lengthening the actual average life
of the mortgage-backed security. Accordingly, it is not possible to
accurately predict the average life of a particular pool. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on
the securities. Therefore, the actual maturity and realized yield on pass-
through or modified pass-through mortgage-backed securities will vary based
upon the prepayment experience of the underlying pool of mortgage
Mortgage Pass-Through Securities. These are securities representing
interests in pools of mortgages in which periodic payments of both
interest and principal on the securities are made by passing through
periodic payments made by the individual borrowers on the residential
mortgage loans underlying such securities (net of fees paid to the issuer
or guarantor of the securities and possibly other costs). Early repayment
of principal on mortgage pass-through securities (arising from prepayments
of principal due to sale of the underlying property, refinancing, or
foreclosure, net of fees and costs which may be incurred) may expose a Fund
to a lower rate of return upon reinvestment of principal. Payment of
principal and interest on some mortgage pass-through securities may be
guaranteed by the full faith and credit of the U.S. government (in the case
of securities guaranteed by the Government National Mortgage Association,
GNMA ), or guaranteed by agencies or instrumentalities of the U.S.
government (in the case of securities guaranteed by the Federal National
Mortgage Association, FNMA, or the Federal Home Loan Mortgage
Corporation, FHLMC ). Mortgage pass-through securities created by non-
governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and
other secondary market issuers) may be uninsured or may be supported by
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance, and letters of credit, which may be issued by
governmental entities, private insurers, or the mortgage poolers.
GNMA Certificates. GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans on which timely
payment of interest and principal is guaranteed by the full faith and
credit of the U.S. Government. GNMA certificates differ from typical bonds
13<PAGE>
because principal is repaid monthly over the term of the loan rather than
returned in a lump sum at maturity. Although GNMA guarantees timely
payment even if homeowners delay or default, tracking the pass-through
payments may, at times, be difficult. Expected payments may be delayed due
to the delays in registering the newly traded paper securities. The
custodian s policies for crediting missed payments while errant receipts
are tracked down may vary. Other mortgage-backed securities, such as those
of FHLMC and FNMA, trade in book-entry form and are not subject to this
risk of delays in timely payment of income. Although the mortgage loans in
the pool will have maturities of up to 30 years, the actual average life of
the GNMA certificates typically will be substantially less because the
mortgages may be purchased at any time prior to maturity, will be subject
to normal principal amortization, and may be prepaid prior to maturity.
Reinvestment of prepayments may occur at higher or lower rates than the
original yield on the certificates.
FNMA and FHLMC Mortgage-Backed Obligations. FNMA, a federally
chartered and privately owned corporation, issues pass-through securities
representing interests in a pool of conventional mortgage loans. FNMA
guarantees the timely payment of principal and interest, but this guarantee
is not backed by the full faith and credit of the U.S. government. FNMA
also issues REMIC certificates, which represent interests in a trust funded
with FNMA certificates. REMIC certificates are guaranteed by FNMA and not
by the full faith and credit of the U.S. Government.
FHLMC, a corporate instrumentality of the U.S. government, issues
participation certificates which represent an interest in a pool of
conventional mortgage loans. FHLMC guarantees the timely payment of
interest and the ultimate collection of principal, and maintains reserves
to protect holders against losses due to default, but these securities are
not backed by the full faith and credit of the U.S. government. As is the
case with GNMA certificates, the actual maturity of and realized yield on
particular FNMA and FHLMC pass-through securities will vary based on the
prepayment experience of the underlying pool of mortgages.
Collateralized Mortgage Obligations. All Funds may purchase
mortgage-backed securities issued by financial institutions such as
commercial banks, savings and loan associations, mortgage banks, and
securities broker-dealers (or affiliates of such institutions established
to issue these securities) in the form of either collateralized mortgage
obligations ( CMOs ) or mortgage-backed bonds. CMOs are obligations fully
collateralized directly or indirectly by a pool of mortgages on which
payments of principal and interest are dedicated to payment of principal
and interest on the CMOs. Payments are passed through to the holders on
the same schedule as they are received. Mortgage-backed bonds are general
obligations of the issuer fully collateralized directly or indirectly by a
pool of mortgages. The mortgages serve as collateral for the issuer s
payment obligations on the bonds but interest and principal payments on the
mortgages are not passed through either directly (as with GNMA certificates
and FNMA and FHLMC pass-through securities) or on a modified basis (as with
CMOs). Accordingly, a change in the rate of prepayments on the pool of
mortgages could change the effective maturity of a CMO but not that of a
14<PAGE>
mortgage-backed bond (although, like many bonds, mortgage-backed bonds may
be callable by the issuer prior to maturity). Although the mortgage-
related securities securing these obligations may be subject to a
government guarantee or third-party support, the obligation itself is not
so guaranteed. Therefore, if the collateral securing the obligation is
insufficient to make payment on the obligation, a holder could sustain a
loss. It is expected that governmental, government-related, or private
entities may create mortgage loan pools and other mortgage-backed
securities offering mortgage pass-through and mortgage-backed securities.
If such securities are developed and offered to other types of investors,
investments in such new types of mortgage-related securities will be
considered.
Risks of Mortgage-Backed Securities. In the case of mortgage pass-
through securities, such as GNMA certificates or FNMA and FHLMC mortgage-
backed obligations, or modified pass-through securities, such as CMOs
issued by various financial institutions, early repayment of principal
arising from prepayments of principal on the underlying mortgage loans due
to the sale of the underlying property, the refinancing of the loan, or
foreclosure may expose a Fund to a lower rate of return upon reinvestment
of the principal. Prepayment rates vary widely and may be affected by
changes in market interest rates and other economic trends and factors. In
periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of the mortgage-backed
security. Conversely, when interest rates are rising, the rate of
prepayment tends to decrease, thereby lengthening the actual average life
of the mortgage-backed security. Accordingly, it is not possible to
accurately predict the average life of a particular pool. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on
the securities. Therefore, the actual maturity and realized yield on pass-
through or modified pass-through mortgage-backed securities will vary based
upon the prepayment experience of the underlying pool of mortgages.
Debt Securities
All Funds may invest in U.S. dollar denominated corporate debt
securities of domestic issuers, and the Asset Allocation Fund and the Fixed
Income Fund may invest in debt securities of foreign issuers that may or
may not be U.S. dollar denominated.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market value
of corporate debt obligations may be expected to rise and fall inversely
with interest rates generally. There also exists the risk that the issuers
of the securities may not be able to meet their obligations on interest or
principal payments at the time called for by an instrument. Debt securities
rated BBB or Baa, which are considered medium-grade category debt
securities, do not have economic characteristics that provide the high
degree of security with respect to payment of principal and interest
associated with higher rated debt securities, and generally have some
speculative characteristics. A debt security will be placed in this rating
category where interest payments and principal security appear adequate for
15<PAGE>
the present, but economic characteristics that provide longer term
protection may be lacking. Any debt security, and particularly those rated
BBB or Baa (or below), may be susceptible to changing conditions,
particularly to economic downturns, which could lead to a weakened capacity
to pay interest and principal.
Risks Associated With High Yield Debt Securities. The Funds may
invest in high yield, high risk, lower-rated debt securities. High yield
debt securities are subject to all risks inherent in any investment in debt
securities. As discussed below, these risks are significantly greater in
the case of high yield debt securities.
Lower-rated debt securities generally offer a higher current yield
than that available from higher-rated issues. However, lower-rated
securities involve higher risks in that they are especially subject to (1)
adverse changes in general economic conditions and in the industries in
which the issuers are engaged, (2) changes in the financial condition of
the issuers and (3) price fluctuation in response to changes in interest
rates. Accordingly, the yield on lower-rated debt securities will
fluctuate over time. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress
which could adversely affect their ability to make payments of principal
and interest, and increase the possibility of default. In addition, the
market for lower-rated securities has expanded rapidly in recent years, and
this expanded market has not been tested in a period of extended economic
downturn. This market may be thinner and less active than the market for
higher quality securities, which may limit the ability to sell such
securities at their fair value in response to changes in the economy or the
financial markets. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may also decrease the values and
liquidity of lower-rated securities, especially in a thinly traded market.
Differing yields on fixed income securities of the same maturity are
a function of several factors, including the relative financial strength of
the issuers. Higher yields are generally available from securities rated
below investment grade categories of recognized rating agencies: Ba1 or
lower by Moody s or BB+ or lower by Standard & Poor s. Debt securities
rated below investment grade are deemed by these agencies to be
predominantly speculative with respect to the issuer s capacity to pay
interest and repay principal and may involve major risk exposure to adverse
conditions.
Foreign Securities
The Asset Allocation Fund may invest in equity securities of foreign
issuers. That Fund may invest up to 50 percent of its net assets in such
securities. The Asset Allocation Fund and Equity Fund may invest in
American Depository Receipts ( ADRs ), which are described below. The Fixed
Income Fund may invest in debt obligations of foreign issuers, including
foreign governments and their agencies and instrumentalities. Investments
in foreign securities may offer unique potential benefits such as
substantial growth in industries not yet developed in the particular
16<PAGE>
country. Such investments also permit a Fund to invest in foreign
countries with economic policies or business cycles different from those of
the United States, or to reduce fluctuations in portfolio value by taking
advantage of foreign stock markets that may not move in a manner parallel
to U.S. markets. Investments in securities of foreign issuers involve
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include fluctuations in foreign exchange
rates, future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability, or diplomatic developments that could adversely affect
investments in those countries. Since the Asset Allocation Fund may invest
in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the value of
securities in that Fund and the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned.
There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject
to accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those to which U.S. companies are subject.
Foreign securities markets, while growing in volume, have, for the most
part, substantially less volume than U.S. markets. Securities of many
foreign companies are less liquid and their prices more volatile than
securities of comparable U.S. companies. Transactional costs in non-U.S.
securities markets are generally higher than in U.S. securities markets.
There is generally less government supervision and regulation of exchanges,
brokers, and issuers than there is in the United States. A Fund might have
greater difficulty taking appropriate legal action with respect to foreign
investments in non-U.S. courts than with respect to domestic issuers in
U.S. courts. In addition, transactions in foreign securities may involve
greater time from the trade date until settlement than domestic securities
transactions and involve the risk of possible losses through the holding of
securities by custodians and securities depositories in foreign countries.
Dividend and interest income from foreign securities may generally be
subject to withholding taxes by the country in which the issuer is located
and may not be recoverable by a Fund or its investors in all cases.
ADRs are certificates issued by a U.S. bank or trust company
representing the right to receive securities of a foreign issuer deposited
in a foreign subsidiary or branch or a correspondent of that bank.
Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and may offer U.S. investors more liquidity than the
underlying securities. The Fund may invest in unsponsored ADRs. The
issuers of unsponsored ADRs are not obligated to disclose material
information in the U.S. and, therefore, there may not be a correlation
between such information and the market value of such ADRs.
Restricted and Illiquid Securities
17<PAGE>
The Funds may invest in restricted securities such as private
placements, although a Fund may not invest in any illiquid restricted
security if, after acquisition thereof, more than 15 percent of the Fund s
assets would be invested in illiquid securities. Once acquired, restricted
securities may be sold by a Fund only in privately negotiated transactions
or in a public offering with respect to which a registration statement is
in effect under the Securities Act of 1933. If sold in a privately
negotiated transaction, a Fund may have difficulty finding a buyer and may
be required to sell at a price that is less than the Adviser had
anticipated. Where registration is required, a Fund may be obligated to
pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time the Fund may
be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the
Fund might obtain a less favorable price than prevailed when it decided to
sell.
MANAGEMENT
The Trustees of the Trust decide upon matters of general policy for
the Trust. In addition, the Trustees review the actions of the Trust s
investment manager, as set forth below. The Trust s officers supervise the
daily business operations of the Trust.
Conseco Capital Management, Inc. (the Adviser ), 11825 N.
Pennsylvania Street, Carmel, Indiana 46032, has been retained under
Investment Advisory Agreements with the Trust, to provide investment
advice, and in general to supervise the management and investment program
of the Trust and each Fund. The Adviser is a wholly-owned subsidiary of
Conseco, Inc., a publicly-owned financial services company, the principal
operations of which are in development, marketing, and administration of
specialized annuity, life and health insurance products. The Adviser
generally manages the affairs of the Trust, subject to the supervision of
the Board of Trustees. For information about the Board of Trustees and the
Trust s officers, see Management in the SAI.
Under the Investment Advisory Agreements, the Adviser receives an
investment advisory fee equal to an annual rate of .45% of the daily net
asset value of the Fixed Income Fund, .70% of the daily net asset value of
the Equity Fund, and .70% of the daily net asset value of the Asset
Allocation Fund. The Adviser also manages another registered investment
company, all of the invested assets of its parent company, Conseco, Inc.,
which owns or manages several life insurance subsidiaries, and provides
investment and servicing functions to the Conseco companies and affiliates.
Pursuant to Investment Advisory Agreements between the Adviser and the
Funds, the Adviser will reduce its aggregate fees for any fiscal year, or
reimburse the Funds, to the extent required, so that the Funds expenses do
not exceed the expense limitations applicable to the Trust under the
securities laws or regulations of those states or jurisdictions in which
the Funds shares are registered or qualified for sale. Expenses for
purposes of these expense limitations include the management fee, but
18<PAGE>
exclude brokerage commissions and fees, taxes, interest and extraordinary
expenses such as litigation, paid or incurred by the Funds. In addition,
the state with the most restrictive expense limitation allows the Trust to
exclude distribution expenses. The Adviser has voluntarily agreed to waive
its investment advisory fee to the extent that the ratio of expenses to net
assets on an annual basis for Class A Shares of the Equity Fund exceeds
1.50%, the Asset Allocation Fund exceeds 1.50%, and the Fixed Income Fund
exceeds 1.25%. These voluntary limits may be discontinued at any time
after April 30, 1998.
The investment professionals primarily responsible for the management
of each Fund, with the respective responsibilities and business experience
for the past five years are as follows:
Equity Fund: Thomas J. Pence, Vice President for the Adviser. He is
responsible for the management of the Adviser s equity portfolios and
oversight of the equity investment process. Prior to joining the Adviser
in 1992, Mr. Pence worked for five years as a securities analyst in the
field of real estate acquisition and development in which he specialized in
residential development and construction finance and was responsible for
overseeing a project portfolio of $750 million in real estate assets.
Fixed Income: Gregory J. Hahn, Senior Vice President, Portfolio
Analytics, for the Adviser. He is responsible for the portfolio analysis
and management of the institutional client accounts and analytical support
for taxable portfolios. In addition, he has responsibility for SEC
registered investment products as well as investments in the insurance
industry. Mr. Hahn joined the Adviser in 1989.
Asset Allocation Fund: Gregory J. Hahn, Portfolio Manager of the
fixed income portion of the Fund. See Mr. Hahn s business experience
above.
Thomas J. Pence, Portfolio Manager of the equity portion of the Fund.
See Mr. Pence s business experience above.
Administrative Fees
Pursuant to an administration agreement ( Administration Agreement ),
Conseco Services, LLC supervises the overall administration of the Funds.
These administrative services include supervising the preparation and
filing of all documents required for compliance by the Funds with
applicable laws and regulations, supervising the maintenance of books and
records, and other general and administrative responsibilities. For
providing these services, Conseco Services receives a fee from each Fund of
.20% per annum of its average daily Class A net assets. Pursuant to the
Administration Agreement, Conseco Services, LLC reserves the right to
employ one or more sub-administrators to perform administrative services
for the Funds.
Distribution and Service Plan for Class A Shares
19<PAGE>
The Funds have adopted a Distribution and Service Plan for Class A
shares to compensate Conseco Equity Sales, Inc. (the Distributor ) for the
distribution of Class A shares and servicing the accounts of Class A
shareholders. The Plan provides for periodic payments to brokers who
provide services to accounts that hold Class A shares and for promotional
and other sales related costs. The Class A Plan provides for payments by
each Fund to the Distributor of up to 0.35% of that Fund s average net
assets attributable to Class A shares. The Trustees currently limit
payments under the Class A Plan to the annual rate of .25% of such assets.
Should the Trustees decide in the future to approve payments in excess of
this amount, shareholders will be notified and this Prospectus will be
revised. Up to .25% of the fee may be used for shareholder servicing
expenses with the remainder used for distribution expenses. Up to .25% of
the fee may be paid to dealers in the form of a trail or maintenance fee
after the first full year of investment in an amount equal to an annual
rate of .25% of Class A s daily net assets owned by clients of such
dealers.
PURCHASE AND REDEMPTION OF SHARES
How to Buy Shares
You may purchase shares from any broker-dealer that has a selling
agreement with the Distributor. In addition, as discussed below, an
account may be opened for the purchase of shares of a Fund by mailing to
the Conseco Fund Group, PO Box 8017, Boston, Massachusetts 02266-8017, a
completed account application and a check payable to the appropriate Fund.
Or you may telephone 1-800-986-3384 to obtain the number of an account to
which you can wire or electronically transfer funds and then send in a
completed application.
Purchase orders for all Funds are accepted only on a regular business
day as defined below. Orders for shares received by the Transfer Agent on
any business day prior to the close of trading on the New York Stock
Exchange (the NYSE ) (normally 4:00 p.m. Eastern Time) will receive that
day s offering price. Orders received by the Transfer Agency after such
time but prior to the close of business on the next business day will
receive the next business day s offering price which is net asset value
plus any applicable sales charge. If you purchase shares through a broker-
dealer, your broker is responsible for forwarding payment promptly to the
Transfer Agent. A business day is any day on which the NYSE is open for
business. It is anticipated that the NYSE will be closed Saturdays and
Sundays and on days on which the NYSE observes New Year s Day, President s
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
The minimum initial investment by a shareholder is $500. The minimum
subsequent investment is $50, but these requirements may be changed or
waived at any time at management s discretion. Each Fund and the
Distributor or Transfer Agent reserves the right to reject any order for
the purchase of shares in whole or in part. The offering price of Class A
20<PAGE>
is the net asset value plus a varying sales charge, depending on the amount
invested. The sales charge applicable to shares of Class A is determined
follows:
Sales Charge
<TABLE>
<CAPTION>
<S> As % of Public As % of Net Dealer Reallowance
Offering Price Amount Invested As % of Offering Price
<C> <C> <C>
On purchases of:
$500 - 50,000 5.0% 5.56% 4.5%
$50,000 - 100,000 4.5% 4.71% 4.0%
$100,000 - 500,000 3.5% 3.63% 3.0%
$500,000 - 1,000,000 2.0% 2.04% 1.5%
over $1,000,000 None None 1.0%
</TABLE>
The sales charge assessed upon the purchase of shares of Class A is
not an expense of Class A and has no effect on the net asset value of
shares of Class A. The Distributor may allow the selling financial service
firms (such as broker-dealer firms and banks) to retain 100% of the sales
charge. This may result in the selling firm being considered an
underwriter under the Securities Act of 1933, as amended.
The Distributor may provide promotional incentives including
cash compensation in excess of the applicable sales charge to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of shares of one or more of the Funds. Other programs
may provide, subject to certain conditions, additional compensation to
broker-dealers based on a combination of aggregate shares sold and
increases of assets under management. All of the above payments will be
made by the Distributor or its affiliates out of their own assets. These
programs will not change the price an investor will pay for shares or the
amount that a Fund will receive from such sale.
You will receive a confirmation of each new transaction in your
account, which will also show you the number of Fund shares you own and the
number of shares being held in safekeeping by the Transfer Agent for your
account. You may rely on these confirmations in lieu of certificates as
evidence of your ownership. Certificates representing shares of the Funds
will not be issued.
Purchases By Wire
Purchase by wire transfer should be directed to the Transfer Agent
to receive an account number at (800) 986-3384 between the hours of 8:00
a.m. and 4:00 p.m. (Eastern Time) on a regular business day (as defined
21<PAGE>
above) on which your bank is open for business. The following information
will be requested: your name, address, tax identification number, dividend
distribution election, amount being wired and the wiring bank.
Instructions should then be given by you to your bank to transfer funds by
wire to: ABA #011000028, State Street Bank, Boston, MA., Account #9905-
244-1. If you arrange for receipt by the Transfer Agent of federal funds
prior to the close of trading (currently 4:00 p.m. Eastern Time) of the
NYSE on a regular business day as defined above, you will receive that
day s offering price. Your bank may charge for these services.
Purchase Through Dealer
Orders for purchase of shares placed through dealers will receive the
net asset value next computed following receipt of the order provided the
dealer receives the order prior to the close of the NYSE and transmits it
to the Distributor prior to its close of business that same day (normally
4:00 p.m. Eastern Time). Dealers are required to provide payment within
three business days after placing an order. Dealers making payment for
confirmed purchases via Federal funds wire must reference the confirmation
number to ensure timely credit.
Purchases By Check
An initial investment made by check must be accompanied by an
Application, completed in its entirety. Additional shares of the Funds may
also be purchased by sending a check payable to the applicable Fund, along
with information regarding your account, including the account number, to
the Transfer Agent. All checks should be drawn only on U.S. banks in U.S.
funds, in order to avoid fees and delays. A charge may be imposed if any
check submitted for investment does not clear. Third party checks will not
be accepted. When purchases are made by check or periodic automatic
investment, redemptions will not be allowed until the investment being
redeemed has been in the account for 15 business days.
Pre-Authorized Investment Plan
For your convenience, a pre-authorized investment plan may be
established where your personal bank account is automatically debited and
your Fund Account is automatically credited with additional full and
fractional shares ($50 subsequent minimum investment). For further
information on pre-authorized investment plans, please contact the Transfer
Agent at (800) 986-3384. The minimum investment requirements may be waived
by the Fund for purchases made pursuant to certain programs such as payroll
deduction plans and retirement plans.
Reduced Sales Charges for Class A Share Purchase
You may be eligible to buy Class A shares at reduced sales charge
rates in one or more of the following ways:
Combined Purchases
22<PAGE>
You may aggregate purchases of shares of the Funds with the purchases
of the other persons listed below to achieve discounts in the applicable
sales charges. The sales charge applicable to a current purchase of Class
A shares of each Fund by a person listed below is determined by adding the
value of Class A shares to be purchased to the aggregate value (at current
net asset value) of all shares of any of the other Funds in the Trust and
shares of the money market fund managed by Federated Investors (derived
from the exchange of Conseco Fund Group Shares on which an initial sales
charge was paid) previously purchased and then owned. In addition, if you
own a Great American Reserve Insurance Company variable annuity contract
the current cash value of such contract will be aggregated with your shares
to determine your sales charge. The Transfer Agent must be notified by you
or your broker-dealer each time a qualifying purchase is made.
Qualifying investments include those by you, your spouse and your
children under the age of 21, if all parties are purchasing Class A shares
for their own account(s), which may include tax qualified plans, such as an
IRA, or by a company solely controlled by such individuals as defined in
the 1940 Act. Reduced sales charges also apply to purchases by a trustee
or other fiduciary if the investment is for a single trust, estate or
single fiduciary account, including pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under the Code.
Reduced sales charges apply to combined purchases by qualified employee
benefit plans of a single corporation, or of corporations affiliated with
each other in accordance with the 1940 Act. Purchases made for nominee or
street name accounts (securities held in the name of a broker or another
nominee such as a bank trust department instead of the customer) may not be
aggregated with those made for other accounts and may not be aggregated
with other nominee or street name accounts unless otherwise qualified as
described above.
Letter of Intent
You may reduce your sales charge on all investments by meeting the
terms of a letter of intent, a non-binding commitment to invest a certain
amount within a 13-month period. Your existing holdings in the Trust may
also be combined with the investment commitment set forth in the letter of
intent to further reduce your sales charge. Up to 5% of the letter amount
will be held in escrow to cover additional sales charges which may be due
if your total investments over the letter period are not sufficient to
qualify for a sales charge reduction. See the SAI and the Application for
further details.
Rights of Accumulation
The sales charge for new purchases of Class A shares of a Fund will
be determined by aggregating the net asset value of all the Funds owned by
the shareholder at the time of the new purchase. You must identify on the
Application all accounts to be linked for Rights of Accumulation.
Waiver of Class A Initial Sales Charge
23<PAGE>
No sales charge is imposed on sales of Class A
shares to certain investors. However, in order for the
following sales charge waivers to be effective, the Transfer
Agent must be notified of the waiver when the purchase order
is placed. The Transfer Agent may require evidence of your
qualification for the waiver. No sales charge is imposed on
the following investors: (1) current or retired officers,
directors and employees (and their parents, in-laws, spouses,
and dependent children) of the Trust, Conseco and its
affiliates and the Transfer Agent, (2) Conseco shareholders
holding 100 or more shares of Conseco common stock, (3) any
participant in a tax qualified retirement plan provided that
the total initial amount invested by the plan totals $500,000
or more, the plan has 50 or more employees eligible to
participate at the time of purchase, or the plan certifies
that it will have projected annual contributions of $200,000
or more; (4) dealers, brokers and wholesalers that have a
sales agreement with the Distributor, if they purchase shares
for their own accounts or for retirement plans for their
employees; (5) employees and registered representatives (and
their parents, grandparents, spouses and dependent children)
of dealers, brokers and wholesalers described above or
financial institutions that have entered into sales
arrangements with such dealers or brokers (and are identified
to the Distributor) or with the Distributor; the purchaser
must certify to the Distributor at the time of the purchase
that the purchase is for the purchaser s own account (or for
the benefit of such employee s parents, grandparents, spouse
or minor children); (6) any charitable organization, state,
county, city, or any instrumentality, department, authority or
agency thereof which has determined that Class A is a legally
permissible investment and which is prohibited by applicable
investment law from paying a sales charge or commission in
connection with the purchase of shares of any registered
management company; (7) one or more members of a group of at
least 100 persons (and persons who are retirees from such
group) engaged in a common business, profession, civic or
charitable endeavor or other activity, and the spouses and
minor dependent children of such persons pursuant to a
marketing program between the Distributor and such group;
(8)(i) through an investment adviser who makes such purchases
through a broker/dealer, bank or trust company (each of which
may impose transaction fees on the purchase), (ii) by an
investment adviser for its own account or for a bona fide
advisory account over which the investment adviser has
investment discretion or (iii) through a financial planner who
charges a fee and makes such purchases through a financial
institution which maintains a net asset value purchase program
that enables the Distributor to realize certain economies of
scale; (9) through bank trust departments or trust company on
behalf of bona fide trust or fiduciary accounts by notifying
the Distributor in advance of purchase. A bona fide advisory,
24<PAGE>
trust or fiduciary account is one which is charged an asset-
based fee and whose purpose is other than purchase of Fund
shares at net asset value; or (10) by purchasers in connection
with investments related to a bona fide medical savings
account.
Additionally, no sales charge is imposed on shares
that are (a) issued in plans of reorganization, such as
mergers, asset acquisitions and exchange offers, to which a
Fund is a party, (b) purchased by the reinvestment of loan
repayments by a participant in retirement plans, (c) purchased
by the reinvestment of dividends or other distributions
reinvested from a Fund, or (d) purchased and paid for with the
proceeds of shares redeemed in the prior 60 days from a mutual
fund on which an initial sales charge or contingent deferred
sales charge was paid (other than a fund managed by the
Adviser or any of its affiliates.)
How to Redeem Shares of the Funds
Shares of Class A are redeemed at net asset value
next determined after receipt of a redemption request in good
form on any day the NYSE is open for business, reduced by the
amount of any federal income tax required to be withheld.
Redemptions by Mail
A written request for redemption must be received by the
Transfer Agent to constitute a valid tender for redemption.
It will also be necessary for corporate investors and other
associations to have an appropriate certification authorizing
redemptions by a corporation or an association on file before
a redemption request will be considered in proper form. A
suggested form of such certification is provided on the
Application accompanying this Prospectus. A signature
guarantee by an eligible guarantor may be required as
stipulated in Rule 17Ad-15(a)(2) under the Securities Exchange
Act of 1934. A signature guarantee is required for
redemptions of $50,000 or more.
Redemptions by Wire or Telephone
Brokers, dealers, or other sales agents may
communicate redemption orders by wire or telephone. These
firms may charge for their services in connection with your
redemption request but neither the Funds nor the Distributor
impose any such charges.
The Funds and the Transfer Agent will not be
responsible for the authenticity of phone instructions or
losses, if any, resulting from unauthorized shareholder
transactions if the Funds or the Transfer Agent reasonably
25<PAGE>
believe that such instructions are genuine. The Funds and the
Transfer Agent have established procedures that the Funds
believe are reasonably appropriate to confirm that
instructions communicated by telephone are genuine. These
procedures include: (i) recording telephone instructions for
exchanges and expedited redemptions; (ii) requiring the caller
to give certain specific identifying information; and (iii)
providing written confirmations to shareholders of record not
later than five days following any such telephone
transactions. If the Funds and the Transfer Agent do not
employ these procedures, they may be liable for any losses due
to unauthorized or fraudulent telephone instructions.
Expedited Redemptions
You may have the payment of redemption requests (of
$250 or more) wired or mailed directly to a domestic
commercial bank account that you have previously designated.
Normally, such payments will be transmitted on the second
business day following receipt of the request (provided
redemptions may be made). You may request a wire redemption by
telephone or written request sent to the Transfer Agent. For
telephone redemptions, call the Transfer Agent at (800) 986-
3384. You must complete the Expedited Redemptions section
of the Application for this privilege to be applicable.
Systematic Withdrawal Plan
You may elect to have regular monthly or quarterly
payments in any fixed amount in excess of $100 made to you, or
to anyone else properly designated as long as the account has
a value of at least $10,000 at the time of election. You must
determine the fixed payment amount for the systematic
withdrawal plan.
There are no separate charges under this plan. A
number of full and fractional shares equal in value to the
amount of the requested payment will be redeemed. Such
redemptions are normally processed on or about the 25th day of
each month or quarter. Checks are then mailed on or about the
first of the following month. If you elect to have a
Systematic Withdrawal Plan, you must have all dividends and
capital gains reinvested. To establish systematic cash
withdrawals, please complete the systematic cash withdrawal
section on the Application.
You may change the amount, frequency, and payee, or
terminate this plan, by giving written notice to the Trust s
Transfer Agent. As shares of a Fund are redeemed under the
plan, you may realize a capital gain or loss to be reported
for income tax purposes. A Systematic Withdrawal Plan may be
26<PAGE>
terminated or modified at any time upon written notice by you
or a Fund.
General
Payment to shareholders for shares redeemed or
repurchased will be made within seven days after receipt by
the Transfer Agent. A Fund may delay the mailing of a
redemption check until the check used to purchase the shares
being redeemed has cleared, which may take up to 15 days or
longer. To reduce such delay, the Funds recommend that all
purchases be made by bank wire Federal funds. A Fund may
suspend the right of redemption under certain extraordinary
circumstances in accordance with the rules of the SEC. Due to
the relatively high cost of handling small investments, the
Funds reserve the right upon 30-days written notice to
redeem, at net asset value, the shares of any shareholder
whose account has a value of less than $500 other than as a
result of a decline in the net asset value per share.
Dollar Cost Averaging
The Dollar Cost Averaging ( DCA ) program enables a
shareholder to transfer the value from the money market fund
managed by Federated Investors to another investment option on
a predetermined and systematic basis. The DCA program is
generally suitable for shareholders making a substantial
investment in the Funds and who desire to control the risk of
investing at the top of a market cycle. The DCA program
allows such investments to be made in equal installments over
time in an effort to reduce such risk.
If you have at least $5,000 invested in the money market
fund managed by Federated Investors, you may choose to have a
specified dollar amount transferred from this Fund to another
Fund(s) on a monthly basis. The main objective of DCA is to
shield your investment from short term price fluctuations.
Since the same dollar amount is transferred to other Funds
each month, more shares are purchased in a Fund if the value
per share is low and less units are purchased if the value per
unit is high. Therefore, a lower average cost per share may
be achieved over the long term. This plan of investing allows
investors to take advantage of market fluctuations but does
not assure a profit or protect against a loss in declining
markets.
DCA may be elected on the application form or at a
later date. The minimum amount that may be transferred each
month into any Fund is $250. The maximum amount which may be
transferred is equal to the amount invested in the money
market fund managed by Federated Investors when elected,
divided by 12.
27<PAGE>
The transfer date will be the same calendar day each
month. The dollar amount will be allocated to the Funds in
the proportions you specify on the appropriate form, or, if
none are specified, in accordance with your original
investment allocation. If, on any transfer date, the amount
invested is equal to or less than the amount you have elected
to have transferred, the entire amount will be transferred and
the option will end. You may change the transfer amount once
each year, or cancel this option by sending the appropriate
form to our Administrative Office which must be received at
least seven days before the next transfer date.
Exchange Privilege
Class A shares of one Fund described in this
Prospectus may be exchanged for Class A shares of the other
Funds or for shares of the money market fund managed by
Federated Investors at the relative net asset values per share
at the time of the exchange. Shares of the money market fund
managed by Federated Investors may be exchanged for Class A
shares at relative net asset values per share at the time of
the exchange to the extent that the shares of the money market
fund managed by Federated Investors are attributable to Class
A shares on which an initial sales charge was previously
payable and dividend reinvestments on such Class A shares. An
initial sales charge will be imposed on other shares
transferred from the money market fund managed by Federated
Investors to the Class A Funds. The total value of shares in
a Fund after the exchange must at least equal the minimum
investment requirement of the Fund into which they are being
exchanged. You should consider the differences in investment
objectives and expenses of the Funds before making an
exchange. Shares are normally redeemed from one Fund and
purchased from the other Fund in the exchange transaction on
the same regular business day on which the Transfer Agent
receives an exchange request that is in proper form by the
close of the NYSE that day. Exchanges are taxable
transactions and may be subject to special tax rules about
which you should consult your own tax adviser.
Electronic Transfers Through Automated Clearing House
Electronic Transfers Through Automated Clearing House
( ACH ) allows you to initiate a purchase or redemption for as
little as $50 or as much as $50,000 between your bank account
and Fund account using the ACH network. Sales charges and
initial purchase minimums apply. You must complete the ACH
Section of the Application for this privilege to be
applicable.
Determination of Net Asset Value
28<PAGE>
The net asset value per share is determined for each
class of shares for each Fund as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each regular business day
(as previously defined) by dividing the value of the Fund s
net assets attributable to a class by the number of shares of
that class outstanding. The assets of each Fund are valued
primarily on the basis of market quotations. If quotations
are not readily available, assets are valued by a method that
the Trustees of the Trust believe accurately reflects fair
value. Foreign securities are valued on the basis of
quotations from the primary market in which they are traded,
and are translated from the local currency into U.S. dollars
using current exchange rates. With respect to all Funds,
short-term investments that will mature in 60 days or less are
valued at amortized cost, which approximates market value.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund is treated as a separate taxable entity and
qualifies as a regulated investment company under applicable
provisions of the Internal Revenue Code of 1986 (the Code ).
As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, each
Fund will be allowed a deduction for amounts distributed to
its shareholders from its ordinary income and net realized
capital gains and will not be subject to federal income tax on
such amounts. To qualify for treatment as a regulated
investment company, each Fund must, among other things,
derive in each taxable year at least 90% of its gross income
from dividends, interest and gains from the sale or other
disposition of securities, and derive less than 30% of its
gross income in each taxable year from the gains (without
deduction for losses) from the sale or other disposition of
securities held for less than three months.
Each Fund intends to distribute sufficient net investment
income to avoid the application of federal income tax on the
Trust. Each Fund also intends to distribute sufficient income
to avoid the application of any federal excise tax. For
dividend purposes, the net investment income of each Fund will
consist of all payments of dividends or interest received and
any net short-term gains or losses from the sale of its
investments less its estimated expenses (including fees
payable to the Adviser). The Asset Allocation Fund is also
required to include in its gross income each year a portion of
the original issue discount at which it acquires zero coupon
securities, even though the Fund receives no interest payment
on the security during the year. Similarly, the Fund must
include in its gross income each year any interest distributed
in the form of additional securities by payment-in-kind
securities. Accordingly, to continue to qualify for treatment
29<PAGE>
as a regulated investment company under the Code, the Fund may
be required to distribute as a dividend an amount that is
greater than the total amount of cash the Fund actually
received. Those distributions will be made from the Fund s
cash assets or the proceeds from sales of Fund securities, if
necessary.
This information is only a summary of certain
federal tax information about your investment. More
information is contained in the SAI. You should consult with
your tax adviser about the effect of an investment in the Fund
on your particular tax situation.
Dividends from the Fixed Income Fund will be
declared and distributed monthly in additional full and
fractional shares of those respective Funds. Dividends from
the Equity Fund and the Asset Allocation Fund will be declared
and distributed quarterly. However, the Trustees may decide
to declare dividends at other intervals.
All net realized long-term capital gains of the
Trust, if any, are declared and distributed annually after the
close of the Trust s fiscal year to the shareholders of the
Fund or Funds to which such gains are attributable.
Distribution Options. When you open your account,
specify on your Application how you want to receive your
distributions. For Conseco Fund Group retirement accounts,
all distributions are reinvested. For other accounts, you
have the following options:
Reinvest All Distributions in the Fund. You can
elect to reinvest all dividends and long term capital gains
distributions in additional shares of the Fund.
Reinvest Income Dividends Only. You can elect to
reinvest investment income dividends in a Fund while receiving
capital gains distributions by check or sent to your bank
account.
Reinvest Capital Gains Only. You can elect to
reinvest capital gains in the Fund while receiving dividends
by check or sent to your bank account.
Receive All Distributions in Cash. You can elect to
receive a check for all dividends and long-term capital gain
distributions or have them sent to your bank.
THE ADVISORS INVESTMENT PERFORMANCE
30<PAGE>
Because the Funds are being offered to the public for the
first time, as of the date of this Prospectus they do not have
any prior operating history or performance. However, the
Equity Fund, Asset Allocation Fund and Fixed Income Fund are
modeled after existing funds of the Conseco Series Trust (the
CST Funds ) that are managed by the Adviser and have
investment objectives and policies substantially similar to
the corresponding Funds. The CST Funds are used as investment
vehicles for the assets of variable annuity and variable life
insurance contracts issued by Conseco affiliates.
Below you will find information about the
performance of the CST Funds. Although the three comparable
Funds discussed above have substantially similar investment
objectives and policies, the same investment adviser and the
same portfolio managers as the CST Funds, you should not
assume that the Funds offered by this Prospectus will have the
same future performance as the CST Funds. For example, any
Fund s future performance may be greater or less than the
performance of the corresponding CST Fund due to, among other
things, differences in expenses and cash flows between a Fund
and the corresponding CST Fund. Moreover, past performance
information is based on historical earnings and is not
intended to indicate future performance.
The investment characteristics of each Fund listed
below will closely resemble the investment characteristics of
the corresponding CST Fund. Depending on the Fund involved,
similarity of investment characteristics may involve factors
such as industry diversification, portfolio beta, portfolio
quality, average maturity of fixed-income assets, equity/non-
equity mixes, and individual holdings.
Certain Funds do have differences from their
corresponding CST Fund none of which the Adviser believes
would cause a significant change in investment results.
Investors should note the following differences: (1) the Funds
may invest in swaps, caps and floors; and (2) the Funds may
lend portfolio securities. See the SAI for further details.
The table below sets forth each Fund, and its
corresponding CST Fund, the date the Adviser began managing
the CST Fund (referred to as the inception date ) and asset
size as of October 31, 1996.
<TABLE>
<CAPTION>
Corresponding CST Fund
Fund (Inception Date and Asset Size)
31<PAGE>
<S> <C>
Equity Fund Common Stock Portfolio (Jan. 31, 1992)
$154,615,806
Asset Allocation Fund Asset Allocation Portfolio (Dec. 1, 1991)
$14,792,025
Fixed Income Fund Corporate Bond Portfolio (July 31, 1990)
$17,031,312
</TABLE>
The following two tables show the average annualized
total returns for the CST Funds for the one, three, five and
ten year (or life of the CST Fund if shorter than 10 years)
periods ended October 31, 1996. These figures are based on
the actual gross investment performance of the CST Funds.
From the gross investment performance figures, the maximum
Total Fund Operating Expenses reflected in the fee table on
page 3 are deducted to arrive at the net return. The first
table reflects a deduction for the maximum applicable sales
charges, while the second table reflects no deduction for
sales charges. Performance figures will be lower when sales
charges are taken into account. CST Fund performance does not
represent the historical performance of the funds and should
not be interpreted as indicative of the future performance of
the funds.
<TABLE>
<CAPTION>
Assuming Class A Share Total Fund Operating Expenses and the Maximum Initial
Sales Load
Applicable to Class A Shares.
CST Fund 10 Years or
(Inception Date) 1 Year 3 Years 5 Years Since Inception
<S> <C> <C> <C> <C>
Common Stock Portfolio 31.509% 20.088% N/A 17.512%
(Jan. 31, 1992)
Asset Allocation Portfolio 19.224% 14.012% N/A 14.011%
(Dec. 31, 1991)
Corporate Bond Portfolio 0.514% 3.677% 7.216% 8.831%
(July 31, 1990)
32<PAGE>
Assuming Class A Share Total Fund Operating Expenses With No Initial Sales
Load.1/
CST Fund 10 Years
(Inception Date) 1 Year 3 Years 5 Years Since Inception
Common Stock Portfolio 38.439% 22.162% N/A 18.767%
(Jan. 31, 1992)
Asset Allocation Portfolio 25.507% 15.981% N/A 15.208%
(Dec. 31, 1991)
Corporate Bond Portfolio 5.810% 5.467% 8.323% 9.717%
(July 31, 1990)
</TABLE>
_____________________
1/ Certain persons may purchase Class A shares that are
not subject to the Class A initial sale charge (see "Waiver of
Class A Initial Sales Charge" in this Prospectus) and certain
other persons may purchase Class A shares subject to less than
the maximum initial sales charge.
Each of the Funds may from time to time advertise certain
investment performance information. Performance information
may consist of yield and average annual total return
quotations reflecting the deduction of all applicable charges
over a period of time. A Fund also may use aggregate total
return figures for various periods, representing the
cumulative change in value of an investment in a Fund for the
specific period. Performance information may be shown in
schedules, charts or graphs. These figures are based on
historical earnings and are not intended to indicate future
performance.
The yield of a Fund refers to the annualized net
income generated by an investment in that Fund over a
specified 30-day period, calculated by dividing the net
investment income per share earned during the period by the
maximum offering price per share on the last day of the
period.
The average annual total return of a Fund refers
to the total rate of return of an investment in the Fund. The
figure is computed by calculating average annual compounded
rates of return over the 1, 5 and 10 year periods that would
equate to the initial amount invested to the ending redeemable
value, assuming reinvestment of all income dividends and
capital gain distributions. Total return quotations reflect
the performance of the Fund and include the effect of capital
changes.
33<PAGE>
Further information about the performance of the
Funds is contained in the SAI and will be contained in the
Funds annual reports to shareholders, which you may obtain
without charge by writing the Funds address or calling the
telephone number set forth on the cover page of this
Prospectus.
Brokerage Commissions
Although the Conduct Rules of the National
Association of Securities Dealers, Inc. prohibit its members
from seeking orders for the execution of investment company
portfolio transactions on the basis of their sales of
investment company shares, under such Rules, sales of
investment company shares may be considered in selecting
brokers to effect portfolio transactions. Accordingly, some
portfolio transactions are, subject to such Rules and to
obtaining best prices and executions, effected through dealers
who sell shares of the Funds. The Adviser may also select an
affiliated broker-dealer to execute transactions for the
Funds, provided that the commissions, fees or other
remuneration paid to such affiliated broker are reasonable and
fair as compared to that paid to non-affiliated brokers for
comparable transactions.
Retirement Plans and Medical Savings Accounts
Class A has available prototype qualified retirement
plans for both corporations and self-employed individuals.
The Trust also has available prototype Individual Retirement
Account ( IRA ) plans (for both individuals and employers) and
Simplified Employee Pension ( SEP ) plans as well as Section
403(b)(7) Tax-Sheltered Retirement Plans which are designed
for employees of public educational institutions and certain
non-profit, tax-exempt organizations. The Trust also has
information concerning prototype Medical Savings Accounts.
For information, see the SAI and call or write the
Distributor.
Shares of Beneficial Interest
All shares of beneficial interest of the Trust are
entitled to one vote, and votes are generally on an aggregate
basis. However, on matters where the interests of the Funds
differ (such as approval of an investment advisory agreement
or a change in fundamental investment policies), the voting is
on a Fund-by-Fund basis. The Trust does not hold routine
annual shareholders meetings. The shares of each Fund
issued, are fully paid and non-assessable, have no preference,
conversion, exchange or similar rights, and are freely
transferable. In addition, each issued and outstanding share
34<PAGE>
in a Fund is entitled to participate equally in dividends and
distributions declared by such Fund.
Reports to Shareholders
Investors in the Funds will be informed of their
progress through periodic reports. Financial statements
certified by independent public accountants will be submitted
to shareholders at least annually.
Class Y Shares
The Trust also offers Class Y Shares which are
available only to the following types of institutional
investors: (i) tax qualified retirement plans which have (A)
at least $10 million in plan assets; (B) 750 or more employees
eligible to participate at the time of purchase; or (C) which
certify that they will have projected annual contributions of
$2.5 million or more, (ii) banks and insurance companies which
are not affiliated with the Adviser purchasing shares for
their own account, (iii) investment companies not affiliated
with the Adviser; (iv) tax-qualified retirement plans of the
Adviser or broker-dealer wholesalers and their affiliates.
Class Y shares are available to eligible
institutional investors at net asset value without the
imposition of an initial or deferred sales charge and are not
subject to ongoing distribution fees imposed under a plan
adopted pursuant to Rule 12b-1 under the 1940 Act. The
minimum initial investment in Class Y shares is $500,000, but
this requirement may be waived at the discretion of a Fund s
officers.
The Systematic Withdrawal Plan and Automatic
Investment Plan are not available for Class Y shares.
If you are considering a purchase of Class Y shares of a
Fund, please call the Transfer Agent at (800) 986-3384 to
obtain information about eligibility.
Distributor
Conseco Equity Sales, 11815 N. Pennsylvania Street,
Carmel, Indiana 46032, serves as distributor of shares of the
Trust.
Transfer Agent
State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Trust s
transfer agent.
35<PAGE>
Custodian
The Bank of New York, 90 Washington Street, 22nd
Floor, New York, New York 10826, serves as custodian of each
Fund s assets. The Bank of New York also performs certain
administrative services for the Funds pursuant to agreements
with Conseco Services, LLC.
Independent Public Accountants
The Trust s independent public accountant is Coopers
& Lybrand, L.L.P., Indianapolis, Indiana.
Legal Counsel
Certain legal matters for the Funds are passed upon
by Jorden Burt Berenson & Johnson LLP, 1025 Thomas Jefferson
Street, N.W., Suite 400 East, Washington, D.C. 20007.
This Prospectus is not an offering of the securities
herein described in any state in which such offering may not
lawfully be made. No salesman, dealer or other person is
authorized to give any information or make any
representations, other than those contained in this Prospectus
or the SAI.
<TABLE>
<CAPTION>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Page
<S> <C>
General Information 2
Investment Objectives 2
Description of Securities and Investment Techniques 4
Investment Performance 18
Portfolio Turnover and Securities Transactions 20
Management 22
Net Asset Values of the Shares of the Funds 24
Fund Expenses 24
Distribution Arrangements 24
Purchase and Redemption of Shares 26
General 27
Taxes 29
Financial Statements 33
</TABLE>
36<PAGE>
If you would like a free copy of the Statement of
Additional Information for this Prospectus, please complete
this form, detach, and mail to:
Conseco Fund Group
Administrative Offices
11815 N. Pennsylvania Street, Carmel, Indiana 46032
Gentlemen:
Please send me a free copy of the Statement of
Additional Information for the Conseco Fund Group at the
following address:
Name:
Mailing Address:
Sincerely,
(Signature)
37<PAGE>
APPENDIX A SECURITIES RATINGS
DESCRIPTION OF CORPORATE BOND RATINGS
Moody s Investor Service, Inc. s Corporate Bond Ratings:
Aaa Bonds which are rated Aaa by Moody s Investor Service,
Inc. ( Moody s ) are judged to be the best quality and carry
the smallest degree of investment risk. 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, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group, they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. 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 Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor
poorly secured. 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 period of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of
a desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
38<PAGE>
Caa Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
Standard & Poor s Corporation s Corporate Bond Ratings:
AAA This is the highest rating assigned by Standard & Poor s
Corporation ( S&P ) to a debt obligation and indicates an
extremely strong capacity to pay principal and interest.
AA Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong, and in the majority of instances they differ from AAA
issues only in small degree.
A Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB/B/CCC/CC Bonds rated BB, B, CCC, and CC are regarded, on
balance, as predominantly speculative with respect to the
issuer s capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
CI The rating CI is reserved for income bonds on which no
interest is being paid.
D Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to B may be
modified by the addition of a plus or minus
sign to show relative standing within the major rating
categories.
Preferred Stock Ratings:
39<PAGE>
Both Moody s and S&P use the same designations for corporate
bonds as they do for preferred stock, except that in the case
of Moody s preferred stock ratings, the initial letter rating
is not capitalized. While the descriptions are tailored for
preferred stocks and relative quality, distinctions are
comparable to those described above for corporate bonds.
40<PAGE>
Conseco Fund Group
Administrative Office
11815 N. Pennsylvania Street
Carmel, Indiana 46032
January 2, 1997
41<PAGE>
Statement of Additional Information
Conseco Fund Group
Equity Fund
Asset Allocation Fund
Fixed Income Fund
Class A and Class Y Shares
January 2, 1997
This Statement of Additional Information ( SAI ) is not a prospectus. It
contains additional information about the Conseco Fund Group (the Trust )
and the three series of the Trust: Equity Fund, Asset Allocation Fund and
Fixed Income Fund (collectively, the Funds ). It should be read in
conjunction with the Fund s Class A and Class Y Prospectuses dated January
2, 1997. You may obtain a copy by contacting the Fund s Administrative
Office, 11815 N. Pennsylvania Street, Carmel, Indiana 46032.
<TABLE>
TABLE OF CONTENTS
Page
<S> <C>
General Information . . . . . . . . . . . . . . . 2
Investment Objectives . . . . . . . . . . . . . . 2
Description of Securities and
Investment Techniques . . . . . . . . . . . 4
Investment Performance . . . . . . . . . . . . . 18
Portfolio Turnover and Securities
Transactions . . . . . . . . . . . . . . . 20
Management . . . . . . . . . . . . . . . . . . . 22
Net Asset Values of the Shares of
the Funds . . . . . . . . . . . . . . . . . 24
Fund Expenses . . . . . . . . . . . . . . . . . 24
Distribution Arrangements . . . . . . . . . . . . 24
Purchase and Redemption of Shares . . . . . . . . 26
General . . . . . . . . . . . . . . . . . . . . . 27
Taxes . . . . . . . . . . . . . . . . . . . . . 29
Financial Statements . . . . . . . . . . . . . . 33
</TABLE>
GENERAL INFORMATION
The Conseco Fund Group (the Trust ) was organized as a Massachusetts
business trust on September 24, 1996. The Trust is an open-end management
investment company registered with the Securities and Exchange Commission
under the Investment Company Act of 1940 (the 1940 Act ). The Trust is a
series type of mutual fund which issues separate series of stock, each of<PAGE>
which currently represents a separate diversified portfolio of investments.
The Funds are divided into Class A and Class Y shares. Each class may have
different expenses which may affect performance.
INVESTMENT OBJECTIVES
The Trust has adopted the following objectives and policies relating to the
investment of assets of the Funds and their activities. These are
fundamental policies and may not be changed without the approval of the
holders of a majority of the outstanding shares of each Fund affected.
Under the 1940 Act, the vote of such a majority means the vote of the
holders of the lesser of (i) 67 percent of the shares represented at a
meeting at which more than 50 percent of the outstanding shares are
represented or (ii) more than 50 percent of the outstanding shares. A
change in policy affecting only one Fund may be effected with the approval
of the holders of a majority of the outstanding shares of such Fund. The
Trust may not, and each Fund may not (except as noted):
1. P u rchase securities on margin, except that Funds engaged in
transactions in options, futures, and options on futures may make
margin deposits in connection with those transactions, and except
that effecting short sales against the box will not be deemed to
constitute a purchase of securities on margin;
2. Purchase or sell commodities or commodity contracts (which, for the
purpose of this restriction, shall not include foreign currency
futures or forward currency contracts), except: (a) any Fund may
engage in interest rate futures contracts, stock index futures,
futures contracts based on other financial instruments, and options
on such futures contracts; and (b) the Asset Allocation Fund may
engage in futures contracts on gold;
3. Borrow money or pledge, mortgage, or assign assets, except that a
Fund may: (a) borrow from banks, but only if immediately after each
borrowing and continuing thereafter it will have an asset coverage of
at least 300 percent; (b) enter into reverse repurchase agreements,
options, futures, options on futures contracts, foreign currency
futures contracts and forward currency contracts as described in the
Prospectus and in this Statement of Additional Information. (The
deposit of assets in escrow in connection with the writing of covered
put and call options and the purchase of securities on a when-issued
or delayed delivery basis and collateral arrangements with respect to
initial or variation margin deposits for future contracts, and
options on futures contracts and foreign currency futures and forward
currency contracts will not be deemed to be pledges of a Fund s
assets);
4. Underwrite securities of other issuers;
5. With respect to 75% of a Fund s total assets, invest more than 5% of
the value of its assets in the securities of any one issuer if
thereafter the Fund in question would have more than 5% of its assets
2<PAGE>
in the securities of any issuer or would own more than 10% of the
outstanding voting securities of such issuer; this restriction does
not apply to U.S. government securities;
6. Invest in securities of a company for the purpose of exercising
control or management;
7. Write, purchase or sell puts, calls or any combination thereof,
except that the Funds may write listed covered or secured calls and
puts and enter into closing purchase transactions with respect to
such calls and puts if, after writing any such call or put, not more
than 25% of the assets of the Fund are subject to covered or secured
calls and puts, and except that the Funds may purchase calls and puts
with a value of up to 5% of each such Fund s net assets;
8. Participate on a joint or a joint and several basis in any trading
account in securities;
9. Invest in the securities of issuers in any one industry if thereafter
more than 25% of the assets of the Fund in question would be invested
in securities of issuers in that industry; investing in cash items,
U.S. government securities, or repurchase agreements as to these
securities, shall not be considered investments in an industry;
10. Purchase or sell real estate, except that it may purchase marketable
securities which are issued by companies which invest in real estate
or interests therein;
11. Make loans of its assets, except the Funds may enter into repurchase
agreements and lend portfolio securities in an amount not to exceed
15% of the value of a Fund s total assets. Any loans of portfolio
securities will be made according to guidelines established by the
SEC and the Board of Trustees; or
12. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act), except as permitted herein and in Investment
Restriction Nos. 1, 2 and 3. Obligations under interest rate swaps
will not be treated as senior securities for purposes of this
restriction so long as they are covered in accordance with applicable
regulatory requirements. Other good faith hedging transactions and
similar investment strategies will also not be treated as senior
securities for purposes of this restriction so long as they are
covered in accordance with applicable regulatory requirements and are
structured consistent with current SEC interpretations.
Nonfundamental Investment Restrictions
The following restrictions are designated as nonfundamental and may be
changed by the Board of Trustees without shareholder approval.
The Trust may not, and each Fund may not (except as noted):
3<PAGE>
1. With respect to in excess of 15% of a Fund s assets, sell securities
short, except that each Fund may, without limit, make short sales
against the box.
2. Purchase any high yield, high risk security if as a result more than
35% of the Fund s assets would be invested in high yield, high risk
securities.
In order to limit the risks associated with entry into repurchase
agreements, the Trustees have adopted certain criteria (which are not
fundamental policies) to be followed by the Funds. These criteria provide
for entering into repurchase agreement transactions (a) only with banks or
broker-dealers meeting certain guidelines for creditworthiness, (b) that
are fully collateralized as defined, (c) on an approved standard form of
agreement and (d) that meet limits on investments in the repurchase
agreements of any one bank, broker or dealer. In accordance with
regulatory requirements, the Board of Trustees has also adopted procedures
for segregating Fund assets whenever a Fund enters into reverse repurchase
agreements or dollar mortgage rolls with institutions other than banks.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes in greater detail different types of
securities and investment techniques used by the individual Funds, as
described in Investment Objectives and Policies of the Funds in each
Prospectus, as well as the risks associated with such securities and
techniques.
U.S. Government Securities
All of the Funds may invest in U.S. government securities as described in
the Prospectus.
All Funds may also purchase obligations of the World Bank, the Inter-
American Development Bank, the Asian Development Bank and the International
Bank for Reconstruction and Development, which, while technically not U.S.
government agencies or instrumentalities, have the right to borrow from the
participating countries, including the United States.
Asset-Backed Securities
Each Fund may invest in asset-backed securities which represent fractional
interests in pools of leases, retail installment loans and revolving credit
receivables, both secured and unsecured. These assets are generally held
by a trust. Payments of principal and interest or interest only are passed
through to certificate holders and may be guaranteed up to certain amounts
by letters of credit issued by a financial institution affiliated or
unaffiliated with the trustee or originator of the trust.
Underlying automobile sales contracts or credit card receivables are
subject to prepayment, which may reduce the overall return to certificate
4<PAGE>
holders. Nevertheless, principal repayment rates tend not to vary much
with interest rates and the short-term nature of the underlying car loans
or other receivables tends to dampen the impact of any change in the
prepayment level. Certificate holders may also experience delays in
payment on the certificates if the full amounts due on underlying sales
contracts or receivables are not realized by the trust because of
unanticipated legal or administrative costs of enforcing the contracts or
because of depreciation or damage to the collateral (usually automobiles)
securing certain contracts, or other factors. If consistent with its
investment objective and policies, the Funds may invest in other asset-
backed securities that may be developed in the future.
Debt Securities
New issues of certain debt securities are often offered on a when-issued or
delayed delivery basis; that is, the payment obligation and the interest
rate are fixed at the time the buyer enters into the commitment, but
delivery and payment for the securities normally take place after the
customary settlement time. The value of when-issued or delayed delivery
securities may vary prior to and after delivery depending on market
conditions and changes in interest rate levels. However, a Fund will not
accrue any income on these securities prior to delivery. A Fund will
maintain in a segregated account with the Trust s custodian an amount of
cash or liquid assets, including equity securities and debt securities of
any grade equal (on a daily mark-to-market basis) to the amount of its
commitment to purchase the when-issued or delayed delivery securities.
As discussed more fully in the Prospectus, the Fixed Income Fund will
invest in rated debt securities only if they are rated investment grade,
except that the Fixed Income Fund may invest up to 10 percent of the Fund s
assets in non investment grade debt securities. The Asset Allocation Fund
may also invest in high yield, high risk lower-rated fixed income
securities. The Asset Allocation Fund does not intend to invest more than
25% of its total assets (measured at the time of investment) in high yield,
high risk debt securities. The Equity and Asset Allocation Funds will not
invest in rated debt securities which are rated below CCC/Caa. All Funds
may invest in unrated securities as long as the Adviser determines that
such securities have investment characteristics comparable to securities
that would be eligible for investment by a Fund by virtue of a rating.
Many securities of foreign issuers are not rated by Moody s or Standard &
Poor s; therefore, the selection of such issuers depends, to a large
extent, on the credit analysis performed or used by the Adviser.
5<PAGE>
High Yield Debt Securities
Although the Adviser considers security ratings when making investment
decisions, it performs its own investment analysis and does not rely
principally on the ratings assigned by the rating services. Rather, the
Adviser performs research and independently assesses the relative value of
particular securities the market. The Adviser s analysis may include
consideration of the issuer s experience and managerial strength, changing
financial condition, borrowing requirements or debt maturity schedules, and
the issuer s responsiveness to changes in business conditions and interest
rates. It also considers relative values based on anticipated cash flow,
interest or dividend coverage, asset coverage and earnings prospects.
Also, the Adviser buys and sells debt securities principally in response to
its evaluation of an issuer s continuing ability to meet its obligations,
the availability of better investment opportunities, and its assessment of
changes in business conditions and interest rates. From time to time,
consistent with a Fund s investment objectives, the Adviser may also trade
high yield debt securities for the purpose of seeking short-term profits.
These securities may be sold in anticipation of a market decline or bought
in anticipation of a market rise. They may also be traded for securities
of comparable quality and maturity to take advantage of perceived short-
term disparities in market values or yields.
When-Issued and Delayed Delivery Securities
Each Fund may purchase securities on a when-issued or delayed delivery
basis. When-issued and delayed delivery transactions arise when securities
are bought with payment and delivery taking place in the future. The
settlement dates of these transactions, which may be a month or more after
entering into the transaction, are determined by mutual agreement of the
parties. A Fund bears the risk that, on the settlement date, the market
value of the securities may vary from the purchase price. At the time a
Fund makes a commitment to purchase securities on a when- issued or delayed
delivery basis, it will record the transaction and reflect the value each
day of such securities in determining the Fund s net asset value. There
are no fees or other expenses associated with these types of transactions
other than normal transaction costs. To the extent a Fund engages in when-
issued and delayed delivery transactions, it will do so for the purpose of
acquiring instruments consistent with the investment objective and policies
of the respective and not for the purpose of investment leverage or to
speculate on interest rate changes. When effecting when-issued and delayed
delivery transactions, cash and liquid securities of a Fund in an amount
sufficient to make payment for the obligations to be purchased will be
segregated at the trade date and maintained until the transaction has been
settled. The Adviser will ensure that such assets are segregated at all
times and are sufficient to satisfy these obligations. A Fund may dispose
of these securities before the issuance thereof. However, absent
extraordinary circumstances not presently foreseen, it is each Fund s
policy not to divest itself of its right to acquire these securities prior
to the settlement date thereof.
6<PAGE>
Variable and Floating Rate Securities
Each Fund may invest in variable and floating rate securities. Variable
rate securities provide for automatic establishment of a new interest rate
at fixed intervals (i.e., daily, monthly, semi-annually, etc.). Floating
rate securities provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable or floating rate securities is ordinarily determined by reference
to, or is a percentage of, a bank s prime rate, the 90-day U.S. Treasury
bill rate, the rate of return on commercial paper or bank certificates of
deposit, an index of short-term interest rates, or some other objective
measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In
many cases, the demand feature can be exercised at any time on seven days
notice; in other cases, the demand feature is exercisable at any time on 30
days notice or on similar notice at intervals of not more than one year.
Banking Industry and Savings Industry Obligations
Each Fund may invest in certificates of deposit, time deposits, bankers
acceptances, and other short-term debt obligations issued by commercial
banks and in certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ( S&Ls ). Certificates
of deposit are receipts from a bank or an S&L for funds deposited for a
specified period of time at a specified rate of return. Time deposits in
banks or S&Ls are generally similar to certificates of deposit, but are
uncertificated. Bankers acceptances are time drafts drawn on commercial
banks by borrowers, usually in connection with international commercial
transactions. The Equity Fund and Fixed Income Fund may each invest in
obligations of foreign branches of domestic commercial banks and foreign
banks so long as the securities are U.S. dollar denominated. The Asset
Allocation Fund may also invest in these types of instruments but such
instruments will not necessarily be U.S. dollar denominated. See Foreign
S e curities below for information regarding risks associated with
investments in foreign securities.
The Funds will not invest in obligations issued by a commercial bank or S&L
unless:
1. The bank or S&L has total assets of at least $1 billion, or the
equivalent in other currencies, and the institution has outstanding
securities rated A or better by Moody s or Standard & Poor s, or, if
the institution has no outstanding securities rated by Moody s or
Standard & Poor s, it has, in the determination of the Adviser,
similar creditworthiness to institutions having outstanding
securities so rated;
2. In the case of a U.S. bank or S&L, its deposits are federally
insured; and
7<PAGE>
3. In the case of a foreign bank, the security is, in the determination
of the Adviser, of an investment quality comparable with other debt
securities which may be purchased by the Fund. These limitations do
not prohibit investments in securities issued by foreign branches of
U.S. banks, provided such U.S. banks meet the foregoing requirements.
Repurchase Agreements and Reverse Repurchase Agreements
Each Fund may enter into repurchase agreements and reverse repurchase
agreements. Repurchase agreements permit an investor to maintain liquidity
and earn income over periods of time as short as overnight. Repurchase
agreements may be characterized as loans collateralized by the underlying
securities. In these transactions, a Fund purchases U.S. Treasury
obligations or U.S. government securities (the underlying securities )
from a broker or bank, which agrees to repurchase the underlying securities
on a certain date or on demand and at a fixed price calculated to produce a
previously agreed upon return to the Fund. If the broker or bank were to
default on its repurchase obligation and the underlying securities were
sold for a lesser amount, the Fund would realize a loss. A repurchase
transaction will be subject to guidelines approved by the Board of Trustees
of the Trust, which include monitoring the creditworthiness of the parties
w i th which the Fund engages in repurchase transactions, obtaining
collateral at least equal in value to the repurchase obligation, and
marking the collateral to market on a daily basis.
A reverse repurchase agreement involves the temporary sale of a security by
a Fund and its agreement to repurchase the instrument at a specified time
and price. Such agreements are short-term in nature and involve minimal
credit risks.
Although not one of the Trust s fundamental policies, it is the Trust s
present policy not to enter into a repurchase transaction which will cause
more than 10 percent of the assets of the Fixed Income Fund to be subject
to repurchase agreements having a maturity of more than seven days. This 10
percent limit also includes the aggregate of (i) fixed time deposits
subject to withdrawal penalties, other than overnight deposits; and (ii)
any restricted securities (i.e., securities which cannot freely be sold for
legal reasons) and any securities for which market quotations are not
readily available; however, this 10 percent limit does not include any
obligations payable at principal amount plus accrued interest, on demand or
within seven days after demand, and thus does not include repurchase
agreements having a maturity of seven days or less.
Warrants
The Equity and Asset Allocation Funds may invest in warrants. Each of
these Funds may invest up to 5 percent of its net assets in warrants (not
including those that have been acquired in units or attached to other
securities), measured at the time of acquisition, and each such Fund may
acquire a warrant not listed on the New York or American Stock Exchanges
if, after such acquisition, no more than 2 percent of the Fund s net assets
would be invested in such warrants.
8<PAGE>
The holder of a warrant has the right to purchase a given number of shares
of a security of a particular issuer at a specified price until expiration
of the warrant. Such investments provide greater potential for profit or
loss than a direct purchase of the same amount of the securities. Prices of
warrants do not necessarily move in tandem with the prices of the
underlying securities, and are considered speculative investments. They
pay no dividends and confer no rights other than a purchase option. If a
warrant is not exercised by the date of its expiration, a Fund would lose
its entire investment in such warrant.
Interest Rate Transactions
Each Fund may seek to protect the value of its investments from interest
rate fluctuations by entering into various hedging transactions, such as
interest rate swaps and the purchase or sale of interest rate caps and
floors. A Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio. A Fund may also enter into these transactions to protect
against an increase in the price of securities a Fund anticipates
purchasing at a later date. Each Fund intends to use these transactions as
a hedge and not as speculative investments. Interest rate swaps involve
the exchange by a Fund with another party of their respective commitments
to pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The purchase of an interest cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls
below a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate floor.
A Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis depending on whether it is hedging its
assets or its liabilities, and will only enter into such swaps, caps and
floors on a net basis, i.e., the two payment streams are netted out, with a
Fund receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of a Fund s
obligations over its entitlements with respect to each interest rate swap,
cap or floor will be accrued on a daily basis and an amount of cash or
liquid securities having an aggregate value at least equal to the accrued
excess will be maintained in a segregated account by the custodian. A Fund
will not enter into any interest rate swap, cap or floor transaction unless
the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in the highest rating category of at least one NRSRO at
the time of entering into such transaction. If there is a default by the
other party to such transaction, a Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has
grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and agents. As a
result, the swap market has become well established and provides a degree
of liquidity. Caps and floors are more recent innovations which tend to be
less liquid than swaps.
9<PAGE>
Lending Securities
Each Fund may lend its securities so long as such loans do not represent in
excess of 15% of the Fund s total assets. This is a fundamental policy.
The procedure for lending securities is for the borrower to give the Fund
collateral consisting of cash or cash equivalents. The Fund may invest the
cash collateral and earn additional income or receive an agreed-upon fee
from a borrower which has delivered cash-equivalent collateral. It is
anticipated that securities will be loaned only under the following
conditions: (1) the borrower must furnish collateral equal at all times to
the market value of the securities loaned and the borrower must agree to
increase the collateral on a daily basis if the securities increase in
value; (2) the loan will be made in accordance with New York Stock Exchange
rules, which presently require the borrower, after notice, to redeliver the
securities within five business days; (3) any cash collateral invested by a
Fund will be in short-term investments which give maximum liquidity so that
the collateral may be paid back to the borrower when the securities are
returned; (4) the Fund may pay reasonable service, placement, custodian or
other fees in connection with loans of securities and share a portion of
the interest from these investments with the borrower of the securities;
and (5) the Fund will limit the amount of lending of securities so that the
aggregate amount of interest received attributed to securities loaned, if
considered other income for the Federal tax purposes, will not cause the
Fund to lose its status as a regulated investment company.
Future Contracts
The Funds may engage in futures contracts and may purchase and sell
interest rate futures contracts. The Funds may purchase and sell stock
index futures contracts, interest rate futures contracts, and futures
contracts based upon other financial instruments and components. The Asset
Allocation Fund may also engage in gold and other precious metals futures
contracts.
Such investments may be made by these Funds solely for the purpose of
hedging against the effect that changes in general market conditions,
interest rates, and conditions affecting particular industries may have on
the values of securities held in a Fund or in which a Fund intends to
purchase, and not for purposes of speculation.
General Description of Futures Contracts. A futures contract provides for
the future sale by one party and purchase by another party of a specified
amount of a particular financial instrument (debt security) or commodity
for a specified price at a designated date, time, and place. Although
futures contracts by their terms require actual future delivery of and
payment for the underlying financial instruments, such contracts are
usually closed out before the delivery date. Closing out an open futures
contract position is effected by entering into an offsetting sale or
purchase, respectively, for the same aggregate amount of the same financial
instrument on the same delivery date. Where a Fund has sold a futures
contract, if the offsetting price is more than the original futures
10<PAGE>
contract purchase price, the Fund realizes a gain; if it is less, the Fund
realizes a loss.
At the time a Fund purchases a futures contract, an amount of cash, U.S.
government securities, or money market instruments, equal to the fair
market value less initial and variation margin of the futures contract,
will be deposited in a segregated account with the Trust s custodian to
collateralize the position and thereby ensure that such futures contract is
covered. A Fund may be required to deposit additional cash equivalent
items in the segregated account in order to continue covering the contract
as market conditions change. In addition, each Fund will comply with
certain regulations of the Commodity Futures Trading Commission to qualify
for an exclusion from being a commodity pool, which require a Fund to set
aside cash and short-term obligations with respect to long positions in a
futures contract.
Interest Rate Futures Contracts. The Funds may purchase and sell interest
rate futures contracts. An interest rate futures contract is an obligation
traded on an exchange or board of trade that requires the purchaser to
accept delivery, and the seller to make delivery, of a specified quantity
of the underlying financial instrument, such as U.S. Treasury bills and
bonds, in a stated delivery month, at a price fixed in the contract.
These Funds may purchase and sell interest rate futures as a hedge against
changes in interest rates that adversely impact the value of debt
instruments and other interest rate sensitive securities being held by a
Fund. A Fund might employ a hedging strategy whereby it would purchase an
interest rate futures contract when it is not fully invested in long-term
debt securities but wishes to defer their purchase until it can orderly
invest in such securities or because short-term yields are higher than
long-term yields. Such a purchase would enable the Fund to earn the income
on a short-term security while at the same time minimizing the effect of
all or part of an increase in the market price of the long-term debt
security which the Fund intends to purchase in the future. A rise in the
price of the long-term debt security prior to its purchase either would be
offset by an increase in the value of the futures contract purchased by the
Fund or avoided by taking delivery of the debt securities under the futures
contract.
A Fund would sell an interest rate futures contract to continue to receive
the income from a long-term debt security, while endeavoring to avoid part
or all of the decline in market value of that security which would
accompany an increase in interest rates. If interest rates rise, a decline
in the value of the debt security held by the Fund would be substantially
offset by the ability of the Fund to repurchase at a lower price the
interest rate futures contract previously sold. While the Fund could sell
the long-term debt security and invest in a short-term security, this would
ordinarily cause the Fund to give up income on its investment since long-
term rates normally exceed short-term rates.
Options on Futures Contracts. The Funds may purchase options on interest
rate futures contracts, although these Funds will not write options on any
11<PAGE>
such contracts. A futures option gives a Fund the right, in return for the
premium paid, to assume a long position (in the case of a call) or short
position (in the case of a put) in a futures contract at a specified
exercise price prior to the expiration of the option. Upon exercise of a
call option, the purchaser acquires a long position in the futures contract
and the writer of the option is assigned the opposite short position. In
the case of a put option, the converse is true. In most cases, however, a
Fund would close out its position before expiration by an offsetting
purchase or sale.
The Funds would enter into options on futures contracts only in connection
with hedging strategies. Generally, these strategies would be employed
under the same market conditions in which a Fund would use put and call
options on debt securities, as described in Options on Securities below.
Stock Index Futures Contracts. The Equity and Asset Allocation Funds may
purchase and sell stock index futures contracts. A stock index assigns
relative values to the common stocks included in an index (for example, the
Standard & Poor s 500 Index of common stocks or the New York Stock Exchange
Composite Index), and the index fluctuates with changes in the market
values of such stocks. A stock index futures contract is a bilateral
agreement to accept or make payment, depending on whether a contract is
purchased or sold, of an amount of cash equal to a specified dollar amount
multiplied by the difference between the stock index value at the close of
the last trading day of the contract and the price at which the futures
contract is originally purchased or sold.
To the extent that changes in the value of the Equity Fund or Asset
Allocation Fund correspond to changes in a given stock index, the sale of
futures contracts on that index ( short hedge ) would substantially reduce
the risk to the Fund of a market decline and, by so doing, provide an
alternative to a liquidation of securities position, which may be difficult
to accomplish in a rapid and orderly fashion. Stock index futures
contracts might also be sold:
1. When a sale of Fund securities at that time would appear to be
disadvantageous in the long-term because such liquidation would:
a. Forego possible appreciation,
b. Create a situation in which the securities would be difficult
to repurchase, or
c. Create substantial brokerage commission;
2. When a liquidation of part of the investment portfolio has commenced
or is contemplated, but there is, in the Adviser s determination, a
substantial risk of a major price decline before liquidation can be
completed; or
3. To close out stock index futures purchase transactions.
12<PAGE>
Where the Adviser anticipates a significant market or market sector
advance, the purchase of a stock index futures contract ( long hedge )
affords a hedge against the possibility of not participating in such
advance at a time when a Fund is not fully invested. Such purchases would
serve as a temporary substitute for the purchase of individual stocks,
which may then be purchased in an orderly fashion. As purchases of stock
are made, an amount of index futures contracts which is comparable to the
amount of stock purchased would be terminated by offsetting closing sales
transactions. Stock index futures might also be purchased:
1. If the Fund is attempting to purchase equity positions in issues
which it may have or is having difficulty purchasing at prices
considered by the Adviser to be fair value based upon the price of
the stock at the time it qualified for inclusion in the investment
portfolio, or
2. To close out stock index futures sales transactions.
Gold and Other Precious Metals Futures Contracts. The Asset Allocation
Fund may enter into futures contracts on gold and other precious metals. A
gold or other precious metal futures contract is a standardized contract
which is traded on a regulated commodity futures exchange, and which
provides for the future delivery of a specified amount of gold or other
precious metal at a specified date, time, and price. When the Fund
purchases a gold or other precious metal futures contract, it becomes
obligated to take delivery and pay for the gold or other precious metal
from the seller in accordance with the terms of the contract. When the
Fund sells a gold or other precious metal futures contract, it becomes
obligated to make delivery of the gold or other precious metal to the
purchaser in accordance with the terms of the contract. The Fund will
enter into gold or other precious metal futures contracts only for the
purpose of hedging its holdings or intended holdings of gold or other
precious metal stocks. The Fund will not engage in these contracts for
speculation or for achieving leverage. The hedging activities may include
purchases of futures contracts as an offset against the effect of
anticipated increases in the price of gold or other precious metal or sales
of futures contracts as an offset against the effect of anticipated
declines in the price of gold or other precious metals.
Risks Associated With Futures and Futures Options. There are several risks
associated with the use of futures and futures options for hedging
purposes. While hedging transactions may protect a Fund against adverse
movements in the general level of interest rates and economic conditions,
such transactions could also preclude the Fund from the opportunity to
benefit from favorable movements in the underlying component. There can be
no guarantee that the anticipated correlation between price movements in
the hedging vehicle and in the portfolio securities being hedged will
occur. An incorrect correlation could result in a loss on both the hedged
securities and the hedging vehicle so that the Fund return might have been
better if hedging had not been attempted. The degree of imperfection of
correlation depends on circumstances such as variations in speculative
market demand for futures and futures options, including technical
13<PAGE>
influences in futures trading and futures options, and differences between
the financial instruments being hedged and the instruments underlying the
standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to
whether, when, and how to hedge involves the exercise of skill and judgment
and even a well-conceived hedge may be unsuccessful to some degree because
of market behavior or unexpected interest rate trends.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day. Once the daily
limit has been reached on a particular contract, no trades may be made that
day at a price beyond that limit. In addition, certain of these
instruments are relatively new and without a significant trading history.
As a result, there is no assurance that an active secondary market will
develop or continue to exist. The daily limit governs only price movements
during a particular trading day and therefore does not limit potential
losses because the limit may work to prevent the liquidation of unfavorable
positions. For example, futures prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some
holders of futures contracts to substantial losses. Lack of a liquid
market for any reason may prevent a Fund from liquidating an unfavorable
position and the Fund would remain obligated to meet margin requirements
and continue to incur losses until the position is closed.
A Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. exchange or board of trade, or, in the
case of futures options, for which an established over-the-counter market
exists. A Fund will not enter into a futures contract or purchase a
futures option if immediately thereafter the initial margin deposits for
futures contracts held by the Fund plus premiums paid by it for open
futures options positions, less the amount by which any such positions are
in-the-money (i.e., the amount by which the value of the contract exceeds
the exercise price), would exceed 5 percent of the Fund s net assets.
Options on Securities
The Funds may purchase put and call options on securities, and the Equity
and Asset Allocation Funds may purchase put and call options on stock
indices at such times as the Adviser deems appropriate and consistent with
a Fund s investment objective. Such Funds may also write covered and
secured call and put options. A Fund may write covered and secured
options with respect to not more than 25 percent of its net assets. A Fund
may purchase call and put options with a value of up to 5 percent of its
net assets. Each of these Funds may enter into closing transactions in
order to terminate its obligations either as a writer or a purchaser of an
option prior to the expiration of the option.
Purchasing Options on Securities. An option on a security is a contract
that gives the purchaser of the option, in return for the premium paid, the
14<PAGE>
right to buy a specified security (in the case of a call option) or to sell
a specified security (in the case of a put option) from or to the seller
( writer ) of the option at a designated price during the term of the
option. A Fund may purchase put options on securities to protect holdings
in an underlying or related security against a substantial decline in
market value. Securities are considered related if their price movements
generally correlate to one another. For example, the purchase of put
options on debt securities held by a Fund would enable a Fund to protect,
at least partially, an unrealized gain in an appreciated security without
actually selling the security. In addition, the Fund would continue to
receive interest income on such security.
A Fund may purchase call options on securities to protect against
substantial increases in prices of securities which the Fund intends to
purchase pending its ability to invest in such securities in an orderly
manner. A Fund may sell put or call options it has previously purchased,
which could result in a net gain or loss depending on whether the amount
realized on the sale is more or less than the premium and other
transactional costs paid on the option which is sold.
Writing Covered Call and Secured Put Options. In order to earn additional
income on its portfolio securities or to protect partially against declines
in the value of such securities, the Funds may each write covered and
secured call options. The exercise price of a call option may be below,
equal to, or above the current market value of the underlying security at
the time the option is written. During the option period, a covered call
option writer may be assigned an exercise notice by the broker-dealer
through whom such call option was sold requiring the writer to deliver the
underlying security against payment of the exercise price. This obligation
is terminated upon the expiration of the option period or at such earlier
time in which the writer effects a closing purchase transaction. Closing
purchase transactions will ordinarily be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being
called, to permit the sale of the underlying security, or to enable the
Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both.
In order to earn additional income or to facilitate its ability to purchase
a security at a price lower than the current market price of such security,
the Funds may write secured put options. During the option period, the
writer of a put option may be assigned an exercise notice by the broker-
dealer through whom the option was sold requiring the writer to purchase
the underlying security at the exercise price.
A Fund may write a call or put option only if the call option is covered
or the put option is secured by the Fund. Under a covered call option,
the Fund is obligated, as the writer of the option, to own the underlying
securities subject to the option or hold a call at the same exercise price,
for the same exercise period, and on the same securities as the written
call. Under a secured put option, a Fund must maintain, in a segregated
account with the Trust s custodian, cash, cash equivalents, or U.S.
government securities with a value sufficient to meet its obligation as
15<PAGE>
writer of the option. A put may also be secured if the Fund holds a put on
the same underlying security at an equal or greater exercise price. Prior
to exercise or expiration, an option may be closed out by an offsetting
purchase or sale of an option of the same Fund.
Options on Securities Indices. The Equity and Asset Allocation Funds may
purchase call and put options on securities indices. Call and put options
on securities indices also may be purchased or sold by a Fund for the same
purposes as the purchase or sale of options on securities. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payment and does not
involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
s e curities or segment of the securities market rather than price
fluctuations in a single security. The Equity and Asset Allocation Funds
may write put and call options on securities indices. When such options
are written, the Fund is required to maintain a segregated account
consisting of cash, or liquid securities, or the Fund must purchase a like
option of greater value that will expire no earlier than the option
written. The purchase of such options may not enable a Fund to hedge
effectively against stock market risk if they are not highly correlated
with the value of a Fund s securities. Moreover, the ability to hedge
effectively depends upon the ability to predict movements in the stock
market, which cannot be done accurately in all cases.
Risks of Options Transactions. The purchase and writing of options
involves certain risks. During the option period, the covered call writer
has, in return for the premium on the option, given up the opportunity to
profit from a price increase in the underlying securities above the
exercise price, and, as long as its obligation as a writer continues, has
retained the risk of loss should the price of the underlying security
decline. The writer of an option has no control over the time when it may
be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option
and must deliver the underlying securities at the exercise price. If a put
or call option purchased by a Fund is not sold when it has remaining value,
and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a
call, remains less than or equal to the exercise price, the Fund will lose
its entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a
related security, the price of the put or call option may move more or less
than the price of the related security.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to
close out a position. If a Fund cannot effect a closing transaction, it
will not be able to sell the underlying security while the previously
written option remains outstanding, even though it might otherwise be
advantageous to do so. Possible reasons for the absence of a liquid
16<PAGE>
s e condary market on a national securities exchange could include:
insufficient trading interest, restrictions imposed by national securities
exchanges, trading halts or suspensions with respect to call options or
their underlying securities, inadequacy of the facilities of national
securities exchanges or The Options Clearing Corporation due to a high
trading volume or other events, and a decision by one or more national
securities exchanges to discontinue the trading of call options or to
impose restrictions on certain types of orders.
Since option premiums paid or received by a Fund, as compared to underlying
investments, are small in relation to the market value of such investments,
buying and selling put and call options offer large amounts of leverage.
Thus, the leverage offered by trading in options could result in a Fund s
net asset value being more sensitive to changes in the value of the
underlying securities.
Foreign Currency Transactions
The Asset Allocation Fund may enter into foreign currency futures contracts
and forward currency contracts. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency, at a future date at a price set at the time of the
contract. A forward currency contract is an obligation to purchase or sell
a currency against another currency at a future date at a price agreed upon
by the parties. The Fund may either accept or make delivery of the
currency at the maturity of the contract or, prior to maturity, enter into
a closing transaction involving the purchase or sale of an offsetting
contract. The Fund will engage in foreign currency futures contracts and
forward currency transactions in anticipation of or to protect itself
against fluctuations in currency exchange rates. The Fund will not commit
more than 15 percent of its total assets computed at market value at the
time of commitment to a foreign currency futures or forward currency
contracts. The Fund will purchase and sell such contracts for hedging
purposes and not as an investment. The Fund will not enter into a foreign
currency contract with a term of greater than one year.
Foreign currency futures and forward currency contracts are not traded on
regulated commodities exchanges. There can be no assurance that a liquid
market will exist when a Fund seeks to close out a foreign currency futures
or forward currency position, in which case a Fund might not be able to
effect a closing purchase transaction at any particular time. In addition,
a Fund entering into a foreign currency futures or forward currency
contract incurs the risk of default by the counter party to the
transaction. While these contracts tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time, they
tend to limit any potential gain which might result should the value of
such currency increase.
Although the Asset Allocation Fund values assets daily in U.S. dollars, it
does not intend to physically convert its holdings of foreign currencies
into U.S. dollars on a daily basis. The Fund will do so from time to time
and investors should be aware of the costs of currency conversion. Although
17<PAGE>
foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the spread ) between the prices
at which they are buying and selling various currencies. Thus, a dealer
may offer to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Options on Foreign Currencies
The Asset Allocation Fund may invest up to 5 percent of its total assets,
taken at market value at the time of investment, in call and put options on
domestic and foreign securities and foreign currencies. The Fund may
purchase call and put options on foreign currencies as a hedge against
changes in the value of the U.S. dollar (or another currency) in relation
to a foreign currency in which portfolio securities of the Fund may be
denominated. A call option on a foreign currency gives the purchaser the
right to buy, and a put option the right to sell, a certain amount of
foreign currency at a specified price during a fixed period of time. The
Fund may enter into closing sale transactions with respect to such options,
exercise them, or permit them to expire.
The Asset Allocation Fund may employ hedging strategies with options on
currencies before the Fund purchases a foreign security denominated in the
hedged currency, during the period the Fund holds the foreign security, or
between the day the foreign security is purchased or sold and the date on
which payment therefor is made or received. Hedging against a change in
the value of a foreign currency in the foregoing manner does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions
reduce or preclude the opportunity for gain if the value of the hedged
currency should change relative to the U.S. dollar. The Fund will purchase
options on foreign currencies only for hedging purposes and will not
speculate in options on foreign currencies. The Fund may invest in options
on foreign currency which are either listed on a domestic securities
exchange or traded on a recognized foreign exchange.
An option position on a foreign currency may be closed out only on an
exchange which provides a secondary market for an option of the same
series. Although the Asset Allocation Fund will purchase only exchange-
traded options, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time.
In the event no liquid secondary market exists, it might not be possible to
effect closing transactions in particular options. If the Fund cannot
close out an exchange-traded option which it holds, it would have to
exercise its option in order to realize any profit and would incur
transactional costs on the sale of the underlying assets.
Borrowing
For temporary purposes, such as to facilitate redemptions, a Fund may
borrow money from a bank, but only if immediately after each such borrowing
and continuing thereafter the Fund would have asset coverage of 300
18<PAGE>
percent. Leveraging by means of borrowing will exaggerate the effect of
any increase or decrease in the value of portfolio securities on a Fund s
net asset value; money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances), which may or may not exceed the income received from the
securities purchased with borrowed funds. The use of borrowing tends to
result in a faster than average movement, up or down, in the net asset
value of a Fund s shares. A Fund also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment
or other fee to maintain a line of credit; either of these requirements
would increase the cost of borrowing over the stated interest rate.
Investment in Securities of Other Investment Companies
Each Fund may purchase securities of other investment companies. Such
securities have the potential to appreciate as do any other securities, but
tend to present less risk because their value is based on a diversified
portfolio of investments. The 1940 Act expressly permits mutual funds such
as the Trust to invest in other investment companies within prescribed
limitations. An investment company may invest in other investment
companies if at the time of such investment (1) it does not purchase more
than 3 percent of the voting securities of any one investment company, (2)
it does not invest more than 5 percent of its assets in any single
investment company, and (3) the investment in all investment companies does
not exceed 10 percent of assets. Each Fund will comply with all of these
limitations with respect to the purchase of securities issued by other
investment companies.
Investment companies in which the Funds may invest charge advisory and
administrative fees and may also assess a sales load and/or distribution
fees. Therefore, investors in a Fund that invested in other investment
companies would indirectly bear costs associated with those investments as
well as the costs associated with investing in the Fund. The percentage
limitations described above significantly limit the costs a Fund may incur
in connection with such investments.
INVESTMENT PERFORMANCE
Standardized Yield Quotations. Each class of the Fixed Income Fund, Equity
Fund, and Asset Allocation Fund may advertise investment performance
figures, including yield. Each class yield will be based upon a stated 30-
day period and will be computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on
the last day of the period, according to the following formula:
YIELD = 2 [(A B/CD)+1)6 1]
Where:
A = the dividends and interest earned during the period.
B = the expenses accrued for the period (net of reimbursements, if any).
19<PAGE>
C = the average daily number of shares outstanding during the period that
were entitled to
receive dividends.
D = the maximum offering price (which is the net asset value) per share on
the last day
of the period.
Standardized Average Annual Total Return Quotations. Each class of the
Funds may advertise its total return and its cumulative total return. The
total return will be based upon a stated period and will be computed by
finding the average annual compounded rate of return over the stated period
that would equate an initial amount invested to the ending redeemable value
of the investment (assuming reinvestment of all distributions), according
to the following formula:
P (1+T)n=ERV
Where:
P = a hypothetical initial payment of $1,000.
T = the average annual total return.
n = the number of years.
ERV = the ending redeemable value at the end of the stated
period of a hypothetical $1,000 payment made at the
beginning of the stated period.
The cumulative total return will be based upon a stated period and will be
computed by dividing the ending redeemable value of a hypothetical
investment by the value of the initial investment (assuming reinvestment of
all distributions).
Each investment performance figure will be carried to the nearest hundredth
of one percent.
Non-Standardized Performance. In addition, in order to more completely
represent a Fund s performance or more accurately compare such performance
to other measures of investment return, a Fund also may include in
advertisements, sales literature and shareholder reports other total return
performance data ( Non-Standardized Return ). Non-Standardized Return may
be quoted for the same or different periods as those for which Standardized
Return is quoted; it may consist of an aggregate or average annual
percentage rate of return, actual year-by-year rates or any combination
thereof. Non-Standardized Return may or may not take sales charges into
account; performance data calculated without taking the effect of sales
charges into account will be higher than data including the effect of such
charges. All non-standardized performance will be advertised only if the
standard performance data for the same period, as well as for the required
periods, is also presented.
General Information. From time to time, the Funds may advertise their
performance compared to similar funds using certain unmanaged indices,
reporting services and publications. Descriptions of some of the indices
which may be used are listed below.
20<PAGE>
The Standard & Poor s 500 Composite Stock Price Index is a well diversified
list of 500 companies representing the U.S. Stock Market.
The NASDAQ Composite OTC Price Index is a market value-weighted and
unmanaged index showing the changes in the aggregate market value of
approximately 3,500 stocks.
The Lehman Government Bond Index is a measure of the market value of all
public obligations of the U.S. Treasury; all publicly issued debt of all
agencies of the U.S. Government and all quasi-federal corporations; and all
corporate debt guaranteed by the U.S. Government. Mortgage backed
securities, bonds and foreign targeted issues are not included in the
Lehman Government Index.
The Lehman Government/Corporate Bond Index is a measure of the market value
of approximately 5,300 bonds with a face value currently in excess of $1.3
trillion. To be included in the Lehman Government/Corporate Index, an
issue must have amounts outstanding in excess of $1 million, have at least
one year to maturity and be rated Baa or higher ( investment grade ) by a
nationally recognized rating agency.
The Lehman Brothers Aggregate Bond Index is an index consisting of the
Lehman Brothers Government/Corporate Bond Index, the Lehman Brothers
Mortgage-Backed Securities Index, and the Lehman-Brothers Assets-Backed
Securities Index. The Government/Corporate Bond Index is described above.
The Mortgage-Backed Securities Index consists of 15 and 30-year fixed rate
securities backed by mortgage pools of GNMA, FHLMC and FNMA (excluding
buydowns, manufactured homes and graduated equity mortgages). The Asset-
Backed Securities Index consists of credit card, auto and home equity loans
(excluding subordinated tranches) with an average life of one year. Each
Index includes income and distributions but does not reflect fees,
brokerage commissions or other expenses of investing.
In addition, from time to time in reports and promotions a Fund s
performance may be compared to: (1) other groups of mutual funds tracked
by: (a) Lipper Analytical Services, a widely used independent research firm
which ranks mutual funds by overall performance, investment objectives, and
assets; (b) Morningstar, Inc., another widely used independent research
f i r m which ranks mutual funds by overall performance, investment
objectives, and assets; or (c) other financial or business publications,
such as Business Week, Money Magazine, Forbes and Barron s which provide
similar information; (2) the Consumer Price Index (measure for inflation)
may be used to assess the real rate of return from an investment in a Fund;
(3) other statistics such as GNP, and net import and export figures derived
from governmental publications, e.g., The Survey of Current Business or
other independent parties, e.g., the Investment Company Institute, may be
used to illustrate investment attributes to a Fund or the general economic,
business, investment, or financial environment in which a Fund operates;
(4) various financial economic and market statistics developed by brokers,
dealers and other persons may be used to illustrate aspects of a Fund s
performance; and (5) the sectors or industries in which the Fund invests
may be compared to relevant indices or surveys (e.g., S&P Industry Surveys)
21<PAGE>
in order to evaluate the Fund s historical performance or current or
potential value with respect to the particular industry or sector.
PORTFOLIO TURNOVER AND SECURITIES TRANSACTIONS
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities (excluding certain
short-term securities) for a year and dividing it by the monthly average of
the market value of such securities during the year. The Funds do not have
a predetermined rate of portfolio turnover since such turnover will be
incidental to transactions taken with a view to achieving their respective
objectives.
High turnover and short-term trading involve correspondingly greater
commission expenses and transaction costs. If a Fund derives more than 30
percent of its gross income from the sale of securities held less than
three months, the Fund may fail to qualify under the tax laws as a
regulated investment company in particular years and thereupon would lose
c e r tain beneficial tax treatment of its income (see Dividends,
Distributions and Taxes in the Prospectus).
The Adviser is responsible for decisions to buy and sell securities for
each Fund, broker-dealer selection, and negotiation of its brokerage
commission rates. The Adviser s primary consideration in effecting a
securities transaction will be execution at the most favorable price and
the Adviser understands that a substantial majority of a Fund s portfolio
transactions will be transacted with primary market makers acting as
principal on a net basis, with no brokerage commissions being paid by a
Fund. In certain instances, the Adviser may make purchases of underwritten
issues at prices which include underwriting fees, and, in selecting a
broker-dealer to execute each particular transaction, the Adviser will take
the following into consideration: the best net price available; the
reliability, integrity and financial condition of the broker-dealer; and
the size of contribution of the broker-dealer to the investment performance
of a Fund on a continuing basis. The Adviser shall not be deemed to have
acted unlawfully or to have breached any duty created by the Investment
Advisory Agreement in question or otherwise solely by reason of its having
caused a Fund to pay a broker-dealer that provides brokerage and research
services to the Adviser an amount of commission for effecting a portfolio
investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if the
Adviser determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Adviser s overall responsibilities with respect to a
Fund. The Adviser allocates the orders placed by it on behalf of a Fund to
such broker-dealers who also provide research or statistical material, or
other services to a Fund, the Adviser or its clients. Such allocation
shall be in such amounts and proportions as the Adviser shall determine and
the Adviser will report on said allocations regularly to a Fund indicating
the broker-dealers to whom such allocations have been made and the basis
22<PAGE>
therefor. Broker-dealers may be selected who provide brokerage and/or
research services to a Fund and/or other accounts over which the Adviser
exercises investment discretion. Such services may include advice
concerning the value of securities (including providing quotations as to
securities); the advisability of investing in, purchasing or selling
securities; the availability of securities or the purchasers or sellers of
securities; furnishing analysis and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance
of accounts; and effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
The receipt of research from broker-dealers may be useful to the Adviser in
rendering investment management services to the Funds and/or the Adviser s
other clients; conversely, such information provided by broker-dealers who
have executed transaction orders on behalf of other clients may be useful
to the Adviser in carrying out its obligations to the Funds. The receipt
of such research will not be substituted for the independent research of
the Adviser. It does enable the Adviser to reduce costs to less than those
which would have been required to develop comparable information through
its own staff. The use of broker-dealers who supply research may result in
the payment of higher commissions than those available from other broker-
dealers who provide only the execution of portfolio transactions. Orders
on behalf of the Funds may be bunched with orders on behalf of other
clients of the Adviser.
The Board of Trustees periodically reviews the Adviser s performance of its
responsibilities in connection with the placement of portfolio transactions
on behalf of the Trust.
MANAGEMENT
The Adviser
Conseco Capital Management, Inc. (the Adviser ) provides investment advice
and, in general, supervises the Trust s management and investment program,
furnishes office space, prepares reports for the Funds, monitors compliance
by the Funds in their investment activities and pays all compensation of
officers and Trustees of the Trust who are affiliated persons of the
Adviser. Each Fund pays all other expenses incurred in the operation of the
Funds, including fees and expenses of unaffiliated Trustees of the Trust.
The Investment Advisory Agreements, dated January 2, 1997, provide that
the Adviser shall not be liable for any error in judgment or mistake of law
or for any loss suffered by a Fund in connection with any investment policy
o r t h e purchase, sale or redemption of any securities on the
recommendations of the Adviser. The Agreements provide that the Adviser is
not protected against any liability to a Fund or its security holders for
which the Adviser shall otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by the Agreements or the violation of any applicable
law.
23<PAGE>
The Adviser has voluntarily agreed to waive its management fee and/or
reimburse each Fund through April 30, 1998, to the extent that the ratio of
expenses (exclusive of taxes, interest, brokerage and other transaction
expenses and any other extraordinary expenses) to net assets on an annual
basis exceeds the following percentage of average annual net assets of
Class A shares each Fund: 1.50% for Equity, 1.50% for Asset Allocation, and
1.25% for Fixed Income and of Class Y Shares of each fund: 1.00% for
Equity, 1.00% for Asset Allocation, and .60% for Fixed Income.
Trustees and Officers
The Trustees and officers of the Trust, their affiliations, if any, with
the Adviser and their principal occupations are set forth below.
Name, Address Position Held Principal Occupation(s)
and Age With Trust or During
Adviser Past 5 Years
William P. Daves, Jr. (71) Chairman of Consultant to insurance
5723 Trail Meadow the Board, and healthcare industries.
Dallas, TX 75230 Trustee Director, President and
Chief Executive Officer,
FFG Insurance Co.
Maxwell E. Bublitz* (41) President and Chartered Financial
11825 N. Pennsylvania St. Trustee; Analyst. President,
Carmel, IN 46032 President and Adviser. Previously,
a Director of Sr. Vice President,
Adviser Adviser.
Gregory J. Hahn* (35) Vice Chartered Financial
11825 N. Pennsylvania St. President for Analyst. Senior Vice
Carmel, IN 46032 Investments President, Adviser.
and Trustee; Portfolio Manager of the
Senior Vice fixed income portion of
President, Asset Allocation and Fixed
Adviser Income Funds.
Harold W. Hartley (73) Trustee Retired. Chartered
317 Peppard Drive, S.W. Financial Analyst.
Ft. Myers Beach, Fl 33913 Previously, Executive Vice
President, Tenneco
Financial Services, Inc.
Dr. R. Jan LeCroy (65) Trustee President, Dallas Citizens
Dallas Citizens Council Council.
1201 Main Street, Suite 2444
Dallas, TX 75202
Dr. Jesse H. Parrish (69) Trustee Former President, Midland
2805 Sentinel College. Higher Education
Midland, TX 79701 Consultant.
24<PAGE>
William P. Latimer (61) Vice Vice President, Sr.
11825 N. Pennsylvania St. President and Counsel and Secretary, and
Carmel, IN 46032 Secretary; Chief Compliance Officer
Vice of Adviser. Previously,
President, Consultant to securities
Director and industry. Previously,
Chief Senior Vice
Compliance President Compliance,
Officer of USF&G Investment Services,
Adviser Inc. and Vice President,
Axe-Houghton Management
Inc.
James S. Adams (37) Treasurer Sr. Vice President,
11815 N. Pennsylvania St. Bankers National, Great
Carmel, IN 46032 American Reserve.
William T. Devanney, Jr. (41) Vice Sr. Vice President,
11815 N. Pennsylvania St. President, Corporate Taxes, Bankers
Carmel, IN 46032 Corporate National and Great
Taxes American Reserve.
* The Trustee so indicated is an interested person, as defined in the
Investment Company Act of 1940, of the Trust due to the positions
indicated with the Adviser.
NET ASSET VALUES OF THE SHARES OF THE FUNDS
Securities held by the Funds will be valued as follows: Fund securities
which are traded on stock exchanges are valued at the last sale price as of
the close of business on the day the securities are being valued, or
lacking any sales, at the mean between the closing bid and asked prices.
Securities traded in the over-the-counter market are valued at the mean
between the bid and asked prices or yield equivalent as obtained from one
or more dealers that make markets in the securities. Fund securities which
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-
counter market. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by
or under the direction of the Board of Trustees of the Trust. In valuing
lower-rated debt securities, it should be recognized that judgment plays a
greater role than is the case with respect to securities for which a
broader range of dealer quotations and last sale information is available.
Debt securities with maturities of sixty (60) days or less are valued at
amortized cost.
25<PAGE>
FUND EXPENSES
Each Fund pays its own expenses including, without limitation (i) expenses
of maintaining the Fund and continuing its existence, (ii) registration of
the Fund under the Investment Company Act, (iii) auditing, accounting and
legal expenses, (iv) taxes and interest, (v) governmental fees, (vi)
expenses of issue, sale, repurchase and redemption of Fund shares, (vii)
expenses of registering and qualifying the Fund and its shares under
f e d eral and state securities laws and of preparing and printing
p r o spectuses for such purposes and for distributing the same to
shareholders, and fees and expenses of registering and maintaining
registrations of the Fund under state securities laws, (viii) expenses and
reports and notices to shareholders and of meetings of shareholders and
proxy solicitations thereof, (ix) expenses of reports to governmental
o f ficers and commissions, (x) insurance expenses, (xi) association
membership dues, (xii) fees, expenses and disbursements of custodians for
all services to the Fund, (xiii) fees, expenses and disbursements of
transfer agents, dividend disbursing agents, shareholder servicing agents
and registrars for all services to the Fund, (xiv) expenses for servicing
shareholder accounts, (xv) any direct charges to Fund shareholders approved
by the Trustees of the Trust, (xvi) compensation and expenses of Trustees
of the Trust who are not interested persons of the Trust, and (xvii) such
nonrecurring items as may arise, including expenses incurred in connection
with litigation, proceedings and claims and the obligation of the Fund to
indemnify its Trustees and officers with respect thereto.
DISTRIBUTION ARRANGEMENTS
Conseco Equity Sales, Inc. (The Distributor ) serves as the principal
underwriter for each Fund pursuant to an Underwriting Agreement, dated
January 2, 1997, initially approved by the Board of Trustees. The
Distributor, is a registered broker-dealer and member of the National
Association of Securities Dealers, Inc. (NASD). Shares of each Fund will
be continuously offered and will be sold by selected broker-dealers who
have executed selling agreements with the Distributor. The Distributor
bears all the expenses of providing services pursuant to the Underwriting
A g r eement including the payment of the expenses relating to the
distribution of Prospectuses for sales purposes as well as any advertising
or sales literature. The Underwriting Agreement continues in effect for
two years from initial approval and for successive one-year periods
thereafter, provided that each such continuance is specifically approved
(i) by the vote of a majority of the Trustees of the Trust, including a
majority of the Trustees who are not parties to the Underwriting Agreement
or interested persons of any such party (as the term interested person is
defined in the 1940 Act); or (ii) by the vote of a majority of the
outstanding voting securities of a Fund. The Distributor is not obligated
to sell any specific amount of shares of any Fund.
The Distributor s principal address is 11815 N. Pennsylvania Street,
Carmel, Indiana 46032.
26<PAGE>
Distribution and Service Plan
The Trust has adopted a distribution and service plan (the Plan ) for
Class A shares of each Fund pursuant to appropriate resolutions of the
Trustees of the Trust in accordance with the requirements of Rule 12b-1
under the 1940 Act and the requirements of the applicable rules of the NASD
regarding asset based sales charges.
Pursuant to the Class A Plan, a Fund may compensate the Distributor for its
expenditures in financing any activity primarily intended to result in the
sale of Fund shares and for maintenance and personal service provided to
existing Class A shareholders. The expenses of a Fund pursuant to the
Class A Plan are currently being accrued on a fiscal year basis with
respect to the Class A Shares of each Fund at an annual rate of 0.25% of
the Fund s average daily net assets attributable to Class A shares. The
Plan as adopted authorizes the Trustees to increase this annual rate to
0.35% of such assets. Up to 0.25% of the fee may be used for shareholder
servicing expenses with the remainder used for distribution expenses. Up
to 0.25% of the fee may be paid to dealers in the form of a trail or
maintenance fee after the first full year of investment in an amount equal
to an annual rate of 0.25% of Class A s daily net assets owned by clients
of such dealers.
In accordance with the terms of the Plan, the Distributor provides to each
Fund, for review by the Trustees, a quarterly written report of the amounts
expended under the Plan and the purpose for which such expenditures were
made. In the Trustees quarterly review of the Plan, they will review the
level of compensation the Plan provides in considering the continued
appropriateness of the Plan.
The Plan was adopted by a majority vote of the Trustees of the Trust,
including at least a majority of Trustees who are not, and were not at the
time they voted, interested persons of each Fund as defined in the 1940 Act
and do not and did not have any direct or indirect financial interest in
the operation of the Plan, cast in person at a meeting called for the
purpose of voting on the Plan. In approving the Plan, the Trustees
identified and considered a number of potential benefits which the Plan may
provide. The Trustees believe that there is a reasonable likelihood that
the Plan will benefit each Fund and its current and future shareholders.
Under their terms, the Plan remains in effect from year to year provided
such continuance is approved annually by vote of the Trustees in the manner
described above. The Plan may not be amended to increase materially the
amount to be spent for distribution without approval of the shareholders of
the affected Fund, and material amendments to the Plan must also be
approved by the Trustees in a manner described above. The Plan may be
terminated at any time, without payment of any penalty, by vote of the
majority of the Trustees who are not interested persons of the Trust and
have no direct or indirect financial interest in the operations of the
Plan, or by a vote of a majority of the outstanding voting securities (as
defined in the 1940 Act of the Fund affected thereby. The Plan will
automatically terminate in the event of its assignment (as defined in the
1940 Act).
27<PAGE>
PURCHASE AND REDEMPTION OF SHARES
For information regarding the purchase of Fund shares, see How to Buy
Shares in each Prospectus.
For a description of how a shareholder may have a Fund redeem his or her
shares, or how he or she may sell shares, see How to Redeem Shares of the
Funds in each Prospectus.
Rights of Accumulation. Each Fund offers to all qualifying investors
Rights of Accumulation under which investors are permitted to purchase
Class A shares of any Fund of the Trust at the price applicable to the
total of (a) the dollar amount then being purchased plus (b) an amount
equal to the then current net asset value of the purchaser s holdings of
shares of any Funds of the Trust and the current cash value of the variable
annuity or variable life contracts issued by affiliates of Conseco.
A c c e ptance of the purchase order is subject to confirmation of
qualification. The rights of accumulation may be amended or terminated at
any time as to subsequent purchases.
Letter of Intent. Any person may qualify for a reduced sales charge on
purchases of Class A shares made within a 13-month period pursuant to a
Letter of Intent (LOI). Class A shares acquired through the reinvestment
of distributions do not constitute purchases for purposes of the LOI. A
Class A shareholder may include, as an accumulation credit towards the
completion of such LOI, the value of all shares of all Funds of the Trust
owned by the shareholder. Such value is determined based on the public
offering price of the date of the LOI. During the term of an LOI, Boston
Financial Data Services ( BFDS ), the Trust s transfer agent, will hold
shares in escrow to secure payment of the higher sales charge applicable
for shares actually purchased if the indicated amount on the LOI is not
purchased. Dividends and capital gains will be paid on all escrowed shares
and these shares will be released when the amount indicated on the LOI has
been purchased. A LOI does not obligate the investor to buy or the Fund to
sell the indicated amount of the LOI. If a Class A shareholder exceeds the
specified amount of the LOI and reaches an amount which would qualify for a
further quantity discount, a retroactive price adjustment will be made at
the time of the expiration of the LOI. The resulting difference in
o f f e ring price will purchase additional Class A shares for the
shareholder s account at the applicable offering price. If the specified
amount of the LOI is not purchased, the shareholder shall remit to BFDS an
amount equal to the difference between the sales charge paid and the sales
charge that would have been paid had the aggregate purchases been made at a
single time. If the Class A shareholder does not within 20 days after a
written request by BFDS pay such difference in sales charge, BFDS will
redeem an appropriate number of escrowed shares in order to realize such
difference. Additional information about the terms of the Letter of Intent
are available from your registered representative or from BFDS at (800)
986-3384.
28<PAGE>
Systematic Withdrawal Plan. The Systematic Withdrawal Plan ( SWP ) is
designed to provide a convenient method of receiving fixed payments at
regular intervals only from Class A shares of a Fund deposited by the
applicant under this SWP. The applicant must deposit or purchase for
deposit shares of the Fund having a total value of not less than $5,000.
Periodic checks of $50 or more will be sent to the applicant, or any person
designated by him, monthly or quarterly.
Any income dividends or capital gains distributions on shares under the SWP
will be credited to the SWP account on the payment date in full and
fractional shares at the net asset value per share in effect on the record
date.
SWP payments are made from the proceeds of the redemption of shares
d e posited in a SWP account. Redemptions are potentially taxable
transactions to shareholders. To the extent that such redemptions for
periodic withdrawals exceed dividend income reinvested in the SWP account,
such redemptions will reduce and may ultimately exhaust the number of
shares deposited in the SWP account. In addition, the amounts received by
a shareholder cannot be considered as an actual yield or income on his or
her investment because part of such payments may be a return of his or her
capital.
The SWP may be terminated at any time (1) by written notice to the Fund or
from the Fund to the shareholder; (2) upon receipt by the Fund of
appropriate evidence of the shareholder s death; or (3) when all shares
under the SWP have been redeemed. The fees of the Fund for maintaining
SWPs are paid by the Fund.
Suspension Of Redemptions
A Fund may not suspend a shareholder s right of redemption, or postpone
payment for a redemption for more than seven days, unless the New York
Stock Exchange (NYSE) is closed for other than customary weekends or
holidays, or trading on the NYSE is restricted, or for any period during
which an emergency exists as a result of which (1) disposal by a Fund of
securities owned by it is not reasonably practicable, or (2) it is not
reasonably practicable for a Fund to fairly determine the value of its
assets, or for such other periods as the Securities and Exchange Commission
may permit for the protection of investors.
GENERAL
The Trustees themselves have the power to alter the number and terms of
office of the Trustees, and they may at any time lengthen their own terms
or make their terms of unlimited duration (subject to certain removal
procedures) and appoint their own successors, provided that always at least
a majority of the Trustees have been elected by the shareholders of the
Trust. The voting rights of shareholders are not cumulative, so that
29<PAGE>
holders of more than 50 percent of the shares voting can, if they choose,
elect all Trustees being selected, while the holders of the remaining
shares would be unable to elect any Trustees. The Trust is not required to
hold Annual Meetings of Shareholders for action by shareholders vote
except as may be required by the 1940 Act or the Declaration of Trust. The
Declaration of Trust provides that shareholders can remove Trustees by a
vote of two-thirds of the vote of the outstanding shares. The Trustees
will call a meeting of shareholders to vote on the removal of a Trustee
upon the written request of the holders of 10 percent of the Trust s
shares. In addition, 10 or more shareholders meeting certain conditions
and holding the lesser of $25,000 worth or 1 percent of the Trust s shares
may advise the Trustees in writing that they wish to communicate with other
shareholders for the purpose of requesting a meeting to remove a Trustee.
The Trustees will then either give those shareholders access to the
shareholder list or, if requested by those shareholders, mail at the
shareholders expense the shareholders communication to all other
shareholders.
Each issued and outstanding share of each Fund is entitled to participate
equally in dividends and distributions of the respective Fund and in the
net assets of such Fund upon liquidation or dissolution remaining after
satisfaction of outstanding liabilities. The shares of each Fund have no
preference, preemptive, conversion, exchange or similar rights, and are
freely transferable.
Under Rule 18f-2 under the 1940 Act, as to any investment company which has
two or more series (such as the Funds) outstanding and as to any matter
required to be submitted to shareholder vote, such matter is not deemed to
have been effectively acted upon unless approved by the holders of a
majority (as defined in that Rule) of the voting securities of each
series affected by the matter. Such separate voting requirements do not
apply to the election of Trustees or the ratification of the selection of
accountants. The Rule contains special provisions for cases in which an
advisory contract is approved by one or more, but not all, series. A
change in investment policy may go into effect as to one or more series
whose holders so approve the change even though the required vote is not
obtained as to the holders of other affected series. Under Rule 18f-3
under the 1940 Act, the Class A and Class Y shares of a Fund shall have
exclusive voting rights on any matters submitted to shareholders that
relates solely to a particular class arrangement, and shall have separate
voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class.
Under Massachusetts law, shareholders of a trust such as the Trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the Trust. The Declaration of Trust, however, contains an
express disclaimer of shareholder liability for acts or obligations of the
Trust and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust
or its Trustees. The Declaration of Trust provides for indemnification and
reimbursement of expenses out of Trust property for any shareholder held
personally liable for its obligations. The Declaration of Trust also
30<PAGE>
provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust
and satisfy any judgment thereon. Thus, while Massachusetts law permits a
shareholder of a trust such as the Trust to be held personally liable as a
partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is highly unlikely and
is limited to the relatively remote circumstances in which the Trust would
be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in
the Declaration of Trust protects a Trustee against any liability to which
he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
The Trust and the Adviser have Codes of Ethics governing the personal
securities transactions of officers and employees. These codes require
prior approval for certain transactions and prohibit transactions which may
be deemed to conflict with the securities trading of the Adviser s clients.
TAXES
Each Fund is treated as a separate entity for accounting and tax purposes.
Each Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the Code ), and intends to continue to so qualify in the
future. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions,
and the diversification of its assets, each Fund will be allowed a
deduction for amounts distributed to its shareholders from its ordinary
income and net realized capital gains and will not be subject to federal
income tax on such amounts distributed to its shareholders at least
annually in accordance with the timing requirements of the Code.
Each Fund will be subject to a 4% non-deductible federal excise tax on
c e r tain amounts not distributed (and not treated as having been
d i stributed) on a timely basis in accordance with annual minimum
distribution requirements. Each Fund intends under normal circumstances to
avoid liability for such tax by satisfying such distribution requirements.
If a Fund acquires stock in certain non-U.S. corporations that receive at
least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50%
of their assets in investments producing such passive income ( passive
foreign investment companies ), that Fund could be subject to federal
income tax and additional interest charges on excess distributions
received from such companies or gain from the sale of stock in such
companies, even if all income or gain actually received by the Fund is
timely distributed to its shareholders. The Fund would not be able to pass
through to its shareholders any credit or deduction for such a tax.
31<PAGE>
C e rtain elections may, if available, ameliorate these adverse tax
consequences, but any such election would require the applicable Fund to
recognize taxable income or gain without the concurrent receipt of cash.
Any Fund that is permitted to acquire stock in foreign corporations may
limit and/or manage its holdings in passive foreign investment companies to
minimize its tax liability or maximize its return from these investments.
Foreign exchange gains and losses realized by a Fund in connection with
certain transactions involving foreign currency-denominated debt
s e c urities, certain foreign currency futures and options, foreign
currencies, or payables or receivables denominated in a foreign currency
are subject to Section 988 of the Code, which generally causes such gains
and losses to be treated as ordinary income and losses and may affect the
amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to a Fund s investment in stock
or securities, possibly including speculative currency positions or
currency derivatives not used for hedging purposes, may increase the amount
of gain it is deemed to recognize from the sale of certain investments held
for less than three months, which gain is limited under the Code to less
than 30% of its annual gross income, and could under future Treasury
regulations produce income not among the types of qualifying income from
which the Fund must derive at least 90% of its annual gross income.
Some Funds may be subject to withholding and other taxes imposed by foreign
countries with respect to their investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate
such taxes. The Funds anticipate that they generally will not qualify to
pass such foreign taxes and any associated tax deductions or credits
through to their shareholders, who therefore generally will not report such
amounts on their own tax returns.
For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. To the extent
subsequent capital gains are offset by such losses, they would not result
in federal income tax liability to the applicable Fund and would not be
distributed as such to shareholders.
Each Fund that invests in certain PIKs, zero coupon securities or certain
deferred interest securities (and, in general, any other securities with
original issue discount or with market discount if the Fund elects to
include market discount in income currently) must accrue income on such
investments prior to the receipt of the corresponding cash payments.
However, each Fund must distribute, at least annually, all or substantially
all of its net income, including such accrued income, to shareholders to
qualify as a regulated investment company under the Code and avoid federal
income and excise taxes. Therefore, a Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash,
or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
32<PAGE>
Investment in debt obligations that are at risk of or in default presents
special tax issues for any Fund that may hold such obligations. Tax rules
are not entirely clear about issues such as when the Fund may cease to
accrue interest, original issue discount, or market discount, when and to
what extent deductions may be taken for bad debts or worthless securities,
how payments received on obligations in default should be allocated between
principal and income, and whether exchanges of debt obligations in a
workout context are taxable. These and other issues will be addressed by
any Fund that may hold such obligations in order to reduce the risk of
distributing insufficient income to preserve its status as a regulated
investment company and seek to avoid becoming subject to federal income or
excise tax.
Limitations imposed by the Code on regulated investment companies like the
Funds may restrict a Fund s ability to enter into futures, options, and
forward transactions.
C e rtain options, futures and forward foreign currency transactions
undertaken by a Fund may cause the Fund to recognize gains or losses from
marking to market its positions that have not been sold or terminated. The
character of capital gain or loss as long-term or short-term (or, in the
case of certain currency forwards, options and futures, as ordinary income
or loss), as well as the timing of the Fund s capital gains and losses
realized, may be affected. Also, certain of a Fund s losses on its
transactions involving options, futures or forward contracts and/or
offsetting portfolio positions may be deferred rather than being taken into
account currently in calculating the Fund s taxable income. Certain of the
applicable tax rules may be modified if a Fund is eligible and chooses to
make one or more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of a
Fund s distributions to shareholders. The Funds will take into account the
s p ecial tax rules (including consideration of available elections)
applicable to options, future or forward contracts in order to minimize any
potential adverse tax consequences to the Fund or its shareholders.
The federal income tax rules applicable to interest rate swaps, caps and
floors are unclear in certain respects, and a Fund may be required to
account for these transactions in a manner that, in certain circumstances,
may limit the degree to which it may utilize these transactions.
Distributions from a Fund s current or accumulated earnings and profits
( E&P ), as computed for federal income tax purposes, will be taxable as
described in the Fund s prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of
capital, which will first reduce an investor s tax basis in a Fund s shares
and thereafter (after such basis is reduced to zero) will generally give
rise to capital gains. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the amount of cash they would
have received had they elected to receive the distributions in cash,
divided by the number of shares received.
33<PAGE>
At the time of an investor s purchase of shares of a Fund, a portion of the
purchase price is often attributable to realized or unrealized appreciation
in the Fund s portfolio or undistributed taxable income of the Fund.
Consequently, subsequent distributions from such appreciation or income may
be taxable to such investor even if the net asset value of the investor s
shares is, as a result of the distributions, reduced below the investor s
cost for such shares, and the distributions in reality represent a return
of a portion of the purchase price.
Upon a redemption of shares of a Fund (including by exercise of the
exchange privilege), a shareholder may realize a taxable gain or loss
depending upon his basis in his shares. Such gain or loss will be treated
as capital gain or loss if the shares are capital assets in the
shareholder s hands and will be long-term or short-term, depending upon the
shareholder s tax holding period for the shares. A sales charge paid in
purchasing shares of a Fund cannot be taken into account for purposes of
determining gain or loss on the redemption or exchange of such shares
within 90 days after their purchase to the extent shares of the Fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. Such disregarded load will result in
an increase in the shareholder s tax basis in the share subsequently
acquired. Also, any loss realized on a redemption or exchange will be
disallowed to the extent the shares disposed of are replaced with shares of
the same Fund within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of, such as pursuant to an
election to reinvest dividends or capital gain distributions automatically.
In such a case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized upon the redemption of
shares with a tax holding period of six months or less will be treated as a
l o n g-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares.
For purposes of the dividends received deduction available to corporations,
dividends received by a Fund, if any, from U.S. domestic corporations in
respect of the stock of such corporations held by the Fund, for federal
income tax purposes, for at least 46 days (91 days in the case of certain
preferred stock) and distributed and designated by the Fund may be treated
as qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement stated above (46 or 91 days) with respect to
their shares of the applicable Fund in order to qualify for the deduction
and, if they borrow to acquire such shares, may be denied a portion of the
dividends received deductions. The entire qualifying dividend, including
the otherwise deductible amount, will be included in determining the excess
(if any) of a corporate shareholder s adjusted current earnings over its
alternative minimum taxable income, which may increase its alternative
minimum tax liability. Additionally, any corporate shareholder should
consult its tax adviser regarding the possibility that its basis in its
shares may be reduced, for federal income tax purposes, by reason of
extraordinary dividends received with respect to the shares, for the
purpose of computing its gain or loss on redemption or other disposition of
the shares.
34<PAGE>
D i f f e r ent tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
d i s tributions and certain prohibited transactions, is accorded to
shareholder accounts maintained as qualified retirement plans.
Shareholders should consult their tax advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax
under such law. The discussion does not address special tax rules
applicable to certain classes of investors, such as tax-exempt entities,
insurance companies, and financial institutions. Dividends, capital gain
distributions, and ownership of or gains realized on the redemption
(including an exchange) of the shares of a Fund may also be subject to
state and local taxes. Shareholders should consult their own tax advisers
as to the federal, state or local tax consequences of ownership of shares
of, and receipt of distributions from, the Funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in a Fund is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above.
These investors may be subject to non-resident alien withholding tax at the
rate of 30% (or a lower rate under an applicable tax treaty) on amounts
treated as ordinary dividends from a Fund and, unless an effective IRS Form
W-8 or authorized substitute is on file, to 31% backup withholding on
certain other payments from the Fund. Non-U.S. investors should consult
their tax advisers regarding such treatment and the application of foreign
taxes to an investment in any Fund.
State and Local. Each Fund may be subject to state or local taxes in
jurisdictions in which such Fund may be deemed to be doing business. In
addition, in those states or localities which have income tax laws, the
treatment of such Fund and its shareholders under such laws may differ from
their treatment under federal income tax laws, and investment in such Fund
may have different tax consequences for shareholders than would direct
investment in such Fund s portfolio securities. Shareholders should
consult their own tax advisers concerning these matters.
Custodian
Portfolio securities of each Fund are held pursuant to a Custodian
Agreement between the Trust and The Bank of New York. The Bank of New York
also performs certain administrative services for the Funds pursuant to
agreements with Conseco Services, LLC.
Transfer Agency Services
State Street Bank and Trust Company is the transfer agent for each Fund.
FINANCIAL STATEMENTS
35<PAGE>
An audited statement of assets and liabilities of the Trust, together with
the report of Coopers & Lybrand, L.L.P., is included in this SAI.
36<PAGE>