As Filed With The Securities And Exchange Commission On April 14, 1998
File Nos. 333-13185
811-7839
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 5
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 6
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CONSECO FUND GROUP
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(Exact Name of Registrant as Specified in Charter)
11825 North Pennsylvania Street
Carmel, Indiana 46032
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(Address of Principal Executive Offices) (Zip Code)
(317) 817-6300
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(Registrant's Telephone Number, including Area Code)
WILLIAM P. LATIMER, Esq.
Conseco Capital Management, Inc.
11825 North Pennsylvania Street
Carmel, Indiana 46032
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(Name and Address of Agent for Service of Process)
Copies to:
DONALD W. SMITH, Esq.
ROBERT J. ZUTZ, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
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[ ] On pursuant to Rule 485(b)
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[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] On ____________ pursuant to Rule 485(a)(i)
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[ X ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] On ____________ pursuant to Rule 485(a)(ii)
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<PAGE>
CONSECO FUND GROUP
Conseco High Yield Focus Fund
Contents of Registration Statement
This Registration Statement consists of the following papers and documents:
o Cover Sheet
o Contents of Registration Statement
o Cross Reference Sheet
o Part A - Conseco Fund Group, Class A , B and C Prospectus
Conseco Fund Group, Class Y Prospectus
o Part B - Statement of Additional Information - Class A, B and C
o Statement of Additional Information - Class Y
o Part C - Other Information
o Signature Pages
No change is intended to be made by this Post-Effective Amendment No. 5
to the prospectuses or statements of additional information for the Conseco
Equity Fund, Conseco Asset Allocation Fund, Conseco Fixed Income Fund, Conseco
20 Fund, Conseco High Yield Fund, or Conseco International Fund.
<PAGE>
CONSECO FUND GROUP
Conseco High Yield Focus Fund
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
N-1A Location in
Item No. Registration Statement
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Part A: Information Required In Prospectus
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1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Not applicable
4. General Description of Registrant Cover Page
5. Management of the Fund Management
6. Capital Stock and Other Securities Investment Objectives and
Policies
7. Purchase of Securities Being Offered Purchase of Shares
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Not Applicable
Part B: Information Required In
Statement of Additional Information
-----------------------------------
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. General Information and History General Information
13. Investment Objectives and Policies Investment Restrictions
14. Management of the Registrant Management
15. Control Persons and Principal Holders Control Persons and Principal
of Securities Holders of Securities
16. Investment Advisory and Other Services Management
17. Brokerage Allocation Portfolio Turnover and
Securities Transactions
18. Capital Stock and Other Securities General
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N-1A Location in
Item No. Registration Statement
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19. Purchase, Redemption and Pricing of Purchase and Redemption of
Securities Being Offered Shares
20. Tax Status Taxes
21. Underwriters Distribution Arrangements
22. Calculation of Performance Data Investment Performance
23. Financial Statements Not Applicable
Part C: Other Information
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24. Financial Statements and Exhibits Financial Statements and
Exhibits
25. Persons Controlled by or Under Common Persons Controlled by or Under
Control Common Control
26. Number of Holders of Securities Number of Holders of
Securities
27. Indemnification Indemnification
28. Business and Other Connections Business and Other Connections
of Investment Adviser of Inv=estment Adviser
29. Principal Underwriters Principal Underwriters
30. Location of Accounts and Records Location of Accounts and
Records
31. Management Services Management Services
32. Undertakings Undertakings
<PAGE>
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
JUNE 30, 1998
CONSECO FUND GROUP
CONSECO HIGH YIELD FOCUS FUND
CLASS A, B AND C SHARES
ADMINISTRATIVE OFFICE: 11815 N. PENNSYLVANIA STREET, CARMEL, INDIANA 46032
800-825-1530
The Conseco High Yield Focus Fund ("Fund") is a non-diversified series of the
Conseco Fund Group ("Trust"), an open-end diversified management investment
company registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940 ("1940 Act"). The Trust was organized as a
Massachusetts business trust on September 24, 1996. The Trust is a "series" type
of mutual fund which issues seven separate series of shares, each of which
represents a separate portfolio of investments. The Fund offers four classes of
shares. This Prospectus relates solely to Class A shares, Class B shares and
Class C shares of the Fund. Class Y shares are offered to certain institutional
investors and qualifying individual investors through a separate prospectus.
Each class may have different expenses, which may affect performance.
The Fund seeks a high level of current income, with a secondary
objective of capital appreciation, by investing primarily in lower-rated fixed
income securities, commonly known as "junk bonds" or "high yield securities."
These securities are subject to greater fluctuations in value and greater risk
of loss of income and principal due to default by the issuer than are
higher-rated securities; therefore, investors should carefully assess the risks
associated with an investment in this Fund. The Fund is a non-diversified
investment company and, as a result, is limited as to the percentage of its
assets which may be invested in the securities of one issuer only by its
investment restrictions and the diversification requirements imposed by the
Internal Revenue Code of 1986.
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 its operations, including fees and expenses of Trustees who
are not affiliated persons of the Adviser or the Trust.
* * * * *
There is no assurance that the Fund will achieve its investment
objective. The Fund may be used independently or in combination with other
mutual funds. You may also purchase shares of the other series of the Trust and
of a money market fund currently managed by Federated Management ("Federated
money market fund") through separate prospectuses. Those prospectuses are
available upon request by calling 800-825-1530.
This Prospectus sets forth concisely the information about the Trust
and the Fund that an investor should know before investing. A Statement of
Additional Information ("SAI") dated June 30, 1998 containing additional
information about the Trust and the Fund, has been filed with the SEC 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. The SEC maintains an Internet World Wide Web site
(http://www.sec.gov) that contains the SAI, materials that are incorporated by
<PAGE>
reference into this Prospectus and the SAI, and other information regarding the
Fund. Information about the Trust and its series is available on the Internet
World Wide Web at http://www.conseco.com.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION ON AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
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 June 30, 1998.
TABLE OF CONTENTS
COVER PAGE
FEE TABLE.........................................................2
INVESTMENT OBJECTIVES AND POLICIES................................5
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES...............7
MANAGEMENT.......................................................15
PURCHASE OF SHARES...............................................16
ALTERNATIVE PRICING ARRANGEMENTS.................................19
REDEMPTION OF SHARES.............................................25
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES.........................28
OTHER INFORMATION................................................31
APPENDIX A SECURITIES RATINGS...................................A-1
FEE TABLE
The following fee tables are provided to assist investors in
understanding the various fees and expenses which may be borne directly or
indirectly by an investment in Class A, Class B and Class C shares of the Fund.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
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CLASS A CLASS B CLASS C
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Maximum Sales Charge Imposed on Purchases 5.75% None None
(as a percentage of offering price)
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Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of None None None
offering price)
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Maximum Contingent Deferred Sales Charge (as a percentage of offering price or None 5%* 1%**
net asset value at the time of sale, whichever is less)
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Redemption Fees None None None
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</TABLE>
2
<PAGE>
*The maximum 5% contingent deferred sales charge applies to sales of
Class B shares during the first year after purchase. The charge generally
declines annually, reaching zero after six years.
**The 1% contingent deferred sales charge applies only if an investor
sells Class C shares within the first year after purchase.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
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MANAGEMENT ADMINISTRATIVE 12B-1 OTHER TOTAL
FEES FEES FEES2 EXPENSES3 OPERATING
AFTER FEE EXPENSES4
RATE
REDUCTION1
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Conseco High Yield Focus 0.60% 0.20% 0.50% 0.10% 1.40%
Fund
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CLASS B AND CLASS C SHARES
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MANAGEMENT ADMINISTRATIVE 12B-1 OTHER TOTAL
FEES FEES FEES2 EXPENSES3 OPERATING
AFTER FEE EXPENSES4
RATE
REDUCTION1
Conseco High Yield Focus Fund 0.60% 0.20% 1.00% 0.10% 1.90%
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</TABLE>
1 The Adviser has voluntarily undertaken to reduce its advisory fee with respect
to the Conseco High Yield Focus Fund to 0.60% of the Fund's average daily net
assets until April 30, 1999. Absent such undertaking the advisory fee would be
0.70% of the Fund's average daily net assets.
2 As a result of 12b-1 fees, a long-term shareholder in the Fund may pay more
than the economic equivalent of the maximum sales charge permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD").
3 Other Expenses in the Fee Table for all classes of the Fund are based on
estimated amounts for the current fiscal year and exclude taxes, interest,
brokerage and other transaction expenses, and any extraordinary expenses.
4 The expense information set forth above reflects voluntary commitments of the
Adviser, Conseco Services, LLC (the "Administrator") and Conseco Equity Sales,
Inc. (the "Distributor") to waive a portion of their fees under the Fund's
Investment Advisory Agreement, Administration Agreement and Distribution and
Service Plan, respectively, and/or to reimburse a portion of the Fund's expenses
through April 30, 1999. The voluntary commitments provide that the Total
Operating Expenses for the Fund, on an annual basis, will not exceed the amounts
set forth above.
In the absence of such waivers and reimbursements (as well as the
Adviser's undertaking as noted above), It is estimated that Other Expenses and
Total Operating Expenses of the Fund would have been as follows:
3
<PAGE>
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OTHER EXPENSES TOTAL OPERATING EXPENSES
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CLASS A CLASS B CLASS A CLASS B
CLASS C
CLASS C
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.25% .25% 1.65% 2.15%
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4
<PAGE>
EXAMPLE
Assuming a hypothetical investment of $1,000 and a 5% annual return, an
investor in Class A, Class B and Class C shares of the Fund would pay
transaction and operating expenses at the end of each year as follows:
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CLASS A SHARES 1 YEAR 3 YEARS
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$63 $91
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CLASS B SHARES
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Assuming redemption at end of period $71 $92
Assuming no redemption $23 $69
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CLASS C SHARES
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Assuming redemption at end of period $29 $59
Assuming no redemption $19 $59
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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
There can be no assurance that the Fund will achieve its investment
objective. The Fund is subject to the risk of changing economic conditions, as
well as the risk inherent in the ability of its investment adviser to make
changes in investments in anticipation of changes in economic, business, and
financial conditions. The investment objectives of the Fund are not fundamental,
as defined below.
The different types of securities and investment techniques of the Fund
all have attendant risks of varying degrees. For example, 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 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 of the
Fund and their risks are described in greater detail in "Description of
Securities and Investment Techniques" in the SAI.
Those investment restrictions that are "fundamental policies" may not
be changed without a majority vote of the outstanding shares of the Fund. Except
as otherwise noted, all investment policies and practices described in this
Prospectus and in the SAI are not fundamental, meaning that the Trust's Board of
Trustees ("Board") may change them without shareholder approval. See
"Description of Securities and Investment Techniques" and "Investment
Restrictions" in the SAI for further information.
CONSECO HIGH YIELD FOCUS FUND
The investment objective of the Conseco High Yield Focus Fund is to
provide investors with a high level of current income, with a secondary
objective of capital appreciation. In seeking to achieve the Fund's objectives,
the Adviser, under normal circumstances, invests at least 65% of the Fund's
5
<PAGE>
total assets in high yield, high risk lower-rated fixed income securities.
Lower-rated fixed income securities are securities rated BB or lower by Standard
& Poor's ("S&P") or Ba or lower by Moody's Investors Service, Inc. ("Moody's"),
securities comparably rated by another nationally recognized statistical rating
organization ("NRSRO"), or unrated securities of equivalent quality. The
lower-rated fixed income securities in which the Fund invests include corporate
debt securities and preferred stock, convertible securities, zero coupon
securities, other deferred interest securities, mortgage-backed securities and
asset-backed securities. The Fund may invest in securities rated as low as C by
Moody's or D by S&P, securities comparably rated by another NRSRO, or unrated
securities of equivalent quality. Such obligations are highly speculative and
may be in default or in danger of default as to principal and interest.
In seeking to achieve its investment objectives, the Fund may vary the
weight of its portfolio among fixed income securities issued by companies in
various business sectors. In response to changes or anticipated changes in the
general economy or within one or more particular business sectors, the Fund may
increase, decrease or eliminate entirely a particular sector's representation in
the Fund's portfolio; similarly, the Fund may acquire securities of a sector not
then represented in its portfolio. A sector or security of a particular company
will be added to or eliminated from the Fund's portfolio based on factors as
such sector's or such company's economic cycle and sensitivity to interest
rates. For example, as interest rates rise and performance of interest-sensitive
securities declines, the Fund expects to remove such securities from its
portfolio. However, as a matter of fundamental policy, the Fund will not invest
25% or more of its total assets in securities of issuers having their principal
business activities in the same industry. Because a business sector may include
companies in a number of related industries, the Fund's investments in a single
business sector may exceed 25% of the Fund's total assets.
While lower-rated fixed income securities are subject to all risks
inherent in any investment in debt securities, these risks are significantly
greater than is the case of for investment grade debt securities. For
information about the risks associated with lower-rated fixed income securities,
see "Risks Associated With High Yield Debt Securities" below and "Description of
Securities and Investment Techniques" in the SAI. The Appendix to this
Prospectus describes Moody's and S&P's rating categories.
The Fund may invest in high yield municipal securities. The interest on
the municipal securities in which the Fund invests typically is not exempt from
federal income tax. The Fund's remaining assets may be held in cash, money
market instruments, or U.S. Government securities, or may be invested in common
stocks and other equity securities when these types of investments are
consistent with the objectives of the Fund or are acquired as part of a unit
consisting of a combination of fixed income securities and equity investments.
Such remaining assets may also be invested in investment grade debt securities
(as defined above in the investment program of the Conseco Asset Allocation
Fund, and including municipal securities). Moreover, the Fund may hold cash or
money market instruments without limit for temporary defensive purposes or
pending investment.
The Fund may invest in zero coupon securities and payment-in-kind
securities (see the discussion with respect to the Conseco Asset Allocation
Fund, above).
The Fund may also invest in equity and debt securities of foreign
issuers, including issuers based in emerging markets. As a non-fundamental
policy, the Fund may invest up to 50% of its total assets (measured at the time
of investment) in foreign securities; however, the Fund presently does not
intend to invest more than 25% of its total assets in such securities. In
addition, the Fund presently intends to invest in foreign securities only
through depositary receipts. See "Foreign Securities" below for further
information.
The Fund may invest in private placements, securities traded pursuant
to Rule 144A under the Securities Act of 1933 ("1933 Act") (Rule 144A permits
qualified institutional buyers to trade certain securities even though they are
not registered under the 1933 Act), or securities which, though not registered
at the time of their initial sale, are issued with registration rights. Some of
these securities may be deemed by the Adviser to be liquid under guidelines
adopted by the Board.
6
<PAGE>
The Adviser does not rely solely on the ratings of rated securities in
making investment decisions but also evaluates other economic and business
factors affecting the issuer. Ratings are only the opinions of the agencies
issuing them and are not absolute standards as to quality. The Adviser seeks to
enhance total return specifically through purchasing securities which it
believes are undervalued and selling, when appropriate, those securities it
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.
The 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 objectives. Such strategies and techniques include, but are not
limited to, writing listed "covered" call and "secured" put options and
purchasing options; purchasing and selling, for hedging purposes, interest rate
and other futures contracts, and purchasing options on such futures contracts;
entering into foreign currency futures contracts, forward contracts and options
on foreign currencies; borrowing from banks to purchase securities; investing in
securities of other investment companies; entering into repurchase agreements,
reverse repurchase agreements and dollar rolls; investing in when-issued or
delayed delivery securities; selling securities short, and entering into swaps
and other interest rate transactions. See "Description of Securities and
Investment Techniques" in the SAI for further information.
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES
NON-DIVERSIFIED FUND
The Fund is "non-diversified" (meaning that it is not limited under the
1940 Act in the percentage of assets that it may invest in any one issuer) and
normally concentrates its investments in a core position of issuers. Because the
Fund may invest a larger portion of its assets in the securities of a single
issuer than a "diversified" fund, an investment in the Fund may be subject to
greater fluctuation in value than an investment in a "diversified" fund.
However, the Fund intends to comply with the standards under the Internal
Revenue Code of 1986, as amended ("Code") that limit a regulated investment
company's investments in any one issuer's securities. To qualify for treatment
as a regulated investment company ("RIC") under the Code, the Fund must meet
several requirements, including the following: at the close of each quarter of
the Fund's taxable year, (i) at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities of
other RICs and other securities, with those other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the
Fund's total assets and that does not represent more than 10% of the issuer's
outstanding voting securities, and (ii) not more than 25% of the value of its
total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer. See "Taxes" below
for further information.
PREFERRED STOCK
The Fund may invest in preferred stock. Preferred stock pays dividends
at a specified rate and generally has preference over common stock in the
payment of dividends and the liquidation of the issuer's assets but is junior to
the debt securities of the issuer in those same respects. Unlike interest
payments on debt securities, dividends on preferred stock are generally payable
at the discretion of the issuer's board of directors, and shareholders may
suffer a loss of value if dividends are not paid. Preferred shareholders
generally have no legal recourse against the issuer if dividends are not paid.
The market prices of preferred stocks are subject to changes in interest rates
and are more sensitive to changes in the issuer's creditworthiness than are the
prices of debt securities. Under ordinary circumstances, preferred stock does
not carry voting rights.
DEBT SECURITIES
The Fund may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers, and in debt securities of foreign issuers that
may or may not be U.S. dollar-denominated.
7
<PAGE>
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 debt securities, do not 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 when
interest payments and principal security appear adequate for 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.
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price of
some commodity. These securities may be convertible into preferred or common
stock (see "Convertible Securities" below), or may be bought as part of a unit
containing common stock. A debt security may be subject to redemption at the
option of the issuer at a price set in the security's governing instrument.
In selecting corporate debt securities for the Fund, the Adviser
reviews and monitors the creditworthiness of each issuer and issue. The Adviser
also analyzes interest rate trends and specific developments which it believes
may affect individual issuers.
RISKS ASSOCIATED WITH HIGH YIELD DEBT SECURITIES. The Fund invests a
substantial portion of its assets in high yield, high risk, lower-rated fixed
income securities. Lower-rated fixed income 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 lower-rated fixed income securities.
Lower-rated fixed income securities generally offer a higher yield than
that available from higher-rated issues with similar maturities, as compensation
for holding a security that is subject to greater risk. Lower-rated fixed income
securities are deemed by rating agencies to be predominately speculative with
respect to the issuer's capacity to pay interest and repay principal and may
involve major risk or exposure to adverse conditions. 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) adverse changes in the financial condition of the issuers, (3)
price fluctuation in response to changes in interest rates and (4) limited
liquidity and secondary market support.
An economic downturn affecting the issuer may result in a weakened
capacity to make principal and interest payments and an increased incidence of
default. In addition, a fund that invests in lower-rated securities may incur
additional expenses to the extent recovery is sought on defaulted securities.
Because of the many risks involved in investing in high yield fixed income
securities, the success of such investments is dependent upon the credit
analysis of the Adviser. Although the market for lower-rated fixed income
securities is not new, and the market has previously weathered economic
downturns, the past performance of the market for such securities may not be an
accurate indication of its performance during future economic downturns or
periods of rising interest rates. 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
8
<PAGE>
lower-rated securities, especially in a thinly traded market. Differing yields
on debt securities of the same maturity are a function of several factors,
including the relative financial strength of the issuers.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security
is a bond, debenture, note, preferred stock or other security that may be
converted into or exchanged for a prescribed amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. Convertible securities are
typically issued by smaller capitalized companies, whose stock prices may be
volatile. The price of a convertible security often reflects such variations in
the price of the underlying common stock in a way that non-convertible debt does
not. A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument, which could have an adverse effect on the Fund's ability to achieve
its investment objective.
ZERO COUPON BONDS
The Fund may invest in zero coupon securities. Zero coupon bonds are
debt obligations which make no fixed interest payments but instead are issued at
a significant discount from face value. Like other debt securities, the market
price can reflect a premium or discount, in addition to the original issue
discount, reflecting the market's judgment as to the issuer's creditworthiness,
the interest rate or other similar factors. The original issue discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity (or the first interest payment date) at a rate of
interest reflecting the market rate at the time of issuance. Because zero coupon
bonds do not make periodic interest payments, their prices can be very volatile
when market interest rates change.
The original issue discount on zero coupon bonds must be included in
the Fund's income ratably as it accrues. Accordingly, to qualify for tax
treatment as a regulated investment company and to avoid a certain excise tax,
the Fund may be required to distribute as a dividend an amount that is greater
than the total amount of cash it actually receives. These distributions must be
made from the Fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. Such sales could occur at a time which would be
disadvantageous to the Fund and when it would not otherwise choose to dispose of
the assets.
PAY-IN-KIND BONDS
The Conseco High Yield Focus Fund may invest in pay-in-kind bonds.
hese bonds pay "interest" through the issuance of additional bonds, thereby
adding debt to the issuer's balance sheet. The market prices of these securities
are likely to respond to changes in interest rates to a greater degree than the
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prices of securities paying interest currently. Pay-in-kind bonds carry
additional risk in that, unlike bonds that pay interest throughout the period to
maturity, the Fund will realize no cash until the cash payment date and the Fund
may obtain no return at all on its investment if the issuer defaults.
The holder of a pay-in-kind bond must accrue income with respect to
these securities prior to the receipt of cash payments thereon. To avoid
liability for federal income and excise taxes, the Fund most likely will be
required to distribute income accrued with respect to these securities, even
though the Fund has not received that income in cash, and may be required to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
MORTGAGE-BACKED SECURITIES
The 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 Fund
may also invest in debt securities which are secured with collateral consisting
of mortgage-backed securities (see "Collateralized Mortgage Obligations,"
below), 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 the 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 Fannie Mae ("FNMA") or
Freddie Mac ("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. As a result, GNMA certificates are considered to have a low risk of
default, although they are subject to the same market risk as comparable debt
securities. 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 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.
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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 interests in pools 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 AND MORTGAGE-BACKED BONDS.
Mortgage-backed securities may be 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,
although not necessarily on a pro rata basis. 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, the Fund could
sustain a loss. If new types of mortgage-related securities are developed and
offered to investors, investments in such securities will be considered.
STRIPPED MORTGAGE-BACKED SECURITIES. The Conseco High Yield Focus Fund
may invest in stripped mortgage-backed securities, which are derivative
securities usually structured with two classes that receive different
proportions of the interest and principal distributions from an underlying pool
of mortgage assets. The Fund may purchase securities representing only the
interest payment portion of the underlying mortgage pools (commonly referred to
as "IOs") or only the principal portion of the underlying mortgage pools
(commonly referred to as "POs"). Stripped mortgage-backed securities are more
sensitive to changes in prepayment and interest rates and the market for such
securities is less liquid than is the case for traditional debt securities and
mortgage-backed securities. The yield on IOs is extremely sensitive to the rate
of principal payments (including prepayments) on the underlying mortgage assets,
and a rapid rate of repayment may have a material adverse effect on such
securities' yield to maturity. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Fund will fail to recoup
fully its initial investment in these securities, even if they are rated high
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quality. Most IOs and POs are regarded as illiquid and will be included in the
Fund's limit on illiquid securities.
RISKS OF MORTGAGE-BACKED SECURITIES. 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 and IOs and POs, are subject to 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). 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.
TRUST ORIGINATED PREFERRED SECURITIES
The Conseco High Yield Focus Fund may also invest in trust originated
preferred securities, a new type of security issued by financial institutions
such as banks and insurance companies. Trust originated preferred securities
represent interests in a trust formed by a financial institution. The trust
sells preferred shares and invests the proceeds in notes issued by the financial
institution. These notes may be subordinated and unsecured. Distributions on the
trust originated preferred securities match the interest payments on the notes;
if no interest is paid on the notes, the trust will not make current payments on
its preferred securities. Issuers of the notes currently enjoy favorable tax
treatment. If the tax characterization of these securities were to change
adversely, they could be redeemed by the issuers, which could result in a loss
to the Fund. In addition, some trust originated preferred securities are
available only to qualified institutional buyers under Rule 144A.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Conseco High Yield Focus Fund may also invest in loan
participations or assignments. In purchasing a loan participation or assignment,
the Fund acquires some or all of the interest of a bank or other lending
institution in a loan to a corporate borrower. Many such loans are secured and
most impose restrictive covenants which must be met by the borrower and which
are generally more stringent than the covenants available in publicly traded
debt securities. However, interests in some loans may not be secured, and the
Fund will be exposed to a risk of loss if the borrower defaults. Loan
participations may also be purchased by the Fund when the borrowing company is
already in default.
In purchasing a loan participation, the Fund may have less protection
under the federal securities laws than it has in purchasing traditional types of
securities. The Fund's ability to assert its rights against the borrower will
also depend on the particular terms of the loan agreement among the parties.
Many of the interests in loans purchased by the Fund will be illiquid and
therefore subject to the Fund's limit on illiquid investments.
COLLATERALIZED BOND OBLIGATIONS
A collateralized bond obligation ("CBO") is a type of asset-backed
security. Specifically, a CBO is an investment grade bond which is backed by a
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diversified pool of high risk, high yield fixed income securities. The pool of
high yield securities is separated into "tiers" representing different degrees
of credit quality. The top tier of CBOs is backed by the pooled securities with
the highest degree of credit quality and pays the lowest interest rate.
Lower-tier CBOs represent lower degrees of credit quality and pay higher
interest rates to compensate for the attendant risk. The bottom tier typically
receives the residual interest payments (i.e. money that is left over after the
higher tiers have been paid) rather than a fixed interest rate. The return on
the bottom tier of CBOs is especially sensitive to the rate of defaults in the
collateral pool.
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers. These securities
may be U.S. dollar denominated or non-U.S. dollar denominated. Foreign
securities include securities issued, assumed or guaranteed by foreign
governments or political subdivisions or instrumentalities thereof.
Investments in foreign securities may offer unique potential benefits
such as substantial growth in industries not yet developed in the particular
country. Such investments also permit the 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 securities 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, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions on foreign investments or repatriation of capital. In addition,
with respect to certain countries, there is the possibility of nationalization
or expropriation of assets; confiscatory taxation; political, social or
financial instability; and war or other diplomatic developments that could
adversely affect investments in those countries. Since the 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
held by the Fund and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned. The Fund generally will incur costs in
connection with conversion between various currencies.
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. Transaction costs, custodial fees and management
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. The 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.
All of the foregoing risks may be intensified in emerging markets.
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Dividend and interest income from foreign securities may be subject to
withholding taxes by the country in which the issuer is located and may not be
recoverable by the Fund or its investors in all cases.
ADRs are certificates issued by a U.S. bank or trust company
representing an interest in securities of a foreign issuer deposited in a
foreign subsidiary or branch or a correspondent of that bank. Generally, ADRs
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 United States and, therefore, there may not be a
correlation between such information and the market value of such ADRs. European
Depositary Receipts ("EDRs") are certificates issued by a European bank or trust
company evidencing its ownership of the underlying foreign securities. EDRs are
designed for use in European securities markets.
RESTRICTED SECURITIES, RULE 144A SECURITIES AND ILLIQUID SECURITIES
The Fund may invest in restricted securities, such as private
placements, and in Rule 144A securities. Once acquired, restricted securities
may be sold by the Fund only in privately negotiated transactions or in a public
offering with respect to which a registration statement is in effect under the
1933 Act. If sold in a privately negotiated transaction, the Fund may have
difficulty finding a buyer and may be required to sell at a price that is less
than it had anticipated. Where registration is required, the 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.
Restricted securities are generally considered illiquid.
Rule 144A securities, although not registered, may be resold to
qualified institutional buyers in accordance with Rule 144A under the 1933 Act.
The Adviser, acting pursuant to guidelines established by the Board, may
determine that some Rule 144A securities are liquid.
The Fund may not invest in any security if, as a result, more than 15%
of the Fund's net assets would be invested in illiquid securities, which are
securities that cannot be expected to be sold within seven days at approximately
the price at which they are valued.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. A repurchase agreement
is an agreement under which securities are acquired from a securities dealer or
bank subject to resale at an agreed upon price on a later date. The acquiring
Fund bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities. However, to
minimize the risk, the Fund will enter into repurchase agreements only with
financial institutions which are deemed to be of good financial standing and
which have been approved by the Board. No more than 15% of the Fund's assets may
be subject to repurchase agreements maturing in more than seven days.
SECURITIES LENDING
The Fund may lend securities to broker-dealers or other institutional
investors pursuant to agreements requiring that the loans be continuously
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secured by any combination of cash, U.S. Government securities, and approved
bank letters of credit that at all times equal at least 100% of the market value
of the loaned securities. Such loans will not be made if, as a result, the
aggregate amount of all outstanding securities loans would exceed 33 1/3% of the
Fund's total assets. The Fund continues to receive interest on the securities
loaned and simultaneously earns either interest on the investment of the cash
collateral or fee income if the loan is otherwise collateralized. Should the
borrower of the securities fail financially, there is a risk of delay in
recovery of the securities loaned or loss of rights in the collateral. However,
the Fund seeks to minimize this risk by making loans only to borrowers which are
deemed by the Adviser to be of good financial standing and which have been
approved by the Board.
BORROWING
The Fund may borrow money to purchase securities, which is a form of
leverage. This leverage may exaggerate the gains and losses on the Fund's
investments and changes in the net asset value of its shares. Leverage also
creates interest expenses; if those expenses exceed the return on the
transactions that the borrowings facilitate, the Fund will be in a worse
position than if it had not borrowed. The use of derivatives in connection with
leverage may create the potential for significant losses. The Fund may pledge
assets in connection with permitted borrowings. The Fund may borrow an amount up
to 33 1/3 % of its assets.
MANAGEMENT
The Trustees of the Trust decide upon matters of general policy for the
Trust. In addition, the Trustees review the actions of the Adviser, as set forth
below. The Trust's officers supervise the daily business operations of the
Trust. For information about the Trust's Board of Trustees and the Trust's
officers, see "Management" in the SAI.
THE ADVISER
Conseco Capital Management, Inc., 11825 N. Pennsylvania Street, Carmel,
Indiana 46032, has been retained under an Investment Advisory Agreement with the
Trust to provide investment advice and in general to supervise the management
and investment program of the Trust and the 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 also
manages the other series of the Trust, another registered investment company,
and 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. The Adviser
generally manages the affairs of the Trust, subject to the supervision of the
Board.
Under the Investment Advisory Agreement, the Adviser has contracted to
receive an investment advisory fee equal to an annual rate of .70% of the
average daily net asset value of the Fund. The Adviser, the Administrator and
the Distributor have voluntarily agreed to waive their fees and/or reimburse
expenses to the extent that the ratio of expenses to net assets on an annual
basis for Class A shares of the Fund exceeds 1.40%, and to the extent that the
ratio of expenses to net assets on an annual basis for Class B shares and Class
C shares of the Fund exceeds 1.90%. These voluntary limits may be discontinued
at any time after April 30, 1999.
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The following investment professionals are primarily responsible for
the management of the Fund:
Peter C. Andersen, CFA, Second Vice President, Portfolio Analytics for
the Adviser. He is co-manager of the Fund, and is responsible for fixed income
management of institutional client accounts. Mr. Anderson joined the Adivser in
1997. Prior to joining the Adviser, he was a portfolio manager for Colonia
Management Associates in Boston, where he managed over $650 million in high
yield, tax-free mutual funds.
Robert L. Cook, CFA, Second Vice President, Research for the Adviser.
He is co-manager of the Fund, and is a senior member of the Adviser's research
group focusing on investments in the financial services, gaming and lodging, and
health care industries. Mr. Cook joined the Adviser in 1994. Prior to joining
the Adviser, he worked in the corporate financial department at PNC Securities
Corporation.
Like other financial and business organizations, the Fund could be
adversely affected if computer systems it relies on do not properly process
date-related information and data involving the years 2000 and after. The
Adviser is taking steps that it believes are reasonable to address this problem
in its own computer systems and to obtain assurances that comparable steps are
being taken by the Fund's other major service providers. The Adviser also
attempts to evaluate the potential impact of this problem on the issuers of
investment securities that the Fund purchases. However, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Fund.
ADMINISTRATIVE FEES
Pursuant to an administration agreement ("Administration Agreement"),
the Administrator supervises the overall administration of the Fund. These
administrative services include supervising the preparation and filing of all
documents required for compliance by the Fund with applicable laws and
regulations, supervising the maintenance of books and records, and other general
and administrative responsibilities. For providing these services, the
Administrator receives a fee from the of .20% per annum of its average daily net
assets. Pursuant to the Administration Agreement, the Administrator reserves the
right to employ one or more sub-administrators to perform administrative
services for the Fund. The Bank of New York performs certain administrative
services for the Fund.
DISTRIBUTION AND SERVICE PLANS
The Fund has adopted a Distribution and Service Plan for Class A, Class
B and Class C shares to compensate the Distributor for distributing the shares
and servicing the accounts of shareholders of each such class. With respect to
Class A shares of the Fund, the Plan authorizes payments to the Distributor of
up to 0.50% annually of the average daily net assets attributable to Class A
shares. With respect to Class B and Class C shares of the Fund, the Plan
authorizes payments to the Distributor of up to 1.00% annually of the Fund's
average daily net assets attributable to Class B and Class C shares,
respectively. The Plan further provides for periodic payments by the Distributor
to brokers, dealers, and other financial intermediaries for providing
shareholder services and for promotional and other sales related costs. The
portion of payments by Class A, Class B or Class C of the Fund for shareholder
servicing may not exceed an annual rate of .25% of the average daily net asset
value of the Fund's shares of that class owned by clients of such broker, dealer
or financial intermediary.
PURCHASE OF SHARES
HOW TO BUY SHARES
You may purchase Class A, Class B or Class C shares from any broker,
dealer, or other financial intermediary that has a selling agreement with the
Distributor. These firms may charge for their services in connection with your
purchase order. In addition, as discussed below, an account may be opened for
the purchase of shares of the Fund by mailing to the Conseco Fund Group, P.O.
Box 8017, Boston, Massachusetts 02266-8017, a completed account application and
a check payable to the Fund. Or you may telephone (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. When placing purchase orders, investors
should specify whether the order is for Class A, Class B or Class C shares.
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Purchase orders for the Fund are accepted only on a business day as
defined below. Orders for shares received by the Fund's Transfer Agent on any
business day prior to the close of regular trading on the New York Stock
Exchange (the "NYSE") (normally 4:00 p.m. Eastern Time) will receive that day's
offering price. The offering price is net asset value plus, for shares of Class
A, a varying sales charge depending on the amount invested. For a discussion of
how the price of shares of each class is computed, see "Alternate Pricing
Arrangements." Orders received by the Transfer Agent after such time but prior
to the close of business on the next business day will receive the next business
day's offering price. 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, Martin Luther King Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Certain brokers, dealers, and other financial intermediaries may be
authorized to accept purchase orders on behalf of the Fund. The Fund will be
deemed to have received a purchase order when an authorized broker, dealer, or
other financial intermediary accepts the order. Orders placed through an
authorized broker, dealer, or other financial intermediary will receive the
offering price next calculated after the order has been accepted by such an
authorized firm. In all other cases, it is the responsibility of the broker,
dealer, or other financial intermediary to forward customer orders received
prior to the close of the NYSE to the Transfer Agent prior to its close of
business that same day (normally 4:00 p.m. Eastern Time).
Brokers, dealers and other financial intermediaries are required to
provide payment within three business days after placing an order. WHEN MAKING
PAYMENT FOR CONFIRMED PURCHASES VIA FEDERAL FUNDS WIRE, SUCH FIRMS MUST
REFERENCE THE CONFIRMATION NUMBER TO ENSURE TIMELY CREDIT.
The minimum initial investment by a shareholder in Class A, Class B or
Class C shares of the Fund is $250 and the minimum subsequent investment is $50.
In the case of a salary reduction contribution under a retirement plan, both the
minimum initial investment and subsequent investment amount is $10. A purchase
of Class B shares of a Fund may not exceed $500,000; however, purchases of Class
A shares exceeding $500,000 are eligible for a sales load waiver (see "Purchase
of Class A Shares" below). These requirements may be changed or waived at any
time at the discretion of the Fund's officers. The Fund and the Distributor or
Transfer Agent reserve the right to reject any order for the purchase of shares
in whole or in part. The Trust reserves the right to cancel any purchase order
for which payment has not been received by the third business day following
placement of the order.
The Distributor may provide promotional incentives including cash
compensation to certain brokers, dealers, or financial intermediaries whose
representatives have sold or are expected to sell significant amounts of shares
of the Fund. Other programs may provide, subject to certain conditions,
additional compensation to brokers, dealers, or financial intermediaries 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 the 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 Fund will not be
issued.
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PURCHASES BY WIRE
Purchases by wire transfer should be directed to the Transfer Agent. To
receive an account number call (800) 986-3384 between the hours of 8:00 a.m. and
4:00 p.m. (Eastern Time) on a business day (as defined 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 regular trading (normally 4:00 p.m. Eastern
Time) of the NYSE on a business day as defined above, you will receive that
day's offering price. Your bank may charge for these services.
PURCHASES BY CHECK
An initial investment made by check must be accompanied by an
application, completed in its entirety. Additional shares of the Fund may also
be purchased by sending a check payable to the 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, 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 minimum monthly 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.
DOLLAR COST AVERAGING
The Dollar Cost Averaging ("DCA") program enables a shareholder to
transfer assets from the Federated money market fund to another investment
option on a predetermined and systematic basis. The DCA program is generally
suitable for shareholders making a substantial investment in the Fund 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 Federated money market
fund, you may choose to have a specified dollar amount transferred from this
fund to the Fund, or to other series of the Trust, 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 the Fund each
month, more shares are purchased in the Fund if the value per share is low and
fewer shares are purchased if the value per share 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 the Fund and the other
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<PAGE>
series of the Trust is $250. The maximum amount which may be transferred is
equal to the amount invested in the Federated money market fund when elected,
divided by 12.
The transfer date will be the same calendar day each month. The dollar
amount will be allocated to the Fund and the other series of the Trust 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 the Trust's Administrative Office, which must be
received at least seven days before the next transfer date.
NET ASSET VALUES OF FUND SHARES
Securities held by the Fund will be valued as follows. Fund securities
that 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 fixed income 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.
ALTERNATIVE PRICING ARRANGEMENTS
Investors in the Fund may select Class A, Class B or Class C shares.
The primary difference between the classes lies in their initial sales charge
and contingent deferred sales charge structures and in their ongoing annual
expenses, including 12b-1 distribution and service fees. The decision as to
which class of shares is better suited to your needs depends on a number of
factors that you should discuss with your broker, dealer or other financial
intermediary. Generally, you should consider the amount you plan to invest and
the length of time you plan to hold your investment, the ongoing expenses plus
contingent deferred sales charges for Class B and Class C shares, the initial
sales charge plus ongoing expenses for Class A shares, the possibility that a
sales charge will be reduced or waived, the possibility that the return on Class
A shares - which is anticipated to be higher due to lower ongoing expenses --
will offset the initial sales charge paid on such shares, and the automatic
conversion of Class B shares to Class A shares.
PURCHASE OF CLASS A SHARES
The offering price of Class A shares is net asset value plus a varying
sales charge depending on the amount invested. Although investors pay an initial
sales charge when they buy Class A shares, the ongoing expenses of this class
are lower than the ongoing expenses of Class B or Class C shares. The sales
charge applicable to shares of Class A is determined as follows:
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<TABLE>
<CAPTION>
SALES CHARGE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
ON PURCHASES OF: AS % OF PUBLIC AS % OF NET DEALER REALLOWANCE
OFFERING PRICE AMOUNT INVESTED AS % OF OFFERING PRICE
- ------------------------------------------------------------------------------------------------------
$250 - 50,000 5.75% 6.10% 5.00%
- ------------------------------------------------------------------------------------------------------
$50,000 - 100,000 4.50% 4.71% 3.75%
- ------------------------------------------------------------------------------------------------------
$100,000 - 250,000 3.50% 3.63% 2.75%
- ------------------------------------------------------------------------------------------------------
$250,000 - 500,000 2.50% 2.56% 2.00%
- ------------------------------------------------------------------------------------------------------
Over $500,000 None None 1.00%
- ------------------------------------------------------------------------------------------------------
</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 broker, dealer or financial
intermediary to retain 100% of the sales charge. This may result in the selling
firm being considered an underwriter under the 1933 Act.
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:
RIGHTS OF ACCUMULATION
The sales charge for new purchases of Class A shares of the Fund will
be determined by aggregating the net asset value of shares of the Fund, shares
of the other series of the Trust, and shares of the Federated money market fund
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.
COMBINED PURCHASES
You may aggregate your purchases of shares of the Fund 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 the 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 series of the Trust and shares of the
Federated money market fund 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 or financial intermediary 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
Individual Retirement Account ("IRA," including a Roth IRA or Education IRA), or
by a company solely controlled (as defined in the 1940 Act) by such individuals.
Reduced sales charges also apply to purchases by a trustee or other fiduciary if
the investment is for a single trust, estate or 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
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<PAGE>
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.
WAIVER OF CLASS A INITIAL SALES CHARGE
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 investments:
o by current or retired officers, directors and employees (and their
parents, grandparents, spouses, and minor children) of the Trust, Conseco
and its affiliates and the Transfer Agent;
o by any participant in (i) a tax qualified retirement plan provided that
the 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; or (ii) by one of a group of tax qualified employee
benefit plans that purchase through an omnibus account relationship with
the Fund maintained by a single service provider, provided that such plans
make an aggregated initial investment of $500,000 or more;
o by brokers, dealers, and other financial intermediaries that have a
selling agreement with the Distributor, if they purchase shares for their
own accounts or for retirement plans for their employees;
o by employees and registered representatives (and their parents,
grandparents, spouses and minor children) of brokers, dealers, and other
financial intermediaries described above; 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);
o by 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 investment company;
o by 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
children of such persons, pursuant to a marketing program between the
Distributor and such group;
<PAGE>
o (i) through an investment adviser who makes such purchases through a
broker, dealer, or other financial intermediary (each of which may impose
transaction fees on the purchase), or (ii) by an investment adviser for its
own account or for a bona fide advisory account over which the investment
adviser has investment discretion;
o through a broker, dealer or other financial intermediary which maintains a
net asset value purchase program that enables the Fund to realize certain
economies of scale;
o through bank trust departments or trust companies on behalf of bona fide
trust or fiduciary accounts by notifying the Distributor in advance of
purchase; a bona fide advisory, 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;
o by purchasers in connection with investments related to a bona fide medical
savings account; or
o by an account established under a wrap fee or asset allocation program
where the accountholder pays the sponsor an asset-based fee.
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 the Fund is a party, (b) purchased by the reinvestment of loan
repayments by participants in retirement plans, (c) purchased by the
reinvestment of dividends or other distributions from the 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 that
is subject to the exchange privilege described below); the purchaser must
certify to the Distributor at the time of purchase that the purchaser is a prior
load investor.
PURCHASE OF CLASS B SHARES
The offering price of Class B shares is net asset value without any
initial sales charge. As a result, the entire purchase amount is immediately
invested. However, the ongoing expenses of Class B shares are higher than those
of Class A shares. A contingent deferred sales charge is imposed upon
redemptions of Class B shares within six years of their purchase. The contingent
deferred sales charge is a percentage of (1) the net asset value of the shares
at the time of purchase or (2) the net asset value of the shares at the time of
redemption, whichever is less. The contingent deferred sales charge is
determined as follows:
REDEMPTION DURING CONTINGENT DEFERRED SALES CHARGE
- ----------------- --------------------------------
1st year since purchase 5%
2nd year since purchase 4%
3rd year since purchase 3%
4th year since purchase 3%
5th year since purchase 2%
6th year since purchase 1%
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<PAGE>
7th year since purchase 0%
8th year since purchase 0%
The contingent deferred sales charge will not apply to shares acquired by the
reinvestment of dividends or capital gains distributions.
In determining the applicability and rate of any contingent deferred
sales charge, Class B shares acquired through reinvestment of dividends and
capital gains distributions will be redeemed first, followed by the Class B
shares held by the shareholder for the longest period of time. The contingent
deferred sales charge, if any, upon redemption of Class B shares acquired
through an exchange will be calculated based on the original purchase date of
the Class B shares exchanged.
The Distributor compensates brokers, dealers, and other financial
intermediaries who sell Class B shares. At the time a shareholder purchases
Class B shares, the Distributor pays the broker, dealer, or other financial
intermediary 4% of the purchase amount from the Distributor's own assets. The
proceeds of the contingent deferred sales charge and the 12b-1 fee, in part, are
used to defray these expenses.
AUTOMATIC CONVERSION OF CLASS B SHARES
Class B shares will automatically convert to a number of Class A shares
of equal dollar value eight years after purchase. This conversion feature
benefits shareholders because Class A shares have lower ongoing expenses than
Class B shares. No initial sales charge or other charge is imposed at
conversion. When Class B shares convert, a pro rata amount of Class B shares
that were acquired by the reinvestment of dividends and capital gains
distributions will also convert to Class A shares.
PURCHASE OF CLASS C SHARES
The offering price of Class C shares is net asset value without any
initial sales charge. As a result, the entire purchase amount is immediately
invested. However, the ongoing expenses of Class C shares are higher than those
of Class A shares. Class C shares never convert to any other class of shares.
Class C shares held for less than one year are subject to a contingent
deferred sales charge on redemptions in an amount equal to 1% of the lower of
(1) the net asset value of the shares at the time of purchase or (2) the net
asset value of the shares at the time of redemption. Class C shares held one
year or longer are not subject to this contingent deferred sales charge. The
contingent deferred sales charge also will not apply to shares acquired by the
reinvestment of dividends or capital gains distributions. The order in which
Class C shares are redeemed will be determined as described for Class B shares
(see "Purchase of Class B Shares").
The contingent deferred sales charge, if any, upon redemption of Class
C shares acquired through an exchange and held less than one year will be
calculated based on the original purchase date of the Class C shares exchanged.
The Distributor compensates brokers, dealers, and other financial
intermediaries who sell Class C shares. At the time a shareholder purchases
Class C shares, the Distributor pays the broker, dealer, or other financial
intermediary 1% of the purchase amount from the Distributor's own assets. The
23
<PAGE>
proceeds of the contingent deferred sales charge and the 12b-1 fee, in part, are
used to defray these expenses.
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE FOR CLASS B AND CLASS C
To obtain a waiver of the contingent deferred sales charge, you must
notify the Transfer Agent, who may require evidence of your qualification. The
contingent deferred sales charge will not apply to:
o any partial or complete redemption in connection with a distribution
without federal tax income penalty under a tax-qualified retirement plan,
upon separation from service and attaining age 55;
o any partial or complete redemption in connection with a qualifying loan or
hardship withdrawal from a tax-qualified retirement plan, eligible 457
plan, or 403(b)(7) plan;
o any complete redemption in connection with a distribution from a
tax-qualified retirement plan, eligible 457 plan, or 403(b)(7) plan in
connection with termination of employment or termination of the employer's
plan;
o any redemption resulting from a tax-free return of an excess contribution
from a tax-qualified retirement plan, IRA, savings incentive match plan for
an employee ("SIMPLE" plan), eligible 457 plan, or 403(b)(7) plan;
o mandated minimum distributions from a tax-qualified retirement plan, IRA,
SIMPLE plan, eligible 457 plan, or 403(b) plan;
o substantially equal periodic payments as defined in Section 72(t) of the
Code;
o any partial or complete redemption following death or disability of a
shareholder (including one who owns the shares as joint tenant with his
spouse), provided the redemption is requested within one year of the death
or initial determination of disability (as defined in Section 72(m) of the
Code);
o redemptions under the Fund's Systematic Withdrawal Plan (investors may not
withdraw annually more than 12% of the value of their account under the
Systematic Withdrawal Plan);
o redemptions in connection with distributions from a Roth IRA or Roth
Conversion IRA that are qualified distributions under the Code;
o redemptions in connection with distributions from an Education IRA that
are used for qualified higher education expenses under the Code or which
are required by the Code to be distributed;
o redemptions in connection with investments related to a bona fide medical
savings account; and
o redemptions from an account established under a wrap fee or asset
allocation program where the accountholder pays the sponsor an asset-based
fee.
24
<PAGE>
REDEMPTION OF SHARES
HOW TO REDEEM SHARES OF THE FUND
Shares are redeemed at net asset value next determined after receipt of
a redemption request in good form on any business day, reduced, for shares of
Class B and Class C, by any applicable contingent deferred sales charge.
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 is required for redemptions of $50,000 or more. A signature
guarantee may be obtained from most banks, brokers and dealers, credit unions,
savings associations and financial institutions, but not from a notary public.
REDEMPTIONS BY WIRE OR TELEPHONE
Brokers, dealers, or other financial intermediaries may communicate
redemption orders by wire or telephone. These firms may charge for their
services in connection with your redemption request but neither the Fund nor the
Distributor imposes any such charges.
The Fund and the Transfer Agent will not be responsible for the
authenticity of telephone instructions or losses, if any, resulting from
unauthorized shareholder transactions if the Fund or the Transfer Agent
reasonably believes that such instructions are genuine. The Fund and the
Transfer Agent have established procedures that the Fund believes 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 Fund and the Transfer Agent do not employ these procedures,
they may be liable for any losses due to unauthorized or fraudulent telephone
instructions.
REDEMPTIONS THROUGH BROKERS, DEALERS AND OTHER FINANCIAL INTERMEDIARIES
Certain brokers, dealers, and other financial intermediaries may be
authorized to accept redemption orders on behalf of the Fund. The Fund will be
deemed to have received a redemption order when an authorized broker, dealer, or
other financial intermediary accepts the order. Orders placed through an
authorized broker, dealer, or other financial intermediary will receive the net
asset value next calculated after the order has been accepted by such an
authorized firm, minus any applicable contingent deferred sales charge. In all
other cases, it is the responsibility of the broker, dealer, or other financial
intermediary to forward customer redemption orders received prior to the close
of the NYSE to the Transfer Agent prior to its close of business that same day
(normally 4:00 p.m. Eastern Time).
25
<PAGE>
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 $50 made to you, or to anyone else properly
designated, as long as the account has a value of at least $5,000 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 Transfer Agent. As shares of the 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 terminated or
modified at any time upon written notice by you or the Fund.
GENERAL
Payment to shareholders for shares redeemed or repurchased will be made
within seven days after receipt by the Transfer Agent. The Fund may delay the
payment of redemption proceeds 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 Fund recommends that all purchases be made by bank wire Federal
funds. The Fund may suspend the right of redemption under certain extraordinary
circumstances in accordance with the rules of the SEC.
EXCHANGE PRIVILEGE
Class A, Class B or Class C shares of the Fund may be exchanged for
shares of the same class of another series of the Trust or for shares of the
Federated money market fund at the relative net asset values per share at the
time of the exchange. Shares of the Federated money market fund may be exchanged
for any Class A shares at relative net asset values per share at the time of the
exchange to the extent that the money market fund shares 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 exchanges of shares of the Federated money market fund for
Class A shares of the Fund.
26
<PAGE>
No contingent deferred sales charge applies at the time Class B or
Class C shares of the Fund are exchanged for shares of the same class of another
Fund or series of the Trust, or for shares of the Federated money market fund.
However, upon redemption of shares acquired through such an exchange, a
contingent deferred sales charge may be deducted from the redemption proceeds
based on the original purchase date of the Class B or Class C shares exchanged.
Shares of the Federated money market fund that are attributable to an
exchange from Class B or Class C shares of the Fund may later be exchanged for
Fund shares of the same class without the imposition of a contingent deferred
sales charge. However, upon redemption of the Fund shares acquired through such
an exchange, a contingent deferred sales charge may be deducted from the
redemption proceeds based on the original purchase date of the Class B or Class
C shares.
The total value of shares of a fund purchased by exchange must at least
equal the fund's minimum investment requirement. Before exchanging shares, you
should consider the differences in investment objectives and expenses of the
fund into which the exchange would be made. Shares are normally redeemed from
one fund and purchased from the other fund in the exchange transaction on the
same business day on which the Transfer Agent receives an exchange request that
is in proper form by the close of the NYSE that day.
REINSTATEMENT PRIVILEGE
If you redeem any or all of your Class A shares of the Fund, you may
reinvest all or any portion of the redemption proceeds in Class A shares of the
Fund or another series of the Trust at net asset value without any initial sales
charge, provided that you make such reinvestment within 60 calendar days after
the redemption date. If you redeem any or all of your Class B or Class C shares
of the Fund, and pay a contingent deferred sales charge on those shares, you may
reinvest all or any portion of the redemption proceeds in Class B or Class C
shares, respectively, of the Fund or any series of the Trust and be reimbursed
for the amount of the contingent deferred sales charge, provided that you make
such reinvestment within 60 calendar days of the redemption date. The original
purchase date of the Class B or Class C shares redeemed will be used for
purposes of calculating the contingent deferred sales charge, if any, upon
redemption of the shares acquired with this privilege.
The reinstatement privilege may be utilized by a shareholder only once
with respect to the Fund and may be subject to other restrictions.
ELECTRONIC TRANSFERS THROUGH AUTOMATED CLEARING HOUSE
Electronic transfers through Automated Clearing House ("ACH") allow 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. Initial
purchase minimums apply. You must complete the "ACH" section of the application
for this privilege to be applicable.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined for each class of shares
for the Fund as of the close of regular trading on the NYSE (normally 4:00 p.m.
Eastern Time) on each business day (as previously defined) by dividing the value
of the Fund's net assets attributable to a class (the class' pro rata share of
the value of the Fund's assets minus the class' pro rata share of the value of
the Fund's liabilities) by the number of shares of that class outstanding.
27
<PAGE>
The assets of the Fund are valued primarily on the basis of market
quotations. If quotations are not readily available, assets are valued by a
method that the Board believes 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. Short-term investments that will mature in
60 days or less are valued at amortized cost, which approximates market value.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income are declared and distributed
monthly by the Fund; however, the Trustees may decide to declare dividends at
other intervals. For dividend purposes, net investment income of the Fund
consists of all dividends and interest it receives, any net short-term gains and
losses from the sale of its investments, and any net gains it realizes from
foreign currency transactions, less its expenses (including fees payable to the
Adviser and its affiliates), and Distributions of the Fund's net capital gain
(the excess of net long-term capital gain over net short-term capital loss) are
declared and distributed to its shareholders annually after the close of the
Fund's fiscal year.
Dividends and other distributions paid on each class of shares of the
Fund are calculated at the same time and in the same manner. Dividends on Class
A, Class B, and Class C shares of the Fund are expected to be lower than those
on its Class Y shares because Class A, Class B, and Class C shares have higher
expenses resulting from their distribution and service fees. Dividends on each
class also might be affected differently by the allocation of other
class-specific expenses.
DISTRIBUTION OPTIONS. When you open your account, specify on your
application how you want to receive your distributions. For retirement accounts,
all Fund distributions are reinvested. For other accounts, you have the
following options:
Reinvest all Distributions. You can elect to reinvest all dividends and
capital gain distributions from the Fund in additional Fund shares of the same
class.
Reinvest Income Dividends Only. You can elect to reinvest dividends
from the Fund in additional Fund shares of the same class while receiving
capital gain distributions by check or sent to your bank account.
Reinvest Capital Gain Distributions Only. You can elect to reinvest
capital gain distributions from the Fund in additional Fund shares of the same
class 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 capital gain distributions from the Fund or have them sent to
your bank account.
TAXES
The Fund is treated as a separate corporation, and intends to qualify
as a RIC (a registered investment company) under the Code. As such, and by
complying with the applicable Code provisions regarding the amount and timing of
its distributions, the Fund will be allowed a deduction for amounts distributed
to its shareholders from its investment company taxable income (generally, its
net investment income as described under "Dividends and Other Distributions")
28
<PAGE>
and net capital gain and will not be subject to federal income tax on those
amounts.
To qualify for treatment as a RIC under the Code, the Fund -- which is
treated as a separate corporation for these purposes -- must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
the Fund, these requirements include the following: (1) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
and (2) at the close of each quarter of the Fund's taxable year, (i) at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs and other securities, with
those other securities limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities, and (ii)
not more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of any
one issuer.
The Fund intends to distribute all its investment company taxable
income and net capital gain so as to avoid federal income and excise taxes.
Dividends from the Fund's investment company taxable income (whether paid in
cash or reinvested in additional shares) generally will be taxable to you as
ordinary income. The portion of those dividends that does not exceed the
aggregate dividends received by the Fund from U.S. corporations will be eligible
for the dividends-received deduction allowed to corporations; however, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the federal alternative
minimum tax.
Distributions of the Fund's net capital gain (whether paid in cash or
reinvested additional shares), when designated as such, will be taxable to you
as long-term capital gain, regardless of how long you have held your Fund
shares. Under the Taxpayer Relief Act of 1997, different maximum tax rates apply
to a non-corporate taxpayer's net capital gain depending on the taxpayer's
holding period and marginal rate of federal income tax -- generally, 28% for
gain recognized on capital assets held for more than one year but not more than
18 months and 20% (10% for taxpayers in the 15% marginal tax bracket) for gain
recognized on capital assets held for more than 18 months. Pursuant to an
Internal Revenue Service notice, the Fund may divide each net capital gain
distribution into a 28% rate gain distribution and a 20% rate gain distribution
(in accordance with the Fund's holding periods for the securities it sold that
generated the distributed gain) and its shareholders must treat those portions
accordingly.
Shareholders who are not subject to tax on their income generally will
not be required to pay tax on distributions.
Dividends and other distributions declared by the Fund in October,
November, or December, but received by you in January, generally are taxable to
you in the year in which declared. The Fund will inform you after the end of
each calendar year as to the amount and nature of dividends and other
distributions paid (or deemed paid) to you for that year. The information
regarding capital gain distributions designates the portions thereof subject to
29
<PAGE>
the different maximum rates of tax applicable to non-corporate taxpayers' net
capital gain indicated above.
When you redeem (sell) shares, it may result in a taxable gain or loss
to you, depending on whether you receive more or less than your adjusted basis
for the shares. An exchange of the Fund's shares, as described under "Purchase
and Redemption of Shares -- Exchange Privilege," generally will have similar tax
consequences. Special rules apply when you dispose of Class A shares of the Fund
through a redemption or exchange within 90 days after your purchase thereof and
subsequently reacquire Class A shares of the same Fund or acquire Class A shares
of another series of the Trust without paying a sales charge. In these cases,
any gain on the disposition of the original Class A shares will be increased, or
any loss decreased, by the amount of the sales charge paid when you acquired
those shares, and that amount will increase the basis of the shares subsequently
acquired. If you purchase shares of the Fund (whether pursuant to the
reinstatement privilege or otherwise) within thirty days before or after
redeeming other shares of the Fund (regardless of class) at a loss, all or part
of that loss will not be deductible and will increase the basis of the newly
purchased shares.
No gain or loss will be recognized by a shareholder as a result of a
conversion of Class B shares into Class A shares.
The Fund is required to withhold 31% of all dividends, capital gain
distributions, and redemption proceeds payable to any individuals and certain
other non-corporate shareholders who do not furnish the Fund with a correct
taxpayer identification number. Withholding at that rate also is required from
dividends and capital gain distributions payable to those shareholders who
otherwise are subject to backup withholding.
The foregoing is only a summary of certain federal income tax
considerations affecting your investment in a Fund. More information is
contained in the SAI. You should consult with your tax adviser about the effect
of an investment in a Fund on your particular tax situation.
GENERAL
The Fund 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. The Fund also may use aggregate total return figures for
various periods, representing the cumulative change in value of an investment in
the 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 the Fund refers to the annualized net income generated
by an investment in the 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 the 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 one-, five- and ten-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.
30
<PAGE>
Further information about the performance of the Fund is contained in
the SAI and in the Fund's semi-annual and annual reports to shareholders, which
you may obtain without charge by writing the Fund's address or calling the
telephone number set forth on the cover page of this Prospectus.
OTHER INFORMATION
BROKERAGE COMMISSIONS
Subject to the Conduct Rules of the NASD and to obtaining best prices
and executions, the Adviser may select brokers who provide research or other
services or who sell shares of the Fund to effect portfolio transactions. The
Adviser may also select an affiliated broker to execute transactions for the
Fund, 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.
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 Fund and other series of the Trust (or classes of the Fund
and other series of the Trust) differ (such as approval of an investment
advisory agreement or a change in fundamental investment policies), the voting
is on a series-by-series (or class-by-class) basis. The Trust does not hold
routine annual shareholders' meetings. The shares of the Fund issued are fully
paid and non-assessable, have no preference or similar rights, and are freely
transferable. In addition, each issued and outstanding share in a class of the
Fund is entitled to participate equally in dividends and distributions declared
by that class.
REPORTS TO SHAREHOLDERS
Investors in the Fund will be informed of their progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
RETIREMENT PLANS AND MEDICAL SAVINGS ACCOUNTS
Class A, Class B and Class C shares are available for purchase by
qualified retirement plans of both corporations and self-employed individuals.
The Trust has available prototype IRA plans (for both individuals and
employers), Simplified Employee Pension ("SEP") plans, and savings incentive
match plans for employees ("SIMPLE" 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, call or write the Distributor.
CLASS Y SHARES
In order to buy Class Y shares you must be an institutional investor or
a qualifying individual investor. Institutional investors may include, but are
not limited to, the following: (i) tax qualified retirement plans which have (a)
at least $10 million in plan assets, or (b) 250 or more employees eligible to
participate at the time of purchase, (ii) banks and insurance companies
purchasing shares for their own account, (iii) investment companies not
affiliated with the Adviser, (iv) tax-qualified retirement plans of the Adviser
or brokers, dealers, and other financial intermediaries that have a selling
agreement with the Distributor and their affiliates, (v) endowments, foundations
31
<PAGE>
and other charitable organizations or (vi) accounts established under wrap fee
or asset allocation programs where the accountholder pays the sponsor an
asset-based fee. A qualifying individual investor is an investor who is a client
of the Adviser and is making a purchase of over $500,000 or whose purchase
together with his current holdings of Class Y shares exceeds $500,000 or any
other individual who meets the minimum investment requirement.
Class Y shares are available to eligible institutional investors and
qualifying individual investors at net asset value without the imposition of an
initial or deferred sales charge and are not subject to ongoing distribution or
service 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 the Trust's officers.
The Systematic Withdrawal Plan and Pre-Authorized Investment Plan are
not available for Class Y shares.
If you are considering a purchase of Class Y shares of the Fund, please
call the Distributor at (800) 825-1530 to obtain information about eligibility
and a prospectus.
DISTRIBUTOR
Conseco Equity Sales, Inc., 11815 N. Pennsylvania Street, Carmel,
Indiana 46032, serves as distributor of shares of the Trust.
TRANSFER AGENT
State Street, 225 Franklin Street, Boston, Massachusetts 02110, serves
as the Trust's transfer agent.
CUSTODIAN
The Bank of New York, 90 Washington Street, 22nd Floor, New York, New
York 10826, serves as custodian of the assets of the Fund..
INDEPENDENT PUBLIC ACCOUNTANTS/AUDITORS
The Trust's independent public accountants are Coopers & Lybrand,
L.L.P., 2900 One American Square, Box 82002, Indianapolis, Indiana 46282-0002.
The independent auditors of the International Portfolio are Ernst & Young LLP,
Dallas, Texas.
LEGAL COUNSEL
Certain legal matters for the Fund are passed upon by Kirkpatrick &
Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington, D.C. 20036.
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.
32
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Page
General Information......................................................
Investment Restrictions..................................................
Description of Securities and Investment Techniques......................
Investment Performance...................................................
Portfolio Turnover and Securities Transactions...........................
Management...............................................................
Fund Expenses ...........................................................
Distribution Arrangements................................................
Purchase and Redemption of Shares........................................
General..................................................................
Taxes....................................................................
Other Information........................................................
Financial Statements.....................................................
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
Attn: 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)
33
<PAGE>
APPENDIX A SECURITIES RATINGS
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa - Bonds which are rated Aaa by Moody's Investors 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.
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.
C - Bonds which are rated C are the lowest rated class of bonds. Such issues can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
A-1
<PAGE>
STANDARD & POOR'S CORPORATE BOND RATINGS:
AAA - This is the highest rating assigned by Standard & Poor's ("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:
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.
A-2
<PAGE>
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
JUNE 30, 1998
CONSECO FUND GROUP
CONSECO HIGH YIELD FOCUS FUND
CLASS Y SHARES
ADMINISTRATIVE OFFICE: 11815 N. PENNSYLVANIA STREET, CARMEL, INDIANA 46032
800-825-1530
The Conseco High Yield Focus Fund ("Fund") is a non-diversified series of the
Conseco Fund Group ("Trust"), an open-end diversified management investment
company registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940 ("1940 Act"). The Trust was organized as a
Massachusetts business trust on September 24, 1996. The Trust is a "series" type
of mutual fund which issues seven separate series of shares, each of which
represents a separate portfolio of investments. The Fund offers four classes of
shares. This Prospectus relates solely to Class Y shares of the Fund. Class A
shares, Class B shares and Class C shares are offered to individual investors
through a separate prospectus. Each class may have different expenses, which may
affect performance.
The Fund seeks a high level of current income, with a secondary
objective of capital appreciation, by investing primarily in lower-rated fixed
income securities, commonly known as "junk bonds" or "high yield securities."
THESE SECURITIES ARE SUBJECT TO GREATER FLUCTUATIONS IN VALUE AND GREATER RISK
OF LOSS OF INCOME AND PRINCIPAL DUE TO DEFAULT BY THE ISSUER THAN ARE
HIGHER-RATED SECURITIES; THEREFORE, INVESTORS SHOULD CAREFULLY ASSESS THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THIS FUND. The Fund is a non-diversified
investment company and, as a result, is limited as to the percentage of its
assets which may be invested in the securities of one issuer only by its
investment restrictions and the diversification requirements imposed by the
Internal Revenue Code of 1986.
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 its operations, including fees and expenses of Trustees who
are not affiliated persons of the Adviser or the Trust.
* * * * *
There is no assurance that the Fund will achieve its investment
objective. The Fund may be used independently or in combination with other
mutual funds. You may also purchase shares of the other series of the Trust and
of a money market fund currently managed by Federated Management ("Federated
money market fund") through separate prospectuses.
Those prospectuses are available upon request by calling 800-825-1530.
This Prospectus sets forth concisely the information about the Trust
and the Fund that an investor should know before investing. A Statement of
Additional Information ("SAI") dated June 30, 1998 containing additional
information about the Trust and the Fund, has been filed with the SEC 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. The SEC maintains an Internet World Wide Web site
(http://www.sec.gov) that contains the SAI, materials that are incorporated by
<PAGE>
reference into this Prospectus and the SAI, and other information regarding the
Fund. Information about the Trust and its series is available on the Internet
World Wide Web at http://www.conseco.com.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION ON AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
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 June 30, 1998.
TABLE OF CONTENTS
COVER PAGE
FEE TABLE............................................................2
INVESTMENT OBJECTIVES AND POLICIES...................................3
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES..................5
MANAGEMENT..........................................................13
PURCHASE AND REDEMPTION OF SHARES...................................15
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES............................18
OTHER INFORMATION...................................................21
APPENDIX A SECURITIES RATINGS......................................A-1
FEE TABLE
The following fee table is provided to assist investors in
understanding the various fees and expenses which may be borne directly or
indirectly by an investment in Class Y shares of the Fund.
- -----------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- -----------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases None
- -----------------------------------------------------------------
Maximum Sales Charge Imposed on None
Reinvested Dividends
- -----------------------------------------------------------------
Maximum Contingent Deferred Sales Charge None
- -----------------------------------------------------------------
Redemption Fees None
- -----------------------------------------------------------------
2
<PAGE>
- -----------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
- -----------------------------------------------------------------
Management Fees .60%
AFTER FEE RATE REDUCTION1
- -----------------------------------------------------------------
Administrative Fees .20%
- -----------------------------------------------------------------
12b-1 Distribution and Service Fees None
- -----------------------------------------------------------------
Other Expenses 2 .10%
- -----------------------------------------------------------------
Total Operating Expenses3 .90%
- -----------------------------------------------------------------
1 The Adviser has voluntarily undertaken to reduce its advisory fee with respect
to the Fund to 0.60% of the Fund's average daily net assets until April 30,
1999. Absent such undertaking, the advisory fee would be 0.70% of the Fund's
average daily net assets.
2 Other Expenses in the fee table are based on estimated amounts for the current
fiscal year and exclude taxes, interest, brokerage and other transaction
expenses, and any extraordinary expenses.
3 The expense information set forth above reflects voluntary commitments of the
Adviser and Conseco Services, LLC (the "Administrator") to waive a portion of
their fees under the Fund's Investment Advisory Agreement and Administration
Agreement, respectively, and/or to reimburse a portion of the Fund's expenses
through April 30, 1999. The voluntary commitments provide that the Total
Operating Expenses for the Fund, on an annual basis, will not exceed the amounts
set forth above. In the absence of such waivers and reimbursements (as well as
the Adviser's undertaking with respect to the Fund as noted above), it is
estimated that Other Expenses would be .25% and Total Operating Expenses would
be 1.15% of the average daily net assets of the Fund.
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 Y of the Fund
would pay transaction and operating expenses at the end of each year as follows:
-----------------------------------------------------------
1 YEAR 3 YEARS
-----------------------------------------------------------
Conseco High Yield Focus Fund $ 9 $28
-----------------------------------------------------------
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
There can be no assurance that the Fund will achieve its investment
objective. The Fund is subject to the risk of changing economic conditions, as
well as the risk inherent in the ability of its investment adviser to make
changes in investments in anticipation of changes in economic, business, and
financial conditions. The investment objectives of the Fund are not fundamental,
as defined below.
3
<PAGE>
The different types of securities and investment techniques of the Fund
all have attendant risks of varying degrees. For example, 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 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 of the
Fund and their risks are described in greater detail in "Description of
Securities and Investment Techniques" in the SAI.
Those investment restrictions that are "fundamental policies" may not
be changed without a majority vote of the outstanding shares of the Fund. Except
as otherwise noted, all investment policies and practices described in this
Prospectus and in the SAI are not fundamental, meaning that the Trust's Board of
Trustees ("Board") may change them without shareholder approval. See
"Description of Securities and Investment Techniques" and "Investment
Restrictions" in the SAI for further information.
CONSECO HIGH YIELD FOCUS FUND
The investment objective of the Conseco High Yield Focus Fund is to
provide investors with a high level of current income, with a secondary
objective of capital appreciation. In seeking to achieve the Fund's objectives,
the Adviser, under normal circumstances, invests at least 65% of the Fund's
total assets in high yield, high risk lower-rated fixed income securities.
Lower-rated fixed income securities are securities rated BB or lower by Standard
& Poor's ("S&P") or Ba or lower by Moody's Investors Service, Inc. ("Moody's"),
securities comparably rated by another nationally recognized statistical rating
organization ("NRSRO"), or unrated securities of equivalent quality. The
lower-rated fixed income securities in which the Fund invests include corporate
debt securities and preferred stock, convertible securities, zero coupon
securities, other deferred interest securities, mortgage-backed securities and
asset-backed securities. The Fund may invest in securities rated as low as C by
Moody's or D by S&P, securities comparably rated by another NRSRO, or unrated
securities of equivalent quality. Such obligations are highly speculative and
may be in default or in danger of default as to principal and interest.
In seeking to achieve its investment objectives, the Fund may vary the
weight of its portfolio among fixed income securities issued by companies in
various business sectors. In response to changes or anticipated changes in the
general economy or within one or more particular business sectors, the Fund may
increase, decrease or eliminate entirely a particular sector's representation in
the Fund's portfolio; similarly, the Fund may acquire securities of a sector not
then represented in its portfolio. A sector or security of a particular company
will be added to or eliminated from the Fund's portfolio based on factors as
such sector's or such company's economic cycle and sensitivity to interest
rates. For example, as interest rates rise and performance of interest-sensitive
securities declines, the Fund expects to remove such securities from its
portfolio. However, as a matter of fundamental policy, the Fund will not invest
25% or more of its total assets in securities of issuers having their principal
business activities in the same industry. Because a business sector may include
companies in a number of related industries, the Fund's investments in a single
business sector may exceed 25% of the Fund's total assets.
While lower-rated fixed income securities are subject to all risks
inherent in any investment in debt securities, these risks are significantly
greater than is the case of for investment grade debt securities. For
information about the risks associated with lower-rated fixed income securities,
see "Risks Associated With High Yield Debt Securities" below and "Description of
Securities and Investment Techniques" in the SAI. The Appendix to this
Prospectus describes Moody's and S&P's rating categories.
The Fund may invest in high yield municipal securities. The interest on
the municipal securities in which the Fund invests typically is not exempt from
federal income tax. The Fund's remaining assets may be held in cash, money
market instruments, or U.S. Government securities, or may be invested in common
stocks and other equity securities when these types of investments are
consistent with the objectives of the Fund or are acquired as part of a unit
consisting of a combination of fixed income securities and equity investments.
Such remaining assets may also be invested in investment grade debt securities
(as defined above in the investment program of the Conseco Asset Allocation
Fund, and including municipal securities). Moreover, the Fund may hold cash or
money market instruments without limit for temporary defensive purposes or
pending investment.
The Fund may invest in zero coupon securities and payment-in-kind
securities (see the discussion with respect to the Conseco Asset Allocation
Fund, above).
4
<PAGE>
The Fund may also invest in equity and debt securities of foreign
issuers, including issuers based in emerging markets. As a non-fundamental
policy, the Fund may invest up to 50% of its total assets (measured at the time
of investment) in foreign securities; however, the Fund presently does not
intend to invest more than 25% of its total assets in such securities. In
addition, the Fund presently intends to invest in foreign securities only
through depositary receipts. See "Foreign Securities" below for further
information.
The Fund may invest in private placements, securities traded pursuant
to Rule 144A under the Securities Act of 1933 ("1933 Act") (Rule 144A permits
qualified institutional buyers to trade certain securities even though they are
not registered under the 1933 Act), or securities which, though not registered
at the time of their initial sale, are issued with registration rights. Some of
these securities may be deemed by the Adviser to be liquid under guidelines
adopted by the Board.
The Adviser does not rely solely on the ratings of rated securities in
making investment decisions but also evaluates other economic and business
factors affecting the issuer. Ratings are only the opinions of the agencies
issuing them and are not absolute standards as to quality. The Adviser seeks to
enhance total return specifically through purchasing securities which it
believes are undervalued and selling, when appropriate, those securities it
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.
The 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 objectives. Such strategies and techniques include, but are not
limited to, writing listed "covered" call and "secured" put options and
purchasing options; purchasing and selling, for hedging purposes, interest rate
and other futures contracts, and purchasing options on such futures contracts;
entering into foreign currency futures contracts, forward contracts and options
on foreign currencies; borrowing from banks to purchase securities; investing in
securities of other investment companies; entering into repurchase agreements,
reverse repurchase agreements and dollar rolls; investing in when-issued or
delayed delivery securities; selling securities short, and entering into swaps
and other interest rate transactions. See "Description of Securities and
Investment Techniques" in the SAI for further information.
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES
NON-DIVERSIFIED FUND
The Fund is "non-diversified" (meaning that it is not limited under the
1940 Act in the percentage of assets that it may invest in any one issuer) and
normally concentrates its investments in a core position of issuers. Because the
Fund may invest a larger portion of its assets in the securities of a single
issuer than a "diversified" fund, an investment in the Fund may be subject to
greater fluctuation in value than an investment in a "diversified" fund.
However, the Fund intends to comply with the standards under the Internal
Revenue Code of 1986, as amended ("Code") that limit a regulated investment
company's investments in any one issuer's securities. To qualify for treatment
as a regulated investment company ("RIC") under the Code, the Fund must meet
several requirements, including the following: at the close of each quarter of
the Fund's taxable year, (i) at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities of
other RICs and other securities, with those other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the
Fund's total assets and that does not represent more than 10% of the issuer's
outstanding voting securities, and (ii) not more than 25% of the value of its
5
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total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer. See "Taxes" below
for further information.
PREFERRED STOCK
The Fund may invest in preferred stock. Preferred stock pays dividends
at a specified rate and generally has preference over common stock in the
payment of dividends and the liquidation of the issuer's assets but is junior to
the debt securities of the issuer in those same respects. Unlike interest
payments on debt securities, dividends on preferred stock are generally payable
at the discretion of the issuer's board of directors, and shareholders may
suffer a loss of value if dividends are not paid. Preferred shareholders
generally have no legal recourse against the issuer if dividends are not paid.
The market prices of preferred stocks are subject to changes in interest rates
and are more sensitive to changes in the issuer's creditworthiness than are the
prices of debt securities. Under ordinary circumstances, preferred stock does
not carry voting rights.
DEBT SECURITIES
The Fund may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers, and 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 debt securities, do not 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 when
interest payments and principal security appear adequate for 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.
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price of
some commodity. These securities may be convertible into preferred or common
stock (see "Convertible Securities" below), or may be bought as part of a unit
containing common stock. A debt security may be subject to redemption at the
option of the issuer at a price set in the security's governing instrument.
In selecting corporate debt securities for the Fund, the Adviser
reviews and monitors the creditworthiness of each issuer and issue. The Adviser
also analyzes interest rate trends and specific developments which it believes
may affect individual issuers.
RISKS ASSOCIATED WITH HIGH YIELD DEBT SECURITIES. The Fund invests a
substantial portion of its assets in high yield, high risk, lower-rated fixed
income securities. Lower-rated fixed income 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 lower-rated fixed income securities.
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Lower-rated fixed income securities generally offer a higher yield than
that available from higher-rated issues with similar maturities, as compensation
for holding a security that is subject to greater risk. Lower-rated fixed income
securities are deemed by rating agencies to be predominately speculative with
respect to the issuer's capacity to pay interest and repay principal and may
involve major risk or exposure to adverse conditions. 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) adverse changes in the financial condition of the issuers, (3)
price fluctuation in response to changes in interest rates and (4) limited
liquidity and secondary market support.
An economic downturn affecting the issuer may result in a weakened
capacity to make principal and interest payments and an increased incidence of
default. In addition, a fund that invests in lower-rated securities may incur
additional expenses to the extent recovery is sought on defaulted securities.
Because of the many risks involved in investing in high yield fixed income
securities, the success of such investments is dependent upon the credit
analysis of the Adviser. Although the market for lower-rated fixed income
securities is not new, and the market has previously weathered economic
downturns, the past performance of the market for such securities may not be an
accurate indication of its performance during future economic downturns or
periods of rising interest rates. 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 debt securities of the same maturity are a function of several factors,
including the relative financial strength of the issuers.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security
is a bond, debenture, note, preferred stock or other security that may be
converted into or exchanged for a prescribed amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. Convertible securities are
typically issued by smaller capitalized companies, whose stock prices may be
volatile. The price of a convertible security often reflects such variations in
the price of the underlying common stock in a way that non-convertible debt does
not. A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument, which could have an adverse effect on the Fund's ability to achieve
its investment objective.
ZERO COUPON BONDS
The Fund may invest in zero coupon securities. Zero coupon bonds are
debt obligations which make no fixed interest payments but instead are issued at
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a significant discount from face value. Like other debt securities, the market
price can reflect a premium or discount, in addition to the original issue
discount, reflecting the market's judgment as to the issuer's creditworthiness,
the interest rate or other similar factors. The original issue discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity (or the first interest payment date) at a rate of
interest reflecting the market rate at the time of issuance. Because zero coupon
bonds do not make periodic interest payments, their prices can be very volatile
when market interest rates change.
The original issue discount on zero coupon bonds must be included in
the Fund's income ratably as it accrues. Accordingly, to qualify for tax
treatment as a regulated investment company and to avoid a certain excise tax,
the Fund may be required to distribute as a dividend an amount that is greater
than the total amount of cash it actually receives. These distributions must be
made from the Fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. Such sales could occur at a time which would be
disadvantageous to the Fund and when it would not otherwise choose to dispose of
the assets.
PAY-IN-KIND BONDS
The Conseco High Yield Focus Fund may invest in pay-in-kind bonds.
These bonds pay "interest" through the issuance of additional bonds, thereby
adding debt to the issuer's balance sheet. The market prices of these securities
are likely to respond to changes in interest rates to a greater degree than the
prices of securities paying interest currently. Pay-in-kind bonds carry
additional risk in that, unlike bonds that pay interest throughout the period to
maturity, the Fund will realize no cash until the cash payment date and the Fund
may obtain no return at all on its investment if the issuer defaults.
The holder of a pay-in-kind bond must accrue income with respect to
these securities prior to the receipt of cash payments thereon. To avoid
liability for federal income and excise taxes, the Fund most likely will be
required to distribute income accrued with respect to these securities, even
though the Fund has not received that income in cash, and may be required to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
MORTGAGE-BACKED SECURITIES
The 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 Fund
may also invest in debt securities which are secured with collateral consisting
of mortgage-backed securities (see "Collateralized Mortgage Obligations,"
below), 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
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incurred) may expose the 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 Fannie Mae ("FNMA") or
Freddie Mac ("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. As a result, GNMA certificates are considered to have a low risk of
default, although they are subject to the same market risk as comparable debt
securities. 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 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 interests in pools 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 AND MORTGAGE-BACKED BONDS.
Mortgage-backed securities may be 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,
although not necessarily on a pro rata basis. Mortgage-backed bonds are general
obligations of the issuer fully collateralized directly or indirectly by a pool
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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, the Fund could
sustain a loss. If new types of mortgage-related securities are developed and
offered to investors, investments in such securities will be considered.
STRIPPED MORTGAGE-BACKED SECURITIES. The Conseco High Yield Focus Fund
may invest in stripped mortgage-backed securities, which are derivative
securities usually structured with two classes that receive different
proportions of the interest and principal distributions from an underlying pool
of mortgage assets. The Fund may purchase securities representing only the
interest payment portion of the underlying mortgage pools (commonly referred to
as "IOs") or only the principal portion of the underlying mortgage pools
(commonly referred to as "POs"). Stripped mortgage-backed securities are more
sensitive to changes in prepayment and interest rates and the market for such
securities is less liquid than is the case for traditional debt securities and
mortgage-backed securities. The yield on IOs is extremely sensitive to the rate
of principal payments (including prepayments) on the underlying mortgage assets,
and a rapid rate of repayment may have a material adverse effect on such
securities' yield to maturity. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Fund will fail to recoup
fully its initial investment in these securities, even if they are rated high
quality. Most IOs and POs are regarded as illiquid and will be included in the
Fund's limit on illiquid securities.
RISKS OF MORTGAGE-BACKED SECURITIES. 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 and IOs and POs, are subject to 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). 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.
TRUST ORIGINATED PREFERRED SECURITIES
The Conseco High Yield Focus Fund may also invest in trust originated
preferred securities, a new type of security issued by financial institutions
such as banks and insurance companies. Trust originated preferred securities
represent interests in a trust formed by a financial institution. The trust
sells preferred shares and invests the proceeds in notes issued by the financial
institution. These notes may be subordinated and unsecured. Distributions on the
trust originated preferred securities match the interest payments on the notes;
if no interest is paid on the notes, the trust will not make current payments on
its preferred securities. Issuers of the notes currently enjoy favorable tax
treatment. If the tax characterization of these securities were to change
adversely, they could be redeemed by the issuers, which could result in a loss
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to the Fund. In addition, some trust originated preferred securities are
available only to qualified institutional buyers under Rule 144A.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Conseco High Yield Focus Fund may also invest in loan
participations or assignments. In purchasing a loan participation or assignment,
the Fund acquires some or all of the interest of a bank or other lending
institution in a loan to a corporate borrower. Many such loans are secured and
most impose restrictive covenants which must be met by the borrower and which
are generally more stringent than the covenants available in publicly traded
debt securities. However, interests in some loans may not be secured, and the
Fund will be exposed to a risk of loss if the borrower defaults. Loan
participations may also be purchased by the Fund when the borrowing company is
already in default.
In purchasing a loan participation, the Fund may have less protection
under the federal securities laws than it has in purchasing traditional types of
securities. The Fund's ability to assert its rights against the borrower will
also depend on the particular terms of the loan agreement among the parties.
Many of the interests in loans purchased by the Fund will be illiquid and
therefore subject to the Fund's limit on illiquid investments.
COLLATERALIZED BOND OBLIGATIONS
A collateralized bond obligation ("CBO") is a type of asset-backed
security. Specifically, a CBO is an investment grade bond which is backed by a
diversified pool of high risk, high yield fixed income securities. The pool of
high yield securities is separated into "tiers" representing different degrees
of credit quality. The top tier of CBOs is backed by the pooled securities with
the highest degree of credit quality and pays the lowest interest rate.
Lower-tier CBOs represent lower degrees of credit quality and pay higher
interest rates to compensate for the attendant risk. The bottom tier typically
receives the residual interest payments (i.e. money that is left over after the
higher tiers have been paid) rather than a fixed interest rate. The return on
the bottom tier of CBOs is especially sensitive to the rate of defaults in the
collateral pool.
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers. These securities
may be U.S. dollar denominated or non-U.S. dollar denominated. Foreign
securities include securities issued, assumed or guaranteed by foreign
governments or political subdivisions or instrumentalities thereof.
Investments in foreign securities may offer unique potential benefits
such as substantial growth in industries not yet developed in the particular
country. Such investments also permit the 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 securities 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, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions on foreign investments or repatriation of capital. In addition,
with respect to certain countries, there is the possibility of nationalization
or expropriation of assets; confiscatory taxation; political, social or
financial instability; and war or other diplomatic developments that could
adversely affect investments in those countries. Since the Fund may invest in
securities denominated or quoted in currencies other than the U.S. dollar,
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changes in foreign currency exchange rates will affect the value of securities
held by the Fund and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned. The Fund generally will incur costs in
connection with conversion between various currencies.
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. Transaction costs, custodial fees and management
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. The 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.
All of the foregoing risks may be intensified in emerging markets.
Dividend and interest income from foreign securities may be subject to
withholding taxes by the country in which the issuer is located and may not be
recoverable by the Fund or its investors in all cases.
ADRs are certificates issued by a U.S. bank or trust company
representing an interest in securities of a foreign issuer deposited in a
foreign subsidiary or branch or a correspondent of that bank. Generally, ADRs
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 United States and, therefore, there may not be a
correlation between such information and the market value of such ADRs. European
Depositary Receipts ("EDRs") are certificates issued by a European bank or trust
company evidencing its ownership of the underlying foreign securities. EDRs are
designed for use in European securities markets.
RESTRICTED SECURITIES, RULE 144A SECURITIES AND ILLIQUID SECURITIES
The Fund may invest in restricted securities, such as private
placements, and in Rule 144A securities. Once acquired, restricted securities
may be sold by the Fund only in privately negotiated transactions or in a public
offering with respect to which a registration statement is in effect under the
1933 Act. If sold in a privately negotiated transaction, the Fund may have
difficulty finding a buyer and may be required to sell at a price that is less
than it had anticipated. Where registration is required, the 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.
Restricted securities are generally considered illiquid.
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Rule 144A securities, although not registered, may be resold to
qualified institutional buyers in accordance with Rule 144A under the 1933 Act.
The Adviser, acting pursuant to guidelines established by the Board, may
determine that some Rule 144A securities are liquid.
The Fund may not invest in any security if, as a result, more than 15%
of the Fund's net assets would be invested in illiquid securities, which are
securities that cannot be expected to be sold within seven days at approximately
the price at which they are valued.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. A repurchase agreement
is an agreement under which securities are acquired from a securities dealer or
bank subject to resale at an agreed upon price on a later date. The acquiring
Fund bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities. However, to
minimize the risk, the Fund will enter into repurchase agreements only with
financial institutions which are deemed to be of good financial standing and
which have been approved by the Board. No more than 15% of the Fund's assets may
be subject to repurchase agreements maturing in more than seven days.
SECURITIES LENDING
The Fund may lend securities to broker-dealers or other institutional
investors pursuant to agreements requiring that the loans be continuously
secured by any combination of cash, U.S. Government securities, and approved
bank letters of credit that at all times equal at least 100% of the market value
of the loaned securities. Such loans will not be made if, as a result, the
aggregate amount of all outstanding securities loans would exceed 33 1/3% of the
Fund's total assets. The Fund continues to receive interest on the securities
loaned and simultaneously earns either interest on the investment of the cash
collateral or fee income if the loan is otherwise collateralized. Should the
borrower of the securities fail financially, there is a risk of delay in
recovery of the securities loaned or loss of rights in the collateral. However,
the Fund seeks to minimize this risk by making loans only to borrowers which are
deemed by the Adviser to be of good financial standing and which have been
approved by the Board.
BORROWING
The Fund may borrow money to purchase securities, which is a form of
leverage. This leverage may exaggerate the gains and losses on the Fund's
investments and changes in the net asset value of its shares. Leverage also
creates interest expenses; if those expenses exceed the return on the
transactions that the borrowings facilitate, the Fund will be in a worse
position than if it had not borrowed. The use of derivatives in connection with
leverage may create the potential for significant losses. The Fund may pledge
assets in connection with permitted borrowings. The Fund may borrow an amount up
to 33 1/3 % of its assets.
MANAGEMENT
The Trustees of the Trust decide upon matters of general policy for the
Trust. In addition, the Trustees review the actions of the Adviser, as set forth
below. The Trust's officers supervise the daily business operations of the
Trust. For information about the Trust's Board of Trustees and the Trust's
officers, see "Management" in the SAI.
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THE ADVISER
Conseco Capital Management, Inc., 11825 N. Pennsylvania Street, Carmel,
Indiana 46032, has been retained under an Investment Advisory Agreement with the
Trust to provide investment advice and in general to supervise the management
and investment program of the Trust and the 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 also
manages the other series of the Trust, another registered investment company,
and 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. The Adviser
generally manages the affairs of the Trust, subject to the supervision of the
Board.
Under the Investment Advisory Agreement, the Adviser has contracted to
receive an investment advisory fee equal to an annual rate of .70% of the
average daily net asset value of the Fund. The Adviser, the Administrator and
the Distributor have voluntarily agreed to waive their fees and/or reimburse
expenses to the extent that the ratio of expenses to net assets on an annual
basis for the Fund exceeds .90%. This voluntary limit may be discontinued at any
time after April 30, 1999.
The following investment professionals are primarily responsible for
the management of the Fund:
Peter C. Andersen, CFA, Second Vice President, Portfolio Analytics for
the Adviser. He is co-manager of the Fund, and is responsible for fixed income
management of institutional client accounts. Mr. Anderson joined the Adivser in
1997. Prior to joining the Adviser, he was a portfolio manager for Colonia
Management Associates in Boston, where he managed over $650 million in high
yield, tax-free mutual funds.
Robert L. Cook, CFA, Second Vice President, Research for the Adviser.
He is co-manager of the Fund, and is a senior member of the Adviser's research
group focusing on investments in the financial services, gaming and lodging, and
health care industries. Mr. Cook joined the Adviser in 1994. Prior to joining
the Adviser, he worked in the corporate financial department at PNC Securities
Corporation.
Like other financial and business organizations, the Fund could be
adversely affected if computer systems it relies on do not properly process
date-related information and data involving the years 2000 and after. The
Adviser is taking steps that it believes are reasonable to address this problem
in its own computer systems and to obtain assurances that comparable steps are
being taken by the Fund's other major service providers. The Adviser also
attempts to evaluate the potential impact of this problem on the issuers of
investment securities that the Fund purchases. However, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Fund.
ADMINISTRATIVE FEES
Pursuant to an administration agreement ("Administration Agreement"),
the Administrator supervises the overall administration of the Fund. These
administrative services include supervising the preparation and filing of all
documents required for compliance by the Fund with applicable laws and
regulations, supervising the maintenance of books and records, and other general
and administrative responsibilities. For providing these services, the
Administrator receives a fee from the of .20% per annum of its average daily net
assets. Pursuant to the Administration Agreement, the Administrator reserves the
right to employ one or more sub-administrators to perform administrative
services for the Fund. The Bank of New York performs certain administrative
services for the Fund.
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PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
You may purchase Class Y shares from any broker, dealer, or other
financial intermediary that has a selling agreement with the Distributor. These
firms may charge for their services in connection with your purchase order. In
addition, as discussed below, an account may be opened for the purchase of
shares of the Fund by mailing to the Conseco Fund Group, P.O. Box 8017, Boston,
Massachusetts 02266-8017, a completed account application and a check payable to
the Fund. Or you may telephone (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.
In order to buy Class Y shares you must be an institutional investor or
a qualifying individual investor. Institutional investors may include, but are
not limited to, the following: (i) tax qualified retirement plans which have (a)
at least $10 million in plan assets, or (b) 250 or more employees eligible to
participate at the time of purchase, (ii) banks and insurance companies
purchasing shares for their own account, (iii) investment companies not
affiliated with the Adviser, (iv) tax-qualified retirement plans of the Adviser
or brokers, dealers, and other financial intermediaries that have a selling
agreement with the Distributor and their affiliates, (v) endowments, foundations
and other charitable organizations or (vi) accounts established under wrap fee
or asset allocation programs where the accountholder pays the sponsor an
asset-based fee. A qualifying individual investor is an investor who is a client
of the Adviser and is making a purchase of over $500,000 or whose purchase
together with his current holdings of Class Y shares exceeds $500,000 or any
other individual who meets the minimum investment requirement.
Purchase orders for the Fund are accepted only on a business day as
defined below. Orders for shares received by the Fund's Transfer Agent on any
business day prior to the close of regular trading on the New York Stock
Exchange (the "NYSE") (normally 4:00 p.m. Eastern Time) will receive that day's
offering price, which is net asset value. Orders received by the Transfer Agent
after such time but prior to the close of business on the next business day will
receive the next business day's offering price. If you purchase shares through a
broker, dealer, or other financial intermediary, that firm 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, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Your initial purchase amount must be at least $500,000. However, the
minimum may be waived at the discretion of the Fund's officers. The 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 Trust reserves the right to cancel
any purchase order for which payment has not been received by the third business
day following placement of the order.
Certain brokers, dealers, and other financial intermediaries may be
authorized to accept purchase orders on behalf of the Fund. The Fund will be
deemed to have received a purchase order when an authorized broker, dealer, or
other financial intermediary accepts the order. Orders placed through an
authorized broker, dealer, or other financial intermediary will receive the
offering price next calculated after the order has been accepted by such an
authorized firm. In all other cases, it is the responsibility of the broker,
dealer, or other financial intermediary to forward customer orders received
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<PAGE>
prior to the close of the NYSE to the Transfer Agent prior to its close of
business that same day (normally 4:00 p.m. Eastern Time).
Brokers, dealers and other financial intermediaries are required to
provide payment within three business days after placing an order. WHEN MAKING
PAYMENT FOR CONFIRMED PURCHASES VIA FEDERAL FUNDS WIRE, SUCH FIRMS MUST
REFERENCE THE CONFIRMATION NUMBER TO ENSURE TIMELY CREDIT.
The Distributor may provide promotional incentives including cash
compensation to certain brokers, dealers, or financial intermediaries whose
representatives have sold or are expected to sell significant amounts of shares
of the Fund. Other programs may provide, subject to certain conditions,
additional compensation to brokers, dealers, or financial intermediaries 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 the 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 Fund will not be
issued.
PURCHASES BY WIRE
Purchases by wire transfer should be directed to the Transfer Agent. To
receive an account number call (800) 986-3384 between the hours of 8:00 a.m. and
4:00 p.m. (Eastern Time) on a business day (as defined 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 regular trading (normally 4:00 p.m. Eastern
Time) of the NYSE on a business day as defined above, you will receive that
day's offering price. Your bank may charge for these services.
PURCHASES BY CHECK
An initial investment made by check must be accompanied by an
application, completed in its entirety. Additional shares of the Fund may also
be purchased by sending a check payable to the 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, redemptions will not be allowed until the investment being redeemed has
been in the account for 15 business days.
HOW TO REDEEM SHARES OF THE FUND
Shares of Class Y are redeemed at net asset value next determined after
receipt of a redemption request in good form on any business day.
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
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<PAGE>
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 is required for redemptions of $50,000 or more. A signature
guarantee may be obtained from most banks, brokers and dealers, credit unions,
savings associations and financial institutions, but not from a notary public.
REDEMPTIONS BY WIRE OR TELEPHONE
Brokers, dealers, or other financial intermediaries may communicate
redemption orders by wire or telephone. These firms may charge for their
services in connection with your redemption request but neither the Fund nor the
Distributor imposes any such charges.
The Fund and the Transfer Agent will not be responsible for the
authenticity of telephone instructions or losses, if any, resulting from
unauthorized shareholder transactions if the Fund or the Transfer Agent
reasonably believes that such instructions are genuine. The Fund and the
Transfer Agent have established procedures that the Fund believes 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 Fund and the Transfer Agent do not employ these procedures,
they may be liable for any losses due to unauthorized or fraudulent telephone
instructions.
REDEMPTIONS THROUGH BROKERS, DEALERS AND OTHER FINANCIAL INTERMEDIARIES
Certain brokers, dealers, and other financial intermediaries may be
authorized to accept redemption orders on behalf of the Fund. The Fund will be
deemed to have received a redemption order when an authorized broker, dealer, or
other financial intermediary accepts the order. Orders placed through an
authorized broker, dealer, or other financial intermediary will receive the net
asset value next calculated after the order has been accepted by such an
authorized firm, minus any applicable contingent deferred sales charge. In all
other cases, it is the responsibility of the broker, dealer, or other financial
intermediary to forward customer redemption orders received prior to the close
of the NYSE to the Transfer Agent prior to its close of business that same day
(normally 4:00 p.m. Eastern Time).
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.
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<PAGE>
GENERAL
Payment to shareholders for shares redeemed or repurchased will be made
within seven days after receipt by the Transfer Agent. The Fund may delay the
payment of redemption proceeds 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 Fund recommends that all purchases be made by bank wire Federal
funds. The Fund may suspend the right of redemption under certain extraordinary
circumstances in accordance with the rules of the SEC.
EXCHANGE PRIVILEGE
Class Y shares of the Fund may be exchanged for Class Y shares of
another series of the Trust at the relative net asset values per share at the
time of the exchange. The total value of shares of a fund purchased by exchange
must at least equal the fund's minimum investment requirement. Before exchanging
shares, you should consider the differences in investment objectives and
expenses of the fund into which the exchange would be made. Shares are normally
redeemed from one fund and purchased from the other fund in the exchange
transaction on the same business day on which the Transfer Agent receives an
exchange request that is in proper form by the close of the NYSE that day.
ELECTRONIC TRANSFERS THROUGH AUTOMATED CLEARING HOUSE
Electronic transfers through Automated Clearing House ("ACH") allow 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. Initial
purchase minimums apply. You must complete the "ACH" section of the application
for this privilege to be applicable.
NET ASSET VALUES OF FUND SHARES
Securities held by the Fund will be valued as follows. Fund securities
that 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 fixed income 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.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income are declared and distributed
monthly by the Fund; however, the Trustees may decide to declare dividends at
other intervals. For dividend purposes, (1) net investment income of the Fund
consists of all dividends and interest it receives, any net short-term gains and
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<PAGE>
losses from the sale of its investments, and any net gains it realizes from
foreign currency transactions, less its expenses (including fees payable to the
Adviser and its affiliates). Distributions of the Fund's net capital gain (the
excess of net long-term capital gain over net short-term capital loss) are
declared and distributed to its shareholders annually after the close of the
Fund's fiscal year.
Dividends and other distributions paid on each class of shares of the
Fund are calculated at the same time and in the same manner. Dividends on Class
A, Class B, and Class C shares of a Fund are expected to be lower than those on
its Class Y shares because Class A, Class B, and Class C shares have higher
expenses resulting from their distribution and service fees. Dividends on each
class also might be affected differently by the allocation of other
class-specific expenses.
DISTRIBUTION OPTIONS. When you open your account, specify on your
application how you want to receive your distributions. For retirement accounts,
all Fund distributions are reinvested. For other accounts, you have the
following options:
REINVEST ALL DISTRIBUTIONS. You can elect to reinvest all dividends and
capital gain distributions from the Fund in additional Class Y shares of the
Fund.
REINVEST INCOME DIVIDENDS ONLY. You can elect to reinvest dividends
from the Fund in Class Y shares of the Fund while receiving capital gain
distributions by check or sent to your bank account.
REINVEST CAPITAL GAIN DISTRIBUTIONS ONLY. You can elect to reinvest
capital gain distributions from the Fund in Class Y shares of 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 capital gain distributions from the Fund or have them sent to
your bank account.
TAXES
The Fund is treated as a separate corporation, and intends to qualify
as a "regulated investment company" ("RIC"), under the Code. As such, and by
complying with the applicable Code provisions regarding the amount and timing of
its distributions, the Fund will be allowed a deduction for amounts distributed
to its shareholders from its investment company taxable income (generally, its
net investment income as described under "Dividends and Other Distributions")
and net capital gain and will not be subject to federal income tax on those
amounts.
To qualify for treatment as a RIC under the Code, the Fund -- which is
treated as a separate corporation for these purposes -- must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
the Fund, these requirements include the following: (1) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
and (2) at the close of each quarter of the Fund's taxable year, (i) at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs and other securities, with
those other securities limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities, and (ii)
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<PAGE>
not more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of any
one issuer.
The Fund intends to distribute all its investment company taxable
income and net capital gain so as to avoid federal income and excise taxes.
Dividends from the Fund's investment company taxable income (whether paid in
cash or reinvested in additional shares) generally will be taxable to you as
ordinary income. The portion of those dividends that does not exceed the
aggregate dividends received by the Fund from U.S. corporations will be eligible
for the dividends-received deduction allowed to corporations; however, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the federal alternative
minimum tax.
Distributions of the Fund's net capital gain (whether paid in cash or
reinvested additional shares), when designated as such, will be taxable to you
as long-term capital gain, regardless of how long you have held your Fund
shares. Under the Taxpayer Relief Act of 1997, different maximum tax rates apply
to a non-corporate taxpayer's net capital gain depending on the taxpayer's
holding period and marginal rate of federal income tax -- generally, 28% for
gain recognized on capital assets held for more than one year but not more than
18 months and 20% (10% for taxpayers in the 15% marginal tax bracket) for gain
recognized on capital assets held for more than 18 months. Pursuant to an
Internal Revenue Service notice, the Fund may divide each net capital gain
distribution into a 28% rate gain distribution and a 20% rate gain distribution
(in accordance with the Fund's holding periods for the securities it sold that
generated the distributed gain) and its shareholders must treat those portions
accordingly.
Shareholders who are not subject to tax on their income generally will
not be required to pay tax on distributions.
Dividends and other distributions declared by the Fund in October,
November, or December, but received by you in January, generally are taxable to
you in the year in which declared. The Fund will inform you after the end of
each calendar year as to the amount and nature of dividends and other
distributions paid (or deemed paid) to you for that year. The information
regarding capital gain distributions designates the portions thereof subject to
the different maximum rates of tax applicable to non-corporate taxpayers' net
capital gain indicated above.
When you redeem (sell) shares, it may result in a taxable gain or loss
to you, depending on whether you receive more or less than your adjusted basis
for the shares. An exchange of the Fund's shares, as described under "Purchase
and Redemption of Shares -- Exchange Privilege," generally will have similar tax
consequences. If you purchase shares of the Fund within thirty days before or
after redeeming other shares of the Fund (regardless of class) at a loss, all or
part of that loss will not be deductible and will increase the basis of the
newly purchased shares.
The Fund is required to withhold 31% of all dividends, capital gain
distributions, and redemption proceeds payable to any individuals and certain
other non-corporate shareholders who do not furnish the Fund with a correct
taxpayer identification number. Withholding at that rate also is required from
dividends and capital gain distributions payable to those shareholders who
otherwise are subject to backup withholding.
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The foregoing is only a summary of certain federal income tax
considerations affecting your investment in a Fund. More information is
contained in the SAI. You should consult with your tax adviser about the effect
of an investment in a Fund on your particular tax situation.
GENERAL
The Fund 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. The Fund also may use aggregate total return figures for
various periods, representing the cumulative change in value of an investment in
the 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 the Fund refers to the annualized net income generated
by an investment in the 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 the 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 one-, five- and ten-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.
Further information about the performance of the Fund is contained in
the SAI and in the Fund's semi-annual and annual reports to shareholders, which
you may obtain without charge by writing the Fund's address or calling the
telephone number set forth on the cover page of this Prospectus.
OTHER INFORMATION
BROKERAGE COMMISSIONS
Subject to the Conduct Rules of the NASD and to obtaining best prices
and executions, the Adviser may select brokers who provide research or other
services or who sell shares of the Fund to effect portfolio transactions. The
Adviser may also select an affiliated broker to execute transactions for the
Fund, 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.
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 Fund and other series of the Trust (or classes of the Fund
and other series of the Trust) differ (such as approval of an investment
advisory agreement or a change in fundamental investment policies), the voting
is on a series-by-series (or class-by-class) basis. The Trust does not hold
routine annual shareholders' meetings. The shares of the Fund issued are fully
paid and non-assessable, have no preference or similar rights, and are freely
transferable. In addition, each issued and outstanding share in a class of the
Fund is entitled to participate equally in dividends and distributions declared
by that class.
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REPORTS TO SHAREHOLDERS
Investors in the Fund will be informed of their progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
RETIREMENT PLANS AND MEDICAL SAVINGS ACCOUNTS
Class Y shares are available for purchase by qualified retirement plans
of both corporations and self-employed individuals. The Trust has available
prototype IRA plans (for both individuals and employers), Simplified Employee
Pension ("SEP") plans, and savings incentive match plans for employees ("SIMPLE"
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, call or write the
Distributor.
CLASS A, CLASS B AND CLASS C SHARES
In addition to Class Y Shares, the Trust also offers Class A, Class B
and Class C shares. These shares are available to individual investors. Class A,
Class B and Class C shares generally have higher operating expenses resulting
from their distribution and service fees and are subject to certain sales
charges. Please call the Distributor at (800) 825-1530 for additional
information on the purchase of Class A, Class B and Class C shares.
DISTRIBUTOR
Conseco Equity Sales, Inc., 11815 N. Pennsylvania Street, Carmel,
Indiana 46032, serves as distributor of shares of the Trust.
TRANSFER AGENT
State Street, 225 Franklin Street, Boston, Massachusetts 02110, serves
as the Trust's transfer agent.
CUSTODIAN
The Bank of New York, 90 Washington Street, 22nd Floor, New York, New
York 10826, serves as custodian of the assets of the Fund..
INDEPENDENT PUBLIC ACCOUNTANTS/AUDITORS
The Trust's independent public accountants are Coopers & Lybrand,
L.L.P., 2900 One American Square, Box 82002, Indianapolis, Indiana 46282-0002.
The independent auditors of the International Portfolio are Ernst & Young LLP,
Dallas, Texas.
LEGAL COUNSEL
Certain legal matters for the Fund are passed upon by Kirkpatrick &
Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington, D.C. 20036.
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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.
23
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TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Page
General Information.....................................................
Investment Restrictions.................................................
Description of Securities and Investment Techniques.....................
Investment Performance..................................................
Portfolio Turnover and Securities Transactions..........................
Management..............................................................
Fund Expenses ..........................................................
Distribution Arrangements...............................................
Purchase and Redemption of Shares.......................................
General.................................................................
Taxes...................................................................
Other Information.......................................................
Financial Statements....................................................
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
Attn: 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)
<PAGE>
APPENDIX A SECURITIES RATINGS
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa - Bonds which are rated Aaa by Moody's Investors 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.
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.
C - Bonds which are rated C are the lowest rated class of bonds. Such issues can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
A-1
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STANDARD & POOR'S CORPORATE BOND RATINGS:
AAA - This is the highest rating assigned by Standard & Poor's ("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:
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.
A-2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CONSECO FUND GROUP
CONSECO HIGH YIELD FOCUS FUND
CLASS A, B AND C SHARES
JUNE 30, 1998
This Statement of Additional Information ("SAI") is not a prospectus. It
contains additional information about the Conseco Fund Group (the "Trust") and
the Conseco High Yield Focus Fund ("Fund"), a series of the Trust. It should be
read in conjunction with the Fund's Class A, B, and C prospectus (the
"Prospectus"), dated June 30, 1998. You may obtain a copy by contacting the
Trust's Administrative Office, 11815 N. Pennsylvania Street, Carmel, Indiana
46032.
TABLE OF CONTENTS
GENERAL INFORMATION...........................................................2
INVESTMENT RESTRICTIONS.......................................................2
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES...........................3
INVESTMENT PERFORMANCE.......................................................17
SECURITIES TRANSACTIONS AND PORTFOLIO TURNOVER...............................19
MANAGEMENT...................................................................20
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..........................24
FUND EXPENSES................................................................25
DISTRIBUTION ARRANGEMENTS....................................................25
PURCHASE AND REDEMPTION OF SHARES............................................26
GENERAL......................................................................28
TAXES........................................................................30
OTHER INFORMATION............................................................34
<PAGE>
GENERAL INFORMATION
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 ("SEC") under the Investment Company Act of
1940 (the "1940 Act"). The Trust is a "series" type of mutual fund which issues
separate series of shares, each of which represents a separate portfolio of
investments. The Fund offers four classes of shares. This SAI relates solely to
Class A shares, Class B shares and Class C shares of the Fund. Class Y shares
are offered to certain institutional investors and qualifying individual
investors through a separate prospectus and SAI. Each class may have different
expenses, which may affect performance. Conseco Capital Management, Inc. (the
"Adviser") serves as the Trust's investment adviser.
INVESTMENT RESTRICTIONS
The Trust has adopted the following policies relating to the investment of
assets the Fund and its activities. These are fundamental policies and may not
be changed without the approval of the holders of a "majority" of the
outstanding shares of the Fund. 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 or interests represented at a meeting at which more than 50 percent of
the outstanding shares or interests are represented or (ii) more than 50 percent
of the outstanding shares or interests. Except for the limitation on borrowing,
any investment policy or limitation that involves a maximum percentage of
securities or assets will not be considered to be violated unless the percentage
limitation is exceeded immediately after, and because of, a transaction by the
Fund.
The Fund may not (except as noted):
1. Purchase or sell commodities or commodity contracts except that the Fund
may purchase or sell options, futures contracts, and options on futures
contracts and may engage in interest rate and foreign currency
transactions;
2. Borrow money, except that the Fund may: (a) borrow from banks, and (b)
enter into reverse repurchase agreements, provided that (a) and (b) in
combination do not exceed 33-1/3% of the value of its total assets
(including the amount borrowed) less liabilities (other than borrowings);
and except that a Fund may borrow from any person up to 5% of its total
assets (not including the amount borrowed) for temporary purposes (but not
for leverage or the purchase of investments);
3. Underwrite securities of other issuers except to the extent that the Fund
may be deemed an underwriter under the Securities Act of 1933 (the "1933
Act") in connection with the purchase or sale of portfolio securities;
4. Purchase any security if thereafter 25% or more of the total assets of the
Fund would be invested in securities of issuers having their principal
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business activities in the same industry; this restriction does not apply
to U.S. Government securities (as defined in the Prospectus);
5. Purchase or sell real estate, except that the Fund may purchase securities
which are issued by companies which invest in real estate or which are
secured by real estate or interests therein;
6. Make loans of its assets if, as a result, more than 33-1/3% of the Fund's
total assets would be lent to other parties except through (a) entering
into repurchase agreements and (b) purchasing debt instruments; or
7. Issue any senior security, except as permitted under the 1940 Act.
NONFUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions are designated as nonfundamental and may be changed
by the Trust's Board of Trustees ("Board") without shareholder approval.
The Fund may not (except as noted):
1. Sell securities short in an amount exceeding 15% of its assets, except
that the Fund may, without limit, make short sales against the box.
Transactions in options, futures, options on futures and other derivative
instruments shall not constitute selling securities short;
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of securities
transactions and except that margin deposits in connection with
transactions in options, futures, options on futures and other derivative
instruments shall not constitute a purchase of securities on margin; or
3. Make loans of its assets, except that the Fund may enter into repurchase
agreements and purchase debt instruments as set forth in its fundamental
policy on lending and may lend portfolio securities in an amount not to
exceed 33 1/3% of the value of the Fund's total assets.
In order to limit the risks associated with entry into repurchase agreements,
the Board has adopted certain criteria (which are not fundamental policies) to
be followed by the Fund. 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, (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.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes in greater detail different types of
securities and investment techniques used by the Fund, as well as the risks
associated with such securities and techniques.
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U.S. GOVERNMENT SECURITIES
U.S. Government securities are issued or guaranteed by the U.S. Government or
its agencies or instrumentalities.
The Inter-American Development Bank, the Asian-American Development Bank and the
International Bank for Reconstruction and Development (the "World Bank"), while
not U.S. Government agencies or instrumentalities, have the right to borrow from
the participating countries, including the United States.
ASSET-BACKED SECURITIES
Asset-backed securities 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 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 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. Other asset-backed
securities may be developed in the future.
HIGH YIELD (HIGH RISK) SECURITIES
IN GENERAL. Higher yields are generally available from securities rated
BB or lower by Standard & Poor's ("S&P") or Ba or lower by Moody's Investors
Service, Inc. ("Moody's"), securities comparably rated by another nationally
recognized statistical rating organization ("NRSRO"), or unrated securities of
equivalent quality. Debt securities rated below investment grade (i.e., below
BBB/Baa) are deemed by the rating agencies to be predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal.
Lower-rated fixed income securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. The special risk
considerations in connection with investments in these securities are discussed
below.
Subsequent to purchase by the Fund, an issue of debt securities may cease to be
rated or its rating may be reduced, so that the securities would no longer be
eligible for purchase by the Fund. In such a case, the Fund will engage in an
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orderly disposition of the downgraded securities to the extent necessary to
ensure that its holdings do not exceed the permissible amount as set forth in
the Prospectus.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. All interest-bearing
securities typically experience appreciation when interest rates decline and
depreciation when interest rates rise. The market values of lower-rated fixed
income securities tend to reflect individual corporate developments to a greater
extent than do higher rated securities, which react primarily to fluctuations in
the general level of interest rates. Lower-rated fixed income securities also
tend to be more sensitive to economic conditions than are higher-rated
securities. As a result, they generally involve more credit risks than
securities in the higher-rated categories. During an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of
lower-rated fixed income securities may experience financial stress which may
adversely affect their ability to service their debt obligations, meet projected
business goals, and obtain additional financing. Periods of economic uncertainty
and changes would also generally result in increased volatility in the market
prices of these securities and thus in a Fund's net asset value.
PAYMENT EXPECTATIONS. Lower-rated fixed income securities may contain
redemption, call or prepayment provisions which permit the issuer of such
securities to, at its discretion, redeem the securities. During periods of
falling interest rates, issuers of these securities are likely to redeem or
prepay the securities and refinance them with debt securities with a lower
interest rate. To the extent an issuer is able to refinance the securities, or
otherwise redeem them, a Fund may have to replace the securities with a lower
yielding security, which would result in a lower return.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies are
designed to evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of
lower-quality securities and, therefore, may not fully reflect the risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. With regard to an
investment in lower-rated fixed income securities, the achievement of a Fund's
investment objective may be more dependent on the Adviser's own credit analysis
than is the case for higher rated securities. Although the Adviser considers
security ratings when making investment decisions, it does not rely solely on
the ratings assigned by the rating services. Rather, the Adviser performs
research and independently assesses the value of particular securities relative
to 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.
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.
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LIQUIDITY AND VALUATION. Lower-rated fixed income securities may lack
an established retail secondary market, and to the extent a secondary trading
market does exist, it may be less liquid than the secondary market for higher
rated securities. The lack of a liquid secondary market may negatively impact a
Fund's ability to dispose of particular securities. The lack of a liquid
secondary market for certain securities may also make it more difficult for a
Fund to obtain accurate market quotations for purposes of valuing the Fund's
portfolio. In addition, adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of
lower-rated fixed income securities, especially in a thinly traded market.
WHEN-ISSUED AND DELAYED DELIVERY 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 settlement dates of these transactions may be a month or more after
entering into the transaction. The Fund bears the risk that, on the settlement
date, the market value of the securities may be lower than the purchase price.
At the time the Fund makes a commitment to purchase securities on a when-issued
or delayed delivery basis, it will record the transaction and reflect the value
of such securities each day in determining the Fund's net asset value. However,
the Fund will not accrue any income on these securities prior to delivery. There
are no fees or other expenses associated with these types of transactions other
than normal transaction costs. To the extent the Fund engages in when-issued and
delayed delivery transactions, it will do so for the purpose of acquiring
instruments consistent with its investment objective and policies and not for
the purpose of investment leverage or to speculate on interest rate changes.
When effecting when-issued and delayed delivery transactions, cash or liquid
securities 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 Fund may dispose of these securities before
the issuance thereof. However, absent extraordinary circumstances not presently
foreseen, it is the Fund's policy not to divest itself of its right to acquire
these securities prior to the settlement date thereof.
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
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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 AND SAVINGS INDUSTRY OBLIGATIONS
Such obligations include certificates of deposit, time deposits, bankers'
acceptances, and other short-term debt obligations issued by commercial banks
and 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 Fund may invest in obligations of
foreign branches of domestic commercial banks and foreign banks. See "Foreign
Securities" in the Prospectus for information regarding risks associated with
investments in foreign securities.
The Fund 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 S&P, or, if the institution has no outstanding
securities rated by Moody's or S&P, 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
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
Repurchase agreements permit the Fund to maintain liquidity and earn income over
periods of time as short as overnight. In these transactions, the Fund purchases
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. 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, as
appropriate. These guidelines require monitoring the creditworthiness of
counterparties to repurchase transactions, obtaining collateral at least equal
in value to the repurchase obligation, and marking the collateral to market on a
daily basis. Repurchase agreements maturing in more than seven days may be
considered illiquid and may be subject to the Fund's limitation on investment in
illiquid securities.
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REVERSE REPURCHASE AGREEMENTS AND MORTGAGE DOLLAR ROLLS
A reverse repurchase agreement involves the temporary sale of a security by the
Fund and its agreement to repurchase the instrument at a specified time at a
higher price. Such agreements are short-term in nature. During the period before
repurchase, the Fund continues to receive principal and interest payments on the
securities.
In a mortgage dollar roll, the Fund sells a fixed income security for delivery
in the current month and simultaneously contracts to repurchase a substantially
similar security (same type, coupon and maturity) on a specified future date.
During the roll period, the Fund would forego principal and interest paid on
such securities. The Fund would be compensated by the difference between the
current sales price and the forward price for the future purchase, as well as by
any interest earned on the proceeds of the initial sale.
In accordance with regulatory requirements, the Fund will segregate cash or
liquid securities whenever it enters into reverse repurchase agreements or
mortgage dollar rolls. Such transactions may be considered to be borrowings for
purposes of the Fund's fundamental policies concerning borrowings.
WARRANTS
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 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
warrants 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, the Fund would lose its entire investment in such
warrant.
INTEREST RATE TRANSACTIONS
The 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, floors and collars.
The Fund expects to enter into these transactions primarily to preserve a return
or spread on a particular investment or portion of its portfolio. The Fund may
also enter into these transactions to protect against an increase in the price
of securities that it anticipates purchasing at a later date. The Fund intends
to use these transactions as a hedge and not as speculative investments.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments. The purchase of an interest rate 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. An interest
rate collar combines elements of buying a cap and selling a floor.
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The Fund may enter into interest rate swaps, caps, floors, and collars 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 transactions on a net
basis, i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. The amount
of the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap, cap, floor, or collar 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.
The Fund will not enter into any interest rate 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,
the 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, floors and collars are more recent innovations which
tend to be less liquid than swaps.
STEP DOWN PREFERRED SECURITIES
Step down perpetual preferred securities are issued by a real estate investment
trust ("REIT") making a mortgage loan to a single borrower. The dividend rate
paid by these securities is initially relatively high, but declines yearly. The
securities are subject to call if the REIT suffers an unfavorable tax event, and
to tender by the issuer's equity holder in the 10th year; both events could be
on terms unfavorable to the holder of the preferred securities. The value of
these securities will be affected by changes in the value of the underlying
mortgage loan. The REIT is not diversified, and the value of the mortgaged
property may not cover its obligations. Step down perpetual preferred securities
are considered restricted securities under the 1933 Act.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Loan participations and assignments are interests in loans originated by banks
and other financial institutions. Both the lending bank and the borrower may be
deemed to be "issuers" of a loan participation.
Although some of the loans may be secured, there is no assurance that the
collateral can be liquidated in particular cases, or that its liquidation value
will be equal to the value of the debt. Borrowers that are in bankruptcy may pay
only a small portion of the amount owed, if they are able to pay at all. Where
the Fund purchases a loan through an assignment, there is a possibility that the
Fund will, in the event the borrower is unable to pay the loan, become the owner
of the collateral. This involves certain risks to the Fund as a property owner.
Loans are often administered by a lead bank, which acts as agent for the lenders
in dealing with the borrower. In asserting rights against the borrower, the Fund
may be dependent on the willingness of the lead bank to assert these rights, or
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upon a vote of all the lenders to authorize the action. Assets held by the lead
bank for the benefit of the Fund may be subject to claims of the lead bank's
creditors.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts 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 by the Fund or which the Fund intends to purchase, and not for
purposes of speculation. For information about foreign currency futures
contracts, see "Foreign Currency Transactions" below.
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 the Fund has sold a futures contract, if the offsetting price is more than
the original futures contract purchase price, the Fund realizes a gain; if it is
less, the Fund realizes a loss.
At the time the Fund enters into a futures contract, an amount of cash or liquid
securities, equal to the fair market value less initial 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. The Fund may be required to deposit additional assets in the segregated
account in order to continue covering the contract as market conditions change.
The Fund may also be required to post additional "variation" margin. In
addition, the Fund will comply with certain regulations of the Commodity Futures
Trading Commission to qualify for an exclusion from being a "commodity pool
operator."
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.
The Fund may purchase and sell interest rate futures as a hedge against changes
in interest rates that would adversely impact the value of debt instruments and
other interest rate sensitive securities being held or to be purchased by the
Fund. The Fund might employ a hedging strategy whereby it would purchase an
interest rate futures contract when it intends to invest 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
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value of the futures contract purchased by the Fund or avoided by taking
delivery of the debt securities under the futures contract.
The 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 Fund may purchase options on futures
contracts, although they will not write options on any such contracts. A futures
option gives the 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, the Fund would close out its position before expiration by
an offsetting purchase or sale.
The Fund may 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 the Fund would use put and call options on debt
securities, as described in "Options on Securities" below.
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 the 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 securities. 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's 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 influences in futures and futures options trading, 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
unexpected market behavior or interest rate trends.
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There can be no assurance that a liquid market will exist at a time when the
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. 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. In addition, certain of these instruments are relatively new
and without a significant trading history. Lack of a liquid market for any
reason may prevent the 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.
The Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. exchange or board of trade. The Fund will not
enter into a futures contract or purchase a futures option if immediately
thereafter the aggregate initial margin deposits for futures contracts held by
the Fund plus premiums paid by it for open futures options positions, excluding
futures contracts and futures options entered into for bona fide hedging
purposes and net of the amount by which any futures options positions are
"in-the-money" would exceed 5 percent of the Fund's net assets.
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may purchase put and call options on securities at such times as the
Adviser deems appropriate and consistent with the Fund's investment objective.
The Fund may also write listed "covered" call and "secured" put options. The
Fund 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
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.
The 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 the Fund would enable it 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.
The 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. The Fund may sell put
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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 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 Fund may write "covered" 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 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 protect partially against increases in
the value of securities to be purchased, the Fund may write "secured" put
options. During the option period, the writer of a put option may be assigned an
exercise notice requiring the writer to purchase the underlying security at the
exercise price.
The 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 an equal or lower exercise price, for
the same exercise period, and on the same securities as the written call. Under
a secured put option, the Fund must maintain, in a segregated account with the
Trust's custodian, cash or liquid securities with a value sufficient to meet its
obligation as 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 by the same Fund.
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 if
the price of the underlying security declines. 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 or purchase the underlying
securities at the exercise price. If a put or call option purchased by the 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
13
<PAGE>
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 the Fund seeks to
close out an option position. If the Fund cannot effect a closing transaction,
it will not be able to sell the underlying security or securities in a
segregated account 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 secondary market on a national securities exchange could
include: insufficient trading interest, restrictions imposed by national
securities exchanges, trading halts or suspensions with respect to 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 options or to impose restrictions on certain types of
orders.
There also can be no assurance that the Fund would be able to liquidate an
over-the-counter ("OTC") option at any time prior to expiration. In contrast to
exchange-traded options where the clearing organization affiliated with the
particular exchange on which the option is listed in effect guarantees
completion of every exchange-traded option, OTC options are contracts between
the Fund and a counter-party, with no clearing organization guarantee. Thus,
when the Fund purchases an OTC option, it generally will be able to close out
the option prior to its expiration only by entering into a closing transaction
with the dealer from whom the Fund originally purchased the option.
Since option premiums paid or received by the Fund are small in relation to the
market value of underlying investments, buying and selling put and call options
offer large amounts of leverage. Thus, trading in options could result in the
Fund's net asset value being more sensitive to changes in the value of the
underlying securities.
FOREIGN CURRENCY TRANSACTIONS
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 purchase and sell such contracts for hedging purposes
and not as an investment. 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 (1)
commit more than 15 percent of its total assets computed at market value at the
time of commitment to foreign currency futures or forward currency contracts, or
(2) enter into a foreign currency contract with a term of greater than one year.
14
<PAGE>
Forward currency contracts are not traded on regulated commodities exchanges.
When the Fund enters into a forward currency contract, it incurs the risk of
default by the counter-party to the transaction.
There can be no assurance that a liquid market will exist when the Fund seeks to
close out a foreign currency futures or forward currency position. 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 Fund values its assets daily in U.S. dollars, it does not intend
physically to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Fund will do so from time to time, thereby incurring the costs
of currency conversion. Although foreign exchange dealers do not charge a fee
for conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange if the Fund desires to resell that
currency to the dealer.
OPTIONS ON FOREIGN CURRENCIES
The Fund may invest in call and put options on 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 Fund may employ hedging strategies with options on currencies before it
purchases a foreign security denominated in the hedged currency, during the
period the Fund holds a foreign security, or between the day a 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 increases 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
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
15
<PAGE>
exercise its option in order to realize any profit and would incur transactional
costs on the purchase or sale of the underlying assets.
BORROWING
The 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
percent. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value; money borrowed will be subject to interest and other costs 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 the Fund's shares. The 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
Securities of other investment companies 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 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 own 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) its investment in all
investment companies does not exceed 10 percent of assets.
Some of the countries in which the Fund may invest may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government approved or authorized investment vehicles,
which may include other investment companies. In addition, it may be less
expensive and more expedient for the Fund to invest in a foreign investment
company in a country which permits direct foreign investment.
Investment companies in which the Fund may invest charge advisory and
administrative fees and may also assess a sales load and/or distribution fees.
Therefore, investors in the Fund that invests 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 the Fund may incur in connection
with such investments.
SHORT SALES
A short sale is a transaction in which a fund sells a security in anticipation
that the market price of the security will decline. The Fund may effect short
sales (i) as a form of hedging to offset potential declines in long positions in
16
<PAGE>
securities it owns or anticipates acquiring, or in similar securities, and (ii)
to maintain flexibility in its holdings. In a short sale "against the box," at
the time of sale the Fund owns the security it has sold short or has the
immediate and unconditional right to acquire at no additional cost the identical
security. Under applicable guidelines of the SEC staff, if a fund engages in a
short sale (other than a short sale against-the-box), it must put an appropriate
amount of cash or liquid securities in a segregated account (not with the
broker).
The effect of short selling on the Fund is similar to the effect of leverage.
Short selling may exaggerate changes in the Fund's NAV. Short selling may also
produce higher than normal portfolio turnover, which may result in increased
transaction costs to the Fund.
INVESTMENT PERFORMANCE
STANDARDIZED YIELD QUOTATIONS. Each class of the 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:
6
YIELD = 2 [(A-B/CD)+1) -1]
Where:
A = the dividends and interest earned during the period.
B = the expenses accrued for the period (net of reimbursements, if any).
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 plus, for Class A
shares only, the maximum initial sales charge) per share on the last day of the
period.
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN QUOTATIONS. Each class of the Fund 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.
17
<PAGE>
The total return for Class B and Class C shares of the Fund will assume the
maximum applicable contingent deferred sales charge is deducted at the times, in
the amounts, and under the terms disclosed in the Fund's Prospectus. The
cumulative total return will be based upon a stated period and will be computed
by dividing the ending redeemable value (i.e., after deduction of any applicable
sales charges) 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
the Fund's performance or more accurately compare such performance to other
measures of investment return, the 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 required to be
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 for Class A, B and C shares may or may not take sales charges into
account; performance data calculated without taking the effect of sales charges,
if any, into account may 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 Fund may advertise their performance
compared to similar funds or types of investments using certain unmanaged
indices, reporting services and publications. Descriptions of some of the
indices which may be used are listed below.
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 and foreign
targeted issues are not included in the Lehman Government Bond Index.
The Lehman Government/Corporate Bond Index is a measure of the market value of
approximately 5,900 bonds with a face value currently in excess of $3.5
trillion. To be included in the Lehman Government/Corporate Index, an issue must
have amounts outstanding in excess of $100 million, have at least one year to
maturity and be rated "BBB/Baa" or higher ("investment grade") by an NRSRO.
The Lehman Brothers Aggregate Bond Index is an index consisting of the
securities listed in Lehman Brothers Government/Corporate Bond Index, the Lehman
Brothers Mortgage-Backed Securities Index, and the Lehman Brothers Asset-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.
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<PAGE>
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 (1) the Fund's
performance may be compared to other groups of mutual funds tracked by: (a)
Lipper Analytical Services and Morningstar, Inc., widely used independent
research firms which rank mutual funds by overall performance, investment
objectives, and assets; or (b) 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 the 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 statistics
derived by other independent parties, e.g., the Investment Company Institute,
may be used to illustrate investment attributes of the Fund or the general
economic, business, investment, or financial environment in which the Fund
operates; (4) various financial, economic and market statistics developed by
brokers, dealers and other persons may be used to illustrate aspects of the
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) in
order to evaluate the Fund's historical performance or current or potential
value with respect to the particular industry or sector.
SECURITIES TRANSACTIONS AND PORTFOLIO TURNOVER
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. It
is anticipated that the annual turnover rate of each Fund normally will not
exceed _____%. High turnover and short-term trading involve correspondingly
greater commission expenses and transaction costs.
The Adviser is responsible for decisions to buy and sell securities for the
Fund, broker-dealer selection, and negotiation of brokerage commission rates.
The Adviser's primary consideration in effecting a securities transaction will
be execution at the most favorable price. A substantial majority of the Fund's
portfolio transactions in fixed income securities will be transacted with
primary market makers acting as principal on a net basis, with no brokerage
commissions being paid by the Fund. In certain instances, the Adviser may make
purchases of underwritten issues at prices which include underwriting fees.
In selecting a broker-dealer to execute a 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; the size of
the order and the difficulty of execution; and the size of contribution of the
broker-dealer to the investment performance of the Fund on a continuing basis.
Broker-dealers may be selected who provide brokerage and/or research services to
the Fund and/or other accounts over which the Adviser exercises investment
discretion. Such services may include furnishing advice concerning the value of
securities (including providing quotations as to securities), the advisability
19
<PAGE>
of investing in, purchasing or selling securities, and the availability of
securities or the purchasers or sellers of securities; furnishing analyses 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,
settlement and custody, or required in connection therewith.
The Adviser shall not be deemed to have acted unlawfully, or to have breached
any duty created by the Fund's Investment Advisory Agreement or otherwise,
solely by reason of its having caused the Fund to pay a broker-dealer that
provides brokerage and research services 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 is 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 the Fund. The Adviser
allocates orders placed by it on behalf of the Fund in such amounts and
proportions as the Adviser shall determine and the Adviser will report on said
allocations regularly to the Fund indicating the broker-dealers to whom such
allocations have been made and the basis therefor.
The receipt of research from broker-dealers may be useful to the Adviser in
rendering investment management services to the Fund and/or the Adviser's other
clients; conversely, 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 Fund. 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 Fund may be bunched with orders on behalf of other
clients of the Adviser. It is the Adviser's policy that, to the extent
practicable, all clients with similar investment objectives and guidelines be
treated fairly and equitably in the allocation of securities trades.
The Board 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
The Adviser provides investment advice and, in general, supervises the Trust's
management and investment program, furnishes office space, prepares reports for
20
<PAGE>
the Fund, and pays all compensation of officers and Trustees of the Trust who
are affiliated persons of the Adviser. The Fund pays all other expenses incurred
in its operation, including fees and expenses of unaffiliated Trustees of the
Trust.
The Adviser is a wholly-owned subsidiary of Conseco, Inc. ("Conseco"), 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. Conseco's offices are located at 11825 N.
Pennsylvania Street, Carmel, Indiana 46032.
The Investment Advisory Agreement, dated December 31, 1997, between the Adviser
and the Fund, provides that the Adviser shall not be liable for any error in
judgment or mistake of law or for any loss suffered by the Fund in connection
with any investment policy or the purchase, sale or redemption of any securities
on the recommendations of the Adviser. The Agreement provides that the Adviser
is not protected against any liability to the 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 Agreement or the violation of any applicable law.
Under the terms of the Investment Advisory Agreement, the Adviser has contracted
to receive an investment advisory fee equal to an annual rate of 0.70% of the
average daily net asset value of the Fund.
The Adviser, together with Conseco Services, LLC (the "Administrator") and
Conseco Equity Sales Inc. (the "Distributor"), have voluntarily agreed to waive
their fees and/or reimburse the Fund's expenses to the extent that the ratios of
expenses to net assets exceed the amount set forth in the fee table in the
Prospectus. This voluntary limit may be discontinued at any time after April 30,
1999.
The Fund may receive credits from its custodian based on cash held by the Fund
at the custodian. These credits may be used to reduce the custody fees payable
by the Fund. In that case, the Adviser's (and, other affiliates') voluntary
agreement to waive fees or reimburse expenses will be applied only after the
Fund's custody fees have been reduced or eliminated by the use of such credits.
THE ADMINISTRATOR
Conseco Services, LLC (the "Administrator") is a wholly-owned subsidiary of
Conseco, and receives compensation from the Trust pursuant to an Administration
Agreement dated January 2, 1997 and amended December 31, 1997. Under that
agreement, the Administrator supervises the overall administration of the Fund.
These administrative services include supervising the preparation and filing of
all documents required for compliance by the Fund with applicable laws and
regulations, supervising the maintenance of books and records, and other general
and administrative responsibilities.
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<PAGE>
For providing these services, the Administrator receives a fee from the Fund of
.20% per annum of its average daily net assets. Pursuant to the Administration
Agreement, the Administrator reserves the right to employ one or more
sub-administrators to perform administrative services for the Fund. The Bank of
New York performs certain administrative services for the Fund. See "The
Adviser" above regarding the Administrator's voluntary agreement to waive its
fees and/or reimburse Fund expenses.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers of the Trust, their affiliations, if any, with the
Adviser and their principal occupations are set forth below.
<TABLE>
<CAPTION>
Name, Address Position Held Principal Occupation(s)
and Age With Trust During Past 5 Years
------------- ---------- -------------------
<S> <C> <C>
William P. Daves, Jr. (71) Chairman of the Consultant to insurance and healthcare
5723 Trail Meadow Board, Trustee industries. Director, President and Chief
Dallas, TX 75230 Executive Officer, FFG Insurance Co. Chairman of
the Board and Trustee of one other mutual fund
managed by the Adviser.
Maxwell E. Bublitz* (42) President and Chartered Financial Analyst. President
11825 N. Pennsylvania St. Trustee and Director, Adviser. Previously,
Carmel, IN 46032 Senior Vice President, Adviser. President and
Trustee of one other mutual fund managed by the
Adviser.
Gregory J. Hahn* (36) Vice President for Chartered Financial Analyst. Senior Vice
11825 N. Pennsylvania St. Investments and President, Adviser. Portfolio Manager of the
Carmel, IN 46032 Trustee fixed income portion of Asset Allocation and
Fixed Income Funds.
Harold W. Hartley (74) Trustee Retired. Chartered Financial Analyst. Previously,
317 Peppard Drive, S.W. Executive Vice President, Tenneco Financial
Ft. Myers Beach, Fl 33913 Services, Inc. Trustee of one other mutual fund
managed by the Adviser.
Dr. R. Jan LeCroy (66) Trustee President, Dallas Citizens Council. Trustee of
Dallas Citizens Council one other mutual fund managed by the Adviser.
1201 Main Street,
Suite 2444
Dallas, TX 75202
22
<PAGE>
Name, Address Position Held Principal Occupation(s)
and Age With Trust During Past 5 Years
------------- ---------- -------------------
Dr. Jesse H. Parrish (70) Trustee Former President, Midland College. Higher
2805 Sentinel Education Consultant. Trustee of one other
Midland, TX 79701 mutual fund managed by the Adviser.
William P. Latimer (62) Vice President and Vice President, Senior Counsel, Secretary, Chief
11825 N. Pennsylvania St. Secretary Compliance Officer and Director of Adviser. Vice
Carmel, IN 46032 President, Senior Counsel, Secretary and
Director, Conseco Equity Sales, Inc. Vice President
and Secretary of one other mutual fund managed by
the Adviser. Previously, Consultant to securities
industry. Previously, Senior Vice
President--Compliance, USF&G Investment Services,
Inc. and Vice President, Axe-Houghton Management
Inc.
James S. Adams (38) Treasurer Senior Vice President, Bankers National, Great
11815 N. Pennsylvania St. American Reserve. Senior Vice President,
Carmel, IN 46032 Treasurer, and Director, Conseco Equity Sales,
Inc. Senior Vice President and Treasurer, Conseco
Services, LLC. Treasurer of one other mutual fund
managed by the Adviser.
William T. Devanney, Jr. (42) Vice President, Senior Vice President, Corporate Taxes, Bankers
11815 N. Pennsylvania St. Corporate Taxes National and Great American Reserve. Senior Vice
Carmel, IN 46032 President, Corporate Taxes, Conseco Equity Sales,
Inc. and Conseco Services LLC. Vice President of
one other mutual fund managed by the Adviser.
</TABLE>
23
<PAGE>
- ------------------
* The Trustee so indicated is an "interested person," as defined in the 1940
Act, of the Trust due to the positions indicated with the Adviser and its
affiliates.
The following table shows the compensation of each disinterested Trustee for the
fiscal year ending December 31, 1997.
COMPENSATION TABLE
Aggregate Total Compensation from
Compensation Investment Companies in the Trust
Name of Person, Position from the Trust Complex Paid to Trustees
- ------------------------ -------------- ---------------------------------
William P. Daves, Jr. $9,000 $18,000
(1 other investment company)
Harold W. Hartley $9,000 $18,000
(1 other investment company)
Dr. R. Jan LeCroy $9,000 $18,000
(1 other investment company)
Dr. Jesse H. Parrish $9,000 $18,000
(1 other investment company)
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of _____ __, 1998, the following shareholders owned of record, or were known
by a Fund to own beneficially, five percent or more of the outstanding shares of
the Class A, Class B and Class C shares of the Fund.
The Trustees and officers of the Trust, as a group, own less than 1% of the
Fund's outstanding shares. A shareholder owning of record or beneficially more
than 25% of a Fund's outstanding shares may be considered a controlling person.
That shareholder's vote could have a more significant effect on matters
presented at a shareholders' meeting than votes of other shareholders.
24
<PAGE>
FUND EXPENSES
The Fund pays its own expenses including, without limitation: (i) organizational
and offering expenses of the Fund and expenses incurred in connection with the
issuance of shares of the Fund; (ii) fees of its custodian and transfer agent;
(iii) expenditures in connection with meetings of shareholders and Trustees;
(iv) compensation and expenses of Trustees who are not interested persons of the
Trust; (v) the costs of any liability, uncollectible items of deposit and other
insurance or fidelity bond; (vi) the cost of preparing, printing, and
distributing prospectuses and statements of additional information, any
supplements thereto, proxy statements, and reports for existing shareholders;
(vii) legal, auditing, and accounting fees; (viii) trade association dues; (ix)
filing fees and expenses of registering and maintaining registration of shares
of the Fund under applicable federal and state securities laws; (x) brokerage
commissions; (xi) taxes and governmental fees; and (xii) extraordinary and
non-recurring expenses.
DISTRIBUTION ARRANGEMENTS
Conseco Equity Sales, Inc. (the "Distributor") serves as the principal
underwriter for the Fund pursuant to an Underwriting Agreement, dated January 2,
1997 as amended December 31, 1997. The Distributor is a registered broker-dealer
and member of the National Association of Securities Dealers, Inc. ("NASD").
Shares of the Fund will be continuously offered and will be sold by brokers,
dealers or other financial intermediaries who have executed selling agreements
with the Distributor. Subject to the compensation arrangement discussed below,
the Distributor bears all the expenses of providing services pursuant to the
Underwriting Agreement, including the payment of the expenses relating to the
distribution of Prospectuses for sales purposes and 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 or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) by a majority of the Trustees who are not
"interested persons" of the Trust (as that term is defined in the 1940 Act). The
Distributor is not obligated to sell any specific amount of shares of the Fund.
The Distributor's principal address is 11815 N. Pennsylvania Street, Carmel,
Indiana 46032.
DISTRIBUTION AND SERVICE PLAN
The Trust has adopted a distribution and service plan dated December 31, 1997
with respect to the Fund (the "Plan"), 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 Plan, the Fund may compensate the Distributor for its
expenditures in financing any activity primarily intended to result in the sale
of each class of Fund shares and for maintenance and personal service provided
to existing shareholders of that class. The Plan authorizes payments to the
Distributor up to 0.50% annually of the Fund's average daily net assets
attributable to its Class A shares.. The Plan authorizes payments to the
Distributor up to 1.00% annually of the Fund's average daily net assets
attributable to its Class B shares. The Plan authorizes payments to the
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Distributor up to 1.00% annually of the Fund's average daily net assets
attributable to its Class C shares. See "Management - The Adviser" above
regarding the Distributor's voluntary agreement to waive its fees and/or
reimburse Fund expenses.
The Plan further provides for periodic payments by the Distributor to brokers,
dealers and other financial intermediaries for providing shareholder services
and for promotional and other sales related costs. The portion of payments by
Class A, Class B or Class C of the Fund for shareholder servicing may not exceed
an annual rate of .25% of the average daily net asset value of Fund shares of
that class owned by clients of such broker, dealer or financial intermediary.
In accordance with the terms of the Plan, the Distributor provides to the 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 the Trust 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. The Trustees believe that
there is a reasonable likelihood that the Plan will benefit the Fund and its
current and future shareholders. Among the anticipated benefits are higher
levels of sales and lower levels of redemptions of Class A, Class B and Class C
shares of the Fund, economies of scale, reduced expense ratios and greater
portfolio diversification.
Under its 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
under the Plan without approval of the shareholders of the 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 of
the Fund affected thereby. The Plan will automatically terminate in the event of
their assignment.
PURCHASE AND REDEMPTION OF SHARES
For information regarding the purchase or redemption of Fund shares, see the
Prospectus.
RIGHTS OF ACCUMULATION. The Fund offers to all qualifying investors rights of
accumulation under which investors are permitted to purchase Class A shares of
the Fund 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
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the purchaser's holdings of shares of the Fund, or shares of the money market
fund currently managed by Federated Management (derived from the exchange of
Fund shares on which an initial sales charge was paid) and the current cash
value of the variable annuity or variable life contracts issued by affiliates of
Conseco. Acceptance 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 series of the Trust owned by the shareholder. Such value is
determined based on the net asset value on 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 offering 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 LOI are
available from your broker, dealer or other financial intermediary or from BFDS
at (800) 986-3384.
SYSTEMATIC WITHDRAWAL PLAN. The Systematic Withdrawal Plan ("SWP") is designed
to provide a convenient method of receiving fixed payments at regular intervals
from Class A, Class B and Class C shares of the 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. Redemptions of Class B or Class C shares under the SWP will not be
subject to any contingent deferred sales charge so long as a shareholder does
not withdraw annually more than 12% of the SWP account.
Any income dividends or capital gain 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 deposited in
a SWP account. Redemptions are taxable transactions to shareholders. To the
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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.
REDEMPTIONS IN KIND
The Fund is obligated to redeem shares for any shareholder for cash during any
90-day period up to $250,000 or 1% of the net assets of the Fund, whichever is
less. Any redemptions beyond this amount also will be in cash unless the Board
determines that further cash payments will have a material adverse effect on
remaining shareholders. In such a case, the Fund will pay all or a portion of
the remainder of the redemptions in portfolio instruments, valued in the same
way as the Fund determines net asset value. The portfolio instruments will be
selected in a manner that the Board deems fair and equitable. A redemption in
kind is not as liquid as a cash redemption. If a redemption is made in kind, a
shareholder receiving portfolio instruments could incur certain transaction
costs.
SUSPENSION OF REDEMPTIONS
The Fund may not suspend a shareholder's right of redemption, or postpone
payment for a redemption for more than seven days, unless the NYSE is closed for
other than customary weekends or holidays; trading on the NYSE is restricted;
for any period during which an emergency exists as a result of which (1)
disposition by the Fund of securities owned by it is not reasonably practicable,
or (2) it is not reasonably practicable for the Fund to fairly determine the
value of its assets; or for such other periods as the SEC 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 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
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upon the written request of the holders of 10% of the Trust's shares. In
addition, 10 or more shareholders meeting certain conditions and holding the
lesser of $25,000 worth or 1% 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 class of the Fund is entitled to
participate equally in dividends and other distributions of the respective class
of the Fund and, upon liquidation or dissolution, in the net assets of that
class remaining after satisfaction of outstanding liabilities. The shares of the
Fund have no preference, preemptive or similar rights, and are freely
transferable. The exchange privilege for each class and the conversion rights of
Class B shares are described in the Prospectus.
Under Rule 18f-2 under the 1940 Act, as to any investment company which has two
or more series (such as the Fund) 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 of the
outstanding voting securities of each series affected by the matter. Such
separate voting requirements do not apply to the election of Trustees, the
ratification of the contract with the principal underwriter 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,
each class of the Fund shall have a different arrangement for shareholder
services or the distribution of securities or both and shall pay all of the
expenses of that arrangement, shall have exclusive voting rights on any matters
submitted to shareholders that relate solely to a particular class' arrangement,
and shall have separate voting rights on any matters submitted to shareholders
in which the interests of one class differ from the interests of any other
class.
Under Massachusetts law, shareholders of 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 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 the Trust to be held personally liable as a partner under certain
circumstances, the risk of a shareholder's incurring financial loss on account
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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
GENERAL
To qualify for treatment as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended ("Code"), the Fund -- which is treated
as a separate corporation for these purposes -- must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
the Fund, these requirements include the following: (1) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
and (2) at the close of each quarter of the Fund's taxable year, (i) at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs and other securities, with
those other securities limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities, and (ii)
not more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of any
one issuer.
If Fund shares are sold at a loss after being held for six months or less, the
loss will be treated as long-term, instead of short-term, capital loss to the
extent of any capital gain distributions received on those shares.
Distributions, if any, in excess of the Fund's current or accumulated earnings
and profits, as computed for federal income tax purposes, will constitute a
return of capital, which first will reduce a shareholder's tax basis in the
Fund's shares and then (after such basis is reduced to zero) generally will give
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rise to capital gains. Under the Taxpayer Relief Act of 1997 ("Tax Act"),
different maximum tax rates apply to a non-corporate taxpayer's net capital gain
(the excess of net long-term capital gain over net short-term capital loss)
depending on the taxpayer's holding period and marginal rate of federal income
tax -- generally, 28% for gain recognized on capital assets held for more than
one year but not more than 18 months and 20% (10% for taxpayers in the 15%
marginal tax bracket) for gain recognized on capital assets held for more than
18 months.
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.
At the time of an investor's purchase of shares of the Fund, a portion of the
purchase price is often attributable to unrealized appreciation in the Fund's
portfolio or undistributed taxable income. Consequently, subsequent
distributions from that appreciation (when realized) or income may be taxable to
the 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 the shares
and the distributions in reality represent a return of a portion of the purchase
price.
The Fund will be subject to a nondeductible 4% federal excise tax ("Excise Tax")
on certain amounts not distributed (and not treated as having been distributed)
on a timely basis in accordance with annual minimum distribution requirements.
The Fund intends under normal circumstances to avoid liability for such tax by
satisfying those distribution requirements.
INCOME FROM FOREIGN SECURITIES
Dividends and interest received by the Fund, and gains realized thereby, may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation -- other than a "controlled foreign
corporation" (I.E., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which the Fund is a U.S. shareholder that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a part of any "excess distribution" received by
it on the stock of a PFIC or of any gain on the Fund's disposition of the stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
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balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain -- which
likely would have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if those earnings and
gain were not distributed thereto by the QEF. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
The Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the PFIC's stock
over the adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also will be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included in income for prior
taxable years. The adjusted basis in each PFIC's stock with respect to which
this election is made will be adjusted to reflect the amounts of income included
and deductions taken under the election.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency positions and
payables or receivables (e.g., dividends or interest receivable) denominated in
a foreign currency are subject to section 988 of the Code, which generally
causes those gains and losses to be treated as ordinary income and losses and
may affect the amount, timing and character of distributions to shareholders.
Any gains from the disposition of foreign currencies could, under future
Treasury regulations, produce income that is not "qualifying income" under the
Income Requirement.
INVESTMENTS IN DEBT SECURITIES
If the Fund invests in zero coupon securities, payment-in-kind securities and/or
certain deferred interest securities (and, in general, any other securities with
original issue discount or with market discount if an election is made to
include market discount in income currently), it must accrue income on those
investments prior to the receipt of cash payments or interest thereon. However,
the Fund must distribute to its shareholders, at least annually, all or
substantially all of its investment company taxable income, including such
accrued discount and other non-cash income to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax. Therefore, the 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 make the
necessary distributions.
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Investment in debt obligations that are at risk of or in default presents
special tax issues for a fund that holds such obligations. Tax rules are not
entirely clear about issues such as when a 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 the Fund in order to seek to reduce the
risk of distributing insufficient income to qualify for treatment as a RIC and
of becoming subject to federal income tax or the Excise Tax.
HEDGING STRATEGIES
The use of hedging strategies, such as writing (selling) and purchasing options
and futures contracts and entering into forward contracts, involves complex
rules that will determine for income tax purposes the amount, character and
timing of recognition of the gains and losses the Fund realizes in connection
therewith. Gains from options, futures and forward contracts derived by the Fund
with respect to its business of investing in securities or foreign currencies --
and as noted above, gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations) -- will qualify as
permissible income under the Income Requirement.
Certain options and futures in which the Fund may invest will be "section 1256
contracts." Section 1256 contracts held by the Fund at the end of each taxable
year, other than section 1256 contracts that are part of a "mixed straddle" with
respect to which the Fund has made an election not to have the following rules
apply, must be marked-to-market (that is, treated as sold for their fair market
value) for federal income tax purposes, with the result that unrealized gains or
losses will be treated as though they were realized. Sixty percent of any net
gain or loss recognized on these deemed sales, and 60% of any net realized gain
or loss from any actual sales of section 1256 contracts, will be treated as
long-term capital gain or loss, and the balance will be treated as short-term
capital gain or loss. As of the date of this SAI, it is not entirely clear
whether that 60% portion will qualify for the reduced maximum tax rates on net
capital gain enacted by the Tax Act noted above -- 20% (10% for taxpayers in the
15% marginal tax bracket) for gain recognized on capital assets held for more
than 18 months -- instead of the 28% rate in effect before that legislation,
which now applies to gain recognized on capital assets held for more than one
year but not more than 18 months, although technical corrections legislation
passed by the House of Representatives late in 1997 would treat it as qualifying
therefor. Section 1256 contracts also may be marked-to-market for purposes of
the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Fund may invest. Section 1092 defines
a "straddle" as offsetting positions with respect to personal property; for
these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If the Fund makes certain
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elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions would be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Fund of straddle transactions are not entirely clear.
If the Fund has an "appreciated financial position" -- generally, an interest
(including an interest through an option, futures or forward contract, or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
- -- and enters into a "constructive sale" of the same or substantially similar
property, the Fund will be treated as having made an actual sale thereof, with
the result that gain will be recognized at that time. A constructive sale
generally consists of a short sale, an offsetting notional principal contract or
futures or forward contract entered into by the Fund or a related person with
respect to the same or substantially similar property. In addition, if the
appreciated financial position is itself a short sale or such a contract,
acquisition of the underlying property or substantially similar property will be
deemed a constructive sale.
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under that 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 the 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 Fund in their particular
circumstances.
OTHER INFORMATION
CUSTODIAN
The Bank of New York, 90 Washington Street, 22nd Floor, New York, New York
10826, serves as custodian of the assets of the Fund.
TRANSFER AGENCY SERVICES
State Street is the transfer agent for the Fund.
INDEPENDENT PUBLIC ACCOUNTANTS/AUDITORS
Coopers & Lybrand L.L.P., 2900 One American Square, Box 82002, Indianapolis,
Indiana 46282-0002 serves as the Trust's independent public accountant.
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Statement of Additional Information
Conseco Fund Group
Conseco High Yield Focus Fund
Class Y Shares
June 30, 1998
This Statement of Additional Information ("SAI") is not a prospectus. It
contains additional information about the Conseco Fund Group (the "Trust") and
the Conseco High Yield Focus Fund ("Fund"), a series of the Trust. It should be
read in conjunction with the Fund's Class Y prospectus (the "Prospectus"), dated
June 30, 1998. You may obtain a copy by contacting the Trust's Administrative
Office, 11815 N. Pennsylvania Street, Carmel, Indiana 46032.
TABLE OF CONTENTS
GENERAL INFORMATION.........................................................2
INVESTMENT RESTRICTIONS.....................................................2
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES.........................3
INVESTMENT PERFORMANCE......................................................17
SECURITIES TRANSACTIONS AND PORTFOLIO TURNOVER..............................19
MANAGEMENT..................................................................20
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.........................24
FUND EXPENSES...............................................................24
DISTRIBUTION ARRANGEMENTS...................................................25
PURCHASE AND REDEMPTION OF SHARES...........................................25
GENERAL.....................................................................26
TAXES.......................................................................27
OTHER INFORMATION...........................................................32
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GENERAL INFORMATION
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 ("SEC") under the Investment Company Act of
1940 (the "1940 Act"). The Trust is a "series" type of mutual fund which issues
separate series of shares, each of which represents a separate portfolio of
investments. The Fund offers four classes of shares. This SAI relates solely to
Class Y shares of the Fund. Class A shares, Class B shares and Class C shares
are offered to individual investors through a separate prospectus and SAI. Each
class may have different expenses, which may affect performance. Conseco Capital
Management, Inc. (the "Adviser") serves as the Trust's investment adviser.
INVESTMENT RESTRICTIONS
The Trust has adopted the following policies relating to the investment of
assets the Fund and its activities. These are fundamental policies and may not
be changed without the approval of the holders of a "majority" of the
outstanding shares of the Fund. 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 or interests represented at a meeting at which more than 50 percent of
the outstanding shares or interests are represented or (ii) more than 50 percent
of the outstanding shares or interests. Except for the limitation on borrowing,
any investment policy or limitation that involves a maximum percentage of
securities or assets will not be considered to be violated unless the percentage
limitation is exceeded immediately after, and because of, a transaction by the
Fund.
The Fund may not (except as noted):
1. Purchase or sell commodities or commodity contracts except that the Fund
may purchase or sell options, futures contracts, and options on futures
contracts and may engage in interest rate and foreign currency
transactions;
2. Borrow money, except that the Fund may: (a) borrow from banks, and (b)
enter into reverse repurchase agreements, provided that (a) and (b) in
combination do not exceed 33-1/3% of the value of its total assets
(including the amount borrowed) less liabilities (other than borrowings);
and except that a Fund may borrow from any person up to 5% of its total
assets (not including the amount borrowed) for temporary purposes (but not
for leverage or the purchase of investments);
3. Underwrite securities of other issuers except to the extent that the Fund
may be deemed an underwriter under the Securities Act of 1933 (the "1933
Act") in connection with the purchase or sale of portfolio securities;
4. Purchase any security if thereafter 25% or more of the total assets of the
Fund would be invested in securities of issuers having their principal
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business activities in the same industry; this restriction does not apply
to U.S. Government securities (as defined in the Prospectus);
5. Purchase or sell real estate, except that the Fund may purchase securities
which are issued by companies which invest in real estate or which are
secured by real estate or interests therein;
6. Make loans of its assets if, as a result, more than 33-1/3% of the Fund's
total assets would be lent to other parties except through (a) entering
into repurchase agreements and (b) purchasing debt instruments; or
7. Issue any senior security, except as permitted under the 1940 Act.
Nonfundamental Investment Restrictions
The following restrictions are designated as nonfundamental and may be changed
by the Trust's Board of Trustees ("Board") without shareholder approval.
The Fund may not (except as noted):
1. Sell securities short in an amount exceeding 15% of its assets, except
that the Fund may, without limit, make short sales against the box.
Transactions in options, futures, options on futures and other derivative
instruments shall not constitute selling securities short;
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of securities
transactions and except that margin deposits in connection with
transactions in options, futures, options on futures and other derivative
instruments shall not constitute a purchase of securities on margin; or
3. Make loans of its assets, except that the Fund may enter into repurchase
agreements and purchase debt instruments as set forth in its fundamental
policy on lending and may lend portfolio securities in an amount not to
exceed 33 1/3% of the value of the Fund's total assets.
In order to limit the risks associated with entry into repurchase agreements,
the Board has adopted certain criteria (which are not fundamental policies) to
be followed by the Fund. 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, (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.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes in greater detail different types of
securities and investment techniques used by the Fund, as well as the risks
associated with such securities and techniques.
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U.S. Government Securities
U.S. Government securities are issued or guaranteed by the U.S. Government or
its agencies or instrumentalities.
The Inter-American Development Bank, the Asian-American Development Bank and the
International Bank for Reconstruction and Development (the "World Bank"), while
not U.S. Government agencies or instrumentalities, have the right to borrow from
the participating countries, including the United States.
Asset-Backed Securities
Asset-backed securities 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 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 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. Other asset-backed
securities may be developed in the future.
High Yield (High Risk) Securities
IN GENERAL. Higher yields are generally available from securities rated
BB or lower by Standard & Poor's ("S&P") or Ba or lower by Moody's Investors
Service, Inc. ("Moody's"), securities comparably rated by another nationally
recognized statistical rating organization ("NRSRO"), or unrated securities of
equivalent quality. Debt securities rated below investment grade (i.e., below
BBB/Baa) are deemed by the rating agencies to be predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal.
Lower-rated fixed income securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. The special risk
considerations in connection with investments in these securities are discussed
below.
Subsequent to purchase by the Fund, an issue of debt securities may cease to be
rated or its rating may be reduced, so that the securities would no longer be
eligible for purchase by the Fund. In such a case, the Fund will engage in an
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orderly disposition of the downgraded securities to the extent necessary to
ensure that its holdings do not exceed the permissible amount as set forth in
the Prospectus.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. All interest-bearing
securities typically experience appreciation when interest rates decline and
depreciation when interest rates rise. The market values of lower-rated fixed
income securities tend to reflect individual corporate developments to a greater
extent than do higher rated securities, which react primarily to fluctuations in
the general level of interest rates. Lower-rated fixed income securities also
tend to be more sensitive to economic conditions than are higher-rated
securities. As a result, they generally involve more credit risks than
securities in the higher-rated categories. During an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of
lower-rated fixed income securities may experience financial stress which may
adversely affect their ability to service their debt obligations, meet projected
business goals, and obtain additional financing. Periods of economic uncertainty
and changes would also generally result in increased volatility in the market
prices of these securities and thus in a Fund's net asset value.
PAYMENT EXPECTATIONS. Lower-rated fixed income securities may contain
redemption, call or prepayment provisions which permit the issuer of such
securities to, at its discretion, redeem the securities. During periods of
falling interest rates, issuers of these securities are likely to redeem or
prepay the securities and refinance them with debt securities with a lower
interest rate. To the extent an issuer is able to refinance the securities, or
otherwise redeem them, a Fund may have to replace the securities with a lower
yielding security, which would result in a lower return.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies are
designed to evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of
lower-quality securities and, therefore, may not fully reflect the risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. With regard to an
investment in lower-rated fixed income securities, the achievement of a Fund's
investment objective may be more dependent on the Adviser's own credit analysis
than is the case for higher rated securities. Although the Adviser considers
security ratings when making investment decisions, it does not rely solely on
the ratings assigned by the rating services. Rather, the Adviser performs
research and independently assesses the value of particular securities relative
to 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.
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.
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LIQUIDITY AND VALUATION. Lower-rated fixed income securities may lack
an established retail secondary market, and to the extent a secondary trading
market does exist, it may be less liquid than the secondary market for higher
rated securities. The lack of a liquid secondary market may negatively impact a
Fund's ability to dispose of particular securities. The lack of a liquid
secondary market for certain securities may also make it more difficult for a
Fund to obtain accurate market quotations for purposes of valuing the Fund's
portfolio. In addition, adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of
lower-rated fixed income securities, especially in a thinly traded market.
When-Issued and Delayed Delivery 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 settlement dates of these transactions may be a month or more after
entering into the transaction. The Fund bears the risk that, on the settlement
date, the market value of the securities may be lower than the purchase price.
At the time the Fund makes a commitment to purchase securities on a when-issued
or delayed delivery basis, it will record the transaction and reflect the value
of such securities each day in determining the Fund's net asset value. However,
the Fund will not accrue any income on these securities prior to delivery. There
are no fees or other expenses associated with these types of transactions other
than normal transaction costs. To the extent the Fund engages in when-issued and
delayed delivery transactions, it will do so for the purpose of acquiring
instruments consistent with its investment objective and policies and not for
the purpose of investment leverage or to speculate on interest rate changes.
When effecting when-issued and delayed delivery transactions, cash or liquid
securities 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 Fund may dispose of these securities before
the issuance thereof. However, absent extraordinary circumstances not presently
foreseen, it is the Fund's policy not to divest itself of its right to acquire
these securities prior to the settlement date thereof.
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
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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 and Savings Industry Obligations
Such obligations include certificates of deposit, time deposits, bankers'
acceptances, and other short-term debt obligations issued by commercial banks
and 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 Fund may invest in obligations of
foreign branches of domestic commercial banks and foreign banks. See "Foreign
Securities" in the Prospectus for information regarding risks associated with
investments in foreign securities.
The Fund 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 S&P, or, if the institution has no outstanding
securities rated by Moody's or S&P, 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
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
Repurchase agreements permit the Fund to maintain liquidity and earn income over
periods of time as short as overnight. In these transactions, the Fund purchases
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. 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, as
appropriate. These guidelines require monitoring the creditworthiness of
counterparties to repurchase transactions, obtaining collateral at least equal
in value to the repurchase obligation, and marking the collateral to market on a
daily basis. Repurchase agreements maturing in more than seven days may be
considered illiquid and may be subject to the Fund's limitation on investment in
illiquid securities.
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Reverse Repurchase Agreements and Mortgage Dollar Rolls
A reverse repurchase agreement involves the temporary sale of a security by the
Fund and its agreement to repurchase the instrument at a specified time at a
higher price. Such agreements are short-term in nature. During the period before
repurchase, the Fund continues to receive principal and interest payments on the
securities.
In a mortgage dollar roll, the Fund sells a fixed income security for delivery
in the current month and simultaneously contracts to repurchase a substantially
similar security (same type, coupon and maturity) on a specified future date.
During the roll period, the Fund would forego principal and interest paid on
such securities. The Fund would be compensated by the difference between the
current sales price and the forward price for the future purchase, as well as by
any interest earned on the proceeds of the initial sale.
In accordance with regulatory requirements, the Fund will segregate cash or
liquid securities whenever it enters into reverse repurchase agreements or
mortgage dollar rolls. Such transactions may be considered to be borrowings for
purposes of the Fund's fundamental policies concerning borrowings.
Warrants
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 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
warrants 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, the Fund would lose its entire investment in such
warrant.
Interest Rate Transactions
The 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, floors and collars.
The Fund expects to enter into these transactions primarily to preserve a return
or spread on a particular investment or portion of its portfolio. The Fund may
also enter into these transactions to protect against an increase in the price
of securities that it anticipates purchasing at a later date. The Fund intends
to use these transactions as a hedge and not as speculative investments.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments. The purchase of an interest rate 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. An interest
rate collar combines elements of buying a cap and selling a floor.
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The Fund may enter into interest rate swaps, caps, floors, and collars 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 transactions on a net
basis, i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. The amount
of the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap, cap, floor, or collar 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.
The Fund will not enter into any interest rate 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,
the 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, floors and collars are more recent innovations which
tend to be less liquid than swaps.
Step Down Preferred Securities
Step down perpetual preferred securities are issued by a real estate investment
trust ("REIT") making a mortgage loan to a single borrower. The dividend rate
paid by these securities is initially relatively high, but declines yearly. The
securities are subject to call if the REIT suffers an unfavorable tax event, and
to tender by the issuer's equity holder in the 10th year; both events could be
on terms unfavorable to the holder of the preferred securities. The value of
these securities will be affected by changes in the value of the underlying
mortgage loan. The REIT is not diversified, and the value of the mortgaged
property may not cover its obligations. Step down perpetual preferred securities
are considered restricted securities under the 1933 Act.
Loan Participations and Assignments
Loan participations and assignments are interests in loans originated by banks
and other financial institutions. Both the lending bank and the borrower may be
deemed to be "issuers" of a loan participation.
Although some of the loans may be secured, there is no assurance that the
collateral can be liquidated in particular cases, or that its liquidation value
will be equal to the value of the debt. Borrowers that are in bankruptcy may pay
only a small portion of the amount owed, if they are able to pay at all. Where
the Fund purchases a loan through an assignment, there is a possibility that the
Fund will, in the event the borrower is unable to pay the loan, become the owner
of the collateral. This involves certain risks to the Fund as a property owner.
Loans are often administered by a lead bank, which acts as agent for the lenders
in dealing with the borrower. In asserting rights against the borrower, the Fund
may be dependent on the willingness of the lead bank to assert these rights, or
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upon a vote of all the lenders to authorize the action. Assets held by the lead
bank for the benefit of the Fund may be subject to claims of the lead bank's
creditors.
Futures Contracts
The Fund may purchase and sell futures contracts 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 by the Fund or which the Fund intends to purchase, and not for
purposes of speculation. For information about foreign currency futures
contracts, see "Foreign Currency Transactions" below.
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 the Fund has sold a futures contract, if the offsetting price is more than
the original futures contract purchase price, the Fund realizes a gain; if it is
less, the Fund realizes a loss.
At the time the Fund enters into a futures contract, an amount of cash or liquid
securities, equal to the fair market value less initial 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. The Fund may be required to deposit additional assets in the segregated
account in order to continue covering the contract as market conditions change.
The Fund may also be required to post additional "variation" margin. In
addition, the Fund will comply with certain regulations of the Commodity Futures
Trading Commission to qualify for an exclusion from being a "commodity pool
operator."
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.
The Fund may purchase and sell interest rate futures as a hedge against changes
in interest rates that would adversely impact the value of debt instruments and
other interest rate sensitive securities being held or to be purchased by the
Fund. The Fund might employ a hedging strategy whereby it would purchase an
interest rate futures contract when it intends to invest 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
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value of the futures contract purchased by the Fund or avoided by taking
delivery of the debt securities under the futures contract.
The 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 Fund may purchase options on futures
contracts, although they will not write options on any such contracts. A futures
option gives the 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, the Fund would close out its position before expiration by
an offsetting purchase or sale.
The Fund may 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 the Fund would use put and call options on debt
securities, as described in "Options on Securities" below.
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 the 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 securities. 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's 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 influences in futures and futures options trading, 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
unexpected market behavior or interest rate trends.
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There can be no assurance that a liquid market will exist at a time when the
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. 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. In addition, certain of these instruments are relatively new
and without a significant trading history. Lack of a liquid market for any
reason may prevent the 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.
The Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. exchange or board of trade. The Fund will not
enter into a futures contract or purchase a futures option if immediately
thereafter the aggregate initial margin deposits for futures contracts held by
the Fund plus premiums paid by it for open futures options positions, excluding
futures contracts and futures options entered into for bona fide hedging
purposes and net of the amount by which any futures options positions are
"in-the-money" would exceed 5 percent of the Fund's net assets.
Options on Securities and Securities Indices
The Fund may purchase put and call options on securities at such times as the
Adviser deems appropriate and consistent with the Fund's investment objective.
The Fund may also write listed "covered" call and "secured" put options. The
Fund 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
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.
The 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 the Fund would enable it 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.
The 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. The Fund may sell put
or call options it has previously purchased, which could result in a net gain or
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loss depending on whether the amount realized on the sale is more or less than
the premium and 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 Fund may write "covered" 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 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 protect partially against increases in
the value of securities to be purchased, the Fund may write "secured" put
options. During the option period, the writer of a put option may be assigned an
exercise notice requiring the writer to purchase the underlying security at the
exercise price.
The 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 an equal or lower exercise price, for
the same exercise period, and on the same securities as the written call. Under
a secured put option, the Fund must maintain, in a segregated account with the
Trust's custodian, cash or liquid securities with a value sufficient to meet its
obligation as 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 by the same Fund.
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 if
the price of the underlying security declines. 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 or purchase the underlying
securities at the exercise price. If a put or call option purchased by the 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
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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 the Fund seeks to
close out an option position. If the Fund cannot effect a closing transaction,
it will not be able to sell the underlying security or securities in a
segregated account 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 secondary market on a national securities exchange could
include: insufficient trading interest, restrictions imposed by national
securities exchanges, trading halts or suspensions with respect to 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 options or to impose restrictions on certain types of
orders.
There also can be no assurance that the Fund would be able to liquidate an
over-the-counter ("OTC") option at any time prior to expiration. In contrast to
exchange-traded options where the clearing organization affiliated with the
particular exchange on which the option is listed in effect guarantees
completion of every exchange-traded option, OTC options are contracts between
the Fund and a counter-party, with no clearing organization guarantee. Thus,
when the Fund purchases an OTC option, it generally will be able to close out
the option prior to its expiration only by entering into a closing transaction
with the dealer from whom the Fund originally purchased the option.
Since option premiums paid or received by the Fund are small in relation to the
market value of underlying investments, buying and selling put and call options
offer large amounts of leverage. Thus, trading in options could result in the
Fund's net asset value being more sensitive to changes in the value of the
underlying securities.
Foreign Currency Transactions
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 purchase and sell such contracts for hedging purposes
and not as an investment. 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 (1)
commit more than 15 percent of its total assets computed at market value at the
time of commitment to foreign currency futures or forward currency contracts, or
(2) enter into a foreign currency contract with a term of greater than one year.
14
<PAGE>
Forward currency contracts are not traded on regulated commodities exchanges.
When the Fund enters into a forward currency contract, it incurs the risk of
default by the counter-party to the transaction.
There can be no assurance that a liquid market will exist when the Fund seeks to
close out a foreign currency futures or forward currency position. 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 Fund values its assets daily in U.S. dollars, it does not intend
physically to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Fund will do so from time to time, thereby incurring the costs
of currency conversion. Although foreign exchange dealers do not charge a fee
for conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange if the Fund desires to resell that
currency to the dealer.
Options on Foreign Currencies
The Fund may invest in call and put options on 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 Fund may employ hedging strategies with options on currencies before it
purchases a foreign security denominated in the hedged currency, during the
period the Fund holds a foreign security, or between the day a 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 increases 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
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
15
<PAGE>
exercise its option in order to realize any profit and would incur transactional
costs on the purchase or sale of the underlying assets.
Borrowing
The 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
percent. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value; money borrowed will be subject to interest and other costs 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 the Fund's shares. The 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
Securities of other investment companies 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 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 own 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) its investment in all
investment companies does not exceed 10 percent of assets.
Some of the countries in which the Fund may invest may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government approved or authorized investment vehicles,
which may include other investment companies. In addition, it may be less
expensive and more expedient for the Fund to invest in a foreign investment
company in a country which permits direct foreign investment.
Investment companies in which the Fund may invest charge advisory and
administrative fees and may also assess a sales load and/or distribution fees.
Therefore, investors in the Fund that invests 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 the Fund may incur in connection
with such investments.
Short Sales
A short sale is a transaction in which a fund sells a security in anticipation
that the market price of the security will decline. The Fund may effect short
sales (i) as a form of hedging to offset potential declines in long positions in
16
<PAGE>
securities it owns or anticipates acquiring, or in similar securities, and (ii)
to maintain flexibility in its holdings. In a short sale "against the box," at
the time of sale the Fund owns the security it has sold short or has the
immediate and unconditional right to acquire at no additional cost the identical
security. Under applicable guidelines of the SEC staff, if a fund engages in a
short sale (other than a short sale against-the-box), it must put an appropriate
amount of cash or liquid securities in a segregated account (not with the
broker).
The effect of short selling on the Fund is similar to the effect of leverage.
Short selling may exaggerate changes in the Fund's NAV. Short selling may also
produce higher than normal portfolio turnover, which may result in increased
transaction costs to the Fund.
INVESTMENT PERFORMANCE
STANDARDIZED YIELD QUOTATIONS. Class Y shares of the Fund may advertise
investment performance figures, including yield. 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:
6
YIELD = 2 [(A-B/CD)+1) -1]
Where:
A = the dividends and interest earned during the period.
B = the expenses accrued for the period (net of reimbursements, if any).
C = the average daily number of shares outstanding during the period that were
entitled to receive dividends.
D = the maximum offering price (which is net asset value) per share on the last
day of the period.
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN QUOTATIONS. Class Y shares of the Fund
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:
n
P (1+T) =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.
17
<PAGE>
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
the Fund's performance or more accurately compare such performance to other
measures of investment return, the 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 required to be
quoted; it may consist of an aggregate or average annual percentage rate of
return, actual year-by-year rates or any combination thereof. 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 Fund may advertise their performance
compared to similar funds or types of investments using certain unmanaged
indices, reporting services and publications. Descriptions of some of the
indices which may be used are listed below.
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 and foreign
targeted issues are not included in the Lehman Government Bond Index.
The Lehman Government/Corporate Bond Index is a measure of the market value of
approximately 5,900 bonds with a face value currently in excess of $3.5
trillion. To be included in the Lehman Government/Corporate Index, an issue must
have amounts outstanding in excess of $100 million, have at least one year to
maturity and be rated "BBB/Baa" or higher ("investment grade") by an NRSRO.
The Lehman Brothers Aggregate Bond Index is an index consisting of the
securities listed in Lehman Brothers Government/Corporate Bond Index, the Lehman
Brothers Mortgage-Backed Securities Index, and the Lehman Brothers Asset-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.
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<PAGE>
In addition, from time to time in reports and promotions (1) the Fund's
performance may be compared to other groups of mutual funds tracked by: (a)
Lipper Analytical Services and Morningstar, Inc., widely used independent
research firms which rank mutual funds by overall performance, investment
objectives, and assets; or (b) 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 the 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 statistics
derived by other independent parties, e.g., the Investment Company Institute,
may be used to illustrate investment attributes of the Fund or the general
economic, business, investment, or financial environment in which the Fund
operates; (4) various financial, economic and market statistics developed by
brokers, dealers and other persons may be used to illustrate aspects of the
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) in
order to evaluate the Fund's historical performance or current or potential
value with respect to the particular industry or sector.
SECURITIES TRANSACTIONS AND PORTFOLIO TURNOVER
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. It
is anticipated that the annual turnover rate of each Fund normally will not
exceed ____%. High turnover and short-term trading involve correspondingly
greater commission expenses and transaction costs.
The Adviser is responsible for decisions to buy and sell securities for the
Fund, broker-dealer selection, and negotiation of brokerage commission rates.
The Adviser's primary consideration in effecting a securities transaction will
be execution at the most favorable price. A substantial majority of the Fund's
portfolio transactions in fixed income securities will be transacted with
primary market makers acting as principal on a net basis, with no brokerage
commissions being paid by the Fund. In certain instances, the Adviser may make
purchases of underwritten issues at prices which include underwriting fees.
In selecting a broker-dealer to execute a 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; the size of
the order and the difficulty of execution; and the size of contribution of the
broker-dealer to the investment performance of the Fund on a continuing basis.
Broker-dealers may be selected who provide brokerage and/or research services to
the Fund and/or other accounts over which the Adviser exercises investment
discretion. Such services may include furnishing advice concerning the value of
securities (including providing quotations as to securities), the advisability
of investing in, purchasing or selling securities, and the availability of
securities or the purchasers or sellers of securities; furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
19
<PAGE>
portfolio strategy and performance of accounts; and effecting securities
transactions and performing functions incidental thereto, such as clearance,
settlement and custody, or required in connection therewith.
The Adviser shall not be deemed to have acted unlawfully, or to have breached
any duty created by the Fund's Investment Advisory Agreement or otherwise,
solely by reason of its having caused the Fund to pay a broker-dealer that
provides brokerage and research services 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 is 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 the Fund. The Adviser
allocates orders placed by it on behalf of the Fund in such amounts and
proportions as the Adviser shall determine, and the Adviser will report on said
allocations regularly to the Fund indicating the broker-dealers to whom such
allocations have been made and the basis therefor.
The receipt of research from broker-dealers may be useful to the Adviser in
rendering investment management services to the Fund and/or the Adviser's other
clients; conversely, 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 Fund. 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 Fund may be bunched with orders on behalf of other
clients of the Adviser. It is the Adviser's policy that, to the extent
practicable, all clients with similar investment objectives and guidelines be
treated fairly and equitably in the allocation of securities trades.
The Board 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
The Adviser provides investment advice and, in general, supervises the Trust's
management and investment program, furnishes office space, prepares reports for
the Fund, and pays all compensation of officers and Trustees of the Trust who
are affiliated persons of the Adviser. The Fund pays all other expenses incurred
in its operation, including fees and expenses of unaffiliated Trustees of the
Trust.
20
<PAGE>
The Adviser is a wholly-owned subsidiary of Conseco, Inc. ("Conseco"), 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. Conseco's offices are located at 11825 N.
Pennsylvania Street, Carmel, Indiana 46032.
The Investment Advisory Agreement, dated December 31, 1997, between the Adviser
and the Fund, provides that the Adviser shall not be liable for any error in
judgment or mistake of law or for any loss suffered by the Fund in connection
with any investment policy or the purchase, sale or redemption of any securities
on the recommendations of the Adviser. The Agreement provides that the Adviser
is not protected against any liability to the 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 Agreement or the violation of any applicable law.
Under the terms of the Investment Advisory Agreement, the Adviser has contracted
to receive an investment advisory fee equal to an annual rate of 0.70% of the
average daily net asset value of the Fund.
The Adviser, together with Conseco Services, LLC (the "Administrator"), have
voluntarily agreed to waive their fees and/or reimburse the Fund's expenses to
the extent that the ratios of expenses to net assets exceed the amount set forth
in the fee table in the Prospectus. This voluntary limit may be discontinued at
any time after April 30, 1999.
The Fund may receive credits from its custodian based on cash held by the Fund
at the custodian. These credits may be used to reduce the custody fees payable
by the Fund. In that case, the Adviser's (and, other affiliates') voluntary
agreement to waive fees or reimburse expenses will be applied only after the
Fund's custody fees have been reduced or eliminated by the use of such credits.
The Administrator
Conseco Services, LLC (the "Administrator") is a wholly-owned subsidiary of
Conseco, and receives compensation from the Trust pursuant to an Administration
Agreement dated January 2, 1997 and amended December 31, 1997. Under that
agreement, the Administrator supervises the overall administration of the Fund.
These administrative services include supervising the preparation and filing of
all documents required for compliance by the Fund with applicable laws and
regulations, supervising the maintenance of books and records, and other general
and administrative responsibilities.
For providing these services, the Administrator receives a fee from the Fund of
.20% per annum of its average daily net assets. Pursuant to the Administration
Agreement, the Administrator reserves the right to employ one or more
sub-administrators to perform administrative services for the Fund. The Bank of
New York performs certain administrative services for the Fund. See "The
Adviser" above regarding the Administrator's voluntary agreement to waive its
fees and/or reimburse Fund expenses.
21
<PAGE>
Trustees and Officers of the Trust
The Trustees and officers of the Trust, their affiliations, if any, with the
Adviser and their principal occupations are set forth below.
<TABLE>
<CAPTION>
Name, Address Position Held Principal Occupation(s)
and Age With Trust During Past 5 Years
------------- ---------- -------------------
<S> <C> <C>
William P. Daves, Jr. (71) Chairman of the Consultant to insurance and healthcare
5723 Trail Meadow Board, Trustee industries. Director, President and Chief
Dallas, TX 75230 Executive Officer, FFG Insurance Co. Chairman of
the Board and Trustee of one other mutual fund
managed by the Adviser.
Maxwell E. Bublitz* (42) President and Chartered Financial Analyst. President and
11825 N. Pennsylvania St. Trustee Director, Adviser. Previously,
Carmel, IN 46032 Senior Vice President, Adviser. President and
Trustee of one other mutual fund managed by the
Adviser.
Gregory J. Hahn* (36) Vice President for Chartered Financial Analyst. Senior Vice
11825 N. Pennsylvania St. Investments and President, Adviser. Portfolio Manager of the
Carmel, IN 46032 Trustee fixed income portion of Asset Allocation and
Fixed Income Funds.
Harold W. Hartley (74) Trustee Retired. Chartered Financial Analyst. Previously,
317 Peppard Drive, S.W. Executive Vice President, Tenneco Financial
Ft. Myers Beach, Fl 33913 Services, Inc. Trustee of one other mutual fund
managed by the Adviser.
Dr. R. Jan LeCroy (66) Trustee President, Dallas Citizens Council. Trustee of
Dallas Citizens Council one other mutual fund managed by the Adviser.
1201 Main Street,
Suite 2444
Dallas, TX 75202
22
<PAGE>
Name, Address Position Held Principal Occupation(s)
and Age With Trust During Past 5 Years
------------- ---------- -------------------
Dr. Jesse H. Parrish (70) Trustee Former President, Midland College. Higher
2805 Sentinel Education Consultant. Trustee of one other
Midland, TX 79701 mutual fund managed by the Adviser.
William P. Latimer (62) Vice President and Vice President, Senior Counsel, Secretary, Chief
11825 N. Pennsylvania St. Secretary Compliance Officer and Director of Adviser. Vice
Carmel, IN 46032 President, Senior Counsel, Secretary and
Director, Conseco Equity Sales, Inc. Vice
President and Secretary of one other mutual fund
managed by the Adviser. Previously, Consultant
to securities industry. Previously, Senior Vice
President--Compliance, USF&G Investment Services,
Inc. and Vice President, Axe-Houghton Management
Inc.
James S. Adams (38) Treasurer Senior Vice President, Bankers National, Great
11815 N. Pennsylvania St. American Reserve. Senior Vice President,
Carmel, IN 46032 Treasurer, and Director, Conseco Equity Sales,
Inc. Senior Vice President and Treasurer, Conseco
Services, LLC. Treasurer of one other mutual
fund managed by the Adviser.
William T. Devanney, Jr. (42) Vice President, Senior Vice President, Corporate Taxes, Bankers
11815 N. Pennsylvania St. Corporate Taxes National and Great American Reserve. Senior Vice
Carmel, IN 46032 President, Corporate Taxes, Conseco Equity Sales,
Inc. and Conseco Services LLC. Vice President of
one other mutual fund managed by the Adviser.
</TABLE>
- ------------------
* The Trustee so indicated is an "interested person," as defined in the 1940
Act, of the Trust due to the positions indicated with the Adviser and its
affiliates.
The following table shows the compensation of each disinterested Trustee for the
fiscal year ending December 31, 1997.
23
<PAGE>
COMPENSATION TABLE
Aggregate Total Compensation from
Compensation Investment Companies in the Trust
Name of Person, Position from the Trust Complex Paid in the Trustees
- ------------------------ -------------- ---------------------------------
William P. Daves, Jr. $9,000 $18,000
(1 other investment company)
Harold W. Hartley $9,000 $18,000
(1 other investment company)
Dr. R. Jan LeCroy $9,000 $18,000
(1 other investment company)
Dr. Jesse H. Parrish $9,000 $18,000
(1 other investment company)
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of _____ __, 1998, the following shareholders owned of record, or were known
by a Fund to own beneficially, five percent or more of the outstanding shares of
the Class Y shares of the Fund.
The Trustees and officers of the Trust, as a group, own less than 1% of the
Fund's outstanding shares. A shareholder owning of record or beneficially more
than 25% of the Fund's outstanding shares may be considered a controlling
person. That shareholder's vote could have a more significant effect on matters
presented at a shareholders' meeting than votes of other shareholders.
FUND EXPENSES
The Fund pays its own expenses including, without limitation: (i) organizational
and offering expenses of the Fund and expenses incurred in connection with the
issuance of shares of the Fund; (ii) fees of its custodian and transfer agent;
(iii) expenditures in connection with meetings of shareholders and Trustees;
(iv) compensation and expenses of Trustees who are not interested persons of the
Trust; (v) the costs of any liability, uncollectible items of deposit and other
insurance or fidelity bond; (vi) the cost of preparing, printing, and
distributing prospectuses and statements of additional information, any
supplements thereto, proxy statements, and reports for existing shareholders;
24
<PAGE>
(vii) legal, auditing, and accounting fees; (viii) trade association dues; (ix)
filing fees and expenses of registering and maintaining registration of shares
of the Fund under applicable federal and state securities laws; (x) brokerage
commissions; (xi) taxes and governmental fees; and (xii) extraordinary and
non-recurring expenses.
DISTRIBUTION ARRANGEMENTS
Conseco Equity Sales, Inc. (the "Distributor") serves as the principal
underwriter for the Fund pursuant to an Underwriting Agreement, dated January 2,
1997 as amended December 31, 1997. The Distributor is a registered broker-dealer
and member of the National Association of Securities Dealers, Inc. ("NASD").
Shares of the Fund will be continuously offered and will be sold by brokers,
dealers or other financial intermediaries who have executed selling agreements
with the Distributor. The Distributor bears all the expenses of providing
services pursuant to the Underwriting Agreement, including the payment of the
expenses relating to the distribution of Prospectuses for sales purposes and 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 or by the vote of a majority
of the outstanding voting securities of the Fund and (ii) by a majority of the
Trustees who are not "interested persons" of the Trust (as that term is defined
in the 1940 Act). The Distributor is not obligated to sell any specific amount
of shares of the Fund.
The Distributor's principal address is 11815 N. Pennsylvania Street, Carmel,
Indiana 46032.
PURCHASE AND REDEMPTION OF SHARES
For information regarding the purchase or redemption of Fund shares, see the
Prospectus.
Redemptions in Kind
The Fund is obligated to redeem shares for any shareholder for cash during any
90-day period up to $250,000 or 1% of the net assets of the Fund, whichever is
less. Any redemptions beyond this amount also will be in cash unless the Board
determines that further cash payments will have a material adverse effect on
remaining shareholders. In such a case, the Fund will pay all or a portion of
the remainder of the redemptions in portfolio instruments, valued in the same
way as the Fund determines net asset value. The portfolio instruments will be
selected in a manner that the Board deems fair and equitable. A redemption in
kind is not as liquid as a cash redemption. If a redemption is made in kind, a
shareholder receiving portfolio instruments could incur certain transaction
costs.
25
<PAGE>
Suspension of Redemptions
The Fund may not suspend a shareholder's right of redemption, or postpone
payment for a redemption for more than seven days, unless the NYSE is closed for
other than customary weekends or holidays; trading on the NYSE is restricted;
for any period during which an emergency exists as a result of which (1)
disposition by the Fund of securities owned by it is not reasonably practicable,
or (2) it is not reasonably practicable for the Fund to fairly determine the
value of its assets; or for such other periods as the SEC 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 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% of the Trust's shares. In
addition, 10 or more shareholders meeting certain conditions and holding the
lesser of $25,000 worth or 1% 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 class of the Fund is entitled to
participate equally in dividends and other distributions of the respective class
of the Fund and, upon liquidation or dissolution, in the net assets of that
class remaining after satisfaction of outstanding liabilities. The shares of the
Fund have no preference, preemptive or similar rights, and are freely
transferable. The exchange privilege for each class and the conversion rights of
Class B shares are described in the Prospectus.
Under Rule 18f-2 under the 1940 Act, as to any investment company which has two
or more series (such as the Fund) 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 of the
outstanding voting securities of each series affected by the matter. Such
separate voting requirements do not apply to the election of Trustees, the
ratification of the contract with the principal underwriter or the ratification
26
<PAGE>
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,
each class of the Fund shall have a different arrangement for shareholder
services or the distribution of securities or both and shall pay all of the
expenses of that arrangement, shall have exclusive voting rights on any matters
submitted to shareholders that relate solely to a particular class' arrangement,
and shall have separate voting rights on any matters submitted to shareholders
in which the interests of one class differ from the interests of any other
class.
Under Massachusetts law, shareholders of 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 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 the Trust to be held personally liable as a partner under certain
circumstances, the risk of a shareholder's 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
General
To qualify for treatment as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended ("Code"), the Fund -- which is treated
as a separate corporation for these purposes -- must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
27
<PAGE>
the Fund, these requirements include the following: (1) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
and (2) at the close of each quarter of the Fund's taxable year, (i) at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs and other securities, with
those other securities limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities, and (ii)
not more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of any
one issuer.
If Fund shares are sold at a loss after being held for six months or less, the
loss will be treated as long-term, instead of short-term, capital loss to the
extent of any capital gain distributions received on those shares.
Distributions, if any, in excess of the Fund's current or accumulated earnings
and profits, as computed for federal income tax purposes, will constitute a
return of capital, which first will reduce a shareholder's tax basis in the
Fund's shares and then (after such basis is reduced to zero) generally will give
rise to capital gains. Under the Taxpayer Relief Act of 1997 ("Tax Act"),
different maximum tax rates apply to a non-corporate taxpayer's net capital gain
(the excess of net long-term capital gain over net short-term capital loss)
depending on the taxpayer's holding period and marginal rate of federal income
tax -- generally, 28% for gain recognized on capital assets held for more than
one year but not more than 18 months and 20% (10% for taxpayers in the 15%
marginal tax bracket) for gain recognized on capital assets held for more than
18 months.
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.
At the time of an investor's purchase of shares of the Fund, a portion of the
purchase price is often attributable to unrealized appreciation in the Fund's
portfolio or undistributed taxable income. Consequently, subsequent
distributions from that appreciation (when realized) or income may be taxable to
the 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 the shares
and the distributions in reality represent a return of a portion of the purchase
price.
The Fund will be subject to a nondeductible 4% federal excise tax ("Excise Tax")
on certain amounts not distributed (and not treated as having been distributed)
on a timely basis in accordance with annual minimum distribution requirements.
The Fund intends under normal circumstances to avoid liability for such tax by
satisfying those distribution requirements.
28
<PAGE>
Income from Foreign Securities
Dividends and interest received by the Fund, and gains realized thereby, may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation -- other than a "controlled foreign
corporation" (i.e., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which the Fund is a U.S. shareholder that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a part of any "excess distribution" received by
it on the stock of a PFIC or of any gain on the Fund's disposition of the stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain -- which
likely would have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if those earnings and
gain were not distributed thereto by the QEF. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
The Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the PFIC's stock
over the adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also will be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included in income for prior
taxable years. The adjusted basis in each PFIC's stock with respect to which
this election is made will be adjusted to reflect the amounts of income included
and deductions taken under the election.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency positions and
29
<PAGE>
payables or receivables (e.g., dividends or interest receivable) denominated in
a foreign currency are subject to section 988 of the Code, which generally
causes those gains and losses to be treated as ordinary income and losses and
may affect the amount, timing and character of distributions to shareholders.
Any gains from the disposition of foreign currencies could, under future
Treasury regulations, produce income that is not "qualifying income" under the
Income Requirement.
Investments in Debt Securities
If the Fund invests in zero coupon securities, payment-in-kind securities and/or
certain deferred interest securities (and, in general, any other securities with
original issue discount or with market discount if an election is made to
include market discount in income currently), it must accrue income on those
investments prior to the receipt of cash payments or interest thereon. However,
the Fund must distribute to its shareholders, at least annually, all or
substantially all of its investment company taxable income, including such
accrued discount and other non-cash income to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax. Therefore, the 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 make the
necessary distributions.
Investment in debt obligations that are at risk of or in default presents
special tax issues for a fund that holds such obligations. Tax rules are not
entirely clear about issues such as when a 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 the Fund in order to seek to reduce the
risk of distributing insufficient income to qualify for treatment as a RIC and
of becoming subject to federal income tax or the Excise Tax.
Hedging Strategies
The use of hedging strategies, such as writing (selling) and purchasing options
and futures contracts and entering into forward contracts, involves complex
rules that will determine for income tax purposes the amount, character and
timing of recognition of the gains and losses the Fund realizes in connection
therewith. Gains from options, futures and forward contracts derived by the Fund
with respect to its business of investing in securities or foreign currencies --
and as noted above, gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations) -- will qualify as
permissible income under the Income Requirement.
Certain options and futures in which the Fund may invest will be "section 1256
contracts." Section 1256 contracts held by the Fund at the end of each taxable
year, other than section 1256 contracts that are part of a "mixed straddle" with
respect to which the Fund has made an election not to have the following rules
apply, must be marked-to-market (that is, treated as sold for their fair market
value) for federal income tax purposes, with the result that unrealized gains or
30
<PAGE>
losses will be treated as though they were realized. Sixty percent of any net
gain or loss recognized on these deemed sales, and 60% of any net realized gain
or loss from any actual sales of section 1256 contracts, will be treated as
long-term capital gain or loss, and the balance will be treated as short-term
capital gain or loss. As of the date of this SAI, it is not entirely clear
whether that 60% portion will qualify for the reduced maximum tax rates on net
capital gain enacted by the Tax Act noted above -- 20% (10% for taxpayers in the
15% marginal tax bracket) for gain recognized on capital assets held for more
than 18 months -- instead of the 28% rate in effect before that legislation,
which now applies to gain recognized on capital assets held for more than one
year but not more than 18 months, although technical corrections legislation
passed by the House of Representatives late in 1997 would treat it as qualifying
therefor. Section 1256 contracts also may be marked-to-market for purposes of
the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Fund may invest. Section 1092 defines
a "straddle" as offsetting positions with respect to personal property; for
these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If the Fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions would be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Fund of straddle transactions are not entirely clear.
If the Fund has an "appreciated financial position" -- generally, an interest
(including an interest through an option, futures or forward contract, or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
- -- and enters into a "constructive sale" of the same or substantially similar
property, the Fund will be treated as having made an actual sale thereof, with
the result that gain will be recognized at that time. A constructive sale
generally consists of a short sale, an offsetting notional principal contract or
futures or forward contract entered into by the Fund or a related person with
respect to the same or substantially similar property. In addition, if the
appreciated financial position is itself a short sale or such a contract,
acquisition of the underlying property or substantially similar property will be
deemed a constructive sale.
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under that 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 the 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 Fund in their particular
circumstances.
31
<PAGE>
OTHER INFORMATION
Custodian
The Bank of New York, 90 Washington Street, 22nd Floor, New York, New York
10826, serves as custodian of the assets of the Fund.
Transfer Agency Services
State Street is the transfer agent for the Fund.
Independent Public Accountants/Auditors
Coopers & Lybrand L.L.P., 2900 One American Square, Box 82002, Indianapolis,
Indiana 46282-0002 serves as the Trust's independent public accountant.
32
<PAGE>
CONSECO FUND GROUP
Conseco High Yield Focus Fund
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) No Financial Statements are included.
(b) Exhibits:
(1) Agreement and Declaration of Trust1/
(2) By-laws1/
(3) Voting trust agreement - None
(4)(a) Agreement and Declaration of Trust of Conseco Fund
Group, Articles V, VI, VII, VIII, and X1/
(b) By-laws of Conseco Fund Group, Articles II, V, and
VII1/
(5)(a) Investment Advisory Agreement between Conseco Fund
Group and Conseco Capital Management, Inc. with
respect to the Equity Fund2/
(b) Investment Advisory Agreement between Conseco Fund
Group and Conseco Capital Management, Inc. with
respect to the Asset Allocation Fund2/
(c) Investment Advisory Agreement between Conseco Fund
Group and Conseco Capital Management, Inc. with
respect to the Fixed Income Fund2/
(d) Form of Investment Advisory Agreement between
Conseco Fund Group, and Conseco Capital
Management, Inc. on behalf of the Conseco 20 Fund,
the Conseco High Yield Fund and the Conseco
International Fund, and Conseco Capital
Management, Inc. (filed herewith)
(e) Investment Advisory Agreement between Conseco Fund
Group and Conseco Capital Management, on behalf of
Conseco High Yield Focus Fund (to be filed)
- ---------------------
1 Incorporated by reference from the Registrant's registration statement, SEC
File No. 333-13185, filed on October 1, 1996.
2 Incorporated by reference from Post-Effective Amendment No. 1 to the
registration statement, SEC File No. 333-13185, filed July 30, 1997.
<PAGE>
(6) Form of Amended and Restated Principal
Underwriting Agreement between Conseco Fund Group
and Conseco Equity Sales, Inc. (filed herewith)
(7) Bonus, profit sharing or pension plans - None
(8)(a) Custody Agreement between Conseco Fund Group and
The Bank of New York2/
(b) Custody Agreement between Conseco Fund Group and
State Street Bank and Trust Company with respect
to the Conseco International Fund (to be filed)
(9)(a) Form of Amended and Restated Administration
Agreement between Conseco Fund Group and Conseco
Services, LLC (filed herewith)
(b) Sub-Administration Agreement between Conseco
Services, LLC and The Bank of New York2/
(c) Sub-Administration Agreement between Conseco
Services, LLC and AMR Investment Services, Inc.
(to be filed)
(d) Fund Accounting Agreement between Conseco
Services, LLC and The Bank of New York2/
(e) Transfer Agency Agreement between Conseco Fund
Group and State Street Bank and Trust Company2/
(f) Form of Agreement Among AMR Investment Services
Trust, AMR Investment Services, Inc., and Conseco
Fund Group and Conseco Capital Management, Inc.
(filed herewith)
(10) Opinion and Consent of Counsel as to the Legality
of the Securities being Registered (to be filed)
(11) Consent of Independent Auditors (to be filed)
(12) Financial statements omitted from prospectus -
None
(13) Letter of investment intent - None
(14) Prototype retirement plan - None
(15)(a) Class A Plan of Distribution and Service pursuant
to Rule 12b-1 with Respect to the Equity Fund2/
2
<PAGE>
(b) Class A Plan of Distribution and Service pursuant
to Rule 12b-1 with Respect to the Asset Allocation
Fund2/
(c) Class A Plan of Distribution and Service pursuant
to Rule 12b-1 with Respect to the Fixed Income
Fund2/
(d) Form of Plan of Distribution and Service pursuant
to Rule 12b-1 (filed herewith)
(e) Selling Group Agreement (to be filed by amendment)
(16) Performance Computation Schedule - None
(17) Financial Data Schedule - None
(18) Amended and Restated Multiple Class Plan Pursuant
to Rule 18f-33
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Number of Record Holders as of
Title of Class April 14, 1998
--------------
Conseco High Yield Focus Fund
Class A shares 0
Class B shares 0
Class C shares 0
Class Y shares 0
- --------------------
3 Incorporated by reference from Post-Effective Amendment No. 4 to the
registration statement, SEC File No. 333-13185, filed on December 29, 1997.
3
<PAGE>
ITEM 27. INDEMNIFICATION.
Reference is made to Articles II and V of the Agreement and Declaration
of Trust incorporated by reference from the Registrant's registration statement,
SEC File No. 333-13185, filed previously on October 1, 1996.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Conseco Capital Management, Inc. (the "Adviser") is an Indiana
corporation which offers investment advisory services. The Adviser is a
wholly-owned subsidiary of Conseco, Inc., also an Indiana corporation, a
publicly owned financial services company. Both the Adviser's and Conseco,
Inc.'s offices are located at 11825 N. Pennsylvania Street, Carmel, Indiana
46032.
Information as to the officers and directors of the Adviser is
included in its current Form ADV filed with the SEC and is incorporated by
reference herein.
ITEM 29. PRINCIPAL UNDERWRITERS.
Conseco Equity Sales, Inc. serves as the Registrant's principal
underwriter. Conseco Equity Sales, Inc. also serves as distributor of one other
investment company, Conseco Series Trust.
The following information is furnished with respect to the officers
and directors of Conseco Equity Sales, Inc. The principal business address of
each person listed is 11815 N. Pennsylvania Street, Carmel, Indiana 46032.
4
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Principal Underwriter with Registrant
---------------- -------------------------- ---------------------
<S> <C> <C>
L. Gregory Gloeckner President None
William P. Latimer Vice President, Senior Vice President and Secretary
Counsel, Secretary, and
Director
James S. Adams Senior Vice President, Treasurer, Principal Financial
Treasurer, and Director and Accounting Officer
William T. Devanney, Jr. Senior Vice President, Vice President,
Corporate Taxes Corporate Taxes
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books and other documents required to be maintained by
the Registrant pursuant to Section 31(a) of the Investment Company Act of 1940
and the rules promulgated thereunder are in the possession of the Adviser or the
registrant's custodian, The Bank of New York, 90 Washington Street, 22nd Floor,
New York, New York 10826.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
No Undertakings are furnished with respect to this Post-Effective Amendment No.
5.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant , Conseco
Fund Group, has duly caused this Post-Effective Amendment No. 5 to its
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Carmel and State of Indiana
on the 14th day of April, 1998.
CONSECO FUND GROUP
By: /s/ Maxwell E. Bublitz
---------------------------------------
Maxwell E. Bublitz
President (Principal Executive Officer)
and Trustee
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 5 to the Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Maxwell E. Bublitz President (Principal Executive April 14, 1998
- --------------------------- Officer) and Trustee
Maxwell E. Bublitz
/s/ James S. Adams Treasurer (Principal Financial April 14, 1998
- --------------------------- and Accounting Officer)
James S. Adams
/s/ William P. Daves, Jr. Chairman of the Board and April 14, 1998
- --------------------------- Trustee
William P. Daves, Jr.*
/s/ Gregory J. Hahn Trustee April 14, 1998
- ---------------------------
Gregory J. Hahn*
/s/ Harold W. Hartley Trustee April 13, 1998
- ---------------------------
Harold W. Hartley*
/s/ R. Jan LeCroy Trustee April 14, 1998
- ---------------------------
Dr. R. Jan LeCroy*
/s/ Jesse H. Parrish Trustee April 14, 1998
- ---------------------------
Dr. Jesse H. Parrish*
/s/ William P. Latimer April 14, 1998
- ---------------------------
*By: William P. Latimer
Attorney-In-Fact
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
(1) Agreement and Declaration of Trust1/
(2) By-laws1/
(3) Voting trust agreement - None
(4)(a) Agreement and Declaration of Trust of Conseco Fund
Group, Articles V, VI, VII, VIII, and X1/
(b) By-laws of Conseco Fund Group, Articles II, V, and
VII1/
(5)(a) Investment Advisory Agreement between Conseco Fund
Group and Conseco Capital Management, Inc. with
respect to the Equity Fund2/
(b) Investment Advisory Agreement between Conseco Fund
Group and Conseco Capital Management, Inc. with
respect to the Asset Allocation Fund2/
(c) Investment Advisory Agreement between Conseco Fund
Group and Conseco Capital Management, Inc. with
respect to the Fixed Income Fund2/
(d) Investment Advisory Agreement between Conseco Fund
Group and Conseco Capital Management, Inc. on
behalf of the Conseco 20 Fund, the Conseco High
Yield Fund and the International Fund, and
Conseco Capital Management, Inc. (filed herewith)
(e) Investment Advisory Agreement between Conseco Fund
Group and Conseco Capital Management, Inc. on
behalf of Conseco High Yield Focus Fund (to be
filed)
(6) Amended and Restated Principal Underwriting
Agreement between Conseco Fund Group and Conseco
Equity Sales, Inc. (filed herewith)
(7) Bonus, profit sharing or pension plans - None
(8)(a) Custody Agreement between Conseco Fund Group and
The Bank of New York2/
- --------------------
1 Incorporated by reference from the Registrant's registration statement, SEC
File No. 333-13185, filed on October 1, 1996.
2 Incorporated by reference from Post-Effective Amendment No. 1 to the
registration statement, SEC File No. 333-13185, filed July 30, 1997.
<PAGE>
(b) Custody Agreement between Conseco Fund Group and
State Street Bank and Trust Company with respect
to the Conseco International Fund (to be filed)
(9)(a) Amended and Restated Administration Agreement
between Conseco Fund Group and Conseco Services,
LLC (filed herewith)
(b) Sub-Administration Agreement between Conseco
Services, LLC and The Bank of New York2/
(c) Sub-Administration Agreement between Conseco
Services, LLC and AMR Investment Services, Inc.
(to be filed)
(d) Fund Accounting Agreement between Conseco
Services, LLC and The Bank of New York2/
(e) Transfer Agency Agreement between Conseco Fund
Group and State Street Bank and Trust Company2/
(f) Agreement Among AMR Investment Services Trust, AMR
Investment Services, Inc., and Conseco Fund Group
and Conseco Capital Management, Inc. (filed
herewith)
(10) Opinion and Consent of Counsel as to the Legality
of the Securities being Registered (to be filed)
(11) Consent of Independent Auditors (to be filed)
(12) Financial statements omitted from prospectus -
None
(13) Letter of investment intent - None
(14) Prototype retirement plan - None
(15)(a) Class A Plan of Distribution and Service pursuant
to Rule 12b-1 with Respect to the Equity Fund2/
(b) Class A Plan of Distribution and Service pursuant
to Rule 12b-1 with Respect to the Asset Allocation
Fund2/
(c) Class A Plan of Distribution and Service pursuant
to Rule 12b-1 with Respect to the Fixed Income
Fund2/
(d) Plan of Distribution and Service pursuant to Rule
12b-1 (filed herewith)
(e) Selling Group Agreement (to be filed by amendment)
(16) Performance Computation Schedule - None
<PAGE>
(17) Financial Data Schedule - None
(18) Amended and Restated Multiple Class Plan Pursuant
to Rule 18f-33
- -----------------
3 Incorporated by reference from Post-Effective Amendment No. 4 to the
registration statement, SEC File No. 333-13185, filed on December 29, 1997.
INVESTMENT ADVISORY AGREEMENT
Between CONSECO FUND GROUP
and
CONSECO CAPITAL MANAGEMENT, INC.
THIS INVESTMENT ADVISORY AGREEMENT is entered into as of this 31st day
of December, 1997, by and between Conseco Fund Group (the "Trust"), a
Massachusetts business trust, and Conseco Capital Management, Inc. (the
"Adviser"), a Delaware corporation.
WITNESSETH:
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end diversified management
investment company;
WHEREAS, the Trust has established several separate series of shares,
each of which represents a separate diversified portfolio of investments, and
may establish additional series of shares (each series now or hereafter listed
on Schedule A hereto, as such schedule may be amended from time to time, shall
be referred to herein as a "Fund");
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940;
WHEREAS, the Trust desires to retain the Adviser to render investment
advice and furnish portfolio management services to each Fund; and
WHEREAS, the Adviser is willing to render such advice and furnish such
services pursuant to the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties mutually agree as follows:
1. Employment; Duties of the Adviser. (a) The Trust hereby employs the
Adviser as investment adviser of each Fund. The Adviser hereby accepts such
employment and agrees to provide the services set forth herein in return for the
compensation under Paragraph 8.
(b) Subject to the supervision and direction of the Board of
Trustees of the Trust (the "Trustees"), the Adviser shall provide a continuous
investment program for each Fund and shall, as part of its duties hereunder, (i)
furnish investment research and management with respect to the investment of the
assets of each Fund, (ii) determine from time to time securities or other
<PAGE>
investments to be purchased, sold, retained or lent by each Fund, (iii) furnish,
without cost to each Fund, such office space, equipment, facilities and
personnel as needed for servicing the investments of the Fund to the extent not
provided by the Trust's administrator under a separate agreement with the Trust,
(iv) maintain all books and records with respect to portfolio transactions of
each Fund, and (v) permit its directors, officers and employees to serve,
without compensation from the Trust or each Fund, as Trustees or officers of the
Trust. The Adviser shall carry out its duties under this Agreement in accordance
with each Fund's stated investment objective, policies, and restrictions, the
1940 Act and other applicable laws and regulations, and such other guidelines as
the Trustees may reasonably establish from time to time.
(c) The Adviser will place orders for each Fund either
directly with the issuer or with any broker or dealer. In placing orders with
brokers and dealers, the Adviser will attempt to obtain the best net results in
terms of price and execution. Consistent with this obligation, the Adviser may,
in its discretion, purchase and sell portfolio securities to and from brokers
and dealers that provide brokerage and research services. The Adviser may pay
such brokers and dealers a higher commission than may be charged by other
brokers and dealers if the Adviser determines in good faith that such commission
is reasonable in relation to the value of the brokerage and research services
provided. This determination may be viewed in terms either of the particular
transaction or of the overall responsibility of the Adviser to the Funds and its
other clients.
2. Retention of a Sub-Adviser. Subject to such approval as may be
required under the 1940 Act, the Adviser may retain a sub-adviser, at the
Adviser's own cost and expense, for the purpose of making investment
recommendations and research available to the Adviser. Retention of a
sub-adviser with respect to any or all Funds shall in no way reduce the
responsibilities or obligations of the Adviser under this Agreement, and the
Adviser shall be responsible to the Trust and each such Fund for all acts or
omissions of the sub-adviser in connection with the performance of the Adviser's
duties hereunder.
3. Independent Contractor Status; Services Not Exclusive. The Adviser
shall, for all purposes herein, be deemed to be an independent contractor. The
services to be rendered by the Adviser pursuant to the provisions of this
Agreement are not to be deemed exclusive and the Adviser shall therefore be free
to render similar or different services to others, provided that, its ability to
render the services described herein shall not be impaired thereby.
4. Furnishing of Information. (a) Each Fund shall from time to time
furnish or make available to the Adviser detailed statements of the investments
and assets of the Fund, information pertaining to the investment objectives and
needs of the Fund, financial reports, proxy statements, and such legal or other
information as the Adviser may reasonably request in connection with the
performance of its obligations hereunder.
(b) The Adviser will furnish the Trustees with such periodic
and special reports (including data on securities, economic conditions and other
pertinent subjects) as the Trustees may reasonably request.
5. Fund Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Adviser agrees that all records which it maintains for
2
<PAGE>
the Trust shall be the property of the Trust and shall be surrendered promptly
to the Trust upon request. The Adviser further agrees to preserve all such
records for the periods prescribed by Rule 31a-2 under the 1940 Act. The Adviser
agrees that it will maintain all records and accounts regarding the investment
activities of each Fund in a confidential manner. All such accounts or records
shall be made available within five (5) business days of request to the
accountants or auditors of each Fund during regular business hours at the
Adviser's offices. In addition, the Adviser will provide any materials
reasonably related to the investment advisory services provided hereunder as may
be reasonably requested in writing by the designated officers of the Trust or as
may be required by any duly constituted authority.
6. Allocation of Costs and Expenses. (a) The Adviser shall pay the
costs of rendering its services pursuant to the terms of this Agreement, other
than the costs of securities (including brokerage commissions, if any) purchased
by the Funds.
(b) Each Fund shall bear all expenses of its operation
(including its proportionate share of the general expenses of the Trust) not
specifically assumed by the Adviser. Expenses borne by each Fund shall include,
but are not limited to, (i) organizational and offering expenses of the Fund and
expenses incurred in connection with the issuance of shares of the Fund; (ii)
fees of the Trust's custodian and transfer agent; (iii) costs and expenses of
pricing and calculating the net asset value per share for each class of the Fund
and of maintaining the books and records required by the 1940 Act; (iv)
expenditures in connection with meetings of shareholders and Trustees, other
than those called solely to accommodate the Adviser; (v) compensation and
expenses of Trustees who are not interested persons of the Trust or the Adviser
("Disinterested Trustees"); (vi) the costs of any liability, uncollectible items
of deposit and other insurance or fidelity bond; (vii) the cost of preparing,
printing, and distributing prospectuses and statements of additional
information, any supplements thereto, proxy statements, and reports for existing
shareholders; (viii) legal, auditing, and accounting fees; (ix) trade
association dues; (x) filing fees and expenses of registering and maintaining
registration of shares of the Fund under applicable federal and state securities
laws; (xi) brokerage commissions; (xii) taxes and governmental fees; and (xiii)
extraordinary and non-recurring expenses.
(c) To the extent the Adviser incurs any costs which are an
obligation of a Fund as set forth herein and to the extent such costs have been
reasonably rendered, the Fund shall promptly reimburse the Adviser for such
costs.
8. Investment Advisory Fees. (a) As compensation for the advice and
services rendered and the expenses assumed by the Adviser pursuant hereto, each
Fund shall pay to the Adviser a fee computed at the annual rate set forth on
Schedule A hereto, as such schedule may be amended from time to time.
(b) The investment advisory fee shall be accrued daily by each
Fund and paid to the Adviser at the end of each calendar month.
(c) In the case this Agreement becomes effective or terminates
with respect to any Fund before the end of any month, the investment advisory
fee for that month shall be calculated on the basis of the number of business
days during which it is in effect for that month.
3
<PAGE>
9. Additional Funds. In the event that the Trust establishes one or
more series of shares with respect to which it desires to have the Adviser
render services under this Agreement, it shall so notify the Adviser in writing.
If the Adviser agrees in writing to provide said services, such series of shares
shall become a Fund hereunder upon execution of a new Schedule A and the
approval of the Trustees and the shareholders of the series as required by the
1940 Act.
10. Compliance with Applicable Law. Nothing contained herein shall be
deemed to require the Funds to take any action contrary to (a) the Agreement and
Declaration of Trust of the Trust, (b) the By-laws of the Trust, or (c) any
applicable statute or regulation. Nothing contained herein shall be deemed to
relieve or deprive the Trustees of their responsibility for and control of the
conduct of the affairs of the Trust or the Funds.
11. Liability. (a) In the absence of willful misfeasance, bad faith or
gross negligence on the part of the Adviser, or reckless disregard by the
Adviser of its obligations or duties hereunder, the Adviser shall not be subject
to liability to the Trust or any Fund or its shareholders for any act or
omission in the course of or in connection with rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security.
(b) No provision of this Agreement shall be construed to
protect any Trustee or officer of the Trust, or any director or officer of the
Adviser, from liability to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence on the part of
such person, or reckless disregard by such person of obligations or duties
hereunder.
(c) A copy of the Trust's Agreement and Declaration of Trust
is on file with the Secretary of the Commonwealth of Massachusetts, and notice
is hereby given that this Agreement is executed on behalf of the Trustees as
Trustees and not individually. The Adviser acknowledges and agrees that the
obligations of a Fund hereunder are not personally binding upon any of the
Trustees or shareholders of the Fund but are binding only upon property of that
Fund and no other.
12. Term of Agreement. This Agreement shall become effective on the
date above written with respect to each Fund listed on Schedule A hereto on such
date and shall continue in effect for two years from such date unless sooner
terminated as hereinafter provided. With respect to each series added by
execution of a new Schedule A, this Agreement shall become effective on the date
of such execution and shall remain in effect for two years after such execution
unless sooner terminated as hereinafter provided. Thereafter, this Agreement
shall continue in effect with respect to each Fund from year to year so long as
such continuation is approved at least annually for each Fund by (i) the
Trustees or by the vote of a majority of the outstanding voting securities of
the Fund, and (ii) the vote of a majority of the Disinterested Trustees, with
such vote being cast in person at a meeting called for the purpose of voting on
such approval.
13. Termination. This Agreement may be terminated with respect to any
Fund at any time without payment of any penalty (a) by the Trustees or by vote
of a majority of the outstanding voting securities of the Fund, upon delivery of
<PAGE>
sixty (60) days' written notice to the Adviser, or (b) by the Adviser upon sixty
(60) days' written notice to the Fund. Termination of this Agreement with
respect to one Fund shall not affect the continued effectiveness of this
Agreement with respect to any other Fund. This Agreement shall terminate
automatically in the event of its assignment.
14. Amendment of Agreement. This Agreement may only be modified or
amended by mutual written agreement of the parties hereto.
15. No Waiver. The waiver by any party of any breach of or default
under any provision or portion of this Agreement shall not operate as or be
construed to be a waiver of any subsequent breach or default.
16. Use of Name. In consideration of the execution of this Agreement,
the Adviser hereby grants to the Trust the right to use the name "Conseco" as
part of its name and the names of the Funds. The Trust agrees that in the event
this Agreement is terminated, it shall immediately take such steps as are
necessary to amend its name to remove the reference to "Conseco."
17. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Indiana, except insofar as the 1940
Act may be controlling.
18. Definitions. For purposes of application and operation of the
provisions of this Agreement, the terms "majority of the outstanding voting
securities, "interested persons," and "assignment" shall have the meaning as set
forth in the 1940 Act. In addition, when the effect of a requirement of the 1940
Act reflected in any provision of this Agreement is modified, interpreted or
relaxed by a rule, regulation or order of the Securities and Exchange
Commission, whether of special or of general application, such provision shall
be deemed to incorporate the effect of such rule, regulation or order.
19. Severability. The provisions of this Agreement shall be considered
severable and if any provision of this Agreement is deemed to be invalid or
contrary to any existing or future law, such invalidity shall not impair the
operation of or affect any other provision of this Agreement which is valid.
20. Counterparts. This Agreement may be executed in counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same instrument.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers on the day and year
first above written.
ATTEST: CONSECO FUND GROUP,
By:
- ------------------------------ --------------------------------
William P. Latimer, Esq. Maxwell E. Bublitz
President
ATTEST: CONSECO CAPITAL MANAGEMENT, INC.
By:
- ------------------------------ --------------------------------
William P. Latimer, Esq. Maxwell E. Bublitz
President
6
<PAGE>
CONSECO FUND GROUP
INVESTMENT ADVISORY AGREEMENT
SCHEDULE A
Series Annual Fee
------ ----------
Conseco 20 Fund .70%
High Yield Fund .70%
International Fund 1.00%
AMENDED AND RESTATED
PRINCIPAL UNDERWRITING AGREEMENT
BETWEEN CONSECO FUND GROUP
AND
CONSECO EQUITY SALES, INC.
THIS PRINCIPAL UNDERWRITING AGREEMENT is entered into as of this 2nd day
of January, 1997, by and between Conseco Fund Group (the "Trust"), a
Massachusetts business trust, and Conseco (formerly GARCO) Equity Sales, Inc., a
Texas corporation (the "Underwriter"), and is amended as of December 31, 1997.
WITNESSETH:
WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end diversified management investment
company, and its shares are registered pursuant to the Securities Act of 1933
(the "1933 Act");
WHEREAS, the Trust has established several separate series of shares, each
of which represents a separate diversified portfolio of investments, and may
establish additional series of shares (each series now or hereafter listed on
Schedule A hereto, as such schedule may be amended from time to time, shall be
referred to herein as a "Fund");
WHEREAS, the Trust has issued shares of each Fund in one or more classes
(each a "Class"), and has adopted Plans of Distribution and Service (the
"Plans") pursuant to Rule 12b-1 under the 1940 Act with respect to certain of
those Classes (each a "12b-1 Class");
WHEREAS, the Underwriter is registered as a broker-dealer under the
Securities Exchange Act of 1934 (the "1934 Act"), and is a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD");
WHEREAS, the Trust desires to retain the Underwriter to act as the Trust's
principal underwriter in connection with the offering and sale of shares of each
Fund and to furnish certain other services; and
WHEREAS, the Underwriter is willing to act as principal underwriter and to
furnish such services pursuant to the terms and conditions set forth herein;
<PAGE>
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties mutually agree as follows:
1. Employment; Duties Of The Underwriter.
-------------------------------------
(a) The Trust hereby employs the Underwriter, and the Underwriter
hereby accepts employment, as the principal underwriter and exclusive sales
agent in connection with the offering and sale of the shares of each Fund. It is
understood, however, that such employment does not preclude sales made directly
by the Trust or through its transfer agent as set forth in the Trust's
Registration Statement. As used herein, the term "Registration Statement" shall
mean the registration statement most recently filed by the Trust under the 1933
Act and the 1940 Act, including any amendments or supplements thereto. The
Underwriter agrees to use its best efforts to promote the sale of the Funds'
shares. The Underwriter is not obligated to sell any specific number of shares.
(b) The Underwriter shall hold itself available to receive
purchase and redemption orders for shares of each Fund and to accept such orders
on behalf of the Trust. The Underwriter shall promptly notify the Trust or its
transfer agent of all orders received. Orders shall be deemed effective at the
time and in the manner set forth in the Registration Statement.
(c) The Trust reserves the right at all times to suspend or limit
the public offering of the shares of any or all Funds (or of any or all Classes
thereof) upon written notice to the Underwriter. The Trust and the Underwriter
each has the right to reject any order in whole or in part.
(d) The Underwriter shall provide or obtain certain shareholder
services, including, but not limited to, maintaining account records for
shareholders; answering inquiries relating to shareholders' accounts, the
policies of the Funds and the performance of their investments; providing
assistance and handling transmission of funds in connection with purchase,
redemption and exchange orders for shares; providing assistance in connection
with changing account setups and enrolling in various optional services; and
producing and disseminating shareholder communications or servicing materials.
The Underwriter may pay compensation and expenses, including overhead, salaries,
and telephone and other communications expenses, to Authorized Dealers (as
defined below) and employees who provide such services.
(e) The Underwriter in its discretion may enter into agreements
with such brokers, dealers or other financial intermediaries ("Authorized
Dealers") as it may select regarding the distribution of Fund shares and/or the
servicing of shareholder accounts. To the extent required by applicable law,
each Authorized Dealer shall be appropriately registered and qualified to carry
out its duties under its agreement with the Underwriter.
2. INDEPENDENT CONTRACTOR STATUS; SERVICES NOT EXCLUSIVE. The Underwriter
shall, for all purposes herein, be deemed to be an independent contractor. The
services to be rendered by the Underwriter pursuant to the provisions of this
Agreement are not to be deemed exclusive, and the Underwriter shall therefore be
free to render similar or different services to others; PROVIDED THAT, its
ability to render the services described herein shall not be impaired thereby.
2
<PAGE>
3. FURNISHING OF INFORMATION. Each Fund shall keep the Underwriter fully
informed with regard to its affairs. Each Fund shall furnish the Underwriter at
least annually with audited financial statements of its books and accounts
certified by its independent public accountants. In addition, from time to time,
each Fund shall furnish such additional financial or other information as the
Underwriter may reasonably request.
4. OFFERING PRICE. Each Class of Fund shares shall be offered at a price
equivalent to its net asset value per share (determined in the manner and at the
time or times set forth in the Registration Statement) plus any applicable sales
charge. On each day on which the New York Stock Exchange ("NYSE") is open for
business, the Trust shall furnish (or arrange for another person to furnish) the
Underwriter with each Class' net asset value per share.
5. COMPENSATION.
(a) As compensation for its activities under this Agreement with
respect to any Class of Fund shares with an initial sales charge, the
Underwriter shall receive the sales charge, if any, imposed on purchases of
shares of that Class. The amount of the sales charge shall be calculated in
accordance with the Registration Statement. The Distributor is authorized to
collect the gross proceeds derived from the sale of such shares, remit the net
asset value thereof to the Trust and retain the initial sales charge.
(b) As compensation for its activities under this Agreement with
respect to any Class of Fund shares with a contingent deferred sales charge, the
Underwriter shall receive the sales charge, if any, imposed on redemptions of
shares of that Class. The amount of the sales charge shall be determined in
accordance with the Registration Statement.
(c) As additional compensation, the Underwriter shall receive a
distribution and service fee with respect to each 12b-1 Class at the rate set
forth in the applicable Plan, as such Plan may be amended from time to time.
(d) The Underwriter may reallow to Authorized Dealers any or all
of the initial sales charges, contingent deferred sales charges, or distribution
and service fees which it is paid under this Agreement; provided, however, that
the Distributor may not make payments to any Authorized Dealer for shareholder
servicing in an amount in excess of .25% of the average annual net asset value
of the shares owned by clients of such Authorized Dealer.
6. PURCHASES FOR UNDERWRITER'S OWN ACCOUNT. The Underwriter shall not
purchase shares for its own account for the purpose of resale to the public, but
the Underwriter may purchase shares for its own account only upon written
assurance that the purchase is for investment purposes and that the shares shall
not be resold except through redemption by the Trust.
7. ALLOCATION OF EXPENSES. (a) Each Fund will pay all fees and expenses
in connection with (i) preparing audited and certified financial statements;
(ii) registering and maintaining the registration of its shares under applicable
federal and state securities laws; and (iii) preparing, printing and
3
<PAGE>
distributing prospectuses and statements of additional information, any
supplements thereto, reports, and other communications that are sent to existing
shareholders.
(b) The Underwriter shall pay (or reimburse) all fees and expenses of each
Fund in connection with (i) printing and distributing additional copies of
prospectuses, statements of additional information, any supplements thereto,
reports, and other communications for other than existing shareholders used to
offer shares to the public; and (ii) preparing, printing and distributing all
advertising and sales literature relating to the Fund.
(c) The Underwriter shall pay all of its own expenses in connection with
its services under this Agreement and may pay the salaries and expenses of
Authorized Dealers or employees who engage in or support the distribution of
Fund shares or who service shareholder accounts.
8. REPORTS OF UNDERWRITER. The Underwriter shall prepare, at least
quarterly, reports for the Trustees showing expenditures under this Agreement
and the purposes for which such expenditures were made.
9. CONDUCT OF BUSINESS. The Trust authorizes the Underwriter to provide
only such information and to make only such statements and representations as
permitted in accordance with federal and state securities laws and applicable
rules of self-regulatory organizations.
10. ADDITIONAL FUNDS. In the event that the Trust establishes one or more
series of shares with respect to which it desires to have the Underwriter render
services under this Agreement, it shall so notify the Underwriter in writing. If
the Underwriter agrees in writing to provide said services, such series of
shares shall become a Fund hereunder upon execution of a new Schedule A and
approval by the Trustees.
11. LIABILITY. In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Underwriter or reckless disregard by the
Underwriter of its obligations or duties hereunder, the Underwriter shall not be
subject to liability to the Trust or any Fund or its shareholders for any act or
omission in the course of or in connection with rendering services hereunder.
12. TERM OF AGREEMENT. This Agreement shall become effective on the date
above written and shall continue in effect for two years from such date unless
sooner terminated as hereinafter provided. Thereafter this Agreement shall
continue in effect with respect to each Fund from year to year so long as such
continuation is approved at least annually for each Fund by (i) the Trustees or
by the vote of a majority of the outstanding voting securities of the Fund and
(ii) the vote of a majority of the Trustees of the Trust who are not parties to
this Agreement or interested persons of any such party ("Disinterested
Trustees") and by a majority of those Disinterested Trustees who have no direct
or indirect financial interest in any Plan or this Agreement. ("Rule 12b-1
Trustees"), with such vote being cast in person at a meeting called for the
purpose of voting on such approval.
13. TERMINATION. This Agreement may be terminated with respect to any
Fund at any time without payment of any penalty (a) by the Trustees, by vote of
4
<PAGE>
a majority of the outstanding voting securities of the Fund, or by the vote of a
majority of the Rule 12b-1 Trustees, upon delivery of sixty (60) days' written
notice to the Underwriter, or (b) by the Underwriter upon sixty (60) days'
written notice to the Fund. Termination of this Agreement with respect to one
Fund shall not affect the continued effectiveness of this Agreement with respect
to any other Fund. This Agreement shall terminate automatically in the event of
its assignment.
14. ENTIRE AGREEMENT; AMENDMENT. This Agreement represents the entire
agreement between the parties hereto and supersedes any prior agreement between
the parties pertaining to the subject matter hereof, whether oral or written.
This Agreement may only be modified or amended by mutual written agreement of
the parties hereto.
15. NO WAIVER. The waiver by any party of any breach of or default under
any provision or portion of this Agreement shall not operate as or be construed
to be a waiver of any subsequent breach or default.
16. DEFINITIONS. For purposes of application and operation of the
provisions of this Agreement, the terms "assignment," "interested persons" and
"majority of the outstanding voting securities" shall have the meanings set
forth in the 1940 Act. In addition, when the effect of a requirement of the 1940
Act reflected in any provision of this Agreement is modified, interpreted or
relaxed by a rule, regulation or order of the Securities and Exchange
Commission, whether of special or of general application, such provision shall
be deemed to incorporate the effect of such rule, regulation or order.
17. SEVERABILITY. The provisions of this Agreement shall be considered
severable and if any provision of this Agreement is deemed to be invalid or
contrary to any existing or future law, such invalidity shall not impair the
operation of or affect any other provision of this Agreement which is valid.
18. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same instrument.
19. NOTICES. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed postage prepaid to the other party at the
address such other party may designate from time to time for the receipt of such
notices.
20. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Indiana, except insofar as the 1940 Act
may be controlling.
21. LIMITATIONS OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS. A copy of
the Agreement and Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts and notice is hereby given that
this Agreement is executed on behalf of the Trustees as Trustees, and not
individually. The Underwriter acknowledges and agrees that the obligations of a
Fund hereunder are not binding upon any of the Trustees or shareholders of the
Fund personally but are binding only upon the assets and property of that Fund
and no other.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers on the day and year
first above written.
CONSECO FUND GROUP
ATTEST: By:
-----------------------------
Gregory J. Hahn
Vice President
__________________________________
CONSECO EQUITY SALES, INC.
ATTEST:
By:
-----------------------------
L. Gregory Gloeckner
__________________________________ President
6
<PAGE>
CONSECO FUND GROUP
AMENDED AND RESTATED PRINCIPAL UNDERWRITING AGREEMENT
SCHEDULE A
SERIES
Conseco Equity Fund
Conseco Asset Allocation Fund
Conseco Fixed Income Fund
Conseco 20 Fund
Conseco High Yield Fund
Conseco International Fund
7
AMENDED AND RESTATED ADMINISTRATION AGREEMENT
BETWEEN CONSECO FUND GROUP
AND
CONSECO SERVICES LLC
THIS ADMINISTRATION AGREEMENT is entered into as of this 2nd day of
January, 1997, by and between Conseco Fund Group (the "Trust"), a Massachusetts
business trust having its principal office and place of business at 11825 N.
Pennsylvania St., Carmel, Indiana, and Conseco Services LLC (the
"Administrator"), an Indiana limited liability company having its principal
office and place of business at 11815 N. Pennsylvania St., Carmel, Indiana, and
is amended as of December 31, 1997.
WITNESSETH:
WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end diversified management investment
company;
WHEREAS, the Trust has established several separate series of shares, each
of which represents a separate portfolio of investments, and may establish
additional series of shares (each series now or hereafter listed on Schedule A
hereto, as such schedule may be amended from time to time, shall be referred to
herein as a "Fund"); and
WHEREAS, the Trust desires to retain the administrator to provide
administrative services to each Fund, and the Administrator is willing to
provide said services directly or through other entities;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties mutually agree as follows:
1. Employment; Duties Of The Administrator
---------------------------------------
1.1 The Trust hereby employs the Administrator as administrator of each Fund,
and the Administrator agrees to provide the services set forth herein in
return for the compensation under Paragraph 2.
1.2 Subject to the supervision and direction of the Board of Trustees of the
Trust (the "Trustees"), the Administrator shall supervise each Fund's
business and affairs and shall provide the services required for the
effective administration of each Fund to the extent not otherwise provided
by employees, agents or contractors of the Trust. These services shall
include: (i) furnishing, without cost to each Fund, such office space,
<PAGE>
equipment, facilities and personnel as needed in connection with the
Fund's operations, (ii) supervising the preparation and filing of all
documents required for compliance by each Fund with the federal and state
securities laws, (iii) monitoring and reporting on compliance by each Fund
with its investment policies and restrictions, (iv) furnishing clerical
and bookkeeping services as needed by each Fund in connection with its
operation (including establishing appropriate expense accruals,
maintaining expense files and coordinating payment of invoices), (v)
maintaining the books and records required by the 1940 Act, (vi) fund
accounting, (vii) assisting in the preparation and distribution of annual
and other reports to shareholders of each Fund, (viii) monitoring and
reporting on compliance with NASD rules, (ix) monitoring and reporting on
compliance with applicable Internal Revenue Code provisions and
regulations, (x) supervising the preparation and filing of any federal,
state and local income tax returns, (xi) preparing for meetings of the
Trustees and shareholders, (xii) permitting its directors, officers and
employees to serve, without compensation from the Trust or each Fund, as
Trustees or officers of the Trust, (xiii) overseeing the determination and
publication of each Fund's net asset value per share in accordance with
the Fund's policies, and (xiv) overseeing relations with, and the
performance of, agents engaged by the Trust, such as its transfer agent,
custodian, independent accountants and legal counsel. Nothing contained
herein shall be deemed to relieve or deprive the Trustees of their
responsibility for and control of the conduct of the affairs of the Trust
or the Funds.
1.3 The administrative services provided hereunder will exclude (i) portfolio
custodial services provided by the Trust's custodian, (ii) transfer agency
services provided by the Trust's transfer agent, (iii) distribution
services provided by the distributor of the Trust's shares, Conseco Equity
Sales, Inc., and (iv) any administrative services provided by the Trust's
investment adviser pursuant to its investment advisory agreements with the
Trust.
2. Administration Fees
-------------------
2.1 As compensation for the services rendered and the expenses assumed by the
Administrator pursuant to this Agreement, each Fund shall pay the
Administrator a fee computed at the annual rate set forth on Schedule A,
as such schedule may be amended from time to time.
2.2 The administration fee shall be accrued daily by each Fund and paid to the
Administrator at the end of each calendar month. In the case this
Agreement becomes effective or terminates with respect to any Fund before
the end of any month, the administration fee for that month shall be
calculated on the basis of the number of business days during which it is
in effect for that month.
3. Expenses
--------
Each Fund shall bear all expenses of its operation (including its
proportionate share of the general expenses of the Trust) not specifically
assumed by the Administrator. Expenses borne by each Fund shall include,
but are not limited to, (i) organizational and offering expenses of the
Fund and expenses incurred in connection with the issuance of shares of
the Fund; (ii) fees of the Trust's custodian and transfer agent; (iii)
expenditures in connection with meetings of shareholders and Trustees,
2
<PAGE>
other than those called solely to accommodate the Administrator; (iv)
compensation and expenses of Trustees who are not interested persons of
the Trust or the Administrator ("Disinterested Trustees"); (v) the costs
of any liability, uncollectible items of deposit and other insurance or
fidelity bond; (vi) the cost of preparing, printing, and distributing
prospectuses and statements of additional information, any supplements
thereto, proxy statements, and reports for existing shareholders; (vii)
legal, auditing, and accounting fees; (viii) trade association dues; (ix)
filing fees and expenses of registering and maintaining registration of
shares of the Fund under applicable federal and state securities laws; (x)
brokerage commissions; (xi) taxes and governmental fees; and (xii)
extraordinary and non-recurring expenses.
4. Representations And Warranties Of The Administrator And The Trust
-----------------------------------------------------------------
4.1 The Administrator represents and warrants to the Trust that:
(a) It is a limited liability company duly organized and existing, in
good standing, under the laws of the State of Indiana.
(b) It is duly qualified to carry on its business in the State of
Indiana.
(c) It is empowered under applicable laws and by its Charter and By-Laws
to enter into and perform this Agreement.
(d) All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
(e) It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement.
4.2 The Trust represents and warrants to the Administrator that:
(a) It is a business trust duly organized and existing, in good standing,
under the laws of the Commonwealth of Massachusetts.
(b) It is empowered under applicable laws and by its Agreement and
Declaration of Trust and By-Laws to enter into and perform this
Agreement.
(c) All corporate proceedings required by said Agreement and Declaration
of Trust and By-Laws have been taken to authorize it to enter into
and perform this Agreement.
(d) A registration statement under the Securities Act of 1933, as
amended, and the 1940 Act is currently effective and will remain
effective, and appropriate securities filings have been made and
will continue to be made, with respect to all shares of the Funds
being offered for sale.
3
2
<PAGE>
5. Confidentiality
---------------
Subject to the duty of the Trust or the Administrator to comply with
applicable law, each party agrees, on its own behalf and on behalf of its
employees, agents and contractors, to treat as confidential all
information with respect to the other party received pursuant to this
Agreement.
6. Delegation Of Duties
--------------------
The Administrator may delegate to a sub-administrator the performance of
any or all of its duties hereunder with respect to one or more Funds. The
Administrator shall be responsible to the Trust and the Funds for the acts
and omissions of any sub-administrator to the same extent as it is for its
own acts and omissions. The Administrator shall compensate any
sub-administrator retained pursuant to this Agreement out of the fees it
receives pursuant to Paragraph 2 above.
7. Liability
---------
7.1 The Administrator and its officers, directors or employees shall not be
liable for, and each Fund shall indemnify and hold the Administrator
harmless from, any and all losses, damages, or expenses resulting from any
action taken or omitted to be taken by the Administrator hereunder, except
a loss, damage or expense resulting from willful misfeasance, bad faith or
negligence of the Administrator or that of its officers, directors or
employees or the reckless disregard by the Administrator or its officers,
directors or employees of obligations and duties hereunder. Nothing herein
shall in any way constitute a waiver or limitation of any rights which may
exist under any federal securities laws.
7.2 A copy of the Trust's Agreement and Declaration of Trust is on file with
the Secretary of the Commonwealth of Massachusetts, and notice is hereby
given that this Agreement is executed on behalf of the Trustees as
Trustees and not individually. The Administrator acknowledges and agrees
that the obligations of a Fund hereunder are not binding upon any of the
Trustees or shareholders of the Fund personally but are binding only upon
the assets and property of that Fund and no other.
8. Fund Records
------------
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
Administrator agrees that all records which it maintains on behalf of the
Trust are the property of the Trust, will be preserved for the periods
prescribed by Rule 31a-2 under the 1940 Act, and will be surrendered
promptly to the Trust upon request.
9. Additional Funds
----------------
In the event that the Trust establishes one or more series of shares with
respect to which it desires to have the Administrator render services
under this Agreement, it shall so notify the Administrator in writing. If
the Administrator agrees in writing to provide said services, such series
4
3
<PAGE>
of shares shall become a Fund hereunder upon execution of a new Schedule A
and approved by the Trustees.
10. Term Of Agreement
-----------------
This Agreement, as amended, shall become effective on the date above
written and shall continue in effect for two years from such date unless
sooner terminated as hereinafter provided. Thereafter, this Agreement
shall continue in effect with respect to each Fund from year to year so
long as such continuation is approved at least annually for each Fund by
(i) the Trustees or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) the vote of a majority of the
Disinterested Trustees, with such vote being cast in person at a meeting
called for the purpose of voting on such approval.
11. Termination
-----------
This Agreement may be terminated by either party upon sixty (60) days'
prior written notice to the other. Termination of this Agreement with
respect to one Fund shall not affect the continued effectiveness of this
Agreement with respect to any other Fund.
12. Amendment
---------
This Agreement may be amended or modified by a written agreement executed
by both parties and authorized or approved by the Trustees.
13. Assignment
----------
Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written consent of the other
party. This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
14. Applicable Law
--------------
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of Indiana, except
insofar as the 1940 Act may be controlling.
15. DEFINITIONS
------------
As used in this Agreement, the terms "majority of the outstanding voting
securities," "interested persons," and "assignment" shall have the meaning
as set forth in the 1940 Act. In addition, when the effect of a
requirement of the 1940 Act reflected in any provision of this Agreement
is modified, interpreted or relaxed by a rule, regulation or order of the
Securities and Exchange Commission, whether of special or of general
application, such provision shall be deemed to incorporate the effect of
such rule, regulation or order.
5
4
<PAGE>
16. Severability
------------
The provisions of this Agreement shall be considered severable and if any
provision of this Agreement is deemed to be invalid or contrary to any
existing or future law, such invalidity shall not impair the operation of
or affect any other provision of this Agreement which is valid.
17. Merger Of Agreement
-------------------
This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
18. Counterparts
------------
This Agreement may be executed by the parties hereto on any number of
counterparts, and all of said counterparts taken together shall be deemed
to constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers on the day and year
first above written.
CONSECO FUND GROUP
ATTEST: By:
------------------------------
Gregory J. Hahn
______________________________ Vice President
William P. Latimer
CONSECO SERVICES LLC
ATTEST: By:
--------------------------------
_______________________________
Karl W. Kindig
<PAGE>
CONSECO FUND GROUP
AMENDED AND RESTATED ADMINISTRATION AGREEMENT
SCHEDULE A
SERIES ANNUAL FEE
------ ----------
Conseco Equity Fund .20%
Conseco Asset Allocation Fund .20%
Conseco Fixed Income Fund .20%
Conseco 20 Fund .20%
Conseco High Yield Fund .20%
Conseco International Fund .75%
AGREEMENT AMONG
AMR INVESTMENT SERVICES TRUST
AMR INVESTMENT SERVICES, INC.
and
CONSECO FUND GROUP
CONSECO CAPITAL MANAGEMENT, INC.
THIS AGREEMENT is made and entered into as of the 10th day of December,
1997, by and among AMR Investment Services Trust ("AMR Trust"), AMR Investment
Services, Inc. ("AMR"), Conseco Fund Group ("Conseco Trust") and Conseco Capital
Management, Inc. ("Adviser").
WHEREAS, the International Equity Portfolio ("Portfolio") is a series
of AMR Trust and the International Fund ("Fund") is a series of Conseco Trust;
WHEREAS, the Portfolio and the Fund are each a series of separate
open-end management investment companies and each have the same investment
objectives and substantially the same investment policies;
WHEREAS, AMR serves as the manager of the Portfolio and Adviser and its
affiliates serve as the investment adviser, administrator, sponsor and
distributor of the Fund;
WHEREAS, the Fund desires to invest all of its investable assets in the
Portfolio in exchange for a beneficial interest in the Portfolio (the
"Investment") on the terms and conditions set forth in this Agreement; and
WHEREAS, the Portfolio believes that accepting the Investment is in the
best interests of the Portfolio and that the interests of existing investors in
the Portfolio will not be diluted as a result of its accepting the Investment;
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
herein made and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows.
<PAGE>
ARTICLE I
THE INVESTMENT
1.1 Agreement to Effect the Investment. The Fund agrees to assign,
transfer and deliver all of the Fund's investable assets ("Assets") to the
Portfolio at each Closing (as hereinafter defined). The Portfolio agrees in
exchange therefor to issue to the Fund a beneficial interest ("Interest") in the
Portfolio equal in value to the net value of the Assets of the Fund conveyed to
the Portfolio on that date of Closing, which Interest shall be fully redeemable
in accordance with the Investment Company Act of 1940, as amended ("1940 Act")
and the AMR Trust's registration thereunder.
ARTICLE II
CLOSING AND CLOSING DATE
2.1 Time of Closing. The conveyance of the Assets in exchange for the
Interest, as described in Article I, together with related acts necessary to
consummate such transactions, shall occur initially on the date the Fund
commences an offering of its shares to the public and at each subsequent date as
the Fund desires to make a further Investment in the Portfolio (each, a
"Closing"). All acts occurring at any Closing shall be deemed to occur
simultaneously as of the last daily determination of the Portfolio's net asset
value on the date of Closing.
2.2 Related Closing Matters. On each date of Closing, the Conseco
Trust, on behalf of the Fund, shall authorize the Fund's custodian to deliver
all of the Assets held by such custodian to the Portfolio's custodian. The
Fund's and the Portfolio's custodians shall acknowledge, in a form acceptable to
the other party, their respective delivery and acceptance of the Assets. The
Portfolio shall deliver to the Conseco Trust evidence acceptable to the Conseco
Trust of the Fund's ownership of the Interest. In addition, each party shall
deliver to each other party such bills of sale, checks, assignments, securities
instruments, receipts or other documents as such other party or its counsel may
reasonably request. Each of the representations and warranties set forth in
Article III shall be deemed to have been made anew on each date of Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
<PAGE>
3.1 The Conseco Trust and Adviser. The Conseco Trust and Adviser each
represents and warrants to AMR Trust and AMR that:
(a) Organization. The Conseco Trust is a trust duly organized,
validly existing and in good standing under the laws of Massachusetts, the Fund
is a duly and validly designated series of the Conseco Trust, and the Conseco
Trust and the Fund have the requisite power and authority to own their property
and conduct their business as now being conducted and as proposed to be
conducted pursuant to this Agreement.
(b) Authorization of Agreement. The execution and delivery of
this Agreement by the Conseco Trust and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary action on the
part of the Conseco Trust and the Fund and no other action or proceeding is
necessary for the execution and delivery of this Agreement by the Conseco Trust,
the performance by the Conseco Trust of its obligations hereunder and the
consummation by the Conseco Trust of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Conseco Trust and
constitutes a legal, valid and binding obligation of the Conseco Trust in
respect of the Fund, and is enforceable against them in accordance with its
terms.
(c) Authorization of Investment. The Investment has been duly
authorized by all necessary action on the part of the Board of Trustees of the
Conseco Trust.
(d) No Bankruptcy Proceedings. Neither the Conseco Trust nor
the Fund is under the jurisdiction of a court in a proceeding under Title 11 of
the United States Code (the "Bankruptcy Code") or similar case within the
meaning of Section 368(a)(3)(A) of the Bankruptcy Code.
(e) Fund Assets. The Fund's Assets will, at the initial
Closing, consist solely of cash.
(f) Fiscal Year. The fiscal year end for the Fund is October
31.
(g) Auditors. The Conseco Trust has appointed Coopers &
Lybrand as the Fund's independent public accountants to certify the Fund's
financial statements in accordance with Section 32 of the 1940 Act.
(h) Registration Statements. The Conseco Trust and Adviser (1)
have reviewed the Portfolio's registration statement on Form N-1A, as filed with
the Securities and Exchange Commission ("SEC"), and the Conseco Trust
<PAGE>
understands and agrees to the Portfolio's policies and methods of operation as
described therein, and (2) have provided to AMR Trust and AMR the Trust's most
recent registration statement on Form N-1A, as filed with the SEC, and all
exhibits contained or incorporated therein.
(i) Errors and Omissions Insurance Policy. The Conseco Trust
has in force an errors and omissions liability insurance policy insuring the
Fund against loss up to at least $2,000,000 for negligence or wrongful acts.
(j) SEC Filings. The Conseco Trust has duly filed all forms
and other documents (collectively, "SEC Filings") required to be filed under the
Securities Act of 1933, as amended ("1933 Act"), the Securities Exchange Act of
1934 ("1934 Act") and the 1940 Act (collectively, the "Securities Laws") in
connection with the registration of the Fund shares, any meetings of the Fund
shareholders and its registration as an investment company. The SEC Filings
regarding the Fund were prepared in accordance with the requirements of the
Securities Laws, as applicable, and the rules and regulations of the SEC
thereunder, and do not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(k) 1940 Act Registration. The Conseco Trust is duly
registered as an open-end management investment company under the 1940 Act and
the Fund and its shares are registered or qualified in any states where such
registration or qualification is necessary and such registrations or
qualifications are in full force and effect.
3.2 The Portfolio and AMR. The Portfolio and AMR each represents and
warrants to the Conseco Trust and Adviser that:
(a) Organization. AMR Trust is a trust duly organized, validly
existing and in good standing under the common law of the State of New York, the
Portfolio is a duly and validly designated series of AMR Trust, and AMR Trust
and the Portfolio have the requisite power and authority to own their property
and conduct their business as now being conducted and as proposed to be
conducted pursuant to this Agreement.
(b) Authorization of Agreement. The execution and delivery of
this Agreement by AMR Trust on behalf of the Portfolio and the consummation of
<PAGE>
the transactions contemplated hereby have been duly authorized by all necessary
action on the part of AMR Trust by its Board of Trustees and no other action or
proceeding is necessary for the execution and delivery of this Agreement by AMR
Trust, the performance by AMR Trust of its obligations hereunder and the
consummation by AMR Trust of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by AMR Trust and constitutes a
legal, valid and binding obligation of AMR Trust enforceable against it in
accordance with its terms.
(c) Authorization of Issuance of Interest. The issuance by the
Portfolio of the Interest in exchange for the Investment by the Fund of its
Assets has been duly authorized by all necessary action on the part of the Board
of Trustees of AMR Trust. When issued in accordance with the terms of this
Agreement, the Interest will be validly issued, fully paid and non-assessable by
the Portfolio.
(d) No Bankruptcy Proceedings. Neither AMR Trust nor the
Portfolio is under the jurisdiction of a court in a proceeding under Title 11 of
the Bankruptcy Code or similar case within the meaning of Section 368(a)(3)(A)
of the Bankruptcy Code.
(e) Fiscal Year. The fiscal year end of the Portfolio is
October 31.
(f) Auditors. The Portfolio has appointed Ernst & Young LLP as
the Portfolio's independent public accountants to certify the Portfolio's
financial statements in accordance with Section 32 of the 1940 Act.
(g) Registration Statement. AMR Trust and AMR have reviewed
the Conseco Trust's registration statement on Form N-1A which were provided to
the AMR Trust and AMR pursuant Section 3.1(h) of this Agreement to the extent
that such registration statement and exhibits relate to the Fund.
(h) Errors and Omissions Insurance Policy. AMR Trust and AMR
have in force an errors and omissions liability insurance policy insuring the
Portfolio against loss up to at least $10,000,000 for negligence or wrongful
acts.
(i) SEC Filings. AMR Trust has duly filed all SEC Filings
required to be filed with the SEC pursuant to the 1934 Act and the 1940 Act in
connection with any meetings of its investors and its registration as an
investment company. Beneficial interests in the Portfolio are not required to be
registered under the 1933 Act because such interests are offered solely in
private placement transactions that do not involve any "public offering" within
<PAGE>
the meaning of Section 4(2) of the 1933 Act. The SEC Filings regarding the
Portfolio were prepared in accordance with the requirements of the Securities
Laws, as applicable, and the rules and regulations of the SEC thereunder, and do
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(j) 1940 Act Registration. AMR Trust is duly registered as an
open-end management investment company under the 1940 Act and such registration
is in full force and effect.
(k) Tax Status. The Portfolio is taxable as a partnership
under the Internal Revenue Code of 1986, as amended (the "Code").
3.3 AMR. AMR represents and warrants to the Conseco Trust and Adviser
that:
(a) Organization. AMR is a Delaware corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite power and authority to conduct its business as
now being conducted.
(b) Authorization of Agreement. The execution and delivery of
this Agreement by AMR have been duly authorized by all necessary action on the
part of AMR and no other action or proceeding is necessary for the execution and
delivery of this Agreement by AMR. This Agreement has been duly executed and
delivered by AMR and constitutes a legal, valid and binding obligation of AMR.
(c) Advisers Act. AMR is duly registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act").
3.4 Adviser. Adviser represents and warrants to the AMR Trust and AMR
that:
(a) Organization. Adviser is a corporation validly existing
and in good standing under the laws of Delaware and has the requisite power and
authority to conduct its business as now being conducted.
(b) Authorization of Agreement. The execution and delivery of
this Agreement by Adviser have been duly authorized by all necessary action on
<PAGE>
the part of Adviser and no other action or proceeding is necessary for the
execution and delivery of this Agreement by Adviser. This Agreement has been
duly executed and delivered by Adviser and constitutes a legal, valid and
binding obligation of Adviser.
ARTICLE IV
COVENANTS
4.1 The Conseco Trust and Adviser. The Conseco Trust and Adviser
covenant as follows:
(a) Advance Review of Certain Documents. Either the Conseco
Trust or Adviser will furnish to AMR Trust and AMR, at least five business days
prior to filing or first use, as the case may be, with a draft of any amendment
or supplement to its Form N-1A registration statement to the extent that such
document relates to the Fund. Any proposed advertisement or sales literature
relating to the Fund will be furnished to AMR Trust and AMR by the party
responsible for preparing such materials at least two business days prior to the
filing of such materials with appropriate regulators or first use, whichever is
sooner. The Conseco Trust and Adviser will include in all such materials which
relate to the Fund any disclosures that may be required by law, and will include
in all such materials any material comments reasonably made by AMR or AMR Trust
prior to such filing or first use. However, AMR and AMR Trust will not be liable
for any errors or omissions in such documents, whether or not they make any
objection thereto, except to the extent such errors or omissions result from
information provided by AMR or AMR Trust. The Conseco Trust and Adviser will not
make any other written or oral representation for general publication about the
AMR Trust or AMR without their prior written consent.
(b) Tax Status. The Fund will qualify for treatment as a
regulated investment company under Subchapter M of the Code for all fiscal
periods of the Fund and Portfolio during which this Agreement is in effect,
except to the extent a failure to so qualify may result from any action or
omission of the Portfolio.
(c) Investment Securities. The Fund will own no investment
security other than its Interest in the Portfolio.
(d) Proxy Voting. If requested to vote on matters pertaining
to AMR Trust or the Portfolio, the Fund will (1) call a timely meeting of
shareholders of the Fund for the purpose of seeking instructions from
<PAGE>
shareholders regarding such matters, (2) vote the Fund's Interest proportionally
as instructed by Fund shareholders, and (3) vote the Fund's Interest with
respect to the shares held by Fund shareholders who do not give voting
instructions in the same proportion as the shares of Fund shareholders who do
give voting instructions.
(e) Auditors. As long as the Fund's independent public
accountants differ from those of the Portfolio, the Fund shall be responsible
for any reasonable costs and expenses associated with the need for the
Portfolio's independent public accountants to provide information to the Fund's
independent public accountants.
4.2 Indemnification by Adviser.
---------------------------
(a) Indemnification. Adviser will indemnify and hold harmless
AMR Trust, the Portfolio, AMR and their respective trustees, directors, officers
and employees and each other person who controls AMR Trust, the Portfolio or
AMR, as the case may be, within the meaning of Section 15 of the 1933 Act (each
a "Covered Person" and collectively "Covered Persons"), against any and all
losses, claims, demands, damages, liabilities and expenses (each a "Liability"
and collectively the "Liabilities") (including, unless Adviser elects to assume
the defense pursuant to paragraph (b), the reasonable cost of investigating and
defending against any claims therefor and any counsel fees incurred in
connection therewith), joint or several, which:
(1) arise out of any misstatement of a material fact or an omission of
a material fact provided by Adviser in the Conseco Trust's registration
statement (including amendments and supplements thereto) or in
advertisements or sales literature prepared by Adviser or an affiliate
of Adviser on behalf of the Conseco Trust, other than a misstatement or
omission arising from information provided by AMR Trust, the Portfolio
or AMR;
(2) result from the failure of any representation or warranty made by
Adviser to be accurate when made or the failure of such parties to
perform any covenant contained herein or otherwise to comply with the
terms of this Agreement; or
(3) arise out of any unlawful or negligent act or omission by Adviser
or any director, officer, employee or agent of Adviser;
provided, however, that in no case shall Adviser be liable with respect to any
claim made against any Covered Person unless the Covered Person shall have
<PAGE>
notified Adviser in writing of the nature of the claim within a reasonable time
after the summons, other first legal process or formal or informal initiation of
a regulatory investigation or proceeding shall have been served upon or provided
to a Covered Person, or any federal, state or local tax deficiency has come to
the attention of Adviser, the Portfolio or a Covered Person. Failure to notify
Adviser of such claim shall not relieve it from any liability that it may have
to any Covered Person otherwise than on account of the indemnification contained
in this Section.
(b) Assumption of Defense. Adviser is entitled to participate
at its own expense in the defense or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but, if Adviser elects to assume
the defense, such defense shall be conducted by legal counsel acceptable to the
applicable Covered Persons, which acceptance shall not be unreasonably withheld
or delayed. In the event Adviser elects to assume the defense of any such suit
and retain such counsel, each Covered Person and any other defendant or
defendants may retain additional counsel, but shall bear the fees and expenses
of such counsel unless (1) Adviser shall have specifically authorized the
retaining of such counsel or (2) the parties to such suit include any Covered
Person and Adviser, and any such Covered Person has been advised by counsel that
one or more legal defenses may be available to it that may not be available to
Adviser, in which case Adviser shall not be entitled to assume the defense of
such suit notwithstanding its obligation to bear the fees and expenses of such
counsel. Adviser shall not be liable to indemnify any Covered Person for any
settlement of any claim affected without Adviser' written consent, which consent
shall not be unreasonably withheld or delayed. The indemnities set forth in
paragraph (a) will be in addition to any liability that the Adviser might
otherwise have to a Covered Person.
4.3 AMR and AMR Trust. AMR and AMR Trust, on behalf of the
Portfolio, covenants as follows:
(a) Advance Review of Certain Documents. AMR and AMR Trust
will furnish to the Conseco Trust or Adviser, at least five business days prior
to filing or first use, as the case may be, with a draft of any amendment or
supplement to its Form N-1A registration statement to the extent that such
document relates to any material change concerning the Portfolio. AMR and AMR
Trust will not make any written or oral representation for general publication
about the Conseco Trust, Fund or Adviser without their prior written consent.
<PAGE>
(b) Tax Status. The Portfolio will qualify to be taxed as a
partnership under the Code for all periods during which this Agreement is in
effect, except to the extent that the failure to so qualify results in whole or
in part from any action or omission of the Fund.
(c) Availability of Interests. Conditional upon the Conseco
Trust complying with the terms of this Agreement, the Portfolio shall permit the
Fund to make additional Investments in the Portfolio on each business day on
which shares of the Fund are sold to the public; provided, however, that the
Portfolio may refuse to permit the Fund to make additional Investments in the
Portfolio on any day on which (1) the Portfolio has refused to permit all other
investors in the Portfolio to make additional Investments in the Portfolio or
(2) the Trustees of the Portfolio have reasonably determined that permitting
additional Investments by the Fund in the Portfolio could constitute a breach of
their fiduciary duties to the Portfolio.
4.4 Indemnification by AMR.
-----------------------
(a) Indemnification. AMR will indemnify and hold harmless the
Conseco Trust, the Fund, Adviser, their respective trustees, directors, officers
and employees and each other person who controls the Conseco Trust, the Fund or
Adviser, as the case may be, within the meaning of Section 15 of the 1933 Act
(each a "Covered Person" and collectively, "Covered Persons"), against any and
all losses, claims, demands, damages, liabilities and expenses (each a
"Liability" and collectively the "Liabilities") (including, unless AMR elects to
assume the defense pursuant to paragraph (b), the reasonable costs of
investigating and defending against any claims therefor and any counsel fees
incurred in connection therewith), joint or several, including liabilities
incurred directly by the Conseco Trust, the Fund or Adviser or indirectly by the
Conseco Trust, the Fund or Adviser through the Fund's Investment in the
Portfolio, which
(1) arise out of or are based upon any Securities Laws, any other
statute or common law or are incurred in connection with or as a result
of any formal or informal administrative proceeding or investigation by
a regulatory agency, insofar as such Liabilities arise out of or are
based upon the ground or alleged ground that any direct or indirect
omission or commission by AMR or the Portfolio (either during the
course of its daily activities or in connection with the accuracy of
its representations or its warranties in this Agreement) caused or
<PAGE>
continues to cause the Adviser, the Conseco Trust or the Fund to
violate any federal or state securities laws or regulations or any
other applicable domestic or foreign law or regulations or common law
duties or obligations, but only to the extent that such Liabilities do
not arise out of and are not based upon an omission or commission of
the Conseco Trust, Fund or Adviser;
(2) arise out of the Portfolio or AMR having caused the Conseco Trust
or the Fund to fail to qualify as a regulated investment company under
the Code;
(3) arise out of any misstatement of a material fact or an omission of
a material fact in the AMR Trust's registration statement (including
amendments and supplements thereto) or included at the request of AMR
or the Portfolio in advertising or sales literature used by the Fund,
other than a misstatement of a material fact or an omission arising
from information provided by the Conseco Trust, Fund or Adviser;
(4) result from the failure of any representation or warranty made by
the AMR Trust, the Portfolio or AMR to be accurate when made or the
failure of such parties to perform any covenant contained herein or
otherwise to comply with the terms of this Agreement; or
(5) arise out of any unlawful or negligent act or omission by the
Portfolio, AMR or any director, trustee, officer, employee or agent of
such persons;
provided, however, that in no case shall AMR be liable with respect to any claim
made against any such Covered Person unless such Covered Person shall have
notified AMR in writing of the nature of the claim within a reasonable time
after the summons, other first legal process or formal or informal initiation of
a regulatory investigation or proceeding shall have been served upon or provided
to a Covered Person or any federal, state or local tax deficiency has come to
the attention of the Conseco Trust, Adviser or a Covered Person. Failure to
notify AMR of such claim shall not relieve it from any liability that it may
have to any Covered Person otherwise than on account of the indemnification
contained in this paragraph.
(b) Assumption of Defense. AMR is entitled to participate at
its own expense in the defense or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but, if AMR elects to assume the
defense, such defense shall be conducted by legal counsel acceptable to the
applicable Covered Persons, which consent shall not be unreasonably withheld or
delayed. In the event AMR elects to assume the defense of any such suit and
retain such counsel, each Covered Person and any other defendant or defendants
in the suit may retain additional counsel but shall bear the fees and expenses
of such counsel unless (1) AMR shall have specifically authorized the retaining
<PAGE>
of such counsel or (2) the parties to such suit include any Covered Person and
AMR, and any such Covered Person has been advised by counsel that one or more
legal defenses may be available to it that may not be available to AMR, in which
case AMR shall not be entitled to assume the defense of such suit
notwithstanding the obligation to bear the fees and expenses of such counsel.
AMR shall not be liable to indemnify any Covered Person for any settlement of
any such claim effected without AMR's written consent, which consent shall not
be unreasonably withheld or delayed. The indemnities set forth in paragraph (a)
will be in addition to any liability that the AMR Trust in respect of the
Portfolio might otherwise have to a Covered Person.
4.5 In-Kind Redemption. If the Fund desires to withdraw or redeem all
of its Interests in the Portfolio, the Portfolio can effect such redemption "in
kind" and in such a manner that the securities delivered to the Fund's custodian
for the account of the Fund will mirror, as closely as practicable, the
composition of the Portfolio immediately prior to such redemption. No other
withdrawal or redemption of any Interest in the Portfolio will be satisfied by
means of an "in kind" redemption except in compliance with Rule 18f-1 under the
1940 Act.
4.6 Reasonable Actions. Each party covenants that it will, subject to
the provisions of this Agreement, from time to time, as and when requested by
another party or in its own discretion, as the case may be, execute and deliver
or cause to be executed and delivered all such assignments and other
instruments, take or cause to be taken such actions, and do or cause to be done
all things reasonably necessary, proper or advisable in order to consummate the
transactions contemplated by this Agreement and to carry out its intent and
purpose.
ARTICLE V
CONDITIONS PRECEDENT
5.1 Conditions Precedent. The obligations of each party to consummate
the transactions provided for herein shall be subject to (a) performance by such
other parties of all the obligations to be performed by the other parties
hereunder on or before each Closing, and (b) all representations and warranties
of the other parties contained in this Agreement being true and correct in all
material respects as of the date hereof and, except as they may be affected by
<PAGE>
the transactions contemplated by this Agreement, as of each date of Closing,
with the same force and effect as if made on and as of the time of such Closing.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Notification of Certain Matters. Each party will give prompt notice
to the other parties of (a) the occurrence or non-occurrence of any event the
occurrence or non-occurrence of which would be likely to cause either (1) any
representation or warranty contained in this Agreement to be untrue or
inaccurate, or (2) any condition precedent set forth in Article V hereof to be
unsatisfied in any material respect at the time of any Closing and (b) any
material failure of a party or any trustee, director, officer, employee or agent
thereof to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by such person hereunder; provided, however, that the
delivery of any notice pursuant to this Section 6.1 shall not limit or otherwise
affect the remedies available, hereunder or otherwise, to the party receiving
such notice.
6.2 Access to Information. The Portfolio and the Fund shall afford each
other access at all reasonable times to such party's officers, employees and
agents and to all its relevant books and records and shall furnish each other
party with all relevant financial and other data and information as reasonably
requested; provided, however, that nothing contained herein shall obligate any
party to provide another party with access to their books and records as they
relate to any series of the Conseco Trust or AMR Trust other than the Fund or
the Portfolio respectively, except as may be required to comply with applicable
law or any provision of this Agreement.
6.3 Confidentiality. Each party agrees that it shall hold in strict
confidence all data and information obtained from another party (unless such
information is or becomes readily ascertainable from public or published
information or trade sources) and shall ensure that its officers, employees and
authorized representatives do not disclose such information to others without
the prior written consent of the party from whom it was obtained, except if
disclosure is required by the SEC, any other regulatory body or the Fund's or
Portfolio's respective auditors, or in the opinion of counsel such disclosure is
required by law, and then only with as much prior written notice to the other
party as is practical under the circumstances.
6.4 Public Announcements. No party shall issue any press release or
otherwise make any public statements with respect to the matters covered by this
<PAGE>
Agreement without the prior consent of the other parties hereto, which consent
shall not be unreasonably withheld; provided, however, that consent shall not be
required if, in the opinion of counsel, such disclosure is required by law,
provided further, however, that the party making such disclosure shall provide
the other parties hereto with as much prior written notice of such disclosure as
is practical under the circumstances.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination.
(a) This Agreement may be terminated by the mutual agreement of
all parties.
(b) This Agreement may be terminated at any time by the Conseco Trust
by redeeming all of the Fund's Interests in the Portfolio.
(c) This Agreement may be terminated on not less than 60 days'
prior written notice by AMR or the AMR Trust to the Fund and Adviser.
(d) This Agreement may be terminated immediately at any time upon
written notice to the other parties in the event that formal proceedings are
instituted against another party to this Agreement by the SEC or any other
regulatory body relating to the Fund or the Portfolio, provided that the
terminating party has a reasonable belief that the institution of the proceeding
is not without foundation and will have a material adverse impact on the
terminating party.
(e) The indemnification obligations in Article IV shall survive the
termination of this Agreement.
7.2 Amendment. This Agreement may be amended, modified or supplemented
at any time in such manner as may be mutually agreed upon in writing by the
parties.
7.3 Waiver. At any time prior to any Closing, any party may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions contained herein.
<PAGE>
ARTICLE VIII
DAMAGES
8.1 Damages. The parties agree that, if this Agreement is breached, the
remedy of money damages would not be adequate and agree that injunctive relief
would be the appropriate relief.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications given or made
pursuant hereto shall to in writing and shall be deemed to have been duly given
or made when actually received in person or by fax, or three days after being
sent by certified or registered United States mail, return receipt requested,
postage prepaid, addressed as follows:
If to AMR or AMR Investment Services, Inc.
AMR Trust: 4333 Amon Carter Boulevard, MD-5645
Fort Worth, Texas 76155
Attn.: Barry Y. Greenberg, Esq.
Tel.: (817) 967-3514
Fax: (817) 967-0768
If to the Conseco Trust:
or the Fund
Conseco Services LLC
11825 North Pennsylvania Street
Carmel, Indiana 46032
Attn: William Latimer
Tel: (317) 817-6863
Fax: (317) 817-6161
If to Adviser: Conseco Capital Management
11825 North Pennsylvania Street
Carmel, Indiana 46032
Attn: Greg Hahn
Cc: William Latimer
Tel: (317) 817-6323
Fax: (317) 817-6161
9.2 Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses.
9.3 Headings. The headings and captions contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
<PAGE>
interpretation of this Agreement.
9.4 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
9.5 Entire Agreement. This Agreement and the agreements and other
documents delivered pursuant hereto set forth the entire understanding between
the parties concerning the subject matter of this Agreement and incorporate or
supersede all prior negotiations and understandings. There are no covenants,
promises, agreements, conditions or understandings, either oral or written,
between them relating to the subject matter of this Agreement other than those
set forth herein. No representation or warranty has been made by or on behalf of
any party to this Agreement (or any officer, director, trustee, employee or
agent thereof) to induce any other party to enter into this Agreement or to
abide by or consummate any transactions contemplated by any terms of this
Agreement, except representations and warranties expressly set forth herein.
9.6 Successors and Assignments. Each and all of the provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and, except as otherwise specifically provided in this Agreement, their
respective successors and assigns. Notwithstanding the foregoing, no party shall
make any assignment of this Agreement or any rights or obligations hereunder
without the written consent of all other parties. As used herein, the term
"assignment" shall have the meaning ascribed thereto in the 1940 Act.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without giving effect to the
choice of law or conflicts of law provisions thereof.
9.8 Counterparts. This Agreement may be executed in any number of
counterparts, all of which shall constitute one and the same instrument, and any
<PAGE>
party hereto may execute this Agreement by signing one or more counterparts.
9.9 Third Parties. Nothing herein expressed or implied is intended or
shall be construed to confer upon or give any person, other than the parties
hereto and their successors or assigns, any rights or remedies under or by
reason of this Agreement.
9.10 Interpretation. Any uncertainty or ambiguity existing herein shall
not presumptively be interpreted against any party, but shall be interpreted
according to the application of the rules of interpretation for arm's length
agreements.
9.11 Limitation of Liability. The parties acknowledge that the Conseco
Trust and AMR Trust have entered into this Agreement solely on behalf of the
Fund and Portfolio, respectively, and that no other series of Conseco Trust or
AMR Trust shall have any obligation hereunder with respect to any liabilities
arising hereunder. The parties further acknowledge and agree that the
obligations of the AMR Trust and Conseco Trust under this Agreement are not
personally binding upon any shareholder or trustee of the AMR Trust or Conseco
Trust, but bind only the property of the Portfolio and the Fund, respectively.
The Adviser and the Conseco Trust represent that they have notice of the
provisions of the Declaration of Trust of the AMR Trust disclaiming shareholder
liability for acts or obligations of the AMR Trust. AMR and the AMR Trust
represent that they have notice of the provisions of the Declaration of Trust of
the Conseco Trust disclaiming shareholder liability for acts or obligations of
the Conseco Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers, thereunto duly authorized, as of the date
first written above.
AMR INVESTMENT SERVICES, INC.
By
-----------------------------
Name:
---------------------------
Title:
--------------------------
AMR INVESTMENT SERVICES TRUST,
on behalf of itself and
the International Equity
Portfolio, a series thereof
By
-----------------------------
Name:
---------------------------
Title:
--------------------------
CONSECO FUND GROUP,
on behalf itself and
the International Fund, a
series thereof
By
-----------------------------
Name:
---------------------------
Title:
--------------------------
CONSECO CAPITAL MANAGEMENT, INC.
By
-----------------------------
Name:
---------------------------
Title:
--------------------------
PLAN OF DISTRIBUTION AND SERVICE
PURSUANT TO RULE 12B-1
CONSECO FUND GROUP
DECEMBER 31, 1997
WHEREAS, Conseco Fund Group (the "Trust"), a Massachusetts business trust,
is registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end management investment company;
WHEREAS, the Trust has established several separate series of shares, each
of which represents a separate portfolio of investments, and may establish
additional series of shares (each series of the Trust shall be referred to
herein as a "Fund"); and
WHEREAS, the Trust is authorized to issue shares of each Fund in one or
more classes (each a "Class").
WHEREAS, the Trust has engaged Conseco Equity Sales, Inc. (the
"Distributor") as distributor of the shares of the Funds pursuant to an Amended
and Restated Principal Underwriting Agreement dated as of January 2, 1997, as
amended December 23, 1997; and
WHEREAS, the Trust desires to adopt a Plan of Distribution and Service
(the "Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to those
Classes of the Funds listed on Schedule A hereto, as such schedule may be
amended from time to time, (each a "Designated Class" and collectively the
"Designated Classes") and the Board of Trustees of the Trust (the "Trustees")
has determined that there is a reasonable likelihood that adoption of this Plan
will benefit the Trust, each Fund and the shareholders of each Designated Class
thereof.
NOW, THEREFORE, the Trust, with respect to each Designated Class, hereby
adopts this Plan in accordance with Rule 12b-1, on the following terms and
conditions:
1. Each Fund shall pay to the Distributor, as compensation for
distributing each Designated Class's shares and for servicing
shareholder accounts, a fee for each Designated Class computed at the
annual rate set forth on Schedule A hereto, as such schedule may be
amended from time to time. The fees shall be payable regardless of
whether those fees exceed or are less than the actual expenses incurred
by the Distributor with respect to that Designated Class in a
particular year. Such compensation shall be calculated and accrued
daily and paid monthly or at such other intervals as the Trustees may
determine.
<PAGE>
2. (a) As principal underwriter of each Designated Class's shares, the
Distributor may spend such amounts as it deems appropriate on any
activities or expenses primarily intended to result in the sale
of such shares, including, but not limited to, compensation to
employees of the Distributor; compensation to the Distributor and
to brokers, dealers or other financial intermediaries that have a
Selling Group Agreement in effect with the Distributor
("Authorized Dealers"); expenses of the Distributor and
Authorized Dealers, including overhead, salaries, and telephone
and other communication expenses; the printing of prospectuses,
statements of additional information, and reports for other than
existing shareholders; and the preparation, printing, and
distribution of sales literature and advertising materials.
(b) The Distributor may spend such amounts as it deems appropriate on
the servicing of shareholder accounts, including, but not limited
to, maintaining account records for shareholders; answering
inquiries relating to shareholders' accounts, the policies of the
Funds and the performance of their investments; providing
assistance and handling transmission of funds in connection with
purchase, redemption and exchange orders for shares; providing
assistance in connection with changing account setups and
enrolling in various optional services; and producing and
disseminating shareholder communications or servicing materials;
and may pay compensation and expenses, including overhead,
salaries, and telephone and other communications expenses, to
Authorized Dealers and employees who provide such services.
3. This Plan shall not take effect with respect to any Class of a Fund
until the Plan, together with any related agreement(s), has been
approved for that Class of the Fund by votes of a majority of both (a)
the Trustees and (b) those Trustees who are not "interested persons" of
the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or any
agreements related to the Plan (the "Rule 12b-1 Trustees") cast in
person at a meeting called for the purpose of voting on the Plan and
such related agreement(s); and only if the Trustees who approve the
Plan have reached the conclusion required by Rule 12b-1(e) with respect
to that Class's shares.
4. This Plan shall remain in effect for one year from the date above written
and shall continue in effect with respect to each Designated Class
thereafter so long as such continuance is specifically approved at least
annually in the manner provided for approval of this Plan in paragraph 3.
5. The Distributor shall provide to the Trustees and the Trustees shall
review, at least quarterly, a written report of the amounts expended by
the Distributor under the Plan and the purposes for which such
expenditures were made.
6. This Plan may be terminated with respect to any Designated Class at any
time by vote of a majority of the Rule 12b-1 Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act)
of that Designated Class, voting separately from any other Class.
2
<PAGE>
7. This Plan may not be amended to increase materially the amount of
compensation payable by any Designated Class under paragraph 1 hereof
unless such amendment is approved by a vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of that
Designated Class, voting separately from any other Class. No material
amendment to the Plan shall be made unless approved in the manner provided
in paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of Trustees who
are not "interested persons" of the Trust (as defined in the 1940 Act)
shall be committed to the discretion of the Trustees who are themselves
not such interested persons.
9. The Trust shall preserve copies of this Plan and any related agreements
and all reports made pursuant to paragraph 5 hereof, for a period of not
less than six years from the date of the Plan, any such agreement, or any
such report, as the case may be, the first two years in an easily
accessible place.
IN WITNESS WHEREOF, the Trust has executed this Plan as of the day and
year first above written.
CONSECO FUND GROUP
By:
-----------------------------
Gregory J. Hahn
Vice President
3
<PAGE>
SCHEDULE A
SERIES ANNUAL FEE
------ ----------
Conseco 20 Fund
Class A 0.50%
Class B 1.00%
Class C 1.00%
Class S 0.25%
Conseco High Yield Fund
Class A 0.50%
Class B 1.00%
Class C 1.00%
Class S 0.25%
Conseco International Fund
Class A 0.50%
Class B 1.00%
Class C 1.00%
Class S 0.25%
Conseco Equity Fund
Class B 1.00%
Class C 1.00%
Class S 0.25%
Conseco Asset Allocation Fund
Class B 1.00%
Class C 1.00%
Class S 0.25%
Conseco Fixed Income
Class B 1.00%
Class C 1.00%
Class S 0.25%
4
