CONSECO FUND GROUP
CONSECO CONVERTIBLE SECURITIES FUND
CLASS A, B AND C SHARES
ADMINISTRATIVE OFFICE: 11815 N. PENNSYLVANIA STREET, CARMEL, INDIANA 46032
800-825-1530
The Conseco Convertible Securities Fund ("Fund") is a 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 high total return through a combination of current
income and capital appreciation by investing primarily in securities that can be
converted into common stock. The Fund may invest a significant amount of its
assets 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.
Conseco Capital Management, Inc. ("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 800-986-3384.
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 October 1, 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
<PAGE>
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
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.
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 October 1, 1998.
TABLE OF CONTENTS
FEE TABLE.............................................................2
INVESTMENT OBJECTIVE AND POLICIES.....................................4
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES...................6
MANAGEMENT...........................................................15
PURCHASE OF SHARES...................................................16
ALTERNATIVE PRICING ARRANGEMENTS.....................................19
REDEMPTION OF SHARES.................................................24
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES.............................27
OTHER INFORMATION....................................................30
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>
SHAREHOLDER TRANSACTION EXPENSES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases 5.75% None None
(as a percentage of offering price)
- -------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of None None None
offering price)
- -------------------------------------------------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------------------------------------------------
Redemption Fees None None None
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*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.
2
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
<TABLE>
<CAPTION>
CLASS A SHARES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FUND MANAGEMENT FEES ADMINISTRATIVE 12B-1 FEES(2) OTHER TOTAL
AFTER FEE RATE FEES EXPENSES(3) OPERATING
REDUCTION(1) EXPENSES(4)
AFTER FEE WAIVERS AND EXPENSE
REIMBURSEMENTS
- --------------------------------------------------------------------------------------------------------------------------
Conseco Convertible 0.75% 0.20% 0.50% 0.10% 1.55%
Securities Fund
- --------------------------------------------------------------------------------------------------------------------------
CLASS B AND CLASS C SHARES
- --------------------------------------------------------------------------------------------------------------------------
FUND MANAGEMENT FEES ADMINISTRATIVE 12B-1 OTHER TOTAL
AFTER FEE RATE FEES FEE(2) EXPENSES(3) OPERATING
REDUCTION(1) EXPENSES(4)
AFTER FEE WAIVERS AND EXPENSE
REIMBURSEMENTS
- --------------------------------------------------------------------------------------------------------------------------
Conseco Convertible 0.75% 0.20% 1.00% 0.10% 2.05%
Securities Fund
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 The Adviser has voluntarily undertaken to reduce its advisory fee with respect
to the Fund to 0.75% of the Fund's average daily net assets until April 30,
1999. Absent such undertaking the advisory fee would be 0.85% 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 ("Administrator") and Conseco Equity Sales, Inc.
("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 be as follows:
- ----------------------------------------------------------------
ESTIMATED ESTIMATED
OTHER EXPENSES TOTAL OPERATING EXPENSES
- ----------------------------------------------------------------
CLASS A CLASS B CLASS A CLASS B
CLASS C CLASS C
- ----------------------------------------------------------------
.25% .25% 1.80% 2.30%
- ----------------------------------------------------------------
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:
- ---------------------------------------------------------------------
CLASS A SHARES 1 YEAR 3 YEARS
- ---------------------------------------------------------------------
$72 $103
- ---------------------------------------------------------------------
CLASS B SHARES
- ---------------------------------------------------------------------
Assuming redemption at end of period $71 $93
Assuming no redemption $21 $63
- --------------------------------------------------------------------
CLASS C SHARES
- --------------------------------------------------------------------
Assuming redemption at end of period $31 $63
Assuming no redemption $21 $63
- --------------------------------------------------------------------
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 OBJECTIVE AND POLICIES
The Fund seeks high total return through a combination of current
income and capital appreciation by investing primarily in convertible
securities. 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 objective of the Fund is 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 equity
securities, there can be no assurance of capital appreciation and there is a
substantial risk of decline. With respect to debt securities, there can be no
assurance that the issuer of such securities will be able to meet its
obligations on interest or 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.
The Fund is subject to investment restrictions that are described under
"Investment Restrictions" 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.
4
<PAGE>
CONSECO CONVERTIBLE SECURITIES FUND
Under normal circumstances, the Fund will invest at least 65% of its
total assets in convertible securities. Convertible securities are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the option of converting the security into common stock. The Fund may
invest in other securities, including common stock and securities that are
convertible other than at the option of the holder.
Convertible securities generally have less potential for gain or loss
than common stocks. In general, a convertible security performs more like a
stock when the underlying stock's price is high (because it is assumed it will
be converted into the stock) and more like a bond when the underlying stock's
price is low (because it is assumed that it will mature without being
converted). Each convertible security offers a different combination of upside
potential and downside risk. Securities that are convertible other than at the
option of the holder generally do not limit the potential for loss to the same
extent as securities convertible at the option of the holder.
Because convertible securities have both an equity and a fixed-income
component, the value of the Fund's investments varies in response to many
factors. The equity component makes the value of convertible securities subject
to the activities of individual companies, and general market and economic
conditions. The fixed-income component causes fluctuations based on changes in
interest rates and in the credit quality of the issuer. In addition, convertible
securities are often lower-rated securities.
The Fund may invest over 50% of its assets in lower-rated fixed-income
securities, commonly known as "junk bonds" or "high yield debt 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. 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 for investment grade debt securities. A debt security will be considered
"investment grade" if it is rated in one of the four highest rating categories
by at least one NRSRO or, if unrated, is determined by the Adviser to be of
comparable quality. The lowest rating categories in which the Fund will invest
are CCC/Caa. 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 zero coupon securities and payment-in-kind
securities. A zero coupon security pays no interest to its holders prior to
maturity, and a payment-in-kind security pays interest in the form of additional
securities. These securities will be subject to greater fluctuation in market
value in response to changing interest rates than securities of comparable
maturities that make periodic cash distributions of interest.
The Fund also may 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.
Investments in foreign securities may involve risks in addition to those of U.S.
investments. See "Foreign Securities" below for further information.
5
<PAGE>
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. As a matter of fundamental policy, with respect to 75% of
its total assets, the Fund will not (1) invest more than 5% of its total assets
in any one issuer, except for U.S. Government securities; or (2) invest more
than 25% of its total assets in securities of issuers having their principal
business activities in the same industry.
The Adviser does not rely solely on the ratings of rated securities in
making investment decisions; rather it 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 objective. Such strategies and techniques include, but are not
limited to, writing call and put options and purchasing options; purchasing and
selling, for hedging purposes, interest rate and other futures contracts, and
purchasing and writing 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. The Fund reserves the right to invest without limitation in
preferred stocks and investment-grade debt instruments for temporary, defensive
purposes. See "Description of Securities and Investment Techniques" in the SAI
for further information.
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES
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
6
<PAGE>
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.
EQUITY SECURITIES
The Fund may invest in equity securities, which may include common
stocks, preferred stocks, convertible securities and warrants. Common stocks,
the most familiar type, represent an equity interest in a corporation. The value
of equity securities fluctuates based on changes in a company's financial
condition and overall economic and market conditions. The Fund invests in
larger, more established companies as well as companies with small and medium
capitalizations ("small- and mid-cap companies").
While small- and mid-cap companies generally have potential for rapid
growth, investments in such companies often involve greater risks than
investments in larger, more established companies because small- and mid-cap
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of companies with larger market
capitalizations. In addition, in many instances the securities of small- and
mid-cap companies are traded only over-the-counter or on a regional securities
exchange, and the frequency and volume of their trading is substantially less
than is typical of larger companies. Therefore, these securities may be subject
to greater and more abrupt price fluctuations. When making large sales, the Fund
may have to sell portfolio holdings at discounts from quoted prices or may have
to make a series of small sales over an extended period of time due to the
trading volume of small- and mid-cap company securities. The Adviser's research
efforts may also play a greater role in selecting small- and mid-cap company
securities for the Fund than securities of larger, more established companies.
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, generally have some
speculative characteristics. A debt security will be placed in this rating
7
<PAGE>
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" above), 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 may invest
significantly 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 lower-rated 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.
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
8
<PAGE>
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 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
also may 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
9
<PAGE>
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 pools 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
10
<PAGE>
(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. Stripped mortgage-backed
securities 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 Fund may also invest in trust originated preferred securities, a
relatively new type of security generally issued by financial institutions such
as banks and insurance companies and other issuers. Trust originated preferred
securities represent interests in a trust formed by the issuer. The trust sells
preferred shares and invests the proceeds in notes issued by the same entity.
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.
11
<PAGE>
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may 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 lower-rated fixed income securities. The pool of lower-rated
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
12
<PAGE>
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 longer 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.
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.
13
<PAGE>
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 Fund may pledge assets in connection
with permitted borrowings. The Fund may borrow an amount up to 33-1/3% of its
assets.
PORTFOLIO TURNOVER
The Fund does not have a predetermined rate of portfolio turnover since
such turnover will be incidental to transactions taken with a view to achieving
its objective. It is anticipated that the annual turnover rate of the Fund
normally will not exceed 325%. Turnover rates in excess of 100% generally result
in higher transaction costs and a possible increase in realized short-term
capital gains or losses. See "Dividends, Other Distributions and Taxes."
14
<PAGE>
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, manages and serves as sub-adviser to
other registered investment companies, and manages 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 also manages foundations, endowments,
public and corporate pension plans, and private client accounts. As of December
31, 1997, the Adviser managed in excess of $32 billion in assets.
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
.85% of the average daily net asset value of the Fund. The Adviser has
voluntarily undertaken to reduce its advisory fee with respect to the Fund until
April 30, 1999. See "Fee Table" for more information. 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 1.55% with respect to Class A and 2.05%
with respect to Class B and Class C. This voluntary limit may be discontinued at
any time after April 30, 1999.
Andrew S. Chow, CFA, FLMI, Vice President, is the investment
professional primarily responsible for the management of the Fund. Mr. Chow is
responsible for trading mortgage-backed securities (MBS), exchange and
over-the-counter derivatives and convertible bonds. He also holds fixed income
portfolio management responsibilities. Prior to joining the Adviser, Mr. Chow
was Manager of Quantitative Analysis at Washington Square Capital, where he was
responsible for MBS, non-dollar bonds and derivatives. Prior to working at
Washington Square, Mr. Chow traded futures on the floor of the Minneapolis Grain
Exchange. Mr. Chow is a Chartered Financial Analyst and a Fellow of the Life
Management Institute.
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.
15
<PAGE>
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 Fund of .20% per annum of the Fund's
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 pursuant to an agreement with the
Administrator.
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 a completed account application
and a check payable to the Fund to the Conseco Fund Group, P.O. Box 8017,
Boston, Massachusetts 02266-8017. 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.
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.
16
<PAGE>
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.
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.
17
<PAGE>
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
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.
18
<PAGE>
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:
SALES CHARGE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ON PURCHASES OF: AS % OF PUBLIC AS % OF NET DEALER REALLOWANCE
OFFERING PRICE AMOUNT INVESTED AS % OF OFFERING PRICE
- --------------------------------------------------------------------------------------------------
Less than $50,000 5.75% 6.10% 5.00%
- --------------------------------------------------------------------------------------------------
$50,000 to $99,999 4.50% 4.71% 3.75%
- --------------------------------------------------------------------------------------------------
$100,000 to $249,999 3.50% 3.63% 2.75%
- --------------------------------------------------------------------------------------------------
$250,000 to $499,999 2.50% 2.56% 2.00%
- --------------------------------------------------------------------------------------------------
$500,000 and over 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
19
<PAGE>
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
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, spouse, 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,
<PAGE>
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;
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.
21-
<PAGE>
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 purchase of Class B shares may not exceed $500,000;
however, purchases of Class A shares exceeding $500,000 are eligible for a sales
waiver (see "Purchase of Class A Shares" above). 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%
- --------------------------------------------------------------------------------
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
22
<PAGE>
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 gain
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
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
employees ("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;
23
<PAGE>
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.
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
24
<PAGE>
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.
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
25
<PAGE>
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.
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
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 180 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 180 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.
26
<PAGE>
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 of
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 Fund's
liabilities) by the number of shares of that class outstanding.
Securities held by the Fund will be valued as follows: Securities that
are traded on stock exchanges or the Nasdaq Stock Market 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. 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. 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, net investment income of the Fund
consists of all dividends and interest it receives, 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), net short-term capital gains, and net realized gains from foreign
currency transactions 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:
27
<PAGE>
REINVEST ALL DISTRIBUTIONS. You can elect to reinvest all dividends and
other 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 other
distributions by check or sent to your bank account.
REINVEST OTHER 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 other 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, net short-term capital gains and net gains from certain
foreign currency transactions) and net capital gain and will not be subject to
federal income tax on those amounts. To qualify for treatment as a RIC the Fund
must, among other things, satisfy certain source of income and diversification
requirements described in the SAI.
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. 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), in which event 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 from the Fund.
Dividends and other distributions declared by the Fund in October,
November, or December, but received by you in January, generally are taxable to
28
<PAGE>
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 will designate 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. Special rules apply when you dispose of Class A shares of the Fund
through a redemption or exchange within 90 after your purchase thereof and
subsequently reacquire Class A shares of the 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. In addition, 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.
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.
29
<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
30
<PAGE>
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.
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) 986-3384 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 Bank and Trust Company, 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 ACCOUNTANT
Coopers & Lybrand L.L.P., 2900 One American Square, Box 82002,
Indianapolis, Indiana 46282-0002, serves as the Trust's independent accountant.
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.
31
<PAGE>
If you would like a free copy of the Statement of Additional Information for
this Prospectus, please complete this form, detach, and mail to:
Conseco Fund Group
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.
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.
A-1
<PAGE>
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>
CONSECO FUND GROUP
CONSECO CONVERTIBLE SECURITIES FUND
CLASS Y SHARES
ADMINISTRATIVE OFFICE: 11815 N. PENNSYLVANIA STREET, CARMEL, INDIANA 46032
800-825-1530
The Conseco Convertible Securities Fund ("Fund") is a 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 October 1, 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 high total return through a combination of current
income and capital appreciation by investing primarily in securities that can be
converted into common stock. The Fund may invest a significant amount of its
assets 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.
Conseco Capital Management, Inc. ("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 through
separate prospectuses. Those prospectuses are available upon request by calling
800-986-3384.
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 October 1, 1998, containing additional
information about the Trust and the Fund, has been filed with the SEC and is
<PAGE>
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
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.
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 October 1, 1998.
TABLE OF CONTENTS
FEE TABLE.................................................................2
INVESTMENT OBJECTIVE AND POLICIES.........................................3
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES.......................6
MANAGEMENT...............................................................14
PURCHASE AND REDEMPTION OF SHARES........................................16
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES.................................20
OTHER INFORMATION........................................................22
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 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>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
FUND MANAGEMENT ADMINISTRATIVE 12B-1 OTHER TOTAL
FEES FEES FEES EXPENSES(2) OPERATING
AFTER FEE EXPENSES(3)
RATE
REDUCTION(1) AFTER FEE WAIVERS AND
EXPENSE REIMBURSEMENTS
- -------------------------------------------------------------------------------------------------------------------------
Conseco Convertible 0.75% 0.20% None 0.10% 1.05%
Securities Fund
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 The Adviser has voluntarily undertaken to reduce its advisory fee with respect
to the Fund to 0.75% of the Fund's average daily net assets until April 30,
1999. Absent such undertaking, the advisory fee would be 0.85% 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 ("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 amount
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 1.30% 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 Convertible Securities Fund $11 $33
-------------------------------------------------------------
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 OBJECTIVE AND POLICIES
The Fund seeks high total return through a combination of current
income and capital appreciation by investing primarily in convertible
securities. 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 objective of the Fund is 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 equity
securities, there can be no assurance of capital appreciation and there is a
substantial risk of decline. With respect to debt securities, there can be no
assurance that the issuer of such securities will be able to meet its
obligations on interest or 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.
The Fund is subject to investment restrictions that are described under
"Investment Restrictions" 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 CONVERTIBLE SECURITIES FUND
Under normal circumstances, the Fund will invest at least 65% of its
total assets in convertible securities. Convertible securities are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the option of converting the security into common stock. The Fund may
invest in other securities, including common stock and securities that are
convertible other than at the option of the holder.
Convertible securities generally have less potential for gain or loss
than common stocks. In general, a convertible security performs more like a
stock when the underlying stock's price is high (because it is assumed it will
be converted into the stock) and more like a bond when the underlying stock's
price is low (because it is assumed that it will mature without being
converted). Each convertible security offers a different combination of upside
potential and downside risk. Securities that are convertible other than at the
option of the holder generally do not limit the potential for loss to the same
extent as securities convertible at the option of the holder.
Because convertible securities have both an equity and a fixed-income
component, the value of the Fund's investments varies in response to many
factors. The equity component makes the value of convertible securities subject
to the activities of individual companies, and general market and economic
conditions. The fixed-income component causes fluctuations based on changes in
interest rates and in the credit quality of the issuer. In addition, convertible
securities are often lower-rated securities.
The Fund may invest over 50% of its assets in lower-rated fixed-income
securities, commonly known as "junk bonds" or "high yield debt 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. 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 for investment grade debt securities. A debt security will be considered
"investment grade" if it is rated in one of the four highest rating categories
by at least one NRSRO or, if unrated, is determined by the Adviser to be of
4
<PAGE>
comparable quality. The lowest rating categories in which the Fund will invest
are CCC/Caa. 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 zero coupon securities and payment-in-kind
securities. A zero coupon security pays no interest to its holders prior to
maturity, and a payment-in-kind security pays interest in the form of additional
securities. These securities will be subject to greater fluctuation in market
value in response to changing interest rates than securities of comparable
maturities that make periodic cash distributions of interest.
The Fund also may 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.
Investments in foreign securities may involve risks in addition to those of U.S.
investments. 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. As a matter of fundamental policy, with respect to 75% of
its total assets, the Fund will not (1) invest more than 5% of its total assets
in any one issuer, except for U.S. Government securities; or (2) invest more
than 25% of its total assets in securities of issuers having their principal
business activities in the same industry.
The Adviser does not rely solely on the ratings of rated securities in
making investment decisions; rather it 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 objective. Such strategies and techniques include, but are not
limited to, writing call and put options and purchasing options; purchasing and
selling, for hedging purposes, interest rate and other futures contracts, and
purchasing and writing 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. The Fund reserves the right to invest without limitation in
preferred stocks and investment-grade debt instruments for temporary, defensive
purposes. See "Description of Securities and Investment Techniques" in the SAI
for further information.
5
<PAGE>
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES
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.
EQUITY SECURITIES
The Fund may invest in equity securities, which may include common
stocks, preferred stocks, convertible securities and warrants. Common stocks,
the most familiar type, represent an equity interest in a corporation. The value
of equity securities fluctuates based on changes in a company's financial
condition and overall economic and market conditions. The Fund invests in
larger, more established companies as well as companies with small and medium
capitalizations ("small- and mid-cap companies").
While small- and mid-cap companies generally have potential for rapid
growth, investments in such companies often involve greater risks than
investments in larger, more established companies because small- and mid-cap
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of companies with larger market
capitalizations. In addition, in many instances the securities of small- and
mid-cap companies are traded only over-the-counter or on a regional securities
exchange, and the frequency and volume of their trading is substantially less
than is typical of larger companies. Therefore, these securities may be subject
to greater and more abrupt price fluctuations. When making large sales, the Fund
may have to sell portfolio holdings at discounts from quoted prices or may have
to make a series of small sales over an extended period of time due to the
trading volume of small- and mid-cap company securities. The Adviser's research
efforts may also play a greater role in selecting small- and mid-cap company
securities for the Fund than securities of larger, more established companies.
6
<PAGE>
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, 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" above), 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 may invest
significantly 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
7
<PAGE>
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 lower-rated 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.
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 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.
8
<PAGE>
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
also may 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.
9
<PAGE>
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. FNMA, a federally chartered
and privately owned corporation, issues pass-through securities representing
interests in pools 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. Stripped mortgage-backed
securities 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
10
<PAGE>
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 Fund may also invest in trust originated preferred securities, a
relatively new type of security generally issued by financial institutions such
as banks and insurance companies and other issuers. Trust originated preferred
securities represent interests in a trust formed by the issuer. The trust sells
preferred shares and invests the proceeds in notes issued by the same entity.
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 Fund may 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
11
<PAGE>
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 lower-rated fixed income securities. The pool of lower-rated
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
12
<PAGE>
may involve longer 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.
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
13
<PAGE>
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 Fund may pledge assets in connection
with permitted borrowings. The Fund may borrow an amount up to 33-1/3% of its
assets.
PORTFOLIO TURNOVER
The Fund does not have a predetermined rate of portfolio turnover since
such turnover will be incidental to transactions taken with a view to achieving
its objective. It is anticipated that the annual turnover rate of the Fund
normally will not exceed 325%. Turnover rates in excess of 100% generally result
in higher transaction costs and a possible increase in realized short-term
capital gains or losses. See "Dividends, Other Distributions and Taxes."
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
14
<PAGE>
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, manages and serves as sub-adviser to
other registered investment companies, and manages 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 also manages foundations, endowments,
public and corporate pension plans, and private client accounts. As of December
31, 1997, the Adviser managed in excess of $32 billion worth of assets.
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
.85% of the average daily net asset value of the Fund. The Adviser has
voluntarily undertaken to reduce its advisory fee with respect to the Fund until
April 30, 1999. See "Fee Table" for more information. 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 1.05%. This voluntary limit may be
discontinued at any time after April 30, 1999.
Andrew S. Chow, CFA, FLMI, Vice President, is the investment
professional primarily responsible for the management of the Fund. Mr. Chow is
responsible for trading mortgage-backed securities (MBS), exchange and
over-the-counter derivatives and convertible bonds. He also holds fixed income
portfolio management responsibilities. Prior to joining the Adviser, Mr. Chow
was Manager of Quantitative Analysis at Washington Square Capital, where he was
responsible for MBS, non-dollar bonds and derivatives. Prior to working at
Washington Square, Mr. Chow traded futures on the floor of the Minneapolis Grain
Exchange. Mr. Chow is a Chartered Financial Analyst and a Fellow of the Life
Management Institute.
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 Fund of .20% per annum of the Fund's
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 pursuant to an agreement with the
Administrator.
15
<PAGE>
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 a completed account application and a check
payable to the Fund to the Conseco Fund Group, P.O. Box 8017, Boston,
Massachusetts 02266-8017. 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
16
<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.
17
<PAGE>
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).
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.
18
<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.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined for each class of shares of 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 Fund's liabilities) by
the number of shares of that class outstanding.
Securities held by the Fund will be valued as follows: Securities that
are traded on stock exchanges or the Nasdaq Stock Market 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. 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. Debt securities with
maturities of sixty (60) days or less are valued at amortized cost.
19
<PAGE>
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, 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), net short-term capital gains, and net realized gains from foreign
currency transactions 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
other 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 other distributions
by check or sent to your bank account.
REINVEST OTHER 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 other 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, net short-term capital gains and net gains from certain
foreign currency transactions) and net capital gain and will not be subject to
federal income tax on those amounts. To qualify for treatment as a RIC the Fund
must, among other things, satisfy certain source of income and diversification
requirements described in the SAI.
The Fund intends to distribute all its investment company taxable
income and net capital gain so as to avoid federal income and excise taxes.
20
<PAGE>
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. 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), in which event 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 from the Fund.
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 will designate 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. In addition, 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.
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.
21
<PAGE>
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.
22
<PAGE>
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) 986-3384 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 Bank and Trust Company, 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 ACCOUNTANTS
Coopers & Lybrand L.L.P., 2900 One American Square, Box 82002,
Indianapolis, Indiana 46282-0002, serves as the Trust's independent accountant.
LEGAL COUNSEL
Certain legal matters for the Fund are passed upon by Kirkpatrick &
Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington, D.C. 20036.
23
<PAGE>
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.
24
<PAGE>
If you would like a free copy of the Statement of Additional Information for
this Prospectus, please complete this form, detach, and mail to:
Conseco Fund Group
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)
25
<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>
STATEMENT OF ADDITIONAL INFORMATION
CONSECO FUND GROUP
CONSECO CONVERTIBLE SECURITIES FUND
CLASS A, B AND C SHARES
OCTOBER 1, 1998
This Statement of Additional Information ("SAI") is not a prospectus. It
contains additional information about the Conseco Fund Group (the "Trust") and
its series the Conseco Convertible Securities Fund ("Fund"). It should be read
in conjunction with the Fund's Class A, B, and C prospectus (the "Prospectus"),
dated October 1, 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........................4
INVESTMENT PERFORMANCE....................................................18
SECURITIES TRANSACTIONS...................................................20
MANAGEMENT................................................................22
FUND EXPENSES.............................................................26
DISTRIBUTION ARRANGEMENTS.................................................26
PURCHASE AND REDEMPTION OF SHARES.........................................27
GENERAL...................................................................29
TAXES.....................................................................31
OTHER INFORMATION.........................................................35
<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 of 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. A change in policy affecting only the
Fund (and not another series of the Trust) may be effected with the approval of
the holders of a majority of the outstanding shares of the Fund. 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 the 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;
2
<PAGE>
4. With respect to 75% of the Fund's total assets, purchase the securities
of any issuer if (a) more than 5% of the Fund's total assets would be
invested in the securities of that issuer or (b) the Fund would own
more than 10% of the outstanding voting securities of that issuer; this
restriction does not apply to U.S. Government securities (as defined in
the Prospectus);
5. 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 business activities in the same industry; this restriction
does not apply to U.S. Government securities (as defined in the
Prospectus);
6. 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;
7. 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
8. Issue any senior security except as permitted under the 1940 Act.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions are designated as non-fundamental with respect to the
Fund and may be changed by the 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
3
<PAGE>
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.
U.S. GOVERNMENT SECURITIES AND SECURITIES OF INTERNATIONAL ORGANIZATIONS
U.S. Government securities are issued or guaranteed by the U.S. Government or
its agencies, authorities or instrumentalities.
Securities issued by international organizations, such as Inter-American
Development Bank, the Asian-American Development Bank and the International Bank
for Reconstruction and Development (the "World Bank"), are not U.S. Government
securities. These international organizations, while not U.S. Government
agencies or instrumentalities, have the ability to borrow from member 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. Lower-rated fixed income securities (also referred to as
"high yield 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. Lower-rated
4
<PAGE>
fixed income securities 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
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 the 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, the 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 the 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
5
<PAGE>
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.
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
the 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 the
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
6
<PAGE>
rate securities provide for automatic adjustment of the interest rate whenever
some specified interest rate index changes. The interest rate on variable or
floating rate securities is ordinarily determined by reference to, or is a
percentage of, a bank's prime rate, the 90-day U.S. Treasury bill rate, the rate
of return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on seven days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year.
BANKING 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
7
<PAGE>
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.
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.
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.
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
8
<PAGE>
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 it
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
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.
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 the Fund 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.
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
9
<PAGE>
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 assets 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
at least the third highest rating category (A/A) of at least one NRSRO at the
time of entering into the 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.
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, it realizes a loss.
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.
10
<PAGE>
Such a purchase would enable the Fund to earn the income on a short-term
security while at the same time minimizing the effect of all or part of an
increase in the market price of the long-term debt security which the Fund
intends to purchase in the future. A rise in the price of the long-term debt
security prior to its purchase either would be offset by an increase in the
value of the futures contract purchased by the Fund or avoided by taking
delivery of the debt securities under the futures contract.
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.
STOCK INDEX FUTURES CONTRACTS. A stock index (for example, the Standard
& Poor's 500 Composite Stock Price Index or the New York Stock Exchange
Composite Index) assigns relative values to the common stocks included in the
index and fluctuates with changes in the market values of such stocks. A stock
index futures contract is a bilateral agreement to accept or make payment,
depending on whether a contract is purchased or sold, of an amount of cash equal
to a specified dollar amount multiplied by the difference between the stock
index value at the close of the last trading day of the contract and the price
at which the futures contract was originally purchased or sold.
To the extent that changes in the value of the Fund correspond to changes in a
given stock index, the sale of futures contracts on that index ("short hedge")
would substantially reduce the risk to the Fund of a market decline and, by so
doing, provide an alternative to a liquidation of securities positions, which
may be difficult to accomplish in a rapid and orderly fashion. Stock index
futures contracts might also be sold:
1. When a sale of Fund securities at that time would appear to be
disadvantageous in the long-term because such liquidation would:
a. Forego possible appreciation,
b. Create a situation in which the securities would be difficult to
repurchase, or
c. Create substantial brokerage commissions;
2. When a liquidation of part of the investment portfolio has commenced or
is contemplated, but there is, in the Adviser's determination, a
substantial risk of a major price decline before liquidation can be
completed; or
3. To close out stock index futures purchase transactions.
11
<PAGE>
Where the Adviser anticipates a significant market or market sector advance, the
purchase of a stock index futures contract ("long hedge") affords a hedge
against the possibility of not participating in such advance at a time when the
Fund is not fully invested. Such purchases would serve as a temporary substitute
for the purchase of individual stocks, which may then be purchased in an orderly
fashion. As purchases of stock are made, an amount of index futures contracts
which is comparable to the amount of stock purchased would be terminated by
offsetting closing sales transactions. Stock index futures might also be
purchased:
1. If the Fund is attempting to purchase equity positions in issues which
it may have or is having difficulty purchasing at prices considered by
the Adviser to be fair value based upon the price of the stock at the
time it qualified for inclusion in the investment portfolio, or
2. To close out stock index futures sales transactions.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write options
on futures contracts. When the Fund purchases a futures option, it acquires 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. When the Fund
writes an option on a futures contract, it becomes obligated to assume a
position in the futures contract (a long position in the case of a put and a
short position in the case of a call) at a specified exercise price at any time
during the term of the option.
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
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.
12
<PAGE>
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.
To the extent that the Fund enters into futures contracts, options on futures
contracts and options on foreign currencies traded on a CFTC-regulated exchange,
in each case that is not for BONA FIDE hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums required to establish these
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) may not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
contracts the Fund has entered into.
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may purchase put and call options on securities, and put and call
options on stock indices, at such times as the Adviser deems appropriate and
consistent with the Fund's investment objective. The Fund may also write call
and 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
13
<PAGE>
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 CALL AND 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 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 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 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.
OPTIONS ON SECURITIES INDICES. Call and put options on securities
indices would be purchased or written by the Fund for the same purposes as the
purchase or sale of options on securities. Options on securities indices are
similar to options on securities, except that the exercise of securities index
options requires cash payment and does not involve the actual purchase or sale
of securities. In addition, securities index options are designed to reflect
price fluctuations in a group of securities or segment of the securities market
rather than price fluctuations in a single security. The purchase of such
options may not enable the Fund to hedge effectively against stock market risk
if they are not highly correlated with the value of its securities. Moreover,
the ability to hedge effectively depends upon the ability to predict movements
in the stock market, which cannot be done accurately in all cases.
RISKS OF OPTIONS TRANSACTIONS. The purchase and writing of options
involves certain risks. During the option period, the covered call writer has,
in return for the premium on the option, given up the opportunity to profit from
a price increase in the underlying securities above the exercise price, and, as
long as its obligation as a writer continues, has retained the risk of loss 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
14
<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.
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.
15
<PAGE>
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 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 gives the purchaser 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 the
Fund 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
exercise its option in order to realize any profit and would incur transactional
costs on the purchase or sale of the underlying assets.
16
<PAGE>
SEGREGATION AND COVER FOR OPTIONS, FUTURES AND OTHER FINANCIAL INSTRUMENTS
The use of the financial instruments discussed above, I.E., interest rate
transactions (including swaps, caps, floors and collars), futures contracts,
options on future contacts, options on securities and securities indices, and
forward contracts (collectively, "Financial Instruments"), may be subject to
applicable regulations of the SEC, the several exchanges upon which they are
traded, and/or the Commodity Futures Trading Commission ("CFTC").
The Fund is required to maintain assets as "cover," maintain segregated accounts
or make margin payments when it takes positions in Financial Instruments
involving obligations to third parties (I.E., Financial Instruments other than
purchased options). The Fund will not enter into such transactions unless it
owns either (1) an offsetting ("covered") position in securities, currencies or
other options, futures contracts or forward contracts, or (2) cash and liquid
assets with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. The Fund will
comply with SEC guidelines regarding cover for these instruments and will, if
the guidelines so require, set aside cash or liquid assets in a segregated
account with its custodian in the prescribed amount as determined daily.
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 generally 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,
17
<PAGE>
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, if the Fund invests in other investment companies, an investor 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 the 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
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 the 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:
YIELD = 2 [((A-B)/CD)+1)6-1]
Where:
A = the dividends and interest earned during the period. B = the expenses
accrued for the period (net of reimbursements, if any).
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.
18
<PAGE>
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.
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 its 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 Merrill Lynch Convertible Securities Index is a market capitalization
weighted index of over 450 non-mandatory domestic corporate convertible
securities, representing approximately 95% of the total outstanding market value
19
<PAGE>
of U.S. convertible securities. To be included in the index, bonds and preferred
stocks must be convertible only to common stock and have a market value or
original par value of at least $500 million.
The Boston Convertible Securities Index is a market capitalization weighted
index of over 250 convertible bonds and preferred stocks rated B- or above. To
be included in the index, convertible bonds must have an original par value of
at least $50 million and preferred stocks must have a minimum of 500,000 shares
outstanding. The index also includes U.S. dollar-denominated Eurobonds that have
been issued by U.S. domiciled companies, are rated B- or above, and have an
original par value of at least $100 million.
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
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
20
<PAGE>
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,
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.
21
<PAGE>
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.
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 between the Adviser and the Fund, dated March
28, 1997 and approved by the Board with respect to the Fund on May 14, 1998,
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 Agreements provide 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 Agreements 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 0.85% 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 ratio of
expenses to net assets exceeds the amount set forth in the fee table in the
Prospectus. These voluntary limits 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 and approved by
the Board with respect to the Fund on May 14, 1998. Under that agreement, the
22
<PAGE>
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 pursuant to
agreements with the Administrator. 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. (72) Chairman of the Board, Consultant to insurance and healthcare
5723 Trail Meadow 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 Trustee Chartered Financial Analyst. President and
11825 N. Pennsylvania St. 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* (37) Vice President for Chartered Financial Analyst. Senior Vice
11825 N. Pennsylvania St. Investments and Trustee President, Adviser. Portfolio Manager of the
Carmel, IN 46032 fixed income portion of Conseco Balanced and
Fixed Income Funds.
23
<PAGE>
Name, Address Position Held Principal Occupation(s)
and Age With Trust During Past 5 Years
--------------- ---------- -------------------
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 (67) Trustee Retired. President, Dallas Citizens Council.
Dallas Citizens Council Trustee of one other mutual fund managed by the
1201 Main Street, Adviser. Director, Southwest Securities Group,
Suite 2444 Inc.
Dallas, TX 75202
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.
24
<PAGE>
Name, Address Position Held Principal Occupation(s)
and Age With Trust During Past 5 Years
--------------- ---------- -------------------
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.
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. $15,000 $24,000
(1 other investment company)
Harold W. Hartley $16,000 $25,000
(1 other investment company)
Dr. R. Jan LeCroy $16,000 $25,000
(1 other investment company)
Dr. Jesse H. Parrish $16,000 $25,000
(1 other investment company)
- ------------------
* Compensation received in 1997 includes a retainer fee from the first
meeting for the Trust held in December 1996.
25
<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 and approved by the Board with respect to the
Fund on May 14, 1998. 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,
and approved by the Board with respect to the Fund on May 14, 1998, with respect
to Class A, Class B and Class C of 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 such class of Fund shares and for maintenance and personal service
provided to existing shareholders of that class. The Plan authorizes payments to
26
<PAGE>
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
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 Plans, 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. The Plan will automatically terminate in the event of its 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 or other series of the Trust at the price applicable to the total of
27
<PAGE>
(a) the dollar amount then being purchased plus (b) an amount equal to the then
current net asset value of the purchaser's holdings of shares of the Fund,
another series of the Trust, 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). 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 shareholder 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.
28
<PAGE>
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
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
29
<PAGE>
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. Fund shares 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
30
<PAGE>
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 or continue 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
31
<PAGE>
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.
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 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
32
<PAGE>
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
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.
33
<PAGE>
Investment in debt obligations that are at risk of or in default presents
special tax issues for the Fund if it holds such obligations. Tax rules are not
entirely clear about issues such as when the Fund may cease to accrue interest,
original issue discount or market discount, when and to what extent deductions
may be taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable. These
and other issues will be addressed by the Fund if holds such obligations 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 futures and foreign currency contracts 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 non-corporate taxpayers' net capital gain enacted by the
Tax Act noted above, although technical corrections legislation passed by the
House of Representatives late in 1997 would clarify that those rates apply.
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
34
<PAGE>
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 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 Bank and Trust Company is the transfer agent for the Fund.
INDEPENDENT ACCOUNTANT
Coopers & Lybrand L.L.P., 2900 One American Square, Box 82002, Indianapolis,
Indiana 46282-0002, serves as the Trust's independent accountant.
35
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CONSECO FUND GROUP
CONSECO CONVERTIBLE SECURITIES FUND
CLASS Y SHARES
OCTOBER 1, 1998
This Statement of Additional Information ("SAI") is not a prospectus. It
contains additional information about the Conseco Fund Group (the "Trust") and
its series the Conseco Convertible Securities Fund ("Fund"): It should be read
in conjunction with the Fund's Class Y prospectus (the "Prospectus"), dated
October 1, 1998. You may obtain a copy by contacting the Trust's Administrative
Office, 11815 N. Pennsylvania Street, Carmel, Indiana 46032.
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION....................................................2
INVESTMENT RESTRICTIONS................................................2
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES....................4
INVESTMENT PERFORMANCE................................................18
SECURITIES TRANSACTIONS...............................................20
MANAGEMENT............................................................21
FUND EXPENSES.........................................................25
DISTRIBUTION ARRANGEMENTS.............................................25
PURCHASE AND REDEMPTION OF SHARES.....................................26
GENERAL...............................................................26
TAXES.................................................................28
OTHER INFORMATION.....................................................32
<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 Y shares of the Funds. 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 of 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. A change in policy affecting only the
Fund (and not another series of the Trust) may be effected with the approval of
the holders of a majority of the outstanding shares of the Fund. 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 the 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;
2
<PAGE>
4. With respect to 75% of the Fund's total assets, purchase the securities of
any issuer if (a) more than 5% of Fund's total assets would be invested in
the securities of that issuer or (b) the Fund would own more than 10% of
the outstanding voting securities of that issuer; this restriction does
not apply to U.S. Government securities (as defined in the Prospectus);
5. 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
business activities in the same industry; this restriction does not apply
to U.S. Government securities (as defined in the Prospectus);
6. 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;
7. 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
8. Issue any senior security except as permitted under the 1940 Act.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions are designated as non-fundamental with respect to the
Fund and may be changed by the 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
3
<PAGE>
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.
U.S. GOVERNMENT SECURITIES AND SECURITIES OF INTERNATIONAL ORGANIZATIONS
U.S. Government securities are issued or guaranteed by the U.S. Government or
its agencies, authorities or instrumentalities.
Securities issued by international organizations, such as Inter-American
Development Bank, the Asian-American Development Bank and the International Bank
for Reconstruction and Development (the "World Bank"), are not U.S. Government
securities. These international organizations, while not U.S. Government
agencies or instrumentalities, have the ability to borrow from member 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. Lower-rated fixed income securities (also referred to as "high
yield 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. Lower-rated
fixed income securities are deemed by the rating agencies to be predominantly
4
<PAGE>
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
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 the 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, the 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 the 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
5
<PAGE>
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.
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
the 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 the
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
6
<PAGE>
rate securities provide for automatic adjustment of the interest rate whenever
some specified interest rate index changes. The interest rate on variable or
floating rate securities is ordinarily determined by reference to, or is a
percentage of, a bank's prime rate, the 90-day U.S. Treasury bill rate, the rate
of return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on seven days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year.
BANKING 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
7
<PAGE>
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.
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.
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.
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
8
<PAGE>
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 it
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
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.
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 the Fund 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.
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
9
<PAGE>
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 assets 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
at least the third highest rating category (A/A) of at least one NRSRO at the
time of entering into the 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.
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, it realizes a loss.
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
10
<PAGE>
increase in the market price of the long-term debt security which the Fund
intends to purchase in the future. A rise in the price of the long-term debt
security prior to its purchase either would be offset by an increase in the
value of the futures contract purchased by the Fund or avoided by taking
delivery of the debt securities under the futures contract.
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.
STOCK INDEX FUTURES CONTRACTS. A stock index (for example, the Standard &
Poor's 500 Composite Stock Price Index or the New York Stock Exchange Composite
Index) assigns relative values to the common stocks included in the index and
fluctuates with changes in the market values of such stocks. A stock index
futures contract is a bilateral agreement to accept or make payment, depending
on whether a contract is purchased or sold, of an amount of cash equal to a
specified dollar amount multiplied by the difference between the stock index
value at the close of the last trading day of the contract and the price at
which the futures contract was originally purchased or sold.
To the extent that changes in the value of the Fund correspond to changes in a
given stock index, the sale of futures contracts on that index ("short hedge")
would substantially reduce the risk to the Fund of a market decline and, by so
doing, provide an alternative to a liquidation of securities positions, which
may be difficult to accomplish in a rapid and orderly fashion. Stock index
futures contracts might also be sold:
1. When a sale of Fund securities at that time would appear to be
disadvantageous in the long-term because such liquidation would:
a. Forego possible appreciation,
b. Create a situation in which the securities would be difficult to
repurchase, or
c. Create substantial brokerage commissions;
2. When a liquidation of part of the investment portfolio has commenced or is
contemplated, but there is, in the Adviser's determination, a substantial
risk of a major price decline before liquidation can be completed; or
3. To close out stock index futures purchase transactions.
11
<PAGE>
Where the Adviser anticipates a significant market or market sector advance, the
purchase of a stock index futures contract ("long hedge") affords a hedge
against the possibility of not participating in such advance at a time when the
Fund is not fully invested. Such purchases would serve as a temporary substitute
for the purchase of individual stocks, which may then be purchased in an orderly
fashion. As purchases of stock are made, an amount of index futures contracts
which is comparable to the amount of stock purchased would be terminated by
offsetting closing sales transactions. Stock index futures might also be
purchased:
1. If the Fund is attempting to purchase equity positions in issues which it
may have or is having difficulty purchasing at prices considered by the
Adviser to be fair value based upon the price of the stock at the time it
qualified for inclusion in the investment portfolio, or
2. To close out stock index futures sales transactions.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write options on
futures contracts. When the Fund purchases a futures option, it acquires 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. When the Fund
writes an option on a futures contract, it becomes obligated to assume a
position in the futures contract (a long position in the case of a put and a
short position in the case of a call) at a specified exercise price at any time
during the term of the option.
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
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.
12
<PAGE>
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.
To the extent that the Fund enters into futures contracts, options on futures
contracts and options on foreign currencies traded on a CFTC-regulated exchange,
in each case that is not for BONA FIDE hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums required to establish these
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) may not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
contracts the Fund has entered into.
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may purchase put and call options on securities, and put and call
options on stock indices, at such times as the Adviser deems appropriate and
consistent with the Fund's investment objective. The Fund may also write call
and 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
13
<PAGE>
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 CALL AND 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 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 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 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.
OPTIONS ON SECURITIES INDICES. Call and put options on securities indices
would be purchased or written by the Fund for the same purposes as the purchase
or sale of options on securities. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payment and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. The purchase of such options may
not enable the Fund to hedge effectively against stock market risk if they are
not highly correlated with the value of its securities. Moreover, the ability to
hedge effectively depends upon the ability to predict movements in the stock
market, which cannot be done accurately in all cases.
RISKS OF OPTIONS TRANSACTIONS. The purchase and writing of options
involves certain risks. During the option period, the covered call writer has,
in return for the premium on the option, given up the opportunity to profit from
a price increase in the underlying securities above the exercise price, and, as
long as its obligation as a writer continues, has retained the risk of loss 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,
14
<PAGE>
where a put or call option on a particular security is purchased to hedge
against price movements in a related security, the price of the put or call
option may move more or less than the price of the related security.
There can be no assurance that a liquid market will exist when 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.
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.
15
<PAGE>
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 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 gives the purchaser 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 the
Fund 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
exercise its option in order to realize any profit and would incur transactional
costs on the purchase or sale of the underlying assets.
16
<PAGE>
SEGREGATION AND COVER FOR OPTIONS, FUTURES AND OTHER FINANCIAL INSTRUMENTS
The use of the financial instruments discussed above, I.E., interest rate
transactions (including swaps, caps, floors and collars), futures contracts,
options on future contacts, options on securities and securities indices, and
forward contracts (collectively, "Financial Instruments"), may be subject to
applicable regulations of the SEC, the several exchanges upon which they are
traded, and/or the Commodity Futures Trading Commission ("CFTC").
The Fund is required to maintain assets as "cover," maintain segregated accounts
or make margin payments when it takes positions in Financial Instruments
involving obligations to third parties (I.E., Financial Instruments other than
purchased options). The Fund will not enter into such transactions unless it
owns either (1) an offsetting ("covered") position in securities, currencies or
other options, futures contracts or forward contracts, or (2) cash and liquid
assets with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. The Fund will
comply with SEC guidelines regarding cover for these instruments and will, if
the guidelines so require, set aside cash or liquid assets in a segregated
account with its custodian in the prescribed amount as determined daily.
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 generally 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
17
<PAGE>
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, if the Fund invests in other investment companies, an investor 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 the 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
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 the 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. The yield will be based upon a
stated 30-day period and will be computed by dividing the net investment income
per share earned during the period by the maximum offering price per share on
the last day of the period, according to the following formula:
YIELD = 2 [((A-B)/CD)+1)6-1]
Where:
A = the dividends and interest earned during the period.
B = the expenses accrued for the period (net of reimbursements, if any).
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
18
<PAGE>
annual compounded rate of return over the stated period that would equate an
initial amount invested to the ending redeemable value of the investment
(assuming reinvestment of all distributions), according to the following
formula:
P (1+T)n=ERV
Where:
P = a hypothetical initial payment of $1,000.
T = the average annual total return.
n = the number of years.
ERV = the ending redeemable value at the end of the stated period of a
hypothetical $1,000 payment made at the beginning of the stated period.
The cumulative total return will be based upon a stated period and will be
computed by dividing the ending redeemable value (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. 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 Merrill Lynch Convertible Securities Index is a market capitalization
weighted index of over 450 non-mandatory domestic corporate convertible
securities, representing approximately 95% of the total outstanding market value
of U.S. convertible securities. To be included in the index, bonds and preferred
stocks must be convertible only to common stock and have a market value or
original par value of at least $500 million.
The Boston Convertible Securities Index is a market capitalization weighted
index of over 250 convertible bonds and preferred stocks rated B- or above. To
be included in the index, convertible bonds must have an original par value of
at least $50 million and preferred stocks must have a minimum of 500,000 shares
outstanding. The index also includes U.S. dollar-denominated Eurobonds that have
19
<PAGE>
been issued by U.S. domiciled companies, are rated B- or above, and have an
original par value of at least $100 million.
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
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,
portfolio strategy and performance of accounts; and effecting securities
20
<PAGE>
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.
21
<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 between the Adviser and the Fund, dated March
28, 1997 and approved by the Board with respect to the Fund on May 14, 1998,
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 Agreements provide 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 Agreements 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 0.85% 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 ratio of
expenses to net assets exceeds the amount set forth in the fee table in the
Prospectus. These voluntary limits 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 and approved by
the Board with respect to the Fund on May 14, 1998. 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 pursuant to
22
<PAGE>
agreements with the Administrator. 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.
Name, Address Position Held Principal Occupation(s)
and Age with Trust During Past 5 Years
--------------- ---------- -------------------
William P. Daves, Jr. (72) Chairman of the Consultant to insurance and
5723 Trail Meadow Board, Trustee healthcare industries. Director,
Dallas, TX 75230 President and Chief 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.
11825 N. Pennsylvania St. Trustee President and Director, Adviser.
Carmel, IN 46032 Previously, Senior Vice
President, Adviser. President and
Trustee of one other mutual fund
managed by the Adviser.
Chartered Financial Analyst.
Gregory J. Hahn* (37) Vice President Senior Vice President, Adviser.
11825 N. Pennsylvania St. for Investments Portfolio Manager of the fixed
Carmel, IN 46032 and Trustee income portion of Balanced and
Fixed Income Funds.
Retired. Chartered Financial
Harold W. Hartley (74) Trustee Analyst. Previously, Executive
317 Peppard Drive, S.W. Vice President, Tenneco Financial
Ft. Myers Beach, Fl 33913 Services, Inc. Trustee of one
other mutual fund managed by the
Adviser.
Retired. President, Dallas
Dr. R. Jan LeCroy (67) Trustee Citizens Council. Trustee of one
Dallas Citizens Council other mutual fund managed by the
1201 Main Street, Adviser. Director, Southwest
Suite 2444 Securities Group, Inc.
Dallas, TX 75202
23
<PAGE>
Name, Address Position Held Principal Occupation(s)
and Age with Trust During Past 5 Years
--------------- ---------- -------------------
Former President, Midland
Dr. Jesse H. Parrish (70) Trustee College. Higher Education
2805 Sentinel Consultant. Trustee of one other
Midland, TX 79701 mutual fund managed by the
Adviser.
Vice President, Senior Counsel,
William P. Latimer (62) Vice President Secretary, Chief Compliance
11825 N. Pennsylvania St. and Secretary Officer and Director of Adviser.
Carmel, IN 46032 Vice 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.
Senior Vice President, Bankers
James S. Adams (38) Treasurer National, Great American Reserve.
11815 N. Pennsylvania St. Senior Vice President, Treasurer,
Carmel, IN 46032 and Director, Conseco Equity
Sales, Inc. Senior Vice President
and Treasurer, Conseco Services,
LLC. Treasurer of one other
mutual fund managed by the
Adviser.
Senior Vice President, Corporate
William T. Devanney, Jr. (42) Vice President, Taxes, Bankers National and Great
11815 N. Pennsylvania St. Corporate Taxes 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.
- ------------------
* 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.
24
<PAGE>
COMPENSATION TABLE
Aggregate Total Compensation from
Compensation Investment Companies in the
Name of Person, Position from the Trust* Trust Complex Paid to
Trustees*
- ------------------------ -------------- ---------------------------
William P. Daves, Jr. $15,000 $24,000
(1 other investment company)
Harold W. Hartley $16,000 $25,000
(1 other investment company)
Dr. R. Jan LeCroy $16,000 $25,000
(1 other investment company)
Dr. Jesse H. Parrish $16,000 $25,000
(1 other investment company)
- ------------------
* Compensation received in 1997 includes a retainer fee from the first meeting
for the Trust held in December 1996.
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 and approved by the Board with respect to the
Fund on May 14, 1998. 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,
25
<PAGE>
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.
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
26
<PAGE>
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 Class Y share 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. Fund shares have no preference,
preemptive or similar rights, and are freely transferable. The exchange
privilege is 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
27
<PAGE>
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 or continue 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
28
<PAGE>
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.
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 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
29
<PAGE>
(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
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
30
<PAGE>
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 the Fund if it holds such obligations. Tax rules are not
entirely clear about issues such as when the Fund may cease to accrue interest,
original issue discount or market discount, when and to what extent deductions
may be taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable. These
and other issues will be addressed by the Fund that holds such obligations 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 futures and foreign currency contracts 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 non-corporate taxpayers' net capital gain enacted by the
Tax Act noted above, although technical corrections legislation passed by the
House of Representatives late in 1997 would clarify that those rates apply.
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
31
<PAGE>
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 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 Bank and Trust Company is the transfer agent for the Fund.
INDEPENDENT ACCOUNTANT
Coopers & Lybrand L.L.P., 2900 One American Square, Box 82002, Indianapolis,
Indiana 46282-0002, serves as the Trust's independent accountant.
32