AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1998
SECURITIES ACT FILE NO. 333-____________
INVESTMENT COMPANY ACT FILE NO. 811-08795
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.
and/or
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] AMENDMENT NO.
------------------------
CONSECO STRATEGIC INCOME FUND
(Exact Name of Registrant as Specified in Charter)
------------------------
11815 N. PENNSYLVANIA STREET,
CARMEL, INDIANA 46032
(Address of Principal Executive Offices)
(317) 817-6383
(Registrant's Telephone Number, Including Area Code)
WILLIAM P. LATIMER, ESQ.
11815 N. PENNSYLVANIA STREET
CARMEL, IN 46032
(Name And Address of Agent for Service)
------------------------
COPIES TO:
DONALD W. SMITH, ESQ. DAVID L. SUGERMAN, ESQ.
R. DARRELL MOUNTS, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON
KIRKPATRICK & LOCKHART LLP ONE LIBERTY PLAZA
1800 MASSACHUSETTS AVE. N.W. 2ND FLOOR NEW YORK, NY 10006
WASHINGTON, DC 20036-1800
Approximate Date of Proposed Public Offering:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
<PAGE>
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate box):
[X] When declared effective pursuant to section 8(c).
If appropriate, check the following box:
[_] this [post-effective] amendment designates a new effective date for a
previously filed [post-effective amendment] [registration statement].
[_] This form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration
statement for the same offering is_________________________ .
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
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______________________________________________________________________________________
PROPOSED PROPOSED MINIMUM AMOUNT OF
TITLE OF AMOUNT BEING MAXIMUM AGGREGATE REGISTRATION
SECURITIES REGISTERED OFFERING PRICE OFFERING PRICE FEE (2)
BEING REGISTERED (1)(3) PER SHARE (1) (1)(3)
______________________________________________________________________________________
<S> <C> <C> <C> <C>
4,000,000 SHARES OF 4,000,000 Shares $15.00 $60,000,000 $ 17,700.00
BENEFICIAL
INTEREST, $0.001 par
value ("Shares")
- ---------------------------------------------------------------------------------
- ------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $17,700.00 has previously been transmitted to the designated lockbox at
Mellon Bank.
(3) Assuming exercise in full of the option granted by the Fund to the
Underwriters to purchase up to an additional 600,000 Shares of Beneficial
Interest to cover over-allotments. See "Underwriting."
</TABLE>
- ------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
ii
<PAGE>
CROSS-REFERENCE SHEET
PURSUANT TO RULE 481(A)
N-2 ITEM NUMBER LOCATION IN PROSPECTUS(CAPTION)
PART A - INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover.............. Outside Front Cover Page
2. Inside Front and Outside Back
Cover Page....................... Outside Front Cover Page; Inside Front
Cover Page; Outside Back Cover Page
3. Fee Table and Synopsis .......... Prospectus Summary; Fee Table
4. Financial Highlights............. Not Applicable
5. Plan of Distribution ............ Outside Front Cover Page; Prospectus
Summary; Management of the Fund;
Underwriting
6. Selling Shareholders............. Not Applicable
7. Use of Proceeds.................. Use of Proceeds; Investment Objectives
and Policies
8. General Description of the
Registrant....................... Outside Front Cover Page; Prospectus
Summary; Risk Factors and Special
Considerations; The Fund; Investment
Objectives and Policies; Other
Investment Practices; Description of
Shares
9. Management....................... Outside Front Cover; Prospectus
Summary; Management of the Fund;
Shareholder Servicing Agent,
Custodian, and Transfer and Dividend
Disbursing Agent
10. Capital Stock, Long-Term Debt,
and Other Securities............. Outside Front Cover Page; Prospectus
Summary; Investment Objectives and
Policies; Description of Shares;
Taxation
11. Defaults and Arrears on Senior
Securities ...................... Not Applicable
12. Legal Proceedings................ Not Applicable
13 Table of Contents of the
Statement of Additional
Information...................... Not Applicable
PART B
14. Cover Page....................... Outside Front Cover Page
15. Table of Contents................ Outside Back Cover Page
16. General Information and
History.......................... The Fund
iii
<PAGE>
17. Investment Objectives Investment Objectives and Policies;
and Policies..................... Investment Restrictions
18. Management....................... Management of the Fund
19. Control Persons and Principal
Holders of Securities............ Not Applicable
20. Investment Advisory and Other
Services......................... Management of the Fund
21. Brokerage Allocation.and Other
Practices........................ Portfolio Transactions
22. Tax Status....................... Taxation
23. Financial Statements............. Report of Independent Accountants;
Statement of Assets and Liabilities
PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
iv
<PAGE>
================================================================================
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
================================================================================
SUBJECT TO COMPLETION, DATED JUNE 2, 1998
___________ SHARES
CONSECO STRATEGIC INCOME FUND
PRELIMINARY PROSPECTUS
___________, 1998
- --------------------------------------------------------------------------------
Conseco Strategic Income Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund's primary
investment objective is to seek high current income. The Fund will also seek
capital growth as a secondary objective, to the extent consistent with its
primary objective of seeking high current income. Under normal market
conditions, the Fund will invest at least 65% of its total assets in high yield
bonds, debentures, notes, corporate loans, convertible debentures, and other
debt instruments rated below investment grade (lower than Baa by Moody's
Investors Service, Inc. ("Moody's") or lower than BBB by Standard & Poor's, a
division of the McGraw-Hill Companies, Inc. ("S&P"), or comparably rated by
another nationally recognized securities organization) or unrated but determined
by Conseco Capital Management, Inc. ("Conseco Capital"), the Fund's investment
manager, to be of comparable quality (collectively, "High Yield Obligations").
The Fund may invest up to 30% of its total assets in the securities, including
High Yield Obligations, of issuers/obligors domiciled outside the United States
or that are denominated in foreign currencies or multinational currency units.
The Fund expects that such foreign securities will consist primarily of High
Yield Obligations of issuers/obligors located in emerging markets. The Fund may
also invest up to 10% of its total assets in securities that are the subject of
bankruptcy proceedings or in default as to payment of principal and/or interest
or in significant risk of being in such default or that are rated in the lower
rating categories (Ca or lower by Moody's and CC or lower by S&P) or which, if
unrated, are in the judgment of Conseco Capital of equivalent quality. There is
no assurance that the Fund will achieve its objectives.
Investments in lower grade securities are subject to special risks, including
greater price volatility and a greater risk of loss of principal and interest.
As a non-diversified investment company, the Fund may invest a greater portion
of its assets in a small number of issuers. The Fund may engage in various
portfolio strategies to seek to enhance income and hedge its portfolio against
investment and interest rate risks, including the use of leverage and the use of
derivative financial instruments. The Fund is designed for investors willing to
assume additional risk in return for the potential for high current income,
primarily, and the potential for capital growth, secondarily. An investment in
the Fund may be speculative in that it involves a high degree of risk and should
not constitute a complete investment program. Investors should carefully assess
the risks associated with an investment in the Fund. See "Risk Factors and
Special Considerations."
The Fund's shares do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
1
<PAGE>
Conseco Capital will serve as the Fund's investment manager and administrator.
Conseco Capital also provides investment management and advisory services to
seven mutual funds, as well as to public and corporate pension plans,
corporations, individuals, foundations and endowments. As of March 31, 1998,
Conseco Capital managed in excess of $32 billion in assets, approximately $3.5
billion of which consisted of High Yield Obligations and approximately $2.3
billion of which were invested in foreign securities.
At times, the Fund expects to utilize financial leverage through borrowings,
including the issuance of debt securities, or the issuance of preferred shares
or through other transactions, such as reverse repurchase agreements, which have
the effect of financial leverage. The Fund intends to utilize financial leverage
in a maximum amount equal to approximately 33 1/3% of its total assets
(including the amount obtained through leverage). The Fund initially expects to
use leverage in an amount equal to approximately 25% of its total assets. The
Fund generally will not utilize leverage if it anticipates that the Fund's
leveraged capital structure would result in a lower return to the holders of its
shares of beneficial interest (the "Shareholders") than that obtainable over
time with an unleveraged capital structure. Use of financial leverage creates an
opportunity for increased income and capital growth for the Shareholders but, at
the same time, creates special risks, and there can be no assurance that a
leveraging strategy will be successful during any period in which it is
employed. See "Risk Factors and Special Considerations--Leverage."
The Fund is offering its shares of beneficial interest, par value $.001 per
share (the "Shares"). Prior to this offering, there has been no public market
for the Fund's Shares. The Fund's Shares have been approved for listing on the
New York Stock Exchange (the "NYSE") under the symbol "CSF," subject to official
notice of issuance. Shares of closed-end management investment companies have in
the past frequently traded at discounts from their net asset values and the
Fund's Shares may likewise trade at such a discount. The risks associated with
this characteristic of closed-end management investment companies may be greater
for investors expecting to sell shares of a closed-end management investment
company soon after completion of an initial public offering of the company's
shares. The minimum investment in this offering is 100 Shares ($1,500). This
Prospectus sets forth in concise form information about the Fund that a
prospective investor should know before investing in the Fund. Investors are
advised to read this Prospectus carefully and to retain it for future reference.
================================================================================
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Sales Load
Price to Payable by Proceeds to
Public Fund (1) Fund (2)
--------------------------------------------------------------
Per Share $15.00 None(1) $15.00
--------------------------------------------------------------
Total (3) $ . None(1) $ .
--------------------------------------------------------------
(1) The Sales Load to the Underwriters will not be paid by the Fund but by
Conseco Capital or an affiliate, Conseco, Inc., from its own assets, in
the amount of $ _____ per Share or ______% of the Price to Public per
Share in connection with the sale of the Shares offered hereby. The Fund
and Conseco Capital have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting certain expenses payable by the Fund, estimated at
$______________ (including approximately $250,000 to be paid to the
Underwriters as reimbursement of certain of their expenses in connection
with this offering).
(3) The Fund has granted the several Underwriters a 60-day over-allotment
option to purchase up to 600,000 additional Shares on the same terms and
conditions as set forth on the front cover. If all such additional shares
are purchased, the total Price to Public will be $ _______, and the total
Proceeds to Fund will be $ __________.
2
<PAGE>
The Shares are offered by the several Underwriters subject to delivery by the
Fund and acceptance by the Underwriters, to prior sale and to withdrawal,
cancellation or modification of the offer without notice. Delivery of the Shares
to the Underwriters is expected to be made through the facilities of The
Depository Trust Company, New York, New York on or about __________, 1998.
Prudential Securities Incorporated
_________________ , 1998.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING
PURCHASES OF THE SHARES TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE SHARES
TO COVER SOME OR ALL OF A SHORT POSITION IN THE SHARES MAINTAINED BY THE
UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus assumes that the Underwriters' over-allotment
option will not be exercised. Investors should carefully consider information
set forth under the heading "Risk Factors and Special Considerations."
The Fund Conseco Strategic Income Fund (the "Fund") is a newly
organized, non-diversified, closed-end management
investment company. The Fund is managed by Conseco
Capital Management, Inc. ("Conseco Capital" or the
"Manager"). See "The Fund."
The Offering The Fund is offering shares of beneficial interest,
par value $.001 per share ("Shares"), through a group
of underwriters ("Underwriters") led by Prudential
Securities Incorporated. The Underwriters have been
granted a 60-day option to purchase up to 600,000
additional Shares solely to cover overallotments, if
any. The initial public offering price is $15.00 per
Share. The minimum investment in the offering is 100
Shares ($1,500). See "Underwriting."
No Sales Charge The Shares will be sold during the initial
public offering without any sales load or underwriting
discounts payable by investors or the Fund. Conseco
Capital or an affiliate (not the Fund) from its own
assets will pay a commission to the Underwriters in
connection with sales of the Shares in this offering.
See "Underwriting."
Investment Objectives
and Policies The Fund's primary investment objective is to seek
high current income. The Fund will also seek capital
growth as a secondary objective, to the extent
consistent with its primary objective of seeking high
current income. The Fund is designed for investors
willing to assume additional risk in return for the
potential for high current income, primarily, and the
potential for capital growth, secondarily. The Fund
is not intended to be a complete investment program
and there is no assurance that the Fund will achieve
its objectives. An investment in the Fund may not be
appropriate for all investors.
Under normal market conditions, the Fund will invest at
least 65% of its total assets in high yield bonds,
debentures, notes, corporate loans, convertible
debentures, and other debt instruments rated below
investment grade (lower than Baa by Moody's Investors
Service, Inc. ("Moody's") or lower than BBB by Standard
& Poor's, a division of the McGraw-Hill Companies, Inc.
("S&P"), or comparably rated by another nationally
recognized rating organization (each, a "Rating
Agency")), or unrated but determined by Conseco Capital
to be of comparable quality (collectively, "High Yield
Obligations"). Lower grade income securities are
commonly known as "junk bonds." The Fund may invest up
to 30% of its total assets in the securities, including
High Yield Obligations, of issuers/obligors domiciled
outside the United States or that are denominated in
foreign currencies or multinational currency units. The
Fund expects that such foreign securities will consist
primarily of High Yield Obligations of issuers/obligors
located in emerging markets. The Fund will treat
securities as foreign securities, for the purpose of the
30% limitation, on the basis of the domicile of the
ultimate unconditional guarantor of the security, if
any, in each instance. The Fund may also invest up to
10% of its total assets in securities that are the
subject of bankruptcy proceedings or in default as to
payment of principal and/or interest or in significant
risk of being in such default, or that are rated in the
4
<PAGE>
lower rating categories (Ca or lower by Moody's and CC
or lower by S&P) or which, if unrated, are in the
judgment of Conseco Capital of equivalent quality
(collectively, "Distressed Securities"). The Fund may
engage in various portfolio strategies to seek to
enhance income and hedge its portfolio against
investment and interest rate risks, including the use of
leverage and the use of derivative financial
instruments. There can be no assurance that the Fund's
strategies will be successful.
At times, the Fund expects to utilize financial leverage
through borrowings, including the issuance of debt
securities, or the issuance of preferred shares or
through other transactions, such as reverse repurchase
agreements, which have the effect of financial leverage.
The Fund intends to utilize financial leverage in a
maximum amount equal to approximately 33 1/3% of its
total assets (including the amount obtained through
leverage). The Fund initially expects to use leverage in
an amount equal to approximately 25% of its total
assets. The Fund generally will not utilize leverage if
it anticipates that the Fund's leveraged capital
structure would result in a lower return to holders of
Shares ("Shareholders") than that obtainable over time
with an unleveraged capital structure. Use of financial
leverage creates an opportunity for increased income and
capital growth for the Shareholders but, at the same
time, creates special risks, and there can be no
assurance that a leveraging strategy will be successful
during any period in which it is employed. Fluctuations
in net asset value may be magnified as a result of the
Fund's use of leverage. In addition, the Fund's use of
leverage may affect the Fund's ability to make
distributions. See "Risk Factors and Special
Considerations--Leverage."
In selecting investments for the Fund's portfolio,
Conseco Capital will seek to identify issuers and
industries that Conseco Capital believes are likely to
experience stable or improving financial conditions.
Conseco Capital believes that this strategy should
enhance the Fund's ability to earn high current income
while also providing opportunities for capital growth.
Although the Fund's net asset value will vary, the
Fund's policy of acquiring interests in variable rate
corporate loans is intended to minimize fluctuations in
the Fund's net asset value as a result of changes in
interest rates. Conseco Capital's analysis may include
consideration of general industry trends, the issuer's
managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and
its responsiveness to changes in business conditions and
interest rates. Conseco Capital may also consider
relative values based on anticipated cash flow, the
security's ranking in the issuer's capital structure,
interest or dividend coverage, asset coverage and
earnings prospects. Of course there can be no assurances
that this strategy will be successful.
The Fund will seek its secondary objective of capital
growth by investing in High Yield Obligations that
Conseco Capital expects may appreciate in value as a
result of favorable developments affecting the business
or prospects of the issuer, which may improve the
issuer's financial condition and credit rating, or as a
result of declines in long-term interest rates.
In certain market conditions, Conseco Capital may
determine that securities rated investment grade (i.e.,
at least Baa by Moody's or BBB by S&P or comparably
rated by another Rating Agency) offer significant
opportunities for high income and capital growth. In
such conditions, the Fund may invest less than 65% of
its total assets in High Yield Obligations. In addition,
the Fund may implement various temporary "defensive"
5
<PAGE>
strategies at times when Conseco Capital determines that
conditions in the markets make pursuing the Fund's basic
investment strategy inconsistent with the best interests
of its Shareholders. These strategies may include
investing all or a portion of the Fund's assets in
higher-quality debt securities. During the first six
months of operation of the Fund, and during all periods
when less than 65% of the Fund's total assets are
invested in High Yield Obligations, the Fund's yield may
be expected to be lower than if at least 65% of the
Fund's total assets were invested in High Yield
Obligations. See "Investment Objectives and Policies."
An investment in the Fund may not be appropriate for
all investors and there is no assurance that the Fund
will achieve its investment objectives. See
"Investment Objective and Policies and Special Risk
Factors."
Investment Manager
and Administrator Conseco Capital is the Fund's investment manager and
administrator. Conseco Capital 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.
Conseco Capital will provide investment management
services to the Fund that include determining the
composition of the Fund's portfolio, placing all orders
for the purchase and sale of securities and for other
transactions, and overseeing the settlement of the
Fund's securities and other portfolio transactions.
Conseco Capital will also provide administration
services to the Fund that include, among other services,
furnishing office space, arranging for persons to serve
as Fund officers, preparing or assisting in preparing
materials for Shareholders of the Fund and regulatory
bodies, and overseeing the provision to the Fund of
custodial and accounting services. Conseco Capital may
engage its affiliate Conseco Services LLC ("Conseco
Services") to provide some or all of these
administration services to the Fund, and will compensate
Conseco Services for doing so out of its own assets, and
not those of the Fund.
For these investment management and administration
services, the Fund will pay Conseco Capital a monthly
fee (the "Management and Administration Fee") at the
annual rate of 0.90% of the Fund's average weekly value
of the total assets of the Fund minus the sum of accrued
liabilities (other than the aggregate indebtedness
constituting financial leverage) (the "Managed Assets").
During periods in which the Fund is utilizing financial
leverage, the Management and Administration Fee payable
to Conseco Capital will be higher than if the Fund did
not utilize a leveraged capital structure because this
fee is calculated as a percentage of the Fund's Managed
Assets including those purchased with leverage. See
"Management of the Fund."
Conseco Capital also provides investment management and
advisory services to seven mutual funds, as well as to
public and corporate pension plans, corporations,
individuals, foundations and endowments. As of March 31,
1998, Conseco Capital managed in excess of $32 billion
in assets, approximately $3.5 billion of which consisted
of High Yield Obligations and approximately $2.3 billion
of which were invested in foreign securities. The Fund's
address is 11815 N. Pennsylvania Street, Carmel, Indiana
46032, and its telephone number is [----------------- ].
6
<PAGE>
Listing Prior to this offering, there has been no public market
for the Shares. The Fund's Shares have been approved for
listing on the New York Stock Exchange (the "NYSE")
under the symbol "CSF," subject to official notice of
issuance.
Dividends and Other
Distributions The Fund intends to pay monthly distributions to
Shareholders from net investment income. The initial
distribution to Shareholders is expected to be paid
approximately 60 days after the completion of the
offering of the Shares. See "Dividends and Other
Distributions."
Automatic Dividend
Reinvestment Plan The Fund has established an Automatic Dividend
Reinvestment Plan (the "DRIP"). Under the DRIP, all
dividends and capital gain distributions will be
automatically reinvested in additional Shares of the
Fund either purchased in the open market or issued by
the Fund if the Shares are trading at or above their
net asset value. A Shareholder may elect to receive
cash dividends and other distributions instead of
participating in the DRIP. See "Automatic Dividend
Reinvestment Plan."
Taxation The Fund intends to elect and qualify to be treated
as a regulated investment company for U.S. federal
income tax purposes. As such, the Fund will
generally not be subject to U.S. federal income tax
on income and gains that are distributed to
Shareholders. See "Taxes."
Stock Repurchases
and Tender Offers;
Conversion To Open-End
Investment Company In recognition of the possibility that the Shares
might trade at a discount to net asset value and that
any such discount may not be in the interest of
Shareholders, the Fund's Board of Trustees, in
consultation with Conseco Capital, from time to time
may review the possibility of open market repurchases
or tender offers for Shares at net asset value. There
can be no assurance that the Board of Trustees will
decide to undertake either of these actions or that,
if undertaken, such actions would result in the
Shares trading at a price equal to or close to net
asset value per Share. The Board of Trustees from
time to time also may consider the conversion of the
Fund to an open-end investment company, however,
there can be no assurance it will decide to do so.
If the Fund were converted, Shareholders could
require the company to redeem their shares at any
time (except in certain circumstances as authorized
by or under the Investment Company Act of 1940 (the
"Investment Company Act")) at their net asset value,
less any applicable redemption charge. Conversion to
an open-end investment company could force alteration
of the leveraged capital structure of the Fund,
modification of certain of the Fund's investment
policies and strategies (to assure sufficient
portfolio liquidity), and/or disposition of portfolio
securities or other assets at a time when it is not
advantageous to do so. These changes could adversely
affect the ability of the Fund to meet its investment
objectives. See "Description of Shares."
Shareholder Servicing
Agent, Custodian and
Transfer and Dividend
Disbursing Agent [_____________] will act as Shareholder Servicing Agent
for the Fund. The Fund will pay a monthly fee at the
annual rate of 0.10% of the Fund's average weekly
Managed Assets (as defined above) for such services.
7
<PAGE>
[ ______________ ] will serve as custodian of the assets
of the Fund (the "Custodian"), and may employ
sub-custodians outside the U.S. in accordance with
regulations of the Securities and Exchange Commission. [
_______________ ] will serve as the Fund's Transfer and
Dividend Disbursing Agent, and will also serve as agent
for the DRIP. See "Shareholder Servicing Agent,
Custodian and Transfer and Dividend Disbursing Agent."
Risk Factors and
Special Considerations Investment in the Fund involves special
considerations. Investors should carefully consider
their ability to assume the following risks before
making an investment in the Fund. An investment in
Shares of the Fund may not be appropriate for all
investors and should not be considered as a complete
investment program. See "Risk Factors and Special
Considerations."
General The Fund is a newly organized, non-diversified,
closed-end management investment company and has no
operating history. Shares of closed-end management
investment companies frequently trade at a discount
from their net asset value. This risk of loss
associated with this characteristic may be greater
for investors expecting to sell their Shares in a
relatively short period after completion of the
public offering. Accordingly, the Shares are designed
primarily for long-term investors and should not be
considered a vehicle for trading purposes. The net
asset value of the Fund's Shares will fluctuate with
interest rate changes as well as with price changes
of the Fund's portfolio securities. These
fluctuations are likely to be greater during periods
in which the Fund utilizes a leveraged capital
structure. See "Other Investment Practices--Leverage."
Lower Grade
Securities Lower grade securities are regarded as being
predominantly speculative as to the issuer's ability to
make payments of principal and interest. Investment in
such securities involves substantial risk. Lower grade
securities are commonly referred to as "junk bonds."
Issuers of lower grade securities may be highly
leveraged and may not have available to them more
traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers
generally are greater than is the case with higher-rated
securities. For example, during an economic downturn or
a sustained period of rising interest rates, issuers of
lower grade securities may be more likely to experience
financial stress, especially if such issuers are highly
leveraged. During periods of economic downturn, such
issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to
service its debt obligations also may be adversely
affected by specific issuer developments, the issuer's
inability to meet specific projected business forecasts
or the unavailability of additional financing.
Therefore, there can be no assurance that in the future
there will not exist a higher default rate relative to
the rates currently existing in the market for lower
grade securities. The risk of loss due to default by the
issuer is significantly greater for the holders of lower
grade securities because such securities may be
unsecured and may be subordinate to other creditors of
the issuer. Other than with respect to Distressed
Securities, discussed below, the lower grade securities
in which the Fund may invest do not include instruments
which, at the time of investment, are in default as to
payment of principal and/or interest or the issuers of
which are in bankruptcy. However, there can be no
assurance that such events will not occur after the Fund
purchases a particular security, in which case the Fund
may experience losses and incur costs.
8
<PAGE>
Lower grade securities frequently have call or
redemption features that would permit an issuer to
repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining
interest rates, the Fund is likely to have to replace
such called security with a lower yielding security,
thus decreasing the net investment income to the Fund
and dividends to Shareholders.
Lower grade securities tend to be more volatile than
higher-rated fixed-income securities, and adverse
economic events may have a greater impact on the prices
of lower grade securities than on higher-rated
fixed-income securities. Factors adversely affecting the
market value of such securities are likely to affect
adversely the Fund's net asset value. Recently, demand
for lower grade securities has increased significantly
and the difference between the yields paid by lower
grade securities and investment grade bonds (i.e., the
"spread") has narrowed. To the extent this differential
increases, the value of lower grade securities in the
Fund's portfolio could be adversely affected.
Like higher-rated fixed-income securities, lower grade
securities generally are purchased and sold through
dealers who make a market in such securities for their
own accounts. However, there are fewer dealers in the
lower grade securities market, and this market may be
less liquid than the market for higher-rated
fixed-income securities, even under normal economic
conditions. Also, there may be significant disparities
in the prices quoted for lower grade securities by
various dealers. As a result, during periods of high
demand in the lower grade securities market, it may be
difficult to acquire lower grade securities appropriate
for investment by the Fund. Adverse economic conditions
and investor perceptions thereof (whether or not based
on economic reality) may impair liquidity in the lower
grade securities market and may cause the prices the
Fund receives for its lower grade securities to be
reduced. In addition, the Fund may experience difficulty
in liquidating a portion of its portfolio when necessary
to meet the Fund's liquidity needs or in response to a
specific economic event such as deterioration in the
creditworthiness of the issuers. Under such conditions,
judgment may play a greater role in valuing certain of
the Fund's portfolio instruments than in the case of
instruments trading in a more liquid market. In
addition, the Fund may incur additional expense to the
extent that it is required to seek recovery upon a
default on a portfolio holding or to participate in the
restructuring of the obligation. See "Investment
Objectives and Policies."
Corporate Loans In furtherance of its primary investment objective
and subject to its investment policies and
limitations, the Fund may also invest in primary or
secondary market purchases of loans or participation
interests in loans extended to corporate borrowers or
sovereign governmental entities by commercial banks
and other financial institutions ("Corporate
Loans"). As in the case of lower grade securities,
the Corporate Loans in which the Fund may invest may
be rated below investment grade (lower than Baa by
Moody's and lower than BBB by S&P), or may be unrated
but of comparable quality. As in the case of lower
grade securities, such Corporate Loans can be
expected to provide higher yields than
lower-yielding, higher-rated fixed income securities
but may be subject to greater risk of loss of
principal and income. The risks of investment in such
Corporate Loans are similar in many respects to those
of investment in lower grade securities. There are,
however, some significant differences between
Corporate Loans and lower grade securities. Corporate
Loans are frequently secured by pledges of liens and
security interests in the assets of the borrower, and
9
<PAGE>
the holders of Corporate Loans are frequently the
beneficiaries of debt service subordination
provisions imposed on the borrower's bondholders.
These arrangements are designed to give Corporate
Loan investors preferential treatment over investors
in lower grade securities in the event of a
deterioration in the credit quality of the issuer.
Even when these arrangements exist, however, there
can be no assurance that the principal and interest
owed on the Corporate Loans will be repaid in full.
Corporate Loans generally bear interest at rates set
at a margin above a generally recognized base lending
rate that may fluctuate on a day to day basis, in the
case of the Prime Rate of a U.S. bank, or which may
be adjusted on set dates, typically 30 days but
generally not more than one year, in the case of the
London Interbank Offered Rate ("LIBOR").
Consequently, the value of Corporate Loans held by
the Fund may be expected to fluctuate significantly
less than the value of fixed rate lower grade
securities as a result of changes in the interest
rate environment. On the other hand, the secondary
dealer market for Corporate Loans is not as well
developed as the secondary dealer market for lower
grade securities, and therefore presents increased
market risk relating to liquidity and pricing
concerns. See "Investment Objectives and Policies -
Corporate Loans."
Distressed
Securities The Fund may also invest up to 10% of its total assets
in Distressed Securities. Investment in Distressed
Securities is speculative and involves significant risk,
including possible loss of the principal invested.
Distressed Securities frequently do not produce income
while they are outstanding and may require the Fund to
bear certain extraordinary expenses in order to protect
and recover its investment. Therefore, to the extent the
Fund pursues its secondary objective of capital growth
through investment in Distressed Securities, the Fund's
ability to achieve current income for its Shareholders
may be diminished.
Leverage The use of leverage creates special risks. There can be
no assurance that a leveraging strategy will be
successful during any period in which it is employed.
The Fund intends to utilize leverage to provide the
holders of Shares with a potentially higher return.
Leverage creates risks for holders of Shares including
the likelihood of greater volatility of net asset value
and market price of the Shares and the risk that
fluctuations in interest rates on borrowings and debt or
in the dividend rates on any preferred shares may affect
the return to the holders of Shares. To the extent the
income or capital growth derived from securities
purchased with funds received from leverage exceeds the
cost of leverage, the Fund's return will be greater than
if leverage had not been used. Conversely, if the income
or capital growth from the securities purchased with
such funds is not sufficient to cover the cost of
leverage, the return to the Fund will be less than if
leverage had not been used, and therefore the amount
available for distribution to Shareholders as dividends
and other distributions will be reduced. Moreover, any
decline in the value of the Fund's assets will be borne
entirely by Shareholders in the form of reductions in
the Fund's net asset value, and any requirement that the
Fund sell assets at a loss in order to redeem or repay
any leverage or for other reasons would make it more
difficult for the net asset value to recover.
Accordingly, the effect of leverage in a declining
market is likely to be a greater decline in the net
asset value of the Shares than if the Fund were not
leveraged, which may be reflected in a greater decline
in the market price of the Shares. Conseco Capital in
its best judgment may nevertheless determine to maintain
the Fund's leveraged position if it deems such action to
be appropriate under the circumstances, and it will seek
10
<PAGE>
to limit certain risks associated with leverage by
investing the Fund's assets in certain floating rate
obligations.
During periods in which the Fund is utilizing financial
leverage, the Management and Administration Fee payable
to Conseco Capital will be higher than if the Fund did
not utilize a leveraged capital structure because such
fee is calculated on the basis of the Fund's assets
including proceeds from borrowings for leverage and the
issuance of preferred shares. Certain types of
borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements, including
those relating to asset coverage and portfolio
composition requirements. The Fund may be subject to
certain restrictions on investments imposed by
guidelines of one or more Rating Agencies, which may
issue ratings for the debt securities or preferred
shares issued by the Fund. These guidelines may impose
asset coverage or portfolio composition requirements
that are more stringent than those imposed by the
Investment Company Act. It is not anticipated that these
covenants or guidelines will impede Conseco Capital in
managing the Fund's portfolio in accordance with the
Fund's investment objectives and policies. The Fund at
times may borrow from affiliates of Conseco Capital,
provided that the terms of such borrowings are no less
favorable than those available from comparable sources
of funds in the marketplace. See "Other Investment
Practices--Leverage."
Foreign
Securities The Fund may invest up to 30% of its total assets in the
securities, including High Yield Obligations, of
issuers/obligors domiciled outside the United States or
that are denominated in foreign currencies or
multinational currency units. The Fund expects that such
foreign securities will consist primarily of High Yield
Obligations of issuers/obligors located in emerging
markets. The Fund will treat securities as foreign
securities, for the purpose of the 30% limitation, on
the basis of the domicile of the ultimate unconditional
guarantor of the security, if any, in each instance.
Investing in securities of foreign entities and
securities denominated in foreign currencies involves
certain risks not involved in domestic investments,
including, but not limited to, fluctuations in foreign
exchange rates, future foreign political and economic
developments, different legal systems and the possible
imposition of exchange controls or other foreign
governmental laws or restrictions. Securities prices in
different countries are subject to different economic,
financial, political and social factors. Because the
Fund may invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in
foreign currency exchange rates may affect the value of
securities in the Fund and the unrealized appreciation
or depreciation of investments. Currencies of certain
countries may be volatile and therefore may affect the
value of securities denominated in such currencies. The
Fund may engage in certain transactions to hedge the
currency-related risks of investing in non-U.S. dollar
denominated securities. See "Other Investment
Practices." In addition, with respect to certain foreign
countries, there is the possibility of expropriation of
assets, confiscatory taxation, difficulty in obtaining
or enforcing a court judgment, economic, political or
social instability or diplomatic developments that could
affect investments in those countries. Moreover,
individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rates of inflation,
capital reinvestment, resources, self-sufficiency and
balance of payments position. Certain foreign
investments also may be subject to foreign withholding
taxes. These risks often are heightened for investments
in smaller, emerging capital markets.
11
<PAGE>
As a result of these potential risks, Conseco Capital
may determine that, notwithstanding otherwise favorable
investment criteria, it may not be practicable or
appropriate to invest in a particular country. The Fund
may invest in countries in which foreign investors,
including Conseco Capital, have had no or limited prior
experience.
Convertible
Securities Convertible securities are bonds, preferred stocks and
other securities that provide for a stable stream of
income and give the owner the option to convert the
security into common stock. Convertible securities have
characteristics similar to both fixed-income and equity
securities: in addition to providing fixed income,
convertible securities offer the potential for capital
growth through the conversion feature, which enables the
holder to benefit from increases in the market price of
the underlying common stock. Convertible securities
generally offer lower interest or dividend yields, and
typically have lower ratings, than non-convertible
securities of similar quality, because of the potential
for capital growth and their subordination to other
fixed-income securities, respectively. Convertible
securities may be converted at either a stated price or
stated rate into underlying shares of common stock.
While no securities investments are without risk,
investments in convertible securities generally entail
less risk than investments in common stock of the same
issuer, though there can be no assurance of capital
growth or current income, as securities prices fluctuate
and issuers of the convertible securities may default on
their obligations.
Other Investment
Management
Techniques The Fund may use various other investment management
techniques that also involve special considerations,
including engaging in interest rate transactions,
utilization of options and futures transactions, making
forward commitments and lending its portfolio
securities. For further discussion of these and other
practices and the associated risks and special
considerations, see "Other Investment Policies."
Illiquid Securities The Fund may invest without limit in
obligations for which no readily available market exists
or which are otherwise illiquid, subject to the Fund's
policy of not investing in excess of 30% of the Fund's
assets in foreign securities or in excess of 10% of its
assets in Distressed Securities. The Fund may not be
able readily to dispose of illiquid securities at prices
that approximate those at which the Fund could sell such
securities if they were more widely traded and, as a
result of such illiquidity, the Fund may have to sell
other investments or engage in borrowing transactions if
necessary to raise cash to meet its obligations.
Non-Diversified Status The Fund is classified as a "non-diversified"
management investment company under the Investment
Company Act, which means that the Fund may invest a
greater portion of its assets in a limited number of
issuers than would be the case if the Fund were
classified as a "diversified" management investment
company. Accordingly, the Fund may be subject to greater
risk with respect to its portfolio securities than a
management investment company that is "diversified"
because changes in the financial condition or market
assessment of a single issuer may cause greater
fluctuations in the net asset value of the Shares.
12
<PAGE>
Market Price, and Net
Asset Value of Shares Whether investors will realize gains or losses upon
the sale of Shares will not depend directly upon the
Fund's net asset value, but will depend upon the
market price of the Shares at the time of sale. Since
the market price of the Shares will be determined by
such factors as relative demand for and supply of the
Shares in the market, general market and economic
conditions and other factors beyond the control of
the Fund, the Fund cannot predict whether the Shares
will trade at, below or above net asset value or at,
below or above the initial offering price. Shares of
closed-end management investment companies in the
past frequently have traded at a discount to their
net asset values. The risk of loss associated with
this characteristic of closed-end management
investment companies may be greater for investors
purchasing Shares in the initial public offering and
expecting to sell the Shares soon after the
completion thereof. The Shares are designed primarily
for long-term investors, and investors in the Shares
should not view the Fund as a vehicle for trading
purposes. See "Risk Factors and Special
Considerations" and "Description of Shares."
Certain Provisions of
the Declaration
of Trust The Fund's Declaration of Trust contains provisions
limiting (i) the ability of other entities or persons
to acquire control of the Fund, (ii) the Fund's
freedom to engage in certain transactions, and (iii)
the ability of the Fund's Trustees or Shareholders to
amend the Declaration of Trust. These provisions of
the Declaration of Trust may be regarded as
"anti-takeover" provisions. These provisions could
have the effect of depriving the Shareholders of
opportunities to sell their Shares at a premium over
prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund in a
tender offer or similar transaction. See "Investment
Objectives and Policies," "Risk Factors and Special
Considerations" and "Description of Shares."
FEE TABLE
The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, directly or
indirectly.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price) None
Automatic Dividend Reinvestment Plan Fees None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO SHARES) (1)
Management and Administration Fees 0.90%
Interest Payments on Borrowed Funds None
Shareholder Servicing Fee 0.10%
Other Expenses 0.25%
Total Annual Fund Expenses 1.25%
- ----------------------
(1) See "Management of the Fund" for additional information. In the event the
Fund utilizes leverage by borrowing in an amount equal to approximately 33
1/3% of the Fund's total assets (including the amount obtained from
leverage), it is estimated that, as a percentage of net assets attributable
to the Shares, the Management and Administration Fee would be _____%,
Interest Payments on Borrowed Funds (assuming an interest rate of [ _____ ]
%) would be ____%, the Shareholder Servicing Fee would be _____%, Other
13
<PAGE>
Expenses would be ____% and Total Annual Fund Expenses would be _____%.
"Other Expenses" amounts are based on estimates through the end of the
Fund's first fiscal year and are annualized. See "Risk Factors and Special
Considerations--Leverage" and "Other Investment Practices--Leverage."
EXAMPLE
The following Example demonstrates the projected dollar amount of total
cumulative expense that would be incurred over various periods with respect to a
hypothetical investment in the Fund. These amounts are based upon payment by the
Fund of operating expenses at the levels set forth in the above table.
1 Year 3 Years 5 Years 10 Years
An investor would directly or indirectly pay
the following expenses on a $1,000 investment
in the Fund, assuming (i) total annual
expenses of 1.25% (assuming no leverage) and
____% (assuming leverage of 33 1/3% of the
Fund's total assets) and (ii) a 5% annual
return throughout the periods and
reinvestment of all dividends and other
distributions at net asset value:
Assuming No Leverage
Assuming 33 1/3 % Leverage
This Example assumes that the percentage amounts listed under Total Annual Fund
Expenses remain the same in the years shown. The above tables and the assumption
in the Example of a 5% annual return and reinvestment at net asset value are
required by regulation of the Securities and Exchange Commission ("SEC")
applicable to all investment companies; the assumed 5% annual return is not a
prediction of, and does not represent, the projected or actual performance of
the Shares. Actual expenses and annual rates of return may be more or less than
those assumed for purposes of the Example. In addition, although the Example
assumes reinvestment of all dividends and other distributions at net asset
value, participants in the Fund's Automatic Dividend Reinvestment Plan may
receive Shares obtained by the DRIP Agent at or based on the market price in
effect at that time, which may be at, above or below net asset value.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AND
THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
14
<PAGE>
THE FUND
Conseco Strategic Income Fund ("Fund") is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), as a
non-diversified, closed-end management investment company. The Fund was
organized as a business trust under the laws of the Commonwealth of
Massachusetts on June 2, 1998 and has no operating history. The Fund's principal
office is located at 11815 N. Pennsylvania Street, Carmel, Indiana 46032, and
its telephone number is [ _______________ ]. Conseco Capital Management, Inc.
("Conseco Capital" or the "Manager"), a Delaware corporation, is the Fund's
investment manager and administrator.
The Fund has been organized as a closed-end management investment company.
Closed-end management investment companies differ from open-end investment
companies (commonly referred to as mutual funds) in that closed-end management
investment companies do not redeem their securities at the option of the
shareholder, whereas mutual funds issue securities redeemable at net asset value
at any time at the option of the shareholder and typically engage in a
continuous offering of their shares. Mutual funds are subject to continuous
asset in-flows and out-flows that can complicate portfolio management, whereas
closed-end funds generally can stay more fully invested. To facilitate
redemption obligations, mutual funds are subject to more stringent regulatory
limitations on certain investments, such as investments in illiquid securities,
than are closed-end funds. However, shares of closed-end companies frequently
trade at a discount from net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after the completion
of the public offering.
USE OF PROCEEDS
The net proceeds to the Fund from this initial public offering are estimated to
be $ ($ if the Underwriters' over-allotment option is exercised in full) after
deducting organizational and offering expenses. The net proceeds will be
invested in accordance with the Fund's investment objectives and policies during
a period not to exceed six months from the closing of the initial public
offering. Pending such investment, the net proceeds may be invested in
short-term interest bearing, investment grade securities, and/or obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
A portion of the Fund's organizational and offering expenses has been advanced
by Conseco Capital and will be repaid by the Fund upon completion of the initial
public offering. There is no sales load or underwriting discount imposed on
sales of Shares in the initial public offering. Conseco Capital or Conseco, Inc.
(not the Fund) will pay a commission from its own assets to the Underwriters in
connection with sales of Shares in this offering. See "Underwriting."
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES. The Fund's primary investment objective is to seek high
current income. The Fund will also seek capital growth as a secondary objective
to the extent consistent with its objective of seeking high current income. The
Fund is designed for investors willing to assume additional risk in return for
the potential for high current income, primarily, and the potential for capital
growth, secondarily. The Fund is not intended to be a complete investment
program and there is no assurance that the Fund will achieve its objectives. The
Fund's investment objectives cannot be changed without approval by the holders
of a majority (as defined in the Investment Company Act) of the Fund's
outstanding voting securities.
INVESTMENT POLICIES. Under normal market conditions, the Fund will invest at
least 65% of its total assets in high yield bonds, debentures, notes, corporate
loans, convertible debentures, and other debt instruments rated below investment
grade (lower than Baa by Moody's Investors Service, Inc. ("Moody's") or lower
than BBB by Standard & Poor's a division of the McGraw-Hill Companies, Inc.
("S&P"), or comparably rated by another nationally recognized securities
organization (each, a "Rating Agency")), or unrated but determined by Conseco
Capital to be of comparable quality (collectively, "High Yield Obligations").
Lower grade income securities are commonly known as "junk bonds." The Fund may
invest up to 30% of its total assets in the securities, including High Yield
Obligations, of issuers/obligors
15
<PAGE>
domiciled outside the United States or that are denominated in foreign
currencies or multinational currency units. The Fund expects that such foreign
securities will consist primarily of High Yield Obligations of issuers/obligors
located in emerging markets. The Fund will treat securities as foreign
securities, for the purpose of the 30% limitation, on the basis of the domicile
of the ultimate unconditional guarantor of the security, if any, in each
instance. The Fund may also invest up to 10% of its total assets in securities
that are the subject of bankruptcy proceedings or in default as to payment of
principal and/or interest or in significant risk of being in such default, or
that are rated in the lower rating categories (Ca or lower by Moody's and CC or
lower by S&P) or which, if unrated, are in the judgment of Conseco Capital of
equivalent quality (collectively, "Distressed Securities").
At times, the Fund expects to utilize financial leverage through borrowings,
including the issuance of debt securities, or the issuance of preferred shares
or through other transactions, such as reverse repurchase agreements, which have
the effect of financial leverage. The Fund intends to utilize financial leverage
in a maximum amount equal to approximately 33 1/3% of its total assets
(including the amount obtained through leverage). The Fund initially expects to
use leverage in an amount equal to approximately 25% of its total assets. The
Fund generally will not utilize leverage if it anticipates that the Fund's
leveraged capital structure would result in a lower return to Shareholders than
that obtainable over time with an unleveraged capital structure. Use of
financial leverage creates an opportunity for increased income and capital
growth for the Shareholders but, at the same time, creates special risks, and
there can be no assurance that a leveraging strategy will be successful during
any period in which it is employed. See "Other Investment Practices--Leverage"
and "Risk Factors and Special Considerations--Leverage."
In certain market conditions, Conseco Capital may determine that securities
rated investment grade (i.e., at least Baa by Moody's or BBB by S&P or
comparably rated by another Rating Agency) offer significant opportunities for
high income and capital growth. In such conditions, the Fund may invest less
than 65% of its total assets in High Yield Obligations. In addition, the Fund
may implement various temporary "defensive" strategies at times when Conseco
Capital determines that conditions in the markets make pursuing the Fund's basic
investment strategy inconsistent with the best interests of its Shareholders.
During the first six months of operation of the Fund, and during all periods
when less than 65% of the Fund's assets are invested in High Yield Obligations,
the Fund's yield may be expected to be lower than if at least 65% of the Fund's
assets were invested in High Yield Obligations. These strategies may include an
increase in the portion of the Fund's assets invested in higher-quality debt
securities. The Fund may invest in money market instruments consisting of
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, certificates of deposit, time deposits, bankers' acceptances,
short-term investment grade corporate bonds and other short-term debt
instruments, and repurchase agreements. Under normal market conditions, the Fund
does not expect to have a substantial portion of its assets invested in money
market instruments. However, when Conseco Capital determines that adverse market
conditions exist, the Fund may adopt a temporary defensive posture and invest
all or a portion of its assets in money market instruments.
In selecting investments for the Fund's portfolio, Conseco Capital will seek to
identify issuers and industries that Conseco Capital believes are likely to
experience stable or improving financial conditions. Conseco Capital believes
that this strategy should enhance the Fund's ability to earn high current income
while also providing opportunities for capital growth. Conseco Capital's
analysis may include consideration of general industry trends, the issuer's
managerial strength, changing financial condition, borrowing requirements or
debt maturity schedules, and its responsiveness to changes in business
conditions and interest rates. Conseco Capital may also consider relative values
based on anticipated cash flow, interest or dividend coverage, asset coverage
and earnings prospects. The Fund will seek its secondary objective of capital
growth by investing in securities that Conseco Capital expects may appreciate in
value as a result of favorable developments affecting the business or prospects
of the issuer which may improve the issuer's financial condition and credit
rating or as a result of declines in long-term interest rates. Of course there
is no assurance the Fund's strategies will be successful.
Following are annual return data for the market for lower grade debt securities
(as measured by the Merrill Lynch High-Yield Master Index), the market for
corporate loans (as measured by the Goldman Sachs / Loan Pricing Corporation
Liquid Leveraged Loan Index), the market for investment grade debt securities
(as measured by the Merrill Lynch Long-Term Corporate Index), and the U.S.
Treasury bill market (as measured by the Merrill Lynch U.S. Treasury 91-Day
Index), for selected years.
16
<PAGE>
<TABLE>
<CAPTION>
GOLDMAN SACHS/
LOAN PRICING DEFAULT RATES
MERRILL LYNCH CORPORATION MERRILL LYNCH MERRILL LYNCH ON U.S. ISSUED
HIGH-YIELD LIQUID LEVERAGED LONG-TERM U.S. TREASURY LOWER GRADE
MASTER INDEX LOAN INDEX CORPORATE INDEX 91-DAY INDEX INCOME SECURITIES
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1991 39.17% N/A 17.60% 6.38% 10.5%
1992 17.44% N/A 8.59% 3.93% 4.6%
1993 16.69% 11.10% 11.57% 3.19% 3.3%
1994 -1.03% 9.69% -3.91% 4.19% 1.8%
1995 20.46% 9.05% 21.66% 6.03% 3.2%
1996 11.27% 8.19% 2.76% 5.31% 1.4%
1997 13.27% 8.59% 10.43% 5.33% 1.1%
</TABLE>
The Merrill Lynch High-Yield Master Index is an unmanaged composite index of
securities rated below BBB by S&P that are not in default. The Goldman
Sachs/Loan Pricing Corporation Liquid Leveraged Loan Index is a total return
index of actively traded highly leveraged loans selected, from time to time, by
Goldman Sachs and Loan Pricing Corporation. This index is currently based on
eleven loans. The Merrill Lynch Long-Term Corporate Index is an unmanaged index
which includes fixed coupon domestic corporate bonds with at least $100 million
par amount outstanding that are rated between BBB and AAA by S&P. The Merrill
Lynch U.S. Treasury 91-Day Index is an average price based on all three-month
Treasury bill auctions over the course of the previous month. U.S. Treasury
bills are direct obligations of the U.S. Government. The Fund will have no
direct investment in, nor will its performance be indicative of, these unmanaged
indices. The statistical information with respect to the historical default
rates is based on information the Fund obtained from Chase Securities, Inc.
The market of outstanding lower grade income securities has increased over the
years. The outstanding principal amounts of lower grade income securities of
U.S. issuers in 1984 was $59 billion, in 1989 was $244 billion, in 1994 was $270
billion and in 1997 was over $450 billion. In addition, the market for leveraged
loans has become larger and more liquid in recent years. The volume of leveraged
loans originated in 1997 (priced at LIBOR plus 125 basis points or higher)
reached $194 billion compared to $134 billion in 1996, $101 billion in 1995 and
$81 billion in 1994. Additionally, the leveraged loan secondary trading market
increased to a record volume of $61.9 billion during 1997 compared to $41.0
billion in 1996, $33.8 billion in 1995 and $20.8 billion in 1994. The
statistical information with respect to the principal amounts of outstanding
lower grade debt securities is based on information the Fund obtained from Chase
Securities, Inc. The statistical information with respect to the volume of
leveraged loans originated and the secondary trading market was provided by Loan
Pricing Corporation.
The Fund's investments in High Yield Obligations may include securities with
fixed or variable rates of interest, zero coupon securities, payment in kind
securities or other deferred payment securities, convertible debt obligations
and convertible preferred stock, corporate loans, participation interests in
commercial loans, mortgage-related securities, asset-backed securities,
municipal obligations, government securities, stripped securities, commercial
paper and other short-term debt obligations. The issuers of the Fund's portfolio
securities may include domestic and foreign corporations, partnerships, trusts
or similar entities, and governmental entities or their political subdivisions,
agencies or instrumentalities. The Fund's portfolio will be invested without
regard to maturity. In connection with its investments in corporate debt
securities, or restructuring of investments owned by the Fund, the Fund may
receive warrants or other non-income producing equity securities. The Fund may
retain such securities, including equity shares received upon conversion of
convertible securities.
PORTFOLIO SECURITIES
LOWER GRADE SECURITIES. Under normal market conditions, the Fund will invest at
least 65% of its total assets in High Yield Obligations, which include high
yield bonds rated below investment grade (lower than Baa by Moody's or lower
than BBB by S&P or comparably rated by another Rating Agency) or unrated but
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determined by the Manager to be of comparable quality. Securities rated Ba by
Moody's are judged to have speculative elements; their future cannot be
considered as well assured and often the protection of interest and principal
payments may be very moderate. Securities rated BB by S&P are regarded as having
predominantly speculative characteristics and, while such obligations have less
near-term vulnerability to default than other speculative grade debt, in the
opinion of S&P they face major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. Securities rated C by
Moody's are regarded by Moody's as having extremely poor prospects of ever
attaining any real investment standing. Securities rated D by S&P are in default
and the payment of interest and/or repayment of principal is in arrears. See
"Appendix A--Ratings of Corporate Bonds" for additional information concerning
rating categories of Moody's and S&P.
Lower grade securities, though high yielding, are characterized by high risk.
They may be subject to certain risks with respect to the issuing entity and to
greater market fluctuations than certain lower yielding, higher rated
securities. The retail secondary market for lower grade securities may be less
liquid than that of higher rated securities; adverse conditions could make it
difficult at times for the Fund to sell certain securities or could result in
lower prices than those used in calculating the Fund's net asset value. Lower
grade securities may be particularly susceptible to economic downturns. It is
likely that an economic recession could disrupt severely the market for such
securities and may have an adverse impact on the value of such securities. In
addition, it is likely that any such economic downturn could adversely affect
the ability of the issuers of such securities to repay principal and pay
interest thereon and increase the incidence of default for such securities. The
higher credit risk associated with lower grade securities potentially can have a
greater effect on the value of such securities than may be the case with higher
quality issues of comparable maturity, and will be a substantial factor in the
Fund's relative Share price volatility. See "Risk Factors and Special
Considerations."
The prices of debt securities generally are inversely related to interest rate
changes; however, the price volatility also is inversely related to coupon.
Accordingly, lower grade securities may be relatively less sensitive to interest
rate changes than higher quality securities of comparable maturity, because of
their higher coupon. This higher coupon is what the investor receives in return
for bearing greater credit risk.
The ratings of Moody's, S&P and the other Rating Agencies represent their
opinions as to the quality of the obligations which they undertake to rate.
Ratings are relative and subjective and, although ratings may be useful in
evaluating the safety of interest and principal payments, they do not evaluate
the market value risk of such obligations. Although these ratings may be an
initial criterion for selection of portfolio investments, Conseco Capital also
will evaluate these securities and the ability of the issuers of such securities
to pay interest and principal. To the extent that the Fund invests in lower
grade securities that have not been rated by a Rating Agency, the Fund's ability
to achieve its investment objectives will be more dependent on Conseco Capital's
credit analysis than would be the case when the Fund invests in rated
securities.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. The Fund may invest in
zero coupon, pay-in-kind and deferred payment securities, including those that
are lower grade securities. Zero coupon securities are securities that are sold
at a discount to par value and on which interest payments are not made during
the life of the security or before another specified date. Upon maturity, the
holder is entitled to receive the par value of the security. While interest
payments are not made on such securities, holders thereof are required, for
federal income tax purposes, to accrue income with respect to these securities
as if it were actually received. Because the Fund must distribute this income to
Shareholders, to the extent that Shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional Shares, the Fund will have
fewer assets with which to purchase income-producing securities. Such
distributions may require the Fund to sell other securities and incur a gain or
loss at a time it may otherwise not want to in order to obtain the cash needed
for these distributions. Pay-in-kind securities are securities that have
interest payable by delivery of additional securities. Upon maturity, the holder
is entitled to receive the aggregate par value of the securities. Deferred
payment securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Zero coupon, pay-in-kind and
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deferred payment securities are subject to greater fluctuation in value and may
have less liquidity in the event of adverse market conditions than comparably
rated securities paying cash interest at regular interest payment periods.
CORPORATE LOANS. The corporate loans in which the Fund may invest ("Corporate
Loans") generally consist of direct obligations of a borrower ("Borrower")
undertaken to finance the growth of the Borrower's business internally or
externally, or to finance a capital restructuring. Corporate Loans may also
include obligations of a Borrower issued in connection with a restructuring or a
bankruptcy. A significant portion of the Corporate Loans in which the Fund will
invest are highly leveraged loans, such as leveraged buy-out loans, leveraged
recapitalization loans and other types of acquisition loans. Such Corporate
Loans may be structured to include both term loans, which are generally fully
funded at the time of the Fund's investment, and revolving credit facilities,
which would require the Fund to make additional investments in Corporate Loans
as required under the terms of the credit facility. Such Corporate Loans may
also include receivables purchase facilities, which are similar to revolving
credit facilities secured by a Borrower's receivables. Subject to the 30%
limitation on the Fund's investment in foreign securities, the Corporate Loans
in which the Fund may invest may include those of foreign Borrowers or obligors,
determined for the purpose of this limitation on the basis of the domicile of
the ultimate unconditional guarantor, if any, in each instance. See "Risk
Factors and Special Considerations -- Corporate Loans."
The Fund may invest in senior and subordinated Corporate Loans, both secured and
unsecured. The Corporate Loans in which the Fund invests may be senior debt
obligations of the Borrower and may, in some instances, hold the most senior
position in the capitalization structure of the Borrower (i.e., not subordinated
to other debt obligations in right of payment). Corporate Loans which are senior
debt obligations of the Borrower may be wholly or partially secured by
collateral, or may be unsecured. However, even in the case of a secured
Corporate Loan, upon an event of default the ability of a lender to have access
to the collateral, if any, or otherwise recover its investment may be limited by
bankruptcy and other insolvency laws. The value of the collateral may decline
subsequent to the Fund's investment in the Corporate Loan. Under certain
circumstances, the collateral may be released with the consent of the syndicate
of lenders and the lender which is administering the Corporate Loan on behalf of
the syndicate ("Agent Bank") or pursuant to the terms of the underlying credit
agreement with the Borrower. There is no assurance that the liquidation of the
collateral would satisfy the Borrower's obligations in the event of the
nonpayment of scheduled interest or principal, or that the collateral could be
readily liquidated. As a result, the Fund might not receive payments to which it
is entitled and thereby may experience a decline in the value of the investment
and possibly, its net asset value. Additionally, no interest is payable on
unsecured or undersecured Corporate Loans following the filing of a bankruptcy
petition in respect of the obligor.
In addition to senior and secured Corporate Loans, the Fund may invest in
Corporate Loans which are unsecured and subordinated. A Corporate Loan which is
unsecured is not supported by any specific pledge of collateral and therefore
constitutes only a general obligation of the Borrower. In addition to being
unsecured a Corporate Loan in which the Fund may invest may be subordinate in
right of payment to the senior debt obligations of the Borrower. Upon a
liquidation or bankruptcy of the Borrower the senior debt obligations of the
Borrower are often required to be paid in full before the subordinated
debtholders are permitted to receive any distribution on behalf of their claim.
Distributions, if any, to subordinated debtholders in such situations may
consist in whole or in part in non-income producing securities, including common
stock. Accordingly, following an event of default or liquidation or bankruptcy
of a Borrower, there can be no assurance that the assets of the Borrower will be
sufficient to satisfy the claims of unsecured and subordinated debtholders or
that such debtholders will receive income producing debt securities in
satisfaction of their claims. As a result, the Fund might not receive payments
to which it is entitled and thereby may experience a decline in the value of its
investment and possibly, its net asset value.
The rate of interest payable on floating or variable rate Corporate Loans is
established as the sum of a base lending rate used by commercial lenders plus a
specified margin. These base lending rates generally are the Prime Rate of a
designated U.S. bank, LIBOR, the CD rate or another base lending rate used by
commercial lenders. The interest rate on Prime Rate-based Corporate Loans floats
daily as the Prime Rate changes, while the interest rate on LIBOR-based and
CD-based Corporate Loans is reset periodically, typically every 30 days to one
year. Certain of the floating or variable rate Corporate Loans in which the Fund
will invest may permit the Borrower to select an interest rate reset period of
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up to one year. A portion of the Fund's portfolio may be generally more
susceptible to interest rate risks in the event of fluctuations in prevailing
interest rates. Although the Fund's net asset value will vary, the Fund's policy
of acquiring interests in variable rate corporate loans is intended to minimize
fluctuations in the Fund's net asset value as a result of changes in interest
rates.
The Fund may receive and/or pay certain fees in connection with its investments
in Corporate Loans. These fees are in addition to interest payments received and
may include facility fees, commissions and prepayment penalty fees. When the
Fund buys a Corporate Loan it may receive a facility fee and when it sells a
Corporate Loan it may pay a facility fee. In certain circumstances, the Fund may
receive a prepayment penalty fee on the prepayment of a Corporate Loan by a
Borrower. These fees are intended to adjust the yield on such Corporate Loans.
In connection with the acquisition of Corporate Loans, the Fund may also acquire
warrants and other debt or equity securities of the Borrower or its affiliates.
The acquisition of such securities will only be incidental to the Fund's
purchase of an interest in a Corporate Loan.
In making an investment in a Corporate Loan, Conseco Capital will consider
factors deemed by it to be appropriate to the analysis of the Borrower and the
Corporate Loan. Such factors include financial ratios of the Borrower such as
pre-tax interest coverage, leverage ratios, and the ratios of cash flows to
total debts and the ratio of tangible assets to debt. In its analysis of these
factors, Conseco Capital also will be influenced by the nature of the industry
in which the Borrower is engaged, the nature of the Borrower's assets, any
guarantees by third parties and Conseco Capital's assessments of the general
quality of the Borrower.
A Borrower also may be required to comply with various restrictive covenants
contained in any loan agreement between the Borrower and the lending syndicate
("Corporate Loan Agreement"). Such covenants, in addition to requiring the
scheduled payment of interest and principal, may include restrictions on
dividend payments and other distributions to stockholders, provisions requiring
the Borrower to maintain specific financial ratios or relationships and limits
on total debt. In addition, a Corporate Loan Agreement may contain a covenant
requiring the Borrower to prepay the Corporate Loan with any excess cash flow.
Excess cash flow generally includes net cash flow after scheduled debt service
payments and permitted capital expenditures, among other things, as well as the
proceeds from asset dispositions or sales of securities. A breach of covenant
(after giving effect to any cure period) which is not waived by the Agent Bank
and the lending syndicate normally is an event of acceleration, i.e., the Agent
Bank has the right to call the outstanding Corporate Loan, generally at the
request of the lending syndicate.
The Fund has no restrictions on portfolio maturity, but it is anticipated that a
majority of the Corporate Loans will have stated maturities ranging from five to
ten years. However, such Corporate Loans usually will require, in addition to
scheduled payments of interest and principal, the prepayment of the Corporate
Loans from excess cash flow, as discussed above, and may permit the Borrower to
prepay at its election. The degree to which Borrowers prepay Corporate Loans,
whether as a contractual requirement or at their election, may be affected by
general business conditions, the financial condition of the Borrower and
competitive conditions among lenders, among other factors. Accordingly,
prepayments cannot be predicted with accuracy.
Loans to non-U.S. Borrowers or to U.S. Borrowers with significant
non-dollar-denominated revenues may provide for conversion of all or part of the
loan from dollar-denominated obligation into a foreign currency obligation at
the option of the Borrower.
PARTICIPATION INTERESTS. Corporate Loans in which the Fund may invest are
typically originated, negotiated and structured by a syndicate of lenders
("Co-Lenders") consisting of commercial banks, thrift institutions, insurance
companies, finance companies or other financial institutions, one or more of
which acts as Agent Bank. Co-Lenders may sell Corporate Loans to third parties
called "Participants." The Fund may invest in a Corporate Loan either by
participating as a Co-Lender at the time the loan is originated or by buying an
interest in the Corporate Loan from a Co-Lender or a Participant. Co-Lenders and
Participants interposed between the Fund and a Borrower, together with Agent
Banks, are referred to herein as "Intermediate Participants."
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The Fund may purchase a Corporate Loan from an Intermediate Participant by means
of a novation, an assignment or a participation. In a novation, the Fund would
assume all the rights of the Intermediate Participant in a Corporate Loan,
including the right to receive payments of principal and interest and other
amounts directly from the Borrower and to enforce its rights as lender directly
against the Borrower and would assume all of the obligations of the Intermediate
Participant, including any obligation to make future advances to the Borrower.
As a result, therefore, the Fund would have the status of a Co-Lender. As an
alternative, the Fund may purchase an assignment of all or a portion of an
Intermediate Participant's interest in a Corporate Loan, in which case the Fund
may be required generally to rely on the assigning lender to demand payment and
enforce its rights against the Borrower, but would otherwise be entitled to all
of such lender's rights in the Corporate Loan. The Fund also may purchase a
participation in a portion of the rights of an Intermediate Participant in a
Corporate Loan by means of a participation agreement with such Intermediate
Participant. A participation in the rights of an Intermediate Participant is
similar to an assignment in that the Intermediate Participant transfers to the
Fund all or a portion of an interest in a Corporate Loan. Unlike an assignment,
however, a participation does not establish any direct relationship between the
Fund and the Borrower. In such a case, the Fund would be required to rely on the
Intermediate Participant that sold the participation not only for the
enforcement of the Fund's rights against the Borrower but also for the receipt
and processing of payments due to the Fund under the Corporate Loan. The Fund
will not act as an Agent Bank, guarantor, sole negotiator or sole structurer
with respect to a Corporate Loan.
In a typical Corporate Loan, the Agent Bank administers the terms of the
Corporate Loan Agreement and is responsible for the collection of principal and
interest and fee payments from the Borrower and the apportionment of these
payments to the credit of all investors which are parties to the Corporate Loan
Agreement. The Fund generally will rely on the Agent Bank or an Intermediate
Participant to collect its portion of the payments on the Corporate Loan.
Furthermore, the Fund will rely on the Agent Bank to enforce appropriate
creditor remedies against the Borrower. Typically, under Corporate Loan
Agreements, the Agent Bank is given broad discretion in enforcing the Corporate
Loan Agreement, and it is obliged to use only the same care it would use in the
management of its own property. For these services the Borrower compensates the
Agent Bank. Such compensation may include special fees paid on structuring and
funding the Corporate Loan and other fees paid on a continuing basis.
In the event that an Agent Bank becomes insolvent, or has a receiver,
conservator, or similar official appointed for it by the appropriate bank
regulatory authority or becomes a debtor in a bankruptcy proceeding, assets held
by the Agent Bank under the Corporate Loan Agreement should remain available to
holders of a Corporate Loan. If, However, assets held by the Agent Bank for the
benefit of the Fund are determined by an appropriate regulatory authority or
court to be subject to the claims of the Agent Bank's general or secured
creditors, the Fund might incur certain costs and delays in realizing payment on
a Corporate Loan, or suffer a loss of principal and/or interest. In situations
involving Intermediate Participants similar risks may arise, as described below.
Intermediate Participants may have certain obligations pursuant to a Corporate
Loan Agreement, which may include the obligation to make future advances to the
Borrower in connection with revolving credit facilities in certain
circumstances. The Fund will not invest in Corporate Loans that would require
the Fund to make any additional investments in connection with such future
advances if such commitments would exceed 20% of the Fund's total assets. To the
extent the Fund's investments in participation interests require the segregation
of greater portions of its investments in more liquid instruments to meet future
advances obligations on a timely basis, the Fund may be required to liquidate
certain of its investments at a loss or forego certain investment opportunities,
possibly resulting in a lower yield than that which it might otherwise achieve.
CONVERTIBLE SECURITIES AND CERTAIN EQUITY SECURITIES. The Fund may invest in
convertible securities. Convertible securities may be converted at either a
stated price or stated rate into underlying shares of common stock. Convertible
securities have characteristics similar to both fixed-income and equity
securities. Convertible securities generally are subordinated to other similar
but non-convertible securities of the same issuer, although convertible bonds,
as corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to shares of common stock,
of the same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
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The Fund also may invest in warrants, preferred stock or other equity securities
of U.S. and foreign issuers when consistent with the Fund's objectives. The Fund
may hold such investments as a result of purchases of unit offerings of debt
securities which include such securities or in connection with an actual or
proposed conversion or exchange of debt securities. The Fund will treat
investments acquired in this manner, together with any holdings of convertible
securities, as debt securities for purposes of its policy to invest at least 65%
of its total assets, under normal circumstances, in High Yield Obligations. The
Fund may also purchase equity securities not associated with debt securities
when, in the opinion of the Manager, such purchase is appropriate.
Although to a lesser extent than with fixed-income securities, the market value
of convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition, because of
the conversion feature, the market value of convertible securities tends to vary
with fluctuations in the market value of the underlying common stock. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
Convertible securities are investments that provide for a stable stream of
income with generally higher yields than common stock. There can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. A convertible security, in addition to providing fixed
income, offers the potential for capital growth through the conversion feature,
which enables the holder to benefit from increases in the market price of the
underlying common stock. There can be no assurance of capital growth, however,
because securities prices fluctuate. Convertible securities, however, generally
offer lower interest or dividend yields than non-convertible securities of
similar quality because of the potential for capital growth.
DISTRESSED SECURITIES. The Fund may invest up to 10% of its total assets in
Distressed Securities. Investment in Distressed Securities is speculative and
involves significant risk, including possible loss of the principal invested.
Distressed Securities frequently do not produce income while they are
outstanding and may require the Fund to bear certain extraordinary expenses in
order to protect and recover its investment. Therefore, to the extent the Fund
pursues its secondary objective of capital growth through investment in
Distressed Securities, the Fund's ability to achieve current income for its
Shareholders may be diminished. The Fund also will be subject to significant
uncertainty as to when and in what manner and for what value the obligations
evidenced by the Distressed Securities will eventually be satisfied (e.g.,
through a liquidation of the obligor's assets, an exchange offer or plan of
reorganization involving the Distressed Securities or a payment of some amount
in satisfaction of the obligation). In addition, even if an exchange offer is
made or plan of reorganization is adopted with respect to Distressed Securities
held by the Fund, there can be no assurance that the securities or other assets
received by the Fund in connection with such exchange offer or plan of
reorganization will not have a lower value or income potential than may have
been anticipated when the investment was made. Moreover, any securities received
by the Fund upon completion of an exchange offer or plan of reorganization may
be restricted as to resale. As a result of the Fund's participation in
negotiations with respect to any exchange offer or plan of reorganization with
respect to an issuer of Distressed Securities, the Fund may be restricted from
disposing of such securities. See "Risk Factors and Special Considerations."
ILLIQUID SECURITIES. The Fund may invest without limit in obligations for which
no readily available market exists or which are otherwise illiquid, subject to
the Fund's policy of not investing in excess of 30% of the Fund's assets in
foreign securities or in excess of 10% of its assets in Distressed Securities.
When purchasing securities that have not been registered under the Securities
Act of 1933, as amended ("Securities Act"), and that are not readily marketable,
the Fund will endeavor, to the extent practicable, to obtain the right to
registration at the expense of the issuer. There may be a lapse of time between
the Fund's decision to sell any such security and the registration of the
security permitting sale. During any such period, the price of the securities
will be subject to market fluctuations. The Fund may purchase certain securities
eligible for sale to qualified institutional buyers as contemplated by Rule 144A
under the Securities Act ("Rule 144A securities"). Rule 144A provides an
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exemption from the registration requirements of the Securities Act for the
resale of certain restricted securities to certain qualified institutional
buyers. One effect of Rule 144A is that certain restricted securities may be
considered liquid, though no assurance can be given that a liquid market for
Rule 144A securities will develop or be maintained.
COLLATERALIZED BOND OBLIGATIONS. A collateralized bond obligation ("CBO") is a
type of asset-backed security. Specifically, a CBO is an investment grade bond
which is backed by a diversified pool of high risk, high yield fixed income
securities. The pool of high yield securities is separated into "tiers"
representing different degrees of credit quality. The top tier of CBOs is backed
by the pooled securities with the highest degree of credit quality and pays the
lowest interest rate. Lower-tier CBOs represent lower degrees of credit quality
and pay higher interest rates to compensate for the attendant risk. The bottom
tier typically receives the residual interest payments (I.E. money that is left
over after the higher tiers have been paid) rather than a fixed interest rate.
The return on the bottom tier of CBOs is especially sensitive to the rate of
defaults in the collateral pool. To the extent the Fund invests in CBOs, under
normal market conditions, if would expect to invest in the lower-tier CBOs.
FOREIGN SECURITIES. The Fund may invest up to 30% of its total assets in the
securities, including High Yield Obligations, of issuers/obligors domiciled
outside the United States or that are denominated in foreign currencies or
multinational currency units. The Fund expects that such foreign securities will
consist primarily of High Yield Obligations of issuers/obligors located in
emerging markets. The Fund will treat securities as foreign securities, for the
purpose of the 30% limitation, on the basis of the domicile of the ultimate
unconditional guarantor of the security, if any, in each instance. Investing in
foreign securities involves certain risks. See "Risk Factors and Special
Considerations - Foreign Securities."
Foreign securities in which the Fund may invest include obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, or supranational entities, that are
determined by Conseco Capital to be of comparable quality to the other
obligations in which the Fund may invest. Supranational entities include
international organizations designated or supported by governmental entities to
promote economic reconstruction or development and international banking
institutions and related government agencies. Examples include the International
Bank for Reconstruction and Development (the World Bank), the European Coal and
Steel Community, the Asian Development Bank and the InterAmerican Development
Bank.
Foreign securities markets generally are not as developed or efficient as those
in the United States. Securities of some foreign issuers are less liquid and
more volatile than securities of comparable U.S. issuers. Similarly, volume and
liquidity in most foreign securities markets are less than in the United States
and, at times, volatility of price can be greater than in the United States.
Because evidences of ownership of such securities usually are held outside the
United States, the Fund will be subject to additional risks which include
possible adverse political and economic developments, seizure or nationalization
of foreign deposits and adoption of governmental restrictions which might
adversely affect or restrict the payment of principal and interest on the
foreign securities to investors located outside the country of the issuer,
whether from currency blockage or otherwise.
Developing countries have economic structures that are generally less diverse
and mature, and political systems that are less stable, than those of developed
countries. The markets of developing countries may be more volatile than the
markets of more mature economies; however, such markets may provide higher rates
of return to investors. Many developing countries providing investment
opportunities for the Fund have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain of these countries.
Since foreign securities often are purchased with and payable in currencies
of foreign countries, the value of these assets as measured in U.S. dollars
may be affected favorably or unfavorably by changes in currency rates and
exchange control regulations. The Fund may engage in certain transactions to
hedge the currency-related risks of investing in non-U.S. dollar denominated
securities. See "Other Investment Practices."
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VARIABLE AND FLOATING RATE SECURITIES. Variable and floating rate securities
provide for a periodic adjustment in the interest rate paid on the obligations.
The terms of such obligations must provide that interest rates are adjusted
periodically based upon an interest rate adjustment index as provided in the
respective obligations. The adjustment intervals may be regular, and range from
daily up to annually, or may be event based, such as based on a change in the
prime rate.
The Fund may invest in floating rate debt instruments ("floaters"). The interest
rate on a floater is a variable rate which is tied to another interest rate,
such as a money-market index or Treasury bill rate. The interest rate on a
floater resets periodically, typically every six months. Because of the interest
rate reset feature, floaters provide the Fund with a certain degree of
protection against rises in interest rates, although the Fund will participate
in any declines in interest rates as well. The Fund also may invest in inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed or inversely to a multiple of
the applicable index. An inverse floating rate security may exhibit greater
price volatility than a fixed rate obligation of similar credit quality.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities are a form of
derivative backed by pools of commercial or residential mortgages. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations. These securities may
include complex instruments such as collateralized mortgage obligations,
stripped mortgage-backed securities, mortgage pass-through securities, interests
in real estate mortgage investment conduits ("REMICs"), adjustable rate
mortgages, as well as other real estate-related securities. The mortgage-related
securities in which the Fund may invest include those with fixed, floating or
variable interest rates, those with interest rates that change based on
multiples of changes in a specified index of interest rates and those with
interest rates that change inversely to changes in interest rates, as well as
those that do not bear interest. See Appendix B hereto for a discussion of
specific types of mortgage-related securities.
ASSET-BACKED SECURITIES. Asset-backed securities are a form of derivative
securities. The securitization techniques used for asset-backed securities are
similar to those used for mortgage-related securities. The collateral for these
securities has included home equity loans, automobile and credit card
receivables, boat loans, computer leases, airplane leases, mobile home loans,
recreational vehicle loans and hospital account receivables. The Fund may invest
in these and other types of asset-backed securities that may be developed in the
future. Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may provide the Fund
with a less effective security interest in the related collateral than do
mortgage-backed securities. Therefore, there is the possibility that recoveries
on the underlying collateral may not, in some cases, be available to support
payments on these securities.
MUNICIPAL OBLIGATIONS. Municipal obligations generally include debt obligations
issued to obtain funds for various public purposes as well as certain industrial
development bonds issued by or on behalf of public authorities. Municipal
obligations are classified as general obligation bonds, revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power. Industrial
development bonds, in most cases, are revenue bonds that generally do not carry
the pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are issued. Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities.
Municipal obligations bear fixed, floating or variable rates of interest.
Certain municipal obligations are subject to redemption at a date earlier than
their stated maturity pursuant to call options, which may be separated from the
related municipal obligations and purchased and sold separately. The Fund also
may acquire call options on specific municipal obligations. The Fund generally
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would purchase these call options to protect the Fund from the issuer of the
related municipal obligation redeeming, or other holder of the call option from
calling away, the municipal obligation before maturity. While, in general,
municipal obligations are tax-exempt securities having relatively low yields as
compared to taxable, non-municipal obligations of similar quality, certain
municipal obligations are taxable obligations, offering yields comparable to,
and in some cases greater than, the yields available on other permissible Fund
investments. Dividends received by Shareholders from the Fund that are
attributable to interest income received by the Fund from municipal obligations
generally will be subject to Federal income tax. The Fund may invest in
municipal obligations, the ratings of which correspond with the ratings of other
permissible Fund investments. The Fund currently intends to invest no more than
25% of its total assets in municipal obligations.
U.S. GOVERNMENT SECURITIES. The Fund may invest in securities and obligations
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
(collectively, "U.S. Government Securities"). Some U.S. Government Securities
are supported by the full faith and credit of the U.S. Treasury; others by the
right of the issuer to borrow from the Treasury; others by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others only by the credit of the agency or
instrumentality. These securities bear fixed, floating or variable rates of
interest. While the U.S. Government provides financial support to certain U.S.
Government-sponsored agencies and instrumentalities, no assurance can be given
that it will always do so since it is not so obligated by law.
STRIPPED SECURITIES. The Fund may invest in zero coupon U.S. Treasury
securities, which are Treasury Notes and Treasury Bonds that have been stripped
of their unmatured interest coupons, the coupons themselves and receipts or
certificates representing interests in such stripped debt obligations and
coupons. Such stripped securities also are issued by corporations and financial
institutions which constitute a proportionate ownership of the issuer's pool of
underlying securities. A stripped security pays no interest to its holder during
its life and is sold at a discount to its face value at maturity. The market
prices of such securities generally are more volatile than the market prices of
securities that pay interest periodically and are likely to respond to a greater
degree to changes in interest rates than coupon securities having similar
maturities and credit qualities.
MONEY MARKET INSTRUMENTS. The Fund may invest in the following types of money
market instruments.
Repurchase Agreements. In a repurchase agreement, the Fund buys, and the seller
agrees to repurchase, a security at a mutually agreed upon time and price
(usually within seven days). The repurchase agreement thereby determines the
yield during the purchaser's holding period, while the seller's obligation to
repurchase is secured by the value of the underlying security. Repurchase
agreements could involve risks in the event of a default or insolvency of the
other party to the agreement, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities. The Fund may enter into
repurchase agreements with certain banks or non-bank dealers.
Bank Obligations. The Fund may purchase certificates of deposit, time deposits,
bankers' acceptances and other short-term obligations issued by domestic banks,
foreign subsidiaries or foreign branches of domestic banks, domestic and foreign
branches of foreign banks, domestic savings and loan associations and other
banking institutions. Certificates of deposit are negotiable certificates
evidencing the obligation of a bank to repay funds deposited with it for a
specified period of time. Time deposits are non-negotiable deposits maintained
in a banking institution for a specified period of time (in no event longer than
seven days) at a stated interest rate. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations bearing fixed,
floating or variable interest rates.
Commercial Paper. Commercial paper consists of short-term, unsecured promissory
notes issued to finance short-term credit needs. The commercial paper purchased
by the Fund will consist only of direct obligations which, at the time of their
purchase, are (a) rated not lower than Prime-1 by Moody's or A-1 by S&P, (b)
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issued by companies having an outstanding unsecured debt issue currently rated
at least A3 by Moody's or A-by S&P, or (c) if unrated, determined by Conseco
Capital to be of comparable quality to those rated obligations which may be
purchased by the Fund.
Other Short-Term Corporate Obligations. These instruments include variable
amount master demand notes, which are obligations that permit the Fund to invest
fluctuating amounts at varying rates of interest pursuant to direct arrangements
between the Fund, as lender, and the borrower. These notes permit daily changes
in the amounts borrowed. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value, plus accrued interest, at any time. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies, and the Fund may invest in them only if at the time of
an investment the borrower meets the criteria set forth in the Fund's Prospectus
for other commercial paper issuers.
OTHER INVESTMENT PRACTICES
The Fund may utilize other investment practices and portfolio management
techniques as set forth below.
LEVERAGE. The Fund intends to utilize financial leverage in a maximum amount
equal to approximately 33 1/3% of its total assets (including the amount
obtained through leverage). The Fund initially expects to use leverage in an
amount equal to approximately 25% of its total assets. The Fund generally will
not utilize leverage if it anticipates that the Fund's leveraged capital
structure would result in a lower return to Shareholders than that obtainable if
the Shares were unleveraged for any significant amount of time. The Fund also
may borrow money as a temporary measure for extraordinary or emergency purposes,
including the payment of dividends and the settlement of securities transactions
which otherwise may require untimely dispositions of Fund securities. The Fund
at times may borrow from affiliates of Conseco Capital, provided that the terms
of such borrowings are no less favorable than those available from comparable
sources of funds in the marketplace. The use of leverage creates risks and
involves special considerations. See "Risk Factors and Special Considerations -
Leverage."
The concept of leveraging is based on the premise that the cost of the assets to
be obtained from leverage will be based on short-term rates which normally will
be lower than the return earned by the Fund on its longer term portfolio
investments. Since it is anticipated that the total assets of the Fund
(including the assets obtained from leverage) will be invested in the higher
yielding portfolio investments or portfolio investments with the potential for
capital growth, the Shareholders should be the beneficiaries of any incremental
return. Should the differential between the underlying assets and cost of
leverage narrow, the incremental return "pick up" will be reduced. Furthermore,
if long-term rates rise, the net asset value of the Shares will reflect the
decline in the value of portfolio holdings resulting therefrom.
Capital raised through leverage will be subject to interest costs or dividend
payments. The Fund, among other things, also may be required to maintain minimum
average balances in connection with borrowings or to pay a commitment or other
fee to maintain a line of credit; either of these requirements will increase the
cost of borrowing over the stated interest rate. The issuance of additional
classes of preferred shares involves offering expenses and other costs and may
limit the Fund's freedom to pay dividends on Shares or to engage in other
activities. Borrowings and the issuance of a class of preferred shares having
priority over the Fund's Shares create an opportunity for greater return per
Share, but at the same time such borrowing is a speculative technique in that it
will increase the Fund's exposure to capital risk. Unless the income and
appreciation, if any, on assets acquired with borrowed funds or offering
proceeds exceed the cost of borrowing or issuing additional classes of
securities, the use of leverage will diminish the investment performance of the
Fund compared with what it would have been without leverage.
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Under the Investment Company Act, the Fund is not permitted to incur
indebtedness unless immediately after such incurrence the Fund has an asset
coverage of at least 300% of the aggregate outstanding principal balance of
indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the Fund's total
assets). Additionally, under the Investment Company Act, the Fund may not
declare any dividend or other distribution upon any class of its capital shares,
or purchase any such capital shares, unless the aggregate indebtedness of the
Fund has, at the time of the declaration of any such dividend or distribution or
at the time of any such purchase, an asset coverage of at least 300% after
deducting the amount of such dividend, distribution, or purchase price, as the
case may be. Under the Investment Company Act, the Fund is not permitted to
issue preferred shares unless immediately after such issuance the net asset
value of the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred shares (i.e., such liquidation value may not exceed 50% of
the Fund's total assets). In addition, the Fund is not permitted to declare any
cash dividend or other distribution on its Shares unless, at the time of such
declaration, the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of
such liquidation value. If preferred shares are issued, the Fund intends, to the
extent possible, to purchase or redeem preferred shares from time to time to
maintain coverage of any preferred shares of at least 200%.
The Fund's willingness to borrow money and issue new securities for investment
purposes, and the amount the Fund will borrow or issue, will depend on many
factors, the most important of which are investment outlook, market conditions
and interest rates. Successful use of a leveraging strategy depends on Conseco
Capital's ability to successfully manage interest rate risks, and there is no
assurance that a leveraging strategy will be successful during any period in
which it is employed.
Assuming the utilization of leverage by borrowings in the amount of
approximately 33 1/3% of the Fund's total assets, and an annual interest rate of
[ ___ ] % payable on such leverage based on market rates as of the date of this
Prospectus, the annual return that the Fund's portfolio must experience (net of
expenses) in order to cover such interest payments would be _______ %. The
Fund's actual cost of leverage will be based on market rates at the time the
Fund undertakes a leveraging strategy and such actual cost of leverage may be
higher or lower than that assumed in the previous example.
The following table is designed to illustrate the effect on the return to a
Shareholder of the leverage obtained by borrowings in the amount of
approximately 33 1/3% of the Fund's total assets, assuming hypothetical annual
returns of the Fund's portfolio of minus 10% to plus 10%. As the table shows,
the leverage generally increases the return to Shareholders when portfolio
return is positive and greater than the cost of leverage and decreases the
return when the portfolio return is negative or less than the cost of leverage.
The figures appearing in the table are hypothetical and actual returns may be
greater or less than those appearing in the table.
Assumed Portfolio Return (net of expenses) (10)% (5)% 0 % 5% 10%
Corresponding Share Return (___)% (___)% (___)% ---% ----%
Until the Fund borrows or issues preferred shares, the Fund's Shares will not be
leveraged, and the risks and special considerations related to leverage
described in this Prospectus will not apply. Such leveraging of the Shares
cannot be fully achieved until the proceeds resulting from the use of leverage
have been invested in longer-term debt instruments in accordance with the Fund's
investment objectives and policies.
SHORT-SELLING. The Fund may engage in short-selling, in which it sells a
security it does not own in anticipation of a decline in the market value of the
security. To complete the transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund is obligated to replace the security borrowed by
purchasing it subsequently at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security was
sold by the Fund, which would result in a loss or gain, respectively.
Securities will not be sold short if, after effect is given to any such short
sale, the total market value of all securities sold short would exceed 25% of
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the value of the Fund's net assets. The Fund may not make a short sale which
results in the Fund having sold short in the aggregate more than 5% of the
outstanding securities of any class of an issuer.
The Fund also may make short sales "against the box," in which the Fund
enters into a short sale of a security it owns. See "Taxes."
Until the Fund closes its short position or replaces the borrowed security, it
will: (a) maintain a segregated account, containing permissible liquid assets,
at such a level that the amount deposited in the account plus the amount
deposited with the broker as collateral always equals the current value of the
security sold short; or (b) otherwise cover its short position.
LENDING PORTFOLIO SECURITIES. The Fund may lend securities from its portfolio to
brokers, dealers and other financial institutions needing to borrow securities
to complete certain transactions. The Fund continues to be entitled to payments
in amounts equal to the interest, dividends or other distributions payable on
the loaned securities, which affords the Fund an opportunity to earn interest on
the amount of the loan and on the loaned securities' collateral. Loans of
portfolio securities may not exceed 33 1/3% of the value of the Fund's total
assets, and the SEC currently requires the Fund to receive collateral consisting
of cash, U.S. Government securities or irrevocable letters of credit which will
be maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. According to the SEC, such loans
currently must be terminable by the Fund at any time upon specified notice. The
Fund might experience risk of loss if the institution with which it has engaged
in a portfolio loan transaction breaches its agreement with the Fund. In
connection with its securities lending transactions, the Fund may return to the
borrower or a third party which is acting as a "placing broker," a part of the
interest earned from the investment of collateral received for securities
loaned.
Generally, the SEC currently requires that the following conditions must be met
whenever portfolio securities are loaned: (1) the Fund must receive at least
100% cash collateral from the borrower; (2) the borrower must increase such
collateral whenever the market value of the securities rises above the level of
such collateral; (3) the Fund must be able to terminate the loan at any time;
(4) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions payable on the loaned securities, and
any increase in market value; (5) the Fund may pay only reasonable custodian
fees in connection with the loan; and (6) while voting rights on the loaned
securities may pass to the borrower, the Fund's Board must terminate the loan
and regain the right to vote the securities if a material event adversely
affecting the investment occurs. If the regulatory requirements pertaining to
portfolio securities lending were to change, the Fund would employ with such
changes as required.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with respect to its portfolio investments subject to the investment
restrictions set forth herein. Reverse repurchase agreements involve the sale of
securities held by the Fund with an agreement by the Fund to repurchase the
securities at an agreed upon price, date and interest payment. The use by the
Fund of reverse repurchase agreements involves many of the same risks of
leverage described under "Risk Factors and Special Considerations" and "--
Leverage" since the proceeds derived from such reverse repurchase agreements may
be invested in additional securities. At the time the Fund enters into a reverse
repurchase agreement, it may establish and maintain a segregated account with
the custodian containing liquid instruments having a value not less than the
repurchase price (including accrued interest). If the Fund establishes and
maintains such a segregated account, a reverse repurchase agreement will not be
considered a borrowing by the Fund; however, under circumstances in which the
Fund does not establish and maintain such a segregated account, such reverse
repurchase agreement will be considered a borrowing for the purpose of the
Fund's limitation on borrowings. Reverse repurchase agreements involve the risk
that the market value of the securities acquired in connection with the reverse
repurchase agreement may decline below the price of the securities the Fund has
sold but is obligated to repurchase. Also, reverse repurchase agreements involve
the risk that the market value of the securities retained in lieu of sale by the
Fund in connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
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obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Fund would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.
DERIVATIVES. The Fund may invest in, or use, derivatives ("Derivatives"). These
are financial instruments that derive their performance, at least in part, from
the performance of an underlying asset, index or interest rate. The Derivatives
the Fund may use include options, futures contracts, forward contracts,
mortgage-related securities, asset-backed securities, and interest rate caps,
floors and swaps. The Fund may invest in, or enter into, Derivatives for a
variety of reasons, including to hedge certain market risks, to provide a
substitute for purchasing or selling particular securities or to increase
potential income gain. Derivatives may provide a cheaper, quicker or more
specifically focused way for the Fund to invest than "traditional" securities
would.
Derivatives can be volatile and involve various types and degrees of risk,
depending upon the characteristics of the particular Derivative and the
portfolio as a whole. Derivatives permit the Fund to increase or decrease the
level of risk, or change the character of the risk, to which its portfolio is
exposed in much the same way as the Fund can increase or decrease the level of
risk, or change the character of the risk, of its portfolio by purchasing or
selling specific securities.
Derivatives may entail investment exposures that are greater than their cost
would suggest, meaning that a small investment in Derivatives could have a large
potential impact on the Fund's performance.
If the Fund invests in Derivatives at inopportune times or judges market
conditions incorrectly, such investments may lower the Fund's return or result
in a loss. The Fund also could experience losses if its Derivatives were poorly
correlated with its other investments, or if the Fund were unable to liquidate
its position because of an illiquid secondary market. The market for many
Derivatives is, or suddenly can become, illiquid. Changes in liquidity may
result in significant, rapid and unpredictable changes in the prices for
Derivatives.
Derivatives may be purchased on established exchanges or through privately
negotiated transactions referred to as over-the-counter Derivatives.
Exchange-traded Derivatives generally are guaranteed by the clearing agency that
is the issuer or counterparty to such Derivatives. This guarantee usually is
supported by a daily payment system (i.e., variation margin requirements)
operated by the clearing agency in order to reduce overall credit risk. As a
result, unless the clearing agency defaults, there is relatively little
counterparty credit risk associated with Derivatives purchased on an exchange.
By contrast, no clearing agency guarantees over-the-counter Derivatives.
Therefore, each party to an over-the-counter Derivative bears the risk that the
counterparty will default. Accordingly, Conseco Capital will consider the
creditworthiness of counterparties to over-the-counter Derivatives in the same
manner as it would review the credit quality of a security to be purchased by
the Fund. Over-the-counter Derivatives are less liquid than exchange-traded
Derivatives since the other party to the transaction may be the only investor
with sufficient understanding of the Derivative to be interested in bidding for
it.
Derivatives in which the Fund may invest include options, futures and forward
currency transactions. See Appendix C hereto for a general discussion of these
investments. .
Future Developments. The Fund may take advantage of opportunities in the area of
options futures contracts, forward currency contracts, and any other Derivatives
that are not presently contemplated for use by the Fund or that are not
currently available but that may be developed, to the extent such opportunities
are both consistent with the Fund's investment objectives and legally
permissible for the Fund.
FORWARD COMMITMENTS; WHEN-ISSUED SECURITIES. The Fund may purchase securities on
a forward commitment or when-issued basis, which means that delivery and payment
take place a number of days after the date of the commitment to purchase. The
payment obligation and the interest rate receivable on a forward commitment or
when-issued security are fixed when the Fund enters into the commitment, but the
Fund does not make payment until it receives delivery from the counterparty. The
Fund will commit to purchase such securities only with the intention of actually
acquiring the securities, but the Fund may sell these securities before the
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settlement date if it is deemed advisable. The Fund will set aside in a
segregated account of the Fund permissible liquid assets at least equal at all
times to the amount of the commitments.
Securities purchased on a forward commitment or when-issued basis are subject to
changes in value (generally changing in the same way, i.e., appreciating when
interest rates decline and depreciating when interest rates rise) based upon the
public's perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Securities purchased on a forward
commitment or when-issued basis may expose the Fund to risks because they may
experience such fluctuations prior to their actual delivery. Purchasing
securities on a when-issued basis can involve the additional risk that the yield
available in the market when the delivery takes place actually may be higher
than that obtained in the transaction itself. Purchasing securities on a forward
commitment or when-issued basis when the Fund is fully or almost fully invested
may result in greater potential fluctuation in the value of the Fund's net
assets and its net asset value per share.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Prospective investors should carefully consider the following risk factors and
special considerations, in addition to the other information set forth in the
Prospectus, in connection with an investment in the Shares offered hereby.
When used in this Prospectus, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend" and similar expressions are intended
to identify forward-looking statements regarding events, conditions and
financial trends that may affect the Fund's future operations, investment
strategy, results of operations and financial position. Prospective investors
are cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward looking statements
as a result of various factors.
GENERAL. The Fund is a newly organized, non-diversified, closed-end management
investment company and has no operating history. Shares of closed-end management
investment companies frequently trade at a discount from their net asset value.
This risk may be greater for investors expecting to sell their shares in a
relatively short period after completion of the public offering. Accordingly,
the Shares are designed primarily for long-term investors and should not be
considered a vehicle for trading purposes. The net asset value of the Fund's
Shares will fluctuate with interest rate changes as well as with price changes
of the Fund's portfolio securities and these fluctuations are likely to be
greater in the case of a fund having a leveraged capital structure, as
contemplated for the Fund.
LOWER GRADE SECURITIES. Lower grade securities are regarded as being
predominantly speculative as to the issuer's ability to make payments of
principal and interest. Investment in such securities involves substantial risk.
Lower grade securities are commonly referred to as "junk bonds." Issuers of
lower grade securities may be highly leveraged and may not have available to
them more traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are greater than is the case
with higher-rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of lower grade securities may
be more likely to experience financial stress, especially if such issuers are
highly leveraged. During periods of economic downturn, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, the issuer's inability to meet specific projected
business forecasts or the unavailability of additional financing. Therefore,
there can be no assurance that in the future there will not exist a higher
default rate relative to the rates currently existing in the market for lower
grade securities. The risk of loss due to default by the issuer is significantly
greater for the holders of lower grade securities because such securities may be
unsecured and may be subordinate to other creditors of the issuer. Other than
with respect to Distressed Securities, discussed below, the lower grade
securities in which the Fund may invest do not include instruments which, at the
time of investment, are in default as to payment of principal and/or interest or
the issuers of which are in bankruptcy. However, there can be no assurance that
such events will not occur after the Fund purchases a particular security, in
which case the Fund may experience losses and incur costs.
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Lower grade securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund is
likely to have to replace such called security with a lower yielding security,
thus decreasing the net investment income to the Fund and dividends to
Shareholders.
Lower grade securities tend to be more volatile than higher-rated fixed-income
securities, so that adverse economic events may have a greater impact on the
prices of lower grade securities than on higher-rated fixed-income securities.
Factors adversely affecting the market value of such securities are likely to
affect adversely the Fund's net asset value. Recently, demand for lower grade
securities has increased significantly and the difference between the yields
paid by lower grade securities and investment grade bonds (i.e., the "spread")
has narrowed. To the extent this differential increases, the value of lower
grade securities in the Fund's portfolio could be adversely affected.
Like higher-rated fixed-income securities, lower grade securities generally are
purchased and sold through dealers who make a market in such securities for
their own accounts. However, there are fewer dealers in the lower grade
securities market, and this market may be less liquid than the market for
higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for lower grade
securities by various dealers. As a result, during periods of high demand in the
lower grade securities market, it may be difficult to acquire lower grade
securities appropriate for investment by the Fund. Adverse economic conditions
and investor perceptions thereof (whether or not based on economic reality) may
impair liquidity in the lower grade securities market and may cause the prices
the Fund receives for its lower grade securities to be reduced. In addition, the
Fund may experience difficulty in liquidating a portion of its portfolio when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as deterioration in the creditworthiness of the issuers.
Under such conditions, judgment may play a greater role in valuing certain of
the Fund's portfolio instruments than in the case of instruments trading in a
more liquid market. In addition, the Fund may incur additional expense to the
extent that it is required to seek recovery upon a default on a portfolio
holding or to participate in the restructuring of the obligation.
CORPORATE LOANS. The Fund may invest in senior and subordinated Corporate Loans,
both secured and unsecured. A Corporate Loan that is unsecured is not supported
by any specific pledge of collateral and therefore constitutes only a general
obligation of the borrower. In addition to being unsecured, a Corporate Loan in
which the Fund may invest may be subordinate in right of payment to the senior
debt obligations of the borrower. Upon a liquidation or bankruptcy of the
borrower, the senior debt obligations of the borrower are often required to be
paid in full before the subordinated debtholders are permitted to receive any
distribution on behalf of their claim. Distributions, if any, to subordinated
debtholders in such situations may consist in whole or in part in non-income
producing securities, including common stock. Accordingly, following an event of
default or liquidation or bankruptcy of a borrower, there can be no assurance
that the assets of the borrower will be sufficient to satisfy the claims of
unsecured and subordinated debtholders or that such debtholders will receive
income producing debt securities in satisfaction of their claims. As a result,
the Fund might not receive payments to which it is entitled and thereby may
experience a decline in the value of its investment and possibly its net asset
value.
The success of the Fund's investment in Corporate Loans depends, to a great
degree, on the skill with which the agent banks administer the terms of the
Corporate Loan agreements, monitor borrower compliance with covenants, collect
principal, interest and fee payments from borrowers and, where necessary,
enforce creditor remedies against borrowers. Typically, the agent bank will have
broad discretion in enforcing a Corporate Loan agreement. The financial status
of the agent bank and co-lenders and participants interposed between the Fund
and a borrower may affect the ability of the Fund to receive payments of
interest and principal. See "Investment Objectives and Policies Corporate
Loans."
PARTICIPATION INTERESTS. Participation interests in a portion of a debt
obligation typically result in a contractual relationship only with the
institution participating out the interest and not with the borrower. In
purchasing a loan participation, the Fund generally will have no right to
enforce compliance by the borrower with the terms of the loan agreement, nor any
rights of set-off against the borrower, and the Fund may not directly benefit
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from the collateral supporting the debt obligation in which it has purchased the
participation. As a result, the Fund will assume the credit risk of both the
borrower and the institution selling the participation to the Fund.
Because it may be necessary to assert through an Intermediate Participant such
rights as may exist against the Borrower, in the event that the Borrower fails
to pay principal and interest when due, the Fund may be subject to delay,
expense and risks that are greater than those that would be involved if the Fund
could enforce its rights directly against the Borrower. Moreover, under the
terms of the participation, the Fund may be regarded as a creditor of the
Intermediate Participant (rather than of the Borrower), so that the Fund may
also be subject to the risk that the Intermediate Participant may become
insolvent. Further, in the event of the bankruptcy or insolvency of the
Borrower, the obligation of the Borrower to repay the Corporate Loan may be
subject to certain defenses that can be asserted by such Borrower as result of
improper conduct by the Agent Bank or Intermediate Participant.
Because the Fund will regard the issuer of a Corporate Loan as including the
Borrower under a Corporate Loan Agreement, the Agent Bank and any Intermediate
Participant, the Fund may be deemed to be concentrated in securities of issuers
in the industry group consisting of financial institutions and their holding
companies, including commercial banks, thrift institutions, insurance companies
and finance companies. As a result, the Fund is subject to certain risks
associated with such institutions. Banking and thrift institutions are subject
to extensive governmental regulations which may limit both the amounts and types
of loans and other financial commitments which such institutions may make and
the profitability of these institutions is largely dependent on the availability
and cost of capital funds. In addition, general economic conditions are
important to the operation of these institutions, with exposure to credit losses
resulting from possible financial difficulties of borrowers potentially having
an adverse effect. Insurance companies are also affected by economic and
financial conditions and are subject to extensive government regulation,
including rate regulations. Individual companies may be exposed to material
risks, including reserve inadequacy. There are no restrictions on the extent to
which the Fund may be exposed to the credit risk of a particular institution
with regard to theses transactions, and no specific rating standards to which
the Fund must adhere in this regard.
DISTRESSED SECURITIES. The Fund may invest up to 10% of its total assets in
Distressed Securities. Investment in Distressed Securities is speculative and
involves significant risk, including possible loss of the principal invested.
Distressed Securities frequently do not produce income while they are
outstanding and may require the Fund to bear certain extraordinary expenses in
order to protect and recover its investment. Therefore, to the extent the Fund
pursues its secondary objective of capital growth through investment in
Distressed Securities, the Fund's ability to achieve current income for its
Shareholders may be diminished.
LEVERAGE. The use of leverage by the Fund creates an opportunity for increased
net income and capital growth for the Shares, but, at the same time, creates
special risks, and there can be no assurance that a leveraging strategy will be
successful during any period in which it is employed. The Fund intends to
utilize leverage to provide the Shareholders with a potentially higher return.
Leverage creates risks for Shareholders including the likelihood of greater
volatility of net asset value and market price of the Shares and the risk that
fluctuations in interest rates on borrowings and short-term debt or in the
dividend rates on any preferred shares may affect the return to the
Shareholders. To the extent the income or capital growth derived from securities
purchased with funds received from leverage exceeds the cost of leverage, the
Fund's return will be greater than if leverage had not been used. Conversely, if
the income or capital growth from the securities purchased with such funds is
not sufficient to cover the cost of leverage, the return to the Fund will be
less than if leverage had not been used, and therefore the amount available for
distribution to Shareholders as dividends and other distributions will be
reduced. In the latter case, Conseco Capital in its best judgment nevertheless
may determine to maintain the Fund's leveraged position if it deems such action
to be appropriate under the circumstances. During periods in which the Fund is
utilizing financial leverage, the Management and Administration Fee payable to
Conseco Capital will be higher than if the Fund did not utilize a leveraged
capital structure because these fees are calculated as a percentage of the
Fund's Managed Assets including those purchased with leverage. Certain types of
borrowings by the Fund may result in the Fund's being subject to covenants in
credit agreements, including those relating to asset coverage and portfolio
composition requirements. The Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more Rating Agencies, which may
issue ratings for the corporate debt securities or preferred shares issued by
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the Fund. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the Investment
Company Act. It is not anticipated that these covenants or guidelines will
impede Conseco Capital in managing the Fund's portfolio in accordance with the
Fund's investment objectives and policies.
FOREIGN SECURITIES. Investing in securities of foreign entities and securities
denominated in foreign currencies involves certain risks not involved in
domestic investments, including, but not limited to, fluctuations in foreign
exchange and interest rates, future foreign political and economic developments,
different legal systems and the possible imposition of exchange controls or
other foreign governmental laws or restrictions. Securities prices in different
countries are subject to different economic, financial, political and social
factors. Since the Fund may invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the Fund and the unrealized
appreciation or depreciation of investments. Currencies of certain countries may
be volatile and therefore may affect the value of securities denominated in such
currencies. In addition, with respect to certain foreign countries, there is the
possibility of expropriation of assets, confiscatory taxation, difficulty in
obtaining or enforcing a court judgment, economic, political or social
instability or diplomatic developments that could affect investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rates of inflation, capital reinvestment, resources, self-sufficiency
and balance of payments position. Certain foreign investments also may be
subject to foreign withholding taxes. These risks often are heightened for
investments in smaller, emerging capital markets.
Investments in securities of foreign issuers may involve additional risks
arising from differences between U.S. and foreign securities markets (including,
among other things, less volume, much greater price volatility in and
illiquidity of certain foreign securities markets, different trading and
settlement practices and less governmental supervision and regulation), from
changes in currency exchange rates, from high and volatile rates of inflation
and, as with domestic multinational corporations, from fluctuating interest
rates.
Investment in certain foreign securities, especially those of issuers in certain
emerging market countries, is restricted or controlled to varying degrees by
government regulation which may at times limit or preclude investment in certain
foreign securities and increase the costs and expenses of the Fund. Certain
foreign countries require governmental approval prior to investments by foreign
persons, limit the amount of investment by foreign persons in a particular
issuer, limit investment by foreign persons to a specific class of securities of
an issuer that may have less advantageous rights than other classes, restrict
investment opportunities in issuers in industries deemed important to national
interests and/or impose additional taxes on foreign investors. Certain foreign
countries, especially certain emerging market countries, may require
governmental approval for the repatriation of investment income, capital or the
proceeds of sales of securities by foreign investors which could adversely
affect the Fund. In addition, if a deterioration occurs in the country's balance
of payments, it could impose temporary restrictions on foreign capital
remittances. Investing in local markets in foreign countries may require the
Fund to adopt special procedures, seek local governmental approvals or take
other actions, each of which may involve additional costs to the Fund.
In addition, there may be less publicly available information about a foreign
issuer, especially one located in an emerging market country, than about
comparable U.S. issuers, and foreign issuers may not be subject to the same
accounting, auditing and financial record-keeping standards and requirements as
U.S. issuers. In particular, the assets and profits appearing on the financial
statements of a foreign issuer may not reflect its financial position or results
of operations in the way they would be reflected if the financial statements had
been prepared in accordance with U.S. generally accepted accounting principles.
In addition, for an issuer that keeps accounting records in local currency,
inflation accounting rules may require, for both tax and accounting purposes,
that certain assets and liabilities be restated on the issuer's balance sheet in
order to express items in terms of currency of constant purchasing power.
Inflation accounting may indirectly generate losses or profits. Consequently,
financial data may be materially affected by restatements for inflation and may
not accurately reflect the real condition of those issuers and securities
markets. Finally, in the event of a default in any such foreign obligations, it
may be more difficult for the Fund to obtain or enforce a judgment against the
issuers of such obligations.
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Since the Fund may invest in securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign currency exchange rates may
affect the value of securities held by the Fund and the unrealized appreciation
or depreciation of investments. Currencies of certain countries may be volatile
and subject to risk of revaluation and therefore may affect the value of
securities denominated in such currencies.
Investments in foreign sovereign debt securities, especially in emerging market
countries, will expose the Fund to the direct or indirect consequences of
political, social or economic changes in the countries that issue the securities
or in which the issuers are located. Certain countries in which the Fund may
invest, especially emerging market countries, have historically experienced, and
may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, balance of payments
and trade difficulties and extreme poverty and unemployment. Many of these
countries are also characterized by political uncertainty or instability. The
cost of servicing external debt will generally be adversely affected by rising
international interest rates because many external debt obligations bear
interest at rates which are adjusted based upon international interest rates. A
substantial portion of the Fund's foreign sovereign and foreign corporate debt
securities portfolio is expected to be issued by issuers/obligors located in
emerging markets countries, and investments in such securities are particularly
speculative.
The ability of a foreign sovereign obligor, especially an obligor in an emerging
market country, to make timely and ultimate payments on its external debt
obligations will also be strongly influenced by the obligor's balance of
payments, including export performance, its access to international credits and
investments, fluctuations of interest rates, the extent of its foreign reserves,
and the particular country's cash flow situation, international currency
reserves, access to foreign exchange, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of its debt service
burden to the economy as a whole, and the government's policy towards the
International Monetary Fund (the "IMF"), the International Bank for
Reconstruction and Development (the "World Bank") and other international
agencies to which a government debtor may be subject. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt. The risks enumerated above generally are
heightened with regard to issuers in emerging market countries.
In the event a governmental obligor defaults on its obligations, the Fund may
have limited legal recourse against the issuer and/or guarantor. Remedies must,
in some cases, be pursued in the courts of the defaulting party itself, and the
ability of the holder of foreign sovereign debt securities to obtain recourse
may be subject to the political climate in the relevant country. In addition, no
assurance can be given that the holders of commercial bank debt will not contest
payments to the holders of other foreign sovereign debt obligations in the event
of default under their commercial bank loan agreements. Payments to holders of
the foreign sovereign debt securities in which the Fund may invest may be
subject to withholding and other taxes imposed by a foreign government. Although
the holders may be entitled to tax gross-up payments from the issuers of such
instruments, there is no assurance that such payments will be made.
As a result of these potential risks, Conseco Capital may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Fund may
invest in countries in which foreign investors, including Conseco Capital, have
had no or limited prior experience.
ILLIQUID SECURITIES. The Fund may invest without limit in obligations for which
no readily available market exists or which are otherwise illiquid, subject to
the Fund's policy of not investing in excess of 30% of the Fund's assets in
foreign securities or in excess of 10% of its assets in Distressed Securities.
The Fund may not be able readily to dispose of such securities at prices that
approximate those at which the Fund could sell such securities if they were more
widely traded and, as a result of such illiquidity, the Fund may have to sell
other investments or engage in borrowing transactions if necessary to raise cash
to meet its obligations.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities are subject to credit
risks associated with the performance of the underlying mortgage properties.
Adverse changes in economic conditions and circumstances are more likely to have
an adverse impact on mortgage-related securities secured by loans on certain
types of commercial properties than on those secured by loans on residential
properties. In addition, these securities are subject to prepayment risk,
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although commercial mortgages typically have shorter maturities than residential
mortgages and prepayment protection features. In certain instances, the credit
risk associated with mortgage-related securities can be reduced by third-party
guarantees or other forms of credit support. Improved credit risk does not
reduce prepayment risk which is generally unrelated to the rating assigned to
the mortgage-related security. Prepayment risk can lead to fluctuations in value
of the mortgage-related security which may be pronounced. If a mortgage-related
security is purchased at a premium, all or part of the premium may be lost if
there is a decline in the market value of the security, whether resulting from
changes in interest rates or prepayments on the underlying mortgage collateral.
Certain mortgage-related securities that may be purchased by the Fund, such as
inverse floating rate collateralized mortgage obligations, have coupons that
move inversely to a multiple of a specific index which may result in a form of
leverage. As with other interest-bearing securities, the prices of certain
mortgage-related securities are inversely affected by changes in interest rates.
However, although the value of a mortgage-related security may decline when
interest rates rise, the converse is not necessarily true, since in periods of
declining interest rates the mortgages underlying the security are more likely
to be prepaid. For this and other reasons, a mortgage-related security's stated
maturity may be shortened by unscheduled prepayments on the underlying
mortgages, and, therefore, it is not possible to predict accurately the
security's return to the Fund. Moreover, with respect to certain stripped
mortgage-backed securities, if the underlying mortgage securities experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment even if the securities are rated in the highest
rating category by a Rating Agency. During periods of rapidly rising interest
rates, prepayments of mortgage-related securities may occur at slower than
expected rates. Slower prepayments effectively may lengthen a mortgage-related
security's expected maturity which generally would cause the value of such
security to fluctuate more widely in response to changes in interest rates. Were
the prepayments on the Fund's mortgage-related securities to decrease broadly,
the Fund's effective duration, and thus sensitivity to interest rate
fluctuations, would increase.
NON-DIVERSIFIED STATUS. The Fund is classified as a "non-diversified" management
investment company under the Investment Company Act, which means that the Fund
may invest a greater portion of its assets in a limited number of issuers than
would be the case if the Fund were classified as a "diversified" management
investment company. Accordingly, the Fund may be subject to greater risk with
respect to its portfolio securities than a management investment company that is
"diversified" because changes in the financial condition or market assessment of
a single issuer may cause greater fluctuations in the net asset value of the
Shares.
MARKET PRICE, DISCOUNT AND NET ASSET VALUE OF SHARES. Shares of closed-end
management investment companies in the past frequently have traded at a discount
to their net asset values. The risk of loss associated with this characteristic
of closed-end management investment companies may be greater for investors
purchasing Shares in the initial public offering and expecting to sell the
Shares soon after the completion thereof. Whether investors will realize gains
or losses upon the sale of Shares will not depend directly upon the Fund's net
asset value, but will depend upon the market price of the Shares at the time of
sale. Since the market price of the Shares will be determined by such factors as
relative demand for and supply of the Shares in the market, general market and
economic conditions and other factors beyond the control of the Fund, the Fund
cannot predict whether the Shares will trade at, below or above net asset value
or at, below or above the initial offering price. The Shares are designed
primarily for long-term investors, and investors in the Shares should not view
the Fund as a vehicle for trading purposes.
ANTI-TAKEOVER PROVISIONS. The Fund's Declaration of Trust contains provisions
limiting (i) the ability of other entities or persons to acquire control of the
Fund, (ii) the Fund's freedom to engage in certain transactions, and (iii) the
ability of the Fund's Trustees or Shareholders to amend the Declaration of
Trust. These provisions of the Declaration of Trust may be regarded as
"anti-takeover" provisions. These provisions could have the effect of depriving
the Shareholders of opportunities to sell their Shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction.
YEAR 2000 RISKS. Like other financial and business organizations, the Fund could
be adversely affected if computer systems on which it relies do not properly
process date-related information and data involving the years 2000 and after.
The Manager is taking steps that it believes are reasonable to address this
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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 Manager
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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions as fundamental
policies, which cannot be changed without approval by the holders of a majority
of the Fund's outstanding voting securities (as defined in the Investment
Company Act). The Fund may not:
1. Purchase any security if as a result 25% or more of the its total
assets of the Fund would be invested in the securities of issuers
having their principal business activities in the same industry,
provided that this restriction does not apply to U.S. Government
Securities (as defined in this Prospectus).
2. Purchase or sell in commodities or commodity contracts, except that
the Fund may purchase and sell options, futures contracts and
options thereon and may engage in interest rate and foreign currency
transactions.
3. Purchase, hold, deal in or sell real estate, or oil, gas or other
mineral leases or exploration or development programs, except (i) as
the foregoing may be acquired through foreclosure, provided that
these are liquidated in a commercially reasonable period thereafter,
and (ii) that the Fund may purchase and sell securities that are
issued by companies that invest in, or that are secured by, oil, gas
or other minerals, real estate, or interests therein.
4. Issue senior securities or borrow money except as permitted by the
Investment Company Act.
5. 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 other investments of the type contemplated by the
Fund's investment objectives and policies.
6. Underwrite securities of other issuers, except to the extent the
Fund may be deemed an underwriter under the Securities Act, as
amended, in connection with the purchase or sale of portfolio
securities.
MANAGEMENT OF THE FUND
INVESTMENT MANAGER AND ADMINISTRATOR. Conseco Capital located at 11825 N.
Pennsylvania Street, Carmel, Indiana 46032, serves as investment manager and
administrator to the Fund. Conseco Capital 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. Conseco Capital also
provides investment management and advisory services to seven mutual funds, as
well as to public and corporate pension plans, corporations, individuals,
foundations and endowments, and manages all of the invested assets of its parent
company, Conseco, Inc., which owns or manages several life insurance
subsidiaries. As of March 31, 1998, Conseco Capital managed in excess of $32
billion in assets, approximately $3.5 billion of which consisted of High Yield
Obligations and approximately $2.3 billion of which were invested in foreign
securities.
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<PAGE>
Conseco Capital supervises and assists in the overall management of the Fund's
affairs under an Investment Management and Administration Agreement with the
Fund, subject to the authority of the Fund's Board in accordance with
Massachusetts law. Conseco Capital manages the Fund's investments in accordance
with the stated policies of the Fund, subject to the supervision of the Fund's
Board. Conseco Capital is responsible for investment decisions, and provides the
Fund with portfolio managers who are authorized by the Board to execute
purchases and sales of securities. Conseco Capital also maintains a research
department with a professional staff of portfolio managers and securities
analysts who provide research services for the Fund as well as for other funds
advised by Conseco Capital. Peter C. Andersen, CFA, and William F. Ficca are the
Fund's portfolio managers. They have held those positions since the Fund's
inception. Mr. Andersen has been employed by Conseco Capital as Second Vice
President since 1997. Prior thereto, Mr. Andersen was a portfolio manager for
Colonial Management Associates in Boston, where he managed over $650 million in
high yield, tax-free investment companies, including two closed-end investment
companies. Mr. Andersen also serves as co-manager to the Conseco High Yield
Fund, an open-end mutual fund which invests in high yield securities. Mr. Ficca
has been employed by Conseco Capital as Vice President since 1991, and also
serves as portfolio manager of certain other investment products managed by the
Manager. In addition, he also manages the Fund's research efforts. Prior
thereto, he worked in investment banking and traded corporate and government
bonds. Conseco Capital provides research services for the Fund and for other
funds advised by Conseco Capital through a professional staff of portfolio
managers and securities analysts. Under the direction of the Fund's portfolio
managers, Conseco Capital's team of analysts will select individual securities
for the Fund. Each analyst has developed expertise in a particular industry. The
same management team is responsible for the Conseco High Yield Fund, and various
client portfolios.
Conseco Capital also provides administration services to the Fund that include,
among other services, maintaining office facilities on behalf of the Fund,
furnishing statistical and research data, clerical help, data processing,
bookkeeping and internal auditing services, arranging for persons to serve as
Fund officers, preparing or assisting in preparing materials for Shareholders
and regulatory bodies, and overseeing the provision to the Fund of custodial,
accounting and certain other required services to the Fund. Conseco Capital also
may make such advertising and promotional expenditures, using its own resources,
as it deems appropriate. Conseco Capital may engage its affiliate Conseco
Services LLC ("Conseco Services") to provide some or all of these administration
services to the Fund, and will compensate Conseco Services out of its own
assets, and not those of the Fund.
The following persons are officers and/or directors of Conseco Capital: [
- ---------------- ]
INVESTMENT MANAGEMENT AND ADMINISTRATION AGREEMENT. Conseco Capital provides
investment management and administration services to the Fund pursuant to the
Investment Management and Administration Agreement (the "Agreement") dated
__________, 1998 with the Fund. As compensation for Conseco Capital's services
to the Fund, the Fund has agreed to pay Conseco Capital a monthly investment
management and administration fee ("Management and Administration Fee") at the
annual rate of 0.90 of 1% of the value of the average weekly value of the total
assets of the Fund minus the sum of accrued liabilities (other than the
aggregate indebtedness constituting financial leverage) (the "Managed Assets").
After an initial term of 2 years, the Agreement is subject to annual approval by
(i) the Fund's Board or (ii) vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Fund, provided that
in either event the continuance also is approved by a majority of the Board
members who are not "interested persons" (as defined in the Investment Company
Act) of the Fund or Conseco Capital, by vote cast in person at a meeting called
for the purpose of voting on such approval. The Agreement was approved by the
Fund's Board, including a majority of the Board members who are not "interested
persons" of any party to the Agreement, at a meeting held on [ _________________
], 1998. The Agreement was approved by the Fund's initial Shareholder on [
_________________ ], 1998. The Agreement is terminable without penalty, on 60
days' notice, by the Fund's Board or by vote of the holders of a majority of the
outstanding voting securities (as defined in the Investment Company Act) of the
Fund, or, on not less than 90 days' notice, by Conseco Capital. The Agreement
will terminate automatically in the event of its assignment (as defined in the
Investment Company Act).
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During periods in which the Fund is utilizing financial leverage, the Management
and Administration Fee payable to Conseco Capital will be higher than if the
Fund did not utilize a leveraged capital structure because these fees are
calculated as a percentage of the Fund's Managed Assets including those
purchased with leverage.
EXPENSES. All expenses incurred in the operation of the Fund are borne by the
Fund, except to the extent specifically assumed by Conseco Capital. The expenses
borne by the Fund include: taxes, interest, brokerage fees and commissions, if
any, fees of Board members who are not officers, trustees, employees or holders
of 5% or more of the outstanding voting securities of Conseco Capital or any of
its affiliates, SEC fees, state Blue Sky qualification fees, advisory and
administration fees, shareholder servicing fees, charges of custodians, transfer
and dividend disbursing agents' fees, certain insurance premiums, industry
association fees, outside auditing and legal expenses, costs of maintaining the
Fund's existence, expenses of reacquiring Shares, expenses in connection with
the Fund's Automatic Dividend Reinvestment Plan, costs of maintaining the
required books and accountings (including the costs of calculating the net asset
value of the Fund's Shares), costs of independent pricing services, costs
attributable to investor services (including, without limitation, telephone and
personnel expenses), costs of preparing and printing prospectuses, and mailing
Share certificates, proxy statements and costs of Shareholders' reports and
meetings, and any extraordinary expenses.
TRUSTEES AND OFFICERS OF THE FUND
The Fund has a Board composed of _____________ Trustees which supervises the
Fund's investment activities and reviews contractual arrangements with companies
that provide the Fund with services. The following lists the Trustees and
officers and their positions with the Fund and their present and principal
occupations during the past five years. Each Trustee who is an "interested
person" (as defined in the Investment Company Act) of the Fund is indicated by
an asterisk (*)._____________of the Trustees also serve as Trustees of
______________________ (collectively, with the Fund, the "Conseco Funds"). Each
Trustee serves on the Audit Committee of the Board. Each Trustee who is not an
"interested person" serves on the Nominating Committee of the Board.
______________________of the Fund's officers listed below also serve as officers
for other investment companies advised by or administered by Conseco Capital,
including __________________________________________.
[ ]
The address of each officer of the Fund is 11815 N. Pennsylvania Street,
Carmel, Indiana 46032.
The officers and Trustees of the Fund as a group owned beneficially less than 1%
of the total shares of the Fund outstanding as of __________, 1998.
No officer of the Fund receives any compensation from the Fund for serving as an
officer or Trustee of the Fund. The Fund pays each disinterested Trustee $ per
annum. In addition, the Fund pays each disinterested Trustee $ per Board meeting
attended and reimburses each Trustee for travel and out-of-pocket expenses.
ESTIMATED AGGREGATE TOTAL COMPENSATION FROM THE FUND AND FUND COMPLEX
PORTFOLIO TRANSACTIONS
Conseco Capital assumes general supervision over placing orders on behalf of the
Fund for the purchase or sale of portfolio securities. Allocation of brokerage
transactions, including their frequency, is made in the best judgment of Conseco
Capital and in a manner deemed fair and reasonable to Shareholders. The primary
consideration is prompt execution of orders at the most favorable net price.
Subject to this consideration, and to the Conduct Rules of the NASD, Conseco
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<PAGE>
Capital may select brokers who provide research or other services or who sell
shares of the Fund to effect portfolio transactions. Such services may be useful
to Conseco Capital in serving both the Fund and other investment advisory
clients which it advises and, conversely, supplemental information obtained by
the placement of business of other clients may be useful to Conseco Capital in
carrying out its obligations to the Fund. Conseco Capital may also select an
affiliated broker to execute transactions for the Fund or other funds managed,
advised or administered by Conseco Capital, 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.
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 their
respective objectives. It is anticipated that the annual turnover rate of the
Fund normally will not exceed 400%. Turnover rates in excess of 100% generally
result in higher transaction costs and a possible increase in realized
short-term capital gains or losses.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is determined on the last business day of
each week and each month, as of the close of regular trading on the New York
Stock Exchange on that day (normally 4:00 p.m. Eastern Time) by dividing the
value of the Fund's net assets by the number of Fund shares outstanding.
The assets of the Fund are valued as follows: Securities that are traded on
stock exchanges are valued at the last sale price as of the close of business on
the day the securities are being valued or, lacking any sales, at the mean
between the closing bid and asked prices. Securities traded in the
over-the-counter market are valued at the mean between the bid and asked prices
or yield equivalent as obtained from one or more dealers that make markets in
the securities. Fund securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees.
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.
The holidays (as observed) on which the New York Stock Exchange is closed
currently are: New Year's Day, Martin Luther King Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to distribute substantially all of its net investment income
monthly. All net realized capital gains, if any, either will be distributed to
the Fund's Shareholders at least annually or will be retained by the Fund, in
which event the retained gains will be subject to Fund-level tax that, in effect
will be "passed through" to the Shareholders. The Fund will distribute to the
Shareholders at least annually all net realized gains from foreign currency
transactions, if any. The Fund may make additional distributions if necessary to
avoid a 4% excise tax on certain undistributed income and capital gain. See
"Taxes." The Fund may change the foregoing distribution policy if its experience
indicates, or its Board of Trustees for any reason determines, that changes are
desirable.
Under the Investment Company Act, the Fund is not permitted to incur
indebtedness unless after such incurrence the Fund has an asset coverage of at
least 300% of the aggregate outstanding principal balance of the indebtedness.
Additionally, under the Investment Company Act, the Fund may not declare any
dividend or other distribution upon any class of its capital shares, or purchase
any such capital shares, unless its aggregate indebtedness has, at the time of
the declaration of any such dividend or other distribution or at the time of any
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such purchase, an asset coverage of at least 300% after deducting the amount of
the dividend, other distribution, or purchase price, as the case may be. While
any preferred shares are outstanding, the Fund may not declare any cash dividend
or other distribution on the Shares, unless at the time of the declaration, (1)
all accumulated preferred share dividends have been paid and (2) the net asset
value of the Fund's portfolio (determined after deducting the amount of the
dividend or other distribution) is at least 200% of the liquidation value of the
outstanding preferred shares (expected to be equal to the original purchase
price per share plus any accumulated and unpaid dividends thereon). In addition
to the limitations imposed by the Investment Company Act as described in this
paragraph, certain lenders may impose additional restrictions on the payment of
dividends or other distributions on the Fund's Shares in the event of a default
on the Fund's borrowings. Any limitation on the Fund's ability to make
distributions on its Shares could in certain circumstances impair the ability of
the Fund to maintain its qualification for taxation as a regulated investment
company ("RIC"). See "Other Investment Practices--Leverage" and "Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the manner
in which dividends and other distributions to Shareholders may be automatically
reinvested in Shares. Dividends and other distributions may be taxable to
Shareholders whether they are reinvested in Shares or received in cash.
The Fund expects that it will commence paying dividends within 60 days of the
date of this Prospectus.
TAXES
The following discussion is a general summary of certain U.S. federal income tax
considerations relating to the Fund and to the acquisition, ownership and
disposition of Shares. The discussion is based on the Internal Revenue Code of
1986, as amended (the "Code"), applicable Treasury regulations and rulings now
in effect, all of which are subject to change, possibly retroactively. This
summary does not purport to discuss all the income tax consequences applicable
to the Fund or to investors that may be subject to special tax rules, such as
banks, tax-exempt organizations, insurance companies, dealers in securities or
currencies, persons that will hold the Shares as part of an integrated
investment (including a "straddle") comprised of Shares and one or more other
positions, or persons having a "functional currency" other than the U.S. dollar.
Investors considering the purchase of Shares should consult their own tax
advisors regarding the application U.S. federal income tax laws to their
particular situations as well as any tax consequences arising under the laws of
any state, local, or foreign taxing jurisdiction.
TAXATION OF THE FUND. The Fund intends to elect to be, and to qualify to be
treated as, a RIC under the Code. For each taxable year that the Fund so
qualifies, the Fund (but not the Shareholders) will be relieved of federal
income tax on that part 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) and net capital gain that is
distributed to the Shareholders.
To qualify for treatment as a RIC under the Code, the Fund must elect to be so
treated, must distribute to the Shareholders for each taxable year at least 90%
of its investment company taxable income ("Distribution Requirement") and must
meet several additional requirements. 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"); (2) at the close of each quarter of the Fund's taxable year, 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
that are 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 (3) at the
close of each quarter of the Fund's taxable year, 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.
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The Fund will be subject to a non-deductible 4% excise tax ("Excise Tax") to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31st of that year, plus certain other amounts.
For these purposes, any such income retained by the Fund, and on which it pays
federal income tax, will be treated as having been distributed. The Fund
anticipates that it will make such distributions as are necessary to avoid the
imposition of the Excise Tax.
The Fund may acquire zero coupon or other securities issued with original issue
discount. As a holder of such securities, the Fund must include in its gross
income the original issue discount that accrues on them during the taxable year,
even if it receives no corresponding payment on the securities during the year.
The Fund also must include in its gross income each year any "interest"
distributed in the form of additional securities on payment-in-kind securities.
Because the Fund annually must distribute substantially all of its investment
company taxable income, including any accrued original issue discount and other
non-cash income, to satisfy the Distribution Requirement and avoid imposition of
the Excise Tax, the Fund may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions will be made from the Fund's cash assets or from
the proceeds of sales of portfolio securities, if necessary. The Fund may
recognize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gain.
The use of certain Derivatives, such as selling (writing) and purchasing options
and futures and entering into forward currency contracts, involves complex rules
that will determine for federal income tax purposes the amount, character and
timing of recognition of the gains and losses the Fund realizes in connection
therewith. These rules also may require the Fund to "mark to market" (that is,
treat as sold for their fair market value) at the end of each taxable year
certain positions in its portfolio, which may cause the Fund to recognize income
or gain without receiving cash with which to make distributions necessary to
satisfy the Distribution Requirement and avoid imposition of the Excise Tax.
Gains from the disposition of foreign currencies, and gains from options,
futures and forward currency contracts derived by the Fund with respect to its
business of investing in securities or foreign currencies, will be treated as
qualifying income under the Income Requirement. Under section 988 of the Code,
foreign currency gains or losses from certain forward contracts not traded in
the interbank market as well as certain other gains or losses attributable to
currency exchange rate fluctuations are typically treated as ordinary income or
loss. Such income or loss may increase or decrease (or possibly eliminate) the
Fund's income available for distribution. If, under the rules governing the tax
treatment of foreign currency gain and losses, the Fund's income available for
distribution is decreased or eliminated, all or a portion of the distributions
by the Fund may be treated for federal income tax purposes as a return of
capital or, in some circumstances, as capital gain.
Income received by the Fund from investments in foreign securities may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
Shareholders. Tax conventions between certain countries and the United States
may reduce or eliminate those taxes.
If the Fund has an "appreciated financial position"--generally, an interest
(including an interest through an option, futures or forward currency 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 currency 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.
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TAXATION OF THE SHAREHOLDERS. Dividends from the Fund's investment company
taxable income (whether received in cash or reinvested in additional Shares)
generally are taxable to the Shareholders as ordinary income to the extent of
the Fund's earnings and profits. Distributions of the Fund's net capital gain
(whether received in cash or reinvested in additional Shares), when designated
as such, are taxable to the Shareholders as long-term capital gain, regardless
of how long they have held their Shares. (See below for a summary of the tax
rates applicable to capital gain distributions.) A participant in the Automatic
Dividend Reinvestment Plan will be treated as having received a distribution in
the amount of the cash used to purchase Shares on his or her behalf, including a
PRO RATA portion of the brokerage fees incurred by the Transfer Agent.
Distributions by the Fund to the Shareholders in any year that exceed the Fund's
earnings and profits generally may be applied by each Shareholder against his or
her basis for the Shares, and any such distribution in excess of that basis will
be taxable at capital gains rates (assuming the Shares are held as a capital
asset). Shareholders who are not liable for tax on their income and whose Shares
are not debt-financed generally are not required to pay tax on dividends or
other distributions they receive from the Fund.
The Fund may retain its net capital gain for investment. If the Fund does so,
however, it will be subject to a tax of 35% on the retained amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gain in a notice to the Shareholders, who (1) will be required to
include in income for tax purposes, as long-term capital gain, their
proportionate shares of the undistributed amount, (2) will be entitled to credit
their proportionate shares of the 35% tax paid by the Fund against their federal
income tax liabilities, if any, and to claim refunds to the extent the credit
exceeds those liabilities, and (3) will increase the tax basis of their Shares
by an amount equal to 65% of the amount of undistributed capital gain included
in their gross income.
The Fund will notify the Shareholders following the end of each calendar year of
the amounts of dividends and capital gain distributions paid (or deemed paid)
that year and undistributed capital gain designated for that year. The
information regarding capital gain distributions and undistributed capital gain
will designate the portion thereof subject to the different maximum rates of tax
applicable to noncorporate taxpayers' net capital gain indicated below.
Dividends and other distributions declared by the Fund in December of any year
and payable to Shareholders of record on a date in that month will be deemed to
have been paid by the Fund and received by the Shareholders on December 31st if
the distributions are paid by the Fund during the following January.
Accordingly, those distributions will be taxed to the Shareholders for the year
in which that December 31st falls.
An investor should be aware that, if Shares are purchased shortly before the
record date for any dividend or other distribution, the investor will pay full
price for the Shares and will receive some portion of the purchase price back as
a taxable distribution.
On the sale or exchange of Shares (including a sale pursuant to a Share
repurchase or tender offer by the Fund), a Shareholder generally will recognize
a taxable gain or loss equal to the difference between his or her adjusted basis
for the Shares and the amount received. Any such gain or loss will be treated as
a capital gain or loss if the Shares are capital assets in the Shareholder's
hands and will be long-term capital gain or loss if the Shares have been held
for more than one year. (See below for a discussion of the tax rates applicable
to capital gains). Any loss recognized on a sale or exchange of Shares that were
held for six months or less will be treated as long-term, rather than
short-term, capital loss to the extent of any capital gain distributions
previously received thereon or any undistributed capital gain designated with
respect thereto. A loss realized on a sale or exchange of Shares will be
disallowed to the extent those Shares are replaced by other Shares within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition of the Shares (which could occur, for example, as a result of
participation in the DRIP). In that event, the basis of the replacement Shares
will be adjusted to reflect the disallowed loss.
Under the Taxpayer Relief Act of 1997 ("1997 Tax Act"), the maximum tax rates
applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (1) the same as ordinary income rates for capital
assets held for one year or less, (2) 28% for capital assets held for more than
one year but not more than 18 months and (3) 20% (10% for taxpayers in the 15%
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marginal tax bracket) for capital assets held for more than 18 months. The 1997
Tax Act did not affect the maximum net capital gain tax rate for corporations,
which remains at 35%. These rates will apply to distributions of net capital
gain by the Fund (if, as expected, the Fund designates net capital gain
distributions as 28% rate gain distributions and 20% rate gain distributions, in
accordance with its holding periods for the securities it sold that generated
the distributed gains), as well as to gains recognized on sales and exchanges of
Shares. With respect to capital losses recognized on dispositions of Shares held
six months or less that are treated as long-term capital losses to the extent of
prior capital gain distributions received thereon (see discussion in the
preceding paragraph), it is unclear which category of gain those capital losses
offset. Shareholders should consult their own tax advisers as to the application
of these capital gains tax rates to their particular circumstances.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individual Shareholders and
certain other non-corporate Shareholders who do not provide the Fund with a
correct taxpayer identification number. The Fund is also required to withhold
31% of all dividends and capital gain distributions payable to such Shareholders
who otherwise are subject to backup withholding.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "DRIP"), unless
a Shareholder otherwise elects, all dividends and capital gain distributions
will be automatically reinvested in additional Shares by [ _____________ ], as
agent for Shareholders in administering the DRIP (the "DRIP Agent").
Shareholders who elect not to participate in the DRIP will receive all dividends
and other distributions in cash paid by check mailed directly to the Shareholder
of record (or, if the Shares are held in street or other nominee name, then to
such nominee) by [ _____________ ] as dividend disbursing agent. Such
participants may elect not to participate in the DRIP and to receive all
dividends and capital gain distributions in cash by sending written instructions
to [ _____________ ], as dividend disbursing agent, at the address set forth
below. Participation in the DRIP is completely voluntary and may be terminated
or resumed at any time without penalty by written notice if received by the DRIP
Agent not less than ten days prior to any distribution record date; otherwise
such termination will be effective with respect to any subsequently declared
dividend or other distribution.
Whenever the Fund declares an income dividend or a capital gain distribution
(collectively referred to as "dividends") payable either in Shares or in cash,
non-participants in the DRIP will receive cash and participants in the DRIP will
receive the equivalent in Shares. The Shares will be acquired by the DRIP Agent
or an independent broker-dealer for the participants' accounts, depending upon
the circumstances described below, either (1) through receipt of additional
unissued but authorized Shares from the Fund ("newly issued shares") or (2) by
purchase of outstanding Shares on the open market ("open-market purchases") on
the New York Stock Exchange or elsewhere. If on the payment date for the
dividend, the net asset value per Share is equal to or less than the market
price per Share plus estimated brokerage commissions (such condition being
referred to herein as "market premium"), the DRIP Agent will invest the dividend
amount in newly issued Shares on behalf of the participants. The number of newly
issued Shares to be credited to each participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per Share on
the date the Shares are issued, provided that the maximum discount from the then
current market price per Share on the date of issuance may not exceed 5%. If on
the dividend payment date the net asset value per Share is greater than the
market value thereof (such condition being referred to herein as "market
discount"), the DRIP Agent will invest the dividend amount in Shares acquired on
behalf of the participants in open-market purchases.
In the event of a market discount on the dividend payment date, the DRIP Agent
will have until the last business day before the next date on which the Shares
trade on an "ex-dividend" basis, but no more than 30 days after the dividend
payment date (the "last purchase date") to invest the dividend amount in Shares
acquired in open-market purchases. It is contemplated that the Fund will pay
monthly income dividends. Therefore, the period during which open-market
purchases can be made will exist only from the payment date of the dividend
through the date before the next "ex-dividend" date which typically will be
approximately ten days. If, before the DRIP Agent has completed its open-market
purchases, the market price of a Share exceeds the net asset value per Share,
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the average per Share purchase price paid by the DRIP Agent may exceed the net
asset value of the Fund's Shares, resulting in the acquisition of fewer Shares
than if the dividend had been paid in newly issued Shares on the dividend
payment date. Because of the foregoing difficulty with respect to open-market
purchases, the DRIP provides that if the DRIP Agent is unable to invest the full
dividend amount in open-market purchases during the purchase period or if the
market discount shifts to a market premium during the purchase period, the DRIP
Agent will cease making open-market purchases and will invest the uninvested
portion of the dividend amount in newly issued Shares at the close of business
on the last purchase date.
The DRIP Agent maintains all Shareholders' accounts in the DRIP and furnishes
written confirmation of all transactions in the accounts, including information
needed by Shareholders for tax records. Shares in the account of each DRIP
participant will be held on his or her behalf by the DRIP Agent on behalf of the
DRIP participant, and each Shareholder proxy will include those Shares purchased
or received pursuant to the DRIP. The DRIP Agent will forward all proxy
solicitation materials to participants and vote proxies for Shares held pursuant
to the DRIP in accordance with the instructions of the participants.
In the case of Shareholders such as banks, brokers or nominees that hold Shares
for others who are the beneficial owners, the DRIP Agent will administer the
DRIP on the basis of the number of Shares certified from time to time by the
record Shareholder's name and held for the account of beneficial owners who
participate in the DRIP.
There will be no brokerage charges with respect to Shares issued directly by the
Fund as a result of dividends or capital gain distributions payable either in
Shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the DRIP Agent's open-market
purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends will not relieve participants of any
federal, state or local income tax that may be payable (or required to be
withheld) on the dividends. See "Taxes."
Shareholders participating in the DRIP may receive benefits not available to
Shareholders not participating in the DRIP. If the market price (plus
commissions) of the Fund's Shares is above their net asset value, participants
in the DRIP will receive Shares of the Fund at less than they could otherwise
purchase them and will have Shares with a cash value greater than the value of
any cash distribution they would have received on their Shares. If the market
price (plus commissions) is below the net asset value, participants will receive
distributions in Shares with a net asset value greater than the value of any
cash distribution they would have received on their Shares. However, there may
be insufficient Shares available in the market to make distributions in Shares
at prices below the net asset value. Also, because the Fund does not redeem its
Shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of participating in the DRIP.
Experience under the DRIP may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the DRIP. There is no direct
service charge to participants in the DRIP; however, the Fund reserves the right
to amend the DRIP to include a service charge payable by the participants.
All correspondence concerning the DRIP should be directed to the DRIP Agent at
____________ .
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UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, and [ ____________ ]. are acting as representatives
(the "Representatives"), have severally agreed, subject to the terms and
conditions contained in the underwriting agreement (the "Underwriting
Agreement"), to purchase from the Fund the number of Shares set forth below
opposite their respective names:
NUMBER
UNDERWRITER OF SHARES
----------- ---------
Prudential Securities Incorporated
Total
The Fund is obligated to sell, and the Underwriters are obligated to purchase,
all of the Shares offered hereby, if any are purchased.
As set forth in the notes to the table on the cover page of this Prospectus, the
Sales Load to the Underwriters will not be paid by the Fund but by Conseco
Capital or Conseco, Inc., from its own assets in the amount of $____ per Share
(___% of the public offering price per Share) or an aggregate amount of $_______
($______ assuming full exercise of the over-allotment option) for all Shares
covered by this Prospectus. The Underwriters, through the Representatives, have
advised the Fund that they propose to offer the Shares to the public initially
at the public offering price set forth on the cover page of this Prospectus, and
that the Underwriters may allow to selected dealers a concession of $_____ per
share and that such dealers may reallow a concession of $_____ per share to
certain other dealers. After completion of offering, the initial public offering
price and the concessions may be changed by the Representatives.
The Fund has granted the Underwriters an option, exercisable for 60 days from
the date of this Prospectus, to purchase up to an additional 600,000 Shares at
the initial public offering price, less the underwriting discounts and
commissions as set forth on the cover page of this Prospectus. The Underwriters
may exercise such option solely for the purpose of covering over-allotments
incurred in the sale of the Shares offered hereby. To the extent that such
option to purchase is exercised, each Underwriter will become obligated and will
have a firm commitment, subject to certain conditions, to purchase approximately
the same percentage of such additional Shares as the number set forth next to
such Underwriter's name in the preceding table bears to ________________.
The Fund and Conseco Capital have agreed to indemnify the several Underwriters
against and contribute to losses arising out of certain liabilities, including
liabilities under the Securities Act.
The Representatives have informed the Fund that the Underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority.
The Fund, its officers and trustees, have agreed not to, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any Shares of the Fund, or any securities convertible or
exercisable or exchangeable for any Shares of the Fund (other than pursuant to
the over-allotment option granted to the Underwriters, and pursuant to the
DRIP), for a period of 180 days in the case of the Fund, and one year in the
case of the Fund's officers and Trustees, from the closing of this offering,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters. Prudential Securities Incorporated may, in its sole
discretion, at any time and without notice, release all or any portion of the
Shares subject to the foregoing lock-up agreements.
The Fund's Shares have been approved for listing on the New York Stock Exchange
("NYSE") under the symbol "CSF," subject to official notice of issuance. In
order to meet one of the requirements for listing the Shares on the NYSE, the
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Underwriters have undertaken to sell (i) lots of 100 or more Shares to a minimum
of 2,000 beneficial holders, (ii) a minimum of 1.1 million Shares and (iii)
Shares with a minimum aggregate market value of $40.0 million.
Prior to the Offering, there has been no public market for the Shares. The
initial public offering price has been determined through negotiations between
the Fund and the Representatives. Among the factors considered in such
determination were prevailing market conditions, the yields and financial
characteristics of registered investment companies that the Fund and the
Representatives believe to be comparable to the Fund, the Fund's expected
performance and yield, estimates of future earnings prospects of the Fund as a
whole and the current state of the lower grade and corporate loan markets.
In the ordinary course of their businesses, Prudential Securities Incorporated,
other Underwriters, and their respective affiliates have in the past engaged,
and may in the future engage, in investment banking or financial transactions
with the Fund, the Manager and their affiliates
In connection with this offering, certain Underwriters and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Shares. Such transactions
may include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase Shares for
the purpose of stabilizing its market price. The Underwriters also may create a
short position for the account of the Underwriters by selling more Shares in
connection with this offering than they are committed to purchase from the Fund,
and in such case may purchase Shares in the open market following completion of
this offering to cover all or a portion of such short position. The Underwriters
may also cover all or a portion of such short position, up to ____ Shares, by
exercising the Underwriters' over-allotment option referred to above. In
addition, Prudential Securities Incorporated, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby they may reclaim from an Underwriter (or any selling group member
participating in this offering) for the account of the other Underwriters, the
selling concession with respect to Shares that are distributed in this offering
but subsequently purchased by Prudential Securities Incorporated for the account
of the Underwriters in the open market. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Shares at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph are required and, if they are
undertaken, each may be discontinued at any time.
ADDITIONAL INFORMATION. Statements contained in this Prospectus as to the
content of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Fund's Registration Statement, each such statement is
qualified in all respects by such reference and the exhibits and schedules
hereto. The Fund's Registration Statement and such exhibits and schedules may be
obtained from the Commission as its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
The Commission maintains a website at http:\\www.sec.gov containing reports,
proxy and information statements and other information regarding registrants,
including the Fund, that file electronically with the Commission. The Fund's
Shares have been approved for listing on the NYSE under the symbol "CSF,"
subject to official notice of issuance and, as such, similar information
concerning the Fund will be available for inspection and copying at the offices
of the NYSE, 20 Broad Street, New York, New York 10005.
The Fund intends to furnish its shareholders with annual reports containing
audited combined financial statements and a report thereon by independent
certified public accountants.
SHAREHOLDER SERVICING AGENT, CUSTODIAN AND
TRANSFER AND DIVIDEND DISBURSING AGENT
Pursuant to a Shareholder Servicing Agreement between [ ______________________ ]
(the "Shareholder Servicing Agent") and the Fund, the Shareholder Servicing
Agent will (i) undertake to make public information pertaining to the Fund on an
ongoing basis and to communicate to investors and prospective investors the
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<PAGE>
Fund's features and benefits (including periodic seminars or conference calls,
responses to questions from current or prospective shareholders and specific
shareholder contact where appropriate); (ii) make available to investors and
prospective investors market price, net asset value, yield and other information
regarding the Fund, if reasonably obtainable, for the purpose of maintaining the
visibility of the Fund in the investor community; (iii) at the request of the
Fund, provide certain economic research and statistical information and reports,
if reasonably obtainable, on behalf of the Fund, and consult with
representatives and Trustees of the Fund in connection therewith, which
information and reports shall include: (a) statistical and financial market
information with respect to the Fund's market performance and (b) comparative
information regarding the Fund and other closed-end management investment
companies with respect to (1) the net asset value of their respective shares,
(2) the respective market performance of the Fund and such other companies and
(3) other relevant performance indicators; and (iv) at the request of the Fund,
provide information to and consult with the Board of Trustees with respect to
applicable strategies designed to address market value discounts, which may
include share repurchase, tender offers, modifications to dividend policies or
capital structure, repositioning or restructuring of the Fund, conversion of the
Fund to an open-end investment company, liquidation or merger; provided,
however, that under the terms of the Shareholder Servicing Agreement, the
Shareholder Servicing Agent is not obligated to render any opinions, valuations
or recommendations of any kind or to perform any such similar services. For
these services, the Fund will pay the Shareholder Servicing Agent a fee equal on
an annual basis to 0.10% of the Fund's average weekly Managed Assets (as defined
above under "Management of the Fund--Investment Management and Administration
Agreements"), payable in arrears at the end of each calendar month. Under the
terms of the Shareholder Servicing Agreement, the Shareholder Servicing Agent is
relieved from liability to the Fund for any act or omission in the course of its
performance under the Shareholder Servicing Agreement, in the absence of gross
negligence or willful misconduct by the Shareholder Servicing Agent. The Fund
has agreed to indemnify the Shareholder Servicing Agent or contribute to losses
arising out of certain liabilities under the Shareholder Servicing Agreement.
The Shareholder Servicing Agreement will continue for an initial term of two
years and thereafter for successive one-year periods unless terminated by either
party upon 60 days written notice. In this regard, as part of its ongoing
oversight responsibilities, the Board of Trustees will monitor the performance
of the Shareholder Servicing Agent and the continuing appropriateness of the
Shareholder Servicing Agreement.
[ ____________________ ] will serve as custodian of the assets of the Fund the
"Custodian". The Custodian may employ sub-custodians outside the U.S. approved
by the Board of Trustees in accordance with regulations under the Investment
Company Act. [ ____________________ ] will serve as the Fund's Transfer and
Dividend Disbursing Agent.
DESCRIPTION OF SHARES
The Fund is a newly organized unincorporated business trust under the laws of
the Commonwealth of Massachusetts created pursuant to a Declaration of Trust on
June 2, 1998. The Fund is authorized to issue an unlimited number of shares of
beneficial interest, par value $.001 per share. Each Share has one vote and,
when issued and paid for in accordance with the terms of the offering, will be
fully paid and non-assessable. Fund Shares are of one class and have equal
rights as to dividends and in liquidation. Shares have no preemptive,
subscription or conversion rights and are freely transferable.
Under Massachusetts law, Shareholders could, under certain circumstances, be
held personally liable for the obligations of a Massachusetts business trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Fund or
a Trustee. The Declaration of Trust provides for indemnification from the Fund's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Fund. Thus, the risk of a Shareholder incurring
financial loss on account of Shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations, a possibility
which management believes is remote. Upon payment of any liability incurred by
the Fund, the shareholder paying such liability will be entitled to
reimbursement from the general assets of the Fund. The Fund intends to conduct
its operations in such a way so as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the Fund.
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The Fund has no present intention of offering additional Shares, except as
described herein and under the Automatic Dividend Reinvestment Plan, as it may
be amended from time to time. See "Automatic Dividend Reinvestment Plan." Other
offerings of its Shares, if made, will require approval of the Fund's Board of
Trustees. Any additional offering will not be sold at a price per Share below
the then current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing Shareholders or
with the consent of a majority of the Fund's outstanding Shares. In accordance
with the rules of the NYSE, the Fund will hold Annual Meetings of Shareholders.
CERTAIN PROVISIONS OF THE DECLARATION OF TRUST
ANTI-TAKEOVER PROVISIONS
The Fund's Declaration of Trust includes provisions that could have the effect
of limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Trustees and could have the
effect of depriving Shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund. These provisions may have the effect of
discouraging attempts to acquire control of the Fund, which attempts could have
the effect of increasing the expenses of the Fund and interfering with the
normal operation of the Fund. A Trustee may be removed from office with or
without cause but only by vote of the holders of at least 66 2/3 % of the shares
entitled to be voted on the matter.
In addition, the Declaration of Trust requires the favorable vote of the holders
of at least 66 2/3% of the Fund's Shares to approve, adopt or authorize the
following:
(i) a merger or consolidation or statutory share exchange of the Fund
with any other corporate entity or partnership;
(ii) a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities); or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Trustees, in which case the
affirmative vote of a majority of the Fund's Shares is required. Following any
issuance of preferred stock by the Fund, it is anticipated that the approval,
adoption or authorization of the foregoing also would require the favorable vote
of a majority of the Fund's shares of preferred stock then entitled to be voted,
voting as a separate class.
REPURCHASE OF SHARES; CONVERSION TO AN OPEN-END INVESTMENT COMPANY
Shares of closed-end management investment companies often trade at a discount
to their net asset values, and the Fund's Shares may likewise trade at a
discount to their net asset value, although it is possible that they may trade
at a premium above net asset value. The market price of the Fund's Shares will
be determined by such factors as relative demand for and supply of such Shares
in the market, the Fund's net asset value, general market and economic
conditions and other factors beyond the control of the Fund. See "Determination
of Net Asset Value." Although the Fund's Shareholders will not have the right to
redeem their Shares, the Fund may take action to repurchase Shares in the open
market or make tender offers for its Shares at their net asset value. This may
have the effect of reducing any market discount from net asset value.
There is no assurance that if action is undertaken to repurchase or tender for
Shares, such action will result in the Shares' trading at a price which
approximates their net asset value. Although Share repurchases and tenders could
have a favorable effect on the market price of the Fund's Shares, it should be
recognized that the acquisition of Shares by the Fund will decrease the total
assets of the Fund and, therefore, have the effect of increasing the Fund's
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expense ratio. Any Share repurchases or tender offers will be made in accordance
with requirements of the Securities Exchange Act of 1934, as amended, and the
Investment Company Act.
The Fund may also be converted to an open-end investment company to reduce the
market discount at which the Fund's Shares trade relative to their net asset
value (or otherwise). Following any such conversion, it is possible that certain
of the Fund's investment policies and strategies would have to be modified to
assure sufficient portfolio liquidity, which could cause the Fund to dispose of
portfolio securities or other assets at a time when it is not advantageous to do
so, and could adversely affect the ability of the Fund to meet its investment
objectives. Doing so also would require the redemption of any outstanding
preferred shares and any indebtedness not constituting bank loans, which could
eliminate or alter the leveraged capital structure of the Fund with respect to
the Shares. Finally, in the event of conversion, the Shares would cease to be
listed on the NYSE or other national securities exchange or market system.
Conversion of the Fund to an open-end investment company would require an
amendment to the Fund's Declaration of Trust. The amendment would have to be
declared advisable by the Board of Trustees prior to its submission to
Shareholders. Such an amendment would require the favorable vote of the holders
of at least 66 2/3% of the Fund's outstanding shares (including any preferred
stock) entitled to be voted on the matter, voting as a single class (or a
majority of such shares if the amendment previously was approved, adopted or
authorized by at least two-thirds of the total number of Trustees), and,
assuming preferred stock is issued, the affirmative vote of a majority of
outstanding shares of preferred stock of the Fund, voting as a separate class.
Such a vote also would satisfy a separate requirement in the Investment Company
Act that the change be approved by the Shareholders.
Shareholders of an open-end investment company may require the company to redeem
their shares at any time (except in certain circumstances as authorized by or
under the Investment Company Act) at their net asset value, less such redemption
charge, if any, as might be in effect at the time of a redemption. The Fund
expects to pay all such redemption requests in cash, but intends to reserve the
right to pay redemption requests in a combination of cash or securities. If a
payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. If the Fund were converted to an open-end
fund, it is likely that new common shares would be sold at net asset value plus
a sales load.
The Board of Trustees has determined that provisions with respect to the Board
of Trustees and the 66 2/3% voting requirements described above, which are
greater than the minimum requirements under Massachusetts law or the Investment
Company Act, are in the best interest of Shareholders generally. Reference
should be made to the Declaration of Trust on file with the SEC for the full
text of these provisions.
OTHER INFORMATION
Prior to the registration statement becoming effective, the Underwriters or
other appropriate party may distribute advertising or other solicitation
material which discusses (i) economic and market conditions and trends
generally; (ii) historical and current conditions and trends in the lower grade
securities market, and risk and reward potential in such market; (iii)
comparative information, including statistical analysis and performance-related
information, related to lower grade securities generally and investing in lower
grade securities; (iv) the special considerations and potential benefits of
investing in closed-end management investment companies; and (v) information
about Conseco Capital and the Fund's portfolio managers, biographical
information about the Fund's portfolio managers, and information and commentary
on investment strategy or other matters of general interest to investors.
LEGAL OPINIONS
Certain legal matters in connection with the Shares offered hereby will be
passed upon for the Fund by Kirkpatrick & Lockhart LLP, Washington, DC, and for
the Underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
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EXPERTS
The statement of assets and liabilities of the Fund included in this Prospectus
has been so included in reliance upon the report of Coopers & Lybrand L.L.P.,
independent auditors, and on their authority as experts in auditing and
accounting.
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INDEPENDENT AUDITORS' REPORT
CONSECO STRATEGIC INCOME FUND
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
________________, 1998
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
NOTE 1. ORGANIZATION
The Fund is a closed-end, non-diversified management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on June 2, 1998, and has had no operations other than the sale to
Conseco Capital Management, Inc. of an aggregate of __________ Shares for $
__________ , on ________________, 1998.
On April 3, 1998, Statement of Position 98-5 was issued. This Statement of
Position required that unamortized organization costs on the Fund's statement of
assets and liabilities be written off. This Statement of Position is effective
for fiscal years beginning after December 15, 1998, therefore, the Fund is
required to write off the deferred organization expenses on April 1, 1999.
NOTE 2. MANAGEMENT AND ADMINISTRATION ARRANGEMENTS
The Fund has engaged Conseco Capital to provide investment management and
administration services to the Fund. Conseco Capital will receive a monthly fee
for advisory and administration services at an annual rate equal to 0.90% of the
Fund's average weekly value of the Managed Assets. Conseco Capital may engage
Conseco Services LLC to provide administration services to the Fund, at Conseco
Capital's own expense, and not that of the Fund.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such (and
by complying with the applicable provisions of the Internal Revenue Code of
1986, as amended) will not be subject to Federal income tax on taxable income
(including realized capital gains) that is distributed to shareholders.
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APPENDIX A
RATINGS OF CORPORATE BONDS
DESCRIPTION OF CORPORATE BOND RATINGS OF STANDARD & POOR'S RATINGS GROUP:
AAA--Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB--Bonds rated BB have less near-term vulnerability to default than other
speculative grade debt. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B--Bonds rated B have a greater vulnerability to default but presently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions would likely impair capacity or willingness to
pay interest and repay principal.
CCC--Bonds rated CCC have a current identifiable vulnerability to default and
are dependent upon favorable business, financial and economic conditions to meet
timely payments of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
CC--The rating CC is currently highly vulnerable to nonpayment.
C--The rating C may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D--Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus (+) or a minus
(-) sign designation, which is used to show relative standing within the major
rating categories, except in the AAA (Prime Grade) category.
DESCRIPTION OF BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and generally are referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, 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 generally are known as high grade
bonds. They are rated lower than the best bonds because margins of protection
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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
length 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, therefore, 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 the 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 present 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, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative standing
within the major rating categories, except in the Aaa category and in the
categories below B. The modifier 1 indicates a ranking for the security in the
higher end of a rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates a ranking in the lower end of a rating category.
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APPENDIX B
MORTGAGE - RELATED SECURITIES
Government-Agency Securities. Mortgage-related securities issued by the
Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Government-Related Securities. Mortgage-related securities issued by the Federal
National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of FNMA and are not backed by or entitled to the full faith and
credit of the United States. FNMA is a government-sponsored organization owned
entirely by private shareholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA. Mortgage-related securities issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
shareholder-owned, government-sponsored enterprise created on July 24, 1970
pursuant to the Federal Home Loan Mortgage Corporation Act, Title III of the
Emergency Home Finance Act of 1970, as amended, 12 U.S.C. ss.ss. 1451-1459.
Freddie Macs are not guaranteed by the United States or by any Federal Home Loan
Bank and do not constitute a debt or obligation of the United States or of any
Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of
interest, which is guaranteed by FHLMC. FHLMC guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When FHLMC does not guarantee timely payment of principal, FHLMC
may remit the amount due on account of its guarantee of ultimate payment of
principal at any time after default on an underlying mortgage, but in no event
later than one year after it becomes payable.
Private Entity Securities. These mortgage-related securities are issued by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental issuers. Timely payment
of principal and interest on mortgage-related securities backed by pools created
by non-governmental issuers often is supported partially by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the
policies, so that if the issuers default on their obligations the holders of the
security could sustain a loss. No insurance or guarantee covers the Fund or the
price of the Fund's Shares. Mortgage-related securities issued by
non-governmental issuers generally offer a higher rate of interest than
government-agency and government-related securities because there are no direct
or indirect government guarantees of payment.
Commercial Mortgage-Related Securities. Commercial mortgage-related securities
generally are multi-class debt or pass-through certificates secured by mortgage
loans on commercial properties. These mortgage-related securities generally are
structured to provide protection to the senior classes of investors against
potential losses on the underlying mortgage loans. This protection generally is
provided by having the holders of subordinated classes of securities
("Subordinated Securities") take the first loss if there are defaults on the
underlying commercial mortgage loans. Other protection, which may benefit all of
the classes or particular classes, may include issuer guarantees, reserve funds,
additional Subordinated Securities, cross-collateralization and
over-collateralization.
The Fund may invest in Subordinated Securities issued or sponsored by commercial
banks, savings and loan institutions, mortgage bankers, private mortgage
insurance companies and other non-governmental issuers. Subordinated Securities
have no governmental guarantee, and are subordinated in some manner as to the
payment of principal and/or interest to the holders of more senior
mortgage-related securities arising out of the same pool of mortgages. The
holders of Subordinated Securities typically are compensated with a higher
stated yield than are the holders of more senior mortgage-related securities. On
the other hand, Subordinated Securities typically subject the holder to greater
risk than senior mortgage-related securities and tend to be rated in a lower
rating category, and frequently a substantially lower rating category, than the
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senior mortgage-related securities issued in respect of the same pool of
mortgages. Subordinated Securities generally are likely to be more sensitive to
changes in prepayment and interest rates and the market for such securities may
be less liquid than is the case for traditional fixed-income securities and
senior mortgage-related securities.
The market for commercial mortgage-related securities developed more recently
and in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-related
securities. In addition, commercial lending generally is viewed as exposing the
lender to a greater risk of loss than one- to four-family residential lending.
Commercial lending, for example, typically involves larger loans to single
borrowers or groups of related borrowers than residential one- to four-family
mortgage loans. In addition, the repayment of loans secured by income producing
properties typically is dependent upon the successful operation of the related
real estate project and the cash flow generated therefrom. Consequently, adverse
changes in economic conditions and circumstances are more likely to have an
adverse impact on mortgage-related securities secured by loans on commercial
properties than on those secured by loans on residential properties.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a multi-class bond backed
by a pool of mortgage pass-through certificates or mortgage loans. CMOs may be
collateralized by (a) Ginnie Mae, Fannie Mae, or Freddie Mac pass-through
certificates, (b) unsecuritized mortgage loans insured by the Federal Housing
Administration or guaranteed by the Department of Veterans' Affairs, (c)
unsecuritized conventional mortgages, (d) other mortgage-related securities, or
(e) any combination thereof. Each class of CMOs, often referred to as a
"tranche," is issued at a specific coupon rate and has a stated maturity or
final distribution date. Principal prepayments on collateral underlying a CMO
may cause it to be retired substantially earlier than the stated maturities or
final distribution dates. The principal and interest on the underlying mortgages
may be allocated among the several classes of a series of a CMO in many ways.
One or more tranches of a CMO may have coupon rates which reset periodically at
a specified increment over an index, such as the London Interbank Offered Rate
("LIBOR") (or sometimes more than one index). These floating rate CMOs typically
are issued with lifetime caps on the coupon rate thereon. The Fund also may
invest in inverse floating rate CMOs. Inverse floating rate CMOs constitute a
tranche of a CMO with a coupon rate that moves in the reverse direction to an
applicable index such as LIBOR. Accordingly, the coupon rate thereon will
increase as interest rates decrease. Inverse floating rate CMOs are typically
more volatile than fixed or floating rate tranches of CMOs. Many inverse
floating rate CMOs have coupons that move inversely to a multiple of the
applicable indexes. The effect of the coupon varying inversely to a multiple of
an applicable index creates a leverage factor. Inverse floaters based on
multiples of a stated index are designed to be highly sensitive to changes in
interest rates and can subject the holders thereof to extreme reductions of
yield and loss of principal. The markets for inverse floating rate CMOs with
highly leveraged characteristics at times may be very thin. The Fund's ability
to dispose of its positions in such securities will depend on the degree of
liquidity in the markets for such securities. It is impossible to predict the
amount of trading interest that may exist in such securities, and therefore the
future degree of liquidity.
Stripped Mortgage-Backed Securities. The Fund also may invest in stripped
mortgage-backed securities. Stripped mortgage-backed securities are created by
segregating the cash flows from underlying mortgage loans or mortgage securities
to create two or more new securities, each with a specified percentage of the
underlying security's principal or interest payments. Mortgage securities may be
partially stripped so that each investor class receives some interest and some
principal. When securities are completely stripped, however, all of the interest
is distributed to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders of another
type of security known as a principal-only security, or PO. Strips can be
created in a pass-through structure or as tranches of a CMO. The yields to
maturity on IOs and POs are very sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Fund may not fully recoup its initial investment in IOs.
Conversely, if the underlying mortgage assets experience less than anticipated
prepayments of principal, the yield on POs could be materially and adversely
affected.
Real Estate Investment Trusts. A REIT is a corporation or a business trust that
would otherwise be taxed as a corporation, which meets the definitional
requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The
Code permits a qualifying REIT to deduct dividends paid, thereby effectively
eliminating corporate-level Federal income tax and making the REIT a
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pass-through vehicle for Federal income tax purposes. To meet the definitional
requirements of the Code, a REIT must, among other things, invest substantially
all of its assets in interests in real estate (including mortgages and other
REITs) or cash and government securities, derive most of its income from rents
from real property or interest on loans secured by mortgages on real property,
and distribute to shareholders annually a substantial portion of its otherwise
taxable income. REITs are characterized as equity REITs, mortgage REITs and
hybrid REITs. Equity REITs, which may include operating or finance companies,
own real estate directly and the value of, and income earned by, the REITs
depends upon the income of the underlying properties and the rental income they
earn. Equity REITs also can realize capital gains (or losses) by selling
properties that have appreciated (or depreciated) in value. Mortgage REITs can
make construction, development or long-term mortgage loans and are sensitive to
the credit quality of the borrower. Mortgage REITs derive their income from
interest payments on such loans. Hybrid REITs combine the characteristics of
both equity and mortgage REITs, generally by holding both ownership interests
and mortgage interests in real estate. The value of securities issued by REITs
are affected by tax and regulatory requirements and by perceptions of management
skill. They also are subject to heavy cash flow dependency, defaults by
borrowers or tenants, self-liquidation and the possibility of failing to qualify
for conduit status under the Code or to maintain exemption from the Investment
Company Act.
Adjustable-Rate Mortgage Loans ("ARMs"). ARMs eligible for inclusion in a
mortgage pool will generally provide for a fixed initial mortgage interest rate
for a specified period of time, generally for either the first three, six,
twelve, thirteen, thirty-six, or sixty scheduled monthly payments. Thereafter,
the interest rates are subject to periodic adjustment based on changes in an
index. ARMs typically have minimum and maximum rates beyond which the mortgage
interest rate may not vary over the lifetime of the loans. Certain ARMs provide
for additional limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Negatively amortizing ARMs may
provide limitations on changes in the required monthly payment. Limitations on
monthly payments can result in monthly payments that are greater or less than
the amount necessary to amortize a negatively amortizing ARM by its maturity at
the interest rate in effect during any particular month.
Other Mortgage-Related Securities. Other mortgage-related securities include
securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals. Other mortgage-related securities may
be equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
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APPENDIX C
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACTS
Options--In General. The Fund may purchase and write (i.e., sell) call or put
options with respect to specific securities. A call option gives the purchaser
of the option the right to buy, and obligates the writer to sell, the underlying
security or securities at the exercise price at any time during the option
period, or at a specific date. Conversely, a put option gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
security or securities at the exercise price at any time during the option
period, or at a specific date.
A covered call option written by the Fund is a call option with respect to which
the Fund owns the underlying security or otherwise covers the transaction by
segregating cash or other liquid assets. A put option written by the Fund is
covered when, among other things, cash or liquid assets having a value equal to
or greater than the exercise price of the option are placed in a segregated
account with the Fund's custodian to fulfill the obligation undertaken. The
principal reason for writing covered call and put options is to realize, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. The Fund receives a premium from writing covered
call or put options which it retains whether or not the option is exercised.
There is no assurance that sufficient trading interest to create a liquid
secondary market on a securities exchange will exist for any particular option
or at any particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist for a variety
of reasons. In the past, for example, higher than anticipated trading activity
or order flow, or other unforeseen events, at times have rendered certain of the
clearing facilities inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
Specific Options Transactions. The Fund may purchase and sell call and put
options on foreign currency. These options convey the right to buy or sell the
underlying currency at a price which is expected to be lower or higher than the
spot price of the currency at the time the option is exercised or expires.
The Fund may purchase and sell call and put options in respect of specific
securities (or groups or "baskets" of specific securities) or indices listed on
national securities exchanges or traded in the over-the-counter market. An
option on an index is similar to an option in respect of specific securities,
except that settlement does not occur by delivery of the securities comprising
the index. Instead, the option holder receives an amount of cash if the closing
level of the index upon which the option is based is greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
Thus, the effectiveness of purchasing or writing index options will depend upon
price movements in the level of the index rather than the price of a particular
security.
The Fund also may purchase cash-settled options on swaps in pursuit of its
investment objectives. A cash-settled option on a swap gives the purchaser the
right, but not the obligation, in return for the premium paid, to receive an
amount of cash equal to the value of the underlying swap as of the exercise
date. These options typically are purchased in privately negotiated transactions
from financial institutions, including securities brokerage firms.
Successful use by the Fund of options will be subject to the ability of Conseco
Capital to predict correctly movements in the prices of individual securities,
the securities markets generally, foreign currencies, or interest rates. To the
extent such predictions are incorrect, the Fund may incur losses.
Futures and Options on Futures Transactions--In General. The Fund may enter into
futures contracts and options on futures contracts in U.S. domestic markets,
such as the Chicago Board of Trade and the International Monetary Market of the
57
<PAGE>
Chicago Mercantile Exchange or on exchanges located outside the United States,
such as the London International Financial Futures Exchange and the Sydney
Futures Exchange Limited. Foreign markets may offer advantages such as trading
opportunities or arbitrage possibilities not available in the United States.
Foreign markets, however, may have greater risk potential than domestic markets.
For example, some foreign exchanges are principal markets so that no common
clearing facility exists and an investor may look only to the broker for
performance of the contract. In addition, any profits that the Fund might
realize in trading could be eliminated by adverse changes in the exchange rate,
or the Fund could incur losses as a result of those changes. Transactions on
foreign exchanges may include both commodities which are traded on domestic
exchanges and those that are not. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the
Commodity Futures Trading Commission ("CFTC").
Engaging in these transactions involves risk of loss to the Fund that could
adversely affect the value of the Fund's net assets. Although the Fund intends
to purchase or sell futures contracts and options thereon only if there is an
active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract or option prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract or option prices could move to the
limit for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures or option positions and potentially
subjecting the Fund to substantial losses. Successful use of futures and options
on futures by the Fund also is subject to the ability of Conseco Capital to
successfully manage interest rate risks and, to the extent the transaction is
entered into for hedging purposes, to ascertain the appropriate correlation
between the transaction being hedged and the price movements of the futures
contract or option thereon. For example, if the Fund uses futures to hedge
against the possibility of a decline in the market value of securities held in
its portfolio and the prices of such securities instead increase, the Fund will
lose part or all of the benefit of the increased value of securities that it has
hedged because it will have offsetting losses in its futures positions.
Furthermore, if in such circumstances the Fund has insufficient cash, it may
have to sell securities to meet daily variation margin requirements. The Fund
may have to sell such securities at a time when it may be disadvantageous to do
so.
Pursuant to regulations and/or published positions of the SEC, the Fund may be
required to segregate cash or other liquid assets in connection with its futures
and options on futures transactions in an amount generally equal to the value of
the underlying commodity. The segregation of such assets will have the effect of
limiting the Fund's ability otherwise to invest those assets.
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,
that are 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. (In general, a call option on a futures
contract is "in-the-money" if the value of the underlying futures contract
exceeds the exercise ("strike") price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying futures contract is
exceeded by the strike price of the put.) This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
Specific Futures Transactions. The Fund may purchase and sell interest rate
futures contracts. An interest rate future obligates the Fund to purchase or
sell an amount of a specific debt security at a future date at a specific price.
The Fund may purchase and sell currency futures. A foreign currency future
obligates the Fund to purchase or sell an amount of a specific currency at a
future date at a specific price. The Fund may purchase and sell stock index and
debt futures contracts. An index future obligates the Fund to pay or receive an
amount of cash equal to a fixed dollar amount specified in the futures contract
multiplied by the difference between the settlement price of the contract on the
contract's last trading day and the value of the index based on the prices of
the securities that comprise it at the opening of trading in such securities on
the next business day.
58
<PAGE>
The Fund may also purchase and sell options on interest rate, currency and index
futures. When the Fund writes an option on a futures contract, it becomes
obligated, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time during the terms of the
option. If the Fund writes a call, it assumes a short futures position. If it
writes a put, it assumes a long futures position. When the Fund purchases an
option on a futures contract, it acquires the right, in return for the premium
it pays, to assume a position in the futures contract (a long position if the
option is a call and a short position if the option is a put).
Forward Currency Contracts. The Fund may enter into forward currency contracts
to purchase or sell foreign currencies for a fixed amount of U.S. dollars or
another foreign currency. A forward currency contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days (term) from the date of the forward currency contract agreed upon
by the parties, at a price set at the time the forward currency contract is
entered into. Forward currency contracts are traded directly between currency
traders (usually large commercial banks) and their customers.
The Fund may purchase a forward currency contract to lock in the U.S. dollar
price of a security denominated in a foreign currency that the Fund intends to
acquire. The Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security or a
dividend or interest payment denominated in a foreign currency. The Fund may
also use forward currency contracts to shift the Fund's exposure to foreign
currency exchange rate changes from one currency to another. For example, if the
Fund owns securities denominated in a foreign currency and Conseco Capital
believes that currency will decline relative to another currency, it might enter
into a forward currency contract to sell the appropriate amount of the first
foreign currency with payment to be made in the second currency. The Fund may
also purchase forward currency contracts to enhance income when Conseco Capital
anticipates that the foreign currency will appreciate in value but securities
denominated in that currency do not present attractive investment opportunities.
The Fund may also use forward currency contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. Such a hedge
would tend to offset both positive and negative currency fluctuations, but would
not offset changes in security values caused by other factors. The Fund could
also hedge the position by entering into a forward currency contract to sell
another currency expected to perform similarly to the currency in which the
Fund's existing investments are denominated. This type of hedge could offer
advantages in terms of cost, yield or efficiency, but may not hedge currency
exposure as effectively as a simple hedge into U.S. dollars. This type of hedge
may result in losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
The Fund may also use forward currency contracts in one currency or a basket of
currencies to attempt to hedge against fluctuations in the value of securities
denominated in a different currency if Conseco Capital anticipates that there
will be a correlation between the two currencies.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of some or all of any expected benefit of the transaction.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract. In either event, the Fund would continue to be subject to
market risk with respect to the position, and would continue to be required to
maintain a position in securities denominated in the foreign currency or to
maintain cash or liquid assets in a segregated account.
59
<PAGE>
The precise matching of forward currency contract amounts and the value of the
securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Interest rate swaps, caps, floors and collars ("interest rate transactions").
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. There is no
limit on the amount of interest rate swap transactions that may be entered into
by the Fund.
The Fund may enter into interest rate swaps, caps, floors, and collars on either
an asset-based or liability-based basis depending on whether it is hedging its
assets or its liabilities, and will only enter into such transactions on a net
basis, i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. The amount
of the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap, cap, floor, or collar will be accrued on a
daily basis and an amount of cash or liquid securities having an aggregate value
at least equal to the accrued excess will be maintained in a segregated account
by the custodian.
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.
Credit Derivatives. The Fund may engage in credit derivative transactions. There
are two broad categories of credit derivatives: default price risk derivatives
and market spread derivatives. Default price risk derivatives are linked to the
price of reference securities or loans after a default by the issuer or
borrower, respectively. Market spread derivatives are based on the risk that
changes in market factors, such as credit spreads, can cause a decline in the
value of a security, loan or index. There are three basic transactional forms
for credit derivatives: swaps, options and structured instruments. The use of
credit derivatives is a highly specialized activity which involves strategies
and risks different from those associated with ordinary portfolio security
transactions. If Conseco Capital is unsuccessful in managing default risks,
market spreads or other applicable factors, the investment performance of the
Fund would diminish compared with what it would have been if these techniques
were not used. Moreover, even if Conseco Capital is successful in doing so,
there is a risk that a credit derivative position may correlate imperfectly with
the price of the asset or liability being hedged. There is no limit on the
amount of credit derivative transactions that may be entered into by the Fund.
The Fund's risk of loss in a credit derivative transaction varies with the form
of the transaction. For example, if the Fund purchases a default option on a
security, and if no default occurs with respect to the security, the Fund's loss
is limited to the premium it paid for the default option. In contrast, if there
is a default by the grantor of a default option, the Fund's loss will include
both the premium that it paid for the option and the decline in value of the
underlying security that the default option hedged.
60
<PAGE>
================================================================================
NO DEALER SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON SHARES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
================================================================================
UNTIL _________________, ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES
OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
61
<PAGE>
TABLE OF CONTENTS
PAGE
Prospectus Summary............................................................
Fee Table.....................................................................
The Fund......................................................................
Use of Proceeds...............................................................
Investment Objectives and Policies............................................
Other Investment Practices....................................................
Risk Factors and Special Considerations.......................................
Investment Restrictions.......................................................
Management of the Fund........................................................
Trustees and Officers of the Fund.............................................
Portfolio Transactions........................................................
Determination of Net Asset Value..............................................
Dividends and Other Distributions.............................................
Taxes.........................................................................
Automatic Dividend Reinvestment Plan..........................................
Underwriting..................................................................
Shareholder Servicing Agent, Custodian and Transfer and Dividend
Disbursing Agent..............................................................
Description of Shares.........................................................
Other Information.............................................................
Legal Opinions................................................................
Experts.......................................................................
Independent Auditors' Report..................................................
Statement of Assets, Liabilities and Capital..................................
Appendix A: Ratings of Corporate Bonds........................................
Appendix B: Mortgage-Related Securities.......................................
Appendix C: Options, Futures and Forward Currency Contracts...................
62
<PAGE>
SHARES
CONSECO STRATEGIC INCOME FUND
---------------
PROSPECTUS
---------------
Prudential Securities Incorporated
---------------
________________, 1998
63
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
Report of Independent Auditors -- To be filed.
Statement of Assets and Liabilities -- To be filed.
(2) Exhibits
(a) Declaration of Trust - Filed herewith.
(b) Bylaws - To be Filed
(c) Inapplicable
(d) (1) Form of Certificate Representing Shares of Beneficial
Interest -- To be filed.
(2) Portions of Declaration of Trust Relating to Shareholders'
Rights -- To be filed.
(3) Portions of Bylaws Relating to Shareholders' Rights -- To be filed.
(e) Form of Terms and Conditions of Dividend Reinvestment Plan -- To be filed.
(f) Inapplicable
(g) Form of Investment Management and Administration Agreement -- To be filed.
(h) (1) Form of Master Agreement Among Underwriters -- To be filed.
(2) Form of Underwriting Agreement -- To be filed.
(3) Form of Master Selected Dealers Agreement -- To be filed.
(i) Inapplicable
(j) Form of Custodian Contract -- To be filed.
(k) (1) Form of Transfer Agency Agreement - To be filed.
(2) Form of Shareholder Servicing Agreement -- To be filed.
(l) Opinion and Consent of Counsel -- To be filed.
(m) Inapplicable
(n) Consent of Independent Auditors -- To be filed.
(o) Inapplicable
(p) Initial Capital Agreement -- To be filed.
(q) Inapplicable
(r) Inapplicable
ITEM 25. MARKETING ARRANGEMENTS
Reference is made to the Form of Underwriting Agreement for Registrant's shares
of beneficial interest to be filed by amendment to this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission Fees $ 17,700.00
NASD Fees and Expenses. $ 6,500.00
New York Stock Exchange Listing Fee $ *
Printing $ *
Accounting Fees and Expenses $ *
Legal Fees $ *
Blue Sky Fees and Expenses $ *
Reimbursement of Underwriters' Expenses $ *
Miscellaneous $ *
==========
Total $ *
==========
<PAGE>
ITEM 27.....PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH REGISTRANT......None
ITEM 28......NUMBER OF RECORD HOLDERS OF SECURITIES ......0 as of June 2, 1998
ITEM 29......INDEMNIFICATION
Article VI of the Registrant's Declaration of Trust provides as follows:
Section 6.1. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Fund Property or the acts,
obligations or affairs of the Fund. The Trustees shall have no power to bind any
Shareholder personally or to call upon any Shareholder for the payment of any
sum of money or assessment whatsoever other than such as the Shareholder may at
any time personally agree to pay by way of subscription to any Shares or
otherwise. Shareholder liability for the acts and obligations of the Fund is
hereby expressly disclaimed. Every note, bond, contract, or other undertaking
issued by or on behalf of the Fund or the Trustees relating to the Fund shall
include a notice and provision limiting the obligation represented thereby to
the Fund and its assets (but the omission of such notice and provision shall not
operate to impose any liability or obligation on any Shareholder). No Trustee,
officer, employee or agent of the Fund shall be subject to any personal
liability whatsoever to any Person, in connection with the Fund Property or the
affairs of the Fund, save only that arising from bad faith, willful misfeasance,
gross negligence or reckless disregard for his or her duty to such Person; and
all such Persons shall look solely to the Fund Property for satisfaction of
claims of any nature arising in connection with the affairs of the Fund. If any
Shareholder, Trustee, officer, employee or agent, as such, of the Fund is made a
party to any suit or proceeding to enforce any such liability, he or she shall
not, on account thereof, be held to any personal liability. The Fund shall
indemnify and hold each Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by reason of his or
her being or having been a Shareholder, other than by reason of his or her own
wrongful act or omission, and shall reimburse such Shareholder for all legal and
other expenses reasonably incurred by him or her in connection with any such
claim or liability. The rights accruing to a Shareholder under this Section 6.1
shall not exclude any other right to which such Shareholder may be lawfully
entitled, nor shall anything herein contained restrict the right of the Fund to
indemnify or reimburse a Shareholder in any appropriate situation even though
not specifically provided herein.
Section 6.2. No Trustee, officer, employee or agent of the Fund shall be liable
to the Fund, its Shareholders, or to any Shareholder, Trustee, officer,
employee, or agent thereof for any action or failure to act (including without
limitation the failure to compel in any way any former or acting Trustee to
redress any breach of trust) except for his or her own bad faith, willful
misfeasance, gross negligence or reckless disregard of his or her duties.
Section 6.3. (a) The Trustee shall provide for indemnification by the Fund of
any person who is, or has been, a Trustee, officer, employee or agent of the
Fund against all liability and against all expenses reasonably incurred or paid
by him in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or having been a
Trustee, officer, employee or agent and against amounts paid or incurred by him
in the settlement thereof, in such manner as the Trustees may provide from time
to time in the by-laws. (b) The words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorney's fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
Insofar as indemnification for liability arising under the Securities Act of
1933 ("1933 Act") may be permitted to trustees, officers and controlling persons
of the Fund, pursuant to the foregoing provisions, or otherwise, the Fund has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for a trustee, officer or
controlling person of the Fund in the successful defense of any action, suit or
<PAGE>
proceeding or payment pursuant to any insurance policy) is asserted against the
Fund by such trustee, officer or controlling person in connection with the
securities being registered, the Fund will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
ITEM 30.....BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Conseco Capital Management, Inc. (the "Manager") is a Delaware corporation which
offers investment advisory services. The Manager is a wholly-owned subsidiary of
Conseco, Inc., also a Delaware corporation, a publicly owned financial services
company. Both the Manager's and Conseco, Inc.'s offices are located at 11825 N.
Pennsylvania Street, Carmel, Indiana 46032.
Information as to the officers and directors of the Manager is included in its
current Form ADV filed with the SEC and is incorporated by reference herein.
ITEM 31.....LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents of the Registrant required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and rules
promulgated thereunder will be maintained at the office of the Registrant's
custodian at __________________, and the Registrant's dividend disbursing agent
and registrar at __________________, except that the Registrant's corporate
records (its declaration of trust, by-laws, and minutes of the meetings of its
Board of Trustees and shareholders) will be maintained at the offices of the
Registrant's investment manager and adviser at 11815 N.
Pennsylvania Street, Carmel, Indiana 46032.
ITEM 32.....MANAGEMENT SERVICES
None
ITEM 33.....UNDERTAKINGS
(1) The Registrant undertakes to suspend offering of its shares until it amends
its prospectus if (1) subsequent to the effective date of its Registration
Statement, the net asset value declines more than 10 percent from its net asset
value as of the effective date of the Registration Statement or (2) the net
asset value increases to an amount greater than its net proceeds as stated in
the prospectus.
(2) Inapplicable
(3) Inapplicable
(4) Inapplicable
(5) the undersigned registrant hereby undertakes that:
(a) For the purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 42(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
the registration statement as of the time it was declared effective.
(b) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
<PAGE>
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(6) Inapplicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on behalf of the undersigned, thereto duly authorized, in the City
of Carmel, and State of Indiana on the 2nd day of June, 1998.
CONSECO STRATEGIC INCOME FUND
By: /s/ GREGORY J. HAHN
----------------------------
Gregory J. Hahn
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following person in the capacities indicated on
the date indicated.
SIGNATURE TITLE DATE
By: /s/ GREGORY J. HAHN President (Chief Executive June 2, 1998
__________________________ Officer and Trustee
Gregory J. Hahn
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
NUMBER DOCUMENT DESCRIPTION REFERENCE PAGE NUMBER
------ -------------------- --------- -----------
<S> <C> <C> <C>
(a) Declaration of Trust. FILED HEREWITH.
(b) Bylaws To be filed.
(c) Inapplicable
(d) (1) Form of Certificate Representing To be filed.
Shares of Beneficial Interest
(2) Portions of Declaration of Trust Relating
to Shareholders' Rights To be filed.
(3) Portions of Bylaws Relating to Shareholders'
Rights To be filed.
(e) Form of Terms and Conditions of Dividend
Reinvestment Plan To be filed.
(f) Inapplicable
(g) Form of Investment Management and Administration
Agreement To be filed.
(h) (1) Form of Master Agreement Among Underwriters To be filed.
(2) Form of Underwriting Agreement To be filed.
(3) Form of Master Selected Dealers Agreement To be filed.
(i) Inapplicable
(j) Form of Custodian Contract To be filed.
(k) (1) Form of Transfer Agency Agreement
(2) Form of Shareholder Servicing Agreement
(l) Opinion and Consent of Counsel To be filed.
(m) Inapplicable
(n) Consent of Independent Auditors To be filed.
(o) Inapplicable
(p) Initial Capital Agreement To be filed.
(q) Inapplicable
(r) Inapplicable
</TABLE>
DECLARATION OF TRUST
OF
CONSECO STRATEGIC INCOME FUND
DATED: MAY 29, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I NAME AND DEFINITIONS................................................1
Section 1.1 Name...........................................................1
Section 1.2 Location.......................................................1
Section 1.3 Nature of Trust................................................1
Section 1.4 Definitions....................................................2
ARTICLE II TRUSTEES...........................................................3
Section 2.1 Number of Trustees.............................................3
Section 2.2 Term of Office of Trustees.....................................3
Section 2.3 Resignation and Appointment of Trustees........................3
Section 2.4 Vacancies......................................................4
Section 2.5 Delegation of Power to Other Trustees..........................4
Section 2.6 Removal of Trustees............................................4
ARTICLE III POWERS OF TRUSTEES................................................4
Section 3.1 General........................................................4
Section 3.2 Investments....................................................4
Section 3.3. Legal Title...................................................5
Section 3.4 Issuance and Repurchase of Securities..........................5
Section 3.5 Borrowing Money; Lending Fund Assets...........................5
Section 3.6 Disposition of Assets..........................................5
Section 3.7 Delegation; Committees.........................................6
Section 3.8 Collection and Payment.........................................6
Section 3.9 Expenses.......................................................6
Section 3.10 Manner of Acting; By-Laws.....................................6
Section 3.11 Miscellaneous Powers..........................................6
Section 3.12 Principal Transactions........................................6
Section 3.13 Litigation....................................................7
ARTICLE IV INVESTMENT ADVISER, DISTRIBUTOR, CUSTODIAN AND TRANSFER AGENT......7
Section 4.1 Investment Adviser.............................................7
Section 4.2 Administrative Services........................................7
Section 4.3 Distributor....................................................7
Section 4.4 Transfer Agent and Shareholder Servicing Agent.................7
Section 4.5 Custodian......................................................7
Section 4.6 Parties to Contract............................................7
ARTICLE V INVESTMENTS.........................................................8
Section 5.1 Statement of Investment Objectives and Policies...............8
Section 5.2 Restrictions..................................................8
Section 5.3 Percentage Restrictions.......................................8
Section 5.4 Amendment of Fundamental Policies.............................8
i
<PAGE>
ARTICLE VI LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS......8
Section 6.1 No Personal Liability of Shareholders, Trustees, etc...........8
Section 6.2 Non-Liability of Trustees, etc.................................9
Section 6.3 Indemnification................................................9
Section 6.4 No Bond Required of Trustees...................................9
Section 6.5 No Duty of Investigation; Notice in Fund Instruments, etc.....9
Section 6.6 Reliance on Experts, etc.......................................9
ARTICLE VII SHARES OF BENEFICIAL INTEREST....................................10
Section 7.1 Beneficial Interest...........................................10
Section 7.2 Rights of Shareholders........................................10
Section 7.3 Issuance of Shares............................................10
Section 7.4 Register of Shares............................................10
Section 7.5 Transfer of Shares............................................10
Section 7.6 Notices.......................................................11
Section 7.7 Voting Powers.................................................11
ARTICLE VIII DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS..11
Section 8.1 Net Asset Value................................................11
Section 8.2 Distributions to Shareholders..................................11
Section 8.3 Determination of Net Income....................................12
Section 8.4 Power to Modify Foregoing Procedures...........................12
Section 8.5 Power to Delegate Determinations...............................12
ARTICLE IX DURATION; TERMINATION OF FUND, AMENDMENT, MERGERS, ETC............12
Section 9.1 Duration.......................................................12
Section 9.2 Termination of Fund............................................12
Section 9.3 Amendment Procedures...........................................13
Section 9.4 Merger, Consolidation and Sale of Assets.......................13
Section 9.5 Incorporation and Reorganization...............................14
Section 9.6 Conversion.....................................................14
Section 9.7 Certain Transactions...........................................14
ARTICLE X REPORTS TO SHAREHOLDERS............................................15
ARTICLE XI MISCELLANEOUS.....................................................15
Section 11.1 Filing........................................................15
Section 11.2 Resident Agent................................................15
Section 11.3 Governing Law.................................................15
Section 11.4 Organizational Expenses.......................................15
Section 11.5 Counterparts..................................................15
Section 11.6 Reliance by Third Parties.....................................15
Section 11.7 Provisions of Conflict with Law or Regulations................15
ii
<PAGE>
DECLARATION OF TRUST
OF
CONSECO STRATEGIC INCOME FUND
DATED: MAY 29, 1998
----------------------------------------
THE DECLARATION OF TRUST of Conseco High Income Fund is made the
29th day of May, 1998 by the party signatory hereto, as Trustee.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Trustee desires to form an unincorporated voluntary
association commonly known as a business trust, as described in the provisions
of Chapter 182 of the General Laws of Massachusetts for the principal purpose of
the investment and reinvestment of funds contributed thereto;
WHEREAS, the Trustee desires that such trust be a closed-end
management investment company registered under the 1940 Act; and
WHEREAS, it is provided that the beneficial interest in the Trust
assets be divided into transferable shares of beneficial interest as hereinafter
provided;
NOW, THEREFORE, the Trustee hereby declares that he will hold in
trust all money and property contributed to the Trust, together with the
proceeds thereof, to manage and dispose of the same for the benefit of the
holders of record from time to time of the shares of beneficial interest issued
hereunder and subject to the provisions hereof, to wit:
Article I
NAME AND DEFINITIONS
-------------------
Section 1.1 Name. The name of the Trust created hereby is the "Conseco
Strategic Income Fund," and so far as may be practicable the Trustees shall
conduct the Trust's activities, execute all documents and sue or be sued under
the name, which name (and the word "Trust" wherever herein used) shall refer to
the Trustees as trustees, and not as individuals, or personally, and shall not
refer to the officers, agents, employees or Shareholders of the Trust. Should
the Trustees determine that the use of such name is not advisable, they may use
such other name for the Trust as they deem proper and the Trust may hold its
property and conduct its activities under such other name.
Section 1.2 Location. The principal office of the Fund shall be located
within or without the Commonwealth of Massachusetts, as the Trustees may from
time to time determine, and is presently located at 11815 North Pennsylvania
Street, Carmel, Indiana 46032. The Resident Agent of the Fund is CT Corporation
Systems, located at Two Oliver Street, Boston, Massachusetts 02109.
<PAGE>
Section 1.3 Nature of Trust. The Trust established hereunder shall be of
the type commonly termed a business trust. The Trust is not intended to be,
shall not be deemed to be and shall not be treated as, a general partnership,
limited partnership, joint venture, corporation or joint stock company. The
Shareholders shall be beneficiaries and their relationship to the Trustees shall
be solely in that capacity in accordance with the rights conferred upon them
hereunder, and nothing in this Declaration of Trust shall be construed to make
the Shareholders, either by themselves or with the Trustees, partners or members
of a joint stock association. The Fund is intended to have the status of a
closed-end management investment company under the 1940 Act and of a "regulated
investment company" as that term is defined in Section 851 of the Internal
Revenue Code of 1958, and this Declaration of Trust and all actions of the
Trustees hereunder shall be construed in accordance with such intent.
Section 1.4 Definitions. Wherever they are used herein, the following
terms have the following respective meanings, unless the context hereof requires
otherwise:
(a) "BY-LAWS" means the By-Laws referred to in Section 3.9 hereof,
as from time to time amended.
(b) The terms "COMMISSION," "AFFILIATED PERSON" and "INTERESTED
PERSON" have the meanings given them in the 1940 Act.
(c) "DECLARATION" means this Declaration of Trust as amended from
time to time. Reference in this Declaration of Trust to
"DECLARATION," "HEREOF," "HEREIN" and "HEREUNDER" shall be
deemed to refer to this Declaration rather than the article or
section in which such words appear.
(d) "DISTRIBUTOR" means the party, other than the Fund, to a
contract described in Section 4.3 hereof.
(e) "TRUST" means the Conseco Strategic Income Fund.
(f) "TRUST PROPERTY" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the
account of the Trust or the Trustees, and shall include any
and all proceeds thereof.
(g) "FUNDAMENTAL POLICIES" shall mean the investment policies and
restrictions set forth in the Registration Statement and
designated as fundamental policies therein.
(h) "INVESTMENT ADVISER" means any party, other than the Trust, to
a contract described in Section 4.1 hereof.
(i) "MAJORITY SHAREHOLDER VOTE" means the vote of the holders of a
--------------------------- majority of Shares, which shall
consist of (i) a majority of Shares presented in person or by
proxy and entitled to vote at a meeting of Shareholders at
which a quorum, as determined in accordance with the By-laws,
is present or (ii) a majority of Shares issued and outstanding
and entitled to vote when action is taken by written consent
of Shareholders, unless the action requires the approval of a
"majority of the outstanding voting securities" under the 1940
Act, in which case such vote as specified in the 1940 Act
shall be required.
(j) "1940 ACT" means the Investment Company Act of 1940 and the
rules and regulations thereunder as amended from time to time.
(k) "PERSON" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other
entities, whether or not legal entities, and governments and
agencies and political subdivisions thereof.
2
<PAGE>
(l) "REGISTRATION STATEMENT" means the Registration Statement of
the Trust under the Securities Act of 1933 as such
Registration Statement may be amended and filed with the
Commission from time to time.
(m) "SHAREHOLDER" means a record owner of outstanding Shares.
(n) "SHARES" means the units of interest into which the beneficial
interest in the Trust shall be divided from time to time and
includes fractions of Shares as well as whole Shares.
(o) "TRANSFER AGENT" means the party, other than the Trust, to the
contract described in Section 4.4 hereof.
(p) "TRUSTEES" means the person who has signed the Declaration, so
long as he shall continue in office in accordance with the
terms hereof, and all other persons who may from time to time
be duly elected or appointed, qualified and serving as
Trustees in accordance with the provisions hereof, and
reference herein to a Trustee or the Trustees shall refer to
such person or persons in their capacity as Trustees
hereunder.
Article II
TRUSTEES
--------
Section 2.1 Number of Trustees. The number of Trustees shall be such
number as shall be fixed from time to time by the Board of Trustees, provided,
however, that, following the issuance of Shares, the number of Trustees shall in
no event be less than three (3) nor more than fifteen (15). No reduction in the
number of Trustees shall have the effect of removing any Trustee from office
prior to the expiration of his or her term unless the Trustee is specifically
removed pursuant to Section 2.2 of this Article II at the time of decrease.
Section 2.2 Term of Office of Trustees. The Board of Trustees shall be
divided into three classes. Within the limits above specified, the number of the
Trustees in each class shall be determined by resolution of the Board of
Trustees. The term of office of all of the Trustees shall expire on the date of
the first annual or special meeting of Shareholders following the effective date
of the Registration Statement relating to the Shares under the Securities Act of
1933, as amended. The term of office of the first class shall expire on the date
of the second annual meeting of Shareholders or special meeting in lieu thereof.
The term of office of the second class shall expire on the date of the third
annual meeting of Shareholders or special meeting in lieu thereof. The term of
office of the third class shall expire on the date of the fourth annual meeting
of Shareholders or special meeting in lieu thereof. Upon expiration of the term
of office of each class as set forth above, the number of Trustees in such
class, as determined by the Board of Trustees, shall be elected for a term
expiring on the date of the third annual meeting of Shareholders or special
meeting in lieu thereof following such expiration to succeed the Trustees whose
terms of office expire. The Trustees shall be elected at an annual meeting of
the Shareholders or special meeting in lieu thereof called for that purpose,
except as provided in Section 2.3 of this Article and each Trustee elected shall
hold office until his or her successor shall have been elected and shall have
qualified; except (a) that any Trustee may resign his or her trust (without need
for prior or subsequent accounting) by an instrument in writing signed by him or
her and delivered to the other Trustees, which shall take effect upon such
delivery or upon such later date as is specified therein; (b) that any Trustee
may be removed (provided the aggregate number of Trustees after such removal
shall not be less than the number required by Section 2.1 hereof) for cause, at
any time by written instrument, signed by the remaining Trustees, specifying the
date when such removal shall become effective; and (c) that any Trustee who
requests in writing to be retired or who has become incapacitated by illness or
injury may be retired by written instrument signed by a majority of the other
Trustees, and he or she shall execute and deliver such documents as the
remaining Trustees shall require for the purpose of conveying to the Trust or
the remaining Trustees any Trust property held in the name of the resigning or
removed Trustee. Upon the incapacity or death of any Trustee, his or her legal
representative shall execute and deliver on his or her behalf such document as
the remaining Trustees shall require as provided in the preceding sentence.
3
<PAGE>
Section 2.3 Resignation and Appointment of Trustees. In case of the
declination, death, resignation, retirement, removal or inability of any of the
Trustees, or in case a vacancy shall, by reason of any increase in number, or
for any other reason, exist, the remaining Trustees or, prior to the public
offering of Shares of the Trust, if only one Trustee shall then remain in
office, the remaining Trustee, shall fill such vacancy by appointing such other
person as they, or anyone of them, in their discretion, shall see fit. Such
appointment shall be evidenced by a written instrument signed by a majority of
the remaining Trustees or by the remaining Trustee, as the case may be. Any such
appointment shall not become effective, however, until the person named in the
written instrument or appointment shall have accepted in writing such
appointment and agreed in writing to be bound by the terms of the Declaration.
Within twelve months of such appointment, the Trustees shall cause notice of
such appointment to be mailed to each Shareholder at his or her address as
recorded on the books of the Trust. An appointment of a Trustee may be made by
the Trustees then in office and notice thereof mailed to Shareholders as
aforesaid in anticipation of a vacancy to occur by reason of retirement,
resignation or increase in number of Trustees effective at a later date,
provided that said appointment shall become effective only at or after the
effective date of said retirement, resignation or increase in number of
Trustees. The power of appointment is subject to the provisions of Section 16(a)
of the 1940 Act.
Section 2.4 Vacancies. The death, declination, resignation, retirement,
removal or incapacity of the Trustees, or any one of them, shall not operate to
annul the Trust or to revoke any existing agency created pursuant to the terms
of this Declaration. Whenever a vacancy in the number of Trustees shall occur,
until such vacancy is filled as provided in Section 2.3, the Trustees in office,
regardless of their number, shall have all the duties imposed upon the Trustees
by the Declaration. A written instrument certifying the existence of such
vacancy signed by a majority of the Trustees shall be conclusive evidence of the
existence of such vacancy.
Section 2.5 Delegation of Power to Other Trustees. Subject to the
provisions of the 1940 Act, any Trustee may, by power of attorney, delegate his
or her power for a period not exceeding six (6) months at any one time to any
other Trustee or Trustees; provided that in no case shall less than two (2)
Trustees personally exercise the powers granted to the Trustees under the
Declaration except as herein otherwise expressly provided.
Section 2.6 Removal of Trustees. The Trust shall comply with the
provisions of Section 16(c) of the 1940 Act as though applicable to the Trust,
and with interpretations thereof by the Commission staff, insofar as such
provisions and interpretations provide for the removal of trustees of common-law
trusts and the calling of Shareholder meetings for such purpose; provided,
however, that the Trust may at any time or from time to time apply to the
Commission for one or more exemptions from all or part of said Section 16(c) or
a staff interpretation thereof and, if exemptive order(s) or interpretation(s)
are issued or provided by the Commission or its staff, such order(s) or
interpretation(s) shall be deemed part of Section 16(c) for the purpose of
applying this Section 2.6.
Article III
POWERS OF TRUSTEES
------------------
Section 3.1 General. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by the Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without the Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities wheresoever in the world they may be
located and to do all such other things and execute all such instruments as they
deem necessary, proper or desirable in order to promote the interests of the
Trust although such things are not herein specifically mentioned. Any
determination as to what is in the interests of the Trust made by the Trustees
in good faith shall be conclusive. In construing the provisions of the
Declaration, the presumption shall be in favor of a grant of power to the
Trustees.
The enumeration of any specific power herein shall not be construed
as limiting the aforesaid power. Such powers of the Trustees may be exercised
without order of or resort to any court.
4
<PAGE>
Section 3.2 Investments. The Trustees shall have the power, subject in all
respects to Article V hereof, to:
(a) conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, sell short, assign, transfer,
exchange, distribute, lend or otherwise deal in, all forms of
securities of every kind, nature, character, type and form,
and other financial instruments that may not be deemed to be
securities, including, but not limited to, futures contracts
and options thereon, forward foreign currency contracts, and
equity swaps. Such securities and other financial instruments
may include, but are not limited to, shares, stocks, bonds,
debentures, notes, script, participation certificates, rights
to subscribe, warrants, options, repurchase agreements,
commercial paper; evidences of indebtedness, certificates of
indebtedness, issued or to be issued by any corporation,
company, partnership, association, trust or entity, public or
private, whether organized under the laws of the United
States, or any state, commonwealth, territory or possession
thereof, or of any foreign country, or any state, province,
territory or possession thereof; and to exercise any and all
rights, powers and privileges of ownership or interest in
respect of any and all such investments of every kind and
description, including, without limitation, the right to
consent and otherwise act with respect thereto, with power to
designate one or more persons, firms, associations or
corporations to exercise any of said rights, powers and
privileges in respect of any of said instruments; and the
Trustee shall be deemed to have the foregoing powers with
respect to any additional securities in which the Trust may
invest should the Fundamental Policies be amended.
The Trustee shall not be limited to investing in obligations maturing before the
possible termination of the Trust, nor shall the Trustees be limited by any law
limiting the investments which may be made by fiduciaries.
Section 3.3 Legal Title. Legal title to all the Trust Property shall be
vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust, or in the name of any
other Person as nominee, on such terms as the Trustees may determine, provided
that the interest of the Trust therein is appropriately protected. The right,
title and interest of the Trustees in the Trust Property shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
resignation, removal or death of a Trustee he or she shall automatically cease
to have any right, title or interest in any of the Trust Property, and the
right, title and interest of such Trustee in the Trust Property shall vest
automatically in the remaining Trustees. Such vesting and cessation of title
shall be effective whether or not conveyancing documents have been executed and
delivered.
Section 3.4 Issuance and Repurchase of Securities. The Trustees shall have
the power to issue, sell, repurchase, retire, cancel, acquire, hold, resell,
reissue, dispose of, transfer, and otherwise deal in Shares and, subject to the
provisions set forth in Articles VII and VIII hereof, to apply to any such
repurchase, retirement, cancellation or acquisition of Shares any funds or
property of the Trust, whether capital or surplus or otherwise, to the full
extent now or hereafter permitted by the laws of the Commonwealth of
Massachusetts governing business corporations.
Section 3.5 Borrowing Money; Lending Fund Assets. Subject to the
Fundamental Policies, the Trustees shall have power to borrow money or otherwise
obtain credit and to secure the same by mortgaging, pledging or otherwise
subjecting as security the assets of the Trust, to endorse, guarantee, or
undertake the performance of any obligation, contract or engagement of any other
Person and to lend Fund assets.
Section 3.6 Disposition of Assets. Subject in all respects to Article V
hereof, the Trustees shall have power to sell, lease, exchange or otherwise
dispose of or grant options with respect to any and all Trust Property free and
clear of any and all trusts, at public or private sale, for cash or on terms,
without advertisement, and subject to such restrictions, stipulations,
agreements and reservations as they shall deem proper, and to execute and
deliver any deed or other instrument in connection with the foregoing. The
Trustees shall also have the power, subject in all respects to Article V hereof,
to:
5
<PAGE>
(a) rent, lease or hire from others for terms which may extend beyond
the termination of this Declaration of Trust any property or rights
to property, real, personal or mixed, tangible or intangible, and,
except for real property, to own, manage, use and hold such property
and such rights;
(b) give consents and make contracts relating to Trust Property or its
use;
(c) grant security interests in or otherwise encumber Trust Property in
connection with borrowings; and
(d) release any Trust Property
Section 3.7 Delegation; Committees. The Trustees shall have power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of such things
and the execution of such instruments either in the name of the Trust or the
names of the Trustees or otherwise as the Trustees deem expedient.
Section 3.8 Collection and Payment. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
Section 3.9 Expenses. The Trustees shall have the power to incur and pay
any expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of the Declaration, and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The Trustees
shall fix the compensation of all officers, employees and Trustees.
Section 3.10 Manner of Acting; By-Laws. Except as otherwise provided
herein or in the By-Laws or by any provision of law, any action to be taken by
the Trustees may be taken by a majority of the Trustees present at a meeting of
Trustees (a quorum being present), including any meeting held by means of a
conference telephone circuit or similar communications equipment by means of
which all persons participating in the meeting can hear each other, or by
written consents of a majority of the Trustees. The Trustees may adopt By-Laws
not inconsistent with this Declaration to provide for the conduct of the
business of the Trust and may amend or repeal such By-Laws to the extent such
power is not reserved to the Shareholders.
Section 3.11 Miscellaneous Powers. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable for
the transaction of the business of the Trust; (b) enter into joint ventures,
partnerships and any other combinations or associations; (c) remove Trustees or
fill vacancies in or add to their number, elect and remove such officers and
appoint and terminate such agents or employees as they consider appropriate, and
appoint from their own number, and terminate, any one or more committees which
may exercise some or all of the power and authority of the Trustees as the
Trustees may determine; (d) purchase, and pay for out of Trust Property,
insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers, distributors, selected dealers or independent
contractors of the Trust against all claims arising by reason of holding any
such position or by reason of any action taken or omitted to be taken by any
such Person in such capacity, whether or not constituting negligence, or whether
or not the Trust would have the power to indemnify such Person against such
liability; (e) establish pension, profit-sharing, Share purchase, and other
retirement incentive and benefit plans for any Trustees, officers, employees and
agents of the Trust; (f) to the extent permitted by law, indemnify any person
with whom the Trust has dealings, including any Investment Adviser, Distributor,
Transfer Agent and selected dealers, to such extent as the Trustees shall
determine; (g) guarantee indebtedness or contractual obligations of others; (h)
determine and change the fiscal year of the Trust and the method by which its
accounts shall be kept; and (i) adopt a seal for the Trust, but the absence of
such seal shall not impair the validity of any instrument executed on behalf of
the Trust.
Section 3.12 Principal Transactions. Except in transactions permitted by
the 1940 Act or any rule or regulation thereunder, or any order of exemption
issued by the Commission, or effected to implement the provisions of any
agreement to which the Trust is a party, the Trustees shall not, on behalf of
the Trust, buy any securities (other than Shares) from or sell any securities
(other than Shares) to, or lend any assets of the Trust to, any Trustee or
6
<PAGE>
officer of the Trust or any firm of which any such Trustee or officer is a
member acting as principal, or have any such dealings with any Investment
Adviser, Distributor or Transfer Agent or with any Affiliated Person of such
Person; but the Trust or any Series thereof may employ any such Person, or firm
or company in which such Person is an Interested Person, as broker, legal
counsel, registrar, transfer agent, dividend disbursing agent or custodian upon
customary terms.
Section 3.13 Litigation. The Trustees shall have the power to engage in
and to prosecute, defend, compromise, abandon, or adjust, by arbitration or
otherwise, any actions, suits, proceedings, disputes, claims, and demands
relating to the Trust, and out of the assets of the Trust to pay or to satisfy
any debts, claims or expenses incurred in connection therewith, including those
of litigation, and such power shall include without limitation the power of the
Trustees or any appropriate committee thereof, in the exercise of their or its
good faith business judgment, to dismiss any action, suit, proceeding, dispute,
claim or demand, derivative or otherwise, brought by any person, including a
Shareholder in its own name or the name of the Trust, whether or not the Trust
or any of the Trustees may be named individually therein or the subject matter
arises by reason of business for or on behalf of the Trust.
Article IV
INVESTMENT ADVISER, DISTRIBUTOR, CUSTODIAN AND TRANSFER AGENT
-------------------------------------------------------------
Section 4.1 Investment Adviser. The Trustees may in their discretion from
time to time enter into one or more investment advisory or management contracts
whereby the other party or parties to any such contracts shall undertake to
furnish the Trust such management, investment advisory, administration,
accounting, legal, statistical and research facilities and services, promotional
or marketing activities, and such other facilities and services, if any, as the
Trustees shall from time to time consider desirable and all upon such terms and
conditions as the Trustees may in their discretion determine. Notwithstanding
any provisions of the Declaration, the Trustees may authorize the Investment
Advisers, or any of them, under any such contracts (subject to such general or
specific instructions as the Trustees may from time to time adopt) to effect
purchases, sales, loans or exchanges of portfolio securities and other
investments of the Trust on behalf of the Trustees or may authorize any officer,
employee or Trustee to effect such purchases, sales, loans or exchanges pursuant
to recommendations of such Investment Advisers, or any of them (and all without
further action by the Trustees). Any such purchases, sales, loans and exchanges
shall be deemed to have been authorized by all of the Trustees.
Section 4.2 Administrative Services. The Trustees may in their discretion
from time to time contract for administrative personnel and services whereby the
other party shall agree to provide the Trustees or the Trust administrative
personnel and services to operate the Trust on a daily or other basis, on such
terms and conditions as the Trustees may in their discretion determine. Such
services may be provided by one or more persons or entities.
Section 4.3 Distributor. The Trustees may in their discretion from time to
time enter into one or more contracts, providing for the sale of Shares whereby
the Trust may either agree to sell the Shares to the other parties to the
contracts, or any of them, or appoint any such other party its sales agent for
such Shares. In either case, any such contract shall be on such terms and
conditions as the Trustees may in their discretion determine not inconsistent
with the provisions of this Article IV or the By-Laws, including, without
limitation, the provision for the repurchase or sale of Shares of the Trust by
such other party as principal or as agent of the Trust, and for entry by the
other parties to the contracts into selected dealer agreements with registered
securities dealers to further the purpose of distribution of the Shares.
Section 4.4 Transfer Agent and Shareholder Servicing Agent. The Trustees
may in their discretion from time to time enter into a transfer agency contract
and/or shareholder servicing contract whereby the other party to such contract
shall undertake to furnish transfer agency and shareholder services to the
Trust. The contract shall have such terms and conditions as the Trustees may in
their discretion determine not inconsistent with the Declaration or the By-Laws.
Such services may be provided by one or more Persons.
Section 4.5 Custodian. The Trustees may appoint or otherwise engage one or
more banks or trust companies, each having an aggregate capital, surplus and
undivided profits (as shown in its last published report) of at least five
million dollars ($5,000,000) to serve as Custodian with authority as its agent,
but subject to such restrictions, limitations and other requirements, if any, as
may be contained in the By-Laws of the Trust.
7
<PAGE>
Section 4.6 Parties to Contract. Any contract of the character described
in Sections 4.1, 4.2, 4.3, 4.4 or 4.5 of this Article IV and any other contract
may be entered into with any Person, although one or more of the Trustees or
officers of the Trust may be an officer, director, trustee, shareholder, or
member of such other party to the contract, and no such contract shall be
invalidated or rendered voidable by reason of the existence of any such
relationship; nor shall any Person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was not
inconsistent with the provisions of this Article IV. The same Person may be the
other party to any contracts entered into pursuant to Sections 4.1, 4.2, 4.3,
4.4 or 4.5 above or otherwise, and any individual may be financially interested
or otherwise affiliated with Persons who are parties to any or all of the
contracts mentioned in this Section 4.6.
Article V
INVESTMENTS
-----------
Section 5.1 Statement of Investment Objectives and Policies. The Trustees
shall be guided in their actions by the Investment Objectives and Policies as
set forth in the most current effective registration statement for the Trust as
filed with the Securities and Exchange Commission.
Section 5.2 Restrictions. Notwithstanding anything in this Declaration of
Trust which may be deemed to authorize the contrary, the Trust shall conduct its
affairs in accordance with the Fundamental Policies as set forth in the most
current effective registration statement for the Trust as filed with the
Securities and Exchange Commission.
Section 5.3 Percentage Restrictions. If the percentage restrictions as set
forth in the Fundamental Policies described in Section 5.2 above are adhered to
at the time of each investment, a later increase or decrease in percentage
resulting from a change in the value of the Trust's assets is not a violation of
such investment restrictions.
Section 5.4 Amendment of Fundamental Policies. The Fundamental Policies
may not be changed without the approval of the holders of a majority of the
outstanding voting Shares of the Trust which, for purposes herein shall mean the
lesser of (i) 67% of the Shares represented at a Shareholders meeting at which
more than 50% of the outstanding Shares are represented or (ii) more than 50% of
the outstanding Shares.
Article VI
LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS
-------------------------------------------------------------
Section 6.1 No Personal Liability of Shareholders, Trustees, etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust. The Trustees shall have no power to bind any Shareholder personally or to
call upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay by way of subscription to any Shares or otherwise. Shareholder liability
8
<PAGE>
for the acts and obligations of the Trust is hereby expressly disclaimed. Every
note, bond, contract, or other undertaking issued by or on behalf of the Trust
or the Trustees relating to the Trust shall include a notice and provision
limiting the obligation represented thereby to the Trust and its assets (but the
omission of such notice and provision shall not operate to impose any liability
or obligation on any Shareholder). No Trustee, officer, employee or agent of the
Trust shall be subject to any personal liability whatsoever to any Person, in
connection with the Trust Property or the affairs of the Trust, save only that
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard for his or her duty to such Person; and all such Persons shall look
solely to the Trust Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust. If any Shareholder, Trustee, officer,
employee or agent, as such, of the Trust is made a party to any suit or
proceeding to enforce any such liability, he or she shall not, on account
thereof, be held to any personal liability. The Trust shall indemnify and hold
each Shareholder harmless from and against all claims and liabilities, to which
such Shareholder may become subject by reason of his or her being or having been
a Shareholder, other than by reason of his or her own wrongful act or omission,
and shall reimburse such Shareholder for all legal and other expenses reasonably
incurred by him or her in connection with any such claim or liability. The
rights accruing to a Shareholder under this Section 6.1 shall not exclude any
other right to which such Shareholder may be lawfully entitled, nor shall
anything herein contained restrict the right of the Trust to indemnify or
reimburse a Shareholder in any appropriate situation even though not
specifically provided herein.
Section 6.2 Non-Liability of Trustees, etc. No Trustee, officer, employee
or agent of the Trust shall be liable to the Trust, its Shareholders, or to any
Shareholder, Trustee, officer, employee, or agent thereof for any action or
failure to act (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust) except for his or
her own bad faith, willful misfeasance, gross negligence or reckless disregard
of his or her duties.
Section 6.3 Indemnification. (a) The Trustees shall provide for
indemnification by the Trust of any person who is, or had been, a Trustee,
officer, employee or agent of the Trust against all liability and against all
expenses reasonably incurred or paid by him or her in connection with any claim,
action, suit or proceeding in which he or she becomes involved as a party or
otherwise by virtue of being or having been a Trustee, officer, employee or
agent and against amounts paid or incurred by him or her in the settlement
thereof, in such manner as the Trustees may provide from time to time in the
By-Laws.
(b) The words "claim," "action," suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
Section 6.4 No Bond Required of Trustees. No Trustee shall be obligated to
give any bond or other security for the performance of any of his or her duties
hereunder.
Section 6.5 No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other Person dealing with the Trustees or
any officer, employee or agent of the Trust shall be bound to make any inquiry
concerning the validity of any transaction purporting to be made by the Trustees
or by said officer, employee or agent or be liable for the application of money
or property paid, loaned, or delivered to or on the order of the Trustees or of
said officer, employee or agent or be liable for the application of money or
property paid, loaned, or delivered to or on the order of the Trustees or of
said officer, employee or agent. Every obligation, contract, instrument,
certificate, Share, other security of the Trust or undertaking, and every other
act or thing whatsoever executed in connection with the Trust shall be
conclusively presumed to have been executed or done by the executors thereof
only in their capacity as officers, employees or agents of the Trust. Every
written obligation, contract, instrument, certificate, Share, other security of
the Trust or undertaking made or issued by the Trustees shall recite that the
same is executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of the Trust under any such instrument are
not binding upon any of the Trustees or Shareholders, individually, but bind
only the Trust, and may contain any further recital which they, or anyone of
them, may deem appropriate, but the omission of such recital shall not affect
the validity of such obligation, contract, instrument, certificate, share,
security or undertaking and shall not operate to bind the Trustees or
Shareholders individually. The Trustees may maintain insurance for the
protection of the Trust Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in their sole
judgment shall deem advisable.
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Section 6.6 Reliance on Experts, etc. Each Trustee and officer or employee
of the Trust shall, in the performance of his or her duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other records
of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of its officers or employees or by any Investment Adviser, Distributor,
Transfer Agent, selected dealers, accountants, appraisers or other experts or
consultants selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
Article VII
SHARES OF BENEFICIAL INTEREST
-----------------------------
Section 7.1 Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable shares of beneficial interest of
$.001 par value. The number of such shares of beneficial interest authorized
hereunder is unlimited. All Shares issued hereunder, including Shares issued in
connection with a dividend in Shares or a split in Shares, shall be fully paid
and nonassessable.
Section 7.2 Rights of Shareholders. The ownership of the Trust Property of
every description and the right to conduct any business herein before described
are vested exclusively in the Trustees, and the Shareholders shall have no
interest therein other than the beneficial interest conferred by their Shares,
and they shall have no right to call for any partition or division of any
property, profits, rights or interests of the Trust nor can they be called upon
to assume any losses of the Trust or suffer an assessment of any kind by virtue
of their ownership of Shares. The Shares shall be personal property giving only
the rights in the Declaration specifically set forth. The Shares shall not
entitle the holder to preference, preemptive, appraisal, conversion or exchange
rights.
Section 7.3 Issuance of Shares. The Trustees in their discretion may, from
time to time without vote of the Shareholders, issue Shares, in addition to the
then issued and outstanding Shares and Shares held in the treasury, to such
party or parties and for such amount and type of consideration, including cash
or property, at such time or times and on such terms as the Trustees may deem
best, and may in such manner acquire other assets (including the acquisition of
assets subject to, and in connection with, the assumption of liabilities) and
businesses. In connection with any issuance of Shares, the Trustees may issue
fractional Shares and Shares held in the treasury. The Trustees may from time to
time divide or combine the Shares into a greater or lesser number without
thereby changing the proportionate beneficial interests in the Trust without the
vote of the Shareholders. Contributions to the Trust may be accepted for whole
Shares and/or 1/1,000ths of a Share or integral multiple thereof.
Section 7.4 Register of Shares. A register shall be kept in respect of the
Trust at the principal office of the Trust or at an office of the Transfer Agent
which shall contain the names and addresses of the Shareholders and the number
of Shares held by them respectively and a record of all transfers thereof. Such
register may be in written form or any other form capable of being converted
into written from within a reasonable time for visual inspection. Such register
shall be conclusive as to who are the holders of the Shares and who shall be
entitled to receive dividends or distributions or otherwise to exercise or enjoy
the rights of Shareholders. No Shareholder shall be entitled to receive payment
of any dividend or distribution, nor to have notice given to him or her as
herein or in the By-Laws provided, until he or she has given his or her address
to the Transfer Agent or such other officer or agent of the Trustees as shall
keep the said register for entry thereon. The Trustees, in their discretion, may
authorize the issuance of Share certificates and promulgate appropriate rules
and regulations as to their use.
Section 7.5 Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his or her agent
thereunto duly authorized in writing, upon delivery to the Trustees or the
Transfer Agent of a duly executed instrument of transfer, together with such
evidence of the genuineness of each such execution and authorization and of
other matters as may reasonably be required. Upon such delivery the transfer
shall be recorded on the register of the Trust. Until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereunder and neither the Trustees nor any Transfer Agent or registrar
nor any officer, employee or agent of the Trust shall be affected by any notice
of the proposed transfer.
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Any person becoming entitled to any Shares in consequence of the
death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation
of law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or the Transfer
Agent, but until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer or agent of the
Trust shall be affected by any notice of such death, bankruptcy or incompetence,
or other operation of law, except as may otherwise be provided by the laws of
the Commonwealth of Massachusetts.
Section 7.6 Notices. Any and all notices to which any Shareholders may be
entitled and any and all communications shall be deemed duly served or given if
mailed, postage prepaid, addressed to any Shareholder of record at his or her
last known address as recorded on the register of the Trust or in such other
manner as is permitted by law. Annual reports and proxy statements need not be
sent to a Shareholder if: (i) an annual report and proxy statement for two
consecutive annual meetings, or (ii) all, and at least two, checks (if sent by
first class mail) in payment of dividends or interest and Shares during a
twelve-month period have been mailed to such Shareholder's address and have been
returned undelivered. However, delivery of such annual reports and proxy
statements shall resume once a Shareholder's current address is determined.
Section 7.7 Voting Powers. The Shareholders shall have power to vote only
(i) for the election of Trustees as provided in Section 2.2 hereof, (ii) for the
removal of Trustees as provided in Section 2.2 hereof, (iii) with respect to any
investment advisory or management contract as provided in Section 4.1, (iv) with
respect to termination of the Trust as provided in Section 9.2, (v) with respect
to any amendment of the Declaration to the extent and as provided in Section
9.3, (vi) with respect to any merger, consolidation, conversion or sale of
assets as provided in Sections 9.4, 9.5 and 9.6, (vii) with respect to
incorporation or reorganization of the Trust to the extent and as provided in
Section 9.5, (viii) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or should not be brought or maintained derivatively or as a class action
on behalf of the Trust or the Shareholders, and (ix) with respect to such
additional matters relating to the Trust as may be required by law, the
Declaration, the By-Laws or any registration of the Trust with the Commission
(or any successor agency) or any state, or as and when the Trustees may consider
necessary or desirable. Each whole Share shall be entitled to one vote as to any
matter on which it is entitled to vote and each fractional Share shall be
entitled to a proportionate fractional vote, except that Shares held in the
treasury of the Trust as of the record date, as determined in accordance with
the By-Laws, shall not be voted. There shall be no cumulative voting in the
election of Trustees. Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities issued by the Trust.
Until Shares are issued, the Trustees may exercise all rights of Shareholders
and may take any action required by law, the Declaration or the By-Laws to be
taken by Shareholders. The By-Laws may include further provisions for
Shareholders' votes and meetings and related matters.
Article VIII
DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS
--------------------------------------------------------------
Section 8.1 Net Asset Value. The net asset value of each outstanding Share
of the Trust shall be determined on such days and at such time or times as the
Trustees may determine. The method of determination of net asset value shall be
determined by the Trustees and shall be as set forth in the Registration
Statement. The Trustees may suspend the determination of net asset value to the
extent permitted by the 1940 Act.
Section 8.2 Distributions to Shareholders. The Trustees shall from time to
time distribute ratably among the Shareholders of the Trust such proportion of
the net income, earnings, profits, gains, surplus (including paid in surplus),
capital, or assets of the Trust held by the Trustees as they may deem proper.
Such distribution may be made in cash or property (including without limitation
any type of obligations of the Trust or any assets thereof), and the Trustees
may distribute ratably among the Shareholders of the Fund additional Shares
issuable hereunder in such manner, at such times, on such terms as the Trustees
may deem proper. Such distributions may be among the Shareholders of record
(determined in accordance with the Registration Statement) of the Fund at the
time of declaring a distribution or may be among the Shareholders of record of
the Fund at such later date as the Trustees shall determine. The Trustees may
always retain from the net income, earnings, profits or gains of the Trust such
amount as they may deem necessary to pay the debts or expenses of the Trust or
to meet obligations of the Trust, or as they may deem desirable to use in the
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conduct of its affairs or to retain for future requirements or extensions of the
business. The Trustees may adopt and offer to Shareholders of the Trust such
dividend reinvestment plans as the Trustees deem appropriate.
Inasmuch as the computation of net income and gains for federal
income tax purposes may vary from the computation thereof on the books, the
above provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
Section 8.3. Determination of Net Income. The Trustees shall have the
power to determine the net income of the Trust and from time to time to
distribute such net income ratably among the Shareholders as dividends in cash
or additional Shares issuable hereunder. The determination of net income and the
resultant declaration of dividends shall be as set forth in the Registration
Statement. The Trustees or their delegates shall have full discretion to
determine whether any cash or property received by the Trust shall be treated as
income or as principal and whether any item of expenses shall be charged to the
income or the principal account, and their determination made in good faith
shall be conclusive upon the Shareholders. In the case of stock dividends
received, the Trustees shall have full discretion to determine, in the light of
the particular circumstances, how much, if any, of the value thereof shall be
treated as income, the balance, if any, to be treated as principal.
Section 8.4 Power to Modify Foregoing Procedures. Notwithstanding any of
the foregoing provisions of this Article VII, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the per
Share net asset value of the Shares or net income, or the declaration and
payment of dividends and distributions, as they may deem necessary or desirable
to enable the Trust to comply with any provision of the 1940 Act, or any rule or
regulation thereunder, or any order of exemption issued by the Commission, all
as in effect now or hereafter amended or modified.
Section 8.5 Power to Delegate Determinations. The power and duty to make
the net asset value calculations may be delegated by the Trustees to any
Investment Adviser, the Custodian, the Transfer Agent or such other person as
the Trustees by resolution may determine. The power and duty to calculate,
declare and make net income and distributions may be delegated by the Trustees
to any officer of the Trust.
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Article IX
DURATION; TERMINATION OF TRUST, AMENDMENT, MERGERS, ETC.
--------------------------------------------------------
Section 9.1 Duration. The Trust shall continue without limitation of time
but subject to the provisions of this Article IX.
Section 9.2 Termination of Trust. (a) The Trust may be terminated by the
affirmative vote of the holders of not less than two-thirds (66-2/3%) of the
Shares outstanding and entitled to vote at any meeting of Shareholders of the
Trust except that a Majority Shareholder Vote shall be sufficient if termination
of the Trust has been recommended by two-thirds of the Trustees. Upon the
termination of the Trust:
(i) The Trust shall carry on no business except for the
purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust and all of the powers of the Trustees under this Declaration shall
continue until the affairs of the Trust shall have been wound up, including the
power to fulfill or discharge the contracts of the Trust, collect its assets,
sell, convey, assign, exchange, transfer or otherwise dispose of all or any part
of the remaining Trust Property to one or more persons at public or private sale
for consideration which may consist in whole or in part of cash, securities or
other property of any kind, discharge or pay its liabilities, and to do all
other acts appropriate to liquidate its business; provided that any sale,
conveyance, assignment, exchange, transfer or other disposition of all or
substantially all the Trust Property shall require Shareholder approval in
accordance with Section 9.4 hereof.
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities and refunding
agreements, as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property, in cash or in kind or partly each,
among the Shareholders of the Trust according to their respective rights.
(b) After termination of the Trust and distribution to the
Shareholders as herein provided, a majority of the Trustees shall execute and
lodge among the records of the Trust an instrument in writing setting forth the
fact of such termination, and the Trustees shall thereupon be discharged from
all further liabilities and duties with respect to the Trust, and the right and
interests of all Shareholders of the Trust shall thereupon cease.
Section 9.3 Amendment Procedures. (a) Except as provided in paragraph (c)
of this Section 9.3, this Declaration may be amended by a Majority Shareholder
Vote, at a meeting of Shareholders, or by written consent without a meeting. The
Trustees may also amend this Declaration without the vote or consent of
Shareholders (i) to change the name of the Trust, (ii) to supply any omission,
or cure, correct or supplement any ambiguous, defective or inconsistent
provision hereof, (iii) if they deem it necessary to conform this Declaration to
the requirements of applicable federal or state laws or regulations or the
requirements of the Internal Revenue Code, or to eliminate or reduce any
federal, state or local taxes which are or may be payable by the Trust or the
Shareholders, but the Trustees shall not be liable for failing to so, or (iv)
for any other purpose which does not adversely affect the rights of any
Shareholder with respect to which the amendment is or purports to be applicable.
(b) No amendment may be made under this Section 9.3 which would
change any rights with respect to any Shares of the Trust by reducing the amount
payable thereon upon liquidation of the Trust or by diminishing or eliminating
any voting rights pertaining thereto, except with the vote or consent of the
holders of two-thirds of the Shares of the Trust outstanding and entitled to
vote. Nothing contained in this Declaration shall permit the amendment of this
Declaration to impair the exemption from personal liability of the Shareholders,
Trustees, officers, employees and agents of the Trust or to permit assessments
upon Shareholders set forth in Section 6.1 above.
(c) No amendment may be made under this Section 9.3 which shall
amend, alter, change or repeal any of the provisions of Sections 9.3, 9.4, 9.6
and 9.7 unless the amendment affecting such amendment, alteration, change or
repeal shall receive the affirmative vote or consent of that proportion of the
Shares outstanding and entitled to vote as would be necessary to approve the
transaction or action set forth in that respective section under circumstances
where the Board of Trustees has not recommended approval of the transaction or
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action. Such affirmative vote or consent shall be in addition to the vote or
consent of the holders of Shares otherwise required by law or by the terms of
any class or series of preferred stock, whether now or hereafter authorized, or
any agreement between the Trust and any national securities exchange.
(d) A certificate signed by a majority of the Trustees or the
Secretary or any Assistant Secretary of the Trust, setting forth an amendment
and reciting that it was duly adopted by the Shareholders or by the Trustees as
aforesaid or a copy of the Declaration, as amended, and executed by a majority
of the Trustees or certified by the Secretary or any Assistant Secretary of the
Trust, shall be conclusive evidence of such amendment when lodged among the
records of the Trust. Unless such amendment or such certificate sets forth some
later time for the effectiveness of such amendment, such amendment shall be
effective when lodged among the records of the Trust.
Notwithstanding any other provision hereof, until such time as the
Registration Statement covering the first public offering of securities of the
Trust shall have become effective, this Declaration may be terminated or amended
in any respect by the affirmative vote of a majority of the Trustees or by an
instrument signed by a majority of the Trustees.
Section 9.4 Merger, Consolidation and Sale of Assets. The Trust may merge
or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property, including its good will, upon such terms and conditions and for
such consideration when and as authorized, at any meeting of Shareholders called
for the purpose, by the affirmative vote of the holders of not less than
sixty-six and two-thirds percent (66-2/3%) of the Shares of the Trust
outstanding and entitled to vote, or by an instrument or instruments in writing
without a meeting, consented to by the holders of not less than sixty-six and
two-thirds percent (66-2/3%) of such Shares; provided, however, that, if such
merger, consolidation, sale, lease or exchange is recommended by two-thirds of
the Trustees, a Majority Shareholder Vote shall be sufficient authorization; and
any such merger, consolidation, sale, lease or exchange shall be deemed for all
purposes to have been accomplished under and pursuant to the laws of the
Commonwealth of Massachusetts. Nothing contained herein shall be construed as
requiring approval of Shareholders for any sale of assets in the ordinary course
of business of the Trust.
Section 9.5 Incorporation and Reorganization. With approval of a Majority
Shareholder Vote, the Trustees may cause to be organized or assist in organizing
a corporation or corporations under the laws of any jurisdiction or any other
trust, partnership, association or other organization to take over all of the
Trust Property or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, convey and transfer the Trust
Property to any such corporation, trust, partnership, association or
organization in exchange for the shares or securities thereof or otherwise, and
to lend money to, subscribe for the shares or securities of, and enter into any
contracts with any such corporation, trust, partnership, association or
organization in which the Trust holds or is about to acquire shares or any other
interest. Subject to Section 9.4 hereof, the Trustees may also cause a merger or
consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders for
the Trustees to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and selling, conveying
or transferring a portion of the Trust Property to such organization or
entities.
Section 9.6 Conversion. The Trust may be converted at any time from a
"closed-end company" to an "open-end company" as those terms are defined by the
1940 Act, upon the approval of such a proposal, together with the necessary
amendments to the Declaration of Trust to permit such a conversion, by the
holders of not less than sixty-six and two-thirds percent (66-2/3%) of the
Trust's outstanding Shares entitled to vote, except that if such proposal is
recommended by two-thirds of the total number of Trustees then in office, such
proposal may be adopted by a Majority Shareholder Vote. From time to time, the
Trustees will consider recommending to the Shareholders a proposal to convert
the Trust from a "closed-end company" to an "open-end company." Upon the
recommendation and subsequent adoption of such a proposal and the necessary
amendments to this Declaration to permit such a conversion of the Trust's
outstanding Shares entitled to vote, the Trust shall, upon complying with any
requirements of the 1940 Act and state law, become an "open-end" investment
company. Such affirmative vote or consent shall be in addition to the vote or
consent of the holders of the Shares otherwise required by law, or any agreement
between the Trust and any national securities exchange.
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Section 9.7 Certain Transactions. (a) Notwithstanding any other provision
of this Declaration and subject to the exceptions provided in paragraph (c) of
this Section, the types of transactions described in paragraph (b) of this
Section shall require the affirmative vote or consent of the holders of
sixty-six and two-thirds percent (66-2/3%) of the Shares outstanding and
entitled to vote. Such affirmative vote or consent shall be in addition to the
vote or consent of the holders of Shares otherwise required by law or by the
terms of any class or series of preferred stock, whether now or hereafter
authorized, or any agreement between the Trust and any national securities
exchange.
(b) This Section shall apply to the following transactions:
(i) The merger or consolidation or statutory share exchange of
the Trust with any other corporate entity or partnership.
(ii) a sale of all or substantially all of the Trust's assets
(other than in the regular course of the Trust's investment activities);
or
(iii) a liquidation or dissolution of the Trust
(vi) a change in the nature of the business of the Trust so
that it would cease to be an investment company registered under the 1940 Act.
(vii) The conversion of the Trust to an "open-end investment
company," or any amendment to the Declaration of Trust of the Trust that makes
the Shares a "redeemable security," as such terms are defined in the 1940 Act.
(c) The provisions of this Section shall not be applicable to (i)
any of the transactions described in paragraph (b) of this Section if two-thirds
of the Board of Trustees of the Trust shall by affirmative vote approve, adopt
or authorize such transaction(s), in which case the affirmative vote of a
majority of the Trust's shares of capital stock is required. Following any
issuance of preferred stock by the Trust, it is anticipated that the approval,
adoption or authorization of the foregoing also would require the favorable vote
of a majority of the Trust's shares of preferred stock then entitled to be
voted, voting as a separate class.
Article X
REPORTS TO SHAREHOLDERS
-----------------------
The Trustees shall at least semi-annually submit or cause the
officers of the Trust to submit to the Shareholders a written financial report
of the Trust, including financial statements which shall at least annually be
certified by independent public accountants.
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Article XI
MISCELLANEOUS
-------------
Section 11.1 Filing. This Declaration and any amendment hereto shall be
filed in the Office of the Secretary of the Commonwealth of Massachusetts and in
such other places as may be required under the laws of Massachusetts and may
also be filed or recorded in such other places as the Trustees deem appropriate.
Each amendment so filed shall be accompanied by a certificate signed and
acknowledged by a Trustee or by the Secretary or any Assistant Secretary of the
Trust stating that such action was duly taken in a manner provided herein. A
restated Declaration, integrating into a single instrument all of the provisions
of the Declaration which are then in effect and operative, may be executed from
time to time by a majority of the Trustees and shall, upon filing with the
Secretary of the Commonwealth of Massachusetts, be conclusive evidence of all
amendments contained therein and may thereafter be referred to in lieu of the
original Declaration and the various amendments thereto.
Section 11.2 Resident Agent. Until changed by the Trustees, the principal
office of the Trust shall be 11815 N. Pennsylvania Street, Carmel, Indiana
46032. Until changed by the Trustees is the resident office of the Trust in the
Commonwealth of Massachusetts.
Section 11.3 Governing Law. By the executing hereof, the Trustees agree
that this Declaration shall be effective when executed by all of the Trustees
and delivered for filing to the Secretary of State of the Commonwealth of
Massachusetts with reference to the laws thereof and the rights of all parties
and the validity and construction of every provision hereof shall be subject to
and construed according to the laws of said State.
Section 11.4 Organizational Expenses. In the event that any person
advances the organizational expenses of the Trust, such advances shall become an
obligation of the Trust, subject to such terms and conditions as may be fixed
by, and on a date fixed by, or determined with criteria fixed by, the Board of
Trustees, to be amortized over a period of periods to be fixed by the Board.
Section 11.5 Counterparts. The Declaration may be simultaneously executed
in several counterparts, each of which shall be deemed to be an original, and
such counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
Section 11.6 Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust, appears to be a Trustee
hereunder, or Secretary or Assistant Secretary of the Trust, certifying to: (a)
the number or identity of Trustees or Shareholders, (b) the due authorization of
the execution of any instrument or writing, (c) the form of any vote passed at a
meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration, (e) the form of any By-Laws
adopted by or the identity of any officers elected by the Trustees, or (f) the
existence of any fact or facts which in any manner relate to the affairs of the
Trust shall be conclusive evidence as to the matters so certified in favor of
any person dealing with the Trustees and their successors.
Section 11.7 Provisions of Conflict with Law or Regulations. (a) The
provisions of the Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code or with other applicable laws and regulations, the
conflicting provisions shall be deemed superseded by such law or regulation to
the extent necessary to eliminate such conflict; provided, however, that such
determination shall not affect any of the remaining provisions of the
Declaration or render invalid or improper any action taken or omitted prior to
such determination.
(b) If any provision of the Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
pertain only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration in any jurisdiction.
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IN WITNESS WHEREOF, the undersigned, the Trustees of the Trust, have
executed this instrument this 29th day of May, 1998.
/s/ Gregory J. Hahn
----------------------------------
Gregory J. Hahn, as Trustee
and not Individually
11815 N. Pennsylvania Street,
Carmel, Indiana 46032
STATE OF INDIANA )
) ss.:
COUNTY OF HAMILTON )
On this 29th day of May, 1998, Gregory J. Hahn, known to me and
known to be the individual(s) described in and who executed the foregoing
instrument, personally appeared before me and they severally acknowledged the
foregoing instrument to be their free act and deed.
/s/ Victoria Jefferson
- ------------------------------------
Notary Public
My Commission Expires 10/07/02
17
