<PAGE>
PROSPECTUS
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6,700,000 Shares
[LOGO OF CONSECO STRATEGIC INCOME FUND APPEARS HERE]
CONSECO STRATEGIC INCOME FUND
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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 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 (primarily in emerging markets) or that are denominated in foreign
currencies or multinational currency units. 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 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.
Conseco Capital will serve as the Fund's investment manager and administrator.
Conseco Capital also provides investment management and advisory services to
ten 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.
Investments in lower grade securities are subject to special risks, including
greater price volatility and a greater risk of loss of principal and interest.
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. See "Risk Factors and Special Considerations." 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.
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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.
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<TABLE>
<CAPTION>
Price to Sales Load Proceeds to
Public Payable by Fund(1) Fund(2)
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<S> <C> <C> <C>
Per Share..................... $15.00 None $15.00
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Total(3)...................... $100,500,000 None $100,500,000
</TABLE>
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(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 $0.75 per Share or 5.0% of the Price to Public per Share in
connection with the sale of the Shares offered hereby. The Fund, Conseco
Capital and Conseco, Inc. 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 organizational and offering expenses payable by the Fund,
estimated respectively to be $60,000 and $691,500 (including approximately
$250,000 to be paid to the Underwriters as reimbursement of certain of
their expenses in connection with this offering). Offering expenses will
be deducted from net proceeds, and organizational expenses will be
included in expenses during the first fiscal period of the Fund.
(3) The Fund has granted the several Underwriters a 45-day over-allotment
option to purchase up to 1,005,000 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 $115,575,000, and the
total Proceeds to Fund will be $115,575,000.
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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 July 31, 1998.
PRUDENTIAL SECURITIES INCORPORATED
CROWELL, WEEDON & CO.
LEGG MASON WOOD WALKER
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
July 27, 1998 MORGAN KEEGAN & COMPANY, INC.
<PAGE>
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. 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 currently intends to utilize financial leverage in an
amount equal to approximately 25% of its total assets (including the amount
obtained through leverage). The Fund is permitted to use leverage in a maximum
amount equal to 33 1/3% 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 "CFD," 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).
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.
Additional information about the Fund has been filed with the SEC and may be
obtained without charge by calling or writing the Fund at 11825 N.
Pennsylvania Street, Carmel, Indiana 46032, (888) 754-3409. The SEC maintains
an Internet World Wide Web site (http://www.sec.gov) that contains this
Prospectus and other information regarding the Fund.
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."
2
<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 6,700,000 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 45-day option to purchase up to 1,005,000
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 statistical 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
3
<PAGE>
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"). 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
currently intends to utilize financial leverage
in an amount equal to approximately 25% of its
total assets (including the amount obtained
through leverage). The Fund is permitted to use
leverage in a maximum amount equal to 33 1/3% 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
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
4
<PAGE>
industry trends, the issuer's managerial
strength, changing financial conditions,
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"
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 Objectives and Policies" and
"Risk Factors and Special Considerations."
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
5
<PAGE>
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 ten 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 11825 N.
Pennsylvania Street, Carmel, Indiana 46032, and
its telephone number is (888) 754-3409.
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 "CFD,"
subject to official notice of issuance.
Dividends .................. 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
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
6
<PAGE>
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, as amended (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 would not be
advantageous to do so. These changes could
adversely affect the ability of the Fund to meet
its investment objectives. See "Certain
Provisions of the Declaration of Trust."
Shareholder Servicing
Agent, Custodian and
Transfer and Dividend
Disbursing Agent........... Conseco Services LLC 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. PNC Bank, National
Association ("PNC") will serve as custodian of
the assets of the Fund (the "Custodian") and may
utilize sub-custodians outside the U.S. PNC will
serve as the Fund's Transfer and Dividend
Disbursing Agent, and will also serve as agent
for the DRIP. PFPC Inc., an affiliate of PNC,
will provide certain bookkeeping and accounting
services for the Fund and perform certain other
services. See "Shareholder Servicing Agent,
Custodian and Transfer and Dividend Disbursing
Agent."
7
<PAGE>
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 relatively soon 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
9
<PAGE>
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
in the judgment of Conseco Capital. 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 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 every 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--Portfolio Securities."
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 Shareholders with a potentially
higher return.
10
<PAGE>
Leverage creates risks for the 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 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 may seek 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."
11
<PAGE>
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.
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
12
<PAGE>
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.
Market Price, Discount 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
13
<PAGE>
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
relatively 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 and 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."
14
<PAGE>
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.
<TABLE>
<S> <C>
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...................................... 1.20%
Interest Payments on Borrowed Funds..................................... 2.05%
Shareholder Servicing Fee............................................... .13%
Other Expenses.......................................................... .25%
Total Annual Fund Expenses.......................................... 3.63%
</TABLE>
- --------
(1) See "Management of the Fund" for additional information. The table above
assumes the Fund will utilize leverage by borrowing in an amount equal to
approximately 25% of the Fund's total assets (including the amount obtained
from leverage) at an annualized interest rate of 6.15%. The actual interest
rate imposed on Fund borrowings may be higher or lower than 6.15%,
depending on market conditions. If the Fund does not use any leverage, the
Fund estimates that its annual operating expenses as a percentage of net
assets attributable to the Shares would be approximately as follows:
Management and Administration Fees--.90%; Interest Payments on Borrowed
Funds--none; Shareholder Servicing Fee--.10%; Other Expenses--.25%; and
Total Annual Fund Expenses--1.25%. "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."
(2) The Fee Table does not reflect the one time payment by the Fund of certain
offering expenses, which are estimated to be $691,500 and which include
approximately $250,000 to be paid as reimbursement of expenses to the
Underwriters.
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.
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 3.63% (assuming leverage of 25% 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:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Assuming No Leverage.......................... $13 $ 40 $ 69 $151
Assuming 25% Leverage......................... $36 $111 $187 $386
</TABLE>
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.
15
<PAGE>
THE FUND
Conseco Strategic Income Fund (the "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 11825 N. Pennsylvania Street, Carmel, Indiana
46032, and its telephone number is (888) 754-3409. 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 management
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 relatively soon
after the completion of the public offering.
USE OF PROCEEDS
The net proceeds to the Fund from this initial public offering are
approximately $99,748,500 ($114,823,500 if the Underwriters' over-allotment
option is exercised in full) after deducting organizational and estimated
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."
16
<PAGE>
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 statistical 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 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 currently intends to utilize
financial leverage in an amount equal to approximately 25% of its total assets
(including the amount obtained through leverage). The Fund is permitted to use
leverage in a maximum amount equal to 33 1/3% 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
17
<PAGE>
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.
<TABLE>
<CAPTION>
GOLDMAN SACHS/
MERRILL LYNCH LOAN PRICING CORPORATION MERRILL LYNCH MERRILL LYNCH DEFAULT RATES ON
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% 10.63%
1992.................... 17.44% N/A 8.59% 3.93% 4.84%
1993.................... 16.69% 11.10% 11.57% 3.19% 3.51%
1994.................... (1.03)% 9.69% (3.91)% 4.19% 1.93%
1995.................... 20.46% 9.05% 21.66% 6.03% 3.20%
1996.................... 11.27% 8.19% 2.76% 5.31% 1.64%
1997.................... 13.27% 8.59% 10.43% 5.33% 1.82%
</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 seventeen 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 "Default Rates on Lower Grade Income Securities" shown above are
calculated as fractions in which the numerator represents the number of
issuers that defaulted on Moody's rated lower grade debt securities in a
particular year and the denominator represents the number of issuers that
could have defaulted on such securities in that time period. For the period
January 1, 1991 through December 31, 1997, the cumulative default rate for
lower grade income securities was 25.2%. This figure represents the
possibility that a lower grade income security issued on January 1, 1991 would
default by December 31, 1997. The rate is based on the ratio of the number of
issuers that defaulted on lower grade bonds outstanding on January 1, 1991 to
the number of issuers at risk of defaulting on such bonds as of such date, and
is based only on bonds which have been rated by Moody's. The foregoing is
derived from information obtained by the Fund from the February 1998 issue of
a Moody's publication entitled "Historical Default Rates of Corporate Bond
Issuers, 1920-1997."
18
<PAGE>
The market for 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 and similar entities, and governmental entities and their
political subdivisions, agencies and 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 will 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
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."
19
<PAGE>
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 each year, 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
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 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 administers
the Corporate Loan on behalf of the syndicate (an "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.
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
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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 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 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 up to one year. 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.
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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.
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.
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.
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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
(including legal, accounting, valuation and transaction 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 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, it 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
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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."
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.
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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 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 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
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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) 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.
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<PAGE>
OTHER INVESTMENT PRACTICES
The Fund may utilize other investment practices and portfolio management
techniques as set forth below.
LEVERAGE. The Fund currently intends to utilize financial leverage in an
amount equal to approximately 25% of its total assets (including the amount
obtained through leverage). The Fund is permitted to use leverage in a maximum
amount equal to 33 1/3% 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. To the extent permitted by SEC rules, regulations and
interpretations, 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.
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%.
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<PAGE>
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 6.15% 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 3.08%. 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of
expenses)......................... (10)% (5)% 0 % 5% 10%
Corresponding Share Return......... (18.08)% (10.58)% (3.08)% 4.42% 11.93%
</TABLE>
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 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.
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
29
<PAGE>
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
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
30
<PAGE>
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 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.
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<PAGE>
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 relatively soon 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.
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
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<PAGE>
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."
A participation interest in a Corporate Loan typically results in a
contractual relationship only with the Intermediate Participant 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 from the collateral supporting the Corporate Loan in
which it has purchased the participation. As a result, the Fund will assume
the credit risk of both the Borrower and the Intermediate Participant.
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
33
<PAGE>
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.
Interests in Corporate Loans generally are not listed on any national
securities exchange or automated quotation system and no active trading market
may exist for many of the Corporate Loans in which the Fund will invest. To
the extent that a secondary market may exist for certain of the Corporate
Loans in which the Fund invests, including participation interests, the Fund
may trade in it. However, such market may be subject to irregular trading
activity, wide bid/ask spreads and extended trade settlement periods.
Corporate Loans are thus relatively illiquid, which illiquidity may impair the
Fund's ability to realize the full value of its assets in the event of a
voluntary or involuntary liquidation of such assets. Liquidity relates to the
ability of the Fund to sell an investment in a timely manner. The market for
relatively illiquid securities tends to be more volatile than the market for
more liquid securities. The Fund has no limitation on the amount of its assets
which may be invested in securities which are not readily marketable or are
subject to restrictions on resale. The substantial portion of the Fund's
assets invested in Corporate Loan interests may restrict the ability of the
Fund to dispose of its investments in a timely fashion and at a fair price,
and could result in capital losses to the Fund and holders of its shares.
However, many of the Corporate Loans in which the Fund expects to purchase
interests are of a relatively large principal amount and are held by a
relatively large number of owners which should, in Conseco Capital's opinion,
enchance the relative liquidity of such interests. The risks associated with
illiquidity are particularly acute in situations where the Fund's operations
require cash and may result in the Fund borrowing to meet short-term cash
requirements.
To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make loans in connection
with highly leveraged transactions, the availability of Corporate Loan
interests for investment by the Fund may be adversely affected. In addition,
such requirements or restrictions may reduce or eliminate sources of financing
for certain Borrowers. Further, to the extent that legislation or federal or
state regulators that regulate certain financial institutions require such
institutions to dispose of Corporate Loan interests relating to highly
leveraged transactions or subject such Corporate Loan interests to increased
regulatory scrutiny, such financial institutions may determine to sell such
Corporate Loan interests in a manner that results in a price which, in the
opinion of Conseco Capital, is not indicative of fair value. Were the Fund to
attempt to sell a Corporate Loan interest at a time when a financial
institution was engaging in such a sale with respect to such Corporate Loan
interest, the price at which the Fund could consummate such a sale might be
adversely affected.
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.
34
<PAGE>
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 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
35
<PAGE>
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.
The Fund's investments in foreign securities may include investments in
Russia, Eastern European countries and other countries that formerly had a
communist form of government. Such investments are subject to the risk that
such countries may return to the centrally planned economy that existed when
such countries had a communist form of government.
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 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
36
<PAGE>
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. To the extent the Fund
invests in illiquid securities, it will be more difficult for the Fund to
effect open market repurchases or tender offers for Fund shares. In addition,
any proposed conversion of the Fund to an open-end investment company will be
made more difficult to the extent the Fund invests in illiquid securities. See
"Certain Provisions of the Declaration of Trust--Repurchase of Shares;
Conversion to an Open-end Investment Company."
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, 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
37
<PAGE>
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 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 in connection with
the purchase or sale of portfolio securities.
38
<PAGE>
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 ten 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. Total assets under management have increased from approximately
$16.1 billion in 1992.
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, serves as the Director of Fixed Income Research and 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 believes in a "bottom up" investment
strategy of selecting individual securities (i.e., analysis on a case-by-case
basis). It believes that this research driven approach helps to manage risk
and to identify potentially attractive investments.
Conseco Capital also provides administration services to the Fund that
include, among other services, maintaining office facilities on behalf of the
Fund, furnishing certain statistical and research data, clerical help, data
processing, certain 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: Maxwell E. Bublitz, President and Chief Executive Officer; William T.
Devanney, Jr., Senior Vice President, Corporate Taxes; Albert J. Gutierrez,
Senior Vice President, Investments; Gregory J. Hahn, Senior Vice President,
Portfolio Analytics; Thomas A. Meyers, Senior Vice President, Director of
Marketing; Nora A. Bammann,Vice President, Investment Operations; Andrew S.
Chow, Vice President, Investments; Christene H. Darnell, Vice President,
Management Reporting; Joseph F. DeMichele, Vice President, Investments;
William F. Ficca, Vice President, Director of
39
<PAGE>
Research; Eric R. Johnson, Vice President, Senior Securities Analyst; John R.
Kline, Vice President, Finance and Treasurer; William P. Latimer, Esq., Vice
President, Senior Counsel and Secretary, Chief Compliance Officer; Jude T.
Driscoll, Vice President, Investments; Thomas J. Pence, Vice President,
Investments; See Yeng Quek, Vice President, Investments; N. Gordon Smith, Vice
President, Portfolio Analytics; Andrew E. Sommers, Vice President, Portfolio
Analytics; Eric D. Todd, Vice President, Senior Securities Analyst; Upender V.
Rao, Vice President, Senior Securities Analyst; Jeffrey A. Whitehead, Director
of Insurance Marketing; Virgil R. Barber, Jr., Director of Taft-Hartley
Marketing; Richard W. Burke, II, Second Vice President, Investment Information
System; Peter C. Andersen, Second Vice President, Portfolio Manager; Robert L.
Cook, Second Vice President, Senior Securities Analyst; Mohammed S. Alhaffar,
Assistant Vice President, Technical Support; Karen R. Palczynski, Assistant
Vice President, Portfolio Manager; Rodney A. Schmucker, Assistant Vice
President, Investment Operations; Lisa M. Zimmerman, Assistant Vice President,
Corporate Taxes; John C. Saf, Assistant Vice President, Asset Liability
Analyst; Ryan K. Brist, Assistant Vice President, Investments; Mathew J.
Stephens, Assistant Vice President, Quantitative Analyst; Wei Wei, Assistant
Vice President, Quantitative Analyst; Michael R. Glickman, Assistant Vice
President, Senior Securities Analyst; DIRECTORS: Maxwell E. Bublitz, Rollin M.
Dick, William P. Latimer, Esq.
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
July 27, 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 July 13, 1998. The Agreement was approved by the Fund's initial
Shareholder on July 17, 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). 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. Conseco Capital may recover some or all
of this expense to the extent that it realizes a profit from fees paid under
the Agreement.
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 of
the Fund (including the costs of calculating the net asset value of the Fund's
Shares), costs of preparing reports regarding the Fund's financial
transactions, the Fund's tax returns and certain SEC and state regulatory
filings, 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.
40
<PAGE>
TRUSTEES AND OFFICERS OF THE FUND
The Fund has a Board composed of five (5) 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 (*). All of the Trustees also serve as Trustees of
two open-end investment companies managed by Conseco Capital, Conseco Series
Trust ("CST") and Conseco Fund Group ("CFG"). Each Trustee who is not an
"interested person," except Mr. Daves, serves on the Audit Committee of the
Board. Each Trustee who is not an "interested person" serves on the Nominating
Committee of the Board. All of the Fund's officers listed below, except Mr.
Hahn, also serve as officers for CST and CFG.
TRUSTEES AND OFFICERS OF THE FUND
The Trustees and officers of the Fund, their affiliations, if any, with the
Manager and their principal occupations are set forth below.
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH THE FUND DURING PAST 5 YEARS
------------- ------------- -----------------------
<S> <C> <C>
William P. Daves, Chairman of the Board, Consultant to insurance and healthcare
Jr.(72)................ Trustee industries. Director, President and
5723 Trail Meadow Chief Executive Officer, FFG Insurance
Dallas, TX 75230 Co. Chairman of the Board and Trustee
of CFG and CST.
Maxwell E. Bublitz* President and Trustee Chartered Financial Analyst. President
(42)................... and Director, Conseco Capital.
11825 N. Pennsylvania Previously, Senior Vice President,
St. Conseco Capital. President and Trustee
Carmel, IN 46032 of CFG and CST.
Harold W. Hartley (74).. Trustee Retired. Chartered Financial Analyst.
502 Canal Cove Ct. Previously, Executive Vice President,
Ft. Myers Beach, Fl Tenneco Financial Services, Inc.
33913 Trustee of CFG and CST. Director,
Ennis Business Forms, Inc.
Dr. R. Jan LeCroy (67).. Trustee Retired. Previously President, Dallas
Dallas Citizens Council Citizens Council. Trustee of CFG and
1201 Main Street, CST. Director, Southwest Securities
Suite 2444 Group, Inc.
Dallas, TX 75202
Dr. Jesse H. Parrish Trustee Former President, Midland College.
(70)................... Higher Education Consultant. Trustee
2805 Sentinel of CFG and CST.
Midland, TX 79701
Gregory J. Hahn (37).... Vice President Chartered Financial Analyst. Senior
11825 N. Pennsylvania Vice President, Conseco Capital.
St. Portfolio Manager of the fixed income
Carmel, IN 46032 portion of Conseco Balanced and Fixed
Income Funds. Trustee of CFG.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH FUND DURING PAST 5 YEARS
------------- ------------- -----------------------
<S> <C> <C>
William P. Latimer Vice President and Vice President, Senior Counsel,
(62)................... Secretary Secretary, Chief Compliance Officer
11825 N. Pennsylvania and Director of Conseco Capital. Vice
St. President, Senior Counsel, Secretary
Carmel, IN 46032 and Director, Conseco Equity Sales,
Inc. Vice President and Secretary of
CFG and CST. Previously, Consultant to
securities industry. Previously,
Senior Vice President--Compliance,
USF&G Investment Services, Inc. and
Vice President, Axe-Houghton
Management Inc.
James S. Adams (38)..... Treasurer Senior Vice President, Bankers
11825 N. Pennsylvania National, Great American Reserve.
St. Senior Vice President, Treasurer, and
Carmel, IN 46032 Director, Conseco Equity Sales, Inc.
Senior Vice President and Treasurer,
Conseco Services, LLC. Treasurer of
CFG and CST.
William T. Devanney, Jr. Vice President Senior Vice President, Corporate
(42)................... Taxes, Bankers National and Great
11825 N. Pennsylvania American Reserve. Senior Vice
St. President, Corporate Taxes, Conseco
Carmel, IN 46032 Equity Sales, Inc. and Conseco
Services LLC. Vice President of CFG
and CST.
</TABLE>
- --------
* The Trustee so indicated is an "interested person," as defined in the
Investment Company Act, of the Fund due to the positions indicated with the
Manager and its affiliates.
The address of each officer of the Fund is 11825 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 July 23, 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
$5,000 per annum. In addition, the Fund pays each disinterested Trustee $1,000
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
The following table shows the estimated compensation of each disinterested
Trustee for the fiscal year ending June 30, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM INVESTMENT
AGGREGATE COMPENSATION COMPANIES IN THE FUND COMPLEX PAID TO
NAME OF PERSON FROM THE FUND* TRUSTEES (INCLUDES CST AND CFG)
-------------- ---------------------- -------------------------------------
<S> <C> <C>
William P. Daves, Jr.... $10,000 $28,000
Harold W. Hartley....... $10,000 $28,000
Dr. R. Jan LeCroy....... $10,000 $28,000
Dr. Jesse H. Parrish.... $10,000 $28,000
</TABLE>
- --------
* Compensation received from the Fund in 1998 includes an annual fee.
42
<PAGE>
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 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 its
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. 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.
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. Interests in such securities, including Corporate
Loans and Distressed Securities, will be valued by Conseco Capital on behalf
of the Fund on the basis of available market quotations and transactions in
instruments which Conseco Capital believes may be comparable to these
investments with respect to the following characteristics: credit quality,
interest rate, interest rate redetermination period and maturity. Such
instruments may include commercial paper, negotiable certificates of deposit
and short-term variable rate securities which have rate redetermination
periods comparable to the Corporate Loans and Distressed Securities in the
Fund's portfolio. In determining the relationship between such instruments and
such investments in the Fund's portfolio, Conseco Capital will consider on an
ongoing basis, among other factors, (i) the credit worthiness of the Borrower
and (ii) the current interest rate, the period until next interest rate
redetermination and maturity of such interests. Because a secondary trading
market in Corporate Loans has not yet fully developed, in valuing Corporate
Loans, Conseco Capital may not rely solely on but may consider, to the extent
it believes such information to be reliable, prices or quotations provided by
banks, dealers or pricing services with respect to secondary market
transactions in Corporate Loans. To the extent that an active secondary market
in Corporate Loans develops to a reliable degree, Conseco Capital may rely to
an increasing extent on such market prices and quotations in valuing the
Corporate Loans in the Fund's portfolio.
43
<PAGE>
Portfolio securities may be valued on the basis of prices furnished by one
or more pricing services which determine prices for securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
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, generally will be
distributed to the Fund's Shareholders at least annually, although net capital
gains (i.e., the excess of net-long term capital gains over net short-term
capital losses) may be retained by the Fund. In the latter event, the retained
gains would be subject to Fund-level tax that, in effect, would 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 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 will 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
44
<PAGE>
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 of 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 it
distributes 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.
The Fund will be subject to a nondeductible 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 pay-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.
45
<PAGE>
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 and gains realized 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 that would reduce its yield and/or
total return thereon. 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.
TAXATION OF THE SHAREHOLDERS. Dividends from the Fund's investment company
taxable income (whether received in cash or reinvested in additional Shares)
generally will be 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, will be 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 rate 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.
46
<PAGE>
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"), as modified by
recent legislation, the maximum tax rates applicable to net capital gains
recognized by individuals and other noncorporate taxpayers are (1) the same as
ordinary income rates for capital assets held for one year or less and (2) 20%
(10% for taxpayers in the 15% marginal tax bracket) for capital assets held
for more than one year. 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 by the Fund of net short-term capital gain and net
capital gain, as well as to gains recognized on sales and exchanges of Shares.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individual Shareholders
and certain other noncorporate 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.
47
<PAGE>
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 PNC
Bank, National Association ("PNC"), 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 PNC as dividend
disbursing agent. DRIP 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 PNC, 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 in this section 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 NYSE 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, 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, the average per
Share purchase price paid by the DRIP Agent may exceed the net asset value per
share, 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 earlier
of the last day of the purchase period or the first day during the purchase
period on which the market discount shifts to a market premium.
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.
48
<PAGE>
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 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 PNC Bank, N.A., P.O. Box 8950, Wilmington, DE 19899.
49
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Crowell, Weedon & Co., Legg Mason Wood Walker
Incorporated, McDonald & Company Securities, Inc., and Morgan Keegan &
Company, Inc. 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:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated.............................. 683,400
Crowell, Weedon & Co. .......................................... 683,400
Legg Mason Wood Walker, Incorporated............................ 683,400
McDonald & Company Securities, Inc. ............................ 683,400
Morgan Keegan & Company, Inc. .................................. 683,400
Bear, Stearns & Co. Inc. ....................................... 134,000
BT Alex. Brown Incorporated..................................... 134,000
CIBC Oppenheimer Corp. ......................................... 134,000
Credit Suisse First Boston Corporation.......................... 134,000
A.G. Edwards & Sons, Inc. ...................................... 134,000
Lehman Brothers Inc. ........................................... 134,000
Morgan Stanley & Co. Incorporated............................... 134,000
PaineWebber Incorporated........................................ 134,000
SG Cowen Securities Corporation................................. 134,000
Advest, Inc. ................................................... 67,000
Robert W. Baird & Co. Incorporated.............................. 67,000
William Blair & Company, L.L.C. ................................ 67,000
Dain Rauscher Wessels........................................... 67,000
Everen Securities, Inc. ........................................ 67,000
Fahnestock & Co. Inc. .......................................... 67,000
Fifth Third/The Ohio Company.................................... 67,000
First Albany Corporation........................................ 67,000
First of Michigan Corporation................................... 67,000
Janney Montgomery Scott Inc. ................................... 67,000
Josephthal & Co. Inc. .......................................... 67,000
Piper Jaffray Inc. ............................................. 67,000
The Robinson-Humphrey Company, LLC.............................. 67,000
Stephens Inc. .................................................. 67,000
Stifel, Nicolaus & Company, Incorporated........................ 67,000
Sutro & Co. Incorporated........................................ 67,000
Tucker Anthony Incorporated..................................... 67,000
Wedbush Morgan Securities....................................... 67,000
Wheat First Securities, Inc. ................................... 67,000
George K. Baum & Company........................................ 33,500
Branch, Cabell and Company...................................... 33,500
Brean Murray & Co., Inc. ....................................... 33,500
JW Charles Securities, Inc. .................................... 33,500
Hanifen, Imhoff Inc. ........................................... 33,500
Harris Webb & Garrison Inc. .................................... 33,500
Interstate/Johnson Lane Corporation............................. 33,500
Johnston, Lemon & Co. Incorporated.............................. 33,500
C.L. King & Associates, Inc. ................................... 33,500
John G. Kinnard and Company, Incorporated....................... 33,500
Moors & Cabot, Inc. ............................................ 33,500
Natcity Investments, Inc. ...................................... 33,500
David A. Noyes & Company........................................ 33,500
Parker/Hunter Incorporated...................................... 33,500
Pennsylvania Merchant Group..................................... 33,500
Ragen Mackenzie Incorporated.................................... 33,500
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Roney Capital Markets........................................... 33,500
Sands Brothers & Co., Ltd. ..................................... 33,500
Scott & Stringfellow, Inc. ..................................... 33,500
The Seidler Companies Incorporated.............................. 33,500
Smith, Moore & Co. ............................................. 33,500
Southwest Securities, Inc. ..................................... 33,500
Suntrust Equitable Securities Corporation....................... 33,500
The Williams Capital Group, L.P. ............................... 33,500
---------
Total........................................................... 6,700,000
=========
</TABLE>
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 $0.75 per Share
(5.0% of the initial public offering price per Share) or an aggregate amount
of $5,025,000 ($5,778,750 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 $0.45 per share and that such dealers may reallow a
concession of $0.10 per share to certain other dealers. After completion of
the 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 45 days
from the date of this Prospectus, to purchase up to an additional 1,005,000
Shares at the initial public offering price, less 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 6,700,000.
The Fund, Conseco Capital and Conseco, Inc. 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 NYSE under the
symbol "CFD," subject to official notice of issuance. In order to meet one of
the requirements for listing the Shares on the NYSE, the 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
51
<PAGE>
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, if any) 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 1,005,000 Shares, by exercising the
Underwriters' over-allotment option referred to previously. 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 dealer 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 thereto. The Fund's
Registration Statement and such exhibits and schedules may be obtained from
the SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fees prescribed by the SEC. The SEC 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 SEC. The Fund's Shares have been approved
for listing on the NYSE under the symbol "CFD," 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 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 Conseco Services LLC
(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
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
52
<PAGE>
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. The Shareholder Servicing Agent may contract
with other parties, at its own expense, to provide the services referred to in
the Shareholder Servicing Agreement with the Fund. 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.
PNC will serve as custodian of the assets of the Fund. In this capacity, PNC
may utilize sub-custodians outside the U.S. approved by the Board of Trustees
in accordance with regulations under the Investment Company Act. PNC will also
serve as the Fund's Transfer and Dividend Disbursing Agent. PFPC Inc., an
affiliate of PNC, will provide certain bookkeeping and accounting services for
the Fund and will perform other services, including preparing certain reports
and regulatory filings, federal and state tax returns and certain SEC and
shareholder reports.
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 also provides that 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 having been a Shareholder, other than by reason of his or her own wrongful
act or omission. Thus, the risk of a Shareholder incurring financial loss on
account of Shareholder liability is normally limited to circumstances in which
the Fund itself would be unable to meet its obligations, a possibility which
the Fund's 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.
53
<PAGE>
The Fund has no present intention of offering additional Shares, except as
described herein and under the DRIP, 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.
The Board of Trustees shall be divided into three classes. 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 of which this Prospectus is a part. Thereafter, the
terms of one class of Trustees will expire at each annual meeting of
Shareholders or special meeting in lieu thereof. At each such annual or
special meeting, one class of Trustees will be elected to a three-year term.
This provision for a classified Board could delay the ability of Shareholders
to replace a majority of the Board of Trustees. 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 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.
54
<PAGE>
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.
EXPERTS
The statement of assets and liabilities of the Fund included in this
Prospectus has been so included in reliance upon the report of
PricewaterhouseCoopers LLP, independent auditors, and on their authority as
experts in auditing and accounting.
55
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees
and Shareholders of
The Conseco Strategic Income Fund
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of The Conseco
Strategic Income Fund (the "Fund") at July 15, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of this financial statement in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
July 20, 1998
56
<PAGE>
CONSECO STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JULY 15, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash................................................................. $100,005
Organizational costs................................................. 60,000
--------
Total assets....................................................... $160,005
--------
Payable to Conseco, Inc................................................ 60,000
--------
Net assets......................................................... $100,005
========
Net assets consist of:
Capital.............................................................. $100,005
========
Outstanding shares..................................................... 6,667
========
Net asset value per share.............................................. $ 15.00
========
</TABLE>
The accompanying notes are an integral part of the statement of assets and
liabilities.
57
<PAGE>
CONSECO STRATEGIC INCOME FUND
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
JULY 15, 1998
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, Inc. of an aggregate of 6,667 shares for $100,005, on July 15,
1998.
NOTE 2. ORGANIZATION COSTS
The Fund has capitalized certain costs of start-up activities and
organization. Pursuant to Statement of Position 98-5, "Reporting on the Costs
of Start-Up Activities", such costs estimated at $60,000, will be amortized on
a monthly basis through December 31, 1998, and any remaining amounts will be
charged to operations on December 31, 1998.
NOTE 3. MANAGEMENT AND ADMINISTRATION ARRANGEMENTS
The Fund has engaged Conseco Capital Management, Inc. ("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 4. 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.
58
<PAGE>
APPENDIX A
RATINGS OF CORPORATE BONDS
DESCRIPTION OF CORPORATE BOND RATINGS OF STANDARD & POOR'S, A DIVISION OF THE
MCGRAW-HILL COMPANIES, INC.:
AAA--Bonds rated AAA have the highest rating assigned by S&P. Capacity to
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 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-1
<PAGE>
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.
A-2
<PAGE>
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. (S)(S) 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
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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 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
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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 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.
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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 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.
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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.
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
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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.
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.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION 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 SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES BY ANY-
ONE IN ANY JURISDICTION IN WHICH SUCH 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 SOLICITA-
TION. 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 AUGUST 22, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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Prospectus Summary....................................................... 3
Fee Table................................................................ 15
The Fund................................................................. 16
Use of Proceeds.......................................................... 16
Investment Objectives and Policies....................................... 17
Other Investment Practices............................................... 28
Risk Factors and Special Considerations.................................. 32
Investment Restrictions.................................................. 38
Management of the Fund................................................... 39
Trustees and Officers of the Fund........................................ 41
Portfolio Transactions................................................... 43
Determination of Net Asset Value......................................... 43
Dividends and Other Distributions........................................ 44
Taxes.................................................................... 44
Automatic Dividend Reinvestment Plan..................................... 48
Underwriting............................................................. 50
Additional Information................................................... 52
Shareholder Servicing Agent, Custodian and Transfer and Dividend
Disbursing Agent........................................................ 52
Description of Shares.................................................... 53
Certain Provisions of the Declaration of Trust........................... 54
Other Information........................................................ 55
Legal Opinions........................................................... 55
Experts.................................................................. 55
Report of Independent Accountants........................................ 56
Statement of Assets and Liabilities...................................... 57
Appendix A: Ratings of Corporate Bonds................................... A-1
Appendix B: Mortgage--Related Securities................................. B-1
Appendix C: Options, Futures and Forward Currency Contracts.............. C-1
</TABLE>
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6,700,000 Shares
[LOGO OF CONSECO STRATEGIC INCOME FUND APPEARS HERE]
Conseco Strategic Income Fund
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P R O S P E C T U S
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PRUDENTIAL SECURITIES INCORPORATED
CROWELL, WEEDON & CO.
LEGG MASON WOOD WALKER
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
July 27, 1998
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