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CONSECO
CONSECO STRATEGIC
INCOME FUND
DECEMBER 31, 1998
SEMI-ANNUAL REPORT
(Unaudited)
<PAGE>
1998 SEMI-ANNUAL REPORT
================================================================================
December 31, 1998
PORTFOLIO MANAGER'S REVIEW
At Conseco Capital Management Inc., our investment philosophy is deeply
rooted in the belief that through investing in securities we consider to be
undervalued, we will provide better portfolio returns without assuming
significant levels of risk. We implement our investment strategies utilizing
proprietary research generated by our team of securities analysts and strive to
achieve every advantage to earn incremental return for your portfolio. This
style was very important to our success during the period ending December 31,
1998.
The high yield market rebounded somewhat in the last quarter of 1998,
following a weak third quarter and strong first half of 1998. As we entered into
the last quarter of the year, the markets were still adjusting to the summer's
negative events -- such as Long Term Capital's losses and $3.5 billion bailout,
Russian defaults, Brazil's problems and Asia's ongoing economic turmoil
continued to put extreme pressure on riskier asset classes.
However, macroscopic and longer-term perspectives helped generate a recovery
and reasonable returns for high yield bonds. But, spreads on higher risk sectors
remained wide by significant amounts. For example, short zero-based coupons
ended at 649 basis points wider, the lower tier cash pay bonds were 612 basis
points wider, and Latin American credits were 566 basis points wider for the
year.
During the fourth quarter, the high yield market was very inactive, as both
new issues and cash flows into high yield product sharply decreased. New cash
flows, a measure of investor demand, decreased as investors adopted a "wait and
see" attitude toward high yield. New issues slowed, because it remained
difficult to market new deals to investors. Even though the fundamentals of many
high yield companies remained positive, investors did not discriminate among
credit quality as they stood anxiously on the sidelines, attempting to
assimilate the most unusual year in recent history.
The Fund's performance, to date, has relied upon prudent management of the
Fund's leverage capabilities. At the end of the third quarter, the Fund was only
about 10 percent leveraged as a percentage of total assets -- having borrowed
$10 million of its $30 million credit line. By the end of the fourth quarter,
the leveraged amount was increased to 18 percent of total assets, having
borrowed a total of $20 million of its $30 million credit line. At the same
time, most of the Fund's competitors were more highly leveraged than your Fund.
Consequently, these funds experienced greater losses on net asset values (NAV).
During the Fund's August ramp-up period, yield spreads had widened to such
attractive purchase levels that the Fund was able to achieve its yield objective
with less credit risk than was projected in the Fund's prospectus. For example,
your Fund didn't invest in any emerging market issues since there were domestic
securities that had widened out to equally attractive levels. Your Fund also
selectively purchased bank loans -- consistent with its investment guidelines.
Most importantly, the Fund achieved its dividend objective of 9 to 9.25
percent on the IPO share price of $15/share with a very moderate amount of 18
percent leverage rather than the maximum leverage of 331/3 percent of total
assets. This should be beneficial to shareholders, as lower leverage mitigates
the risk of loss in NAV.
Following eight consecutive years of expansion, our economy, combined with
deflationary price pressures from the Southeast Asian economies, continues to
produce declines in several commodity prices. This lack of price pressure has
steered us clear of several of the cyclical sectors, including chemicals, paper
and forest products. We look favorably on the telecommunications sector, media,
healthcare and retail.
Entering the first quarter, 1999, we saw a pickup in new issues that has set
the stage for moderate stability in high yield. As investor confidence returns,
cash flows into high yield mutual funds should increase, which could further
support the primary and secondary markets. Consequently, we'll be prepared to
add more seasoned and better-positioned names in selected sectors -- timing
those transactions to specific issues.
Looking forward, we expect to experience stability in interest rates as a
shrinking industrial sector - combined with trade imbalances -- helps to slow
U.S. economic growth. While we have experienced some easing in our labor markets
recently, the low level of unemployment may cause some pressure on wages. Still,
at such wide spreads, we believe this is an attractive environment for bond
investors.
/s/ Peter C. Anderson, CFA
- ----------------------------------
Peter C. Anderson, CFA
Vice President
Portfolio Manager
Conseco Capital Management, Inc.
<PAGE>
CONSECO STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1998
(UNAUDITED)
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
CORPORATE BONDS (93.67% of total investments) (a)
AMUSEMENT AND RECREATION SERVICES (1.15%)
1,000,000 AMF Bowling Worldwide,
Series B, 10.875%,
due 03/15/2006 ........................... $ 820,000
500,000 Trump Atlantic City
Funding, Inc.,
11.250%, due 05/01/2006 .................. 440,000
-----------
1,260,000
-----------
APPAREL AND OTHER FINISHED PRODUCTS (2.56%)
1,000,000 Norton McNaughton, Inc.,
12.500%, due 06/01/2005 .................. 820,000
2,000,000 Sassco Fashions Limited,
12.750%, due 03/31/2004 .................. 1,980,000
-----------
2,800,000
-----------
BUILDING CONSTRUCTION - GENERAL CONTRACTOR,
OPERATION BUILDER (2.73%)
5,106,000 Pinnacle Holdings, Inc.,
0.000%, due 03/15/2008 ................... 2,987,010
-----------
BUSINESS SERVICES (2.71%)
1,075,000 Advanstar Communications, Inc.,
9.250%, due 05/01/2008 ................... 1,097,843
1,800,000 Muzak Capital Limited
Partnership,
10.000%, due 10/01/2003 .................. 1,863,000
-----------
2,960,843
-----------
CABLE AND OTHER PAY TELEVISION STATIONS (4.65%)
2,000(c) Classic Communications, Inc.,
0.000%, due 08/01/2009 (b)
Cost - $1,217,502
Acquired - 08/11/1998 .................... 1,215,000
3,000,000 Coaxial Communications of
Central Ohio, Inc.,
10.000%, due 08/15/2006 (b)
Cost - $3,000,000
Acquired - 08/17/1998 .................... 3,090,000
2,250,000 TCI Satellite Entertainment, Inc.,
0.000%, due 02/15/2007 ................... 450,000
1,000,000 TCI Satellite Entertainment, Inc.,
10.875%, due 02/15/2007 .................. 330,000
-----------
5,085,000
-----------
CHEMICALS AND ALLIED PRODUCTS (1.81%)
1,000,000 Agricultural Minerals &
Chemicals, Inc., 10.750%,
due 09/30/2003 ........................... $ 1,021,250
1,000,000 Styling Technology Corp.,
10.875%, due 07/01/2008 .................. 955,000
-----------
1,976,250
-----------
CONSTRUCTION - SPECIAL TRADE (1.35%)
1,500,000 Brand Scaffold Services, Inc.,
10.250%, due 02/15/2008 .................. 1,481,250
-----------
COMMUNICATION BY PHONE, TELEVISION,
RADIO, CABLE (1.79%)
2,300,000 Park N View, Inc.,
13.000%, due 05/15/2008 (b)
Cost - $2,082,817
Acquired - 07/31/1998,
10/23/1998 and
11/09/1998 ............................... 1,952,125
-----------
DEPOSITORY INSTITUTIONS (.42%)
500,000 BF Saul Real Estate Investment
Trust, Series B, 9.750%,
due 04/01/2008 ........................... 460,000
-----------
DURABLE GOODS - WHOLESALE (.80%)
1,000,000 AAI Fostergrant, Inc.,
10.750%, due 07/15/2006 .................. 880,000
-----------
EATING AND DRINKING PLACES (2.79%)
2,000,000 Friendly Ice Cream Corp.,
10.500%, due 12/01/2007 .................. 2,030,000
1,000,000 Krystal Co./Port Royal Holdings,
10.250%, due 10/01/2007 .................. 1,020,000
-----------
3,050,000
-----------
ELECTRIC, GAS, SANITARY SERVICES (.40%)
500,000 GNI Group, Inc.,
10.875%, due 07/15/2005 .................. 442,500
-----------
ELECTRICAL, OTHER ELECTRICAL EQUIPMENT,
EXCEPT COMPUTERS (2.52%)
1,000,000 High Voltage Engineering Corp.,
10.500%, due 08/15/2004 .................. 947,500
500,000 IPC Information Systems, Inc.,
0.000%, due 05/01/2008 ................... 315,000
1,500,000 Level 3 Communications, Inc.,
9.125%, due 05/01/2008 ................... 1,492,500
-----------
2,755,000
-----------
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
1998 SEMI-ANNUAL REPORT
================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1998
(UNAUDITED)
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
FOOD STORES (2.36%)
2,500,000 Jitney-Jungle Stores
of America, Inc., 10.375%,
due 09/15/2007 ........................... $ 2,581,250
-----------
HEALTH SERVICES (3.92%)
3,250,000 Hudson Respiratory Care, Inc.,
9.125%, due 04/15/2008 ................... 2,665,000
2,000,000 Medpartners, Inc.,
7.375%, due 10/01/2006 ................... 1,620,000
-----------
4,285,000
-----------
HOME FURNITURE AND EQUIPMENT STORE (2.21%)
2,500,000 Musicland Group, Inc.,
9.000%, due 06/15/2003 ................... 2,418,750
-----------
HOTELS, OTHER LODGING PLACES (1.46%)
2,000,000 Signature Resorts, Inc.,
9.750%, due 10/01/2007 ................... 1,600,000
-----------
INDUSTRIAL, COMMERCIAL MACHINERY,
Computer Equipment (1.92%)
1,500,000 Bayard Drilling Technologies,
Inc.,11.000%,
due 06/30/2005 ........................... 1,635,000
500,000 Grove Worldwide LLC,
9.250%, due 05/01/2008 ................... 462,500
-----------
2,097,500
-----------
INSURANCE CARRIERS (1.68%)
2,000,000 Oxford Health Plans, Inc.,
11.000%, due 05/15/2005 (b)
Cost - $1,776,730
Acquired - 07/30/1998 and
10/08/1998 ............................... 1,840,000
-----------
LEATHER AND LEATHER PRODUCTS (.86%)
1,000,000 Nine West Group, Inc.,
Series B, 9.000%,
due 08/15/2007 ........................... 938,750
-----------
METAL MINING (1.38%)
1,500,000 Golden Northwest
Aluminum Corp., 12.000%,
due 12/15/2006 (b)
Cost - $1,500,000
Acquired - 12/14/1998 .................... 1,503,750
-----------
MISCELLANEOUS MANUFACTURING INDUSTRIES (3.02%)
1,000,000 Bell Sports, Inc.,
11.000%, due 08/15/2008 (b)
Cost - $1,000,000
Acquired - 08/10/1998 .................... 1,030,000
2,250,000 True Temper Sports, Inc.,
10.875%, due 12/01/2008 (b)
Cost - $2,259,950
Acquired - 11/18/1998
and 11/25/98 ............................. 2,272,500
-----------
3,302,500
-----------
MOTION PICTURES (5.13%)
1,000,000 Fox Family Worldwide, Inc.,
9.250%, due 11/01/2007 ................... 990,000
3,000,000 Hollywood Entertainment Corp.,
Series B, 10.625%,
due 08/15/2004 ........................... 3,060,000
1,500,000 Regal Cinemas, Inc., 9.500%,
due 06/01/2008 ........................... 1,563,750
-----------
5,613,750
-----------
NON - DURABLE GOODS - WHOLESALE (2.61%)
3,000,000 Cluett American Corp.,
10.125%, due 05/15/2008 .................. 2,850,000
-----------
OIL AND GAS EXTRACTION (1.47%)
1,000,000 Parker Drilling Co., Series D,
9.750%, due 11/15/2006 ................... 895,000
750,000 Pride Petroleum Services, Inc.,
9.375%, due 05/01/2007 ................... 708,750
-----------
1,603,750
-----------
PAPER AND ALLIED PRODUCTS (.74%)
950,000 Gaylord Container Corp.,
Series B, 9.750%,
due 06/15/2007 ........................... 807,500
-----------
PHONE COMMUNICATIONS EXCEPT
RADIOTELEPHONE (8.68%)
1,000,000 Allegiance Telecom, Inc.,
12.875%, due 05/15/2008 .................. 1,000,000
1,700,000 E.Spire Communications, Inc.,
0.000%, due 07/01/2008 ................... 714,000
1,500,000 Hermes Europe Railtel BV,
11.500%, due 08/15/2007 .................. 1,616,250
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CONSECO STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1998
(UNAUDITED)
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
PHONE COMMUNICATIONS EXCEPT
RADIOTELEPHONE (8.68%) (CONTINUED)
1,000,000 Metromedia Fiber Network, Inc.,
10.000%, due 11/15/2008 (b)
Cost -$1,000,000
Acquired - 11/20/1998 .................. $ 1,036,250
2,500,000 Nextlink Communications, Inc.,
0.000%, due 04/15/2008 ................. 1,431,250
2,000,000 Rogers Cantel, Inc., 9.375%,
due 06/01/2008 ......................... 2,120,000
1,500,000 Time Warner
Telecommunications LLC Inc.,
9.750%, due 07/15/2008 ................. 1,575,000
-----------
9,492,750
-----------
RADIOTELEPHONE COMMUNICATIONS (13.97%)
1,500,000 Arch Communications Group,
Inc.,12.750%,
due 07/01/2007 (b)
Cost - $1,552,500
Acquired - 08/07/1998 .................. 1,500,000
1,000(c) ICO Global Communications
Holdings, 15.000%,
due 08/01/2005 ......................... 750,000
2,250,000 Iridium Capital Corp. LLC,
Series B, 14.000%,
due 07/15/2005 ......................... 2,151,563
2,000,000 Microcell Telecommunications,
Series B, 0.000%,
due 06/01/2006 ......................... 1,520,000
1,000,000 Mobile Telecommunications
Technology Corp., 13.500%,
due 12/15/2002 ......................... 1,105,000
3,000,000 Nextel Communications, Inc.,
0.000%, due 09/15/2007 ................. 1,935,000
1,000,000 Nextel Communications, Inc.,
0.000%, due 02/15/2008 ................. 602,500
1,000,000 Omnipoint Corp.,
11.625%, due 08/15/2006 ................ 695,000
3,000,000 Pagemart Wireless, Inc.,
0.000%, due 02/01/2008 ................. 1,440,000
2,000,000 Price Communications
Wireless, Inc., 11.750%,
due 07/15/2007 ......................... 2,110,000
1,400,000 USA Mobile Communications,
14.000%, due 11/01/2004 ................ 1,470,000
-----------
15,279,063
-----------
SOCIAL SERVICES (2.65%)
2,000,000 Integrated Health Services, Inc.,
Series A, 9.250%,
due 01/15/2008 ......................... 1,905,000
1,000,000 La Petite Academy, Inc.,
Series B, 10.000%,
due 05/15/2008 ......................... 990,000
-----------
2,895,000
-----------
TELEVISION AND RADIO BROADCAST STATIONS (5.69%)
2,300,000 Antenna TV SA, 9.000%,
due 08/01/2007 ......................... 2,024,000
1,250,000 Benedek Communications, Inc.,
0.000%, due 05/15/2006 ................. 912,500
1,000,000 Pegasus Communications Corp.,
Series B, 9.625%,
due 10/15/2005 ......................... 1,000,000
2,000,000 Telemundo Holdings, Inc.,
0.000%, due 08/15/2008 (b)
Cost - $1,192,826
Acquired - 08/10/1998 .................. 1,150,000
2,100,000 Radio Unica Corp., 0.000%,
due 08/01/2006 (b)
Cost - $1,379,034
Acquired - 08/05/1998
and 08/10/1998 ......................... 1,136,625
-----------
6,223,125
-----------
TEXTILE MILL PRODUCTS (1.99%)
2,000,000 Galey & Lord, Inc.,
9.125%, due 03/01/2008 ................. 1,760,000
1,000,000 Tultex Corp.,
10.625%, due 03/15/2005 ................ 420,000
-----------
2,180,000
-----------
TRANSPORTATION BY AIR (2.27%)
1,000,000 Amtran, Inc.,
10.500%, due 08/01/2004 ................ 993,750
1,000,000 Amtran, Inc.,
9.625%, due 12/15/2005 ................. 1,000,000
500,000 Kitty Hawk, Inc.,
9.950%, due 11/15/2004 ................. 490,000
-----------
2,483,750
-----------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
1998 SEMI-ANNUAL REPORT
================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1998
(UNAUDITED)
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
WATER TRANSPORTATION (3.98%)
2,000,000 Enterprises Ship
Holding Corp., 8.875%,
due 05/01/2008 ......................... $ 1,632,500
3,000,000 Stena Line AB, 10.625%,
due 06/01/2008 ......................... 2,718,750
------------
4,351,250
------------
TOTAL CORPORATE BONDS
(COST $109,235,999) .................... $102,437,416
------------
TERM LOANS (3.98% OF TOTAL INVESTMENTS) (a)
MOTION PICTURES (1.25%)
364,270 Regal Cinemas, Term B,
7.875%, due 06/15/2006 ................. 363,072
1,005,882 Regal Cinemas, Term C,
8.125%, due 06/15/2007 ................. 1,002,573
------------
1,365,645
------------
RADIOTELEPHONE COMMUNICATIONS (.91%)
997,059 Sprint Spectrum,5.610%-6.535%,
due 07/02/2005 ......................... 997,059
------------
TELEVISION AND RADIO BROADCAST STATIONS (1.82%)
2,000,000 Lin Television, Term B,
7.570%, due 03/31/2007 ................. 1,987,500
------------
TOTAL TERM LOANS
(COST $4,349,963) ...................... $ 4,350,204
------------
NUMBER OF
SHARES
-----------
PREFERRED STOCK (.75% OF TOTAL INVESTMENTS) (a)
TELEVISION AND RADIO BROADCAST STATIONS (.75%)
1,000 Benedek Communications
11.500% (b), Cost - $990,000
Acquired 08/11/1998 .................... 820,000
------------
TOTAL PREFERRED STOCK
(COST $990,000) ........................ $ 820,000
------------
WARRANTS (.01% OF TOTAL INVESTMENTS) (a)
AMUSEMENT AND RECREATION SERVICES (.01%)
2,300 Park N View, Inc., Warrants
due 05/15/2008 (b),
Cost - $0; Acquired 07/31/1998,
10/23/1998 and
11/09/1998 ............................. 13,800
------------
TOTAL WARRANTS (COST $0) ................. $ 13,800
------------
PRINCIPAL
AMOUNT
-----------
SHORT - TERM INVESTMENTS
(1.59% of total investments)
COMMERCIAL PAPER (1.46%)
OIL AND GAS EXTRACTION (1.46%)
1,600,000 Koch Industries, Inc.,
5.250%, due 01/04/1999 ................. $ 1,599,300
------------
UNITED STATES SHORT - TERM OBLIGATIONS (.13%)
140,171 Temporary Investment
Fund, Inc. - Temp Cash
Portfolio .............................. 140,171
------------
TOTAL SHORT - TERM INVESTMENTS
(COST $1,739,471) ...................... $ 1,739,471
------------
TOTAL INVESTMENTS IN
SECURITIES (100%)
(COST $116,315,433)(d) ................. $109,360,891
============
- -----------------
(a) Using Standard Industry Codes prepared by the Technical Committee on
Industrial Classifications.
(b) Restricted under Rule 144A of the Securities Act of 1933.
(c) Units.
(d) Aggregate cost for Federal income tax purposes
is $116,958,921. The aggregate gross unrealized depreciation for all
securities is as follows:
Gross unrealized appreciation ............. $772,716
Gross unrealized depreciation ............. (8,370,746)
-----------
($7,598,030)
===========
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
================================================================================
CONSECO STRATEGIC INCOME FUND
Statement of Assets and Liabilities
December 31, 1998
(unaudited)
================================================================================
ASSETS:
Investments at value (Cost: $116,315,433).................$109,360,891
Cash ..................................................... 1,597
Interest and dividends receivable ........................ 2,355,665
Receivable for securities sold ........................... 768,924
Other assets ............................................. 16,667
- --------------------------------------------------------------------------------
Total assets ............................................. 112,503,744
================================================================================
LIABILITIES AND NET ASSETS:
Payable to Conseco, Inc. and subsidiaries................. 228,478
Accrued expenses ......................................... 66,181
Distribution payable ..................................... 861,266
Interest payable ......................................... 74,067
Line of credit payable ................................... 20,000,000
- --------------------------------------------------------------------------------
Total liabilities ........................................ 21,229,992
- --------------------------------------------------------------------------------
Net assets ............................................... $91,273,752
================================================================================
Net assets consist of:
Capital stock, $0.001 par value (unlimited
Shares of beneficial interest authorized)............... 6,715
Paid-in capital .......................................... 99,921,993
Distributions in excess of net investment income ......... (4,628)
Accumulated net realized loss on investments ............. (1,695,786)
Net unrealized depreciation on investments ............... (6,954,542)
- --------------------------------------------------------------------------------
Net assets ............................................... $91,273,752
================================================================================
Shares outstanding ....................................... 6,714,989
Net asset value per share ................................ $13.59
===============================================================================
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
1998 SEMI-ANNUAL REPORT
================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 31, 1998 (COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1998
(UNAUDITED)
================================================================================
Investment income:
Interest ................................................... $4,498,737
Dividends .................................................. 37,694
- --------------------------------------------------------------------------------
Total investment income .................................... 4,536,431
- --------------------------------------------------------------------------------
Expenses:
Investment advisory fees ................................... 352,562
Shareholders service fees .................................. 39,174
Administration fees ........................................ 41,132
Custodian fees ............................................. 4,641
Transfer agent fee ......................................... 11,812
Directors' fees............................................. 17,299
Amortization of organization costs ......................... 60,000
Legal fees ................................................. 16,875
Registration and filing fees ............................... 10,125
Insurance .................................................. 8,438
Reports-- printing ......................................... 8,438
Audit fees ................................................. 6,329
Other ...................................................... 3,165
- --------------------------------------------------------------------------------
TOTAL EXPENSES BEFORE INTEREST EXPENSE 579,990
================================================================================
Interest expense ........................................... 207,628
- --------------------------------------------------------------------------------
Total expenses ............................................. 787,618
- --------------------------------------------------------------------------------
Net investment income ............................................ 3,748,813
- --------------------------------------------------------------------------------
Net realized losses on sales of investments................. (1,695,786)
- --------------------------------------------------------------------------------
Net change in unrealized depreciation of investments........ (6,954,542)
- --------------------------------------------------------------------------------
Net realized losses and unrealized depreciation on investments.... (8,650,328)
Net decrease in net assets from operations........................($4,901,515)
================================================================================
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JULY 31, 1998 (COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1998
(UNAUDITED)
================================================================================
Operations:
Net investment income ....................................... $ 3,748,813
Net realized losses on sales of investments.................. (1,695,786)
Net change in unrealized depreciation of investments ........ (6,954,542)
- --------------------------------------------------------------------------------
Net decrease in net assets from operations................... (4,901,515)
- --------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ........................ (3,753,441)
- --------------------------------------------------------------------------------
Net decrease in net assets from distributions ............... (3,753,441)
- --------------------------------------------------------------------------------
Capital share transactions:
Net proceeds from the sale of shares (6,700,000 shares)...... 100,500,000
Net asset value of shares issued from reinvestment
of distributions (including $3,788 paid to
Conseco, Inc.)............................................. 110,287
Offering costs charged to paid-in capital ................... (781,584)
- --------------------------------------------------------------------------------
Net increase in net assets from capital share transactions .. 99,828,703
- --------------------------------------------------------------------------------
Total increase in net assets ................................ 91,173,747
- --------------------------------------------------------------------------------
Net assets, beginning of period (6,667 shares outstanding) ........ 100,005
Net assets, end of period .........................................$ 91,273,752
================================================================================
Share data:
Shares sold ................................................. 6,700,000
Shares issued from reinvestment of distributions............. 8,322
- --------------------------------------------------------------------------------
Net increase in shares....................................... 6,708,322
================================================================================
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
1998 SEMI-ANNUAL REPORT
================================================================================
CONSECO STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 31, 1998
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1998
---------------------
<S> <C>
Net asset value per share, beginning of period (a) ..................................... $ 14.88
Income from investment operations (b):
Net investment income ............................................................ 0.56
Net realized losses and unrealized depreciation on investments ................... (1.29)
- -------------------------------------------------------------------------------------------------------------
Total loss from investment operations ............................................ (0.73)
- -------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ............................................. (0.56)
- -------------------------------------------------------------------------------------------------------------
Total distributions .............................................................. (0.56)
- -------------------------------------------------------------------------------------------------------------
Net asset value per share, end of period................................................ $ 13.59
=============================================================================================================
Per share market value, end of period................................................... $ 12.8125
=============================================================================================================
Total return (c)(d) .................................................................... -10.26%
=============================================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands), end of period ....................................... $91,274
Ratio of expenses to average net assets (e)(f) ......................................... 1.39%
Ratio of net investment income to average net assets (e) ............................... 9.59%
Portfolio turnover (d) ................................................................. 48.22%
</TABLE>
- ------------------
(a) Initial public offering price of $15.00 per share less offering costs of
$0.12 per share.
(b) Per share amounts presented are based on an average of monthly shares
outstanding throughout the periods indicated.
(c) Total investment return is calculated assuming a purchase of common stock
at the beginning of period price of $14.88 (intial offering price of $15.00
less offering costs of $0.12 per share) and a sale at the current market
price on the last day of each period reported. Dividends and distributions,
if any, are assumed for purposes of this calculation to be reinvested at
prices obtained under the Fund's dividend reinvestment plan. Total
investment return does not reflect brokerage commissions or sales charges.
(d) Not annualized
(e) Annualized
(f) Including interest expense, ratio of expenses to average net assets would
have been 1.92% for the period July 31, 1998 (commencement of operations)
through December 31, 1998.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 31, 1998
(COMMENCEMENT OF
PERATIONS) THROUGH
DECEMBER 31, 1998
-------------------
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from sales of investments ..................................... $47,278,302
Purchases of investments ............................................... (163,542,394)
Net increase in short-term investments ................................. (1,739,471)
Investment income ...................................................... 1,404,185
Interest expense paid .................................................. (150,228)
Operating expenses paid ................................................ (287,458)
- -------------------------------------------------------------------------------------------------
Net cash used by investing and operating activities .................... (117,037,064)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of shares ....................................... 100,500,000
Cash distributions paid (net of reinvestment of $110,287) .............. (2,781,888)
Offering costs paid .................................................... (779,456)
Net increase in loans outstanding ...................................... 20,000,000
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities .............................. 116,938,656
- -------------------------------------------------------------------------------------------------
Net decrease in cash ......................................................... (98,408)
Cash at beginning of period .................................................. 100,005
- -------------------------------------------------------------------------------------------------
Cash at end of period ........................................................ $1,597
=================================================================================================
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH USED BY
INVESTING AND OPERATING ACTIVITIES:
Net investment income .................................................. $3,748,813
Proceeds from sales of investments ..................................... 47,278,302
Purchases of investments ............................................... (163,542,394)
Net increase in short-term investments ................................. (1,739,471)
Net increase in receivables related to operations ...................... (2,355,540)
Net increase in payables related to operations ......................... 349,931
Accretion/amortization of discounts and premiums ....................... (776,705)
- -------------------------------------------------------------------------------------------------
Net cash used by investing and operating activities ................ ($117,037,064)
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
1998 SEMI-ANNUAL REPORT
================================================================================
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1.ORGANIZATION
The Conseco Strategic Income Fund (the "Fund") was organized as a business
trust under the laws of the Commonwealth of Massachusetts on June 2, 1998 and
commenced operations on July 31, 1998. The Fund is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940 (the "1940 Act"), as amended, as a closed-end, non-diversified management
investment company. Prior to commencing its operations on July 31, 1998, the
Fund had no activities other than the sale of 6,667 shares of common stock to
Conseco, Inc., ("Conseco") on July 15, 1998. At December 31, 1998, Conseco owned
6,954 shares of the Fund's common stock. Conseco is a publicly owned financial
services company which develops, markets, and administers supplemental health
insurance, annuity, life insurance, individual and group major medical
insurance, other insurance products and consumer and commercial finance products
and services.
Costs incurred by the Fund in connection with its organization totaling
$60,000 were amortized from July 31, 1998 (commencement of operations) through
December 31, 1998. The Fund adopted Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" which requires such costs to be amortized
prior to December 31, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION, TRANSACTIONS,
AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date. The cost of
investments sold is determined by use of the specific identification method for
both financial reporting and income tax reporting purposes. Interest income is
recorded on an accrual basis; dividend income is recorded on the ex-dividend
date. The Fund did not hold any investments which are restricted as to resale,
except bonds with a cost of $17,961,359 and a market value of $17,726,250,
preferred stock with a cost of $990,000 and a market value of $820,000 and
warrants with no cost and a market value of $13,800, all of which are eligible
for resale under Rule 144A of the Securities Act of 1933. These securities
represent 16.97% of the total investments of the Fund. These securities may be
resold to qualified institutional buyers in transactions exempt from
registration.
Investments are stated at market value in the accompanying financial
statements. In valuing the Fund's assets, securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the mean between
the closing bid and asked prices. Securities traded in the over-the-counter
market are valued at the mean between the bid and asked prices or yield
equivalent as obtained from one or more dealers that make markets in the
securities. Fund securities which are traded both in the over-the-counter market
and on a stock exchange are valued according to the broadest and most
representative market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the supervision of the Board of Trustees. Debt securities
with maturities of sixty days or less are valued at amortized cost.
DISTRIBUTION OF INCOME AND GAINS
The Fund intends to distribute monthly to shareholders substantially all of
its net investment income and to distribute, at least annually any net realized
capital gains in excess of net realized capital losses (including any capital
loss carryovers). However, the Board of Trustees may decide to declare dividends
at other intervals.
FEDERAL INCOME TAXES
For federal income tax purposes, the Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code by
distributing substantially all of its taxable income and net capital gains to
its shareholders annually and otherwise complying with the requirements for
regulated investment companies. Therefore, no provision has been made for
federal income taxes.
EXPENSES
The Fund pays expenses of Trustees who are not affiliated persons of the Fund
or Conseco Capital Management, Inc., (the "Adviser" and "Administrator"), a
wholly owned subsidiary of Conseco. The Fund pays each of its Trustees who are
not a Trustee, officer or employee of the Adviser, the Administrator or any
affiliate thereof an annual fee of $5,000 plus $1,000 for each Board of
Directors meeting attended. In addition, the Fund reimburses all directors for
travel and out-of-pocket expenses incurred in connection with Board of Trustees
meetings.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
11
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AGREEMENT
The Adviser serves as the investment manager and Administrator to the Fund
under the terms of the Investment Management Agreement. The Adviser supervises
the Fund's management and investment program, performs a variety of services in
connection with management and operation of the Fund and pays all compensation
of officers and Trustees of the Fund who are affiliated persons of the Adviser
or the Fund. As compensation for its services to the Fund, the Fund has agreed
to pay the Adviser a monthly investment management and administration fee equal
to an annual rate of 0.90 of 1% of the value of the average weekly value of the
total assets of the Fund less the sum of accrued liabilities (other than the
aggregate indebtedness constituting financial leverage) (the "Managed Assets").
For the period July 31, 1998 (commencement of operations) through December 31,
1998, these fees amounted to $352,562.
SHAREHOLDER SERVICING AGREEMENT
Conseco Services, LLC, a wholly owned subsidiary of Conseco, acts as
Shareholder Servicing Agent to the Fund under the Shareholder Service Agreement.
As compensation for its services, the Fund has agreed to pay Conseco Services,
LLC a monthly shareholder servicing fee equal to an annual rate of 0.10 of 1% of
the Managed Assets. For the period July 31, 1998 (commencement of operations)
through December 31, 1998, these fees amounted to $39,174.
4. ADMINISTRATION AGREEMENT
The Fund contracted for certain administration services with PFPC Inc.
("PFPC"). For its services, PFPC receives a monthly fee equal to .105 of 1% of
the first $250 million of average weekly net assets; .08 of 1% of the next $250
million of average weekly net assets; .055 of 1% of the next $250 million of
average weekly net assets; and .035 of 1% of average weekly net assets in excess
of $750 million. For the period July 31, 1998 (commencement of operations)
through December 31, 1998, these fees amounted to $41,132.
5. PORTFOLIO ACTIVITY
Purchases and sales of securities other than short-term obligations
aggregated $163,542,394 and $47,850,130, respectively, for the period July 31,
1998 (commencement of operations) through December 31, 1998.
6. INDEBTEDNESS
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. There can be no
assurance that a leveraging strategy will be successful during any period during
which it is used. The Fund intends to utilize leverage to provide the
shareholders with a potentially higher return. 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 of fluctuations in interest rates on
borrowings.
LOAN AGREEMENT
On October 2, 1998, the Fund entered into an unsecured $30 million Line of
Credit Agreement (the "Agreement") with The First National Bank of Chicago.
Under the Agreement, the aggregate amount outstanding may not exceed the lower
of: (i) $30 million; or (ii) one-third of the Fund's net asset value plus the
amount of all outstanding obligations under the Agreement less the
non-performing assets value less 50 percent of the emerging markets securities
value.
Borrowings bear interest at either the bank's alternate base rate or
Eurodollar rate. The alternate base rate is the rate of interest per annum equal
to the higher of either the bank's base rate or the sum of the Federal Funds
Funding rate plus .50 percent per annum. The Eurodollar rate is the applicable
London interbank offered rate ("LIBOR") plus a margin of .50 percent. Advances
made under the Agreement are due and payable on demand. Interest payments are
made monthly. Borrowings at December 31, 1998, totaled $20 million and the
interest rate on such borrowings was 6.06 percent.
The Agreement also permits five-day revolving Swing Line loans, as defined,
up to $10 million. Each Swing Line advance may be either an alternate base rate
advance or a Federal Funds rate advance, as selected by the Fund. The Federal
Funds rate is the interest rate per annum equal to the Federal Funds Funding
rate for such day, plus .75 percent per annum. At December 31, 1998, there were
no Swing Line loans outstanding.
The Fund is subject to a utilization fee of 0.10 of 1% per annum on the daily
unused portion of the commitment, payable in arrears on each payment date. The
Agreement requires the Fund to maintain an Asset Coverage Ratio, as defined in
the Agreement, of at least 3:1.
12
<PAGE>
1998 SEMI-ANNUAL REPORT
================================================================================
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
Average daily balance of loans outstanding
during the period July 31, 1998
(commencement of operations) through
December 31, 1998.......................... $8,051,948
Weighted average interest rate for
the period ................................. 5.97%
Maximum amount of loans outstanding
at any month-end during the period
July 31, 1998 (commencement of operations)
through December 31, 1998.................. $20,000,000
Percentage of total assets ................. 17.78%
Amount of loans outstanding at
December 31, 1998 .......................... $20,000,000
Percentage of total assets at
December 31, 1998 .......................... 17.78%
13
<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 PFPC Inc.
("PFPC"), 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 PFPC 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 PFPC, 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: (i) through receipt of additional unissued but authorized shares from
the Fund ("newly issued shares"); or (ii) 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.
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.
Shareholders participating in the DRIP may receive benefits not available to
shareholders not participating in the DRIP. If
14
<PAGE>
1998 SEMI-ANNUAL REPORT
================================================================================
AUTOMATIC DIVIDEND REINVESTMENT PLAN--(CONTINUED)
the market price (plus commissions) of the Fund's shares is above their net
asset value, participants of 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.
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 PFPC, Inc., 400 Bellevue Parkway, Wilmington, DE 19809.
15
<PAGE>
BOARD OF TRUSTEES
WILLIAM P. DAVES, JR.
Chairman of the Board
Consultant to the insurance
and healthcare industries.
Director, President and CEO, FFG Insurance Co.
GREGORY J. HAHN, CFA
Senior VP, Portfolio Analytics
Conseco Capital Management, Inc.
DR. R. JAN LECROY (RET.)
Former Director, Southwest Securities Group, Inc.
Former President, Dallas Citizens Council
DAVID N. WALTHALL
President, Chief Executive Officer and Director,
Lyrick Corporation
MAXWELL E. BUBLITZ, CFA
President
President, Conseco Capital Management
Executive VP, Conseco, Inc.
HAROLD W. HARTLEY, CFA (RET.)
Former Executive VP, Tenneco Financial Services
Former Director, Ennis Business Forms, Inc.
DR. JESSE H. PARRISH
Higher education consultant.
Former President, Midland College
INVESTMENT ADVISOR
Conseco Capital Management, Inc.
Carmel, IN
TRANSFER AGENT
PFPC, Inc.
Wilmington, DE
INDEPENDENT PUBLIC ACCOUNTANT
PricewaterhouseCoopers, LLP
Indianapolis, IN
CUSTODIAN
PFPC Trust Company
Philadelphia, PA
LEGAL COUNSEL
Kirkpatrick & Lockhart, LLP
Washington, DC
