[LOGO]
CONSECO STRATEGIC INCOME FUND
June 30, 1999
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ANNUAL REPORT
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<PAGE>
1999 Annual Report
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June 30, 1999
PORTFOLIO MANAGER'S REVIEW
Our investment philosophy remains deeply rooted in selecting undervalued
securities capable of providing a high level of income without assuming
significant levels of risk. To achieve this, the fund's investment strategies
utilize proprietary, in-house, bottom-up research generated by our team of 31
analysts who strive to obtain and exploit every available advantage in order to
achieve the fund's objective.
The inherent value and importance of this investment approach became evident
during key market events that occurred during the third and fourth quarters of
1998.
The fund opened at the end of July 1998 in the midst of an exceptionally weak
quarter with markets still adjusting from the summer slide perpetuated by
defaults in Russia, economic turmoil in Brazil and Asia, as well as the losses
and subsequent $3.5 billion bailout of Long Term Capital Management. Despite
extreme pressure on riskier asset classes, spreads widened to such attractive
purchase levels that the fund was able to achieve its yield objective with less
credit risk than originally anticipated during the fund's formation. For
example, the fund didn't invest in any emerging market issues because its
analysts were able to identify high-quality domestic securities available at
equally attractive levels.
The high-yield market rebounded somewhat during the fourth quarter of 1998 as
longer-term investor perspectives helped initiate a recovery and generate
reasonable returns on high-yield bonds. However, spreads on higher-risk sectors
remained significantly wide.
In spite of this, the high-yield market was very inactive, as both new issues
and cashflows into high-yield product sharply decreased. Net cashflows, a
measure of investor demand, decreased as investors adopted a "wait and see"
attitude toward the high-yield market. In response, new issues slowed because
the lack of demand made it difficult to attract investors. Even though the
fundamentals of many issuers were positive, investors didn't discriminate among
credit quality, but stood anxiously on the sidelines trying to get a grasp on
one of the most unusual years in recent memory.
In the first and second quarters of 1999, the market withstood another
Brazilian crisis, rallying investor confidence in cyclical industries and the
higher-risk sectors that investors had avoided in the second half of 1998. This
renewed confidence led to a surge in new issues.
In the first quarter of 1999 alone, 125 new issues came to market
representing $28.3 billion, an increase of $4 billion over the fourth quarter of
1998 and $9 billion over the third quarter of 1998. The increase in new issues
generated greater high-yield stability that matched early 1998 and gave
investors excellent opportunities for return. Consequently, cashflow into high
yield securities began increasing and supporting the primary and secondary
markets.
Having anticipated these developments, we were well prepared and positioned
for this upturn and able to add more seasoned and better-positioned names in
selected sectors at attractive prices. We timed our transactions to specific
issues in the high-demand telecommunications, media, healthcare and retail
sectors. The fund's holdings that are at the top of their respective sectors in
performance are Classic Communications, Inc. and Omnipoint Corp.
This focused approach has proven to be on-target, effective and integral to
the fund's performance during this inaugural year. Most important, I'm pleased
to report that the investment management team delivered on its promise without
taking a more aggressive - and riskier - posture.
The Conseco Strategic Income Fund produced a SEC 30-day yield of 10.03% (as
of June 30, 1999) and met its dividend objective of 9% to 9.25% on the IPO share
price of $15.
The fund's performance also has relied upon prudent management of its
leverage capabilities. At the end of the year, the fund was about 24% leveraged
as a percentage of total assets, which is below our target of 25% and well below
our limit of 33%.
This should be beneficial, as the lower leverage mitigates the risk of loss
in your net asset value (NAV). While the fund's primary objective is high
current income, NAV integrity is also important.
As we move into the new millennium, we expect the economy to continue to grow
at or near its present pace and the Federal Reserve to keep its foot lightly on
the inflation brake through small incremental interest rate adjustments -- an
attractive environment for high-yield bond investors.
/s/Peter C. Anderson
-------------------------------------
Peter C. Anderson, CFA
Vice President
Portfolio Manager
Conseco Capital Management, Inc.
1
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1999
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
CORPORATE BONDS
(93.95% OF TOTAL INVESTMENTS) (A)
AMUSEMENT AND RECREATION
SERVICES (1.86%)
2,000,000 AMF Bowling Worldwide,
Series B, 10.875%,
due 03/15/2006 ................... $1,640,000
500,000 Trump Atlantic City
Funding, Inc.,
11.250%, due 05/01/2006 .......... 451,250
----------
2,091,250
----------
APPAREL AND OTHER FINISHED
PRODUCTS (3.49%)
1,000,000 Jo-Ann Stores, Inc.,
10.375%, due 05/01/2007
(b) Cost - $985,200;
Acquired - 04/30/1999 ............ 990,000
3,000,000 Kasper A.S.L., Ltd.
12.750%, due 03/31/2004 .......... 2,940,000
----------
3,930,000
----------
AUTO REPAIR AND PARKING (1.52%)
1,700,000 Avis Rent A Car, Inc.,
11.000%, due 05/01/2009
(b) Cost - $1,700,000;
Acquired - 06/25/99 .............. 1,706,375
----------
BUILDING CONSTRUCTION GENERAL
CONTRACTOR, OPERATIVE BUILDERS (0.84%)
1,000,000 US Home Corp.,
8.875%, due 02/15/2009 ........... 950,000
----------
BUSINESS SERVICES (4.37%)
1,075,000 Advanstar
Communications, Inc.,
9.250%, due 05/01/2008 ........... 1,075,000
6,606,000 Pinnacle Holdings, Inc.,
(STEP) (c) 0.000%/10.000%,
due 03/15/2008. .................. 3,847,995
----------
4,922,995
----------
CABLE AND OTHER PAY TELEVISION
STATIONS (5.66%)
2,000,000 Cablevision SA,
13.750%, due 05/01/2009
(b) Cost - $2,000,000;
Acquired - 04/29/1999 ............ 1,850,000
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
CABLE AND OTHER PAY TELEVISION
STATIONS (CONTINUED)
2,000,000 Classic Communications, Inc.,
(STEP) (c) 0.000%/13.250%,
due 08/01/2009
(b) Cost - $1,285,380;
Acquired - 08/11/1998 ............ $1,335,000
3,000,000 Coaxial Communications of
Central Ohio, Inc., 10.000%,
due 08/15/2006 ................... 3,135,000
50,000 Northland Cable Television,
10.250%, due 11/15/2007 .......... 52,375
----------
6,372,375
----------
CHEMICALS AND ALLIED PRODUCTS (1.76%)
1,000,000 Agricultural Minerals &
Chemicals, Inc., 10.750%,
due 09/30/2003 ................... 1,018,750
1,000,000 Styling Technology Corp.,
10.875%, due 07/01/2008 .......... 962,500
----------
1,981,250
----------
COMMUNICATION BY PHONE, TELEVISION,
RADIO, CABLE (4.72%)
1,000,000 Arch Escrow Corp.,
13.750%, due 04/15/2008
(b) Cost - $951,619;
Acquired - 04/07/1999 ............ 900,000
2,250,000 Crown Castle
International Corp., (STEP)
(c) 0.000%/10.375%,
due 05/15/2011 ................... 1,316,250
3,300,000 Park 'N View, Inc., Series B,
13.000%, due 05/15/2008 .......... 1,023,000
2,100,000 Level 3 Communications, Inc.,
9.125%, due 05/01/2008 ........... 2,073,750
----------
5,313,000
----------
CONSTRUCTION - SPECIAL TRADE (1.31%)
1,500,000 Brand Scaffold Services, Inc.,
10.250%, due 02/15/2008 .......... 1,471,875
----------
DEPOSITORY INSTITUTIONS (0.42%)
500,000 BF Saul Real Estate Investment
Trust, Series B, 9.750%,
due 04/01/2008 ................... 475,625
----------
DURABLE GOODS - WHOLESALE (0.63%)
1,000,000 AAI Fostergrant, Inc., 10.750%,
due 07/15/2006 ................... 705,000
----------
The accompanying notes are an integral part of these financial statements.
2
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1999
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
EATING AND DRINKING PLACES (1.61%)
750,000 Domino's, Inc., 10.375%,
due 01/15/2009 ................... $ 765,000
1,000,000 Port Royal Holdings, 10.250%,
due 10/01/2007 ................... 1,051,250
-----------
1,816,250
-----------
ELECTRIC, GAS, COGENERATION
SANITARY SERVICES (1.02%)
750,000 AES Corp., 9.500%,
due 06/01/2009 ................... 772,500
500,000 GNI Group, Inc., Series B,
10.875%, due 07/15/2005 .......... 375,000
-----------
1,147,500
-----------
ELECTRICAL, OTHER ELECTRICAL EQUIPMENT,
EXCEPT COMPUTERS (1.17%)
1,000,000 High Voltage Engineering Corp.,
10.500%, due 08/15/2004 .......... 935,000
500,000 IPC Information Systems, Inc.,
(STEP) (c) 0.000%/10.875%,
due 05/01/2008 ................... 380,000
-----------
1,315,000
-----------
FOOD AND KINDRED PRODUCTS (1.82%)
1,000,000 National Wine & Sprits,
10.125%, due 01/15/2009
(b) Cost - $1,000,000;
Acquired - 1/20/1999 ............. 1,030,000
1,000,000 New World Pasta Co.,
9.250%, due 02/15/2009
(b) Cost - $1,000,000;
Acquired - 02/11/1999 ............ 1,016,250
-----------
2,046,250
-----------
HEALTH SERVICES (5.80%)
1,000,000 Genesis Health Ventures,
9.875%, due 01/15/2009 .......... 830,000
3,250,000 Hudson Respiratory Care, Inc.,
9.125%, due 04/15/2008 ........... 2,912,813
2,000,000 Medpartners, Inc., 7.375%,
due 10/01/2006 ................... 1,770,000
1,000,000 Triad Hospitals Holdings,
11.000%, due 05/15/2009
(b) Cost - $1,000,000;
Acquired - 4/30/1999 ............. 1,020,000
-----------
6,532,813
-----------
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
HOTELS, OTHER LODGING PLACES (1.63%)
2,000,000 Signature Resorts, Inc., 9.750%,
due 10/01/2007 ................... $1,840,000
-----------
INDUSTRIAL, COMMERCIAL MACHINERY,
COMPUTER EQUIPMENT (1.86%)
1,500,000 Bayard Drilling
Technologies, Inc.,
Series B, 11.000%,
due 06/30/2005 ................... 1,665,000
500,000 Grove Worldwide, LLC,
9.250%, due 05/01/2008 ........... 430,000
-----------
2,095,000
-----------
INSURANCE CARRIERS (1.85%)
2,000,000 Oxford Health Plans, Inc.,
11.000%, due 05/15/2005
(b) Cost - $1,789,365;
Acquired - 07/30/1998
and 10/08/1998 ................... 2,082,500
-----------
METAL MINING (1.37%)
1,500,000 Golden Northwest
Aluminum Corp.,
12.000%, due 12/15/2006 .......... 1,545,000
-----------
MISCELLANEOUS MANUFACTURING
INDUSTRIES (1.71%)
2,250,000 True Temper Sports, Inc.,
10.875%, due 12/01/2008
(b) Cost - $2,259,658;
Acquired - 11/18/1998
and 11/25/1998 ................... 1,923,750
-----------
MOTION PICTURES (6.82%)
1,000,000 Fox Family Worldwide, Inc.,
9.250%, due 11/01/2007 ........... 930,000
3,000,000 Hollywood Entertainment Corp.,
Series B, 10.625%,
due 08/15/2004 ................... 2,962,500
1,000,000 Hollywood Entertainment Corp.,
10.625%, due 08/15/2004
(b) Cost - $987,583;
Acquired - 06/24/1999 ............ 980,000
3,000,000 Regal Cinemas, Inc., 9.500%,
due 06/01/2008 ................... 2,812,500
-----------
7,685,000
-----------
The accompanying notes are an integral part of these financial statements.
3
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1999
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
NON - DURABLE GOODS - WHOLESALE (2.00%)
3,000,000 Cluett American Corp.,
10.125%, due 05/15/2008 .......... $ 2,250,000
-----------
OIL AND GAS EXTRACTION (2.17%)
500,000 ICO, Inc., Series B,
10.375%, due 06/01/2007 .......... 375,000
2,000,000 RBF Finance Co.,
11.375%, due 03/15/2009
(b) Cost - $2,020,120;
Acquired - 03/19/1999
and 05/20/1999 ................... 2,070,000
-----------
2,445,000
-----------
PAPER AND ALLIED PRODUCTS (1.66%)
1,000,000 Doman Industries Ltd.,
12.000%, due 07/01/2004
(b) Cost - $946,705;
Acquired - 06/15/1999 ............ 965,000
950,000 Gaylord Container Corp.,
Series B, 9.750%,
due 06/15/2007 ................... 907,250
-----------
1,872,250
-----------
PHONE COMMUNICATIONS EXCEPT
RADIOTELEPHONE (8.79%)
1,000,000 Allegiance Telecom, Inc.,
12.875%, due 05/15/2008 .......... 1,070,000
1,500,000 Hermes Europe Railtel BV,
11.500%, due 08/15/2007 .......... 1,575,000
1,000,000 Metromedia Fiber Network, Inc.,
10.000%, due 11/15/2008 .......... 1,030,000
2,500,000 Nextlink Communications, Inc.,
10.750%, due 11/15/2008 .......... 2,568,750
2,000,000 Rogers Cantel, Inc., 9.375%,
due 06/01/2008 ................... 2,105,000
1,500,000 Time Warner
Telecommunications,
LLC, 9.750%,
due 07/15/2008 ................... 1,548,750
-----------
9,897,500
-----------
RADIOTELEPHONE
COMMUNICATIONS (14.65%)
2,900,000 Arch Communications
Group, Inc., 12.750%,
due 07/01/2007 ................... 2,523,000
1,000,000 Granite Broadcasting, 10.375%,
due 05/15/2005 ................... 1,025,000
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
RADIOTELEPHONE
COMMUNICATIONS (CONTINUED)
1,000,000 Granite Broadcasting,
8.875%, due 05/15/2008 ........... $ 965,000
1,000,000 KMC Telecom Holdings, Inc.,
13.500%, due 05/15/2009
(b) Cost - $1,000,000;
Acquired - 05/19/1999 ............ 1,001,250
2,000,000 Microcell Telecommunications,
Inc., Series B, (STEP) (c)
0.000%/14.000%,
due 06/01/2006 ................... 1,615,000
1,000,000 Mobile Telecommunications
Technology Corp., 13.500%,
due 12/15/2002 ................... 1,140,000
3,000,000 Nextel Communications, Inc.,
9.750%, due 08/15/2004 ........... 3,060,000
1,000,000 Omnipoint Corp., 11.625%,
due 08/15/2006 ................... 1,035,000
3,000,000 Pagemart Wireless, Inc., (STEP)
(c) 0.000%/11.250%,
due 02/01/2008 ................... 1,110,000
2,000,000 Price Communications
Wireless, Inc., 11.750%,
due 07/15/2007 ................... 2,225,000
1,000,000 USA Mobile Communications,
9.500%, due 02/01/2004 ........... 800,000
-----------
16,499,250
-----------
SOCIAL SERVICES (0.87%)
1,000,000 La Petite Academy, Inc.,
Series B, 10.000%,
due 05/15/2008 ................... 983,750
-----------
TELEVISION AND RADIO BROADCAST
STATIONS (4.70%)
2,300,000 Antenna TV SA, 9.000%,
due 08/01/2007 ................... 2,070,000
1,250,000 Benedek Communications
Corp., (STEP) (c)
0.000%/13.250%,
due 05/15/2006 ................... 1,031,250
1,000,000 Pegasus Communications Corp.,
Series B, 9.625%,
due 10/15/2005 ................... 982,500
2,100,000 Radio Unica Corp., (STEP)
(c) 0.000%/11.750%,
due 08/01/2006 ................... 1,212,750
-----------
5,296,500
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The accompanying notes are an integral part of these financial statements.
4
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1999
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
TEXTILE MILL PRODUCTS (0.82%)
1,000,000 Galey & Lord, Inc., 9.125%,
due 03/01/2008 .................. $ 660,000
599,000 Tultex Corp., 10.625%,
due 03/15/2005 .................. 263,560
------------
923,560
------------
TRANSPORTATION EQUIPMENT (5.05%)
1,000,000 Amtran, Inc., 10.500%,
due 08/01/2004 .................. 990,000
2,000,000 Amtran, Inc., 9.625%,
due 12/15/2005 .................. 1,950,000
500,000 Kitty Hawk, Inc., 9.950%,
due 11/15/2004 .................. 500,000
3,000,000 Stena Line AB, 10.625%,
due 06/01/2008 .................. 2,250,000
------------
5,690,000
------------
TOTAL CORPORATE BONDS
(COST $113,036,286).............. $105,806,618
------------
TERM LOAN PARTICIPATION
(2.89% OF TOTAL INVESTMENTS) (A)
MOTION PICTURES (1.21%)
364,270 Regal Cinemas, Inc., Term B,
7.567%, due 06/15/2006 .......... $ 363,359
995,824 Regal Cinemas, Inc., Term C,
7.818%, due 06/15/2007 .......... 998,313
------------
1,361,672
------------
TELEVISION AND RADIO BROADCAST STATIONS (1.68%)
166,667 Lin Television, Term B,
7.040%, due 03/31/2007 .......... 166,250
1,735,467 Lin Television, Term B,
6.790%, due 03/31/2007 .......... 1,731,129
------------
1,897,379
------------
TOTAL TERM LOANS
(COST $3,247,202)................ $ 3,259,051
------------
NUMBER OF
SHARES
- ---------
COMMON STOCK (0.04% OF TOTAL INVESTMENTS) (A)
CABLE AND OTHER PAY TELEVISION
STATIONS (0.04%)
6,000 Classic Communications ............ $ 40,000
------------
TOTAL COMMON STOCK
(COST $0)........................ $ 40,000
------------
PREFERRED STOCK (2.70% OF TOTAL INVESTMENTS) (A)
TELEVISION AND RADIO BROADCAST STATIONS (2.70%)
1,000 Benedek Communications
11.500% ......................... $ 750,000
NUMBER OF
SHARES SECURITY VALUE
----------- --------- -------
TELEVISION AND RADIO
BROADCAST STATIONS (CONTINUED)
20,000 Adelphia Communications
13.000% ......................... $ 2,290,000
------------
TOTAL PREFERRED STOCK
(COST $3,375,194 )............... $ 3,040,000
------------
STOCK APPRECIATION RIGHTS
(0.41% OF TOTAL INVESTMENTS) (A)
AUTOMOBILE (0.41%)
35,741 General Motors Corp., Class H ..... $ 455,909
------------
TOTAL STOCK
APPRECIATION RIGHTS
(COST $477,497) ................. $ 455,909
------------
WARRANTS (0.00% OF TOTAL INVESTMENTS) (A)
COMMUNICATION BY PHONE, TELEVISION,
RADIO, CABLE (0.00%)
3,300 Park `N View, Inc.,
expire 05/15/2008 ............... $ 3,300
------------
TOTAL WARRANTS
(COST $0)........................ $ 3,300
------------
PRINCIPAL
AMOUNT
-----------
SHORT - TERM INVESTMENTS
(0.01% OF TOTAL INVESTMENTS)
UNITED STATES SHORT - TERM OBLIGATIONS
(0.01% OF TOTAL INVESTMENTS)
13,743 Temporary Investment Fund,
Inc. Temp Cash Portfolio ........ $ 13,743
------------
TOTAL SHORT - TERM
INVESTMENTS
(COST $13,743) .................. $ 13,743
------------
TOTAL INVESTMENTS IN
SECURITIES
(COST $120,149,922) (D) ......... $112,618,621
============
- ----------------
(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) Bonds where the coupon increases or steps up at a predetermined rate.
(d) Aggregate cost for Federal income tax purposes is $120,266,531.
The aggregate gross unrealized appreciation (depreciation) for all
securities is as follows:
Excess of market value over tax cost ...... $ 1,153,500
Excess of tax cost over market value ...... (8,801,410)
-----------
($7,647,910)
===========
The accompanying notes are an integral part of these financial statements.
5
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<TABLE>
<CAPTION>
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CONSECO STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999
===============================================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost: $120,149,922).............................................. $112,618,621
Interest receivable..................................................................... 2,466,486
Receivable for securities sold.......................................................... 1,746,088
Other assets............................................................................ 8,177
- ---------------------------------------------------------------------------------------------------------------
Total assets................................................................. 116,839,372
===============================================================================================================
LIABILITIES AND NET ASSETS:
Payable to Conseco, Inc. and subsidiaries............................................... 95,824
Accrued expenses........................................................................ 71,136
Distribution payable.................................................................... 762,444
Interest payable........................................................................ 84,933
Line of credit payable.................................................................. 28,000,000
- ---------------------------------------------------------------------------------------------------------------
Total liabilities............................................................ 29,014,337
- ---------------------------------------------------------------------------------------------------------------
Net assets................................................................... $ 87,825,035
===============================================================================================================
Net assets consist of:
Capital stock, $0.001 par value (unlimited shares of beneficial interest authorized).... $ 6,735
Paid-in capital......................................................................... 100,199,037
Distributions in excess of net investment income........................................ (1,150)
Accumulated net realized loss on investments............................................ (4,848,286)
Net unrealized depreciation on investments.............................................. (7,531,301)
- ----------------------------------------------------------------------------------------------------------------
Net assets................................................................... $ 87,825,035
================================================================================================================
Shares outstanding...................................................................... 6,735,370
Net asset value per share............................................................... $ 13.04
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
1999 ANNUAL REPORT
================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 31, 1998
(COMMENCEMENT OF OPERATIONS) THROUGH JUNE 30, 1999
Investment income:
Interest................................................... $10,911,306
Dividends.................................................. 95,194
- --------------------------------------------------------------------------------
Total investment income................................ 11,006,500
- --------------------------------------------------------------------------------
Expenses:
Investment advisory fees................................... 913,744
Shareholders service fees.................................. 101,526
Administration fees........................................ 88,708
Amortization of organization costs......................... 61,500
Directors' fees........................................... 44,001
Legal fees................................................. 30,491
Transfer agent fees........................................ 30,106
Reports - printing......................................... 20,755
Custodian fees............................................. 15,910
Audit fees................................................. 14,968
Registration and filing fees............................... 14,960
Insurance.................................................. 6,655
Other...................................................... 8,337
- --------------------------------------------------------------------------------
Total expenses before interest expense................. 1,351,661
================================================================================
Interest expense .......................................... 976,181
- --------------------------------------------------------------------------------
Total expenses......................................... 2,327,842
- --------------------------------------------------------------------------------
Net investment income.................................. 8,678,658
- --------------------------------------------------------------------------------
Net realized losses on sales of investments............ (4,848,286)
Net change in unrealized depreciation on investments... (7,531,301)
- --------------------------------------------------------------------------------
Net realized losses and unrealized depreciation on investments... (12,379,587)
- --------------------------------------------------------------------------------
Net decrease in net assets from operations.......................$ (3,700,929)
================================================================================
The accompanying notes are an integral part of these financial statements.
7
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CONSECO STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JULY 31, 1998
(COMMENCEMENT OF OPERATIONS) THROUGH JUNE 30, 1999
- --------------------------------------------------------------------------------
Operations:
Net investment income ....................................... $ 8,678,658
Net realized losses on sales of investments.................. (4,848,286)
Net change in unrealized depreciation of investments ........ (7,531,301)
- --------------------------------------------------------------------------------
Net decrease in net assets from operations............... (3,700,929)
- --------------------------------------------------------------------------------
Distributions to shareholders:
Dividends from net investment income ........................ (8,679,808)
- --------------------------------------------------------------------------------
Net decrease in net assets from distributions ........... (8,679,808)
- --------------------------------------------------------------------------------
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 $8,175 paid to Conseco, Inc.)....... 387,351
Offering costs charged to paid-in capital ................... (781,584)
- --------------------------------------------------------------------------------
Net increase in net assets from capital share
transactions ......................................... 100,105,767
- --------------------------------------------------------------------------------
Total increase in net assets ............................ 87,725,030
- --------------------------------------------------------------------------------
Net assets, beginning of period (6,667 shares outstanding) ........ 100,005
- --------------------------------------------------------------------------------
Net assets, end of period .........................................$ 87,825,035
================================================================================
Share data:
Shares sold ................................................. 6,700,000
Shares issued from reinvestment of distributions............. 28,703
- --------------------------------------------------------------------------------
Net increase in shares................................... 6,728,703
================================================================================
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
1999 Annual Report
================================================================================
CONSECO STRATEGIC INCOME FUND
Financial Highlights
For the period July 31, 1998
(commencement of operations) through June 30, 1999
================================================================================
Net asset value per share, beginning of period (a) ................. $ 14.88
Income from investment operations (b):
Net investment income ........................................ 1.29
Net realized losses and change in unrealized
depreciation on investments ................................ (1.84)
- --------------------------------------------------------------------------------
Total from investment operations ......................... (0.55)
- --------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ......................... (1.29)
- --------------------------------------------------------------------------------
Total distributions ...................................... (1.29)
- --------------------------------------------------------------------------------
Net asset value per share, end of period............................ $ 13.04
================================================================================
Per share market value, end of period............................... $ 12.9375
================================================================================
Total return (c)(d) ................................................ (5.06)%
================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands), end of period ................... $87,825
Ratio of expenses to average net assets (e)......................... 2.74%
Ratio of operating expenses to average net assets (e)(f) ........... 1.59%
Ratio of net investment income to average net assets (e) ........... 10.24%
Portfolio turnover (d) ............................................. 129.87%
- -----------------
(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.
(c) Total return is calculated assuming a purchase of common stock at the
beginning of period price of $14.88 (initial 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 return does not
reflect brokerage commissions or sales charges.
(d) Not annualized.
(e) Annualized.
(f) Excluding interest expense.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
================================================================================
CONSECO STRATEGIC INCOME FUND
Statement of Cash Flows
For the period July 31, 1998
(commencement of operations) through June 30, 1999
================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income ........................................... $ 6,874,212
Interest expense paid ....................................... (891,248)
Operating expenses paid ..................................... (1,192,878)
- --------------------------------------------------------------------------------
Net cash provided by operating activities ............... 4,790,086
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments .......................... 127,249,381
Purchases of investments ....................................(252,314,133)
Net increase in short-term investments ...................... (13,743)
- --------------------------------------------------------------------------------
Net cash used by investing activities ...................(125,078,495)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of shares ............................ 100,500,000
Cash distributions paid (net of reinvestment of $387,351) ... (7,530,012)
Offering costs paid ......................................... (781,584)
Net increase in loans outstanding ........................... 28,000,000
- --------------------------------------------------------------------------------
Net cash provided by financing activities ................... 120,188,404
- --------------------------------------------------------------------------------
Net decrease in cash ........................................ (100,005)
Cash at beginning of period ................................. 100,005
- --------------------------------------------------------------------------------
Cash at end of period ....................................... --
- --------------------------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH USED BY
OPERATING ACTIVITIES:
Net investment income ....................................... $ 8,678,658
Net increase in interest and dividends receivable ........... (2,466,486)
Net increase in other assets ................................ (8,177)
Net increase in payable to Conseco, Inc. and subsidiaries ... 95,824
Net increase in accrued expenses ............................ 71,136
Net increase in interest payable ............................ 84,933
Accretion/amortization of discounts and premiums ............ (1,665,802)
- --------------------------------------------------------------------------------
Net cash provided by operating activities ............... $ 4,790,086
================================================================================
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
1999 Annual Report
================================================================================
Notes to Financial Statements
June 30, 1999
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 (the "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 June 30, 1999, Conseco
owned 7,280 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.
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 $18,925,630 and a market value of $18,870,125, all
of which are eligible for resale under Rule 144A of the Securities Act of 1933.
These securities represent 16.76% 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.
At June 30, 1999, the Fund had a total capital loss carryover of $4,731,678
which is available to offset future net realized gains on securities
transactions to the extent provided for in the Internal Revenue Code. The
capital loss carryover will expire in 2007.
The Fund's realized capital losses incurred after October 31, 1998, through
June 30, 1999, which are included in the total above, are deemed to arise on the
first business day of the following year. The Fund incurred and elected to defer
such realized capital losses of approximately $3,741,454.
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.
ORGANIZATION COSTS
Costs incurred by the Fund in connection with its organization totaling
$61,500 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.
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
11
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1999
assets from operations during the reporting period. Actual results could differ
from those estimates.
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 the 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 percent 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 June
30, 1999, these fees amounted to $913,744.
SHAREHOLDER SERVICING AGREEMENT
Conseco Services, LLC, a wholly owned subsidiary of Conseco, acts as the
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 percent
of the Managed Assets. For the period July 31, 1998 (commencement of operations)
through June 30, 1999, these fees amounted to $101,526.
4. ADMINISTRATION AGREEMENT
The Fund contracted for certain administration services with PFPC Inc.
("PFPC"). For its services, PFPC receives an annual fee equal to 0.105 percent
of the first $250 million of average weekly net assets; 0.08 percent of the next
$250 million of average weekly net assets; 0.055 percent of the next $250
million of average weekly net assets; and 0.035 percent of average weekly net
assets in excess of $750 million. For the period July 31, 1998 (commencement of
operations) through June 30, 1999, these fees amounted to $88,708.
5. PORTFOLIO ACTIVITY
Purchases and sales of securities other than short-term obligations
aggregated $252,314,133 and $128,995,469, respectively, for the period July 31,
1998 (commencement of operations) through June 30, 1999.
6. INDEBTEDNESS
The Fund expects to utilize financial leverage through borrowings, including
the issuance of debt securities, 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 0.50 percent per annum. The Eurodollar rate is the applicable
London interbank offered rate ("LIBOR") plus a margin of 0.50 percent. Advances
made under the Agreement are due and payable on demand. Interest payments are
made monthly. Borrowings at June 30, 1999, totaled $28 million and the interest
rate on such borrowings was 5.46 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 0.75 percent per annum. At June 30, 1999, there were no
Swing Line loans outstanding.
The Fund is subject to a utilization fee of 0.10 percent 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. The Fund was in compliance with the terms of
the agreement at June 30, 1999.
12
<PAGE>
1999 ANNUAL REPORT
================================================================================
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1999
Average daily balance of loans outstanding
during the period July 31, 1998
(commencement of operations) through
June 30, 1999.............................. $18,271,642
Weighted average interest rate for
the period ................................. 5.82%
Maximum amount of loans outstanding
at any month-end during the period
July 31, 1998 (commencement of
operations) through June 30, 1999.......... $28,000,000
Percentage of total assets ................. 23.96%
Amount of loans outstanding at
June 30, 1999 .............................. $28,000,000
Percentage of total assets at
June 30, 1999 .............................. 23.96%
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>
1999 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>
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of the
Conseco Strategic Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and
changes in net assets, the statement of cash flows, and the financial highlights
present fairly, in all material respects, the financial position of the Conseco
Strategic Income Fund (the "Fund") at June 30, 1999, and the results of its
operations, the changes in its net assets, the statement of cash flows and the
financial highlights for the period July 31, 1998 (commencement of operations)
through June 30, 1999 in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "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 these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at June 30, 1999 by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above.
/s/PriceWaterhouseCoopers LLP
- -------------------------------------------
Indianapolis, Indiana
August 11, 1999
16
<PAGE>
================================================================================
BOARD OF TRUSTEES
WILLIAM P. DAVES, JR.
Chairman of the Board
Consultant to the insurance
and healthcare industries.
Director, Chairman and CEO, FFG Insurance Co.
MAXWELL E. BUBLITZ, CFA
President
President, CEO and Director
Conseco Capital Management, Inc.
Senior VP, Conseco, Inc.
GREGORY J. HAHN, CFA
Senior VP, Portfolio Analytics
Conseco Capital Management, Inc.
DR. R. JAN LECROY
Director, Southwest Securities Group, Inc.
Former President, Dallas Citizens Council
DAVID N. WALTHALL
Principal, Walthall Asset Management
HAROLD W. HARTLEY, CFA
Director, Ennis Business Forms, Inc.
Former Executive VP, Tenneco Financial Services, Inc.
DR. JESS 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 ACCOUNTANTS
PricewaterhouseCoopers LLP
Indianapolis, IN
CUSTODIAN
PFPC Trust Company
Philadelphia, PA
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
Washington, DC
<PAGE>
CONSECO STRATEGIC INCOME FUND
11815 North Pennsylvania Street, Carmel, IN 46032
800-852-4750
