[GRAPHIC LOGO OMITTED]
CONSECO
Step Up(SM)
CONSECO STRATEGIC INCOME FUND
December 31, 1999
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Semi-Annual Report
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CONSECO STRATEGIC INCOME FUND Semi-Annual Report
================================================================================
PORTFOLIO MANAGER'S REVIEW December 31, 1999
In the midst of a tough fixed-income market, we've forged ahead and produced
a respectable SEC 30-day yield of 9.66% (as Dec. 31, 1999).
This result met the dividend objective while outperforming the Lehman High
Yield Composite Index yield of 9.40%.
Although a short-lived upward surge in the high-yield market occurred during
the first quarter, the 1999 fixed-income market proved to be full of
interest-rate nervousness and one of the toughest in history. Much of this
bear-market mentality was caused by the Fed's economic policy decisions. After
easing interest rates 100 basis points in 1998 - a policy that tends to increase
bond prices - the Fed reversed course during 1999 with 75 basis points of
tightening, contributing to a broad retreat from bonds and a flight into
equities.
Compounding the Fed tightening was the global "bounce-back" from the 1998
financial crisis in Asia, Russia and Brazil. This global upturn encouraged
investors -- seeking higher returns from overseas opportunities -- to pull
assets out of the domestic bond markets.
Consequently, the high-yield market was relatively inactive, as both new
issues and cash flows into high-yield products sharply decreased. Net cash
flows, a measure of investor demand, decreased as investors adopted a "wait and
see" attitude toward the high-yield market. In response, new issues slowed due
to the lack of demand making it difficult to attract investors.
Even though many issuers' fundamentals 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.
The fund navigates these waters with great confidence that stems from our
disciplined and proven investment approach which always remains deeply rooted in
selecting undervalued securities capable of providing a high level of income
without assuming significant levels of risk.
Our proprietary, bottom-up, investigative research is generated by more than
30 analysts. Their efforts enable us to identify high-quality companies and
securities available at attractive prices.
This focused approach to investing has proven to be on-target, effective and
integral to the fund's performance since inception. I'm also pleased to report
to you that the investment management team delivered on its income objective
without taking a more aggressive - and riskier - posture.
The fund's performance also has relied upon prudent management of its
leverage capabilities. At the end of the year, the fund was about 24.2%
leveraged as a percentage of total assets, which is below our target of 25% -
well below our limit of 33% of total assets.
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
an important factor in our total- return philosophy. We're confident the
high-yield market prices should rebound and the NAV has the potential to return
to more reasonable levels.
Moving into the new millennium, we expect the economy to continue to grow at
a healthy rate and we'll closely follow bond issues in the media, healthcare,
telecommunications and retail sectors. We further expect the Fed will maintain a
foot on the inflation brake through small incremental interest rate adjustments,
and there should be some attractive opportunities for high-yield investors.
The management team is well prepared to purchase these opportunities at
attractive prices and the portfolio is well-positioned to continue to produce an
above-average yield.
/s/ PETER C. ANDERSEN
- ---------------------------------
Peter C. Andersen
Vice President, Portfolio Manager
Conseco Capital Management, Inc.
1
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
CORPORATE BONDS
(111.89% OF NET ASSETS) (A)
AMUSEMENT AND RECREATION
SERVICES (0.49%)
500,000 Trump Atlantic City Funding, Inc.,
11.250%, due 05/01/2006 ....... $ 411,875
-------------
APPAREL AND OTHER FINISHED
PRODUCTS (3.34%)
3,000,000 Kasper A.S.L., Ltd.,
12.750%, due 03/31/2004 ....... 2,823,750
-------------
AUTO REPAIR & PARKING (2.12%)
1,700,000 Avis Rent A Car, Inc.,
11.000%, due 05/01/2009 ....... 1,797,750
-------------
BUILDING CONSTRUCTION GENERAL -
CONTRACTOR, OPERATION BUILDER (1.06%)
1,000,000 US Home Corp.,
8.875%, due 02/15/2009 ........ 900,000
-------------
BUSINESS SERVICES (12.33%)
1,075,000 Advanstar Communications, Inc.,
9.250%, due 05/01/2008 ........ 1,007,813
6,606,000 Pinnacle Holdings, Inc.,
(STEP) (c) 0.000%/10.000%,
due 03/15/2008 ................ 4,326,930
3,500,000 PSINET, Inc.,
10.500%, due 12/01/2006,
(b) Cost - $3,500,000
Acquired - 11/24/1999 ......... 3,552,500
1,500,000 PSINET, Inc.,
11.000%, due 08/01/2009 ....... 1,552,500
-------------
10,439,743
-------------
CABLE AND OTHER PAY TELEVISION
STATIONS (8.70%)
700,000 Classic Cable, Inc.,
Series B, 9.375%,
due 08/01/2009 ................ 693,000
2,000,000 Classic Communications, Inc.,
(STEP) (c) 0.000%/13.250%,
due 08/01/2009 ................ 1,390,000
3,000,000 Coaxial Communications of
Central Ohio, Inc., 10.000%,
due 08/15/2006 ................ 2,955,000
2,170,000 CSC Holdings, Inc.,
9.875%, due 02/15/2013 ........ 2,278,500
50,000 Northland Cable Television, Inc.,
10.250%, due 11/15/2007 ....... 50,375
-------------
7,366,875
-------------
CHEMICALS AND ALLIED PRODUCTS (0.76%)
395,000 Agricultural Minerals &
Chemicals, Inc., 10.750%,
due 09/30/2003 ................ 268,600
1,000,000 Styling Technology Corp.,
10.875%, due 07/01/2008 ....... 370,000
-------------
638,600
-------------
COMMUNICATION BY PHONE, TELEVISION,
RADIO, CABLE (9.59%)
1,000,000 Arch Escrow Corp.,
13.750%, due 04/15/2008 ....... 780,000
2,250,000 Crown Castle
International Corp., (STEP)(c)
0.000%/10.375%,
due 05/15/2011 ................ 1,411,875
500,000 Globenet Communication
Group, Ltd., 13.000%,
due 07/15/2007,
(b) Cost - $500,000
Acquired - 07/09/1999 ......... 511,250
3,100,000 Level 3 Communications, Inc.,
9.125%, due 05/01/2008 ........ 2,929,500
3,300,000 Park 'N View, Inc., Series B,
13.000%, due 05/15/2008 ....... 2,483,250
-------------
8,115,875
-------------
CONSTRUCTION - SPECIAL TRADE (1.61%)
1,500,000 Brand Scaffold Services, Inc.,
10.250%, due 02/15/2008 ....... 1,361,250
-------------
DEPOSITORY INSTITUTIONS (2.21%)
500,000 BF Saul Real Estate Investment
Trust, Series B, 9.750%,
due 04/01/2008 ................ 473,125
1,370,000 Sovereign Bancorp,
10.500%, due 11/15/2006 ....... 1,393,975
-------------
1,867,100
-------------
DURABLE GOODS - WHOLESALE (0.39%)
1,000,000 AAI Fostergrant, Inc., 10.750%,
due 07/15/2006 ................ 330,000
-------------
EATING AND DRINKING PLACES (2.09%)
750,000 Domino's, Inc., 10.375%,
due 01/15/2009. ............... 725,625
1,000,000 Port Royal Holdings, 10.250%,
due 10/01/2007 ................ 1,045,000
-------------
1,770,625
-------------
The accompanying notes are an integral part of these financial statements.
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
ELECTRIC, GAS, WATER, COGENERATION,
SANITARY SERVICES (0.25%)
500,000 GNI Group, Inc., Series B,
10.875%, due 07/15/2005 ....... $ 215,000
-------------
ELECTRICAL WORK (1.23%)
1,000,000 Worldwide Fiber, Inc.,
12.000%, due 08/01/2009,
(b) Cost - $1,007,500
Acquired - 11/04/1999 ......... 1,042,500
-------------
ELECTRICAL, OTHER ELECTRICAL EQUIPMENT,
EXCEPT COMPUTERS (2.81%)
2,000,000 Amkor Technologies, Inc.,
10.500%, due 05/01/2009,
(b) Cost $1,985,000
Acquired - 11/10/1999 ......... 1,985,000
500,000 IPC Information Systems, Inc.,
(STEP) (c) 0.000%/10.875%,
due 05/01/2008 ................ 390,000
-------------
2,375,000
-------------
FOOD AND KINDRED PRODUCTS (2.28%)
1,000,000 National Wine & Spirits, Inc.,
10.125%, due 01/15/2009 ....... 1,010,000
1,000,000 New World Pasta Co.,
9.250%, due 02/15/2009 ........ 922,500
-------------
1,932,500
-------------
HEALTH SERVICES (0.97%)
1,000,000 Medpartners, Inc.,
7.375%, due 10/01/2006 ........ 821,250
-------------
HOTELS, OTHER LODGING PLACES (2.10%)
2,000,000 Signature Resorts, Inc.,
9.750%, due 10/01/2007 ........ 1,780,000
-------------
METAL MINING (2.49%)
2,000,000 Golden Northwest Aluminum, Inc.,
12.000%, due 12/15/2006 ....... 2,105,000
-------------
MISCELLANEOUS MANUFACTURING
INDUSTRIES (1.52%)
1,350,000 True Temper Sports, Inc.,
10.875%, due 12/01/2008 ....... 1,284,187
-------------
NON-DEPOSITORY CREDIT
INSTITUTIONS (1.10%)
1,000,000 Metris Companies, Inc.,
10.125%, due 07/15/2006 ....... 933,750
-------------
OFFICE MACHINES (1.94%)
2,100,000 Dictaphone Corp.,
11.750%, due 08/01/2005 ....... 1,638,000
-------------
OIL AND GAS EXTRACTION (7.07%)
1,000,000 Cliffs Drilling Co.,
10.250%, due 05/15/2003 ....... 1,025,000
1,000,000 Grey Wolf, Inc.,
8.875%, due 07/01/2007 ........ 930,000
1,500,000 Perez Companc,
9.000%, due 05/01/2006,
(b) Cost - $1,365,000
Acquired - 11/16/1999 ......... 1,365,000
500,000 Pride Petroleum Services, Inc.,
9.375%, due 05/01/2007 ........ 501,250
2,000,000 RBF Finance Co.,
11.375%, due 03/15/2009 ....... 2,165,000
-------------
5,986,250
-------------
PAPER AND ALLIED PRODUCTS (2.86%)
1,450,000 Doman Industries, Ltd.,
12.000%, due 07/01/2004 ....... 1,511,625
950,000 Gaylord Container Corp.,
Series B, 9.750%,
due 06/15/2007 ................ 909,625
-------------
2,421,250
-------------
PETROLEUM REFINING AND
RELATED INDUSTRIES (3.24%)
1,325,000 Lyondell Chemical Co.,
9.625%, due 05/01/2007 ........ 1,364,750
1,325,000 Lyondell Chemical Co.,
10.875%, due 05/01/2009 ....... 1,378,000
-------------
2,742,750
-------------
PHONE COMMUNICATIONS EXCEPT
RADIOTELEPHONE (8.93%)
1,500,000 Hermes Europe Railtel BV,
11.500%, due 08/15/2007 ....... 1,548,750
1,000,000 Metromedia Fiber Network, Inc.,
Series B, 10.000%,
due 11/15/2008 ................ 1,027,500
2,500,000 NEXTLINK Communications, Inc.,
10.750%, due 11/15/2008 ....... 2,600,000
800,000 NEXTLINK Communications, Inc.,
10.500%, due 12/01/2009,
(b) Cost - $800,000
Acquired - 11/12/1999 ......... 824,000
The accompanying notes are an integral part of these financial statements.
3
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
PRINCIPAL
AMOUNT SECURITY VALUE
----------- --------- -------
PHONE COMMUNICATIONS EXCEPT
RADIOTELEPHONE (CONTINUED)
1,500,000 Time Warner
Telecommunications, LLC,
9.750%, due 07/15/2008 ........ $ 1,556,250
-------------
7,556,500
-------------
PRIMARY METAL INDUSTRIES (4.47%)
2,000,000 Algoma Steel, Inc.,
12.375%, due 07/15/2005 ....... 1,930,000
1,800,000 NS Group, Inc.,
13.500%, due 07/15/2003 ....... 1,854,000
-------------
3,784,000
-------------
RADIOTELEPHONE COMMUNICATIONS (16.09%)
2,900,000 Arch Communications Group, Inc.,
12.750%, due 07/01/2007 ....... 2,378,000
1,000,000 Granite Broadcasting Corp.,
10.375%, due 05/15/2005 ....... 1,025,000
1,000,000 Granite Broadcasting Corp.,
8.875%, due 05/15/2008 ........ 972,500
1,500,000 ICG Services, Inc., (STEP)(c)
0.000%/10.000%,
due 02/15/2008 ................ 750,000
2,000,000 Microcell Telecommunications,
Inc., Series B, (STEP)(c)
0.000%/14.000%,
due 06/01/2006 ................ 1,775,000
1,000,000 Omnipoint Corp.,
Series A, 11.625%,
due 08/15/2006 ................ 1,067,500
3,000,000 Pagemart Wireless, Inc.,
(STEP) (c) 0.000%/11.250%,
due 02/01/2008 ................ 960,000
2,000,000 Price Communications
Wireless, Inc., 11.750%,
due 07/15/2007 ................ 2,210,000
1,000,000 USA Mobile Communications,
9.500%, due 02/01/2004 ........ 800,000
1,600,000 Williams Communications
Group, Inc., 10.875%,
due 10/01/2009 ................ 1,680,000
-------------
13,618,000
-------------
TELEVISION AND RADIO BROADCAST
STATIONS (3.82%)
2,300,000 Antenna TV SA,
9.000%, due 08/01/2007 ........ 2,044,125
1,250,000 Benedek Communications Corp.,
(STEP) (c) 0.000%/13.250%,
due 05/15/2006 ................ 1,128,125
100,000 Radio Unica Corp.,
(STEP) (c) 0.000%/11.750%,
due 08/01/2006 ................ 62,000
--------------
3,234,250
--------------
TRANSPORTATION EQUIPMENT (4.03%)
1,000,000 Amtran, Inc.,
10.500%, due 08/01/2004 ....... 987,500
2,000,000 Amtran, Inc.,
9.625%, due 12/15/2005 ........ 1,930,000
500,000 Kitty Hawk, Inc.,
9.950%, due 11/15/2004 ........ 496,250
--------------
3,413,750
--------------
TOTAL CORPORATE BONDS
(COST $98,932,049) ............ 94,707,380
--------------
TERM LOANS
(6.70% OF NET ASSETS) (A)
HEALTH SERVICES (2.95%)
3,546,482 Integrated Health, 8.823%,
due 09/30/2004 (d) ............ 1,773,241
1,453,518 Integrated Health, 9.073%,
due 12/31/2005 (d) ............ 726,759
--------------
2,500,000
--------------
MOTION PICTURES (1.51%)
364,270 Regal Cinemas, Term B,
8.606%, due 06/15/2006 ........ 342,414
995,824 Regal Cinemas, Term C,
8.856%, due 06/15/2007 ........ 936,074
--------------
1,278,488
--------------
TELEVISION AND RADIO
BROADCAST STATIONS (2.24%)
166,667 Lin Television, Term B,
7.910%, due 03/31/2007 ........ 165,833
1,735,467 Lin Television, Term C,
7.850%, due 03/31/2007 ........ 1,726,790
--------------
1,892,623
--------------
TOTAL TERM LOANS
(COST $5,450,043) ............. 5,671,111
--------------
The accompanying notes are an integral part of these financial statements.
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Semi-Annual Report
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
NUMBER OF
SHARES SECURITY VALUE
----------- --------- -------
COMMON STOCK (0.26% OF NET ASSETS) (a)
CABLE AND OTHER PAY
TELEVISION STATIONS (0.26%)
6,000 Classic Communications, Inc. .... $ 219,375
-------------
TOTAL COMMON STOCK
(COST $0 ) .................... 219,375
-------------
PREFERRED STOCK
(9.46% OF NET ASSETS) (a)
RADIOTELEPHONE COMMUNICATIONS (5.91%)
4,605 Nextel Communications, Inc.,
Series D, PIK (c), 13.000%,
due 11/15/2004 ................ 5,003,333
-------------
TELEVISION AND RADIO
BROADCAST STATIONS (3.55%)
20,000 Adelphia Communications,
Series B, 13.000%. ............ 2,180,000
1,000 Benedek Communications Corp.,
11.500% ....................... 820,000
-------------
3,000,000
-------------
TOTAL PREFERRED STOCK
(COST $8,313,994) ............. 8,003,333
-------------
WARRANTS (0.02% OF NET ASSETS) (a)
COMMUNICATION BY PHONE, TELEVISION,
RADIO, CABLE (0.02%)
3,300 Park 'N View, Inc.,
expire 05/15/2008 ............. 16,500
-------------
TEXTILE MILL PRODUCTS (0.00%)
54,117 Tultex Corp.,
expire 04/15/2007 ............ 54
27,058 Tultex Corp.,
expire 04/15/2007 ............. 27
-------------
81
-------------
TOTAL WARRANTS
(COST $0) ..................... 16,581
-------------
PRINCIPAL
AMOUNT
-----------
SHORT - TERM INVESTMENTS
(5.16% OF NET ASSETS)
4,367,261 Temporary Investment Fund,
Inc. - Temp Cash Portfolio .... 4,367,261
-------------
NUMBER OF
SHARES
-----------
TOTAL SHORT - TERM
INVESTMENTS
(COST $4,367,261) .......... 4,367,261
----------------
TOTAL INVESTMENTS
IN SECURITIES
(133.49% OF NET ASSETS)
(COST $117,063,347) (e) .... 112,985,041
----------------
LIABILITIES IN EXCESS OF
OTHER ASSETS
(33.49% OF NET ASSETS) ..... (28,343,481)
----------------
TOTAL NET ASSETS (100%). ..... $ 84,641,560
================
- ----------
(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) STEP - Bonds where the coupon increases or steps up at a predetermined
rate. PIK - Payment in kind.
(d) Non income producing.
(e) Aggregate cost for Federal income tax purposes is $117,128,347.
The aggregate gross unrealized appreciation (depreciation) for all
securities is as follows:
Excess of market value over tax cost $ 1,927,820
Excess of tax cost over market value (6,071,126)
------------
($4,143,306)
============
The accompanying notes are an integral part of these financial statements.
5
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<TABLE>
<CAPTION>
==========================================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(UNAUDITED)
==========================================================================================================
ASSETS:
<S> <C> <C>
Investments, at value (Cost: $117,063,347) ........................................... $ 112,985,041
Interest and dividends receivable .................................................... 2,843,516
- ----------------------------------------------------------------------------------------------------------
Total Assets ..................................................................... 115,828,557
==========================================================================================================
LIABILITIES AND NET ASSETS:
Payable to Conseco, Inc. and subsidiaries ............................................ 95,220
Accrued expenses ..................................................................... 49,719
Distribution payable ................................................................. 681,237
Interest payable ..................................................................... 160,821
Payable for securities purchased ..................................................... 2,200,000
Line of credit payable ............................................................... 28,000,000
- ----------------------------------------------------------------------------------------------------------
Total liabilities ................................................................ 31,186,997
- ----------------------------------------------------------------------------------------------------------
Net Assets ....................................................................... $ 84,641,560
==========================================================================================================
Net assets consist of:
Capital stock, $0.001 par value (unlimited shares of beneficial interest authorized).. $ 6,752
Paid-in capital ...................................................................... 100,407,629
Distributions in excess of net investment income ..................................... (1,215)
Accumulated net realized loss on investments ......................................... (11,693,300)
Net unrealized depreciation on investments ........................................... (4,078,306)
- ----------------------------------------------------------------------------------------------------------
Net Assets ....................................................................... $ 84,641,560
==========================================================================================================
Shares outstanding ................................................................... 6,751,603
Net asset value per share ............................................................ $ 12.54
==========================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
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Semi-Annual Report
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CONSECO STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
================================================================================
Investment income:
Interest ................................................. $ 6,003,276
Dividends ................................................ 317,500
- --------------------------------------------------------------------------------
Total investment income ................................ 6,320,776
- --------------------------------------------------------------------------------
Expenses:
Investment advisory fees ................................. 512,457
Shareholders service fees ................................ 56,940
Administration fees ...................................... 45,621
Transfer agent fees ...................................... 23,075
Trustees' fees ........................................... 22,294
Reports - printing ....................................... 11,571
Custodian fees ........................................... 8,920
Registration and filing fees ............................. 8,177
Audit fees ............................................... 8,171
Legal fees ............................................... 4,417
Other .................................................... 3,930
- --------------------------------------------------------------------------------
Total expenses before interest expense ................. 705,573
================================================================================
Interest expense ......................................... 858,192
- --------------------------------------------------------------------------------
Total expenses ......................................... 1,563,765
- --------------------------------------------------------------------------------
Net investment income .................................. 4,757,011
- --------------------------------------------------------------------------------
Net realized and unrealized gains (losses) on investments:
Net realized losses on sales of investments ............ (6,845,014)
Net change in unrealized appreciation on investments ... 3,452,995
- --------------------------------------------------------------------------------
Net realized losses and unrealized depreciation on investments.. (3,392,019)
- --------------------------------------------------------------------------------
Net increase in net assets from operations ..................... $ 1,364,992
================================================================================
The accompanying notes are an integral part of these financial statements.
7
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<TABLE>
<CAPTION>
===============================================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
JULY 31, 1998
FOR THE SIX (COMMENCEMENT
MONTHS ENDED OF OPERATIONS)
DECEMBER 31, 1999 THROUGH
(UNAUDITED) JUNE 30, 1999
===============================================================================================================
<S> <C> <C>
Operations:
Net investment income ............................................... $ 4,757,011 $ 8,678,658
Net realized losses on sales of investments ......................... (6,845,014) (4,848,286)
Net change in unrealized appreciation (depreciation) of investments.. 3,452,995 (7,531,301)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations ............. 1,364,992 (3,700,929)
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
Dividends from net investment income ................................ (4,757,076) (8,679,808)
- ---------------------------------------------------------------------------------------------------------------
Net decrease in net assets from distributions ..................... (4,757,076) (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 $2,677 and $8,175, respectively, paid to Conseco, Inc.). 208,609 387,351
Offering costs charged to paid-in capital ........................... -- (781,584)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets from capital share transactions ........ 208,609 100,105,767
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ........................... (3,183,475) 87,725,030
- ---------------------------------------------------------------------------------------------------------------
Net assets, beginning of period ........................................... 87,825,035 100,005
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period ................................................. $ 84,641,560 $ 87,825,035
===============================================================================================================
Share data:
Shares sold ......................................................... -- 6,700,000
Shares issued from reinvestment of distributions .................... 16,233 28,703
- ---------------------------------------------------------------------------------------------------------------
Net increase in shares ............................................ 16,233 6,728,703
===============================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
8
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Semi-Annual Report
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CONSECO STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
FOR THE PERIOD
JULY 31, 1998
FOR THE SIX (COMMENCEMENT
MONTHS ENDED OF OPERATIONS)
DECEMBER 31, 1999 THROUGH
(UNAUDITED) JUNE 30, 1999(a)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value per share, beginning of period ................. $ 13.04 $ 14.88
Income from investment operations (b):
Net investment income .................................... 0.70 1.29
Net realized losses and change in
unrealized depreciation on investments ................. (0.50) (1.84)
- ------------------------------------------------------------------------------------------------
Total from investment operations ..................... 0.20 (0.55)
- ------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ..................... (0.70) (1.29)
- ------------------------------------------------------------------------------------------------
Total distributions .................................. (0.70) (1.29)
- ------------------------------------------------------------------------------------------------
Net asset value per share, end of period ....................... $ 12.54 $ 13.04
================================================================================================
Per share market value, end of period .......................... $ 10.1875 $ 12.9375
================================================================================================
Total return (c)(d) ............................................ (16.39)% (5.06)%
================================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands), end of period ......... $ 84,642 $ 87,825
Ratio of expenses to average net assets (e) .............. 3.65% 2.74%
Ratio of operating expenses to average net assets (e)(f).. 1.65% 1.59%
Ratio of net investment income to average net assets (e).. 11.10% 10.24%
Portfolio turnover (d) ................................... 69.75% 129.87%
</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 return is calculated assuming a purchase of common stock at the
current market price on the first day and a sale at the current market
price on the last day of each period reported except for the period ended
June 30, 1999, total return is based on a beginning of period price of
$14.88 (initial offering price of $15.00 less offering costs of $0.12 per
share). 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) Excluding interest expense.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE PERIOD
JULY 31, 1998
FOR THE (COMMENCEMENT
SIX MONTHS ENDED OF OPERATIONS)
DECEMBER 31, 1999 THROUGH
(UNAUDITED) JUNE 30, 1999
=======================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income ............................................................. $ 5,161,877 $ 6,874,212
Interest expense paid ......................................................... (782,304) (891,248)
Operating expenses paid ....................................................... (719,417) (1,192,878)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ................................... 3,660,156 4,790,086
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ............................................ 78,416,328 127,249,381
Purchases of investments ...................................................... (73,210,467) (252,314,133)
Net increase in short-term investments ........................................ (4,236,343) (13,743)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities ............................ 969,518 (125,078,495)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of shares .............................................. -- 100,500,000
Cash distributions paid (net of reinvestment of
$208,609 and $387,351, respectively) ........................................ (4,629,674) (7,530,012)
Offering costs paid ........................................................... -- (781,584)
Net increase in loans outstanding ............................................. -- 28,000,000
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities ............................ (4,629,674) 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 PROVIDED BY OPERATING ACTIVITIES:
Net investment income ......................................................... $ 4,757,011 $ 8,678,658
Net (increase) in interest and dividends receivable ........................... (377,030) (2,466,486)
Net (increase) decrease in other assets ....................................... 8,177 (8,177)
Net increase (decrease) in payable to Conseco, Inc. and subsidiaries .......... (604) 95,824
Net increase (decrease) in accrued expenses ................................... (21,417) 71,136
Net increase in interest payable .............................................. 75,888 84,933
Accretion and amortization of discounts and premiums .......................... (781,869) (1,665,802)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ................................... $ 3,660,156 $ 4,790,086
=======================================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
10
<PAGE>
Semi-Annual Report
================================================================================
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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, 1999, Conseco owned
7,730 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 $9,157,500 and a market value of $9,280,250, all of
which are eligible for resale under Rule 144A of the Securities Act of 1933.
These securities represent 8.21% 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 by third party pricing services. 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 the 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 Trustees
meeting attended. In addition, the Fund reimburses all trustees 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.
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
11
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
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"). The total fees incurred
for such services for the six months ended December 31, 1999, were $512,457.
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. The total fees incurred for such services for the six
months ended December 31, 1999, were $56,940.
4. ADMINISTRATION AGREEMENT
The Fund contracted for certain administration services with PFPC Inc.
("PFPC"). For its services, PFPC receives a monthly fee equal to an annual rate
of 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. The total fees incurred for such
services for the six months ended December 31, 1999, were $45,621.
5. PORTFOLIO ACTIVITY
Purchases and sales of securities other than short-term obligations
aggregated $75,410,467 and $76,670,240, respectively, for the six months ended
December 31, 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 Bank One Corp. 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 December 31, 1999, totaled $28 million and the
interest rate on such borrowings was 6.67 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 December 31, 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 December 31, 1999.
Average daily balance of loans outstanding
during the six months
ended December 31, 1999...................... $28,000,000
Weighted average interest rate for
the period .................................. 6.10%
Maximum amount of loans outstanding
at any month-end during the six months
ended December 31, 1999...................... $28,000,000
Percentage of total assets ..................... 24.80%
Amount of loans outstanding at
December 31, 1999 ........................... $28,000,000
Percentage of total assets at
December 31, 1999 ........................... 24.17%
7. SUBSEQUENT EVENT
Integrated Health filed Chapter 11 bankruptcy on February 3, 2000.
12
<PAGE>
Semi-Annual Report
================================================================================
AUTOMATIC DIVIDEND REINVEST PLAN
Pursuant to the Fund's Automatic Dividend Reinvest 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 Agents 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
13
<PAGE>
================================================================================
AUTOMATIC DIVIDEND REINVEST PLAN
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.
14
<PAGE>
Semi-Annual Report
================================================================================
CONSECO STRATEGIC INCOME FUND
ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 14, 1999
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS:
An annual shareholders' meeting was held on October 14, 1999 for Conseco
Strategic Income Fund. Shareholders were asked to vote on two separate issues:
election of members to the Board of Trustees and ratification of
PricewaterhouseCoopers LLP as independent auditors.
PROPOSAL 1 - Election of Trustees
CLASS I - Term Expires 2000:
FOR WITHHELD
Maxwell E. Bublitz ........................ 5,876,835 88,629
William P. Daves, Jr....................... 5,875,835 89,629
CLASS II - Term Expires 2001:
Gregory J. Hahn ........................... 5,877,835 87,629
Dr. Jess H. Parrish ....................... 5,875,200 90,264
David N. Walthall.......................... 5,877,835 87,629
CLASS III - Term Expires 2002:
Dr. R. Jan LeCroy ......................... 5,877,235 88,229
Harold W. Hartley.......................... 5,876,835 88,629
PROPOSAL 2 - Ratification of the selection of PricewaterhouseCoopers LLP as
independent auditors for the fund. This item was approved.
FOR AGAINST ABSTAIN
5,891,426 20,623 53,414
(Fractional shares not shown.)
15
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<PAGE>
Annual Report
================================================================================
BOARD OF TRUSTEES
WILLIAM P. DAVES, JR.
Chairman of the Board
Insurance and healthcare industries
consultant
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 ADVISER
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
