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[LOGO OMITTED]
CONSECO(R)
Step up.(SM)
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CONSECO STRATEGIC INCOME FUND
June 30, 2000
-------------
Annual Report
-------------
<PAGE>
PORTFOLIO MANAGERS' REVIEW Annual Shareholder Report
================================================================================
Portfolio Managers' Review June 30, 2000
Over the last twelve months, the high yield market has experienced one of its
most difficult periods in its history. Much of this bear-market mentality was
caused by the Fed's ongoing economic policy decisions. After easing interest
rates 75 basis points in 1998 - a policy that tends to increase bond prices -
the Fed reversed course during 1999 and into the first half of 2000 with 175
basis points of tightening, contributing to a broad retreat from bonds and a
flight into equities.
Compounding the Fed tightening has been the investing public's continued
preference for equities at the expense of fixed income investments. Net cash
flows, a measure of investor demand, decreased as investors adopted a "wait and
see" attitude toward the high-yield market.
Consequently, the high-yield market experienced technical selling pressure.
One offset to the lack of high yield demand has been the decrease in supply. New
issuance is down over 50% in 2000 versus the same period in 1999.
The Fund continues to navigate these waters with 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 a talented
group of credit analysts. Their extraordinary 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. The investment management
team continues to focus on delivering its investment objectives 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 23% 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 management philosophy. Despite the difficult market
environment of the past twelve months, we remain optimistic about the future.
Looking forward to the next year, we believe the high yield market is poised
to stabilize and improve. The Fed appears to be near the end of its tightening
bias and the economy remains on firm ground. Although defaults are running at
levels somewhat above historical levels, yields more than compensate for the
current level of defaults.
We will continue to rely on our bottom-up research and credit analysis to
capitalize on undervalued opportunities in the market.
Robert L. Cook, CFA
Vice President
Portfolio Manager
Conseco Capital Management, Inc.
Eric D. Todd, CFA
Vice President
Portfolio Manager
Conseco Capital Management, Inc.
1
<PAGE>
================================================================================
CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2000
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE
---------------- ----------
<S> <C> <C>
CORPORATE BONDS (108.3% OF NET ASSETS) (a)
AMUSEMENT AND RECREATION SERVICES (3.3%)
1,300,000 Mirage Resorts, Inc., 6.750%, due 02/01/2008 ....................................................... $1,149,167
3,300,000 Park 'N View, Inc., Series B, 13.000%, due 05/15/2008 .............................................. 1,336,500
----------
2,485,667
----------
APPAREL AND OTHER FINISHED PRODUCTS (2.6%)
3,000,000 Kasper A.S.L., Ltd., 13.000%, due 03/31/2004 ....................................................... 1,935,000
----------
BUSINESS SERVICES (1.3%)
1,000,000 Exodus Communications, Inc., 11.625%, due 07/15/2010, (b) Cost--$1,000,000; Acquired--06/28/2000 ... 1,005,000
----------
CABLE AND OTHER PAY TELEVISION STATIONS (16.4%)
1,300,000 Cable Satisfaction International, Inc., 12.750%, due 03/01/2010 .................................... 1,270,750
1,000,000 Charter Communications Holdings LLC, 8.625%, due 04/01/2009 ........................................ 883,750
700,000 Classic Cable, Inc., Series B, 9.375%, due 08/01/2009 .............................................. 614,250
1,700,000 Classic Cable, Inc., 10.500%, due 03/01/2010 ....................................................... 1,576,750
3,000,000 Coaxial Communications of Central Ohio, Inc., 10.000%, due 08/15/2006 .............................. 2,857,500
4,170,000 CSC Holdings, Inc., 9.875%, due 02/15/2013 ......................................................... 4,295,100
1,050,000 Northland Cable Television, Inc., 10.250%, due 11/15/2007 .......................................... 876,750
----------
12,374,850
----------
CHEMICALS AND ALLIED PRODUCTS (3.5%)
395,000 Agricultural Minerals & Chemicals, Inc., 10.750%, due 09/30/2003 ................................... 237,987
1,000,000 Lyondell Chemical Co., Series A, 9.625%, due 05/01/2007 ............................................ 987,500
1,325,000 Lyondell Chemical Co., 10.875%, due 05/01/2009 ..................................................... 1,321,688
1,000,000 Styling Technology Corp., 10.875%, due 07/01/2008 (d) .............................................. 105,000
----------
2,652,175
----------
COMMUNICATIONS BY PHONE, TELEVISION, RADIO, CABLE (7.0%)
1,250,000 Benedek Communications Corp., STEP (c) 0.000%/13.250%, due 05/15/2006 .............................. 1,038,672
2,000,000 Clearnet Communications, Inc., STEP (c) 0.000%/14.750%, due 12/15/2005 ............................. 2,075,000
3,450,000 Crown Castle International Corp., STEP (c) 0.000%/10.375%, due 05/15/2011 .......................... 2,126,063
----------
5,239,735
----------
DEPOSITORY INSTITUTIONS (1.8%)
1,370,000 Sovereign Bancorp, Inc., 10.500%, due 11/15/2006 ................................................... 1,359,725
----------
DURABLE GOODS--WHOLESALE (0.4%)
1,000,000 AAI Fostergrant, Inc., 10.750%, due 07/15/2006 ..................................................... 285,000
----------
EATING AND DRINKING PLACES (2.1%)
750,000 Domino's, Inc., Series B, 10.375%, due 01/15/2009 .................................................. 699,375
1,000,000 Krystal Co., 10.250%, due 10/01/2007 ............................................................... 890,000
----------
1,589,375
----------
ELECTRIC, GAS, WATER, COGENERATION, SANITARY SERVICES (2.8%)
500,000 GNI Group, Inc., Series B, 10.875%, due 07/15/2005 (d) ............................................. 62,500
2,000,000 PSEG Energy Holdings, 9.125%, due 02/10/2004, (b) Cost--$1,996,720; Acquired--02/03/2000 ........... 2,024,816
----------
2,087,316
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
2000 Annual Report
================================================================================
CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2000
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE
---------------- ----------
<S> <C> <C>
ELECTRICAL, OTHER ELECTRICAL EQUIPMENT, EXCEPT COMPUTERS (2.7%)
2,000,000 Amkor Technologies, Inc., 10.500%, due 05/01/2009 .................................................. $2,012,500
----------
HEALTH SERVICES (1.1%)
1,000,000 Medpartners, Inc., 7.375%, due 10/01/2006 .......................................................... 840,000
----------
HOTELS, OTHER LODGING PLACES (0.1%)
2,000,000 Signature Resorts, Inc., 9.750%, due 10/01/2007 (d) (g) ............................................ 90,000
----------
METAL MINING (3.3%)
2,500,000 Golden Northwest Aluminum, Inc., 12.000%, due 12/15/2006 ........................................... 2,512,500
----------
MISCELLANEOUS MANUFACTURING INDUSTRIES (1.7%)
1,350,000 True Temper Sports, Inc., Series B, 10.875%, due 12/01/2008 ........................................ 1,290,938
----------
NON-DEPOSITORY CREDIT INSTITUTIONS (1.3%)
1,000,000 Metris Companies, Inc., 10.125%, due 07/15/2006 .................................................... 955,000
----------
OFFICE MACHINES (2.8%)
2,100,000 Dictaphone Corp., 11.750%, due 08/01/2005 .......................................................... 2,142,000
----------
OIL AND GAS EXTRACTION (11.4%)
1,000,000 Cliffs Drilling Co., Series B, 10.250%, due 05/15/2003 ............................................. 1,007,500
1,000,000 Grey Wolf, Inc., 8.875%, due 07/01/2007 ............................................................ 955,000
1,500,000 Perez Companc SA, 9.000%, due 05/01/2006, (b) Cost--$1,365,000; Acquired--11/16/1999 ............... 1,323,750
2,000,000 Pride Petroleum Services, Inc., 9.375%, due 05/01/2007 ............................................. 2,005,000
1,000,000 RBF Finance Co., 11.000%, due 03/15/2006 ........................................................... 1,076,250
2,000,000 RBF Finance Co., 11.375%, due 03/15/2009 ........................................................... 2,180,000
----------
8,547,500
----------
PAPER AND ALLIED PRODUCTS (2.3%)
1,450,000 Doman Industries, Ltd., 12.000%, due 07/01/2004 .................................................... 1,457,250
300,000 Gaylord Container Corp., Series B, 9.750%, due 06/15/2007 .......................................... 238,500
----------
1,695,750
----------
PHONE COMMUNICATIONS, EXCEPT RADIOTELEPHONE (16.4%)
1,500,000 Hermes Europe Railtel BV, 11.500%, due 08/15/2007 .................................................. 1,290,000
1,500,000 ICG Holding, Inc., STEP (c) 0.000%/13.500%, due 09/15/2005 ......................................... 1,458,750
3,635,000 ICG Holding, Inc., STEP (c) 0.000%/12.500% , due 05/01/2006 ........................................ 3,026,137
2,500,000 NEXTLINK Communications, Inc., 10.750%, due 11/15/2008 ............................................. 2,475,000
800,000 NEXTLINK Communications, Inc., 10.500%, due 12/01/2009, (b) Cost--$800,00; Acquired--11/12/1999 .... 784,000
1,500,000 Time Warner Telecom, LLC, 9.750%, due 07/15/2008 ................................................... 1,458,750
2,000,000 Winstar, 12.750%, due 04/15/2010, (b) Cost--$1,937,500; Acquired--03/29/2000 ....................... 1,875,000
----------
12,367,637
----------
PRIMARY METAL INDUSTRIES (2.5%)
1,800,000 NS Group, Inc., 13.500%, due 07/15/2003 ............................................................ 1,845,000
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
================================================================================
CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2000
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE
---------------- ----------
<S> <C> <C>
RADIOTELEPHONE COMMUNICATIONS (10.3%)
1,000,000 Arch Communications, Inc., 13.750%, due 04/15/2008 ................................................. $ 810,000
2,900,000 Arch Communications, Inc., 12.750%, due 07/01/2007 ................................................. 2,233,000
1,500,000 Focal Communications, Corp., Series B, STEP (c) 0.000%/12.125%, due 02/15/2008 ..................... 1,020,000
2,000,000 Microcell Telecommunications, Inc., Series B, STEP (c) 0.000%/14.000%, due 06/01/2006 .............. 1,855,000
1,000,000 Omnipoint Corp., Series A, 11.625%, due 08/15/2006 ................................................. 1,085,000
1,000,000 USA Mobile Communications, Inc., 9.500%, due 02/01/2004 ............................................ 765,000
----------
7,768,000
----------
REAL ESTATE OPERATORS, AGENTS, MANAGERS (4.7%)
5,106,000 Pinnacle Holdings, Inc., STEP (c) 0.000%/10.000%, due 03/15/2008 ................................... 3,548,670
----------
TELEVISION AND RADIO BROADCAST STATIONS (2.9%)
2,300,000 Antenna TV SA, 9.000%, due 08/01/2007 .............................................................. 2,101,625
100,000 Radio Unica Corp., STEP (c) 0.000%/11.750%, due 08/01/2006 ......................................... 65,000
----------
2,166,625
----------
TRANSPORTATION EQUIPMENT (3.6%)
1,000,000 Amtran, Inc., 10.500%, due 08/01/2004 .............................................................. 927,500
2,000,000 Amtran, Inc., 9.625%, due 12/15/2005 ............................................................... 1,755,000
----------
2,682,500
----------
TOTAL CORPORATE BONDS (COST $90,238,812) ........................................................... 81,478,463
----------
TERM LOANS (5.9% OF NET ASSETS) (a)
HEALTH SERVICES (2.0%)
3,546,482 Integrated Health, 0.000%, due 09/30/2004 (d) (g) .................................................. 1,099,409
1,453,518 Integrated Health, 0.000%, due 12/31/2005 (d) (g) .................................................. 450,591
----------
1,550,000
----------
MOTION PICTURES (1.4%)
364,270 Regal Cinemas, Term B, 9.328%, due 06/15/2006 ...................................................... 276,845
985,765 Regal Cinemas, Term C, 9.328%, due 06/15/2007 ...................................................... 749,181
----------
1,026,026
----------
TELEVISION AND RADIO BROADCAST STATIONS (2.5%)
152,849 Lin Television, Term B, 8.540%, due 03/31/2007 ..................................................... 152,276
1,735,467 Lin Television, Term C, 8.880%, due 03/31/2007 ..................................................... 1,728,959
----------
1,881,235
----------
TOTAL TERM LOANS (COST $5,568,538) ................................................................. 4,457,261
----------
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE>
2000 Annual Report
================================================================================
CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2000
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE
---------------- ----------
<S> <C> <C>
COMMON STOCK (1.8% OF NET ASSETS) (a)
CABLE AND OTHER PAY TELEVISION STATIONS (0.1%)
6,000 Classic Communications, Inc. (d) ................................................................... $ 53,625
----------
RADIOTELEPHONE COMMUNICATIONS (1.7%)
97,541 WebLink Wireless, Inc. (d) ......................................................................... 1,292,418
----------
TOTAL COMMON STOCK (COST $2,197,745) ............................................................... 1,346,043
----------
PREFERRED STOCK (11.7% OF NET ASSETS) (a)
COMMUNICATION BY PHONE, TELEVISION, RADIO, CABLE (10.4%)
20,000 Adelphia Communications Corp., Series B, 13.000% ................................................... 2,015,000
1,000 Benedek Communications Corp., PIK (f), 11.500% ..................................................... 552,500
4,908 Nextel Communications, Inc., Series D, PIK (f), 13.000% ............................................ 5,288,370
----------
7,855,870
----------
RADIOTELEPHONE COMMUNICATIONS (1.3%)
1,000 Rural Celluar Corp., Series B, PIK (f), 11.375% .................................................... 942,500
----------
TOTAL PREFERRED STOCK (COST $9,629,524) ............................................................ 8,798,370
----------
WARRANTS (0.1% OF NET ASSETS) (a)
AMUSEMENT AND RECREATION SERVICES (0.0%)
3,300 Park 'N View, Inc., expire 05/15/2008 .............................................................. 3
----------
CABLE AND OTHER PAY TELEVISION STATIONS (0.1%)
1,300 Cable Satisfaction International, Inc., expire 03/01/2005 .......................................... 36,400
----------
TEXTILE MILL PRODUCTS (0.0%)
54,117 Tultex Corp., expire 04/15/2007 .................................................................... 54
27,058 Tultex Corp., expire 04/15/2007 .................................................................... 27
----------
81
----------
TOTAL WARRANTS (COST $30,976) ...................................................................... 36,484
----------
SHORT-TERM INVESTMENTS (2.6% OF NET ASSETS) (a)
COMMERCIAL PAPER (2.6%)
NON-DEPOSITORY CREDIT INSTITUTION (1.3%)
1,000,000 Associates Corp. 6.880%, due 07/03/00 .............................................................. 999,618
----------
SECURITY AND COMMODITY BROKER (1.3%)
1,000,000 Morgan Stanley Group 6.850%, due 07/03/00 .......................................................... 999,620
----------
1,999,238
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
================================================================================
CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2000
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE
---------------- ----------
<S> <C> <C>
UNITED STATES SHORT-TERM OBLIGATIONS (0.0%)
5,663 Temporary Investment Fund, Inc. --
Temp Cash Portfolio .............................................................................. $ 5,663
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $2,004,901) ..................................................... 2,004,901
-----------
TOTAL INVESTMENTS IN SECURITIES (130.4% OF NET ASSETS) (COST $109,670,496) (e) ..................... 98,121,522
-----------
LIABILITIES IN EXCESS OF OTHER ASSETS (30.4% OF NET ASSETS) ........................................ (22,866,952)
-----------
TOTAL NET ASSETS (100.0%) .......................................................................... $75,254,570
===========
---------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
(d) Non income producing.
(e) Aggregate cost for Federal income tax purposes is $109,735,496.
The aggregate gross unrealized appreciation (depreciation) for all
securities is as follows:
Excess of market value over tax cost ..... $ 1,192,741
Excess of tax cost over market value ..... (12,806,715)
-------------
($ 11,613,974)
-------------
(f) PIK -- Payment in kind.
(g) Company in bankruptcy proceedings.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
2000 Annual Report
================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000
================================================================================
Assets:
Investments, at value (cost $109,670,496) ................ $ 98,121,522
Interest receivable ...................................... 2,237,031
Dividends receivable ..................................... 130,000
Other assets ............................................. 8,805
--------------------------------------------------------------------------------
Total assets ......................................... 100,497,358
================================================================================
Liabilities and Net Assets:
Payable to Conseco Inc. and subsidiaries ................. 81,316
Accrued expenses ......................................... 42,045
Distribution payable ..................................... 814,919
Interest payable ......................................... 304,508
Payable for securities purchased ......................... 1,000,000
Line of credit payable ................................... 23,000,000
--------------------------------------------------------------------------------
Total liabilities .................................... 25,242,788
--------------------------------------------------------------------------------
Net assets ........................................... $ 75,254,570
================================================================================
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 ......... (111,529)
Accumulated net realized loss on investments ............. (13,499,308)
Net unrealized depreciation on investments ............... (11,548,974)
--------------------------------------------------------------------------------
Net assets ........................................... $ 75,254,570
================================================================================
Shares outstanding ............................................. 6,751,603
Net asset value per share ...................................... $ 11.15
================================================================================
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
================================================================================
Investment income:
Interest (less provision for uncollectable
accounts of $127,955) .................................. $ 11,801,460
Dividends ................................................ 816,747
--------------------------------------------------------------------------------
Total investment income .............................. 12,618,207
--------------------------------------------------------------------------------
Expenses:
Investment advisory fees ................................. 992,760
Shareholders service fees ................................ 110,307
Administration fees ...................................... 90,375
Trustees' fees ........................................... 43,999
Transfer agent fees ...................................... 40,367
Audit fees ............................................... 20,931
Reports-- printing ....................................... 16,404
Registration and filing fees ............................. 16,218
Custodian fees ........................................... 17,249
Legal fees ............................................... 750
Other .................................................... 7,525
--------------------------------------------------------------------------------
Total expenses before interest expense ............... 1,356,885
--------------------------------------------------------------------------------
Interest expense ......................................... 1,783,853
--------------------------------------------------------------------------------
Total expenses ....................................... 3,140,738
--------------------------------------------------------------------------------
Net investment income ................................ 9,477,469
--------------------------------------------------------------------------------
Net realized and unrealized gains (losses) on investments:
Net realized losses on sales of investments .......... (8,651,022)
Net change in unrealized depreciation of investments . (4,017,673)
--------------------------------------------------------------------------------
Net realized losses and unrealized depreciation
on investments ......................................... (12,668,695)
--------------------------------------------------------------------------------
Net decrease in net assets from operations ..................... $ (3,191,226)
================================================================================
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
2000 Annual Report
================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
JULY 31,
FOR THE 1998(a)
YEAR ENDED THROUGH
JUNE 30, 2000 JUNE 30, 1999
================================================================================
Operations:
Net investment income ...................... $ 9,477,469 $ 8,678,658
Net realized losses on sales of
investments .............................. (8,651,022) (4,848,286)
Net change in unrealized depreciation
of investments ........................... (4,017,673) (7,531,301)
--------------------------------------------------------------------------------
Net decrease from operations ........... (3,191,226) (3,700,929)
--------------------------------------------------------------------------------
Distributions to Shareholders:
Net investment income ...................... (9,587,848) (8,679,808)
--------------------------------------------------------------------------------
Net decrease from distributions ........ (9,587,848) (8,679,808)
--------------------------------------------------------------------------------
Capital Share Transactions:
Shares sold (6,700,000 shares) ............. -- 100,500,000
Reinvestment of distributions
(including $10,876 and $8,175 paid to
Conseco, Inc., respectively) ......... 208,609 387,351
Offering costs charged to paid-in capital .. -- (781,584)
--------------------------------------------------------------------------------
Net increase from capital share
transactions ......................... 208,609 100,105,767
--------------------------------------------------------------------------------
Total increase (decrease) in
net assets ........................... (12,570,465) 87,725,030
--------------------------------------------------------------------------------
Net Assets:
Beginning of period ........................ 87,825,035 100,005
End of period .............................. $75,254,570 $87,825,035
================================================================================
Share data:
Shares sold ................................ -- 6,700,000
Reinvestment of distributions .............. 16,233 28,703
--------------------------------------------------------------------------------
Net increase ........................... 16,233 6,728,703
--------------------------------------------------------------------------------
Shares outstanding:
Beginning of period ...................... 6,735,370 6,667
End of period ........................... 6,751,603 6,735,370
================================================================================
(a) Commencement of operations.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
================================================================================
CONSECO STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
FOR THE PERIOD
FOR THE JULY 31, 1998(g)
YEAR ENDED THROUGH
JUNE 30, 2000 JUNE 30, 1999
================================================================================
Net asset value per share, beginning of period .. $ 13.04 $14.88 (a)
Income from investment operations (b):
Net investment income ..................... 1.40 1.29
Net realized losses and change in
unrealized depreciation on investments .. (1.87) (1.84)
--------------------------------------------------------------------------------
Total from investment operations ...... (0.47) (0.55)
--------------------------------------------------------------------------------
Distributions:
Net investment income ..................... (1.42) (1.29)
--------------------------------------------------------------------------------
Total distributions ................... (1.42) (1.29)
--------------------------------------------------------------------------------
Net asset value per share, end of period ........ $ 11.15 $ 13.04
================================================================================
Per share market value, end of period ........... $10.3125 $12.9375
================================================================================
Total return (c)(d) ............................. (9.44%) (5.06%)
================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands),
end of period ........................... $ 75,255 $ 87,825
Ratio of expenses to average net assets (e) 3.80% 2.74%
Ratio of operating expenses to average
net assets (f) (e) ...................... 1.64% 1.59%
Ratio of net investment income to average
net assets (e) .......................... 11.48% 10.24%
Portfolio turnover (d) .................... 118.92% 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 period 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 for periods of less than one year.
(e) Annualized for periods of less than one year.
(f) Excluding interest expense.
(g) Commencement of operations.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
2000 Annual Report
================================================================================
CONSECO STRATEGIC INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE PERIOD
JULY 31,
FOR THE 1998(a)
YEAR ENDED THROUGH
JUNE 30, 2000 JUNE 30, 1999
================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income ............................ $ 10,589,691 $ 6,874,212
Interest expense paid ........................ (1,564,278) (891,248)
Operating expenses paid ...................... (1,401,114) (1,192,878)
--------------------------------------------------------------------------------
Net cash provided by operating
activities ............................. 7,624,299 4,790,086
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ........... 133,394,451 127,249,381
Purchases of investments ..................... (124,869,906) (252,314,133)
Net increase in short-term investments ....... (1,822,080) (13,743)
--------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities ............................. 6,702,465 (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) .. (9,326,764) (7,530,012)
Offering costs paid .......................... -- (781,584)
Net increase (decrease) in loans outstanding . (5,000,000) 28,000,000
--------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities ............................. (14,326,764) 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 ........................ $ 9,477,469 $ 8,678,658
Net (increase) decrease in interest and
dividends receivable ....................... 99,455 (2,466,486)
Net (increase) in other assets ............... (628) (8,177)
Net increase (decrease) in payable to
Conseco, Inc. and subsidiaries ............. (14,508) 95,824
Net increase (decrease) in accrued expenses .. (29,091) 71,136
Net increase in interest payable ............. 219,575 84,933
Accretion and amortization of discounts
and premiums ............................... (2,127,973) (1,665,802)
--------------------------------------------------------------------------------
Net cash provided by operating
activities ............................. $ 7,624,299 $ 4,790,086
================================================================================
(a) Commencement of operations.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
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 June 30, 2000, Conseco owned
8,271 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 $7,099,220 and a market value of $7,012,566, all of
which are eligible for resale under Rule 144A of the Securities Act of 1933.
These securities represent 7.15% 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 purchased with maturities of sixty days or less are
valued at amortized cost.
Investments held by the Fund may be purchased with accrued interest or the
investment owned by the Fund will accrue interest during the period the
investment is owned by the Fund. If an investment owned by the Fund experiences
a default and has accrued interest from purchase or has recorded accrued
interest during the period it is owned, the Fund's policy is to cease interest
accruals from the time the investments are traded as "flat" in the market. The
Fund will evaluate whether any provision for purchased accrued interest and
previously recorded interest is necessary on an investment by investment basis.
For the year ended June 30, 2000, the Fund provided for $127,955 of accrued
interest.
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, 2000, the Fund had a total capital loss carryover of $6,539,006
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 of $990,224 will expire in 2007 and the remainder of
$5,548,782 in 2008.
The Fund's realized capital losses incurred after October 31, 1999 through
June 30, 2000, 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 $6,895,302.
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 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
12
<PAGE>
2000 Annual Report
================================================================================
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 2000
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 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 year ended June 30,
2000 were $992,760.
SHAREHOLDER SERVICING AGREEMENT
Conseco Services, LLC, a wholly owned subsidiary of Conseco, acts as the
Shareholder Servicing Agent to the Fund under the Shareholder Servicing
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 year ended June 30, 2000 were $110,307.
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, subject to a minimum monthly
charge. The total fees incurred for such services for the year ended June 30,
2000 were $90,375.
5. PORTFOLIO ACTIVITY
Purchases and sales of securities other than short-term obligations
aggregated $125,869,906 and $131,648,363, respectively, for the year ended June
30, 2000.
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. This Agreement is subject to
an annual renewal provision on the anniversary date and such agreement is not
being renewed. The Fund is in the process of establishing a new credit facility.
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 0.55 percent. Advances
made under the Agreement are due and payable on demand. Interest payments are
made monthly. Borrowings at June 30, 2000, totaled $23 million and the interest
rate on such borrowings was 6.86 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, 2000, 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, 2000.
13
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 2000
Average daily balance of loans outstanding
during the year ended June 30, 2000 ........................ $ 27,740,437
Weighted average interest rate
for the year ............................................... 6.43%
Maximum amount of loans outstanding
at any month-end during the year ended
June 30, 2000 .............................................. $ 28,000,000
Percentage of total assets ................................... 26.99%
Amount of loans outstanding at
June 30, 2000 .............................................. $ 23,000,000
Percentage of total assets at
June 30, 2000 .............................................. 22.89%
14
<PAGE>
2000 Annual Report
================================================================================
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 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 the market price (plus commissions) of the Fund's shares is above their
net asset value, participants of the DRIP will
15
<PAGE>
================================================================================
AUTOMATIC DIVIDEND REINVESTMENT PLAN
--(CONTINUED)
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.
MANAGEMENT OF THE FUND
Robert L. Cook, CFA and Eric D. Todd, CFA are the Fund's portfolio managers.
Mr. Cook has been employed at Conseco Capital Management, Inc. ("CCM") since
1994. He joined CCM as a fixed-income analyst in the high yield arena. In
addition to co-managing this fund, he is a vice president and senior
fixed-income securities analyst at CCM and also co-manages more than $150
million in high-yield assets for institutional clients. Mr. Todd has been
employed at CCM since 1991. He joined CCM as a fixed-income analyst. He is a
vice president at CCM and will share the responsibility for managing this fund,
as well as, more than $150 million in high-yield institutional client accounts.
As director of structured products, he also manages over $1.8 billion in private
investment funds, primarily in high yield.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
================================================================================
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
THE CONSECO STRATEGIC INCOME FUND
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of 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, 2000, the results of
its operations for the year then ended, the changes in its net assets for the
year then ended and for the period July 31, 1998 (commencement of operations)
through June 30, 1999 and the financial highlights for the year ended June 30,
2000 and for the period July 31, 1998 (commencement of operations) through June
30, 1999, in conformity with accounting principles generally accepted in the
United States. 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 audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, 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, 2000 by
correspondence with the custodian and pending trades with brokers, provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Indianapolis, Indiana
August 18, 2000
17
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<PAGE>
================================================================================
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
