As filed with the Securities and Exchange Commission on March 2, 1999
Registration Nos. 811-3641/2-80455
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 22 [ X ]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24 [ X ]
(Check appropriate box or boxes)
CONSECO SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
11815 N. Pennsylvania Street, Carmel, Indiana 46032
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (317) 817-6300
William P. Kovacs, Esq.
Conseco Series Trust
11815 N. Pennsylvania Street
Carmel, Indiana 46032
(Name and Address of Agent for Service)
With a copy to:
Donald Smith, Esq.
Kirkpatrick & Lockhart
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
Approximate date of proposed public Offering: Continuous
It is proposed that this filing will become effective (check appropriate space):
______ immediately upon filing pursuant to paragraph (b) of Rule 485
______ on May 1, 1998 pursuant to paragraph (b) of Rule 485
__X___ 60 days after filing pursuant to paragraph (a) (1) of Rule 485
______ on [DATE] pursuant to paragraph (a) (1) of Rule 485
______ 75 days after filing pursuant to paragraph (a) (2) of Rule 485
______ on [DATE] pursuant to paragraph (a) (2) of Rule 485
If appropriate, check the following box:
______ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
CONSECO SERIES TRUST
Equity Portfolio
Balanced Portfolio
Fixed Income Portfolio
Government Securities Portfolio
Money Market Portfolio
Contents of Registration Statement
This Registration Statement consists of the following papers and documents:
|X| Cover Sheet
Contents of Registration Statement:
|X| Part A - Prospectus
|X| Statement of Additional Information
|X| Signature Pages
|X| Exhibits
<PAGE>
CONSECO SERIES TRUST PROSPECTUS
MAY 1, 1999
EQUITY PORTFOLIO
BALANCED PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
FIXED INCOME PORTFOLIO
MONEY MARKET PORTFOLIO
As with any mutual fund, the Securities and Exchange Commission (SEC) has not
approved or disapproved of these securities or determined whether this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
<PAGE>
2
TABLE OF CONTENTS
The Portfolios
Equity Portfolio
Balanced Portfolio
Government Securities Portfolio
Fixed Income Portfolio
Money Market Portfolio
Primary Risk Considerations
Fees and Expenses
Management
Purchase and Redemption of Shares
Dividends, Distributions and Taxes
Financial Highlights
For More Information
<PAGE>
3
(Intro)
THE ADVISER'S INTEGRATED APPROACH TO MONEY MANAGEMENT
We believe that combining the knowledge and experience of both fixed income and
equity analysts leads to better security selection over time.
Whether selecting fixed income or equity securities, our analysts look for
companies with:
o Proven management teams
o Leading edge products
o Dominant market share positions
They then conduct a rigorous financial analysis of these companies, focusing on
such indicators as:
o Cost of capital
o Financial strength
o Spending plans
This analysis is used to select those securities deemed by the Adviser to be
most appropriate for each Fund's investment objective.
Each of the Portfolios may invest in restricted securities, such as private
placements, which are not registered with the Securities Exchange Commission.
Restricted securities are generally illiquid; however, the Adviser focuses on
those that are liquid and may not invest in any restricted security that would
cause more than 15 percent of the Portfolio's total assets to be invested in
illiquid securities. The Portfolios also may invest in securities that qualify
to be sold directly to institutional investors pursuant to Rule 144A under the
Securities Act of 1933.
Because of the Adviser's active management style, our Portfolios generally have
a higher turnover rate than other Portfolios and, therefore, may have higher
taxable distributions and increased trading costs which may impact performance.
There is no assurance that the Portfolios will achieve their investment
objectives. All of the Portfolios have the ability to change their investment
objectives without shareholder approval, although they do not currently intend
to do so. In addition, the value of your investment in any Portfolio will
fluctuate, which means that you may lose money.
(Sidebar)
A WORD ABOUT THE ADVISER
Conseco Capital Management, Inc. (CCM), or the "Adviser," provides investment
advice and management to each Portfolio. CCM manages more than $35.3 billion in
assets for an array of foundations, endowments, corporations, government and
union clients (as of 12/31/98).
Please note: Definitions for bold-faced words within the text can be found
directly following each Portfolio's Primary Risk Considerations.
<PAGE>
4
EQUITY PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide a high total return consistent with preservation
of capital and a prudent level of risk.
ADVISER'S INVESTMENT STRATEGY
The Portfolio will invest primarily in selected equity securities, including
common stocks and other securities having the investment characteristics of
common stocks, such as CONVERTIBLE SECURITIES and WARRANTS.
Normally, the Portfolio will be widely diversified by industry and company, but
will focus on SMALL- AND MID-CAP COMPANIES.
The Adviser looks for securities that will provide the two elements of total
return:
o Price appreciation
o Income from dividends
In selecting equity securities, the Adviser considers the following factors: o
Growth trends of the stock's issuer and the industry it represents o Significant
purchases and sales of the stock by corporate insiders o Recent changes in
earnings per share and their deviations from analysts' expectations
o Relative price-earnings ratios, as compared to industry peers and
earnings growth potential
o The stock's historical price movement
For defensive purposes, the Portfolio may temporarily depart from its investment
objective and invest all or part of the Portfolio's assets in money market
instruments. This could help the Fund avoid losses but may mean lost
opportunities.
PRIMARY RISKS
Market Risk
Liquidity and Valuation Risk
Small Company Risk
See "Primary Risk Considerations" on page 00 for a detailed discussion of the
Portfolio's risks.
<PAGE>
5
(Sidebar definitions)
CONVERTIBLE SECURITIES
Bonds, debentures, notes or preferred stock that are convertible into common
stock. Convertible securities have some unique return characteristics relative
to market fluctuations:
o When equity markets go up, they tend to rise in price
o When equity markets decline, they tend to decline relatively less in
price than stocks
Convertible securities have both an equity and a fixed income component.
Therefore,
o While the equity component is subject to fluctuations in value due to
activities of the issuing companies, and general market and economic
conditions;
o The fixed income component will be impacted by shifting interest rates
and changes in credit quality of the issuers.
WARRANTS
Contracts that allow the bearer to purchase shares for a specified price at a
future date.
SMALL- AND MID-CAP COMPANIES
Generally refers to companies in the earlier period of their growth
expectations, from start-ups to better established firms. While these companies
have potential for attractive long-term returns, their securities may involve
greater risks, and more volatility, than investments in larger companies with a
stronger competitive advantage. The Adviser's extensive research efforts can
play a greater role in selecting securities from this sector than from larger
companies.
HOW HAS THE PORTFOLIO PERFORMED?
The chart and table below give an indication of the Portfolio's risks and
performance. The chart shows you how the Portfolio's performance has varied from
year to year. The table compares the Portfolio's performance over time to that
of a broad measure of market performance. WHEN YOU CONSIDER THIS INFORMATION,
PLEASE REMEMBER THAT THE PORTFOLIO'S PAST PERFORMANCE IS NOT NECESSARILY AN
INDICATION OF HOW IT WILL PERFORM IN THE FUTURE.
YEAR-BY-YEAR TOTAL RETURN (as of 12/31 each year)
(Place Bar Chart Here)
BEST QUARTER: Q[...] [...]%
WORST QUARTER: Q[...] [...]%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
(Place Table Here)
<PAGE>
6
BALANCED PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks a high total investment return, consistent with the
preservation of capital and prudent investment risk.
THE ADVISER'S INVESTMENT STRATEGY
Normally, the Portfolio invests approximately 50-65% of its assets in equity
securities, and the remainder in a combination of fixed income securities, or
cash equivalents.
o
The balance may change:
|X| A much higher percentage of assets may be invested in equity securities
if the Adviser considers conditions in the stock market to be
substantially more favorable than in the bond market.
o Conversely, if the Adviser considers conditions in the bond market to
be substantially more favorable than in the equity market, a much
higher percentage of assets may be invested in fixed income securities.
THE EQUITY PORTION OF THE PORTFOLIO
The Fund may invest in equity securities of domestic and foreign issuers. These
may include common and PREFERRED STOCKS, CONVERTIBLE SECURITIES AND WARRANTS.
The Adviser intends for the equity portion of the Portfolio to be widely
diversified by size of company and industry.
The Adviser looks for securities that will provide the two elements of total
return:
|X| Price appreciation
|X| Income from dividends
In selecting equity securities, the Adviser considers the following factors:
o Growth trends of the stock - and its industry
o Significant purchases or sales of the stock by corporate insiders
o Recent changes in earnings per share and their deviations from
analysts' expectations
o Relative price-earnings ratios, as compared to industry peers and
earnings growth potential
o The stock's price movement
THE FIXED INCOME PORTION OF THE PORTFOLIO
Normally, the Adviser will maintain at least 25% of the value of the portfolio's
assets in a wide range of domestic and foreign debt securities, including
non-U.S. dollar denominated securities. The majority of foreign investments will
be in YANKEE BONDS.
The Adviser anticipates that bonds will be invested primarily in intermediate
and/or long-term domestic debt securities.
The Portfolio may also invest in BELOW INVESTMENT GRADE SECURITIES that are not
believed to involve undue risk to income or principal. In general, however,
these types of securities are issued by companies without long track
<PAGE>
7
records of sales and earnings, or by companies with questionable credit
strength. The lowest rating categories in which the Portfolio will invest are
CCC/Caa.
For defensive purposes, the Portfolio may temporarily depart from its investment
objective and invest without limitation in money market instruments. This could
help the Portfolio avoid losses but may mean lost opportunities.
PRIMARY RISKS
Market risk
Credit risk
Interest rate risk
Foreign risk
Leverage risk
See "Primary Risk Considerations" on page 00 for a detailed discussion of the
Portfolio's risks.
PREFERRED STOCK
Shares of a company that do not ordinarily have voting rights but do have a
stated dividend payment, as opposed to common stocks which ordinarily do have
voting rights but do not have a stated dividend payment.
CONVERTIBLE SECURITIES See Page 00.
WARRANTS See Page 00.
YANKEE BONDS
Dollar-denominated bonds issued in the U.S. by foreign banks and corporations.
BELOW INVESTMENT GRADE SECURITIES
These securities offer higher return potential in exchange for assuming greater
risk. Normally, they are rated BB+ or lower by Standard & Poor's Corporation or
Ba1 or lower by Moody's Investors Services, Inc., or, if unrated deemed by the
Adviser to be of comparable credit.
[Enclose in shaded boxes]
INTEREST RATES AND BOND MATURITIES
Bonds with longer maturities will be more effected by interest rate changes than
intermediate-term bonds. For example, if interest rates go down, the price of
long-term bonds will increase more rapidly than the price of intermediate-term
bonds.
HOW HAS THE PORTFOLIO PERFORMED?
The chart and table below give an indication of the Portfolio's risks and
performance. The chart shows you how the Portfolio's performance has varied from
year to year. The table compares the Portfolio's performance over time to that
of a broad measure of market performance. WHEN YOU CONSIDER THIS INFORMATION,
PLEASE REMEMBER THAT THE PORTFOLIO'S PAST PERFORMANCE IS NOT NECESSARILY AN
INDICATION OF HOW IT WILL PERFORM IN THE FUTURE.
YEAR-BY-YEAR TOTAL RETURN (as of 12/31 each year)
(Place Bar Chart Here)
BEST QUARTER: Q[...] [...]%
<PAGE>
8
WORST QUARTER: Q[...] [...]%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
(Place Table Here)
<PAGE>
9
GOVERNMENT SECURITIES PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks safety of capital, liquidity and current income.
INVESTMENT STRATEGY
The Portfolio will invest primarily in securities issued by the U.S. government
or an agency or instrumentality of the U.S. government. The fund uses
proprietary research to uncover undervalued securities. These securities may be
undervalued on the basis of structure, optionality or issuer.
The Adviser may invest in any or all of the following:
o Treasury bills
o Certificates of indebtedness
o Notes
o Bonds
o Insured Bank deposits
o INVESTMENT GRADE CORPORATE DEBT SECURITIES
o Mortgage-related securities
Mortgage-related securities may include:
o Mortgage-backed securities of the Government National Mortgage
Association (GNMA)
o Mortgage-backed securities of the Federal Home Loan Mortgage
Corporation (FHLMC)
o Mortgage-backed securities of the Federal National Mortgage Association
(FNMA)
o PASS-THROUGH SECURITIES AND PARTICIPATION CERTIFICATES
o COLLATERALIZED MORTGAGE OBLIGATIONS
The Adviser may also purchase mortgage-related securities not issued by the U.S.
government or any agency or instrumentality of the U.S. government.
PRIMARY RISKS
Market Risk
Interest Rate Risk
Restricted Securities Risk
Credit Risk
Prepayment Risk
See "Primary Risk Considerations" on page 00 for a detailed discussion of the
Portfolio's risks.
<PAGE>
10
[sidebar]
INVESTMENT GRADE DEBT SECURITIES
Considered especially creditworthy, these debt securities are rated in either
(i) normally rated AAA to BBB- by Standard and Poor's Corporation or Aaa to Baa3
by Moody's Investors Services, Inc., or (ii) if unrated, are deemed by the
Adviser to be of comparable credit quality.
PASS-THROUGH SECURITIES AND PARTICIPATION CERTIFICATES
Both represent pools of mortgages that are assembled, with interests sold in
each pool. Payments of principal (including prepayments) and interest by
mortgagors are "passed through" to the holders of the interests in each
portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS
These are similar to conventional bonds in that they have fixed maturities and
interest rates but are secured by groups of individual mortgages.
HOW HAS THE PORTFOLIO PERFORMED?
The chart and table below give an indication of the Portfolio's risks and
performance. The chart shows you how the Portfolio's performance has varied from
year to year. The table compares the Portfolio's performance over time to that
of a broad measure of market performance. WHEN YOU CONSIDER THIS INFORMATION,
PLEASE REMEMBER THAT THE PORTFOLIO'S PAST PERFORMANCE IS NOT NECESSARILY AN
INDICATION OF HOW IT WILL PERFORM IN THE FUTURE.
YEAR-BY-YEAR TOTAL RETURN (as of 12/31 each year)
(Place Bar Chart Here)
BEST QUARTER: Q[...] [...]%
WORST QUARTER: Q[...] [...]%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
(Place Table Here)
<PAGE>
11
FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks the highest level of income consistent with preservation of
capital.
INVESTMENT STRATEGY
The Portfolio invests primarily in INVESTMENT GRADE DEBT SECURITIES.
The Adviser actively manages the portfolio to generate income, reduce risk, and
preserve or enhance total return in light of current market conditions and
trends.
Adhering to a strict buy/sell discipline, the Adviser seeks to enhance total
return by:
o Purchasing securities it believes are undervalued
o Selling securities it believes are overvalued or fully priced To
determine value, the Adviser utilizes:
o Independent FUNDAMENTAL ANALYSIS in evaluating the issuer, and
o An analysis of the specific structure of the security
In an effort to achieve it's investment objective, the Portfolio may invest in
debt securities issued by:
o Publicly or privately held companies in the U.S.
o Publicly or privately held companies overseas (primarily in
YANKEE BONDS)
o The U.S. government, its agencies and instrumentalities
o States and their political subdivisions issuing taxable
MUNICIPAL SECURITIES
o Foreign governments, their agencies and instrumentalities
The Adviser may also invest in:
o Mortgage-backed debt securities
o Asset-backed debt securities
o Restricted securities
While the Portfolio may purchase debt securities of any MATURITY, it is
anticipated that the AVERAGE LIFE of the portfolio will be in the intermediate
range - between seven and 15 years - but may be shorter or longer depending on
market conditions.
PRIMARY RISKS
Credit risk
Interest rate risk
Market risk
Prepayment risk
Restricted securities risk
Municipal market risk
Foreign risk
See "Primary Risk Considerations" on page 00 for a detailed discussion of the
Portfolio's risks.
(Sidebar)
<PAGE>
12
INVESTMENT GRADE DEBT SECURITIES See Page 00.
FUNDAMENTAL ANALYSIS
A research technique that looks at a company's financial condition,
creditworthiness, management, and place in its industry to determine the
intrinsic value of the company's securities .
YANKEE BONDS See Page 00.
MUNICIPAL SECURITIES
Bonds and other debt obligations issued by state and local governments. The
interest on the municipal securities in which the Portfolio invests typically is
NOT exempt from federal income tax.
MATURITY
When the principal, or face value of a bond, must be repaid.
AVERAGE LIFE
The average number of years that each principal dollar will be outstanding,
before it is repaid.
HOW HAS THE PORTFOLIO PERFORMED?
The chart and table below give an indication of the Portfolio's risks and
performance. The chart shows you how the Portfolio's performance has varied from
year to year. The table compares the Portfolio's performance over time to that
of a broad measure of market performance. WHEN YOU CONSIDER THIS INFORMATION,
PLEASE REMEMBER THAT THE PORTFOLIO'S PAST PERFORMANCE IS NOT NECESSARILY AN
INDICATION OF HOW IT WILL PERFORM IN THE FUTURE.
YEAR-BY-YEAR TOTAL RETURN (as of 12/31 each year)
(Place Bar Chart Here)
BEST QUARTER: Q[...] [...]%
WORST QUARTER: Q[...] [...]%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
(Place Table Here)
<PAGE>
13
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks current income consistent with stability of capital and
liquidity.
[sidebar]
An investment in this Portfolio is neither insured nor guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the Adviser seeks to preserve the value of your investment at
$1.00 per share, there can be no assurance that it will be able to do so.
It is possible to lose money by investing in the Portfolio.
INVESTMENT STRATEGY
The Portfolio may invest in the following types of money market securities:
o U.S. government securities
o BANK OBLIGATIONS
o COMMERCIAL PAPER OBLIGATIONS
o SHORT-TERM CORPORATE DEBT SECURITIES
PRINCIPAL RISKS:
Market Risk
Credit Risk
Interest Rate Risk
See "Principal Risk Considerations" on page 00 for a detailed discussion of the
Portfolio's risks.
[sidebar]
BANK OBLIGATIONS
Time deposits, certificates of deposit, bankers' acceptances and other bank
obligations of Banks that have total assets in excess of $1 billion and are
subject to regulation by the U.S. government, including:
o U.S. subsidiaries of foreign banks
o London branches of domestic banks
o Foreign branches of domestic commercial banks and foreign banks,
as long as the securities are U.S. dollar-denominated
COMMERCIAL PAPER OBLIGATIONS
A short-term debt obligation, including variable and floating rate securities of
U.S. corporations, maturing within 270 days and rated:
o A-1 or A-2 by Standard & Poor's Corporation or
o Prime-1 or Prime-2 by Moody's Investor Services, Inc. or,
o If not rated, of a comparable quality as determined by the
Adviser under supervision of the Board of Trustees
SHORT-TERM CORPORATE DEBT SECURITIES
Corporate debt securities (other than commercial paper) maturing in 13 months or
less.
<PAGE>
14
HOW HAS THE PORTFOLIO PERFORMED?
The chart and table below give an indication of the Portfolio's risks and
performance. The chart shows you how the Portfolio's performance has varied from
year to year. The table compares the Portfolio's performance over time to that
of a broad measure of market performance. WHEN YOU CONSIDER THIS INFORMATION,
PLEASE REMEMBER THAT THE PORTFOLIO'S PAST PERFORMANCE IS NOT NECESSARILY AN
INDICATION OF HOW IT WILL PERFORM IN THE FUTURE.
YEAR-BY-YEAR TOTAL RETURN (as of 12/31 each year)
(Place Bar Chart Here)
BEST QUARTER: Q[...] [...]%
WORST QUARTER: Q[...] [...]%
AVERAGE ANNUAL TOTAL RETURN (as of 12/31/98)
(Place Table Here)
<PAGE>
15
PRIMARY RISK CONSIDERATIONS
All Portfolio investments are subject to risk and may decline in value. The
principal risks of investing in the Portfolios are described below. Each
Portfolio's exposure to risk depends upon its specific investment profile. The
amount and types of risk vary depending on:
o The Portfolio's investment objective
o The Portfolio's ability to achieve its objective
o The markets in which the Portfolio invests o The investments the
Portfolio makes in those markets
o Prevailing economic conditions over the period of an investment
CREDIT RISK
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise be unable to honor a financial obligation. Securities rated
below investment grade are especially susceptible to this risk.
FOREIGN RISK
The risk that foreign issuers may be subject to foreign political and economic
instability, the imposition or tightening of exchange controls or other
limitations on repatriation of foreign capital. In addition, there may be
changes in foreign governmental attitudes towards private investment, possibly
leading to nationalization, increased taxation or confiscation of investors'
assets. Investments in issuers located or doing business in emerging or
developing markets are especially susceptible to these risks.
INTEREST RATE RISK
The risk that changing interest rates may adversely affect the value of an
investment. With fixed income securities, an increase in interest rates
typically causes the value of those securities to fall, while a decline in
interest rates may produce an increase in the market value of those securities.
Because of this risk, an investment in a Portfolio that invests in fixed income
securities is subject to risk even if all the fixed income securities in the
Portfolio's portfolio are paid in full at maturity. Changes in interest rates
will affect the value of longer-term fixed income securities more than
shorter-term securities.
LEVERAGE RISK
The risk that borrowing, or some derivative instruments, such as forward
commitment transactions, may multiply smaller market movements into large
changes in value.
LIQUIDITY AND VALUATION RISKS
The risk that securities that were liquid when purchased by a Portfolio may
become temporarily illiquid (i.e., not be sold readily) and hard to value,
especially in declining markets.
MARKET RISK
The risk that the market value of a Portfolio's investments will fluctuate as
the stock and bond markets fluctuate. Market risk may affect a single issuer,
industry or section of the economy or may affect the market as a whole.
MUNICIPAL MARKET RISK
The risk that special factors may negatively affect the value of municipal
securities and, as a result, a Fund's share price. These factors include
political or legislative changes, uncertainties related to the tax status of the
securities or the rights of investors in the securities. A Fund may invest in
municipal obligations that are related in such a way that an economic, business
or political development or change affecting one of these obligations would also
affect the other obligations.
<PAGE>
16
PREPAYMENT RISK
The risk that will prepay fixed rate obligations when interest rates fall,
forcing the Portfolio to re-invest in obligations with lower interest rates than
the original obligations..
RESTRICTED SECURITIES RISK
The risk that a buyer will be difficult to come by and selling price will need
to be less than originally anticipated because these restricted securities may
only be sold in privately negotiated transactions.
SMALL COMPANY RISK
The risk that investments in smaller companies may be more volatile than
investments in larger companies. Smaller companies generally experience higher
growth rates and higher failure rates than do larger companies. The trading
volume of the securities of smaller companies is normally lower than that of
larger companies. Short-term changes in the demand for the securities of smaller
companies generally has a disproportionate effect on their market price, tending
to make prices rise more in response to buying demand and fall more in response
to selling pressure.
YEAR 2000
The Trusts could be adversely affected by problems relating to the inability of
computer systems used by the Adviser and the Trusts' other service providers to
recognize the year 2000. While year 2000-related computer problems could have a
negative effect on the Portfolios, the Adviser is working to avoid these
problems in its own computer systems and to obtain assurances from service
providers that they are taking similar steps. The Adviser is also making efforts
to determine whether companies in the Trust's portfolios will be affected by
this issue.
EURO CONVERSION
The Portfolios also could be adversely affected by the conversion of European
currencies into the Euro beginning January 1, 1999. This conversion will not be
complete until 2002, and its full implementation may be delayed. Difficulties
with the conversion and potential delays may significantly impact European
capital markets and could increase volatility in world capital markets.
It is impossible to know whether the problems associated with both Year 2000 and
Euro conversion, which could disrupt operations of investments if uncorrected,
have been adequately addressed until the dates in question arrive.
Please note that there are other circumstances not described here which could
adversely affect your investment and potentially prevent a Portfolio from
achieving its objectives.
<PAGE>
17
FEES AND EXPENSES
The tables below describe the fees and expenses that you may pay if you buy and
hold shares of the Portfolios. These expenses are deducted from the Portfolios'
assets.
The purpose of the Conseco Series Trust (the "Trust") is to serve as the
investment medium for variable annuity contracts ("Contracts") offered by
insurance companies (see "Purchase and Redemption of Shares"). The Portfolios'
shares are not offered directly to the public.
ANNUAL PORTFOLIO OPERATING EXPENSES (expenses that are deducted from each
Portfolio's assets) as a % of average daily net assets
ANNUAL PORTFOLIO OPERATING EXPENSES
% OF AVERAGE DAILY NET ASSETS
<TABLE>
<CAPTION>
COMMON ASSET GOVERNMENT CORPORATE MONEY
STOCK ALLOCATION SECURITIES BOND MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
========================================================================
<S> <C> <C> <C> <C> <C>
Management and Administrative Fees 0.65% 0.65% 0.50% 0.50% 0.50%
Other Expenses x.xx% x.xx% x.xx% x.xx% x.xx%
------------------------------------------------------------------------
Equals: Total Annual Portfolio Operating Expenses x.xx% x.xx% x.xx% x.xx% x.xx%
Less: Fee Waiver and/or Expense Reimbursement* x.xx% x.xx% x.xx% x.xx% x.xx%
------------------------------------------------------------------------
Equals: Net Expenses 0.80% 0.75% 0.70% 0.70% 0.45%
========================================================================
</TABLE>
* PURSUANT TO A CONTRACTUAL ARRANGEMENT WITH THE TRUST, THE ADVISER HAS AGREED
TO WAIVE FEES AND/OR REIMBURSE PORTFOLIO EXPENSES THROUGH 4/30/00, SO THAT THE
TOTAL ANNUAL OPERATING EXPENSES OF EACH PORTFOLIO ARE LIMITED TO THE NET
EXPENSES FOR EACH RESPECTIVE PORTFOLIO, AS SET FORTH ABOVE. THIS ARRANGEMENT
DOES NOT COVER INTEREST, TAXES, BROKERAGE COMMISSIONS, AND EXTRAORDINARY
EXPENSES.
EXPENSE EXAMPLE
<TABLE>
<CAPTION>
COMMON ASSET GOVERNMENT CORPORATE MONEY
STOCK ALLOCATION SECURITIES BOND MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
========================================================================
<S> <C> <C> <C> <C> <C>
1 Year
3 Year*
5 Year*
10 Years*
</TABLE>
* THE EXAMPLES FOR 3, 5 AND 10 YEARS ARE BASED ON TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES AS DESCRIBED IN THE ANNUAL PORTFOLIO OPERATING EXPENSE TABLE,
ABOVE. IF THE EXPENSES HAD BEEN COMPUTED BASED ON THE NET EXPENSES (TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES LESS FEE WAIVERS AND/OR EXPENSE REIMBURSEMENTS),
YOUR COSTS WOULD HAVE BEEN ____ FOR 3 YEARS, _____ FOR 5 YEARS AND _____ FOR 10
YEARS.
<PAGE>
18
ADVISER
Conseco Capital Management, Inc. (CCM) is a wholly owned subsidiary of Conseco,
Inc., a publicly owned financial services company that provides specialized
annuity, life and health insurance products. CCM serves as the "Adviser" to each
of the Portfolios and as adviser to other registered investment companies. In
addition to managing the invested assets of Conseco, Inc., CCM manages
foundations, endowments, corporations, government and unions. As of December 31,
1998, CCM managed over $35.3 billion .
ADVISORY FEES
For the fiscal year ended 12/31/98, the advisory fee paid to the Adviser by each
Portfolio was as follows:
-----------------------------------------------------------------------------
ADVISORY FEES PAID
PORTFOLIO NAME (expressed as a percentage of
average daily net assets)
-----------------------------------------------------------------------------
Equity Portfolio %
-----------------------------------------------------------------------------
Balanced Portfolio %
-----------------------------------------------------------------------------
Government Securities Portfolio %
-----------------------------------------------------------------------------
Fixed Income Portfolio %
-----------------------------------------------------------------------------
Money Market Portfolio %
------------------------------------------------------------------------------
PORTFOLIO MANAGERS OF CONSECO SERIES TRUST
EQUITY PORTFOLIO:
THOMAS J. PENCE, CFA, SENIOR VICE PRESIDENT
Since joining the Adviser in 1992, Mr. Pence has been responsible for the
management of all of the Adviser's equity portfolios and for the oversight of
the equity investment process. Additionally, he is portfolio manager of other
affiliated investment companies.
BALANCED PORTFOLIO:
GREGORY J. HAHN, CFA, SENIOR VICE PRESIDENT, PORTFOLIO ANALYTICS
At CCM, Mr. Hahn is also responsible for the portfolio analysis and management
of the institutional client accounts and analytical support for taxable
portfolios. In addition, he is responsible for SEC registered investment
products, , investments in the insurance industry and is portfolio manager of
other affiliated investment companies. Mr. Hahn joined the Adviser as a Vice
President and portfolio manager in 1989.
THOMAS J. PENCE, CFA, SENIOR VICE PRESIDENT
See Equity Portfolio for Mr. Pence's complete biography.
<PAGE>
19
GOVERNMENT SECURITIES PORTFOLIO:
G. NOLAN SMITH, VICE PRESIDENT, PORTFOLIO ANALYTICS
At CCM, Mr. Smith is also responsible for taxable and tax-exempt, fixed income,
institutional client accounts, including other investment companies. Prior to
joining the Adviser in 1995, Mr. Smith was a portfolio manager at Strong Capital
Management, where he managed the Strong Municipal Money Market, Short-Term and
Municipal Bond Funds.
CORPORATE BOND PORTFOLIO:
GREGORY J. HAHN, CFA, SENIOR VICE PRESIDENT, PORTFOLIO ANALYTICS
See Balanced Portfolio for Mr. Hahn's complete biography.
MONEY MARKET PORTFOLIO:
GREGORY J. HAHN, CFA, SENIOR VICE PRESIDENT, PORTFOLIO ANALYTICS
See Balanced Portfolio for Mr. Hahn's complete biography.
<PAGE>
20
PURCHASE AND REDEMPTION OF SHARES
Portfolio shares are offered only to variable annuity insurance separate
accounts established by insurance companies to fund variable annuity contracts.
Individuals may not purchase Portfolio shares directly from the Trust. Shares of
each Portfolio are purchased or redeemed at their respective net asset values
next computed (without a sales charge) after receipt of an appropriate order.
A Portfolio's net asset value (NAV) per share is the NAV (total market value of
its assets minus its liabilities) divided by the total number of shares
outstanding. Because the value of each Portfolio's securities changes every
business day, the Portfolio's share price usually changes as well.
Each Portfolio calculates its NAV per share at the close of regular trading
(normally 4:00 p.m., Eastern Time) on the New York Stock Exchange (NYSE). The
NYSE is open every day for trading, except:
- --------------------------------------------------------------------------------
Saturday Presidents' Day Labor Day
Sunday Good Friday Thanksgiving Day
New Year's Day Memorial Day Christmas Day
Martin Luther King, Jr. Day Independence Day
- --------------------------------------------------------------------------------
The NAV is generally based on the market price of the securities held in a
Portfolio. Securities held by all Portfolios other than the Money Market
Portfolio are valued based on readily available market quotations.
The NAV for the Money Market Portfolio is determined using the amortized cost
method. In this method, securities are valued at the time of purchase at cost
and thereafter assume a constant amortization to maturity of any discount or
premium. This method does not take into account unrealized gains and losses, nor
does it consider the impact of fluctuating interest rates on the market value of
the security. The Money Market Portfolio will attempt to maintain a constant net
asset value of $1.00 per share, however, there can be no assurance that it will
be able to do so.
Under the direction of the Board, the Portfolios may use a practice known as
fair value pricing under the following circumstances:
|X| Securities and assets for which market quotations are not readily
available
|X| Events that occur after an exchange closes are likely to affect the
value of the security
|X| Trust's management strongly believes a market price is not reflective
of a security's appropriate price
|X|
<PAGE>
21
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio distributes at least 90% of its net investment income to its
shareholders to meet requirements of the Internal Revenue Code applicable to
regulated investment companies.
Investors should understand that, as Contract Owners, they will not receive any
dividends or other distributions directly from the Trust or any of the
Portfolios. All such dividends and other distributions are payable to, and
reinvested by, the separate accounts of the insurance company in which contract
premiums are invested.
SCHEDULE OF DIVIDEND REINVESTMENTS
Dividends from net investment income are declared and reinvested in additional
full and fractional shares by each Portfolio according to the schedule below.
The Trustees may elect to change dividend distribution intervals.
- --------------------------------------------------------------------------------
PORTFOLIO DECLARED AND REINVESTED
- --------------------------------------------------------------------------------
Government Securities Portfolio Monthly
- --------------------------------------------------------------------------------
Corporate Bond Portfolio Monthly
- --------------------------------------------------------------------------------
Common Stock Portfolio Quarterly
- --------------------------------------------------------------------------------
Asset Allocation Portfolio Quarterly
- --------------------------------------------------------------------------------
Money Market Portfolio Daily
- --------------------------------------------------------------------------------
Capital gains - i.e., the excess of net long-term capital gain over net
short-term capital loss - are generally declared and distributed to shareholders
annually after the close of the Portfolio's fiscal year.
SEE THE APPLICABLE CONTRACT PROSPECTUS FOR INFORMATION REGARDING THE FEDERAL
INCOME TAX TREATMENT OF DISTRIBUTIONS TO THE INSURANCE COMPANY SEPARATE
ACCOUNTS.
<PAGE>
22
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Trust's
financial performance for the past five years (or, if shorter, the period of the
Trust's operations). Certain information reflects financial results for a single
Portfolio share. The total returns in the table represent the rate that an
investor would have earned (or lost) on an investment in each Portfolio
(assuming reinvestment of all dividends and distributions). This information has
been audited by PricewaterhouseCoopers whose report, along with the Trusts'
financial statements, is included in the Trusts' annual report, which is
available upon request.
(Place Table and Related Footnotes Here)
<PAGE>
[back cover]
FOR MORE INFORMATION
More information on the Conseco Series Trust is available free upon request:
SHAREHOLDER REPORTS
Additional information about the Portfolio's investments is available in the
Portfolio's annual and semi-annual reports to shareholders. In the Portfolio's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Portfolio's performance
during their most recent fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about each Portfolio and its policies. The SAI is
on file with the Securities and Exchange Commission (SEC) and is incorporated by
reference into (is legally considered part of) this prospectus.
(Sidebar)
To obtain a shareholder report, SAI, or other information:
BY TELEPHONE
Call 800-
BY MAIL
Conseco Series Trust
Attn: Administrative Offices
11815 N. Pennsylvania Street
Carmel, IN 46032
BY EMAIL
[email protected]
ON THE INTERNET
Text-only versions of the prospectuses and other documents pertaining to the
Portfolios can be viewed online or downloaded from:
SEC
http://www.sec.gov
CONSECO CAPITAL MANAGEMENT, INC.
http://www.conseco.com
Information about the Trusts (including the SAI) can also be reviewed and copied
at the SEC's public reference room in Washington, DC (phone 800-SEC-0330). Or,
you can obtain copies of this information by sending a request, along with a
duplicating fee, to the SEC's Public Reference Section, Washington, DC
20549-6009.
Registration Number: 811-3641
<PAGE>
CONSECO SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
This Statement of Additional Information ("SAI") is not a prospectus. It
contains additional information about the Conseco Series Trust (the "Trust") and
should be read in conjunction with the Trust's Prospectus dated May 1, 1999. You
can obtain a copy by contacting the Trust's Administrative Office, 11815 N.
Pennsylvania Street, Carmel, Indiana 46032.
TABLE OF CONTENTS
PAGE
Fund History.........................................................
Investment Restrictions..............................................
Investment Strategies................................................
Portfolio Turnover...................................................
Description of Securities and Investment Techniques..................
Investment Performance...............................................
Securities Transactions..............................................
Management...........................................................
Dividends, Distributions and Taxes...................................
Net Asset Values of the Shares of the Portfolios.....................
General..............................................................
Independent Accountants..............................................
Financial Statements.................................................
CCM INVESTMENT ADVISER
---
Conseco Capital Management, Inc.
<PAGE>
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FUND HISTORY
The Conseco Series Trust (the "Trust") was organized as a Massachusetts
business trust on November 15, 1982. The Trust is a no-load, open-end management
investment company registered with the Securities and Exchange Commission under
the Investment Company Act of 1940. The Trust is a "series" type of mutual fund
which issues separate series of shares, each of which currently represents a
separate diversified portfolio of investments. The Trust's series of shares are
issued and redeemed at net asset value without a sales load. This SAI relates to
the shares of five portfolios ("Portfolios") of the Trust, each with its own
investment objective or objectives and investment policies. There is no
assurance that any of the Portfolios will achieve its investment objective. The
various Portfolios may be used independently or in combination.
The shares of the Portfolios are offered to insurance companies in order to
fund certain of their separate accounts used to support various variable annuity
contracts (the "Contracts"). The rights of an insurance company holding Trust
shares for a separate account are different from the rights of the owner of a
Contract. The terms "shareholder" or "shareholders" in this SAI shall refer to
the insurance companies, and not to any Contract owner.
The Trust serves as the underlying investment medium for sums invested in
Contracts issued by affiliated insurance companies, such as, Bankers National
Life Insurance Company ("Bankers National"), Conseco Variable Insurance Company
("Conseco Variable"), and unaffiliated insurance companies. Trust shares are not
offered directly to and may not be purchased directly by members of the public.
Prior to May 1, 1999, the Equity Portfolio was formerly known as the Common
Stock Portfolio; the Balanced Portfolio was formerly known as the Asset
Allocation Portfolio; and the Fixed Income Portfolio was formerly known as the
Corporate Bond Portfolio.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions and policies relating to
the investment of assets of the Portfolios and their activities. These are
fundamental policies and may not be changed without the approval of the holders
of a "majority" of the outstanding shares of each Portfolio affected. Under the
1940 Act, the vote of such a "majority" means the vote of the holders of the
lesser of (i) 67 percent of the shares represented at a meeting at which more
than 50 percent of the outstanding shares are represented or (ii) more than 50
percent of the outstanding shares. A change in policy affecting only one
Portfolio may be effected with the approval of the holders of a "majority" of
the outstanding shares of such Portfolio. The Trust may not, and each Portfolio
may not (except as noted):
1. Purchase securities on margin or sell securities short, except that
Portfolios engaged in transactions in options, futures, and options on
futures may make margin deposits in connection with those transactions, and
except that each Portfolio (except the Money Market Portfolio) may make
short sales against the box and that effecting short sales against the box
will not be deemed to constitute a purchase of securities on margin;
2. Purchase or sell commodities or commodity contracts (which, for the purpose
of this restriction, shall not include foreign currency futures or forward
currency contracts), except: (a) any Portfolio (except the Money Market
Portfolio) may engage in interest rate futures contracts, stock index
futures, futures contracts based on other financial instruments, and options
on such futures contracts; and (b) the Balanced Portfolio may engage in
futures contracts on gold;
3. Borrow money or pledge, mortgage, or assign assets, except that a Portfolio
may: (a) borrow from banks, but only if immediately after each borrowing and
continuing thereafter it will have an asset coverage of at least 300
percent; (b) enter into reverse repurchase agreements, options, futures,
options on futures contracts, foreign currency futures contracts and forward
currency contracts as described in the Prospectus and in this Statement of
Additional Information. (The deposit of assets in escrow in connection with
the writing of covered put and call options and the purchase of securities
on a when-issued or delayed delivery basis and collateral arrangements with
respect to initial or variation margin deposits for future contracts, and
options on futures contracts and foreign currency futures and forward
currency contracts will not be deemed to be pledges of a Portfolio's
assets);
4. Underwrite securities of other issuers;
B-1
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5. With respect to 75 percent of its total assets, invest more than 5 percent
of its assets in the securities of any one issuer if thereafter the
Portfolio in question would have more than 5 percent of its assets in the
securities of any issuer; this restriction does not apply to U.S. Government
securities;
6. Invest in securities of a company for the purpose of exercising control or
management;
7. Write, purchase or sell puts, calls or any combination thereof, except that
the Equity Portfolio, the Balanced Portfolio, the Fixed Income Portfolio and
the Government Securities Portfolio may write listed covered or secured
calls and puts and enter into closing purchase transactions with respect to
such calls and puts if, after writing any such call or put, not more than 25
percent of the assets of the Portfolio are subject to covered or secured
calls and puts, and except that the Equity Portfolio, Balanced Portfolio,
Fixed Income Portfolio and Government Securities Portfolio may purchase
calls and puts with a value of up to 5 percent of each such Portfolio's net
assets;
8. Participate on a joint or a joint and several basis in any trading account
in securities;
9. With respect to 75 percent of its total assets, invest in the securities of
issuers in any one industry if thereafter more than 25 percent of the assets
of the Portfolio in question would be invested in securities of issuers in
that industry; investing in cash items (including time and demand deposits
such as certificates of deposit of domestic banks), U.S. Government
securities, or repurchase agreements as to these securities, shall not be
considered investments in an industry;
10. Purchase or sell real estate, except that it may purchase marketable
securities which are issued by companies which invest in real estate or
interests therein; or
11. Lend any of its assets except to purchase or hold money market instruments
permitted by its investment objective and policies.
In order to limit the risks associated with entry into repurchase
agreements, the Trustees have adopted certain criteria (which are not
fundamental policies) to be followed by the Portfolios. These criteria provide
for entering into repurchase agreement transactions (a) only with banks or
broker-dealers meeting certain guidelines for creditworthiness, (b) that are
fully collateralized as defined therein, (c) on an approved standard form of
agreement and (d) that meet limits on investments in the repurchase agreements
of any one bank, broker or dealer.
INVESTMENT STRATEGIES
In addition to the investment strategies described in the Prospectus, the
EQUITY PORTFOLIO may:
o Invest in below investment grade securities, commonly known as "junk
bonds".
o Use various investment strategies and techniques when the Adviser
determines that such use is appropriate in an effort to meet the
Portfolio's investment objectives. Such strategies and techniques include,
but not limited to: writing listed "covered" call and "secured" put
options, including options on stock indices, and purchasing such options;
purchasing and selling, for hedging purposes, stock index, interest rate,
and other futures contracts, and purchasing options on such futures
contracts; purchasing warrants and preferred and convertible preferred
stocks; borrowing from banks to purchase securities; purchasing foreign
securities in the form of American Depository Receipts; purchasing
securities of other investment companies; entering into repurchase
agreements; purchasing restricted securities; investing in when-issued or
delayed delivery securities; and selling securities short "against the
box."
o If market conditions indicate their desirability, for defensive purposes,
temporarily invest all or a part of the assets of the Equity Portfolio in
money market instruments.
In addition to the investment strategies described in the Prospectus, the
BALANCED PORTFOLIO may:
o If the Adviser believes that inflationary or monetary conditions warrant a
significant investment in companies involved in precious metals, invest up
to 10 percent of its total assets in the equity securities of companies
exploring, mining, developing, producing, or distributing gold or other
precious metals.
B-2
<PAGE>
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o Invest in below investment grade securities, commonly known as "junk
bonds".
o Invest in zero coupon securities and payment-in-kind securities.
o Invest in equity and debt securities of foreign issuers, including non-U.S.
dollar-denominated securities, Eurodollar securities and securities issued,
assumed or guaranteed by foreign governments or political subdivisions or
instrumentalities thereof. As a non-fundamental operating policy, the
Balanced Portfolio will not invest more than 50 percent of its total assets
(measured at the time of investment) in foreign securities.
o Use various investment strategies and techniques when the Adviser
determines that such use is appropriate in an effort to meet the
Portfolio's investment objective, including but not limited to: writing
listed "covered" call and "secured" put options, including options on stock
indices, and purchasing such options; purchasing and selling, for hedging
purposes, stock index, interest rate, gold, and other futures contracts,
and purchasing options on such futures contracts; purchasing warrants and
preferred and convertible preferred stocks; purchasing foreign securities;
entering into foreign currency transactions and options on foreign
currencies; borrowing from banks to purchase securities; purchasing
securities of other investment companies; entering into repurchase
agreements; purchasing restricted securities; investing in when-issued or
delayed delivery securities; and selling securities short "against the
box."
o Make temporary defensive investments (i.e., money market instruments)
without limit if it is believed that market conditions warrant a more
conservative investment strategy.
In addition to the investment strategies described in the Prospectus, the
GOVERNMENT SECURITIES PORTFOLIO may:
o Invest the portion of the investment Portfolio which is not invested in
U.S. Government securities, in high rated debt securities that the Adviser
believes will not expose the Portfolio to undue risk.
o Use various investment strategies and techniques when the Adviser
determines that such use is appropriate in an effort to meet the
Portfolio's investment objective. Such strategies and techniques include,
but are not limited to, writing listed "covered" call and "secured" put
options and purchasing such options; purchasing and selling, for hedging
purposes, interest rate and other futures contracts, and purchasing options
on such futures contracts; borrowing from banks to purchase securities;
investing in securities of other investment companies; entering into
repurchase agreements; investing in when-issued or delayed delivery
securities; and selling securities short "against the box."
In addition to the investment strategies described in the Prospectus, the
FIXED INCOME PORTFOLIO may:
o Invest up to 15 percent of the Portfolio's assets directly in equity
securities, including preferred and common stocks, convertible debt
securities and debt securities carrying warrants to purchase equity
securities.
o Invest up to 10 percent of the Portfolio's assets in debt securities below
investment grade.
o Use various investment strategies and techniques when the Adviser
determines that such use is appropriate in an effort to meet the
Portfolio's investment objective. Such strategies and techniques include,
but are not limited to, writing listed "covered" call and "secured" put
options and purchasing such options; purchasing and selling, for hedging
purposes, interest rate and other futures contracts, and purchasing options
on such futures contracts; borrowing from banks to purchase securities;
investing in securities of other investment companies; entering into
repurchase agreements; investing in when-issued or delayed delivery
securities; and selling securities short "against the box."
In addition to the investment strategies described in the Prospectus, the
MONEY MARKET PORTFOLIO may:
o Invest only in U.S. dollar-denominated money market instruments that
present "minimal credit risk." At least 95 percent of the Money Market
Portfolio's total assets, as measured at the time of investment, must be of
the "highest quality." A money market instrument will be considered in the
highest quality (1) if it is rated in the
B-3
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highest rating category by (i) any two nationally recognized statistical
rating organization ("NRSRO") or, (ii) by the only NRSRO that rated the
security; (2) if, in the case of an instrument with a remaining maturity of
13 months or less that was long-term at the time of issuance, the issuer
thereof has short-term debt obligations comparable in priority and
securities to such security, and that are rate in the highest rating
category by (i) any two NRSROs or (ii) the only NRSRO that has rated the
security; or (3) in the case of an unrated security, such security is of
comparable quality to a security in the highest rating category as
determined by the Adviser.
o With respect to no more than 5 percent of its total assets, measured at the
time of investment, invest in money market instruments that are in the
second-highest rating category for short-term debt obligations.
o Not invest more than 5 percent of its total assets, measured at the time of
investment, in securities of any one issuer, except that this limitation
shall not apply to U.S. Government securities and repurchase agreements
thereon and except that the Portfolio may invest more than 5 percent of its
total assets in securities of a single issuer that are of the highest
quality for a period of up to three business days.
o Not invest more than the greater of 1 percent of its total assets or
$1,000,000, measured at the time of investment, in securities of any one
issuer that are in the second-highest rating category, except that this
limitation shall not apply to U.S. Government securities.
o From time to time, purchase securities on a when-issued or delayed delivery
basis.
o Also enter into repurchase agreements.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities (excluding certain
short-term securities) for a year and dividing it by the monthly average of the
market value of such securities during the year. The Money Market Portfolio does
not have a stated portfolio turnover matrix as securities of the type in which
it invests are excluded in the usual calculation of that rate. The remaining
Portfolios do not have a predetermined rate of portfolio turnover since such
turnover will be incidental to transactions taken with a view to achieving their
respective objectives.
Because of the Adviser's active management style, our Portfolios generally
have a higher portfolio turnover than other portfolios and therefore, may have
higher taxable distribution and increased trading costs with may impact
performance. The following is a list of the Portfolios' portfolio turnover rates
for the fiscal year ended December 31, 1997 and 1998:
-------------------------------------------------------------------
YEAR ENDED
-------------------------------------------------------------------
PORTFOLIO NAME 1997 1998
-------------------------------------------------------------------
Equity Portfolio 234.20%
-------------------------------------------------------------------
Balanced Portfolio 369.39%
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Government Securities Portfolio 195.08%
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Fixed Income Portfolio 276.46%
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes in greater detail different types of
securities and investment techniques used by the individual Portfolios, as well
as the risks associated with such securities and techniques.
B-4
<PAGE>
U.S. GOVERNMENT SECURITIES AND SECURITIES OF INTERNATIONAL ORGANIZATIONS
U.S. Government securities are issued or guaranteed by the U.S. Government
or its agencies, authorities or instrumentalities.
Securities issued by international organizations, such as Inter-American
Development Bank, the Asian-American Development Bank and the International Bank
for Reconstruction and Development (the "World Bank"), are not U.S. Government
securities. These international organizations, while not U.S. Government
agencies or instrumentalities, have the ability to borrow from member countries,
including the United States.
SMALL AND MEDIUM CAPITALIZATION COMPANIES
The Equity Portfolio may invest a substantial portion of its assets in
securities issued by small- and mid-cap companies. While these companies
generally have potential for rapid growth, investments in such companies often
involve greater risks than investments in larger, more established companies
because small- and mid-cap companies may lack the management experience,
financial resources, product diversification, and competitive strengths of
companies with larger market capitalizations. In addition, in many instances the
securities of small- and mid-cap companies are traded only over-the-counter or
on a regional securities exchange, and the frequency and volume of their trading
is substantially less than is typical of larger companies. Therefore, these
securities may be subject to greater and more abrupt price fluctuations. When
making large sales, a Portfolio may have to sell portfolio holdings at discounts
from quoted prices or may have to make a series of small sales over an extended
period of time due to the trading volume of small- and mid-cap company
securities. As a result, an investment in any of these Portfolios may be subject
to greater price fluctuations than an investment in a fund that invests
primarily in larger, more established companies. The Adviser's research efforts
may also play a greater role in selecting securities for these Portfolios than
in a portfolio that invests in larger, more established companies.
PREFERRED STOCK
Preferred stock pays dividends at a specified rate and generally has
preference over common stock in the payment of dividends and the liquidation of
the issuer's assets but is junior to the debt securities of the issuer in those
same respects. Unlike interest payments on debt securities, dividends on
preferred stock are generally payable at the discretion of the issuer's board of
directors, and shareholders may suffer a loss of value if dividends are not
paid. Preferred shareholders generally have no legal recourse against the issuer
if dividends are not paid. The market prices of preferred stocks are subject to
changes in interest rates and are more sensitive to changes in the issuer's
creditworthiness than are the prices of debt securities. Under ordinary
circumstances, preferred stock does not carry voting rights.
DEBT SECURITIES
All Portfolios may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers, and the Balanced Portfolio and the Fixed Income
Portfolio may invest in debt securities of foreign issuers that may or may not
be U.S dollar-denominated.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument. Debt securities rated BBB or
Baa, which are considered medium-grade category debt securities, do not have
economic characteristics that provide the high degree of security with respect
to payment of principal and interest associated with higher rated debt
securities, and generally have some speculative characteristics. A debt security
will be placed in this rating category where interest payments and principal
security appear adequate for the present, but economic characteristics that
provide longer term protection may be lacking. Any debt security, and
particularly those rated BBB or Baa (or below), may be susceptible to changing
conditions, particularly to economic downturns, which could lead to a weakened
capacity to
B-5
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pay interest and principal.
As discussed more fully earlier in the SAI, the Money Market Portfolio may
invest in rated debt securities only if they are rated in one of the two highest
short-term ratings categories. The Fixed Income Portfolio and Government
Securities Portfolio will invest in rated debt securities only if they are rated
"investment grade," except that the Fixed Income Portfolio may invest up to 10
percent of the Portfolio's assets in below investment grade debt securities. The
Common Stock and Balanced Portfolios will not invest in rated debt securities
which are rated below CCC/Caa. All Portfolios may invest in unrated securities
as long as the Adviser determines that such securities have investment
characteristics comparable to securities that would be eligible for investment
by a Portfolio by virtue of a rating. Many securities of foreign issuers are not
rated by Moody's or Standard & Poor's; therefore, the selection of such issuers
depends, to a large extent, on the credit analysis performed or used by the
Adviser.
BELOW INVESTMENT GRADE SECURITIES
IN GENERAL. The Balanced Portfolio, Equity Portfolio, and the Fixed Income
Portfolio may invest in below investment grade securities. Below investment
grade securities (also referred to as "high yield securities are securities
rated BB+ or lower by S&P or Ba1 or lower by Moody's, securities comparably
rated by another NRSRO, or unrated securities of equivalent quality. Below
investment grade securities are deemed by the rating agencies to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. Below investment grade securities, while generally offering
higher yields than investment grade securities with similar maturities, involve
greater risks, including the possibility of default or bankruptcy. As discussed
below, these risks are significantly greater in the case of below investment
grade securities.
Below investment grade securities generally offer a higher yield than that
available from higher-rated issues with similar maturities, as compensation for
holding a security that is subject to greater risk. Below investment grade
securities are deemed by rating agencies to be predominately speculative with
respect to the issuer's capacity to pay interest and repay principal and may
involve major risk or exposure to adverse conditions. Below investment grade
securities involve higher risks in that they are especially subject to (1)
adverse changes in general economic conditions and in the industries in which
the issuers are engaged, (2) adverse changes in the financial condition of the
issuers, (3) price fluctuation in response to changes in interest rates and (4)
limited liquidity and secondary market support.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. An economic downturn
affecting the issuer may result in a weakened capacity to make principal and
interest payments and an increased incidence of default. In addition, a fund
that invests in below investment grade securities may incur additional expenses
to the extent recovery is sought on defaulted securities. Because of the many
risks involved in investing in below investment grade securities, the success of
such investments is dependent upon the credit analysis of the Adviser. Although
the market for below investment grade securities is not new, and the market has
previously weathered economic downturns, the past performance of the market for
such securities may not be an accurate indication of its performance during
future economic downturns or periods of rising interest rates. This market may
be thinner and less active than the market for higher quality securities, which
may limit the ability to sell such securities at their fair value in response to
changes in the economy or the financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of below investment grade securities, especially in a
thinly traded market. Differing yields on debt securities of the same maturity
are a function of several factors, including the relative financial strength of
the issuers.
Differing yields on fixed income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities rated below
investment grade categories of recognized rating agencies: Ba1 or lower by
Moody's or BB+ or lower by Standard & Poor's. Debt securities rated below
investment grade are deemed by these agencies to be predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal and
may involve major risk exposure to adverse conditions.
Although Conseco Capital Management, Inc., the Adviser, considers security
ratings when making investment decisions, it performs its own investment
analysis and does not rely principally on the ratings assigned by the rating
services. The Adviser's analysis may include consideration of the issuer's
experience and managerial strength,
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changing financial condition, borrowing requirements or debt maturity schedules,
and the issuer's responsiveness to changes in business conditions and interest
rates. It also considers relative values based on anticipated cash flow,
interest or dividend coverage, asset coverage and earnings prospects.
Also, the Adviser buys and sells debt securities principally in response to
its evaluation of an issuer's continuing ability to meet its obligations, the
availability of better investment opportunities, and its assessment of changes
in business conditions and interest rates. From time to time, consistent with
the Equity Portfolio's and the Balanced Portfolio's investment objectives, the
Adviser may also trade high yield debt securities for the purpose of seeking
short-term profits. These securities may be sold in anticipation of a market
decline or bought in anticipation of a market rise. They may also be traded for
securities of comparable quality and maturity to take advantage of perceived
short-term disparities in market values or yields.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities ordinarily provide a stable
stream of income with generally higher yields than those of common stocks of the
same or similar issuers, but lower than the yield on non-convertible debt.
Convertible securities are usually subordinated to comparable-tier
non-convertible securities but rank senior to common stock in a corporation's
capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. Convertible securities are
typically issued by smaller capitalized companies, whose stock prices may be
volatile. The price of a convertible security often reflects such variations in
the price of the underlying common stock in a way that non-convertible debt does
not. A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument, which could have an adverse effect on a Portfolio's ability to
achieve its investment objective.
MORTGAGE-BACKED SECURITIES
Each Portfolio other than the Money Market Portfolio may invest in
mortgage-backed securities.
MORTGAGE PASS-THROUGH SECURITIES. These are securities representing
interests in "pools" of mortgages in which periodic payments of both interest
and principal on the securities are made by "passing through" periodic payments
made by the individual borrowers on the residential mortgage loans underlying
such securities (net of fees paid to the issuer or guarantor of the securities
and possibly other costs). Early repayment of principal on mortgage pass-through
securities (arising from prepayments of principal due to sale of the underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose a Portfolio to a lower rate of return upon reinvestment of
principal. Payment of principal and interest on some mortgage pass-through
securities may be guaranteed by the full faith and credit of the U.S. Government
(in the case of securities guaranteed by the Government National Mortgage
Association, "GNMA"), or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by the Federal National
Mortgage Association, "FNMA," or the Federal Home Loan Mortgage Corporation,
"FHLMC"). Mortgage pass-through securities created by non-governmental issuers
(such as commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers) may
be uninsured or may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance, and letters of
credit, which may be issued by governmental entities, private insurers, or the
mortgage poolers.
GNMA CERTIFICATES. GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans on which timely payment
of interest and principal is guaranteed by the full faith and credit of the U.S.
Government. GNMA certificates differ from typical bonds because principal is
repaid monthly over the term of the loan rather than returned in a lump sum at
maturity. Although the mortgage loans in the pool will have maturities of up to
30 years, the actual average life of the GNMA certificates typically will be
substantially less
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because the mortgages may be purchased at any time prior to maturity, will be
subject to normal principal amortization, and may be prepaid prior to maturity.
Reinvestment of prepayments may occur at higher or lower rates than the original
yield on the certificates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. FNMA, a federally chartered and
privately owned corporation, issues pass-through securities representing
interests in a pool of conventional mortgage loans. FNMA guarantees the timely
payment of principal and interest, but this guarantee is not backed by the full
faith and credit of the U.S. Government. FNMA also issues REMIC certificates,
which represent interests in a trust funded with FNMA certificates. REMIC
certificates are guaranteed by FNMA and not by the full faith and credit of the
U.S. Government.
FHLMC, a corporate instrumentality of the U.S. Government, issues
participation certificates which represent an interest in a pool of conventional
mortgage loans. FHLMC guarantees the timely payment of interest and the ultimate
collection of principal, and maintains reserves to protect holders against
losses due to default, but these securities are not backed by the full faith and
credit of the U.S. Government. As is the case with GNMA certificates, the actual
maturity of and realized yield on particular FNMA and FHLMC pass-through
securities will vary based on the prepayment experience of the underlying pool
of mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MORTGAGE-BACKED BONDS. All
Portfolios other than the Money Market Portfolio may purchase mortgage-backed
securities issued by financial institutions such as commercial banks, savings
and loan associations, mortgage banks, and securities broker-dealers (or
affiliates of such institutions established to issue these securities) in the
form of either collateralized mortgage obligations ("CMOs") or mortgage-backed
bonds. CMOs are obligations fully collateralized directly or indirectly by a
pool of mortgages on which payments of principal and interest are dedicated to
payment of principal and interest on the CMOs. Payments are passed through to
the holders on the same schedule as they are received. Mortgage-backed bonds are
general obligations of the issuer fully collateralized directly or indirectly by
a pool of mortgages. The mortgages serve as collateral for the issuer's payment
obligations on the bonds but interest and principal payments on the mortgages
are not passed through either directly (as with GNMA certificates and FNMA and
FHLMC pass-through securities) or on a modified basis (as with CMOs).
Accordingly, a change in the rate of prepayments on the pool of mortgages could
change the effective maturity of a CMO but not that of a mortgage-backed bond
(although, like many bonds, mortgage-backed bonds may be callable by the issuer
prior to maturity). Although the mortgage-related securities securing these
obligations may be subject to a government guarantee or third-party support, the
obligation itself is not so guaranteed. Therefore, if the collateral securing
the obligation is insufficient to make payment on the obligation, a holder could
sustain a loss. If new types of mortgage-related securities are developed and
offered to other types of investors, investments in such securities will be
considered.
RISKS OF MORTGAGE-BACKED SECURITIES. In the case of mortgage pass-through
securities, such as GNMA certificates or FNMA and FHLMC mortgage-backed
obligations, or modified pass-through securities, such as CMOs issued by various
financial institutions, early repayment of principal arising from prepayments of
principal on the underlying mortgage loans due to the sale of the underlying
property, the refinancing of the loan, or foreclosure may expose a Portfolio to
a lower rate of return upon reinvestment of the principal. Prepayment rates vary
widely and may be affected by changes in market interest rates and other
economic trends and factors. In periods of falling interest rates, the rate of
prepayment tends to increase, thereby shortening the actual average life of the
mortgage-backed security. Conversely, when interest rates are rising, the rate
of prepayment tends to decrease, thereby lengthening the actual average life of
the mortgage-backed security. Accordingly, it is not possible to accurately
predict the average life of a particular pool. Reinvestment of prepayments may
occur at higher or lower rates than the original yield on the securities.
Therefore, the actual maturity and realized yield on pass-through or modified
pass-through mortgage-backed securities will vary based upon the prepayment
experience of the underlying pool of mortgages.
ASSET-BACKED SECURITIES
Asset-backed securities represent fractional interests in pools of leases,
retail installment loans and revolving credit receivables, both secured and
unsecured. These assets are generally held by a trust. Payments of principal and
interest or interest only are passed through to certificate holders and may be
guaranteed up to certain amounts by letters of credit issued by a financial
institution affiliated or unaffiliated with the trustee or originator of the
trust.
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Underlying automobile sales contracts or credit card receivables are subject
to prepayment, which may reduce the overall return to certificate holders.
Nevertheless, principal repayment rates tend not to vary much with interest
rates and the short-term nature of the underlying car loans or other receivables
tends to dampen the impact of any change in the prepayment level. Certificate
holders may experience delays in payment on the certificates if the full amounts
due on underlying sales contracts or receivables are not realized by the trust
because of unanticipated legal or administrative costs of enforcing the
contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. Other asset-backed
securities may be developed in the future.
ZERO COUPON BONDS
The Balanced Portfolio may invest in zero coupon securities. Zero coupon
bonds are debt obligations which make no fixed interest payments but instead are
issued at a significant discount from face value. Like other debt securities,
the market price can reflect a premium or discount, in addition to the original
issue discount, reflecting the market's judgment as to the issuer's
creditworthiness, the interest rate or other similar factors. The original issue
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity (or the first interest payment date) at
a rate of interest reflecting the market rate at the time of issuance. Because
zero coupon bonds do not make periodic interest payments, their prices can be
very volatile when market interest rates change.
The original issue discount on zero coupon bonds must be included in a
Portfolio's income ratably as it accrues. Accordingly, to qualify for tax
treatment as a regulated investment company and to avoid a certain excise tax, a
Portfolio may be required to distribute as a dividend an amount that is greater
than the total amount of cash it actually receives. These distributions must be
made from the Portfolio's cash assets or, if necessary, from the proceeds of
sales of portfolio securities. Such sales could occur at a time which would be
disadvantageous to a Portfolio and when the Portfolio would not otherwise choose
to dispose of the assets.
PAY-IN-KIND BONDS
The Balanced Portfolio may invest in pay-in-kind bonds. These bonds pay
"interest" through the issuance of additional bonds, thereby adding debt to the
issuer's balance sheet. The market prices of these securities are likely to
respond to changes in interest rates to a greater degree than the prices of
securities paying interest currently. Pay-in-kind bonds carry additional risk in
that, unlike bonds that pay interest throughout the period to maturity, a
Portfolio will realize no cash until the cash payment date and the Portfolio may
obtain no return at all on its investment if the issuer defaults.
The holder of a pay-in-kind bond must accrue income with respect to these
securities prior to the receipt of cash payments thereon. To avoid liability for
federal income and excise taxes, a Portfolio most likely will be required to
distribute income accrued with respect to these securities, even though the
Portfolio has not received that income in cash, and may be required to dispose
of portfolio securities under disadvantageous circumstances in order to generate
cash to satisfy these distribution requirements.
COLLATERALIZED BOND OBLIGATIONS
A collateralized bond obligation ("CBO") is a type of asset-backed security.
Specifically, a CBO is an investment grade bond which is backed by a diversified
pool of high risk, high yield fixed income securities. The pool of high yield
securities is separated into "tiers" representing different degrees of credit
quality. The top tier of CBOs is backed by the pooled securities with the
highest degree of credit quality and pays the lowest interest rate. Lower-tier
CBOs represent lower degrees of credit quality and pay higher interest rates to
compensate for the attendant risk. The bottom tier typically receives the
residual interest payments (I.E. money that is left over after the higher tiers
have been paid) rather than a fixed interest rate. The return on the bottom tier
of CBOs is especially sensitive to the rate of defaults in the collateral pool.
EURODOLLAR AND YANKEEDOLLAR OBLIGATIONS
Eurodollar obligations are U.S. dollar obligations issued outside the United
States by domestic or foreign entities,
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while Yankeedollar obligations are U.S. dollar obligations issued inside the
United States by foreign entities. There is generally less publicly available
information about foreign issuers and there may be less governmental regulation
and supervision of foreign stock exchanges, brokers and listed companies.
Foreign issuers may use different accounting and financial standards, and the
addition of foreign governmental restrictions may affect adversely the payment
of principal and interest on foreign investments. In addition, not all foreign
branches of United States banks are supervised or examined by regulatory
authorities as are United States banks, and such branches may not be subject to
reserve requirements.
FOREIGN SECURITIES
The Balanced Portfolio may invest in equity securities of foreign issuers.
That Portfolio may invest up to 50 percent of its net assets in such securities.
The Balanced Portfolio and Equity Portfolio may invest in American Depository
Receipts ("ADRs"), which are described below. The Fixed Income Portfolio may
invest in debt obligations of foreign issuers, including foreign governments and
their agencies and instrumentalities. Investments in foreign securities may
offer unique potential benefits such as substantial growth in industries not yet
developed in the particular country. Such investments also permit a Portfolio to
invest in foreign countries with economic policies or business cycles different
from those of the United States, or to reduce fluctuations in portfolio value by
taking advantage of foreign stock markets that may not move in a manner parallel
to U.S. markets. Investments in securities of foreign issuers involve certain
risks not ordinarily associated with investments in securities of domestic
issuers. Such risks include fluctuations in foreign exchange rates, U.S. also,
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions. In addition, with respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability, or diplomatic developments that could adversely affect
investments in those countries. Since the Balanced Portfolio may invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in that Portfolio and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those to which U.S. companies are subject.
Foreign securities markets, while growing in volume, have, for the most part,
substantially less volume than U.S. markets. Securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable U.S. companies. Transactional costs in non-U.S. securities markets
are generally higher than in U.S. securities markets. There is generally less
government supervision and regulation of exchanges, brokers, and issuers than
there is in the United States. A Portfolio might have greater difficulty taking
appropriate legal action with respect to foreign investments in non-U.S. courts
than with respect to domestic issuers in U.S. courts. In addition, transactions
in foreign securities may involve greater time from the trade date until
settlement than domestic securities transactions and involve the risk of
possible losses through the holding of securities by custodians and securities
depositories in foreign countries. All of the foregoing risks may be intensified
in emerging markets.
Dividend and interest income from foreign securities may generally be
subject to withholding taxes by the country in which the issuer is located and
may not be recoverable by a Portfolio or its investors in all cases.
ADRs are certificates issued by a U.S. bank or trust company representing
the right to receive securities of a foreign issuer deposited in a foreign
subsidiary or branch or a correspondent of that bank. Generally, ADRs are
designed for use in U.S. securities markets and may offer U.S. investors more
liquidity than the underlying securities. The Portfolio may invest in
unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose
material information in the U.S. and, therefore, there may not be a correlation
between such information and the market value of such ADRs.
RESTRICTED SECURITIES, 144A SECURITIES AND ILLIQUID SECURITIES
The Equity Portfolio, the Balanced Portfolio and the Fixed Income Portfolio
may invest in restricted securities such as private placements, and in 144A
Securities. Once acquired, restricted securities may be sold by a Portfolio only
in privately negotiated transactions or in a public offering with respect to
which a registration statement is in effect under the Securities Act of 1933. If
sold in a privately negotiated transaction, a Portfolio may have difficulty
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finding a buyer and may be required to sell at a price that is less than the
Adviser had anticipated. Where registration is required, a Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Portfolio might obtain a less favorable price than prevailed when it decided
to sell.
Rule 144A securities, although not registered, may be resold to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act. The
Adviser, acting pursuant to guidelines established by the Board, may determine
that some Rule 144A securities are liquid.
A Portfolio may not invest in any illiquid restricted security if, after
acquisition thereof, more than 15 percent of the Portfolio's assets would be
invested in illiquid securities, which are securities that cannot be expected to
be sold within seven days at approximately the price at which they are valued.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Trust may, on behalf of each Portfolio, purchase securities on a
when-issued or delayed delivery basis. When-issued and delayed delivery
transactions arise when securities are bought with payment and delivery taking
place in the future. The settlement dates of these transactions, which may be a
month or more after entering into the transaction, are determined by mutual
agreement of the parties. The Trust bears the risk that, on the settlement date,
the market value of the securities may vary from the purchase price. At the time
the Trust makes a commitment to purchase securities on a when- issued or delayed
delivery basis, it will record the transaction and reflect the value each day of
such securities in determining the net asset value of the Portfolio in question.
There are no fees or other expenses associated with these types of transactions
other than normal transaction costs. To the extent the Trust engages in
when-issued and delayed delivery transactions, it will do so for the purpose of
acquiring portfolio instruments consistent with the investment objective and
policies of the respective Portfolio and not for the purpose of investment
leverage or to speculate on interest rate changes. When effecting when-issued
and delayed delivery transactions, cash or liquid securities of a Portfolio in
an amount sufficient to make payment for the obligations to be purchased will be
segregated at the trade date and maintained until the transaction has been
settled. The Adviser will ensure that such assets are segregated at all times
and are sufficient to satisfy these obligations. The Portfolio may dispose of
these securities before the issuance thereof. However, absent extraordinary
circumstances not presently foreseen, it is the Trust's policy not to divest
itself of its right to acquire these securities prior to the settlement date
thereof.
VARIABLE AND FLOATING RATE SECURITIES
Each Portfolio may invest in variable and floating rate securities. Variable
rate securities provide for automatic establishment of a new interest rate at
fixed intervals (i.e., daily, monthly, semi-annually, etc.). Floating rate
securities provide for automatic adjustment of the interest rate whenever some
specified interest rate index changes. The interest rate on variable or floating
rate securities is ordinarily determined by reference to, or is a percentage of,
a bank's prime rate, the 90-day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an index of short-term
interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on seven days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Each Portfolio may invest in certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by commercial
banks and in certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ("S&Ls"). Certificates of
deposit are receipts from a bank or an S&L for funds deposited for a specified
period of time at a specified rate of return. Time deposits in banks or S&Ls are
generally similar to certificates of deposit, but are uncertificated. Bankers'
acceptances are time drafts drawn on commercial banks by borrowers, usually in
connection with international commercial transactions. The Money
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Market Portfolio, Equity Portfolio and Fixed Income Portfolio may each invest in
obligations of foreign branches of domestic commercial banks and foreign banks
so long as the securities are U.S. dollar-denominated. The Balanced Portfolio
may also invest in these types of instruments but such instruments will not
necessarily be U.S. dollar- denominated. See "Foreign Securities" below for
information regarding risks associated with investments in foreign securities.
The Portfolios will not invest in obligations issued by a commercial bank or
S&L unless:
1. The bank or S&L has total assets of at least $1 billion, or the equivalent
in other currencies, and the institution has outstanding securities rated A
or better by Moody's or Standard & Poor's, or, if the institution has no
outstanding securities rated by Moody's or Standard & Poor's, it has, in
the determination of the Adviser, similar credit-worthiness to institutions
having outstanding securities so rated;
2. In the case of a U.S. bank or S&L, its deposits are federally insured; and
3. In the case of a foreign bank, the security is, in the determination of the
Adviser, of an investment quality comparable with other debt securities
which may be purchased by the Portfolio. These limitations do not prohibit
investments in securities issued by foreign branches of U.S. banks,
provided such U.S. banks meet the foregoing requirements.
COMMERCIAL PAPER
Commercial paper refers to promissory notes representing an unsecured debt of a
corporation or finance company with a fixed maturity of no more than 270 days. A
variable amount master demand note (which is a type of commercial paper)
represents a direct borrowing arrangement involving periodically fluctuating
rates of interest under a letter agreement between a commercial paper issuer and
an institutional lender pursuant to which the lender may determine to invest
varying amounts.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements and reverse repurchase
agreements. Repurchase agreements permit an investor to maintain liquidity and
earn income over periods of time as short as overnight. In these transactions, a
Portfolio purchases U.S. Treasury obligations or U.S. Government securities (the
"underlying securities") from a broker or bank, which agrees to repurchase the
underlying securities on a certain date or on demand and at a fixed price
calculated to produce a previously agreed upon return to the Portfolio. If the
broker or bank were to default on its repurchase obligation and the underlying
securities were sold for a lesser amount, the Portfolio would realize a loss. A
repurchase transaction will be subject to guidelines approved by the Board of
Trustees of the Trust, which include monitoring the credit-worthiness of the
parties with which the Portfolio engages in repurchase transactions, obtaining
collateral at least equal in value to the repurchase obligation, and marking the
collateral to market on a daily basis.
A reverse repurchase agreement involves the temporary sale of a security by
a Portfolio and its agreement to repurchase the instrument at a specified time
and price. Such agreements are short-term in nature. A Portfolio will segregate
cash or liquid securities whenever it enters into reverse repurchase agreements.
Such transactions may be considered to be borrowings.
Although not one of the Trust's fundamental policies, it is the Trust's
present policy not to enter into a repurchase transaction which will cause more
than 10 percent of the assets of the Money Market Portfolio, the Fixed Income
Portfolio or the Government Securities Portfolio to be subject to repurchase
agreements having a maturity of more than seven days. This 10 percent limit also
includes the aggregate of (i) fixed time deposits subject to withdrawal
penalties, other than overnight deposits; and (ii) any restricted securities
(i.e., securities which cannot freely be sold for legal reasons) and any
securities for which market quotations are not readily available; however, this
10 percent limit does not include any obligations payable at principal amount
plus accrued interest, on demand or within seven days after demand, and thus
does not include repurchase agreements having a maturity of seven days or less.
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MORTGAGE DOLLAR ROLLS
In a mortgage dollar roll, a Portfolio sells a fixed income security for
delivery in the current month and simultaneously contracts to repurchase a
substantially similar security (same type, coupon and maturity) on a specified
future date. During the roll period, the Portfolio would forego principal and
interest paid on such securities. The Portfolio would be compensated by the
difference between the current sales price and the forward price for the future
purchase, as well as by any interest earned on the proceeds of the initial sale.
In accordance with regulatory requirements, a Portfolio will segregate cash
or liquid securities whenever it enters into mortgage dollar rolls. Such
transactions may be considered to be borrowings for purposes of the Portfolios'
fundamental policies concerning borrowings.
WARRANTS
The Common Stock and Balanced Portfolios may invest in warrants. Each of
these Portfolios may invest up to 5 percent of its net assets in warrants (not
including those that have been acquired in units or attached to other
securities), measured at the time of acquisition, and each such Portfolio may
acquire a warrant not listed on the New York or American Stock Exchanges if,
after such acquisition, no more than 2 percent of the Portfolio's net assets
would be invested in such warrants.
The holder of a warrant has the right to purchase a given number of shares
of a security of a particular issuer at a specified price until expiration of
the warrant. Such investments provide greater potential for profit or loss than
a direct purchase of the same amount of the securities. Prices of warrants do
not necessarily move in tandem with the prices of the underlying securities, and
are considered speculative investments. They pay no dividends and confer no
rights other than a purchase option. If a warrant is not exercised by the date
of its expiration, a Portfolio would lose its entire investment in such warrant.
FUTURES CONTRACTS
The Common Stock, Corporate Bond, Government Securities and Balanced
Portfolios may engage in futures contracts and may purchase and sell interest
rate futures contracts. The Common Stock and Balanced Portfolios may purchase
and sell stock index futures contracts, interest rate futures contracts, and
futures contracts based upon other financial instruments and components. The
Balanced Portfolio may also engage in gold and other precious metals futures
contracts.
Such investments may be made by these Portfolios solely for the purpose of
hedging against the effect that changes in general market conditions, interest
rates, and conditions affecting particular industries may have on the values of
securities held in a Portfolio or in which a Portfolio intends to purchase, and
not for purposes of speculation.
GENERAL DESCRIPTION OF FUTURES CONTRACTS. A futures contract provides for
the future sale by one party and purchase by another party of a specified amount
of a particular financial instrument (debt security) or commodity for a
specified price at a designated date, time, and place. Although futures
contracts by their terms require actual future delivery of and payment for the
underlying financial instruments, such contracts are usually closed out before
the delivery date. Closing out an open futures contract position is effected by
entering into an offsetting sale or purchase, respectively, for the same
aggregate amount of the same financial instrument on the same delivery date.
Where a Portfolio has sold a futures contract, if the offsetting price is more
than the original futures contract purchase price, the Portfolio realizes a
gain; if it is less, the Portfolio realizes a loss.
At the time a Portfolio enters into a futures contract, an amount of cash,
or liquid securities equal to the fair market value less initial margin of the
futures contract, will be deposited in a segregated account with the Trust's
custodian to collateralize the position and thereby ensure that such futures
contract is covered. A Portfolio may be required to deposit additional assets in
the segregated account in order to continue covering the contract as market
conditions change. In addition, each Portfolio will comply with certain
regulations of the Commodity Futures Trading Commission to qualify for an
exclusion from being a "commodity pool operator".
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INTEREST RATE FUTURES CONTRACTS. The Common Stock, Corporate Bond,
Government Securities and Balanced Portfolios may purchase and sell interest
rate futures contracts. An interest rate futures contract is an obligation
traded on an exchange or board of trade that requires the purchaser to accept
delivery, and the seller to make delivery, of a specified quantity of the
underlying financial instrument, such as U.S. Treasury bills and bonds, in a
stated delivery month, at a price fixed in the contract.
These Portfolios may purchase and sell interest rate futures as a hedge
against changes in interest rates that adversely impact the value of debt
instruments and other interest rate sensitive securities being held by a
Portfolio. A Portfolio might employ a hedging strategy whereby it would purchase
an interest rate futures contract when it is not fully invested in long-term
debt securities but wishes to defer their purchase until it can orderly invest
in such securities or because short-term yields are higher than long-term
yields. Such a purchase would enable the Portfolio to earn the income on a
short-term security while at the same time minimizing the effect of all or part
of an increase in the market price of the long-term debt security which the
Portfolio intends to purchase in the future. A rise in the price of the
long-term debt security prior to its purchase either would be offset by an
increase in the value of the futures contract purchased by the Portfolio or
avoided by taking delivery of the debt securities under the futures contract.
A Portfolio would sell an interest rate futures contract to continue to
receive the income from a long-term debt security, while endeavoring to avoid
part or all of the decline in market value of that security which would
accompany an increase in interest rates. If interest rates rise, a decline in
the value of the debt security held by the Portfolio would be substantially
offset by the ability of the Portfolio to repurchase at a lower price the
interest rate futures contract previously sold. While the Portfolio could sell
the long-term debt security and invest in a short-term security, this would
ordinarily cause the Portfolio to give up income on its investment since
long-term rates normally exceed short-term rates.
OPTIONS ON FUTURES CONTRACTS. The Common Stock, Corporate Bond, Government
Securities and Balanced Portfolios may purchase options on interest rate futures
contracts, although these Portfolios will not write options on any such
contracts. A futures option gives a Portfolio the right, in return for the
premium paid, to assume a long position (in the case of a call) or short
position (in the case of a put) in a futures contract at a specified exercise
price prior to the expiration of the option. Upon exercise of a call option, the
purchaser acquires a long position in the futures contract and the writer of the
option is assigned the opposite short position. In the case of a put option, the
converse is true. In most cases, however, a Portfolio would close out its
position before expiration by an offsetting purchase or sale.
The Portfolios would enter into options on futures contracts only in
connection with hedging strategies. Generally, these strategies would be
employed under the same market conditions in which a Portfolio would use put and
call options on debt securities, as described in "Options on Securities" below.
STOCK INDEX FUTURES CONTRACTS. The Common Stock and Balanced Portfolios may
purchase and sell stock index futures contracts. A "stock index" assigns
relative values to the common stocks included in an index (for example, the
Standard & Poor's 500 and Composite Stock Price Index or the New York Stock
Exchange Composite Index), and the index fluctuates with changes in the market
values of such stocks. A stock index futures contract is a bilateral agreement
to accept or make payment, depending on whether a contract is purchased or sold,
of an amount of cash equal to a specified dollar amount multiplied by the
difference between the stock index value at the close of the last trading day of
the contract and the price at which the futures contract is originally purchased
or sold.
To the extent that changes in the value of the Equity Portfolio or Balanced
Portfolio correspond to changes in a given stock index, the sale of futures
contracts on that index ("short hedge") would substantially reduce the risk to
the Portfolio of a market decline and, by so doing, provide an alternative to a
liquidation of securities position, which may be difficult to accomplish in a
rapid and orderly fashion. Stock index futures contracts might also be sold:
1. When a sale of portfolio securities at that time would appear to be
disadvantageous in the long-term because such liquidation would:
a. Forego possible appreciation,
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b. Create a situation in which the securities would be difficult to
repurchase, or
c. Create substantial brokerage commission;
2. When a liquidation of part of the investment portfolio has commenced or is
contemplated, but there is, in the Adviser's determination, a substantial
risk of a major price decline before liquidation can be completed; or
3. To close out stock index futures purchase transactions.
Where the Adviser anticipates a significant market or market sector advance,
the purchase of a stock index futures contract ("long hedge") affords a hedge
against the possibility of not participating in such advance at a time when a
Portfolio is not fully invested. Such purchases would serve as a temporary
substitute for the purchase of individual stocks, which may then be purchased in
an orderly fashion. As purchases of stock are made, an amount of index futures
contracts which is comparable to the amount of stock purchased would be
terminated by offsetting closing sales transactions. Stock index futures might
also be purchased:
1. If the Portfolio is attempting to purchase equity positions in issues which
it may have or is having difficulty purchasing at prices considered by the
Adviser to be fair value based upon the price of the stock at the time it
qualified for inclusion in the investment portfolio, or
2. To close out stock index futures sales transactions.
GOLD FUTURES CONTRACTS. The Balanced Portfolio may enter into futures
contracts on gold. A gold futures contract is a standardized contract which is
traded on a regulated commodity futures exchange, and which provides for the
future delivery of a specified amount of gold at a specified date, time, and
price. When the Portfolio purchases a gold futures contract, it becomes
obligated to take delivery and pay for the gold from the seller in accordance
with the terms of the contract. When the Portfolio sells a gold futures
contract, it becomes obligated to make delivery of the gold to the purchaser in
accordance with the terms of the contract. The Portfolio will enter into gold
futures contracts only for the purpose of hedging its holdings or intended
holdings of gold stocks. The Portfolio will not engage in these contracts for
speculation or for achieving leverage. The hedging activities may include
purchases of futures contracts as an offset against the effect of anticipated
increases in the price of gold or sales of futures contracts as an offset
against the effect of anticipated declines in the price of gold.
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures and futures options for hedging purposes.
While hedging transactions may protect a Portfolio against adverse movements in
the general level of interest rates and economic conditions, such transactions
could also preclude the Portfolio from the opportunity to benefit from favorable
movements in the underlying component. There can be no guarantee that the
anticipated correlation between price movements in the hedging vehicle and in
the portfolio securities being hedged will occur. An incorrect correlation could
result in a loss on both the hedged securities and the hedging vehicle so that
the Portfolio's return might have been better if hedging had not been attempted.
The degree of imperfection of correlation depends on circumstances such as
variations in speculative market demand for futures and futures options,
including technical influences in futures trading and futures options, and
differences between the financial instruments being hedged and the instruments
underlying the standard contracts available for trading in such respects as
interest rate levels, maturities, and credit-worthiness of issuers. A decision
as to whether, when, and how to hedge involves the exercise of skill and
judgment and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day. Once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. In addition, certain of these instruments are relatively new
and without a significant trading history. Lack of a liquid market for any
reason may prevent a
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Portfolio from liquidating an unfavorable position and the Portfolio would
remain obligated to meet margin requirements and continue to incur losses until
the position is closed.
A Portfolio will only enter into futures contracts or futures options which
are standardized and traded on a U.S. exchange or board of trade. A Portfolio
will not enter into a futures contract or purchase a futures option if
immediately thereafter the initial margin deposits for futures contracts held by
the Portfolio plus premiums paid by it for open futures options positions,
excluding transactions entered into for bona fide hedging purposes and less the
amount by which any such positions are "in-the-money" (i.e., the amount by which
the value of the contract exceeds the exercise price), would exceed 5 percent of
the Portfolio's net assets.
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Common Stock, Asset Allocation, Corporate Bond and Government Securities
Portfolios may purchase put and call options on securities, and the Common Stock
and Balanced Portfolios may purchase put and call options on stock indices at
such times as the Adviser deems appropriate and consistent with a Portfolio's
investment objective. Such Portfolios may also write listed "covered" calls and
"secured" put options. A Portfolio may write covered and secured options with
respect to not more than 25 percent of its net assets. A Portfolio may purchase
call and put options with a value of up to 5 percent of its net assets. Each of
these Portfolios may enter into closing transactions in order to terminate its
obligations either as a writer or a purchaser of an option prior to the
expiration of the option.
PURCHASING OPTIONS ON SECURITIES. An option on a security is a contract that
gives the purchaser of the option, in return for the premium paid, the right to
buy a specified security (in the case of a call option) or to sell a specified
security (in the case of a put option) from or to the seller ("writer") of the
option at a designated price during the term of the option. A Portfolio may
purchase put options on securities to protect holdings in an underlying or
related security against a substantial decline in market value. Securities are
considered related if their price movements generally correlate to one another.
For example, the purchase of put options on debt securities held by a Portfolio
would enable a Portfolio to protect, at least partially, an unrealized gain in
an appreciated security without actually selling the security. In addition, the
Portfolio would continue to receive interest income on such security.
A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities which the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly manner.
A Portfolio may sell put or call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transactional costs paid on
the option which is sold.
WRITING COVERED CALL AND SECURED PUT OPTIONS. In order to earn additional
income on its portfolio securities or to protect partially against declines in
the value of such securities, the Common Stock, Asset Allocation, Corporate Bond
and Government Securities Portfolios may each write "covered" call and "secured"
put options. The exercise price of a call option may be below, equal to, or
above the current market value of the underlying security at the time the option
is written. During the option period, a covered call option writer may be
assigned an exercise notice from OCC if exchanged traded requiring the writer to
deliver the underlying security against payment of the exercise price. This
obligation is terminated upon the expiration of the option period or at such
earlier time in which the writer effects a closing purchase transaction. Closing
purchase transactions will ordinarily be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to
permit the sale of the underlying security, or to enable the Portfolio to write
another call option on the underlying security with either a different exercise
price or expiration date or both.
In order to earn additional income or to protect partially against increases
in the value or securities to be purchased, the Asset Allocation, Corporate
Bond, Government Securities and Equity Portfolios may write "secured" put
options. During the option period, the writer of a put option may be assigned an
exercise notice requiring the writer to purchase the underlying security at the
exercise price.
A Portfolio may write a call or put option only if the call option is
"covered" or the put option is "secured" by the Portfolio. Under a covered call
option, the Portfolio is obligated, as the writer of the option, to own the
underlying securities subject to the option or hold a call at an equal or lower
exercise price, for the same exercise period, and on the same securities as the
written call. Under a secured put option, a Portfolio must maintain, in a
segregated
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account with the Trust's custodian, cash or liquid securities with a value
sufficient to meet its obligation as writer of the option. A put may also be
secured if the Portfolio holds a put on the same underlying security at an equal
or greater exercise price. Prior to exercise or expiration, an option may be
closed out by an offsetting purchase or sale of an option of the same Portfolio.
OPTIONS ON SECURITIES INDICES. The Common Stock and Balanced Portfolios may
purchase call and put options on securities indices. Call and put options on
securities indices also may be purchased or sold by a Portfolio for the same
purposes as the purchase or sale of options on securities. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security. The
Common Stock and Balanced Portfolios may write put and call options on
securities indices. When such options are written, the Portfolio is required to
maintain a segregated account consisting of cash, or liquid securities, or the
Portfolio must purchase a like option of greater value that will expire no
earlier than the option written. The purchase of such options may not enable a
Portfolio to hedge effectively against stock market risk if they are not highly
correlated with the value of a Portfolio's securities. Moreover, the ability to
hedge effectively depends upon the ability to predict movements in the stock
market, which cannot be done accurately in all cases.
RISKS OF OPTIONS TRANSACTIONS. The purchase and writing of options involves
certain risks. During the option period, the covered call writer has, in return
for the premium on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, and, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation under
the option and must deliver the underlying securities at the exercise price. If
a put or call option purchased by a Portfolio is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a call,
remains less than or equal to the exercise price, the Portfolio will lose its
entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Portfolio may be unable to
close out a position. If a Portfolio cannot effect a closing transaction, it
will not be able to sell the underlying security or securities in a segregated
account while the previously written option remains outstanding, even though it
might otherwise be advantageous to do so. Possible reasons for the absence of a
liquid secondary market on a national securities exchange could include:
insufficient trading interest, restrictions imposed by national securities
exchanges, trading halts or suspensions with respect to options or their
underlying securities, inadequacy of the facilities of national securities
exchanges or The Options Clearing Corporation due to a high trading volume or
other events, and a decision by one or more national securities exchanges to
discontinue the trading of call options or to impose restrictions on certain
types of orders.
Since option premiums paid or received by a Portfolio, as compared to
underlying investments, are small in relation to the market value of such
investments, buying and selling put and call options offer large amounts of
leverage. Thus, the leverage offered by trading in options could result in a
Portfolio's net asset value being more sensitive to changes in the value of the
underlying securities.
FOREIGN CURRENCY TRANSACTIONS
The Balanced Portfolio may enter into foreign currency futures contracts and
forward currency contracts. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a foreign
currency, at a future date at a price set at the time of the contract. A forward
currency contract is an obligation to purchase or sell a currency against
another currency at a future date at a price agreed upon by the parties. The
Portfolio may either accept or make delivery of the currency at the maturity of
the contract or, prior to maturity, enter into a closing transaction involving
the purchase or sale of an offsetting contract. The Portfolio will engage in
foreign currency futures contracts and forward currency transactions in
anticipation of or to protect itself against fluctuations
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in currency exchange rates. The Portfolio will not commit more than 15 percent
of its total assets computed at market value at the time of commitment to a
foreign currency futures or forward currency contracts. The Portfolio will
purchase and sell such contracts for hedging purposes and not as an investment.
The Portfolio will not enter into a foreign currency contract with a term of
greater than one year.
Forward currency contracts are not traded on regulated commodities
exchanges. A Portfolio entering into a forward currency contract incurs the risk
of default by the counter party to the transaction. There can be no assurance
that a liquid market will exist when a Portfolio seeks to close out a foreign
currency futures or forward currency position, in which case a Portfolio might
not be able to effect a closing purchase transaction at any particular time.
While these contracts tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time, they tend to limit any potential
gain which might result should the value of such currency increase.
Although the Balanced Portfolio values assets daily in U.S. dollars, it does
not intend to physically convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Portfolio will do so from time to time and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
OPTIONS ON FOREIGN CURRENCIES
The Balanced Portfolio may invest up to 5 percent of its total assets, taken
at market value at the time of investment, in call and put options on domestic
and foreign securities and foreign currencies. The Portfolio may purchase call
and put options on foreign currencies as a hedge against changes in the value of
the U.S. dollar (or another currency) in relation to a foreign currency in which
portfolio securities of the Portfolio may be denominated. A call option on a
foreign currency gives the purchaser the right to buy, and a put option the
right to sell, a certain amount of foreign currency at a specified price during
a fixed period of time. The Portfolio may enter into closing sale transactions
with respect to such options, exercise them, or permit them to expire.
The Balanced Portfolio may employ hedging strategies with options on
currencies before the Portfolio purchases a foreign security denominated in the
hedged currency, during the period the Portfolio holds the foreign security, or
between the day the foreign security is purchased or sold and the date on which
payment therefor is made or received. Hedging against a change in the value of a
foreign currency in the foregoing manner does not eliminate fluctuations in the
prices of portfolio securities or prevent losses if the prices of such
securities decline. Furthermore, such hedging transactions reduce or preclude
the opportunity for gain if the value of the hedged currency should increase
relative to the U.S. dollar. The Portfolio will purchase options on foreign
currencies only for hedging purposes and will not speculate in options on
foreign currencies. The Portfolio may invest in options on foreign currency
which are either listed on a domestic securities exchange or traded on a
recognized foreign exchange.
An option position on a foreign currency may be closed out only on an
exchange which provides a secondary market for an option of the same series.
Although the Balanced Portfolio will purchase only exchange-traded options,
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option, or at any particular time. In the event no liquid
secondary market exists, it might not be possible to effect closing transactions
in particular options. If the Portfolio cannot close out an exchange-traded
option which it holds, it would have to exercise its option in order to realize
any profit and would incur transactional costs on the sale of the underlying
assets.
SEGREGATION AND COVER FOR OPTIONS, FUTURES AND OTHER FINANCIAL INSTRUMENTS
The use of the financial instruments discussed above, I.E., interest rate
transactions (including swaps, caps, floors and collars), futures contracts,
options on future contacts, options on securities and securities indices, and
forward contracts (collectively, "Financial Instruments"), may be subject to
applicable regulations of the SEC, the several exchanges upon which they are
traded, and/or the Commodity Futures Trading Commission ("CFTC").
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Each Portfolio is required to maintain assets as "cover," maintain
segregated accounts or make margin payments when it takes positions in Financial
Instruments involving obligations to third parties (I.E., Financial Instruments
other than purchased options). No Portfolio will enter into such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies or other options, futures contracts or forward contracts, or (2) cash
and liquid assets with a value, marked-to-market daily, sufficient to cover its
potential obligations to the extent not covered as provided in (1) above. Each
Portfolio will comply with SEC guidelines regarding cover for these instruments
and will, if the guidelines so require, set aside cash or liquid assets in a
segregated account with its custodian in the prescribed amount as determined
daily.
BORROWING
For temporary purposes, such as to facilitate redemptions, a Portfolio may
borrow money from a bank, but only if immediately after each such borrowing and
continuing thereafter the Portfolio would have asset coverage of 300 percent.
Leveraging by means of borrowing will exaggerate the effect of any increase or
decrease in the value of portfolio securities on a Portfolio's net asset value;
money borrowed will be subject to interest and other costs which may or may not
exceed the income received from the securities purchased with borrowed funds.
The use of borrowing tends to result in a faster than average movement, up or
down, in the net asset value of a Portfolio's shares. A Portfolio also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
INVESTMENT IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each Portfolio (except the Money Market Portfolio) may purchase securities
of other investment companies. Such securities have the potential to appreciate
as do any other securities, but tend to present less risk because their value is
based on a diversified portfolio of investments. The 1940 Act expressly permits
mutual funds such as the Trust to invest in other investment companies within
prescribed limitations. An investment company may invest in other investment
companies if at the time of such investment (1) it does not purchase more than 3
percent of the voting securities of any one investment company, (2) it does not
invest more than 5 percent of its assets in any single investment company, and
(3) the investment in all investment companies does not exceed 10 percent of
assets. Each Portfolio will comply with all of these limitations with respect to
the purchase of securities issued by other investment companies.
Investment companies in which the Portfolios may invest charge advisory and
administrative fees and may also assess a sales load and/or distribution fees.
Therefore, investors in a Portfolio that invested in other investment companies
would indirectly bear costs associated with those investments as well as the
costs associated with investing in the Portfolio. The percentage limitations
described above significantly limit the costs a Portfolio may incur in
connection with such investments.
INVESTMENT PERFORMANCE
The methods by which the investment performance of the Money Market
Portfolio are calculated for a specified period of time are described below.
The first method, which results in an amount referred to as the "current
yield," assumes an account containing exactly one share at the beginning of the
period. (The net asset value of this share will be $1.00 except under
extraordinary circumstances.) The net change in the value of the account during
the period is then determined by subtracting this beginning value from the value
of the account at the end of the period; however, capital changes (i.e.,
realized gains and losses from the sale of securities and unrealized
appreciation and depreciation) are excluded from the calculation.
This net change in the account value is then divided by the value of the
account at the beginning of the period (i.e., normally $1.00 as discussed above)
and the resulting figure (referred to as the "base period return") is then
annualized by multiplying it by 365 and dividing by the number of days in the
period; the result is the "current yield." Normally a seven-day period will be
used in determining yields (both the current yield and the effective yield
discussed below) in published or mailed advertisements.
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The second method results in an amount referred to as the "compounded
effective yield." This represents an annualization of the current yield with
dividends reinvested daily. This compounded effective yield is calculated for a
seven-day period by compounding the unannualized base period return by adding
one to the base period return, raising the sum to a power equal to 365 divided
by seven and subtracting one from the result.
Yield information may be useful to investors in reviewing the performance of
the Money Market Portfolio. However, a number of factors should be taken into
account before using yield information as a basis for comparison with
alternative investments. An investment in the Money Market Portfolio is not
insured and its yields are not guaranteed. The yields normally will fluctuate on
a daily basis. The yields for any given past period are not an indication or
representation by the Trust of future yields or rates of return on the shares of
the Money Market Portfolio and, therefore, they cannot be compared to yields on
savings accounts or other investment alternatives which often provide a
guaranteed fixed yield for a stated period of time, and may be insured by a
government agency. In comparing the yields of one money market fund to another,
consideration should be given to each fund's investment policy, portfolio
quality, portfolio maturity, type of instruments held and operating expenses. In
addition, the yield of the Money Market Portfolio as well as the yield of the
Corporate Bond, Government Securities, Common Stock and Balanced Portfolios will
each be affected by charges imposed by the separate accounts that invest in the
Portfolios. See the Prospectus of the applicable separate account for details.
The Fixed Income Portfolio and Government Securities Portfolio may advertise
investment performance figures, including yield. Each Portfolio's yield will be
based upon a stated 30-day period and will be computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
YIELD = 2 ((A-B/CD)+1)6-1
Where:
A = the dividends and interest earned during the period.
B = the expenses accrued for the period (net of reimbursements, if any).
C = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
D = the maximum offering prices (which is the net asset value) per share
on the last day of the period.
Based on the 30-day period ended December 31, 1998, the average yield for
the Fixed Income Portfolio was _____% and the Government Securities Portfolio
_____%.
Each of the Portfolios may advertise its total return and its cumulative
total return. The total return will be based upon a stated period and will be
computed by finding the average annual compounded rate of return over the stated
period that would equate an initial amount invested to the ending redeemable
value of the investment (assuming reinvestment of all distributions), according
to the following formula:
P (1+T)n=ERV
Where:
P = a hypothetical initial payment of $1,000.
T = the average annual total return.
n = the number of years.
ERV = the ending redeemable value at the end of the stated period of a
hypothetical $1,000 payment made at the beginning of the stated
period.
The cumulative total return will be based upon a stated period and will be
computed by dividing the ending redeemable value of a hypothetical investment by
the value of the initial investment (assuming reinvestment of all
distributions).
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Each investment performance figure will be carried to the nearest hundredth
of one percent.
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
PERIODS ENDED DECEMBER 31, 1998
-------------------------------
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PORTFOLIO NAME ONE YEAR FIVE YEARS 10 YEARS
-------------- -------- ---------- --------
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Equity Portfolio
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Fixed Income Portfolio
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Balanced Portfolio
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Government Securities Portfolio
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SECURITIES TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities for the
Trust, broker-dealer selection, and negotiation of brokerage commission rates.
The Adviser's primary consideration in effecting a securities transaction will
be execution at the most favorable price. A substantial portion of the Trust's
portfolio transactions in fixed income securities will be transacted with
primary market makers acting as principal on a net basis, with no brokerage
commissions being paid by the Trust. In certain instances, the Adviser may make
purchases of underwritten issues at prices which include underwriting fees. In
selecting a broker-dealer to execute each particular transaction, the Adviser
will take the following into consideration: the best net price available; the
reliability, integrity and financial condition of the broker-dealer; and the
size of contribution of the broker-dealer to the investment performance of the
Trust on a continuing basis. The Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by the Investment Advisory
Agreement in question or otherwise solely by reason of its having caused the
Trust to pay a broker-dealer that provides brokerage and research services to
the Adviser an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker-dealer would
have charged for effecting that transaction, if the Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker-dealer, viewed in
terms of either that particular transaction or the Adviser's overall
responsibilities with respect to its clients. The Adviser allocates the orders
placed by it on behalf of the Trust to such broker-dealers who also provide
research or statistical material, or other services to the Trust, the Adviser or
its clients. Such allocation shall be in such amounts and proportions as the
Adviser shall determine and the Adviser will report on said allocations
periodically to the Trust indicating the broker-dealers to whom such allocations
have been made and the basis therefor. Broker-dealers may be selected who
provide brokerage and/or research services to the Trust and/or other accounts
over which the Adviser exercises investment discretion. Such services may
include advice concerning the value of securities (including providing
quotations as to securities); the advisability of investing in, purchasing or
selling securities; the availability of securities or the purchasers or sellers
of securities; furnishing analysis and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts; and effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
The Adviser shall not be deemed to have acted unlawfully, or to have
breached any duty created by a Portfolio's Investment Advisory Agreement or
otherwise, solely by reason of its having caused the Portfolio to pay a
broker-dealer that provides brokerage and research services an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker-dealer would have charged for effecting that
transaction, if the Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the Portfolio. The Adviser allocates orders placed by it on behalf of these
Portfolios in such amounts and proportions as the Adviser shall determine and
the Adviser will report on said allocations regularly to a Portfolio indicating
the broker-dealers to whom such allocations have been made and the basis
therefor.
B-21
<PAGE>
================================================================================
The receipt of research from broker-dealers may be useful to the Adviser in
rendering investment management services to these Portfolios and/or the
Adviser's other clients; conversely, information provided by broker-dealers who
have executed transaction orders on behalf of other clients may be useful to the
Adviser in carrying out its obligations to these Portfolios. The receipt of such
research will not be substituted for the independent research of the Adviser. It
does enable the Adviser to reduce costs to less than those which would have been
required to develop comparable information through its own staff. The use of
broker-dealers who supply research may result in the payment of higher
commissions than those available from other broker-dealers who provide only the
execution of portfolio transactions.
During the fiscal years ended December 31, 1997 and 1998, no Portfolio paid
brokerage commissions to any affiliated brokers.
During the fiscal years ended December 31, 1997 and 1998, $1,075,944 and
$ , respectively, were -- paid in brokerage commissions to brokers.
The Board of Trustees periodically reviews the Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Trust.
MANAGEMENT
THE ADVISER
Conseco Capital Management, Inc. (the "Adviser") provides investment advice
and, in general, supervises the Trust's management and investment program,
furnishes office space, prepares reports for the Trust, monitors compliance by
the Trust in its investment activities and pays all compensation of officers and
Trustees of the Trust who are affiliated persons of the Adviser. The Trust pays
all other expenses incurred in the operation of the Trust, including fees and
expenses of unaffiliated Trustees of the Trust.
The Adviser is a wholly-owned subsidiary of Conseco, Inc. ("Conseco"), a
publicly-owned financial services company, the principal operations of which are
in development, marketing and administration of specialized annuity, life and
health insurance products. Conseco's offices are located at 11825 N.
Pennsylvania Street, Carmel, Indiana 46032. The Adviser manages and serves as
sub-adviser to other registered investment companies and manages the invested
assets of Conseco, which owns or manages several life insurance subsidiaries,
and provides investment and servicing functions to the Conseco companies and
affiliates. The Adviser also manages foundations, endowments, public and
corporate pension plans, and private client accounts. As of December 31, 1998,
the Adviser managed in excess of $35.3 billion in assets.
The Investment Advisory Agreements provide that the Adviser shall not be
liable for any error in judgment or mistake of law or for any loss suffered by
the Trust in connection with any investment policy or the purchase, sale or
redemption of any securities on the recommendations of the Adviser. The
Agreements provide that the Adviser is not protected against any liability to
the Trust or its security holders for which the Adviser shall otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by the Agreements or the
violation of any applicable law.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
ADVISORY FEES ACCRUED AMOUNT REIMBURSED/WAIVED
FISCAL YEAR ENDED DECEMBER 31 FISCAL YEAR ENDED DECEMBER 31
----------------------------- -----------------------------
- ----------------------------------------------------------------------------------------------------------
PORTFOLIO 1997 1998 1997 1998
--------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
- --------------------------------------------------------------- ------------------------------------------
Balanced Portfolio $ 119,987 $ 20,538
- ----------------------------------------------------------------------------------------------------------
Equity Portfolio $1,145,633 $ 511
- ----------------------------------------------------------------------------------------------------------
Fixed Income Portfolio $ 95,504 $ 13,678
- ----------------------------------------------------------------------------------------------------------
</TABLE>
B-22
<PAGE>
- --------------------------------------------------------------------------------
Government Securities Portfolio $ 20,206 $ 9,016
- --------------------------------------------------------------------------------
Money Market Portfolio $ 19,048 $ 5,353
- --------------------------------------------------------------------------------
Pursuant to a contractual arrangement with the Trust, the Adviser has agreed
to waive fees and/or reimburse expenses through April 30, 2000, so that annual
operating expenses of each Portfolio are limited to the following net expenses:
0.75% for the Balanced Portfolio; 0.80% for the Equity Portfolio; 0.70% for the
Fixed Income Portfolio; 0.70% for the Government Securities Portfolio; and 0.45%
for the Money Market Portfolio. This arrangement does not cover interest, taxes,
brokerage commissions, and extraordinary expenses.
Holders of Outstanding shares of Conseco Series Trust for the benefit of
contract owners:
Conseco Variable Insurance Company, (formerly Great American Reserve
Insurance Company),subsidiary of Conseco, Inc
Bankers National Life Insurance Company, subsidiary of Conseco, Inc
Nationwide Insurance Company
Business Men's Assurance Company of America
OTHER SERVICE PROVIDERS
THE ADMINISTRATOR. Conseco Services, LLC (the "Administrator") is a wholly
owned subsidiary of Conseco, and receives compensation from the Trust pursuant
to an Administration Agreement dated ______________. Under the agreement, the
Administrator supervises the overall administration of the Portfolios. These
administrative services include supervising the preparation and filing of all
documents required for compliance by the Portfolios with applicable laws and
regulations, supervising the maintenance of books and records, and other general
administrative responsibilities.
For providing these services, the Administrator receives a fee from each
Portfolio of 0.20% per annum of its average daily net assets.
CUSTODIAN. The Bank of Enw York , 90 Washington Street, 22nd Floor, New
York, New York 10826, serves as custodian of the assets of each Portfolio.
INDEPENDENT ACCOUNTANTS/AUDITORS. PricewaterhouseCoopers LLP, 2900 One
American Square, Box 82002, Indianapolis, Indiana 46282-0002 serves as the
Trust's independent accountant.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their affiliations, if any, with the
Adviser and their principal occupations are set forth below. As of the date of
this Prospectus, Messrs. Parrish and LeCroy are Owners of contracts with Conseco
Variable Insurance Company; none of the other Trustees or officers own any of
the shares of any of the Portfolios, either directly or through ownership of the
Contracts.
B-23
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
NAME, ADDRESS POSITION HELD WITH PRINCIPAL OCCUPATION(S)
AND AGE TRUST OR ADVISER DURING PAST 5 YEARS
<S> <C> <C>
WILLIAM P. DAVES, JR. (73) Chairman of the Board, Consultant to insurance and healthcare
5723 Trail Meadow Trustee industries. Director, President and Chief
Dallas, TX 75230 Executive Officer, FFG Insurance Co. Chairman of
the Board and Trustee of other mutual funds
managed by the Adviser.
MAXWELL E. BUBLITZ* (43) President and Trustee Chartered Financial Analyst. President and
11825 N. Pennsylvania St. Director, Adviser. Previously, Senior Vice
Carmel, IN 46032 President, Adviser. President and Trustee of
other mutual funds managed by the Adviser.
HAROLD W. HARTLEY (75) Trustee Retired. Chartered Financial Analyst. Previously,
317 Peppard Drive, S.W. Executive Vice President, Tenneco Financial
Ft. Myers Beach, Fl 33913 Services, Inc. Trustee of other mutual funds
managed by the Adviser.
DR. R. JAN LECROY (68) Trustee Retired. Previously, President, Dallas Citizens
Dallas Citizens Council Council. Trustee of other mutual funds managed
1201 Main Street, Suite 2444 by the Adviser. Director, Southwest Securities
Dallas, TX 75202 Group, Inc.
DR. JESSE H. PARRISH (71) Trustee Former President, Midland College. Higher
2805 Sentinel Education Consultant. Trustee of other mutual
Midland, TX 79701 funds managed by the Adviser.
DAVID N. WALTHALL (53) Trustee President, Chief Executive Officer and Director
2435 N. Central Expressway, Ste. 1600 of Lyrick Corporation. Formerly, President and
Richardson, TX 75080 CEO, Heritage Media Corporation. Formerly,
Director, Eagle National Bank. Trustee of other
mutual funds managed by the Adviser.
</TABLE>
B-24
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
NAME, ADDRESS POSITION HELD WITH PRINCIPAL OCCUPATION(S)
AND AGE TRUST OR ADVISER DURING PAST 5 YEARS
===============================================================================================================================
<S> <C> <C>
WILLIAM P. KOVACS (53) Vice President and Vice President, Senior Counsel, Secretary, Chief
11825 N. Pennsylvania St. Secretary Compliance Officer and Director of Adviser. Vice
Carmel, IN 46032 President, Senior Counsel, Secretary and
Director, Conseco Equity Sales, Inc. Vice
President and Secretary of other mutual funds
managed by the Adviser. Previously, Associate
Counsel, Vice President and Assistant Secretary,
Kemper Financial Services, Inc. (1989-1996);
previous to Of Counsel, Rudnick & Wolfe
(1997-1998); previous to Of Counsel, Shefsky &
Froelich (1998).
JAMES S. ADAMS (39) Treasurer Senior Vice President, Bankers National, Great
11815 N. Pennsylvania St. American Reserve. Senior Vice President,
Carmel, IN 46032 Treasurer, and Director, Conseco Equity Sales,
Inc. Senior Vice President and Treasurer, Conseco
Services, LLC. Treasurer of other mutual funds
managed by the Adviser.
WILLIAM T. DEVANNEY, JR. (43) Vice President, Senior Vice President, Corporate Taxes, Bankers
11815 N. Pennsylvania St. Corporate Taxes National and Great American Reserve. Senior Vice
Carmel, IN 46032 President, Corporate Taxes, Conseco Equity Sales,
Inc. and Conseco Services LLC. Vice President
of other mutual funds managed by the Adviser.
===============================================================================================================================
</TABLE>
* The Trustee so indicated is an "interested person," as defined in the
Investment Company Act of 1940, of the Trust due to the positions indicated with
the Adviser
The following table shows the compensation of each disinterested Trustee for the
fiscal year ending December 31, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION FROM INVESTMENT
COMPENSATION COMPANIES IN THE TRUST COMPLEX
NAME OF PERSON, POSITION FROM THE TRUST PAID TO TRUSTEES
- ------------------------ ------------- ----------------
<S> <C> <C>
William P. Daves, Jr. $9,000 $26,000
(1 other investment company)
Harold W. Hartley $9,000 $26,000
(1 other investment company)
Dr. R. Jan LeCroy $9,000 $26,000
(1 other investment company)
Dr. Jesse H. Parrish $9,000 $26,000
(1 other investment company)
David N. Walthall $6,000 $8,000
(1 other investment company)
</TABLE>
B-25
<PAGE>
================================================================================
NET ASSET VALUES OF THE SHARES OF THE PORTFOLIOS
THE VALUE OF THE SECURITIES OF THE MONEY MARKET PORTFOLIO
The Money Market Portfolio's use of the amortized cost method is conditioned
on compliance with certain conditions contained in Rule 2a-7 (the "Rule") under
the 1940 Act. The Rule also obligates the Trustees, as part of their
responsibility within the overall duty of care owed to the shareholders, to
establish procedures reasonably designed, taking into account current market
conditions and the Portfolio's investment objectives, to stabilize the net asset
value per share as computed for the purpose of distribution and redemption at
$1.00 per share. The Trustees' procedures include periodically monitoring, as
they deem appropriate and at such intervals as are reasonable in light of
current market conditions, the relationship between the amortized cost value per
share and the net asset value per share based upon available indications of
market value. The Trustees will consider what steps should be taken, if any, in
the event of difference of more than one-half of one percent between the two. To
minimize any material dilution or other unfair results which might arise from
differences between the two, the Trustees will take such steps as they consider
appropriate (e.g., redemption in kind or shortening the average portfolio
maturity).
It is the normal practice of the Money Market Portfolio to hold portfolio
securities to maturity. Therefore, unless a sale or other disposition of a
security is mandated by redemption requirements or other extraordinary
circumstances, the Portfolio will realize the principal amount of the security.
Under the amortized cost method of valuation, neither the amount of daily income
nor the net asset value is affected by any unrealized appreciation or
depreciation of the Portfolio. In periods of declining interest rates, the yield
on shares of the Portfolio will tend to be higher than if the valuation were
based upon market prices and estimates. In periods of rising interest rates, the
yield on shares of the Portfolio will tend to be lower than if the valuation was
based upon market prices and estimates.
THE VALUE OF THE SECURITIES OF THE OTHER PORTFOLIOS
Securities held by all Portfolios except the Money Market Portfolio will be
valued as follows: Portfolio securities which are traded on stock exchanges are
valued at the closing market prices on the day the securities are being valued,
or lacking any sales, at the mean between the closing bid and asked prices.
Securities traded in the over-the-counter market are valued at the mean between
the closing bid and asked prices as quoted by one or more dealers that make
markets in such securities. Portfolio 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 and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Trustees of the Trust. In valuing below investment grade securities, it should
be recognized that judgment plays a greater role than is the case with respect
to securities for which a broader range of dealer quotations and last sale
information is available. Debt securities with maturities of sixty (60) days or
less are valued at amortized cost.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
Investors should understand that, as Owners, they will not receive directly
any dividends or other distributions from the Trust or any of the Portfolios.
All such dividends and other distributions are payable to, and reinvested by,
the separate accounts of the insurance company in which contract premiums are
invested.
It is each Portfolio's intention to distribute sufficient net investment
income to avoid the imposition of federal income tax on the Portfolio. Each
portfolio also intends to distribute sufficient income to avoid the application
of any federal excise tax. For dividend purposes, the net investment income of
each Portfolio, other than the Money Market Portfolio, consists of all dividends
and/or interest received less its estimated expenses (including fees payable to
the Adviser). Net investment income of the Money Market Portfolio consists of
accrued interest (i) plus or minus amortized discounts or premiums, (ii) plus or
minus realized gains or losses on portfolio securities, (iii) less the estimated
expenses of that Portfolio applicable to that dividend period. The Asset
Allocation Portfolio is also required to include in its taxable income each year
a portion of the original issue discount at which it acquires zero coupon
securities, even though the Portfolio receives no interest payment on the
securities during the year. Similarly, that Portfolio must include in its
taxable income each year any interest on payment-in-kind securities in
B-26
<PAGE>
================================================================================
the form of additional securities. Accordingly, to continue to qualify for
treatment as a regulated investment company under the Code, that Portfolio may
be required to distribute as a dividend an amount that is greater than the total
amount of cash the Portfolio actually receives. Those distributions will be made
from the Portfolio's cash assets or the proceeds from sales of portfolio
securities, if necessary.
Dividends from the Government Securities Portfolio and Corporate Bond
Portfolio will be declared and reinvested monthly in additional full and
fractional shares of those respective Portfolios. Dividends from the Common
Stock Portfolio and the Asset Allocation Portfolio will be declared and
reinvested quarterly in additional full and fractional shares of those
respective Portfolios. Dividends from the Money Market Portfolio will be
declared and reinvested daily in additional full and fractional shares of that
Portfolio. However, the Trustees may decide to declare dividends at other
intervals.
Distributions of each Portfolio's net capital gains (the excess of net
long-term capital gain over net short-term capital loss), net short-term gains,
and net realized gains from foreign currency transactions, if any, is declared
and paid to its shareholders annually after the close of its fiscal year. See
the applicable Contract prospectus for information regarding the federal income
tax treatment of distributions to the insurance company separate accounts.
Each Portfolio of the Trust is treated as a separate corporation for
federal income tax purposes and intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986 (the "Code").
As such, a portfolio will not be subject to federal income tax on the part of
its net investment income and net realized capital gains that it distributes to
shareholders. To qualify for treatment as a "regulated investment company," each
Portfolio must, among other things, derive at least 90 percent of its gross
income for each taxable year from dividends, interest and gains from the sale or
other disposition of securities.
GENERAL
The Trustees themselves have the power to alter the number and terms of
office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration (subject to certain removal procedures)
and appoint their own successors, provided that always at least a majority of
the Trustees have been elected by the shareholders of the Trust. The voting
rights of shareholders are not cumulative, so that holders of more than 50
percent of the shares voting can, if they choose, elect all Trustees being
selected, while the holders of the remaining shares would be unable to elect any
Trustees. The Trust is not required to hold Annual Meetings of Shareholders for
action by shareholders' vote except as may be required by the 1940 Act or the
Declaration of Trust. The Declaration of Trust provides that shareholders can
remove Trustees by a vote of two-thirds of the vote of the outstanding shares.
The Trustees will call a meeting of shareholders to vote on the removal of a
Trustee upon the written request of the holders of 10 percent of the Trust's
shares. In addition, 10 or more shareholders meeting certain conditions and
holding the lesser of $25,000 worth or 1 percent of the Trust's shares may
advise the Trustees in writing that they wish to communicate with other
shareholders for the purpose of requesting a meeting to remove a Trustee. The
Trustees will then either give those shareholders access to the shareholder list
or, if requested by those shareholders, mail at the shareholders' expense the
shareholders' communication to all other shareholders. See the Contract and
Policy Prospectuses for information as to the voting of shares by Owners.
Each issued and outstanding share of each Portfolio is entitled to
participate equally in dividends and distributions of the respective Portfolio
and in the net assets of such Portfolio upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities. The shares of each
Portfolio have no preference, preemptive, conversion, exchange or similar
rights, and are freely transferable.
Under Rule 18f-2 under the 1940 Act, as to any investment company which has
two or more series (such as the Portfolios) outstanding and as to any matter
required to be submitted to shareholder vote, such matter is not deemed to have
been effectively acted upon unless approved by the holders of a "majority" (as
defined in that Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases on which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is
B-27
<PAGE>
not obtained as to the holders of other affected series.
Under Massachusetts law, shareholders of a trust such as the Trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the Trust. The Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Trust or its Trustees. The
Declaration of Trust provides for indemnification and reimbursement of expenses
out of Trust property for any shareholder held personally liable for its
obligations. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon. Thus, while
Massachusetts law permits a shareholder of a trust such as the Trust to be held
personally liable as a partner under certain circumstances, the risk of a
Contract Owner incurring financial loss on account of shareholder liability is
highly unlikely and is limited to the relatively remote circumstances in which
the Trust would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
The Trust and the Adviser have Codes of Ethics governing the personal
securities transactions of officers and employees. These codes require prior
approval for certain transactions and prohibit transactions which may be deemed
to conflict with the securities trading of the Adviser's clients.
INDEPENDENT ACCOUNTANTS
The financial statements of the Trust included in the Prospectus and the
Statement of Additional Information have been examined by PricewaterhouseCoopers
L.L.P., Indianapolis, Indiana, independent accountants, for the periods
indicated in their reports as stated in their opinion and have been so included
in reliance upon such opinion given upon the authority of the firm as experts in
accounting and auditing.
FINANCIAL STATEMENTS
Audited Financial Statements for the Conseco Series Trust Asset Allocation
Portfolio (now, the Balanced Portfolio), Common Stock Portfolio (now, the Equity
Portfolio), Corporate Bond Portfolio (now, the Fixed Income Portfolio),
Government Securities Portfolio and Money Market Portfolio for the fiscal year
ended December 31, 1998 are incorporated by reference from the Trust's annual
report to shareholders.
B-28
<PAGE>
CONSECO SERIES TRUST
ADMINISTRATIVE OFFICE
11815 N. PENNSYLVANIA STREET
CARMEL, INDIANA 46032
SAI-100 (5/99) May 1, 1999
<PAGE>
CONSECO SERIES TRUST
Equity Portfolio
Balanced Portfolio
Fixed Income Portfolio
Government Securities Portfolio
Money Market Portfolio
REGISTRATION STATEMENT ON FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) -- Amended Declaration of Trust, incorporated herein by
reference to Exhibit 1 (i) to Pre-Effective Amendment No.
1 to the Registration Statement on Form N-1 (File No.
2-80455) filed on June 28, 1983; Amendment to Amended
Declaration of Trust, incorporated by reference to Exhibit
No. 1 (ii) to Post-Effective Amendment No. 1 to the
Registration Statement of Form N-1A (File No. 2-80455)
April 20, 1984; Amendment to Amended Declaration of Trust
incorporated by reference to Exhibit No. 1 (iii) to
Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A (File No. 2-80455) April 28, 1993.
(b) -- By-Laws, incorporated by reference to Exhibit No. 2 to
the Registration Statement on Form N-1 (File No. 2-80455).
(c) -- Not Applicable.
(d) -- Investment Advisory Agreements, incorporated by reference
to Exhibit No. 5 to the Post-Effective Amendment No. 8 to
the Registration Statement on Form N-1A (File No. 2-80455)
March 3, 1988; and an Investment Advisory Agreement dated
January 1, 1993 between the Registrant and Conseco Capital
Management, Inc. incorporated by reference to Exhibit No.
5 (ii) to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A (File No. 2-80455)
April 28, 1993.
(e) -- Not Applicable
(f) -- Not Applicable.
(g) -- Custodian Agreement:
(h) -- Administration Agreement:
<PAGE>
(i) -- Consent and Opinion of Counsel:
(j) -- Consent of Independent Accountants:
(k) -- Not Applicable.
(l) -- Not Applicable.
(m) -- Not Applicable.
(n) -- Financial Data Schedule:
(o) -- Not Applicable.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The following information concerns the principal companies that may be
deemed to be controlled by or under common control with Registrant (all 100%
owned unless indicated otherwise):
CONSECO, INC. (IN) - (publicly traded)
Conseco Capital Management, Inc. (DE)
Marketing Distribution Systems Consulting Group, Inc. (DE)
MDS of New Jersey, Inc. (NJ)
Conseco Equity Sales, Inc. (TX)
Conseco Risk Management, Inc. (IN
Conseco Mortgage Capital, Inc. (DE)
Conseco Group Risk Management Company (MS)
Green Tree Financial Corporation (DE)
CIHC, Incorporated (DE)
Conseco Services, LLC (IN)
Conseco Marketing, LLC (IN)
Conseco Financial Services, Inc. (DE)
Bankers National Life Insurance Company (TX)
National Fidelity Life Insurance Company (MO)
Bankers Life Insurance Company of Illinois (IL)
Bankers Life & Casualty Company (IL)
Certified Life Insurance Company (IL
Jefferson National Life Insurance Company of Texas (TX)
Conseco Direct Life Insurance Company (PA)
Conseco Annuity Assurance Company (IL)
<PAGE>
Vulcan Life Insurance Company (IN)
Conseco Senior Health Insurance Company (PA)
Continental Life Insurance Company (TX)
United General Life Insurance Company (TX)
Conseco Life Insurance Company of New York (NY)
Conseco Variable Insurance Company (TX)
Providential Life Insurance Company (AR)
Washington National Corporation (DE
Washington National Insurance Company (IL)
United Presidential Corporation (IN)
United Presidential Life Insurance Company (IN)
Wabash Life Insurance Company (KY)
Conseco Life Insurance Company (IN)
Lincoln American Life Insurance Company (TN)
Pioneer Financial Services, Inc. (DE)
Geneva International Insurance Company, Inc. (Turks and
Caicos Islands)
Pioneer Life Insurance Company (IL)
Health and Life Insurance Company of America (IL)
Manhattan National Life Insurance Company (IL)
Conseco Medical Insurance Company (IL)
Capitol American Financial Corporation (OH)
Conseco Health Insurance Company (AZ)
Frontier National Life Insurance Company (OH)
Consumer Acceptance Corporation (IN)
General Acceptance Corporation (IN)
NAL Financial Group, Inc. (DE)
Conseco Series Trust (Massachusetts)*
Conseco Fund Group (Massachusetts) (publicly held)**
Conseco Strategic Income Fund (Massachusetts) (publicly held)***
* The shares of Conseco Series Trust currently are sold to insurance separate
accounts which are both affiliated and unaffiliated.
<PAGE>
** The shares of the Conseco Fund Group are sold to the public; Conseco
affiliates currently hold in excess of 55% of its shares.
*** The shares of the
Conseco Strategic Income Fund, a closed-end management investment company,
are traded on the New York Stock Exchange.
ITEM 25. INDEMNIFICATION
Reference is made to Articles II and V of the Declaration of Trust filed as
Exhibit (1) to Post-Effective Amendment No. 2 to the Registration Statement on
Form N-1A (File No. 2-80455) June 19, 1984. Reference is also made to Article
VII of the Investment Advisory Agreements filed as Exhibit (5) to Post-Effective
Amendment No. 8 and Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A (File No. 2-80455) March 3, 1988 and April 28, 1993,
respectively.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Conseco Capital Management, Inc. (the "Adviser") is an Indiana corporation
which offers investment advisory services. The Adviser is a wholly-owned
subsidiary of Conseco, Inc., also an Indiana corporation, a publicly owned
financial services company. Both the Adviser's and Conseco, Inc.'s offices are
located at 11825 N. Pennsylvania Street, Carmel, Indiana 46032.
Rollin M. Dick, Director, Executive Vice President and Chief Financial
Officer of Conseco, Inc., Carmel, Indiana. Mr. Dick is an officer and/or
director of various affiliates of the Adviser. He is a director of Brightpoint,
Inc., Indianapolis, Indiana and General Acceptance Corporation, Bloomington,
Indiana. Additionally, Mr. Dick is a director of approximately ten non-public
companies, which are believed to be not affiliated with Conseco, Inc.
Maxwell E. Bublitz, President and Director; Executive Vice President of
Conseco, Inc.; President and Trustee of Conseco Series Trust; President and
Trustee of Conseco Strategic Income Fund
Albert J. Gutierrez, Senior Vice President, Investment Officer.
Gregory J. Hahn, Senior Vice President, Portfolio Analytics; Trustee of
Conseco Strategic Income Fund
Thomas A. Meyers, Senior Vice President, Director of Marketing.
Thomas J. Pence, Senior Vice President.
William P. Kovacs, Senior Counsel and Secretary; Chief Compliance
Officer and Director; Vice President and Secretary of Conseco Series Trust; Vice
President and Secretary of Conseco Strategic Income Fund; Vice President and
Secretary of Conseco Equity Sales, Inc.; Vice President and Secretary of Conseco
Financial Services, Inc.
<PAGE>
Information as to the officers and directors of the Adviser is included
in its current Form ADV filed with the SEC and is incorporated by reference
herein.
ITEM 27. PRINCIPAL UNDERWRITER
Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be maintained by
the Registrant pursuant to Section 31(a) of the Investment Company Act of 1940
and the rules promulgated thereunder are in the possession of the Adviser or the
Funds' custodian, The Bank of New York, 90 Washington Street, 22nd Floor, New
York, New York 10826.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDER TAKINGS
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Conseco Series Trust, has duly
caused this Post-Effective Amendment No. 22 to the Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the city of
Carmel, of the State of Indiana, on the 2nd day of March, 1999.
CONSECO SERIES TRUST
By: /s/ MAXWELL E. BUBLITZ
-------------------------------
Maxwell E. Bublitz
President
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------- ----- ----
<S> <C> <C>
/s/ MAXWELL E. BUBLITZ* President March 2, 1999
- ------------------------------ (Principal Executive Officer)
Maxwell E. Bublitz
/s/ WILLIAM P. DAVES, JR.* Chairman of the Board and March 2, 1999
- ------------------------------- Trustee
William P. Daves, Jr.
/s/ HAROLD W. HARTLEY* Trustee March 2, 1999
- ------------------------------
Harold W. Hartley
/s/ R. JAN LECROY* Trustee March 2, 1999
- -----------------------------
R. Jan LeCroy
/s/ JESSE H. PARRISH* Trustee March 2, 1999
- -----------------------------
Jesse H. Parrish
/s/ JAMES S. ADAMS* Treasurer March 2, 1999
- -----------------------------
James S. Adams
</TABLE>
* /s/ WILLIAM P. KOVACS
William P. Kovacs
Attorney-in-fact
<PAGE>
Exhibit Sequentially
NUMBER EXHIBIT NUMBERED PAGE
------ ------- -------------
(I) Consent and Opinion of Counsel C-
(J) Consent of Accountants C-
(N) Financial Data Schedule C-
