As filed with the Securities and Exchange Commission on October 8, 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. 26 [ X ]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 28 [ 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: As soon as practicable following
the effective date of this Registration Statement.
It is proposed that this filing will become effective (check appropriate space):
___ immediately upon filing pursuant to Rule 485 (b)
___ on _______, 2000 pursuant to Rule 485 (b)
___ 60 days after filing pursuant to Rule 485 (a)(i)
___ on [DATE] pursuant to Rule 485 (a)(i)
_X_ 75 days after filing pursuant to Rule 485 (a) (ii)
___ on [DATE] pursuant to Rule 485 (a)(ii)
<PAGE>
CONSECO SERIES TRUST PROSPECTUS
PRELIMINARY
[DATE OF PROSPECTUS]
HIGH YIELD PORTFOLIO
CONSECO FOCUS 20 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
General Information About the Portfolios ........................ 3
High Yield Portfolio ............................................ 4
Conseco Focus 20 Portfolio ...................................... 6
Primary Risk Considerations ............................................. 8
Fees and Expenses ........................................................ 10
Management ............................................................... 11
Your Account ............................................................. 12
Purchase and Redemption of Shares ............................... 12
Dividends and Distributions ..................................... 12
<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 Portfolio'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 portfolio 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. 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 $41.0 billion in
assets for an array of foundations, endowments, corporations, government and
union clients (as of 6/30/99).
Please note: Definitions for bold-faced words within the text can be found
directly following each Portfolio's Primary Risk Considerations.
<PAGE>
4
HIGH YIELD PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide high level of current income with a secondary
objective of capital appreciation.
ADVISER'S STRATEGY
Normally, the Adviser invests at least 65% of the Portolio's assets in BELOW
INVESTMENT GRADE SECURITIES (those rated BB+/Ba1 or lower by independent rating
agencies).
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 select securities, the Adviser utilizes:
o Independent FUNDAMENTAL ANALYSIS to evaluate the issuer of a security
o An analysis of the specific structure of the security
In an effort to achieve its investment objective, the Portfolio may invest in
any or all of the following:
o Corporate debt securities and PREFERRED STOCK
o ZERO COUPON BONDS and other deferred interest securities
o Mortgage-backed securities
o Asset-backed securities
o Convertible securities
o RESTRICTED SECURITIES
o Taxable MUNICIPAL SECURITIES issued by states and their political
subdivisions
The Portfolio may also invest in:
o Cash or cash equivalents
o Money market instruments
o Securities issued or guaranteed by the U.S. government, its agencies, and
instrumentalities
In addition, the Portfolio may invest in the following:
o Common stocks and other equity securities
o Equity and debt securities of foreign issuers, including issuers in
emerging markets
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 comparable credit.
[sidebar]
For defensive purposes or pending investment, the Portfolio may
temporarily depart from its objective and hold an unlimited amount of
cash or money market instruments. This could help the Portfolio avoid
losses, but may mean lost opportunities.
<PAGE>
5
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.
PREFERRED STOCK
Shares of a company that ordinarily do not 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.
ZERO COUPON BONDS
Bonds that are sold at a deep discount and do not pay periodic interest to
investors; instead, investors receive, at maturity, the difference between the
discounted price and the maturity value of the bond.
RESTRICTED SECURITIES
Securities that are not registered with the Securities and Exchange Commission,
some of which may qualify to be sold directly to institutional investors
pursuant to Rule 144A under the Securities Act of 1933. Restricted securities
are generally illiquid; however, the Adviser focuses on those that are liquid,
i.e., easily convertible into cash.
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.
[sidebar]
PRIMARY RISKS:
Credit Risk
Interest Rate Risk
Market Risk
Restricted
Securities Risk
Prepayment Risk
Foreign Risk
See "Primary Risk Considerations" on page 00 for a detailed discussion of the
Portfolio's risks.
HOW HAS THE PORTFOLIO PERFORMED?
High Yield Portfolio
Because the High Yield Portfolio was new when this prospectus was printed, it
has no previous operating or performance history. However, the Portfolio has
investment objectives and policies that are substantially similar to those of
another mutual fund managed by the Adviser, the Conseco Fund Group--Conseco High
Yield Fund. See the Appendix for information about the performance of this
similar mutual fund.
Please note: The similar mutual fund performance presented in the Appendix does
not represent the historical performance of the High Yield Portfolio and should
not be interpreted as indicative of the future performance of the Portfolio.
<PAGE>
6
CONSECO FOCUS 20 FUND
INVESTMENT OBJECTIVE
The Portfolio seeks capital appreciation.
ADVISER'S STRATEGY
Normally, the Portfolio will invest at least 65% of its assets in common stocks
of companies that the Adviser believes have above-average growth prospects.
The Portfolio is NON-DIVERSIFIED and will normally concentrate its investments
in a core position of approximately 20 to 30 common stocks. While the Portfolio
invests in securities issued by large-cap companies, a substantial portion of
these securities may be issued by SMALL- AND MID-CAP COMPANIES.
The Adviser looks for companies that demonstrate strong growth potential,
preferring:
o Companies whose earnings appear likely to continue in an upward direction
o Companies that demonstrate the ability to consistently grow their earnings
at a faster rate than their peer group
o Companies whose stocks appear to the Adviser to be undervalued in the
marketplace
In selecting equity securities, the Adviser considers the following factors:
o High return on invested capital
o Sound financial policies and a strong balance sheet
o Competitive advantages (including innovative products and services)
o Effective research, product development and marketing
o Stable, capable management
The Adviser may also invest in any or all of the following:
o PREFERRED STOCK
o CONVERTIBLE SECURITIES
o WARRANTS
o Fixed Income Securities (when the Adviser believes they are more attractive
than stocks on a long-term basis)
NON-DIVERSIFIED
A Portfolio is considered non-diversified if it is not limited by the percentage
of assets it may invest in any one issuer. The success or failure of one issuer
will cause the Portfolio to fluctuate more than it would in a diversified fund.
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, then investments in larger companies with a
stronger competitive advantage. The Adviser's extensive research efforts can
play a greater role in selecting securities form this sector then from larger
companies.
[sidebar]
<PAGE>
7
If the Adviser believes that market conditions warrant a defensive
position, the Portfolio may temporarily depart from its investment
objective and invest without limitation in cash and short-term debt
securities. This could help the Portfolio avoid losses but may mean lost
opportunities.
PREFERRED STOCK
See page 00.
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.
PRIMARY RISKS
Concentration Risk
Market Risk
Small Company Risk
Liquidity and
Valuation Risk
Foreign Risk
See "Primary Risk Considerations" on page 00 for a detailed discussion of the
Portfolio's risks.
HOW HAS THE PORTFOLIO PERFORMED?
Conseco Focus 20 Portfolio
Because the Conseco Focus 20 Portfolio was new when this prospectus was printed,
it has no previous operating or performance history. However, the Portfolio has
investment objectives and policies that are substantially similar to those of
another mutual fund managed by the Adviser, the Conseco Fund Group--Conseco 20
Fund. See the Appendix for more information about the performance of this
similar mutual fund.
Please note: The similar mutual fund performance presented in the Appendix does
not represent the historical performance of the Conseco Focus 20 Portfolio and
should not be interpreted as indicative of the future performance of the
Portfolio.
<PAGE>
8
PRIMARY RISK CONSIDERATIONS
The value of your investment in any Portfolio will fluctuate, which means that
you may lose money. The primary 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
CONCENTRATION RISK
The risk that if a Portfolio has most of its investments in a few securities or
a single sector, its portfolio will be more susceptible to factors adversely
affecting issuers within that sector than would a more diversified portfolio of
securities.
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. Below investment
grade securities 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.
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.
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.
<PAGE>
9
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.
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.
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>
10
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: (1) separate accounts funding variable annuity and
variable life insurance contracts ("Contracts") issued by both affiliated and
unaffiliated life insurance companies (see "Purchase and Redemption of Shares");
and (2) qualified pension and retirement plans outside of the separate account
context. 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
HIGH YIELD CONSECO
PORTFOLIO FOCUS 20
PORTFOLIO
--------------------------
Management Fees 0.80% 0.80%
Other Expenses* 0.10% 0.10%
--------------------------
Equals: Total Annual Portfolio Operating
Expenses 0.90% 0.90%
Less: Fee Waiver and/or Expense
Reimbursement** 0.10% 0.10%
--------------------------
Equals: Net Expenses 0.80% 0.80%
==========================
* BECAUSE THE PORTFOLIO HAS NOT COMPLETED A FULL FISCAL YEAR, OTHER EXPENSES
ARE ESTIMATED.
** PURSUANT TO A CONTRACTUAL ARRANGEMENT WITH THE TRUST, THE ADVISER HAS AGREED
TO WAIVE FEES AND/OR REIMBURSE PORTFOLIO EXPENSES THROUGH XX/XX/XX, 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.
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 June 30,
1999, CCM managed over $41.0 billion.
<PAGE>
11
ADVISORY FEES
Since this is the first year of operations for the High Yield Portfolio and the
Conseco Focus 20 Portfolio, no advisory fees were paid in prior years.
(Sidebar)
CONSECO CAPITAL MANAGEMENT, INC.
11825 N. Pennsylvania Street, Carmel, Indiana 46032
PORTFOLIO MANAGERS OF CONSECO SERIES TRUST
HIGH YIELD PORTFOLIO:
PETER C. ANDERSEN, CFA, VICE PRESIDENT, PORTFOLIO ANALYTICS
CONSECO CAPITAL MANAGEMENT, INC.
At CCM, Mr. Andersen is responsible for managing below investment grade fixed
income portfolios for institutional client accounts and is the portfolio manager
of other affiliated investment companies. Prior to joining the Adviser in 1997,
he was a portfolio manager for Colonial Management Associates, where he managed
over $650 million in high-yield, tax-free mutual funds.
CONSECO FOCUS 20 PORTFOLIO:
THOMAS J. PENCE, CFA, SENIOR VICE PRESIDENT
CONSECO CAPITAL MANAGEMENT, INC.
Mr. Pence is the portfolio manager for the Portfolio. Since joining the Adviser
in 1992, Mr. Pence has been responsible for the management 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.
ERIK J. VOSS, SECOND VICE PRESIDENT, SENIOR SECURITIES ANALYST
CONSECO CAPITAL MANAGEMENT, INC.
At CCM, Mr. Voss is also responsible for assisting in research and portfolio
management efforts for all of the Adviser's equity portfolios. Prior to joining
the Adviser in 1996, Mr. Voss worked as an equity analyst for Gardner Lewis
Asset Management for over three years.
<PAGE>
12
PURCHASE AND REDEMPTION OF SHARES
Portfolio shares are currently offered to insurance separate accounts
established by insurance companies to fund variable annuity and variable life
insurance 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 total market value of the
Portfolio's securities and other 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 are valued based on readily
available market quotations.
Under the direction of the Board, the Portfolios may use a practice known as
fair value pricing under the following circumstances:
o Securities and assets for which market quotations are not readily available
o Events occur after an exchange closes which are likely to affect the value
of the security
o Trust's management strongly believes a market price is not reflective of a
security's appropriate value
<PAGE>
13
DIVIDENDS AND DISTRIBUTIONS
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 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.
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.
SCHEDULE OF DIVIDEND REINVESTMENTS
- --------------------------------------------------------------------------------
PORTFOLIO DECLARED AND REINVESTED
- --------------------------------------------------------------------------------
High Yield Portfolio Monthly
- --------------------------------------------------------------------------------
Conseco Focus 20 Portfolio Quarterly
- --------------------------------------------------------------------------------
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>
APPENDIX
PRIOR PERFORMANCE OF SIMILAR FUNDS
The High Yield Portfolio and the Conseco 20 Focus Portfolio are modeled after
the High Yield Fund and the Conseco 20 Fund ("CFG Funds") which are previously
existing funds of the Conseco Fund Group ("CFG") that are managed by the
Adviser, Conseco Capital Management, Inc., and have investment objectives and
policies substantially similar to the Portfolios. While the Portfolios are
investment choices for variable annuity and variable life contracts, shares of
the CFG Funds are distributed through multiple distribution channels to the
retail marketplace in four separate classes (Classes A, B, C and Y).
Below you will find information about the performance of Class A shares of the
CFG Funds, NOT the Portfolios. The performance data of the Class A CFG Funds is
provided in two ways: (1) net of all management fees, distribution fees, other
expenses, and the applicable sales charge, and (2) net of all management fees,
distribution fees and other expenses. Although the Portfolios have substantially
similar investment objectives and policies, the same investment adviser and the
same portfolio managers as the corresponding CFG Funds, you should not assume
that the Portfolios will have the same future performance of the corresponding
CFG Funds due to, among other things, differences in expenses and cash flows
between a Portfolio and the corresponding CFG Fund. Moreover, past performance
information is based on historical earnings and is not intended to indicate
future performance of either the CFG Funds or the Portfolios.
The investment characteristics of each of these Portfolios are intended to
closely resemble the investment characteristics of the corresponding CFG Fund.
Depending on the Portfolio involved, similarity of investment characteristics
may involve factors such as industry diversification, portfolio beta, portfolio
quality, average maturity of fixed-income assets, equity/non-equity mixes, and
individual holdings. The Adviser also may manage other similar funds and
accounts that may have better or worse performance than the CFG Funds,
performance information for which is not presented here due to differences in
factors such as investment policies and/or portfolio management strategies
and/or because these accounts are not mutual funds.
Investors should note that the High Yield Portfolio, as a fundamental policy,
may not with respect to 75% of the total assets, purchase the securities of any
issuer if (a) more than 5% of the Portfolio's total assets would be invested in
securities of that issuer or (b) the Portfolio would own more than 10% of the
outstanding voting securities of that issuer. This policy differs slightly from
that of the CFG High Yield Fund, though the Adviser does not believe this
practice alone would cause the investment results of the High Yield Fund to
differ significantly from those of the High Yield Portfolio.
The table below sets forth each Portfolio, its corresponding CFG Fund - Class A,
the date the Adviser began managing the CFG Fund (referred to as the "inception
date") and net asset size as of September 30, 1999.
<PAGE>
Corresponding CFG Fund - Class A
PORTFOLIO (INCEPTION DATE AND NET ASSET SIZE)
High Yield Portfolio Conseco High Yield Fund (Jan. 1, 1998)
$115,825,618
Conseco Focus 20 Portfolio Conseco 20 Portfolio (Jan. 1, 1998)
$108,788,069
The following table shows the average annualized total returns for the CFG Funds
- - Class A for the one year and since inception periods ending September 30,
1999. These figures are based on the gross investment performance of CFG Class A
shares and calculated as described above. Note that the actual investment
performance experienced by the investors in variable annuity and variable life
insurance contracts issued by affiliated and unaffiliated insurance companies
would be lower than the gross investment performance of the CFG Funds due to
expenses at the separate account level; these expenses typically are higher than
those borne by investors in CFG or CST. The following CFG performance does not
represent the historical performance of the Portfolios and should not be
interpreted as indicative of the future performance of the Portfolios.
PERFORMANCE HISTORY
-------------------
THE CONSECO 20 FUND
-------------------
CLASS A SHARES
--------------
<TABLE>
<CAPTION>
One Year Since Inception
(as of September 30, 1999) (as of September 30, 1999)
------------------------------------------------------------
<S> <C> <C>
ANNUAL RETURN (NET OF ALL FEES AND EXPENSES) 54.22% 27.13%
- --------------------------------------------
ANNUAL RETURN (WITHOUT DEDUCTING CLASS A SALES 63.63% 31.51%
- -----------------------------------------------
CHARGE**)
- ---------
</TABLE>
PERFORMANCE HISTORY
-------------------
THE HIGH YIELD FUND
-------------------
CLASS A SHARES
--------------
<TABLE>
<CAPTION>
One Year Since Inception
(as of September 30, 1999) (as of September 30, 1999)
------------------------------------------------------------
<S> <C> <C>
ANNUAL RETURN (NET OF ALL FEES AND EXPENSES) 0.24% 2.85%
- --------------------------------------------
ANNUAL RETURN (WITHOUT DEDUCTING CLASS A SALES 6.36% 6.39%
- -----------------------------------------------
CHARGE**)
- ---------
**This performance is net of all fees and expenses except for applicable
maximum Sales Charge.
</TABLE>
<PAGE>
14
[back cover]
FOR MORE INFORMATION
More information on the Conseco Series Trust is available free upon request:
SHAREHOLDER REPORTS
Additional information about the Portfolios' investments will be available in
the Portfolios' first annual and semi-annual reports to shareholders.
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 SAI, or other information:
BY TELEPHONE
Call 800-557-7043
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 prospectus and other documents pertaining to the
Portfolios can be viewed online or downloaded from:
SEC
http://www.sec.gov
Information about the Trust (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
HIGH YIELD PORTFOLIO
CONSECO FOCUS 20 PORTFOLIO
[PRELIMINARY]
[DATE OF PROSPECTUS]
This Statement of Additional Information ("SAI") is not a prospectus. It
contains additional information about the Conseco Series Trust (the "Trust") and
the two series of the Trust: High Yield Portfolio and Conseco Focus 20 Portfolio
(each a "Portfolio" and collectively the "Portfolios"). It should be read in
conjunction with the Trust's Prospectus dated . You can
obtain a copy by contacting the Trust's Administrative Office, 11815 N.
Pennsylvania Street, Carmel, Indiana 46032 or by phoning 800-557-7043.
TABLE OF CONTENTS
PAGE
Fund History.......................................................... 2
Investment Restrictions............................................... 2
Nonfundamental Investment Restrictions................................ 3
Investment Strategies................................................. 3
Temporary Defensive Positions......................................... 4
Portfolio Turnover.................................................... 5
Description of Securities and Investment Techniques................... 5
Investment Performance................................................ 24
Securities Transactions............................................... 25
Management............................................................ 26
Other Service Providers............................................... 27
Net Asset Values of the Shares of the Portfolios...................... 29
Dividends, Distributions and Taxes.................................... 30
General............................................................... 30
CCM INVESTMENT ADVISER
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Conseco Capital Management, Inc.
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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
("SEC") under the Investment Company Act of 1940 (the "1940 Act"). The Trust is
a "series" type of mutual fund which issues separate series of shares, each of
which currently represents a separate 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 two portfolios ("Portfolios") of the
Trust, High Yield Portfolio and Conseco Focus 20 Portfolio, each with its own
investment objective or objectives and investment policies. There is no
assurance that the Portfolios will achieve its investment objective. The
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 variable annuity and
variable life insurance contracts (the "Contracts"). Although not currently
doing so, Conseco Series Trust may also serve as an investment medium for
qualified pension and retirement plans outside of the separate account context.
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.
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 or sell commodities or commodity contracts except that a Portfolio
may purchase or sell options, futures contracts, and options on futures
contracts and may engage in interest rate and foreign currency transactions;
2. Borrow money, except that a Portfolio may: (a) borrow from banks, and (b)
enter into reverse repurchase agreements, provided that (a) and (b) in
combination do not exceed 33-1/3% of the value of its total assets
(including the amount borrowed) less liabilities (other than borrowings);
and except that a Portfolio may borrow from any person up to 5% of its total
assets (not including the amount borrowed) for temporary purposes (but not
for leverage or the purchase of investments);
3. Underwrite securities of other issuers except to the extent that a Portfolio
may be deemed an underwriter under the Securities Act of 1933 (the "1933
Act") in connection with the purchase or sale of portfolio securities;
4. With respect to 75% of the High Yield Portfolio's total assets, purchase the
securities of any issuer if (a) more than 5% of the Portfolio's total assets
would be invested in the securities of that issuer or (b) the Portfolio
would own more than 10% of the outstanding voting securities of that issuer;
this restriction does not apply to U.S. Government securities (as defined in
the Prospectus);
5. Purchase any security if thereafter 25% or more of the total assets of the
Portfolio would be invested in
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securities of issuers having their principal business activities in the same
industry; this restriction does not apply to U.S. Government securities (as
defined in the Prospectus);
6. Purchase or sell real estate, except that a Portfolio may purchase
securities which are issued by companies which invest in real estate or
which are secured by real estate or interests therein;
7. Make loans of its assets if, as a result, more than 33-1/3% of the
Portfolio's total assets would be lent to other parties except through (a)
entering into repurchase agreements and (b) purchasing debt instruments; or
8. Issue any senior security, except as permitted under the 1940 Act.
NONFUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions are designated as nonfundamental and may be
changed by the Trust's Board of Trustees ("Board") without shareholder approval.
1. Sell securities short in an amount exceeding 15% of its assets, except that
a Portfolio may, without limit, make short sales against the box.
Transactions in options, futures, options on futures and other derivative
instruments shall not constitute selling securities short;
2. Purchase securities on margin, except that a Portfolio may obtain such
short-term credits as are necessary for the clearance of securities
transactions and except that margin deposits in connection with transactions
in options, futures, options on futures and other derivative instruments
shall not constitute a purchase of securities on margin; or
3. Make loans of its assets, except that a Portfolio may enter into repurchase
agreements and purchase debt instruments as set forth in its fundamental
policy on lending and may lend portfolio securities in an amount not to
exceed 33-1/3% of the value of the Portfolio's total assets.
INVESTMENT STRATEGIES
In addition to the investment strategies described in the Prospectus, the
HIGH YIELD PORTFOLIO may:
o Invest in below investment grade securities which include corporate debt
securities and preferred stock, convertible securities, zero coupon
securities, other deferred interest securities, mortgage-backed securities
and asset-backed securities. The Portfolio may invest in securities rated as
low as C by Moody's Investors Service, Inc. ("Moody's") or D by Standard &
Poor's ("S&P"), securities comparably rated by another national statistical
rating organization ("NRSRO"), or unrated securities of equivalent quality.
Such obligations are highly speculative and may be in default or in danger
of default as to principal and interest.
o Invest in high yield municipal securities. The interest on the municipal
securities in which the Portfolio invests typically is not except from
federal income tax.
o Invest in zero coupon securities and payment-in-kind securities.
o Invest in equity and debt securities of foreign issuers, including issuers
based in emerging markets. As a non-fundamental policy, the Portfolio may
invest up to 50% of its total assets (measured at the time of investment) in
foreign securities; however, the Portfolio presently does not intend to
invest more than 25% of its total assets in such securities. In addition,
the Portfolio presently intends to invest in foreign securities only through
depositary receipts. See "Foreign Securities" below for further information.
o Invest in private placements, securities traded pursuant to Rule 144A under
the 1933 Act (Rule 144A permits qualified institutional buyers to trade
certain securities even though they are not registered under
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the 1933 Act), or securities which, though not registered at the time of
their initial sale, are issued with registration rights. Some of these
securities may be deemed by the Adviser to be liquid under guidelines
adopted by the Board. As a matter of fundamental policy, the Portfolio will
not (1) with respect to 75% of the total assets, invest more than 5% in any
one issuer, except for U.S. Government securities or (2) with respect to
total assets, invest 25% or more in securities of issuers having their
principal business activities in the same industry.
o The Portfolio's remaining assets may be held in cash, money market
instruments, or securities issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities, or may be invested in common
stocks and other equity securities when these types of investments are
consistent with the objectives of the Portfolio or are acquired as part of a
unit consisting of a combination of fixed income securities and equity
investments. Such remaining assets may also be invested in investment grade
debt securities, including municipal 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
objectives. Such strategies and techniques include, but are not limited to,
writing listed "covered" call and "secured" put options and purchasing
options; purchasing and selling, for hedging purposes, interest rate and
other futures contracts, and purchasing options on such futures contracts;
entering into foreign currency futures contracts, forward foreign currency
contracts ("forward contracts") and options on foreign currencies; borrowing
from banks to purchase securities; investing in securities of other
investment companies; entering into repurchase agreements, reverse
repurchase agreements and dollar rolls; investing in when-issued or delayed
delivery securities; selling securities short; and entering into swaps and
other interest rate transactions. See "Description of Securities and
Investment Techniques" below for further information.
In addition to the investment strategies described in the Prospectus, the
CONSECO FOCUS 20 PORTFOLIO may:
o Invest in preferred stocks, convertible securities, and warrants, and in
debt obligations when the Adviser believes that they are more attractive
than stocks on a long-term basis. The debt obligations in which it invests
will be primarily investment grade debt securities, U.S. Government
securities, or short-term debt securities. However, the Portfolio may invest
up to 5% of its total assets in below investment grade securities.
o Invest up to 25% of its total assets in equity and debt securities of
foreign issuers. The Portfolio presently intends to invest in foreign
securities only through depositary receipts. See "Foreign Securities" below
for more information.
o Use a variety of investment techniques and strategies, including but not
limited to: writing listed "covered" call and "secured" put options,
including options on stock indices, and purchasing options; purchasing and
selling, for hedging purposes, stock index, interest rate, and other futures
contracts, and purchasing options on such futures contracts; entering into
foreign currency futures contracts, forward contracts and options on foreign
currencies; borrowing from banks to purchase securities; purchasing
securities of other investment companies; entering into repurchase
agreements and reverse repurchase agreements; investing in when-issued or
delayed delivery securities; and selling securities short. See "Description
of Securities and Investment Techniques" below for further information.
TEMPORARY DEFENSIVE POSITIONS
When unusual market or other conditions warrant, a Portfolio may temporarily
depart from its investment objective. In assuming a temporary defensive
position, each Portfolio may make investments as follows:
The High Yield Portfolio may invest in money market instruments without limit.
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The Conseco Focus 20 Portfolio may invest without limit in short-term debt
securities and cash and money market instruments.
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 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.
Turnover rates in excess of 100% generally result in higher transaction
costs and a possible increase in realized short-term capital gains or losses.
Because the Portfolios are new, there is no portfolio turnover rate to
report.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The different types of securities and investment techniques common to one or
more Portfolios all have attendant risks of varying degrees. For example, with
respect to equity securities, there can be no assurance of capital appreciation
and there is a substantial risk of decline. With respect to debt securities,
there can be no assurance that the issuer of such securities will be able to
meet its obligations on interest or principal payments in a timely manner. In
addition, the value of debt instruments generally rises and falls inversely with
interest rates. The investments and investment techniques common to one or more
Portfolios and their risks are described in greater detail below.
The investment objectives of the Portfolios are not fundamental. All
investment policies and practices described in this SAI are not fundamental,
meaning that the Trust's Board of Trustees ("Board") may change them without
shareholder approval.
The following discussion describes in greater detail different types of
securities and investment techniques used by the Portfolios, as well as the
risks associated with such securities and techniques.
SMALL AND MEDIUM CAPITALIZATION COMPANIES
The Conseco Focus 20 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
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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.
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.
DEBT SECURITIES
All Portfolios may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers, and the Portfolios 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 pay interest and principal.
Corporate debt securities may pay fixed or variable rates of interest, or
interest at a rate contingent upon some other factor, such as price of some
commodity. These securities may be convertible into preferred or common stock,
or may be bought as part of a unit containing common stock. A debt security may
be subject to redemption at the option of the issuer at a price set in the
security's governing instrument.
In selecting corporate debt securities for the Portfolios, the Adviser
reviews and monitors the creditworthiness of each issuer and issue. The Adviser
also analyzes interest rate trends and specific developments which it believes
may affect individual issuers.
BELOW INVESTMENT GRADE SECURITIES
IN GENERAL. The Portfolios 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
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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.
Subsequent to purchase by a Portfolio (except the High Yield Portfolio), an
issuer of debt securities may cease to be rated or its rating may be reduced, so
that the securities would no longer be eligible for purchase by that Portfolio.
In such a case, the Portfolio will engage in an orderly disposition of the
downgraded securities to the extent necessary to ensure that its holdings do not
exceed the permissible amount as set forth in the Prospectus and this SAI.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. All interest-bearing
securities typically experience appreciation when interest rates decline and
depreciation when interest rates rise. The market values of below investment
grade securities tend to reflect individual corporate developments to a greater
extent than do higher rated securities, which react primarily to fluctuations in
the general level of interest rates. Below investment grade securities also tend
to be more sensitive to economic conditions than are higher-rated securities. As
a result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of below investment grade
securities may experience financial stress which may adversely affect their
ability to service their debt obligations, meet projected business goals, and
obtain additional financing. Periods of economic uncertainty and changes would
also generally result in increased volatility in the market prices of these
securities and thus in a Portfolio's net asset value.
PAYMENT EXPECTATIONS. Below investment grade securities may contain
redemption, call or prepayment provisions which permit the issuer of such
securities to, at its discretion, redeem the securities. During periods of
falling interest rates, issuers of these securities are likely to redeem or
prepay the securities and refinance them with debt securities with a lower
interest rate. To the extent an issuer is able to refinance the securities, or
otherwise redeem them, a Portfolio may have to replace the securities with a
lower yielding security, which would result in a lower return.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies are
designed to evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of
lower-quality securities and, therefore, may not fully reflect the risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. With regard to an
investment in below investment grade securities, the achievement of a
Portfolio's investment objective may be more dependent on the Adviser's own
credit analysis than is the case for higher rated securities. Although the
Adviser considers security ratings when making investment decisions, it does not
rely solely on the ratings assigned by the rating services. Rather, the Adviser
performs research and independently assesses the value of particular securities
relative to the market. The Adviser's analysis may include consideration of the
issuer's experience and managerial strength, 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.
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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.
LIQUIDITY AND VALUATION. Below investment grade securities may lack an
established retail secondary market, and to the extent a secondary trading
market does exist, it may be less liquid than the secondary market for higher
rated securities. The lack of a liquid secondary market may negatively impact a
Portfolio's ability to dispose of particular securities. The lack of a liquid
secondary market for certain securities may also make it more difficult for a
Portfolio to obtain accurate market quotations for purposes of valuing the
Portfolio's portfolio. In addition, adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of below investment grade securities, especially in a thinly traded
market.
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. Differing yields on debt securities of the
same maturity are a function of several factors, including the relative
financial strength of the issuers.
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 may invest in mortgage-backed securities. Mortgage-backed
securities are interests in "pools" of mortgage loans made to residential home
buyers including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations (see "Mortgage Pass-Through Securities," below). These
Portfolios may also invest in debt securities which are secured with collateral
consisting of mortgage-backed securities (see "Collateralized Mortgage
Obligations," below), and in other types of mortgage-related securities. The
Conseco Focus 20 Portfolio presently does not intend to invest more than 5% of
its assets 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
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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 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. The
Portfolios 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
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mortgage-related securities are developed and offered to other types of
investors, investments in such securities will be considered.
STRIPPED MORTGAGE-BACKED SECURITIES. The High Yield Portfolio may invest in
stripped mortgage-backed securities, which are derivative securities usually
structured with two classes that receive different proportions of the interest
and principal distributions from an underlying pool of mortgage assets. The
Portfolio may purchase securities representing only the interest payment portion
of the underlying mortgage pools (commonly referred to as "IOs") or only the
principal portion of the underlying mortgage pools (commonly referred to as
"POs"). Stripped mortgage-backed securities are more sensitive to changes in
prepayment and interest rates and the market for such securities is less liquid
than is the case for traditional debt securities and mortgage-backed securities.
The yield on IOs is extremely sensitive to the rate of principal payments
(including prepayments) on the underlying mortgage assets, and a rapid rate of
repayment may have a material adverse effect on such securities' yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Portfolio will fail to recoup fully its initial
investment in these securities, even if they are rate high quality. Most IOs and
Pos are regarded as illiquid and will be included in the Portfolio's limit on
illiquid securities.
RISKS OF MORTGAGE-BACKED SECURITIES. 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
and IOs and POs, are subject to 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).
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.
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 High Yield and Conseco Focus 20 Portfolios 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
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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 High Yield 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.
TRUST ORIGINATED PREFERRED SECURITIES
The High Yield Portfolio may invest in trust originated preferred
securities, a relatively new type of security issued by financial institutions
such as banks and insurance companies and other issuers. Trust originated
preferred securities represent interests in a trust formed by the issuer. The
trust sells preferred shares and invests the proceeds in notes issued by the
same entity. These notes may be subordinated and unsecured. Distributions on the
trust originated preferred securities match the interest payments on the notes;
if no interest is paid on the notes, the trust will not make current payments on
its preferred securities. Issuers of the notes currently enjoy favorable tax
treatment. If the tax characterization of these securities were to change
adversely, they could be redeemed by the issuers, which could result in a loss
to a Portfolio. In addition, some trust originated preferred securities are
available only to qualified institutional buyers under Rule 144A.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The High Yield Portfolio may invest in loan participations or assignments.
In purchasing a loan participation or assignment, a Portfolio acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Both the lending bank and the borrower may be deemed to be
"issuers" of a loan participation. Many such loans are secured and most impose
restrictive covenants which must be met by the borrower and which are generally
more stringent than the covenants available in publicly traded debt securities.
However, interests in some loans may not be secured, and a Portfolio will be
exposed to a risk of loss if the borrower defaults. There is no assurance that
the collateral can be liquidated in particular cases, or that its liquidation
value will be equal to the value of the debt. Loan participations may also be
purchased by a Portfolio when the borrowing company is already in default.
Borrowers that are in bankruptcy may pay only a small portion of the amount
owed, if they are able to pay at all. Where a Portfolio purchases a loan through
an assignment, there is a possibility that the Portfolio will, in the event the
borrower is unable to pay the loan, become the owner of the collateral. This
involves certain risks to the Portfolio as a property owner.
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In purchasing a loan participation, a Portfolio may have less protection
under the federal securities laws than it has in purchasing traditional types of
securities. Loans are often administered by a lead bank, which acts as agent for
the lenders in dealing with the borrower. In asserting rights against the
borrower, a Portfolio may be dependent on the willingness of the lead bank to
assert these rights, or upon a vote of all the lenders to authorize the action.
Assets held by the lead bank for the benefit of the Portfolio may be subject to
claims of the lead bank's creditors. A Portfolio's ability to assert its rights
against the borrower will also depend on the particular terms of the loan
agreement among the parties. Many of the interests in loans purchased by a
Portfolio will be illiquid and therefore subject to the Portfolio's limit on
illiquid investments.
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, 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
These securities may be U.S. dollar denominated or non-U.S. dollar
denominated. Foreign securities include securities issued, assumed or guaranteed
by foreign governments or political subdivisions or instrumentalities thereof.
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
securities 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, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions on foreign investments or repatriation of capital. In addition,
with respect to certain countries, there is the possibility of nationalization
or expropriation of assets; confiscatory taxation; political, social or
financial instability; and war or other diplomatic developments that could
adversely affect investments in those countries. Since a 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
held by the Portfolio and the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned. A Portfolio generally will
incur costs in connection with conversion between various currencies.
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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. European Depository
Receipts ("EDRs") are certificates issued by a European bank or trust company
evidencing its ownership of the underlying foreign securities. EDRs are designed
for use in European securities markets.
RESTRICTED SECURITIES, 144A SECURITIES AND ILLIQUID SECURITIES
The Portfolios 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 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. Restricted securities are generally
considered illiquid.
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
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
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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 Portfolios may each
invest in obligations of foreign branches of domestic commercial banks and
foreign banks. 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.
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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.
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 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.
INTEREST RATE TRANSACTIONS
Each of these Portfolios may seek to protect the value of its investments
from interest rate fluctuations by entering into various hedging transactions,
such as interest rate swaps and the purchase or sale of interest
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rate caps, floors and collars. A Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio. A Portfolio may also enter into these transactions
to protect against an increase in the price of securities a Portfolio
anticipates purchasing at a later date. Each Portfolio intends to use these
transactions as a hedge and not as speculative investments.
Interest rate swaps involve the exchange by a Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor. An interest
rate collar combines elements of buying a cap and selling a floor.
A Portfolio may enter into interest rate swaps, caps, floors, and collars
on either an asset-based or liability-based basis depending on whether it is
hedging its assets or its liabilities, and will only enter into such
transactions on a net basis, i.e., the two payment streams are netted out, with
a Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. The amount of the excess, if any, of a Portfolio's obligations
over its entitlements with respect to each interest rate swap, cap, floor, or
collar will be accrued on a daily basis and an amount of cash or liquid
securities having an aggregate value at least equal to the accrued excess will
be maintained in a segregated account by the custodian.
A Portfolio will not enter into any interest rate transaction unless the
unsecured senior debt or the claims- paying ability of the other party thereto
is rated in the highest rating category of at least one NRSRO at the time of
entering into such transaction. If there is a default by the other party to such
transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and agents. As a result, the swap market has become well
established and provides a degree of liquidity. Caps, floors and collars are
more recent innovations which tend to be less liquid than swaps.
STEP DOWN PREFERRED SECURITIES
Step down perpetual preferred securities are issued by a real estate
investment trust ("REIT") making a mortgage loan to a single borrower. The
dividend rate paid by these securities is initially relatively high, but
declines yearly. The securities are subject to call if the REIT suffers an
unfavorable tax event, and to tender by the issuer's equity holder in the tenth
year; both events could be on terms unfavorable to the holder of the preferred
securities. The value of these securities will be affected by changes in the
value of the underlying mortgage loan. The REIT is not diversified, and the
value of the mortgaged property may not cover its obligations. Step down
perpetual preferred securities are considered restricted securities under the
1933 Act.
FUTURES CONTRACTS
Each of these Portfolios may purchase and sell futures contracts 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 by a Portfolio or which a Portfolio
intends to purchase, and not for purposes of speculation. For information about
foreign currency futures contracts, see "Foreign Currency Transactions" below.
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
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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".
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.
The 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. Each of the 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 may 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 Conseco Focus 20 Portfolio 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
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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 a 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,
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.
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
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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 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 Conseco Focus 20 Portfolio may purchase put and call options on
securities, and put and call options on stock indices, at such times as the
Adviser deems appropriate and consistent with a Portfolio's investment
objective. Such Portfolio may write listed "covered" calls and "secured" put
options. The Conseco Focus 20 Portfolio may write covered and secured options
with respect to not more than 25 percent of its net assets. The Conseco Focus 20
Portfolio may purchase call and put options with a value of up to 5 percent of
its net assets. The Portfolio 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, each Portfolio 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
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purchased, the 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 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. Call and put options on securities indices
also may be purchased or sold by the Conseco Focus 20 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
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, a Portfolio may be unable to
close out a position, for example, if trading restrictions or suspensions are
imposed on the options markets. 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.
There also can be no assurance that a Portfolio would be able to liquidate
an over-the-counter ("OTC") option at any time prior to expiration. In contrast
to exchange-traded options where the clearing organization
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affiliated with the particular exchange on which the option is listed in effect
guarantees completion of every exchange-traded option, OTC options are contracts
between a Portfolio and a counter-party, with no clearing organization
guarantee. Thus, when a Portfolio purchases an OTC option, it generally will be
able to close out the option prior to its expiration only by entering into a
closing transaction with the dealer from whom the Portfolio originally purchased
the option.
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
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 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 each 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
Each of these Portfolios may invest in call and put option on foreign
currencies. A 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.
A Portfolio may employ hedging strategies with options on currencies before
the Portfolio purchases a
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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 Portfolios 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 a 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").
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.
SECURITIES LENDING
The High Yield and Conseco Focus 20 Portfolios may lend securities to
broker-dealers or other institutional investors pursuant to agreements requiring
that the loans be continuously secured by any combination of cash, U.S.
Government securities, and approved bank letters of credit that at all times
equal at least 100% of the market value of the loaned securities. The High Yield
and Conseco Focus 20 Portfolios will not make such loans if, as a result, the
aggregate amount of all outstanding securities loans would exceed 33 1/3% of the
Portfolio's total assets. A Portfolio continues to receive interest on the
securities loaned and simultaneously earns either interest on the investment of
the cash collateral or fee income if the loan is otherwise collateralized.
Should the borrower of the securities fail financially, there is a risk of delay
in recovery of the securities loaned or loss of rights in the collateral.
However, the Portfolios seek to minimize this risk by making loans only to
borrowers which are deemed by the Adviser to be of good financial standing and
that have been approved by the Board.
BORROWING
Each Portfolio may borrow money from a bank, but only if immediately after
each such borrowing and continuing thereafter the Portfolio would have asset
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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. The use of derivatives in connection
with leverage may create the potential for significant losses. The Portfolios
may pledge assets in connection with permitted borrowings. As a matter of
fundamental policy, the Portfolios may (1) borrow money from banks and (2) enter
into reverse repurchase agreements, provided that (1) and (2) in combination do
not exceed 33 1/3 of the value of the Portfolio's total assets (including the
amount borrowed) less liabilities (other than borrowings). The Portfolios may
borrow from any person up to 5% of its total assets (not including the amount
borrowed) for temporary purposes (but not for leverage or the purchase of
investments).
INVESTMENT IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each 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.
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.
SHORT SALES
The Portfolios may effect short sales. A short sale is a transaction in
which a Portfolio sells a security in anticipation that the market price of the
security will decline. A Portfolio may effect short sales (i) as a form of
hedging to offset potential declines in long positions in securities it owns or
anticipates acquiring, or in similar securities, and (ii) to maintain
flexibility in its holdings. In a short sale "against the box," at the time of
sale the Portfolio owns the security it has sold short or has the immediate and
unconditional right to acquire at no additional cost the identical security.
Under applicable guidelines of the SEC staff, if a Portfolio engages in a short
sale (other than a short sale against-the-box), it must put an appropriate
amount of cash or liquid securities in a segregated account (not with the
broker).
The effect of short selling on a Portfolio is similar to the effect of leverage.
Short selling may exaggerate changes in a Portfolio's NAV. Short selling may
also produce higher than normal portfolio turnover, which may result in
increased transaction costs to a Portfolio.
INVESTMENT PERFORMANCE
STANDARDIZED YIELD QUOTATIONS
Each class of the Portfolios may advertise investment performance figures,
including yield. Each class' 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:
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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 price per share on the last day of the period.
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN QUOTATIONS
Each class 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
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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.
NON-STANDARDIZED PERFORMANCE
In addition, in order to more completely represent a Portfolio's
performance or more accurately compare such performance to other measures of
investment return, a Portfolio also may include in advertisements, sales
literature and shareholder reports other total return performance data
("Non-Standardized Return"). Non-Standardized Return may be quoted for the same
or different periods as those for which Standardized Return is required to be
quoted; it may consist of an aggregate or average annual percentage rate of
return, actual year-by-year rates or any combination thereof. All
non-standardized performance will be advertised only if the standard performance
data for the same period, as well as for the required periods, is also
presented.
From time to time, the Portfolios may advertise their performance compared
to similar funds or types of investments using certain unmanaged indices,
reporting services and publications. Descriptions of some of the indices which
may be used are listed below.
The Standard & Poor's 500 Composite Stock Price Index is a well diversified
list of 500 companies representing the U.S. stock market.
The Standard & Poor's MidCap 400 Index consists of 400 domestic stocks of
companies whose market capitalizations range from $201 million to $14.4 billion,
with a median market capitalization of $2.1 billion.
The Merrill Lynch High Yield Master Index consists of publicly placed
nonconvertible, coupon-bearing US domestic debt and carries a term to maturity
of at least one year. Par amounts outstanding are not less than $10 million at
the start and at the close of the performance measurement period. Issues must be
rated by Standard & Poor's or by Moody's Investors Service as less than
investment grade (i.e., BBB or Baa) but not in default (i.e., DDD1 or less). The
index excludes floating rate debt, equipment trust certificates and Title 11
securities.
In addition, from time to time in reports and promotions (1) a Portfolio's
performance may be compared to other groups of mutual funds tracked by: (a)
Lipper Analytical Services and Morningstar, Inc., widely used independent
research firms which rank mutual funds by overall performance, investment
objectives, and assets; or (b) other financial or business publications, such as
Business Week, Money Magazine, Forbes and Barron's which provide similar
information; (2) the Consumer Price Index (measure for inflation) may be used to
assess the real rate of return from an investment in a Portfolio; (3) other
statistics such as GNP and net import and export figures derived from
governmental publications, e.g., The Survey of Current Business or statistics
derived by other independent parties, e.g., the Investment Company Institute,
may be used to illustrate investment attributes of a Portfolio or the general
economic, business, investment, or financial environment in which a Portfolio
operates; (4) various financial, economic and market statistics developed by
brokers, dealers and other persons may be used to illustrate aspects of a
Portfolio's performance; and (5) the sectors or industries in which a Portfolio
invests may be compared to relevant indices or surveys (e.g., S&P Industry
Surveys) in order to evaluate the Portfolio's historical performance or current
or potential value with respect to the particular industry or sector.
[CLONE PERFORMANCE]
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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.
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. Orders on behalf of the Trust may be
bunched with orders on behalf of other clients of the Adviser.
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.
26
<PAGE>
- --------------------------------------------------------------------------------
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
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 June 30, 1999, the
Adviser managed in excess of $41.0 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.
Because these are new portfolios, no advisory fees were paid, reimbursed
and/or waived in the prior year.
Pursuant to a contractual arrangement with the Trust, the Adviser has agreed
to waive fees and/or reimburse expenses through April 30, , so that annual
operating expenses of each Portfolio are limited to the following net expenses:
0.80% for the High Yield Portfolio; and 0.80% for the Conseco Focus 20
Portfolio. This arrangement does not cover interest, taxes, brokerage
commissions, and extraordinary expenses.
Conseco Variable Insurance Company and Bankers National Life Insurance
Company, subsidiaries of Conseco, Inc., hold a majority of the outstanding
shares of Conseco Series Trust for the benefit of contract owners.
OTHER SERVICE PROVIDERS
THE ADMINISTRATOR. Conseco Services, LLC, a wholly owned subsidiary of
Conseco, acts as Administrator to the Trust. Under the agreement, the
Administrator will supervise the overall administration of the Portfolios. These
administrative services may 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 as follows: 0.10% for the first $100 million;
0.08% for the second $100 million; and 0.06% in excess of $200 million.
CUSTODIAN. The Bank of New 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.
27
<PAGE>
- --------------------------------------------------------------------------------
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.
<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. (74) Chairman of the Board, Consultant to insurance and healthcare
5723 Trail Meadow Trustee industries. Director, Chairman of the Board and
Dallas, TX 75230 Chief Executive Officer, FFG Insurance Co.
Chairman of the Board and Trustee of other
mutual funds managed by the Adviser.
MAXWELL E. BUBLITZ* (44) 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 (76) Trustee Retired. Chartered Financial Analyst. Previously,
502 Canal Cove Court Executive Vice President, Tenneco Financial
Ft. Myers Beach, Fl 33931 Services, Inc. Trustee of other mutual funds
managed by the Adviser. Director Ennis Business
Forms, Inc.
DR. R. JAN LECROY (68) Trustee Retired. Previously, President, Dallas Citizens
841 Liberty Council. Trustee of other mutual funds managed
Dallas, TX 75204 by the Adviser. Director, Southwest Securities
Group, Inc.
DR. JESSE H. PARRISH (72) 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 (54) Trustee Principal, Walthall Asset Management. Former
1 Galleria Tower, Suite 1050 President, Chief Executive Officer and Director
13355 Noel Road of Lyrick Corporation. Formerly, President and
Dallas, TX 75240 CEO, Heritage Media Corporation. Formerly,
Director, Eagle National Bank. Trustee of other
mutual funds managed by the Adviser.
</TABLE>
28
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<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 (40) 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. (44) 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 and its affiliates.
The following table shows the compensation of each disinterested Trustee for the
fiscal year ending December 31, 1998 for affiliated investment companies within
the Fund Complex. In addition to Conseco Series Trust, the Fund Complex consists
of: Conseco Fund Group and Conseco Strategic Income Fund.
COMPENSATION TABLE
Total Compensation
from Investment Companies
Aggregate Compensation in the Trust Complex
Name of Person, Position From the Trust Paid to Trustees
- ------------------------ -------------- ----------------
William P. Daves, Jr. $9,000 $26,000
(2 other investment company)
Harold W. Hartley $9,000 $26,000
(2 other investment company)
Dr. R. Jan LeCroy $9,000 $26,000
(2 other investment company)
29
<PAGE>
- --------------------------------------------------------------------------------
Dr. Jesse H. Parrish $9,000 $26,000
(2 other investment company)
David N. Walthall $6,000 $8,000
(2 other investment company)
NET ASSET VALUES OF THE SHARES OF THE PORTFOLIOS
THE VALUE OF THE SECURITIES OF THE PORTFOLIOS
Securities held by all Portfolios 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 consists of all dividends and/or interest received less its
estimated expenses (including fees payable to the Adviser).
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
30
<PAGE>
- --------------------------------------------------------------------------------
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 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.
31
<PAGE>
CONSECO SERIES TRUST
ADMINISTRATIVE OFFICE
11815 N. PENNSYLVANIA STREET
CARMEL, INDIANA 46032
SAI-100 ( /99) , 1999
<PAGE>
CONSECO SERIES TRUST
High Yield Portfolio
Conseco Focus 20 Portfolio
Contents of Registration Statement
This Registration Statement consists of the following papers and documents:
o Cover Sheet
Contents of Registration Statement:
o Part A - Prospectus
o Part B-
o Statement of Additional Information
o Part C- Other Information
o Signature Pages
o Exhibits
<PAGE>
PART A
<PAGE>
PART B
<PAGE>
PART C
<PAGE>
CONSECO SERIES TRUST
High Yield Portfolio
Conseco Focus 20 Portfolio
REGISTRATION STATEMENT ON FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) Articles of Incorporation:
-- 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.
All exhibits incorporated by reference to Post-Effective
Amendment No. 24 to the Registration Statement (SEC File
No. 2-80455), were filed November 5, 1998.
(b) Bylaws
-- By-Laws, incorporated by reference to Exhibit No. 2 to the
Registration Statement on Form N-1 (File No. 2-80455). All
exhibits incorporated by reference to Post-Effective
Amendment No. 24 to the Registration Statement (SEC File
No. 2-80455), were filed November 5, 1998.
(c) Instruments Defining Rights of Security Holders
-- Not Applicable.
(d) Investment Advisory Contracts
-- 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. All exhibits incorporated by reference to
Post-Effective Amendment No. 24 to the Registration
<PAGE>
Statement (SEC File No. 2-80455), were filed November 5,
1998.
-- Investment Advisory Agreements for the High Yield
Portfolio and the Conseco Focus 20 Portfolio to be filed.
(e) Underwriting Contracts
-- Not Applicable.
(f) Bonus or Profit Sharing Contracts
-- Not Applicable.
(g) Custodian Agreements
-- Custodian Agreement incorporated by reference to Exhibit
No. 8 to the Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A (File No. 2-80455)
April 28, 1993; and Custodian Agreement incorporated by
reference to Exhibit No. (g) to the Post-Effective
Amendment No. 25 to the Registration Statement on Form
N-1A (File No. 2-80455) May 3, 1999.
(h) Other Material Contracts
-- Administration Agreement incorporated by reference to
Exhibit No. (h) to the Post-Effective Amendment No. 25 to
the Registration Statement on Form N-1A (File No. 2-80455)
May 3, 1999;
-- Amended Schedule A to the Administration Agreement dated
May 3, 1999: To be filed.
(i) Legal Opinion
-- Consent and Opinion of Counsel: To be filed.
(j) Consent of Independent Accountants
-- None
(k) Omitted Financial Statements
-- Not Applicable.
(i) Letter of Intent
-- Not Applicable.
(m) Rule 12b-1 Plan
-- Not Applicable.
(n) Financial Data Schedule.
-- None
(o) Rule 18f-3 Plan
-- Not Applicable.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
<PAGE>
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. (Indiana) - (publicly traded)
Conseco Capital Management, Inc. (Delaware)
Marketing Distribution Systems Consulting Group, Inc. (Delaware)
MDS of New Jersey, Inc. (New Jersey)
Conseco Equity Sales, Inc. (Texas)
Conseco Risk Management, Inc. (Indiana)
Conseco Mortgage Capital, Inc. (Delaware)
Conseco Group Risk Management Company (Mississippi)
Green Tree Financial Corporation (Delaware)
CIHC, Incorporated (Delaware)
Conseco Services, LLC (Indiana)
Conseco Marketing, LLC (Indiana)
Conseco Financial Services, Inc. (Delaware)
Bankers National Life Insurance Company (Texas)
National Fidelity Life Insurance Company (Missouri)
Bankers Life Insurance Company of Illinois (Illinois)
Bankers Life & Casualty Company (Illinois)
Certified Life Insurance Company (Illinois)
Jefferson National Life Insurance Company of Texas (Texas)
Conseco Direct Life Insurance Company (Pennsylvania)
Conseco Annuity Assurance Company (Illinois)
Vulcan Life Insurance Company (Indiana)
Conseco Senior Health Insurance Company (Pennsylvania)
Continental Life Insurance Company (Texas)
United General Life Insurance Company (Texas)
Conseco Life Insurance Company of New York (New York)
Conseco Variable Insurance Company (Texas)
Providential Life Insurance Company (Arkansas)
Washington National Corporation (Delaware)
Washington National Insurance Company (Illinois)
<PAGE>
United Presidential Corporation (Indiana)
United Presidential Life Insurance Company
(Indiana)
Wabash Life Insurance Company (Kentucky)
Conseco Life Insurance Company (Indiana)
Lincoln American Life Insurance Company (Tennessee)
Pioneer Financial Services, Inc. (Delaware)
Geneva International Insurance Company, Inc. (Turks
and Caicos Islands)
Pioneer Life Insurance Company (Illinois)
Health and Life Insurance Company of America
(Illinois)
Manhattan National Life Insurance Company
(Illinois)
Conseco Medical Insurance
Company (Illinois)
Capital American Financial Corporation (Ohio)
Conseco Health Insurance Company (Arizona)
Frontier National Life Insurance Company (Ohio)
Consumer Acceptance Corporation (Indiana)
General Acceptance Corporation (Indiana)
NAL Financial Group, Inc. (Delaware)
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, both affiliated and unaffiliated.
** The shares of the Conseco Fund Group are sold to the public; Conseco
affiliates currently hold in excess of 35% 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.
<PAGE>
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.
The principal officers and directors of Conseco Capital Management, Inc.
are as follows:
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 Consumer 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, CEO, President and Director; Executive Vice President
of Conseco, Inc.; President and Trustee of Conseco Fund Group; 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 Fund Group; 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 Fund Group; Vice President
and Secretary of Conseco Strategic Income Fund;. Vice President and Secretary
Conseco Equity Sales, Inc.; Vice President and Secretary of Conseco Securities,
Inc.
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.
<PAGE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books, or 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, Conseco
Capital Management, Inc., or the Custodian, The Bank of New York, 90 Washington
Street, 22nd Floor, New York, New York 10826.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Conseco Series Trust, certifies
that it meets all of the requirements for effectiveness of this Post-Effective
Amendment No. 26 to the Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 26
to be signed on its behalf by the undersigned, thereto duly authorized, in the
city of Carmel, of the State of Indiana, on the 8th day of October, 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 October 8, 1999
- --------------------------
Maxwell E. Bublitz (Principal Executive Officer) and Trustee
/S/ WILLIAM P. DAVES, JR.* Chairman of the Board and October 8, 1999
- --------------------------
William P. Daves, Jr. Trustee
/S/ HAROLD W. HARTLEY* Trustee October 8, 1999
- --------------------------
Harold W. Hartley
/S/ R. JAN LECROY* Trustee October 8, 1999
- --------------------------
R. Jan LeCroy
/S/ JESSE H. PARRISH* Trustee October 8, 1999
- --------------------------
Jesse H. Parrish
/S/ JAMES S. ADAMS* Treasurer October 8, 1999
- --------------------------
James S. Adams
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ DAVID N. WALTHALL* Trustee October 8, 1999
- --------------------------
David N. Walthall
* /S/ WILLIAM P. KOVACS
--------------------------
William P. Kovacs
Attorney-in-fact
</TABLE>
<PAGE>
Exhibit
NUMBER EXHIBIT
------- -------
(h) Amended Schedule A of the Administration Agreement- To be filed.
(i) Consent and Opinion of Counsel- To be filed.
