The role of the Audit Committee is to assist the Board of Trustees in its oversight of the Fund’s financial reporting process. The Audit Committee operates pursuant to a Charter that was most recently amended and approved by the Board on August 19, 2004, a copy is attached as Exhibit A. As set forth in the Charter, management of the Fund is responsible for maintaining appropriate systems for accounting and internal control. The Fund’s independent registered public accounting firm is responsible for planning and conducting an audit to determine whether the financial statements present fairly in all material respects the financial position and results of the operations of the Fund.
PricewaterhouseCoopers, LLP (“PwC”) was the Independent Registered Public Accounting Firm for the Fund for the fiscal year ended June 30, 2004. In performing its oversight function, the Audit Committee reviewed and discussed the audited financial statements for the Fund’s fiscal year ended June 30, 2004 with Fund management and PwC. The Audit Committee discussed with PwC the matters required to be discussed by Statement on Auditing Standards No. 61, COMMUNICATIONS WITH AUDIT COMMITTEES, as modified or supplemented. The Audit Committee also received the written disclosures from PwC required by Independence Standards Board Standard No. 1, INDEPENDENT DISCUSSIONS WITH AUDIT COMMITTEES, as currently in effect. Finally, the Committee considered whether the provision by PwC relating to non-audit service s to the Fund, or of professional services to the Adviser and those affiliates thereof that provide services to the Fund, is compatible with maintaining PwC’s independence and has discussed with PwC its independence. PwC has not provided to the Fund, the Adviser or those affiliates thereof that provide services to the Fund, any information technology services relating to financial information design and implementation or internal audit services.
Members of the Fund’s Audit Committee are not professionally engaged in the practice of auditing or accounting and are not employed by the Fund for accounting, financial management or internal control. Moreover, the Audit Committee relies on, and makes no independent verification of, the facts presented and the representations made to it by Fund management and PwC. Accordingly, the Audit Committee’s oversight does not provide an independent basis to determine that management has maintained appropriate accounting and/or financial reporting principles and policies, or internal controls and procedures, designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee’s considerations and discussions referred to above do not provide assurance that the audit of the Fund’s financial statements has been carried out in accordance with generally accepted auditing standards or that the financial statements are presented in accordance with generally accepted accounting principles.
Based on its consideration of the Fund’s audited financial statements and the discussions referred to above with Fund management and PwC, and subject to the limitations on the responsibilities and role of the Audit Committee as set forth in the Charter and discussed above, the Audit Committee recommended the inclusion of the Fund’s audited financial statements for the year ended June 30, 2004 in the Fund’s Annual Report dated June 30, 2004.
At a meeting held on August 19, 2004, upon the recommendation of the Audit Committee, a majority of the Trustees who are not “interested persons” of the Fund (as defined in the 1940 Act) selected PwC as Independent Registered Public Accounting Firm for the Fund for the fiscal year ending June 30, 2005. It is expected that representatives of PwC will not be present at the Meeting, but will be available by telephone to answer any questions that may arise. In reliance on Rule 32a-4 under the 1940 Act, the Fund is not seeking shareholder ratification of the selection of PwC as its independent registered public accounting firm.
Harold W. Hartley, Chairman of Audit Committee
Dr. R. Jan LeCroy
Dr. Jess H. Parrish
David N. Walthall, Chairman of the Board
40|86 STRATEGICINCOMEFUND(“FUND”)
AUDIT COMMITTEE CHARTER
Adopted August 19, 2004
I. Audit Committee Membership and Qualifications
The Audit Committee shall consist of at least three members appointed by the Board. The Board may replace members of the Audit Committee for any reason.
No member of the Audit Committee shall be an “interested person” of the Fund, as that term is defined in Section 2(a)(19) of the Investment Company Act of 1940, nor shall any member receive any compensation from the Fund except compensation for service as a member of the Fund’s Board of Directors/Trustees (“Board”) or a committee of the Board. Each member of the Audit Committee must be financially literate, as that qualification is interpreted by the Board in its business judgment, or must become financially literate within a reasonable time after appointment to the Audit Committee. At least one member of the Audit Committee must have accounting or related financial management expertise as the Board interprets such qualification in its business judgment.
The Board shall determine annually whether any member of the Audit Committee is an “audit committee financial expert” as defined in Item 3 of Form N-CSR.
II. Purposes of the Audit Committee
The purposes of the Audit Committee are:
(a) to oversee the accounting and financial reporting processes of the Fund and its internal control over financial reporting and, as the Committee deems appropriate, to inquire into the internal control over financial reporting of certain third-party service providers;
(b) to oversee, or, as appropriate, assist Board oversight of, the quality and integrity of the Fund’s financial statements and the independent audit thereof;
(c) to oversee, or, as appropriate, assist Board oversight of, the Fund’s compliance with legal and regulatory requirements that relate to the Fund’s accounting and financial reporting, internal control over financial reporting and independent audits;
(d) to approve prior to appointment the engagement of the Fund’s independent auditors and, in connection therewith, to review and evaluate the qualifications, independence and performance of the Fund’s independent auditors;
(e) to act as a liaison between the Fund’s independent auditors and the full Board: and
(f) to prepare an audit committee report as required by Item 306 of Regulation S-K to be included in proxy statements relating to the election of directors/trustees.
(g) to assist Board oversight of the Fund’s internal audit function (if any).
The independent auditors for the Fund shall report directly to the Audit Committee.
III. Duties and Powers of the Audit Committee
To carry out its purposes, the Audit Committee shall have the following duties and powers:
(a) to approve prior to appointment the engagement of auditors to annually audit and provide their opinion on the Fund’s financial statements, to recommend to those Board members who are not “interested persons” (as that term is defined in Section 2(a)(19) of the Investment Company Act) the selection, retention or termination of the Fund’s independent auditors and, in connection therewith, to review and evaluate matters potentially affecting the independence and capabilities of the auditors. In evaluating the
auditor’s qualifications, performance and independence, the Audit Committee must, among other things obtain and review a report by the auditor, at least annually, describing the following items:
(i) all relationships between the independent auditor and the Fund, as well as the Fund’s investment adviser or any control affiliate of the adviser that provides ongoing services to the Fund;
(ii) any material issues raised by the most recent internal quality-control review, or peer review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken t o deal with any such issues; and
(iii) the auditor’s internal quality-control procedures.
(b) to approve prior to appointment the engagement of the auditor to provide other audit services to the Fund or to provide non-audit services to the Fund, its investment adviser or any entity controlling, controlled by, or under common control with the investment adviser (“adviser affiliate”) that provides ongoing services to the Fund, if the engagement relates directly to the operations and financial reporting of the Fund;
(c) to develop, to the extent deemed appropriate by the Audit Committee, policies and procedures for pre-approval of the engagement of the Fund’s auditors to provide any of the services described in (b) above;
(d) to consider the controls applied by the auditors and any measures taken by management in an effort to assure that all items requiring pre-approval by the Audit Committee are identified and referred to the Committee in a timely fashion;
(e) to consider whether the non-audit services provided by the Fund’s auditor to the Fund’s investment adviser or any adviser affiliate that provides ongoing services to the Fund, which services were not pre-approved by the Audit Committee, are compatible with maintaining the auditor’s independence;
(f) to review the arrangements for and scope of the annual audit and any special audits;
(g) to review and approve the fees proposed to be charged to the Fund by the auditors for each audit and non-audit service;
(h) to consider information and comments from the auditors with respect to the Fund’s accounting and financial reporting policies, procedures and internal control over financial reporting (including the Fund’s critical accounting policies and practices), to consider management’s responses to any such comments and, to the extent the Audit Committee deems necessary or appropriate, to promote improvements in the quality of the Fund’s accounting and financial reporting;
(i) to consider information and comments from the auditors with respect to, and meet with the auditors to discuss any matters of concern relating to, the Fund’s financial statements, including any adjustments to such statements recommended by the auditors, to review the auditors’ opinion on the Fund’s financial statements and to discuss with management and the independent auditor the Fund’s annual audited financial statements and other periodic financial statements, including the Fund’s disclosures under “Management’s Discussion of Fund Performance”;
(j) to resolve disagreements between management and the auditors regarding financial reporting;
(k) to consider any reports of difficulties that may have arisen in the course of the audit, including any limitations on the scope of the audit, and management’s response thereto;
(l) to review with the Fund’s principal executive officer and/or principal financial officer in connection with required certifications on Form N-CSR any significant deficiencies in the design or operation of internal control over financial reporting or material weaknesses therein and any reported evidence of fraud involving management or other employees who have a significant role in the Fund’s internal control over financial reporting;
(m) to establish procedures for the receipt, retention and treatment of complaints received by the Fund relating to accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by employees of the Fund, its investment adviser, administrator, principal underwriter, or any other provider of accounting related services for the Fund of concerns about accounting or auditing matters, and to address reports from attorneys or auditors of possible violations of federal or state law or fiduciary duty;
(n) to discuss generally the Fund’s earnings press releases, as well as any financial information and earnings guidance provided to analysts and rating agencies (if any), e.g., the types of information to be disclosed and the type of presentation to be made;
(o) to review in a general manner, but not as a committee to assume responsibility for, the Fund’s processes with respect to risk assessment and risk management;
(p) to set clear policies relating to the hiring by entities within the Fund’s investment company complex1of employees or former employees of the independent auditors;
(q) to investigate or initiate an investigation of reports of improprieties or suspected improprieties in connection with the Fund’s accounting or financial reporting;
(r) to report its activities to the full Board on a regular basis and to make such recommendations with respect to the above and other matters as the Audit Committee may deem necessary or appropriate; and
(s) to perform such other functions and to have such powers as may be necessary or appropriate in the efficient and lawful discharge of the powers provided in this Charter.
The Audit Committee shall have the resources and authority appropriate to discharge its responsibilities, including appropriate funding, as determined by the Committee, for payment of compensation to the auditors for the purpose of conducting the audit and rendering their audit report, the authority to retain and compensate special counsel and other experts or consultants as the Committee deem necessary, and the authority to obtain specialized training for Audit Committee members, at the expense of the Fund or series, as appropriate.
The Audit Committee may delegate any portion of its authority, including the authority to grant pre-approvals of audit and permitted non-audit services, to a subcommittee of one or more members. Any decisions of the subcommittee to grant pre-approvals shall be presented to the full Audit Committee at its next regularly scheduled meeting.
IV. Role and Responsibilities of the Audit Committee
The function of the Audit Committee is oversight; it is management’s responsibility to maintain appropriate systems for accounting and internal control over financial reporting, and the auditor’s responsibility to plan and carry out a proper audit. Specifically, Fund’s management is responsible for: (1) the preparation, presentation and integrity of the Fund’s financial statements; (2) the maintenance of appropriate accounting and financial reporting principles and policies; and (3) the maintenance of internal control over
_________
| 1 | “Investment company complex” includes: |
| - | the fund and its investment adviser or sponsor; |
| - | any entity controlling, controlled by or under common control with the investment adviser or sponsor, if the entity (1) is an investment adviser or sponsor or (2) is engaged in the business of providing administrative, custodian, underwriting or transfer agent services to any investment company, investment adviser or sponsor; and - any investment company hedge fund or unregistered fund that has an investment adviser included in the definition set forth in either of the two bullet points above |
An investment adviser, for these purposes, does not include a sub-adviser whose role is primarily portfolio management and that is subcontracted with or overseen by another investment adviser. Sponsor refers to the sponsor of a unit investment trust.
financial reporting and other procedures designed to assure compliance with accounting standards and related laws and regulations. The independent auditors are responsible for planning and carrying out an audit consistent with applicable legal and professional standards and the term of their engagement letter. Nothing in this Charter shall be construed to reduce the responsibilities or liabilities of the Fund’s service providers, including the auditors.
Although the Audit Committee is expected to take a detached and questioning approach to the matters that come before it, the review of a Fund’s financial statements by the Audit Committee is not an audit, nor does the Committee’s review substitute for the responsibilities of the Fund’s management for preparing, or the independent auditors for auditing, the financial statements. Members of the Audit Committee are not full-time employees of the Fund and, in serving on this Committee, are not, and do not hold themselves out to be, acting as accountants or auditors. As such, it is not the duty or responsibility of the Committee or its members to conduct “field work” or other types of auditing or accounting reviews or procedures.
In discharging their duties the members of the Audit Committee are entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (1) one or more officers of the Fund whom the director reasonably believes to be reliable and competent in the matters presented; (2) legal counsel, public accountants, or other persons as to matters the director reasonably believes are within the person’s professional or expert competence; or (3) a Board committee of which the director is not a member.
V. Operations of the Audit Committee
(a) The Audit Committee shall meet on a regular basis and at least one time annually and is empowered to hold special meetings, as circumstances require. The chair or a majority of the members shall be authorized to call a meeting of the Audit Committee and send notice thereof.
(b) The Audit Committee shall ordinarily meet in person; however, members may attend telephonically, and the Committee may act by written consent, to the extent permitted by law and by the Fund’s bylaws.
(c) The Audit Committee shall have the authority to meet privately and to admit non-members individually by invitation.
(d) The Audit Committee shall regularly meet, in separate executive sessions, with representatives of Fund management, the Fund’s internal auditors or other personnel responsible for the Fund’s internal audit function (if any) and the Fund’s independent auditors. The Committee may also request to meet with internal legal counsel and compliance personnel of the Fund’s investment adviser and with entities that provide significant accounting or administrative services to the Fund to discuss matters relating to the Fund’s accounting and compliance as well as other Fund- related matters.
(e) The Audit Committee shall prepare and retain minutes of its meetings and appropriate documentation of decisions made outside of meetings by delegated authority.
(f) The Audit Committee may select one of its members to be the chair and may select a vice chair.
(g) A majority of the members of the Audit Committee shall constitute a quorum for the transaction of business at any meeting of the Committee. The action of a majority of the members of the Audit Committee present at a meeting at which a quorum is present shall be the action of the Committee.
(h) The Board shall adopt and approve this Charter and may amend it on the Board’s own motion. The Audit Committee shall review this Charter at least annually and recommend to the full Board any changes the Committee deems appropriate.
(i) The Audit Committee shall evaluate its performance at least annually.
[4983 - 4086 STRATEGIC INCOME FUND] [FILE NAME: ZSIF41.ELX] [VERSION - (2)] [11/24/04] [orig. 11/19/04]
DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL
ZSIF41
4983
X
Please markvotes as inthis example.
| 1. | Election of Class I Trustees. | | 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting, or any adjournment or adjournments. |
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| | Nominees:(01) Diana H. Hamilton, (02) R. Matthew Neff |
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| | Election of Class II Trustees. | |
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| | Nominees:(03) Gregory J. Hahn, (04) David N. Walthail | |
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| | [ ] FORNOMINEES | [ ] WITHHOLDFROMNOMINEES | MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT |
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| | | | Signature(s) should be exactly as name or names appearing on this proxy. If shares are held jointly, each holder should sign. If signing is by attorney, administrator, trustee or guardian, please give full title. |
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| | [ ] For all nominees except as noted above | |
| | SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE TO: Proxy Services, PFPC Inc., P.O. Box 8586, Edison, NJ 08818-8586 IMPORTANT: No matter how many shares you own, please sign, date and mail your proxy IMMEDIATELY. To hold the meeting, a majority of the shares eligible to vote is required by law to be represented. Therefore, it is important that you vote now so that your Fund will not have to bear the unnecessary expense of another solicitation of proxies. |
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PLEASE MARK BOXES IN BLUE OR BLACK INK. |
Signature: ___________________ Date: ______________________ Signature: ___________________ Date:____________________
[4983 - 4086 STRATEGIC INCOME FUND] [FILE NAME: ZSIF42.ELX] [VERSION - (4)] [11/30/04] [orig. 11/19/04]
DETACH HERE
ZSIF42
PROXY
ANNUAL MEETING OF SHAREHOLDERS - December 30, 2004
The undersigned shareholder of 40|86 Strategic Income Fund (the "Fund") hereby appoint(s) Karl W. Kindig and Sarah
L. Bertrand, or either of them, attorneys with full power of substitution, to vote, as indicated herein, all of the shares of
beneficial interest (the "shares") of the Fund standing in the name of the undersigned at the close of business on
November 24, 2004 at the Annual Meeting of Shareholders of the Fund to be held at the 40|86 Advisors, Inc. Offices, 535
N. College Drive, Building K, Carmel, Indiana on December 30, 2004 at 11:00 a.m., and any and all adjournments thereof;
with all the powers the undersigned would possess if then and there personally present and especially (but without limiting
the general authorization and power hereby given) to vote as indicated on the proposals, as more fully described in the
Proxy Statement for the meeting.
This Proxy is solicited by the Board of Trustees and will be voted "FOR" election of the proposed Trustees
listed on the reverse side, unless otherwise indicated.
SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
40|86 STRATEGIC INCOME FUND
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
| SEE REVERSESIDE | | SEE REVERSESIDE |
