UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08795
CONSECO STRATEGIC INCOME FUND
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(Exact name of registrant as specified in charter)
11825 N. Pennsylvania Street
Carmel, IN 46032
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(Address of principal executive offices) (Zip code)
Audrey L. Kurzawa, Treasurer
11825 N. Pennsylvania Street
Carmel, IN 46032
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(Name and address of agent for service)
Registrant's telephone number, including area code: 800-825-1530
Date of fiscal year end: JUNE 30, 2003
Date of reporting period: JUNE 30, 2003
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
Item 1. Report to Stockholders.
[Conseco Logo]
CONSECO(R)
Step up(sm)
CONSECO STRATEGIC INCOME FUND
June 30, 2003
Annual Report
CONSECO STRATEGIC INCOME FUND Annual Shareholder Report
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PORTFOLIO MANAGERS' REVIEW June 30, 2003
HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK?
For the year ended June 30, 2003, the Conseco Strategic Income Fund returned
45.80% based on share price and the reinvestment of dividends. This compares
favorably with the 22.20% return on the benchmark Merrill Lynch High Yield
Master II Index over the same period.(1)
WHAT CAUSED THE VARIANCE IN PERFORMANCE BETWEEN THE FUND AND ITS BENCHMARK?
The positive performance variance was driven by our fundamental research
process allowing us to take advantage of the market dislocation that occurred
between June 2002 and October 2002 in the crossover sector of the market. In
addition, the Fund took advantage of oversold levels in the Telecom, Cable, and
Media sectors where we believed that solid management teams and/or leading
market positions would allow those companies to manage through the difficult
capital market conditions. Additionally, the use of leverage positively impacted
performance for the twelve-month period ended June 30, 2003.
WHICH PORTFOLIO HOLDINGS ENHANCED THE FUND'S PERFORMANCE?
For the twelve months ended June 30, 2003, Fund performance benefited greatly
from investing in higher quality credits that were trading at extremely
attractive levels relative to the high yield universe. These included names such
as Sprint, Tyco, AOL Time Warner, and Qwest. While many of these names were
facing legitimate concerns surrounding corporate governance or accounting issues
during the latter part of 2002, our fundamental research process enabled us to
take advantage of the temporary market dislocation that occurred in these
securities. All of these bonds have rallied significantly from the lows
witnessed in October 2002. In addition to these "fallen angels," Nextel, Crown
Castle, and Charter contributed positively to performance.
WHICH HOLDINGS DETRACTED FROM PERFORMANCE?
For the twelve months ended June 30, 2003, the Fund was most negatively
impacted by its exposure to the airline sector, which continues to be plagued by
bankruptcies, overcapacity, and weak demand. While we were meaningfully
underweight the sector in general, the exposure to Delta and US Air still
contributed negatively to Fund performance. In addition, Fund performance was
negatively affected by the Healthsouth default stemming from allegations of
massive fraud and accounting irregularities.
WHAT IS YOUR OUTLOOK FOR THE NEXT FISCAL YEAR?
As we highlighted in the December 2002 Semi-Annual Shareholder Report, we
entered 2003 optimistic about the high yield market and believed that investors
could be rewarded with returns in line with historical averages of 8-12%. Given
that the Merrill Lynch High Yield Master II Index is already up 17.88% for the
year, it appears that we may have been too conservative. Expectations for an
improving economy, coupled with strong fund flows and improving capital markets
have combined to drive spreads tighter and bond prices higher. In addition to
the spread tightening, bond prices have received the dual benefit of Treasury
rates moving materially lower over the past six months. While the high yield
market has rallied significantly since December, it remains fairly valued by
historical standards, as spreads are still 50-75 basis points cheap to the
20-year average. That said, we have and will continue to take advantage of the
rally in the Treasury market and reduce those higher quality securities that no
longer offer a compelling risk/return trade-off at current levels. Similarly, we
will continue to capitalize on the strength in the lower quality names to reduce
riskier credits where we believe the market technicals have gotten ahead of the
fundamentals. The proceeds of these sales will be selectively reinvested in the
new issue market where, we believe, the majority of opportunity and supply
currently exists. As we stated six months ago, the quality of the issuers in the
market today is better than we have seen in over five years, largely due to the
attrition of many of the over-leveraged business plans that tapped the market in
the late 1990's and early 2000's.
Robert L. Cook, CFA
Senior Vice President
Director of Research
Conseco Capital
Management, Inc.
Thomas G. Hauser, CFA
Vice President
Portfolio Manager
Conseco Capital
Management, Inc.
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(1) Past performance does not guarantee future results. Your investment return
and principal will fluctuate, and your shares may be worth more or less than
their original cost. Total return is provided in accordance with SEC guidelines
for comparative purposes. The Merrill Lynch High Yield Master II Index is an
unmanaged, market capitalization weighted index of all domestic and yankee high
yield bonds.
1
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2003
SHARES OR
PRINCIPAL AMOUNT VALUE
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CORPORATE BONDS (122.4% OF NET ASSETS) (a)
AMUSEMENT AND RECREATION SERVICES (5.9%)
$ 725,000 Boca Resorts, Inc., 9.875%, due 04/15/2009 (g)........................................................ $ 784,813
875,000 Six Flags, Inc., 8.875%, due 02/01/2010 (g)........................................................... 844,375
525,000 Six Flags, Inc., 9.750%, due 04/15/2013, (b) Cost--$525,000; Acquired--04/09/2003..................... 522,375
740,000 Trump Atlantic City Associates, 11.250%, due 05/01/2006 (g)........................................... 584,600
825,000 Vail Resorts, Inc., 8.750%, due 05/15/2009 (g)........................................................ 866,250
480,000 Venetian Casino, 11.000%, due 06/15/2010 (g).......................................................... 543,600
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4,146,013
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APPAREL AND OTHER FINISHED PRODUCTS (2.7%)
750,000 Levi Strauss & Co., 12.250%, due 12/15/2012 (g)....................................................... 628,125
280,000 Oxford Industries, Inc., 8.875%, due 06/01/2011, (b) Cost--$278,046; Acquired--05/06/2003............. 295,400
580,000 Phillips Van-Heusen Corp., 8.125%, due 05/01/2013, (b) Cost--$580,000; Acquired--04/30/2003........... 598,125
325,000 Warnaco, Inc., 8.875%, due 06/15/2013, (b) Cost--$325,000; Acquired--06/05/2003....................... 338,000
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1,859,650
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BUILDING CONSTRUCTION, GENERAL CONTRACTORS AND OPERATIVE BUILDERS (0.8%)
515,000 D.R. Horton, Inc., 8.500%, due 04/15/2012............................................................. 581,950
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BUSINESS SERVICES (3.1%)
470,000 H&E Equipment, 11.125%, due 06/15/2012 (g)............................................................ 415,950
950,000 RH Donnelley Finance Corp., 10.875%, due 12/15/2012, (b) Cost--$950,000; Acquired--11/26/2002 (g)..... 1,111,500
595,000 Universal Hospital Services, Inc., 10.250%, due 03/01/2008 (g)........................................ 615,825
-----------
2,143,275
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CABLE AND OTHER PAY TELEVISION SERVICES (6.7%)
500,000 Charter Communications Holdings LLC, 11.125%, due 01/15/2011 ......................................... 390,000
2,280,000 Charter Communications Holdings LLC, STEP (c) 0.000%/13.500%, due 01/15/2011 (g)...................... 1,197,000
550,000 CSC Holdings, Inc., 10.500%, due 05/15/2016 (g)....................................................... 602,250
915,000 DirectTV Holdings, 8.375%, due 03/15/2013, (b) Cost--$915,000; Acquired--02/25/2003 (g)............... 1,024,800
1,215,000 Insight Communications Co., Inc., STEP (c) 0.000%/12.250%, due 02/15/2011 (g)......................... 1,014,525
415,000 Quebecor Media, Inc., 11.125%, due 07/15/2011 (g)..................................................... 477,250
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4,705,825
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CHEMICALS AND ALLIED PRODUCTS (7.5%)
440,000 Ethyl Corp., 8.875%, due 05/01/2010, (b) Cost--$440,000; Acquired--04/15/2003......................... 451,000
363,000 HMP Equity Holdings Corp., 0.000%, due 05/15/2008, (b) Cost--$176,019; Acquired--04/30/2003 (h)....... 185,130
345,000 Huntsman ICI Chemicals, 10.125%, due 07/01/2009 (g)................................................... 332,925
150,000 Huntsman International LLC, 9.875%, due 03/01/2009, (b) Cost--$157,858; Acquired--04/03/2003......... 156,750
525,000 Lyondell Chemical Co., 10.875%, due 05/01/2009 (g) ................................................... 490,875
515,000 Lyondell Chemical Co., 11.125%, due 07/15/2012 (g).................................................... 530,450
580,000 Polyone Corp., 10.625%, due 05/15/2010, (b) Cost--$580,000; Acquired--04/30/2003...................... 568,400
690,000 Solutia, Inc., 11.250%, due 07/15/2009 (g) ........................................................... 600,300
155,000 Solutia, Inc., 6.720%, due 10/15/2037................................................................. 124,775
405,000 Terra Capital, Inc., 12.875%, due 10/15/2008 (g)...................................................... 433,350
1,135,000 Terra Capital, Inc., 11.500%, due 06/01/2010, (b) Cost--$1,128,380; Acquired--05/16/2003 (g).......... 1,049,875
320,000 Witco Corp., 6.875%, due 02/01/2026................................................................... 278,400
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5,202,230
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The accompanying notes are an integral part of these financial statements.
2
2003 Annual Report
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2003
SHARES OR
PRINCIPAL AMOUNT VALUE
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COMMUNICATIONS SERVICES (6.5%)
$ 800,000 American Tower Corp., 5.000%, due 02/15/2010 (g) ..................................................... $ 688,000
480,000 Crown Castle International Corp., STEP (c) 0.000%/11.250%, due 08/01/2011 ............................ 463,200
1,080,000 Echostar DBS Corp., 9.375%, due 02/01/2009 (g)........................................................ 1,156,950
440,000 Rogers Wireless, Inc., 9.625%, due 05/01/2011......................................................... 508,200
560,000 Spectrasite, Inc., 8.250%, due 05/15/2010, (b) Cost--$561,050; Acquired--05/16/2003 and 05/19/2003 ... 585,200
1,000,000 Vivendi Universal, 9.250%, due 04/15/2010, (b) Cost--$1,000,000; Acquired--04/03/2003 (g)............. 1,142,500
-----------
4,544,050
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EATING AND DRINKING PLACES (1.0%)
695,000 Denny's Corp. 11.250%, due 01/15/2008 (g)............................................................. 538,625
155,000 Dominos, Inc., 8.250%, due 07/01/2011, (b) Cost--$153,887; Acquired--06/18/2003....................... 160,812
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699,437
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ELECTRIC, GAS, AND SANITARY SERVICES (5.6%)
630,000 Allied Waste North America, Series B, 7.875%, due 01/01/2009 (g) .................................... 662,288
600,000 Browning-Ferris, 7.400%, due 09/15/2035 (g)........................................................... 555,000
285,000 El Paso Production Holdings, 7.750%, due 06/01/2013, (b) Cost--$285,000; Acquired--05/20/2003......... 285,712
320,000 MSW Energy Holdings, 8.500%, due 09/01/2010, (b) Cost--$320,000; Acquired--06/11/2003................. 330,400
640,000 PG&E Corp., 6.875%, due 07/15/2008, (b) Cost--$640,000; Acquired--06/27/2003.......................... 664,000
910,000 Southern Natural Gas, 8.875%, due 03/15/2010, (b) Cost--$898,772; Acquired--02/28/2003 (g)............ 996,450
250,000 Transcontinental Gas Pipe Corp., Series B, 7.000%, due 08/15/2011..................................... 257,500
160,000 Williams Companies, Inc., 8.625%, due 06/01/2010...................................................... 168,000
-----------
3,919,350
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ELECTRONIC, OTHER ELECTRICAL EQUIPMENT, EXCEPT COMPUTERS (12.6%)
550,000 Alamosa Delaware, Inc., 13.625%, due 08/15/2011 (g) .................................................. 464,750
1,320,000 Alamosa PCS Holdings, Inc., STEP (c) 0.000%/12.875%, due 02/15/2010 (g)............................... 772,200
1,530,000 Celestica, Inc., 0.000%, due 08/01/2020 (g)(h) ....................................................... 807,075
850,000 IPC Acquisition Corp., 11.500%, due 12/15/2009 (g).................................................... 905,250
620,000 Nortel Networks Ltd., 6.125%, due 02/15/2006 (g)...................................................... 604,500
790,000 Sanmina-Sci Corp., 10.375%, due 01/15/2010, (b) Cost--$790,000; Acquired--12/18/2002 (g).............. 884,800
1,013,000 Solectron Corp., 0.000%, due 11/20/2020 (h)........................................................... 567,280
488,000 Telecorp PCS, Inc., 10.625%, due 07/15/2010 (g) ...................................................... 591,700
1,127,000 Telecorp PCS, Inc., STEP (c) 0.000%/11.625%, due 04/15/2009 (g) ...................................... 1,172,080
1,875,000 Tyco International Group, 6.375%, due 10/15/2011 (g).................................................. 1,987,500
-----------
8,757,135
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FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND TRANSPORTATION EQUIPMENT (1.0%)
820,000 Park-Ohio Industries, Inc., 9.250%, due 12/01/2007 (g) ............................................... 701,100
-----------
FOOD AND KINDRED PRODUCTS (1.8%)
870,000 Eagle Family Foods Co., Series B, 8.750%, due 01/15/2008 (g) ......................................... 595,950
310,000 Le-Nature's, Inc., 9.000%, due 06/15/2013, (b) Cost--$310,000; Acquired--06/18/2003 ................. 320,850
320,000 Merisant Co., 9.500%, due 07/15/2013, (b) Cost--$320,000; Acquired--06/27/2003........................ 332,800
-----------
1,249,600
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FOREIGN GOVERNMENTS (0.4%)
320,000 Federative Republic of Brazil, 10.250%, due 06/17/2013 ............................................... 306,400
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The accompanying notes are an integral part of these financial statements.
3
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2003
SHARES OR
PRINCIPAL AMOUNT VALUE
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GENERAL MERCHANDISE STORES (0.6%)
$ 430,000 JC Penny Co., Inc., 8.000%, due 03/01/2010............................................................ $ 452,575
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HEALTH SERVICES (5.4%)
590,000 HCA, Inc., 6.950%, due 05/01/2012..................................................................... 629,788
430,000 HealthSouth Corp., 8.500%, due 02/01/2008 (e)(f)(g) .................................................. 339,700
540,000 HealthSouth Corp., 10.750%, due 10/01/2008 (e)(f)(g) ................................................. 283,500
345,000 Matria HealthCare, Series B, 11.000%, 05/01/2008...................................................... 355,350
590,000 Res-Care, Inc., 10.625%, due 11/15/2008 (g) ......................................................... 557,550
795,000 Tenet HealthCare Corp., 6.500%, due 06/01/2012........................................................ 741,338
875,000 Tenet HealthCare Corp., 7.375%, due 02/01/2013........................................................ 848,750
-----------
3,755,976
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HOTELS, OTHER LODGING PLACES (4.2%)
750,000 Host Marriott LP, 9.500%, due 01/15/2007 (g).......................................................... 810,000
640,000 Park Place Entertainment Corp., 8.125%, due 05/15/2011................................................ 705,600
750,000 RFS Partnership LP, 9.750%, due 03/01/2012 (g)........................................................ 761,250
660,000 Starwood Hotels & Resorts, 7.375%, due 11/15/2015..................................................... 685,575
-----------
2,962,425
-----------
INDUSTRIAL AND COMMERCIAL MACHINERY AND COMPUTER EQUIPMENT (3.4%)
1,135,000 Cummins Engine, Inc., 5.650%, due 03/01/2098 (g)...................................................... 785,988
340,000 Rexnord Corp., 10.125%, due 12/15/2012................................................................ 375,700
505,000 Terex Corp., Series B, 10.375%, due 04/01/2011........................................................ 560,550
660,000 Unova, Inc., 7.000%, due 03/15/2008................................................................... 617,925
-----------
2,340,163
-----------
INSURANCE CARRIERS (1.0%)
810,000 Fairfax Financial Holdings Ltd., 7.375%, due 04/15/2018 (g) .......................................... 712,800
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LEATHER AND LEATHER PRODUCTS (1.0%)
690,000 Samsonite Corp., 10.750%, due 06/15/2008.............................................................. 708,975
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LUMBER AND WOOD PRODUCTS, EXCEPT FURNITURE (3.3%)
660,000 Georgia-Pacific Corp., 9.500%, due 12/01/2011 (g) .................................................... 730,125
1,590,000 Georgia-Pacific Corp., 7.700%, due 06/15/2015 (g) .................................................... 1,538,325
-----------
2,268,450
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MEASURING INSTRUMENTS, PHOTO GOODS, WATCHES (0.4%)
490,000 Hudson Respiratory Care, Inc., 9.125%, due 04/15/2008................................................. 276,850
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MISCELLANEOUS RETAIL (0.7%)
475,000 Toys R Us, 7.625%, due 08/01/2011 .................................................................... 510,140
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MOTION PICTURES (2.7%)
810,000 Alliance Atlantis Communications, Inc., 13.000%, due 12/15/2009 (g) .................................. 927,450
755,000 AOL Time Warner, Inc., 9.125%, due 01/15/2013 (g)..................................................... 968,932
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1,896,382
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NON-DEPOSITORY CREDIT INSTITUTIONS (1.3%)
875,000 Ford Motor Credit Co., 7.375%, due 10/28/2009 (g)..................................................... 918,661
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The accompanying notes are an integral part of these financial statements.
4
2003 Annual Report
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2003
SHARES OR
PRINCIPAL AMOUNT VALUE
- ----------------- -----
OIL AND GAS EXTRACTION (4.3%)
$ 595,000 Citgo Petroleum Corp., 11.375%, due 02/01/2011, (b) Cost--$631,902; Acquired--03/28/2003 and 04/09/2003 $ 666,400
495,000 Dynegy Holdings, Inc., 6.750%, due 12/15/2005......................................................... 470,250
640,000 Dynegy Holdings, Inc., 7.125%, due 05/15/2018 (g) .................................................... 524,800
650,000 Houston Exploration Co., 7.000%, due 06/15/2013, (b) Cost--$650,000; Acquired--06/05/2003............. 674,375
620,000 Pogo Producing Co., Series B, 8.750%, due 05/15/2007.................................................. 641,700
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2,977,525
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PAPER AND ALLIED PRODUCTS (1.9%)
785,000 Mail-Well, Inc., 9.625%, due 03/15/2012 (g)........................................................... 830,138
440,000 Pliant Corp., 11.125%, due 09/01/2009, (b) Cost--$441,750; Acquired--05/22/2003 and 05/23/2003........ 469,700
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1,299,838
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PERSONAL SERVICES (2.3%)
465,000 Cendant Corp., 7.375%, due 01/15/2013 (g)............................................................. 548,700
720,000 Service Corp. International, 6.875%, due 10/01/2007 (g) .............................................. 716,400
345,000 Service Corp. International, 6.500%, due 03/15/2008 (g) .............................................. 338,962
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1,604,062
-----------
PETROLEUM REFINING AND RELATED INDUSTRIES (0.7%)
445,000 Tesoro Petroleum Corp., 8.000%, due 04/15/2008, (b) Cost--$442,387; Acquired--04/07/2003 and 04/09/2003 458,350
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PRINTING, PUBLISHING AND ALLIED INDUSTRIES (5.6%)
210,000 Dex Media East LLC, 9.875%, due 11/15/2009............................................................ 235,200
735,000 Dex Media East LLC, 12.125%, due 11/15/2012 (g)....................................................... 872,813
400,000 Hollinger International Publishing, 9.000%, due 12/15/2010............................................ 430,000
665,000 Houghton Mifflin Co., 8.250%, due 02/01/2011, (b) Cost--$665,000; Acquired--01/24/2003 (g)............ 704,900
275,000 Houghton Mifflin Co., 9.875%, due 02/01/2013, (b) Cost--$272,911; Acquired--01/24/2003................ 299,750
630,000 Moore North American Finance, 7.875%, due 01/15/2011, (b) Cost--$628,185; Acquired--03/11/2003 (g).... 659,925
655,000 Sun Media Corp., 7.625%, due 02/15/2013............................................................... 700,850
-----------
3,903,438
-----------
RAILROAD TRANSPORTATION (0.9%)
605,000 TFM SA de CV, 11.750%, due 06/15/2009 ................................................................ 618,612
-----------
REAL ESTATE INVESTMENT TRUSTS (REITS) (3.7%)
320,000 Felcor Lodging, 9.500%, due 09/15/2008................................................................ 332,000
595,000 iStar Financial, Inc., 7.000%, due 03/15/2008 (g).................................................... 623,440
875,000 JDN Realty Corp., 6.950%, due 08/01/2007 (g) ......................................................... 976,406
390,000 Senior Housing Trust, 8.625%, due 01/15/2012 (g) ..................................................... 417,300
245,000 Senior Housing Trust, 7.875%, due 04/15/2015 ......................................................... 251,125
-----------
2,600,271
-----------
STONE, CLAY, GLASS AND CONCRETE PRODUCTS (2.7%)
170,000 Hexcel Corp., 9.875%, due 10/01/2008, (b) Cost--$168,301; Acquired--03/07/2003........................ 187,850
330,000 Hexcel Corp., 9.750%, due 01/15/2009.................................................................. 330,000
320,000 Jacuzzi Brands, Inc., 9.625%, due 07/01/2010, (b) Cost--$320,000; Acquired--06/30/2003................ 320,000
295,000 Owens-Brockway Glass, 7.750%, due 05/15/2011, (b) Cost--$295,000; Acquired--04/29/2003................ 313,437
440,000 Owens-Brockway Glass, 8.250%, due 05/15/2013, (b) Cost--$440,000; Acquired--04/29/2003................ 462,000
295,000 Owens-Illinois, Inc., 7.500%, due 05/15/2010.......................................................... 290,575
-----------
1,903,862
-----------
The accompanying notes are an integral part of these financial statements.
5
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CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2003
SHARES OR
PRINCIPAL AMOUNT VALUE
- ----------------- -----
TELEPHONE COMMUNICATIONS (11.6%)
$1,390,000 AirGate PCS, Inc., STEP (c) 0.000%/13.500%, due 10/01/2009 (g) ....................................... $ 660,250
875,000 Fairpoint Communications, 12.500%, due 05/01/2010 (g) ................................................ 931,875
515,000 Intermedia Communications, Inc., Series B, 8.600%, due 06/01/2008 (e)(f) ............................. 383,675
340,000 Madison River Capital LLC, 13.250%, due 03/01/2010 (g) ............................................... 334,900
510,000 Nextel Communications, Inc., 9.950%, due 02/15/2008 (g) .............................................. 535,500
620,000 Nextel Partners, Inc., 8.125%, due 07/01/2011, (b) Cost--$620,000; Acquired--06/16/2003............... 621,550
2,795,000 Qwest Capital Funding, 7.250%, due 02/15/2011 (g) .................................................... 2,305,875
965,000 Sprint Capital Corp., 8.375%, due 03/15/2012 (g) ..................................................... 1,157,632
245,000 Triton PCS, Inc., 8.750%, due 11/15/2011 ............................................................. 245,613
485,000 Triton PCS, Inc., 8.500%, due 06/01/2013, (b) Cost--$485,000; Acquired--05/30/2003 ................... 523,800
1,320,000 Worldcom, Inc., 6.950%, due 08/15/2028 (e)(f) ........................................................ 392,700
-----------
8,093,370
-----------
TELEVISION BROADCASTING STATIONS (2.2%)
525,000 CanWest Media, Inc., 10.625%, due 05/15/2011 (g) ..................................................... 601,125
530,000 CanWest Media, Inc., 7.625%, due 04/15/2013, (b) Cost--$530,000; Acquired--03/31/2003................ 565,775
365,000 Sinclair Broadcasting Group, 8.000%, due 03/15/2012,
(b) Cost--$376,138; Acquired--12/17/2002 and 04/10/2003 ............................................ 391,462
-----------
1,558,362
-----------
TRANSPORTATION BY AIR (0.4%)
1,030,000 US Airways, Inc., 9.820%, due 01/01/2013 (e)(f)(g) ................................................... 255,672
-----------
TRANSPORTATION EQUIPMENT (3.8%)
630,000 Dana Corp., 9.000%, due 08/15/2011.................................................................... 685,125
320,000 General Motors Corp., 7.125%, due 07/15/2013.......................................................... 318,742
640,000 General Motors Corp., 8.375%, due 07/15/2033.......................................................... 628,602
645,000 United Components, Inc., 9.375%, due 06/15/2013,
(b) Cost--$656,600; Acquired--06/06/2003 and 06/09/2003............................................. 672,412
320,000 Vought Aircraft Industries, Inc. , 8.000%, due 07/15/2011, (b) Cost--$320,000; Acquired--06/27/2003... 317,002
-----------
2,621,883
-----------
WATER TRANSPORTATION (1.3%)
850,000 Royal Carribean Cruises, 8.000%, due 05/15/2010 (g) .................................................. 888,250
-----------
WHOLESALE TRADE - DURABLE GOODS (1.4%)
495,000 TRW Automotive, Inc., 9.375%, due 02/15/2013, (b) Cost--$495,000; Acquired--02/06/2003 (g)............ 539,550
420,000 TRW Automotive, Inc., 11.000%, due 02/15/2013, (b) Cost--$420,000; Acquired--02/06/2003............... 459,900
-----------
999,450
-----------
TOTAL CORPORATE BONDS (COST $78,611,685).............................................................. 85,402,357
-----------
COMMON STOCK (0.2% OF NET ASSETS) (a)
INDUSTRIAL AND COMMERCIAL MACHINERY AND COMPUTER EQUIPMENT (0.2%)
23,861 Dictaphone Corp. (f) ................................................................................. 101,409
-----------
TOTAL COMMON STOCK (COST $1,616,369).................................................................. 101,409
-----------
The accompanying notes are an integral part of these financial statements.
6
2003 Annual Report
- --------------------------------------------------------------------------------
CONSECO STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2003
SHARES OR
PRINCIPAL AMOUNT VALUE
- ----------------- -----
PREFERRED STOCK (7.2% OF NET ASSETS) (a)
APPAREL AND OTHER FINISHED PRODUCTS (0.6%)
16,291 Tommy Hilfiger USA, Inc., 9.000%...................................................................... $ 407,764
-----------
CABLE AND OTHER PAY TELEVISION SERVICES (0.9%)
6,250 CSC Holdings, Inc., 11.125% (g)....................................................................... 642,188
-----------
COMMUNICATION SERVICES (2.3%)
1,467 Crown Castle International Corp., PIK (d), 12.750% (g)................................................ 1,610,170
-----------
RADIO AND TELEVISION BROADCASTING STATIONS (0.4%)
2,305 Sinclair Capital, 11.625%............................................................................. 243,177
-----------
TELEPHONE COMMUNICATIONS (3.0%) ...
1,971 Nextel Communications, Inc., Series D, 13.000% (g).................................................... 2,096,651
-----------
TOTAL PREFERRED STOCK (COST $4,014,476)............................................................... 4,999,950
-----------
WARRANTS (0.0%) (a)
CHEMICALS AND ALLIED PRODUCTS (0.0%)
690 Solutia, Inc., expire 7/15/2009 (f)(g)................................................................ 345
-----------
INDUSTRIAL AND COMMERCIAL MACHINERY AND COMPUTER EQUIPMENT (0.0%)
21,541 Dictaphone Corp., expire 03/28/2006 (f)............................................................... 1,077
-----------
TOTAL WARRANTS (COST $0)............................................................................. 1,422
-----------
SHORT-TERM OBLIGATIONS (8.9% OF NET ASSETS)
1,205,926 RBB Sansom Street Fund Money Market Portfolio......................................................... 1,205,926
5,007,994 Temporary Investment Fund, Inc. ...................................................................... 5,007,994
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $6,213,920)........................................................ 6,213,920
-----------
TOTAL INVESTMENTS (138.7% OF NET ASSETS) (COST $90,456,450) (i) ...................................... $96,719,058
-----------
LIABILITIES, LESS OTHER ASSETS (-38.7% OF NET ASSETS)................................................. (26,964,209)
-----------
TOTAL NET ASSETS (100.0%)............................................................................. $69,754,849
===========
- ----------
(a) Using Standard Industry Codes prepared by the Technical Committee on
Industrial Classifications.
(b) Restricted under Rule 144A of the Securities Act of 1933.
(c) STEP -- Bonds where the coupon increases or steps up at a predetermined
rate.
(d) PIK -- Payment in kind.
(e) Security in default.
(f) Non-income producing security.
(g) All or a portion of these securities were included in a pledge account (see
footnote 6).
(h) Zero Coupon -- Bonds that make no interest payments.
(i) Aggregate cost for Federal income tax purposes is $90,668,088.
The aggregate gross unrealized appreciation (depreciation) for Federal
income tax purposes is as follows:
Excess of market value over tax cost ..... $ 9,465,350
Excess of tax cost over market value ..... (3,414,380)
------------
$ 6,050,970
------------
The accompanying notes are an integral part of these financial statements.
7
- --------------------------------------------------------------------------------
CONSECO STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2003
- --------------------------------------------------------------------------------
Assets:
Investments at cost....................................................................... $ 90,456,450
------------
Investments at value...................................................................... $ 96,719,058
Receivable for securities sold............................................................ 973,152
Interest receivable....................................................................... 1,569,257
Dividends receivable...................................................................... 17,383
Other assets.............................................................................. 13,070
------------
Total assets.......................................................................... 99,291,920
============
Liabilities and net assets:
Payable to Conseco, Inc. and subsidiaries................................................. 78,569
Accrued expenses.......................................................................... 76,777
Distribution payable...................................................................... 420,447
Interest payable.......................................................................... 43,054
Payables for securities purchased......................................................... 2,869,030
Line of credit payable.................................................................... 26,049,194
------------
Total liabilities..................................................................... 29,537,071
------------
Net assets............................................................................ $ 69,754,849
============
Net assets consist of:
Capital stock, $0.001 par value (unlimited shares of beneficial interest authorized)...... $6,837
Paid-in capital........................................................................... $101,169,525
Undistributed net investment income....................................................... 106,649
Accumulated net realized loss on investments.............................................. (37,790,770)
Net unrealized appreciation on investments................................................ 6,262,608
------------
Net assets............................................................................ $ 69,754,849
============
Shares outstanding.............................................................................. 6,836,532
Net asset value per share....................................................................... $ 10.20
============
The accompanying notes are an integral part of these financial statements.
8
2003 Annual Report
- --------------------------------------------------------------------------------
CONSECO STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2003
- --------------------------------------------------------------------------------
Investment Income:
Interest.................................................................................. $ 7,736,082
Dividends................................................................................. 474,765
------------
Total investment income............................................................... 8,210,847
============
Expenses:
Investment advisory fees.................................................................. 718,419
Administration fees....................................................................... 89,998
Shareholders service fees................................................................. 79,824
Trustees' fees............................................................................ 70,250
Audit fees................................................................................ 50,128
Transfer agent fees....................................................................... 38,747
Registration and filing fees.............................................................. 25,123
Reports - printing........................................................................ 17,402
Custodian fees............................................................................ 15,284
Legal fees................................................................................ 14,077
Other..................................................................................... 21,195
------------
Total expenses before interest expense................................................ 1,140,447
============
Interest expense.......................................................................... 493,062
------------
Total expenses........................................................................ 1,633,509
------------
Net investment income................................................................. 6,577,338
============
Net realized and unrealized gains (losses) on investments:
Net realized losses on sales of investments........................................... (3,080,322)
------------
Net change in unrealized appreciation of investments.................................. 19,318,780
------------
Net realized and unrealized gains on investments.......................................... 16,238,458
------------
Net increase in net assets from operations...................................................... $ 22,815,796
============
The accompanying notes are an integral part of these financial statements.
9
- --------------------------------------------------------------------------------
CONSECO STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- --------------
Operations:
Net investment income ................................................. $ 6,577,338 $ 6,861,556
Net realized losses on sales of investments ........................... (3,080,322) (5,487,701)
Net change in unrealized appreciation or depreciation of investments .. 19,318,780 (4,519,182)
------------ ------------
Net increase (decrease) from operations ........................... 22,815,796 (3,145,327)
------------ ------------
Distributions to shareholders:
Net investment income ................................................. (6,457,299) (6,876,164)
------------ ------------
Net decrease from distributions ................................... (6,457,299) (6,876,164)
------------ ------------
Capital Share Transactions:
Reinvestment of distributions
(including $10,392 and $10,220 paid to Conseco, Inc., respectively) 226,364 438,450
------------ ------------
Net increase from capital share transactions ...................... 226,364 438,450
------------ ------------
Total increase (decrease) in net assets ........................... 16,584,861 (9,583,041)
------------ ------------
Net assets:
Beginning of year ..................................................... 53,169,988 62,753,029
End of year ........................................................... $ 69,754,849 $ 53,169,988
============ ============
Share data:
Reinvestment of distributions ......................................... 26,371 49,124
------------ ------------
Net increase ...................................................... 26,371 49,124
------------ ------------
Shares outstanding:
Beginning of year ..................................................... 6,810,161 6,761,037
End of year ........................................................... 6,836,532 6,810,161
------------ ------------
The accompanying notes are an integral part of these financial statements.
10
2003 Annual Report
- --------------------------------------------------------------------------------
CONSECO STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2001 2000 1999 (g)
---------- ---------- ---------- ---------- -------------
Net asset value per share, beginning of period .......... $ 7.81 $ 9.28 $ 11.15 $ 13.04 $ 14.88(a)
Income from investment operations (b):
Net investment income .............................. 0.96 1.01 1.11 1.40 1.29
Net realized gains (losses) and change in unrealized
appreciation or depreciation on investments ...... 2.38 (1.47) (1.89) (1.87) (1.84)
-------- ------- ------- -------- --------
Net increase (decrease) from operations ........ 3.34 (0.46) (0.78) (0.47) (0.55)
-------- ------- ------- -------- --------
Distributions:
Net investment income .............................. (0.95) (1.01) (1.09) (1.42) (1.29)
-------- ------- ------- -------- --------
Net decrease from distributions ................ (0.95) (1.01) (1.09) (1.42) (1.29)
-------- ------- ------- -------- --------
Net asset value per share, end of period ................ $ 10.20 $ 7.81 $ 9.28 $ 11.15 $ 13.04
======== ======= ======= ======== ========
Per share market value, end of period ................... $10.1700 $7.8200 $9.5100 $10.3125 $12.9375
======== ======= ======= ======== ========
Total return (c) (d) .................................... 45.80% (7.60%) 3.39% (9.44%) (5.06%)
======== ======= ======= ======== ========
Ratios/supplemental data:
Net assets (dollars in thousands),
end of period .................................... $ 69,755 $53,170 $62,753 $ 75,255 $ 87,825
Ratios of expenses to average
net assets (e) ................................... 2.84% 3.13% 4.04% 3.80% 2.74%
Ratios of operating expenses to average
net assets (f) (e) ............................... 1.98% 1.93% 1.80% 1.64% 1.59%
Ratios of net investment income to
average net assets (e) ........................... 11.43% 11.47% 10.95% 11.48% 10.24%
Portfolio turnover (d) ............................. 111.69% 247.73% 213.80% 118.92% 129.87%
- ----------
(a) Initial public offering price of $15.00 per share less offering costs of
$0.12 per share.
(b) Per share amounts presented are based on an average of monthly shares
outstanding throughout the period indicated.
(c) Total return is calculated assuming a purchase of common stock at the
current market price on the first day and a sale at the current market
price on the last day of each period reported except for the period ended
June 30, 1999, total return is based on a beginning of period price of
$14.88 (initial offering price of $15.00 less offering costs of $0.12 per
share). Dividends and distributions, if any, are assumed for purposes of
this calculation to be reinvested at prices obtained under the Fund's
dividend reinvestment plan. Total investment return does not reflect
brokerage commissions or sales charges.
(d) Not annualized for periods of less than one year.
(e) Annualized for periods of less than one year.
(f) Excluding interest expense.
(g) For the period July 31, 1998 (commencement of operations) through June 30,
1999.
The accompanying notes are an integral part of these financial statements.
11
- --------------------------------------------------------------------------------
CONSECO STRATEGIC INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income .................................................. $ 6,776,691 $ 7,327,093
Interest expense paid .............................................. (498,308) (756,421)
Operating expenses paid ............................................ (1,078,182) (1,156,115)
------------- -------------
Net cash provided by operating activities ...................... 5,200,201 5,414,557
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ................................. 88,527,651 198,862,836
Purchases of investments ........................................... (86,349,908) (196,070,252)
Net (increase) in short-term investments ........................... (4,177,915) (1,347,576)
------------- -------------
Net cash provided by (used for) investing activities ........... (2,000,172) 1,445,008
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid (net of reinvestment of $226,364
and $438,450, respectively) .................................... (6,200,029) (6,650,581)
Net increase in loans outstanding .................................. 3,000,000 --
------------- -------------
Net cash used for financing activities ......................... (3,200,029) (6,650,581)
------------- -------------
Net increase in cash ........................................... -- 208,984
Cash at beginning of year ...................................... -- (208,984)
------------- -------------
Cash at end of year ............................................ $ -- $ --
============= =============
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH USED BY
OPERATING ACTIVITIES:
Net investment income .............................................. $ 6,577,338 $ 6,861,556
Net decrease in interest and dividends receivable .................. 105,688 425,800
Net decrease (increase) in other assets ............................ (29) 475
Net increase (decrease) in payable to Conseco, Inc. and subsidiaries 12,108 (5,665)
Net increase in accrued expenses ................................... 50,186 6,208
Net (decrease) in interest payable ................................. (5,246) (42,856)
Payment in kind bonds .............................................. (197,199) (412,945)
Accretion and amortization of discounts and premiums ............... (1,342,645) (1,418,016)
------------- -------------
Net cash provided by operating activities ...................... $ 5,200,201 $ 5,414,557
============= =============
The accompanying notes are an integral part of these financial statements.
12
2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003
1. ORGANIZATION
The Conseco Strategic Income Fund (the "Fund") was organized as a business
trust under the laws of the Commonwealth of Massachusetts on June 2, 1998, and
commenced operations on July 31, 1998. The Fund is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940 (the "1940 Act"), as amended, as a closed-end, non-diversified management
investment company. At June 30, 2003, Conseco, Inc. ("Conseco") owned 11,685
shares of the Fund's common stock. Conseco is a publicly owned financial
services company that, through its subsidiaries and a nationwide network of
distributors, provides supplemental health insurance, life insurance and
annuities.
On December 17, 2002, Conseco filed a petition for reorganization under
Chapter 11 of Title 11 of the United States Bankruptcy Code. The Fund is a
separate legal entity and is not included in the petition filed by Conseco.
Therefore, the assets of the Fund are not subject to the claims of the creditors
of Conseco.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION, TRANSACTIONS,
AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date. The cost of
investments sold is determined by use of the specific identification method for
both financial reporting and income tax reporting purposes. Interest income is
recorded on an accrual basis; dividend income is recorded on the ex-dividend
date. The Fund did not hold any investments which are restricted as to resale,
except bonds with a cost of $20,192,184 and a market value of $21,313,019, all
of which are eligible for resale under Rule 144A of the Securities Act of 1933.
These securities represent 30.55% of the net assets of the Fund. These
securities may be resold to qualified institutional buyers in transactions
exempt from registration.
Investments are stated at market value in the accompanying financial
statements. Values for fixed income and other securities traded in the
over-the-counter market are provided by third-party pricing services. Securities
that are traded on stock exchanges are valued at the last sale price as of the
close of business on the day the securities are being valued, or lacking any
sales, at the mean between the closing bid and asked prices. Fund securities,
which are traded both in the over-the-counter market and on an exchange, are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the supervision of
the Board of Trustees. Debt securities purchased with maturities of sixty days
or less are valued at amortized cost.
Investments held by the Fund may be purchased with accrued interest, and the
investments owned by the Fund may accrue interest during the period the
investment is owned by the Fund. If an investment owned by the Fund experiences
a default and has accrued interest from purchase or has recorded accrued
interest during the period it is owned, the Fund's policy is to cease interest
accruals from the time the investments are traded as "flat" in the market. The
Fund evaluates the collectibility of purchased accrued interest and previously
recorded interest on an investment-by-investment basis.
DISTRIBUTION OF INCOME AND GAINS
The Fund intends to distribute monthly to shareholders substantially all of
its net investment income and to distribute, at least annually, any net realized
capital gains in excess of net realized capital losses (including any capital
loss carryovers). However, the Board of Trustees may decide to declare dividends
at other intervals.
FEDERAL INCOME TAXES
For federal income tax purposes, the Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code by
distributing substantially all of its taxable income and net capital gains to
its shareholders annually and otherwise complying with the requirements for
regulated investment companies. Therefore, no provision has been made for
federal income taxes.
Income and Capital Gain distributions are determined in accordance with
federal income tax regulations which may differ from GAAP. The tax character of
distributions paid during the year ended June 30, 2003 and June 30, 2002 were as
follows:
Ordinary income ................................. $ 6,426,396
Ordinary income ................................. 7,089,031
At June 30, 2003, the components of net assets (excluding paid in capital) on a
tax basis were as follows:
Undistributed Ordinary Income ................... $ 528,121
Capital Loss and other loss carryovers .......... (37,579,132)
------------
Accumulated Earnings ............................ (37,051,011)
------------
Less: Dividend Payable .......................... (421,472)
Unrealized Appreciation--Tax .................... 6,050,970
------------
Total Accumulated Earnings (Deficit) ............ $(31,421,513)
============
The differences between book and tax basis net unrealized appreciation are
primarily attributable to wash sales. The cumulative timing difference for
ordinary income is due to the timing of distributions and deferred organization
costs. The
13
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2003
cumulative timing difference for the capital loss carryover is due to Post
October Losses and Wash Sales.
Net Asset Value ................................ $ 69,754,849
Paid in Capital ................................ (101,176,362)
-------------
Net assets (excluding paid in capital) ......... $ (31,421,513)
=============
As of June 30, 2003, the Fund had a total capital loss carryover of
$34,787,825, which is available to offset future net realized gains on
securities transactions to the extent provided for in the Internal Revenue Code.
The capital loss of $990,224 will expire in 2007, $6,647,128 in 2008,
$17,308,696 in 2009, $5,367,863 in 2010 and $4,473,914 in 2011. The Fund's
realized capital losses incurred after October 31, 2002, through June 30, 2003,
are deemed to arise on the first business day of the following year. The Fund
incurred and elected to defer such realized capital losses of $2,791,307. For
the year ended June 30, 2003 dividends of $197,699 paid by the Fund may be
subject to a maximum tax rate of 15%, as provided by the Jobs and Growth Tax
Relief and Reconciliation Act of 2003. The Fund intends to designate the maximum
amount allowable as taxed at a maximum rate of 15%. Complete information will be
reported in conjunction with your 2003 Form 1099-DIV.
EXPENSES
The Fund pays expenses of Trustees who are not affiliated persons of the Fund
or Conseco Capital Management, Inc. (the "Adviser" and "Administrator"), a
wholly-owned subsidiary of Conseco. The Fund pays each of its Trustees who is
not a Trustee, officer or employee of the Adviser, the Administrator or any
affiliate thereof an annual fee of $7,500 plus $1,500 for each Board of Trustees
meeting attended. The Board Chairman receives an additional $375 for each
meeting attended. The Fund reimburses all Trustees for travel and out-of-pocket
expenses incurred in connection with Board of Trustees meetings.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities, as
of the date of the financial statements, and the reported amount of increases
and decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AGREEMENT
The Adviser serves as the Investment Manager and Administrator to the Fund
under the terms of the Investment Management Agreement. The Adviser supervises
the Fund's management and investment program, performs a variety of services in
connection with management and operation of the Fund and pays all compensation
of officers and Trustees of the Fund who are affiliated persons of the Adviser
or the Fund. As compensation for its services to the Fund, the Fund has agreed
to pay the Adviser a monthly advisory fee equal to an annual rate of 0.90
percent of the value of the average weekly value of the total assets of the Fund
less the sum of accrued liabilities (other than the aggregate indebtedness
constituting financial leverage) (the "Managed Assets"). The total fees incurred
for such services for the year ended June 30, 2003 were $718,419.
SHAREHOLDER SERVICING AGREEMENT
Conseco Services, LLC, a wholly-owned subsidiary of Conseco, acts as the
Shareholder Servicing Agent to the Fund under the Shareholder Service Agreement.
As compensation for its services, the Fund has agreed to pay Conseco Services,
LLC a monthly shareholder servicing fee equal to an annual rate of 0.10 percent
of the Managed Assets. The total fees incurred for such services for the year
ended June 30, 2003 were $79,824.
4. ADMINISTRATION AGREEMENT
The Fund contracted for certain administration services with PFPC, Inc.
("PFPC"). For its services, PFPC receives a monthly fee equal to an annual rate
of 0.105 percent of the first $250 million of average weekly net assets; 0.080
percent of the next $250 million of average weekly net assets; 0.055 percent of
the next $250 million of average weekly net assets; and 0.035 percent of average
weekly net assets in excess of $750 million, subject to a minimum monthly charge
of $7,500. The total fees incurred for such services for the year ended June 30,
2003 were $89,998.
5. PORTFOLIO ACTIVITY
Purchases and sales of securities other than short-term obligations
aggregated $83,043,766 and $87,698,612, respectively, for the year ended June
30, 2003.
6. INDEBTEDNESS
The Fund expects to utilize financial leverage through borrowings, including
the issuance of debt securities, preferred shares or through other transactions,
such as reverse repurchase agreements, which have the effect of financial
leverage. There can be no assurance that a leveraging strategy will be
successful during any period in which it is used. The Fund intends to utilize
leverage to provide the shareholders with a potentially higher return. Leverage
creates risks for the shareholders, including the likelihood of greater
volatility of net asset value and market price of the shares, and the risk of
fluctuations in interest rates on borrowings.
14
2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2003
LOAN AGREEMENT
The Fund entered into a secured Loan and Pledge Agreement with Custodial
Trust Company (the "Agreement") on October 4, 2000. The Agreement is callable on
demand. Under the Agreement, the aggregate amount of the loans outstanding may
not exceed 33 1/3 percent of total assets (including the amount obtained through
leverage). Borrowings bear interest at the Federal Funds Rate plus a margin of
0.75 percent. Interest payments are made monthly. Advances made under the
Agreement are due and payable on demand. The Fund shall maintain a pledge
account which gives the Custodial Trust Company as pledgee effective control
over the Fund assets with a collateral value greater than the sum of the
outstanding aggregate principal amount of the loans and the interest accrued
thereon. The Fund is required to maintain asset coverage, as defined in the
Agreement, of at least 3:1. Portfolio securities with an aggregate value of
$56,284,185 were included in the pledge account at June 30, 2003. The Fund was
in compliance with the terms of the agreement at June 30, 2003.
Borrowings at June 30, 2003 totaled $26 million and the interest rate on such
borrowings was 2.13 percent.
Average daily balance of loans
outstanding during the year
ended June 30, 2003 .......................... $22,238,235
Weighted average interest rate for
the period ................................... 2.22%
Maximum amount of loans outstanding
at any month-end during the year
ended June 30, 2003 .......................... $26,049,194
Percentage of total assets at
June 30, 2003 ................................ 26.23%
Amount of loans outstanding at
June 30, 2003 ................................ $26,049,194
Percentage of total assets at
June 30, 2003 ................................ 26.23%
15
- --------------------------------------------------------------------------------
AUTOMATIC DIVIDEND REINVESTMENT PLAN
(UNAUDITED)
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "DRIP"),
unless a shareholder otherwise elects, all dividends and capital gain
distributions will be automatically reinvested in additional shares by PFPC,
Inc. ("PFPC"), as agent for shareholders in administering the DRIP (the "DRIP
Agent"). Shareholders who elect not to participate in the DRIP will receive all
dividends and other distributions in cash paid by check mailed directly to the
shareholder of record (or, if the shares are held in street or other nominee
name, then to such nominee) by PFPC as dividend disbursing agent. DRIP
participants may elect not to participate in the DRIP and to receive all
dividends and capital gain distributions in cash by sending written instructions
to PFPC, as dividend disbursing agent, at the address set forth below.
Participation in the DRIP is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the DRIP
Agent not less than ten days prior to any distribution record date; otherwise
such termination will be effective with respect to any subsequently declared
dividend or other distribution.
Whenever the Fund declares an income dividend or a capital gain distribution
(collectively referred to in this section as "dividends") payable either in
shares or in cash, non-participants in the DRIP will receive cash and
participants in the DRIP will receive the equivalent in shares. The shares will
be acquired by the DRIP Agent or an independent broker-dealer for the
participants' accounts, depending upon the circumstances described below,
either: (i) through receipt of additional unissued but authorized shares from
the Fund ("newly issued shares"); or (ii) by purchase of outstanding shares on
the open market ("open market purchases") on the NYSE or elsewhere. If on the
payment date for the dividend, the net asset value per share is equal to or less
than the market price per share plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the DRIP Agent will
invest the dividend amount in newly issued shares on behalf of the participants.
The number of newly issued shares to be credited to each participant's account
will be determined by dividing the dollar amount of the dividend by the net
asset value per share on the date the shares are issued, provided that the
maximum discount from the then current market price per share on the date of
issuance may not exceed 5%. If on the dividend payment date, the net asset value
per share is greater than the market value thereof (such condition being
referred to herein as "market discount"), the DRIP Agent will invest the
dividend amount in shares acquired on behalf of the participants in open-market
purchases.
In the event of a market discount on the dividend payment date, the DRIP
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis, but no more than 30 days after the
dividend payment date, to invest the dividend amount in shares acquired in
open-market purchases. It is contemplated that the Fund will pay monthly income
dividends. Therefore, the period during which open-market purchases can be made
will exist only from the payment date of the dividend through the date before
the next "ex-dividend" date, which typically will be approximately ten days. If,
before the DRIP Agent has completed its open-market purchases, the market price
of a share exceeds the net asset value per share, the average per share purchase
price paid by the DRIP Agent may exceed the net asset value per share, resulting
in the acquisition of fewer shares than if the dividend had been paid in newly
issued shares on the dividend payment date. Because of the foregoing difficulty
with respect to open-market purchases, the DRIP provides that if the DRIP Agent
is unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the DRIP Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the earlier of the last day of the purchase period or
the first day during the purchase period on which the market discount shifts to
a market premium.
The DRIP Agent maintains all shareholders' accounts in the DRIP and furnishes
written confirmation of all transactions in the accounts, including information
needed by shareholders for tax records. Shares in the account of each DRIP
partici- pant will be held on his or her behalf by the DRIP Agent on behalf of
the DRIP participant, and each shareholder proxy will include those shares
purchased or received pursuant to the DRIP. The DRIP Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the DRIP in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the DRIP Agent will administer
the DRIP on the basis of the number of shares certified from time to time by the
record shareholder's name and held for the account of beneficial owners who
participate in the DRIP.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends payable either in shares or in cash. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to the DRIP Agents open-market purchases in connection with the
reinvestment of dividends.
The automatic reinvestment of dividends will not relieve participants of any
federal, state or local income tax that may be payable (or required to be
withheld) on the dividends.
Shareholders participating in the DRIP may receive benefits not available to
shareholders not participating in the DRIP.
If the market price (plus commissions) of the Fund's shares is above their
net asset value, participants of the DRIP will receive shares of the Fund at
less than they could otherwise purchase them and will have shares with a cash
value greater
16
2003 Annual Report
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AUTOMATIC DIVIDEND REINVESTMENT PLAN
(UNAUDITED)--(CONTINUED)
than the value of any cash distribution they would have received on their
shares. If the market price (plus commissions) is below the net asset value,
participants will receive distributions in shares with a net asset value greater
than the value of any cash distribution they would have received on their
shares. However, there may be insufficient shares available in the market to
make distributions in shares at prices below the net asset value. Also, because
the Fund does not redeem its shares, the price on resale may be more or less
than the net asset value.
Experience under the DRIP may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the DRIP. There
is no direct service charge to participants in the DRIP, however, the Fund
reserves the right to amend the DRIP to include a service charge payable by the
participants.
All correspondence concerning the DRIP should be directed to the DRIP Agent
at PFPC, Inc., PO Box 43027, Providence, RI 02940-3027.
17
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REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of the
Conseco Strategic Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of the Conseco
Strategic Income Fund (the "Fund") at June 30, 2003, the results of its
operations for the year then ended, the changes in its net assets and the
results of its cash flows for each of the two years in the period then ended and
the financial highlights for each of the five years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at June 30, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
August 15, 2003
18
2003 Annual Report
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NAME, ADDRESS POSITION HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH TRUST DURING PAST 5 YEARS
------------- ------------ ---------------------
William P. Daves, Jr. (77) Chairman of the Consultant to insurance and healthcare industries. Director,
11825 N. Pennsylvania St. Board, Trustee Chairman and Chief Executive Officer, FFG Insurance Co.
Carmel, IN 46032 Since July 1998 Chairman of the Board and Trustee of other mutual funds
managed by the Adviser.
Maxwell E. Bublitz* (47) President and Chartered Financial Analyst. CEO, President and Director,
11825 N. Pennsylvania St. Trustee Adviser. Senior Vice President, Investments of Conseco, Inc.
Carmel, IN 46032 Since July 1998 President and Trustee of other mutual funds managed by the
Adviser.
Gregory J. Hahn* (42) Vice President for Chartered Financial Analyst. Senior Vice President, Adviser.
11825 N. Pennsylvania St. Investments and Trustee and portfolio manager of other mutual funds managed
Carmel, IN 46032 Trustee by the Adviser.
Since July 1998
Harold W. Hartley (79) Trustee Chartered Financial Analyst. Director, Ennis Business Forms,
11825 N. Pennsylvania St. Since July 1998 Inc. Retired, Executive Vice President, Tenneco Financial
Carmel, IN 46032 Services, Inc. Trustee of other mutual funds managed by the
Adviser.
Dr. R. Jan LeCroy (71) Trustee Director, Southwest Securities Group, Inc. Retired, President,
11825 N. Pennsylvania St. Since July 1998 Dallas Citizens Council. Trustee of other mutual funds managed
Carmel, IN 46032 by the Adviser.
Dr. Jess H. Parrish (75) Trustee Higher Education Consultant. Former President, Midland
11825 N. Pennsylvania St. Since July 1998 College Trustee of other mutual funds managed by the Adviser.
Carmel, IN 46032
David N. Walthall (57) Trustee Principal, Walthall Asset Management. Former President,
11825 N. Pennsylvania St. Since December 1998 Chief Executive Officer and Director of Lyrick Corporation.
Carmel, IN 46032 Formerly, President and CEO, Heritage Media Corporation.
Formerly, Director, Eagle National Bank. Trustee of other
mutual funds managed by the Adviser.
- ----------
* The Trustee so indicated is an "interested person," as defined in the 1940
Act, of the Trust due to the positions indicated with the Adviser and its
affiliates.
All Trustees oversee the 17 Portfolios that make up the total fund complex
including Conseco Strategic Income Fund, Conseco Fund Group, Conseco Series
Trust and Conseco StockCar Stocks Mutual Fund, Inc.
Each Trustee serves until the expiration of the term of his designated class
and until his successor is elected and qualified, or until his death or
resignation, or removal as provided in the Fund's by-laws or charter or statute.
19
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INVESTMENT ADVISER
Conseco Capital Management, Inc.
Carmel, IN
TRANSFER AGENT
PFPC, Inc.
Wilmington, DE
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
Indianapolis, IN
CUSTODIAN
PFPC Trust Company
Philadelphia, PA
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
Washington, DC
CONSECO STRATEGIC INCOME FUND
11815 North Pennsylvania Street, Carmel, IN 46032
800-852-4750
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
CONSECO STRATEGIC INCOME FUND
PROXY VOTING POLICY
I. Statement of Policy
It shall be the policy of Conseco Strategic Income Fund (the "Fund") to
delegate the authority and responsibility to vote proxies related to portfolio
securities to its investment adviser, Conseco Capital Management, Inc. (the
"Adviser"). Accordingly, the Board of Trustees of the Fund has authorized the
proxy voting policies and procedures of the Adviser ("Proxy Voting Procedures")
as the proxy voting policies and procedures that will be used by or on behalf of
the Fund when exercising voting authority on behalf of the Fund.
II. Standard
The Adviser shall vote proxies related to portfolio securities of the
Fund in the best interests of the Fund and its shareholders.
III. Review of Proxy Voting Procedures
The Board of Trustees of the Fund shall periodically review the Proxy
Voting Procedures presented by the Adviser to determine the following:
A. The Proxy Voting Procedures promote the voting of proxies in a
manner that is consistent with the standard set forth in Section
II above.
B. The Proxy Voting Procedures provide for the voting of proxies in
a manner that is consistent with the standard set forth in
Section II above in situations where a proxy vote presents a
conflict between the interests of the shareholders of the Fund,
on the one hand, and those of the Adviser or any affiliated
person of the Adviser, on the other.
The Adviser shall provide a written report to the Fund's Board of
Trustees regarding any proxy voted where a conflict of interest (as set forth
above) was identified, EXCEPT in circumstances where:
(i) the Adviser and/or the Fund engaged an independent third party
to provide a recommendation on how to vote such proxy;
(ii) the Adviser caused the proxy to be voted consistent with the
recommendation of the independent third party; and
(iii) the instructions to the independent third party with respect to
the proxy voted were consistent with the standard set forth in
Section II above.
The Adviser shall provide such report at the next regularly scheduled meeting of
the Board.
The Adviser shall notify the Board promptly of any material change to
its Proxy Voting Procedures.
IV. Disclosure
The following disclosure shall be provided:
A. The Adviser shall make available its proxy voting records in
respect of the Fund, for inclusion in the Fund's Form N-PX.
B. The Fund's administrator, Conseco Services LLC (the
"Administrator"), shall cause the Trust to include the proxy
voting policies and procedures required in the Fund's annual
filing on Form N-CSR.
C. The Administrator shall cause the Fund's shareholder reports to
include a statement that a copy of these policies and procedures
is available upon request (i) by calling a toll-free number and
(ii) on the SEC's website.
D. The Administrator shall cause the Fund's annual and semi-annual
reports to include a statement that information is available
regarding how the Fund voted proxies during the most recent
twelve-month period (i) without charge, upon request, by calling
a toll-free number and (ii) on the SEC's website.
Adopted effective as of July 1, 2003.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Exchange Act
(17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
ITEM 10. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 are attached hereto.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) CONSECO STRATEGIC INCOME FUND
------------------------------------------------------------------
By (Signature and Title) /s/ Maxwell E. Bublitz
--------------------------------------------------------
Maxwell E. Bublitz, President
(principal executive officer)
Date SEPTEMBER 4, 2003
------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /s/ Maxwell E. Bublitz
--------------------------------------------------------
Maxwell E. Bublitz, President
(principal executive officer)
Date SEPTEMBER 4, 2003
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By (Signature and Title) /s/ Audrey L. Kurzawa
--------------------------------------------------------
Audrey L. Kurzawa, Treasurer
(principal financial officer)
Date SEPTEMBER 4, 2003
------------------------------------------------------------