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 811-03641
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40|86 SERIES TRUST
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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)
William P. Kovacs, Esq.
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: 317-817-6422
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Date of fiscal year end: DECEMBER 31, 2003
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Date of reporting period: DECEMBER 31, 2003
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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.
40|86 SERIES TRUST
December 31, 2003
Annual Report
Focus 20 Portfolio
Equity Portfolio
Balanced Portfolio
High Yield Portfolio
Fixed Income Portfolio
Government Securities Portfolio
Money Market Portfolio
40|86 SERIES TRUST
TABLE OF CONTENTS
2003 ANNUAL REPORT
================================================================================
Statements of Assets and Liabilities...................................... 2
Statements of Operations.................................................. 2
Statements of Changes in Net Assets....................................... 4
FOCUS 20 PORTFOLIO
Portfolio Manager's Review............................................. 6
Schedule of Investments ............................................... 7
EQUITY PORTFOLIO
Portfolio Manager's Review............................................. 8
Schedule of Investments................................................ 9
BALANCED PORTFOLIO
Portfolio Managers' Review............................................. 15
Schedule of Investments................................................ 16
HIGH YIELD PORTFOLIO
Portfolio Managers' Review............................................. 24
Schedule of Investments ............................................... 25
FIXED INCOME PORTFOLIO
Portfolio Managers' Review............................................. 31
Schedule of Investments................................................ 32
GOVERNMENT SECURITIES PORTFOLIO
Portfolio Manager's Review............................................. 39
Schedule of Investments................................................ 40
MONEY MARKET PORTFOLIO
Portfolio Manager's Review............................................. 43
Schedule of Investments ............................................... 44
Notes to Financial Statements ............................................ 46
Financial Highlights...................................................... 50
Report of Independent Auditors............................................ 57
Board of Trustees......................................................... 58
This report is for the information of 40|86 Series Trust contract owners.
It is authorized for distribution to other persons only when preceded,
or accompanied by, a current prospectus that contains more
complete information, including charges and expenses.
40|86 SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
===================================================================================================================
FOCUS 20 EQUITY
PORTFOLIO PORTFOLIO
===================================================================================================================
ASSETS:
Investments in securities at cost ...................................... $ 4,471,784 $ 147,147,603
- -------------------------------------------------------------------------------------------------------------------
Investments in securities at value (Note 2) ............................ $ 5,109,528 $ 179,669,367
Interest and dividends receivable ...................................... 2,044 197,751
Receivable for securities sold ......................................... -- 155,851
Receivable for shares sold ............................................. 5,518 --
Cash ................................................................... 290 --
Prepaid expenses ....................................................... -- 2,902
- -------------------------------------------------------------------------------------------------------------------
Total assets ........................................................ 5,117,380 180,025,871
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS:
Payable to Conseco, Inc. subsidiaries .................................. 9,992 190,186
Payable to Custodian ................................................... -- 5,037
Accrued expenses ....................................................... 8,063 83,166
Payable for shares redeemed ............................................ -- 40,935
Payable for securities purchased ....................................... -- 1,285,596
Payable upon return of securities on loan .............................. -- 12,622,962
- -------------------------------------------------------------------------------------------------------------------
Total liabilities ................................................... 18,055 14,227,882
- -------------------------------------------------------------------------------------------------------------------
Net assets ....................................................... $ 5,099,325 $ 165,797,989
===================================================================================================================
NET ASSETS CONSIST OF:
Paid-in capital ........................................................ $ 5,068,871 $ 169,492,113
Accumulated undistributed net investment income (loss) ................. -- 143
Accumulated undistributed net realized loss on investments ............. (607,290) (36,216,031)
Net unrealized appreciation on investments ............................. 637,744 32,521,764
- -------------------------------------------------------------------------------------------------------------------
Net assets ....................................................... $ 5,099,325 $ 165,797,989
===================================================================================================================
Shares outstanding (unlimited shares authorized) ....................... 1,521,010 8,118,687
Net asset value, redemption price and
offering price per share ............................................ $ 3.35 $ 20.42
===================================================================================================================
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
===================================================================================================================
FOCUS 20 EQUITY
PORTFOLIO PORTFOLIO
===================================================================================================================
INVESTMENT INCOME:
Interest ............................................................... $ 1,433 $ 18,279
Dividends .............................................................. 16,111 2,020,232
Other income ........................................................... -- 56,925
- -------------------------------------------------------------------------------------------------------------------
Total investment income .......................................... 17,544 2,095,436
- -------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees ............................................... 20,502 990,901
Distribution fees ...................................................... 7,322 381,116
Administration fee ..................................................... 3,698 193,123
Custody fees ........................................................... 2,076 18,084
Auditor fees ........................................................... 2,188 65,825
Reports - printing ..................................................... 893 22,120
Trustee fees and expenses .............................................. 365 29,060
Insurance .............................................................. 202 3,364
Legal .................................................................. 365 8,620
Other .................................................................. 365 21,976
- -------------------------------------------------------------------------------------------------------------------
Total expenses ...................................................... 37,976 1,734,189
- -------------------------------------------------------------------------------------------------------------------
Less expense reductions and reimbursements (Note 3) ....................... (4,298) (64,540)
- -------------------------------------------------------------------------------------------------------------------
Net expenses ........................................................ 33,678 1,669,649
- -------------------------------------------------------------------------------------------------------------------
Net investment income (loss) ........................................ (16,134) 425,787
- -------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on sales of investments .................... 230,577 12,716,695
Net change in unrealized appreciation or depreciation on investments ... 731,802 35,281,497
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) on investments ........... 962,379 47,998,192
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations ................................ $ 946,245 $ 48,423,979
===================================================================================================================
The accompanying notes are an integral part of these financial statements.
2
===================================================================================================================================
HIGH
BALANCED YIELD FIXED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
===================================================================================================================================
ASSETS:
Investments in securities at cost ...................................... $ 45,830,660 $ 9,144,191 $ 36,413,424
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in securities at value (Note 2) ............................ $ 51,101,298 $ 9,751,820 $ 37,925,665
Interest and dividends receivable ...................................... 258,425 161,171 433,320
Receivable for securities sold ......................................... -- 26,813 --
Receivable for shares sold ............................................. 31,730 4,101 --
Cash ................................................................... -- 1,031,057 --
Prepaid expenses ....................................................... 663 -- 555
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets ........................................................ 51,392,116 10,974,962 38,359,540
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS:
Payable to Conseco, Inc. subsidiaries .................................. 55,400 14,019 38,876
Payable to Custodian ................................................... 1,002 -- 4,584
Accrued expenses ....................................................... 29,776 9,071 28,086
Payable for shares redeemed ............................................ 1,847 10,644 28,736
Payable for securities purchased ....................................... -- -- --
Payable upon return of securities on loan .............................. 3,022,340 -- 3,190,995
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities ................................................... 3,110,365 33,734 3,291,277
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets ....................................................... $ 48,281,751 $ 10,941,228 $ 35,068,263
===================================================================================================================================
NET ASSETS CONSIST OF:
Paid-in capital ........................................................ $ 59,797,420 $ 10,570,559 $ 35,004,307
Accumulated undistributed net investment income (loss) ................. (3,836) (7,250) (1,682)
Accumulated undistributed net realized loss on investments ............. (16,782,471) (229,710) (1,446,603)
Net unrealized appreciation on investments ............................. 5,270,638 607,629 1,512,241
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets ....................................................... $ 48,281,751 $ 10,941,228 $ 35,068,263
===================================================================================================================================
Shares outstanding (unlimited shares authorized) ....................... 3,910,591 1,038,630 3,479,088
Net asset value, redemption price and
offering price per share ............................................ $ 12.35 $ 10.53 $ 10.08
===================================================================================================================================
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
===================================================================================================================================
HIGH
BALANCED YIELD FIXED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
===================================================================================================================================
INVESTMENT INCOME:
Interest ............................................................... $ 1,017,178 $ 641,063 $ 2,208,707
Dividends .............................................................. 518,778 18,507 9,839
Other income ........................................................... 4,332 343 5,431
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment income .......................................... 1,540,288 659,913 2,223,977
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees ............................................... 297,186 60,123 200,114
Distribution fees ...................................................... 114,302 21,472 100,057
Administration fee ..................................................... 57,927 10,880 50,752
Custody fees ........................................................... 6,642 1,541 5,762
Auditor fees ........................................................... 19,552 5,787 19,061
Reports - printing ..................................................... 8,274 1,926 6,634
Trustee fees and expenses .............................................. 8,667 1,486 7,570
Insurance .............................................................. 2,095 365 1,095
Legal .................................................................. 2,636 834 2,799
Other .................................................................. 6,866 2,928 5,537
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses ...................................................... 524,147 107,342 399,381
- -----------------------------------------------------------------------------------------------------------------------------------
Less expense reductions and reimbursements (Note 3) ....................... (21,956) (8,570) (20,431)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses ........................................................ 502,191 98,772 378,950
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) ........................................ 1,038,097 561,141 1,845,027
- -----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on sales of investments .................... (745,637) 477,286 946,482
Net change in unrealized appreciation or depreciation on investments ... 9,308,600 965,357 718,656
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) on investments ........... 8,562,963 1,442,643 1,665,138
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations ................................ $ 9,601,060 $ 2,003,784 $ 3,510,165
===================================================================================================================================
===================================================================================================================
GOVERNMENT MONEY
SECURITIES MARKET
PORTFOLIO PORTFOLIO
===================================================================================================================
ASSETS:
Investments in securities at cost ...................................... $ 26,325,577 $ 40,502,790
- -------------------------------------------------------------------------------------------------------------------
Investments in securities at value (Note 2) ............................ $ 26,494,265 $ 40,502,790
Interest and dividends receivable ...................................... 177,201 92,821
Receivable for securities sold ......................................... -- --
Receivable for shares sold ............................................. -- --
Cash ................................................................... -- 1,835,963
Prepaid expenses ....................................................... 677 366
- -------------------------------------------------------------------------------------------------------------------
Total assets ........................................................ 26,672,143 42,431,940
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS:
Payable to Conseco, Inc. subsidiaries .................................. 23,871 14,629
Payable to Custodian ................................................... 33 --
Accrued expenses ....................................................... 29,592 57,530
Payable for shares redeemed ............................................ 18,970 394,769
Payable for securities purchased ....................................... -- --
Payable upon return of securities on loan .............................. 3,809,165 --
- -------------------------------------------------------------------------------------------------------------------
Total liabilities ................................................... 3,881,631 466,928
- -------------------------------------------------------------------------------------------------------------------
Net assets ....................................................... $ 22,790,512 $ 41,965,012
===================================================================================================================
NET ASSETS CONSIST OF:
Paid-in capital ........................................................ $ 22,622,476 $ 41,969,576
Accumulated undistributed net investment income (loss) ................. -- --
Accumulated undistributed net realized loss on investments ............. (652) (4,564)
Net unrealized appreciation on investments ............................. 168,688 --
- -------------------------------------------------------------------------------------------------------------------
Net assets ....................................................... $ 22,790,512 $ 41,965,012
===================================================================================================================
Shares outstanding (unlimited shares authorized) ....................... 1,947,341 41,969,576
Net asset value, redemption price and
offering price per share ............................................ $ 11.70 $ 1.00
===================================================================================================================
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
===================================================================================================================
GOVERNMENT MONEY
SECURITIES MARKET
PORTFOLIO PORTFOLIO
===================================================================================================================
INVESTMENT INCOME:
Interest ............................................................... $ 1,491,643 $ 840,094
Dividends .............................................................. -- --
Other income ........................................................... 35,836 --
- -------------------------------------------------------------------------------------------------------------------
Total investment income .......................................... 1,527,479 840,094
- -------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees ............................................... 179,027 387,468
Distribution fees ...................................................... 89,514 --
Administration fee ..................................................... 45,435 98,532
Custody fees ........................................................... 4,502 10,945
Auditor fees ........................................................... 20,544 32,745
Reports - printing ..................................................... 13,290 20,928
Trustee fees and expenses .............................................. 7,769 15,462
Insurance .............................................................. 814 2,190
Legal .................................................................. 4,199 1,026
Other .................................................................. 6,984 17,051
- -------------------------------------------------------------------------------------------------------------------
Total expenses ...................................................... 372,078 586,347
- -------------------------------------------------------------------------------------------------------------------
Less expense reductions and reimbursements (Note 3) ....................... (31,927) (237,653)
- -------------------------------------------------------------------------------------------------------------------
Net expenses ........................................................ 340,151 348,694
- -------------------------------------------------------------------------------------------------------------------
Net investment income (loss) ........................................ 1,187,328 491,400
- -------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on sales of investments .................... 171,002 (102)
Net change in unrealized appreciation or depreciation on investments ... (751,573) --
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) on investments ........... (580,571) (102)
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations ................................ $ 606,757 $ 491,298
===================================================================================================================
The accompanying notes are an integral part of these financial statements.
3
40|86 SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
===================================================================================================================================
FOCUS 20 EQUITY
PORTFOLIO PORTFOLIO
-------------------------- --------------------------
2003 2002 2003 2002
===================================================================================================================================
OPERATIONS:
Net investment income (loss) ........................................... $ (16,134) $ (13,448) $ 425,787 $ 640,151
Net realized gains (losses) on sale of investments ..................... 230,577 (1,851,492) 12,716,695 (8,375,874)
Net change in unrealized appreciation or depreciation on investments ... 731,802 (142,936) 35,281,497 (19,398,052)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from operations ............................ 946,245 (2,007,876) 48,423,979 (27,133,775)
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends to shareholders from net investment income ................... -- -- (371,095) (576,255)
Distributions to shareholders of net realized gains .................... -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease from dividends and distributions ...................... -- -- (371,095) (576,255)
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Shares sold ............................................................ 9,362,432 11,404,503 4,707,032 22,777,278
Reinvested dividends and distributions ................................. -- -- 371,095 576,255
Shares redeemed ........................................................ (6,107,236) (11,560,635) (36,214,413) (80,744,949)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions ............ 3,255,196 (156,132) (31,136,286) (57,391,416)
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ............................ 4,201,441 (2,164,008) 16,916,598 (85,101,446)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period .................................................... 897,884 3,061,892 148,881,391 233,982,837
End of period .......................................................... $ 5,099,325 $ 897,884 $165,797,989 $148,881,391
===================================================================================================================================
Including undistributed net investment income (loss) of ................... $ -- $ -- $ 143 $ --
SHARE DATA
Shares sold ............................................................ 3,691,088 3,646,620 269,190 1,303,800
Reinvested dividends and distributions ................................. -- -- 18,173 38,623
Shares redeemed ........................................................ (2,582,370) (3,903,198) (2,144,386) (4,891,706)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) ............................................ 1,108,718 (256,578) (1,857,023) (3,549,283)
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding
Beginning of period ................................................ 412,292 668,870 9,975,710 13,524,993
End of period ...................................................... 1,521,010 412,292 8,118,687 9,975,710
===================================================================================================================================
The accompanying notes are an integral part of these financial statements.
4
BALANCED HIGH YIELD
PORTFOLIO PORTFOLIO
-------------------------- --------------------------
2003 2002 2003 2002
===================================================================================================================================
OPERATIONS:
Net investment income (loss) .............................................. $ 1,038,097 $ 1,822,073 $ 561,141 $ 629,421
Net realized gains (losses) on sale of investments ..................... (745,637) (9,362,089) 477,286 (389,765)
Net change in unrealized appreciation or depreciation on investments ... 9,308,600 (955,704) 965,357 (188,355)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from operations ............................ 9,601,060 (8,495,720) 2,003,784 51,301
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends to shareholders from net investment income ................... (1,040,088) (1,821,764) (565,486) (634,033)
Distributions to shareholders of net realized gains .................... -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease from dividends and distributions ...................... (1,040,088) (1,821,764) (565,486) (634,033)
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Shares sold ............................................................ 2,779,306 2,929,860 22,528,282 27,006,765
Reinvested dividends and distributions ................................. 1,040,088 1,821,764 565,486 634,033
Shares redeemed ........................................................ (8,553,210) (21,614,722) (22,792,952) (24,947,357)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions ............ (4,733,816) (16,863,098) 300,816 2,693,441
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ............................ 3,827,156 (27,180,582) 1,739,114 2,110,709
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period .................................................... 44,454,595 71,635,177 9,202,114 7,091,405
End of period .......................................................... $ 48,281,751 $ 44,454,595 $ 10,941,228 $ 9,202,114
===================================================================================================================================
Including undistributed net investment income (loss) of ................ $ (3,836) $ -- $ (7,250) $ (4,665)
SHARE DATA
Shares sold ............................................................ 250,494 246,904 2,343,739 3,081,914
Reinvested dividends and distributions ................................. 93,120 167,117 57,514 72,616
Shares redeemed ........................................................ (769,420) (1,969,502) (2,401,063) (2,880,648)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) ............................................... (425,806) (1,555,481) 190 273,882
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding
Beginning of period ................................................... 4,336,397 5,891,878 1,038,440 764,558
End of period ......................................................... 3,910,591 4,336,397 1,038,630 1,038,440
===================================================================================================================================
FIXED INCOME GOVERNMENT SECURITIES
PORTFOLIO PORTFOLIO
-------------------------- --------------------------
2003 2002 2003 2002
===================================================================================================================================
OPERATIONS:
Net investment income (loss) ........................................... $ 1,845,027 $ 2,996,776 $ 1,187,328 $ 1,469,104
Net realized gains (losses) on sale of investments ..................... 946,482 (1,648,017) 171,002 1,003,463
Net change in unrealized appreciation or depreciation on investments ... 718,656 616,503 (751,573) 858,269
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from operations ............................ 3,510,165 1,965,262 606,757 3,330,836
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends to shareholders from net investment income ................... (1,849,081) (2,995,063) (1,190,887) (1,463,827)
Distributions to shareholders of net realized gains .................... -- (367,983) (172,058) (886,774)
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease from dividends and distributions ...................... (1,849,081) (3,363,046) (1,362,945) (2,350,601)
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Shares sold ............................................................ 18,178,233 17,678,691 49,442,173 86,411,906
Reinvested dividends and distributions ................................. 1,849,169 3,363,046 1,362,945 2,350,601
Shares redeemed ........................................................ (28,577,163) (38,335,621) (68,934,298) (79,334,258)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions ............ (8,549,761) (17,293,884) (18,129,180) 9,428,249
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ............................ (6,888,677) (18,691,668) (18,885,368) 10,408,484
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period .................................................... 41,956,940 60,648,608 41,675,880 31,267,396
End of period .......................................................... 35,068,263 $ 41,956,940 $ 22,790,512 $ 41,675,880
===================================================================================================================================
Including undistributed net investment income (loss) of ................... $ (1,682) $ -- $ -- $ 3,060
SHARE DATA
Shares sold............................................................... 1,840,445 1,803,844 4,122,971 7,159,366
Reinvested dividends and distributions.................................... 186,316 346,879 114,310 196,351
Shares redeemed........................................................... (2,891,689) (3,945,707) (5,750,171) (6,568,161)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) ............................................ (864,928) (1,794,984) (1,512,890) 787,556
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding
Beginning of period ................................................ 4,344,016 6,139,000 3,460,231 2,672,675
End of period ...................................................... 3,479,088 4,344,016 1,947,341 3,460,231
===================================================================================================================================
MONEY MARKET
PORTFOLIO
------------------------------
2003 2002
===========================================================================================================
OPERATIONS:
Net investment income (loss) ........................................... $ 491,400 $ 1,477,761
Net realized gains (losses) on sale of investments ..................... (102) (4,462)
Net change in unrealized appreciation or depreciation on investments ... -- --
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) from operations ............................ 491,298 1,473,299
- -----------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends to shareholders from net investment income ................... (491,400) (1,477,761)
Distributions to shareholders of net realized gains .................... -- (20,934)
- -----------------------------------------------------------------------------------------------------------
Net decrease from dividends and distributions ...................... (491,400) (1,498,695)
- -----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Shares sold ............................................................ 469,814,657 961,304,943
Reinvested dividends and distributions ................................. 491,400 1,498,694
Shares redeemed ........................................................ (524,108,125) (996,540,834)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions ............ (53,802,068) (33,737,197)
- -----------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ............................ (53,802,170) (33,762,593)
- -----------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period .................................................... 95,767,182 129,529,775
End of period .......................................................... $ 41,965,012 $ 95,767,182
===========================================================================================================
Including undistributed net investment income (loss) of ................ $ -- $ --
SHARE DATA
Shares sold ............................................................ 469,814,657 961,304,943
Reinvested dividends and distributions ................................. 491,400 1,498,694
Shares redeemed ........................................................ (524,108,125) (996,540,834)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) ............................................ (53,802,068) (33,737,197)
- -----------------------------------------------------------------------------------------------------------
Shares Outstanding
Beginning of period ................................................ 95,771,644 129,508,841
End of period ...................................................... 41,969,576 95,771,644
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
40|86 SERIES TRUST
FOCUS 20 PORTFOLIO
================================================================================
PORTFOLIO MANAGER'S REVIEW (UNAUDITED)
HOW DID THE PORTFOLIO PERFORM RELATIVE TO ITS BENCHMARKS?
The Focus 20 Portfolio returned 53.67% for the year ended December 31,
2003.(1) This compares to 28.69% for the benchmark S&P 500 Index and 35.63% for
the benchmark S&P MidCap 400 Index.
WHAT CAUSED THE VARIANCE IN PERFORMANCE BETWEEN THE PORTFOLIO AND ITS
BENCHMARKS?
Our concentrated strategy will result in out-performing the benchmark during
up markets. All three sectors in which the Portfolio is currently invested
performed very well for the year. Technology, our largest weighting, drove the
portfolio higher. Within tech, networking and semiconductors were strong.
Semiconductors benefited due to the cyclical nature of the industry while
raising expectations for capital spending on technology helped the networking
sector.
Interest rate sensitive stocks also performed well. The prospects of
continued low rates helped the group. Market-sensitive financials lagged. Debate
continues over how long the Fed may be on hold, but for now, the low inflation
environment, healthy growth and mediocre labor markets suggest it may be some
time before the Fed acts to raise rates.
In general, healthcare stocks performed in-line with the broader market
during the quarter. The noticeable standout was the drug sector. The group
experienced a relief rally after passage of the Medicare Drug Benefit that
lacked strong pricing control language. Until the fourth quarter, healthcare
stocks had suffered an overhang from concern over the government's involvement
in the sector.
WHICH PORTFOLIO HOLDINGS ENHANCED THE PORTFOLIO'S PERFORMANCE?
The Portfolio's performance was aided by several of our investment holdings
including PMC Sierra, EMC, Intel Corp, Juniper Networks, Cisco Systems and
Veritas Software.
WHICH HOLDINGS DETRACTED FROM PERFORMANCE?
The largest detractors were Eli Lilly, Pfizer, Medtronic and Microsoft.
WHAT IS YOUR OUTLOOK FOR THE NEXT FISCAL YEAR?
We expect economic data that points to an improving economy will continue to
trickle in. We feel our companies are extremely well positioned to capitalize on
not only an improved economy domestically, but a global synchronized economic
recovery. For most of 2003, a financially healthy consumer helped pull the
economy out of the recession. For 2004, it is likely corporations will take
over, generating real earnings growth and higher spending.
Oak Associates, ltd.
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE FOCUS 20 PORTFOLIO
AND THE S&P 500 INDEX AND THE S&P MIDCAP 400 INDEX
[The table below represents a line chart in the printed report.]
20 Focus Standard & Poor's Standard & Poor's
DATE Portfolio MidCap 400 Index 500 Index
5/4/00 10000 10000 10000
12/31/00 8495.01 11176.6 9344.29
12/31/01 4588.11 11112.3 8234.83
12/31/02 2183.86 9497.84 6414.43
12/31/03 3355.93 12881.7 8254.78
---------------------------------
Average Annual Total Return
---------------------------------
1 Year Since Inception(1)
---------- ----------------------
53.67% (25.79%)
---------- ----------------------
(1) The Inception date of this portfolio was May 4, 2000. Past performance is
not predictive of future performance. Performance does not include separate
account expenses. Performance does not reflect the deduction of taxes that
a contract-holder would pay on portfolio distributions or the redemption of
portfolio shares.
- --------------------------------------------------------------------------------
4
40|86 SERIES TRUST
FOCUS 20 PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (94.8%)
BUSINESS SERVICES (13.7%)
10,000 Microsoft Corp. ........................................ $ 275,400
5,700 Paychex, Inc. .......................................... 212,040
5,700 VERITAS Software Corp. (a) ............................. 211,812
----------
699,252
----------
CHEMICALS AND ALLIED PRODUCTS (4.4%)
6,300 Pfizer, Inc. ........................................... 222,579
----------
DEPOSITORY INSTITUTIONS (4.2%)
4,400 Citigroup, Inc. ........................................ 213,576
----------
ELECTRONIC, OTHER ELECTRICAL EQUIPMENT, EXCEPT COMPUTERS (15.5%)
5,300 Linear Technology Corp. ................................ 222,971
12,200 McData Corp. (a) ....................................... 116,266
4,400 Maxim Integrated Products, Inc. ........................ 219,120
6,000 Xilinx, Inc. (a) ....................................... 232,440
----------
790,797
----------
INDUSTRIAL, COMMERCIAL MACHINERY, COMPUTERS (18.8%)
11,800 Cisco Systems, Inc. (a) ................................ 286,622
6,300 Dell Computer Corp. (a) ................................ 213,948
17,100 EMC Corp. (a) .......................................... 220,932
12,800 Juniper Networks, Inc. (a) ............................. 239,104
----------
960,606
----------
INSURANCE CARRIERS (4.3%)
----------
3,300 American International Group, Inc. ..................... 218,724
----------
MEASURING INSTRUMENTS, PHOTO GOODS, WATCHES (5.1%)
5,400 Medtronic, Inc. ........................................ 262,494
----------
NON-DEPOSITORY CREDIT INSTITUTIONS (4.1%)
8,400 MBNA Corp. ............................................. 208,740
----------
SECURITY AND COMMODITY BROKERS (7.1%)
23,300 Charles Schwab Corp. ................................... 275,872
1,500 Morgan Stanley Dean Witter & Co. ....................... 86,805
----------
362,677
----------
SEMICONDUCTORS, RELATED DEVICES (9.2%)
9,700 Intersil Corp.--Class A ................................ 241,045
11,400 PMC-Sierra, Inc. (a) ................................... 229,710
----------
470,755
----------
SPECIAL INDUSTRY MACHINERY (4.4%)
10,000 Applied Materials, Inc. (a) ............................ 224,500
----------
WHOLESALE TRADE--NON-DURABLE GOODS (4.0%)
3,300 Cardinal Health, Inc. .................................. 201,828
----------
TOTAL COMMON STOCK (COST $4,198,784) ................... 4,836,528
----------
SHORT-TERM INVESTMENTS (5.4%)
$ 44,000 AIM Liquid Asset Portfolio, 0.690% ..................... 44,000
229,000 Nations Treasury Reserve, 0.700% ....................... 229,000
----------
TOTAL SHORT-TERM INVESTMENTS (COST $273,000) ........... 273,000
----------
TOTAL INVESTMENTS (COST $4,471,784) (100.2%) ........... 5,109,528
----------
Liabilities, less other assets (-0.2%) ................. (10,203)
----------
TOTAL NET ASSETS (100.0%) .............................. $5,099,325
- -------------------------------------------------------------------
(a) Non-income producing security.
The accompanying notes are an integral part of these financial statements.
7
40|86 SERIES TRUST
EQUITY PORTFOLIO
================================================================================
PORTFOLIO MANAGER'S REVIEW (UNAUDITED)
HOW DID THE PORTFOLIO PERFORM RELATIVE TO ITS BENCHMARK?
The Equity Portfolio returned 37.17% for the year ended December 31, 2003.(1)
This compares to 28.69% for the benchmark S&P 500 Index.
WHAT CAUSED THE VARIANCE IN PERFORMANCE BETWEEN THE PORTFOLIO AND ITS BENCHMARK?
The year 2003 saw equity markets post gains not seen since the bubble years
of the late 1990's. The euphoria over the expectations of a stronger economy
carried over to the equity markets, especially the tech heavy NASDAQ. The two
themes that dominated equity markets in 2003 were a lowering of the equity risk
premium and a better than expected rebound in corporate profits. The lower
equity risk premium helped the riskiest stocks with high growth potential, low
market capitalizations and expensive multiples. The rebound in the economy and
corporate profits greatly benefited economically sensitive (cyclical) stocks.
Valuation and quality of earnings factors were not rewarded during 2003.
WHICH PORTFOLIO HOLDINGS ENHANCED THE PORTFOLIO'S PERFORMANCE?
In terms of performance during the year, stock selection in Industrial,
Healthcare, and Consumer Staples sectors were the largest contributors relative
to the benchmark. The largest contributors to performance were over-weight
positions (relative to benchmark weight) in D.R. Horton Inc., Cypress
Semiconductor Corp., and Countrywide Financial Corp.
WHICH HOLDINGS DETRACTED FROM PERFORMANCE?
Within the Portfolio, stock selection in the Technology, Consumer
Discretionary, and Materials sectors detracted the most in 2003 relative to the
index. The largest detractors were under-weight positions (relative to the
benchmark weight) in Corning Inc., Yahoo! Inc., and International Game
Technology.
WHAT IS YOUR OUTLOOK FOR THE NEXT FISCAL YEAR?
The economic expansion finally accelerated around the middle of 2003, and
2004 could see a continuation of this momentum. For 2004, GDP growth should
accelerate, allowing the unemployment rate to fall for the year. First half
growth in GDP is predicted to accelerate between 4% and 6%. Consumption will
respond to prior tax cuts, tax refunds from retroactive cuts in 2003, and
improving job market, while business spending should rise in response to
successive quarters of profit expansion. It should be a good environment for
equities, with predicted GDP expansion, mild inflation, and profits registering
further solid gains. Interest rates could be on the rise, but should not be
enough to spoil this environment. Overall, our philosophy will not change based
on short-term trends or conditions in the market. Our goal is to add value
through security selection, while attempting to neutralize other risk factors,
such as market timing and sector rotation, for which there is not adequate
compensation by the market.
Chicago Equity Partners, LLC
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE EQUITY PORTFOLIO AND
THE S&P 500 INDEX
Equity S&P's 500
DATE Portfolio Index
12/31/93 10000 10000
12/31/94 10200.1 10132.7
12/31/95 13900.1 13940
12/31/96 20160.4 17140.1
12/31/97 23921.8 22860.9
12/31/98 27668.2 29394.4
12/31/99 41293.2 35576.9
12/31/00 42406.5 32343.9
12/31/01 38045.7 28503.7
12/31/02 32939 22202.6
12/31/03 45182.5 28572.7
Average Annual Total Return(1)
----------------------------------
10 Years 5 Years 1 Year
----------- ----------- ----------
37.17% 10.31% 16.28%
----------- ----------- ----------
(1) Past performance is not predictive of future performance. Performance does
not include separate account expenses. Performance does not reflect the
deduction of taxes that a contractholder would pay on portfolio
distributions or the redemptions of portfolio shares.
- --------------------------------------------------------------------------------
8
40|86 SERIES TRUST
EQUITY PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (99.0%)
APPAREL AND ACCESSORY STORES (1.0%)
71,400 Foot Locker, Inc. ...................................... $1,674,330
----------
APPAREL AND OTHER FINISHED PRODUCTS (2.0%)
25,800 Chico's, Inc. (a) ...................................... 953,310
77,800 Claire's Stores, Inc. .................................. 1,465,752
20,400 VF Corp. ............................................... 882,096
----------
3,301,158
----------
AUTOMOTIVE REPAIR, SERVICES, PARKING (0.9%)
43,900 Ryder System, Inc. ..................................... 1,499,185
----------
BUILDING CONSTRUCTION, GENERAL CONTRACTORS
AND OPERATIVE BUILDERS (2.0%)
50,900 D.R. Horton, Inc. ...................................... 2,201,934
11,800 Pulte Homes, Inc. ...................................... 1,104,716
----------
3,306,650
----------
BUSINESS SERVICES (9.6%)
16,900 Affiliated Computer Services (a) ....................... 920,374
48,800 Citrix Systems, Inc. (a) ............................... 1,035,048
42,000 Computer Sciences Corp. (a) (c) ........................ 1,857,660
40,500 Convergys Corp. (a) .................................... 707,130
15,400 DST Systems, Inc. (a) (c) .............................. 643,104
14,600 Dun & Bradstreet (a) ................................... 740,366
54,100 Electronic Arts, Inc. (a) .............................. 2,584,898
18,200 Factset Research Systems, Inc. ......................... 695,422
10,000 Fair Issac & Co., Inc. (c) ............................. 491,600
27,100 GTECH Holdings Corp. ................................... 1,341,179
20,400 IMS Health, Inc. ....................................... 507,144
16,800 NCR Corp. (a) .......................................... 651,840
6,000 Pixar, Inc. (a) (c) .................................... 415,740
38,400 Rent-A-Center, Inc. (a) ................................ 1,147,392
10,273 Sotheby's Holdings, Inc. (a) ........................... 140,329
55,600 Symantec Corp. (a) ..................................... 1,926,540
----------
15,805,766
----------
CHEMICALS AND ALLIED PRODUCTS (5.0%)
21,450 Biogen, Inc. (a) ....................................... 788,931
23,600 Chiron Corp. (a) (c) ................................... 1,344,964
29,600 Cytec Industries, Inc. (a) ............................ 1,136,344
43,800 Endo Pharmaceuticals Corp. (a) ......................... 843,588
19,900 Invitrogen Corp. (a) (c) ............................... 1,393,000
27,900 Lubrizol Corp. ......................................... 907,308
38,000 Mylan Laboratories, Inc. ............................... 959,880
24,400 Praxair, Inc. .......................................... 932,080
----------
8,306,095
----------
The accompanying notes are an integral part of these financial statements.
9
40|86 SERIES TRUST
EQUITY PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
COMMUNICATIONS BY PHONE, TELEVISION, RADIO, CABLE (2.0%)
19,000 Adtran, Inc. ........................................... $ 589,000
52,600 Centurytel, Inc. ....................................... 1,715,812
21,100 Global Payments, Inc. .................................. 994,232
----------
3,299,044
----------
DEPOSITORY INSTITUTIONS (8.0%)
42,500 Associated Banc Corp. .................................. 1,812,625
25,600 City National Corp. .................................... 1,590,272
34,200 First Tennessee National Corp. ......................... 1,508,220
78,800 Hibernia Corp.--Class A ................................ 1,852,588
81,500 Huntington Bancshares .................................. 1,833,750
35,000 Regions Financial Corp. ................................ 1,302,000
17,900 Sovereign Bancorp, Inc. ................................ 425,125
34,400 UnionBanCal Corp. ...................................... 1,979,376
20,800 Webster Financial Corp. ................................ 953,888
----------
13,257,844
----------
EATING AND DRINKING PLACES (2.2%)
38,200 Applebee's International, Inc. ......................... 1,500,114
45,100 Ruby Tuesday, Inc. ..................................... 1,284,899
26,300 Starbucks Corp. (a) .................................... 869,478
----------
3,654,491
----------
ELECTRIC, GAS, WATER, COGENERATION, SANITARY SERVICES (7.3%)
57,400 Constellation Energy Group, Inc. ....................... 2,247,784
88,700 Northeast Utilities .................................... 1,789,079
38,800 Nstar Corp. ............................................ 1,881,800
114,000 ONEOK, Inc. ............................................ 2,517,120
44,700 Questar Corp. .......................................... 1,571,205
287,500 Reliant Resources, Inc. (a) ............................ 2,116,000
----------
12,122,988
----------
ELECTRONIC, OTHER ELECTRICAL EQUIPMENT, EXCEPT COMPUTERS (6.0%)
21,200 Amkor Technologies, Inc. (a) ........................... 386,052
32,000 Energizer Holdings, Inc. (a) ........................... 1,201,920
32,200 Fairchild Semiconductor International--Class A (a) ..... 804,034
35,900 National Semiconductor Corp. (a) ....................... 1,414,819
16,800 QLogic Corp. (a) ....................................... 866,880
47,500 Polycom, Inc. (a) ...................................... 927,200
32,400 Rockwell Collins, Inc. ................................. 972,972
47,000 Scientific-Atlanta, Inc. (c) ........................... 1,283,100
17,200 Silicon Laboratories, Inc. (a) ......................... 743,384
34,700 UTStarcom, Inc. (a) (c) ................................ 1,286,329
----------
9,886,690
----------
The accompanying notes are an integral part of these financial statements.
10
40|86 SERIES TRUST
EQUITY PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT SERVICES (0.5%)
13,400 Moody's Corp. .......................................... $ 811,370
----------
FABRICATED METAL PRODUCTS (0.8%)
18,400 Fortune Brands, Inc. ................................... 1,315,416
----------
FOOD AND KINDRED PRODUCTS (2.0%)
9,700 Hershey Foods Corp. .................................... 746,803
26,900 Pepsiamericas, Inc. .................................... 460,528
16,100 The J.M. Smucker Co. ................................... 729,169
104,600 Tyson Foods, Inc.--Class A ............................. 1,384,904
----------
3,321,404
----------
FURNITURE AND FIXTURES (0.7%)
19,300 Lear Corp. ............................................. 1,183,669
----------
GENERAL MERCHANDISE STORES (1.9%)
42,000 Federated Department Stores, Inc. ...................... 1,979,460
24,000 Sears Roebuck & Co. (c) ................................ 1,091,760
----------
3,071,220
----------
HEALTH SERVICES (3.0%)
5,400 Advance PCS (a) ........................................ 284,364
18,300 Appria Heathcare Group (a) ............................. 521,001
24,300 Coventry Health Care, Inc. (a) ......................... 1,567,107
16,100 Renal Care Group, Inc. (a) ............................. 663,320
13,600 SICOR, Inc. (a) ........................................ 369,920
35,000 Watson Pharmaceuticals, Inc. (a) ....................... 1,610,000
----------
5,015,712
----------
INDUSTRIAL, COMMERCIAL MACHINERY, COMPUTERS (6.2%)
21,900 Black & Decker, Inc. ................................... 1,080,108
49,800 Cypress Semiconductor Corp. (a) ........................ 1,063,728
22,300 Diebold Co. ............................................ 1,201,301
48,900 Foundry Networks, Inc. (a) ............................. 1,337,904
42,500 Lam Research Corp. (a) (c) ............................. 1,372,750
10,500 Lexmark International, Inc. (a) ........................ 825,720
59,000 Maxtor Corp. (a) ....................................... 654,900
23,000 Network Appliance, Inc. (a) ............................ 472,190
32,800 Pall Corp. ............................................. 880,024
10,700 Sandisk Corp. (a) ...................................... 654,198
10,100 Varian Medical Systems, Inc. (a) ....................... 697,910
----------
10,240,733
----------
INSURANCE CARRIERS (6.0%)
8,453 Anthem, Inc. (a) ....................................... 633,975
21,825 Fidelity National Financial, Inc. ...................... 846,374
22,100 MBIA, Inc. ............................................. 1,308,983
14,500 Mid-Atlantic Medical Services, Inc. (a) ................ 939,600
The accompanying notes are an integral part of these financial statements.
11
40|86 SERIES TRUST
EQUITY PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
50,700 Old Republic International Corp. ....................... $1,285,752
26,700 The PMI Group, Inc. .................................... 994,041
22,600 Protective Life Corp. .................................. 764,784
24,600 Reinsurance Group of America, Inc. ..................... 950,790
34,200 Torchmark Corp. ........................................ 1,557,468
7,400 Wellpoint Health Networks, Inc. (a) .................... 717,726
----------
9,999,493
----------
LEATHER AND LEATHER PRODUCTS (0.3%)
13,800 Coach, Inc. (a) ........................................ 520,950
----------
MEASURING INSTRUMENTS, PHOTO GOODS, WATCHES (2.7%)
14,600 Beckman Coulter, Inc. .................................. 742,118
33,100 Becton Dickinson & Co. ................................. 1,361,734
25,700 Tektronix, Inc. ........................................ 812,120
21,800 Zimmer Holdings, Inc. (a) .............................. 1,534,720
----------
4,450,692
----------
MISCELLANEOUS RETAIL (1.8%)
32,000 Blockbuster, Inc. (c) .................................. 574,400
70,500 Borders Group .......................................... 1,545,360
20,100 Michael's Stores, Inc. ................................. 888,420
----------
3,008,180
----------
NON-DEPOSITORY CREDIT INSTITUTIONS (1.5%)
32,933 Countrywide Financial Corp. ............................ 2,497,993
----------
OIL AND GAS EXTRACTION (3.1%)
20,000 BJ Services Co. (a) .................................... 718,000
47,300 FMC Technologies, Inc. (a) ............................. 1,102,090
28,800 Marathon Oil Corp. ..................................... 952,992
26,900 Newfield Exploration Co. (a) .......................... 1,198,126
25,200 Pogo Producing Co. ..................................... 1,217,160
----------
5,188,368
----------
PAPER AND ALLIED PRODUCTS (1.3%)
20,200 Boise Cascade (c) ...................................... 663,772
60,500 Pactiv Corp. (a) ...................................... 1,445,950
----------
2,109,722
----------
PETROLEUM REFINING AND RELATED PRODUCTS (0.5%)
17,200 Valero Energy Corp. .................................... 797,048
----------
PRIMARY METAL INDUSTRIES (0.7%)
39,000 Engelhard Corp. (c) .................................... 1,168,050
----------
PRINTING, PUBLISHING, AND ALLIED INDUSTRIES (2.0%)
27,800 Dow Jones & Co., Inc. .................................. 1,385,830
42,500 Harte-Hanks, Inc. ...................................... 924,375
15,700 McClatchy Newspapers--Class A .......................... 1,080,160
----------
3,390,365
----------
The accompanying notes are an integral part of these financial statements.
12
40|86 SERIES TRUST
EQUITY PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST (REIT'S) (4.9%)
22,200 CBL & Associates Properties ............................ $ 1,254,300
62,900 CarrAmerica Realty Corp. ............................... 1,873,162
81,300 General Growth Properties, Inc. ........................ 2,256,075
32,600 Mack-Cali Realty Corp. ................................. 1,356,812
25,700 Vornado Realty Trust ................................... 1,407,075
-----------
8,147,424
-----------
RUBBER AND MISCELLANEOUS PLASTIC PRODUCTS (0.8%)
24,200 Sealed Air Corp. (a) ................................... 1,310,188
-----------
SECURITY AND COMMODITY BROKERS (2.1%)
13,300 Bear Stearns Companies, Inc. ........................... 1,063,335
81,600 E*Trade Financial Corp. (a) ............................ 1,032,240
24,800 Franklin Resources, Inc. ............................... 1,291,088
-----------
3,386,663
-----------
TEXTILE MILL PRODUCTS (0.6%)
14,900 Mohawk Industries, Inc. (a) ............................ 1,051,046
-----------
TOBACCO PRODUCTS (0.7%)
20,500 R.J. Reynolds Tobacco Holdings (c) ..................... 1,192,075
-----------
TRANSPORTATION EQUIPMENT (4.6%)
36,100 Brunswick Corp. ........................................ 1,149,063
27,650 Paccar, Inc. ........................................... 2,353,568
14,700 Polaris Industries, Inc. (c) ........................... 1,302,126
49,400 Textron, Inc. .......................................... 2,818,764
-----------
7,623,521
-----------
TRANSPORTATION SERVICES (0.5%)
31,500 J. B. Hunt (a) ......................................... 850,815
-----------
WHOLESALE TRADE--DURABLE GOODS (2.3%)
64,600 Arrow Electronics. Inc. (a) ............................ 1,494,844
56,600 Avnet, Inc. (a) ........................................ 1,225,956
13,100 BorgWarner, Inc. ....................................... 1,114,417
-----------
3,835,217
-----------
WHOLESALE TRADE--NON-DURABLE GOODS (1.5%)
10,100 Henry Schein, Inc. (a) ................................. 682,558
60,800 SUPERVALU, INC ......................................... 1,738,272
-----------
2,420,830
-----------
TOTAL COMMON STOCK (COST $131,500,641) ................. 164,022,405
-----------
The accompanying notes are an integral part of these financial statements.
13
40|86 SERIES TRUST
EQUITY PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
VARIABLE RATE BONDS AND CD'S (3.0%)
$2,500,000 Credit Suisse First Boston (USA), Inc., 1.420%,
due 07/05/2005 (b) .................................... $ 2,508,325
2,500,000 Lehman Brothers Holdings, 1.450%, due 09/20/2004 (b) .. 2,503,800
------------
TOTAL VARIABLE RATE BONDS AND CDS (COST $5,012,125) ... 5,012,125
------------
SHORT-TERM INVESTMENTS (6.4%)
2,207,000 Boston Repurchase Agreement, 0.900%,
due 01/02/2004 (b) .................................... 2,207,000
5,403,837 DAI Securities, Repurchase Agreement, 1.030%,
due 01/02/2004 (b) .................................... 5,403,837
3,024,000 Nations Cash Reserve .................................. 3,024,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $10,634,837) ....... 10,634,837
------------
TOTAL INVESTMENTS (COST $147,147,603) (108.4%) ........ 179,669,367
------------
Liabilities, less other assets (-8.4%) ................ (13,871,378)
------------
TOTAL NET ASSETS (100.0%) ............................. $165,797,989
------------
- ------------------------------------------------------------------
(a) Non-income producing security.
(b) Securities lending collateral (Note 2).
(c) Securities (partial/entire) out on loan (Note 2).
The accompanying notes are an integral part of these financial statements.
14
40|86 SERIES TRUST
BALANCED PORTFOLIO
================================================================================
PORTFOLIO MANAGERS' REVIEW (UNAUDITED)
HOW DID THE PORTFOLIO PERFORM RELATIVE TO ITS BENCHMARKS?
The Balanced Portfolio returned 23.29% for the year ended December 31,
2003.(1) This compares to 28.69% for the benchmark S&P 500 Index and 4.68% for
the benchmark Lehman Brothers Government/Credit Index.
WHAT CAUSED THE VARIANCE IN PERFORMANCE BETWEEN THE PORTFOLIO AND ITS
BENCHMARKS?
The year 2003 saw equity markets post gains not seen since the bubble years
of the late 1990's. The euphoria over the expectations of a stronger economy
carried over to the equity markets, especially the tech heavy NASDAQ. The two
themes that dominated equity markets in 2003 were a lowering of the equity risk
premium and a better than expected rebound in corporate profits. The lower
equity risk premium helped the riskiest stocks with high growth potential, low
market capitalizations and expensive multiples. The rebound in the economy and
corporate profits greatly benefited economically sensitive (cyclical) stocks.
Valuation and quality of earnings factors were not rewarded during 2003.
The fixed income performance was a result of the portfolio structure and its
overweight to corporate bonds. The corporate bond sector experienced significant
spread contraction during the year as companies reduced leverage through excess
cash flow and sold off non-core businesses. The return of fiscal discipline
helped alleviate fears in the capital market which had forced credit spreads to
historic wide levels in the prior year. In addition, our increased exposure to
the high yield sector helped add incremental return through the year.
WHICH PORTFOLIO HOLDINGS ENHANCED THE PORTFOLIO'S PERFORMANCE?
In terms of performance during the year, stock selection in Healthcare,
Industrial and Materials sectors were the largest contributors relative to the
benchmark in the equity portion of the Portfolio. The largest contributors to
performance were over-weight positions (relative to benchmark weight) in Centex
Corp., Freeport-McMoRan Copper & Gold Inc., and Countrywide Financial Corp.
The Portfolio's performance was aided on the fixed income side by several of
our investment holdings including Kraft Foods, Sprint and Tyco. Kraft has been
under some scrutiny as its parent company, Phillip Morris, endures the tobacco
litigation pain. Kraft's underlying businesses are strong and performing well.
In order to preserve the enterprise value of Kraft, we believe that there is a
strong probability that Phillip Morris will spin-off Kraft. Sprint has done an
excellent job of focusing on its core business and cutting costs. In spite of
the highly publicized lawsuits surrounding Tyco's ex-chairman, the fundamentals
of Tyco's underlying businesses appear solid and the new management team has
done a good job of reducing debt and selling non-core businesses.
WHICH HOLDINGS DETRACTED FROM PERFORMANCE?
Within the Portfolio, stock selection in the Consumer Discretionary,
Technology and Financial sectors detracted the most in 2003 relative to the
index. The largest detractors were under-weight positions (relative to the
benchmark weight) in Comcast Corp., FleetBoston Financial Corp., and MBNA Corp.
While the credit markets improved through the year, our fixed income holdings
in tobacco settlement bonds lagged the recovery. The tobacco settlement
structures were created by certain states to prefund the long payouts associated
with the settlement of tobacco litigation. As tobacco companies make payments
into the Master Settlement Agreement, they are funneled to the states to pay
interest and principal on these bonds outstanding. With the overhang of the
tobacco litigation, these structured deals did not perform well last year.
WHAT IS YOUR OUTLOOK FOR THE NEXT FISCAL YEAR?
Going forward, the economic expansion finally accelerated around the middle
of 2003, and 2004 could see a continuation of this momentum. For 2004, GDP
growth is predicted to accelerate, allowing the unemployment rate to fall for
the year. First half growth in GDP is predicted to accelerate between 4% and 6%.
Consumption will respond to prior tax cuts, tax refunds from retroactive cuts in
2003, and improving job market, while business spending should rise in response
to successive quarters of profit expansion. It should be a good environment for
equities, with predicted GDP expansion, mild inflation, and profits registering
further solid gains. Interest rates could be on the rise, but should not be
enough to spoil this environment. Overall, our philosophy will not change based
on short-term trends or conditions in the market. Our goal is to add value
through security selection, while attempting to neutralize other risk factors,
such as sector rotation, for which there is not adequate compensation by the
market.
For fixed income, we believe we are in a period of relative low interest
rates, however, with the strength of the economic recovery, the risks of an
increase in interest rates from the current levels is pretty high. The credit
markets have improved significantly and we remain positive on the outlook for
credit. In addition, we expect the mortgage-backed securities sector to
underperform in a rising interest rate environment.
Chicago Equity Partners, LLC
Gregory J. Hahn, CFA
Chief Investment Officer
40|86 Advisors, Inc.
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE BALANCED PORTFOLIO
AND THE S&P 500 INDEX AND THE LEHMAN BROTHERS GOVERNMENT/CREDIT INDEX
Balanced Standard & Poor's Lehman Brothers Government/
DATE Portfolio 500 Index Credit|Index
- ---- --------- ----------------- ---------------------------
12/31/93 10000 10000 10000
12/31/94 9948.26 10132.7 9649.93
12/31/95 13080.7 13940 11507.6
12/31/96 16785 17140.1 11839.7
12/31/97 19778.2 22860.9 12994.4
12/31/98 21833.6 29394.4 14224.4
12/31/99 28564.5 35576.9 13918.3
12/31/00 30643.8 32343.9 15566
12/31/01 28623.9 28503.7 16889.9
12/31/02 24940.1 22202.6 18751
12/31/03 30746.6 28572.7 19627.7
Average Annual Total Return(1)
----------------------------------
1 Year 5 Years 10 Years
---------- ------------ ----------
23.29% 7.09% 11.89%
---------- ------------ ----------
(1) Past performance is not predictive of future performance. Performance does
not include separate account expenses. Performance does not reflect the
deduction of taxes that a contractholder would pay on portfolio
distributions or the redemptions of portfolio shares.
- --------------------------------------------------------------------------------
15
40|86 SERIES TRUST
BALANCED PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (72.7%)
APPAREL AND ACCESSORY STORES (0.2%)
3,900 Foot Locker, Inc. ...................................... $ 91,455
----------
APPAREL AND OTHER FINISHED PRODUCTS (0.2%)
4,200 Claire's Stores, Inc. .................................. 79,128
----------
BUILDING CONSTRUCTION, GENERAL CONTRACTORS
AND OPERATIVE BUILDERS (0.8%)
3,600 Centex Corp. (e) ....................................... 387,540
----------
BUILDING MATERIALS, HARDWARE, GARDEN--RETAIL (1.3%)
12,390 The Home Depot, Inc. ................................... 439,721
3,500 Lowe's Companies, Inc. ................................. 193,865
----------
633,586
----------
BUSINESS SERVICES (5.0%)
12,200 Cendant Corp. (a) ...................................... 271,694
8,400 Citrix Systems, Inc. (a) ............................... 178,164
1,400 Computer Sciences Corp. (a) ............................ 61,922
2,400 Electronic Arts, Inc. (a) .............................. 114,672
3,700 GTECH Holdings Corp. ................................... 183,113
31,540 Microsoft Corp. ........................................ 868,612
2,300 NCR Corp. (a) .......................................... 89,240
25,100 Oracle Corp. (a) ....................................... 331,320
5,200 Rent-A-Center, Inc. (a) ................................ 155,375
1,355 Sotheby's Holdings, Inc.(a) ............................ 18,509
4,800 Sungard Data Systems, Inc. (a) ......................... 133,008
----------
2,405,629
----------
CHEMICALS AND ALLIED PRODUCTS (7.6%)
4,800 Amgen, Inc. (a) ........................................ 296,640
2,000 Avon Products, Inc. .................................... 134,980
6,700 Bristol-Meyers Squibb Co. .............................. 191,620
1,300 Clorox Corp. ........................................... 63,128
5,000 Cytec Industries, Inc. (a) ............................. 191,950
1,700 Genetech, Inc. (a) ..................................... 159,069
1,300 Invitrogen Corp. (a) (e) ............................... 91,000
6,110 Merck & Co., Inc. ...................................... 282,282
4,350 Mylan Laboratories, Inc. ............................... 109,881
34,540 Pfizer, Inc. ........................................... 1,220,298
4,200 Praxair, Inc. .......................................... 160,440
4,100 The Procter & Gamble Co. ............................... 409,508
2,300 Sigma-Aldrich Corp. (e) ................................ 131,514
5,800 Wyeth .................................................. 246,210
----------
3,688,520
----------
The accompanying notes are an integral part of these financial statements.
16
40|86 SERIES TRUST
BALANCED PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
COMMUNICATIONS BY PHONE, TELEVISION, RADIO, CABLE (2.9%)
26,400 BellSouth Corp. ........................................ $ 747,120
5,100 Comcast Corp.--Class A (a) ............................. 167,637
12,300 Nextel Communications, Inc.--Class A (a) ............... 345,138
7,100 Sprint Corp. ........................................... 116,582
----------
1,376,477
----------
DEPOSITORY INSTITUTIONS (8.6%)
6,800 Bank of America Corp. .................................. 546,924
10,700 Banc One Corp. ......................................... 487,813
18,832 Citigroup, Inc. ........................................ 914,105
4,400 First Tennessee National Corp. ......................... 194,040
1,400 Golden West Financial Corp. ............................ 144,466
50 GreenPoint Financial Corp. ............................. 1,766
13,600 JP Morgan Chase & Co. .................................. 499,528
4,500 UnionBanCal Corp. ...................................... 258,930
18,400 Wachovia Corp. ......................................... 857,256
2,400 Wells Fargo & Co. ...................................... 141,336
2,100 Zions Bancorporation ................................... 128,793
----------
4,174,957
----------
EATING AND DRINKING PLACES (0.5%)
6,500 Applebee's International, Inc. ......................... 255,255
----------
EDUCATIONAL SERVICES (0.3%)
1,900 University of Phoenix Online (a) ....................... 130,967
----------
ELECTRIC, GAS, WATER, COGENERATION, SANITARY SERVICES (2.3%)
6,800 Entergy Corp. .......................................... 388,484
7,100 Exelon Corp. ........................................... 471,156
10,600 ONEOK, Inc. ............................................ 234,048
----------
1,093,688
----------
ELECTRONIC, OTHER ELECTRICAL EQUIPMENT, EXCEPT COMPUTERS (5.0%)
21,190 General Electric Co. ................................... 656,466
32,080 Intel Corp. ............................................ 1,032,976
4,400 National Semiconductor Corp. (a) ....................... 173,404
3,400 Polycom, Inc. (a) ...................................... 66,368
2,600 Rockwell Collins, Inc. ................................. 78,078
3,900 Scientific-Atlanta, Inc. ............................... 106,470
900 Silicon Laboratories, Inc. (a) ......................... 38,898
5,300 Texas Instruments, Inc. ................................ 155,714
3,000 UTStarcom, Inc. (a) .................................... 111,210
----------
2,419,584
----------
ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT SERVICES (0.4%)
700 Cephalon, Inc. (a) (e) ................................. 33,887
2,500 Moody's Corp. .......................................... 151,375
----------
185,262
----------
The accompanying notes are an integral part of these financial statements.
17
40|86 SERIES TRUST
BALANCED PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
FABRICATED METAL PRODUCTS (0.7%)
2,000 Fortune Brands, Inc. ................................... $ 142,980
5,000 Gillette Co. ........................................... 183,650
----------
326,630
----------
FOOD AND KINDRED PRODUCTS (2.5%)
3,000 Anheuser-Busch Companies, Inc. ......................... 158,040
7,520 The Coca-Cola Co. ...................................... 381,640
2,400 Hershey Foods Corp. .................................... 184,776
4,160 PepsiCo, Inc. .......................................... 193,939
14,600 Tyson Foods, Inc.--Class A ............................. 193,304
1,800 Wm. Wrigley Jr. Co. .................................... 101,178
----------
1,212,877
----------
FOOD STORES (0.3%)
8,000 Kroger Co. (a) ......................................... 148,080
----------
FURNITURE AND FIXTURES (0.3%)
2,200 Lear Corp. ............................................. 134,926
----------
GENERAL MERCHANDISE STORES (1.4%)
6,200 Federated Department Store, Inc. ....................... 292,206
2,500 Sears Roebuck & Co. (e) ................................ 113,725
4,890 Wal-Mart Stores, Inc. .................................. 259,415
----------
665,346
----------
HEALTH SERVICES (1.2%)
2,900 Coventry Health Care, Inc. (a) ......................... 187,021
4,396 Medco Health Solutions, Inc. (a) ....................... 149,420
900 Pharmaceutical Resources, Inc. (a) ..................... 58,635
4,000 Watson Pharmaceuticals, Inc. (a) ....................... 184,000
579,076
----------
HOME FURNITURE AND EQUIPMENT STORES (0.6%)
5,300 Best Buy Co., Inc. ..................................... 276,872
----------
INDUSTRIAL, COMMERCIAL MACHINERY, COMPUTERS (6.1%)
9,300 Applied Materials, Inc. (a) ............................ 208,785
25,770 Cisco Systems, Inc. (a) ................................ 625,954
12,000 Dell Computer Corp. (a) ................................ 407,520
10,200 EMC Corp. (a) .......................................... 131,784
2,900 Foundry Networks, Inc. (a) ............................. 79,344
9,988 Hewlett-Packard Co. .................................... 229,424
3,000 Illinois Tool Works .................................... 251,730
2,600 Ingersoll Rand Co. Class A ............................. 176,488
2,750 International Business Machines Corp. .................. 254,870
1,600 Lexmark International, Inc. (a) ........................ 125,824
1 Riverstone Networks, Inc. (a) .......................... 1
4,400 Smith International, Inc. (a) .......................... 182,688
4,300 Storage Technology Corp. (a) ........................... 110,725
The accompanying notes are an integral part of these financial statements.
18
40|86 SERIES TRUST
BALANCED PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
1,900 Varian Medical Systems, Inc. (a) ....................... $ 131,290
3,800 Western Digital Corp. (a) .............................. 44,802
----------
2,961,229
----------
INSURANCE CARRIERS (3.5%)
6,000 The Allstate Corp. ..................................... 258,120
4,584 American International Group, Inc. ..................... 303,828
3,000 Hartford Financial Services, Inc. ...................... 177,090
3,400 Lincoln National Corp. ................................. 137,258
4,900 Metlife, Inc. .......................................... 164,983
5,400 Old Republic International Corp. ....................... 136,944
3,900 Torchmark Corp. ........................................ 177,606
3,600 UnitedHealth Group, Inc. ............................... 209,448
1,400 Wellpoint Health Networks, Inc. (a) .................... 135,786
----------
1,701,063
----------
LEATHER AND LEATHER PRODUCTS (0.1%)
1,300 Timberland Co. (a) ..................................... 67,691
MEASURING INSTRUMENTS, PHOTO GOODS, WATCHES (2.2%)
6,200 Becton Dickinson & Co. ................................. 255,068
2,800 Boston Scientific Corp. (a) ............................ 102,928
1,500 C.R. Bard, Inc. ........................................ 121,875
4,000 Guidant Corp. .......................................... 240,800
2,900 Tektronix, Inc. ........................................ 91,640
3,900 Zimmer Holdings, Inc. (a) .............................. 274,560
----------
1,086,871
----------
METAL MINING (0.7%)
8,200 Freeport--McMoRan Copper & Gold, Inc. .................. 345,466
----------
MISCELLANEOUS RETAIL (0.2%)
3,200 CVS Corp. .............................................. 115,584
----------
MOTION PICTURES (1.5%)
18,800 Walt Disney Co. ........................................ 438,604
14,430 Time Warner, Inc. (a) .................................. 259,596
----------
698,200
----------
NON-DEPOSITORY CREDIT INSTITUTIONS (1.8%)
4,200 Capital One Financial Corp. ............................ 257,418
4,533 Countrywide Financial Corp. ............................ 343,854
3,700 Prudential Financial, Inc. ............................. 154,549
3,050 Washington Mutual, Inc. ................................ 122,366
----------
878,187
----------
OIL AND GAS EXTRACTION (1.5%)
3,600 Burlington Resources, Inc. ............................. 199,368
3,500 Newfield Exploration Co. (a) ........................... 155,890
8,600 Occidental Petroleum Corp. ............................. 363,264
----------
718,522
----------
The accompanying notes are an integral part of these financial statements.
19
40|86 SERIES TRUST
BALANCED PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
PAPER AND ALLIED PRODUCTS (1.2%)
6,800 3M Co. ................................................. $ 578,204
----------
PETROLEUM REFINING AND RELATED INDUSTRIES (2.3%)
5,817 ChevronTexaco Corp. .................................... 502,531
14,540 Exxon Mobil Corp. ...................................... 596,140
----------
1,098,671
----------
PRINTING, PUBLISHING, AND ALLIED INDUSTRIES (1.6%)
3,100 Harte-Hanks, Inc. ...................................... 67,425
4,125 The McGraw-Hill Companies, Inc. ........................ 288,420
9,500 Viacom, Inc.--Class B .................................. 421,610
----------
777,455
----------
REAL ESTATE INVESTMENT TRUSTS (REITS) (1.0%)
6,400 CarrAmerica Realty Corp. ............................... 190,592
10,800 General Growth Properties, Inc. ........................ 299,700
----------
490,292
----------
RUBBER AND MISCELLANEOUS PLASTIC PRODUCTS (0.4%)
3,300 Sealed Air Corp. (a) ................................... 178,662
----------
SECURITY AND COMMODITY BROKERS (1.4%)
4,200 Bear Stearns Companies, Inc. ........................... 335,790
5,400 Merrill Lynch & Co., Inc. .............................. 316,710
----------
652,500
----------
TOBACCO PRODUCTS (0.9%)
7,910 Altria Group, Inc. ..................................... 430,462
----------
TRANSPORTATION BY AIR (0.5%)
3,700 FedEx Corp. ............................................ 249,750
----------
TRANSPORTATION EQUIPMENT (2.4%)
2,700 General Motors Corp. ................................... 144,180
2,800 Harley-Davidson, Inc. .................................. 133,084
5,200 J. B. Hunt (a) ......................................... 140,452
1,700 Northrop Grumman Corp. ................................. 162,520
5,100 Textron, Inc. .......................................... 291,006
3,160 United Technologies Corp. .............................. 299,473
----------
1,170,715
----------
WHOLESALE TRADE--DURABLE GOODS (1.1%)
5,300 Avnet, Inc. (a) ........................................ 114,798
8,080 Johnson & Johnson Co. .................................. 417,413
----------
532,211
----------
WHOLESALE TRADE--NON-DURABLE GOODS (0.2%)
2,700 SYSCO Corp. ............................................ 100,521
----------
TOTAL COMMON STOCKS (COST $30,695,078) ................. 35,098,111
----------
The accompanying notes are an integral part of these financial statements.
20
40|86 SERIES TRUST
BALANCED PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
CORPORATE BONDS (18.8%)
AMUSEMENT & RECREATIONAL SERVICES (0.2%)
$ 80,000 Six Flags, Inc., 8.875%, due 02/01/2010 (e) ............ $ 82,500
----------
CHEMICALS AND ALLIED PRODUCTS (0.7%)
80,000 Lyondell Chemical Co., Series A., 9.625%, due 05/01/2007 89,200
40,000 Polyone Corp., 10.625%, due 05/15/2010 (e) ............. 40,200
190,000 Terra Capital, Inc.,12.875%, due 10/15/2008 ............ 225,150
----------
354,550
----------
COMMUNICATIONS BY PHONE, TELEVISION, RADIO, CABLE (3.6%)
155,000 AT&T Wireless Services, Inc., 8.750%, due 03/01/2031 ... 191,920
105,000 DirecTV Holdings, 8.375%, due 03/15/2013 ............... 122,325
100,000 EchoStar Broadband Corp., 10.375%, due 10/01/2007 ...... 110,125
325,000 Nextel Communications, Inc., 9.375% due 11/15/2009 ..... 355,875
190,000 Sprint Capital Corp., 6.875%, due 11/15/2028 ........... 186,060
700,000 Qwest Capital Funding, Inc., 7.250%, due 02/15/2011 .... 693,000
80,000 Triton PCS, Inc., 8.500%, due 06/01/2013 ............... 86,400
----------
1,745,705
----------
DEPOSITORY INSTITUTION (0.1%)
40,000 Union Planters Bank, 6.500%, due 03/15/2008 ............ 43,188
----------
ELECTRIC, GAS, WATER, COGENERATION, SANITARY SERVICES (2.1%)
25,000 Allied Waste North America, 7.875%, due 01/01/2009 ..... 26,188
120,000 Allied Waste North America, 8.875%, due 04/01/2008 ..... 135,000
525,000 Sempra Energy, Inc., 6.800% due 07/01/2004 ............. 538,306
110,000 Southern Natural Gas Co., 8.875%, due 03/15/2010 ....... 124,300
200,000 Waste Management, Inc., 7.000%, due 05/15/2005 ......... 212,138
----------
1,035,932
----------
ELECTRONIC, OTHER ELECTRICAL EQUIPMENT, EXCEPT COMPUTERS (2.7%)
280,000 Celestica, Inc., 0.000% (c), due 08/01/2020 ............ 149,450
150,000 Nortel Networks Ltd., 6.125%, due 02/15/2006 ........... 152,625
375,000 Tyco International Group, 6.000%, due 11/17/2020,
(b) Cost--$373,398; Acquired--11/06/2003 (e) ........... 388,125
575,000 Tyco International Group, 6.875%, due 01/15/2029 ....... 589,950
----------
1,280,150
----------
FOOD AND KINDRED PRODUCTS (0.6%)
280,000 Kraft Foods, Inc., 6.250%, due 06/01/2012 .............. 305,664
----------
FOOD STORES (0.4%)
155,000 Kroger Co., 7.000%, due 05/01/2018 ..................... 173,795
----------
GENERAL MERCHANDISE STORES (0.3%)
125,000 JC Penney Co., Inc., 8.000%, due 03/01/2010 ............ 143,906
----------
The accompanying notes are an integral part of these financial statements.
21
40|86 SERIES TRUST
BALANCED PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
HOTELS, OTHER LODGING PLACES (1.0%)
$ 155,000 Hyatt Equities LLC, 6.875%, due 06/15/2007,
(b) Cost--$154,732, Acquired--06/12/2002 ............... $ 166,644
150,000 Park Place Entertainment, 8.875%, due 09/15/2008 ....... 170,250
110,000 Vail Resorts, Inc., 8.750%, due 05/15/2009 ............. 116,600
----------
453,494
----------
INSURANCE CARRIERS (0.5%)
225,000 RenaissanceRe Holdings, Ltd., 7.000%, due 07/15/2008 ... 244,963
----------
LUMBER AND WOOD PRODUCTS, EXCEPT FURNITURE (0.5%)
240,000 Georgia-Pacific Corp., 7.700%, due 06/15/2015 .......... 250,800
----------
MEASURING INSTRUMENTS, PHOTO GOODS, WATCHES (0.5%)
105,000 Guidant Corp., 6.150%, due 02/15/2006 .................. 112,494
130,000 PLC Trust 2003-1, 2.709%, due 03/31/2006,
(b) Cost--$130,000; Acquired--12/12/2003 ............... 130,000
----------
242,494
----------
PAPER AND ALLIED PRODUCTS (0.0%)
20,000 Bosie Cascade Co., 6.500%, due 11/01/2010 .............. 20,892
----------
PERSONAL SERVICES (0.3%)
155,000 Service Corp. International, 6.875%, due 10/01/2007 .... 161,200
----------
PIPE LINES, EXCEPT NATURAL GAS (0.6%)
325,000 Dynegy-Roseton Danskamme., 7.670%, due 11/08/2016 ...... 310,578
----------
PRINTING, PUBLISHING AND ALLIED INDUSTRIES (1.0%)
55,000 Moore North American Finance, 7.875%, due 01/15/2011,
(b) Cost--$54,618; Acquired--03/11/2003 ................ 62,563
75,000 News America, Inc., 7.625%, due 11/30/2028 ............. 83,857
200,000 Quebecor Media, Inc., 11.125%, due 07/15/2011 .......... 232,500
35,000 R.H. Donnelley Financial Corp., 8.875%, due 12/15/2010,
(b) Cost--$35,000; Acquired--11/26/2002 ................ 39,550
70,000 R.H. Donnelley Financial Corp., 10.875%, due 12/15/2012,
(b) Cost--$70,000; Acquired--11/26/2002 ................ 83,388
----------
501,858
----------
REAL ESTATE INVESTMENT TRUSTS (REITS) (1.7%)
250,000 Health Care REIT, Inc., 7.500%, due 08/15/2007 ......... 281,844
215,000 Hospitality Properties, 6.750%, 02/15/2013 ............. 225,649
75,000 ISTAR Financial, Inc., 8.750%, due 08/15/2008 .......... 87,000
200,000 Senior Housing Trust, 8.625%, due 01/15/2012 ........... 219,000
----------
813,493
----------
REAL ESTATE OPERATORS, AGENTS, MANAGERS (0.3%)
150,000 Regency Centers, L.P., 7.400%, due 04/01/2004 .......... 152,208
----------
STONE, CLAY, GLASS, CONCRETE PRODUCTS (0.9%)
375,000 Owens-Brockway Glass, 8.875%, due 02/15/2009 ........... 412,969
----------
TOBACCO PRODUCTS (0.5%)
225,000 Universal Corp., Series B, 7.500%, due 01/26/2004 ...... 225,721
----------
WATER TRANSPORTATION (0.2%)
77,500 Carnival Corp., 6.150%, due 04/15/2008 ................. 84,475
----------
The accompanying notes are an integral part of these financial statements.
22
40|86 SERIES TRUST
BALANCED PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
WHOLESALE TRADE--NON-DURABLE GOODS (0.1%)
$ 45,000 Amerisoucebergen Corp., 7.250%, due 11/15/2013 ......... $ 48,713
----------
TOTAL CORPORATE BONDS (COST $8,234,568) ................ 9,089,248
----------
PREFERRED SECURITIES (0.6%)
APPAREL AND OTHER FINISHED PRODUCTS (0.2%)
4,000 Tommy Hilfiger USA ..................................... 104,480
----------
NONDEPOSITORY CREDIT INSTITUTIONS (0.4%)
145 Centaur Funding Corp., (b) Cost--$171,062;
Acquired--07/22/2003 ................................... 178,305
----------
TOTAL PREFERRED SECURITIES (COST $273,002) ............. 282,785
MUNICIPAL BONDS (2.0%)
$ 230,000 California County, 7.500%, due 06/01/2019 .............. 229,453
146,118 Educational Enhancement Funding Corp., 6.720%,
due 06/01/2025 ......................................... 139,395
170,000 Indiana State Dev. Fin. Auth. Rev., 5.500%, due 01/01/2033 173,907
210,000 Tobacco Settlement Fin Corp., 5.920%, due 06/01/2012 ... 205,760
203,591 Tobacco Settlement Fin Corp., 6.360%, due 05/15/2025 ... 199,230
----------
TOTAL MUNICIPAL BONDS (COST $962,223) .................. 947,745
----------
ASSET BACKED SECURITIES (0.5%)
236,273 First Union National Bank Commercial Mortgage,
99-C4 A1, 7.184%, due 12/15/2031 ....................... 252,432
----------
TOTAL ASSET BACKED SECURITIES (COST $237,303) .......... 252,432
----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (3.8%)
655,000 U.S. Treasury Bond, 5.375%, due 02/15/2013 (e) ......... 683,273
705,000 U.S. Treasury Bond, 4.250%, due 11/15/2013 (e) ......... 704,449
475,000 U.S. Treasury Note, 3.375%, due 11/15/2008 (e) ......... 478,915
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $1,864,146) ...................................... 1,866,637
----------
SHORT-TERM INVESTMENTS (7.4%)
3,022,340 Duetche GSI, Repurchase Agreement, 1.030%,
due 01/02/2004 (d) ..................................... 3,022,340
542,000 Nations Cash Reserve ................................... 542,000
----------
TOTAL SHORT-TERM INVESTMENTS (COST $3,564,340) ......... 3,564,340
----------
TOTAL INVESTMENTS (COST $45,830,660) (105.8%) .......... 51,101,298
Liabilities, less other assets (-5.8%) ................. (2,819,547)
TOTAL NET ASSETS (100.0%) .............................. $48,281,751
----------
- ----------
(a) Non-income producing security.
(b) Restricted under Rule 144A of the Securities Act of 1933.
(c) Zero Coupon--Bonds that make no interest payments.
(d) Securities lending collateral (Note 2).
(e) Securities (partial/entire) out on loan (Note 2).
The accompanying notes are an integral part of these financial statements.
23
40|86 SERIES TRUST
HIGH YIELD PORTFOLIO
================================================================================
PORTFOLIO MANAGERS' REVIEW (UNAUDITED)
HOW DID THE PORTFOLIO PERFORM RELATIVE TO ITS BENCHMARK?
The High Yield Portfolio returned 27.38% for the year ended December 31,
2003.(1) This compares to 28.15% for the benchmark Merrill Lynch High Yield
Master II Index.
WHAT CAUSED THE VARIANCE IN PERFORMANCE BETWEEN THE PORTFOLIO AND ITS BENCHMARK?
During 2003, Portfolio performance was driven by our holdings in the Telecom
and Cable/Media sectors. These sectors benefited most as the lower rated, higher
yielding names improved throughout 2003 as the credit markets underwent a major
revaluation of risk.
WHICH PORTFOLIO HOLDINGS ENHANCED THE PORTFOLIO'S PERFORMANCE?
During 2003, Portfolio performance was driven by our holdings in the Telecom,
Cable/Media and Utility sectors. This included many previously
distressed/dislocated names such as Airgate, Alamosa, Charter Communications,
Qwest Communications, and Dynegy. Many of these lower rated, higher yielding
names continued to rally throughout 2003 as the credit markets underwent a major
revaluation of risk. While many of these names underperformed during the market
turmoil of 2002, they contributed significantly to Portfolio performance in
2003.
WHICH HOLDINGS DETRACTED FROM PERFORMANCE?
During 2003, the Portfolio was most negatively impacted by its exposure to
Levi Strauss and Delta Airlines.
WHAT IS YOUR OUTLOOK FOR THE NEXT FISCAL YEAR?
During 2003, we continued to take advantage of the rally in the lower rated
sector and sold many of the credits that we believed had moved beyond
justifiable valuations. At the same time, we reduced many higher quality names
that were trading at levels that no longer offered compelling relative value.
The proceeds of these sales continue to be selectively reinvested in securities
representing better risk/return characteristics.
While the 2003 rally has pushed yields to record lows (7.46%) and spreads
(+418) to the tightest levels since 1998, there is still opportunity for further
spread compression. A strengthening economy, earnings momentum, and balance
sheet repair have contributed to an overall improvement in credit quality. As
evidence, the JP Morgan domestic default rate decreased to 2.9% for the 12
months ended December 2003 and is expected to reach 2% by the end of 2004. While
spreads have pushed through the 20-year average and may appear relatively tight
on an historical basis, it is necessary to compare spreads to similar periods in
the credit cycle. For example, the domestic default rate was below 2.5% for most
of the period between 1993 and 1997. During this period, the average spread to
worst was +372 basis points. Assuming that we are in the early stages of a
similar credit cycle, it is not unreasonable to expect spreads to continue to
grind tighter over the next 6-12 months.
While an expected 6-10% return for 2004 would pale in comparison to the
returns witnessed in 2003, it may prove attractive relative to cash, investment
grade bonds, and equities on a risk-adjusted basis. In addition to incremental
yield provided, the high yield market has a low correlation with other
investment alternatives. Additionally, the excess spread and short duration
characteristics should serve as a buffer should interest rates rise. For these
reasons, demand for the high yield asset class is expected to remain strong
through at least 2004.
Given the expectations for lower nominal returns, we expect a much tighter
dispersion of manager returns for 2004. After several years of significant
difference between top and bottom managers, we believe that the deviation should
moderate over the next couple years. With approximately 85% of the market
trading above par, credit selection will be increasingly important in this
asymmetric landscape. Given this environment, 2004 could well be about credit
problem avoidance, rather than significant price appreciation. As a result,
security selection will be back to the forefront in determining relative
performance. Our intensive credit process will continue to guide our investment
decisions, and, we believe, will continue to allow us to generate competitive,
risk-adjusted returns over time.
Robert L. Cook, CFA Thomas G. Hauser, CFA
Senior Vice President Vice President
Director of Research 40|86 Advisors, Inc.
40|86 Advisors, Inc.
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE HIGH YIELD PORTFOLIO
AND THE MERRILL LYNCH HIGH YIELD MASTER II INDEX
High Yield Merrill Lynch High Yield
DATE Portfolio Master II Index
6/13/00 10000 10000
12/31/00 10316.4 9649.81
12/31/01 10647.2 10083.5
12/31/02 11229 9892.19
12/31/03 14304 12675.6
-------------------------------
Average Annual Total Return
-------------------------------
1 Year Since Inception(1)
--------- ---------------------
27.38% 10.61%
--------- ---------------------
(1) The Inception date of this Portfolio was June 13, 2000. Past performance is
not predictive of future performance. Performance does not include separate
account expenses. Performance does not reflect the deduction of taxes that
a contractholder would pay on portfolio distributions or the redemptions of
portfolio shares.
- --------------------------------------------------------------------------------
24
40|86 SERIES TRUST
HIGH YIELD PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
CORPORATE BONDS (79.4%)
AMUSEMENT AND RECREATION SERVICES (4.8%)
$ 50,000 Boca Resorts, Inc., 9.875%, due 04/15/2009 .............. $ 53,500
45,000 Pinnacle Entertainment, 8.750%, due 10/01/2013 .......... 46,013
20,000 Six Flags, Inc., 8.875%, due 02/01/2010 ................. 20,625
125,000 Six Flags, Inc., 9.750%, due 04/15/2013 ................. 132,187
150,000 Station Casinos, Inc., 9.875%, due 07/01/2010 ........... 165,750
50,000 Vail Resorts, Inc., 8.750%, due 05/15/2009 .............. 53,000
50,000 Venetian Casino, 11.000%, due 06/15/2010 ................ 58,250
----------
529,325
----------
APPAREL AND OTHER FINISHED PRODUCTS (2.0%)
65,000 Levi Strauss & Co., 12.250%, due 12/15/2012 ............ 42,575
50,000 Phillips Van Heusen Corp., 8.125%, due 05/01/2013 ...... 53,375
55,000 Playtex Products, Inc., 9.375%, due 06/01/2011 ......... 55,825
70,000 Russell Corp., 9.250%, due 05/01/2010 .................. 72,887
----------
224,662
----------
BUILDING CONSTRUCTION, GENERAL CONTRACTORS
AND OPERATIVE BUILDERS (0.4%)
40,000 D. R. Horton, Inc., 8.500%, due 04/15/2012 .............. 45,400
----------
BUSINESS SERVICES (0.8%)
10,000 H&E Equipment/Finance, 11.125%, due 06/15/2012 .......... 10,100
70,000 Universal Hosptial Services, Inc., 10.125%,
due 11/01/2011, (a) Cost--$70,000;
Acquired--10/08/2003 ..................................... 73,850
----------
83,950
----------
CHEMICALS AND ALLIED PRODUCTS (5.9%)
43,000 HMP Equity Holdings Corp., 0.000% (c), due 05/15/2008,
(a) Cost--$22,464; Acquired--04/30/2003 ................. 26,445
30,000 Huntsman ICI Chemicals, 10.125%, due 07/01/2009 ......... 31,050
50,000 Lyondell Chemical Co., 10.875%, due 05/01/2009 .......... 51,500
75,000 Lyondell Chemical Co., 11.125%, due 07/15/2012 .......... 83,625
35,000 Nalco Co., 8.875%, due 11/15/2013, (a) Cost--$35,000;
Acquired--10/29/2003 .................................... 37,275
20,000 Nalco Co., 7.750%, due 11/15/2011, (a) Cost--$20,000;
Acquired--10/29/2003 .................................... 21,500
70,000 Polyone Corp., 8.875%, due 05/01/2012 ................... 70,350
70,000 Rockwood Specialties Corp., 10.625%, due 05/15/2011,
(a) Cost--$70,000; Acquired--07/09/2003 ................. 78,400
35,000 Terra Capital, Inc., 12.875%, due 10/15/2008 ............ 41,475
150,000 Terra Capital, Inc., 11.500%, due 06/01/2010 ............ 157,500
55,000 Witco Corp., 6.875%, due 02/01/2026 ..................... 47,437
----------
646,557
----------
COMMUNICATIONS BY PHONE, TELEVISION, RADIO, CABLE (20.5%)
130,000 AirGate PCS, Inc., STEP (b) 0.000%/13.500%,
due 10/01/2009 .......................................... 92,300
75,000 American Tower Corp., 5.000%, due 02/15/2010 ............ 71,813
90,000 Charter Communications Holdings, LLC, 10.250%,
due 09/15/2010 (a) Cost--$91,125; Acquired--10/07/2003 .. 94,950
70,000 Charter Communications Holdings, LLC, 11.125%,
due 01/15/2011 .......................................... 64,575
50,000 Charter Communications Holdings, LLC, STEP
(b) 0.000%/13.500%, due 01/15/2011 ...................... 37,500
The accompanying notes are an integral part of these financial statements.
25
40|86 SERIES TRUST
HIGH YIELD PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
$ 40,000 Cincinnati Bell, Inc., 7.250%, due 07/15/2013, (a) Cost--$40,306; Acquired--07/02/2003 & 07/08/2003 ....... $ 42,200
25,000 Cincinnati Bell, Inc., 8.375%, due 01/15/2014, (a) Cost--$26,008; Acquired--10/31/2003 & 12/09/2003 ....... 27,000
90,000 Crown Castle International Corp., 7.500%, due 12/01/2013, (a) Cost--$86,960; Acquired--11/17/2003 ......... 90,900
125,000 CSC Holdings, Inc., 10.500%, due 05/15/2016 ............................................................... 143,750
10,000 Dex Media East LLC, 9.875%, due 11/15/2009 ................................................................ 11,500
45,000 Dex Media East LLC, 12.125%, due 11/15/2012 ............................................................... 55,575
40,000 Dex Media Finance/East, 8.500%, due 08/15/2010, (a) Cost--$40,000; Acquired--08/15/2003 ................... 44,750
40,000 Dex Media West LLC, 9.875%, due 08/15/2013, (a) Cost--$40,000; Acquired--08/15/2003 ....................... 46,700
65,000 DirecTV Holdings, 8.375%, due 03/15/2013 .................................................................. 75,725
50,000 EchoStar Communications, 9.375%, due 02/01/2009 ........................................................... 52,562
85,000 EchoStar DBS Corp., 9.125%, due 01/15/2009 ................................................................ 95,519
60,000 Fairpoint Communications, 12.500%, due 05/01/2010 ......................................................... 65,700
50,000 Innova S de RL, 9.375%, due 09/19/2013, (a) Cost--$51,500; Acquired--12/11/2003 ........................... 51,562
110,000 Insight Communications, Inc., STEP (b) 0.000%/12.250%, due 02/15/2011 ..................................... 94,600
55,000 Madison River Capital, LLC, 13.250%, due 03/01/2010 ....................................................... 60,638
150,000 Nextel Communications, Inc., 7.375%, due 08/01/2015 ....................................................... 162,000
30,000 Quebecor Media, Inc., 11.125%, due 07/15/2011 ............................................................. 34,875
185,000 Qwest Capital Funding, Inc., 7.250%, due 02/15/2011 ....................................................... 183,150
55,000 Qwest Corp., 8.875%, due 03/15/2012, (a) Cost--$53,694; Acquired--11/26/2002 .............................. 63,387
40,000 Rogers Wireless, Inc., 9.625%, due 05/01/2011 ............................................................. 48,000
85,000 Sinclair Broadcast Group, 8.000%, due 03/15/2012 .......................................................... 92,225
70,000 SpectraSite Holdings, Inc., 8.250%, due 05/15/2010 ........................................................ 75,075
80,000 Sprint Capital Corp., 8.375%, due 03/15/2012 .............................................................. 93,613
50,000 Triton PCS, Inc., 8.750%, due 11/15/2011 .................................................................. 49,500
65,000 Vivendi Universal Corp., 6.250%, due 04/15/2010, (a) Cost--$65,000; Acquired--07/02/2003 .................. 69,143
60,000 Worldcom, Inc., 6.950%, due 08/15/2006 (d) ................................................................ 48,600
------------
2,239,387
------------
ELECTRIC, GAS, WATER, COGENERATION, SANITARY SERVICES (2.9%)
35,000 Allied Waste North America, 7.875%, due 01/01/2009 ........................................................ 36,663
70,000 Allied Waste Industries, Inc., 7.400%, due 09/15/2035 ..................................................... 66,675
40,000 Dynegy Holdings, Inc., 10.125%, due 07/15/2013, (a) Cost--$39,689; Acquired--10/07/2003 ................... 46,200
40,000 El Paso Production Holding, Inc., 7.750%, due 06/01/2013, (a) Cost--$40,000; Acquired--05/20/2003 ......... 39,600
65,000 Southern Natural Gas Co., 8.875%, due 03/15/2010 .......................................................... 73,450
50,000 Transcontinental Gas Pipeline Corp., 7.000%, due 08/15/2011 ............................................... 53,500
------------
316,088
------------
ELECTRONIC, OTHER ELECTRICAL EQUIPMENT, EXCEPT COMPUTERS (5.4%)
32,000 Alamosa Delaware, Inc., 13.625%, due 08/15/2011 ........................................................... 34,880
77,000 Alamosa Delaware, Inc., STEP (b) 0.000%/12.000%, due 07/31/2009 ........................................... 69,685
75,000 Flextronics International Ltd., 6.500%, due 05/15/2013 .................................................... 78,000
100,000 IPC Acquisition Corp., 11.500%, due 12/15/2009 ............................................................ 109,500
125,000 Nortel Networks Ltd., 6.125%, due 02/15/2006 .............................................................. 127,188
30,000 Rayovac Corp., 8.500%, due 10/01/2013 ..................................................................... 31,950
63,000 Solectron Corp., 0.000% (c), due 05/08/2020 ............................................................... 36,068
------------
The accompanying notes are an integral part of these financial statements.
26
40|86 SERIES TRUST
HIGH YIELD PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
$ 27,000 TeleCorp PCS, Inc., 10.625%, due 07/15/2010 ............................................................... $ 31,575
55,000 Tyco International Group, 6.000%, due 11/15/2013, (a) Cost--$54,765; Acquired--11/06/2003 ................. 56,925
20,000 Tyco International Ltd, 6.375%, due 10/15/2011 ............................................................ 21,475
------------
597,246
------------
FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND TRANSPORTATION EQUIPMENT (0.5%)
50,000 Jacuzzi Brands, Inc., 9.625%, due 07/01/2010, (a) Cost--$50,962; Acquired--06/30/2003 & 07/01/2003 ........ 55,250
------------
FOOD AND KINDRED PRODUCTS (1.6%)
75,000 Altria Group, Inc., 7.000%, due 11/04/2013 ................................................................ 80,153
35,000 Philip Morris Co., 7.650%, due 07/01/2008 ................................................................. 38,775
50,000 Reddy Ice Group, Inc., 8.875%, due 08/01/2011, (a) Cost--$51,123; Acquired--07/17/2003 .................... 53,250
------------
172,178
------------
FOOD STORES (1.3%)
40,000 General Nutrition Center, 8.500%, due 12/01/2010, (a) Cost--$40,000; Acquired--11/15/2003 ................. 41,200
45,000 Marsh Supermarket, Inc., 8.875%, due 08/01/2007 ........................................................... 42,750
50,000 Merisant Co., 9.500%, due 07/15/2013, (a) Cost--$51,488; Acquired--06/27/2003 & 07/01/2003 ................ 53,500
------------
137,450
------------
GENERAL MERCHANDISE STORE (0.3%)
30,000 JC Penney Co., Inc., 8.000%, due 03/01/2010 ............................................................... 34,538
------------
HEALTH SERVICES (3.1%)
30,000 HCA, Inc., 6.950%, due 05/01/2012 ......................................................................... 32,217
65,000 HCA, Inc., 6.750%, due 07/15/2013 ......................................................................... 69,054
25,000 HEALTHSOUTH Corp., 10.750%, due 10/01/2008 ................................................................ 23,750
35,000 HEALTHSOUTH Corp., 8.500%, due 02/01/2008 ................................................................. 33,775
30,000 Matria Healthcare, 11.000%, due 05/01/2008 ................................................................ 32,250
40,000 Res-Care, Inc., 10.625%, due 11/15/2008 ................................................................... 41,600
70,000 Tenet Healthcare Corp., 7.375%, due 02/01/2013 ............................................................ 70,700
35,000 Tenet Healthcare Corp., 6.500%, due 06/01/2012 ............................................................ 33,731
------------
337,077
------------
HEAVY CONSTRUCTION OTHER THAN BUILDING CONSTRUCTION CONTRACTORS (0.3%)
30,000 Great Lakes Dredge & Dock, 7.750%, due 12/15/2013, (a) Cost--$30,000; Acquired--12/12/2003 ................ 31,013
------------
HOTELS, OTHER LODGING PLACES (4.2%)
55,000 Host Marriott LP, 9.500%, due 01/15/2007 .................................................................. 61,463
35,000 Host Marriott LP, 9.250%, due 10/01/2007 .................................................................. 39,287
125,000 MGM Grand, Inc., 9.750%, due 06/01/2007 ................................................................... 143,125
110,000 Park Place Entertainment, 8.125%, due 05/15/2011 .......................................................... 123,888
90,000 Starwood Hotel & Resorts, 7.375%, due 11/15/2015 .......................................................... 96,750
------------
464,513
------------
INDUSTRIAL, COMMERCIAL MACHINERY, COMPUTER EQUIPMENT (1.9%)
85,000 Cummins Engine, Inc., 5.650%, due 03/01/2098............................................................. 56,737
30,000 Rexnord Corp., 10.125%, due 12/15/2012................................................................... 33,000
The accompanying notes are an integral part of these financial statements.
27
40|86 SERIES TRUST
HIGH YIELD PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
$ 55,000 Terex Corp., 10.375%, due 04/01/2011....................................................................... $ 61,875
60,000 Unova, Inc., 7.000%, due 03/15/2008........................................................................ 58,500
------------
210,112
------------
LEATHER AND LEATHER PRODUCTS (0.9%)
95,000 Samsonite Corp., 10.750%, due 06/15/2008 .................................................................. 98,800
------------
LUMBER AND WOOD PRODUCTS, EXCEPT FURNITURE (1.8%)
190,000 Georgia-Pacific Corp., 7.750%, due 11/15/2029 ............................................................. 198,550
------------
MEASURING INSTRUMENTS, PHOTO GOODS, WATCHES (1.5%)
70,000 DRS Technologies, Inc., 6.875%, due 11/01/2013, (a) Cost--$70,000; Acquired--10/16/2003 ................... 72,275
70,000 Eastman Kodac Co., 7.250%, due 11/15/2013 ................................................................. 73,576
25,000 Hudson Respiratory Care, Inc., 9.125%, due 04/15/2008 ..................................................... 22,125
------------
167,976
------------
MISCELLANEOUS RETAIL (0.4%)
40,000 Suburban Propane Partners L.P., 6.875%, due 12/15/2013, (a) Cost--$40,000; Acquired--12/18/2003 ........... 40,600
------------
NON-DEPOSITORY CREDIT INSTITUTIONS (1.1%)
105,000 Ford Motor Credit Corp., 7.600%, due 08/01/2005 ........................................................... 115,444
------------
OIL AND GAS EXTRACTION- (2.7%)
45,000 Citgo Petroleum Corp., 11.375%, due 02/01/2011 ............................................................ 52,425
60,000 Houston Exploration Co., 7.000%, due 06/15/2013, (a) Cost--$60,000; Acquired--06/05/03 .................... 62,250
25,000 Pogo Producing Co., 8.750%, due 05/15/2007 ................................................................ 26,625
145,000 Pride International, Inc., 10.000%, due 06/01/2009 ........................................................ 156,238
------------
297,538
------------
PAPER AND ALLIED PRODUCTS (3.1%)
75,000 Abitibi-Consolidated, Inc., 8.850%, due 08/01/2030 ........................................................ 81,338
40,000 Boise Cascade Corp., 6.500%, due 11/01/2010 ............................................................... 41,784
35,000 Boise Cascade Corp., 7.000%, due 11/01/2013 ............................................................... 36,439
50,000 Buckeye Technologies, Inc., 8.500%, due 10/01/2013 ........................................................ 53,750
35,000 Graphic Packaging International, 9.500%, due 08/15/2013, (a) Cost--$35,000; Acquired--08/01/2003 .......... 38,850
45,000 Mail-Well, Inc., 9.625%, due 03/15/2012 ................................................................... 50,175
35,000 Pliant Corp., 11.125%, due 09/01/2009 ..................................................................... 37,975
------------
340,311
------------
PERSONAL SERVICES (0.8%)
50,000 Service Corp. International, 6.000%, due 12/15/2005 ....................................................... 52,000
30,000 Service Corp. International, 6.500%, due 03/15/2008 ....................................................... 30,975
------------
82,975
------------
PRIMARY METAL INDUSTRIES (0.5%)
55,000 General Cable Corp., 9.500%, due 11/15/2010, (a) Cost--$55,000; Acquired--11/18/2003 ...................... 59,125
------------
The accompanying notes are an integral part of these financial statements.
28
40|86 SERIES TRUST
HIGH YIELD PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
PRINTING, PUBLISHING AND ALLIED PRODUCTS (1.8%)
$ 45,000 Moore North American Finance, 7.875%, due 01/15/2011, (a) Cost--$44,687; Acquired--03/11/2003 ............. $ 51,187
80,000 R.H. Donnelley Financial Corp., 10.875%, due 12/15/2012, (a) Cost--$80,000; Acquired--11/26/2002 .......... 95,300
45,000 Sun Media Corp., 7.625%, due 02/15/2013 ................................................................... 48,375
------------
194,862
------------
RAILROAD TRANSPORTATION (0.6%)
65,000 TFM SA de CV, STEP (b) 0.000%/11.750%, due 06/15/2009 ..................................................... 67,113
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) (0.9%)
40,000 ISTAR Financial, Inc., 8.750%, due 08/15/2008 ............................................................. 43,400
20,000 Senior Housing Trust, 8.625%, due 01/15/2012 .............................................................. 21,900
30,000 Senior Housing Trust, 7.875%, due 04/15/2015 .............................................................. 31,650
------------
96,950
------------
RUBBER AND MISCELLANEOUS PLASTIC PRODUCTS (0.7%)
70,000 Tekni-Plex, Inc., 8.750%, due 11/15/2013 .................................................................. 73,325
------------
STONE, CLAY, GLASS, CONCRETE (1.2%)
20,000 Hexcel Corp., 9.750%, due 01/15/2009 ...................................................................... 21,050
25,000 Owens-Brockway Glass, 7.750%, due 05/15/2011 .............................................................. 26,968
75,000 Owens-Brockway Glass, 8.250%, due 05/15/2013 .............................................................. 80,906
------------
128,924
------------
TRANSPORTATION BY AIR (0.3%)
89,915 US Airways, Inc., 9.820%, due 01/01/2013 .................................................................. 30,455
------------
TRANSPORTATION EQUIPMENT (2.2%)
80,000 Dana Corp., 9.000%, due 08/15/2011 ........................................................................ 96,800
65,000 General Motors Corp., 8.375%, due 07/15/2033 .............................................................. 75,680
60,000 United Components, Inc., 9.375%, due 06/15/2013 ........................................................... 65,850
------------
238,330
------------
WATER TRANSPORTATION (0.7%)
70,000 Royal Caribbean Cruises, 8.000%, due 05/15/2010 ............................................................ 76,650
WHOLESALE TRADE--DURABLE GOODS (0.8%)
80,000 TRW Automotive, Inc., 9.375%, due 02/15/2013 .............................................................. 91,800
------------
WHOLESALE TRADE--NON-DURABLE GOODS (1.5%)
80,000 Amerisoucrcebergen Corp., 7.250%, due 11/15/2012 .......................................................... 86,600
75,000 DIMON, Inc., 7.750%, due 06/01/2013, (a) Cost--$76,806; Acquired--11/17/2003 & 12/09/2003 ................. 77,625
------------
164,225
------------
TOTAL CORPORATE BONDS (COST $8,093,956) ................................................................... 8,688,699
------------
The accompanying notes are an integral part of these financial statements.
29
40|86 SERIES TRUST
HIGH YIELD PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL/YANKEE (U.S. $ DENOMINATED) (0.7%)
$ 30,000 Alliance Atlantis Communications, Inc., 13.000%, due 12/15/2009 ........................................... $ 34,350
40,000 Federative Republic of Brazil, 10.250%, due 06/17/2013 .................................................... 43,200
------------
TOTAL INTERNATIONAL/YANKEE (COST $69,903) ................................................................. 77,550
------------
PREFERRED STOCKS (0.7%)
APPAREL AND OTHER FINISHED PRODUCTS (0.6%)
2,768 Tommy Hilfiger USA, 9.000% ................................................................................ 72,300
------------
COMMUNICATIONS BY PHONE, TELEVISION, RADIO, CABLE (0.1%)
26 Alamosa Holdings, Inc., 7.500% ............................................................................ 9,230
1 Intermedia Communications, Inc., Series B, 13.500% (d) .................................................... 41
------------
9,271
------------
TOTAL PREFERRED STOCK (COST $76,332) ...................................................................... 81,571
------------
SHORT-TERM INVESTMENTS (8.3%)
452,000 Aim Government Tax Advantage .............................................................................. 452,000
452,000 Nations Treasury Reserve .................................................................................. 452,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $904,000) .............................................................. 904,000
------------
TOTAL INVESTMENTS (COST $9,144,191)--(89.1%) .............................................................. 9,751,820
Other assets, less liabilities--(10.9%) ................................................................... 1,189,408
------------
TOTAL NET ASSETS--(100.0%) ................................................................................ $ 10,941,228
------------
- ----------------------------------------------------------------------------------------------------------------------
(a) Restricted under Rule 144A of the Securities Act of 1933.
(b) STEP--Bonds where the coupon increases or steps up at a predetermined rate.
(c) Zero Coupon Bonds that make no interest payments.
(d) Security in default.
The accompanying notes are an integral part of these financial statements.
30
40|86 SERIES TRUST
FIXED INCOME PORTFOLIO
================================================================================
PORTFOLIO MANAGERS' REVIEW (UNAUDITED)
HOW DID THE PORTFOLIO PERFORM RELATIVE TO ITS BENCHMARK?
The Fixed Income Portfolio returned 9.33% for the year ended December 31,
2003.(1) This compares to 7.04% for the benchmark Lehman Brothers
Government/Corporate Index.
WHAT CAUSED THE VARIANCE IN PERFORMANCE BETWEEN THE PORTFOLIO AND ITS BENCHMARK?
The Portfolio's out performance was a result to the portfolio structure and
its overweight to corporate bonds. The corporate bond sector experienced
significant spread contraction during the year as companies reduced leverage
through excess cash flow and sold off non-core businesses. The return of fiscal
discipline helped alleviate fears in the capital market which had forced credit
spreads to historic wide levels in the prior year. In addition, our increased
exposure to the high yield sector helped add incremental return through the
year.
WHICH PORTFOLIO HOLDINGS ENHANCED THE PORTFOLIO'S PERFORMANCE?
The Portfolio's performance was aided by several of our investment holdings
including Kraft Foods, Sprint and Tyco. Kraft has been under some scrutiny as
its parent company, Phillip Morris, endures the tobacco litigation pain. Kraft's
underlying businesses are strong and performing well. In order to preserve the
enterprise value of Kraft, we believe that there is a strong probability that
Phillip Morris will spin-off Kraft. Sprint has done an excellent job of focusing
on its core business and cutting costs. In spite of the highly publicized
lawsuits surrounding Tyco's ex-chairman, the fundamentals of Tyco's underlying
businesses appear solid and the new management team has done a good job of
reducing debt and selling non-core businesses.
WHICH HOLDINGS DETRACTED FROM PERFORMANCE?
While the credit markets improved through the year, our holdings in tobacco
settlement bonds lagged the recovery. The tobacco settlement structures were
created by certain states to prefund the long payouts associated with the
settlement of tobacco litigation. As tobacco companies make payments into the
Master Settlement Agreement, they are funneled to the states to pay interest and
principal on these bonds outstanding. With the overhang of the tobacco
litigation, these structured deals did not perform well last year.
WHAT IS YOUR OUTLOOK FOR THE NEXT FISCAL YEAR?
We believe we are in a period of relative low interest rates, however, with
the strength of the economic recovery, the risks of an increase in interest
rates from the current levels is pretty high. The credit markets have improved
significantly and we remain positive on the outlook for credit. In addition, we
expect the mortgage-backed securities sector to underperform in a rising
interest rate environment.
Gregory J. Hahn, CFA Michael D. Richman, CFA
Chief Investment Officer Second Vice President
40|86 Advisors, Inc. 40|86 Advisors, Inc.
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE FIXED INCOME
PORTFOLIO AND THE LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX
Lehman Brothers
Fixed Income Government/Corporate
Portfolio Index
------------ --------------------
"12/31/93" 10000 10000
"12/31/94" 9731.25 9649.93
"12/31/95" 11509.3 11507.6
"12/31/96" 12079.1 11839.7
"12/31/97" 13282.7 12994.4
"12/31/98" 14103.5 14224.4
"12/31/99" 14048.4 13918.3
"12/31/00" 15431.6 15566
"12/31/01" 16790.6 16889.9
"12/31/02" 17576.6 18751
"12/31/03" 19215.9 19628.4
----------------------------------
Average Annual Total Return(1)
----------------------------------
1 Year 5 Years 10 Years
--------- --------- --------------
9.33% 6.38% 6.75%
--------- --------- --------------
(1) Past performance is not predictive of future performance. Performance does
not include separate account expenses. Performance does not reflect the
deduction of taxes that a contractholder would pay on Portfolio
distributions or the redemptions of Portfolio shares.
31
40|86 SERIES TRUST
FIXED INCOME PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (59.5%)
AMUSEMENT AND RECREATIONAL SERVICES (0.2%)
$ 75,000 Six Flags, Inc., 8.875%, due 02/01/2010 (d) ............................................................... $ 77,344
------------
BUILDING CONSTRUCTION, GENERAL CONTRACTORS AND OPERATIVE BUILDERS (0.5%)
175,000 Ryland Group, 5.375%, due 06/01/2008 ...................................................................... 181,125
------------
BUSINESS SERVICES (1.9%)
230,000 Cendant Corp., 7.375%, due 01/15/2013 ..................................................................... 264,182
70,000 NCR Corp., 7.125%, due 06/15/2009 ......................................................................... 78,162
265,000 Time Warner, Inc., 7.700%, due 05/01/2032 ................................................................. 310,453
------------
652,797
------------
CHEMICALS AND ALLIED PRODUCTS (1.4%)
75,000 Lyondell Chemical Co., Series A, 9.625%, due 05/01/2007 ................................................... 83,625
35,000 Polyone Corp., 10.625%, due 06/15/2010 (d) ................................................................ 35,175
80,000 Terra Capital, Inc., 12.875%, due 10/15/2008 .............................................................. 94,800
275,000 Wyeth, 5.250%, due 03/15/2013 ............................................................................. 280,441
------------
494,041
------------
COMMUNICATIONS BY PHONE, TELEVISION, RADIO, CABLE (9.1%)
115,000 AT&T Wireless Services, Inc., 8.750%, due 03/01/2031 ...................................................... 142,392
80,000 Ameritech Capital Funding, 7.500%, due 04/01/2005 ......................................................... 85,567
185,000 Chancellor Media CCU, 8.000%, due 11/01/2008 .............................................................. 215,062
90,000 Clear Channel Communications, 6.625%, due 06/15/2008 ...................................................... 100,085
155,000 Comcast Corp., 7.050%, due 03/15/2033 ..................................................................... 169,267
125,000 Cox Enterprises, 4.375%, due 05/01/2008, (a) Cost $124,920; Acquired--04/14/2003 .......................... 127,109
280,000 Deutsche Telcom International Finance, Inc., 8.750%, due 06/15/2030 ....................................... 358,958
90,000 DirecTV Holdings, 8.375%, due 03/15/2013 .................................................................. 104,850
100,000 EchoStar Broadband Corp., 10.375%, due 10/01/2007 ......................................................... 110,125
125,000 Insight Midwest LLP, 10.500%, due 11/01/2010 .............................................................. 136,562
125,000 Nextel Communications, Inc., 9.375%, due 11/15/2009 ....................................................... 136,875
390,000 Qwest Capital Funding Inc., 6.875%, due 07/15/2028 ........................................................ 386,100
215,000 Sprint Capital Corp., 6.875%, due 11/15/2028 .............................................................. 210,541
75,000 Tele-Communications, Inc., 9.800%, due 02/01/2012 ......................................................... 97,979
445,000 Telus Corp., 8.000%, due 06/01/2011 ....................................................................... 521,227
75,000 Triton PCS, Inc., 8.500%, due 06/01/2013 .................................................................. 81,000
215,000 Vodafone Group PLC, 5.375%, due 01/30/2015 ................................................................ 217,532
------------
3,201,231
------------
DEPOSITORY INSTITUTIONS (3.9%)
170,000 Citicorp, 6.750%, due 08/15/2005 .......................................................................... 183,448
90,000 Citifinancial, 6.500%, due 08/01/2004 ..................................................................... 92,642
85,000 Fleetboston Financial Corp., 7.250%, due 09/15/2005 ....................................................... 92,467
145,000 Huntington National Bank, 3.125%, due 05/15/2008 .......................................................... 141,405
460,000 J.P. Morgan Chase & Co., 4.000%, due 02/01/2008 ........................................................... 500,977
The accompanying notes are an integral part of these financial statements.
32
40|86 SERIES TRUST
FIXED INCOME PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
$ 138,000 Nationsbank Corp., 6.875%, due 02/15/2005 ................................................................. $ 145,626
185,000 Union Planters Bank, 6.500%, due 03/15/2008 ............................................................... 199,745
------------
1,356,310
------------
EATING AND DRINKING PLACES (0.5%)
140,000 Yum! Brands, Inc., 7.700%, due 07/01/2012 ................................................................. 161,875
------------
ELECTRIC, GAS, WATER, COGENERATION, SANITARY SERVICES (8.8%)
115,000 Allied Waste North America, 8.875%, due 04/01/2008 ........................................................ 129,375
200,000 AMERENENERGY Generating, Series C, 7.750%, due 11/01/2005 ................................................. 219,398
135,000 Cilcorp, Inc., 8.700%, due 10/15/2009 ..................................................................... 163,111
145,000 Consolidated Edison, Inc., 3.625%, due 08/01/2008 ......................................................... 145,179
145,000 Constellation Energy Corp., 4.550%, due 06/15/2015 ........................................................ 133,586
150,000 Detroit Edison Co, 5.050%, due 10/01/2005 ................................................................. 156,970
225,000 Kansas City Power & Light, 7.125%, due 12/15/2005 ......................................................... 245,195
270,000 Niagara Mohawk Power Co., 5.375%, due 10/01/2004 .......................................................... 277,427
155,000 Nisource Finance, 7.875%, due 11/15/2010 .................................................................. 184,607
135,000 Ohio Power Co., 6.600%, due 02/15/2033 .................................................................... 145,363
400,000 Pinnacle West Capital Corp., 6.400%, due 04/01/2006 ....................................................... 429,310
245,000 PSI Energy, Inc., 6.650%, due 06/15/2006 .................................................................. 267,178
100,000 Southern Natural Gas Co., 7.350%, due 02/15/2031 .......................................................... 113,000
265,000 Southwestern Public Service Co, Series B, 5.125%, due 11/01/2006 .......................................... 281,007
170,000 Texas Eastern Transmission L.P., 7.000%, due 07/15/2032 ................................................... 188,700
------------
3,079,406
------------
ELECTRONIC, OTHER ELECTRICAL EQUIPMENT, EXCEPT COMPUTERS (3.9%)
260,000 Celestica, Inc., 0.000% (b), due 08/01/2020 ............................................................... 138,775
150,000 Cooper Industries, Inc., 5.500%, due 11/01/2009 ........................................................... 161,510
120,000 Nortel Networks Ltd, 6.125%, due 02/15/2006 ............................................................... 122,100
186,000 TeleCorp PCS, Inc., 10.625%, due 07/15/2010 ............................................................... 217,515
185,000 Tyco International Group, 6.000%, due 11/15/2013, (a) Cost--$184,209; Acquired--11/06/2003 (d) ............ 191,475
525,000 Tyco International Group, 6.875%, due 01/15/2029 .......................................................... 538,650
------------
1,370,025
------------
FOOD AND KINDRED PRODUCTS (1.8%)
115,000 Coca-Cola HBC Finance, 5.125%, due 09/17/2013, (a) Cost--$113,969; Acquired--09/10/2003 ................... 115,514
220,000 Kraft Foods, Inc., 6.250%, due 06/01/2012 ................................................................. 240,165
275,000 Kraft Foods, Inc., 5.250%, due 10/01/2013 ................................................................. 278,004
------------
633,683
------------
FOOD STORES (0.4%)
140,000 Kroger Co., 7.000%, due 05/01/2018 ........................................................................ 156,976
------------
FURNITURE AND FIXTURES (0.5%)
100,000 Lear Corp., 8.110%, due 05/15/2009 ........................................................................ 118,125
60,000 Rubbermaid, Inc., 6.600%, due 11/15/2006 .................................................................. 66,193
------------
184,318
------------
The accompanying notes are an integral part of these financial statements.
33
40|86 SERIES TRUST
FIXED INCOME PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
GENERAL MERCHANDISE STORES (0.6%)
$ 65,000 May Department Stores Co., 6.875%, due 11/01/2005 ......................................................... $ 70,042
110,000 JC Penny Co., Inc., 8.000%, due 03/01/2010 ................................................................ 126,638
------------
196,680
------------
HEALTH SERVICES (0.7%)
235,000 HCA, Inc., 6.950%, due 05/01/2012 ......................................................................... 252,370
------------
HOTELS, OTHER LODGING PLACES (1.0%)
135,000 Hyatt Equities LLC, 6.875%, due 06/15/2007, (a) Cost--$134,767; Acquired--06/12/2002 ...................... 145,141
100,000 Park Place Entertainment, 8.875%, due 09/15/2008 .......................................................... 113,500
90,000 Vail Resorts, Inc., 8.750%, due 05/15/2009 ................................................................ 95,400
------------
354,041
------------
INSURANCE CARRIERS (4.6%)
200,000 Everest Reinsurance Holdings, Ltd., 8.500%, due 03/15/2005 ................................................ 214,527
30,000 Florida Windstrorm, Series MBIA, 6.850%, due 08/25/2007, (a) Cost--$30,940; Acquired--06/22/2001 .......... 33,959
145,000 John Hancock Financial Services, 5.625%, due 12/01/2008 ................................................... 156,799
220,000 Monumental Global Funding II, 2.800%, due 03/03/2008, (a) Cost--$210,756; Acquired--12/09/2003 ............ 212,767
505,000 Protective Life US Funding Trust, 5.875%, due 08/15/2006, (a) Cost--$505,950;
Acquired--08/06/2001 & 08/28/2001 ......................................................................... 549,135
325,000 RenaissanceRe Holdings, Ltd., 7.000%, due 07/15/2008 ...................................................... 353,836
115,000 TGT Pipeline LLC, 5.200%, due 06/01/2018 .................................................................. 107,944
------------
1,628,967
------------
LUMBER AND WOOD PRODUCTS, EXCEPT FURNITURE (1.0%)
175,000 Georgia-Pacific Corp., 7.700%, due 06/15/2015 ............................................................. 182,875
160,000 Weyerhaeuser Co., 5.950%, due 11/01/2008 .................................................................. 172,162
------------
355,037
------------
MEASURING INSTRUMENTS, PHOTO GOODS, WATCHES (0.6%)
95,000 Guidant Corp., 6.150%, due 02/15/2006 ..................................................................... 101,780
95,000 PLC Trust 2003-1, 2.709%, due 03/31/2006, (a) Cost--$95,000; Acquired--12/12/2003 ......................... 95,000
------------
196,780
------------
MISCELLANEOUS MANUFACTURING INDUSTRIES (0.4%)
105,000 CIT Group Holdings, 7.750%, due 04/02/2012 ................................................................ 124,245
------------
MOTION PICTURES (0.2%)
75,000 Liberty Media Corp., 5.700%, due 05/15/2013 (d) ........................................................... 76,009
------------
NON-DEPOSITORY CREDIT INSTITUTIONS (3.2%)
125,000 Aristar, Inc., 5.850%, due 01/27/2004 ..................................................................... 125,344
160,000 Credit Suisse USA, Inc., 3.875%, due 01/15/2009 ........................................................... 159,990
205,000 Ford Motor Credit Corp., 7.600%, due 08/01/2005 ........................................................... 219,188
135,000 Ford Motor Credit Corp., 7.000%, due 10/01/2013 ........................................................... 142,634
200,000 Gemstone Investors Ltd., 7.710%, due 10/31/2004, (a) Cost--$200,000; Acquired--10/25/2001 ................. 203,000
215,000 General Motors Acceptance Corp., 5.250%, due 05/16/2005 ................................................... 222,840
35,000 Transamerica Corp., 6.750%, due 11/15/2006 ................................................................ 38,794
------------
1,111,790
------------
The accompanying notes are an integral part of these financial statements.
34
40|86 SERIES TRUST
FIXED INCOME PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
OIL AND GAS EXTRACTION (0.9%)
$ 90,000 Enterprise Products Operations, Inc., 8.250%, due 03/15/2005 .............................................. $ 96,183
200,000 Petroleos Mexicanos, 6.500%, due 02/01/2005 ............................................................... 209,750
------------
305,933
------------
PAPER & ALLIED PRODUCTS (0.7%)
55,000 Boise Cascade Co., 6.500%, due 11/01/2010 ................................................................. 57,452
190,000 Meadwestvaco Corp., 2.750%, due 12/01/2005 ................................................................ 188,480
------------
245,932
------------
PERSONAL SERVICES (1.1%)
210,000 Service Corp. International, 6.500%, due 03/15/2008 (d) ................................................... 216,825
165,000 Service Corp. International, 7.700%, due 04/15/2009 ....................................................... 176,963
------------
393,788
------------
PETROLEUM REFINING AND RELATED INDUSTRIES (0.1%)
50,000 Norsk Hydro ASA, 8.400%, due 07/15/2004 ................................................................... 51,752
------------
PIPE LINES, EXCEPT NATURAL GAS (0.7%)
260,000 Dynegy-Roseton Danskamme, 7.670%, due 11/08/2016 .......................................................... 248,462
------------
PRINTING, PUBLISHING, AND ALLIED INDUSTRIES (2.2%)
50,000 Moore North American Finance, 7.875%, due 01/15/2011, (a) Cost--$49,652; Acquired--03/11/2003 ............. 56,875
70,000 News America, Inc., 7.280%, due 06/30/2028 ................................................................ 78,267
190,000 News America, Inc., 7.625%, due 11/30/2028 ................................................................ 220,749
110,000 News American Holdings, 7.700%, due 10/30/2025 ............................................................ 128,482
145,000 Quebecor Media, Inc., 11.125%, due 07/15/2011 ............................................................. 168,563
30,000 R.H. Donnelley Financial Corp., 8.875%, due 12/15/2010, (a) Cost--$30,000; Acquired--11/26/2002 ........... 33,900
60,000 R.H. Donnelley Financial Corp., 10.875%, due 12/15/2012, (a) Cost--$60,000; Acquired--11/26/2002 .......... 71,475
------------
758,311
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) (5.2%)
125,000 EOP Operating LP, 8.375%, due 03/15/2006 .................................................................. 140,038
130,000 Healthcare Properties, Inc., 6.875%, due 06/08/2005 ....................................................... 136,177
200,000 Health Care REIT, Inc., 7.500%, due 08/15/2007 ............................................................ 225,475
175,000 Hospitality Properties, 6.750%, due 02/15/2013 ............................................................ 183,668
100,000 ISTAR Financial, Inc., 8.750%, due 08/15/2008 ............................................................. 116,000
170,000 JDN Realty Corp., 6.800%, due 04/01/2004 .................................................................. 174,090
300,000 Post Apartment Homes, 6.850%, due 03/16/2005 .............................................................. 312,300
110,000 Prologis, 6.750%, due 04/15/2004 .......................................................................... 111,728
165,000 Reckson Operating Partnership, 7.400%, due 03/15/2004 ..................................................... 166,652
150,000 Senior Housing Trust, 8.625%, due 01/15/2012 .............................................................. 164,250
70,000 Simon Properties Group, 7.125%, due 02/09/2009 ............................................................ 79,506
------------
1,809,884
------------
SECURITY & COMMODITY BROKERS (0.8%)
115,000 Goldman Sachs Group, Inc., 5.250%, due 10/15/2013 ......................................................... 116,325
145,000 Merrill Lynch & Co., Inc., 6.000%, due 07/15/2005 ......................................................... 155,211
------------
271,536
------------
The accompanying notes are an integral part of these financial statements.
35
40|86 SERIES TRUST
FIXED INCOME PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
TOBACCO PRODUCTS (1.0%)
$ 175,000 Universal Corp., Series B, 7.500%, due 01/26/2004 ......................................................... $ 175,561
185,000 Universal Corp., 5.200%, due 10/15/2013 ................................................................... 184,760
------------
360,321
------------
TRANSPORTATION BY AIR (0.3%)
99,264 Delta Air Lines, Inc., 8.540%, due 01/02/2007 .............................................................. 89,213
WATER TRANSPORTATION (0.2%)
80,000 Carnival Corp., 6.150%, due 04/15/2008 .................................................................... 87,200
------------
WHOLESALE TRADE--NON-DURABLE GOODS (1.1%)
110,000 Amerisoucebergen Corp., 7.250%, due 11/15/2012 ............................................................ 119,075
125,000 Cardinal Health, Inc., 4.000%, due 06/15/2015 ............................................................. 114,358
145,000 DIMON, Inc., 9.625%, due 10/15/2011 ....................................................................... 162,400
------------
395,833
------------
TOTAL CORPORATE BONDS (COST $19,495,493) .................................................................. 20,863,215
------------
PREFERRED STOCKS (0.7%)
APPAREL AND OTHER FINISHED PRODUCTS (0.3%)
3,500 Tommy Hilfiger USA ........................................................................................ 91,420
------------
NONDEPOSITORY CREDIT INSTITUTUTIONS (0.4%)
130 Centaur Funding Corp., (a) Cost--$153,366; Acquired--07/22/2003 ........................................... 159,859
------------
TOTAL PREFERRED STOCK (COST $242,563) ..................................................................... 251,279
------------
MUNICIPAL BONDS (5.8%)
$ 195,000 California County, 7.500%, due 06/01/2019 ................................................................. 194,536
140,000 Decatur Texas Hospital Authority, Hospital Revenue, 7.750%, due 09/01/2009 ................................ 150,060
122,550 Educational Enhancement Funding Corp., 6.720%, due 06/01/2025 ............................................. 116,912
170,000 Eufaula Ala., 4.000%, due 08/15/2012 ...................................................................... 170,239
130,000 Indiana State Dev. Fin. Auth. Rev., 5.500%, due 01/01/2033 ................................................ 132,987
100,000 New Jersey Economic Development Authority, 3.250%, due 09/15/2006 ......................................... 101,729
505,000 North Carolina Eastern Municipal Power Agency Revenue, 7.050%, due 01/01/2007 ............................. 549,278
120,000 Rothschild Wisconsin Ref, 2.125%, due 03/01/2004 .......................................................... 120,059
140,000 San Diego California Community College, 1.340%, due 05/01/2004 ............................................ 140,021
205,000 Tobacco Settlement Fin. Corp., 5.920%, due 06/01/2013 ..................................................... 200,861
158,349 Tobacco Settlement Fin. Corp., 6.360%, due 05/15/2025 ..................................................... 154,957
------------
TOTAL MUNICIPAL BONDS (COST $2,000,144) ................................................................... 2,031,639
------------
ASSET BACKED SECURITIES (6.8%)
116,954 Bear Stearns Commercial Mortgage Securities, Inc., 99-C1 A1, 5.910%, due 05/14/2008 ....................... 125,089
230,000 Centex Home Equity, 2001-A A6, 6.250%, due 04/25/2031 ..................................................... 241,120
225,000 Chase Funding Mortgage Loan, 2001-3 1A4, 5.602%, due 05/25/2027 ........................................... 228,014
102,075 CMAT 1999-C1 A1, 6.250%, due 01/17/2032 ................................................................... 106,975
36,554 CS First Boston Mortgage Securities Corp., 2002-9 2A3, 6.580%, due 03/25/2032 ............................. 36,520
115,000 CS First Boston Mortgage Securities Corp., 2001-CKN5 A3, 5.107%, due 09/15/2034 ........................... 121,787
29,362 DLJ Commercial Mortgage Corp., #1999CG, 7.120%, due 10/10/2032 ............................................ 31,859
71,648 Equity One Abs, Inc., 2002-1 AF2, 5.523%, due 08/01/2032 .................................................. 73,440
The accompanying notes are an integral part of these financial statements.
36
40|86 SERIES TRUST
FIXED INCOME PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
$ 18,403 First Union Chase Commercial Mortgage, 99-C2 A1, 6.363%, due 06/15/2008 ................................... $ 19,274
44,096 First Union Lehman Brothers Commercial Mortgage Trust, 97-C2 A2, 6.600%, due 05/18/2007 ................... 44,918
202,442 GMAC Commercial Mortgage Securities, Inc., 99-C1 A1, 5.830%, due 05/15/2033 ............................... 213,893
34,769 GMAC Commercial Mortgage Securities, Inc., 99-C2, 6.570%, due 09/15/2033 .................................. 37,297
250,000 LB-UBS Commercial Mortgage Securities, Inc., #2001C3, 6.365%, due 12/15/2028 .............................. 278,401
465,000 Salomon Brothers Mortgage Services, 6.168%, due 02/13/2010 ................................................ 510,086
95,000 Residential Asset Mortgage Products, Inc., 2002-RZ3 A4, 4.730%, due 11/25/2010 ............................ 97,734
153,307 Residential Asset Mortgage Products, Inc., 2001-RZ4 A4, 5.200%, due 03/25/2030 ............................ 154,320
58,737 Residential Asset Securities Corp., 2001-KS3 AI3, 5.180%, due 08/25/2027 .................................. 58,795
------------
TOTAL ASSET BACKED SECURITIES (COST $2,335,547) ........................................................... 2,379,522
------------
COLLATERIZED MORTGAGE OBLIGATIONS (2.5%)
290,000 Deutsche Mortgage and Asset Receiving Corp., 1998-C1 A2, 6.538%, due 06/15/2031 ........................... 317,783
315,000 Fannie Mae, #200318, 4.500%, due 11/25/2014 ............................................................... 322,101
93,857 Fannie Mae, 2001-68 A, 6.000%, due 07/25/2029 ............................................................. 95,434
84,247 Freddie Mac, 2435 HC, 6.250%, due 05/15/2027 .............................................................. 84,581
26,671 Paine Webber Mortgage Acceptance Corp., 99-4 2B1, 6.291%, due 01/28/2009,
(a) Cost--$25,968; Acquired--01/21/2000 ................................................................... 26,671
28,551 Residential Asset Mortgage Products, Inc., 2001-RZ3 A4, 6.130%, due 03/25/2030 ............................ 28,624
------------
TOTAL COLLATERIZED MORTGAGE OBLIGATIONS (COST $834,183) ................................................... 875,194
------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (15.2%)
160,000 Federal Home Loan Mortgage Corp., #002638, 3.000%, due 07/15/2009 ......................................... 162,064
185,000 Federal Home Loan Mortgage Corp., #2614CH, 3.500%, due 12/15/2010 ......................................... 189,309
33,168 Federal Home Loan Mortgage Corp., #G00479, 9.000%, due 04/01/2025 ......................................... 37,076
33,075 Federal Home Loan Mortgage Corp., #002489, 6.000%, due 01/15/2026 ......................................... 33,129
78,881 Federal Home Loan Mortgage Corp., #2478EF, 6.000%, due 03/15/2026 ......................................... 79,322
60,596 Federal Home Loan Mortgage Corp., #2422 CD, 6.000%, due 04/15/2028 ........................................ 60,970
68,065 Federal Home Loan Mortgage Corp., #G00943, 6.000%, due 07/01/2028 ......................................... 70,537
5,905 Federal Home Loan Mortgage Corp., #C00712, 6.500%, due 02/01/2029 ......................................... 6,195
79,703 Federal Home Loan Mortgage Corp., #C50964, 6.500%, due 05/01/2031 ......................................... 83,533
484,129 Federal Home Loan Mortgage Corp., #009441, 6.500%, due 09/01/2031 ......................................... 507,396
44,206 Federal Home Loan Mortgage Corp., #C60697, 6.000%, due 11/01/2031 ......................................... 45,728
165,000 Federal National Mortgate Assn. #200357, 4.500%, due 12/25/2012 ........................................... 168,560
160,000 Federal National Mortgage Assn., #002638, 3.000%, due 02/15/2015 .......................................... 161,870
178,273 Federal National Mortgage Assn., #545449, 6.500%, due 02/01/2017 .......................................... 189,264
550,000 Federal National Mortgage Assn., #200342, 4.000%, due 09/25/2017 .......................................... 562,123
220,000 Federal National Mortgage Assn., #200336, 4.500%, due 07/25/2022 .......................................... 221,514
14,580 Federal National Mortgage Assn., #349410, 7.000%, due 08/01/2026 .......................................... 15,482
4,083 Federal National Mortgage Assn., #062289, 5.982%, due 03/01/2028 .......................................... 4,133
1,048 Government National Mortgage Assn., #051699, 15.000%, due 07/15/2011 ...................................... 1,253
5,874 Government National Mortgage Assn., #354859, 9.000%, due 07/15/2024 ....................................... 6,566
1,015,000 U.S. Treasury Bond, 4.250%, due 11/15/2013 (d) ............................................................ 1,014,207
1,200,000 U.S. Treasury Bond, 5.375%, due 02/15/2031 (d) ............................................................ 1,251,798
460,000 U.S. Treasury Note, 3.375%, due 11/15/2008 (d) ............................................................ 463,792
------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS (COST $5,316,499) ............................................ 5,335,821
------------
The accompanying notes are an integral part of these financial statements.
37
40|86 SERIES TRUST
FIXED INCOME PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (17.6%)
$1,419,000 Aim Government Tax Advantage .............................................................................. $ 1,419,000
3,190,995 Deutsche GSI, Repurchase Agreement, 1.030%, due 01/02/2004 (c) ............................................ 3,190,995
1,579,000 Nations Treasury Reserve .................................................................................. 1,579,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $6,188,995) ............................................................ 6,188,995
------------
TOTAL INVESTMENTS (COST $36,413,424) (108.1%) ............................................................. 37,925,665
------------
Liabilities, less other assets (-8.1%) .................................................................... (2,857,402)
-------------
TOTAL NET ASSETS (100.0%) ................................................................................. $ 35,068,263
------------
- ----------------------------------------------------------------------------------------------------------------------
(a) Restricted under Rule 144A of the Securities Act of 1933.
(b) Zero Coupon Bonds that make no interest payments.
(c) Securities Lending Collateral (Note 2).
(d) Securities (partial/entire) out on loan (Note 2).
The accompanying notes are an integral part of these financial statements.
38
40|86 SERIES TRUST
GOVERNMENT SECURITIES PORTFOLIO
================================================================================
PORTFOLIO MANAGERS' REVIEW (UNAUDITED)
HOW DID THE PORTFOLIO PERFORM RELATIVE TO ITS BENCHMARKS?
The Government Securities Portfolio returned 1.36% for the year ended
December 31, 2003.(1) This compares to 2.36% for the benchmark Lehman Brothers
Government Bond Index and 3.06% for the benchmark Lehman Brothers
Mortgage-Backed Securities ("MBS") Index.
WHAT CAUSED THE VARIANCE IN PERFORMANCE BETWEEN THE PORTFOLIO AND ITS
BENCHMARKS?
The variance can be explained by the relatively high amount of cash, over 8%
at year-end, which was maintained in the Portfolio and an effective duration of
3.62 years versus 5.20 years for the Lehman Brothers Government Bond Index and
2.98 years for the Lehman Brothers MBS Index.
WHICH PORTFOLIO HOLDINGS ENHANCED THE PORTFOLIO'S PERFORMANCE?
The two sectors that contributed the most to the Portfolio's performance,
that were held throughout the year, were the mortgage pass throughs and asset
backed securities. The two best performing sectors, purchased throughout the
year, were the government agency and commercial mortgage backed securities
sectors.
WHICH HOLDINGS DETRACTED FROM PERFORMANCE?
The only securities to post a meaningful negative return during the year were
some longer duration treasury securities.
WHAT IS YOUR OUTLOOK FOR THE NEXT FISCAL YEAR?
Mortgage convexity will remain a key issue over the coming months. Given the
cuspy nature of the mortgage market, the risks towards the extension side are
staggering. In addition to having to worry about managing the duration of the
asset, the mortgage market will have to contend with a sharp decline in bank
demand, as well as, servicer selling of mortgage hedges. The Portfolio will
continue to stay short the benchmark duration and look to add higher yielding
assets with limited extension risk in the short end.
Gregory J. Hahn, CFA Michael J. Dunlop
Chief Investment Officer Second Vice President
40|86 Advisors, Inc. 40|86 Advisors, Inc.
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE GOVERNMENT SECURITIES
PORTFOLIO, THE LEHMAN BROTHERS GOVERNMENT INDEX AND THE LEHMAN BROTHERS
MBS INDEX
Government
Securities Lehman Brothers Lehman Brothers
Portfolio Government Index MBS Index
---------- ---------------- ---------------
"12/31/93" 10000 10000 10000
"12/31/94" 9719.91 9661.84 9839.34
"12/31/95" 11408.8 11434.1 11492
"12/31/96" 11716.9 11750 12107.6
"12/31/97" 12687.9 12875.4 13256
"12/31/98" 13589.7 14143.8 14179.4
"12/31/99" 13250.9 13826.1 14441.9
"12/31/00" 14805.8 15657.6 16054.5
"12/31/01" 15712.4 16790.9 17373.7
"12/31/02" 17178.5 18721.7 18892.7
"12/31/03" 17411.5 19163.5 19470.1
-------------------------------
Average Annual Total Return
-------------------------------
1 Year 5 Years 10 Years
--------- --------- -----------
1.36% 5.08% 5.70%
--------- --------- -----------
Past performance is not predictive of future performance. Performance does not
include separate account expenses. Performance does not reflect the deduction of
taxes that a contractholder would pay on portfolio distributions or the
redemptions of portfolio shares.
39
40|86 SERIES TRUST
GOVERNMENT SECURITIES PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (27.2%)
INSURANCE CARRIERS (0.5%)
$ 95,000 MGIC Investment Corp., 6.000%, due 03/15/2007 ............................................................. $ 102,194
------------
NON-DEPOSITORY CREDIT INSTITUTIONS (26.4%)
250,000 Federal Farm Credit Union, 6.000%, due 06/14/2012 ......................................................... 261,673
500,000 Federal Home Loan Bank, 4.875%, due 11/10/2010 ............................................................ 505,852
500,000 Federal Home Loan Bank, 6.050%, due 03/12/2012 ............................................................ 504,175
150,000 Fannie Mae, 6.000%, due 02/23/2009 ........................................................................ 150,990
650,000 Fannie Mae, 6.040%, due 02/25/2009 ........................................................................ 654,493
500,000 Fannie Mae, 6.200%, due 04/01/2009 ........................................................................ 505,945
71,715 Fannie Mae #320582, 6.500%, due 01/01/2011 ................................................................ 76,145
500,000 Fannie Mae, 6.375%, due 01/12/2011 ........................................................................ 500,730
147,826 Fannie Mae #336290, 6.500%, due 04/01/2011 ................................................................ 156,919
770,000 Fannie Mae, 6.500%, due 04/05/2012 ........................................................................ 779,693
1,000,000 Fannie Mae, #099999, 5.250%, due 08/01/2012 ............................................................... 1,027,145
11,515 Fannie Mae, 7.000%, due 03/01/2026 ........................................................................ 12,235
14,394 Fannie Mae 6.0 30 YR, 6.000%, due 11/01/2031 .............................................................. 14,894
236,684 Fannie Mae Pool #253845, 6.000%, due 06/01/2016 ........................................................... 248,672
224,115 Fannie Mae Pool #545449, 6.500%, due 02/01/2017 ........................................................... 237,931
314,160 Fannie Mae Pool #645649, 6.000%, due 06/01/2017 ........................................................... 330,104
53,500 Fannie Mae Pool #535837, 6.000%, due 04/01/2031 ........................................................... 55,359
------------
6,022,955
------------
TOBACCO PRODUCTS (0.3%)
75,000 Universal Corp., Series B, 7.500%, due 01/26/2004 ......................................................... 75,240
------------
TOTAL CORPORATE BONDS (COST $6,124,971) ................................................................... 6,200,389
------------
MUNICIPAL BONDS (2.0%)
280,000 Alaska Industrial Development & Export Auth., 6.625%, due 05/01/2006 ..................................... 299,508
150,000 Tobacco Settlement Fin. Corp., 5.920%, due 06/01/2013 ..................................................... 146,972
------------
TOTAL MUNICIPAL BONDS (COST $429,368) ..................................................................... 446,480
------------
ASSET BACKED SECURITIES (15.3%)
75,000 Atlantic City Trans. Fund, 5.550%, due 10/20/2032 ......................................................... 76,407
29,238 Bear Stearns Commercial Mortgage Securities, Inc., 5.910%, due 05/14/2008 ................................ 31,272
110,000 CCCIT 2003-C3 C3, 4.450%, due 04/07/2010 .................................................................. 111,893
50,000 Centex Home Equity, 2001-A A4, 6.470%, due 07/25/2029 ..................................................... 52,189
225,000 Chase Funding Mortgage Loan Asset-Backed CTFS, 5.602% due 5/25/2027 ....................................... 228,015
43,943 Chase Mortgage Finance Corp., 6.605%, due 03/28/2025, (a) Cost--$44,400; Acquired--08/27/2002 ............. 43,943
108,880 CMAT 1999-C1 A1, 6.250%, due 01/17/2032 ................................................................... 114,107
285,000 Countrywide, 2002-S1 A5, 5.960%, due 10/25/2032 ........................................................... 291,552
35,955 CS First Boston Mortgage Securities Corp., 2002-9 2A3, 5.149%, due 03/25/2032 ............................. 35,922
80,747 DLJ Commerical Mortgage Corp., #1999CG, 7.120%, due 10/10/2032 ............................................ 87,614
The accompanying notes are an integral part of these financial statements.
40
40|86 SERIES TRUST
GOVERNMENT SECURITIES PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
$ 75,000 FUNBC 99-C4 A2, #1999C4, 7.390%, due 12/15/2031 ........................................................... $ 86,939
37,252 GMAC Commercial Mortgage Securities, #1999C2, 6.570%, due 09/15/2033 ...................................... 39,962
250,000 GNR 2002-50 PB, 6.000%, due 06/20/2027 .................................................................... 254,315
499,323 JPMC 2000-C9 A1, 7.590%, due 10/15/2032 ................................................................... 538,271
500,000 LB-UBS Commercial Mortgage Trust, 6.365%, due 12/15/2028 .................................................. 556,801
70,000 MBNA Credit Card Master Note, 6.800%, due 07/15/2014 ...................................................... 76,224
300,000 The Money Store Home Equity Trust, 98-B, 6.335%, due 08/15/2039 ........................................... 319,654
24,982 Residential Asset Securities Corp., 01-KS3 A13, 5.180%, due 08/25/2027 .................................... 25,046
218,095 Residential Asset Securities Corp., 99-KS2 A19, 7.150%, due 07/25/2030 .................................... 228,481
266,881 Residential Asset Securities Corp., 00-KS3 A16, 7.810%, due 07/25/2031 .................................... 284,795
------------
TOTAL ASSET BACKED SECURITIES (COST $3,443,324) ........................................................... 3,483,402
------------
COLLATERALIZED MORTGAGE OBLIGATIONS (1.0%)
48,135 Fanniemae Grantor Trust, 99-T2 A1, 7.500%, due 01/19/2039 ................................................. 52,587
32,755 Freddie Mac 2422-CD, 6.000%, due 02/01/2032 ............................................................... 32,957
21,541 Housing Securities, Inc., 94-2 A1, 6.500%, due 07/25/2009 ................................................. 22,058
85,000 Residential Asset Mortgage Products, Inc., 4.730%, due 11/25/2010 ......................................... 87,447
25,551 Residential Asset Mortgage Products, Inc., 5.200% due 3/25/2030 ........................................... 25,720
5,933 Residential Asset Mortgage Products, Inc., 6.130% due 3/25/2030 ........................................... 5,939
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $216,249) ................................................. 226,708
------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (46.0%)
500,000 Federal Home Loan Mortgage Corp., 6.250%, due 03/05/2012 .................................................. 536,980
7,899 Federal Home Loan Mortgage Corp., Gold., #D66012, 7.000%, due 11/01/2025 .................................. 8,386
122,501 Federal Home Loan Mortgage Corp., #002489, 6.000%, due 01/15/2026 ......................................... 122,701
112,346 Federal Home Loan Mortgage Corp., #2478EF, 6.000%, due 03/15/2026 ......................................... 112,973
65,634 Federal Home Loan Mortgage Corp., #C28063, 6.500%, due 07/01/2029 ......................................... 68,825
147,202 Federal Home Loan Mortgage Corp., #C01186, 6.000%, due 06/01/2031 ......................................... 152,271
189,255 Federal Home Loan Mortgage Corp., #C01184, 6.500%, due 06/01/2031 ......................................... 198,350
8,519 FGCI Gold, #E00441, 7.500%, due 07/01/2011 ................................................................ 9,097
28,511 FGLMC Gold, #C29168 6.500%, due 07/01/2029 ................................................................ 29,897
58,460 FGLMC Gold, #C01131, 6.500%, due 01/01/2031 ............................................................... 61,271
60,759 FGLMC Pool, 6.500%, due 02/01/2031 ........................................................................ 63,680
1,095 Government National Mortgage Assn., #044522, 13.000%, due 03/15/2011 ...................................... 1,276
3,955 Government National Mortgage Assn., #119896, 13.000%, due 11/15/2014 ...................................... 4,645
84,543 Government National Mortgage Assn., #408675, 7.500%, due 01/15/2026 ....................................... 91,022
5,960,000 U.S. Treasury Note, 3.375%, due 11/15/2008 (c) ............................................................ 6,009,128
3,010,000 U.S. Treasury Bond, 4.250%, due 11/15/2013 ................................................................ 3,007,649
------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS (COST $10,452,530) ........................................... 10,478,151
------------
The accompanying notes are an integral part of these financial statements.
41
40|86 SERIES TRUST
GOVERNMENT SECURITIES PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (24.8%)
$3,809,165 Deutsche GSI, Repurchase Agreement, 1.030%, due 01/02/2004 (b) ........................................... $ 3,809,165
1,800,000 Federal Home Loan Discount Note .......................................................................... 1,799,970
50,000 Nations Cash Reserve ..................................................................................... 50,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $5,659,135) ........................................................... 5,659,135
------------
TOTAL INVESTMENTS (COST $26,325,577) (116.3%) ............................................................ 26,494,265
------------
Liabilities, less other assets (-16.3%) .................................................................. (3,703,753)
------------
TOTAL NET ASSETS (100.0%) ................................................................................ $ 22,790,512
------------
- ---------------------------------------------------------------------------------------------------------------------
(a) Restricted under Rule 144A of the Securities Act of 1933.
(b) Securities lending collateral (Note 2).
(c) Securities (entire/partial) out on loan (Note 2).
The accompanying notes are an integral part of these financial statements.
42
40|86 SERIES TRUST
MONEY MARKET PORTFOLIO
================================================================================
PORTFOLIO MANAGER'S REVIEW (UNAUDITED)
In 2003, similar to the first half of 2002, the fixed income market saw
investment grade corporate credit spreads continue to tighten, as investors
attempted to pick up yield over Treasuries and mortgages. Strong technicals,
improving corporate balance sheets, and an improving economy drove corporate
bond spreads tighter in the last half of the year. The average Option-Adjusted
Spread (OAS) of the credit market tightened 80 basis points.
In the second half of the year, corporations continued to term-out debt to
take advantage of low interest rates. As a result, outstanding Tier-1 corporate
commercial paper dropped by 2% during the second half of 2003. This decline was
seen mostly in non-financial commercial paper.
It appears that economic stimuli, low interest rates and lower taxes, began
working in the latter half of 2003. Chairman Greenspan remains intent on not
raising interest rates until the economy remains healthy for some time, as we
have yet to see a threat of inflation. We expect to see stable to slightly
higher interest rates and stronger economic growth in 2004.
With the Federal Reserve on hold, for the last half of 2003 and into the
first half of 2004, the LIBOR curve remained flat in the one to six month range
and steepened from six months to one year. We used six to twelve month corporate
securities to boost yield on the Portfolio while maintaining liquidity in the
short end with commercial paper. Although we have purchased commercial paper
with maturities of sixty days or less, it has not affected the Portfolio yield
because the commercial paper yield curve has remained flat out to six months.
At the beginning of 2003, the discount rate was 1.25%, which the Fed cut by
25 basis points to 1.00% at their June meeting. For the last half of the year,
the Fed held the discount rate constant at 1.00%. Because of low interest rates
and no indication of tightening, we have positioned the Portfolio accordingly.
We have increased our position in Variable Rate Demand Notes (VRDNs) to just
over 50% of the Portfolio. VRDN's are municipal securities, with a weekly reset
feature, that provide above average market yields while avoiding recurring
transaction costs.
In order to counter the decline in Portfolio yield caused by low interest
rates, we have increased our exposure to short-term, high-grade corporate
securities to 10% from 7% of the Portfolio. The average annual yield on our
short corporate position is 1.93%. By increasing our allocation to corporate
securities we added additional yield without materially extending the duration
of the Portfolio. We will maintain this strategy until short-term interest rates
increase.
We expect interest rates to remain in a narrow range over the next six
months. We will maintain our strategy to invest in the short end of the
commercial paper curve and add yield to the Portfolio with six to twelve month
corporate securities.
Gregory J. Hahn, CFA
Chief Investment Officer
40|86 Advisors, Inc.
43
40|86 SERIES TRUST
MONEY MARKET PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (12.2%)
CHEMICALS AND ALLIED PRODUCTS (2.2%)
$ 500,000 Dow Chemical Corp., 5.250%, due 05/14/2004 (a) (Putable at $100 and rate reset effective 05/14/2004) $ 506,610
400,000 Eastman Chemical Corp., 6.375%, due 01/15/2004 (a) (Putable at $100 and rate reset effective 01/15/2004)... 400,718
-----------
907,328
-----------
DEPOSITORY INSTITUTIONS (1.4%)
600,000 Aristar, Inc., 5.850%, due 01/27/2004 (a) (Putable at $100 and rate reset effective 01/27/2004) ........... 601,943
-----------
FOOD AND KINDRED PRODUCTS (3.5%)
950,000 Golden Oval Eggs, 1.200%, due 07/01/2015, (a) (Putable at $100 and rate reset effective 01/30/2004) 950,000
500,000 Pepsi Bottling Holdings, Inc., 5.375%, due 02/17/2004, (a) (Putable at $100 and rate reset
effective 02/17/2004) ................................................................................... 502,668
-----------
1,452,668
-----------
INSURANCE CARRIERS (1.3%)
500,000 Hartford Life, Inc., 6.900%, due 06/15/2004, (a) (Putable at $100 and rate reset effective 06/15/2004) .... 512,500
20,000 Progressive Corp., 6.600%, due 01/15/2004, (a) (Putable at $100 and rate reset effective 01/15/2004) ...... 20,036
------------
532,536
------------
MISCELLANEOUS RETAILS (1.4%)
600,000 CVS Corp., 5.500%, due 02/15/2004, (a) (Putable at $100 and rate reset effective 02/15/2004) .............. 603,149
------------
NON-DEPOSITORY CREDIT INSTITUTIONS (2.4%)
1,000,000 Federal National Mortgage Assosiation, 5.625%, due 05/14/2004, (a) (Putable at $100 and rate reset
effective 05/14/2004) ................................................................................... 1,015,773
------------
TOTAL CORPORATE BONDS (COST $5,113,397) ................................................................... 5,113,397
------------
MUNICIPAL BONDS (58.3%)
100,000 ABAG Finacial Authorities For Nonprofit, 1.270%, due 12/15/2032 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 100,000
1,400,000 California Housing Financial Agency, 1.260%, due 08/01/2029 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 1,400,000
1,000,000 Cleveland Ohio Apartment System Rev, 1.2500%, due 01/01/2031 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 1,000,000
100,000 Colorado Housing Financial Authority, 1.100%, due 10/15/2016 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 100,000
1,000,000 Conneticut State Housing Financial Authority, 1.200%, due 11/15/2032 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 1,000,000
565,000 Cunat Capital Corp., 1.250%, due 12/01/2025 (a) (Putable at $100 and rate reset effective 01/30/2004) ..... 565,000
1,000,000 Detroit Michigan Water Supply, 1.120%, due 07/01/2029 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 1,000,000
2,000,000 Illinois Health Fac. Authorities, 1.120%, due 11/15/2023 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 2,000,000
700,000 Kent County MI Tax, 1.190%, due 03/01/2004 (a) (Putable at $100 and rate reset effective 01/07/2004) ...... 700,000
1,000,000 Kentucky Economic Dev. Hosp. Facs. , 1.300%, due 08/15/2031, (a) (Putable at $100 and rate
reset effective 01/02/2004) ............................................................................. 1,000,000
500,000 Kuehn Enterprises, LLC, 1.300%, due 10/01/2043, (a) (Putable at $100 and rate reset effective 01/07/2004) . 500,000
2,100,000 Los Angeles CA Water & Power Rev., 1.140%, due 07/01/2034, (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 2,100,000
1,000,000 Michigan State Housing Authorities, 1.250%, due 04/01/2037 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 1,000,000
1,000,000 New York NY Hsg. Dev. Corp., 1.100%, due 08/15/2032 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 1,000,000
1,000,000 New York State Dorm. Auth., 1.200%, due 02/15/2031 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 1,000,000
100,000 New York State Housing Financial Agency Rev., 1.100%, due 11/01/2032 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 100,000
500,000 North Cent. Tex. Health Fac., 1.300%, due 10/01/2015 (a) (Putable at $100 and rate
reset effective 01/30/2004) ............................................................................. 500,000
1,000,000 Northern California Transmission, 1.180%, due 05/01/2024 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 1,000,000
1,695,000 Philadelphia Authority for Industry, 1.200%, due 07/01/2010 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 1,695,000
1,000,000 Pinellis Florida Authorities, 1.000%, due 06/15/2025 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 1,000,000
900,000 St. Francis Healthcare Hawaii, 1.800%, due 08/01/2012 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 900,000
The accompanying notes are an integral part of these financial statements.
44
40|86 SERIES TRUST
MONEY MARKET PORTFOLIO
Schedule of Investments
DECEMBER 31, 2003
====================================================================================================================================
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
$ 295,000 Stafford County VA Indl. Dev. Auth., 1.500%, due 08/01/2004 (a) (Putable at $100 and rate
reset effective 08/01/2004) ............................................................................. $ 295,167
2,000,000 Student Loan Finance Association Washington Education, 1.220%, due 12/01/2036 (a) (Putable at $100
and rate reset effective 01/30/2000) .................................................................... 2,000,000
1,000,000 Sunshine Government, 1.050%, due 07/01/2016 (a) (Putable at $100 and rate reset effective 01/07/2004) ..... 1,000,000
500,000 Westminster Colo. Economic Dev., 1.230%, due 12/01/2008 (a) (Putable at $100 and rate
reset effective 01/07/2004) ............................................................................. 500,000
1,000,000 Winston-Salem NC FR Cops, 1.250%, due 07/01/2009 (a) (Putable at $100 and rate reset
effective 01/07/2004) ................................................................................... 1,000,000
------------
TOTAL MUNICIPAL BONDS (COST $24,455,167) ................................................................ 24,455,167
------------
COMMERCIAL PAPER (16.9%)
CHEMICALS AND ALLIED PRODUCTS (2.6%)
1,100,000 Merck & Co., Inc., 1.010%, due 01/12/2004 ................................................................. 1,099,661
------------
DEPOSITORY INSTITUTIONS (4.7%)
1,000,000 Barclays US Funding Corp., 1.040%, due 01/12/2004 ......................................................... 999,682
1,000,000 UBS Financial, 1.050%, due 01/12/2004 ..................................................................... 999,679
------------
1,999,361
------------
FURNITURE AND FIXTURES (2.4%)
1,000,000 Johnson Controls, Inc., 0.930%, due 01/02/2004 ............................................................ 999,974
------------
NON-DEPOSITORY CREDIT INSTITUTIONS (2.4%)
1,000,000 Nestle Capital Corp., 1.050%, due 01/12/2004............................................................... 999,679
------------
SECURITY AND COMMODITY BROKERS (4.8%)
1,000,000 Bear Stearns Companies, Inc., 1.080%, due 01/12/2004 ...................................................... 999,670
1,000,000 Goldman Sachs Group, 1.070%, due 01/05/2004 ............................................................... 999,881
------------
1,999,551
------------
TOTAL COMMERCIAL PAPER (COST $7,098,226) ................................................................ 7,098,226
------------
SHORT-TERM INVESTMENTS (9.1%)
1,918,000 Aim Government Tax Advantage .............................................................................. 1,918,000
1,918,000 Nations Treasury Reserve .................................................................................. 1,918,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $3,836,000) .......................................................... 3,836,000
------------
TOTAL INVESTMENTS (COST $40,502,790) (96.5%) ............................................................ 40,502,790
------------
Other assets, less liabilities (3.5%) ................................................................... 1,462,222
------------
TOTAL NET ASSETS (100.0%) ............................................................................... $ 41,965,012
------------
- ----------------------------------------------------------------------------------------------------------------------
(a) Variable Coupon Rate
The accompanying notes are an integral part of these financial statements.
45
40|86 SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
================================================================================
(1) GENERAL
40|86 Series Trust, formerly Conseco Series Trust (the "Trust"), is an
open-end management investment company registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended (the
"Act"), and was organized as a Massachusetts Trust effective November 15, 1982.
The Trust is a "series" type of mutual fund which issues separate series of
shares, each of which currently represents a separate portfolio of investments.
The Trust consists of seven series ("Portfolios") each with its own investment
objective and investment policies. The Portfolios are the Focus 20, Equity,
Balanced, High Yield, Fixed Income, Government Securities and Money Market. The
Trust offers shares to affiliated and unaffiliated life insurance company
separate accounts (registered as unit investment trusts under the Act) to fund
the benefits under variable annuity and variable life contracts.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION, TRANSACTIONS, AND RELATED INVESTMENT INCOME
The investments in each Portfolio are valued at the close of regular trading
on the New York Stock Exchange on each business day. Investment transactions are
accounted for on trade date (the date the order to buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
accrued daily. The cost of investments sold is determined on the specific
identification basis. The following summarizes the investments, which carry
certain restrictions as to resale from the Trust to certain qualified buyers:
Portfolio Cost Value % of Net Assets
- --------------------------------------------------------------------------------
Balanced Portfolio--bonds $ 988,810 $1,048,575 2.17%
High Yield Portfolio--bonds 1,531,577 1,642,212 15.01%
Fixed Income Portfolio--bonds 1,919,497 2,021,880 5.77%
These securities are eligible for resale to qualified institutional buyers in
transactions exempt from registration under Rule 144A of the Securities Act of
1933. In addition, 40|86 Advisors, Inc., formerly Conseco Capital Management,
Inc., (the "Adviser"), a wholly-owned subsidiary of Conseco, Inc. ("Conseco"),
which serves as investment adviser to the Portfolios, has determined that the
securities are liquid securities through a procedure approved by the Board of
Trustees of the Trust (the "Trustees").
The Trustees determined that the Money Market Portfolio will value
investments at amortized cost, which is conditioned on the Trust's compliance
with certain conditions contained in Rule 2a-7 of the Act. The investment
adviser of the Trust continuously reviews this method of valuation and
recommends changes to the Trustees, if necessary, to ensure that the Money
Market Portfolio investments are valued at fair value (as determined by the
Trustees in good faith).
In all Portfolios of the Trust, except for the Money Market Portfolio,
securities that are traded on stock exchanges, excluding the NASDAQ national
market system, are valued at the last sale price as of the close of business on
the day the securities are being valued, or lacking any sales, at the mean
between the closing bid and asked prices. Securities that are principally traded
on the NASDAQ nation market system are generally valued at the NASDAQ Official
Closing Price ("NOCP"). Securities traded in the over-the-counter market are
valued at the mean between the bid and asked prices obtained from a pricing
service or brokers. Prices for fixed income securities may be obtained from an
independent pricing source which uses information provided by market makers or
estimates of market value obtained from yield data relating to investments or
securities with similar characteristics. Portfolio securities which are traded
both in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market, and it is expected that for debt
securities this ordinarily will be the over-the-counter market. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Trustees.
Debt securities with maturities of sixty (60) days or less are valued at
amortized cost which approximates value. If an investment owned by a Portfolio
experiences a default and has accrued interest from purchase or has recorded
accrued interest during the period it is owned, the Portfolio's policy is to
cease interest accruals from the time the investments are traded as "flat" in
the market. The Portfolio evaluates the collectibility of purchased accrued
interest and previously recorded interest on an investment-by-investment basis.
FEDERAL INCOME TAXES
Each Portfolio is treated as a separate taxable entity for federal income tax
purposes and qualifies as a regulated investment company under Subchapter M of
the Internal Revenue Code. The Trust intends to distribute substantially all
taxable income and net realized gains to shareholders annually, and otherwise
comply with the requirements for regulated investment companies. Therefore, no
provision has been made for federal income taxes.
Net investment income and net realized gains (losses) may differ for
financial statement and tax purposes because of temporary or permanent book/tax
differences. To the extent these differences are permanent, reclassifications
are made to the appropriate equity accounts in the period that the difference
arises. On the Statement of Assets and Liabilities the following
reclassifications were made:
Accumulated Undistributed
Net Realized Net Investment Paid-in
Fund Gain (Loss) Income Capital
---------- ---------- -----------
Focus 20 Portfolio $3,413,087 $ 16,134 $(3,429,221)
Equity Portfolio 54,549 (54,549) --
Balanced Portfolio 2,363 (1,845) (518)
High Yield Portfolio (1,860) 1,760 100
Fixed Income Portfolio 913 2,372 (3,285)
Government Securities Portfolio 1,431 499 (1,930)
DIVIDENDS TO SHAREHOLDERS
Dividends are declared and reinvested from net investment income on a daily
basis in the Money Market Portfolio, on a monthly basis in the Government
Securities, Fixed Income and
46
40|86 SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
================================================================================
High Yield Portfolios, on a quarterly basis in the Balanced Portfolio and on an
annual basis in the Focus 20 and Equity Portfolios. Distributions of net
short-term capital gains and losses are declared and reinvested on an annual
basis as a component of net realized gains (losses).
Dividends to shareholders from net investment income are determined in
accordance with income tax regulations which may differ from accounting
principles generally accepted in the United States of America. Permanent book
and tax differences relating to dividends to shareholders may result in
reclassifications to paid-in capital and may effect per-share allocation between
net investment income and realized and unrealized gains (losses). Any taxable
income or gain of the Trust remaining at fiscal year end will be declared and
distributed in the following year to the shareholders of the Portfolio or
Portfolios to which such gains are attributable.
SECURITIES LENDING
The Portfolios have entered into a Securities Lending Agreement (the
"Agreement") with the Bank of New York. Under terms of the Agreement, the
Portfolios may lend portfolio securities to qualified institutional borrowers in
order to earn additional income. The Agreement requires that loans are
collateralized at all times by cash equal to at least 100% of the market value
of any loaned securities, plus accrued interest. Cash collateral is invested in
short-term securities or variable rate bonds and CDs which are included in the
respective Portfolio's Schedule of Investments.
At December 31, 2003, the Equity, Balanced, Fixed Income and Government
Securities Portfolios had securities with a market value of $12,248,965,
$2,950,252, $3,113,942, and $3,769,909, respectively, on loan (included within
Investments in securities in the Statements of Assets and Liabilities) and had
received $12,622,962, $3,022,340, $3,190,995 and $3,809,165, respectively, in
collateral. Amounts earned as interest on investments of cash collateral, net of
rebates and other securities lending expenses, are included in Other income in
the Statements of Operations. For the year ended December 31, 2003, the
securities lending income totaled $56,925, $3,558, $5,199, and $35,196,
respectively.
The primary risk associated with securities lending is if the borrower
defaults on its obligation to return the securities loaned because of insolvency
or other reasons. The Portfolios could experience delays and costs in recovering
securities loaned or in gaining access to the collateral.
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 amount of
assets and liabilities, and disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting period. Actual
results may differ from these estimates.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AGREEMENT
The Adviser provides investment advice and, in general, supervises the
Trust's management and investment program, furnishes office space, prepares
Portfolio reports for the Trust, monitors Portfolio compliance by the Trust in
its investment activities and pays compensation of officers and Trustees of the
Trust who are affiliated persons of the Adviser. The Trust pays all other
expenses incurred in the operation of the Trust, including fees and expenses of
unaffiliated Trustees of the Trust.
Under the Investment Advisory Agreement, the Adviser receives an investment
advisory fee based on the daily net asset value at an annual rate of 0.70
percent for the Focus 20 and High Yield Portfolios, 0.65 percent for the Equity
and Balanced Portfolios, 0.50 percent for the Fixed Income, Government
Securities, and Money Market Portfolios. The Adviser has voluntarily reduced its
advisory fee to 0.25 percent of the average daily net assets of the Money Market
Portfolio. The total fees incurred for such services were $2,135,321 for the
year ended December 31, 2003.
The Adviser has entered into Subadvisory Agreements for the management of the
investments in the Focus 20 Portfolio, Equity Portfolio and the equity portion
of the Balanced Portfolio. The Adviser is solely responsible for the payment of
all fees to the Subadviser. The Subadviser for the Focus 20 Portfolio is Oak
Associates, ltd. The Subadviser for the Equity Portfolio and the equity portion
of the Balanced Portfolio is Chicago Equity Partners, LLC.
The Adviser has contractually agreed to waive its investment advisory fee
and/or reimburse the Portfolios through April 30, 2004 to the extent that the
ratio of expenses to net assets on an annual basis exceeds the following:
Portfolio
- --------
Focus 20 1.15%
Equity 1.10%
Balanced 1.10%
High Yield 1.15%
Fixed Income 0.95%
Government Securities 0.95%
Money Market 0.45%
The Adviser may discontinue these contractual limits at any time after April
30, 2004. After this date the Adviser may elect to continue, modify or terminate
the limitation on Portfolio operating expenses. Further, under the terms of this
agreement any fund expenses including initial organizational costs, waived or
reimbursed after May 1, 2000, may be recouped by the Adviser from the Fund to
the extent actual operating expenses for a period are less than the expense
limitation caps, the Adviser may only be entitled to recoup such amounts for a
period of three years from the fiscal year were waived or reimbursed.
Reimbursed/absorbed expenses subject to potential recovery by year of expiration
are as follows:
Year of Expiration
--------------------------------------
December 31,
2004 2005 2006
----- ----- -----
Focus 20 205 19,034 4,298
Equity -- 98,019 64,540
Balanced -- 49,725 21,956
High Yield -- 22,304 8,570
Fixed Income -- 36,301 20,431
Government Securities -- 13,736 31,927
Money Market 314,209 335,352 237,653
47
40|86 SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
================================================================================
ADMINISTRATIVE AGREEMENT
Conseco Services, LLC, (the "Administrator") a wholly-owned subsidiary of
Conseco, supervises the preparation and filing of regulatory documents required
for compliance by the Portfolios with applicable laws and regulations,
supervises the maintenance of books and records of the Portfolios and provides
other general and administrative services. Effective May 1, 2001, the
Administrator receives an annual fee, for providing these services, equal to
0.15 percent for the first $200 million of average daily net assets of the
Trust; 0.10 percent of the next $300 million of average daily net assets of the
Trust; and 0.08 percent of the average daily net assets in excess of $500
million of the Trust. The total fees under this Agreement for the year ended
December 31, 2003, were $460,347. The Administrator has contractually agreed to
waive its administration fee and/or reimburse the Portfolios through April 30,
2004 to the extent that the ratio of expenses to net assets on an annual basis
exceeds the expense limitations as stated above for the Investment Advisory
Agreement. The Administrator may discontinue these contractual limits at any
time after April 30, 2004.
DISTRIBUTION AGREEMENT
Conseco Equity Sales, Inc. (the "Distributor"), a wholly-owned subsidiary of
Conseco, serves as the principal underwriter for each Portfolio pursuant to an
Underwriting Agreement, approved by the Trustees. The Distributor is a
registered broker-dealer and a member of the National Association of Securities
Dealers, Inc. ("NASD"). Shares of each Portfolio will be continuously offered to
life insurance company separate accounts to fund the benefits under variable
annuity and variable life contracts. The Distributor bears all the expenses of
providing services pursuant to the Underwriting Agreement including the payment
of the expenses relating to the distribution of prospectuses for sales purposes,
as well as, any advertising or sales literature.
The Trust adopted a Distribution and Service Plan pursuant to Rule 12b-1 (the
"Plan"), dated May 1, 2001, for the Focus 20, Equity, Balanced, High Yield,
Fixed Income and Government Securities Portfolios in accordance with the
requirements of Rule 12b-1 under the 1940 Act and the requirements of the
applicable rules of the NASD regarding asset based sales charges. Pursuant to
the Plan, a Portfolio may compensate the Distributor for its expenditures in
financing any activity primarily intended to result in the sale of shares of the
Portfolio and for account maintenance provided to shareholders. The Plan
authorizes pay ments to the Distributor up to 0.25 percent annually of each
Portfolio's average daily net assets. The Plan provides for periodic payments by
the Distributor to financial intermediaries for providing shareholder services
to accounts that hold shares and for promotional and other sales related costs.
The total fees incurred by the Trust for such services for the year ended
December 31, 2003, were $713,783.
4. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and the aggregate proceeds from sales of
investments for the year ended December 31, 2003 are shown below:
GOVERNMENT
FOCUS 20 EQUITY BALANCED HIGH YIELD FIXED INCOME SECURITIES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases:
U.S. Government .................. $ -- $ -- $ 9,097,027 $ -- $43,453,349 $48,574,161
Other ............................ 8,245,840 161,132,619 34,656,006 11,044,797 65,059,728 6,610,366
Sales:
U.S. Government .................. $ -- $ -- $ 8,728,382 $ -- $45,259,697 $57,680,972
Other ............................ 5,236,959 190,647,154 38,841,473 8,591,021 71,968,243 14,183,922
5. FEDERAL INCOME TAXES
The following information for the Portfolios is presented on an income tax
basis as of December 31, 2003:
GOVERNMENT
FOCUS 20 EQUITY BALANCED HIGH YIELD FIXED INCOME SECURITIES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
====================================================================================================================================
Cost of investments (a) ............. $4,474,533 $148,039,116 $46,361,203 $9,154,045 $36,582,948 $26,326,229
- ------------------------------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation ....... $ 702,317 $ 33,333,780 $ 6,362,355 $ 671,669 $ 1,606,982 $ 212,951
Gross unrealized depreciation ....... (67,322) (1,703,529) (1,622,260) (73,894) (264,265) (44,915)
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
on investments ................... $ 634,995 $ 31,630,251 $ 4,740,095 $ 597,775 $ 1,342,717 $ 168,036
====================================================================================================================================
(a) Represents cost for federal income tax purposes and differs from the cost
for financial reporting purposes by the amount of losses recognized for the
financial reporting purposes in excess of federal income tax purposes.
48
40|86 SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
================================================================================
As of December 31, 2003, the components of accumulated earnings (deficit) on
a tax basis were:
GOVERNMENT MONEY
FOCUS 20 EQUITY BALANCED HIGH YIELD FIXED INCOME SECURITIES MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
====================================================================================================================================
Distributable ordinary income .......... $ -- $ 143 $ -- $ 272,320 $ -- $ -- $ --
Distributable long-term gains .......... -- 590,121 -- 140,650 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated earnings ................... -- 590,264 -- 412,970 -- -- --
Accumulated capital and post-October
losses .............................. (604,541) (35,914,639) (16,251,928) (632,726) (1,277,079) -- (4,564)
Unrealized appreciation ................ 634,995 31,630,251 4,740,095 597,775 1,342,717 168,036 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total accumulated earnings (deficit) ... $ 30,454 $ (3,694,124) $(11,511,833) $ 378,019 $ 65,638 $ 168,036 $ (4,564)
The tax components of dividends paid during the years ended December 31, 2003
and 2002 were as follows:
GOVERNMENT MONEY
FOCUS 20 EQUITY BALANCED HIGH YIELD FIXED INCOME SECURITIES MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
Ordinary Income dividends
December 31, 2003 ................... $ -- $ 371,095 $ 1,040,088 $ 565,486 $1,849,081 $1,190,887 $ 491,400
December 31, 2002 ................... -- 576,255 1,821,764 634,033 3,363,046 2,262,119 1,498,698
Long-term capital gain distributions
December 31, 2003 ................... $ -- $ -- $ -- $ -- $ -- $ 172,058 $ --
December 31, 2002 ................... -- -- -- -- -- 88,482 --
For corporate shareholders in the Portfolios, the percentage of dividend
income distributed for the year ended December 31, 2003, which is designated as
qualifying for the dividends-received deduction, is as follows (unaudited):
Equity Portfolio 100%, Balanced Portfolio 49.8% and High Yield Portfolio 3.3%.
As of December 31, 2003, the following Portfolios have capital loss
carryforwards available to offset capital gains in the future, if any:
AMOUNT EXPIRES
================================================================================
Focus 20 Portfolio ...................................... $ 249,147 2010
Balanced Portfolio ...................................... 1,887,956 2010
Balanced Portfolio ...................................... 1,556,918 2011
Fixed Income Portfolio .................................. 1,277,079 2010
Money Market Portfolio .................................. 4,462 2010
Money Market Portfolio .................................. 80 2011
As of the latest tax year end of December 31, 2003, the following Portfolios
had additional net capital loss carryforwards, subject to certain limitations on
availability, to offset future net capital gains, if any. To the extent that
these carryovers are used to offset future capital gains, it is probable that
the gains so offset will not be distributed to shareholders:
AMOUNT EXPIRES
================================================================================
Focus 20 Portfolio ...................................... $ 274,616 2009
Focus 20 Portfolio ...................................... 40,389 2010
Focus 20 Portfolio ...................................... 40,389 2011
Equity Portfolio ........................................ 29,892,313 2009
Equity Portfolio ........................................ 6,022,326 2010
Balanced Portfolio ...................................... 4,850,675 2009
Balanced Portfolio ...................................... 7,956,380 2010
High Yield Portfolio .................................... 173,568 2009
High Yield Portfolio .................................... 420,330 2010
High Yield Portfolio .................................... 38,828 2011
Net realized gains or losses may differ from Federal income tax purposes
primarily as a result of wash sales and post-October losses which may not be
recognized for tax purposes until the first of the following fiscal year. Such
amounts may be used to offset future capital gains.
The following summarizes the amount of post-October losses deferred, on a tax
basis, for the year ended December 31, 2003.
AMOUNT
================================================================================
Money Market Portfolio................................... $ 22
49
40|86 SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING DURING THE YEAR OR PERIOD ENDED DECEMBER 31,
====================================================================================================================================
FOCUS 20 PORTFOLIO
===============================================
2003 2002 2001 2000(C)
- -------------------------------------------------------------------------------------------------------------------
Net asset value per share, beginning of period ..................... $ 2.18 $ 4.58 $ 8.48 $ 10.00
Income from investment operations:
Net investment income (loss) .................................. (0.01) (0.03) (0.02) 0.02
Net realized gains (losses) and change in unrealized
appreciation or depreciation on investments ................. 1.18 (2.37) (3.88) (1.52)
- -------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations .............. 1.17 (2.40) (3.90) (1.50)
- -------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ............................ -- -- -- (0.02)
- -------------------------------------------------------------------------------------------------------------------
Distributions of net realized gains ............................. -- -- -- --
Total distributions ......................................... -- -- -- (0.02)
- -------------------------------------------------------------------------------------------------------------------
Net asset value per share, end of period ........................... $ 3.35 $ 2.18 $ 4.58 $ 8.48
- -------------------------------------------------------------------------------------------------------------------
Total return (a)(b)(d) ............................................. 53.67% (52.40%) (46.00%) (15.04%)
===================================================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands), end of period ................ $ 5,099 $ 898 $ 3,062 $ 3,681
Ratio of expenses to average net assets (b)(e):
Before expense reimbursement .................................. 1.30% 1.96% 1.10% 0.90%
After expense reimbursement ................................... 1.15% 1.15% 1.09% 0.90%
Ratio of net investment income (loss) to average
net assets (b)(e) ............................................. (0.55%) (0.57%) (0.34%) 0.33%
Portfolio turnover rate (d) ..................................... 179.09% 412.37% 280.48% 351.37%
- -------------------------------------------------------------------------------------------------------------------
(a) Total return represents performance of the Trust only and does not include
mortality and expense deductions in separate accounts.
(b) The Adviser and Administrator have contractually agreed to reimburse Fund
expenses to the extent that the ratio of expenses to average net assets
exceeds, on an annual basis, the net expenses defined in Note 3. These
contractual limits may be discontinued at any time after April 30, 2004.
(c) For the period from May 4, 2000 (commencement of operations) through
December 31, 2000.
(d) Not annualized for periods of less than one full year.
(e) Annualized for periods of less than one full year.
The accompanying notes are an integral part of these financial statements.
50
40|86 SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING DURING THE YEAR ENDED DECEMBER 31,
====================================================================================================================================
EQUITY PORTFOLIO
==============================================================
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value per share, beginning of period ..................... $ 14.92 $ 17.30 $ 19.43 $ 23.18 $ 21.59
Income from investment operations:
Net investment income (loss) .................................. 0.06 0.06 0.07 0.00(c) (0.00)(c)
Net realized gains (losses) and change in unrealized
appreciation or depreciation on investments ................... 5.49 (2.38) (2.07) 0.63 10.63
- ------------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations .................. 5.55 (2.32) (2.00) 0.63 10.63
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income .......................... (0.05) (0.06) (0.07) (0.00)(c) --
Distributions of net realized gains ........................... -- -- (0.06) (4.38) (9.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions ......................................... (0.05) (0.06) (0.13) (4.38) (9.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value per share, end of period ........................... $ 20.42 $ 14.92 $ 17.30 $ 19.43 $ 23.18
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (a)(b) ................................................ 37.17% (13.42%) (10.30%) 2.71% 49.28%
====================================================================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands), end of period ................... $165,798 $148,881 $233,983 $309,201 $300,437
Ratio of expenses to average net assets (b):
Before expense reimbursement .................................. 1.14% 1.15% 1.02% 0.81% 0.82%
After expense reimbursement ................................... 1.10% 1.10% 1.02% 0.78% 0.77%
Ratio of net investment income (loss) to average net assets (b) . 0.28% 0.32% 0.38% (0.02%) (0.10%)
Portfolio turnover rate ......................................... 106.74% 101.94% 132.69% 431.14% 364.53%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total return represents performance of the Trust only and does not include
mortality and expense deductions in separate accounts.
(b) The Adviser and Administrator have contractually agreed to reimburse Fund
expenses to the extent that the ratio of expenses to average net assets
exceeds, on an annual basis, the net expenses defined in Note 3. These
contractual limits may be discontinued at any time after April 30, 2004.
(c) Amount calculated is less than $0.005 per share.
The accompanying notes are an integral part of these financial statements.
51
40|86 SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING DURING THE YEAR ENDED DECEMBER 31,
====================================================================================================================================
BALANCED PORTFOLIO
==============================================================
2003 2002 2001 2000 1999
====================================================================================================================================
Net asset value per share, beginning of period ..................... $ 10.25 $ 12.16 $ 13.45 $ 14.65 $ 13.67
Income from investment operations:
Net investment income ........................................... 0.27 0.36 0.40 0.43 0.42
Net realized gains (losses) and change in unrealized
appreciation or depreciation on investments ................... 2.09 (1.91) (1.29) 0.67 3.72
- ------------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations .............. 2.36 (1.55) (0.89) 1.10 4.14
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income .......................... (0.26) (0.36) (0.40) (0.43) (0.42)
Distributions of net realized gains ........................... -- -- (0.00)(c) (1.87) (2.74)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions ......................................... (0.26) (0.36) (0.40) (2.30) (3.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value per share, end of period ........................... $ 12.35 $ 10.25 $ 12.16 $ 13.45 $ 14.65
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (a)(b) ................................................ 23.29% (12.87%) (6.60%) 7.29% 30.83%
====================================================================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands), end of period ................ $ 48,282 $ 44,455 $ 71,635 $ 75,355 $ 51,941
Ratio of expenses to average net assets (b):
Before expense reimbursement .................................. 1.15% 1.18% 1.04% 0.83% 0.83%
After expense reimbursement ................................... 1.10% 1.10% 1.04% 0.78% 0.73%
Ratio of net investment income to average net assets (b) ....... 2.27% 3.11% 3.16% 2.77% 2.89%
Portfolio turnover rate ......................................... 99.96% 180.27% 238.63% 334.36% 343.43%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total return represents performance of the Trust only and does not include
mortality and expense deductions in separate accounts.
(b) The Adviser and Administrator have contractually agreed to reimburse Fund
expenses to the extent that the ratio of expenses to average net assets
exceeds, on an annual basis, the net expenses defined in Note 3. These
contractual limits may be discontinued at any time after April 30, 2004.
(c) Amount calculated is less than $0.005 per share.
The accompanying notes are an integral part of these financial statements.
52
40|86 SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING DURING THE YEAR OR PERIOD ENDED DECEMBER 31,
====================================================================================================================================
HIGH YIELD PORTFOLIO
============================================
2003 2002 2001 2000(C)
- ------------------------------------------------------------------------------------------------------------------
Net asset value per share, beginning of period ..................... $ 8.86 $ 9.28 $ 10.07 $ 10.00
Income from investment operations:
Net investment income ........................................... 0.67 0.86 1.10 0.24
Net realized gains (losses) and change in unrealized
appreciation or depreciation on investments ................... 1.68 (0.42) (0.78) 0.07
- ------------------------------------------------------------------------------------------------------------------
Total income from investment operations ..................... 2.35 0.44 0.32 0.31
- ------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ............................ (0.68) (0.86) (1.11) (0.24)
Distributions of net realized gains ............................. -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total distributions ......................................... (0.68) (0.86) (1.11) (0.24)
- ------------------------------------------------------------------------------------------------------------------
Net asset value per share, end of period ........................... $ 10.53 $ 8.86 $ 9.28 $ 10.07
- ------------------------------------------------------------------------------------------------------------------
Total return (a)(b)(d) ............................................. 27.38% 5.47% 3.17% 3.20%
==================================================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands), end of period ................ $ 10,941 $ 9,202 $ 7,091 $ 4,040
Ratio of expenses to average net assets (b)(e):
Before expense reimbursement .................................. 1.25% 1.47% 1.11% 0.90%
After expense reimbursement ................................... 1.15% 1.15% 1.11% 0.90%
Ratio of net investment income to average net assets (b)(e) ..... 6.53% 8.95% 11.12% 3.31%
Portfolio turnover rate (d) ..................................... 125.73% 257.92% 232.18% 1.02%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total return represents performance of the Trust only and does not include
mortality and expense deductions in separate accounts.
(b) The Adviser and Administrator have contractually agreed to reimburse Fund
expenses to the extent that the ratio of expenses to average net assets
exceeds, on an annual basis, the net expenses defined in Note 3. These
contractual limits may be discontinued at any time after April 30, 2004.
(c) For the period from June 13, 2000 (commencement of operations) through
December 31, 2000.
(d) Not annualized for periods of less than one full year.
(e) Annualized for periods of less than one full year.
The accompanying notes are an integral part of these financial statements.
53
40|86 SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING DURING THE YEAR ENDED DECEMBER 31,
====================================================================================================================================
FIXED INCOME PORTFOLIO
==============================================================
2003 2002 2001 2000 1999
--------------------------------------------------------------
Net asset value per share, beginning of period ..................... $ 9.66 $ 9.88 $ 9.63 $ 9.39 $ 10.05
Income from investment operations:
Net investment income ......................................... 0.46 0.58 0.59 0.65 0.62
Net realized gains (losses) and change in unrealized
appreciation or depreciation on investments ................. 0.42 (0.13) 0.25 0.24 (0.66)
- ------------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations ............ 0.88 0.45 0.84 0.89 (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income .......................... (0.46) (0.58) (0.59) (0.65) (0.62)
Distributions of net realized gains ........................... -- (0.09) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions ....................................... (0.46) (0.67) (0.59) (0.65) (0.62)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value per share, end of period ........................... $ 10.08 $ 9.66 $ 9.88 $ 9.63 $ 9.39
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (a)(b) ................................................ 9.33% 4.68% 8.84% 9.87% (0.44)%
====================================================================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands), end of period ................ $ 35,068 $ 41,957 $ 60,649 $ 37,433 $ 28,899
Ratio of expenses to average net assets (b):
Before expense reimbursement .................................. 1.00% 1.02% 0.91% 0.67% 0.67%
After expense reimbursement ................................... 0.95% 0.95% 0.91% 0.67% 0.67%
Ratio of net investment income to average net assets (b) ....... 4.61% 5.86% 5.96% 6.87% 6.46%
Portfolio turnover rate ......................................... 306.65% 370.92% 515.02% 280.73% 337.26%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total return represents performance of the Trust only and does not include
mortality and expense deductions in separate accounts.
(b) The Adviser and Administrator have contractually agreed to reimburse Fund
expenses to the extent that the ratio of expenses to average net assets
exceeds, on an annual basis, the net expenses defined in Note 3. These
contractual limits may be discontinued at any time after April 30, 2004.
The accompanying notes are an integral part of these financial statements.
54
40|86 SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING DURING THE YEAR ENDED DECEMBER 31,
====================================================================================================================================
GOVERNMENT SECURITIES PORTFOLIO
==============================================================
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value per share, beginning of period ..................... $ 12.04 $ 11.70 $ 11.54 $ 10.96 $ 12.15
Income from investment operations:
Net investment income ......................................... 0.42 0.47 0.54 0.66 0.64
Net realized gains (losses) and change in unrealized
appreciation or depreciation on investments ................. (0.25) 0.60 0.16 0.58 (1.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations ............ 0.17 1.07 0.70 1.24 (0.55)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income .......................... (0.42) (0.47) (0.54) (0.66) (0.64)
Distributions of net realized gains ........................... (0.09) (0.26) == == ==
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions ....................................... (0.51) (0.73) (0.54) (0.66) (0.64)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value per share, end of period ........................... $ 11.70 $ 12.04 $ 11.70 $ 11.54 $ 10.96
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (a)(b) ................................................ 1.36% 9.33% 6.13% 11.71% (2.48%)
====================================================================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands), end of period ................ $ 22,791 $ 41,676 $ 31,267 $ 18,833 $ 13,104
Ratio of expenses to average net assets (b):
Before expense reimbursement .................................. 1.04% 0.99% 0.91% 0.66% 0.66%
After expense reimbursement ................................... 0.95% 0.95% 0.91% 0.66% 0.66%
Ratio of net investment income to average net assets (b) ....... 3.32% 3.78% 4.60% 5.89% 5.61%
Portfolio turnover rate ......................................... 175.15% 174.37% 199.41% 69.31% 168.69%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total return represents performance of the Trust only and does not include
mortality and expense deductions in separate accounts.
(b) The Adviser and Administrator have contractually agreed to reimburse Fund
expenses to the extent that the ratio of expenses to average net assets
exceeds, on an annual basis, the net expenses defined in Note 3. These
contractual limits may be discontinued at any time after April 30, 2004.
The accompanying notes are an integral part of these financial statements.
55
40|86 SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING DURING THE YEAR ENDED DECEMBER 31,
====================================================================================================================================
MONEY MARKET PORTFOLIO
==============================================================
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value per share, beginning of period ..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income ......................................... 0.01 0.01 0.04 0.06 0.05
Net realized gains (losses) and change in unrealized
appreciation or depreciation on investments ................. -- (0.00)(c) 0.00(c) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total income from investment operations ................... 0.01 0.01 0.04 0.06 0.05
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income .......................... (0.01) (0.01) (0.04) (0.06) (0.05)
Distributions of net realized gains ........................... -- (0.00)(c) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions ....................................... (0.01) (0.01) (0.04) (0.06) (0.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value per share, end of period ........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (a)(b) ................................................ 0.63% 1.24% 3.97% 6.08% 4.87%
====================================================================================================================================
Ratios/supplemental data:
Net assets (dollars in thousands), end of period .......... $ 41,965 $ 95,767 $129,530 $ 96,616 $ 85,692
Ratio of expenses to average net assets (b):
Before expense reimbursement .................................. 0.76% 0.73% 0.72% 0.66% 0.65%
After expense reimbursement ................................... 0.45% 0.45% 0.43% 0.41% 0.40%
Ratio of net investment income to average net assets (b) ........ 0.64% 1.23% 3.74% 5.98% 4.93%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total return represents performance of the Trust only and does not include
mortality and expense deductions in separate accounts.
(b) The Adviser and Administrator have contarctually agreed to reimburse Fund
expenses to the extent that the ratio of expenses to average net assets
exceeds, on an annual basis, the net expenses defined in Note 3. These
contractual limits may be discontinued at any time after April 30, 2004.
(c) Amount calculated is less than $0.005 per share.
The accompanying notes are an integral part of these financial statements.
56
REPORT OF INDEPENDENT AUDITORS
================================================================================
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
40|86 SERIES TRUST:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Focus 20 Portfolio, Equity
Portfolio, Balanced Portfolio, High Yield Portfolio, Fixed Income Portfolio,
Government Securities Portfolio and Money Market Portfolio (seven portfolios
constituting 40|86 Series Trust, hereafter referred to as the "Funds") at
December 31, 2003, the results of each of their operations for the year then
ended, the changes in their net assets for each of the two years then ended and
the financial highlights for each of the periods presented, 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 Funds' 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 December 31, 2003 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Indianapolis, Indiana
February 13, 2004
57
40|86 SERIES TRUST
BOARD OF TRUSTEES (unaudited)
====================================================================================================================================
NAME, ADDRESS POSITION HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH TRUST DURING PAST 5 YEARS
------------- ------------- ----------------------
William P. Daves, Jr. (77) Chairman of the Board, Consultant to insurance and healthcare industries. Director,
11825 N. Pennsylvania St. Trustee Chairman and Chief Executive Officer, FFG Insurance Co.
Carmel, IN 46032 Since June 1993 Chairman of the Board and Trustee of other mutual funds managed
by the Adviser.
Gregory J. Hahn* (42) President Chartered Financial Analyst. Senior Vice President, Adviser.
11825 N. Pennsylvania St. and Trustee Portfolio Manager of the fixed income portion of Balanced and
Carmel, IN 46032 Since January 2001 Fixed Income Portfolios. Trustee, President and portfolio manager
of other mutual funds managed by the Adviser.
Harold W. Hartley (79) Trustee Chartered Financial Analyst. Director, Ennis Business Forms, Inc.
11825 N. Pennsylvania St. Since June 1993 Retired, Executive Vice President, Tenneco Financial Services, Inc.
Carmel, IN 46032 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 June 1993 Dallas Citizens Council. Trustee of other mutual funds managed by
Carmel, IN 46032 the Adviser.
Dr. Jess H. Parrish (75) Trustee Higher Education Consultant. Former President, Midland
11825 N. Pennsylvania St. Since June 1993 College. Trustee of other mutual funds managed by the Adviser.
Carmel, IN 46032
David N. Walthall (57) Trustee Principal, Walthall Asset Management. Former President, Chief
11825 N. Pennsylvania St. Since October 1998 Executive Officer and Director of Lyrick Corporation. Formerly,
Carmel, IN 46032 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 positons indicated with the Adviser and its
affiliates.
All Trustees will serve until their successors are duly elected and
qualified.
All Trustees oversee the 17 portfolios that make up the Conseco fund complex
including Conseco Fund Group, 40|86 Series Trust, 40|86 Strategic Income Fund
and Conseco StockCar Stocks Mutual Fund, Inc.
58
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================================================================================
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================================================================================
INVESTMENT ADVISER LEGAL COUNSEL
40|86 Advisors, Inc. Kirkpatrick & Lockhart LLP
Carmel, Indiana Washington, D.C.
CUSTODIAN INVESTMENT SUB-ADVISERS
The Bank of New York Chicago Equity Partners, LLC
New York, New York Chicago, IL
INDEPENDENT AUDITORS Oak Associates, ltd.
PricewaterhouseCoopers LLP Akron, OH
Indianapolis, Indiana
HOW TO OBTAIN A COPY OF THE PORTFOLIOS' PROXY VOTING POLICIES
A description of the Policies and Procedures that the Portfolios use to
determine how to vote proxies relating to the Portfolio securities is available
without charge upon request by calling 866-299-4086.
================================================================================
40|86 SERIES TRUST IS A REGISTERED INVESTMENT COMPANY MANAGED BY
40|86 ADVISORS, INC., A LEADING FIXED-INCOME INVESTMENT ADVISOR.
40|86 Series Trust
11815 North Pennsylvania Street
Carmel, Indiana 46032
CI-319 ( / ) 06104
(C) 2003 40|86 Series Trust
Principal Underwriter:
Conseco Equity Sales, Inc.
11815 N. Pennsylvania St.
Carmel, IN 46032
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any amendments to its code of ethics during the covered period. The
registrant has not granted any waivers from any provisions of the code of ethics
during the covered period. The registrant undertakes to provide to any person
without charge, upon request, a copy of its code of ethics by mail when they
call the registrant at 1-866-299-4086.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of directors has determined that there is at least one
audit committee financial expert serving on its audit committee. Harold W.
Hartley is the audit committee financial expert and is considered to be
independent.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The registrant has engaged its principal accountant to perform audit services,
audit-related services, tax services and other services during the past two
fiscal years. Audit services include performing an audit of the registrant's
annual financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years. There were no audit-related services provided by the
principal accountant that are reasonably related to the performance of the audit
of the registrant. Tax services refer to professional services rendered by the
principal accountant for tax compliance, tax advice, and tax planning. There
were no other services provided by the principal accountant to the registrant.
The following table details the aggregate fees billed for each of the last two
fiscal years for audit fees, audit-related fees, tax fees and other fees by the
principal accountant.
=====================================================================
FYE 12/31/2003 FYE 12/31/2002
---------------------------------------------------------------------
Audit Fees $ 103,000.00 $ 60,000.00
Audit-Related Fees $ -- $ --
Tax Fees $ 19,810.00 $ 16,975.00
All Other Fees $ -- $ --
=====================================================================
The audit committee has adopted pre-approval policies and procedures as follows:
Before the accountant is engaged by the registrant to render audit or non-audit
services, the engagement is approved by the registrant's audit committee. The
Chairman of the audit committee is authorized to pre-approve engagement of the
accountant to perform other non-audit services for the registrant and to report
such pre-approvals to the audit committee at their next meeting. All services
disclosed above were approved by the audit committee.
The following table indicates the non-audit fees billed by the registrant's
accountant for services to the registrant and to the registrant's investment
adviser (and any entity controlling, controlled by, or under common control with
the investment adviser that provides ongoing services to the registrant--not
sub-adviser) for the last two years.
=====================================================================
Non-Audit Related Fees FYE 12/31/2003 FYE 12/31/2002
---------------------------------------------------------------------
Registrant $ -- $ --
Registrant's Investment Adviser $10,435.90 $193,639.49
---------------------------------------------------------------------
The audit committee of the board of trustees has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant is compatible with maintaining the principal accountant's
independence and has concluded that the provision of such non-audit services by
the accountant has not compromised the accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to open-end investment companies.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATE PURCHASES.
Not applicable to open-end investment companies.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Applicable for periods ending after January 1, 2004.
ITEM 10. 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 11. EXHIBITS.
(a)(1) Any code of ethics or amendment thereto. Incorporated by
reference to the Registrant's Form N-1A filed May 12, 2000.
(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) 40|86 Series Trust
-------------------------------------------------------------------
By (Signature and Title) /s/ Gregory J. Hahn
--------------------------------------------------------
Gregory J. Hahn, President
(principal executive officer)
Date February 23, 2004
----------------------------------------------------------------------------
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/ Gregory J. Hahn
--------------------------------------------------------
Gregory J. Hahn, President
(principal executive officer)
Date February 23, 2004
----------------------------------------------------------------------------
By (Signature and Title) /s/ Audrey L. Kurzawa
--------------------------------------------------------
Audrey L. Kurzawa, Treasurer
(principal financial officer)
Date February 23, 2004
----------------------------------------------------------------------------