Mosaic Focus Fund
Annual Report
December 31, 1998
Mosaic Focus Fund
Letter to Shareholders
December 31, 1998
Dear Shareholder:
The year ended December 31, 1998, the first for Mosaic Focus, was an eventful
one for the Fund and the markets in which it is invested. Despite some
notable market volatility, Focus ended the year with extremely solid results,
rising 44.23% for the year, beating all relative indices and widely outpacing
the average domestic equity fund, which as measured by the Lipper Growth Fund
Index, was up 25.69% for the year.
Since the launch of our first mutual fund in 1978, we have been believers in
concentrated equity portfolios. Over the years we have developed
considerable experience and expertise in managing portfolios with 25-30
stocks. A few years ago, at the request of a regional brokerage house, we
"back-tested" the performance of our top 10 stock picks over the years. The
results were quite impressive. Mosaic Focus is an outgrowth of this
research, giving investors a low-minimum access to our top stock ideas.
The performance of Focus over the past year has not gone unnoticed, as the
fund has been featured in stories in The Wall Street Journal, Mutual Funds
Magazine, Investor's Business Daily, Morningstar.net, and the Chicago
Tribune.
The past year, our first full year under our Mosaic banner, was an important
one, as we realized our initial goals for our newly integrated fund family.
Some of these improvements are represented in our improved and expanded
communications. Others are seen in terms of service, as we worked hard to
make information more accessible to you through our 24-hour automated
telephone line, Mosaic Tiles (1-800-336-3063) and our website at
www.mosaicfunds.com.
We adjusted our fund lineup to provide you a variety of investment vehicles
and realigned our stock funds to reflect our discipline of seeking the best
companies at reasonable valuations.
We hope you are taking advantage of our expanded services and will consider a
fresh look at our fund lineup in light of the diversification opportunities
we now provide.
Thank you again for your continued confidence in Mosaic.
Sincerely,
(signature)
Katherine L. Frank
President
Mosaic Funds
<PAGE>
Mosaic Focus Fund
Management's Discussion of Fund Performance
December 31, 1998
The Year In Review
In the wake of three tremendous years for the stock indices, many observers
thought that 1998 would be a year in which the stock markets took a breather.
Instead, it left us breathless, with a relatively steady march upward to
index-beating highs in mid-July, followed by a dramatic drop which lopped off
20% of market value as measured by the major indices. This drop was in turn
followed by a heady fourth-quarter rally that brought us close to the index
records set in July. By the year's end, the S&P 500 was up 28.6%, and the
Dow Industrial Averages was ahead 18.1%.
Following a trend we've been observing for the past few years, these market
moves did not necessarily represent the "average" stock. In reality, a small
number of large stocks have dominated the popular indices, such as the S&P
500, while the rest of the market has performed less positively. In 1998,
the 10 largest stocks in the S&P 500 (just 2% of the companies in the index)
accounted for 43% of the index's gain. The 50 largest stocks (10% of the
companies in the index) accounted for 87.5% of the gain. Some of the broader
market indices, such as the small-cap Russell 2000, were actually negative
for the year. In fact, two-thirds of U.S. stocks actually ended the year
negative. Further cloaking the underlying difficulty for stocks was the
outsized performance of Internet stocks, which grabbed many of the headlines,
and contributed to the overall, and somewhat misleading, impression of a
banner year for stocks.
While the domestic economy remained benign, albeit with signs of slowing, the
market indices were notably resilient in the face of such concerns as crises
in Asia, Russia, Latin America; the collapse of the major hedge fund Long
Term Capital Management; troubles in Iraq; and finally declining corporate
profits. Countering these negative developments was the lowering of interest
rates, as Alan Greenspan and the Fed began dropping rates mid-year and
continued to ease throughout the remainder of the year.
Fund Overview
In early 1998 as the market was moving steadily towards new highs, Mosaic
Focus concentrated on the sort of solid, large companies that we felt could
do well in a variety of market and economic environments. Our discipline
always steers us away from the market's excesses. This did keep us away from
many of the market's leaders, as investors demonstrated preference for a
small number of the larger, highly valued S&P 500 companies, and speculative
Internet issues.
We found the best combinations of growth and value in the consumer sector, as
we opened the year with positions in supermarket giant Safeway, McDonald's
and Federated Department Stores. We liked the stability and steady growth
potential of pharmaceuticals Abbott Labs and Merck. On the financial side we
opted to avoid international exposure with investments in regional bank
Norwest and Feddie Mac, a company that has been in our equity portfolios
since the late 1980s. At the same time, due to valuation and international
concerns, we were underweighted in technology, but still had sizable
positions in Compaq and Sun Microsystems.
With the market racing to new heights in mid-summer we continued to be
defensive in our stock picks. When a stock, such as Federated, hits its
price target, we see if we have prospects that we feel have better
opportunities for appreciation. In this case, we rotated our investments
into PepsiCo. Even as the market hit its mid-year high in July, we were
quite comfortable with our positions. This confidence proved to be well
deserved as the portfolio came through the rough third quarter with a tiny
loss of just 0.77%, while the average domestic stock fund lost close to 15%
over the same quarter.
Not only did our stocks show resilience in the down market, but they came
back quite strongly in the fourth quarter, giving the fund a 25.12% boost to
end the year up 44.23%. Adjustments included adding supermarket chain Kroger
to our top holdings, while taking some profits from our Safeway position.
As we enter 1999, we retain much of the same posture that we took a year ago.
It is our goal to provide a mix of excellent companies that can create a
whole greater than the sum of its parts. We are not looking for one or two
companies that can carry the portfolio, but a solid base of some 15 firms
that can all contribute. We attempt to moderate the risk of concentration by
avoiding companies we feel have excessive downside potential. This strategy
served us well in 1998, and we have every expectation that it can continue to
do so in the years ahead.
TOP FIVE HOLDINGS
AS OF DECEMBER 31, 1998
% of net assets
Kroger 11.6%
Wells Fargo 11.2%
Johnson & Johnson 8.6%
Freddie Mac 7.8%
Safeway 7.1%
Fund-at-a-Glance
Objective: To provide capital appreciation through a highly concentrated
portfolio.
Net Assets: $1.7 million
Date of Inception: December 31, 1997
Ticker: Not yet available
Comparison of Changes in the Value of a $10,000 Investment
Depicted herein is a graph showing the following:
Focus S&P 500 Lipper Growth
12/31/1997 10,000 10,000 10,000
03/31/1998 11,171 11,395 11,238
06/30/1998 11,617 11,771 11,557
09/30/1998 11,527 10,600 10,238
12/31/1998 14,423 12,858 12,569
One Year Total Return/Average Annual Total Return Since Inception
on December 31, 1997: 44.23%
Past performance is not predictive of future results
Interview with lead equity manager Jay Sekelsky
Q. How would you characterize the performance of Mosaic Focus for the
year?
A. To put it simply, we had a great year in 1998. Our total return was
44.23%. Only the top 3% of all domestic funds tracked by Morningstar could
match or better this return. This performance came in a market environment
that was more difficult than it might first appear. Even though the S&P 500
was up 28.6%, a small minority of very large companies generated the lion's
share of its return. In fact, the average stock in the S&P 500 was up just
7% and over two-thirds of U.S. stocks had a negative return for the year.
This so-called "two-tiered market" has been well documented. The bottom line
is that it was a difficult market for most investors to generate double-digit
returns, which made our index-topping results all the more gratifying.
Q. What was the key to your outperformance?
A. We had contributions from across our holdings. This is really the
heart of our investment discipline: finding a small number of companies that
can produce positive results, while avoiding any major problem stocks. We
don't look for one or two "hot" stocks to propel our portfolio, but instead
look for steady performance throughout. In a year in which high-profile
technology and Internet stocks grabbed most of the headlines, we were happy
to plug away with less exciting, but more dependable companies.
Q. What aspects of market performance in the past year did you anticipate
going into the year?
A. A year ago we expected to see a continuation of international problems
that were at that point concentrated in Asia. Since then we've seen the
collapse of Russia and the beginnings of an economic crisis in South America.
As a result, our decision to screen companies for overseas exposure proved to
be prudent. We did a good job of avoiding the companies hit hardest by lost
international sales. We also reported that we found the market vulnerable as
we entered 1998. Our concentration on strong domestic companies with proven
income streams was part of our defensive strategy. When the market turned
sharply downward in July and August, our stocks held up better than the
overall market.
Q. What aspects of the market surprised you?
A. I'd have to say the biggest surprise was the size and speed in which
the market recovered at the end of the year. The market swooned in the third
quarter of the year, and while we held our own for the quarter (losing just
0.77%), we were not immune from the market's woes. Focus bounced back in the
fourth quarter with a 25.12% return, and by the end of the year the indices
were testing new highs, even though the majority of stocks were not nearly
that resilient. Nevertheless, the market's comeback was stronger and steeper
than we could have predicted.
Q. Did you make any substantial changes to the portfolios over the course
of the year?
A. While we are willing and actually pleased to be able to hold a stock
for multiple years, our sell discipline is an important component of our
strategy. We will sell a stock when we feel it is fully valued or when we're
convinced we have better opportunities in another company. One of the
results of a volatile market like we had in 1998 is the way stocks sometimes
hit their target prices much faster than we expect and become sell
candidates.
Q. Where was the Fund positioned in terms of types of industries or
sectors?
A. Our stock selection discipline leads us to four major sectors:
consumer, healthcare, financial and technology. Over a long period of time
we'd expect our exposure to be relatively evenly balanced across these
sectors. For a shorter period of time, including the one-year period we are
reviewing, conditions will likely produce a heavier weighting in one broad
sector over another. In 1998, we favored the consumer sector, with
substantial holdings in the supermarket chains of Kroger and Safeway and the
drugstore operator CVS. These were companies with a history of strong,
dependable earnings that were not dependent on overseas sales. We were able
to acquire these companies at below-market valuations based on the S&P 500's
valuation. Plus, we liked the way these companies were likely to hold up in
any downturn. After all, consumers will still buy groceries and fill their
prescriptions, regardless of the short-term economic conditions. We were
relatively under-weighted in technology, which turned out to be the best
performing sector of the market. While we had excellent results from Compaq
and Sun Microsystems, overall technology valuations kept us from a heavier
exposure as this relatively pricey sector led the market to new and even
pricier valuations.
Q. What is your outlook and strategy for 1999?
A. We head into 1999 with some of the same basic concerns and approaches
that served us well in 1998. We still find the international scene fraught
with dangers and prefer to somewhat limit our exposure to overseas economies,
although not to the same extent as last year. We think the highly priced
market as a whole remains vulnerable but remain positive about the domestic
economy and the ability of good, solid companies to prosper. With our risk-
conscious style of investing, success is not predicated on picking the next
"hot" stock, but on solid performance across the board--singles and doubles
rather than home runs, if you will. Our best results come when we have a
number of smaller success stories along with an avoidance of major problems.
So looking forward into 1999 we hope to avoid the major pitfalls of the
market by sticking with companies that can continue to prosper in the low-
inflation, lower-growth economy we foresee.
Independent Auditor's Report
To the Board of Trustees and Shareholders of Mosaic Focus Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Mosaic Focus Fund as of
December 31, 1998, and the related statements of operations and changes in net
assets and the financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1998 by correspondence with the custodian and broker.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mosaic Focus Fund as of December 31, 1998, the results of its operations, the
changes in its net assets, and its financial highlights for the year then
ended in conformity with generally accepted accounting principles.
(signature)
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 1999
<PAGE>
Mosaic Focus Fund
Portfolio of Investments - December 31, 1998
Number
of
Shares Value
COMMON STOCKS: 92.46% of net assets
CONSUMER PRODUCTS - CYCLICAL: 4.86%
Dayton Hudson Corporation 1,550 $ 84,088
CONSUMER SERVICES - TELECOMMUNICATIONS: 4.57%
MCI WorldCom, Inc.* 1,100 78,925
CONSUMER STAPLES -
RETAIL: 23.42%
CVS Corporation 1,500 82,500
Kroger Company 3,300 199,650
Safeway, Inc.* 2,000 121,875
CONSUMER STAPLES - FOOD & BEVERAGE: 4.75%
PepsiCo, Inc. 2,000 81,875
FINANCIAL - BANKS: 15.84%
National City Corporation 1,100 79,750
Wells Fargo & Company 4,845 193,496
FINANCIAL - SERVICES: 11.55%
Citigroup, Inc. 1,300 64,350
Freddie Mac 2,095 134,997
HEATHCARE: 18.21%
Abbott Laboratories 1,675 82,075
Bristol Meyers Squibb Company 625 83,633
Johnson & Johnson 1,770 148,459
TECHNOLOGY: 9.26%
Compaq Computer Corporation 1,950 81,778
Sun Microsystems, Inc.* 910 77,919
TOTAL COMMON STOCKS (Cost $1,256,106) $1,595,370
REPURCHASE AGREEMENT: 10.55% of net assets
With Donaldson, Lufkin & Jenrette Securities
Corporation issued 12/31/98 at 4.625%, due
1/4/99, collateralized by $185,640 in
United States Treasury Notes due 6/30/00.
Proceeds at maturity are $182,094.
(Cost $182,000) $ 182,000
TOTAL INVESTMENTS (Cost $1,438,106) $1,777,370
CASH AND RECEIVABLES LESS LIABILITIES: (3.01%)
of net assets $ (51,906)
NET ASSETS: 100% $1,725,464
* Non-income producing.
Statement of Assets and Liabilities
December 31, 1998
ASSETS
Investments, at value (Notes 1 and 2)
Investment securities $1,595,370
Repurchase agreements 182,000
Total investments 1,777,370
Cash 649
Receivables
Dividends and interest 367
Capital shares sold 500
Total assets 1,778,886
LIABILITIES
Payables
Investment securities purchased 53,422
Total liabilities 53,422
NET ASSETS (Note 7) $1,725,464
CAPITAL SHARES OUTSTANDING 60,838
NET ASSET VALUE PER SHARE $28.36
Statement of Operations
For the year ended December 31, 1998
INVESTMENT INCOME (Note 1)
Interest income $ 5,253
Dividend income 9,930
Total investment income 15,183
EXPENSES (Notes 3 and 5)
Investment advisory fees 8,210
Transfer agent, administrative,
registration and professional fees 5,396
Total expenses 13,606
NET INVESTMENT INCOME 1,577
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments 121,441
Change in net unrealized
appreciation of investments 339,264
NET GAIN ON INVESTMENTS 460,705
TOTAL INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $462,282
Statement of Changes in Net Assets
For the year ended December 31, 1998
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
Net investment income $ 1,577
Net realized gain on investments 121,441
Net unrealized appreciation of investments 339,264
Total increase in net assets resulting
from operations 462,282
DISTRIBUTIONS TO SHAREHOLDERS (Note 7)
From net investment income (4,295)
From net capital gains (81,146)
Total distributions (85,441)
CAPITAL SHARE TRANSACTIONS (Note 8) 548,518
TOTAL INCREASE IN NET ASSETS 925,359
NET ASSETS
Beginning of year $ 800,105
End of year $1,725,464
Financial Highlights
Selected data for a share outstanding for the year ended December 31, 1998.
NET ASSET VALUE
Beginning of year $21.09
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.03
Net realized and unrealized gains on securities 9.02
Total income from investment operations 9.05
LESS DISTRIBUTIONS
Dividends from net income (0.10)
Capital gain distributions (1.68)
Total distributions (1.78)
NET ASSET VALUE
End of year $28.36
TOTAL RETURN 44.23%
RATIOS
Operating expenses to average net assets 1.25%
Net income to average net assets 0.15%
Portfolio turnover rate 112%
Mosaic Focus Fund
Notes to Financial Statements
December 31, 1998
1. Summary of Significant Accounting Principles. Mosaic Focus Fund adopted
its current investment objectives and policies effective January 1, 1998. It
is a non-diversified equity fund seeking long-term growth of capital. Its
policies are to invest in approximately 12-18 stocks. The Fund is organized
as a Massachusetts Business Trust. Prior to 1998, the Fund was known as
Madison Opportunity Fund, Inc. Madison Opportunity Fund, Inc. was a
diversified, small to mid-cap growth portfolio that was never publicly offered
to investors. Its portfolio was liquidated prior to 1998. As such, the
financial information in this report for periods prior to January 1, 1998 is
not presented because it is not indicative of the operations or performance of
the Fund under its current investment objectives, policies and operations.
The Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company. Its effective registration
under the Securities Act of 1933 was on July 9, 1998.
Securities Valuation: The market quotation for each security is the last
reported sale price on a national securities exchange, or, in the case of
Over-The-Counter securities, the mean between bid and ask. Other securities
for which quotations are not readily available are valued at fair value as
determined by the Board of Trustees. Short-term securities (maturing within
60 days) are valued on the basis of amortized cost. Securities with
maturities in excess of 60 days are valued at market value. The cost of
investments sold is determined on the identified cost basis for financial
statements and federal income tax purposes.
Income Tax: No provision is made for Federal income taxes since it is the
intention of the Fund to comply with the provisions of the Internal Revenue
Code available to investment companies and to make the requisite distribution
to shareholders of taxable income which will be sufficient to relieve it from
all or substantially all Federal income taxes.
Investment Income: The Fund follows industry practice and records security
transactions within one day of the trade date. Dividend income is recognized
on the ex-dividend date and interest income is accrued on a daily basis.
Dividends: Substantially all of the Fund's accumulated net investment income,
if any, determined as gross investment income less accrued expenses, is
declared as a regular dividend and distributed to shareholders at fiscal year
end. Capital gain distributions, if any, are declared and paid annually at
calendar year end. Additional distributions may be made if necessary.
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ from
those estimates.
2. Investments in Repurchase Agreements. When the Fund purchases securities
under agreements to resell, the securities are held for safekeeping by the
custodian bank as collateral. Should the market value of the securities
purchased under such an agreement decrease below the principal amount to be
received at the termination of the agreement plus accrued interest, the
counterparty is required to place an equivalent amount of additional
securities in safekeeping with the Fund's custodian bank. Repurchase
agreements may be terminated within seven days. Pursuant to an Exemptive
Order issued by the Securities and Exchange Commission, the Fund, along with
other registered investment companies having Advisory and Services Agreements
with the same advisor, transfers uninvested cash balances into a joint trading
account. The aggregate balance in this joint trading account is invested in
one or more consolidated repurchase agreements whose underlying securities are
U.S. Treasury or federal agency obligations.
3. Investment Advisory Agreement. The Investment Advisor to the Fund,
Madison Mosaic, LLC, earns an advisory fee of 0.75% per annum of the average
net assets of the Fund; the fees are accrued daily and are paid monthly. The
Advisory Agreement was approved by the Fund's shareholders on July 9, 1998.
4. Investment Transactions. For the year ended December 31, 1998, the
purchases and sales of investment securities (excluding short-term securities)
were $2,205,480 and $1,070,813, respectively.
5. Other Expenses. All expenses and support services are provided by the
Advisor under a Services Agreement for fees based on a percentage of net
assets. This percentage is 0.50% and is accrued daily and paid monthly.
6. Aggregate Cost and Unrealized Appreciation. The aggregate cost for
federal income tax purposes and the net unrealized appreciation are as follows
as of December 31, 1998.
Aggregate Cost $1,438,106
Gross unrealized appreciation 339,264
Gross unrealized depreciation --
Net unrealized appreciation $ 339,264
7. Net Assets. At December 31, 1998, net assets include the following:
Net paid in capital on shares of beneficial interest $1,336,571
Accumulated net realized gains 49,629
Net unrealized appreciation on investments 339,264
Total net assets $1,725,464
In 1998, the Fund distributed $2,718 of net investment income and $9,334 of
net capital gains attributable to the 1997 activities of Madison Opportunity
Fund prior to the Fund's initial public offering.
8. Capital Share Transactions. An unlimited number of capital shares, without
par value, are authorized. Transactions in capital shares for the year ended
December 31, 1998 were as follows:
In Dollars
Shares sold $658,792
Shares issued in reinvestment of dividends 85,440
Total shares issued 744,232
Shares redeemed (195,714)
Net increase $548,518
In Shares
Shares sold 28,525
Shares issued in reinvestment of dividends 3,369
Total shares issued 31,894
Shares redeemed (8,988)
Net increase 22,906