Prospectus/February 1, 1999
1655 Fort Myer Drive, Arlington, Virginia 22209-3108
Mosaic Tax-Free Trust
Arizona Fund Missouri Fund National Fund
Maryland Fund Virginia Fund Tax-Free Money Market
Mosaic Tax-Free Trust offers six mutual funds whose objectives are to provide
investors tax-free dividend income. They seek to achieve this objective by
investing in tax-free municipal bonds.
The Arizona, Maryland, Missouri and Virginia Funds provide dividend income
free of both federal and state income tax for those who purchase shares in the
fund of their state of residence.
The National Fund provides dividend income free of federal tax for residents
of any state.
The Tax-Free Money Market is a money market mutual fund that provides dividend
income free of federal tax for residents of any state.
Features
* No commissions or sales charges
* $1,000 minimum initial investment
* No "12b-1" expenses
* Checking privileges
* Dividends accrue every day and can be paid by check, electronic funds
transfer, or reinvested monthly
* Invest or withdraw funds by phone or by mail
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
Madison Mosaic, LLC
Investment Advisor
Table of Contents
Risk/Return Summary: Investments, Risks and Performance
Fund Investment Objectives/Goals 3
Principal Investment Stategies of the Trust 3
Principal Risks of Investing in the Trust 3
Risk/Return Bar Chart and Table 3
Fees and expenses of the Trust 5
Investment Objectives 8
Implementation of Investment Policies 9
Management 14
Pricing of Fund Shares 16
Dividends and Distributions 16
Taxes 16
Financial Highlights 18
<PAGE>
Risk/Return Summary: Investments, Risks and Performance
Fund Investment Objectives/Goals
Each mutual fund portfolio offered by Mosaic Tax-Free Trust (the "Trust")
shares a common objective: To receive income from municipal bonds and to
distribute that income to its investors as tax-free dividends. Generally, a
"municipal" bond is one that is issued by a city, state or county government.
As a result, all dividends from each of the six Funds offered by the Trust are
intended to be free from federal income tax.
The Arizona, Maryland, Missouri and Virginia Funds have a second objective: To
distribute dividends that are intended to be exempt from state (and local) tax
as well as federal tax.
Finally, the Tax-Free Money Market has the additional objectives of preserving
capital and providing liquidity.
a stable share price of $1.00 per share.
Principal Investment Strategies of the Trust
Each fund seeks to achieve its objective through diversified investment in
municipal bonds. These securities may be issued by state governments, their
political subdivisions (for example, cities and counties) and public
authorities (for example, school districts, housing authorities, etc.). The
funds may also invest in bonds that, under federal law, are exempt from
federal and state income taxation, such as bonds issued by the District of
Columbia, Puerto Rico, the Virgin Islands and Guam.
We only purchase "investment grade" bonds for the funds. That means bonds in
the top four rating categories awarded by nationally recognized statistical
rating organizations such as Moody's and S&P.
The Tax-Free Money Market has a second principal investment strategy of seeking
to maintain a stable share price of $1.00 per share.
Principal Risks of Investing in the Trust
All Funds
Interest Rate Risk
The share price of each of these funds reflects the value of the bonds held by
them. When interest rates or general demand for municipal securities change,
the value of these bonds change. If the value of these bonds falls, the share
price of the fund will go down. If it falls below the price you paid for your
shares, you could lose money when you redeem your shares.
What might cause bonds to lose value? One reason is because interest rates
went up. When this happens, existing bonds that pay a lower rate become less
attractive and their prices tend to go down.
Legislative Risk
If Congress or a state legislature changes or limits the tax code or the tax-
free nature of municipal bonds, they could lose value.
Call Risk
If a municipal bond issuer "calls" a bond (pays it off at a specified price
before it matures), the affected fund would have to reinvest the proceeds at a
lower interest rate. It may also experience loss if the bond is called at a
price lower than what we paid.
Tax-Related Risk
You can receive a taxable distribution of capital gain. You may also owe taxes
if you sell your shares at a price that is higher than the price you paid for
them.
Fund Specific Risks
Arizona Fund
Particular risks to consider when investing in Arizona securities are:
* There are no general obligation bonds
* The State has a seasonal population
* Its population is concentrated in Phoenix
* The State restricts local school bond issues
Maryland Fund
Particular risks to consider when investing in Maryland securities are:
* The State begins implementing a 10% income tax reduction in 1999
* The State must have a balanced budget
* The State has historically been heavily indebted
* Marylanders rely heavily on Federal government employment
Missouri Fund
Particular risks to consider when investing in Missouri securities are:
* Tax cuts will be implemented in 1999
* The State has desegregation lawsuit obligations and must defend riverboat
gambling lawsuits
* The State's economy is more heavily dependant on transportation than other
states
* The State economy is subject to the cyclical automobile and defense-related
manufacturing sectors
Virginia Fund
Particular risks to consider when investing in Virginia securities are:
* The State has rising debt levels
* The State must have a balanced budget
* A $2.8 billion "car tax" revenue loss is pending
* Virginians rely heavily on Federal government employment
* Single-term governorships may result in volatile financial policies and
management.
Tax-Free Money Market
Since the Tax-Free Money Market's share price is intended to be stable at
$1.00 per share, it is most suitable for investors who are seeking current
income with low risk. Of course, as interest rates generally rise and fall
in the overall economy, the yield of this fund will rise and fall in the same
manner.
An investment in the Tax-Free Money Market is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the Tax-Free Money Market seeks to preserve the value of your
investments at $1.00 per share, it is possible to lose money by investing in
this fund.
Risk/Return Bar Chart and Performance Table
The following bar charts illustrate the variability of each fund's returns by
showing changes in each fund's performance from year to year over a 10-year
period (or for the life of the fund, if less than 10 years). After the bar
chart for each fund is a table that compares the fund's average annual total
returns with those of a broad-based securities market index that is not
subject to the fees and expenses typical of mutual funds. Remember, however,
that past performance does not necessarily indicate how a fund will perform in
the future.
Arizona Fund
Year Return
1998 4.73%
1997 8.00%
1996 3.22%
1995 14.90%
1994 (8.70)%
1993 12.00%
1992 8.46%
1991 9.75%
1990 6.73%
During the period shown in the bar chart, the highest return for a quarter was
6.66% (quarter ending March 31, 1995) and the lowest return for a quarter was -
7.61% (quarter ending March 31, 1994).
Average Annual Total Past One Year Past 5 Years Since Inception
Returns October 13, 1989
(for the periods ending
December 31, 1998)
Arizona Fund 4.73% 4.14% 6.26%
Lehman Muni Index* 6.48% 6.23% 8.09%
Maryland Fund
Year Return
1998 4.61%
1997 8.10%
1996 2.18%
1995 15.21%
1994 (8.81)%
During the period shown in the bar chart, the highest return for a quarter was
7.05% (quarter ending March 31, 1995) and the lowest return for a quarter was -
7.97% (quarter ending March 31, 1994).
Average Annual Total Past One Year Past 5 Years Since Inception
Returns February 10, 1993
(for the periods ending
December 31, 1998)
Maryland Fund 4.61% 3.95% 4.73%
Lehman Muni Index* 6.48% 6.23% 6.66%
Missouri Fund
Year Return
1998 4.88%
1997 8.10%
1996 2.72%
1995 16.19%
1994 (8.51)%
1993 11.16%
1992 7.99%
1991 9.75%
1990 5.89%
During the period shown in the bar chart, the highest return for a quarter was
7.35% (quarter ending March 31, 1995) and the lowest return for a quarter was -
6.69% (quarter ending March 31, 1994).
Average Annual Total Past One Year Past 5 Years Since Inception
Returns October 12, 1989
(for the periods ending
December 31, 1998)
Missouri Fund 4.88% 4.36% 6.16%
Lehman Muni Index* 6.48% 6.23% 8.09%
Virginia Fund
Year Return
1998 5.01%
1997 8.50%
1996 3.17%
1995 16.14%
1994 (8.30)%
1993 12.51%
1992 7.52%
1991 9.81%
1990 5.91%
1989 7.38%
During the period shown in the bar chart, the highest return for a quarter was
6.78% (quarter ending March 31, 1995) and the lowest return for a quarter was -
7.23% (quarter ending March 31, 1994).
Average Annual Total Past One Year Past 5 Years Past 10 Years
Returns
(for the periods ending
December 31, 1998)
Virginia Fund 5.01% 4.59% 6.58%
Lehman Muni Index* 6.48% 6.23% 8.22%
National Fund
Year Return
1998 4.86%
1997 8.30%
1996 2.93%
1995 15.37%
1994 (8.87)%
1993 11.79%
1992 8.20%
1991 10.24%
1990 5.49%
1989 7.17%
During the period shown in the bar chart, the highest return for a quarter was
6.42% (quarter ending March 31, 1995) and the lowest return for a quarter was -
7.77% (quarter ending March 31, 1994).
Average Annual Total Past One Year Past 5 Years Past 10 Years
Returns
(for the periods ending
December 31, 1998)
National Fund 4.86% 4.21% 6.36%
Lehman Muni Index* 6.48% 6.23% 8.22%
*The Lehman Brothers Municipal Bond Index is a recognized, unmanaged index of
approximately 25,000 investment grade municipal bonds.
Tax-Free Money Market
Year Return
1998 2.85%
1997 2.93%
1996 2.52%
1995 3.00%
1994 1.81%
1993 1.43%
1992 2.48%
1991 3.70%
1990 5.26%
1989 5.79%
During the period shown in the bar chart, the highest return for a quarter was
1.53% (quarter ending June 30, 1989) and the lowest return for a quarter was
0.31% (quarter ending September 30, 1993).
Average Annual Total Past One Year Past 5 Years Past 10 Years
Returns
(for the periods ending
December 31, 1998)
Tax-Free Money Market 2.85% 2.62% 3.14%
To obtain the current 7-day yield for the Tax-Free Money Market or the 30-day
yield for any other fund, call our shareholder service department toll-free at
888-670-3600 or call our toll-free 24-hour automated information line, Mosaic
Tiles, at 800-336-3063.
Fees and Expenses of the Trust
This table describes the fees and expenses that you may pay if you buy and
hold shares of any fund offered by Mosaic Tax-Free Trust.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) of any type None
Redemption Fee None
Exchange Fee None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Tax-Free
Arizona Maryland Missouri Virginia National Money
Fund Fund Fund Fund Fund Market
Management Fees........................ 0.63% 0.63% 0.63% 0.63% 0.63% 0.50%
Distribution (12b-1) Fees.............. None None None None None None
Other Expenses......................... 0.48% 0.50% 0.46% 0.39% 0.44% 0.35%
Total Annual Fund Operating Expenses 1.11% 1.13% 1.09% 1.02% 1.07% 0.85%
</TABLE>
Example:
This Example is intended to help you compare the cost of investing in a fund
offered by Mosaic Tax-Free Trust with the cost of investing in other mutual
funds. For simplicity, fee and expense percentages above are rounded to two
decimal places.
The Example assumes that you invest $10,000 in the fund for the time periods
indicated. The Example also assumes that your investment has a 5% return each
year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Tax-Free
Arizona Maryland Missouri Virginia National Money
Fund Fund Fund Fund Fund Market
1 year......................... $113 $115 $111 $104 $109 $89
3 years........................ $353 $359 $347 $325 $340 $278
5 years........................ $612 $622 $601 $563 $590 $482
10 years....................... $1352 $1375 $1329 $1248 $1306 $1073
</TABLE>
Additional fees and transaction charges described in Mosaic's "Guide to Doing
Business," if applicable, will increase the level of expenses that can be
incurred. (For example, fees are charged for certain wire transfers, stop
payments on checks and bounced investment checks). In addition, if you
purchase or redeem shares in the Trust through a securities broker you may be
charged a transaction fee by the broker for handling of the transaction. The
Trust does not receive these fees. You can engage in any transaction directly
with the Trust to avoid such charges.
Investment Objectives
Each mutual fund portfolio offered by the Trust shares a common objective: To
receive income from municipal bonds and to distribute that income to its
investors as tax-free dividends. Generally, a "municipal" bond is one that is
issued by a city, state or county government. As a result, all dividends from
each of the six funds offered by the Trust are intended to be free from
federal income tax.
The Arizona, Maryland, Missouri and Virginia Funds have a second objective:
To distribute dividends that are intended to be exempt from state (and local)
tax as well as federal tax.
Finally, the Tax-Free Money Market has the additional objectives of preserving
capital and providing liquidity.
There can be no assurance that the objective of any fund will be achieved.
Although the investment objective of any fund may be changed without
shareholder approval, shareholders will be notified in writing prior to any
material change.
Implementation of Investment Objectives
We select bonds for each fund that we believe provide the highest combination
of yield (the interest rate the bond pays in relation to its price), credit
risk and diversification for the respective fund. To a lesser extent, we also
consider whether a particular bond may increase in value from its price at the
time of purchase. We research and analyzes bonds with the following principal
investment strategies in mind:
Municipal Bonds
Each fund seeks to achieve its objective through diversified investment in
municipal bonds. These securities may be issued by state governments, their
political subdivisions (for example, cities and counties) and public
authorities (for example, school districts, housing authorities, etc.). The
funds may also invest in bonds that, under federal law, are exempt from
federal and state income taxation, such as bonds issued by the District of
Columbia, Puerto Rico, the Virgin Islands and Guam.
The Arizona, Maryland, Missouri and Virginia Funds will invest in bonds that
are exempt from federal and state income tax for residents of the state of
issue.
The National Fund and Money Market will invest in bonds that are exempt from
federal income tax.
We will rely on the opinion of counsel to the issuer of these bonds that they
are, in fact, exempt from tax.
We have a fundamental policy that at least 80% of each fund will be invested in
tax-exempt securities. Since this is a fundamental policy, we cannot change
the policy without shareholder vote.
Tax-Free Money Market Policies
We manage the Tax-Free Money Market to maintain a stable share price of $1.00
per share. We do this by investing in high-grade municipal securities having a
maximum effective maturity of 13 months. We will not purchase any investment
that at the time of purchase would cause the average effective maturity of the
fund to exceed 90 days. We intend to manage the Money Market in accordance
with current regulations of the Securities and Exchange Commission applicable
to funds seeking to maintain a constant price per share of $1.00.
Bond Diversification
Each fund invests in general obligation bonds of states and municipalities
(backed by the general credit of the issuing city, state or county) and
specific or limited purpose bonds (supported by a specific power company,
hospital or highway project, etc.). Each fund seeks to limit its exposure
from any single issuer. This is accomplished by limiting fund purchases from
any issuer to no more than 5% of the fund's total assets.
Bond Maturity
Each fund other than the Money Market invests in long-term bonds. This is
because they normally provide a higher return than comparably rated shorter-
term bonds. However, long-term bonds have a greater tendency to fluctuate in
value as interest rates change.
The bonds in any fund other than the Money Market may have an average maturity
of 20 years or more. Average maturities of 15 to 20 years will be more
typical. An average maturity of 10 years or less may be appropriate in some
market conditions.
Bond Quality
The Trust only purchases "investment grade" bonds. That means bonds in the
top four rating categories awarded by nationally recognized statistical rating
organizations such as Moody's and S&P (e.g., AAA, AA, A and BBB). (You should
refer to the Statement of Additional Information if you would like more detail
about the meaning of bond ratings.)
If a fund owns a bond that is downgraded below investment grade, the fund will
sell the bond. We will attempt to sell the bond so as to avoid incurring a
substantial loss. As a result, the affected fund may have to hold the bond
for awhile after its downgrade in an attempt to avoid selling it at a "fire
sale" price.
Portfolio Trading Activity - Taxable Capital Gains Potential
We may alter the composition of any fund with regard to quality and maturity
and it may sell securities prior to maturity. Under normal circumstances,
however, turnover for each fund is generally not expected to exceed 100%
(except for the Money Market for which turnover statistics are not
applicable).
Sales of fund securities may result in capital gains that are not exempt from
taxation. This can occur any time a fund sells a bond at a price that was
higher than the price it paid for the bond, even if the fund does not engage
in active or frequent trading.
Under normal circumstances, no fund will engage in active or frequent trading
of its bonds. However, it is possible that we will determine that market
conditions require a significant change to the composition of a fund's
portfolio. (For example, if interest rates rise or fall significantly, we may
attempt to sell bonds before they lose much value.) Also, if a fund
experiences large swings in shareholder purchases and redemptions, we may be
required to sell bonds more frequently in order to generate the cash needed to
pay redeeming shareholders. Under these circumstances, the fund (other than
the Money Market) could make a taxable capital gain distribution.
Temporary Defensive Position
We might determine that extraordinary conditions exist (such as tax law
changes or a need to adopt a defensive investment position) that make it
advisable to invest a larger portion of any Fund's assets in taxable
investments. If this occurs, more than 20% and even as much as 100% of a
Fund's assets could be invested in securities whose income is taxable on the
federal or state level. If this situation were to occur, the affected Fund
would not be invested in a manner designed to achieve its investment
objective.
Risks
Interest Rate and Market Risk
The value of shares purchased in each fund will fluctuate due to changes in the
value of securities held by such fund. Of course, the Tax-Free Money Market
has little risk of price fluctuation because it is managed to maintain a
constant $1.00 share price. At the time an investor sells his or her shares,
they may be worth more or less than their original cost.
Municipal securities tend to increase in value when prevailing interest rates
fall, and to decrease in value when prevailing interest rates rise. The
longer the maturities of the bonds held in the fund, the greater the magnitude
of these changes. Investments with the highest yields may have longer
maturities or lower quality ratings than other investments, increasing the
possibility of fluctuations in value per share.
Legislative Risk
Municipal bonds pay lower rates of interest than comparable corporate bonds
because of the tax-free nature of their interest payments. If the tax-free
status of municipal securities is altered or eliminated by act of Congress or
the legislature of any particular state, the value of the affected bonds will
drop. This is because their low interest payments will be less competitive
with other taxable bonds.
Tax-Related Risk
While dividend income is expected to be tax-free, shareholders in each fund
can recognize taxable income in two ways:
(1) If you sell your shares at a price that is higher than when you bought them,
you will have a taxable capital gain. On the other hand, if you sell
your shares at a price that is lower than the price when you bought them, you
will have a deductible capital loss.
(2) In the event a fund sells more securities at prices higher than when they
were bought by the fund, the fund may pass through the profit it makes from
these transactions by making a taxable capital gain distribution. (The
discussion regarding Portfolio Trading Activity - Taxable Capital Gains
Potential in the previous section above explains what circumstances can
produce taxable capital gains.)
Call Risk
We may buy "callable bonds." This means that the issuer can redeem the
bond before maturity. An issuer may want to call a bond after interest rates
have gone down. If an issuer calls a bond we own, we would have to reinvest the
proceeds at a lower interest rate. Also, if the price we paid for the bond was
higher than the call price, the effect is the same as if the affected fund sold
the bond at a loss.
Portfolio Specific Risks
<i>Money Market Fund is Not Guaranteed.</i> We intend to manage the Money Market
to maintain a constant share price of $1.00. This $1.00 share price has been
maintained since the fund's inception. However, there is no assurance that
the fund will be able to maintain a constant share price of $1.00 in the
future.
<i>Arizona, Maryland, Missouri and Virginia Funds are Not Diversified
Geographically.</i> Since each of these funds will invest primarily in
securities issued by one state, each fund is susceptible to changes in value
due to political and economic factors affecting its state. Discussed below are
various risks you should consider when investing in a single state bond fund.
We monitor these developments and unique situations in each state. We attempt
to make purchases or sales for the Trust with these specific state related risks
in mind.
Arizona Fund
The State of Arizona does not issue general obligation bonds. As a result,
Arizona municipal bonds are issued by local jurisdictions (cities, school
districts) or are tied to specific municipal projects. This also means that
bonds are not always backed by state-wide revenues.
Arizona's population is concentrated in the Phoenix area. Also, the state-wide
population tends to fluctuate seasonally. The State has a significant winter
tourist and part-time resident population. These demographic factors affect the
amounts of revenue generated to pay for Arizona bonds. It also limits the
diversity of these bonds.
Finally, in order to equalize school districts in Arizona, the State government
controls school funding. The State is required to fund existing deficiencies.
This may require the State to issue additional school bond financing.
Maryland Fund
Maryland has historically been among the more heavily indebted states. Because
the State budget is required to be balanced, Marylanders have historically had a
high tax burden. Beginning in 1999, a 10% income tax reduction will begin to
take effect. It will be phased in over four years. If income tax revenues
fall, the State will be required to reduce its debt and this could reduce the
historical supply of Maryland bonds.
Marylanders have a moderate to heavy reliance on the Federal government for
their employment. As the Federal goverment continues to reduce its size,
Maryland revenues could be reduced as a result.
Missouri Fund
Missouri has a higher than average reliance on manufacturing revenue. Some of
this manufacturing is in the cyclical automobile and defense-related industries.
As a result, Missouri revenues can be reduced when these industries enter a slow
period.
Missouri is somewhat more dependant on transportation (railroads, trucking and
air) than the nation as a whole. If the oil costs rise or other factors affect
the transportation sector, Missouri could be more seriously affected than other
states.
Missouri recently approved tax cuts that will reduce 1999 revenue. The State is
also subject to certain spending requirements resulting from desegregation
lawsuits. It is currently facing lawsuits over riverboat gambling.
Virginia Fund
Virginia is required to have a balanced budget. However, its debt levels are
rising since the State is beginning a variety of large highway and university
construction projects. This is occurring at the same time as the State repeals
its $2.8 billion personal property tax on automobiles. The personal property
tax repeal will be phased in through 2002. The State has not yet developed
plans to replace the lost revenue.
Virginians have a higher than average reliance on the Federal government for
employment than other states. At the same time, the Federal government is
attempting to reduce its size. Although much of the Federal civilian workforce
reductions in Virginia have already occurred, the State remains vulnerable to
military reductions and base closings.
Management
The Advisor
We are Madison Mosaic, LLC (of the same address as the Trust), a wholly-owned
subsidiary of Madison Investment Advisors, Inc., 6411 Mineral Point Road,
Madison, Wisconsin ("Madison"). We manage approximately $200 million in the
Mosaic family of mutual funds, which includes stock, bond and money market
portfolios. Madison, a registered investment advisory firm for over 24 years,
provides professional portfolio management services to a number of clients and
has approximately $3.5 billion under management. We share investment
management personnel with Madison.
We are responsible for the day-to-day administration of the Trust's
activities. Investment decisions regarding each of the Trust's funds can be
influenced in various manners by a number of individuals.
Generally, all decisions regarding a fund's average maturity, duration and
investment considerations concerning interest rate and market risk are the
primary responsibility of Madison's investment policy committee. The
investment policy committee is made up of the top officers and managers of
Madison.
Day-to-day decisions regarding the selection of individual bonds and other
management functions for all of the Trust's funds are primarily the
responsibilities of Michael J. Peters and Chris Berberet.
Mr. Peters, portfolio manager and vice president of Madison since joining
Madison in 1997, was formerly Vice President and Fixed-Income Portfolio Manager
for Wachovia Asset Management from March 1993 until joining Madison. Prior to
his management of mutual fund assets at Wachovia, Mr. Peters had been
involved in municipal bond management and trading for NationsBank since March
1990. Mr. Peters became involved in the management of the Trust's six funds on
February 20, 1997.
Mr. Berberet, vice president of Madison Mosaic and a principal of Madison,
joined Madison in 1992. Since that time, he has continuously been a lead manager
for the fixed-income portfolios of Madison's private advisory clients. He has
also been a member of Madison's investment policy committee since joining
Madison in 1992. Mr. Berberet began managing the Trust's portfolios
after July 31, 1996.
Compensation
Advisory Fee. We receive a fee for our services under our Investment Advisory
Agreement with the Trust. The fee is calculated as 5/8% per
year of the average daily net assets of each fund other than the Money Market
and 1/2% per year of the average daily net assets of the Money Market.
Administrative and Services Fee. Under a separate Services Agreement with the
Trust, we provide or arrange for each fund to have all other operational and
other support services it needs. We receive a fee calculated as a percentage
of the average daily net assets of each fund for these services. Since
October 1, 1998, this fee has been set at the following rates: Money Market -
0.36%; National Fund -- 0.44%; Arizona Fund -- 0.49%; Maryland Fund -- 0.51%;
Missouri Fund -- 0.47%; and Virginia Fund -- 0.39%.
Managing for the Year 2000
We are monitoring developments as they relate to the so-called "Millennium
Bug": The computer problem that may cause errors when the calendar reaches
January 1, 2000. The Millennium Bug may cause disruption in securities and
other markets that affect the national and global economy.
At Mosaic Funds, we are taking appropriate measures to help ensure that the
Millennium Bug does not interrupt our own portfolio and shareholder accounting
or our fund management operations. For example, we requested and received
written assurances of Year 2000 compliance from the mission critical companies
we use to manage fund records and information. Also, we plan to test all our
systems before the end of 1999 to help ensure that our operations will not be
compromised by the Millenium Bug.
Pricing of Fund Shares
The price of each fund share is based on its net asset value (or "NAV"). This
equals the total daily value of the respective fund's investments, minus its
expenses and liabilities, divided by the total number of outstanding shares.
Each fund's NAV is calculated at the close of the New York Stock Exchange each
day it is open for trading.
We use the market value o the securities in each fund in order to determine
NAV. We obtain the market value from one or more established pricing services.
In order to stabilize the Tax-Free Money Market's share price at $1.00, we use
the "penny rounding" pricing method. This allows us to round the NAV to the
nearest penny.
When you purchase or redeem shares, your transaction will be priced based on
the next calculation of NAV after your order is placed. This may be higher,
lower or the same as the NAV from the previous day.
Dividends and Distributions
Each fund's net income is declared as dividends each business day. Dividends
are paid in the form of additional shares credited to your account at the end
of each calendar month, unless you elect in writing to receive a monthly
dividend check. Any net realized capital gains would be distributed at least
annually. (Please refer to Mosaic's "Guide to Doing Business" for more
information about dividend distribution options.)
Taxes
Federal Tax Considerations
Each fund offered by the Trust will distribute to shareholders 100% of its net
income and net capital gains, if any. At least 80% of the net income each
fund distributes will be tax-free income.
Capital gain distributions, if any, will be taxable to you. In January each
year, the Trust will send you an annual notice of dividends and other
distributions paid during the prior year. While dividends will normally be
exempt from income tax, capital gain distributions, if any, are subject to
taxation. Capital gains distributions can be taxed at different rates
depending on the length of time the securities were held.
Because the share price fluctuates for each fund, if you redeem shares in such
funds, you will create a capital gain or loss that has tax consequences. It is
your responsibility to calculate the cost basis of shares purchased. You must
retain all statements received from the Trust to maintain accurate records of
your investments.
An <i>exchange</i> of any fund's shares for shares of another fund will be
treated as a <i>sale</i> of the fund's shares. As a result, any gain on the
transaction may be subject to federal, state or local income tax.
If you do not provide a valid social security or tax identification number,
you may be subject to federal withholding at a rate of 31% of dividends, any
capital gain distributions and redemptions. Any fine assessed against the
Trust that results from your failure to provide a valid social security or tax
identification number will be charged to your account.
In addition to possible taxable capital gain distributions, certain bonds
owned by the Trust generate income that is subject to the Alternative Minimum
Tax ("AMT"). The interest on these "private activity" bonds could become
subject to AMT if you are a taxpayer that meets the AMT criteria. If you are
subject to AMT, you will be required to add any income attributable to these
bonds (as reported by the Trust annually) to other so-called "tax preference
items" to determine possible liability for AMT. Income from AMT bonds may not
exceed 20% of any fund's net income.
State Tax Considerations
While dividends from the Arizona, Maryland, Missouri and Virginia Funds will
normally be exempt from income tax for investors in their respective states,
capital gain distributions are subject to applicable state taxation in
Arizona, Missouri and Virginia. For Maryland Fund shareholders, capital gains
derived from Maryland obligations are exempt from Maryland state tax.
Normally, the percentage of the National Fund or the Money Market invested in
the shareholder's home state becomes the percentage of total dividend income
exempt from state taxes. However, in most states, the rest of the dividends
from the National Fund and Money Market will be subject to any state income tax.
Financial Highlights
The following financial highlights table is intended to help you understand
each fund's financial performance for the past 5 years. Certain information
reflects financial results for a single fund share. The total returns in the
table represent the rate that an investor would have earned on an investment
in each fund (assuming reinvestment of all dividends and distributions). This
information for periods after September 30, 1996 has been audited by Deloitte
& Touche LLP, whose report, along with the Trust's financial statements, are
included in the annual report, which is available upon request. Other
independent auditors audited information for periods before October 1, 1996.
Arizona Fund
Year ended September 30,
1998 1997 1996 1995 1994
Net asset
value
beginning
of period $10.45 10.15 10.11 9.71 11.21
Net
investment
income $0.45 0.47 0.44 0.44 0.44
Net
realized &
unrealized
gains
(losses) on
securities $0.29 0.30 0.04 0.40 (1.10)
Total from
investment
operations $0.74 0.77 0.48 0.84 (0.66)
Distributions
from net
investment
income $(0.45) (0.47) (0.44) (0.44) (0.44)
Distributions
from capital
gains $ -- -- -- -- (0.40)
Total
Distributions$(0.45) (0.47) (0.44) (0.44) (0.84)
Net asset
value end
of period $10.74 10.45 10.15 10.11 9.71
Total
Return 7.21% 7.67% 4.85% 8.95% (6.20)%
Net assets
at end of
period
(thousands) $8,625 8,746 9,066 10,009 11,815
Ratio of
expenses to
average net
assets-1 1.11% 1.11% 1.35% 1.31% 1.29%
Net
investment
income to
average
net assets 4.22% 4.54% 4.35% 4.48% 4.23%
Portfolio
turnover 26% 32% 9% 24% 67%
Maryland Fund
Year ended September 30,
1998 1997 1996 1995 1994
Net asset
value
beginning
of period $10.00 9.71 9.74 9.32 10.44
Net
investment
income $ 0.41 0.42 0.41 0.42 0.46
Net
realized &
unrealized
gains
(losses) on
securities $ 0.24 0.29 (0.03) 0.42 (1.10)
Total from
investment
operations $0.65 0.71 0.38 0.84 (0.64)
Distributions
from net
investment
income $(0.41)(0.42) (0.41) (0.42) (0.46)
Distributions
from capital
gains $ -- -- -- -- (0.02)
Total
Distributions$(0.41)(0.42) (0.41) (0.42) (0.48)
Net asset
value end
of period $10.24 10.00 9.71 9.74 9.32
Total
Return 6.68% 7.42% 3.96% 9.17% (6.33)%
Net assets
at end of
period
(thousands) $2,113 2,098 2,042 2,880 3,083
Ratio of
expenses to
average net
assets-1 1.13% 1.12% 1.28% 0.87% 0.64%
Net
investment
income to
average
net assets 4.09% 4.29% 4.12% 4.42% 4.60%
Portfolio
turnover 30% 15% 21% 9% 78%
Missouri Fund
Years ended September 30,
1998 1997 1996 1995 1994
Net asset
value
beginning
of period $10.53 10.22 10.13 9.73 11.17
Net
investment
income $0.44 0.46 0.44 0.44 0.44
Net
realized &
unrealized
gains
(losses) on
securities $0.34 0.31 0.09 0.40 (1.05)
Total from
investment
operations $0.78 0.77 0.53 0.84 (0.61)
Distributions
from net
investment
income $(0.44)(0.46) (0.44) (0.44) (0.44)
Distributions
from capital
gains $ -- -- -- -- (0.39)
Total
Distributions$(0.44)(0.46) (0.44) (0.44) (0.83)
Net asset
value end
of period $10.87 10.53 10.22 10.13 9.73
Total
Return 7.61% 7.72% 5.24% 8.87% (5.80)%
Net assets
at end of
period
(thousands) $12,002 11,553 11,381 11,394 11,490
Ratio of
expenses to
average net
assets-1 1.09% 1.02% 1.34% 1.31% 1.29%
Net
investment
income to
average
net assets 4.18% 4.45% 4.27% 4.43% 4.23%
Portfolio
turnover 24% 41% 21% 16% 52%
Virginia Fund
Years ended September 30,
1998 1997 1996 1995 1994
Net asset
value
beginning
of period $11.56 11.21 11.12 10.63 12.37
Net
investment
income $ 0.50 0.52 0.51 0.50 0.48
Net
realized &
unrealized
gains
(losses) on
securities $0.37 0.35 0.09 0.49 (1.14)
Total from
investment
operations $0.87 0.87 0.60 0.99 (0.66)
Distributions
from net
investment
income $(0.50) (0.52) (0.51) (0.50) (0.48)
Distributions
from capital
gains $ -- -- -- -- (0.60)
Total
Distributions$(0.50) (0.52) (0.51) (0.50) (1.08)
Net asset
value end
of period $11.93 11.56 11.21 11.12 10.63
Total
Return 7.66% 7.95% 5.50% 9.54% (5.67)%
Net assets
at end of
period
(thousands) $32,612 32,614 33,340 33,822 35,550
Ratio of
expenses to
average net
assets-1 1.02% 1.05% 1.20% 1.14% 1.18%
Net
investment
income to
average
net assets 4.28% 4.55% 4.53% 4.68% 4.23%
Portfolio
turnover 32% 28% 28% 55% 104%
National Fund
Years ended September 30,
1998 1997 1996 1995 1994
Net asset
value
beginning
of period $10.62 10.29 10.21 9.85 11.91
Net
investment
income $ 0.42 0.44 0.45 0.45 0.42
Net
realized &
unrealized
gains
(losses) on
securities $0.38 0.33 0.08 0.36 (1.12)
Total from
investment
operations $0.80 0.77 0.53 0.81 (0.70)
Distributions
from net
investment
income $(0.42)(0.44) (0.45) (0.45) (0.42)
Distributions
from capital
gains $ -- -- -- -- (0.94)
Total
Distributions$(0.42)(0.44) (0.45) (0.45) (1.36)
Net asset
value end
of period $11.00 10.62 10.29 10.21 9.85
Total
Return 7.66% 7.70% 5.17% 8.40% (6.25)%
Net assets
at end of
period
(thousands) $25,607 26,698 29,286 32,734 34,072
Ratio of
expenses to
average net
assets-1 1.07% 1.05% 1.20% 1.18% 1.23%
Net
investment
income to
average
net assets 3.91% 4.20% 4.32% 4.49% 3.98%
Portfolio
turnover 20% 44% 39% 56% 175%
Tax-Free Money Market
Years ended September 30,
1998 1997 1996 1995 1994
Net asset
value
beginning
of period $ 1.00 1.00 1.00 1.00 1.00
Net
investment
income $ 0.03 0.03 0.03 0.03 0.02
Net
realized &
unrealized
gains
(losses) on
securities $ -- -- -- -- --
Total from
investment
operations $0.03 0.03 0.03 0.03 0.02
Distributions
from net
investment
income $(0.03)(0.03) (0.03) (0.03) (0.02)
Distributions
from capital
gains $ -- -- -- -- --
Total
distributions$(0.03)(0.03) (0.03) (0.03) (0.02)
Net asset
value end
of period $ 1.00 1.00 1.00 1.00 1.00
Total
Return 2.75% 2.71% 2.63% 2.87% 1.56%
Net assets
at end of
period
(thousands) $7,270 6,852 7,499 8,454 8,916
Ratio of
expenses to
average net
assets-1 0.85% 0.83%-2 0.88%-2 0.81% 0.81%
Net
investment
income to
average
net assets 2.70% 2.68%-3 2.59%-3 2.83% 1.52%
1 For the years ended September 30, 1997 and 1996, the ratio reflects fee paid
indirectly.
2 For the years ended September 30, 1997 and 1996, ratio of expenses to
average net assets before expenses incurred and paid by the investment
advisor would have been 0.95% and 1.15%, respectively, for such years.
3 For the years ended September 30, 1997 and 1996, ratio of net investment
income to average net assets before expenses incurred and paid by the
investment advisor would have been 2.56% and 2.32%, respectively, for such
years.
<PAGE>
Mosaic Tax-Free Trust has a Statement of Additional Information that includes
additional information about each Mosaic Tax-Free Fund. Additional
information about each fund's investments is available in the Trust's annual
and semi-annual reports to shareholders. In the Trust's annual report, you
will find a discussion of the market conditions and investment strategies
that significantly affected the performance of the Trust's funds during
their last fiscal year. The Statement of Additional Information and the
Trust's annual and semi-annual reports are available without charge by
calling the Trust at the shareholder service phone number.
Information on how to purchase and sell shares in any Mosaic Fund is provided
in a separate brochure entitled, "Guide to Doing Business." Mosaic's "Guide
to Doing Business" is incorporated by reference into this prospectus.
Please call our shareholder service department if you have any questions about
any Mosaic Tax-Free Fund or if you would like a copy of any written fund
information. Additional information is also available at the Mosaic Funds
Internet Investment Center at http://www.mosaicfunds.com.
Finally, you can review and copy information about Mosaic Tax-Free Trust at
the SEC's Public Reference Room in Washington, DC. Information about the
operation of the Public Reference Room may be obtained by calling the SEC at
800-SEC-0330. The SEC maintains a Worldwide Web site that contains reports,
proxy information statements and other information regarding the Trust at
http://www.sec.gov. Copies of this information may also be obtained, upon
payment of a duplicating fee, by writing the SEC's Public Reference Section,
Washington, DC 20549-6009.
Telephone Numbers
Shareholder Service
Washington, DC area: 703 528-6500
Toll-free nationwide: 888 670-3600
Mosaic Tiles (24 hour automated information)
Toll-free nationwide: 800 336-3063
Mosaic Funds, 1655 Fort Myer Drive, 10th Floor, Arlington, Virginia 22209-3108
SEC File Number 811-3486
<PAGE>
Mosaic's Guide to Doing Business
The information disclosed in this Guide is part of and incorporated in,
the prospectuses of Mosaic Government Money Market, Mosaic Tax-Free Trust,
Mosaic Equity Trust, Mosaic Income Trust and Mosaic Focus Fund.
Mosaic Funds
http://www.mosaicfunds.com
<PAGE>
An Introduction to Mosaic Services
This brochure is your guide to taking advantage of the many transaction
choices available to Mosaic shareholders.
Mosaic's flagship fund, Mosaic Investors, was launched in 1978. Since that
time, Mosaic Funds has grown to provide a wide range of investment options,
including stock, bond, tax-free and money market funds.
If any of the information in this Guide prompts questions, please call a
Mosaic account executive. Our toll-free nationwide number is 888-670-3600 and
our local number in the Washington, DC area is 703-528-6500. Account
executives are available Monday through Friday, from 9:00 am to 6:00 p.m.
Eastern time.
Mosaic Tiles, our 24-hour automated information line, can be reached at 800-
336-3063. Visit our Internet Investment Center for additional information,
including daily share prices: http://www.mosaicfunds.com.
Table of Contents
Shareholder Account Transactions x
Confirmations and Statements x
Changes to an Account x
How to Open An Account x
Minimum Initial Investment x
By Check x
By Wire x
By Exchange x
How to Purchase Additional Shares x
By Check x
By Wire x
By Automatic Investment Plan x
How to Redeem Shares x
By Telephone or By Mail x
By Wire x
By Exchange x
By Customer Check x
By Systematic Withdrawal Plan x
Special Redemption Rules for IRAs x
How to Close an Account x
Other Fees x
Returned Investment Check Fee x
Minimum Balance x
Broker Fees x
Other Fees x
Retirement Plans x
Traditional IRAs x
Roth IRAs x
Conversion Roth IRAs x
Education IRAs x
Employer Plans x
Shareholder Account Transactions
Confirmations and Statements
Daily Transaction Confirmation.
All purchases and redemptions (unless systematic) are confirmed in writing
with a transaction confirmation. Transaction confirmations are usually mailed
on the same day a transaction is posted to your account. Therefore, you
should receive the confirmation in the mail within a few days of your
transaction.
Quarterly Statement.
Quarterly statements are mailed at the end of each calendar quarter. The
statements reflect account activity for the most recent quarter. At the end
of the calendar year, the statement will reflect account activity for the
entire year.
We strongly recommend that you retain all daily transaction confirmations
until you receive your quarterly statements. Likewise, you should keep all of
your quarterly statements until you receive your year-end statement showing
the activity for the entire year.
Changes to an Account
To make any changes to an account, we recommend that you call an account
executive to discuss the changes to be made and ask about any documentation
that you may need to provide us. Though some changes may be made by phone,
generally, in order to make any changes to an account, Mosaic may require a
written request signed by all of the shareholders with their signatures
guaranteed.
Telephone Transactions.
Mosaic Funds has a number of telephone transaction options. You can exchange
your investment among the funds in the family, request a redemption and obtain
account balance information by telephone. Mosaic will employ reasonable
security procedures to confirm that instructions communicated by telephone are
genuine; and if it does not, it may be liable for losses due to unauthorized
or fraudulent transactions. These procedures can include, among other things,
requiring one or more forms of personal identification prior to acting upon
your telephone instructions, providing written confirmations of your
transaction and recording all telephone conversations with shareholders.
Certain transactions, including some account registration changes, must be
authorized in writing.
Certificates.
Certificates will not be issued to represent shares in any Mosaic fund.
How to Open a New Account
Minimum Initial Investment
o $1,000 for a regular account
o $500 for an IRA account*
o $100 for an Education IRA Plus account*
*Not available to Mosaic Tax-Free Trust accounts.
By Check
Open your new account by completing an application and sending it along with a
check payable to Mosaic Funds to:
Mosaic Funds
1655 Fort Myer Drive, Suite 1000
Arlington, VA 22209-3108
By Wire
Please call Mosaic before you wire money to ensure proper and timely
credit to your account.
When you open a new account by wire, you must promptly send us a signed
application. We cannot send any redemption proceeds from your account until
we have your signed application in proper form. Please wire money to:
Star Bank, NA
Cinti/Trust
ABA # 0420-0001-3
Credit Mosaic Acct # 48038-8883
(Shareholder name and account number)
<I>Wire Fee.</I>
There may be a charge of $6.00 for processing incoming wires of less than
$1,000.
By Exchange
You may open a new account by exchange from an existing account when your new
account will have the same registration and tax identification number as the
existing account. A new account application is required only when the account
registration or tax identification number will be different from the
application for the existing account. Exchanges may only be made into funds
that are sold in the shareholder's state of residence.
How to Purchase Additional Shares
Purchase Price.
Share prices (net asset values or "NAV") are determined every day that the New
York Stock Exchange is open. Purchases are priced at the next share price
determined after the purchase request is received in proper form by Mosaic.
Purchases and Uncollected Funds.
Sometimes a shareholder investment check or electronic transfer is returned to
Mosaic Funds unpaid. In other words, we sometimes get checks that bounce.
Mosaic has a procedure to protect you and other shareholders from loss
resulting from these items. We may delay paying the proceeds of any redemption
for 10 days or more until we can be determine that the check or other deposit
item (including purchases by Electronic Funds Transfer "EFT") used for
purchase of the shares has cleared. Such deposit items are considered
"uncollected" until Mosaic determines that they have actually been paid by the
bank on which they were drawn.
Purchases made by federal funds wire or U.S. Treasury check are considered
collected when received and not subject to the 10 day hold. All purchases
earn dividends from the day after the day of credit to a shareholder's
account, even while not collected.
Minimum Subsequent Investment
Subsequent investments may be made for $50 or more.
By Check
Please make your check payable to Mosaic Funds. Mail it along with an
investment slip or, if you don't have one, please write your fund and account
number (and the name of the fund) on your check. Mail it to:
Mosaic Funds
PO Box 640393
Cincinnati, OH 45264-0393
By Wire
You should call Mosaic before you wire money to ensure proper and timely
credit.
Please wire money to:
Star Bank, NA
Cinti/Trust
ABA # 0420-0001-3
Credit Mosaic Acct # 48038-8883
(Shareholder name and account number)
<I>Wire Fee.</I>
There may be a charge of $6.00 for processing incoming wires of less than
$1,000.
By Automatic Investment Plan
You can elect to have a monthly (or less frequent) automatic investment plan.
Mosaic will automatically credit your Mosaic account and debit the bank
account you designate with the amount of your automatic investment. The
automatic investment is processed as an electronic funds transfer (EFT).
To establish an automatic investment plan, complete the appropriate section of
the application or call an Account Executive for information. The minimum
monthly amount for an EFT is $100. You may change the amount or discontinue
the automatic investment plan any time. Mosaic does not charge for this
service.
How to Redeem Shares
Redemption Price.
Share prices (net asset values or "NAVs") are determined every day that the
New York Stock Exchange is open. Redemptions are priced at the next share
price determined after the redemption request is received in proper form by
Mosaic.
Signature Guarantees.
To protect your investments, Mosaic requires signature guarantees for certain
redemptions.
What is a signature guarantee? It is a certification by a financial
institution that knows you and recognizes your signature that your signature
on a document is genuine.
A signature guarantee helps Mosaic ensure the identity of the authorized
shareholder(s). If you anticipate the need to redeem large amounts of money,
we encourage you to establish pre-authorized bank wire instructions on your
account. Redemptions by wire to a pre-authorized bank and account may be in
any amount and do not require a signature guarantee. You can pre-authorize
bank wire instructions by completing the appropriate section of a new
application or by calling an Account Executive to inquire about any necessary
documents. A signature guarantee may be required to add or change bank wire
instruction on an account.
A signature guarantee is required for any redemption when:
(1) the proceeds are to be greater than $50,000 (unless proceeds are being
wired to a pre-authorized bank and account),
(2) the proceeds are to be delivered to someone other than you, as shareholder
of record,
(3) the proceeds are to be delivered to an address other than your address of
record, or
(4) you made any change to your registration or account privileges within the
last 15 days.
Mosaic accepts signature guarantees from banks with FDIC insurance, certain
credit unions, trust companies, and members of a domestic stock exchange. A
guarantee from a notary public is not an acceptable signature guarantee.
Redemptions and Uncollected Funds.
We may delay paying the proceeds of any redemption for 10 days or more until
we can determine that the check or other deposit item (including purchases by
Electronic Funds Transfer "EFT") used for purchase of the shares has cleared.
Such deposit items are considered "uncollected," until Mosaic determines that
the bank on which they were drawn has actually paid them. Purchases made with
federal funds wire or U.S. Treasury check are considered collected when
received and not subject to the 10-day hold.
By Telephone or By Mail
Upon request by telephone or in writing, we will send a redemption check up to
$50,000 to you, the shareholder, at your address of record only. A redemption
request for more than $50,000 or for proceeds to be sent to anyone or anywhere
other than the shareholder at the address of record must be made in writing,
signed by all shareholders with their signatures guaranteed. See section
"Signature Guarantees" above. Redemption requests in proper form received by
mail and telephone are normally processed within one business day.
<I>Stop Payment Fee.</I>
To stop payment on a check issued by Mosaic, call our Shareholder Service
department immediately.
Normally, Mosaic Funds charges a fee of $28.00, or the cost of stop payment,
if greater, for stop payment requests on a check issued by Mosaic on behalf of
a shareholder. Certain documents may be required before such a request can be
processed.
By Wire
With one business day's notice, we can send funds by wire transfer to the bank
and account designated on the account application or by subsequent written
authorization. If you anticipate the need to redeem large amounts of money, we
encourage you to establish pre-authorized bank wire instructions on your
account. Redemptions by wire to a pre-authorized bank and account may be in
any amount and do not require a signature guarantee. You can pre-authorize
bank wire instructions by completing the appropriate section of a new
application or by calling an Account Executive to inquire about any necessary
documents. A signature guarantee may be required to add or change bank wire
instruction on an account.
Redemptions by wire can be arranged by calling the telephone numbers on the
back page of your prospectus and this Guide to Doing Business. Requests for
wire transfer must be made by 4:00 p.m. Eastern time the day before the wire
will be sent.
<I>Wire Fee.</I>
There will be a $10 fee for redemptions by wire to domestic banks. Wire
transfers sent to a foreign bank for any amount will be processed for a fee of
$30 or the cost of the wire if greater.
By Exchange
You can redeem shares from one Mosaic account and concurrently
invest the proceeds in another Mosaic account by telephone when your
account registration and tax identification number are the same.
There is no charge for this service.
By Customer Check
If you requested check writing privileges and submitted a signature card, you
can write checks in any amount payable to anyone. Check writing privileges
are not available from Mosaic Equity Trust or Mosaic Focus Fund accounts.
A confirmation statement showing the amount and number of each check you write
will be sent to you. Mosaic does not return canceled checks, but will provide
copies of specifically requested checks. Mosaic charges a fee of $1.00 per
copy for frequent requests or a request for numerous copies.
<I>Stop Payment Fee.<I>
To stop payment on a customer check that you wrote, call an Account Executive
immediately.
Mosaic will honor stop payment requests on unpaid checks that you wrote for a
fee of $5.00. Oral stop payment requests are effective for 14 calendar days.
Unless you confirm your oral stop order in writing, it will be canceled after
14 calendar days.
Written stop payment orders are effective for six months. You can extend
their effectiveness for another six months by written request.
Ordering Customer Checks.
When you complete a signature card for check writing privileges an initial
supply of preprinted checks will be sent free of charge. The cost of check
reorders (currently $2.00) and of printing special checks will be charged to
the shareholder's account.
By Systematic Withdrawal Plan
You can elect to have a systematic withdrawal plan whereby Mosaic will
automatically redeem shares in your Mosaic account and send the proceeds to a
designated recipient. To establish a systematic withdrawal plan, complete the
appropriate section of the application or call an Account Executive for
information. The minimum amount for a systematic withdrawal is $100.
Shareholders may change the amount or discontinue the systematic withdrawal
plan anytime.
Electronic Funds Transfer Systematic Withdrawal.
A systematic withdrawal can be processed as an electronic funds transfer,
commonly known as EFT, to credit a bank account or financial institution.
Check Systematic Withdrawal.
Or it can be processed as a check that is mailed to anyone you designate.
Special Redemption Rules for IRAs
Because IRA owners must make a written withholding election for income tax
purposes when they redeem shares from their IRA, you must request IRA
redemptions in writing. Before you think you may need to redeem funds from
your IRA at Mosaic, call us for a form that contains the required tax election
provisions.
How to Close an Account
To close an account, you should call an Account Executive and request that
your account be closed. You cannot close your account by writing a check.
When you close your account, shares will be redeemed at the next determined
net asset value. You can close your account by telephone, wire transfer or by
mail as explained above in the section "How To Redeem Shares."
Other Fees
Returned Investment Check Fee.
Your account will be charged (by redemption of shares) $10.00 for items
deposited for investment that are returned unpaid for any reason.
Minimum Balance.
Mosaic reserves the right to involuntarily redeem accounts with balances of
less than $700. Prior to closing any such account, Mosaic will give you 30
days written notice, during which time you may increase the balance to avoid
having the account closed.
Broker Fees.
If you purchase or redeem shares through a securities broker, your broker
may charge you a transaction fee. This charge is kept by the broker and not
transmitted to Mosaic Funds. However, you can engage in any transaction
directly with Mosaic Funds to avoid such charges.
Other Fees.
Mosaic reserves the right to impose additional charges, upon 30 days written
notice, to cover the costs of unusual transactions. Services for which
charges could be imposed include, but are not limited to, processing items
sent for special collection, international wire transfers, research and
processes for retrieval of documents or copies of documents.
Retirement Plans
All Mosaic Funds except Mosaic Tax-Free Trust can be used for retirement plan
investments, including IRAs.
<I>Annual IRA Fee.</I>
Mosaic currently charges an annual fee of $12 per shareholder (not per IRA
account) invested in an IRA of any type at Mosaic. You can prepay this fee.
Traditional IRAs
Traditional Individual Retirement Accounts ("Traditional IRAs") may be opened
with a reduced minimum investment of $500. Even though they may be
nondeductible or partially deductible, traditional IRA contributions up to the
allowable annual limits may be made, and the earnings on such contributions
will accumulate tax-free until distribution. Traditional IRA contributions
that you deducted from your income taxes and the earnings on such
contributions will be taxable when distributed.
Mosaic Funds will provide you with an IRA disclosure statement with an IRA
application. The disclosure statement explains various tax rules that apply
to traditional IRAs. A separate application is required for IRA accounts.
Roth IRAs
Roth IRAs may be opened with a reduced minimum investment of $500. Roth IRAs
are nondeductible; however, the earnings on such contributions will accumulate
and are distributed tax-free as long as you meet the Roth IRA requirements.
Mosaic Funds will provide you with an IRA disclosure statement with an IRA
application. The disclosure statement explains various tax rules that apply
to Roth IRAs. A separate application is required for IRA accounts.
Conversion Roth IRAs
You may convert all or part of your Traditional IRA into a Roth IRA at Mosaic.
Please call an Account Executive for a Conversion Roth IRA form if you want to
accomplish this conversion. You will be required to pay taxes on some or all
of the amounts converted from a traditional IRA to a Conversion Roth IRA. You
should consult your tax advisor and your IRA disclosure statement before you
accomplish this conversion.
Education IRAs
Mosaic Funds offers Education IRAs. Eligible investors may establish
Education IRAs with a reduced minimum investment of $100 as long as the
shareholder establishes and maintains an "Education IRA Plus" automatic
investment plan of at least $100 monthly.
The "Education IRA Plus" is designed to invest $41.66 each month into an
Education IRA, with the remaining $58.34 (or more) invested in another account
established by the parent or guardian of the Education IRA beneficiary. As a
result, each Education IRA Plus that is open for a full year will reach, but
not exceed, the annual $500 Education IRA limit. If you establish an
Education IRA Plus program in the middle of the year, you can make an
additional investment during the year to the Education IRA to make up for any
months you missed before your automatic monthly investments started.
Mosaic Funds will provide you with an Education IRA disclosure document with
an Education IRA application. The disclosure document explains various tax
rules that apply to Education IRAs. A separate application is required for
Education IRA accounts.
<I>Education IRA Fee.</I> Mosaic does not charge an annual fee on Education
IRA Plus accounts that have an active automatic investment plan of at
least $100 monthly or on Education IRA accounts of $5,000 or greater.
All other Education IRA accounts may be charged an annual fee of $12 for each
Education IRA beneficiary (not for each Education IRA account). You can
prepay this fee.
Employer Plans
Mosaic also offers SEP IRAs, SIMPLEs, 401(k) and 403(b) retirement plans.
Further information on the retirement plans available through Mosaic,
including minimum investments, may be obtained by calling Mosaic's shareholder
service department.
<PAGE>
Telephone Numbers
Shareholder Service
Washington, DC area: 703 528-6500
Toll-free nationwide: 1 888 670-3600
Mosaic Tiles (24 hour automated information)
Toll-free nationwide: 1 800 336-3063
The Mosaic Family of Mutual Funds
Mosaic Equity Trust
Mosaic Investors Fund
Mosaic Balanced Fund
Mosaic Mid-Cap Growth Fund
Mosaic Foresight Fund
Mosaic Focus Fund
Mosaic Income Trust
Mosaic High Yield Fund
Mosaic Government Fund
Mosaic Bond Fund
Mosaic Tax-Free Trust
Mosaic Tax-Free Arizona Fund
Mosaic Tax-Free Maryland Fund
Mosaic Tax-Free Missouri Fund
Mosaic Tax-Free Virginia Fund
Mosaic Tax-Free National Fund
Mosaic Tax-Free Money Market
Mosaic Government Money Market
This guide does not constitute an offering by the distributor in any
jurisdiction in which such offering may not be lawfully made.
1655 Fort Myer Drive, 10th Floor
Arlington, Virginia 22209-3108
mosgtdb199
<PAGE>
Statement of Additional Information
Dated February 1, 1999
For use with the prospectus of the Mosaic Tax-Free Trust
dated February 1, 1999
Mosaic Tax-Free Trust
Tax-Free Arizona Fund
Tax-Free Maryland Fund
Tax-Free Missouri Fund
Tax-Free Virginia Fund
Tax-Free National Fund
Tax-Free Money Market
1655 Fort Myer Drive
Arlington, VA 22209-3108
(888) 670-3600 or (703) 528-6500
This Statement of Additional Information is not a Prospectus. You should read
this Statement of Additional Information with the Prospectus of Mosaic Tax-
Free Trust bearing the date indicated above (the "Prospectus"). You can
obtain a copy of the Prospectus from Mosaic Funds at the address and telephone
numbers shown above.
Audited Financial Statements for the Trust for the fiscal year ended September
30, 1998 appear in the Trust's Annual Report to shareholders for that period.
The Report is incorporated herein by reference. You can get a copy of the
Report at no charge by writing or calling Mosaic Funds at the address and
telephone numbers shown above.
Table of Contents
TRUST HISTORY............................................... 2
DESCRIPTION OF THE TRUST ("Investment Objectives"
and "Implementation of Investment Policies")............. 2
Classification.............................................. 2
Investment Strategies and Risks............................. 2
Fund Policies............................................... 8
Fundamental Policies........................................ 10
Temporary Defensive Position................................ 12
MANAGEMENT OF THE FUNDS ("Management")
Board of Trustees..................................... 12
Management Information................................ 12
Compensation.......................................... 13
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES......... 14
INVESTMENT ADVISORY AND OTHER SERVICES ("Fees and
Expenses of the Funds" and "Management")................. 14
BROKERAGE ALLOCATION AND OTHER PRACTICES.................... 17
CAPITAL STOCK AND OTHER SECURITIES.......................... 18
PURCHASE, REDEMPTION AND PRICING OF SHARES ("Guide
to Doing Business," "Pricing of Fund Shares"
and "Dividends and Distributions")........................ 19
TAXATION OF THE TRUST ("Taxes").............................. 22
CALCULATION OF PERFORMANCE DATA ("Risk/Return Summary")...... 24
FINANCIAL STATEMENTS AND OTHER ADDITIONAL INFORMATION
("Financial Highlights") ................................. 26
APPENDIX - QUALITY RATINGS ("Implementation of Investment
Policies")............................................... 27
Note: The items appearing in parentheses above are cross references to
sections in the Prospectus that correspond to the sections of this Statement
of Additional Information.
TRUST HISTORY
Mosaic Tax-Free Trust ("the Trust") is organized as a Massachusetts business
trust under a Declaration of Trust dated June 8, 1982. Its first two funds
were the Money Market and National Fund. In the late 1980's, the Arizona,
Missouri and Virginia Funds were established and the Maryland Fund began in
1993.
Throughout this Statement of Additional Information, we sometimes refer to the
Trust or to the Funds when describing matters that affect all the Tax-Free
Funds.
The Trust was originally known as GIT Tax-Free Trust. The Trust changed its
name in May 1997. The name change followed the 1996 change in the Trust's
advisor from Bankers Finance Investment Management Corp. to Madison Mosaic,
LLC.
DESCRIPTION OF THE FUND
Classification
The Trust is a diversified open-end management investment company, commonly
known as a mutual fund.
The Trust issues six series of shares: Arizona Tax-Free Fund shares, Maryland
Tax-Free Fund shares, Missouri Tax-Free Fund shares, Virginia Tax-Free Fund
shares, Tax-Free National Fund shares (known as Tax-Free High Yield Portfolio
shares prior to February 1, 1994) and Tax-Free Money Market shares.
Investment Strategies and Risks
Shares in each of the four state tax-free Funds represent interests in a
portfolio principally composed of long-term tax-free bonds from issuers in the
respective state (the "Arizona Fund," the "Maryland Fund," the "Missouri Fund"
and the "Virginia Fund," or collectively the "State Funds").
Tax-Free National Fund shares represent interests in a portfolio principally
composed of long-term, tax-free bonds (the "National Fund"). Tax-Free Money
Market shares represent interests in a portfolio principally composed of
short-term, tax-free "money market" securities (the "Money Market").
The investment objectives of the Funds are described in the Prospectus. You
should also read the Prospectus for information about the Funds' principal
investment strategies and risks.
Each of the Trust's Funds are subject to the same general investment policies.
However, the maturities, quality ratings and issuing jurisdictions of the
municipal securities purchased will normally differ among the six funds as
described in the Prospectus.
In addition to the principal investment strategies described in the
Prospectus, the following describes additional investment strategies. Also
discussed are the risks associated with such strategies that you should
understand.
1. Municipal Securities.
Our principal investment strategy is to invest in municipal securities for the
Trust. However, there are many different kinds of municipal securities and we
must make various decisions in our efforts to follow this principal investment
strategy.
The market for municipal securities is diverse and constantly changing. The
following is therefore not necessarily a complete description of all types of
municipal securities we may purchase for the Trust.
Who Issues Municipal Securities in General? The term "municipal securities"
includes a variety of debt obligations. They are issued for public purposes
by or on behalf of states, territories and possessions of the United States,
their political subdivisions, the District of Columbia, Guam, Puerto Rico and
other territories. They are also issued by the duly constituted authorities,
agencies, public corporations and other instrumentalities of these
jurisdictions.
What are Municipal Securities Used For? Municipal securities may be used for
many public purposes, including constructing public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets, water and sewer works and gas and electric utilities. Municipal
securities may also be used to refund outstanding obligations, to obtain funds
to lend to other public institutions and certain private borrowers or for
general operating expenses.
How are Municipal Securities Classified by Purpose?
Municipal securities are usually classified as either "general obligation,"
"revenue" or "industrial development."
a. General Obligation. General Obligation securities are the obligations of
an issuer with taxing power and are payable from the issuer's general
unrestricted revenues. These securities are backed by the full faith, credit
and taxing power of the issuer for the payment of principal and interest.
They are not limited to repayment from any particular fund or revenue source.
For example, a bond issued directly by the State of Maryland is a General
Obligation Bond.
b. Revenue. Revenue securities are repayable only from revenues derived from
a particular facility, local agency, special tax, facility user or other
specific revenue source. Certain revenue issues may also be backed by a
reserve fund or specific collateral.
Ordinary revenue bonds are used to finance income producing projects such as
public housing, toll roads and bridges. The investor bears the risk that the
project will produce insufficient revenue and have insufficient reserves to
cover debt service on the bonds.
c. Industrial Development. Industrial development securities are revenue
obligations backed only by the agreement of a specific private sector entity
to make regular payments to the public authority in whose name they were
issued. Collateral may be pledged. States or local authorities generally
issue industrial development securities on behalf of private organizations for
the purpose of attracting or assisting local industry. These securities
usually have no credit backing from any public body.
Industrial development securities include pollution and environmental control
revenue bonds.
Industrial revenue bonds are used to finance privately-operated facilities for
business, manufacturing, housing, sports and other purposes and are limited to
$10 million per issuer, except when used for certain exempted purposes.
Pollution and environmental control revenue bonds are used to finance air and
water pollution control facilities required by private users. Repayment of
revenue bonds issued to finance privately used or operated facilities is
usually dependent entirely on the ability of the private beneficiary to meet
its obligations and on the value of any collateral pledged.
How are Municipal Securities Further Classified?
Municipal securities may be classified according to maturity as "notes" if up
to about two years in term, or as "bonds" if longer in term.
a. Callable Bonds. Callable municipal bonds are municipal bonds that contain
a provision in the bond indenture permitting the issuer to redeem bonds prior
to maturity. (A bond indenture is the legal document that contains the
important terms of the security.) Callable bonds are generally subject to
call during periods of declining interest rates. If the proceeds of a called
bond under such circumstances are reinvested, the result may be a lower
overall yield due to lower interest rates. If, when purchased, we paid a
premium for the bond, some or all of that premium may not be recovered,
depending on the call price.
b. Notes. Notes are generally used to meet short-term financing needs and
include the following specific types:
o Tax Anticipation Notes. Normally, these are general obligation issues.
They are issued to meet cash needs prior to collecting taxes and generally
are payable from specific future tax revenues.
o Bond Anticipation Notes. Like Tax Anticipation Notes, these also are
normally general obligation issues. They are issued to provide interim
financing in anticipation of sales of long-term bonds and generally are
payable from the proceeds of a specific proposed bond issue.
o Revenue Anticipation Notes. These may be general obligation issues and are
issued to provide cash prior to receipt of expected non-tax revenues from a
specific source, such as scheduled payments due from the federal government.
o Project Notes. Local authorities issue these notes to finance various
local redevelopment and housing projects conducted under sponsorship of the
federal government. Project notes are guaranteed and backed by the full
faith and credit of the United States.
o Construction Loan Notes. These notes provide interim financing for
construction projects. They are frequently issued in connection with
federally insured or guaranteed mortgage financing and may also be insured
or guaranteed by the federal government.
o Tax-Exempt Commercial Paper. These notes (sometimes called "municipal
paper") are similar to conventional commercial paper, but tax-free.
Municipal paper may be either a general obligation or a revenue issue,
although the latter is more common. These issues may provide greater
flexibility in scheduling maturities than other municipal notes.
c. Municipal Lease Obligations. Municipalities issue municipal lease
obligations to finance their obligation to pay rent on buildings or equipment
they use. We intend to limit our investments in such obligations to those
that represent liquid securities for purposes of a Fund's 10% limitation on
investments in illiquid securities. We will make daily determinations of the
liquidity and appropriate valuation of each such obligation. We will base our
decision on all relevant facts including: (1) the frequency of trades and
quotes for the obligation; (2) the number of dealers willing to purchase or
sell the security; (3) the number of other potential buyers; (4) the
willingness of dealers to make a market in the security; and (5) the nature of
the marketplace. With regard to the nature of the marketplace, we will
consider the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer.
A municipal lease obligation will not be considered liquid unless there is
reasonable assurance that its marketability will be maintained throughout the
time we hold the instrument. We must conclude that the obligation is liquid
considering: (1) whether the lease can be cancelled; (2) what assurance there
is that the assets represented by the lease can be sold; (3) the strength of
the lessee's general credit; (4) the likelihood that the municipality will
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to the operations of the municipality; and (5)
our legal recourse in the event of failure to appropriate.
How Can You Tell the Identity of the Issuer?
From time to time we must make determinations as to the identity of the issuer
of a particular municipal security. We will make this determination
considering our understanding of the assets and revenue principally backing
the issue and the most significant source of repayment of principal and
interest for the issue. If the specific securities are backed by assets and
revenues that are independent or separate from the assets and revenues of the
jurisdiction or agency in whose name they were issued, then we will normally
consider those securities to have a separate issuer.
What are the Risks of Investing in Various Municipal Securities?
Municipal securities generally are subject to possible default, bankruptcy or
insolvency of the issuer. Principal and interest repayment may be affected by
federal, state and local legislation, referendums, judicial decisions and
executive acts. The tax-exempt status of municipal securities may be affected
by future changes in the tax laws, litigation involving the tax status of the
securities and errors and omissions by issuers and their counsel. We will not
attempt to make an independent determination of the present or future tax-
exempt status of municipal securities acquired for the Trust.
While most municipal securities have a readily available market, a variety of
factors, including the scarcity of issues and the fact that tax-free
investments are inappropriate for significant numbers of investors, limit the
depth of the market for these securities. Accordingly, it may be more
difficult for the Trust to sell large blocks of municipal securities
advantageously than would be the case with comparable taxable securities.
Summaries of the economies of the States that make up the State Funds.
a. Arizona Fund. Arizona's economy is based primarily on tourism,
government, retail trade, construction and manufacturing. The State economy
has experienced strong growth that is expected to begin to slow. The retail
and construction sectors have begun to experience labor shortages, with recent
unemployment rates at their lowest levels since 1984. It is not possible to
predict whether these difficulties might affect the State's finances in the
future. The State of Arizona does not issue general obligation bonds.
b. Maryland Fund. In recent years, the federal and local government and the
information technology and life-sciences industries (including health
services) have become increasingly important to maintaining the employment
base in Maryland. Government spending reductions, including defense-related
spending cuts, increasing competition at the same time as the aging of the
information technology industry and pressures on health services providers to
reduce costs could adversely affect the Maryland economy to a greater degree
than that of other areas. Maryland's general obligation bonds have AAA and
Aaa ratings from Standard & Poor's and Moody's, respectively, as of the date
of this document.
c. Missouri Fund. Missouri has a well-diversified economy based on
manufacturing, commerce, trade, agriculture and mining. Its general
obligation bonds are rated AAA by Standard & Poor's and Aaa by Moody's as of
the date of this document. While service and trade gains have offset recent
losses in manufacturing-sector employment, the State's somewhat larger-than-
average dependence on manufacturing leaves its industry vulnerable to possible
cutbacks in defense spending.
d. Virginia Fund. The Virginia economy is based primarily on manufacturing,
government, agriculture, transportation, mining and tourism. Because of its
proximity to Washington, DC, Virginia's economy has been more sensitive than
other states to federal spending reductions. The Virginia State constitution
mandates a balanced budget and contains certain restrictions on the creation
of debt. As of the date of this document, bonds representing general
obligations of the Commonwealth of Virginia carry ratings of AAA by Standard &
Poor's and Aaa by Moody's.
2. Cash Position.
We may maintain a portion of the Trust's assets in uninvested cash in order to
meet day to day transaction requirements. The greater this cash position in
any particular Fund, the lower the dividends that Fund will yield.
3. Securities with Variable Interest Rates.
We may purchase some securities that carry variable interest rates. Municipal
securities with variable interest rates are adjusted periodically to pay a
fixed percentage of some base rate, such as the current rate on Treasury bills
or the "prime" rate of a specified bank. Rate adjustments may be specified to
occur on fixed dates, such as the beginning of each calendar month, or to
occur whenever the base rate changes. Some of these variable rate municipal
securities may be payable upon demand by the holder, generally within seven
days. Others may have a fixed stated maturity with no demand feature.
Variable rate securities may offer higher yields than are available from
shorter term securities but less risk of market value fluctuations than longer
term securities with fixed interest rates. When interest rates are generally
falling, yields of variable rate securities will tend to fall. When rates are
generally rising, variable rate yields will tend to rise.
Variable rate securities may not be rated and may not have a readily available
secondary market. The Trust's ability to obtain payment after the exercise of
demand rights could be adversely affected by subsequent events prior to
repayment of the investment at par. On an ongoing basis, we will monitor the
revenues and liquidity of issuers of variable rate securities and the ability
of issuers to pay principal and interest pursuant to any demand feature.
4. When-Issued Securities.
We may purchase and sell securities for the Funds on a when-issued or delayed
delivery basis. When-issued and delayed delivery transactions happen when
securities are bought or sold with payment for and delivery of the securities
scheduled to take place at a date later than normal settlement.
For example, when we purchase newly issued municipal securities on a when-
issued basis, payment and delivery may not take place for 15 to 45 days after
we commit to the purchase.
Fluctuations in the value of securities we agreed to buy or sell on a when-
issued basis may increase changes in a Fund's value. This is because the
fluctuations in value must be added to changes in the values of securities
actually held in the Fund during the same period.
When engaging in when-issued or delayed delivery transactions, we must rely on
the seller or buyer to complete the transaction at the scheduled time. If the
other party fails to do so, we might lose an opportunity for a more
advantageous purchase or sale. If the transaction is completed, intervening
changes in market conditions or the issuer's financial condition could make it
less advantageous than investment alternatives available at the time of
settlement.
While we will only commit to security purchases we intend to complete on
behalf of the Trust, we may sell any securities purchase contracts before
settlement of the transaction. If this occurs, the Trust could realize a gain
or loss despite the fact that the original transaction was never completed.
When fixed yield contracts are made to purchase when-issued securities, we
will take certain actions to protect the Trust. We will maintain in a
segregated account a combination of designated liquid investments and cash
sufficient in value to provide adequate funds to complete the scheduled
purchase.
5. Privately Arranged Loans and Participations.
We may make or acquire participations in privately negotiated loans to
municipal borrowers. Frequently such loans have variable interest rates and
may be backed by a bank letter of credit. In other cases, they may be
unsecured. If we engage in this type of investment strategy, we will rely on
the opinion of tax or bond counsel to the borrower as to the tax status of
these loans. Such transactions may provide an opportunity to achieve higher
tax-free yields than would be available from municipal securities offered and
sold to the general public.
Privately arranged loans, however, will generally not be rated by a credit
rating agency and will normally be illiquid. In most cases, we will only be
able to sell such loans through a provision requiring repayment following
demand by the Trust. Such loans made by the Trust will normally have a demand
provision permitting the Trust to require repayment within seven days.
Participations in such loans, however, may not have such a demand provision
and may not be otherwise marketable. To the extent these securities are
illiquid, they will be subject to each Fund's 10% limitation on investments in
illiquid securities (see "Fundamental Policies" below).
Recovery of an investment in any private loan that is illiquid and payable on
demand may depend on the ability of the municipal borrower to meet an
obligation for full repayment of principal and payment of accrued interest
within the demand period. The demand period is normally 7 days or less
(unless we determine that a particular loan issue, unlike most such loans, has
a readily available market). If appropriate, we will establish procedures to
monitor the credit standing of each such municipal borrower, including its
ability to honor contractual payment obligations.
6. Securities with Put Rights.
We may acquire securities for the Trust and in the same or a related
transaction acquire the right to resell the same securities at a fixed price
during a specified period of time. This is known as a "put" right. Such puts
may be considered standby commitments.
The combined cost of the securities purchased and the related put rights may
exceed the price at which the securities could be purchased alone. In that
case, the effective yield on the transaction would be lower than that
available from the security itself. However, the advantage of such a combined
transaction is that the put rights protect the Trust from the risk of falling
prices. As a result, the combined transaction produces an investment that may
be terminated prior to the maturity of the securities while providing a fixed
minimum yield.
Generally, puts are expected to be non-assignable and to terminate if we sell
the related securities. Since we may only acquire puts in connection with
portfolio securities and such puts cannot be assigned, the puts we acquire
will normally be without value except in conjunction with specific portfolio
investments. Accordingly, we intend to value any such puts at zero as
separate securities. However, we intend to value any related investment at
its fair value as determined in good faith by the Trustees, after
consideration of the value of the specific securities and the related put
together (or at the value of the related investment alone, if higher).
Of course, the value of a put depends on the ability of the issuer to actually
make payment for the securities if we exercise our put rights. In the event
the issuer of the put is unable to make the required payment, the Trust will
be left with securities that will probably be worth less than the price at
which they were to have been resold by means of the put.
We may acquire puts issued by issuers of the related securities or by
financial institutions, including securities dealers, but we will only acquire
puts issued by institutions we determine are creditworthy.
7. Loans of Portfolio Securities.
In certain circumstances, we may be able to earn additional income for the
Trust by loaning portfolio securities to a broker-dealer or financial
institution. We may make such loans only if cash or US Government securities,
equal in value to 100% of the market value of the securities loaned, are
delivered to the Trust by the borrower and maintained in a segregated account
at full market value each business day.
During the term of any securities loan, the borrower must pay us all dividend
and interest income earned on the loaned securities. At the same time, we
will also be able to invest any cash portion of the collateral or otherwise
charge a fee for making the loan, thereby increasing the Trust's overall
potential return.
If we make a loan of securities, the Trust would be exposed to the possibility
that the borrower of the securities might be unable to return them when
required. This would leave the Trust with the collateral maintained against
the loan. If the collateral were of insufficient value, the Trust could
suffer a loss.
8. Financial Futures Contracts.
We may use financial futures contracts, including contracts traded on a
regulated commodity market or exchange, to purchase or sell securities for the
Trust. A futures contract on a security is a binding contractual commitment
that, if held to maturity, will result in an obligation to make or accept
delivery, during a particular month, of securities having a standardized face
value and rate of return. By purchasing a futures contract, we will obligate
the Trust to make delivery of the security against payment of the agreed
price.
We will use financial futures contracts only when we intend to take or make
the required delivery of securities. However, if it is economically more
advantageous to do so, we may acquire or sell the same securities in the open
market instead and concurrently liquidate the corresponding futures position
by entering into another futures transaction that precisely offsets the
original futures position.
A financial futures contract for a purchase of securities is called a "long"
position, while a financial futures contract for a sale of securities is
called a "short" position. A short futures contract acts as a hedge against a
decline in the value of an investment. This is because it locks in a future
sale price for the securities specified for delivery against the contract. A
long futures contract acts to protect against a possible decline in interest
rates. Hedges may be implemented by futures transactions for either the
securities held or for comparable securities that are expected to parallel the
price movements of the securities being hedged.
Customarily, most futures contracts are liquidated prior to the required
settlement date by disposing of the contract. This transaction may result in
either a gain or loss. When part of a hedging transaction, this gain or loss
is expected to offset corresponding losses or gains on the hedged securities.
We intend to use financial futures contracts as a defense, or hedge, against
anticipated interest rate changes and not for speculation. A futures contract
sale is intended to protect against an expected increase in interest rates and
a futures contract purchase is intended to offset the impact of an interest
rate decline. By means of futures transactions, we may arrange a future
purchase or sale of securities under terms fixed at the time the futures
contract is made.
The Trust will incur brokerage fees in connection with any futures
transactions. Also, the Trust will be required to deposit and maintain cash
or US Government securities with brokers as margin to guarantee performance of
its futures obligations. When purchasing securities by means of futures
contracts, we take steps to protect the Trust. We will maintain in a
segregated account (including brokerage accounts used to maintain the margin
required by the contracts) a combination of liquid High Grade investments and
cash that is sufficient in aggregate value to provide adequate funds to
complete the purchase.
While we may use futures to reduce the risks of interest rate fluctuations,
futures trading itself entails certain other risks. Thus, while the Trust may
benefit from using financial futures contracts, unanticipated changes in
interest rates may result in a poorer overall performance than if the Trust
had not entered into any such contracts.
9. Repurchase and Reverse Repurchase Agreement Transactions.
Repurchase Agreements. A repurchase agreement involves acquiring securities
from a financial institution, such as a bank or securities dealer, with the
right to resell the same securities to the financial institution on a future
date at a fixed price.
Repurchase agreements are a highly flexible medium of investment. This is
because they may be for very short periods, including maturities of only one
day. Under the Investment Company Act of 1940, repurchase agreements are
considered loans and the securities involved may be viewed as collateral.
If we invest in repurchase agreements, the Trust could be subject to the risk
that the other party may not complete the scheduled repurchase. In that case,
we would be left holding securities we did not expect to retain in the Trust.
If those securities decline in price to a value of less than the amount due at
the scheduled time of repurchase, then the Trust could suffer a loss of
principal or interest.
In the event of insolvency or bankruptcy of the other party to a repurchase
agreement, the Trust could encounter restrictions on the exercise of its
rights under the repurchase agreement.
Reverse Repurchase Agreements. If a Fund requires cash to meet redemption
requests and we determine that it would not be advantageous to sell portfolio
securities to meet those requests, then we may sell the Fund's securities to
another investor with a simultaneous agreement to repurchase them. Such a
transaction is commonly called a "reverse repurchase agreement." It has the
practical effect of constituting a loan to the Trust, the proceeds would be
used to meet cash requirements for redemption requests.
During the period of any reverse repurchase agreement, the affected Fund would
recognize fluctuations in value of the underlying securities to the same
extent as if those securities were held by the Fund outright. If we engage in
reverse repurchase agreement transactions for any Fund, we will take steps to
protect the Fund. We will maintain in a segregated account a combination of
designated liquid securities and cash that is sufficient in aggregate value to
provide adequate funds to complete the repurchase.
10. Maturities. As used in this Statement of Additional Information and in
the Prospectus, the term "effective maturity" may have a variety of meanings.
(1) It may mean the actual stated maturity of the investment. (2) It may also
mean the time between its scheduled interest rate adjustment dates (for
variable rate securities). (3) Finally, it may mean the time between its
purchase settlement and scheduled future resale settlement pursuant to a
resale or optional resale under fixed terms arranged in connection with the
purchase, whichever period is shorter.
A "stated maturity" means the time scheduled for final repayment of the entire
principal amount of the investment under its terms. "Short-term" means a
maturity of one year or less, while "long-term" means longer than one year.
However, for purposes of the Trust's "penny rounding" exemptive order
applicable to the Money Market (see "Purchase, Redemption and Pricing of
Shares" below), in the case of a variable rate security, the "effective
maturity" is the longer of the notice period required before the Fund is
entitled to repayment under the terms of the security or the period
remaining until its next interest rate adjustment.
Fund Policies
1. Derivatives
We may invest in financial futures contracts, repurchase agreements and reverse
repurchase agreements (as described in the Investment Strategies and Risks
section above). However, since assuming management of the Trust, we have not
purchased financial futures contracts for the Trust or engaged in any
repurchase agreement or reverse repurchase agreement transaction for the Trust.
It is our policy never to invest in any other type of so-called "derivative"
securities (including, but not limited to, options on futures contracts,
swaptions, caps, floors and other synthetic securities). The Trustees must
provide advance approval for any deviation from this policy.
2. Geographic Concentration.
If the credit standing of a particular State or type of issuer generally
declined, then a Fund could be more adversely affected than if its investments
were more diversified. This risk is greatest in the State Funds since each is
expected to invest principally in the securities of one State.
3. Bond Quality Classifications.
We only purchase "investment grade" securities for the Trust. Investment grade
securities are those with the top four quality ratings given by nationally
recognized statistical rating organizations for that type of security. (For
example, a top rated long-term security will be rated AAA by Standard & Poor's
Corporation while a top rated short-term security will be rated A-1 by Standard
& Poor's.)
Investment grade securities can be further classified as either "High Grade"
or "Medium Grade." As used in this Statement of Additional Information, "High
Grade" securities include US Government securities and those municipal
securities which are rated AAA, AA, A-1; SP-1 by Standard & Poor's Corporation;
Aaa, Aa, P-1, MIG-1, MIG-2, VMIG-1; or VMIG-2 by Moody's Investors Service,
Inc. "Medium Grade" municipal securities are those rated A, BBB, A-2, A-3, SP-
2 or SP-3 by Standard & Poor's; A, Baa, P-2, P-3, MIG-3; or VMIG-3 by Moody's.
For unrated municipal securities, we may make our own determinations of those
investments we classify as "High Grade" or "Medium Grade," as a
part of the exercise of our investment discretion. However, we make such
determinations by reference to the rating criteria followed by recognized
rating agencies (see the Quality Ratings Appendix at the end of this Statement
of Additional Information). Our quality classification procedure is subject
to review by the Trustees.
Within the established quality parameters, we are free to select investments
for each Fund in any quality rating mix we deem appropriate. We will base the
mix on our evaluation of the desirability of each investment in light of its
relative yield and credit characteristics.
State and National Funds. The lowest rated securities we will purchase for the
State Funds are those rated BBB or Baa. These are considered Medium Grade
obligations. They are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
We expect that the preponderance of the State Funds will be in High Grade
securities with a portion of each Fund in Medium Grade securities to improve
yields.
We expect that the preponderance of the National Fund will be in Medium Grade
securities and that the remainder of the fund will be in High Grade
securities.
To the extent investments selected have higher yields than alternative
investments, they may be less liquid, have lower quality ratings and entail
more risk that their value could fall than comparable investments with lower
yields. To the extent we purchase lower-rated investments, the average credit
quality of the National Fund will be reduced. (See the Quality Ratings
Appendix for the investment characteristics of lower rated securities.)
4. Securities Loans.
If we loan any Trust securities, it is our policy to have the option to
terminate any loan at any time upon 7 days' notice to the borrower. The Trust
may pay fees for the placement, administration and custody of securities
loans, as appropriate.
5. Assets as Collateral
We will not pledge, mortgage or hypothecate in excess of 10% of any Fund's net
assets at market value.
6. Repurchase and Reverse Repurchase Agreements.
We require delivery of repurchase agreement collateral to the Trust's
Custodian. Alternatively, in the case of book-entry securities held by the
Federal Reserve System, we require that such collateral be registered in the
Custodian's name or in negotiable form. In the event of insolvency or
bankruptcy of the other party to a repurchase agreement, we could encounter
restrictions on the exercise of the Trust's rights under the repurchase
agreement. It is our policy to limit the financial institutions with which we
engage in repurchase agreements to banks, savings and loan associations and
securities dealers meeting financial responsibility standards prescribed in
guidelines adopted by the Trustees.
Our current operating policy is not to engage in reverse repurchase agreements
for any purpose, if reverse repurchase agreements in the aggregate would
exceed five percent of a Fund's total assets.
7. Puts, Calls, Future Contracts.
Our current policy not to write call options, not to acquire put options
(except in conjunction with a purchase of portfolio securities), not to lend
portfolio securities, and not to use financial futures contracts. If we
change such policies, we will notify you of this policy change at least 30
days prior to its implementation and describe the new investment techniques to
be employed.
8. Policy Review.
A majority of the Trustees may determine, based on unanticipated future
circumstances, that it is inadvisable to continue the Trust's policy of
seeking tax exempt income or to continue any of the more specific policies of
any Fund. If this happens, then the Trustees may change any such policies
without shareholder approval, subject to the limitations provided elsewhere in
this Statement of Additional Information and after giving 30 days' written
notice to shareholders affected by the change.
In the event of a permanent change, a larger portion, and possibly all, of the
Trust could be invested in Taxable Investments. Regulatory guidelines may
require a change in the Trust's name in such an event.
Except for the fundamental investment policies described below, the Trustees
may change the other investment policies and techniques we use to manage the
Trust. Any change would be as the Trustees deem appropriate, in response to
market conditions and other factors. There can be no assurance that the
Trust's present objectives will be achieved.
Fundamental Policies
The Trust has a number of limitations on its investment activities designated
as "Fundamental Policies." These limitations are described below. By
designating these policies as fundamental, we cannot change them without a
majority vote of the Trust's shareholders.
1. Non-Income Producing Securities.
We will not purchase any securities that do not, at the time of purchase,
provide income through interest or dividend payments (or equivalent income
through a purchase price discount from par). This does not prevent us from
purchasing or acquiring put options related to any such securities held.
Also, any such securities may be purchased pursuant to repurchase agreements
with financial institutions or securities dealers or may be purchased from any
person, under terms and arrangements determined by the Trust, for future
delivery.
2. Illiquid Investments.
With respect to any Fund, we will not invest in securities for which there is
no readily available market if at the time of acquisition more than 10% of the
Fund's net assets would be invested in such securities.
3. Restricted Investments.
We will not invest more than 5% of the value of the total assets of a Fund
(determined as of the date of purchase) in the securities of any one issuer
(other than securities issued or guaranteed by the United States Government or
any of its agencies or instrumentalities and excluding bank deposits). We
will not purchase any securities when, as a result, more than 10% of the
voting securities of the issuer would be held by a Fund. For purposes of
these restrictions, the issuer is deemed to be the specific legal entity
having ultimate responsibility for payment of the obligations evidenced by the
security and whose assets and revenues principally back the security.
4. Taxable Investments.
Under normal circumstances, each Fund will be at least 80% invested in
securities whose income is exempt from Federal income tax. The State Funds
will be at least 80% invested in securities whose income is exempt from
Federal and state income taxes for residents of their respective states.
Securities subject to Alternative Minimum Tax are not considered exempt
for purposes of this fundamental policy.
5. Seasoned Issuers.
We will not purchase any security when the entity responsible for repayment
has been in operation for less than three years if the purchase would result
in more than 5% of the total assets of a Fund being invested in such security.
This restriction does not apply to any security that has a government
jurisdiction or instrumentality ultimately responsible for its repayment.
6. Industry Concentration.
In purchasing securities for the Tax-Free Money Market (other than obligations
issued or guaranteed by the United States Government or its agencies and
instrumentalities, obligations which provide income exempt from Federal income
taxes, and short-term obligations of domestic banks, their branches, and other
domestic depository institutions), we will limit such investments so that not
more than 25% of the assets of the Fund is invested in any one industry.
In purchasing securities for the Tax-Free National Fund and the State
Funds (other than obligations issued or guaranteed by the United States
Government or its agencies and instrumentalities, or obligations which provide
income exempt from Federal income taxes), we will limit such investments so
that not more than 25% of the assets of each Fund is invested in any one
industry.
For purposes of our limitation on investments in any one industry, the general
obligations of governmental units are not considered related to any industry.
However, revenue obligations backed by particular types of projects (roads,
hospitals, etc.) will be considered related to the industry classifications of
the associated projects. Likewise, industrial revenue obligations will be
classified by the industry of the private user or users.
7. Financial Futures Contracts.
We will not purchase or sell futures contracts for any Fund if immediately
afterward the sum of the amount of margin deposits of the Fund's existing
futures positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
8. Borrowing and Lending.
We will not obtain bank loans for any Fund except for extraordinary or
emergency purposes. We will not borrow for the purpose of making investments
except as described in the next paragraph.
We may enter into reverse repurchase agreements for any Fund in amounts up to
25% of the Fund's total assets (including the proceeds of the reverse
repurchase transactions) for purposes of purchasing other securities. We will
not obtain loans or enter into reverse repurchase agreements in total amounts
exceeding one-third of total assets for any purpose.
We will not mortgage, pledge or hypothecate any assets to secure bank loans,
except in amounts up to 15% of a Fund's net assets taken at cost, and only for
extraordinary or emergency purposes.
We will not loan more than two thirds of a Fund's securities (calculated as a
percentage of gross assets). For any portfolio securities loaned, we will
require the Fund to be provided collateral satisfactory to the Trustees. The
collateral must be continuously maintained in amounts equal to or greater than
the value of the securities loaned.
9. Other Prohibited Activities.
* The Trust may not act as an underwriter.
* We will not make short sales or maintain a short position except in limited
circumstances. Specifically, the applicable Fund must own at least an equal
amount of securities (or securities convertible or exchangeable into such
securities). Furthermore, not more than 25% of a Fund's net assets may be
held as collateral for such sales).
* We will not purchase securities on margin (except for customary credit used
in transaction clearance) for the Fund.
* We will not invest in oil, gas or other mineral exploration or development
programs.
* We will not invest in commodities. This prohibition does not prevent us
from using financial futures contracts to make purchases or sales of
securities, provided the transactions would otherwise be permitted under the
Trust's investment policies.
* We will not invest in real estate for any Fund. This does not prevent us
from buying securities for any Fund that are secured by real estate.
* We will not acquire shares of other investment companies for any Fund. This
restriction does not apply to any investment in any tax-free money market
mutual fund or unit investment trust under limited circumstances. (1) Such
investment by any one issuer cannot exceed 5% of net assets. (2) Such
investments in the aggregate cannot exceed 10% of net assets. (3) If the
Tax-Free Money Market so invests, the Trustees must make a determination
that the other money market fund meets all applicable requirements of Rule
2a-7 under the Investment Company Act of 1940 (i.e. the rules governing the
quality and diversification standards by which money market mutual funds
must operate). Also, this restriction will not apply in connection with an
investment company merger, consolidation, acquisition or reorganization.
* We will not knowingly take any investment action which has the effect of
eliminating any Fund's tax qualification as a registered investment
company under applicable provisions of the Internal Revenue Code.
* We will not purchase any security for purposes of exercising management
control of the issuer, except in connection with a merger, consolidation,
acquisition or reorganization of an investment company.
* We will not purchase or retain the securities of any issuer if, to our
knowledge, the holdings of those of the Trust's officers, Trustees and
officers of the Advisor who beneficially hold one-half percent or more of
such securities, together exceed 5% of such outstanding securities.
* We will only purchase put options or write call options (and purchase
offsetting call options in closing purchase transactions) if the put option
purchased or call option written is covered by Fund securities, whether
directly or by conversion or exchange rights.
Temporary Defensive Position.
We do not intend to invest in any taxable securities under normal
circumstances. We may decide, however, that extraordinary conditions require
us to purchase taxable investments.
The "Taxable Investments" we may purchase for the Trust are limited to the
following US dollar denominated investments: (1) US Government securities; (2)
obligations of banks having total assets of $750 million or more; (3)
commercial paper and other corporate debt securities of High Grade (see
"Quality Ratings"); and (4) repurchase agreements involving any of the
foregoing securities or municipal securities.
For the State Funds and the National Fund, maturities of Taxable Investments
may exceed one year in extraordinary circumstances when the Trust has
determined to invest more than 20% of its assets in taxable securities. For
the Money Market, the Trust's Taxable Investments may not have an effective
maturity exceeding thirteen months.
"US Government securities" are obligations issued or guaranteed by the United
States Government, its agencies and instrumentalities. US Government
securities include direct obligations issued by the US Treasury, such as
Treasury bills, notes and bonds. Also included are obligations of the various
federal agencies and instrumentalities, such as the Government National
Mortgage Association, the Federal Farm Credit System, the Federal Home Loan
Mortgage Corporation and the Federal Home Loan Banks, and deposits fully
insured as to principal by federal deposit insurance. Except for Treasury
securities, which are full faith and credit obligations, US Government
securities may either be backed by the full faith and credit of the United
States or only by the credit of the particular federal agency or
instrumentality which issues them. Some such agencies have borrowing
authority from the US Treasury while others do not.
Bank obligations that are eligible Taxable Investments are certificates of
deposit ("CDs"), bankers acceptances ("BAs") and other obligations of banks
having assets of $750 million or more (including assets of affiliates). CDs
are generally short-term interest-bearing negotiable certificates issued by
banks against funds deposited with the issuing bank for a specified period of
time. Such CDs may be marketable or may be redeemable upon demand of the
holder. BAs are time drafts drawn against a business, often an importer, and
"accepted" by a bank, that agrees unconditionally to pay the draft on its
maturity date. BAs are negotiable and trade in the secondary market.
"Commercial paper" describes unsecured promissory notes issued by major
corporations to finance short-term credit needs. Commercial paper is issued
in maturities of nine months or less usually on a discount basis. The Trust
may purchase taxable commercial paper rated A-1 or P-1 (see "Quality
Ratings"). The Trust may also purchase other non-convertible corporate debt
securities (e.g., notes, bonds and debentures) of the appropriate remaining
maturities.
MANAGEMENT OF THE FUNDS
Board of Trustees.
Under the terms of the Declaration of Trust, which is governed by the laws of
the Commonwealth of Massachusetts, the Trustees are ultimately responsible for
the conduct of the Fund's affairs. As such, they meet at least quarterly to
review our operation and management of the Trust. In addition to the
information we provide the Trustees, they also meet with the Trust's
independent auditors at least annually to discuss any accounting or internal
control issues that the auditors may raise.
The Trustees serve indefinite terms of unlimited duration and they appoint
their own successors, provided that always at least two-thirds of the Trustees
have been elected by shareholders. The Declaration of Trust provides that a
Trustee may be removed at any special meeting of shareholders by a vote of
two-thirds of the Trust's outstanding shares.
Management Information.
Trustees and executive officers of the Trust and their principal occupations
during the past five years are shown below:
<TABLE>
<C> <C> <C>
Name, Address and Age Positions Held with Trust Principal Occupation During
Past 5 Years
Frank E. Burgess+ Trustee and Vice President President and Director of
6411 Mineral Point Road Madison Investment Advisors,
Madison, WI 53705 Inc.; Trustee and Vice
Born 08/04/1942 President of each Mosaic fund
and Vice President of Madison
Mosaic.
Thomas S. Kleppe* Trustee Trustee of each Mosaic fund;
7100 Derby Road Chairman of the Board of
Bethesda, MD 20817 Presidential Savings Bank, FSB;
Born 07/01/1919 Retired US Congressman and
Presidential Cabinet Secretary.
James R. Imhoff, Jr.* Trustee Trustee of each Mosaic fund;
429 Gammon Place Chairman and CEO of First Weber
Madison, WI 53719 Group, Inc. (residential real
Trustee estate brokers) of Madison, WI.
Born 05/20/1944
Lorence D. Wheeler* Trustee Trustee of each Mosaic fund;
4905 W. 60th Avenue Pension Specialist for CUNA
Arvada, CO 80003 Mutual Group (insurance); formerly
Born 01/31/1938 President of Credit Union Benefits
Services, Inc. (a provider of
retirement plans and related
services for credit union
employees nationwide).
Katherine L. Frank+ President President of each Mosaic Fund;
6411 Mineral Point Road Vice Pres and Principal of Madison
Madison, WI 53705 Investment Advisors, Inc.;
Born 11/27/1960 President of Madison Mosaic.
Julia M. Nelson+,** Vice President Vice President and Chief
1655 Fort Myer Drive Operating Officer of each Mosaic
Arlington, VA 22209 fund; Principal of Mosaic Funds
Born 05/17/1958 Distributor, LLC; Vice
President of Madison Mosaic.
Jay R. Sekelsky+,** Vice President Vice Pres. of each Mosaic fund;
6411 Mineral Point Road Vice President and Principal of
Madison, WI 53705 Madison Investment Advisors, Inc;
Born 9/14/1959 Vice President of Madison Mosaic.
Christopher C. Berberet+,**Vice President Vice Pres. of each Mosaic fund;
6411 Mineral Point Road Vice President and Principal of
Madison, WI 53705 Madison Investment Advisors, Inc;
Born 07/31/1959 Vice President of Madison Mosaic.
W. Richard Mason+,** Secretary Secretary and General Counsel of
1655 Ft. Myer Drive each Mosaic fund; Principal of
Arlington, VA 22209 Mosaic Funds Distributor, LLC;
Born 05/13/1960 Genl. Counsel of Madison Mosaic;
Secretary of Presidential Savings
Bank, FSB
</TABLE>
+An "interested person" of the Trust as the term is defined in the Investment
Company Act of 1940. Only those persons named in the above table of Trustees
and officers who are not interested persons of the Trust are eligible to be
compensated by the Trust.
*Member of the Audit Committee of the Trust. The Audit Committee is
responsible for reviewing the results of each audit of the Trust by its
independent auditors and for recommending the selection of independent
auditors for the coming year.
**Member of the Pricing Committee of the Trust. The Pricing Committee is
responsible for reviewing the accuracy of the Trust's daily net asset value
determinations. It reports to the Trustees at least quarterly and makes any
recommendations for pricing of Trust securities in the event pricing cannot be
determined in accordance with established written pricing procedures approved
by the Trustees.
Compensation.
The compensation of each non-interested (or "Independent") Trustee currently
is fixed at $4,000 per year, to be pro-rated according to the number of
regularly scheduled Board meetings each year. Four Board meetings are
currently scheduled to take place each year. In addition to such
compensation, those Trustees who may be compensated by the Trust will be
reimbursed for any out-of-pocket expenses incurred by them in connection with
the affairs of the Trust, such as travel to any Board meetings.
During the last fiscal year of the Trust, the Trustees were compensated as
follows:
Aggregate Total Compensation from
Compensation Trust and Fund Complex*
from Trust Paid to Trustees
Frank E. Burgess 0 0
Thomas S. Kleppe $4,000 $15,000
James R. Imhoff, Jr. $4,000 $15,000
Lorence D. Wheeler $4,000 $15,000
The Mosaic Funds complex is comprised of 5 trusts with a total of 15 funds
and/or series.
Under the Declaration of Trust, the Trustees can be indemnified by the Trust
for certain matters. For example, they can be indemnified against all
liabilities and expenses reasonably incurred by them by virtue of their
service as Trustees. However, they will not be indemnified for liabilities
incurred by reason of their willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of their office.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of October 30, 1998, the shareholders of record that held five percent or
more of the Trust were: for the Arizona Fund -- Charles Schwab & Co., 101
Montgomery Street, San Francisco, CA (7%); for the Maryland Fund -- Marie
Cheng, 7508 Cayuga, Bethesda, MD (5%), D&C Lindbeck, 4809 Sharon Road, Temple
Hills, MD (5%) and E. Bocci, Box 764, Olney, MD (5%); for the Missouri Fund --
Blueridge & Co., 4240 Blue Ridge Blvd., Kansas City, MO (34%) and J&V Rys,
4423 Blue Ridge Blvd, Kansas City, MO (5%); for the Virginia Fund -- none; for
the National Fund -- none; and for the Money Market -- Fagel & Haber, 140
South Dearborn Street, Chicago, IL (19%), K.L. Norris, 4637 Randolph Drive,
Annandale, VA (7%), and S & C Schaub, 1924 Gaither St., Temple Hills, MD (8%).
By virtue of owning more than 25% of the Missouri Fund, the shareholder
referenced above is considered to control the Fund. The shareholder is a
Missouri financial institution acting in a fiduciary capacity and is not
otherwise related to us or the Trust. It does not beneficially own the shares
it controls.
As of October 30, 1998, the Trustees and officers of the Trust directly or
indirectly owned as a group less than 1% of the outstanding shares of each
Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
1. Investment Advisors.
We are Madison Mosaic, LLC (known as Bankers Finance Advisors, LLC prior to
April 1998), 1655 Fort Myer Drive, Arlington, Virginia 22209-3108, the
investment advisor to the Trust.
We are a wholly owned subsidiary of Madison Investment Advisors, Inc.
("Madison"), 6411 Mineral Point Road, Madison, Wisconsin. Madison is a
registered investment advisor and has numerous advisory clients. Madison was
founded in 1973 and has no business affiliates other than those described in
the Prospectus and this Statement of Additional Information. Madison operates
Madison Scottsdale in Scottsdale, Arizona. We share our investment management
personnel with Madison.
Frank E. Burgess is President, Treasurer and Director of Madison. Mr. Burgess
owns a majority of the controlling interest of Madison, which, in turn, owns
and controls Madison Mosaic (see "Management Information" above).
Madison formed us in 1996 for the purpose of providing investment management
services to the Mosaic family of mutual funds, including the Trust. We
purchased the investment management assets of the former advisor to the Trust,
Bankers Finance Investment Management Corp., on July 31, 1996. As a result,
any references in this Statement of Additional Information and in the
Prospectus to advisory or management activities during periods prior to July
31, 1996 refer to Bankers Finance Investment Management Corp. We also serve
as the investment advisor to Mosaic Equity Trust, Mosaic Income Trust, Mosaic
Focus Fund Trust and Mosaic Government Money Market Trust.
The Arizona Fund paid aggregate advisory fees for the fiscal years ended
September 30, 1996, 1997 and 1998 in the amounts of $59,352, $55,147 and
$53,176, respectively.
The Missouri Fund paid aggregate advisory fees for the fiscal years ended
September 30, 1996, 1997 and 1998 in the amounts of $71,065, $70,293 and
$71,998, respectively.
The Maryland Fund paid aggregate advisory fees for the fiscal years ended
September 30, 1996, 1997 and 1998 in the amounts of $1,214, $12,517 and
$13,251, respectively. The then-acting advisor waived $15,118 in advisory
fees for the fiscal year ending September 30, 1996.
The Virginia Fund paid aggregate advisory fees for the for the fiscal years
ended September 30, 1996, 1997 and 1998 in the amounts of $213,357, $204,610
and $201,362, respectively.
The National Fund paid aggregate advisory fees for the for the fiscal years
ended September 30, 1996, 1997 and 1998 in the amounts of $192,643, $176,540
and $163,646, respectively.
The Money Market paid aggregate advisory fees for the for the fiscal years
ended September 30, 1996, 1997 and 1998 in the amounts of $41,488, $36,259 and
$34,022, respectively.
2. Principal Underwriter.
Mosaic Funds Distributor, LLC, 1655 Ft. Myer Drive, Suite 1000, Arlington,
Virginia 22209, acts as the Trust's broker-dealer Distributor pursuant to a
Distribution Agreement dated July 30, 1998 between it and all Mosaic Funds.
The Distributor does not engage in underwriting activities and receives no
compensation for its services (see the "Distribution Agreement" section
below). The Distributor is a wholly owned subsidiary of Madison.
3. Services Provided by Each Investment Advisor and Fund Expenses Paid by
Third Parties.
Together, we (Madison Mosaic) and Madison are responsible for the investment
management of the Trust. We are authorized to execute each Fund's portfolio
transactions, to select the methods and firms with which such transactions are
executed, to oversee the Trust's operations, and otherwise to administer the
affairs of each Fund as we deem advisable.
We provide or arrange for all the Trust's required services through three main
contracts: An investment advisory agreement; a services agreement and a
distribution agreement. These contracts are described below. No Fund
expenses are paid by third parties.
Investment Advisory Contract.
The Investment Advisory Agreement between us and the Trust is subject to
annual review and approval by the Trustees, including a majority of those
Trustees who are not "interested persons," as defined in the Investment
Company Act of 1940. The agreement was approved by Trust shareholders for an
initial two year term at a special meeting of shareholders held in July 1996
and most recently renewed for another year last July.
The Investment Advisory Agreement may be terminated at any time, without
penalty, by the Trustees or by the vote of a majority of the outstanding
voting securities, or by us, upon sixty days' written notice to the other
party. We cannot assign the agreement and it will automatically terminate
upon any assignment.
Advisory Fee and Expense Limitations. For our services under the Investment
Advisory Agreement, we receive a fee, payable monthly, calculated as 0.625%
per year for the National and State Funds and 0.5% per year for the Money
Market of average daily net assets during the month. Such percentage does not
decrease as net assets increase. We can waive or reduce this fee during any
period. We can also reduce our fee on a permanent basis, without any
requirement for consent by the affected Fund or its shareholders, under such
terms as we may determine, by written notice to the Trust.
We agreed to be responsible for the fees and expenses of the Trustees and
officers of the Trust who are affiliated with us. We are also responsible for
the Trust's various promotional expenses (including distributing Prospectuses
to potential shareholders).
Payments to Third Parties. We can make payments out of our investment
advisory fee to other persons, including broker-dealers that make one or more
of the Trust's funds available to investors pursuant to any "no transaction
fee" network or service they provide. Under regulations of the Securities and
Exchange Commission, such arrangements are permissible in connection with
distributing investment company shares, if the payments of the shared fee
amounts are made out of our own resources.
Services Contract.
The Trust does not have any officers or employees who are paid directly by the
Trust. The Trust entered into a Services Agreement with us for operational
and other services required by its Funds. Such services may include:
* The functions of shareholder servicing agent and transfer agent.
* Bookkeeping and portfolio accounting.
* Handling telephone inquiries, cash withdrawals and other customer service
functions (including monitoring wire transfers).
* Providing appropriate supplies, equipment and ancillary services necessary
to conduct of its affairs.
* Calculating net asset value.
* Arranging for and paying the Custodian.
* Arranging for and paying the Trust's independent accountants.
* Arranging for and paying the Trust's legal counsel.
* Registering the Trust and its shares with the Securities and Exchange
Commission and notifying any applicable state securities commissions of its
sale in their jurisdiction.
* Printing and distributing prospectuses and periodic financial reports to
current shareholders.
* Trade association membership.
* Preparing shareholder reports, proxy materials and holding shareholder
meetings.
We provide all these services to each Fund for a fee calculated as a
percentage of average daily net assets. This fee is reviewed and approved at
least annually by the Trustees and is compared with the fee paid by other
mutual funds of similar size and investment objective to determine if it is
reasonable. The current fees are stated in the Trust's Prospectus.
Our payment under the Services Agreement is in addition to and independent of
payments made pursuant to the Investment Advisory Agreement. We also provide
such services to Mosaic Equity Trust, Mosaic Income Trust, Mosaic Focus Fund
Trust and Mosaic Government Money Market Trust.
The Trust remains responsible for any extraordinary or non-recurring expenses
it incurs.
Distribution Agreement.
Mosaic Funds Distributor, LLC, is the Distributor of Mosaic Funds. It
receives no compensation for its services under the Distribution Agreement.
The agreement has an initial term of two years beginning July 30, 1998 and may
continue in effect after that term only if approved annually by the Trustees,
including a majority of those who are not "interested persons," as defined in
the Investment Company Act of 1940.
The Distribution Agreement provides for distribution of the Trust's shares
without a sales charge to the investor. The Distributor may act as the
Trust's agent for any sales of its shares, but the Trust may also sell its
shares directly to any person. The Distributor makes each Fund's shares
continuously available to the general public in those States where it has
given notice that it will do so. However, the Distributor has no obligation
to purchase any of the Trust's shares.
The Distributor is wholly owned by Madison Investment Advisors, Inc. and we
share our personnel.
4. Other Service Providers.
We arrange for Trust securities to be held in custody by the Trust's
Custodian, for the Trust to be audited annually by independent accountants and
for the Trust and the Independent Trustees to be represented by outside
counsel. The Trust does not pay any separate fees for the services of these
third parties because the cost of these services is included in the advisory
and service fees we receive to manage the Trust.
Transfer Agent and Dividend-Paying Agent.
The Trust is registered with the Securities and Exchange Commission as the
transfer agent for its shares and acts as its own dividend-paying agent.
While transfer agent personnel and facilities are included among those
services provided to the Trust under the Services Agreement between us and the
Trust (see above), the Trust itself is ultimately responsible for its transfer
agent and dividend payment functions and for supervising those functions by
its officers.
Custodian.
Star Bank, N.A., 425 Walnut Steet, Cincinnati, OH 45202, is Custodian for the
cash and securities of the Trust. The Custodian maintains custody of the
Trust's cash and securities, handles its securities settlements and performs
transaction processing for cash receipts and disbursements in connection with
the purchase and sale of the Trust's shares.
From time to time, the Trust may appoint as Special Custodians certain banks,
trust companies, and firms that are members of the New York Stock Exchange and
trade for their own account in the types of securities purchased by the Trust.
Such Special Custodians will be used by the Trust only for the purpose of
providing custody and safekeeping services in limited circumstances. First,
custody would be of relatively short duration. Second, custody would be for
designated types of securities that, in our opinion or in the opinion of the
Trustees, would most suitably be held by such Special Custodians rather than
by the Custodian.
In the event any such Special Custodian is used, it shall serve the Trust only
in accordance with a written agreement with the Trust. The agreement must
meet the requirements of the Securities and Exchange Commission for mutual
fund custodians and be approved and reviewed at least annually by the
Trustees. If the Special Custodian is a securities dealer, it must deliver to
the Custodian its receipt for the safekeeping of each lot of securities
involved prior to payment by the Trust for such securities.
The Trust may also maintain deposit accounts for the handling of cash balances
of relatively short duration with various banks, as we or the Trustees deem
appropriate, to the extent permitted by the Investment Company Act of 1940.
Independent Public Accountant.
Deloitte & Touche LLP, 117 Campus Drive, Princeton, NJ 08540, serves as
independent public accountants to the Trust. The independent accountant
audits the Trust's annual reports and annually reviews the internal controls
of the Trust both as a mutual fund and as a transfer agent.
BROKERAGE ALLOCATION AND OTHER PRACTICES
We make all decisions regarding the purchase and sale of securities and
executing of these transactions. This includes selecting market, broker or
dealer and negotiating commissions. Our decisions are subject to review by
the Trustees.
During its three most recent fiscal years, the Trust did not pay any brokerage
commissions.
In general, we seek to obtain prompt and reliable execution of orders at the
most favorable prices or yields when purchasing and selling Trust securities.
In determining the best price and execution, we may take into account a
dealer's operational and financial capabilities, the type of transaction
involved, the dealer's general relationship with us and any statistical,
research or other services the dealer provides us. To the extent such non-
price factors are taken into account, the execution price paid may be
increased, but only in reasonable relation to the benefit of such non-price
factors to the Trust as we determine in good faith. The Trust may not be our
only client that benefits from our receipt of research from the brokers and
dealers the Trust uses for its trading needs.
Brokers or dealers who execute portfolio transactions for the Trust may also
sell its shares; however, any such sales will not be either a qualifying or
disqualifying factor in selecting brokers or dealers.
We expect that most portfolio transactions will be made directly with a dealer
acting as a principal. As a result, the transaction will not involve payment
of commissions. However, any purchases from an underwriter or selling group
could involve payments of fees and concessions to the underwriting or selling
group.
Affiliated Transactions. We can purchase portfolio securities through an
affiliated broker if we decide it is in the Trust's interests. If we trade
through an affiliated broker, we will observe four requirements. (1) The
transaction must be in the ordinary course of the broker's business. (2) The
transaction cannot involve a purchase from another broker or dealer. (3)
Compensation to the broker in connection with the transaction cannot be in
excess of one percent of the cost of the securities purchased. (4) The terms
to the Trust for purchasing the securities, including the cost of any
commissions, must be as favorable to the Trust as the terms concurrently
available from other sources. Any compensation paid in connection with such a
purchase will be in addition to fees payable to us under the Investment
Advisory Agreement.
We do not anticipate that any such purchases through affiliates will ever
represent a significant portion of the Trust's trading activity. In fact, no
such transactions took place during the Trust's six most recent fiscal years.
Portfolio Turnover. We do not expect to engage in short-term trading for the
State Funds or the National Fund, but securities may be purchased and sold in
anticipation of market interest rate changes, as well as for other reasons.
We anticipate that annual portfolio turnover for these Funds will generally
not exceed 100%, but actual turnover rate will not be a limiting factor if we
believe it is desirable to make purchases or sales.
CAPITAL STOCK AND OTHER SECURITIES
Summary.
The Declaration of Trust, dated June 8, 1982, was filed with the Secretary of
State of the Commonwealth of Massachusetts and the Clerk of the City of
Boston, Massachusetts. Under the terms of the Declaration of Trust, the
Trustees may issue an unlimited number of whole and fractional shares of
beneficial interest without par value for each series of shares they have
authorized. All shares issued will be fully paid and nonassessable and will
have no preemptive or conversion rights. Under Massachusetts law, the
shareholders, under certain circumstances, may be held personally liable for
the Trust's obligations. The Declaration of Trust, however, provides
indemnification out of Trust property of any shareholder held personally
liable for obligations of the Trust.
Shares and Classes of Shares.
Six series of the Trust's shares are currently authorized: Tax-Free Arizona
shares, Tax-Free Maryland shares, Tax-Free Missouri shares, Tax-Free Virginia
shares, Tax-Free National shares and Tax-Free Money Market shares. Each share
has one vote and fractional shares have fractional votes. Except as otherwise
required by applicable regulations, any matter submitted to a shareholder vote
will be voted upon by all shareholders without regard to series or class. For
matters where the interests of separate series or classes are not identical,
the question will be voted on separately by each affected series or class.
For example, shareholder votes relating to the election of Trustees or
approval of the Trust's selection of independent public accountants, as well
as any other matter in which the interests of all shareholders are identical,
will be voted on without regard to series or classes of shares. Matters that
affect a particular series or class of shares will not be voted upon by the
unaffected shareholders. On the other hand, required shareholder approval of
the Investment Advisory Agreement and any change in a Fund's fundamental
investment policies will be submitted to a separate vote by each series and
class of shares. When a matter is voted upon separately by more than one
series or class of shares, it may be approved with respect one series or class
even if it is rejected by the shareholders of another series or class.
The Trustees may authorize at any time creating additional series of shares.
The proceeds of the new series would be invested in separate, independently
managed portfolios. The Trustees can also authorize additional classes of
shares within any series (which would be used to distinguish among the rights
of different categories of shareholders, as might be required by future
regulations or other unforeseen circumstances). These classes can have such
preferences, privileges, limitations, and voting and dividend rights as the
Trustees may determine.
All money received by the Trust for shares of any additional series or class,
and all assets in which such consideration is invested, would belong to that
series or class (but classes may represent proportionate undivided interests
in a series), and would be subject to its own related liabilities.
Share Splits and Liquidation Rights.
The Trustees may divide or combine the Trust's shares into a greater or lesser
number of shares as long as the action will not change your proportionate
interest in the Trust. In the event of unforeseen gains or losses, the
Trustees might use this authority to maintain the price of Money Market shares
at $1.00. Any assets, income and expenses of the Trust that we cannot readily
identify as belonging to a particular series will be allocated by or under the
direction of the Trustees as they deem fair and equitable. Upon any
liquidation of the Trust or any of its Funds, you would be entitled to share
pro-rata in the liquidation proceeds available for distribution.
Shareholder Meetings.
Because there is no requirement for annual elections of Trustees, the Trust
does not anticipate having regular annual shareholder meetings. Shareholder
meetings will be called as necessary to consider questions requiring a
shareholder vote. The selection of the Trust's independent accountants will
be submitted to a ratification vote by the shareholders at any meetings held
by the Trust.
Any change in the terms of the Declaration of Trust (except for immaterial
changes like a name change), in the Investment Advisory Agreement (except for
reductions of the Advisor's fee) or in the fundamental investment limitations
of a Fund must be approved by a majority of the shareholders before it can
become effective.
Shareholder inquiries can be made to the offices of the Trust at the address
on the cover of this document.
Voting Rights.
The voting rights of shareholders are not cumulative. As a result, holders of
more than 50 percent of the shares voting can, if they choose, elect all
Trustees being selected, while the holders of the remaining shares would be
unable to elect any Trustees.
A "majority" is constituted by either 50 percent of all shares of the Fund or
67 percent of the shares voted at an annual meeting or special meeting of
shareholders at which at least 50 percent of the shares are present or
represented by proxy.
The Declaration of Trust provides that two-thirds of the holders of record of
the Trust's shares may remove a Trustee from office by votes cast in person or
by proxy at a meeting called for the purpose. A Trustee may also be removed
from office provided two-thirds of the holders of record of the Trust's shares
file declarations in writing with the Trust's Custodian. The Trustees are
required to promptly call a meeting of shareholders for the purpose of voting
on removal of a Trustee if requested to do so in writing by the record holders
of at least 10% of the Trust's outstanding shares.
Ten or more persons who have been shareholders for at least six months and who
hold shares with a total value of at least $25,000 (or 1% of the Trust's net
assets, if less) may require the Trust to assist a shareholder solicitation
with the purpose of calling a shareholder meeting. Such assistance could
include providing a shareholder mailing list or an estimate of the number of
shareholders and approximate cost of the shareholder mailing. In the latter
case, unless the Securities and Exchange Commission determines otherwise, the
shareholders desiring the solicitation may require the Trustees to undertake
the mailing if those shareholders provide the materials to be mailed and
assume the cost of the mailing.
Shareholder Liability.
Under Massachusetts law, the shareholders of an entity such as the Trust may,
under certain circumstances, be held personally liable for its obligations.
The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. The Declaration of Trust
provides for indemnification out of Trust property of any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment against a shareholder under such a claim. The risk of a
shareholder incurring financial loss as a result of being a shareholder is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
Liability of Trustees and Others.
The Declaration of Trust provides that the officers and Trustees of the Trust
will not be liable for any neglect, wrongdoing, errors of judgment, or
mistakes of fact or law. However, they are not protected from liability
arising out of willful misfeasance, bad faith, gross negligence, or reckless
disregard of their duties to the Trust. Similar protection is provided to the
Advisor under the terms of the Investment Advisory Agreement and the Services
Agreement. In addition, protection from personal liability for the
obligations of the Trust itself, similar to that provided to shareholders, is
provided to all Trustees, officers, employees and agents of the Trust.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Mosaic's "Guide to Doing Business"describes the basic procedures for investing
in the Trust. The following information concerning other investment procedures
is presented to supplement the information contained in the Guide.
Offering Price.
We calculate the net asset value (NAV) of each Fund every day the New York
Stock Exchange is open for trading. NAV is not calculated on New Year's Day,
the observance of Martin Luther King, Jr.'s Birthday, Presidents Day, Good
Friday, the observance of Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas Day, and on other days the New York Stock Exchange
is closed for trading. The NAV calculation for each Fund is made at the time
of the close of the New York Stock Exchange.
NAV is determined by adding the value of all securities and other assets of a
Fund, subtracting its liabilities and dividing the result by the total number
of outstanding shares of that Fund. Since the Trust does not charge a "sales
load," its shares are both offered and redeemed at NAV.
We determine the value of each Fund's securities in a number of ways. If
current market quotations are readily available for a security, we value it at
the mean between its bid and asked prices. For securities for which current
market quotations are not readily available, we value them at their fair value
as determined in good faith by the Trustees. We value securities having a
remaining effective maturity of 60 days or less at amortized cost which
approximates market value.
The Trustees authorized using independent pricing services to obtain daily
securities prices when required.
The market for many municipal issues is not active and transactions in such
issues may occur infrequently. Accordingly, the independent pricing service
may price securities with reference to market transactions in comparable
securities and to historical relationships among the prices of comparable
securities. Such prices may also reflect an allowance for the impact upon
prices of the larger transactions typical of trading by institutions.
Shares in all Funds are priced by rounding to the nearest penny. NAV of
shares in the State and National Funds is expected to fluctuate daily, and we
will make no attempt to stabilize the value of these shares.
To the extent reasonably practicable, we intend to assure that the Money
Market's net asset value per share will not deviate from $1.00. Despite this
consideration, there can be no absolute assurance that the Money Market will
always maintain a $1.00 share price. The "penny rounding" pricing method, in
fact, requires that if the NAV deviates one-half percent or more from $1.00,
the share price must be rounded upward or downward accordingly.
Shareholder Service Policies.
Our policies concerning shareholder services are subject to change from time
to time. In the event of a material change, you will receive an updated
"Guide to Doing Business."
Minimum Initial Investment and Minimum Balance.
We can change the minimum account size below which an account is subject to a
monthly service charge or to involuntary closing. We may change the Trust's
minimum amount for subsequent investments by 30 days written notice. The
notice may be provided in Mosaic's quarterly shareholder newsletter.
Special Service Charges.
We may impose special service charges for services that are not regularly
afforded to shareholders. In order to do this, we must give 30 days written
notice to you or to shareholders in general. These special charges may
include, but are not limited to, fees for excessive exchange activity or
unusual historical account research and copying requests. Mosaic's standard
service charges are also subject to adjustment from time to time.
Share Certificates.
The Trust will not issue share certificates.
Subaccounting Services.
The Trust can provide subaccounting services to institutions. The Trustees
reserve the right to determine from time to time such guidelines as they deem
appropriate to govern the level of subaccounting service that can be provided
to individual institutions in differing circumstances. Normally, the Trust's
minimum initial investment to open an account will not apply to subaccounts.
However, we reserve the right to impose the same minimum initial investment
requirement that would apply to regular accounts if it seems that the cost of
carrying a particular subaccount or group of subaccounts is likely to be
excessive.
The Trust may provide and charge for subaccounting services that we determine
exceed those services that can be provided without charge. The availability
and cost of such additional services will be determined in each case by
negotiation between Mosaic and the parties requesting the additional services.
We are not presently aware of any such services for which a charge will be
imposed.
Crediting of Investments.
We can reject any investment in the Trust for any reason and may at any time
suspend all new investment in any Fund. We may also, in our discretion,
decline to recognize an investment by funds wired for credit until such funds
are actually received by the Trust. This is because we may be responsible for
any losses resulting from changes in a Fund's net asset value that happen
because we failed to receive funds from a shareholder to whom recognition for
investment was given in advance of receipt of payment.
If shares are purchased by wire and the wire is not received or if shares are
purchased by a check that, after deposit, is returned unpaid or proves
uncollectible, then the share purchase may be canceled immediately. The
shareholder that gave notice of the intended wire or submitted the check will
be held fully responsible for any losses incurred by us, the Trust or the
Distributor.
Foreign Checks.
Checks drawn on foreign banks will not be considered received until we have
actual receipt of payment in immediately available US dollars after submitting
the check for collection. Collection of such checks through the international
banking system may require 30 days or more. We will pass the cost of such
collection to you if you invest using a foreign check.
Purchase Orders from Brokers.
An order to purchase shares that we receive from a securities broker will be
considered received in proper form for the net asset value per share
determined as of the close of business of the New York Stock Exchange on the
day of the order. However, the broker must assure us that it received the
order from its customer prior to that time.
Shareholders who invest in the Trust through a broker may be charged a
commission for handling the transaction. A shareholder may deal directly with
us anytime to avoid the fee.
Redemptions and Checkwriting.
Redemptions will take place at the NAV for the day we receive the redemption
order in proper form. A redemption request may not be in proper form unless
we have a signed account application from you or your application is submitted
with the withdrawal request.
If you draw a check against your account, it will not be considered in proper
form unless there are sufficient collected funds available in the account on
the day the check is presented for payment. Generally, it takes up to 10 days
before checks deposited in your account are collected. Therefore, if you plan
to write a check against your account shortly after making an investment, we
recommend you call us to make sure that your funds will be available.
Unusual Circumstances Resulting in Suspension of Payments.
We will use our best efforts in normal circumstances to handle redemptions
timely. However, we may for any reason we deem sufficient suspend the right
of redemption or postpone payment for any shares in the Trust for any period
up to seven days.
Our sole responsibility with regard to redemptions shall be to process timely
redemption requests in proper form. Neither the Trust, its affiliates, nor
the Custodian can accept responsibility for any act or event which has the
effect of delaying or preventing timely transfers of payment to or from
shareholders.
Payment for shares in any Fund may be suspended or delayed for more than seven
days only in limited circumstances. These occur (1) during any period when
the New York Stock Exchange is closed, other than customary weekend and
holiday closings; (2) when trading on such Exchange is restricted, as
determined by the Securities and Exchange Commission; or (3) during any period
when the Securities and Exchange Commission has by order permitted such
suspension.
Final Payments on Closed Accounts.
The redemption payment you receive when you close your account will normally
have all accrued dividends included. However, when an account is closed, we
may make payment by check of any final dividends declared but not yet paid to
the date of the redemption that closed the account. The payment may be made
on the same day such dividends are paid to other shareholders, rather than at
the time the account is closed.
Inter-Fund Exchange.
Funds exchanged between shareholder accounts will earn their final day's
dividend on day of exchange.
We reserve the right, when we deem such action necessary to protect the
interests of Fund shareholders, to refuse to honor withdrawal requests made by
anyone purporting to act with the authority of another person or on behalf of
a corporation or other legal entity. Each such individual must provide a
corporate resolution or other appropriate evidence of his or her authority or
satisfactory identity. We reserve the right to refuse any third party
redemption requests.
Payments in Kind.
If, in the opinion of the Trustees, extraordinary conditions exist which make
cash payments undesirable, payments for any shares redeemed may be made in
whole or in part in securities and other property of the Trust. However, the
Trust elected, pursuant to rules of the Securities and Exchange Commission, to
permit any shareholder of record to make redemptions wholly in cash to the
extent the shareholder's redemptions in any 90-day period do not exceed the
lesser of 1% of the aggregate net assets of the Trust or $250,000.
Any property of the Trust distributed to shareholders will be valued at fair
value. In disposing of any such property received from the Trust, a
shareholder might incur commission costs or other transaction costs. There is
no assurance that a shareholder attempting to dispose of any such property
would actually receive the full net asset value for it. Except as described
herein, however, we intend to pay for all share redemptions in cash.
Address Changes and Lost Shareholder Accounts.
It is your obligation to inform us of address changes.
We will exercise reasonable care to ascertain your correct address if you
become "lost" in our records. We will conduct two database searches for you
and use at least one information database service. The search will be
conducted at no cost to you. We will not, however, perform such searches if
your account is less than $25, if you are not a natural person or we receive
documentation that you are deceased. If we cannot locate you after such
procedures, your account may be escheated to the State of your last residence
in our records.
No interest will accrue on amounts represented by uncashed distribution or
redemption checks.
Dividend Payments.
Dividends are payable to you at the time they are determined. They are not
actually paid in the form of additional shares of the Fund credited to your
account until the end of each calendar month (or normally when the account is
closed, if sooner), unless you make a written election to receive dividends in
cash.
Substantially all of each Fund's accumulated net income is declared as
dividends each business day. We calculate accumulated net income for each
Fund just prior to calculating the Fund's net asset value. The amount of such
net income reflects interest income (plus any original discount earned less
premium amortized) and expenses accrued by the Fund since the previously
declared dividend.
Realized capital gains and losses and unrealized appreciation and depreciation
are reflected as changes in NAV per share of each Fund. Premium on securities
purchased is amortized daily as a charge against income. Original issue
discount on municipal bonds is considered tax-exempt and an amortization of
the remaining unearned portion of such discount will be included in each
Fund's daily income.
You will receive notice of payment of dividends quarterly. For tax purposes,
you will also receive an annual summary of dividends paid by your Fund and the
extent to which they constitute capital gains dividends. If you purchase
shares as of a particular net asset value determination (the close of the New
York Stock Exchange) on a given day, you will not be considered a shareholder
of record for the dividend declaration made that day. If you withdraw as of
such determination you will be considered a shareholder of record with respect
to the shares withdrawn. A "business day" will be any day the New York Stock
Exchange is open for trading.
TAXATION OF THE TRUST
Federal Income Tax Requirements.
To qualify as a "regulated investment company" and avoid Fund-level federal
income tax under the Internal Revenue Code (the "Code"), each Fund must, among
other things, distribute its net income and net capital gains in the fiscal
year in which it is earned. The Code also requires each Fund to distribute at
least 98% of undistributed net income for the calendar year and capital gains
determined as of October 31 each year before the calendar year-end in order to
avoid a 4% excise tax. We intend to distribute all taxable income to the
extent it is realized to avoid federal excise taxes.
To qualify as a regulated investment company under the Code, each Fund must
also derive at least 90% of its gross income from dividends, interest, gains
from the sale or disposition of securities and certain other types of income.
Should any Fund fail to qualify as a "regulated investment company" under the
Code, it would be taxed as a corporation with no allowable deduction for
distributing dividends.
Tax Consequences to Shareholders.
Federal Income Tax. As a shareholder, you will be subject to federal income
tax on any ordinary net income and net capital gains realized by your Fund and
distributed to you as regular or capital gains dividends. It does not matter
whether the dividend is distributed in cash or in the form of additional
shares. Generally, dividends declared by your Fund during October, November
or December of any calendar year and paid to you before February 1 of the
following year will be treated for tax purposes as received in the year the
dividend was declared.
We can sell any securities held by a Fund or which we have committed to
purchase. Since profits realized from such sales are classified as capital
gains, they would be subject to capital gains taxes, even if the securities
sold are otherwise tax-exempt.
State and Local Taxes. Exemption from federal income tax of dividends derived
from municipal securities does not necessarily result in an exemption under
the tax laws of any State or local taxing authority. You may be exempt from
State and local taxes on dividends derived from municipal securities issued by
entities located within your State of residence, but you may be subject to
State or local tax on dividends derived from other obligations. You will
receive a breakdown of dividends by State on an annual basis for the National
Fund and Money Market. You should consult with your tax advisor about the
status of distributions from the Trust in your tax jurisdiction.
Wash Sales.
If you receive exempt-interest dividends on shares held for less than six
months, any loss on the sale or exchange of such shares will be disallowed up
to the value of such dividends.
Pass Through of Tax-Exempt Dividends.
The Code permits mutual funds with at least 50 percent of the value of their
assets invested in tax-exempt securities as of the close of each fiscal
quarter to "flow through" to shareholders the tax-exempt character of the
interest paid. We intend to qualify under this provision so that dividends
paid to you will be treated as "exempt-interest dividends" in the same
proportion as each Fund's annual net investment income is derived from tax-
exempt sources.
This means that, to the extent a Fund's dividends are exempt-interest
dividends, you may treat them for Federal income tax purposes as if they were
interest excluded from gross income. To qualify as exempt-interest dividends,
distributions we must designate them as such in a written notice mailed to you
within 60 days of the close of the Trust's taxable year.
Dividends Received Deduction.
No portion of the dividends paid by the Trust to its shareholders is expected
to be subject to the dividends received deduction for corporations (70% of
dividends received).
31% Withholding.
You may be subject to a 31% withholding requirement on transactions with the
Trust in certain circumstances. (1) If you fail to comply with the interest
and dividends "back-up" withholding provisions of the Code (by accurately
filing Form W-9 or its equivalent, when required); or (2) if the Internal
Revenue Service determined that you failed to properly report dividend or
interest income.
Alternative Minimum Tax Considerations.
We may purchase bonds for any Fund on which the interest received may be
subject to the so-called "alternative minimum tax" (AMT). Under the Code,
interest received on certain otherwise tax-exempt securities is subject to
AMT. AMT will apply to interest received on "private activity" bonds issued
after August 7, 1986 that are used to finance activities other than those
generally performed by governmental units (for example, bonds issued to
finance commercial enterprises or reduced interest rate home mortgage loans).
Interest income received on AMT bonds will be a "tax preference item" that may
make shareholders liable for payment of AMT. Deductions and preference items
such as state and local taxes, excess depletion and excess intangible drilling
costs (in addition to interest on AMT bonds) are among the items that are
added to taxable income to determine whether AMT is due in place of ordinary
income tax.
Corporations that are shareholders may be subject to AMT based in part on
certain differences between their taxable income adjusted for other tax
preference items and their "adjusted current earnings."
Distribution of Market Discount.
If we buy a security for a Fund at a "market discount", the amount of gain
earned by the Fund when we sell it may be considered ordinary taxable income.
Such income earned as a result of "market discount" will be distributed to
shareholders and will not qualify as tax-exempt. For the Trust's fiscal year
ended September 30, 1998, no portfolio experienced any recognizable gain due
to "market discount."
Personal Holding Company.
We reserve the right to involuntarily redeem shares if ownership has or may
become concentrated as to make a Fund a personal holding company under the
Code.
CALCULATION OF PERFORMANCE DATA
So that you can compare the Trust's Funds with similar funds (and to market
indices, investments such as savings accounts, savings certificates, taxable
and tax-free bonds, taxable money market funds and money market instruments),
we calculate yields for each Fund and total returns for the National Fund and
the State Funds.
How are Total Returns Calculated? We calculate annual total return and
average annual total returns for the State Funds and the National Fund.
Annual total return is based on the change in share price from the beginning
to the end of the year, plus any distributions. We calculate average annual
total return by finding the compounded annual rate of return over a given
period that would be required to equal the return on an assumed initial
investment in the Fund to the ending redeemable value this investment would
have had at the end of the period. This is done by taking into account the
effect of the changes in the Fund's share price during the period and any
recurring fees charged to shareholder accounts. We also assume all dividends
and other distributions are reinvested at the applicable share price when they
were paid.
We may also calculate non-annualized aggregate total returns by computing the
simple percentage change in value that equals an assumed initial investment in
a Fund with its redeemable value at the end of a given period, determined in
the same manner as for average annual total return calculations.
How is Standardized Yield Calculated? The yields of each of the Trust's Funds
are calculated according to standardized formulas prescribed by the SEC.
a. The State Portfolios and National Fund. The standardized yields of the
State Funds and of the National Fund are calculated as follows: Add one to
the respective Fund's total daily theoretical net income per share during a
given 30-day period and divide the sum by the Fund's maximum offering price
per share on the last day of the period. Next raise the result to the sixth
power, subtract one and multiply the result by two.
The standardized yield may be calculated daily any business day.
For purposes of calculating yield, the daily theoretical gross income of each
income bearing obligation in a Fund is determined as 1/360 of the obligation's
yield to maturity (or put or call date in certain cases). This is based upon
its current value (defined as the obligation's closing market value that day,
plus any accrued interest), multiplied by such current value. For tax-exempt
securities having a current value discount that exceeds any unamortized
original issue discount, we value such securities at the unamortized original
issue discount, or if there is none, at par. A Fund's daily theoretical gross
income is the sum of the daily theoretical gross income amounts computed for
each of the obligations in the Fund. A Fund's total daily theoretical net
income per share during a given 30-day period is the Fund's daily theoretical
gross income less daily expenses accrued (reduced by any waived expenses),
totaled for each day in the period and divided by the average number of shares
outstanding during the period.
b. Money Market Yield.
7-day Yield. This formula divides the net income earned on one share during a
given 7-day period by the initial value of that share (normally $1.00) and
expresses the result as an annualized percentage. We calculated yield by
dividing net income (including the benefit of any expenses waived by us)
earned on one share during a given seven-day period, exclusive of any capital
changes, by the initial value of that share (normally $1.00). We express the
result (called the "base period return") as an annualized percentage. The
base period return is annualized by multiplying it by 365 and dividing the
product by seven, with the resulting yield figure carried to at least the
nearest hundredth of one percent.
Effective Annual Yield. We calculate the Money Market's "effective annual
yield" in a similar manner as 7-day yield, except we assume that the net
income earned during a seven-day period is reinvested at the same rate over a
full year, thereby generating additional earnings from compounding. The
effective annual yield is computed by adding one to the base period return,
raising the result to the power equal to 365 divided by seven, and subtracting
one from the result, which is then expressed as a percentage.
Taxable Equivalent Yield. We may also compute taxable equivalent yields for
each Fund. The taxable equivalent yield of a Fund is equal to (1) the portion
of its yield representing tax-exempt income (2) divided by one minus a stated
income tax rate (expressed as a fraction), (3) plus any portion of the Fund's
yield which is not tax-exempt.
Representative Yield Quotations.
The following quotations are as of September 30, 1998.
Arizona Fund. The standardized 30-day yield of the Arizona Fund was 3.52% and
the corresponding taxable equivalent yield as of such date was 5.83%. The
taxable equivalent yield is based on the combined highest Arizona and 36%
federal income tax rate of 39.58% (determined after giving effect to the
deductibility of Arizona income tax payments for federal tax purposes). For
the calendar quarter, its return was 2.97%. Average annual total returns
were: One year -- 7.21%; five years - 4.34%; and since inception on October
13, 1989 -- 6.44%. The average annual total return since inception would have
been reduced had the then acting advisor not waived a portion of its
management fee or paid certain expenses during this period.
Maryland Fund. The standardized 30-day yield of the Maryland Fund was 3.54%
and the corresponding taxable equivalent yield as of such date was 6.01%. The
taxable equivalent yield is based on the combined highest Maryland and 36%
federal income tax rate of 41.12% (determined after giving effect to the
deductibility of Maryland income tax payments for federal tax purposes). For
the calendar quarter, its return was 2.32%. Average annual total returns
were: One year - 6.68%; five years - 4.03%; and since inception on February
10, 1993 -- 4.86%. The five year and annual total return since inception
would have been reduced had the then acting advisor not waived a portion of
its management fee or paid certain expenses during these periods.
Missouri Fund. The standardized 30-day yield of the Missouri Fund was 3.61%
and the corresponding taxable equivalent yield as of such date was 5.99%. The
taxable equivalent yield is based on the combined highest Missouri and 36%
federal income tax rate of 39.84% (determined after giving effect to the
deductibility of Missouri income tax payments for federal tax purposes). For
the calendar quarter, its return was 3.04%. Average annual total returns
were: One year -- 7.61%; five years - 4.58%; and since inception on October
12, 1989 -- 6.37%. The average annual total return since inception would have
been reduced had the then acting advisor not waived a portion of its
management fee or paid certain expenses during this period.
Virginia Fund. The standardized 30-day yield of the Virginia Fund was 3.67%
and the corresponding taxable equivalent yield as of such date was 6.09%. The
taxable equivalent yield is based on the combined highest Virginia and 36%
federal income tax rate of 39.68% (determined after giving effect to the
deductibility of Virginia income tax payments for federal tax purposes). For
the calendar quarter, its return was 2.98%. Average annual total returns
were: One year -- 7.66%; five years - 4.85%; ten years -- 6.72%; and since
inception on October 13, 1987 - 7.72%.
National Fund. The standardized 30-day yield of the National Fund was 3.52%
and the corresponding taxable equivalent yield as of such date was 5.50%. The
taxable equivalent yield is based on the 36% federal income tax rate. For the
calendar quarter, its return was 3.14%. Average annual total returns were:
One year -- 7.66%; five years - 4.38%; ten years -- 6.51%; and since inception
on December 30, 1982 - 8.19%.
Money Market. The standardized 7-day yield was 2.94%, amounting to an
effective annual yield of 2.98%. The corresponding taxable equivalent yield
was 4.60%. The taxable equivalent yield is based on the federal income tax
rate of 36%.
Caution Regarding Representative Yield Quotations. The Funds' yields are not
fixed. Yield tends to fluctuate daily. Do not consider effective annual
yield as representative of what an investment may earn in any future period.
Actual dividends will tend to reflect changes in interest rates and will also
depend upon the level of a Fund's expenses, any realized or unrealized
investment gains and losses and the relative results of the Fund's investment
policies. Thus, at any point in time, future yields may be either higher or
lower than past yields and there is no assurance that any historical yield
level will continue.
The average maturities of the National Fund and the State Funds are expected
to be longer than the average maturity of the Money Market. As a result, the
actual monthly dividend income from an investment in the National Fund or in
any State Fund is expected to change more slowly over time than the monthly
dividend income from a comparable Money Market account.
Performance Comparisons.
From time to time, in advertisements or in reports to shareholders and others,
we may compare the performance of the Trust to that of recognized market
indices. We may cite the ranking or performance of any Fund as reported in
recognized national periodicals, financial newsletters, reference
publications, radio and television news broadcasts, or by independent
performance measurement firms.
We may also compare the performance of any Fund to that of other funds we
manage, if appropriate. We may compare our performance to that of other types
of investments, substantiated by representative indices and statistics for
those investments.
Market indices that we may use include those compiled by major securities
firms. Other indices compiled by securities rating or valuation services,
such as Standard and Poor's Corporation, may also be used. Periodicals that
report market averages and indices, performance information, and/or rankings
may include: The Wall Street Journal, Investors Business Daily, The New York
Times, The Washington Post, Barron's, Forbes Magazine, Money Magazine, Mutual
Funds Magazine, Kiplinger's Personal Finance and the Bank Rate Monitor.
Independent performance measurement firms include Lipper Analytical Services,
Inc. and Morningstar.
In addition, a variety of newsletters and reference publications provide
information on the performance of mutual funds, such as the Donoghue's Money
Fund Report. Financial news is broadcast by various radio and television
media.
When we use Lipper Analytical Services, Inc. to make performance comparisons
in advertisements or in reports to shareholders or others, we compare the
Virginia Fund to "Virginia Municipal Debt Funds," the Arizona Fund to "Arizona
Municipal Debt Funds", the Maryland Fund to "Maryland Municipal Debt Funds,"
and the Missouri Fund to "Missouri Municipal Debt Funds." Similarly, the Money
Market is ranked by Lipper in the category of "Tax-Exempt Money Market Funds,"
and the National Fund is ranked by Lipper in the category of "General
Municipal Debt Funds." In the event Lipper changes the category in which a
Fund is ranked, then we will use the revised category when we cite Lipper
rankings.
We may disclose the contents of each Fund as frequently as daily in
advertisements and elsewhere.
Average Maturities. We calculate average maturity information for the Funds.
The "average maturity" of a Fund on any day is determined by first multiplying
the number of days then remaining to the effective maturity of each investment
in the Fund by the value of that investment. Next, the results of these
calculations are summed. Finally, the total is divided by the aggregate value
of the Fund that day. Thus, the average maturity represents a dollar-weighted
average of the effective maturities of Fund investments.
By comparison, the "mean average maturity" of a Fund over some period, such as
seven days, a month or a year, represents the arithmetic mean (i.e., simple
average) of the daily average maturity figures for the Fund during the
respective period.
FINANCIAL STATEMENTS AND OTHER ADDITIONAL INFORMATION
Audited Financial Statements for the Trust, together with the Report of
Deloitte & Touche LLP, Independent Auditors for the fiscal year ended
September 30, 1998, appear in the Trust's Annual Report to shareholders for
the fiscal year ended September 30, 1998. That report is incorporated herein
by reference. The Report was filed with the Securities and Exchange
Commission.
Statements contained in this Statement of Additional Information and in the
Prospectus regarding the contents of contracts and other documents are not
necessarily complete. You should refer to the documents themselves for
definitive information on their provisions. We will supply copies of the
Trust's important documents and contracts to interested persons upon request,
or you can obtain them from the SEC's Internet site at www.sec.gov.
The Trust registered with the Securities and Exchange Commission in
Washington, DC, by the filing a Registration Statement. The Registration
Statement contains certain additional information not included in the
Prospectus or this Statement of Additional Information. This information is
available from the SEC or its Internet site. (See the back cover of the
Prospectus for information about obtaining this information.)
APPENDIX - QUALITY RATINGS
Any investment we make will have a "quality rating" determined principally by
ratings assigned by nationally recognized statistical rating organizations
(NRSRO). Otherwise, we will assign a rating according to comparable standards
when there is no published rating or when published ratings differ or are
considered obsolete.
Quality ratings will often be determined by referring to the ratings assigned
by two major NRSROs that rate municipal securities: Moody's Investors Service,
Inc. (Moody's) and Standard and Poor's Corporation (S&P). In cases where more
than one NRSRO rates an issue, it will be graded according to whichever rating
we deem appropriate. In cases where no organization rates an issue, we will
grade it using the following standards that we believe are comparable to those
followed by the NRSROs.
Bonds. Moody's uses ratings Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C; S&P uses
ratings AAA, AA, A, BBB, BB, B, CCC, CC and C. Municipal bonds rated Aaa or
AAA are judged to be of the best quality; interest and principal are secure
and prices respond only to market rate fluctuations. Bonds rated Aa or AA are
also judged to be of high quality, but margins of protection for interest and
principal may not be quite as good as for the highest rated securities.
Municipal bonds rated A are considered upper medium grade by each
organization. Protection for interest and principal is deemed adequate but
susceptible to future impairment, and market prices of such obligations, while
moving primarily with market rate fluctuations, also may respond to economic
conditions and issuer credit factors.
Bonds rated Baa or BBB are considered medium grade obligations. Protection
for interest and principal is adequate over the short term, but these bonds
may have speculative characteristics over the long term and therefore may be
more susceptible to changing economic conditions and issuer credit factors
than they are to market rate fluctuations.
The Trust does not invest in issues rated below Baa or BBB or equivalent
unrated issues.
Obligations rated Baa or above by Moody's or rated BBB or above by S&P are
considered "investment grade" securities, whereas lower rated obligations are
considered "speculative grade" securities.
Bond ratings may be further enhanced by the notation "+" or "-." For purposes
of the Trust and its investment policies and restrictions, such notations
shall be disregarded. Thus, for example, bonds rated BBB- are considered
investment grade while bonds rated BB+ are not.
Notes. Moody's rates shorter term municipal issues with "Moody's Investment
Grade" or "MIG" designations, MIG-1, MIG-2 and MIG-3; it assigns separate
"VMIG" ratings, VMIG-1, VMIG-2 and VMIG-3, to variable rate demand obligations
for which the issuer or a third-party financial institution guarantees to
repurchase the obligation upon demand from the holder.
MIG-1 and VMIG-1 notes are of the best quality, enjoying strong protection
from established cash flows for debt service or well established and broadly
based access to the market for refinancing. MIG-2 and VMIG-2 notes are of
high quality, with ample margins of protection, but not as well protected as
the highest rated issues. MIG-3 and VMIG-3 notes are of favorable quality,
having all major elements of security, but lacking the undeniable strength of
the higher rated issues and having less certain access to the market for
refinancing.
S&P assigns the ratings, SP-1, SP-2, and SP-3, to shorter term municipal
issues, which are comparable to Moody's MIG-1, MIG-2 and MIG-3 ratings,
respectively.
Commercial Paper. Commercial paper, only some of which may be tax-exempt, is
rated by Moody's with "Prime" or "P" designations, as P-1, P-2 or P-3, all of
which are considered investment grades. In assigning its rating, Moody's
considers a number of credit characteristics of the issuer, including: (1)
industry position; (2) rates of return; (3) capital structure; (4) access to
financial markets; and (5) backing by affiliated companies.
P-1 issuers have superior repayment capacity and credit characteristics; P-2
issuers have strong repayment capacity but more variable credit
characteristics; P-3 issuers have acceptable repayment capacity, but highly
variable credit characteristics and may be highly leveraged.
S&P rates commercial paper as A-1, A-2 or A-3. To receive a rating from S&P,
the issuer must have adequate liquidity to meet cash requirements, long-term
senior debt rated A or better (except for occasional situations in which a BBB
rating is permitted), and at least two additional channels of borrowing. The
issuer's basic earnings and cash flow must have an upward trend (except for
unusual circumstances) and typically, the issuer has a strong position in a
well-established industry. S&P assigns the individual ratings A-1, A-2 and A-
3 based on its assessment of the issuer's relative strengths and weakness
within the group of ratable companies.
