Mosaic Income Trust
Management's Discussion of Fund Performance
December 31, 1997
Dear Shareholder:
The annual period ended December 31, 1997 was an eventful one for Mosaic
High Yield Fund, Mosaic Government Fund and Mosaic Bond Fund. As we
consolidated funds under the Mosaic name, High Yield and Government
shifted their annual periods to match the calendar year. Mosaic Bond
Fund was reborn as a 100% no-load fund. Along with the name change came
some restructuring of our portfolio holdings, as we positioned the funds
to seek the best mix of total return and yield.
At Mosaic we are committed to managing high-quality bond funds. With
the exception of our High Yield Bond Fund, Mosaic bond funds concentrate
on higher-rated, investment grade bonds. We do not stray from the core
investment objectives of a fund in search of higher returns by adding
risky or exotic securities.
Using numerous screens and economic indicators we track bond market and
interest rate trends. Our analysis includes the monitoring of interest
rate trends, inflationary pressures, Federal Reserve policy, economic
momentum, liquidity conditions and the psychology of the market. Based
upon these conditions we actively manage the duration of our portfolios,
seeking to shorten maturities when rates are rising to limit the impact
of the accompanying decline in bond prices, and lengthening maturities
when rates are falling to capture accompanying price appreciation.
Sincerely,
(signature)
Katherine Frank
President
Mosaic Funds
Period in Review
In 1997 the United States' economy continued its expansion with few
inflationary signs, while the equity and fixed income markets rewarded
investors once again. Meanwhile, global markets were stirred late in
1997 by widening concerns over Southeast Asia's financial condition.
Over the last quarter of 1997 the situation in Asia deteriorated with
effects spreading to other financial markets, including our own. After
a late summer increase, reported consumer and commodity prices finished
1997 well behaved. Most importantly, global troubles and lower domestic
inflation have overshadowed our strong economy, allowing the Federal
Reserve to remain on the sidelines, refraining from future interest rate
increases.
U.S. fixed-income securities posted strong returns in 1997. Yields
were broadly lower, boosting the value of existing bonds. Over the
course of the year, the two-year Treasury returned 6.60%, while the 30-
year Treasury returned 15.34%.
Portfolio Review
Overview
Given the rally in the markets in 1997, portfolio maturities are
currently slightly shorter than the Lehman Intermediate
Government/Corporate index. In general, we took advantage of a widening
spread between corporate and government securities by increasing our
corporate exposure with an accompanying increase in portfolio yield.
With short rates poised to fall, we have positioned the portfolios to
take advantage of this by overweighting the shorter portion of the
curve. With only .10% separating the yield of two-year governments and
10-year governments at the end of 1997, our bond positioning is on the
lower-risk, short-side of the spectrum, given the small rewards
currently available for higher-risk, long-term securities.
Mosaic High Yield Fund
The high yield market enjoyed another good year of performance in 1997.
During the calendar year ended December 31, 1997, the Mosaic High Yield
Fund returned 9.90% with dividends reinvested. For the nine-month
fiscal year, the Fund returned 9.12%.
Having posted exceptionally strong results over the past six years, the
high yield market entered 1997 trading near all-time high valuation
levels. As such, we positioned the Fund more conservatively than the
high yield market in general, expecting a more difficult market
environment in 1997. This strategy produced very solid results, but
somewhat less than the market's return. Those sectors that performed
well for theFund included media, cable and retail. Results were
negatively impacted by couple of bonds: CAI Wireless and Sterling
Chemicals.
As we begin 1998, we are still positioned with a more conservative
portfolio as we believe that increasing risk at this point in the market
cycle is not warranted. In fact, given the turmoil in the Far East in
the fourth quarter, this strategy has begun to pay dividends. It is a
strategy that we believe will serve our shareholders well in 1998.
Fund-at-a-Glance
Objective: Mosaic High Yield provides relatively higher income by
investing in lower-rated corporate bonds.
Net Assets: $6.5 million
Date of Inception: July 21, 1983
Ticker: GITMX
Mosaic Government Fund
For the calendar year ended December 31, 1997, the Mosaic Government
Fund returned 7.70% with dividends reinvested. For the nine-month
period ended December 31, 1997, the Fund returned 9.07%.
The Fund began 1997 with a relatively aggressive positioning, having an
effective duration in excess of five years and an average maturity of
almost nine years. During the course of the year, as interest rates
gradually trended downward, the Fund's average maturity was shortened to
take advantage of price appreciation in the bonds owned. As 1997 ended,
the Fund was positioned at its most conservative of the year, with
duration at 3.7 years and average maturity of less than five years.
This conservative orientation is based on our belief that interest rates
are nearing cyclical lows and that fears of economic fallout from the
Southeast Asian crisis have been fully discounted by the market. With
the yield curve very "flat," there is little, if any, additional yield
to compensate investors for the increased price risk of owning long
maturity bonds.
Fund-at-a-Glance
Objective: Mosaic Government provides investors with monthly dividends
by investing in bonds and other securities issued or guaranteed by the
U.S. Government.
Net Assets: $5.5 million
Date of Inception: July 21, 1983
Ticker: GIGVX
Mosaic Bond Fund
During the year ended December 31, 1997, the Mosaic Bond Fund returned
6.04% with dividends reinvested. This was comprised of a $0.12 increase
in the Fund's net asset value and $1.085 in income dividends paid during
the year, as well as the return benefits of compounding from reinvesting
dividends.
As with the Mosaic Government Fund, the Bond Fund began the year
positioned aggressively relative to its intermediate-maturity benchmark.
By year-end, with yields on 10-year bonds having fallen about two-thirds
of a percent, the Fund was positioned at an average duration of 2.8
years. This, again, is due to our belief that today's yields offer
little in the way of long-term value, especially as one extends out the
maturity spectrum.
We continue to favor yield-oriented assets such as corporate bonds, and
have, in fact, increased our commitment to this sector moderately over
the last twelve months in an attempt to bolster the Fund's earning power
and provide additional yield cushion should prices decline. We fell
confident that, as 1998 unfolds, the intermediate nature of this Fund
will serve its shareholders well in preserving capital and providing a
reliable stream of income.
Fund-at-a-Glance
Objective: Mosaic Bond Fund has the dual goal of providing dividend
income while seeking capital preservation. The fund invests mainly in
investment grade corporate and government bonds of intermediate
maturity.
Net Assets: $1.1 million
Date of Inception: April 23, 1990
Ticker: MBNDX
<PAGE>
Management's Discussion of Fund Performance (continued)
Comparison in Changes in the Value of
A $10,000 Investment
High Yield Fund
Depicted herein is a graphic presentation of the growth of a
$10,000 investment in each of the following:
High Yield Fund
Lipper
High Yield Corp High Lehman Aggregate
Year Fund Yield Bond Bond Index
1987 $10,000 $10,000 $10,000
1988 11,014 11,357 10,789
1989 11,321 11,042 12,357
1990 10,467 9,815 13,464
1991 13,148 13,762 15,618
1992 14,738 16,290 16,774
1993 16,954 19,522 18,409
1994 16,500 18,804 17,872
1995 18,884 22,073 21,173
1996 20,176 24,856 21,941
1997 22,177 28,079 25,125
Average Annual Total Return
1 year: 9.9% 5 years: 8.5% 10 Years: 8.3%
Government Fund
Lehman Inter-
Government mediate Lehman Aggregate
Year Fund Government Bond Index
1987 $10,000 $10,000 $10,000
1988 11,710 10,640 10,789
1989 11,900 11,989 12,357
1990 12,755 13,135 13,464
1991 14,523 14,989 15,618
1992 15,306 16,027 16,774
1993 16,785 17,337 18,409
1994 16,179 17,033 17,872
1995 18,504 19,448 21,173
1996 18,567 20,279 21,941
1997 19,996 21,845 25,125
Average Annual Total Return
1 year: 7.2% 5 years: 5.5% 10 Years: 7.7%
The Advisor believes that the Lehman Aggregate Bond Index is an
inappropriate index for the Government Fund due to the duration
of the long bonds and the corporate bond component. Therefore,
this will be the last year it will appear in this graph.
Bond Fund
Bond Lehman Intermediate Government
Year Fund Corporate Bond Index
Beginning 10,000 10,000
1990 10,535 10,953
1991 12,011 12,554
1992 12,504 13,454
1993 13,261 14,637
1994 12,984 14,355
1995 14,815 16,555
1996 15,193 17,226
1997 16,111 18,581
Average Annual Total Return
1 year: 6.0% 5 years: 5.2% Since Inception: 6.4%
Past performance is not predictive of future performance.
<PAGE>
Question and Answer with lead fixed-income manager Chris Berberet
What was the general economic background for investors in 1997?
There are two factors to consider here. First is the reality of how the
year went economically, and second how the market perceived the economy
to be progressing in advance of the reality. This second part does much
to explain the swings in the bond market since, in hindsight, the year
1997 was a rather stable period of economic growth and low/declining
inflation. However, during the year, bond market participants went
through various cycles of optimism and pessimism regarding the direction
of economic growth. These psychological cycles were the reason bond
yields fluctuated in a 1.3% range despite a relatively stable economic
and inflation backdrop. We closely watch measures of investor sentiment
as part of our overall management process.
Did you change duration much during the period?
Yes, we did move the durations of the portfolios during the year in an
attempt to take advantage of swings in interest rates. Unlike some
prior years, however, our duration positioning was much more directly
influenced by the sentiment swings referred to above. It was our view
during most of 1997 that the economy would be quite healthy, and that
inflation pressures would remain mostly muted, with a few flare-ups here
and there, mainly due to short term swings in commodities prices and
wage pressures. This forecast proved correct, and so our strategy was
to buy (extend) when sentiment was pessimistic, and sell (shorten) when
the markets were overly euphoric. This worked well for the first three
quarters of the year, until the market caught the "Asian Flu."
How did the Asia situation affect the funds?
Certainly the "Asia situation" was the big news story for the bond
market in 1997, and the funds did benefit from the accompanying rise in
prices and drop in yields. The international economic situation is one
part of the overall "mosaic" we piece together in assessing how the
funds should be positioned, and we will be watching Asia closely going
forward. But we will mostly be watching for signs that the "flu" is
easing, as we feel that the worst is largely over.
Looking back, would you change anything you did?
If we made a mistake during the year, it was underestimating the market
impact of the Southeast Asian turmoil. Again, this is a question of
perceptions versus reality. Perceptions hold that the economic and
inflation fallout from recent events in Asia will have a severe
dampening effect on the U.S. economy and inflation. While we agree
that there will be some dampening effects, we disagree as to their
severity, and as a result spent a good part of the fourth quarter
shortening portfolio maturities as interest rates fell and bond prices
rose. However, the rally continued far past our expectations, and as a
result the Funds lagged during the fourth quarter. While this was
unfortunate, the Funds are well positioned heading into 1998 when we
feel that a goodly dose of reality will return to counter these
optimistic perceptions.
What is the outlook for bonds going forward, and what are your major
concerns?
Let's separate this question into two parts. First, the long-term trend
(three to five years) in interest rates appears to be down. This is a
result of significant fundamental changes in both the U.S. and global
economies that has been brewing for years. Increasing use of technology
has enhanced overall production and raised worker productivity.
Industrialization of the "less-developed-countries" has brought a large
pool of labor into the international market place. And the organization
of groups of countries into consolidated trading blocks has increased
global competition. All of these factors have a long-term dampening
effect on the rate of inflation due to higher productivity and
competition, which is good for interest rates over longer periods.
In the shorter term (next 12 months), cyclical fluctuations in world
economies, currencies, and capital flows can overwhelm the longer term
positive backdrop. Our greatest concern in the next twelve months is
that the markets have "over-discounted" the positive news at the expense
of recognizing the risks. The U.S. economy remains strong, labor
markets are tight and wage gains are accelerating. These forces paint a
picture of continued economic vigor and will likely prevent the Federal
Reserve from lowering short-term interest rates. Thus, our greatest
concern is that once the Asian turmoil comes under control the markets
will begin to refocus on a set of economic fundamentals which argue for
higher, rather than lower, interest rates. This explains our current
cautious stance in the Funds, and is a natural outgrowth of our desire
to protect shareholder principal during periods of high risk.
Report of Independent Auditors
To the Board of Trustees and Shareholders of Mosaic Income Trust:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the High Yield, Government,
and Bond Funds (the "Funds") of the Mosaic Income Trust as of December
31, 1997, and the related statements of operations, changes in net
assets and the financial highlights for the periods then ended. These
financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
The financial statements of the High Yield and Government Funds for the
year ended March 31, 1997 and the financial highlights for each of the
years in the five-year period then ended were audited by other auditors
whose report, dated May 2, 1997, expressed an unqualified opinion on
those financial statements and financial highlights. The financial
statements of the Bond Fund (formerly known as Madison Bond Fund, Inc.)
for the year ended December 31, 1996 and the financial highlights for
each of the years in the four-year period then ended were audited by
other auditors whose report, dated January 24, 1997, expressed an
unqualified opinion on those financial statements and financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1997 by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the
High Yield, Government, and Bond Funds of the Mosaic Income Trust as of
December 31, 1997, the results of their operations, the changes in their
net assets, and their financial highlights for the periods then ended in
conformity with generally accepted accounting principles.
(signature)
Deloitte & Touche LLP
Princeton, New Jersey
February 13, 1998
High Yield Fund
Portfolio of Investments - December 31, 1997
Credit Rating* Principal
Moody's S&P Amount Value
CORPORATE DEBT SECURITIES: 97.16% of Net Assets
CABLE TELEVISION: 12.93%
B2 B Cablevision Systems Corporation, Senior
Subordinated Debenture, 9.875%, 2/15/13 $200,000 $221,500
Ba3 BB- Century Commiunications Corporation, Senior
Notes, 8.875%, 1/15/07 200,000 206,000
Ba1 BBB-TCI Communications Inc., Senior Notes, 8%,
8/1/05 200,000 214,250
B1 BB Viacom, Inc., Subordinated Debentures, 8%,
7/7/06 200,000 201,000
CHEMICALS: 4.11%
B3 B Harris Chemical North America, Inc., Senior
Subordinated Notes, 10.75%, 10/15/03 100,000 107,000
B3 B+ Sterling Chemical Inc., Senior Subordinated
Notes, 11.75%, 8/15/06 150,000 160,875
TECHNOLOGY: 7.34%
Ba1 BB+ Digital Equipment Corporation, Debentures,
8.625%, 11/1/12 200,000 217,500
Baa3 BBB Seagate Technology Inc., Senior Subordinated
Notes, 7.37%, 3/1/07 250,000 260,937
CONSUMER PRODUCTS: 6.12%
B1 B Golden Books Publications Inc., Senior
Notes, 7.65%, 9/15/02 200,000 193,000
B1 BB- Outboard Marine, Notes Series A, 8.625%,
3/15/01 100,000 100,000
B3 B- Revlon Consumer Products Corporation,
Senior Subordinated Notes, 10.5%, 2/15/03 100,000 105,625
FINANCIAL SERVICES: 1.63%
B3 B- UCC Investors Holdings, Inc., Senior
Subordinated Notes, 11%, 5/1/03 100,000 106,000
FOREST AND PAPER PRODUCTS: 5.22%
B1 B+ Container Corporation, Senior Notes, 9.75%,
4/1/03 100,000 108,000
B3 B Crown Paper, Senior Subordinated Notes,
11%, 9/1/05 125,000 131,563
B1 BB- Stone Container, Corp., Senior Subordinated
Debentures, 10.75%, 4/1/02 100,000 100,875
HOMEBUILDING: 4.79%
Ba3 B+ Continental Homes Holding Corporation,
Senior Notes, 10%, 4/15/06 156,000 168,480
Ba3 BB- Johns Manville International Group, Inc.,
Senior Notes, 10.875%, 12/15/04 35,000 38,850
B1 B+ Ryland Group, Inc., Senior Subordinated
Notes, 10.5%, 7/15/02 100,000 104,875
HOSPITAL MANAGEMENT: 3.35%
Ba3 B+ Tenet Healthcare Corporation, Senior
Subordinated Notes, 10.125%, 3/1/05 200,000 218,500
HOTELS: 2.45%
Ba2 BB Prime Hospitality Corporation, 1st Mortgage
Notes, 9.25%, 1/15/06 150,000 159,563
INDUSTRIAL: 9.93%
Ba2 B+ Apple South Inc., Senior Notes, 9.75%, 6/1/06 200,000 212,500
B1 B+ NVR Inc., Senior Notes, 11%, 4/15/03 200,000 216,500
Ba1 BB Westinghouse Electric Corporation,
Debentures, 8.625%, 8/1/12 200,000 218,250
MANUFACTURING: 8.80%
B1 B+ American Standard Co., Senior Subordinated
Notes, 9.875%, 6/1/01 200,000 208,000
B1 NR Exide Corporation, Senior Notes, 10%, 4/15/05 200,000 212,500
B1 B+ Navistar Financial Corp., Senior Subordinated
Notes, 8.875%, 11/15/98 150,000 152,625
OIL & GAS: 4.82%
Ba3 BB Clark Oil & Refining Corporation, Senior Notes,
9.5%, 9/15/04 $200,000 $205,750
Ba1 BB Oryx Energy Co., Debentures, 8.125%, 10/15/05 100,000 108,125
RADIO & TV BROADCASTING: 4.06%
B3 B- SFX Broadcasting, Inc., Senior Subordinated
Notes, 11.375%, 10/1/00 250,000 264,375
RETAIL-FOOD: 4.29%
B1 B+ Chiquita Brands International Inc., Senior
Notes, 10.25%, 11/1/06 100,000 109,500
Caa NR Super Markets General Holding Co.,
Subordinated Notes, 11.625%, 6/15/02 200,000 169,750
RETAIL-SPECIALTY STORES: 2.23%
Ba2 BB- Michael's Stores, Inc., Senior Notes,
10.875%, 6/15/06 131,000 145,082
SOVEREIGN NATIONS: 1.78%
Ba1 B+ Korea Development Bank, 7.25%, 5/15/06 150,000 116,250
TELECOMMUNICATIONS: 4.56%
Caa CCC+CAI Wireless Systems, Inc., Senior Notes,
12.25%, 9/15/02 256,000 71,680
B2 B+ Sprint Spectrum, L.P., Senior Notes, 11%,
8/15/06 200,000 225,000
TEXTILES-APPAREL: 3.22%
B2 B+ WestPoint Stevens, Inc., Senior Subordinate
Debentures, 9.375%, 12/15/05 200,000 210,000
UTILITIES: 5.53%
Ba3 BB CMS Energy, Senior Notes, 8.125%, 5/15/02 150,000 154,125
Ba3 BB- Toledo Edison, Debentures, 8.7%, 9/1/02 200,000 206,500
TOTAL CORPORATE DEBT SECURITIES (Cost $6,339,130) 6,330,905
REPURCHASE AGREEMENT: 0.55% of Net Assets
With Donaldson, Lufkin & Jenrette Securities Corporation
issued 12/31/97 at 6.00%, due 1/2/98 collateralized by
$36,698 in United States Treasury Notes due 2/29/00.
Total proceeds at maturity are $36,012. (Cost $36,000) 36,000
TOTAL INVESTMENTS (Cost $6,375,130)+ $6,366,905
CASH, RECEIVABLES AND OTHER ASSETS, NET OF
LIABILITIES: 2.29% of Net Assets 149,546
TOTAL NET ASSETS: 100% $6,516,451
Government Fund
Portfolio of Investments - December 31, 1997
Credit Rating* Principal
Moody's S&P Amount Value
U.S. GOVERNMENT OBLIGATIONS: 96.87% of Net Assets
U.S. TREASURY NOTES:
Aaa AAA United States Treasury Note, 5.625%, 1/31/98 $605,000 $605,090
Aaa AAA United States Treasury Note, 7.125%, 2/29/00 600,000 617,550
Aaa AAA United States Treasury Note, 7.75%, 2/15/01 700,000 740,404
Aaa AAA United States Treasury Note, 6.25%, 2/15/03 450,000 460,413
Aaa AAA United States Treasury Note, 7.25%, 5/15/04 450,000 485,775
Aaa AAA United States Treasury Note, 5.875%, 11/15/05 775,000 779,526
Aaa AAA United States Treasury Note, 5.625%, 2/15/06 250,000 247,338
Aaa AAA United States Treasury Note, 6.5%, 10/15/06 300,000 314,262
MORTGAGE BACKED SECURITIES:
Aaa AAA Federal Home Loan Mortgage Corporation
Mortgage Pool, 6.5%, 3/1/09 347,572 348,441
Aaa AAA Federal National Mortgage Association, 6.65%,
3/8/06 325,000 327,808
Aaa AAA Government National Mortgage Assocation, 7.00%,
9/20/27 398,742 400,484
TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost $5,201,153) 5,327,091
REPURCHASE AGREEMENT: 1.49% of Net Assets
With Donaldson, Lufkin & Jenrette Securities Corporation
issued 12/31/97 at 6.00%, due 1/2/98, collaterized by
$83,590 in United States Treasury Notes due 2/29/00.
Proceeds at maturity are $82,027. (Cost $82,000) 82,000
TOTAL INVESTMENTS (Cost $5,283,153)+ $5,409,091
CASH, RECEIVABLES AND OTHER ASSETS, NET OF
LIABILITIES: 1.64% of Net Assets 89,928
TOTAL NET ASSETS: 100% $5,499,019
Bond Fund
Portfolio of Investments - December 31, 1997
Credit Rating* Principal
Moody's S&P Amount Value
COLLATERALIZED MORTGAGE BACKED SECURITIES: 9.36% of Net Assets
Aaa AAA Ryland Acceptance Corporation Series
76 CL 76-B, 9%, 8/1/18 $100,400 $105,470
TOTAL COLLATERALIZED MORTGAGE BACKED
SECURITIES (Cost $101,746) 105,470
CORPORATE DEBT SECURITIES: 35.68% of Net Assets
FINANCIALS: 11.18%
A1 A+ Ford Motor Credit Corporation, 7.75%,
3/15/05 40,000 43,000
Aa3 AA- Merrill Lynch & Company, Inc., 7%,
1/15/07 40,000 41,850
A1 A+ Morgan Stanley Group, Inc., 6.875%,
3/1/07 40,000 41,100
CONSUMER PRODUCTS-CYCLICAL: 3.67%
A2 A Walt Disney Co., Senior Notes, 6.75%,
3/30/06 40,000 41,350
CONSUMER PRODUCTS-FOOD & BEVERAGE: 1.89%
A3 AA- Coca-Cola Enterprises, Inc., 7.875%,
2/1/02 20,000 21,250
METAL FABRICATING: 7.97%
Baa1 BBB Reynolds Metals Corp., Debentures,
9%, 8/15/03 80,000 89,800
RETAIL: 7.26%
Baa1 BBB Kohls Corporation, 6.7%, 2/1/06 40,000 40,200
A2 A GAP Inc., 6.9%, 9/15/07 40,000 41,550
TECHNOLOGY-SEMICONDUCTORS/ELECTRONICS: 3.72%
A2 A Arrow Electronics, Inc., Senior Notes,
7.0%, 1/15/07 40,000 41,900
TOTAL CORPORATE DEBT SECURITIES (Cost $399,795) 402,000
U.S. GOVERNMENT OBLIGATIONS: 45.03% of Net Assets
Aaa AAA US Treasury Note, 5.625%, 1/31/98 120,000 120,018
Aaa AAA US Treasury Note, 6.125%, 8/31/98 105,000 105,363
Aaa AAA US Treasury Note, 5.875%, 10/31/98 100,000 100,202
Aaa AAA US Treasury Note, 6.25%, 5/31/00 140,000 141,765
Aaa AAA US Treasury Note, 5.625%, 2/8/01 40,000 39,910
TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost $505,092) 507,258
REPURCHASE AGREEMENT: 8.17% of Net Assets
With Donaldson, Lufkin & Jenrette Securities
Corporation issued 12/31/97 at 6.00%,
due 1/2/98, collaterized by $93,784 in United States
Treasury Notes due 2/29/00. Proceeds at maturity are
$92,031. (Cost $92,000) 92,000
TOTAL INVESTMENTS (Cost $1,098,633)+ $1,106,728
CASH, RECEIVABLES AND OTHER ASSETS, NET
OF LIABILITIES: 1.76% of Net Assets 19,804
TOTAL NET ASSETS: 100% $1,126,532
Notes to the Portfolio of Investments:
* Unaudited
+ Equals aggregate cost for federal income tax purposes (See Note 4.)
Moody's Moody's Investors Services, Inc.
S&P Standard & Poor's Corporation
<PAGE>
Statement of Assets and Liabilities
December 31, 1997
High Yield Government Bond
Fund Fund Fund
ASSETS
Investments, at value (Notes 1 and 2)
Investment securities $6,330,905 $5,327,091 $1,014,728
Repurchase agreements 36,000 82,000 92,000
Total investments $6,366,905 $5,409,091 $1,106,728
Cash 662 260 789
Receivables
Investment securities sold -- -- 1,675
Interest 157,347 91,559 18,102
Share subscriptions receivable 1,000 -- --
Total Assets $6,525,914 $5,500,910 $1,127,294
LIABILITIES
Payables
Capital shares redeemed $765 $-- $--
Dividends 8,698 1,891 762
Total liabilities $9,463 $1,891 $762
NET ASSETS (Note 6) $6,516,451 $5,499,019 $1,126,532
CAPITAL SHARES OUTSTANDING 904,032 555,911 54,280
NET ASSET VALUE PER SHARE $7.21 $9.89 $20.75
Statement of Operations
For the period indicated
High Yield Fund Government Fund BondFund
Nine Year Nine Year Year
Months Ended Ended Months Ended Ended Ended
12/31, 3/31, 12/31, 3/31, 12/31,
1997 1997 1997 1997 1997
INVESTMENT INCOME (Note 1)
Interest income $459,881 $611,764 $272,341 $412,214 $145,849
Other income 600 4,024 -- -- --
Total investment income 460,481 615,788 272,341 412,214 145,849
EXPENSES* (Notes 3 and 5)
Investment advisory fee $31,741 $40,413 $26,628 $39,438 $12,598
Transfer agent and
administrative expenses 16,515 34,589 10,714 32,814 11,547
Securities registration and
blue sky expenses 7,422 9,490 7,422 9,662 --
Registration and professional
expenses 4,995 8,475 4,533 8,531 13,290
Total expenses 60,673 $92,967 49,297 $90,445 37,435
NET INVESTMENT INCOME $399,808 $522,821 $223,044 $321,769 $108,414
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on
investments $80,365 $8,912 $(64,210) $(44,628) $4,737
Net unrealized appreciation
(depreciation) of investments 112,883 (149,195) 333,544 (128,957) (273)
NET GAIN (LOSS) ON INVESTMENTS 193,248 (140,283) 269,334 (173,585) 4,464
TOTAL INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $593,056 $382,538 $492,378 $148,184 $112,878
*Certain reclassifications have been made to prior year end information to
conform to current year presentation.
Statements of Changes in Net Assets
For the period indicated
<TABLE>
<CAPTION>
High Yield Fund Government Fund Bond Fund
Nine Year Year Nine Year Year Year Year
Months Ended Ended Ended Months Ended Ended Ended Ended Ended
December March March December March March December December
31, 1997 31, 1997 31, 1996 31, 1997 31, 1997 31, 1996 31, 1997 31, 1996
INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net investment income $399,808 $522,821 $584,431 $223,044 $321,769 $352,814 $108,414 $232,121
Net realized gain (loss)
on investments 80,365 8,912 167,400 (64,210) (44,628) 253,063 4,737 23,073
Net unrealized appreciation
(depreciation) of
investments 112,883 (149,195) 53,681 333,544 (128,957) (111,252) (273) (155,073)
Total increase in net assets resulting
from operations $593,056 $382,538 $805,512 $492,378 $148,184 $494,625 $112,878 $100,121
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment income(399,808) (522,821) (584,431) (223,044) (321,769) (352,814) (109,872) (230,690)
CAPITAL SHARE
TRANSACTIONS (Note 8) 69,342 (395,943) (157,381) (561,940) (890,892) (938,698)(2,964,462)(1,573,347)
TOTAL INCREASE
(DECREASE) IN NET ASSETS 262,590 (536,226) 63,700 (292,606)(1,064,477) (796,887)(2,961,456)(1,703,916)
NET ASSETS
Beginning of period $6,253,861 $6,790,087 $6,726,387 $5,791,625 $6,856,102 $7,652,989 $4,087,988 $5,791,904
End of period $6,516,451 $6,253,861 $6,790,087 $5,499,019 $5,791,625 $6,856,102 $1,126,532 $4,087,988
</TABLE>
<PAGE>
Financial Highlights
Selected data for a share outstanding throughout each year:
<TABLE>
Ratio of
Net Ratio of net
Net realized & Distri- Net Net expenses investment
asset Net unrealized butions asset assets to income
value invest. gain Total from from netDist. value end of average (loss) Port.
begin income (loss) on invest. invest. fm. cap.Total end of Total period net to average turnover
period (loss) invest's operat's income gains dist'ions period return (1000s) assets net assets rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund
19972 $7.009 $0.428 $0.199 $0.627 $(0.428) -- $(0.428) $7.208 9.12% $6,516 1.20%4 7.90%4 38%
19973 7.162 0.574 (0.153) 0.421 (0.574) -- (0.574) 7.009 6.06 6,254 1.44 8.07 95
19963 6.938 0.608 0.224 0.832 (0.608) -- (0.608) 7.162 12.32 6,790 1.60 8.47 237
19953 7.285 0.597 (0.347) 0.250 (0.597) -- (0.597) 6.938 3.75 6,726 1.52 8.56 243
19943 7.455 0.606 (0.170) 0.436 (0.606) -- (0.606) 7.285 5.89 7,702 1.54 8.02 251
19933 7.255 0.674 0.200 0.874 (0.674) -- (0.674) 7.455 12.69 7,329 1.52 9.26 73
Government Fund
19972 $9.434 $0.384 $0.458 $0.842 $(0.384) -- $(0.384) $9.892 9.07% $5,499 1.16%4 5.26%4 37%
19973 9.705 0.489 (0.271) 0.218 (0.489) -- (0.489) 9.434 2.29 5,792 1.43 5.09 17
19963 9.551 0.472 0.154 0.626 (0.472) -- (0.472) 9.705 6.56 6,856 1.59 4.77 190
19953 9.695 0.391 (0.144) 0.247 (0.391) -- (0.391) 9.551 2.67 7,653 1.52 4.12 318
19943 10.621 0.363 (0.151) 0.212 (0.363)$(0.775) (1.138) 9.695 1.95 8,576 1.54 3.53 287
19933 10.300 0.501 0.854 1.355 (0.501) (0.533) (1.034) 10.621 13.96 9,734 1.52 4.78 357
Bond Fund1
1997 $20.63 $1.08 $0.12 $1.20 $(1.08) -- $(1.08) $20.75 6.04% $1,127 1.65% 4.79% 49%
1996 21.17 1.07 (0.55) 0.52 (1.06) -- (1.06) 20.63 2.55 4,088 1.51 4.86 94
1995 19.62 1.17 1.55 2.72 (1.17) -- (1.17) 21.17 14.11 5,792 1.35 5.49 58
1994 21.21 1.15 (1.59) (0.44) (1.15) -- (1.15) 19.62 (2.11) 7,166 1.18 5.50 78
1993 21.14 1.03 0.24 1.27 (1.03) $(0.17) (1.03) 21.21 6.04 9,064 1.19 4.92 68
</TABLE>
1 Data prior to June 13, 1997 represents the Madison Bond Fund.
2 For the nine-months period ended December 31, 1997.
3 For the year ended March 31.
4 Annualized.
Notes:
Effective July 31, 1996, the investment advisory services transferred to
Bankers Finance Advisors, LLC from Bankers Finance Investment Management
Corp. (See Note 3).
<PAGE>
Mosaic Income Trust
Notes to Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies. Mosaic Income Trust
(the "Trust"), formerly known as GIT Income Trust, is registered with
the Securities and Exchange Commission under the Investment Company Act
of 1940 as an open-end, diversified investment management company. The
Trust maintains three separate funds whose principal objectives are to
obtain high current income. The High Yield Fund, formerly known as the
Maximum Income Portfolio, invests in long-term debt securities which may
include securities rated as low as "Caa" or "CCC" by Moody's Investors
Service, Inc. or Standard & Poor's Corporation, respectively. The
Government Fund invests in securities of the U. S. Government and its
agencies. The Bond Fund invests in investment grade corporate and
government fixed-income securities. Data for the Bond Fund prior to
June 13, 1997 represents the former Madison Bond Fund, Inc.
Securities Valuation: Securities having maturities of 60 days or less
are valued at amortized cost, if determined to approximate market value.
Securities having longer maturities, for which market quotations are
readily available, are valued at the mean between their bid and asked
prices. Securities for which market quotations are not readily
available are valued at their fair value as determined in good faith by
the Trustees. Investment transactions are recorded on the trade date.
The cost of investments sold is determined on the identified cost basis
for financial statement and federal income tax purposes. Repurchase
Agreements are valued at amortized cost, which approximates market
value.
Investment Income: Interest income, net of amortization of premium or
discount, and other income (if any) is accrued as earned.
Dividends: Net investment income, determined as gross investment income
less expenses, is declared as a regular dividend each business day.
Dividends are distributed to shareholders or reinvested in additional
shares as of the close of business at the end of each month. Capital
gains distributions, if any, are declared and paid annually at calendar
year end. Additional distributions may be made if necessary.
Income Tax: In accordance with the provisions of Subchapter M of the
Internal Revenue Code applicable to regulated investment companies, all
of the taxable income of each fund is distributed to its shareholders,
and therefore no federal income tax provision is required. As of
December 31, 1997, the High Yield, Government and Bond Funds had
available for federal income tax purposes unused capital loss carryovers
of $1,630,171, expiring from December 31, 1998 through December 31,
2002, and $422,264, expiring December 31, 2003 through December 31,
2005, and $293,572, expiring December 31, 2002 through December 31,
2005, respectively.
Share Subscriptions: Shares purchased by check or otherwise not paid for
in immediately available funds are accounted for as share subscriptions
receivable and shares reserved for subscriptions.
Use of Estimates: The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and reported amounts of increases and
decreases in net assets from operations during the reporting period.
Actual results could differ from those estimates.
Fiscal Year: Beginning April 1, 1997, the Trust's fiscal year will end
on December 31. The predecessor of the Bond Fund had previously
maintained a December 31 fiscal year and this report represents a full
twelve-month Annual Report for such fund. With regard to the High Yield
and Government Funds, this report is the second of two financial
statements. The Trust has provided for its short fiscal year beginning
April 1, 1997 and ending December 31, 1997.
2. Investments in Repurchase Agreements. When the Trust purchases
securities under agreements to resell, the securities are held for
safekeeping by the Trust's custodian bank as collateral. Should the
market value of the securities purchased under such an agreement
decrease below the principal amount to be received at the termination of
the agreement plus accrued interest, the counterparty is required to
place an equivalent amount of additional securities in safekeeping with
the Trust's custodian bank. Repurchase agreements may be terminated
within seven days. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Trust, along with other
registered investment companies having Advisory and Services Agreements
with the same advisor, transfers uninvested cash balances into a joint
trading account. The aggregate balance in this joint trading account is
invested in one or more consolidated repurchase agreements whose
underlying securities are U.S. Treasury or federal agency obligations.
3. Investment Advisory Fees and Other Transactions with Affiliates.
The Investment Advisor to the Trust, Bankers Finance Advisors, LLC ("the
Advisor"), earns an advisory fee equal to 0.625% per annum of the
average net assets of the Trust's High Yield and Government Funds and
0.50% per annum of the average net assets of the Bond Fund; the fees are
accrued daily and are paid monthly. The Advisory Agreement between the
Trust and the Advisor was approved at the special meeting of the Trust's
shareholders on July 29, 1996. The Advisor purchased the investment
management assets of Bankers Finance Investment Management Corp.
("BFIMC"), the Trust's previous investment advisor, effective July 31,
1996.
The Advisor is responsible for the fees and expenses of Trustees who are
affiliated with the Advisor and certain promotional expenses. For the
period ended December 31, 1997, outside Trustee fees were $1,500 for
High Yield, $1,125 for Government and $1,700 for Bond.
4. Aggregate Cost and Unrealized Appreciation (Depreciation). The
aggregate cost for federal income tax purposes and the net unrealized
appreciation are stated as follows as of December 31, 1997:
High Yield Government Bond
Fund Fund Fund
Aggregate cost $6,375,130 $5,283,153 $1,098,633
Gross unrealized appreciation $232,183 $127,744 $10,710
Gross unrealized depreciation (240,408) (1,806) (2,615)
Net unrealized appreciation
(depreciation) $(8,225) $125,938 $8,095
5. Other Expenses. Effective November 1, 1997, all expenses and
support services are provided by the Advisor under a Service Agreement
for a fee based on a percentage of average net assets. This percentage
is 0.53% for the High Yield Fund, 0.52% for the Government Fund and
0.60% for the Bond Fund. Prior to November 1, 1997, with the exception
of certain expenses of the Trust payable by it directly, all support
services were provided to the Trust under a services agreement between
the Trust and the Advisor, pursuant to which such services were provided
for amounts not exceeding the cost to the Advisor. For the period ended
December 31, 1997, operating expenses of $28,932 for the High Yield
Fund, $22,669 for the Government Fund and $24,837 for the Bond Fund have
been reimbursed to the Advisor under the Services Agreement.
6. Net Assets. At December 31, 1997, net assets include the following:
High Yield Government Bond
Fund Fund Fund
Net paid in capital on shares
of beneficial interest $8,154,847 $5,795,345 $1,412,057
Distribution in excess of net
investment income -- -- (48)
Accumulated net realized losses (1,630,171) (422,264) (293,572)
Net unrealized appreciation
(depreciation) of investments (8,225) 125,938 8,095
Total net assets $6,516,451 $5,499,019 $1,126,532
The High Yield Fund reclassified $617,940 from accumulated net realized
losses to paid in capital as a result of permanent book and tax
differences relating to expired capital loss carryovers for the period
ended December 31, 1997. The reclassification had no impact on net
asset value.
7. Investment Transactions. Purchases and sales of securities other
than short-term securities for the period ended December 31, 1997 were
as follows:
High Yield Fund Government Fund Bond Fund
Nine Months Ended Nine Months Ended Twelve Months Ended
Purchases $3,024,828 $2,020,841 $1,040,827
Sales 2,376,972 2,491,034 3,860,029
8. Capital Share Transactions. An unlimited number of capital shares,
without par value, are authorized. Transactions in capital shares for
the following periods were:
<TABLE>
<CAPTION>
High Yield Fund Government Fund Bond Fund
Nine Year Nine Year Year Year
Months Ended Ended Months Ended Ended Ended Ended
December 31, March 31, December 31, March 31, December 31, December 31,
1997 1997 1997 1997 1997 1996
<S> <C> <C> <C> <C> <C> <C>
In Dollars
Shares sold $1,756,590 $1,219,205 $500,312 $517,989 $80,744 $38,092
Shares issued in
reinvestment of
dividends 326,962 432,108 205,143 298,946 83,381 173,253
Total shares issued 2,083,552 1,651,313 705,455 816,935 164,125 211,345
Shares redeemed (2,014,210) (2,047,256) (1,267,395) (1,707,827) (3,128,587) (1,784,692)
Net increase (decrease)$69,342 $(395,943) $(561,940) $(890,892)$(2,964,462)$(1,573,347)
In Shares
Shares sold 245,860 171,378 51,880 54,150 6,491 1,799
Shares issued in
reinvestment of
dividends 45,466 60,737 21,075 31,219 1,490 8,436
Total shares issued 291,326 232,115 72,855 85,369 7,981 10,235
Shares redeemed (279,507) (287,940) (130,825) (177,975) (151,880) (85,618)
Net increase (decrease) 11,819 (55,825) (57,970) (92,606) (143,899) (75,383)
</TABLE>
9. Discussion of Business Combination. Effective June 13, 1997,
Madison Bond Fund, Inc. merged into a newly created series of Mosaic
Income Trust to form the Mosaic Bond Fund. The merger was designed to
be accomplished as a tax-free reorganization pursuant to Internal
Revenue Code Section 368(a)(1)(F). Each shareholder of Madison Bond
Fund, Inc. received an identical number of shares of beneficial
interest of Mosaic Income Trust Mosaic Bond Fund as such shareholder
held immediately prior to the reorganization. The total amount of
shares of beneficial interest issued was 128,731.269 at $20.53 per
share. The separate and combined aggregate net assets as of the date of
the reorganization were identical.
