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Mosaic Income Trust
Government Fund
High Yield Fund
Bond Fund
Semi-Annual Report
June 30, 1999 (unaudited)
Management's Discussion of Fund Performance June 30, 1999
The Period in Review As 1999 began, consensus expectation was an economic slowdown in the first half of the year, which along with deflationary pressures would prompt the Federal Reserve to continue to lower rates. But instead, as 1999 unfolded and continued into the second quarter, the domestic economy remained robust and the global economies showed signs of strengthening. Historically low unemployment rates and high consumer demand characterized the strong U.S. economy. However, despite strong demand, a tight labor market, and rising oil prices, inflation at the consumer level remained subdued. Productivity gains continue to help moderate price pressures.
With the economy showing unexpected strength and the price of energy rising, it is no wonder that the period was characterized by concerns over inflation, the specter of ensuing Federal Reserve rate hikes and higher interest rates. In fact, despite the Fed's lack of action, rates have risen 150 basis points, from the low last fall of 4.4% to 6.0% on the 10-year Treasury. During the quarter, long bonds suffered significant declines while the total return for intermediate bond indices was once again slightly negative. The stock market remained surprisingly resilient, even as it absorbed sharp losses in the more speculative sectors, specifically internet-related stocks.
The Federal Reserve demonstrated considerable caution during the quarter, which allowed the economy to stay strong. Only on the last day of the period, June 30, did the Fed announce a widely anticipated 25-basis-point rate increase. Coupled with this announcement was the Fed's less-anticipated declaration of a neutral bias, dampening fears of ensuing rate increases. Both bonds and stocks initially responded favorably to this mixed message from the Fed.
On balance, the tug-of-war between strong growth and inflation prospects continues to heat up. The Fed is being pre-emptive by raising interest rates and in effect removing some of the stimulus they added during last Fall's financial crisis. We believe that this will be a limited, and successful, Fed tightening cycle that will lead the economy to gradually slow while keeping inflation pressures low. Meanwhile, the rise in interest rates has brought considerable "value" back to the bond market and should present a solid investment opportunity in the next few months.
Mosaic High Yield Fund
Fund-at-a-Glance
Objective: Mosaic High Yield provides relatively higher income by investing in lower-rated corporate bonds.
Net Assets: $5.3 million
Date of Inception: July 21, 1983
Ticker: GITMX
Total Return 12/31/98–6/30/99: -1.97%
Mosaic Government Fund
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
Total Return 12/31/98–6/30/99: -2.24%
Mosaic Bond Fund
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: $640 thousand
Date of Inception: April 23, 1990
Ticker: MBNDX
Total Return 12/31/98–6/30/99: -1.39%
High Yield Fund Portfolio of Investments – June 30, 1999 (unaudited)
Government Fund Portfolio of Investments - June 30, 1999 (unaudited)
Bond Fund Portfolio of Investments – June 30, 1999 (unaudited)
Notes to the Portfolio of Investments:
* Unaudited
Moody's Moody's Investors Services, Inc.
S&P Standard & Poor's Corporation
June 30, 1999 (unaudited)
Statements of Operations
For the six months ended June 30, 1999 (unaudited)
Statements of Changes in Net Assets For the period indicated
Financial Highlights
Selected data for a share outstanding throughout each period indicated:
1 Data prior to June 13, 1997 represents Madison Bond Fund, Inc.
2 For the nine-month period ended December 31, 1997.
3 For the year ended March 31.
4 Annualized.
5 For the six-month period ended June 30, 1999.
Notes: Effective July 31, 1996, the investment advisory services for the High Yield and Government Funds transferred to Madison Mosaic, LLC from Bankers Finance Investment Management Corp.
Mosaic Income Trust Notes to Financial Statements For the Six Months Ended June 30, 1999 (unaudited)
1. Summary of Significant Accounting Policies. Mosaic Income Trust (the "Trust") is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as an open-end, diversified investment management company. As of the date of this report, the Trust maintained three separate funds whose principal objectives were to obtain high current income. The High Yield Fund invested 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 investrd in securities of the U. S. Government and its agencies. The Bond Fund invested in investment grade corporate, government and government agency fixed-income securities. Data for the Bond Fund prior to June 13, 1997 represents the former Madison Bond Fund, Inc. which merged ino the Trust on such date. The Bond Fund merged into the High Yield Fund on July 1, 1999. Comtemporaneously with the merger, the High Yield Fund's name changed to the Intermediate Income Fund and it began following policies of investing only in securities with maturities of 10 years or less, with no more than 35% of total assets beling below investment grade.
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, substantially all of the taxable income of each fund is distributed to it shareholders and therefore, no income tax provision is required. As of December 31, 1998, the High Yield, Government, and Bond Funds had available for federal income tax purposes the following unused capital loss carryovers:
Expiration Date High Yield Fund Government Fund Bond Fund
December 31, 2002 $740,266 -- $188,652
December 31, 2003 -- $268,589 94,831
December 31, 2004 -- 44,628 --
December 31, 2005 -- 64,210 293
December 31, 2006 239,050 -- --
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 and Accountants: Beginning April 1, 1997 the Trust's fiscal year changed to December 31 and the Trust changed its Independent Auditors to Deloitte & Touche LLP.
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, Madison Mosaic, 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.
4. Aggregate Cost and Unrealized Appreciation (Depreciation). The aggregate cost for federal income tax purposes and the net unrealized appreciation (depreciation) are stated as follows as of June 30, 1999:
High Yield Fund Government Fund Bond Fund
Aggregate Cost $5,086,812 $5,399,693 $638,158
Gross unrealized appreciation 60,280 45,814 3,164
Gross unrealized depreciation (107,912) (50,449) (10,945)
Net unrealized appreciation (depreciation) $ (47,632) $ (4,635) $ (7,781)
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; the fees are accrued daily and paid monthly.
The Advisor is also responsible for the fees and expenses of Trustees who are affiliated with the Advisor and certain promotional expenses.
6. Net Assets. At June 30, 1999, net assets include the following:
High Yield Fund Government Fund Bond Fund
Net paid in capital on shares of beneficial interest $6,586,616 $5,823,716 $931,716
Undistributed net investment income 1 -- --
Accumulated net realized gains (1,280,853) (365,535) (283,890)
Net unrealized depreciation on investments (47,632) (4,635) (7,781)
Total net assets $5,258,132 $5,453,546 $640,045
The High Yield Fund reclassified $889,905 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 year ended December 31, 1998. The reclassification had no impact on net asset value.
7. Investment Transactions. Purchases and sales of securities other than short-term securities for the six months ended June 30, 1999 were as follows:
High Yield Fund Government Fund Bond Fund
Purchases $2,242,068 $605,363 $ 64,441
Sales 2,905,169 588,577 170,111
8. Capital Share Transactions. An unlimited number of capital shares, without par value, are authorized. Transactions in capital shares for the following periods were:
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: 1 888 336-3063
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 Government Fund
Mosaic Intermediate Income 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
For more complete information on any Mosaic Fund, including charges and expenses, request a prospectus by calling the numbers above. Read it carefully before you invest or send money.
1655 Fort Myer Drive, 10th floor
Arlington, Virginia 22209-3108
http://www.mosaicfunds.com
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