Mosaic Income Trust
1655 Ft. Myer Drive
Arlington, Virginia 22209
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on June 28, 1999
Notice is hereby given that a Special Meeting of Shareholders (the "Meeting")
of Mosaic Income Trust's Bond Fund series (the "Bond Fund") will be held at
the offices of the Fund at 1655 Ft. Myer Drive, Suite 1000, Arlington,
Virginia 22209, on Monday, June 28, 1999, at 12:00 noon for the following
purposes:
1. To consider and act upon the Agreement and Plan of Merger (the "Plan")
dated April 19, 1999 providing for:
a) the acquisition of substantially all of the assets of the Bond Fund by an
existing series of Mosaic Income Trust to be newly named and known as Mosaic
Intermediate Income Fund (currently known as the High Yield Fund) (the "New
Fund"), in exchange for shares of the New Fund;
b) the assumption by the New Fund of the liabilities of the Bond Fund; and
c) distribution of such shares of the New Fund to shareholders of the Bond
Fund.
2. To transact any other business as may properly come before the meeting or
any of its adjournments.
The Trustees fixed the close of business on April 30, 1999 as the record date
for the determination of shareholders of the Bond Fund entitled to notice of
and to vote at this Meeting or any adjournment thereof.
IMPORTANT
Your vote is important and all Shareholders are asked to be present in person
or by proxy. If you are unable to attend the meeting in person, we urge you
to complete, sign, date and return the enclosed proxy as soon as possible
using the enclosed stamped envelope. Sending the proxy will not prevent you
from personally voting your shares at the Meeting since you may revoke your
proxy by advising the Secretary of Mosaic Income Trust in writing (by
subsequent proxy or otherwise) of such revocation at anytime before it is
voted.
By order of the Board of Trustees
(signature)
W. Richard Mason
Secretary
June 1, 1999
<PAGE>
Mosaic Funds
1655 Ft. Myer Drive, Suite 1000
Arlington, Virginia 22209
888-670-3600
June 1, 1999
Dear Shareholder:
The attached proxy materials seek your approval to merge Mosaic Income
Trust's Mosaic Bond Fund into a reformulated Mosaic Income Trust bond fund,
to be known as Mosaic Intermediate Income Fund.
What are we proposing?
* Upon approval by Bond Fund shareholders, the Bond Fund series of the Trust
will merge into the High Yield Fund series of the Trust effective July 1,
1999.
* Contemporaneously with the merger, the High Yield Fund series will change
its investment policies and become known as the Mosaic Intermediate Income
Fund series of the Trust.
* Former Bond Fund shareholders will receive shares of the newly named Mosaic
Intermediate Income Fund in exchange for their Bond Fund shares.
This merger represents a logical step in the progressive restructuring of the
Mosaic family of funds to best utilize management expertise and provide
shareholder value.
Your board of trustees unanimously recommends a vote FOR this proposal. If
the merger is approved, you will still own shares in a bond fund with the
objective of providing monthly income and distributing that income as
dividends. Under its revised objectives, the fund will be able to invest in a
broader range of securities as described in the attached prospectus.
Specifically, you will own shares in an intermediate term bond fund that will
invest at least 65% of its assets in investment grade bonds, while retaining
the option to invest up to 35% of assets in bonds rated as low as "B."
In contrast, your current Mosaic Bond Fund allows investment only in bonds
rated "BBB" or "Baa" or better. By allowing Intermediate Income Fund to
invest in what are known as "high-yield securities," your fund managers
anticipate opportunities for improved yield and total return. The Fund will
invest in such securities only when the managers believe that the
creditworthiness of the issuer is stable or improving, and when the potential
return of investing in such securities justifies the higher level of risk.
However, consistent with the existing Mosaic Bond Fund, Intermediate Income
will only invest in securities having a final maturity of less than 10 years.
This maturity cap is intended to help temper the impact of changing interest
rates on the value of the portfolio.
Why merge these funds?
* A merger will result in a larger pool of assets and allow for more
efficient management. Efficiency of management will allow total expenses to
remain competitive.
* With increased assets, the Mosaic Intermediate Income Fund will have the
opportunity to purchase or sell securities at the more favorable prices that
can often be obtained when trading in larger blocks of securities.
* The Mosaic Intermediate Income Fund will begin operation on July 1, 1999,
with the ability to pick the best opportunities from a broad range of
government and corporate bonds. Your managers and your Trustees believe that
it will be in the best interests of Mosaic Bond Fund's shareholders to be a
part of this exciting new fund as it combines what management judges to be
the best aspects of two existing funds.
Please review the enclosed prospectus and send us your voted proxy as soon as
possible.
Thank you. Call us if you have any questions.
Sincerely,
(signature) (signature)
Katherine L. Frank Frank E. Burgess
President, Mosaic Income Trust President, Madison Investment Advisors
<PAGE>
Prospectus Dated June 1, 1999
Mosaic Income Trust
1655 Ft. Myer Drive
Suite 1000
Arlington, Virginia 22209-3108
888-670-3600
Acquisition of the Assets of
Mosaic Bond Fund series of Mosaic Income Trust ("the "Trust")
by and in exchange for shares of
Mosaic High Yield Fund series of the Trust
This prospectus explains that the Trustees of Mosaic Income Trust are
soliciting the proxies of shareholders of the Mosaic Bond Fund in connection
with the following transaction:
* Merging the Bond Fund series of the Trust into the High Yield Fund series
of the Trust effective July 1, 1999.
* Contemporaneously with the merger, changing the High Yield Fund series'
investment policies and its name to Mosaic Intermediate Income Fund series of
the Trust.
* Distributing to former Bond Fund shareholders shares of the newly named
Mosaic Intermediate Income Fund in exchange for their Bond Fund shares.
Specifically, Bond Fund shareholders will own shares in an intermediate term
bond fund that will invest at least 65% of its assets in investment grade
bonds, while retaining the option to invest up to 35% of assets in bonds
rated as low as "B."
If approved, you will receive shares in the Mosaic Intermediate Income Fund
equal in value to your current investment in the Bond Fund. The proposed
merger is designed to be a tax-free reorganization so that you will not
recognize any income as a result of the merger and your tax basis in the Bond
Fund will carry over to the shares of the Mosaic Intermediate Income Fund.
This prospectus sets forth concisely the information about Mosaic Income
Trust's new Mosaic Intermediate Income Fund series that a prospective
investor ought to know before investing. You should retain this prospectus
for future reference.
Although your Trustees are soliciting your proxy vote, when this prospectus
speaks about "we" or "us," it refers to your fund's manager, Madison Mosaic.
Additional information about Mosaic Income Trust (including a Statement of
Additional Information that is incorporated by reference into and dated the
same day as this prospectus) has been filed with the Securities and Exchange
Commission and is available upon oral or written request and without charge.
Contact Mosaic Funds shareholder service department at the address and phone
number above.
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.
<TABLE>
Table of Contents
<S> <C>Transaction Summary and Cover Page 1
Fee Table, Synopsis Information and Risk Factors 3
Fee Table 3
Synopsis Information 4
Comparison of Risks 6
Information about the Transaction 8
Information about Mosaic Intermediate Income Fund 11
Risk/Return Summary: Investments, Risks and Performance 11
Fee Table 12
Investment Objectives 13
Implementation of Investment Policies 13
Management 16
Pricing of Fund Shares 17
Dividends and Distributions 18
Taxes 18
Financial Highlights 18
Additional Information 19
Information about Your Fund 20
Voting Information 20
Notice to Banks, Broker-Dealers and Voting Trustees &
Their Nominees 22
</TABLE>
Fee Table, Synopsis Information and Risk Factors
Fee Table
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Intermediate Income Fund and compares them with current
expenses for the Bond Fund and the High Yield Fund.
<TABLE>
Shareholder Fees (fees paid directly from your investment)
<S> <C> <C> <C>
High Intermediate
Yield Bond Income Fund
Fund Fund (Pro forma)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None None None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None None None
Redemption Fee None None None
Exchange Fee None None None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
High Intermediate
Yield Bond Income Fund
Fund Fund (Pro forma)
Management Fees 0.50% 0.63% 0.63%
Distribution (12b-1) Fees None None None
Other Expenses 0.61% 0.53% 0.45%
Total Annual Fund Operating Expenses 1.11% 1.16% 1.08%
</TABLE>
Example: This Example is intended to help you compare the cost of investing
in the Intermediate Income Fund with the cost of investing in the Bond and
High Yield funds. For simplicity, fee and expense percentages above are
rounded to two decimal places.
The Example assumes that you invest $10,000 for the time periods indicated
and you redeem your shares at the end of those periods. 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>
1 Year 3 Years 5 Years 10 Years
Bond Fund $113 $353 $612 $1,352
High Yield Fund $118 $368 $638 $1,409
Intermediate Income Fund $110 $343 $595 $1,317
</TABLE>
Synopsis Information
Your Trustees determined that it will be in the best interests of the
shareholders of your fund and the current shareholders of what is now known
as the High Yield Fund to merge your fund's assets into the High Yield Fund
while simultaneously changing the investment policies and name of the High
Yield Fund.
Why did the Trustees reach these decisions?
Consolidation of Funds within Mosaic.
Since the launch of Mosaic funds in June 1997, the funds' advisor has sought
to utilize management expertise and maximize shareholder value across the
fund family. The realignment and merger of funds has been a natural
consequence of this effort.
Small size of your fund.
Mosaic Bond Fund is the smallest of all the Mosaic funds (with less than
$750,000 in assets, compared with the next smallest fund at over $2 million).
In light of the higher fees that your fund will likely have to bear at its
current small size, it will become more difficult to achieve your fund's
investment objectives. The Merger should increase the size of the
Intermediate Income Fund, thereby accomplishing certain economies of scale
and eliminating duplications.
Limitations on investment opportunities for your fund.
The small size of your fund also prevents us from purchasing or selling
securities for the fund at the more favorable prices that can sometimes be
obtained when trading in larger blocks of securities.
The independent Trustees retained independent counsel to advise them with
respect to their fiduciary duties in connection with approval of the proposed
Merger.
In light of these unique circumstances, your trustees decided to combine
these two funds and create a single new fund to be known as the Intermediate
Income Fund.
Comparison of Differences Between Your Fund and the Intermediate Income Fund
The Intermediate Income Fund will be a restructured series of Mosaic Income
Trust. As a result, like all Mosaic Income Trust funds, we will continue to
seek to provide you monthly dividends by investing in bonds and other debt
securities. However, the Intermediate Income Fund will differ from your
current fund in two ways: (1) it will have different investment
objectives and policies and (2) it will have different expenses. All other
matters (investment advisor, distributor, investment and redemption
procedures, exchange and checking privileges, pricing methods and all
shareholder services) will be identical to those you have now.
1. New Investment Objectives and Policies
Objectives
The Bond Fund's primary objective is to receive income from bonds and to
distribute that income to investors as dividends. It has a secondary
objective of seeking capital preservation.
The objective of the Intermediate Income Fund will be to receive income from
bonds and to distribute that income to investors as dividends.
What is the difference? The Intermediate Income Fund will not make seeking
capital preservation an investment objective. Rather, the Intermediate
Income Fund's single objective will allow for an expanded range in seeking
higher yields and total returns.
Policies
* Quality
The Bond Fund invests only in investment grade securities. By comparison,
the Intermediate Income Fund may invest up to 35% of its assets in bonds
rated below "investment grade." The Intermediate Income Fund may hold bonds
rated BB or B by nationally recognized statistical rating organizations. The
Trustees authorized this flexibility in order to help the Intermediate Income
Fund provide a better yield, especially during periods of low interest rates
such as we are now experiencing.
However, the Intermediate Income Fund will be required to invest at least 65%
of its assets in investment grade bonds. As a result, we intend it to be a
general intermediate term bond fund with the flexibility to invest a limited
percentage of its assets in higher yielding bonds.
The risks involved with bonds that are below investment grade are described
below under "Comparison of Risks Between Your Fund and the Intermediate
Income Fund" and again in the risk discussions in the "Information About the
Intermediate Income Fund" beginning on page 12.
* Maturity
Like your current Bond Fund, the Intermediate Income Fund's investment
policies will be to invest in securities with an average maturity of 10 years
or less, thereby acting to help preserve capital. Generally, the shorter the
maturity of a bond, the less the fluctuation in the bond's price in response
to changing interest rates.
* Diversification
Like your current Bond Fund, the Intermediate Income Fund will invest in a
broad range of corporate debt securities and obligations of the U.S.
Government and its agencies. There are no restrictions or limitations on the
percentage either fund will invest in any of these types of securities.
2. Fees and Expenses
Total Expense Ratio
As of the end of your fund's most recent fiscal year, its total annual
expense ratio was 1.11%. The Intermediate Income Fund's total annual expense
ratio has been approved by the Trustees to be 1.08%.
Although the total expense ratio for the Intermediate Income Fund will be
lower than that for your fund, you should understand that expenses for both
funds is divided between management fees and all other operational and
administrative expenses ("other expenses"). The lower total expense ratio
will be achieved because other expenses will be 0.45% -- much lower than the
0.61% your fund is currently paying. However, the management fee of the
Intermediate Income Fund is 0.625% compared with the current management fee
of your fund at 0.50%. Total expenses will be in line with other funds in
Mosaic Income Trust.
How Will the Transaction Be Accomplished?
The Trustees approved an Agreement and Plan of Merger (the "Plan") that
describes the technical details of how the two funds will merge. (You can
receive a copy of the Plan at no cost by calling us at 888-670-3600.) The
Plan provides for substantially all of the assets and liabilities of your
fund to be acquired by the Intermediate Income Fund in exchange for shares of
the Intermediate Income Fund (the transaction is referred to as the
"Merger"). Following the Merger, shares of the Intermediate Income Fund will
be distributed to the then-existing shareholders of your fund.
The Merger is being structured as a tax-free reorganization for federal
income tax purposes. This means that if the Merger is approved, you should
not incur any tax consequences from the transaction. Your tax basis in your
Bond Fund shares should carryover to your Intermediate Income Fund shares.
Comparison of Risks
Except for the Intermediate Income Fund's policy of permitting an investment
in bonds rated as low as B, the principal risk factors of investing in the
Intermediate Income Fund will be generally the same as those of your fund.
Specifically, the risks are:
Interest Rate Risk: When interest rates or general demand for fixed-income
securities change, the value of these bonds change. Bonds can lose value when
there is a rise in interest rates.
Call Risk: If a 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 for it.
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.
New Risks
The credit risk for the Intermediate Income Fund will be greater than that of
the Bond Fund. This is because your fund invests 100% of its assets in
investment grade bonds. By comparison, the Intermediate Income Fund will be
required to invest at least 65% of its assets in investment grade bonds. Of
course, since this 65% policy is a minimum, the Intermediate Income Fund may
invest up to 100% of its assets in investment grade bonds. However, the
Intermediate Income Fund will give us the flexibility to invest up to 35% of
its assets in bonds rated as low as B. If the rating of any bond the
Intermediate Income Fund holds drops below B, we will take steps to dispose
of the security as soon as practical.
You should understand the risks associated with the type of high yield bonds
the Intermediate Income Fund may own:
* The high yield bond market is relatively young so it is difficult to
identify trends regarding these types of bonds.
* Prices of high yield bonds may be less sensitive to interest rates than
other bonds, but more sensitive to adverse economic changes or individual
corporate developments.
* High yield bond values are very sensitive to market expectations about the
credit worthiness of the issuing companies.
* There may be "thin" trading of these bonds during times of market distress.
* Interest income may be recognized as taxable even though payment of such
interest is not received in cash.
* Changes in credit ratings by the major credit rating agencies may lag
changes in the credit worthiness of the issuer.
Other Risk and Reward Considerations
One risk particular to your fund is less applicable to the Intermediate
Income Fund. This risk is related to the Mosaic Bond Fund's objective of
capital preservation. In pursuit of this objective, your managers may
shorten portfolio maturity until they perceive that a period of market
volatility has passed. This may cause the Mosaic Bond Fund to underperform
the general bond market during particular periods and may generate greater
capital gains potential. With Intermediate Term Bond, such defensive actions
are expected to be less likely, and any drastic changes of this sort would
only occur as an unusual temporary measure rather than as a matter of fund
objective.
The most important change from a fund management perspective is the loosening
of restrictions on management. Specifically, investors who have a primary
interest in yield will potentially benefit from the freer hand their managers
will have in purchasing higher yielding bonds. As previously noted, there are
a number of likely benefits to being in a fund with the greater assets that
will be available following the merger.
Information About the Transaction
Summary of Terms of the Plan
You are asked to approve the transfer of substantially all of the assets and
liabilities of the Mosaic Bond Fund series of the Trust in exchange for
shares of the Intermediate Income Fund, a restructured existing series of the
Trust. The Plan also calls for the Trust to distribute shares of the
Intermediate Income Fund series to the shareholders of your fund. (The
transaction is referred to in this document as the "Merger.")
As provided in the Plan, shareholders will not pay any of the expenses
involved in accomplishing the Merger. Any expenses will be paid by the
advisors to the Trust.
At or prior to the Merger, the Plan provides that your fund will declare a
dividend and distribution. This distribution, together with all previous
distributions, will have the effect of distributing to your fund's
shareholders: (1) all of the fund's investment company taxable income for the
taxable year ending on or prior to the day of the Merger; and (2) all of its
net capital gains realized in all taxable years ending on or prior to that
day (after reductions for any capital loss carryforward).
The consummation of the Merger is subject to the conditions set forth in the
Plan, including approval by your fund's shareholders and receipt of an
opinion of counsel regarding the Federal income tax consequences of the
Merger. The Plan can be terminated at any time prior to the Merger.
If the Merger is not approved by your fund's shareholders, the Trustees will
continue to operate your fund under its existing arrangements. However, due
to its small size, if the Merger is not approved, we will likely reexamine
the level of expenses your fund must pay upon expiration of the Trust's
current services agreement in July 1999.
Description of Securities to be Issued
As a result of the Merger, each shareholder of record of Mosaic Bond Fund
will become the record holder of that number of full and fractional shares of
the Intermediate Income Fund having an aggregate net asset value equal to the
aggregate net asset value of the shareholder's shares of your fund. These
calculations are made in accordance with the Plan as of the close of business
on the date that your Bond Fund assets are exchanged for shares of the
Intermediate Income Fund.
Since both your fund and the Intermediate Income Fund are series of Mosaic
Income Trust, there are no material differences between the rights of
shareholders of your fund and the rights of shareholders of the Intermediate
Income Fund.
Reasons for the Merger
Your trustees, including the trustees who are not "interested persons," as
that term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), have concluded that it is in the best interests of both funds
for the Merger to take place. The Trustees have concluded that the interests
of the Trust's shareholders will not be diluted as a result of the
transactions contemplated by the Merger. Therefore, they have submitted the
Merger for the approval by you.
Why have your trustees reached these conclusions?
Consolidation of Funds within Mosaic. Since the launch of Mosaic funds i
June 1997, the funds' advisor has sought to utilize management expertise and
maximize shareholder value across the fund family. The realignment and merger
of funds has been a natural consequence of this effort.
Small size of your fund. Mosaic Bond Fc d is the smallest of all the Mosaic
funds (with less than $750,000 in assets, compared with the next smallest
Mosaic Fund with over $2 million). As a result, the Trustees recognized that
its transfer agent, administrative and other expenses must increasei
nubstantially at the expiration of its current services agreement in July
1999. In light of the higher fees that your fund will likely have to bear at
its current small size, it will become more difficult to achieve your fund's
investment objectives. The Cerger should increase the size of the
Intermediate Income Fund, thereby accomplishing certain economies of scale
while at the same time eliminating duplicative administrative expenses that
are incurred with the operation of two distinct funds.
Limitations on investment opportunities for your fund. The small size of
your fund also prevents us from purchasing or selling securities for the fund
at the more favorable prices that can sometimes be obtained when trading in
larger blocks of securities. As the fund continues to diminish in size, this
limitation will also adversely affect your fund's ability to achieve its
investment objectives.
The independent Trustees retained independent counsel to advise them with
respect to their fiduciary duties in connection with approval of the proposed
Merger.
Tax Consequences.
Before the Merger happens, the Trust will receive an opinion of counsel that
the Merger has been structured so that no gain or loss will be recognized by
your fund or it shareholders for federal income tax purposes as a result of
the receipt of shares of the Intermediate Income Fund in the
Merger. The holding period and aggregate tax basis of shares of the
Intermediate Income Fund that are received by the your fund's shareholders
will re the same as the holding period and aggregate tax basis of shares of
your Fund previously held by your Fund's shareholders (provided, of course,
that shares of your fund are held as capital assets). In addition, the
holding period and tax basis of thes ssets of your fund in the hands of the
Intermediate Income Fund as a result of the Merger will be the same as in the
hands of your Fund immediately prior to the Merger.
The Merger is being structured to meet the requirements of Internal Revenue
Codenuection 368(a)(1)(C) for tax-free exchanges.
Capitalization
The following table shows the capitalization as of December 31, 1998 of your
fund and the Intermediate Income Fund individually and on a pro forma
combined basis as of that date, giving effeit to the proposed acquisition of
your fund's net assets at market value:
<TABLE>
<S> <C> <C> <C>
Mosaic Mosaic High Intermediate Income
Bond Fund Yield Fund Fund (Pro Forma for Merger)
Net Assets $823,528 $6,154,306 $6,977,834
Net Asset Value
per share $21.21 $6.92 $6.92
Shares
outstanding 38,819 888,809 1,007,816
</TABLE>
Portfolio Realignment Consequences
We must make significant changes to the investment portfolio of the High
Yield Fund as we restructure it to become the Intermediate Income Fund.
Specifically, we will sell (1) all securities rated below B and (2) all
remaining securities rated below investment grade to the extent they would
exceed 35% of the fund's assets on July 1, 1999. This restructuring will
cause the fund to recognize tax gain or loss on the securities we sell.
Currently, this fund has substantial capital loss carryovers, so we do not
believe that the restructuring we perform will result in any unusual capital
gain distributions. Of course, to the extent we must use some of the fund's
capital loss carryovers to offset any gains realized, this will reduce the
overall capital losses available to offset any future year gains.
We anticipate completing restructuring contemporaneously with the Merger so
that the performance of the Intermediate Income Fund should not be affected.
We do not believe that we will need to restructure the Bond Fund prior to the
Merger if the Merger is approved.
Information About the Intermediate Income Fund
Although the following discussion is written in the present tense for ease of
understanding, you should be aware that the Intermediate Income Fund is not
intended to become effective until July 1, 1999.
Risk/Return Summary: Investments, Risks and Performance
Fund Investment Objectives/Goals
The objective of the Intermediate Income Fund is to receive income from bonds
and to distribute that income to its investors as dividends.
Principal Investment Strategies of the Intermediate Income Fund
The Intermediate Income Fund seeks to achieve its objectives through
diversified investment in bonds and other debt securities. It invests in a
broad range of corporate debt securities and obligations of the U.S.
Government and its agencies. It invests at least 65% of its assets in bonds
with the total portfolio having an average dollar weighted maturity of ten
years or less. Also, at least 65% of the fund will be invested in investment
grade bonds. Finally, up to 35% of the fund may be invested in securities
rated as low as B, including those commonly referred to as "high yield" or
"junk" bonds.
Principal Risks of Investing in the Intermediate Income Fund
Interest Rate Risk
The share price of the Intermediate Income Fund reflects the value of the
bonds it holds. When interest rates or general demand for fixed-income
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 might be a rise in interest
rates. When this happens, existing bonds that pay a lower rate become less
attractive and their prices tend to go down.
Call Risk
If a 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 for it.
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.
High Yield Bond Risk
Since the Intermediate Income Fund may invest up to 35% of its assets in
bonds rated below investment grade, you should understand the risks of such
bonds:
* The Youth and Growth of the High Yield Bond Market. The high yield bond
market is relatively young and supply is limited.
* Sensitivity to Interest Rates and Economic Changes. Prices of high yield
bonds may be less sensitive to interest rate than other bonds, but more
sensitive to adverse economic changes or individual corporate developments.
* Market Expectations. High yield bond values are very sensitive to market
expectations about the credit worthiness of the issuing companies.
* Liquidity and Valuation. There may be "thin" trading during times of market
distress.
* Taxation. Interest income may be recognized as taxable even though payment
of such interest is not received in cash.
* Credit Ratings. Changes in credit ratings by the major credit rating
agencies may lag changes in the credit worthiness of the issuer.
Risk/Return Bar Chart and Performance Table
Risk/Return Bar Charts and comparative performance tables for Mosaic Income
Trust's High Yield Fund and Bond Fund are contained in pages 5 and 6 of the
Mosaic Income Trust prospectus dated April 30, 1999 enclosed with this
document and incorporated by reference. You should refer to it for
historical performance information.
Fees and Expenses of the Intermediate Income Fund
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Intermediate Income Fund.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
<C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
Redemption Fee None
Exchange Fee None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
Management Fees 0.63%
Distribution (12b-1) Fees None
Other expenses 0.45%
Total Annual Fund Operating Expenses 1.08%
</TABLE>
Example: This Example is intended to help you compare the cost of investing
in the Intermediate Income Fund 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 and then redeem all of your shares at the end of those periods.
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>
1 Year 3 Years 5 Years 10 Years
Intermediate Income Fund $110 $343 $595 $1,317
</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
The Intermediate Income Fund's investment objective is to receive income from
bonds and other debt securities and to distribute that income to its
investors as monthly dividends.
There can be no assurance that the objective of the fund will be achieved.
Although the investment objective of the fund may be changed without
shareholder approval, shareholders will be notified in writing prior to any
material change.
Implementation of Investment Objectives
General Selection Criteria
We select bonds for the Intermediate Income Fund that we believe provide the
best combination of yield (the interest rate the bond pays in relation to its
price), credit risk and diversification. To a lesser extent, we also
consider whether a particular bond may increase in value from its price at
the time of purchase.
Temporary Defensive Position
We reserve the right to invest a portion of the fund's total assets in short-
term debt securities (those with maturities of one year or less) and to
maintain a portion of fund assets in cash. However, we do not intend to hold
more than 35 percent of the fund in such investments unless we determine that
market conditions warrant a temporary defensive investment position. Under
such circumstances, up to 100 percent of the fund may be so invested. To the
extent that the fund is so invested, it is not invested in accordance with
policies designed to achieve its stated investment objective.
Short-term investments may include certificates of deposit, commercial paper
and repurchase agreements. We might hold substantial cash reserves in seeking
to reduce a fund's exposure to bond price depreciation during a period of
rising interest rates and to maintain desired liquidity while awaiting more
attractive investment conditions in the bond market.
Selection
The Intermediate Income Fund seeks to achieve its objectives by investing in
corporate debt securities, obligations of the U.S. Government and its
agencies and instrumentalities and money market instruments.
The percentage of the Intermediate Income Fund's assets that we may invest at
any particular time in a particular type of securities and the average
weighted maturity of the total portfolio (never more than 10 years) will
depend on our judgment regarding the risks in the general market. We monitor
many factors affecting the market outlook, including economic, monetary and
interest rate trends, market momentum, institutional psychology and
historical similarities to current conditions.
Corporate Debt Securities. We will primarily buy corporate debt securities
accorded one of the four highest quality ratings by Standard & Poor's or
Moody's or, if unrated, judged by the Advisor to be of comparable quality.
These are generally referred to as "investment grade" securities and are
rated AAA, AA, A and BBB by Standard & Poor's or Aaa, Aa, A or Baa by
Moody's.
Although all of the corporate debt securities we hold in the fund may be
investment grade at any time, we may also invest up to 35% of the
Intermediate Income Fund's assets in lower grade corporate debt securities,
commonly known as "high yield" or "junk" bonds. The lowest-grade securities
we will purchase for this fund are those rated "B". We will only invest in
lower-grade securities when we believe that the creditworthiness of the
issuer is stable or improving, and when the potential return of investing in
such securities justifies the higher level of risk.
Although the fund may invest in securities with ratings as low as "B", we
follow certain policies intended to lessen some of the risks associated with
investment in such securities. Included among such policies are the
following:
1. bonds acquired at the time of their initial public offering must be rated
at least "B" by either Standard & Poor's Corporation or Moody's Investors
Services, Inc.;
2. bonds rated "BB" or "Ba" or lower must have more than one market maker at
the time of acquisition;
3. we do not purchase unrated bonds issued by an unrated company, privately
placed bonds or bonds of issuers in bankruptcy;
4. we do not purchase zero coupon bonds or bonds having interest paid in the
form of additional securities (commonly called "payment-in-kind" or "PIK"
bonds) if immediately after the investment more than 15 percent of the value
of the fund would be invested in such bonds; and
5. we will sell, as soon as practical, any security owned by the Intermediate
Income Fund that is downgraded below B.
We apply our investment selection criteria at the time an investment is made.
Except as described in item 5 above, we might not sell a bond because of an
adverse change in the quality rating or other characteristics because in our
view the change may be temporary, or the impact of such change is often
already reflected in market price before the bond can be sold.
U.S. Government Securities. We may also buy Government Securities for the
Intermediate Income Fund. These include a variety of securities issued or
guaranteed by the U.S. Treasury and various agencies of the federal
government. They also include various instrumentalities that were
established or sponsored by the U.S. Government and certain interests in
these types of securities.
Treasury securities include notes, bills and bonds. Obligations of the
Government National Mortgage Association (Ginnie Mae), the Federal Home Loan
Banks, the Federal Farm Credit System, Freddie Mac, Fannie Mae, the Small
Business Association and the Student Loan Marketing Association are also
considered to be U.S. Government securities.
Except for Treasury securities, these obligations may or may not be backed by
the "full faith and credit" of the United States. Government agency
obligations are generally guaranteed as to principal and interest by agencies
and instrumentalities of the U.S. government.
Money Market Securities. Finally, we may invest in money market securities.
Money market securities are subject to the limitation that they mature within
one year of the date of their purchase. These include:
1. commercial paper (including variable rate master demand notes) rated at
least A-2 by Standard and Poor's Corporation or Prime-2 by Moody's, or if not
so rated, issued by a corporation which has outstanding debt obligations
rated at least in the top two ratings by Standard and Poor's and Moody's;
2. debt obligations (other than commercial paper) of corporate issuers which
obligations are rated at least AA by Standard or Poor's or Aa by Moody's; and
3. short-term obligations of or guaranteed by the U.S. government, its
agencies or instrumentalities.
Maturity
We will normally invest the Intermediate Income Fund so that the fund has an
average dollar weighted maturity of 10 years or less. If we believe that
market risks are high and bond prices in general are vulnerable to decline,
we may take certain temporary defensive actions such as reducing the average
maturity of the fund's holdings and increasing its cash reserves. We do not,
however, intend to engage in extensive short-term trading.
Portfolio Trading Activity - Taxable Capital Gains Potential
We may alter the composition of the fund with regard to quality and maturity
and we may sell securities prior to maturity. Under normal circumstances,
however, turnover for the fund is generally not expected to exceed 100%.
Sales of fund securities may result in capital gains. This can occur any
time we sell a bond at a price that was higher than the price we paid for it,
even if we do not engage in active or frequent trading.
Under normal circumstances, we will not engage in active or frequent trading
of bonds. However, it is possible that we will determine that market
conditions require a significant change to the composition of the 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 the 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 could
make a taxable capital gain distribution.
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 $3.8 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.
The decisions reached by the investment policy committee are carried out on a
day-to-day basis by a team of portfolio management officers of Madison. This
"fixed-income portfolio management team" selects individual bonds and
performs other management functions for all of the Trust's funds. The team
performs the same type of activities for Madison's individual clients.
Compensation
Advisory Fee. We receive a fee for our services under our Investment
Advisory Agreement with the Trust. For the last fiscal year of the Trust, the
fee was calculated as 5/8% of average daily net assets.
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.
This fee is to be set at 0.45% effective as of the date of the Merger.
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 assets, 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 of the securities in each fund in order to determine
NAV. We obtain the market value from one or more established pricing
services.
When you purchase or redeem shares, your transaction will be priced based on
the next calculation of NAV after your order is received in proper form.
This may be higher, lower or the same as the NAV from the previous day.
Dividends and Distributions
The 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 or payments by electronic funds transfer. 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
The Intermediate Income Fund will distribute to shareholders 100% of its net
income and net capital gains, if any.
Dividends and any capital gain distributions 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. 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, every time 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 exchange of any fund's shares for shares of another fund will be treated
as a sale 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.
State Tax Considerations
In most states, the dividends and any capital gains you receive will be
subject to any state income tax.
Financial Highlights
The Intermediate Income Fund will adopt its investment objectives and
policies on the date of the Merger. The financial highlights information for
its predecessor, Mosaic High Yield Fund, are incorporated herein by reference
to the audited Mosaic Income Trust Annual Report dated December 31, 1998.
The report accompanies this document for your information.
Additional Information
Mosaic Income Trust has a Statement of Additional Information that includes
additional information about each Mosaic Income Trust 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. They are incorporated into
this document by reference.
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 document.
You can review and copy information about Mosaic Income 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.
You can inspect and copy information about Mosaic Income Trust at the Public
Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices located at
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-
2511 and Seven World Trade Center, Suite 1300, New York, New York 10048.
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
Information About Your Fund
A complete copy of Mosaic Income Trust's prospectus dated April 30, 1999 is
enclosed with this document for your review. It is incorporated herein by
reference. Please refer to it for information regarding your fund.
Voting Information
Who is requesting your proxy?
This document is furnished in connection with a solicitation of proxies by
the Board of Trustees of Mosaic Income Trust with respect to your fund, the
Mosaic Bond Fund series of the Trust. The proxies will be used at the
Special Meeting of Shareholders of your fund, to be held at our offices at
1655 Ft. Myer Drive, Suite 1000, Arlington, Virginia, on Monday, June 28,
1999, at 12:00 noon and at any adjournments of the meeting.
Although your Trustees are soliciting your proxy vote, when the prospectus
speaks about "we" or "us", it refers to your fund's manager, Madison Mosaic.
Who will receive this solicitation?
This document, along with a Notice of the Meeting and a proxy card, will be
mailed to shareholders on or about June 1, 1999. (We may send follow-up
copies by overnight delivery or facsimile.) Only shareholders of record as
of the close of business on the Record Date will be entitled to notice of,
and to vote at, the Meeting or any of its adjournments. The holders of a
majority of the shares outstanding at the close of business on the Record
Date present in person or represented by proxy will constitute a quorum for
the Meeting.
How will your proxy be voted?
If the enclosed form of proxy is properly executed and returned in time to be
voted at the Meeting, the named proxies will vote the shares represented by
the proxy in accordance with the instructions marked.
Unmarked proxies will be voted FOR the proposed Merger and FOR any other
matters deemed appropriate. Proxies that reflect abstentions and "broker non-
votes" (i.e., shares held by brokers or nominees as to which (i) instructions
have not been received from the beneficial owners or the persons entitled to
vote or (ii) the broker or nominee does not have discretionary voting power
on a particular matter) will be counted as shares that are present and
entitled to vote for purposes of determining the presence of a quorum. Since
shares represented by "broker non-votes" are considered outstanding shares, a
"broker non-vote" has the same effect as a vote against the Merger.
Can a proxy be revoked?
A proxy may be revoked at any time before the Meeting by written notice to
the Secretary of the Trust, 1655 Ft. Myer Drive, Suite 1000, Arlington,
Virginia 22209 (800-368-3195) or by appearing at the meeting in person.
Unless revoked, all valid proxies will be voted as specified by you or, if
you do not make any specifications, for approval of the Plan and the Merger.
Will anyone solicit proxies?
As the meeting date nears, our shareholder service representatives (and other
employees of our company located at our offices in Virginia or Wisconsin) may
contact you by telephone to encourage you to complete and return your proxy
or to determine if you will be attending the Meeting. No one will be
compensated for doing so.
Who is paying for this proxy solicitation?
We are bearing all expenses of this proxy solicitation. Neither the Trust
nor its shareholders will pay any proxy solicitation costs.
What vote is required to approve the Merger?
Approval of the Merger will require the affirmative vote of more than 50% of
the outstanding voting securities of your fund. Fractional shares outstanding
are entitled to a proportionate share of one vote.
In the event that sufficient votes to approve the Plan are not received by
June 28, 1999, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the
information to be provided to shareholders with respect to the reasons for
the solicitation. Any such adjournment will require an affirmative vote by
the holders of a majority of the shares present in person or by proxy and
entitled to vote at the Meeting. The persons named as proxies will vote upon
such adjournment after consideration of all circumstances which may bear upon
a decision to adjourn the Meeting.
A shareholder who objects to the proposed transaction will not be entitled
under either Massachusetts law or the Declaration of Trust to demand payment
for, or an appraisal of, his or her shares. However, you should be aware that
the Merger as proposed is not expected to result in recognition of gain or
loss to shareholders for federal income tax purposes. If the Merger is
consummated, you will be free to redeem the shares of the Intermediate Income
Fund that you receive in the transaction at their then-current net asset
value. Shares of your fund may be redeemed at any time prior to the
consummation of the Merger. You may wish to consult your tax advisor as to
any differing consequences of redeeming your fund shares prior to the Merger
or exchanging such shares in the Merger.
Notice to Banks, Broker-Dealers and Voting Trustees and Their Nominees
Please advise the Trust whether other persons are beneficial owners of shares
for which proxies are being solicited and, if so, the number of copies of
this Prospectus/Proxy Statement needed to supply copies to the beneficial
owners of the respective shares.
The votes of any current shareholders of the Intermediate Income Fund (or its
predecessor, the High Yield Fund) are not being solicited and are not
required to carry out the Merger.
The Board of Trustees, including the "non-interested" Trustees, recommends
approval of the Merger, and any unmarked proxies without instructions to the
contrary will be voted in favor of approval of the merger.
What is the record date and number of outstanding shares?
As of April 30, 1999, (the "Record Date"), there were 36,081.882 outstanding
shares of beneficial interest of Mosaic Income Trust's Mosaic Bond Fund
series.
Controlling Shareholders, Large Shareholders and Holdings of Trustees and
Officers of the Trust
No one entity is considered to control either your fund or the Intermediate
Income Fund.
The following own 5% or more of your fund or the Intermediate Income Fund
(the High Yield Fund) as of the Record Date:
For the High Yield Fund: Charles Schwab & Co for the benefit of customers,
101 Montgomery Street, San Francisco, CA (7%)
For your fund: Donald L. McConaghy, 505 16th St., Baraboo, WI (13%), Madison
Investment Advisors, Inc., 6411 Mineral Point Road, Madison, WI (10%), Peter
De Cicco, 2000 N. Court St., #AF, Fairfield, IA (9%) and Star Bank, Trustee
for Mary Ann Arsenault, 28629 Sunnydate St, Livonia, MI (6%).
As of the Record Date, the officers and Trustees of the Trust beneficially
owned as a group less than 1% of the outstanding shares of the Intermediate
Income Fund and less than 5% of your fund.
June 1, 1999
Mosaic Income Trust - Proxy Card
Special Meeting of Shareholders -- June 28, 1999
This proxy is solicited on behalf of the Trustees of Mosaic Income Trust with
respect to its Mosaic Bond Fund series of shares. The undersigned hereby
appoints Frank E. Burgess, Katherine L. Frank and Julia M. Nelson, and each
of them separately, proxies, with full power of substitution, and hereby
authorizes them to represent and to vote, as designated below at the Special
Meeting of Shareholders of the above referenced fund (the "Fund") to be held
on Monday, June 28, 1999 at 1655 Ft. Myer Drive, Suite 1000, Arlington,
Virginia 22209 at 12:00 noon Eastern time, and at any adjournments thereof
(the "Meeting"), all of the shares of the Fund which the undersigned would be
entitled to vote if the undersigned were personally present.
Every shareholder's vote is important! Vote this Proxy Card today!
This proxy, when properly executed, will be voted in the manner directed
herein by the shareholder whose name is signed herein. If you sign, date and
return this proxy card but give no voting instructions, your shares will be
voted for each proposal.
To vote, mark blocks below in blue or black ink as follows [x]
1. To approve the proposed Agreement and Plan of Merger into Mosaic Income
Trust's High Yield Fund (to be thereafter known as the Intermediate Income
Fund).
[ ] YES [ ] NO [ ] ABSTAIN
2. To consider and vote upon such other matters as may properly come before
said meeting or any adjournments thereof.
[ ] YES [ ] NO [ ] ABSTAIN
These items are discussed in greater detail in the attached Prospectus. The
Board of Directors of Mosaic Income Trust (Bond Fund series) fixed the close
of business on April 30, 1999, as the record date for the determination of
shareholders entitled to notice of and to vote at the meeting.
If you attend the meeting, you may vote your shares in person. Please
complete, sign, date and return this proxy card in the enclosed envelope,
which needs no postage if mailed in the United States, if you do not expect
to attend the meeting.
Note: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as an executor, administrator, attorney, trustee,
guardian or custodian for a minor, please give full title as such. If a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in partnership name.
_____________________________________ Date: June ______, 1999
Signature
Record date shares #######.###
Account Number 038-###########
Registration #############################, ##############################,
############################, ############################################
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Dated June 1, 1999
Acquisition of the Assets of
Mosaic Income Trust Mosaic Bond Fund
By and in Exchange for Shares of
Mosaic Income Trust Intermediate Income Fund
1655 Ft. Myer Drive, Suite 1000
Arlington, Virginia 22209
1-888-670-3600
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets of the Mosaic Bond Fund series of Mosaic
Income Trust in exchange for shares of the newly named Intermediate Income
Fund series of the Trust (the "Merger") is not a prospectus. A Prospectus
dated June 1, 1999 relating to the above-referenced matter may be obtained
from Mosaic Income Trust at the address and phone number above. This
Statement of Additional Information relates to and should be read in
conjunction with such Prospectus.
This Statement of Additional Information incorporates by reference the
following documents, a copy of each of which accompanies this Statement of
Additional Information:
1. The Prospectus of Mosaic Income Trust dated April 30, 1999.
2. The Statement of Additional Information of Mosaic Income Trust dated April
30, 1999.
3. The Annual Report of Mosaic Income Trust dated December 31, 1998.
The following information is provided with regard to the Intermediate Income
Fund series of Mosaic Income Trust which is expected to become effective on
July 1, 1999 (the date of the proposed Merger):
Table of Contents
TRUST HISTORY 2
DESCRIPTION OF THE TRUST ("Investment Objectives"
and "Implementation of Investment Policies") 2
Classification 2
Investment Strategies and Risks 3
Fund Policies 8
Fundamental Policies 10
MANAGEMENT OF THE FUNDS ("Management")
Board of Trustees 12
Management Information 13
Compensation 14
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES 15
INVESTMENT ADVISORY AND OTHER SERVICES ("Fees and
Expenses of the Funds" and "Management") 15
BROKERAGE ALLOCATION AND OTHER PRACTICES 19
CAPITAL STOCK AND OTHER SECURITIES 20
PURCHASE, REDEMPTION AND PRICING OF SHARES ("Guide
to Doing Business," "Pricing of Fund Shares" and "Dividends and
Distributions") 23
TAXATION OF THE TRUST ("Taxes") 28
CALCULATION OF PERFORMANCE DATA ("Risk/Return Summary") 29
FINANCIAL STATEMENTS AND OTHER ADDITIONAL INFORMATION
("Financial Highlights") 31
APPENDIX - QUALITY RATINGS ("Implementation of Investment Policies") 31
FINANCIAL STATEMENTS 33
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 Income Trust ("the Trust") is organized as a Massachusetts business
trust under a Declaration of Trust dated November 18, 1982. Its first two
funds were the Government and Intermediate Income Funds. The Government Fund
was originally known as the "A-Rated Fund". Before the date of its proposed
Merger with Mosaic Bond Fund on July 1, 1999, the Intermediate Income Fund
was a junk bond fund known as the High Yield Fund (and known as the Maximum
Income Portfolio before May 12, 1997).
Throughout this Statement of Additional Information, we sometimes refer to
the Trust or to the Funds when describing matters that affect both funds.
The Trust was originally known as GIT Income 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 Trust
Classification
The Trust is a diversified open-end management investment company, commonly
known as a mutual fund.
The Trust currently issues three series of shares: Government Fund shares,
High Yield Fund shares (to be known as Intermediate Income Fund shares
effective July 1, 1999) and Mosaic Bond Fund shares.
Investment Strategies and Risks
Government Fund shares represent interests in a portfolio of Government
Securities. Intermediate Income Fund shares represent interests in a
portfolio of high and medium-grade securities, with no more than 35% in
lower-grade debt securities, rated not lower than B or of equivalent quality.
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.
Both of the Trust's Funds are subject to the same general investment
policies. However, the maturities, quality ratings and types of issuers of
the bonds and other debt instruments purchased will normally differ among the
two 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. 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 bonds 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.
2. Securities with Variable Interest Rates.
Some of the securities we purchase may carry variable interest rates.
Securities with variable interest rates normally are adjusted periodically to
pay an interest rate that is a fixed percentage of some base rate, such as
the "prime" interest rate of a specified bank. The rate adjustments may be
specified either to occur on fixed dates, such as the beginning of each
calendar month, or to occur whenever the base rate changes.
Certain of these variable rate securities may be payable by the issuer upon
demand of the holder, generally within seven days of the date of demand.
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. When interest rates generally are falling, the yields of
variable rate securities will tend to fall. Likewise, when rates are
generally rising, variable rate yields will tend to rise.
What are other risks of some variable rate securities? Variable rate
securities may not always be rated and may not have a readily available
secondary market. Our 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. We will monitor on an ongoing basis the revenues and
liquidity of issuers of variable rate securities and the ability of such
issuers to pay principal and interest pursuant to any demand feature.
3. 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.
5. Loans of Fund 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.
6. 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 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.
7. Foreign Securities. We may invest a portion of the Intermediate Income
Fund's assets in securities of foreign issuers that are listed on a
recognized domestic or foreign exchange.
Foreign investments involve certain special considerations not typically
associated with domestic investments. Foreign investments may be denominated
in foreign currencies and may require the Trust to hold temporary foreign
currency bank deposits while transactions are completed. The Trust might
benefit from favorable currency exchange rate changes, but it could also be
affected adversely by changes in exchange rates. Other risks include
currency control regulations and costs incurred when converting between
various currencies. Furthermore, foreign issuers may not be subject to the
uniform accounting, auditing and financial reporting requirements applicable
to domestic issuers, and there may be less publicly available information
about such issuers.
In general, foreign securities markets have substantially less volume than
comparable domestic markets and therefore foreign investments may be less
liquid and more volatile in price than comparable domestic investments.
Fixed commissions in foreign securities markets may result
in higher commissions than for comparable domestic transactions, and foreign
markets may be subject to less governmental supervision and regulation than
their domestic counterparts.
Foreign securities transactions are subject to documentation and delayed
settlement risks arising from difficulties in international communications.
Moreover, foreign investments may be adversely affected by diplomatic,
political, social or economic circumstances or events in other countries,
including civil unrest, expropriation or nationalization, unanticipated
taxes, economic controls, and acts of war. Individual foreign economies may
also differ from the United States economy in such measures as growth,
productivity, inflation, national resources and balance of payments position.
8. 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.
9. Short-Term Investments.
The "short-term investments" we may buy for the Trust are limited to the
following U.S. dollar denominated investments:
(a) U.S. Government securities;
(b) obligations of banks having total assets of $750 million or more;
(c) commercial paper having a quality rating appropriate to the respective
Fund of the Trust; and
(d) repurchase agreements secured by any of the foregoing securities or long-
term debt securities of the type in which the respective Fund could invest
directly.
Bank obligations eligible as short-term investments are certificates of
deposit ("CDs"), bankers acceptances ("BAs") and other obligations of banks
having total 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. Some redeemable CDs may have penalties for early withdrawal, while
others may not. Federally insured bank deposits are presently limited to
$100,000 of insurance per depositor per bank, so the interest or principal of
CDs may not be fully insured if we purchase a CD greater than $100,000. BAs
are time drafts drawn against a business, often an importer, and "accepted"
by a bank, which agrees unconditionally to pay the draft on its maturity
date. BAs are negotiable and trade in the secondary market.
We will not invest in non-transferable time deposits that have penalties for
early withdrawal if such time deposits mature in more than seven calendar
days, and such time deposits maturing in two business days to seven calendar
days will be limited to 10% of the respective Fund's total assets.
"Commercial paper" describes the unsecured promissory notes issued by major
corporations to finance short-term credit needs. Commercial paper is issued
in maturities of nine months or less and usually on a discount basis.
Commercial paper may be rated A-1, P-1, A-2, P-2, A-3 or P-3 (see "Quality
Ratings" at the end of this Statement of Additional Information).
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 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. Bond Quality Classifications.
We expect that the preponderance of the Government Fund will be in High Grade
securities.
We expect that the preponderance of the Intermediate Income Fund will be in
High Grade securities with a portion of the fund in Medium and Low Grade
securities to improve yields.
Government Fund
We only purchase "investment grade" securities for the Government Fund.
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 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. Of course, it is unlikely
that we will ever purchase anything but High Grade securities for the
Government Fund due to the High Grade nature of Government securities.
Intermediate Income Fund.
At least 65% of the Intermediate Income Fund will always be invested in
investment grade securities as described above for the Government Fund.
Indeed, up to 100% of its assets may be so invested. However, the lowest
rated securities we will purchase for the Intermediate Income Fund are those
rated B. These are considered Low Grade obligations. They are generally
deemed to lack desirable investment characteristics. There may be only small
assurance of payment of interest and principal or adherence to the original
terms of the issue over any long period.
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 this fund will be reduced.
3. 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.
4. Assets as Collateral.
We will not pledge, mortgage or hypothecate in excess of 10% of any Fund's
net assets at market value.
5. 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.
6. Puts and Calls.
Our current policy is not to write call options, not to acquire put options
(except in conjunction with a purchase of portfolio securities) and not to
lend portfolio securities. 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.
7. Policy Review.
If, in the judgment of a majority of the Trustees of the Trust, it becomes
inadvisable to continue any Trust or individual fund policy, then the
Trustees may change any such policies without shareholder approval. Before
any such changes are made, you must receive 30 days' written notice.
Except for the fundamental investment limitations placed upon the Trust's
activities, the Trustees can review and change the other investment policies
and techniques employed by the Trust. In the event of some policy changes, a
change in the Trust's or a fund's name might be required. 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. 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.
5. Industry Concentration.
In purchasing securities for any Fund (other than obligations issued or
guaranteed by the United States Government or its agencies and
instrumentalities), we will limit such investments so that not more than 25%
of the assets of each Fund is invested in any one industry.
6. 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.
7. 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.
8. 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 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. 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 that 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.
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>
Principal Occupation During
Name, Address and Age Positions Held with Trust 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.
</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 Trustee has been fixed at $4,000 per
year, to be pro-rated according to the number of regularly scheduled meetings
each year. Four Board meetings are currently scheduled to take place each
year. The Trustees have stipulated that their compensation will be at 25% of
the regular rate until the net assets of the Trust reach $25 million and 50%
of the regular rate until the net assets of the Trust reach $50 million. 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 $1,000 $15,000
James R. Imhoff, Jr. $1,000 $15,000
Lorence D. Wheeler $1,000 $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 April 15, 1999, the shareholders of record that held five percent or
more of the Trust were: For the Government Fund -- BFIMC Money Purchase
Pension Plan, P.O. Box 1118, Cincinnati, OH (12%) and Star Bank, Trustee for
Geraldine Schaeffer, 2201 L St., NW, Suite 109, Washington, DC (6%); for the
High Yield (Intermediate Income) Fund -- Charles Schwab & Co for the benefit
of customers, 101 Montgomery Street, San Francisco, CA (7%); and for the
Mosaic Bond Fund -- Donald L. McConaghy, IRA, 505 16th St., Baraboo, WI
(12%), Madison Investment Advisory Profit Sharing Plan, 6411 Mineral Point
Rd., Madison, WI (10%), Peter De Cicco, 2000 N. Court St., #AF, Fairfield, IA
(8%) and Star Bank, Trustee for Mary Ann Arsenault, 28629 Sunnydate St,
Livonia, MI (5%).
As of April 15, 1999, the Trustees and officers of the Trust directly or
indirectly owned as a group less than 1% of the outstanding shares of the
Government and High Yield (Intermediate Income) Fund and less than 5% of the
Mosaic Bond 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 Tax-Free Trust,
Mosaic Focus Fund Trust and Mosaic Government Money Market Trust.
For the fiscal year ending December 31, 1998, aggregate advisory fees paid
were as follows: Government Fund - $35,388 and Intermediate Income Fund
(then operating as the High Yield Fund) - $40,518.
During the short fiscal period ended December 31, 1997, aggregate advisory
fees paid were as follows: Government Fund - $26,628 and Intermediate Income
Fund (then operating as the High Yield Fund) - $31,741.
For the fiscal years ended March 31, 1997 and 1996, aggregate advisory fees
paid were as follows: Government Fund - $39,438 and $46,093, respectively,
and Intermediate Income Fund (then operating as the High Yield Fund) -
$40,413 and $42,986, 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 calculated as 0.625% per year of average
daily net assets of the Government and Intermediate Income (High Yield) Fund
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 Tax-Free 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.
Firstar 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
any 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 November 18, 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.
Three series of the Trust's shares are currently authorized: Government Fund
shares and Intermediate Income Fund 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 high yield 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 each Fund is expected to fluctuate daily, and we will make no
attempt to stabilize the value of these shares.
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 sbaccounts.
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.
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.
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.
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.
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 and total returns for each Fund.
How are Total Returns Calculated? We calculate annual total return and
average annual total returns for the Funds. 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. They 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.
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.
Total return quotations as of the end of the Trust's most recent fiscal year
are presented in the Prospectus.
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
performance of the Government Fund to mutual funds categorized as "General
U.S. Government Funds" and the performance of the Intermediate Income Fund
will be compared to mutual funds categorized as "Intermediate Corporate Debt
Funds".
If any of these categories should be changed by Lipper Analytical Services,
Inc., we will make comparisons based on the revised categories. 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
December 31, 1998, appear in the Trust's Annual Report to shareholders for
the fiscal year ended December 31, 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.
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.
Notes and bonds rated Ba or BB are considered to have immediate speculative
elements and their future can not be considered well assured; protection of
interest and principal may be only moderate and not secure over the long
term; the position of these bonds is characterized as uncertain.
Notes and bonds rated B or lower by each organization are generally deemed to
lack desirable investment characteristics; there may be only small assurance
of payment of interest and principal or adherence to the original terms of
issue over any long period.
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.
Financial Statements
This Statement of Additional Information incorporates by reference the
following documents, a copy of each of which accompanies this Statement of
Additional Information:
1. The Prospectus of Mosaic Income Trust dated April 30, 1999 (including the
Mosaic Bond Fund, Mosaic High Yield Fund and Mosaic Government Fund).
2. The Statement of Additional Information of Mosaic Income Trust dated April
30, 1999.
3. The Annual Report of Mosaic Income Trust dated December 31, 1998.
The following pro forma financial statements are prepared as of assets held
by the predecessor of Mosaic Income Trust's Intermediate Income Fund (Mosaic
High Yield Fund) and Mosaic Bond Fund as of December 31, 1998. It is
anticipated that as of the date of the Merger, the Intermediate Income Fund
will not hold any assets rated lower than B and no more than 35% of its
assets will be rated lower than BBB. (See Note 3 to the Pro Forma Financial
Statements.)
Pro Forma Financial Statements
December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Statement of Net Assets
Schedule of Investments
December 31, 1998
High Yield Bond Intermediate Income
Fund Fund Fund (Pro Forma)
Principal Principal Principal
Amount Value Amount Value Amount Value
Schedule of Investments
December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS:
Ryland Acceptance Corporation, Class Four,
Series 76, 9%, 8/1/18 $ 67,335 $ 71,195 $ 67,335 $ 71,195
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $68,194) 71,195 71,195
US GOVERNMENT & AGENCY OBLIGATIONS:
US Treasury Notes, 6.25%, 5/31/00 110,000 112,404 110,000 112,404
US Treasury Notes, 6.25%, 4/30/01 105,000 108,809 105,000 108,809
Fannie Mae Notes, 6%, 5/15/08 10,000 10,579 10,000 10,579
TOTAL US GOVERNMENT & AGENCY OBLIGATIONS (Cost $227,563) 231,792 231,792
CORPORATE DEBT SECURITIES:
CABLE TELEVISION
CSC Holdings, Inc., Senior Subordinated
Debentures, 9.875%, 2/15/13 $200,000 $ 224,750 200,000 224,750
Century Communications Corporation,
Senior Notes, 8.875%, 1/15/07 200,000 221,500 200,000 221,500
CAPITAL GOODS: 6.10%
American Standard, Inc., Senior Notes,
7.375%, 2/1/08 175,000 177,406 175,000 177,406
Federal-Mogul Corporation, Notes, 7.875%,
7/1/10 200,000 198,000 200,000 198,000*
CELLULAR COMMUNICATIONS: 4.45%
Paging Network, Inc., Senior Subordinated
Notes, 10.125%, 8/1/07 100,000 100,000 100,000 100,000*
Sprint Spectrum, L.P., Senior Notes, 11%,
8/15/06 150,000 174,000 150,000 174,000
CHEMICALS: 2.10%
Sterling Chemicals, Inc., Senior Subordinated
Notes, 11.75%, 8/15/06 150,000 129,000 150,000 129,000*
CONSUMER PRODUCTS: 3.13%
Outboard Marine Corporation, Notes, Series A,
8.625%, 3/15/01 100,000 98,000 100,000 98,000
Revlon Consumer Products Corporation, Senior
Notes, 8.125%, 2/1/06 100,000 94,500 100,000 94,500*
CONSUMER STAPLES - FOOD: 1.70%
Chiquita Brands International, Inc., Senior
Notes, 10.25%, 11/1/06 100,000 104,375 100,000 104,375*
ENERGY: 4.96%
Clark Oil & Refining Corporation, Senior
Notes, 9.5%, 9/15/04 200,000 197,000 200,000 197,000*
Oryx Energy Company, 8.125%, 10/15/05 100,000 108,000 100,000 108,000*
FINANCIALS: 20.55%
Associates Corporation North America, Senior
Notes, 6%, 4/15/03 40,000 40,800 40,000 40,800
Ford Motor Credit Company, 7.75%, 3/15/05 40,000 44,450 40,000 44,450
Merrill Lynch & Company, Inc., 7%, 1/15/07 40,000 43,050 40,000 43,050
Morgan Stanley Dean Witter Discover & Company,
6.375%, 8/1/02 40,000 40,950 40,000 40,950
FOREST & PAPER PRODUCTS: 5.74%
Container Corporation of America, Senior
Notes, 9.750%, 4/1/03 100,000 101,125 100,000 101,125
Crown Paper Company, Senior Subordinated
Notes, 11%, 9/1/05 175,000 153,125 175,000 153,125*
Stone Container Corporation, Senior
Subordinated Debentures, 10.75%, 4/1/02 100,000 99,000 100,000 99,000
GAMBLING: 2.14%
Trump Atlantic City Associates, First
Mortgage Notes, 11.25%, 5/1/06 150,000 132,000 150,000 132,000*
HEALTHCARE: 7.25%
High Yield Bond Intermdiate Income Fund
Fund Fund (Pro Forma)
Principal Principal Principal
Amount Value Amount Value Amount Value
Healthsouth Corporation, Senior Subordinated
Notes, 9.5%, 4/1/01 150,000 155,438 150,000 155,438
Integrated Health Services, Inc., Senior
Subordinated Notes, Series A, 9.25%, 1/15/08 80,000 76,200 80,000 76,200*
Tenet Healthcare Corporation, Senior
Subordinated Notes, 8.625%, 1/15/07 200,000 214,250 200,000 214,250
HOMEBUILDING: 2.69%
D R Horton, Inc., Senior Notes, 10%, 4/15/06 156,000 165,360 156,000 165,360*
LODGING & RESTAURANTS: 5.47%
Apple South, Inc. Senior Notes 9.75%, 6/1/06 200,000 190,500 200,000 190,500
HMH Properties, Inc., Senior Notes, Series
B, 7.875%, 8/1/08 150,000 146,437 150,000 146,437*
RADIO & TV BROADCASTING: 7.91%
SFX Broadcasting, Inc., Senior Subordinated
Notes, 11.375%, 10/1/00 250,000 260,625 250,000 260,625
Westinghouse Electric Corporation,
Debentures, 8.625%, 8/1/12 200,000 226,000 200,000 226,000*
RETAIL: 5.47%
Gap, Inc., 6.9%, 9/15/07 40,000 43,950 40,000 43,950
Kohls Corporation, 6.7%, 2/1/06 40,000 41,900 40,000 41,900
Tommy Hilfiger USA, Inc., Senior Notes,
6.85%, 6/1/08 200,000 197,250 200,000 197,250
Tommy Hilfiger USA, Inc., 6.5%, 6/1/03 40,000 39,950 40,000 39,950
Michael's Stores, Inc., Senior Notes,
10.875%, 6/15/06 131,000 139,187 131,000 139,187*
SOVEREIGN NATIONS: 2.23%
Korea Development Bank Bonds, 7.25%, 5/15/06 150,000 137,438 150,000 137,438*
SUPERMARKETS: 5.84%
Fred Meyer, Inc. Senior Notes, 7.45%, 3/1/08 150,000 162,375 150,000 162,375*
Supermarkets General Holdings Corp.,
Subordinated Notes, 11.625%, 6/15/02 200,000 197,250 200,000 197,250
TECHNOLOGY: 8.16%
Advanced Micro Devices, Inc., Senior Notes,
11%, 8/1/03 150,000 159,000 150,000 159,000*
Arrow Electronics, Inc., Senior Notes, 7%,
1/15/07 40,000 44,000 40,000 44,000*
Dictaphone Corporation, Senior Subordinated
Notes, 11.75%, 8/1/05 100,000 97,500 100,000 97,500*
Lexmark International, Inc., 6.75%, 5/15/08 40,000 40,200 40,000 40,200
Motorola, Inc., 5.8%, 10/15/08 40,000 40,900 40,000 40,900
Seagate Technology, Inc., Senior Notes,
7.37%, 3/1/07 250,000 245,625 250,000 245,625
Xerox Corporation, 5.5%, 11/15/03 20,000 20,050 20,000 20,050
TELECOMMUNICATIONS: 4.34%
Globalstar, L.P., Senior Notes, 11.25%,
6/15/04 100,000 75,750 100,000 75,750*
Iridium, L.L.C., /Iridium Capital, Senior
Notes, Series A, 13%, 7/15/05 100,000 92,000 100,000 92,000*
Level 3 Communications, Inc., Senior Notes,
9.125%, 5/1/08 100,000 99,500 100,000 99,500*
TEXTILES: 3.34%
WestPoint Stevens, Inc., Senior Notes,
7.875%, 6/15/08 200,000 205,500 200,000 205,500
TRANSPORTATION: 1.60%
Northwest Airlines, Inc., Notes, 8.7%,
3/15/07 100,000 98,625 100,000 98,625*
UTILITIES: 5.20%
CMS Energy Corporation, Senior Notes,
8.125%, 5/15/02 150,000 157,875 150,000 157,875
Toledo Edison Company, Debentures, 8.7%,
9/1/02 150,000 162,188 150,000 162,188
TOTAL CORPORATE DEBT
SECURITIES (Cost $6,427,749) $5,973,654 440,200 6,413,854
REPURCHASE AGREEMENT (Cost $97,000) $ 29,000 68,000 97,000
TOTAL INVESTMENTS (Cost $6,820,500) $6,002,654 811,187 6,813,841
CASH AND RECEIVABLES LESS LIABILITIES: $ 151,652 12,341 163,993
TOTAL NET ASSETS: 100% $6,154,306 $823,528 6,977,834
Adjustment
Capital Shares Outstanding 888,809 38,819 80,188 1,007,816
Net Asset Value per Share 6.92 21.21 - 6.92
</TABLE>
* Securities to be sold prior to Merger. These securities have been or are
expected to be liquidated prior to the date of the proposed Merger in order
to be consistent with the investment policies of the Intermediate Income Fund
on July 1, 1999.
Pro Forma Statement of Operations (Unaudited, December 31, 1998)
Intermediate
High Yield Bond Income Fund
Fund Fund ADJ (Pro Forma)
Income
Interest 572,422 58,948 631,370
Other investment income 25,090 - 25,090
Total income 597,512 58,948 - 656,460
Expenses
Investment advisor fee 40,518 4,917 (1,824)Note 3 43,611
Transfer agent, registration 34,359 5,901 (8,860)Note 3 31,400
administrative and
professional fees
Total Expenses 74,877 10,818 (10,684)Note 3 75,011
Net Investment Income 522,635 48,130 10,684 Note 3 581,449
Net Realized Gain (Loss) (239,050) 9,796 - (229,254)
Unrealized Ap(De)preciation (19,659) 13,124 - (6,535)
Net Gain (Loss) (258,709) 22,920 - (235,789)
Total Increase in Net
Assets 263,926 71,050 10,684 Note 3 345,660
Pro Forma Statement of Assets and Liabilities (December 31, 1998)
Intermediate
High Yield Bond Income Fund
Fund Fund Pro Forma
ASSETSInvestments, at value (Note 1 and 2)
Investment securites $5,973,654 $ 743,187 $6,716,841
Repurchase agreements 29,000 68,000 97,000
Total investments 6,002,654 811,187 6,813,841
Cash 708 969 1,677
Receivables
Interest 157,608 11,650 169,258
Capital shares sold 6,097 -- 6,097
Total assets 6,167,067 823,806 6,990,873
LIABILITIES
Payables
Dividends 8,693 278 8,971
Capital shares redeemed 4,068 -- 4,068
Total liabilities 12,761 278 13,039
NET ASSETS (Note 4) $6,154,306 $823,528 $6,977,834
CAPITAL SHARES OUTSTANDING 888,809 38,819 1,007,816
NET ASSET VALUE PER SHARE $6.92 $21.21 $6.92
See Accompanying Notes to Financial Statements
Notes to Pro Forma Financial Statements of
Mosaic Income Trust
December 31, 1998
(unaudited)
1. Basis of Combination
The Pro Forma Statement of Net Assets reflects the accounts of Mosaic Income
Trust High Yield Fund (the "Intermediate Income Fund") and Mosaic Bond Fund
(the "Your Fund") as of December 31, 1998. The Pro Forma Statement of
Operations reflects the accounts of the Intermediate Income Fund and Your
Fund for the year ended December 31, 1998. These statements have been derived
from the Intermediate Income Fund's and Your Fund's books and records
utilized in calculating daily net asset value at December 31, 1998.
The pro forma statements give effect to the proposed transfer of the assets
and stated liabilities of Your Fund in exchange for shares of the New
Bond Fund under generally accepted accounting principles. The historical cost
of investment securities will be carried forward to the surviving entity and
the results of operations of the Intermediate Income Fund for pre-combination
periods will not be restated. The pro forma statements do not reflect the
expenses of either fund in carrying out its obligations under the Agreement
and Plan of Merger since such expenses will not be borne by either fund.
The Pro Forma Statement of Net Assets and the Pro Forma Statement of
Operations should be read in conjunction with the historical financial
statements of Mosaic Income Trust included or incorporated by reference in
the Statement of Additional Information.
2. Shares of Beneficial Interest
The pro forma net asset value per share assumes the issuance of shares of
the Intermediate Income Fund that would have been issued at December 31,
1998, in connection with the proposed reorganization, had it occurred then.
3. Pro Forma Operations
The Pro Forma Statement of Operations assumes the same rate of gross
investment income for the investments of the Intermediate Income Fund and
Your Fund. However, it is anticipated that all securities held by the
Intermediate Income Fund prior to the proposed reorganization that are rated
below B will be sold prior to the date of the Merger as indicated on the
Schedule of Investment included in the Pro Forma Statement of Net Assets.
Also, any securities rated below BBB that would exceed of 35% of net assets
of the combined fund on the date of the Merger will also be sold. This may
reduce gross investment income. Such sales, however, are not expected to
generate taxable capital gains in light of ample capital loss carryforwards
in the High Yield Fund in excess of $950,000 as of December 31, 1998.
Assets of the Bond Fund are expected to retain their tax properties after the
Merger. As of December 31, 1998, both the High Yield Fund and Bond Fund had
substantial capital loss carryovers due to expire on December 31, 2002 (High
Yield Fund - $740,266; Bond Fund - $188,652). To the extent such losses are
not fully offset by gains through such period by the Intermediate Income
Fund, any remaining amounts will be lost. The High Yield Fund has additional
unused capital loss carryovers equal to $239,050 expiring on December 31,
2006 and the Bond Fund has an additional $94,831 expiring on December 31,
2003.
By operation of Internal Revenue Code Section 382, the Intermediate Income
Fund's use of Bond Fund unused capital loss carryovers may be limited.
Furthermore, it is anticipated that, for the fiscal year ending December 31,
1999, the Intermediate Income Fund will be further limited to using
approximately 50% of the available unused capital loss carryover by operation
of Internal Revenue Code Section 381.
The pro forma operating expenses reflects the service fees approved by the
Trustees for the applicable periods. As a result, pro forma operating
expenses would be required to be adjusted downward by approximately $8,860 in
order for the pro forma total expenses to result in an expense ratio of
0.45%. This decrease in expenses is a result of a general decline in
expenses due to the restructuring of the services agreement between Mosaic
Income Trust and the investment adviser. In addition, the Pro Forma
Statement of Operations reflects downward adjustments of $1,824 in advisory
fees so that, together with other operating expenses, total adjustment of
$10,684 was made in order to result in a total expense ratio of 1.08%. The
reduction is offset by an adjusting increase in net investment income.
