Mosaic Income Trust
Mosaic High Yield Fund
Mosaic Government Fund
Mosaic Bond Fund
Annual Report
December 31, 1998
Mosaic Funds
Mosaic Income Trust
Letter to the Shareholders
December 31, 1998
Dear Shareholder:
The year ended December 31, 1998, our first full calendar year under the
Mosaic name, was an eventful one for the Income Trust and the markets in
which the funds are invested. Despite some notable economic bumps, all three
of the funds in the Income Trust ended the period with positive results.
One-year total returns through December 31, 1998 were: 4.07% for High Yield
Fund; 8.52% for Government Fund; and 7.33% for Bond Fund.
The past year was an important one for Mosaic, as we realized our initial
goals for our newly named fund family. Some of these improvements are
represented in our expanded newsletter and annual reports. Others are seen
in terms of service, as we worked hard to make information more accessible to
you through our 24-hour automated telephone line, Mosaic Tiles (1-800-336-
3063) and our website at www.mosaicfunds.com.
We adjusted our fund lineup to provide you a variety of investment vehicles
and realigned our stock funds to reflect our discipline of seeking the best
companies at reasonable valuations.
We hope you are taking advantage of our expanded services and will consider a
fresh look at our fund lineup in light of the diversification opportunities
we now provide.
Thank you again for your continued confidence in Mosaic.
Sincerely,
(signature)
Katherine L. Frank
President
Mosaic Funds
Mosaic Income Trust
Management's Discussion of Fund Performance
December 31, 1998
The Year in Review
Despite a surplus of international woes, domestic political upheaval, and a
volatile stock market, patient bond investors were rewarded with another year
of solid returns. The U.S. bond market exceeded last year's return with the
help of falling interest rates, ongoing global financial turmoil and
expectations of slower economic growth.
The year began with sound economic conditions, rising commodity prices and
the stock market reaching new highs daily. Internationally, Asian markets
appeared to be on the mend while it was argued that world economic problems
would be contained to Asia. The yield curve--the relationship between yields
of short-term and long-term bonds--remained very flat providing very little
advantage for investing in longer bonds.
By mid-summer the stock market was hitting new, perhaps unsustainable, highs
and the world economic problems no longer seemed contained abroad. Commodity
prices turned down abruptly, suggesting possible deflation. The Russian
economy collapsed and they defaulted on their debt. Latin America economies
were troubled. The Federal Reserve Board began to hint at the need to lower
interest rates. All of these factors suggested strong bond performance, and
we lengthened the maturity of bonds in the Income Trust portfolios.
In late summer, the stock market suffered a sharp decline and the flow of
funds was redirected to the bond market. Ten-year bond yields ultimately
fell by more than one percent. As we entered the fall, the wake of
international uncertainties and the stock market drop drove investors from
around the world to the perceived safety of U.S. Treasury bonds. This
produced a relative value gap between government and corporate bonds.
While there has been wide sentiment for a reversal in our domestic economy,
we do not see the economy rolling over again. Growth in the first quarter of
1999 is expected to be rather robust. The consumer continues to spend more
than he earns and appears as confident of his financial well-being as ever.
The stock market, a barometer of future economic strength, looks strong as we
enter 1999, and it is hard to believe the Fed would lower interest rates
further while the stock market is once again accelerating to new heights.
Long term, the world economic softness will likely be felt on our shores. As
a result, rates should continue a gradual decline and inflation should remain
subdued. However, as long as the consumer (representing two-thirds of the
economy) has a head of steam and a pocketful of stock market gains, this
slowing will likely be deferred.
Portfolio Review
Mosaic High Yield Fund
The high yield market had a difficult year in 1998, with the average high-
yield bond fund ending the year slightly negative at -0.08%, as reported by
the Lipper High Yield Bond Fund Index. For the year ended December 31, 1998,
Mosaic High Yield had a relatively strong result, with a total return of
4.07%.
The global turmoil mentioned above had an even bigger impact on the high
yield market than on U.S. Treasury or investment grade corporate bonds. As
investors feared the worst, higher risk assets (such as high yield bonds)
suffered the most. For example, The CSI Asian High Yield Index was down
nearly 25% for 1998. The Mosaic High Yield Fund was able to post a solid
positive return in this environment due to its more cautious and higher
quality approach to managing assets in the high yield market.
Results were enhanced by our investments in the telecommunications, cable and
utility sectors. Among the better returns posted were those of Toledo
Edison, Century Communications and CBS Corp. These companies did well
primarily because their revenue streams are generated domestically and as
such they were not directly impacted by the various financial crises around
the globe. The weakest bond in the entire portfolio was Golden Books Family
Entertainment, whose operating results were below expectation due to very
strong competitive pressures.
With our outlook for a slower global economy, we will continue to position
the portfolio in a somewhat more cautious and defensive posture, while still
maintaining an attractive yield.
Fund-at-a-Glance
Objective: Mosaic High Yield provides relatively higher income by investing
in lower-rated corporate bonds.
Net Assets: $6.2 million
Date of Inception: July 21, 1983
Ticker: GITMX
Mosaic Government Fund
For the calendar year ended December 31, 1998, the Mosaic Government Fund
returned 8.52%. The year proved to be a good one for Treasuries in
particular, with the Lipper Intermediate U.S. Government Fund Index up 8.17%
for the year. This focus on Treasury securities and minimal exposure to
mortgage backed bonds, helped the Fund outpace its peer group for the 12
month period. By extending portfolio maturities at mid-year, we particularly
helped the Fund's relative performance, as interest rates fell and bond
prices rose, shortly after we extended the Fund's duration.
Fund-at-a-Glance
Objective: Mosaic Government provides investors with monthly dividends by
investing in bonds and other securities issued or guaranteed by the U.S.
Government.
Net Assets: $5.8 million
Date of Inception: July 21, 1983
Ticker: GIGVX
Mosaic Bond Fund
For the calendar year ended December 31, 1998, the Mosaic Bond Fund returned
7.33%. The Lipper General Bond Fund Index was up 6.66% for the same period.
Good relative returns resulted because we extended the Fund's maturities at
mid-year, and then significantly increased corporate bond holdings in late
fall as corporate bond yield premiums rose relative to Treasury yields. This
increase in the credit risk of the Fund proved rewarding as corporate bonds
performed well late in 1998 when the Federal Reserve began lowering short-
term interest rates.
Fund-at-a-Glance
Objective: Mosaic Bond Fund has the dual goal of providing dividend income
while seeking capital preservation. The fund invests mainly in investment
grade corporate and government bonds of intermediate maturity.
Net Assets: $824 thousand
Date of Inception: April 23, 1990
Ticker: MBNDX
Comparison of Changes in the Value of a $10,000 Investment
Depicted herein are the following line graphs:
High Yield Lehman Lipper Corp.
Fund Aggregate Bond High Yield
1988 10,000 10,000 10,000
1989 10,279 11,453 9,723
1990 9,503 12,479 8,642
1991 11,938 14,476 12,118
1992 13,381 15,547 14,343
1993 15,393 17,063 17,189
1994 14,981 16,565 16,557
1995 17,146 19,624 19,435
1996 18,318 20,337 21,886
1997 20,135 23,287 24,723
1998 20,955 25,311 25,729
Government Lehman Intermediate
Fund Gov't Bond Index
1988 10,000 10,000
1989 11,111 11,268
1990 11,910 12,345
1991 13,561 14,087
1992 14,292 15,063
1993 15,672 16,294
1994 15,106 16,009
1995 17,277 18,316
1996 17,336 19,059
1997 18,671 20,531
1998 20,261 22,274
Bond Lehman Intermediate
Fund Gov't Corp Bond Index
04/23/1990 10,000 10,000
1990 10,535 10,953
1991 12,011 12,554
1992 12,505 13,454
1993 13,261 14,637
1994 12,984 14,355
1995 14,816 16,555
1996 15,201 17,226
1997 16,119 18,581
1998 17,301 20,150
Average Annual Total Return One Year Five Years Ten Years
High Yield Fund 4.07% 6.37% 7.68%
Government Fund 8.52% 5.27% 7.32%
Bond Fund 7.33% 5.46% 6.51%*
*Since inception on 4/23/90
Past performance is not predictive of future performance.
<PAGE>
Report of Independent Auditors
To the Board of Trustees and Shareholders of Mosaic Income Trust:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the High Yield, Government, and
Bond Funds (the "Funds") of the Mosaic Income Trust as of December 31, 1998,
and the related statements of operations for the year then ended, changes in
net assets and the financial highlights for the year then ended and the
periods ended December 31, 1997. These financial statements and financial
highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net
assets for the year ended March 31, 1997 and the financial highlights of the
High Yield and Government Funds for each of the years in the four-year period
ended March 31, 1997 were audited by other auditors whose report, dated May
2, 1997, expressed an unqualified opinion on the statements of changes in net
assets and financial highlights. The financial highlights of the Bond Fund
for each of the years in the three-year period ended December 31, 1996 were
audited by other auditors whose report, dated January 24, 1997, expressed an
unqualified opinion on the statements of changes in net assets and financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
High Yield, Government, and Bond Funds of the Mosaic Income Trust as of
December 31, 1998, the results of their operations for the year then ended,
the changes in their net assets, and their financial highlights for the year
then ended and the periods ended December 31, 1997 in conformity with
generally accepted accounting principles.
(signature)
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 1999
<PAGE>
High Yield Fund
Portfolio of Investments - December 31, 1998
Credit Rating* Principal
Moody's S&P Amount Value
CORPORATE DEBT SECURITIES: 97.07% of net assets
CABLE TELEVISION: 7.25%
B1 BB- CSC Holdings, Inc., Senior Subordinated
Debentures, 9.875%, 2/15/13 $200,000 $ 224,750
Ba3 BB- Century Communications Corporation,
Senior Notes, 8.875%, 1/15/07 200,000 221,500
CAPITAL GOODS: 6.10%
Ba3 BB- American Standard, Inc., Senior Notes,
7.375%, 2/1/08 175,000 177,406
Ba2 BB+ Federal-Mogul Corporation, Notes, 7.875%,
7/1/10 200,000 198,000
CELLULAR COMMUNICATIONS: 4.45%
B2 B Paging Network, Inc., Senior Subordinated
Notes, 10.125%, 8/1/07 100,000 100,000
Baa3 A- Sprint Spectrum, L.P., Senior Notes, 11%,
8/15/06 150,000 174,000
CHEMICALS: 2.10%
B3 B+ Sterling Chemicals, Inc., Senior Subordinated
Notes, 11.75%, 8/15/06 150,000 129,000
CONSUMER PRODUCTS: 3.13%
B3 B Outboard Marine Corporation, Notes, Series A,
8.625%, 3/15/01 100,000 98,000
B2 B Revlon Consumer Products Corporation, Senior
Notes, 8.125%, 2/1/06 100,000 94,500
CONSUMER STAPLES - FOOD: 1.70%
B1 B+ Chiquita Brands International, Inc., Senior
Notes, 10.25%, 11/1/06 100,000 104,375
ENERGY: 4.96%
Ba3 BB Clark Oil & Refining Corporation, Senior
Notes, 9.5%, 9/15/04 200,000 197,000
Ba1 BB+ Oryx Energy Company, 8.125%, 10/15/05 100,000 108,000
FOREST & PAPER PRODUCTS: 5.74%
B2 B- Container Corporation of America, Senior
Notes, 9.750%, 4/1/03 100,000 101,125
B3 B Crown Paper Company, Senior Subordinated
Notes, 11%, 9/1/05 175,000 153,125
B3 B- Stone Container Corporation, Senior
Subordinated Debentures, 10.75%, 4/1/02 100,000 99,000
GAMBLING: 2.14%
B2 B Trump Atlantic City Associates, First
Mortgage Notes, 11.25%, 5/1/06 150,000 132,000
HEALTHCARE: 7.25%
Ba2 BBB- Healthsouth Corporation, Senior Subordinated
Notes, 9.5%, 4/1/01 150,000 155,438
B2 B- Integrated Health Services, Inc., Senior
Subordinated Notes, Series A, 9.25%, 1/15/08 80,000 76,200
Ba3 BB- Tenet Healthcare Corporation, Senior
Subordinated Notes, 8.625%, 1/15/07 200,000 214,250
HOMEBUILDING: 2.69%
Ba2 BB D R Horton, Inc., Senior Notes, 10%, 4/15/06 156,000 165,360
LODGING & RESTAURANTS: 5.47%
Ba3 B+ Apple South, Inc., Senior Notes, 9.75%, 6/1/06 200,000 190,500
Ba2 BB HMH Properties, Inc., Senior Notes, Series
B, 7.875%, 8/1/08 150,000 146,437
RADIO & TV BROADCASTING: 7.91%
B3 N/R SFX Broadcasting, Inc., Senior Subordinated
Notes, 11.375%, 10/1/00 250,000 260,625
Baa3 BBB- Westinghouse Electric Corporation,
Debentures, 8.625%, 8/1/12 200,000 226,000
RETAIL: 5.47%
Baa3 BBB- Tommy Hilfiger USA, Inc., Senior Notes,
6.85%, 6/1/08 200,000 197,250
Ba2 BB Michael's Stores, Inc., Senior Notes,
10.875%, 6/15/06 131,000 139,187
SOVERIGN NATIONS: 2.23%
Ba2 BB+ Korea Development Bank, Bonds, 7.25%, 5/15/06 150,000 137,438
SUPERMARKETS: 5.84%
Ba2 BB+ Fred Meyer, Inc., Senior Notes, 7.45%, 3/1/08 150,000 162,375
Caa3 CCC+ Supermarkets General Holdings Corp.,
Subordinated Notes, 11.625%, 6/15/02 200,000 197,250
TECHNOLOGY: 8.16%
Ba3 B Advanced Micro Devices, Inc., Senior Notes,
11%, 8/1/03 150,000 159,000
Caa1 CCC Dictaphone Corporation, Senior Subordinated
Notes, 11.75%, 8/1/05 100,000 97,500
Ba1 BBB Seagate Technology, Inc., Senior Notes,
7.37%, 3/1/07 250,000 245,625
TELECOMMUNICATIONS: 4.34%
Caa1 CCC Globalstar, L.P., Senior Notes, 11.25%,
6/15/04 100,000 75,750
B3 B- Iridium, L.L.C., /Iridium Capital, Senior
Notes, Series A, 13%, 7/15/05 100,000 92,000
B3 B Level 3 Communications, Inc., Senior Notes,
9.125%, 5/1/08 100,000 99,500
TEXTILES: 3.34%
Ba3 BB WestPoint Stevens, Inc., Senior Notes,
7.875%, 6/15/08 200,000 205,500
TRANSPORTATION: 1.60%
Ba2 BB Northwest Airlines, Inc., Notes, 8.7%,
3/15/07 100,000 98,625
UTILITIES: 5.20%
Ba3 BB CMS Energy Corporation, Senior Notes,
8.125%, 5/15/02 150,000 157,875
Ba3 BB- Toledo Edison Company, Debentures, 8.7%,
9/1/02 150,000 162,188
TOTAL CORPORATE DEBT SECURITIES (Cost $6,001,538) $5,973,654
REPURCHASE AGREEMENT: 0.47% of net assets
With Donaldson, Lufkin & Jenrette Securities Corporation issued
12/31/98 at 4.625%, due 1/4/99, collateralized by $29,580 in United
States Treasury Notes due 6/30/00. Proceeds at maturity are $29,015
(Cost $29,000) $ 29,000
TOTAL INVESTMENTS (Cost $6,030,538) $6,002,654
CASH AND RECEIVABLES LESS LIABILITIES: 2.46% of net assets $ 151,652
TOTAL NET ASSETS: 100% $6,154,306
Government Fund
Portfolio of Investments - December 31, 1998
Credit Rating* Principal
Moody's S&P Amount Value
US GOVERNMENT & AGENCY OBLIGATIONS: 93.76% of net assets
US TREASURY NOTES: 51.62%
Aaa AAA US Treasury Notes, 7.125%, 2/29/00 $150,000 $ 154,121
Aaa AAA US Treasury Notes, 7.75%, 2/15/01 350,000 371,798
Aaa AAA US Treasury Notes, 6.25%, 4/30/01 500,000 518,140
Aaa AAA US Treasury Notes, 7.25%, 5/15/04 450,000 504,243
Aaa AAA US Treasury Notes, 5.875%, 11/15/05 775,000 828,297
Aaa AAA US Treasury Notes, 5.625%, 2/15/06 250,000 264,605
Aaa AAA US Treasury Notes, 6.5%, 10/15/06 300,000 333,777
US GOVERNMENT AGENCY NOTES: 30.91%
Aaa AAA Fannie Mae Notes, 5.75%, 4/15/03 550,000 565,669
Aaa AAA Fannie Mae Notes, 5.75%, 6/15/05 350,000 362,936
Aaa AAA Fannie Mae Notes, 6.65%, 3/8/06 325,000 334,282
Aaa AAA Fannie Mae Notes, 5.75%, 2/15/08 250,000 259,312
Aaa AAA Freddie Mac Notes, 5.75%, 4/15/08 250,000 259,068
MORTGAGE BACKED SECURITIES: 11.23%
Aaa AAA Freddie Mac, Gold Pass Through Certificates
#E57247, 6.5%, 3/1/09 283,629 288,059
Aaa AAA Government National Mortgage Association II,
Guaranteed Pass Through Certificates #2483,
7%, 9/20/27 352,374 359,309
TOTAL US GOVERNMENT & AGENCY OBLIGATIONS (Cost $5,138,950) $5,403,616
REPURCHASE AGREEMENT: 5.28% of net assets
With Donaldson, Lufkin & Jenrette Securities Corporation issued
12/31/98 at 4.625%, due 1/4/99, collateralized by $310,080
in United States Treasury Notes due 6/30/00.
Proceeds at maturity are $304,156. (Cost $304,000) $ 304,000
TOTAL INVESTMENTS (Cost $5,442,950) $5,707,616
CASH AND RECEIVABLES LESS LIABILITIES: 0.96% of net assets $ 55,203
TOTAL NET ASSETS: 100% $5,762,819
Bond Fund
Portfolio of Investments - December 31, 1998
Credit Rating* Principal
Moody's S&P Amount Value
COLLATERALIZED MORTGAGE OBLIGATIONS: 8.65% of net assets
Aaa AAA Ryland Acceptance Corporation, Class Four,
Series 76, 9%, 8/1/18 $ 67,335 $ 71,195
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $68,194) 71,195
CORPORATE DEBT SECURITIES: 53.45% of net assets
CONSUMER CYCLICALS: 4.85%
Baa3 BBB- Tommy Hilfiger USA, Inc., 6.5%, 6/1/03 40,000 39,950
FINANCIALS: 20.55%
Aa3 A- Associates Corporation North America, Senior
Notes, 6%, 4/15/03 40,000 40,800
A1 A Ford Motor Credit Company, 7.75%, 3/15/05 40,000 44,450
Aa3 AA- Merrill Lynch & Company, Inc., 7%, 1/15/07 40,000 43,050
Aa3 A+ Morgan Stanley Dean Witter Discover & Company,
6.375%, 8/1/02 40,000 40,950
RETAIL: 10.42%
A2 A Gap, Inc., 6.9%, 9/15/07 40,000 43,950
Baa1 BBB+ Kohls Corporation, 6.7%, 2/1/06 40,000 41,900
TECHNOLOGY: 17.63%
A3 A- Arrow Electronics, Inc., Senior Notes, 7%,
1/15/07 40,000 44,000
Baa2 BBB- Lexmark International, Inc., 6.75%, 5/15/08 40,000 40,200
Aa3 AA- Motorola, Inc., 5.8%, 10/15/08 40,000 40,900
A2 A Xerox Corporation, 5.5%, 11/15/03 20,000 20,050
TOTAL CORPORATE DEBT SECURITIES (Cost $426,211) 440,200
US GOVERNMENT & AGENCY OBLIGATIONS: 28.14% of net assets
Aaa AAA US Treasury Notes, 6.25%, 5/31/00 110,000 112,404
Aaa AAA US Treasury Notes, 6.25%, 4/30/01 105,000 108,809
Aaa AAA Fannie Mae Notes, 6%, 5/15/08 10,000 10,579
TOTAL US GOVERNMENT & AGENCY OBLIGATIONS (Cost $227,563) 231,792
TOTAL INVESTMENT SECURITIES $743,187
REPURCHASE AGREEMENT: 8.26% of net assets
With Donaldson, Lufkin & Jenrette Securities Corporation
issued 12/31/98 at 4.625%, due 1/4/99, collateralized by
$69,360 in United States Treasury Notes due 6/30/00.
Proceeds at maturity are $68,035. (Cost $68,000) $ 68,000
TOTAL INVESTMENTS (Cost $789,968) $811,187
CASH AND RECEIVABLES LESS LIABILITIES: 1.50% of net assets $ 12,341
TOTAL NET ASSETS: 100% $823,528
Notes to the Portfolio of Investments:
* Unaudited
Moody's Moody's Investors Services, Inc.
S&P Standard & Poor's Corporation
Statements of Assets and Liabilities
December 31, 1998
High Yield Government Bond
Fund Fund Fund
ASSETS
Investments, at value (Note 1 and 2)
Investment securites $5,973,654 $5,403,616 $743,187
Repurchase agreements 29,000 304,000 68,000
Total investments 6,002,654 5,707,616 811,187
Cash 708 526 969
Receivables
Interest 157,608 68,388 11,650
Capital shares sold 6,097 -- --
Total assets 6,167,067 5,776,530 823,806
LIABILITIES
Payables
Dividends 8,693 2,390 278
Capital shares redeemed 4,068 11,321 --
Total liabilities 12,761 13,711 278
NET ASSETS (Note 4) $6,154,306 $5,762,819 $823,528
CAPITAL SHARES OUTSTANDING 888,809 563,734 38,819
NET ASSET VALUE PER SHARE $6.92 $10.22 $21.21
Statements of Operations
For the year ended December 31, 1998
High Yield Government Bond
Fund Fund Fund
INVESTMENT INCOME (Note 1)
Interest income $572,422 $342,382 $58,948
Other investment income 25,090 -- --
Total investment income 597,512 342,382 58,948
EXPENSES (Notes 3 and 5)
Investment advisory fees 40,518 35,388 4,917
Transfer agent, administrative,
registration and professional fees 34,359 29,443 5,901
Total expenses 74,877 64,831 10,818
NET INVESTMENT INCOME 522,635 277,551 48,130
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on
investments (239,050) 44,837 9,796
Change in net unrealized appreciation
(depreciation) of investments (19,659) 138,728 13,124
NET GAIN (LOSS) ON INVESTMENTS (258,709) 183,565 22,920
TOTAL INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $263,926 $461,116 $71,050
Statements of Changes in Net Assets
for the period indicated
<TABLE>
<CAPTION>
High Yield Fund Government Fund Bond Fund
Year Nine Year Year Nine Year Year Year
Ended Months Ended Ended Ended Months Ended Ended Ended Ended
December December March December December March December December
31, 1998 31, 1997 31, 1997 31, 1998 31, 1997 31, 1997 31, 1998 31, 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
Net investment income $522,635 $399,808 $522,821 $277,551 $223,044 $321,769 $ 48,130 $108,414
Net realized gain (loss) on
investments (239,050) 80,365 8,912 44,837 (64,210) (44,628) 9,796 4,737
Net unrealized appreciation
(depreciation) of investments (19,659) 112,883 (149,195) 138,728 333,544 (128,957) 13,124 (273)
Total increase in net assets resulting
from operations 263,926 593,056 382,538 461,116 492,378 148,184 71,050 112,878
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (522,572) (399,808) (522,821) (277,551) (223,044) (321,769) (48,082) (109,872)
CAPITAL SHARE
TRANSACTIONS (Note 8) (103,499) 69,342 (395,943) 80,235 (561,940) (890,892) (325,972)(2,964,462)
TOTAL INCREASE (DECREASE) IN NET
ASSETS (362,145) 262,590 (536,226) 263,800 (292,606)(1,064,477) (303,004)(2,961,456)
NET ASSETS
Beginning of period $6,516,451 $6,253,861 $6,790,087$5,499,019$5,791,625 $6,856,102$1,126,532 $4,087,988
End of period $6,154,306 $6,516,451 $6,253,861$5,762,819$5,499,019 $5,791,625 $ 823,528 $1,126,532
</TABLE>
Financial Highlights
Selected data for a share outstanding throughout each period:
<TABLE>
Ratio of
Net Ratio of net
Net realized & Distri- Net Net expenses investment
asset Net unrealized butions asset assets to income
value invest. gain Total from from netDist. value end of average (loss) Port.
begin income (loss) on invest. invest. fm. cap.Total end of Total period net to average turnover
period (loss) invest's operat's income gains dist'ions period return (1000s) assets net assets rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund
1998 $7.21 $0.58 $(0.29) $ 0.29 $(0.58) -- $(0.58) $ 6.92 4.07% $6,154 1.16% 8.11% 43%
1997-2 7.01 0.43 0.20 0.63 (0.43) -- (0.43) 7.21 9.12 6,516 1.20-4 7.90-4 38
1997-3 7.16 0.57 (0.15) 0.42 (0.57) -- (0.57) 7.01 6.06 6,254 1.44 8.07 95
1996-3 6.94 0.61 0.22 0.83 (0.61) -- (0.61) 7.16 12.32 6,790 1.60 8.47 237
1995-3 7.29 0.60 (0.35) 0.25 (0.60) -- (0.60) 6.94 3.75 6,726 1.52 8.56 243
1994-3 7.46 0.61 (0.17) 0.44 (0.61) -- (0.61) 7.29 5.89 7,702 1.54 8.02 251
Government Fund
1998 $9.89 $0.49 $0.33 $0.82 $(0.49) -- $(0.49) $10.22 8.52% $5,763 1.15% 4.93% 46%
1997-2 9.43 0.38 0.46 0.84 (0.38) -- (0.38) 9.89 9.07 5,499 1.16-4 5.26-4 37
1997-3 9.71 0.49 (0.28) 0.21 (0.49) -- (0.49) 9.43 2.29 5,792 1.43 5.09 17
1996-3 9.55 0.47 0.16 0.63 (0.47) -- (0.47) 9.71 6.56 6,856 1.59 4.77 190
1995-3 9.70 0.39 (0.15) 0.24 (0.39) -- (0.39) 9.55 2.67 7,653 1.52 4.12 318
1994-3 10.62 0.36 (0.14) 0.22 (0.36) $(0.78) (1.14) 9.70 1.95 8,576 1.54 3.53 287
Bond Fund-1
1998 $20.75 $1.03 $0.46 $1.49 (1.03) -- $(1.03) $21.21 7.33% $ 824 1.11% 4.92% 82%
1997 20.63 1.089 0.121) 1.20 (1.08) -- (1.08) 20.75 6.04 1,127 1.65 4.79 49
1996 21.17 1.07 (0.55) 0.52 (1.06) -- (1.06) 20.63 2.55 4,088 1.51 4.86 94
1995 19.62 1.17 1.55 2.72 (1.17) -- (1.17) 21.17 14.11 5,792 1.35 5.49 58
1994 21.21 1.15 (1.59) (0.44) (1.15) -- (1.15) 19.62 (2.11) 7,166 1.18 5.50 78
</TABLE>
1 Data prior to June 13, 1997 represents Madison Bond Fund, Inc.
2 For the nine-month period ended December 31, 1997.
3 For the year ended March 31.
4 Annualized.
Notes:
Effective July 31, 1996, the investment advisory services transferred
to Madison Mosaic, LLC from Bankers Finance Investment Management Corp.
Mosaic Income Trust
Notes to Financial Statements
December 31, 1998
1. Summary of Significant Accounting Policies. Mosaic Income Trust (the
"Trust") is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 as an open-end, diversified investment
management company. The Trust maintains three separate funds whose principal
objectives are to obtain high current income. The High Yield Fund invests in
long-term debt securities which may include securities rated as low as "Caa"
or "CCC" by Moody's Investors Service, Inc. or Standard & Poor's Corporation,
respectively. The Government Fund invests in securities of the U. S.
Government and its agencies. The Bond Fund invests in investment grade
corporate, government and government agency fixed-income securities. Data for
the Bond Fund prior to June 13, 1997 represents the former Madison Bond Fund,
Inc. which merged ino the Trust on such date.
Securities Valuation: Securities having maturities of 60 days or less are
valued at amortized cost, if determined to approximate market value.
Securities having longer maturities, for which market quotations are readily
available, are valued at the mean between their bid and asked prices.
Securities for which market quotations are not readily available are valued at
their fair value as determined in good faith by the Trustees. Investment
transactions are recorded on the trade date. The cost of investments sold is
determined on the identified cost basis for financial statement and federal
income tax purposes. Repurchase Agreements are valued at amortized cost,
which approximates market value.
Investment Income: Interest income, net of amortization of premium or
discount, and other income (if any) is accrued as earned.
Dividends: Net investment income, determined as gross investment income less
expenses, is declared as a regular dividend each business day. Dividends are
distributed to shareholders or reinvested in additional shares as of the close
of business at the end of each month. Capital gains distributions, if any,
are declared and paid annually at calendar year end. Additional distributions
may be made if necessary.
Income Tax: In accordance with the provisions of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, substantially all
of the taxable income of each fund is distributed to it shareholders and
therefore, no income tax provision is required. As of December 31, 1998, the
High Yield, Government, and Bond Funds had available for federal income tax
purposes the following unused capital loss carryovers:
Expiration Date High Yield Fund Government Fund Bond Fund
December 31, 2002 $740,266 -- $188,652
December 31, 2003 -- $268,589 94,831
December 31, 2004 -- 44,628 --
December 31, 2005 -- 64,210 293
December 31, 2006 239,050 -- --
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ from
those estimates.
Fiscal Year and Accountants: Beginning April 1, 1997 the Trust's fiscal year
changed to December 31 and the Trust changed its Independent Auditors to
Deloitte & Touche LLP.
2. Investments in Repurchase Agreements. When the Trust purchases securities
under agreements to resell, the securities are held for safekeeping by the
Trust's custodian bank as collateral. Should the market value of the
securities purchased under such an agreement decrease below the principal
amount to be received at the termination of the agreement plus accrued
interest, the counterparty is required to place an equivalent amount of
additional securities in safekeeping with the Trust's custodian bank.
Repurchase agreements may be terminated within seven days. Pursuant to an
Exemptive Order issued by the Securities and Exchange Commission, the Trust,
along with other registered investment companies having Advisory and Services
Agreements with the same advisor, transfers uninvested cash balances into a
joint trading account. The aggregate balance in this joint trading account is
invested in one or more consolidated repurchase agreements whose underlying
securities are U.S. Treasury or federal agency obligations.
3. Investment Advisory Fees and Other Transactions with Affiliates. The
Investment Advisor to the Trust, Madison Mosaic, LLC ("the Advisor"), earns an
advisory fee equal to 0.625% per annum of the average net assets of the
Trust's High Yield and Government Funds and 0.50% per annum of the average net
assets of the Bond Fund; the fees are accrued daily and are paid monthly. The
Advisory Agreement between the Trust and the Advisor was approved at the
special meeting of the Trust's shareholders on July 29, 1996.
4. Aggregate Cost and Unrealized Appreciation (Depreciation). The aggregate
cost for federal income tax purposes and the net unrealized appreciation
(depreciation) are stated as follows as of December 31, 1998:
High Yield Government Bond
Fund Fund Fund
Aggregate cost $6,030,538 $5,442,950 $ 789,968
Gross unrealized appreciation $170,002 $ 264,666 $ 21,555
Gross unrealized depreciation (197,886) -- (336)
Net unrealized appreciation
(depreciation) $ (027,884) $ 264,666 $ 21,219
5. Other Expenses. Effective November 1, 1997, all expenses and support
services are provided by the Advisor under a Service Agreement for a fee based
on a percentage of average net assets. This percentage is 0.53% for the High
Yield Fund, 0.52% for the Government Fund and 0.60% for the Bond Fund; the
fees are accrued daily and paid monthly.
The Advisor is also responsible for the fees and expenses of Trustees who are
affiliated with the Advisor and certain promotional expenses.
6. Net Assets. At December 31, 1998, net assets include the following:
High Yield Government Bond
Fund Fund Fund
Net paid in capital on
shares of beneficial interest $7,161,443 $5,875,580 $1,086,085
Undistributed net investment income 63 -- --
Accumulated net realized losses (979,316) (377,427) (283,776)
Net unrealized appreciation
(depreciation) of investments (27,884) 264,666 21,219
Total net assets $6,154,306 $5,762,819 $ 823,528
The High Yield Fund reclassified $889,905 from accumulated net realized losses
to paid in capital as a result of permanent book and tax differences relating
to expired capital loss carryovers for the year ended December 31, 1998. The
reclassification had no impact on net asset value.
7. Investment Transactions. Purchases and sales of securities other than
short-term securities for the year ended December 31, 1998 were as follows:
High Yield Fund Government Fund Bond Fund
Purchases $2,667,218 $2,468,984 $ 726,029
Sales 2,751,524 2,571,348 1,016,713
8. Capital Share Transactions. An unlimited number of capital shares,
without par value, are authorized. Transactions in capital shares for the
following periods were:
<TABLE>
<CAPTION>
High Yield Fund Government Fund Bond Fund
Year Ended 9 Months Ended Year Ended 9 Months Ended Year Ended Year Ended
December December December December December December
31, 1998 31, 1997 31, 1998 31, 1997 31, 1998 31, 1997
<S> <C> <C> <C> <C> <C> <C>
In Dollars
Shares sold $1,538,776 $1,756,590 $711,549 $(,500,312 $ (21,820) $ (80,744)
Shares issued in
reinvestment of
dividends 416,840 326,962 252,269 205,143 43,625 83,381
Total shares issued 1,955,616 2,083,552 963,818 705,455 65,445 164,125
Shares redeemed (2,059,115) (2,014,210) (883,583) (1,267,395) (391,417) (3,128,587)
Net increase
(decrease) $ (103,499) $ 69,342 $ 80,235 $ (561,940) $(325,972)$(2,964,462)
In Shares
Shares sold 215,057 245,860 70,939 51,780 1,050 6,491
Shares issued in
reinvestment of
dividends 58,572 45,466 25,110 21,075 2,084 1,490
Total shares issued 273,629 291,326 96,049 72,855 3,134 7,981
Shares redeemed (288,852) (279,507) (88,226) (130,825) (18,595) (151,880)
Net increase (decrease) (15,223) 11,819 7,823 (57,970) (15,461) (143,899)
</TABLE>
