Prospectus/April 30, 1999
1655 Fort Myer Drive, Arlington, Virginia 22209-3108
Mosaic Income Trust
Government Fund High Yield Fund Bond Fund
Mosaic Income Trust offers three mutual funds whose objectives are to provide
investors monthly dividends by investing in bonds and other debt securities.
The Government Fund invests only in investment grade U.S. Government securities
and emphasizes the safety of principal and interest that comes with investing
in U.S. Government securities.
The High Yield Fund invests primarily in corporate debt securities expected to
provide the highest yields. This policy of seeking high yields carries
a high risk that an investor's shares in the fund could lose value. This is
because the High Yield Fund may be entirely invested in lower-rated
securities, including those commonly referred to as "junk" bonds.
The Bond Fund invests only in investment grade securities with an average
dollar weighted maturity not to exceed 10 years. By investing in these
"intermediate term" bonds, the Bond Fund seeks a secondary objective of capital
preservation.
Features
* No commissions or sales charges
* $1,000 minimum initial investment
* No "12b-1" expenses
* Checking privileges
* Dividends accrue every day and can be paid by check, electronic funds
transfer, or reinvested monthly
* Invest or withdraw funds by phone or by mail
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
Madison Mosaic, LLC
Investment Advisor
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Table of Contents
Risk/Return Summary: Investments, Risks and Performance
Fund Investment Objectives/Goals 3
Principal Investment Stategies of the Trust 3
Principal Risks of Investing in the Trust 3
Risk/Return Bar Chart and Table 3
Fees and expenses of the Trust 5
Investment Objectives 8
Implementation of Investment Policies 9
Principal Risks 12
Management 15
Pricing of Fund Shares 17
Dividends and Distributions 17
Taxes 17
Financial Highlights 18
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Risk/Return Summary: Investments, Risks and Performance
Fund Investment Objectives/Goals
The common objective shared by the Government, High Yield and Bond Funds
offered by Mosaic Income Trust (the "Trust") is to receive income from bonds
and to distribute that income to its investors as dividends. The Bond Fund
has a secondary objective of seeking capital preservation.
Principal Investment Strategies of the Trust
Each fund seeks to achieve its objectives through diversified investment in
bonds and other debt securities.
The Government Fund invests only in investment grade U.S. Government securities
and emphasizes the safety of principal and interest that comes with investing
in U.S. Government securities. The maturities of such investments may range
from long-term (20 years or more) or short-term (less than 10 years).
The High Yield Fund invests primarily in debt securities expected to provide
the highest yields and may include lower-rated securities, including those
commonly referred to as "high yield" or "junk" bonds. The maturities of such
investments may range from long-term (20 years or more) or short-term (less
than 10 years).
The Bond Fund invests only in investment grade corporate debt securities,
obligations of the U.S. Government and its agencies and money market
instruments. In seeking to preserve capital, it invests at least 65% of its
assets in bonds with the total portfolio having an average dollar weighted
maturity of 10 years or less.
Principal Risks of Investing in the Trust
All Funds
Interest Rate Risk
The share price of each of these funds reflects the value of the bonds held by
them. When interest rates or general demand for 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.
The longer the maturity of any bond, the greater the effect will be on its
price when interest rates change. The Government and High Yield Funds may
have long average maturities, while the average maturity of the Bond Fund may
be shorter at 10 years or less.
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.
Tax-Related Risk
You can receive a taxable distribution of capital gain. You may also owe
taxes if you sell your shares at a price that is higher than the price you
paid for them.
Fund Specific Risks
Government Fund
Some federal agency securities are not backed by the full faith and credit of
the United States, so we must look to the agency issuing the bond for ultimate
repayment. Also, the fund may own government agency obligations backed by
mortgages. If the mortgage holders prepay them during a period of falling
interest rates, the fund could be exposed to prepayment risk. In that case, it
must reinvest the proceeds at a lower interest rate. The security itself may
not increase in value with the corresponding drop in rates since the prepayment
acts to shorten the maturity of the security.
High Yield Fund
Particular risks to consider when investing in junk bonds are:
* 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.
* Congressional Proposals. Various proposals have been considered by Congress
in the past that would restrict or adversely impact the market for high
yield bonds.
* 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.
Bond Fund
We may shorten portfolio maturity of this fund until we perceive that a period
of market vulnerability has passed. This may cause it to underperform the
general bond market during particular periods and may generate greater capital
gains to investors.
Risk/Return Bar Chart and Performance Table
The following bar charts illustrate the risk of each fund by
showing changes in each fund's performance from year to year over a 10-year
period (or for the life of the fund, if less than 10 years). After the bar
chart for each fund is a table that compares the fund's average annual total
returns with those of a broad-based securities market index that is not
subject to the fees and expenses typical of mutual funds. Remember, however,
that past performance does not necessarily indicate how a fund will perform in
the future.
Government Fund
Year Return
1998 8.52%
1997 7.70%
1996 0.34%
1995 14.37%
1994 (3.61)%
1993 9.66%
1992 5.39%
1991 13.86%
1990 7.19%
1989 11.11%
During the period shown in the bar chart, the highest return for a quarter was
5.48% (quarter ending September 30, 1998) and the lowest return for a quarter
was -3.13% (quarter ending March 31, 1996).
Average Annual Total Past One Year Past 5 Years Past 10 Years
Returns
(for the periods ending
December 31, 1998)
Government Fund 8.52% 5.27% 7.32%
Lehman Intermediate
Government Bond Index 8.49% 6.45% 8.34%
High Yield Fund
Year Return
1998 4.07%
1997 9.92%
1996 6.84%
1995 14.45%
1994 (2.68)%
1993 15.04%
1992 12.09%
1991 25.62%
1990 (7.55)%
1989 2.79%
During the period shown in the bar chart, the highest return for a quarter was
11.52% (quarter ending March 31, 1991) and the lowest return for a quarter was
- -8.47% (quarter ending September 30, 1990).
Average Annual Total Past One Year Past 5 Years Past 10 Years
Returns
(for the periods ending
December 31, 1998)
High Yield Fund 4.07% 6.37% 7.68%
Lehman Aggregate Bond Index 8.69% 8.21% 9.73%
Bond Fund
Year Return
1998 7.33%
1997 6.04%
1996 2.55%
1995 14.11%
1994 (2.11)%
1993 6.04%
1992 4.08%
1991 14.01%
During the period shown in the bar chart, the highest return for a quarter was
5.27% (quarter ending September 30, 1991) and the lowest return for a quarter
was -1.56% (quarter ending March 31, 1996).
Average Annual Total Past One Year Past 5 Years Since Inception
Returns April 23, 1990
(for the periods ending
December 31, 1998)
Bond Fund 7.33% 5.46% 6.51%
Lehman Intermediate
Government Corporate
Bond Index 8.44% 6.60% 8.40%
*Each Lehman Bond Index is a recognized, unmanaged index of thousands of bonds
of the respective type named by the index.
To obtain the current 30-day yield for any fund, call our shareholder service
department toll-free at 888-670-3600 or call our toll-free 24-hour automated
information line, Mosaic Tiles, at 800-336-3063.
Fees and Expenses of the Trust
This table describes the fees and expenses that you may pay if you buy and
hold shares of any fund offered by Mosaic Income Trust.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Redemption Fee None
Exchange Fee None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
High Yield Government Bond
Fund Fund Fund
Management Fees 0.63% 0.63% 0.50%
Distribution (12b-1) Fees None None None
Other expenses 0.53% 0.52% 0.61%
Total Annual Fund
Operating Expenses 1.16% 1.15% 1.11%
Example: This Example is intended to help you compare the cost of investing
in a fund offered by Mosaic Income Trust with the cost of investing in other
mutual funds. For simplicity, fee and expense percentages above are rounded to
two decimal places.
The Example assumes that you invest $10,000 in the fund for the time periods
indicated 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:
1 Year 3 Years 5 Years 10 Years
High Yield Fund $118 $368 $638 $1,409
Government Fund $117 $365 $633 $1,398
Bond Fund $113 $353 $612 $1,352
Additional fees and transaction charges described in Mosaic's "Guide to Doing
Business," if applicable, will increase the level of expenses that can be
incurred. (For example, fees are charged for certain wire transfers, stop
payments on checks and bounced investment checks). In addition, if you
purchase or redeem shares in the Trust through a securities broker you may be
charged a transaction fee by the broker for handling of the transaction. The
Trust does not receive these fees. You can engage in any transaction directly
with the Trust to avoid such charges.
Investment Objectives
Each mutual fund portfolio offered by the Trust shares a common objective: To
receive income from bonds and other debt securities and to distribute that
income to its investors as monthly dividends.
The Bond Fund has a second objective: To preserve capital.
There can be no assurance that the objective of any fund will be achieved.
Although the investment objective of any fund may be changed without
shareholder approval, shareholders will be notified in writing prior to any
material change.
Implementation of Investment Objectives
All Funds
General Selection Criteria
We select bonds for each 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 for the respective fund. To a lesser extent, we also
consider whether a particular bond may increase in value from its price at the
time of purchase.
Temporary Defensive Position
We reserve the right to invest a portion of any 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 uninvested cash. However, we do not
intend to hold more than 35 percent of any fund in such investments unless we
determine that market conditions warrant a temporary defensive investment
position. Under such circumstances, up to 100 percent of any fund may be so
invested. To the extent that a 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.
Government Fund
Selection
We limit investments in the Government Fund to investment grade U.S. Government
securities. 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.
Maturity
We buy bonds for the Government Fund with maturities that, in our judgment,
will provide the highest yields available from debt securities over the life
of the investment. This means that the average effective maturity of the
Government Fund may be 20 years or more, depending on market conditions. We
may adjust this maturity, however, and may sell securities prior to maturity.
We do not intend, however, to engage in extensive short-term trading.
High Yield Fund
Selection
The High Yield Fund may invest in corporate bonds, notes and debentures
(including corporate debt securities convertible into other securities). The
High Yield Fund invests principally in lower medium grade and low 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
"Caa" or "CCC." We may vary the quality rating mix of this fund based on our
evaluation of each investment in light of its yield and credit characteristics.
Although the fund may invest in securities with ratings as low as "CCC" or
"Caa," 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; and
(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.
We apply our investment selection criteria at the time an investment is made.
We might not sell a bond because of an adverse change in the quality rating or
other characteristics because the impact of such change is often already
reflected in market price before the bond can be sold.
Maturity
We buy bonds for the High Yield Fund with maturities that, in our judgment,
will provide the highest yields available from debt securities over the life
of the investment. This means that the average effective maturity of the High
Yield Fund may be 20 years or more, depending on market conditions. We may
adjust this maturity, however, and may sell securities prior to maturity. We
do not intend, however, to engage in extensive short-term trading.
Bond Fund
Selection
The Bond Fund seeks to achieve its objectives by investing in investment grade
corporate debt securities, obligations of the U.S. Government and its agencies
and instrumentalities and money market instruments. It normally invests at
least 65% of its assets in bonds, rather than money market instruments.
The percentage of the Bond 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 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. For the Bond Fund, we may buy in 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 a 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.
U.S. Government Securities. We may also buy the same type of Government
Securities for the Bond Fund as we purchase for the Government Fund described
above.
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:
a) 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;
b) 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
c) short-term obligations of or guaranteed by the U.S. government, its
agencies or instrumentalities.
Maturity
We will normally invest the Bond Fund so that at 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 believe that the ability and willingness to shorten maturities and hold
substantial cash reserves during periods of market vulnerability is the most
distinguishing feature in comparing the Bond Fund's investment philosophy and
strategies with those of the other mutual funds with similar investment
objectives. In our opinion, such other mutual funds generally do not shorten
maturities dramatically during volatile times. When we anticipate that
interest rates will be stable or falling, we intend to maintain the average
dollar weighted maturity in the 5-10 year range. During periods when interest
rates are rising or we anticipate rising interest rates, the average dollar
weighted maturity may be shortened dramatically to 1-2 years. We do not,
however, intend to engage in extensive short-term trading.
The objective of shortening maturities is to reduce the Bond Fund's exposure
to bond price depreciation during period of rising interest rates and to
maintain desired liquidity while awaiting more attractive investment
conditions in the bond market.
Portfolio Trading Activity - Taxable Capital Gains Potential
We may alter the composition of any fund with regard to quality and maturity
and we may sell securities prior to maturity. Under normal circumstances,
however, turnover for each 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, no fund will engage in active or frequent trading
of its bonds. However, it is possible that we will determine that market
conditions require a significant change to the composition of a fund's
portfolio. (For example, if interest rates rise or fall significantly, we may
attempt to sell bonds before they lose much value.) Also, if a fund
experiences large swings in shareholder purchases and redemptions, we may be
required to sell bonds more frequently in order to generate the cash needed to
pay redeeming shareholders. Under these circumstances, the fund could make a
taxable capital gain distribution.
Principal Risks
Interest Rate Risk
The value of shares purchased in each fund will fluctuate due to changes in
the value of securities held by such fund. At the time an investor sells his
or her shares, they may be worth more or less than their original cost.
Bonds tend to increase in value when prevailing interest rates fall, and to
decrease in value when prevailing interest rates rise. The longer the
maturities of the bonds held in the fund, the greater the magnitude of these
changes. Investments with the highest yields may have longer maturities or
lower quality ratings than other investments, increasing the possibility of
fluctuations in value per share.
Tax-Related Risk
In addition to monthly dividends from interest, shareholders in each fund can
recognize taxable income in two ways:
(1) If you sell your shares at a price that is higher than when you bought
them, you will have a taxable capital gain. On the other hand, if you sell
your shares at a price that is lower than the price when you bought them, you
will have a capital loss.
(2) In the event a fund sells more securities at prices higher than when they
were bought by the fund, the fund may pass through the profit it makes from
these transactions by making a taxable capital gain distribution. (The
discussion regarding Portfolio Trading Activity - Taxable Capital Gains
Potential in the previous section above explains what circumstances can
produce taxable capital gains.)
Call Risk
We may buy "callable bonds." This means that the issuer can redeem the bond
before maturity. An issuer may want to call a bond after interest rates have
gone down. If an issuer calls a bond we own, we would have to reinvest the
proceeds at a lower interest rate. Also, if the price we paid for the bond
was higher than the call price, the effect is the same as if the affected fund
sold the bond at a loss.
Portfolio Specific Risks
Government Fund
Some federal agencies have authority to borrow from the U.S. Treasury while
others do not. In the case of securities not backed by the full faith and
credit of the United States, we must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment. We may not be able to
assess a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments.
The Government Fund may own securities that are backed by mortgages such as,
for example, Ginnie Mae or Fannie Mae securities. Normally, the payments the
fund will receive on such securities represent interest and a portion of the
principal on each mortgage. However, mortgage holders may refinance their
properties when interest rates fall. This has the effect of prepaying large
amounts of the principal on these types of securities. If this happens, we
must reinvest the proceeds at a lower interest rate than we were able to obtain
when we purchased the security. Another aspect of this "prepayment risk" is
that prepayments have the effect of shortening maturity. As a result, when
bonds with longer maturities are becoming more valuable as interest rates fall,
these types of securities may not enjoy the full benefit of this interest rate
movement.
High Yield Fund
The High Yield Fund may invest in securities rated Caa or CCC. These bonds
may have highly speculative characteristics, may be of poor standing and may
present other elements of immediate danger to payment of principal and
interest or could even be in default (although the fund will not purchase
securities in default).
You should consider certain risks associated with the kinds of securities held
by the High Yield Fund. These risks include the following:
Youth and Growth of the High Yield Bond Market. The high yield bond market is
relatively young and its major growth occurred during a long period of
economic expansion. Past economic downturns resulted in large price swings in
the value of high yield bonds. This also adversely affected the value of
outstanding bonds and the ability of the issuers to repay principal and
interest.
Sensitivity to Interest Rates and Economic Changes. Changes in the economy
and interest rates may affect high yield securities differently from other
securities. Prices of high yield bonds may be less sensitive to interest rate
fluctuations than investment grade securities, but more sensitive to adverse
economic changes or individual corporate developments. An economic downturn
or a period of rising interest rates could adversely affect the ability of
highly leveraged issuers to make required principal and interest payments,
meet financial projections or obtain additional financing. Periods of
economic decline or uncertainty may increase the price volatility of high
yield bonds and, therefore, magnify changes in the High Yield Fund's net asset
value. Zero coupon bonds and payment-in-kind securities may be affected to a
greater extent by such developments and thereby tend to be more volatile than
securities that pay interest periodically in cash.
Market Expectations. High yield bond values are very sensitive to market
expectations about the credit worthiness of the issuing companies. If events
produce a sudden concern in the marketplace about the ability of high yield
bond issuers to service their debts, investors might try to liquidate
significant amounts of high yield bonds within a short period of time. If
shareholders in the High Yield Fund made significant redemptions at the same
time, we might be forced to sell some of the fund's holdings under adverse
market conditions. We would have to do this without regard to their
investment merits. If this happened, the fund could realize capital losses
and decrease the asset base upon which expenses can be spread.
Rising interest rates can adversely affect the value of high yield bonds, both
by lowering the perceived credit worthiness of the issuers and by lowering
bond prices generally. However, when interest rates are falling or the credit
worthiness of the issuer improves, early redemption or call features of the
bonds may limit their potential for increased value.
Liquidity and Valuation. Adverse publicity about or public perceptions of
high yield securities and their market, whether or not based on fundamental
analysis, may cause these bonds to lose value and liquidity. Since the high
yield market is an over-the-counter market, there may be "thin" trading during
times of market distress. This means there is a limited number of buyers and
sellers in the market.
Congressional Proposals. Various proposals have been considered by Congress
in the past that would restrict or adversely impact the market for high yield
bonds. For example, federally insured savings and loan associations have been
required to divest investments in high yield bonds. Any such legislation may
have had or may in the future have an adverse impact on the net asset value of
the High Yield Fund or its investment flexibility.
Taxation. Interest income is recognized on zero coupon and payment-in-kind
securities. This income is passed through to shareholders for income tax
purposes, even though payment of such interest is not received in cash.
Credit Ratings. We consider quality ratings of debt securities when
investments are selected. However, changes in credit ratings by the major
credit rating agencies may lag changes in the credit worthiness of the issuer.
We monitor the issuers of high yield bonds to anticipate whether the issuer
will have sufficient cash flow to meet required principal and interest
payments and to assess the bonds' liquidity, but we may not always be able to
foresee adverse developments. Furthermore, credit ratings attempt to evaluate
the safety of principal and interest payments and may not accurately reflect
the market value risks of high yield bonds.
Bond Fund
We may shorten portfolio maturities temporarily or until we perceive that a
period of market vulnerability has passed. Adopting or maintaining a
defensive posture may, however, cause the Bond Fund to underperform the
general market during particular periods. In addition, such action will
affect portfolio turnover and purchase and sale activity that can increase
Bond Fund expenses. Significant portfolio turnover may generate greater
capital gains to investors. See "Portfolio Trading Activity - Taxable Capital
Gains Potential" above. Portfolio turnover can also lower fund performance
by increasing transaction costs.
Management
The Advisor
We are Madison Mosaic, LLC (of the same address as the Trust), a wholly-owned
subsidiary of Madison Investment Advisors, Inc., 6411 Mineral Point Road,
Madison, Wisconsin ("Madison"). We manage approximately $200 million in the
Mosaic family of mutual funds, which includes stock, bond and money market
portfolios. Madison, a registered investment advisory firm for over 24 years,
provides professional portfolio management services to a number of clients and
has approximately $3.5 billion under management. We share investment
management personnel with Madison.
We are responsible for the day-to-day administration of the Trust's
activities. Investment decisions regarding each of the Trust's funds can be
influenced in various manners by a number of individuals.
Generally, all decisions regarding a fund's average maturity, duration and
investment considerations concerning interest rate and market risk are the
primary responsibility of Madison's investment policy committee. The
investment policy committee is made up of the top officers and managers of
Madison.
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. The fee for the most recent fiscal year was
calculated as 5/8% of the average daily net assets of the Government and High
Yield Funds and 1/2% of the average daily net assets of the Bond Fund.
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. For the
Trust's last fiscal year, this fee was: Government Fund - 0.52%; High Yield
Fund -- 0.53%; and Bond Fund -- 0.61%.
Managing for the Year 2000
We are monitoring developments as they relate to the so-called "Millennium
Bug": the computer problem that may cause errors when the calendar reaches
January 1, 2000. The Millennium Bug may cause disruption in securities and
other markets that affect the national and global economy.
At Mosaic Funds, we are taking appropriate measures to help ensure that the
Millennium Bug does not interrupt our own portfolio and shareholder accounting
or our fund management operations. For example, we requested and received
written assurances of Year 2000 compliance from the mission critical companies
we use to manage fund records and information. Also, we plan to test all our
systems before the end of 1999 to help ensure that our operations will not be
compromised by the Millenium Bug.
Pricing of Fund Shares
The price of each fund share is based on its net asset value (or "NAV"). This
equals the total daily value of the respective fund's investments, minus its
expenses and liabilities, divided by the total number of outstanding shares.
Each fund's NAV is calculated at the close of the New York Stock Exchange each
day it is open for trading.
We use the market value o the securities in each fund in order to determine
NAV. We obtain the market value from one or more established pricing
services.
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
Each fund's net income is declared as dividends each business day. Dividends
are paid in the form of additional shares credited to your account at the end
of each calendar month, unless you elect in writing to receive a monthly
dividend check or payments by electronic funds transfer. Any net realized
capital gains would be distributed at least annually. (Please refer to
Mosaic's <i>"Guide to Doing Business"</i> for more information about dividend
distribution options.)
Taxes
Federal Tax Considerations
Each fund offered by the Trust will distribute to shareholders 100% of its net
income and net capital gains, if any.
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 <i>exchange</i> of any fund's shares for shares of another fund will be
treated as a <i>sale</i> of the fund's shares. As a result, any gain on the
transaction may be subject to federal, state or local income tax.
If you do not provide a valid social security or tax identification number,
you may be subject to federal withholding at a rate of 31% of dividends, any
capital gain distributions and redemptions. Any fine assessed against the
Trust that results from your failure to provide a valid social security or tax
identification number will be charged to your account.
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 following financial highlights table is intended to help you understand
each fund's financial performance for the past 5 years. Certain information
reflects financial results for a single fund share. The total returns in the
table represent the rate that an investor would have earned on an investment
in each fund (assuming reinvestment of all dividends and distributions). This
information for periods after September 30, 1996 has been audited by Deloitte
& Touche LLP, whose report, along with the Trust's financial statements, are
included in the annual report, which is available upon request. Other
independent auditors audited information for periods before October 1, 1996.
<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>
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
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
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.
<PAGE>
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.
Information on how to purchase and sell shares in any Mosaic Fund is provided
in a separate brochure entitled, "Guide to Doing Business." Mosaic's "Guide
to Doing Business" is incorporated by reference into this prospectus.
Please call our shareholder service department if you have any questions about
any Mosaic Income Trust Fund or if you would like a copy of any written fund
information. Additional information is also available at the Mosaic Funds
Internet Investment Center at http://www.mosaicfunds.com.Finally, you can review
and copy information about Mosaic 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.
Telephone Numbers
Shareholder Service
Washington, DC area: 703 528-6500
Toll-free nationwide: 888 670-3600
Mosaic Tiles (24 hour automated information)
Toll-free nationwide: 800 336-3063
Mosaic Funds, 1655 Fort Myer Drive, 10th Floor, Arlington, Virginia
22209-3108
SEC File Number 811-3616
<PAGE>
Mosaic's Guide to Doing Business
The information disclosed in this Guide is part of and incorporated in,
the prospectuses of Mosaic Government Money Market, Mosaic Tax-Free Trust,
Mosaic Equity Trust, Mosaic Income Trust and Mosaic Focus Fund.
Mosaic Funds
http://www.mosaicfunds.com
<PAGE>
An Introduction to Mosaic Services
This brochure is your guide to taking advantage of the many transaction
choices available to Mosaic shareholders.
Mosaic's flagship fund, Mosaic Investors, was launched in 1978. Since that
time, Mosaic Funds has grown to provide a wide range of investment options,
including stock, bond, tax-free and money market funds.
If any of the information in this Guide prompts questions, please call a
Mosaic account executive. Our toll-free nationwide number is 888-670-3600 and
our local number in the Washington, DC area is 703-528-6500. Account
executives are available Monday through Friday, from 9:00 am to 6:00 p.m.
Eastern time.
Mosaic Tiles, our 24-hour automated information line, can be reached at 800-
336-3063. Visit our Internet Investment Center for additional information,
including daily share prices: http://www.mosaicfunds.com.
Table of Contents
Shareholder Account Transactions
Confirmations and Statements
Changes to an Account
How to Open An Account
Minimum Initial Investment
By Check
By Wire
By Exchange
How to Purchase Additional Shares
By Check
By Wire
By Automatic Investment Plan
How to Redeem Shares
By Telephone or By Mail
By Wire
By Exchange
By Customer Check
By Systematic Withdrawal Plan
Special Redemption Rules for IRAs
How to Close an Account
Other Fees
Returned Investment Check Fee
Minimum Balance
Broker Fees
Other Fees
Retirement Plans
Traditional IRAs
Roth IRAs
Conversion Roth IRAs
Education IRAs
Employer Plans
Shareholder Account Transactions Confirmations and Statements
Daily Transaction Confirmation.
All purchases and redemptions (unless systematic) are confirmed in writing
with a transaction confirmation. Transaction confirmations are usually mailed
on the same day a transaction is posted to your account. Therefore, you
should receive the confirmation in the mail within a few days of your
transaction.
Quarterly Statement.
Quarterly statements are mailed at the end of each calendar quarter. The
statements reflect account activity for the most recent quarter. At the end
of the calendar year, the statement will reflect account activity for the
entire year.
We strongly recommend that you retain all daily transaction confirmations
until you receive your quarterly statements. Likewise, you should keep all of
your quarterly statements until you receive your year-end statement showing
the activity for the entire year.
Changes to an Account
To make any changes to an account, we recommend that you call an account
executive to discuss the changes to be made and ask about any documentation
that you may need to provide us. Though some changes may be made by phone,
generally, in order to make any changes to an account, Mosaic may require a
written request signed by all of the shareholders with their signatures
guaranteed.
Telephone Transactions.
Mosaic Funds has a number of telephone transaction options. You can exchange
your investment among the funds in the family, request a redemption and obtain
account balance information by telephone. Mosaic will employ reasonable
security procedures to confirm that instructions communicated by telephone are
genuine; and if it does not, it may be liable for losses due to unauthorized
or fraudulent transactions. These procedures can include, among other things,
requiring one or more forms of personal identification prior to acting upon
your telephone instructions, providing written confirmations of your
transaction and recording all telephone conversation with shareholders.
Certain transactions, including some account registration changes, must be
authorized in writing.
Certificates.
Certificates will not be issued to represent shares in any Mosaic fund.
How to Open a New Account
Minimum Initial Investment
o $1,000 for a regular account
o $500 for an IRA account*
o $100 for an Education IRA Plus account*
*Not available to Mosaic Tax-Free Trust accounts.
By Check
Open your new account by completing an application and sending it along with a
check payable to Mosaic Funds to:
Mosaic Funds
1655 Fort Myer Drive, Suite 1000
Arlington, VA 22209-3108
By Wire
Please call Mosaic before you wire money to ensure proper and timely
credit to your account.
When you open a new account by wire, you must promptly send us a signed
application. We cannot send any redemption proceeds from your account until
we have your signed application in proper form. Please wire money to:
Star Bank, NA
Cinti/Trust
ABA # 0420-0001-3
Credit Mosaic Acct # 48038-8883
(Shareholder name and account number)
<I>Wire Fee.</I>
There may be a charge of $6.00 for processing incoming wires of less than
$1,000.
By Exchange
You may open a new account by exchange from an existing account when your new
account will have the same registration and tax identification number as the
existing account. A new account application is required only when the account
registration or tax identification number will be different from the
application for the existing account. Exchanges may only be made into funds
that are sold in the shareholder's state of residence.
How to Purchase Additional Shares
Purchase Price.
Share prices (net asset values or "NAV") are determined every day that the New
York Stock Exchange is open. Purchases are priced at the next share price
determined after the purchase request is received in proper form by Mosaic.
Purchases and Uncollected Funds.
Sometimes a shareholder investment check or electronic transfer is returned to
Mosaic Funds unpaid. In other words, we sometimes get checks that bounce.
Mosaic has a procedure to protect you and other shareholders from loss
resulting from these items. We may delay paying the proceeds of any redemption
for 10 days or more until we can be determine that the check or other deposit
item (including purchases by Electronic Funds Transfer "EFT") used for
purchase of the shares has cleared. Such deposit items are considered
"uncollected" until Mosaic determines that they have actually been paid by the
bank on which they were drawn.
Purchases made by federal funds wire or U.S. Treasury check are considered
collected when received and not subject to the 10 day hold. All purchases
earn dividends from the day after the day of credit to a shareholder's
account, even while not collected.
Minimum Subsequent Investment
Subsequent investments may be made for $50 or more.
By Check
Please make your check payable to Mosaic Funds. Mail it along with an
investment slip or, if you don't have one, please write your fund and account
number (and the name of the fund) on your check. Mail it to:
Mosaic Funds
PO Box 640393
Cincinnati, OH 45264-0393
By Wire
You should call Mosaic before you wire money to ensure proper and timely
credit.
Please wire money to:
Star Bank, NA
Cinti/Trust
ABA # 0420-0001-3
Credit Mosaic Acct # 48038-8883
(Shareholder name and account number)
<I>Wire Fee.</I>
There may be a charge of $6.00 for processing incoming wires of less than
$1,000.
By Automatic Investment Plan
You can elect to have a monthly (or less frequent) automatic investment plan.
Mosaic will automatically credit your Mosaic account and debit the bank
account you designate with the amount of your automatic investment. The
automatic investment is processed as an electronic funds transfer (EFT).
To establish an automatic investment plan, complete the appropriate section of
the application or call an Account Executive for information. The minimum
monthly amount for an EFT is $100. You may change the amount or discontinue
the automatic investment plan any time. Mosaic does not charge for this
service.
How to Redeem Shares
Redemption Price.
Share prices (net asset values or "NAVs") are determined every day that the
New York Stock Exchange is open. Redemptions are priced at the next share
price determined after the redemption request is received in proper form by
Mosaic.
Signature Guarantees.
To protect your investments, Mosaic requires signature guarantees for certain
redemptions.
What is a signature guarantee? It is a certification by a financial
institution that knows you and recognizes your signature that your signature
on a document is genuine.
A signature guarantee helps Mosaic ensure the identity of the authorized
shareholder(s). If you anticipate the need to redeem large amounts of money,
we encourage you to establish pre-authorized bank wire instructions on your
account. Redemptions by wire to a pre-authorized bank and account may be in
any amount and do not require a signature guarantee. You can pre-authorize
bank wire instructions by completing the appropriate section of a new
application or by calling an Account Executive to inquire about any necessary
documents. A signature guarantee may be required to add or change bank wire
instruction on an account.
A signature guarantee is required for any redemption when:
(1) the proceeds are to be greater than $50,000 (unless proceeds are being
wired to a pre-authorized bank and account),
(2) the proceeds are to be delivered to someone other than you, as shareholder
of record,
(3) the proceeds are to be delivered to an address other than your address of
record, or
(4) you made any change to your registration or account privileges within the
last 15 days.
Mosaic accepts signature guarantees from banks with FDIC insurance, certain
credit unions, trust companies, and members of a domestic stock exchange. A
guarantee from a notary public is not an acceptable signature guarantee.
Redemptions and Uncollected Funds.
We may delay paying the proceeds of any redemption for 10 days or more until
we can determine that the check or other deposit item (including purchases by
Electronic Funds Transfer "EFT") used for purchase of the shares has cleared.
Such deposit items are considered "uncollected," until Mosaic determines that
the bank on which they were drawn has actually paid them. Purchases made with
federal funds wire or U.S. Treasury check are considered collected when
received and not subject to the 10-day hold.
By Telephone or By Mail
Upon request by telephone or in writing, we will send a redemption check up to
$50,000 to you, the shareholder, at your address of record only. A redemption
request for more than $50,000 or for proceeds to be sent to anyone or anywhere
other than the shareholder at the address of record must be made in writing,
signed by all shareholders with their signatures guaranteed. See section
"Signature Guarantees" above. Redemption requests in proper form received by
mail and telephone are normally processed within one business day.
Stop Payment Fee.
To stop payment on a check issued by Mosaic, call our Shareholder Service
department immediately.
Normally, Mosaic Funds charges a fee of $28.00, or the cost of stop payment,
if greater, for stop payment requests on a check issued by Mosaic on behalf of
a shareholder. Certain documents may be required before such a request can be
processed.
By Wire
With one business day's notice, we can send funds by wire transfer to the bank
and account designated on the account application or by subsequent written
authorization. If you anticipate the need to redeem large amounts of money, we
encourage you to establish pre-authorized bank wire instructions on your
account. Redemptions by wire to a pre-authorized bank and account may be in
any amount and do not require a signature guarantee. You can pre-authorize
bank wire instructions by completing the appropriate section of a new
application or by calling an Account Executive to inquire about any necessary
documents. A signature guarantee may be required to add or change bank wire
instruction on an account.
Redemptions by wire can be arranged by calling the telephone numbers on the
back page of your prospectus and this Guide to Doing Business. Requests for
wire transfer must be made by 4:00 p.m. Eastern time the day before the wire
will be sent.
Wire Fee.
There will be a $10 fee for redemptions by wire to domestic banks. Wire
transfers sent to a foreign bank for any amount will be processed for a fee of
$30 or the cost of the wire if greater.
By Exchange
You can redeem shares from one Mosaic account and concurrently invest the
proceeds in another Mosaic account by telephone when your account registration
and tax identification number are the same. There is no charge for this
service.
By Customer Check
If you requested check writing privileges and submitted a signature card, you
can write checks in any amount payable to anyone. Check writing privileges
are not available from Mosaic Equity Trust or Mosaic Focus Fund accounts.
A confirmation statement showing the amount and number of each check you write
will be sent to you. Mosaic does not return canceled checks, but will provide
copies of specifically requested checks. Mosaic charges a fee of $1.00 per
copy for frequent requests or a request for numerous copies.
<I>Stop Payment Fee.</I>
To stop payment on a customer check that you wrote, call an Account Executive
immediately.
Mosaic will honor stop payment requests on unpaid checks that you wrote for a
fee of $5.00. Oral stop payment requests are effective for 14 calendar days.
Unless you confirm your oral stop order in writing, it will be canceled after
14 calendar days.
Written stop payment orders are effective for six months. You can extend
their effectiveness for another six months by written request.
Ordering Customer Checks.
When you complete a signature card for check writing privileges an initial
supply of preprinted checks will be sent free of charge. The cost of check
reorders (currently $2.00) and of printing special checks will be charged to
the shareholder's account.
By Systematic Withdrawal Plan
You can elect to have a systematic withdrawal plan whereby Mosaic will
automatically redeem shares in your Mosaic account and send the proceeds to a
designated recipient. To establish a systematic withdrawal plan, complete the
appropriate section of the application or call an Account Executive for
information. The minimum amount for a systematic withdrawal is $100.
Shareholders may change the amount or discontinue the systematic withdrawal
plan anytime.
Electronic Funds Transfer Systematic Withdrawal.
A systematic withdrawal can be processed as an electronic funds transfer,
commonly known as EFT, to credit a bank account or financial institution.
Check Systematic Withdrawal.
Or it can be processed as a check that is mailed to anyone you designate.
Special Redemption Rules for IRAs
Because IRA owners must make a written withholding election for income tax
purposes when they redeem shares from their IRA, you must request IRA
redemptions in writing. Before you think you may need to redeem funds from
your IRA at Mosaic, call us for a form that contains the required tax election
provisions.
How to Close an Account
To close an account, you should call an Account Executive and request that
your account be closed. You cannot close your account by writing a check.
When you close your account, shares will be redeemed at the next determined
net asset value. You can close your account by telephone, wire transfer or by
mail as explained above in the section "How To Redeem Shares."
Other Fees
Returned Investment Check Fee.
Your account will be charged (by redemption of shares) $10.00 for items
deposited for investment that are returned unpaid for any reason.
Minimum Balance.
Mosaic reserves the right to involuntarily redeem accounts with balances of
less than $700. Prior to closing any such account, Mosaic will give you 30
days written notice, during which time you may increase the balance to avoid
having the account closed.
Broker Fees.
If you purchase or redeem shares through a securities broker, your broker may
charge you a transaction fee. This charge is kept by the broker and not
transmitted to Mosaic Funds. However, you can engage in any transaction
directly with Mosaic Funds to avoid such charges.
Other Fees.
Mosaic reserves the right to impose additional charges, upon 30 days written
notice, to cover the costs of unusual transactions. Services for which
charges could be imposed include, but are not limited to, processing items
sent for special collection, international wire transfers, research and
processes for retrieval of documents or copies of documents.
Retirement Plans
All Mosaic Funds except Mosaic Tax-Free Trust can be used for retirement plan
investments, including IRAs.
<I>Annual IRA Fee. </I>
Mosaic currently charges an annual fee of $12 per shareholder (not per IRA
account) invested in an IRA of any type at Mosaic. You can prepay this fee.
Traditional IRAs
Traditional Individual Retirement Accounts ("Traditional IRAs") may be opened
with a reduced minimum investment of $500. Even though they may be
nondeductible or partially deductible, traditional IRA contributions up to the
allowable annual limits may be made, and the earnings on such contributions
will accumulate tax-free until distribution. Traditional IRA contributions
that you deducted from your income taxes and the earnings on such
contributions will be taxable when distributed.
Mosaic Funds will provide you with an IRA disclosure statement with an IRA
application. The disclosure statement explains various tax rules that apply
to traditional IRAs. A separate application is required for IRA accounts.
Roth IRAs
Roth IRA may be opened with a reduced minimum investment of $500. Roth IRAs
are nondeductible; however, the earnings on such contributions will accumulate
and are distributed tax-free as long as you meet the Roth IRA requirements.
Mosaic Funds will provide you with an IRA disclosure statement with an IRA
application. The disclosure statement explains various tax rules that apply
to Roth IRAs. A separate application is required for IRA accounts.
Conversion Roth IRAs
You may convert all or part of your Traditional IRA into a Roth IRA at Mosaic.
Please call an Account Executive for a Conversion Roth IRA form if you want to
accomplish this conversion. You will be required to pay taxes on some or all
of the amounts converted from a traditional IRA to a Conversion Roth IRA. You
should consult your tax advisor and your IRA disclosure statement before you
accomplish this conversion.
Education IRAs
Mosaic Funds offers Education IRAs. Eligible investors may establish
Education IRAs with a reduced minimum investment of $100 as long as the
shareholder establishes and maintains an "Education IRA Plus" automatic
investment plan of at least $100 monthly.
The "Education IRA Plus" is designed to invest $41.66 each month into an
Education IRA, with the remaining $58.34 (or more) invested in another account
established by the parent or guardian of the Education IRA beneficiary. As a
result, each Education IRA Plus that is open for a full year will reach, but
not exceed, the annual $500 Education IRA limit. If you establish an
Education IRA Plus program in the middle of the year, you can make an
additional investment during the year to the Education IRA to make up for any
months you missed before your automatic monthly investments started.
Mosaic Funds will provide you with an Education IRA disclosure document with
an Education IRA application. The disclosure document explains various tax
rules that apply to Education IRAs. A separate application is required for
Education IRA accounts.
<I>Education IRA Fee.</I> Mosaic does not charge an annual fee on Education
IRA Plus accounts that have an active automatic investment plan of at
least $100 monthly or on Education IRA accounts of $5,000 or greater. All
other Education IRA accounts may be charged an annual fee of $12 for each
Education IRA beneficiary (not for each Education IRA account). You can
prepay this fee.
Employer Plans
Mosaic also offers SEP IRAs, SIMPLEs, 401(k) and 403(b) retirement plans.
Further information on the retirement plans available through Mosaic,
including minimum investments, may be obtained by calling Mosaic's
shareholder service department.
<PAGE>
Telephone Numbers
Shareholder Service
Washington, DC area: 703 528-6500
Toll-free nationwide: 1 888 670-3600
Mosaic Tiles (24 hour automated information)
Toll-free nationwide: 1 800 336-3063
The Mosaic Family of Mutual Funds
Mosaic Equity Trust
Mosaic Investors Fund
Mosaic Balanced Fund
Mosaic Mid-Cap Growth Fund
Mosaic Foresight Fund
Mosaic Focus Fund
Mosaic Income Trust
Mosaic High Yield Fund
Mosaic Government Fund
Mosaic Bond Fund
Mosaic Tax-Free Trust
Mosaic Tax-Free Arizona Fund
Mosaic Tax-Free Maryland Fund
Mosaic Tax-Free Missouri Fund
Mosaic Tax-Free Virginia Fund
Mosaic Tax-Free National Fund
Mosaic Tax-Free Money Market
Mosaic Government Money Market
This guide does not constitute an offering by the distributor in any
jurisdiction in which such offering may not be lawfully made.
1655 Fort Myer Drive, 10th Floor
Arlington, Virginia 22209-3108
mosgtdb199
<PAGE>
Statement of Additional Information
Dated April 30, 1999
For use with the prospectus of Mosaic Income Trust
dated April 30, 1999
Mosaic Income Trust
Government Fund
High Yield Fund
Bond Fund
1655 Fort Myer Drive
Arlington, VA 22209-3108
(888) 670-3600 or (703) 528-6500
This Statement of Additional Information is not a Prospectus. You should read
this Statement of Additional Information with the Prospectus of Mosaic Income
Trust bearing the date indicated above (the "Prospectus"). You can obtain a
copy of the Prospectus from Mosaic Funds at the address and telephone numbers
shown above.
Audited Financial Statements for the Trust for the fiscal year ended December
31, 1998 appear in the Trust's Annual Report to shareholders for that period.
The Report is incorporated herein by reference. You can get a copy of the
Report at no charge by writing or calling Mosaic Funds at the address and
telephone numbers shown above.
Table of Contents
TRUST HISTORY............................................... 2
DESCRIPTION OF THE TRUST ("Investment Objectives"
and "Implementation of Investment Policies")............. 2
Classification.............................................. 2
Investment Strategies and Risks............................. 2
Fund Policies............................................... 8
Fundamental Policies........................................ 10
Temporary Defensive Position................................ 12
MANAGEMENT OF THE FUNDS ("Management")
Board of Trustees..................................... 12
Management Information................................ 12
Compensation.......................................... 13
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES......... 14
INVESTMENT ADVISORY AND OTHER SERVICES ("Fees and
Expenses of the Funds" and "Management")................. 14
BROKERAGE ALLOCATION AND OTHER PRACTICES.................... 17
CAPITAL STOCK AND OTHER SECURITIES.......................... 18
PURCHASE, REDEMPTION AND PRICING OF SHARES ("Guide
to Doing Business," "Pricing of Fund Shares"
and "Dividends and Distributions")........................ 19
TAXATION OF THE TRUST ("Taxes").............................. 22
CALCULATION OF PERFORMANCE DATA ("Risk/Return Summary")...... 24
FINANCIAL STATEMENTS AND OTHER ADDITIONAL INFORMATION
("Financial Highlights") ................................. 26
APPENDIX - QUALITY RATINGS ("Implementation of Investment
Policies")............................................... 27
Note: The items appearing in parentheses above are cross references to
sections in the Prospectus that correspond to the sections of this Statement
of Additional Information.
TRUST HISTORY
Mosaic 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 High Yield Funds. The Government Fund was
originally known as the "A-Rated Fund" and the High Yield Fund was known as
the Maximum Income Portfolio before May 12, 1997. In June 1997, the Bond Fund
was added as a successor to Madison Bond Fund, Inc.
Throughout this Statement of Additional Information, we sometimes refer to the
Trust or to the Funds when describing matters that affect all three 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 FUND
Classification
The Trust is a diversified open-end management investment company, commonly
known as a mutual fund.
The Trust issues three series of shares: Government Fund shares, High Yield
Fund shares and Bond Fund shares.
Investment Strategies and Risks
Government Fund shares represent interests in a portfolio of Government
Securities. High Yield Fund shares represent interests in a portfolio of
medium and lower-grade debt securities, rated not lower than CCC or Caa or of
equivalent quality. Finally, Bond Fund shares represent interests in a
portfolio of investment grade corporate debt securities, Government Securities
and short-term fixed income securities.
The investment objectives of the Funds are described in the Prospectus. You
should also read the Prospectus for information about the Funds' principal
investment strategies and risks.
Each of the Trust's Funds are subject to the same general investment policies,
with the Bond Fund also seeking to preserve capital as a secondary objective.
However, the maturities, quality ratings and types of issuers of the bonds and
other debt instruments purchased will normally differ among the three 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 a Fund's assets (other
than the Government Fund) 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:
(1) U.S. Government securities;
(2) obligations of banks having total assets of $750 million or more;
(3) commercial paper having a quality rating appropriate to the respective
Fund of the Trust; and
(4) 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 Bond Fund will be in High Grade
securities with a portion of the fund in Medium Grade securities to improve
yields.
We expect that the preponderance of the High Yield Fund will be in Medium and
Low Grade securities.
Government and Bond Funds
We only purchase "investment grade" securities for the Government and Bond
Funds. 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.
High Yield Fund. The lowest rated securities we will purchase for the High
Yield Fund are those rated CCC or Caa. These are considered Low Grade
obligations. They may have speculative characteristics and may lack desirable
investments characteristics. Assurance of interest and principal payments or
maintenance of other terms of the investment over extended periods of time may
be small.
To the extent investments selected have higher yields than alternative
investments, they may be less liquid, have lower quality ratings and entail
more risk that their value could fall than comparable investments with lower
yields. To the extent we purchase lower-rated investments, the average credit
quality of the respective 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>
Name, Address and Age Positions Held with Trust Principal Occupation During
Past 5 Years
Frank E. Burgess+ Trustee and Vice President President and Director of
6411 Mineral Point Road Madison Investment Advisors,
Madison, WI 53705 Inc.; Trustee and Vice
Born 08/04/1942 President of each Mosaic fund
and Vice President of Madison
Mosaic.
Thomas S. Kleppe* Trustee Trustee of each Mosaic fund;
7100 Derby Road Chairman of the Board of
Bethesda, MD 20817 Presidential Savings Bank, FSB;
Born 07/01/1919 Retired US Congressman and
Presidential Cabinet Secretary.
James R. Imhoff, Jr.* Trustee Trustee of each Mosaic fund;
429 Gammon Place Chairman and CEO of First Weber
Madison, WI 53719 Group, Inc. (residential real
Trustee estate brokers) of Madison, WI.
Born 05/20/1944
Lorence D. Wheeler* Trustee Trustee of each Mosaic fund;
4905 W. 60th Avenue Pension Specialist for CUNA
Arvada, CO 80003 Mutual Group (insurance); formerly
Born 01/31/1938 President of Credit Union Benefits
Services, Inc. (a provider of
retirement plans and related
services for credit union
employees nationwide).
Katherine L. Frank+ President President of each Mosaic Fund;
6411 Mineral Point Road Vice Pres and Principal of Madison
Madison, WI 53705 Investment Advisors, Inc.;
Born 11/27/1960 President of Madison Mosaic.
Julia M. Nelson+,** Vice President Vice President and Chief
1655 Fort Myer Drive Operating Officer of each Mosaic
Arlington, VA 22209 fund; Principal of Mosaic Funds
Born 05/17/1958 Distributor, LLC; Vice
President of Madison Mosaic.
Jay R. Sekelsky+,** Vice President Vice Pres. of each Mosaic fund;
6411 Mineral Point Road Vice President and Principal of
Madison, WI 53705 Madison Investment Advisors, Inc;
Born 9/14/1959 Vice President of Madison Mosaic.
Christopher C. Berberet+,**Vice President Vice Pres. of each Mosaic fund;
6411 Mineral Point Road Vice President and Principal of
Madison, WI 53705 Madison Investment Advisors, Inc;
Born 07/31/1959 Vice President of Madison Mosaic.
W. Richard Mason+,** Secretary Secretary and General Counsel of
1655 Ft. Myer Drive each Mosaic fund; Principal of
Arlington, VA 22209 Mosaic Funds Distributor, LLC;
Born 05/13/1960 Genl. Counsel of Madison Mosaic.
</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 January 29, 1999, the shareholders of record that held five percent or
more of the Trust were: For the Bond Fund - Donald L. McConaghy, IRA, 505 16th
St., Baraboo, WI 53913 (12%), Madison Investment Advisory Profit Sharing Plan,
6411 Mineral Point Rd., Madison, WI 53705 (10%), Peter De Cicco, 2000 N. Court
St., #AF, Fairfield, IA 52556 (8%) and Star Bank, Trustee for Mary Ann
Arsenault, 28629 Sunnydate St, Livonia, MI 48154; for the
Government Fund -- BFIMC Money Purchase Pension Plan, P.O. Box 1118,
Cincinnati, OH 45201-1118 (12%) and Star Bank, Trustee for Geraldine
Schaeffer, 2201 L St., NW, Suite 109, Washington, DC 20037-1410
(6%); and for the High Yield Fund -- Charles Schwab & Co for the benefit of
customers, 101 Montgomery Street, San Francisco, CA 94104 (7%).
As of January 29, 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 Funds and 10% of the 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, High Yield Fund - $40,518 and
Bond Fund - $4,917.
During the short fiscal period ended December 31, 1997, aggregate advisory
fees paid were as follows: Government Fund - $26,628 and 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 High Yield Fund - $40,413 and $42,986, respectively.
For the fiscal years ended December 31, 1997 and 1996, aggregate advisory fees
paid by the Bond Fund were $12,598 and $23,878, 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 for the
Government and High Yield Funds and 0.5% per year for the Bond Fund of average
daily net assets during the month. Such percentage does not decrease as net
assets increase. We can waive or reduce this fee during any period. We can
also reduce our fee on a permanent basis, without any requirement for consent
by the affected Fund or its shareholders, under such terms as we may
determine, by written notice to the Trust.
We agreed to be responsible for the fees and expenses of the Trustees and
officers of the Trust who are affiliated with us. We are also responsible for
the Trust's various promotional expenses (including distributing Prospectuses
to potential shareholders).
Payments to Third Parties. We can make payments out of our investment
advisory fee to other persons, including broker-dealers that make one or more
of the Trust's funds available to investors pursuant to any "no transaction
fee" network or service they provide. Under regulations of the Securities and
Exchange Commission, such arrangements are permissible in connection with
distributing investment company shares, if the payments of the shared fee
amounts are made out of our own resources.
Services Contract.
The Trust does not have any officers or employees who are paid directly by the
Trust. The Trust entered into a Services Agreement with us for operational
and other services required by its Funds. Such services may include:
* The functions of shareholder servicing agent and transfer agent.
* Bookkeeping and portfolio accounting.
* Handling telephone inquiries, cash withdrawals and other customer service
functions (including monitoring wire transfers).
* Providing appropriate supplies, equipment and ancillary services necessary
to conduct of its affairs.
* Calculating net asset value.
* Arranging for and paying the Custodian.
* Arranging for and paying the Trust's independent accountants.
* Arranging for and paying the Trust's legal counsel.
* Registering the Trust and its shares with the Securities and Exchange
Commission and notifying any applicable state securities commissions of its
sale in their jurisdiction.
* Printing and distributing prospectuses and periodic financial reports to
current shareholders.
* Trade association membership.
* Preparing shareholder reports, proxy materials and holding shareholder
meetings.
We provide all these services to each Fund for a fee calculated as a
percentage of average daily net assets. This fee is reviewed and approved at
least annually by the Trustees and is compared with the fee paid by other
mutual funds of similar size and investment objective to determine if it is
reasonable. The current fees are stated in the Trust's Prospectus.
Our payment under the Services Agreement is in addition to and independent of
payments made pursuant to the Investment Advisory Agreement. We also provide
such services to Mosaic Equity Trust, Mosaic 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, High Yield Fund shares and Bond 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 subaccounts.
However, we reserve the right to impose the same minimum initial investment
requirement that would apply to regular accounts if it seems that the cost of
carrying a particular subaccount or group of subaccounts is likely to be
excessive.
The Trust may provide and charge for subaccounting services that we determine
exceed those services that can be provided without charge. The availability
and cost of such additional services will be determined in each case by
negotiation between Mosaic and the parties requesting the additional services.
We are not presently aware of any such services for which a charge will be
imposed.
Crediting of Investments.
We can reject any investment in the Trust for any reason and may at any time
suspend all new investment in any Fund. We may also, in our discretion,
decline to recognize an investment by funds wired for credit until such funds
are actually received by the Trust. This is because we may be responsible for
any losses resulting from changes in a Fund's net asset value that happen
because we failed to receive funds from a shareholder to whom recognition for
investment was given in advance of receipt of payment.
If shares are purchased by wire and the wire is not received or if shares are
purchased by a check that, after deposit, is returned unpaid or proves
uncollectible, then the share purchase may be canceled immediately. The
shareholder that gave notice of the intended wire or submitted the check will
be held fully responsible for any losses incurred by us, the Trust or the
Distributor.
Foreign Checks.
Checks drawn on foreign banks will not be considered received until we have
actual receipt of payment in immediately available US dollars after submitting
the check for collection. Collection of such checks through the international
banking system may require 30 days or more. We will pass the cost of such
collection to you if you invest using a foreign check.
Purchase Orders from Brokers.
An order to purchase shares that we receive from a securities broker will be
considered received in proper form for the net asset value per share
determined as of the close of business of the New York Stock Exchange on the
day of the order. However, the broker must assure us that it received the
order from its customer prior to that time.
Shareholders who invest in the Trust through a broker may be charged a
commission for handling the transaction. A shareholder may deal directly with
us anytime to avoid the fee.
Redemptions and Checkwriting.
Redemptions will take place at the NAV for the day we receive the redemption
order in proper form. A redemption request may not be in proper form unless
we have a signed account application from you or your application is submitted
with the withdrawal request.
If you draw a check against your account, it will not be considered in proper
form unless there are sufficient collected funds available in the account on
the day the check is presented for payment. Generally, it takes up to 10 days
before checks deposited in your account are collected. Therefore, if you plan
to write a check against your account shortly after making an investment, we
recommend you call us to make sure that your funds will be available.
Unusual Circumstances Resulting in Suspension of Payments.
We will use our best efforts in normal circumstances to handle redemptions
timely. However, we may for any reason we deem sufficient suspend the right
of redemption or postpone payment for any shares in the Trust for any period
up to seven days.
Our sole responsibility with regard to redemptions shall be to process timely
redemption requests in proper form. Neither the Trust, its affiliates, nor
the Custodian can accept responsibility for any act or event which has the
effect of delaying or preventing timely transfers of payment to or from
shareholders.
Payment for shares in any Fund may be suspended or delayed for more than seven
days only in limited circumstances. These occur (1) during any period when
the New York Stock Exchange is closed, other than customary weekend and
holiday closings; (2) when trading on such Exchange is restricted, as
determined by the Securities and Exchange Commission; or (3) during any period
when the Securities and Exchange Commission has by order permitted such
suspension.
Final Payments on Closed Accounts.
The redemption payment you receive when you close your account will normally
have all accrued dividends included. However, when an account is closed, we
may make payment by check of any final dividends declared but not yet paid to
the date of the redemption that closed the account. The payment may be made
on the same day such dividends are paid to other shareholders, rather than at
the time the account is closed.
Inter-Fund Exchange.
Funds exchanged between shareholder accounts will earn their final day's
dividend on day of exchange.
We reserve the right, when we deem such action necessary to protect the
interests of Fund shareholders, to refuse to honor withdrawal requests made by
anyone purporting to act with the authority of another person or on behalf of
a corporation or other legal entity. Each such individual must provide a
corporate resolution or other appropriate evidence of his or her authority or
satisfactory identity. We reserve the right to refuse any third party
redemption requests.
Payments in Kind.
If, in the opinion of the Trustees, extraordinary conditions exist which make
cash payments undesirable, payments for any shares redeemed may be made in
whole or in part in securities and other property of the Trust. However, the
Trust elected, pursuant to rules of the Securities and Exchange Commission, to
permit any shareholder of record to make redemptions wholly in cash to the
extent the shareholder's redemptions in any 90-day period do not exceed the
lesser of 1% of the aggregate net assets of the Trust or $250,000.
Any property of the Trust distributed to shareholders will be valued at fair
value. In disposing of any such property received from the Trust, a
shareholder might incur commission costs or other transaction costs. There is
no assurance that a shareholder attempting to dispose of any such property
would actually receive the full net asset value for it. Except as described
herein, however, we intend to pay for all share redemptions in cash.
Address Changes and Lost Shareholder Accounts.
It is your obligation to inform us of address changes.
We will exercise reasonable care to ascertain your correct address if you
become "lost" in our records. We will conduct two database searches for you
and use at least one information database service. The search will be
conducted at no cost to you. We will not, however, perform such searches if
your account is less than $25, if you are not a natural person or we receive
documentation that you are deceased. If we cannot locate you after such
procedures, your account may be escheated to the State of your last residence
in our records.
No interest will accrue on amounts represented by uncashed distribution or
redemption checks.
Dividend Payments.
Dividends are payable to you at the time they are determined. They are not
actually paid in the form of additional shares of the Fund credited to your
account until the end of each calendar month (or normally when the account is
closed, if sooner), unless you make a written election to receive dividends in
cash.
Substantially all of each Fund's accumulated net income is declared as
dividends each business day. We calculate accumulated net income for each
Fund just prior to calculating the Fund's net asset value. The amount of such
net income reflects interest income (plus any original discount earned less
premium amortized) and expenses accrued by the Fund since the previously
declared dividend.
Realized capital gains and losses and unrealized appreciation and depreciation
are reflected as changes in NAV per share of each Fund. Premium on securities
purchased is amortized daily as a charge against income.
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", the performance of the High Yield Fund to mutual funds
categorized as "High Current Yield Funds" and the performance of the
Bond Fund 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. (See the back cover of the
Prospectus for information about obtaining this information.)
APPENDIX - QUALITY RATINGS
Any investment we make will have a "quality rating" determined principally by
ratings assigned by nationally recognized statistical rating organizations
(NRSRO). Otherwise, we will assign a rating according to comparable standards
when there is no published rating or when published ratings differ or are
considered obsolete.
Quality ratings will often be determined by referring to the ratings assigned
by two major NRSROs that rate municipal securities: Moody's Investors Service,
Inc. (Moody's) and Standard and Poor's Corporation (S&P). In cases where more
than one NRSRO rates an issue, it will be graded according to whichever rating
we deem appropriate. In cases where no organization rates an issue, we will
grade it using the following standards that we believe are comparable to those
followed by the NRSROs.
Bonds. Moody's uses ratings Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C; S&P uses
ratings AAA, AA, A, BBB, BB, B, CCC, CC and C. Municipal bonds rated Aaa or
AAA are judged to be of the best quality; interest and principal are secure
and prices respond only to market rate fluctuations. Bonds rated Aa or AA are
also judged to be of high quality, but margins of protection for interest and
principal may not be quite as good as for the highest rated securities.
Municipal bonds rated A are considered upper medium grade by each
organization. Protection for interest and principal is deemed adequate but
susceptible to future impairment, and market prices of such obligations, while
moving primarily with market rate fluctuations, also may respond to economic
conditions and issuer credit factors.
Bonds rated Baa or BBB are considered medium grade obligations. Protection
for interest and principal is adequate over the short term, but these bonds
may have speculative characteristics over the long term and therefore may be
more susceptible to changing economic conditions and issuer credit factors
than they are to market rate fluctuations.
The Government and Bond Funds do not invest in issues rated below Baa or BBB
or equivalent unrated issues.
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.
Issues rated Caa or CCC and below may also be highly speculative, of
poor standing and may even be in default or present other elements of
immediate danger to payment of interest and principal.
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.
