1933 Act Registration No. 33-
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [ ] Post-Effective
Amendment No. Amendment No.
MOSAIC INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (703) 528-3600
1655 Ft. Myer Drive, Suite 1000
Arlington, Virginia 22209
----------------------------------------------------------------
(Address of Principal Executive Offices)
W. Richard Mason, Esq.
1655 Ft. Myer Drive, Suite 1000
Arlington, Virginia 22209
(Name and Address of Agent for Service)
Approximate date of proposed public offering: As soon as possible after
the effective date of this Registration Statement.
The Registrant has registered an indefinite amount of securities under
the Securities Act of 1933 pursuant to Section 24(f) under the
Investment Company Act of 1940; accordingly, no fee is payable herewith. A
Rule 24f-2 Notice for the Registrant's most recent fiscal year ended December
31, 1998 was filed with the Commission on or about February 16, 1999.
It is proposed that this filing will become effective on June 1, 1999
pursuant to Rule 488 of the Securities Act of 1933.
<PAGE>
MOSAIC INCOME TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Item of Part A of Form N-14 Location in Prospectus
1. Beginning of Cross Reference Sheet; Cover Page
Registration Statement
and Outside Front
Cover Page of
Prospectus
2. Beginning and Outside Table of Contents; Back Cover
Back Cover Page of
Prospectus
3. Synopsis and Risk Fee Table; Synopsis Information;
Risks Factors
4. Information about the Information about the Transaction
Transaction (Terms; Description of Securities;
Reasons for Transaction; Tax
Consequences; Pro Forma capitalization)
5. Information about the Information about the Intermediate Term
Registrant Bond Fund:
(Risk/Return Summary: Investments,
Risks and Performance; Fee Table;
Investment Objectives; Implementation of
Investment Policies; Management; Pricing
of Fund Shares; Dividends and Distributions;
Taxes; and Financial Highlights
6. Information about the Information about Mosaic Bond Fund
Company Being Acquired (Incorporated by reference in Mosaic
Income Trust Prospectus dated April
30, 1999)
7. Voting Information Cover Page; Summary; Information
about the Transaction; Voting
Information
8. Interest of Certain Inapplicable
Persons and Experts
9. Additional Information Inapplicable
Required for
Reoffering by Persons
Deemed to be
Underwriters
Part B
10. Cover Page Cover Page
11. Table of Contents Statement of Additional Information
Dated June 1, 1999
12. Additional Information Statement of Additional Information
About the Registrant Dated June 1, 1999
13. Additional Information Statement of Additional Information
about the Company Being of Mosaic Income Trust dated April 30,
Acquired 1999
14. Financial Statements Incorporated by reference; Pro
Forma Financial Statements
Item of Part C of Form N-14
15. Indemnification Indemnification of
Trustees/Directors
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
<PAGE>
SUBJECT TO COMPLETION, PRELIMINARY COPY
Prospectus Dated June 1, 1999
Mosaic Income Trust
1655 Ft. Myer Drive
Arlington, Virginia 22209
888-670-3600
June 1, 1999
Dear Shareholder:
The attached proxy materials seek your approval to merge Mosaic Income Trust's
Mosaic Bond Fund into a reformulated Mosaic Income Trust bond fund, to be
known as Mosaic Intermediate Income Fund. This merger represents a logical
step in the progressive restructuring of the Mosaic family of funds to best
utilize management expertise and provide shareholder value.
Your board of trustees unanimously recommends a vote FOR this proposal. If
the merger is approved, you will still own shares in a bond fund with the
objective of providing monthly income and distributing that income as
dividends. Under its revised objectives, the fund will be able to invest in a
broader range of securities as described in the attached prospectus.
Specifically, you will own shares in an intermediate term bond fund that will
invest at least 65% of its assets in investment grade bonds, while retaining
the option to invest up to 35% of assets in bonds rated as low as "B."
In contrast, your current Mosaic Bond Fund allows investment only in bonds
rated "BBB" or "Baa" or better. By allowing Intermediate Income Fund to
invest in what are known as "high-yield securities," your fund managers
anticipate opportunities for improved yield and total return. The Fund will
invest in such securities only when the managers believe that the
creditworthiness of the issuer is stable or improving, and when the potential
return of investing in such securities justifies the higher level of risk.
Consistent with the existing Mosaic Bond Fund, Intermediate Income will only
invest in high-yield securities having a final maturity of less than 10 years.
This maturity cap is intended to help temper the impact of changing interest
rates on the value of the portfolio.
Why merge these funds?
* A merger will result in a larger pool of assets and allow for more efficient
management. Efficiency of management will allow total expenses to remain
competitive.
* With increased assets, the Mosaic Intermediate Income Fund will have the
opportunity to purchase or sell securities at the more favorable prices that
can often be obtained when trading in larger blocks of securities.
* The Mosaic Intermediate Income Fund will begin operation on July 1, 1999,
with the ability to pick the best opportunities from a broad range of
government and corporate bonds. Your managers and your Trustees believe that
it will be in the best interests of Mosaic Bond Fund's shareholders to be a
part of this exciting new fund as it combines what management judges to be the
best aspects of two existing funds.
If approved, you will receive shares in the Mosaic Intermediate Income Fund
equal in value to your current investment in the Bond Fund. The proposed
merger is designed to be a tax-free reorganization so that you will not
recognize any income as a result of the merger and your tax basis in the Bond
Fund will carry over to the shares of the Mosaic Intermediate Income Fund.
PLEASE REVIEW THE ENCLOSED PROSPECTUS AND SEND US YOUR VOTED PROXY AS SOON AS
POSSIBLE.
Thank you. Call us if you have any questions.
Sincerely,
(signature) (signature)
Katherine L. Frank Frank E. Burgess
President, Mosaic Income Trust President, Madison Investment Advisors
This prospectus sets forth concisely the information about Mosaic Income
Trust's new Mosaic Intermediate Income Fund series that a prospective investor
ought to know before investing. You should retain this prospectus for future
reference.
Although your Trustees are soliciting your proxy vote, when the prospectus
speaks about "we" or "us," it refers to your fund's manager, Madison Mosaic.
Additional information about Mosaic Income Trust (including a Statement of
Additional Information that is incorporated by reference into and dated the
same day as this prospectus) has been filed with the Securities and Exchange
Commission and is available upon oral or written request and without charge.
Contact Mosaic Funds shareholder service department at the address and phone
number above.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
Table of Contents
President's Letter Cover Page
Fee Table, Synopsis Information and Risk Factors 3
Information about the Transaction x
Information about Mosaic Intermediate Income Fund x
Risk/Return Summary: Investments, Risks and
Performance x
Fee Table x
Investment Objectives x
Implementation of Investment Policies x
Management x
Pricing of Fund Shares x
Dividends and Distributions x
Taxes x
Financial Highlights x
Information about Mosaic Bond Fund x
Voting Information x
Notice to Banks, Broker-Dealers and Voting
Trustees and Their Nominees x
<PAGE>
Fee Table, Synopsis Information and Risk Factors
Fee Table
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Intermediate Income Fund and compares them with current
expenses for your fund. The Merger is not expected to affect the expenses of
the Intermediate Income Fund.
Shareholder Fees (fees paid directly from your investment)
Intermediate
Your Fund Income Fund
Maximum Sales Charge (Load) Imposed on Purchases None None
Maximum Deferred Sales Charge (Load) None None
Redemption Fee None None
Exchange Fee None None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
Your Fund Intermediate Income Fund
Management Fees 0.50% 0.63%
12b-1 Fees None None
Other Expenses 0.61% 0.45%
Total Fund Operating
Expenses 1.11% 1.08%
Example: This Example is intended to help you compare the cost of investing
in the Intermediate Income Fund with the cost of investing in your fund and
other mutual funds. For simplicity, fee and expense percentages above are
rounded to two decimal places.
The Example assumes that you invest $10,000 for the time periods indicated.
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
Your Fund $113 $353 $612 $1,352
Intermediate Income Fund $110 $343 $595 $1,317
Synopsis Information
Your Trustees determined that it will be in the best interests of the
shareholders of your fund and the current shareholders of what is now known as
the High Yield Fund to merge your fund's assets into the High Yield Fund while
simultaneously changing the investment policies of the High Yield Fund. The
Intermediate Income Fund will have slightly lower total expenses than either
fund separately.
Why did the Trustees reach these decisions?
Consolidation of Funds within Mosaic. Since the launch of Mosaic funds in
June 1997, the funds' advisor has sought to utilize management expertise and
maximize shareholder value across the fund family. The realignment and merger
of funds has been a natural consequence of this effort.
Small size of your fund. Mosaic Bond Fund is the smallest of all the Mosaic
funds. In light of the higher fees that your fund will likely have to bear at
its current small size, it will become more difficult to achieve your fund's
investment objectives. The Merger should increase the size of the
Intermediate Income Fund, thereby accomplishing certain economies of scale and
existing duplications.
Limitations on investment opportunities for your fund. The small size of your
fund also prevents us from purchasing or selling securities for the fund at
the more favorable prices that can sometimes be obtained when trading in
larger blocks of securities.
The independent Trustees retained independent counsel to advise them with
respect to their fiduciary duties in connection with approval of the proposed
Merger.
In light of these unique circumstances, your trustees decided to combine these
two funds and create a single new fund to be known as the Intermediate Income
Fund.
Comparison of Differences Between Your Fund and the Intermediate Income Fund
The Intermediate Income Fund will be a series of Mosaic Income Trust like your
current Bond Fund. As a result, like all Mosaic Income Trust funds, we will
continue to seek to provide you monthly dividends by investing in bonds and
other debt securities. However, the Intermediate Income Fund will differ from
your current fund in two ways: (1) it will have different investment
objectives and policies and (2) it will have different expenses. All other
matters (investment advisor, distributor, investment and redemption
procedures, exchange and checking privileges, pricing methods and all
shareholder services) will be identical to those you have now.
1. New Investment Objectives and Policies
Objectives
The principal investment objective of your fund remains the same: Receiving
income from bonds and distributing the income to you as dividends.
Intermediate Income Fund's objectives will allow for an expanded range in
seeking higher yields and total returns. While the Fund will be actively
managed to seek the best risk-adjusted returns and to attempt to sustain
existing capital, the Fund will not primarily be a capital preservation
instrument, in the manner of money market, which is restricted to extremely
short-term debt instruments. Nevertheless, like your current Mosaic Bond Fund,
the Intermediate Income Fund's investment policies are to generally invest in
securities with an average maturity of 10 years or less, thereby acting to
help preserve capital: Generally, the shorter the maturity of a bond, the
less the fluctuation in the bond's price in response to changing interest
rates.
Policies
A significant policy difference between your fund and the Intermediate Income
Fund is that we may invest up to 35% of the Intermediate Income Fund in bonds
rated below "investment grade." The Intermediate Income Fund can hold bonds
rated BB or B by nationally recognized statistical rating organizations. The
Trustees authorized this flexibility in order to help the Intermediate Income
Fund provide a better yield, especially during periods of low interest rates
such as we are now experiencing.
However, the Intermediate Income Fund, with at least 65% of its assets in
investment grade bonds, is clearly not a junk bond fund. Rather, it is
intended to be a general intermediate term bond fund with the flexibility to
invest a limited percentage of its assets in such higher yielding bonds.
The risks involved with bonds that are below investment grade are described
below under "Comparison of Risks Between Your Fund and the Intermediate Income
Fund" and again in the risk discussions in the "Information About the
Intermediate Income Fund" beginning on page x.
2. Fees and Expenses
Total Expense Ratio
As of the end of your fund's most recent fiscal year, its total annual expense
ratio was 1.11%. The Intermediate Income Fund's total annual expense ratio
has been approved by the Trustees to be 1.08%.
Although the total expense ratio for the Intermediate Income Fund will be
lower than that for your fund, you should understand that expenses for both
funds is divided between management fees and all other operational and
administrative expenses ("other expenses"). The lower total expense ratio
will be achieved because other expenses will be 0.45% -- much lower than the
0.61% your fund is currently paying. However, the management fee of the
Intermediate Income Fund is 0.625% compared with the current management fee of
your fund at 0.50%. Total expenses will be in line with other funds in Mosaic
Income Trust.
How Will the Transaction Be Accomplished?
The Trustees approved an Agreement and Plan of Merger (the "Plan") that
describes the technical details of how the two funds will merge. (You can
receive a copy of the Plan at no cost by calling us at 888-670-3600.) The
Plan provides for substantially all of the assets of your fund to be acquired
by the Intermediate Income Fund in exchange for shares of the Intermediate
Income Fund. It also provides for the assumption by the Intermediate Income
Fund of certain identified liabilities of your fund (the transaction is
referred to as the "Merger"). Following the Merger, shares of the
Intermediate Income Fund will be distributed to the then-existing shareholders
of your fund.
The Merger is being structured as a tax-free reorganization for federal income
tax purposes. This means that if the Merger is approved, you should not incur
any tax consequences from the transaction. Your tax basis in your Bond Fund
shares should carryover to your Intermediate Income Fund shares.
Comparison of Risks
Except for the Intermediate Income Fund's policy of permitting a limited
investment in bonds rated as low as B, the principal risk factors of investing
in the Intermediate Income Fund are generally the same as those of your fund.
Specifically, both funds have:
Interest Rate Risk: When interest rates or general demand for fixed-income
securities change, the value of these bonds change. Bonds can lose value when
there is a rise in interest rates.
Call Risk: If a bond issuer "calls" a bond (pays it off at a specified price
before it matures), the affected fund would have to reinvest the proceeds at a
lower interest rate. It may also experience loss if the bond is called at a
price lower than what we paid.
Tax-Related Risk: You can receive a taxable distribution of capital gain. You
may also owe taxes if you sell your shares at a price that is higher than the
price you paid for them.
New Risks
Your fund never invested in bonds below investment grade (BBB). At any
particular time, the Intermediate Income Fund may not own any bonds rated
below investment grade, either. However, the Intermediate Income Fund gives
us the flexibility to invest up to 35% of its assets in bonds rated as low as
B. Therefore, you should understand the risks associated with the type of
high yield bonds the Intermediate Income Fund may own:
* The high yield bond market is relatively young so it is difficult to
identify trends regarding these types of bonds.
* Prices of high yield bonds may be less sensitive to interest rates than
other bonds, but more sensitive to adverse economic changes or individual
corporate developments.
* High yield bond values are very sensitive to market expectations about the
credit worthiness of the issuing companies.
* There may be "thin" trading of these bonds during times of market distress.
* Interest income may be recognized as taxable even though payment of such
interest is not received in cash.
* Changes in credit ratings by the major credit rating agencies may lag
changes in the credit worthiness of the issuer.
Reduced Risks
One risk particular to your fund is less applicable to the Intermediate Income
Fund. This risk is related to the Mosaic Bond Fund's objective of capital
preservation. In pursuit of this objective, your managers may shorten
portfolio maturity until they perceive that a period of market volatility has
passed. This may cause the Mosaic Bond Fund to underperform the general bond
market during particular periods and may generate greater capital gains
potential. With Intermediate Term Bond, such defensive actions are expected
to be less likely, and any drastic changes of this sort would only occur as an
unusual temporary measure rather than as a matter of fund objective.
Potential Benefits
The most important change from a fund management perspective is the loosening
of restrictions on management. Specifically, investors who have a primary
interest in yield will potentially benefit from the freer hand their managers
will have in purchasing higher yielding bonds. As previously noted, there are
a number of likely benefits to being in a fund with the greater assets that
will be available following the merger.
Information About the Transaction
Summary of Terms of the Plan
You are asked to approve the transfer of substantially all of the assets of
the Mosaic Bond Fund series of the Trust in exchange for shares of the
Intermediate Income Fund, an existing series of the Trust. The Plan requires
the Intermediate Income Fund to assume certain identified liabilities of your
fund. The Plan also calls for the Trust to distribute shares of the
Intermediate Income Fund series to the shareholders of your fund. (The
transaction is referred to in this document as the "Merger.")
As provided in the Plan, shareholders will not pay any of the expenses
involved in accomplishing the Merger. Any expenses will be paid by the
advisors to the Trust.
At or prior to the Merger, the Plan provides that your fund will declare a
dividend and distribution. This distribution, together with all previous
distributions, will have the effect of distributing to your fund's
shareholders: (1) all of the fund's investment company taxable income for the
taxable year ending on or prior to the day of the Merger; and (2) all of its
net capital gains realized in all taxable years ending on or prior to that day
(after reductions for any capital loss carryforward).
The consummation of the Merger is subject to the conditions set forth in the
Plan, including approval by your fund's shareholders and receipt of an opinion
of counsel regarding the Federal income tax consequences of the Merger. The
Plan can be terminated at any time prior to the Merger.
If the Merger is not approved by your fund's shareholders, the Trustees will
continue to operate your fund under its existing arrangements. However, due
to its small size, if the Merger is not approved, we will likely reexamine the
level of expenses your fund must pay upon expiration of the Trust's current
services agreement in July 1999.
Description of Securities to be Issued
As a result of the Merger, each shareholder of record of Mosaic Bond Fund will
become the record holder of that number of full and fractional shares of the
Intermediate Income Fund having an aggregate net asset value equal to the
aggregate net asset value of the shareholder's shares of your fund. These
calculations are made in accordance with the Plan as of the close of
business on the date that your Bond Fund assets are exchanged for shares of
the Intermediate Income Fund.
Since both your fund and the Intermediate Income Fund are series of Mosaic
Income Trust, there are no material differences between the rights of
shareholders of your fund and the rights of shareholders of the Intermediate
Income Fund.
Reasons for the Merger
Your trustees, including the trustees who are not "interested persons," as
that term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), have concluded that it is in the best interests of both funds for
the Merger to take place. The Trustees have concluded that the interests of
the Trust's shareholders will not be diluted as a result of the transactions
contemplated by the Merger. Therefore, they have submitted the Merger for the
approval by you.
Why have your trustees reached these conclusions?
Consolidation of Funds within Mosaic. Since the launch of Mosaic funds in
June 1997, the funds' advisor has sought to utilize management expertise and
maximize shareholder value across the fund family. The realignment and merger
of funds has been a natural consequence of this effort.
Small size of your fund. Mosaic Bond Fund is the smallest of all the Mosaic
funds. As a result, the Trustees recognized that its transfer agent,
administrative and other expenses must increase substantially at the
expiration of its current services agreement in July 1999. In light of the
higher fees that your fund will likely have to bear at its current small size,
it will become more difficult to achieve your fund's investment objectives.
The Merger should increase the size of the Intermediate Income Fund, thereby
accomplishing certain economies of scale while at the same time eliminating
duplicative administrative expenses that are incurred with the operation of
two distinct funds.
Limitations on investment opportunities for your fund. The small size of your
fund also prevents us from purchasing or selling securities for the fund at
the more favorable prices that can sometimes be obtained when trading in
larger blocks of securities. As the fund continues to diminish in size, this
limitation will also adversely affect your fund's ability to achieve its
investment objectives.
The independent Trustees retained independent counsel to advise them with
respect to their fiduciary duties in connection with approval of the proposed
Merger.
Tax Consequences.
Before the Merger happens, the Trust will receive an opinion of counsel that
the Merger has been structured so that no gain or loss will be
recognized by your fund or it shareholders for federal income tax purposes as
a result of the receipt of shares of the Intermediate Income Fund in the
Merger. The holding period and aggregate tax basis of shares of the
Intermediate Income Fund that are received by the your fund's shareholders
will be the same as the holding period and aggregate tax basis of shares of
your Fund previously held by your Fund's shareholders (provided, of course,
that shares of your fund are held as capital assets). In addition, the holding
period and tax basis of the assets of your fund in the hands of the
Intermediate Income Fund as a result of the Merger will be the same as in the
hands of your Fund immediately prior to the Merger.
The Merger is being structured to meet the requirements of Internal Revenue
Code Section 368(a)(1)(C) for tax-free exchanges.
Capitalization
The following table shows the capitalization as of December 31, 1998 of your
fund and the Intermediate Income Fund individually and on a pro forma combined
basis as of that date, giving effect to the proposed acquisition of your
fund's net assets at market value:
Mosaic Mosaic Intermediate Pro Forma For
Bond Fund Income Fund Merger
Net Assets $823,528 $6,154,306 $6,977,834
Net Asset Value
per share $21.21 $6.92 $6.92
Shares
outstanding 38,819 888,809 1,007,816
Had the Merger been consummated on December 31, 1998, your fund would have
received 119,007 shares of the Intermediate Income Fund, which would then be
available for distribution to shareholders. No assurance can be given as to
how many shares of the Intermediate Income Fund that your fund's shareholders
will receive on the day of the Merger and the foregoing should not be relied
upon to reflect the number of shares of the Intermediate Income Fund that will
actually be received on or after the day of the Merger.
Information About the Intermediate Income Fund
Risk/Return Summary: Investments, Risks and Performance
Fund Investment Objectives/Goals
The objective of the Intermediate Income Fund is to receive income from bonds
and to distribute that income to its investors as dividends.
Principal Investment Strategies of the Intermediate Income Fund
The Intermediate Income Fund seeks to achieve its objectives through
diversified investment in bonds and other debt securities. It invests in
corporate debt securities and obligations of the U.S. Government and its
agencies. It invests at least 65% of its assets in bonds with the total
portfolio having an average dollar weighted maturity of ten years or less. No
more than 35% of the fund will be invested in lower-rated securities,
including those commonly referred to as "high yield" or "junk" bonds.
Principal Risks of Investing in the Intermediate Income Fund
Interest Rate Risk
The share price of the Intermediate Income Fund reflects the value of the
bonds held by it. When interest rates or general demand for fixed-income
securities change, the value of these bonds change. If the value of these
bonds falls, the share price of the fund will go down. If it falls below the
price you paid for your shares, you could lose money when you redeem your
shares.
What might cause bonds to lose value? One reason might be a rise in interest
rates. When this happens, existing bonds that pay a lower rate become less
attractive and their prices tend to go down.
Call Risk
If a bond issuer "calls" a bond (pays it off at a specified price before it
matures), the affected fund would have to reinvest the proceeds at a lower
interest rate. It may also experience loss if the bond is called at a price
lower than what we paid.
Tax-Related Risk
You can receive a taxable distribution of capital gain. You may also owe
taxes if you sell your shares at a price that is higher than the price you
paid for them.
High Yield Bond Risk
Since the Intermediate Income Fund may invest up to 35% of its assets in bonds
rated below investment grade, you should understand the risks of such bonds:
* The Youth and Growth of the High Yield Bond Market. The high yield bond
market is relatively young and supply is limited.
* Sensitivity to Interest Rates and Economic Changes. Prices of high yield
bonds may be less sensitive to interest rate than other bonds, but more
sensitive to adverse economic changes or individual corporate developments.
* Market Expectations. High yield bond values are very sensitive to market
expectations about the credit worthiness of the issuing companies.
* Liquidity and Valuation. There may be "thin" trading during times of market
distress.
* Taxation. Interest income may be recognized as taxable even though payment
of such interest is not received in cash.
* Credit Ratings. Changes in credit ratings by the major credit rating
agencies may lag changes in the credit worthiness of the issuer.
Risk/Return Bar Chart and Performance Table
Because the Intermediate Income Fund will adopt its investment objectives and
policies on July 1, 1999 (the date of the Merger), no historical performance
information is available. Past performance for the Intermediate Income Fund's
predecessor, Mosaic High Yield Fund, would not be an appropriate comparison in
light of the policy differences between these two funds.
Fees and Expenses of the Intermediate Income Fund
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Intermediate Income Fund.
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)
Intermediate
Income Fund
Management Fees 0.63%
Distribution (12b-1) Fees None
Other expenses 0.45%
Total Annual Fund
Operating Expenses 1.08%
Example: This Example is intended to help you compare the cost of investing
in the Intermediate Income Fund with the cost of investing in other mutual
funds. For simplicity, fee and expense percentages above are rounded to two
decimal places.
The Example assumes that you invest $10,000 in the fund for the time periods
indicated. 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
Intermediate Income Fund $110 $343 $595 $1,317
Additional fees and transaction charges described in Mosaic's <i>"Guide to
Doing Business,"</i> if applicable, will increase the level of expenses that
can be incurred. (For example, fees are charged for certain wire transfers,
stop payments on checks and bounced investment checks). In addition, if you
purchase or redeem shares in the Trust through a securities broker you may be
charged a transaction fee by the broker for handling of the transaction. The
Trust does not receive these fees. You can engage in any transaction directly
with the Trust to avoid such charges.
Investment Objectives
The Intermediate Income Fund's investment objective is to receive income from
bonds and other debt securities and to distribute that income to its investors
as monthly dividends.
There can be no assurance that the objective of the fund will be achieved.
Although the investment objective of the fund may be changed without
shareholder approval, shareholders will be notified in writing prior to any
material change.
Implementation of Investment Objectives
General Selection Criteria
We select bonds for the Intermediate Income Fund that we believe provide the
best combination of yield (the interest rate the bond pays in relation to its
price), credit risk and diversification. To a lesser extent, we also consider
whether a particular bond may increase in value from its price at the time of
purchase.
Temporary Defensive Position
We reserve the right to invest a portion of the fund's total assets in short-
term debt securities (those with maturities of one year or less) and to
maintain a portion of fund assets in cash. However, we do not intend to hold
more than 35 percent of the fund in such investments unless we determine that
market conditions warrant a temporary defensive investment position. Under
such circumstances, up to 100 percent of the fund may be so invested. To the
extent that the fund is so invested, it is not invested in accordance with
policies designed to achieve its stated investment objective.
Short-term investments may include certificates of deposit, commercial paper
and repurchase agreements. We might hold substantial cash reserves in seeking
to reduce a fund's exposure to bond price depreciation during a period of
rising interest rates and to maintain desired liquidity while awaiting more
attractive investment conditions in the bond market.
Intermediate Income Fund
Selection
The Intermediate Income Fund seeks to achieve its objectives by investing in
corporate debt securities, obligations of the U.S. Government and its agencies
and instrumentalities and money market instruments.
The percentage of the Intermediate Income Fund's assets that we may invest at
any particular time in a particular type of securities and the average
weighted maturity of the total portfolio will depend on our judgment regarding
the risks in the general market. We monitor many factors affecting the market
outlook, including economic, monetary and interest rate trends, market
momentum, institutional psychology and historical similarities to current
conditions.
Corporate Debt Securities. We will primarily buy corporate debt securities
accorded one of the four highest quality ratings by Standard & Poor's or
Moody's or, if unrated, judged by the Advisor to be of comparable quality.
These are generally referred to as "investment grade" securities and are rated
AAA, AA, A and BBB by Standard & Poor's or Aaa, Aa, A or Baa by Moody's.
Although all of the corporate debt securities we hold in the fund may be
investment grade at any time, we may also invest up to 35% of the Intermediate
Income Fund's assets in lower grade corporate debt securities, commonly known
as "high yield" or "junk" bonds. The lowest-grade securities we will purchase
for this fund are those rated "B". We will only invest in lower-grade
securities when we believe that the creditworthiness of the issuer is stable
or improving, and when the potential return of investing in such securities
justifies the higher level of risk.
Although the fund may invest in securities with ratings as low as "B", we
follow certain policies intended to lessen some of the risks associated with
investment in such securities. Included among such policies are the
following:
(1) bonds acquired at the time of their initial public offering must be rated
at least "B" by either Standard & Poor's Corporation or Moody's Investors
Services, Inc.;
(2) bonds rated "BB" or "Ba" or lower must have more than one market maker at
the time of acquisition;
(3) we do not purchase unrated bonds issued by an unrated company, privately
placed bonds or bonds of issuers in bankruptcy; 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 in our view the change may be temporary, or the
impact of such change is often already reflected in market price before the
bond can be sold.
U.S. Government Securities. We may also buy Government Securities for the
Intermediate Income Fund. These include a variety of securities issued or
guaranteed by the U.S. Treasury and various agencies of the federal
government. They also include various instrumentalities that were established
or sponsored by the U.S. Government and certain interests in these types of
securities.
Treasury securities include notes, bills and bonds. Obligations of the
Government National Mortgage Association (Ginnie Mae), the Federal Home Loan
Banks, the Federal Farm Credit System, Freddie Mac, Fannie Mae, the Small
Business Association and the Student Loan Marketing Association are also
considered to be U.S. Government securities.
Except for Treasury securities, these obligations may or may not be backed by
the "full faith and credit" of the United States. Government agency
obligations are generally guaranteed as to principal and interest by agencies
and instrumentalities of the U.S. government.
Money Market Securities. Finally, we may invest in money market securities.
Money market securities are subject to the limitation that they mature within
one year of the date of their purchase. These include:
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 Intermediate Income Fund so that the fund has an
average dollar weighted maturity of 10 years or less. If we believe that
market risks are high and bond prices in general are vulnerable to decline, we
may take certain temporary defensive actions such as reducing the average
maturity of the fund's holdings and increasing its cash reserves. We do not,
however, intend to engage in extensive short-term trading.
Portfolio Trading Activity - Taxable Capital Gains Potential
We may alter the composition of the fund with regard to quality and maturity
and we may sell securities prior to maturity. Under normal circumstances,
however, turnover for 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, we will not engage in active or frequent trading
of bonds. However, it is possible that we will determine that market
conditions require a significant change to the composition of the fund's
portfolio. (For example, if interest rates rise or fall significantly, we may
attempt to sell bonds before they lose much value.) Also, if the fund
experiences large swings in shareholder purchases and redemptions, we may be
required to sell bonds more frequently in order to generate the cash needed to
pay redeeming shareholders. Under these circumstances, the fund could make a
taxable capital gain distribution.
Management
The Advisor
We are Madison Mosaic, LLC (of the same address as the Trust), a wholly-owned
subsidiary of Madison Investment Advisors, Inc., 6411 Mineral Point Road,
Madison, Wisconsin ("Madison"). We manage approximately $200 million in the
Mosaic family of mutual funds, which includes stock, bond and money market
portfolios. Madison, a registered investment advisory firm for over 24 years,
provides professional portfolio management services to a number of clients and
has approximately $3.8 billion under management. We share investment
management personnel with Madison.
We are responsible for the day-to-day administration of the Trust's
activities. Investment decisions regarding each of the Trust's funds can be
influenced in various manners by a number of individuals.
Generally, all decisions regarding a fund's average maturity, duration and
investment considerations concerning interest rate and market risk are the
primary responsibility of Madison's investment policy committee. The
investment policy committee is made up of the top officers and managers of
Madison.
The decisions reached by the investment policy committee are carried out on a
day-to-day basis by a team of portfolio management officers of Madison. This
"fixed-income portfolio management team" selects individual bonds and performs
other management functions for all of the Trust's funds. The team performs
the same type of activities for Madison's individual clients.
Compensation
Advisory Fee. We receive a fee for our services under our Investment Advisory
Agreement with the Trust. For the last fiscal year of the Trust, the fee was
calculated as 5/8% of average daily net assets.
Administrative and Services Fee. Under a separate Services Agreement with the
Trust, we provide or arrange for each fund to have all other operational and
other support services it needs. We receive a fee calculated as a percentage
of the average daily net assets of each fund for these services. This fee is
to be set at 0.45% effective as of the date of the Merger.
Managing for the Year 2000
We are monitoring developments as they relate to the so-called "Millennium
Bug": the computer problem that may cause errors when the calendar reaches
January 1, 2000. The Millennium Bug may cause disruption in securities and
other markets that affect the national and global economy.
At Mosaic Funds, we are taking appropriate measures to help ensure that the
Millennium Bug does not interrupt our own portfolio and shareholder accounting
or our fund management operations. For example, we requested and received
written assurances of Year 2000 compliance from the mission critical companies
we use to manage fund records and information. Also, we plan to test all our
systems before the end of 1999 to help ensure that our operations will not be
compromised by the Millenium Bug.
Pricing of Fund Shares
The price of each fund share is based on its net asset value (or "NAV"). This
equals the total daily value of the respective fund's 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 of the securities in each fund in order to determine
NAV. We obtain the market value from one or more established pricing
services.
When you purchase or redeem shares, your transaction will be priced based on
the next calculation of NAV after your order is placed. This may be higher,
lower or the same as the NAV from the previous day.
Dividends and Distributions
The fund's net income is declared as dividends each business day. Dividends
are paid in the form of additional shares credited to your account at the end
of each calendar month, unless you elect in writing to receive a monthly
dividend check or payments by electronic funds transfer. Any net realized
capital gains would be distributed at least annually. (Please refer to
Mosaic's "Guide to Doing Business" for more information about dividend
distribution options.)
Taxes
Federal Tax Considerations
The Intermediate Income Fund will distribute to shareholders 100% of its net
income and net capital gains, if any.
Dividends and any capital gain distributions will be taxable to you. In
January each year, the Trust will send you an annual notice of dividends and
other distributions paid during the prior year. Capital gains distributions
can be taxed at different rates depending on the length of time the securities
were held.
Because the share price fluctuates for each fund, every time you redeem shares
in such funds, you will create a capital gain or loss that has tax
consequences. It is your responsibility to calculate the cost basis of shares
purchased. You must retain all statements received from the Trust to maintain
accurate records of your investments.
An <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
Since the Intermediate Income Fund will adopt its investment objectives and
policies on the date of the Merger, there is no relevant financial performance
history to present. For general information about the past 5 years of any of
Mosaic Income Trust's funds, please refer to the audited annual report
accompanying this document.
Additional Information
Mosaic Income Trust has a Statement of Additional Information that includes
additional information about each Mosaic Income Trust Fund. Additional
information about each fund's investments is available in the Trust's annual
and semi-annual reports to shareholders. In the Trust's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the performance of the Trust's funds during their last
fiscal year. The Statement of Additional Information and the Trust's annual
and semi-annual reports are available without charge by calling the Trust at
the shareholder service phone number. They are incorporated into this
document by reference.
Information on how to purchase and sell shares in any Mosaic Fund is provided
in a separate brochure entitled, "Guide to Doing Business." Mosaic's "Guide
to Doing Business" is incorporated by reference into this document.
You can review and copy information about Mosaic Income Trust at the
SEC's Public Reference Room in Washington, DC. Information about the
operation of the Public Reference Room may be obtained by calling the SEC at
800-SEC-0330. The SEC maintains a Worldwide Web site that contains reports,
proxy information statements and other information regarding the Trust at
http://www.sec.gov. Copies of this information may also be obtained, upon
payment of a duplicating fee, by writing the SEC's Public Reference Section,
Washington, DC 20549-6009.
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
<PAGE>
Information About Your Fund
A complete copy of Mosaic Income Trust's prospectus dated April 30, 1999 is
enclosed with this document for your review. It is incorporated herein by
reference. Please refer to it for information regarding your fund.
Voting Information
Who is requesting your proxy?
This document is furnished in connection with a solicitation of proxies by the
Board of Trustees of Mosaic Income Trust with respect to your fund, the Mosaic
Bond Fund series of the Trust. The proxies will be used at the Special
Meeting of Shareholders of your fund, to be held at our offices at 1655 Ft.
Myer Drive, Suite 1000, Arlington, Virginia, on Monday, June 28, 1999, at
12:00 noon and at any adjournments of the meeting.
Although your Trustees are soliciting your proxy vote, when the prospectus
speaks about "we" or "us", it refers to your fund's manager, Madison Mosaic.
Who will receive this solicitation?
This document, along with a Notice of the Meeting and a proxy card, will be
mailed to shareholders on or about June 1, 1999. (We may send follow-up
copies by overnight delivery or facsimile.) Only shareholders of record as of
the close of business on the Record Date will be entitled to notice of, and to
vote at, the Meeting or any of its adjournments. The holders of a majority of
the shares outstanding at the close of business on the Record Date present in
person or represented by proxy will constitute a quorum for the Meeting.
How will your proxy be voted?
If the enclosed form of proxy is properly executed and returned in time to be
voted at the Meeting, the named proxies will vote the shares represented by
the proxy in accordance with the instructions marked.
Unmarked proxies will be voted FOR the proposed Merger and FOR any other
matters deemed appropriate. Proxies that reflect abstentions and "broker non-
votes" (i.e., shares held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or the persons
entitled to vote or (ii) the broker or nominee does not have discretionary
voting power on a particular matter) will be counted as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum. Since shares represented by "broker non-votes" are considered
outstanding shares, a "broker non-vote" has the same effect as a vote against
the Merger.
Can a proxy be revoked?
A proxy may be revoked at any time at or before the Meeting by written notice
to the Secretary of the Trust, 1655 Ft. Myer Drive, Suite 1000, Arlington,
Virginia 22209 (800-368-3195). Unless revoked, all valid proxies will be voted
as specified by you or, if you do not make any specifications, for approval of
the Plan and the Merger.
Will anyone solicit proxies?
As the meeting date nears, our shareholder service representatives (and other
employees of our company located at our offices in Virginia or Wisconsin) may
contact you by telephone to encourage you to complete and return your proxy or
to determine if you will be attending the Meeting. No one will be compensated
for doing so.
Who is paying for this proxy solicitation?
We are bearing all expenses of this proxy solicitation. Neither the Trust nor
its shareholders will pay any proxy solicitation costs.
What vote is required to approve the Merger?
Approval of the Merger will require the affirmative vote of more than 50% of
the outstanding voting securities of your fund. Fractional shares outstanding
are entitled to a proportionate share of one vote.
In the event that sufficient votes to approve the Plan are
not received by June 28, 1999, the persons named as proxies
may propose one or more adjournments of the Meeting to
permit further solicitation of proxies. In determining
whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the
percentage of negative votes actually cast, the nature of
any further solicitation and the information to be provided
to shareholders with respect to the reasons for the
solicitation. Any such adjournment will require an
affirmative vote by the holders of a majority of the shares
present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such
adjournment after consideration of all circumstances which
may bear upon a decision to adjourn the Meeting.
A shareholder who objects to the proposed transaction will not be entitled
under either Massachusetts law or the Declaration of Trust to demand payment
for, or an appraisal of, his or her shares. However, you should be aware that
the Merger as proposed is not expected to result in recognition of gain or
loss to shareholders for federal income tax purposes. If the Merger is
consummated, you will be free to redeem the shares of the Intermediate Income
Fund that you receive in the transaction at their then-current net asset
value. Shares of your fund may be redeemed at any time prior to the
consummation of the Merger. You may wish to consult your tax advisor as to any
differing consequences of redeeming your fund shares prior to the Merger or
exchanging such shares in the Merger.
Notice to Banks, Broker-Dealers and Voting Trustees and Their Nominees.
Please advise the Trust whether other persons are beneficial owners of shares
for which proxies are being solicited and, if so, the number of copies of this
Prospectus/Proxy Statement needed to supply copies to the beneficial owners of
the respective shares.
The votes of any current shareholders of the Intermediate Income Fund (or its
predecessor, the High Yield Fund) are not being solicited and are not required
to carry out the Merger.
THE BOARD OF TRUSTEES, INCLUDING THE "NON-INTERESTED" TRUSTEES, RECOMMENDS
APPROVAL OF THE MERGER, AND ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE
CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE MERGER.
What is the record date and number of outstanding shares?
As of April 30, 1998, (the "Record Date"), there were [number of]
outstanding shares of beneficial interest of Mosaic Income Trust's Mosaic Bond
Fund series.
Controlling Shareholders, Large Shareholders and Holdings of Trustees and
Officers of the Trust
No one entity is considered to control either your fund or the Intermediate
Income Fund.
The following own 5% or more of your fund or the Intermediate Income Fund (the
High Yield Fund) as of the Record Date:
For the Intermediate Income Fund: Charles Schwab & Co for the benefit of
customers, 101 Montgomery Street, San Francisco, CA 94104 (7%)
For your 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 (5%).
As of the Record Date, the officers and Trustees of the Trust beneficially
owned as a group less than 1% of the outstanding shares of the Intermediate
Income Fund and less than 5% of your fund.
June 1, 1999
<PAGE>
Mosaic Income Trust
1655 Ft. Myer Drive
Arlington, Virginia 22209
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on June 28, 1999
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of Mosaic Income Trust's Bond Fund series (the "Bond Fund")
will be held at the offices of the Fund at 1655 Ft. Myer Drive, Suite 1000,
Arlington, Virginia 22209, on Monday, June 28, 1999, at 12:00 n.n. for the
following purposes:
1. To consider and act upon the Agreement and Plan of Merger (the "Plan")
dated April 19, 1999 providing for:
(a) the acquisition of substantially all of the assets of the Bond Fund by an
existing series of Mosaic Income Trust to be newly named and known as Mosaic
Intermediate Income Fund (currently known as the High Yield Fund) (the "New
Fund"), in exchange for shares of the New Fund;
(b) the assumption by the New Fund of certain identified liabilities of the
Bond Fund; and
(c) distribution of such shares of the New Fund to shareholders of the Bond
Hill Fund.
2. To transact any other business as may properly come before the meeting or
any of its adjournments.
The Trustees fixed the close of business on April 30, 1998 as the record date
for the determination of shareholders of the Bond Fund entitled to notice of
and to vote at this Meeting or any adjournment thereof.
IMPORTANT
Your vote is important and all Shareholders are asked to be
present in person or by proxy. If you are unable to attend
the meeting in person, we urge you to complete, sign, date
and return the enclosed proxy as soon as possible using the
enclosed stamped envelope. Sending the proxy will not
prevent you from personally voting your shares at the
Meeting since you may revoke your proxy by advising the
Secretary of Mosaic Income Trust in writing (by subsequent
proxy or otherwise) of such revocation at anytime before it
is voted.
By order of the Board of Trustees
(signature)
W. Richard Mason
Secretary
June 1, 1999
<PAGE>
Mosaic Income Trust
Special Meeting of Shareholders -- June 28, 1999
This proxy is solicited on behalf of the Trustees of Mosaic Income Trust with
respect to its Mosaic Bond Fund series of shares.
The undersigned hereby appoints Frank E. Burgess, Katherine L. Frank and Julia
M. Nelson, and each of them separately, proxies, with full power of
substitution, and hereby authorizes them to represent and to vote, as
designated below at the Special Meeting of Shareholders of the above
referenced fund (the "Fund") to be held on Monday, June 28, 1999 at 1655 Ft.
Myer Drive, Suite 1000, Arlington, Virginia 22209 at 12:00 noon Eastern time,
and at any adjournments thereof (the "Meeting"), all of the shares of the
Fund which the undersigned would be entitled to vote if the undersigned were
personally present.
Note: Please sign exactly as name appears on this card.
All joint owners should sign. When signing as an executor,
administrator, attorney, trustee, guardian or custodian for
a minor, please give full title as such. If a corporation,
please sign in full corporate name and indicate the signer's
office. If a partner, sign in partnership name.
Every shareholder's vote is important! Vote this Proxy Card
today! Please detach at perforation before mailing.
This proxy, when properly executed, will be voted in the
manner directed herein by the shareholder whose name is
signed herein. IF YOU SIGN, DATE AND RETURN THIS PROXY CARD
BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED FOR
EACH PROPOSAL.
To vote, mark blocks below in blue or black ink as follows [x]
1. To approve the proposed Agreement and Plan of Merger
into Mosaic Income Trust's Intermediate Income Fund (formerly
the High Yield Fund).
o YES o NO o ABSTAIN
2. To consider and vote upon such other matters as may properly
come before said meeting or any adjournments thereof.
o YES o NO o ABSTAIN
These items are discussed in greater detail in the attached
Prospectus. The Board of Directors of Mosaic Income Trust (Bond Fund
series) fixed the close of business on April 30, 1999, as
the record date for the determination of shareholders entitled to notice of
and to vote at the meeting.
IF YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON. IF YOU DO NOT
EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THIS
PROXY CARD IN THE ENCLOSED ENVELOPE WHICH NEEDS NO POSTAGE
IF MAILED IN THE UNITED STATES.
(Pre-printed name) Date:
<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 JUNE 1, 1999
Acquisition of the Assets of
Mosaic Income Trust Mosaic Bond Fund
By and in Exchange for Shares of
Mosaic Income Trust Intermediate Income Fund
1655 Ft. Myer Drive, Suite 1000
Arlington, Virginia 22209
1-888-670-3600
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets of the Mosaic Bond Fund series of Mosaic
Income Trust in exchange for shares of the newly named Intermediate Income
Fund series of the Trust (the "Merger") is not a prospectus. A Prospectus
dated June 1, 1999 relating to the above-referenced matter may be obtained
from Mosaic Income Trust at the address and phone number above. This Statement
of Additional Information relates to and should be read in conjunction with
such Prospectus.
This Statement of Additional Information incorporates by reference the
following documents, a copy of each of which accompanies this Statement of
Additional Information:
1. The Prospectus of Mosaic Income Trust dated April 30, 1999.
2. The Statement of Additional Information of Mosaic Income Trust dated April
30, 1999.
3. The Annual Report of Mosaic Income Trust dated December 31, 1998.
The following information is provided with regard to the Intermediate Income
Fund series of Mosaic Income Trust which is expected to become effective on
July 1, 1999 (the date of the proposed Merger):
Table of Contents
TRUST HISTORY............................................... 2
DESCRIPTION OF THE TRUST ("Investment Objectives"
and "Implementation of Investment Policies")............. 2
Classification.............................................. 2
Investment Strategies and Risks............................. 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 Intermediate Income Funds. The Government Fund
was originally known as the "A-Rated Fund". Before the date of its proposed
Merger with Mosaic Bond Fund on July 1, 1999, the Intermediate Income Fund was
a junk bond fund known as the High Yield Fund (and known as the Maximum Income
Portfolio before May 12, 1997).
Throughout this Statement of Additional Information, we sometimes refer to the
Trust or to the Funds when describing matters that affect both funds.
The Trust was originally known as GIT Income Trust. The Trust changed its
name in May 1997. The name change followed the 1996 change in the Trust's
advisor from Bankers Finance Investment Management Corp. to Madison Mosaic,
LLC.
DESCRIPTION OF THE TRUST
Classification
The Trust is a diversified open-end management investment company, commonly
known as a mutual fund.
The Trust currenly issues three series of shares: Government Fund shares, High
Yield Fund shares (to be known as Intermediate Income Fund shares effective
July 1, 1999) and Mosaic Bond Fund shares.
Investment Strategies and Risks
Government Fund shares represent interests in a portfolio of Government
Securities. Intermediate Income Fund shares represent interests in a
portfolio of high and medium-grade securities, with no more than 35% in lower-
grade debt securities, rated not lower than B or of equivalent quality.
The investment objectives of the Funds are described in the Prospectus. You
should also read the Prospectus for information about the Funds' principal
investment strategies and risks.
Both of the Trust's Funds are subject to the same general investment policies.
However, the maturities, quality ratings and types of issuers of the bonds and
other debt instruments purchased will normally differ among the two funds as
described in the Prospectus.
In addition to the principal investment strategies described in the
Prospectus, the following describes additional investment strategies. Also
discussed are the risks associated with such strategies that you should
understand.
1. When-Issued Securities.
We may purchase and sell securities for the Funds on a when-issued or delayed
delivery basis. When-issued and delayed delivery transactions happen when
securities are bought or sold with payment for and delivery of the securities
scheduled to take place at a date later than normal settlement.
For example, when we purchase newly issued bonds on a when-issued basis,
payment and delivery may not take place for 15 to 45 days after we commit to
the purchase.
Fluctuations in the value of securities we agreed to buy or sell on a when-
issued basis may increase changes in a Fund's value. This is because the
fluctuations in value must be added to changes in the values of securities
actually held in the Fund during the same period.
When engaging in when-issued or delayed delivery transactions, we must rely on
the seller or buyer to complete the transaction at the scheduled time. If the
other party fails to do so, we might lose an opportunity for a more
advantageous purchase or sale. If the transaction is completed, intervening
changes in market conditions or the issuer's financial condition could make it
less advantageous than investment alternatives available at the time of
settlement.
While we will only commit to security purchases we intend to complete on
behalf of the Trust, we may sell any securities purchase contracts before
settlement of the transaction. If this occurs, the Trust could realize a gain
or loss despite the fact that the original transaction was never completed.
When fixed yield contracts are made to purchase when-issued securities, we
will take certain actions to protect the Trust. We will maintain in a
segregated account a combination of designated liquid investments and cash
sufficient in value to provide adequate funds to complete the scheduled
purchase.
2. Securities with Variable Interest Rates.
Some of the securities we purchase may carry variable interest rates.
Securities with variable interest rates normally are adjusted periodically to
pay an interest rate that is a fixed percentage of some base rate, such as the
"prime" interest rate of a specified bank. The rate adjustments may be
specified either to occur on fixed dates, such as the beginning of each
calendar month, or to occur whenever the base rate changes.
Certain of these variable rate securities may be payable by the issuer upon
demand of the holder, generally within seven days of the date of demand.
Others may have a fixed stated maturity with no demand feature. Variable rate
securities may offer higher yields than are available from shorter-term
securities. When interest rates generally are falling, the yields of variable
rate securities will tend to fall. Likewise, when rates are generally rising,
variable rate yields will tend to rise.
What are other risks of some variable rate securities? Variable rate
securities may not always be rated and may not have a readily available
secondary market. Our ability to obtain payment after the exercise of demand
rights could be adversely affected by subsequent events prior to repayment of
the investment at par. We will monitor on an ongoing basis the revenues and
liquidity of issuers of variable rate securities and the ability of such
issuers to pay principal and interest pursuant to any demand feature.
3. Repurchase and Reverse Repurchase Agreement Transactions.
Repurchase Agreements. A repurchase agreement involves acquiring securities
from a financial institution, such as a bank or securities dealer, with the
right to resell the same securities to the financial institution on a future
date at a fixed price.
Repurchase agreements are a highly flexible medium of investment. This is
because they may be for very short periods, including maturities of only one
day. Under the Investment Company Act of 1940, repurchase agreements are
considered loans and the securities involved may be viewed as collateral.
If we invest in repurchase agreements, the Trust could be subject to the risk
that the other party may not complete the scheduled repurchase. In that case,
we would be left holding securities we did not expect to retain in the Trust.
If those securities decline in price to a value of less than the amount due at
the scheduled time of repurchase, then the Trust could suffer a loss of
principal or interest.
In the event of insolvency or bankruptcy of the other party to a repurchase
agreement, the Trust could encounter restrictions on the exercise of its
rights under the repurchase agreement.
Reverse Repurchase Agreements. If a Fund requires cash to meet redemption
requests and we determine that it would not be advantageous to sell portfolio
securities to meet those requests, then we may sell the Fund's securities to
another investor with a simultaneous agreement to repurchase them. Such a
transaction is commonly called a "reverse repurchase agreement." It has the
practical effect of constituting a loan to the Trust, the proceeds would be
used to meet cash requirements for redemption requests.
During the period of any reverse repurchase agreement, the affected Fund would
recognize fluctuations in value of the underlying securities to the same
extent as if those securities were held by the Fund outright. If we engage in
reverse repurchase agreement transactions for any Fund, we will take steps to
protect the Fund. We will maintain in a segregated account a combination of
designated liquid securities and cash that is sufficient in aggregate value to
provide adequate funds to complete the repurchase.
5. Loans of Fund Securities.
In certain circumstances, we may be able to earn additional income for the
Trust by loaning portfolio securities to a broker-dealer or financial
institution. We may make such loans only if cash or US Government securities,
equal in value to 100% of the market value of the securities loaned, are
delivered to the Trust by the borrower and maintained in a segregated account
at full market value each business day.
During the term of any securities loan, the borrower must pay us all dividend
and interest income earned on the loaned securities. At the same time, we
will also be able to invest any cash portion of the collateral or otherwise
charge a fee for making the loan, thereby increasing the Trust's overall
potential return.
If we make a loan of securities, the Trust would be exposed to the possibility
that the borrower of the securities might be unable to return them when
required. This would leave the Trust with the collateral maintained against
the loan. If the collateral were of insufficient value, the Trust could
suffer a loss.
6. Financial Futures Contracts.
We may use financial futures contracts, including contracts traded on a
regulated commodity market or exchange, to purchase or sell securities for the
Trust. A futures contract on a security is a binding contractual commitment
that, if held to maturity, will result in an obligation to make or accept
delivery, during a particular month, of securities having a standardized face
value and rate of return. By purchasing a futures contract, we will obligate
the Trust to make delivery of the security against payment of the agreed
price.
We will use financial futures contracts only when we intend to take or make
the required delivery of securities. However, if it is economically more
advantageous to do so, we may acquire or sell the same securities in the open
market instead and concurrently liquidate the corresponding futures position
by entering into another futures transaction that precisely offsets the
original futures position.
A financial futures contract for a purchase of securities is called a "long"
position, while a financial futures contract for a sale of securities is
called a "short" position. A short futures contract acts as a hedge against a
decline in the value of an investment. This is because it locks in a future
sale price for the securities specified for delivery against the contract. A
long futures contract acts to protect against a possible decline in interest
rates. Hedges may be implemented by futures transactions for either the
securities held or for comparable securities that are expected to parallel the
price movements of the securities being hedged.
Customarily, most futures contracts are liquidated prior to the required
settlement date by disposing of the contract. This transaction may result in
either a gain or loss. When part of a hedging transaction, this gain or loss
is expected to offset corresponding losses or gains on the hedged securities.
We intend to use financial futures contracts as a defense, or hedge, against
anticipated interest rate changes and not for speculation. A futures contract
sale is intended to protect against an expected increase in interest rates and
a futures contract purchase is intended to offset the impact of an interest
rate decline. By means of futures transactions, we may arrange a future
purchase or sale of securities under terms fixed at the time the futures
contract is made.
The Trust will incur brokerage fees in connection with any futures
transactions. Also, the Trust will be required to deposit and maintain cash
or Government securities with brokers as margin to guarantee performance of
its futures obligations. When purchasing securities by means of futures
contracts, we take steps to protect the Trust. We will maintain in a
segregated account (including brokerage accounts used to maintain the margin
required by the contracts) a combination of liquid High Grade investments and
cash that is sufficient in aggregate value to provide adequate funds to
complete the purchase.
While we may use futures to reduce the risks of interest rate fluctuations,
futures trading itself entails certain other risks. Thus, while the Trust may
benefit from using financial futures contracts, unanticipated changes in
interest rates may result in a poorer overall performance than if the Trust
had not entered into any such contracts.
7. Foreign Securities. We may invest a portion of the Intermediate Income
Fund's assets in securities of foreign issuers that are listed on a recognized
domestic or foreign exchange.
Foreign investments involve certain special considerations not typically
associated with domestic investments. Foreign investments may be denominated
in foreign currencies and may require the Trust to hold temporary foreign
currency bank deposits while transactions are completed. The Trust might
benefit from favorable currency exchange rate changes, but it could also be
affected adversely by changes in exchange rates. Other risks include currency
control regulations and costs incurred when converting between various
currencies. Furthermore, foreign issuers may not be subject to the uniform
accounting, auditing and financial reporting requirements applicable to
domestic issuers, and there may be less publicly available information about
such issuers.
In general, foreign securities markets have substantially less volume
than comparable domestic markets and therefore foreign investments may
be less liquid and more volatile in price than comparable domestic
investments. Fixed commissions in foreign securities markets may result
in higher commissions than for comparable domestic transactions, and
foreign markets may be subject to less governmental supervision and
regulation than their domestic counterparts.
Foreign securities transactions are subject to documentation and delayed
settlement risks arising from difficulties in international communications.
Moreover, foreign investments may be adversely affected by diplomatic,
political, social or economic circumstances or events in other countries,
including civil unrest, expropriation or nationalization, unanticipated taxes,
economic controls, and acts of war. Individual foreign economies may
also differ from the United States economy in such measures as growth,
productivity, inflation, national resources and balance of payments
position.
8. Maturities.
As used in this Statement of Additional Information and in the Prospectus, the
term "effective maturity" may have a variety of meanings. (1) It may mean the
actual stated maturity of the investment. (2) It may also mean the time
between its scheduled interest rate adjustment dates (for variable rate
securities). (3) Finally, it may mean the time between its purchase
settlement and scheduled future resale settlement pursuant to a resale or
optional resale under fixed terms arranged in connection with the purchase,
whichever period is shorter.
A "stated maturity" means the time scheduled for final repayment of the entire
principal amount of the investment under its terms. "Short-term" means a
maturity of one year or less, while "long-term" means longer than one year.
9. Short-Term Investments.
The "short-term investments" we may buy for the Trust are limited to the
following U.S. dollar denominated investments:
(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 Intermediate Income Fund will be in
High Grade securities with a portion of the fund in Medium and Low Grade
securities to improve yields.
Government Fund
We only purchase "investment grade" securities for the Government Fund.
Investment grade securities are those with the top four quality ratings given
by nationally recognized statistical rating organizations for that type of
security. (For example, a top rated long-term security will be
rated AAA by Standard & Poor's Corporation while a top rated short-term
security will be rated A-1 by Standard & Poor's.)
Investment grade securities can be further classified as either "High Grade"
or "Medium Grade." As used in this Statement of Additional Information, "High
Grade" securities include US Government securities and those municipal
securities which are rated AAA, AA, A-1; SP-1 by Standard & Poor's
Corporation; Aaa, Aa, P-1, MIG-1, MIG-2, VMIG-1; or VMIG-2 by Moody's
Investors Service, Inc. "Medium Grade" municipal securities are those rated
A, BBB, A-2, A-3, SP-2 or SP-3 by Standard & Poor's; A, Baa, P-2, P-3, MIG-3;
or VMIG-3 by Moody's.
For unrated securities, we may make our own determinations of those
investments we classify as "High Grade" or "Medium Grade," as a
part of the exercise of our investment discretion. However, we make such
determinations by reference to the rating criteria followed by recognized
rating agencies (see the Quality Ratings Appendix at the end of this Statement
of Additional Information). Our quality classification procedure is subject
to review by the Trustees.
Within the established quality parameters, we are free to select investments
for each Fund in any quality rating mix we deem appropriate. We will base the
mix on our evaluation of the desirability of each investment in light of its
relative yield and credit characteristics. Of course, it is unlikely that we
will ever purchase anything but High Grade securities for the Government Fund
due to the High Grade nature of Government securities.
Intermediate Income Fund.
At least 65% of the Intermediate Income Fund will always be invested in
investment grade securities as described above for the Government Fund.
Indeed, up to 100% of its assets may be so invested. However, the lowest
rated securities we will purchase for the Intermediate Income Fund are those
rated B. These are considered Low Grade obligations. They are generally
deemed to lack desirable investment characteristics. There may be only small
assurance of payment of interest and principal or adherence to the original
terms of the issue over any long period.
To the extent investments selected have higher yields than alternative
investments, they may be less liquid, have lower quality ratings and entail
more risk that their value could fall than comparable investments with lower
yields. To the extent we purchase lower-rated investments, the average credit
quality of this fund will be reduced.
3. Securities Loans.
If we loan any Trust securities, it is our policy to have the option to
terminate any loan at any time upon 7 days' notice to the borrower. The Trust
may pay fees for the placement, administration and custody of securities
loans, as appropriate.
4. Assets as Collateral.
We will not pledge, mortgage or hypothecate in excess of 10% of any Fund's net
assets at market value.
5. Repurchase and Reverse Repurchase Agreements.
We require delivery of repurchase agreement collateral to the Trust's
Custodian. Alternatively, in the case of book-entry securities held by the
Federal Reserve System, we require that such collateral be registered in the
Custodian's name or in negotiable form. In the event of insolvency or
bankruptcy of the other party to a repurchase agreement, we could encounter
restrictions on the exercise of the Trust's rights under the repurchase
agreement. It is our policy to limit the financial institutions with which we
engage in repurchase agreements to banks, savings and loan associations and
securities dealers meeting financial responsibility standards prescribed in
guidelines adopted by the Trustees.
Our current operating policy is not to engage in reverse repurchase agreements
for any purpose, if reverse repurchase agreements in the aggregate would
exceed five percent of a Fund's total assets.
6. Puts and Calls.
Our current policy is not to write call options, not to acquire put options
(except in conjunction with a purchase of portfolio securities) and not to
lend portfolio securities. If we change such policies, we will notify you of
this policy change at least 30 days prior to its implementation and describe
the new investment techniques to be employed.
7. Policy Review.
If, in the judgment of a majority of the Trustees of the Trust, it becomes
inadvisable to continue any Trust or individual fund policy, then the Trustees
may change any such policies without shareholder approval. Before any such
changes are made, you must receive 30 days' written notice.
Except for the fundamental investment limitations placed upon the
Trust's activities, the Trustees can review and change the other investment
policies and techniques employed by the Trust. In the event of some policy
changes, a change in the Trust's or a fund's name might be required. There
can be no assurance that the Trust's present objectives will be achieved.
Fundamental Policies
The Trust has a number of limitations on its investment activities designated
as "Fundamental Policies." These limitations are described below. By
designating these policies as fundamental, we cannot change them without a
majority vote of the Trust's shareholders.
1. Non-Income Producing Securities.
We will not purchase any securities that do not, at the time of purchase,
provide income through interest or dividend payments (or equivalent income
through a purchase price discount from par). This does not prevent us from
purchasing or acquiring put options related to any such securities held.
Also, any such securities may be purchased pursuant to repurchase agreements
with financial institutions or securities dealers or may be purchased from any
person, under terms and arrangements determined by the Trust, for future
delivery.
2. Illiquid Investments.
With respect to any Fund, we will not invest in securities for which there is
no readily available market if at the time of acquisition more than 10% of the
Fund's net assets would be invested in such securities.
3. Restricted Investments.
We will not invest more than 5% of the value of the total assets of a Fund
(determined as of the date of purchase) in the securities of any one issuer
(other than securities issued or guaranteed by the United States Government or
any of its agencies or instrumentalities and excluding bank deposits). We
will not purchase any securities when, as a result, more than 10% of the
voting securities of the issuer would be held by a Fund. For purposes of
these restrictions, the issuer is deemed to be the specific legal entity
having ultimate responsibility for payment of the obligations evidenced by the
security and whose assets and revenues principally back the security.
4. Seasoned Issuers.
We will not purchase any security when the entity responsible for repayment
has been in operation for less than three years if the purchase would result
in more than 5% of the total assets of a Fund being invested in such security.
This restriction does not apply to any security that has a government
jurisdiction or instrumentality ultimately responsible for its repayment.
5. Industry Concentration.
In purchasing securities for any Fund (other than obligations issued or
guaranteed by the United States Government or its agencies and
instrumentalities), we will limit such investments so that not more than 25%
of the assets of each Fund is invested in any one industry.
6. Financial Futures Contracts.
We will not purchase or sell futures contracts for any Fund if immediately
afterward the sum of the amount of margin deposits of the Fund's existing
futures positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
7. Borrowing and Lending.
We will not obtain bank loans for any Fund except for extraordinary or
emergency purposes. We will not borrow for the purpose of making investments
except as described in the next paragraph.
We may enter into reverse repurchase agreements for any Fund in amounts up to
25% of the Fund's total assets (including the proceeds of the reverse
repurchase transactions) for purposes of purchasing other securities. We will
not obtain loans or enter into reverse repurchase agreements in total amounts
exceeding one-third of total assets for any purpose.
We will not mortgage, pledge or hypothecate any assets to secure bank loans,
except in amounts up to 15% of a Fund's net assets taken at cost, and only for
extraordinary or emergency purposes.
We will not loan more than two thirds of a Fund's securities (calculated as a
percentage of gross assets). For any portfolio securities loaned, we will
require the Fund to be provided collateral satisfactory to the Trustees. The
collateral must be continuously maintained in amounts equal to or greater than
the value of the securities loaned.
8. Other Prohibited Activities.
* The Trust may not act as an underwriter.
* We will not make short sales or maintain a short position except in limited
circumstances. Specifically, the applicable Fund must own at least an equal
amount of securities (or securities convertible or exchangeable into such
securities). Furthermore, not more than 25% of a Fund's net assets may be
held as collateral for such sales).
* We will not purchase securities on margin (except for customary credit used
in transaction clearance) for the Fund.
* We will not invest in oil, gas or other mineral exploration or development
programs.
* We will not invest in commodities. This prohibition does not prevent us
from using financial futures contracts to make purchases or sales of
securities, provided the transactions would otherwise be permitted under the
Trust's investment policies.
* We will not invest in real estate for any Fund. This does not prevent us
from buying securities for any Fund that are secured by real estate.
* We will not acquire shares of other investment companies for any Fund. This
restriction does not apply to any investment in any money market mutual fund
or unit investment trust under limited circumstances. (1) Such
investment by any one issuer cannot exceed 5% of net assets. (2) Such
investments in the aggregate cannot exceed 10% of net assets. Also, this
restriction will not apply in connection with an investment company merger,
consolidation, acquisition or reorganization.
* We will not knowingly take any investment action that has the effect of
eliminating any Fund's tax qualification as a registered investment
company under applicable provisions of the Internal Revenue Code.
* We will not purchase any security for purposes of exercising management
control of the issuer, except in connection with a merger, consolidation,
acquisition or reorganization of an investment company.
* We will not purchase or retain the securities of any issuer if, to our
knowledge, the holdings of those of the Trust's officers, Trustees and
officers of the Advisor who beneficially hold one-half percent or more of
such securities, together exceed 5% of such outstanding securities.
* We will only purchase put options or write call options (and purchase
offsetting call options in closing purchase transactions) if the put option
purchased or call option written is covered by Fund securities, whether
directly or by conversion or exchange rights.
MANAGEMENT OF THE FUNDS
Board of Trustees.
Under the terms of the Declaration of Trust, which is governed by the laws of
the Commonwealth of Massachusetts, the Trustees are ultimately responsible for
the conduct of the Fund's affairs. As such, they meet at least quarterly to
review our operation and management of the Trust. In addition to the
information we provide the Trustees, they also meet with the Trust's
independent auditors at least annually to discuss any accounting or internal
control issues that the auditors may raise.
The Trustees serve indefinite terms of unlimited duration and they appoint
their own successors, provided that always at least two-thirds of the Trustees
have been elected by shareholders. The Declaration of Trust provides that a
Trustee may be removed at any special meeting of shareholders by a vote of
two-thirds of the Trust's outstanding shares.
Management Information.
Trustees and executive officers of the Trust and their principal occupations
during the past five years are shown below:
<TABLE>
<C> <C> <C>
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 April 15, 1999, the shareholders of record that held five percent or
more of the Trust were: For the Government Fund -- BFIMC Money Purchase
Pension Plan, P.O. Box 1118, Cincinnati, OH 45201-1118 (12%) and Star Bank,
Trustee for Geraldine Schaeffer, 2201 L St., NW, Suite 109, Washington, DC
20037-1410 (6%); for the High Yield (Intermediate Income) Fund -- Charles
Schwab & Co for the benefit of customers, 101 Montgomery Street, San
Francisco, CA 94104 (7%); and for the Mosaic 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 (5%).
As of April 15, 1999, the Trustees and officers of the Trust directly or
indirectly owned as a group less than 1% of the outstanding shares of the
Government and High Yield (Intermediate Income) Fund and less than 5% of the
Mosaic Bond Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
1. Investment Advisors.
We are Madison Mosaic, LLC (known as Bankers Finance Advisors, LLC prior to
April 1998), 1655 Fort Myer Drive, Arlington, Virginia 22209-3108, the
investment advisor to the Trust.
We are a wholly owned subsidiary of Madison Investment Advisors, Inc.
("Madison"), 6411 Mineral Point Road, Madison, Wisconsin. Madison is a
registered investment advisor and has numerous advisory clients. Madison was
founded in 1973 and has no business affiliates other than those described in
the Prospectus and this Statement of Additional Information. Madison operates
Madison Scottsdale in Scottsdale, Arizona. We share our investment management
personnel with Madison.
Frank E. Burgess is President, Treasurer and Director of Madison. Mr. Burgess
owns a majority of the controlling interest of Madison, which, in turn, owns
and controls Madison Mosaic (see "Management Information" above).
Madison formed us in 1996 for the purpose of providing investment management
services to the Mosaic family of mutual funds, including the Trust. We
purchased the investment management assets of the former advisor to the Trust,
Bankers Finance Investment Management Corp., on July 31, 1996. As a result,
any references in this Statement of Additional Information and in the
Prospectus to advisory or management activities during periods prior to July
31, 1996 refer to Bankers Finance Investment Management Corp. We also serve
as the investment advisor to Mosaic Equity Trust, Mosaic Tax-Free Trust,
Mosaic Focus Fund Trust and Mosaic Government Money Market Trust.
For the fiscal year ending December 31, 1998, aggregate advisory fees paid
were as follows: Government Fund - $35,388 and Intermediate Income Fund
(then operating as the High Yield Fund) - $40,518.
During the short fiscal period ended December 31, 1997, aggregate advisory
fees paid were as follows: Government Fund - $26,628 and Intermediate Income
Fund (then operating as the High Yield Fund) - $31,741.
For the fiscal years ended March 31, 1997 and 1996, aggregate advisory fees
paid were as follows: Government Fund - $39,438 and $46,093, respectively,
and Intermediate Income Fund (then operating as the High Yield Fund) -
$40,413 and $42,986, respectively.
2. Principal Underwriter.
Mosaic Funds Distributor, LLC, 1655 Ft. Myer Drive, Suite 1000, Arlington,
Virginia 22209, acts as the Trust's broker-dealer Distributor pursuant to a
Distribution Agreement dated July 30, 1998 between it and all Mosaic Funds.
The Distributor does not engage in underwriting activities and receives no
compensation for its services (see the "Distribution Agreement" section
below). The Distributor is a wholly owned subsidiary of Madison.
3. Services Provided by Each Investment Advisor and Fund Expenses Paid by
Third Parties.
Together, we (Madison Mosaic) and Madison are responsible for the investment
management of the Trust. We are authorized to execute each Fund's portfolio
transactions, to select the methods and firms with which such transactions are
executed, to oversee the Trust's operations, and otherwise to administer the
affairs of each Fund as we deem advisable.
We provide or arrange for all the Trust's required services through three main
contracts: An investment advisory agreement; a services agreement and a
distribution agreement. These contracts are described below. No Fund
expenses are paid by third parties.
Investment Advisory Contract.
The Investment Advisory Agreement between us and the Trust is subject to
annual review and approval by the Trustees, including a majority of those
Trustees who are not "interested persons," as defined in the Investment
Company Act of 1940. The agreement was approved by Trust shareholders for an
initial two year term at a special meeting of shareholders held in July 1996
and most recently renewed for another year last July.
The Investment Advisory Agreement may be terminated at any time, without
penalty, by the Trustees or by the vote of a majority of the outstanding
voting securities, or by us, upon sixty days' written notice to the other
party. We cannot assign the agreement and it will automatically terminate
upon any assignment.
Advisory Fee and Expense Limitations. For our services under the Investment
Advisory Agreement, we receive a fee calculated as 0.625% per year of average
daily net assets of the Government and Intermediate Income (High Yield) Fund
during the month. Such percentage does not
decrease as net assets increase. We can waive or reduce this fee during any
period. We can also reduce our fee on a permanent basis, without any
requirement for consent by the affected Fund or its shareholders, under such
terms as we may determine, by written notice to the Trust.
We agreed to be responsible for the fees and expenses of the Trustees and
officers of the Trust who are affiliated with us. We are also responsible for
the Trust's various promotional expenses (including distributing Prospectuses
to potential shareholders).
Payments to Third Parties. We can make payments out of our investment
advisory fee to other persons, including broker-dealers that make one or more
of the Trust's funds available to investors pursuant to any "no transaction
fee" network or service they provide. Under regulations of the Securities and
Exchange Commission, such arrangements are permissible in connection with
distributing investment company shares, if the payments of the shared fee
amounts are made out of our own resources.
Services Contract.
The Trust does not have any officers or employees who are paid directly by the
Trust. The Trust entered into a Services Agreement with us for operational
and other services required by its Funds. Such services may include:
* The functions of shareholder servicing agent and transfer agent.
* Bookkeeping and portfolio accounting.
* Handling telephone inquiries, cash withdrawals and other customer service
functions (including monitoring wire transfers).
* Providing appropriate supplies, equipment and ancillary services necessary
to conduct of its affairs.
* Calculating net asset value.
* Arranging for and paying the Custodian.
* Arranging for and paying the Trust's independent accountants.
* Arranging for and paying the Trust's legal counsel.
* Registering the Trust and its shares with the Securities and Exchange
Commission and notifying any applicable state securities commissions of its
sale in their jurisdiction.
* Printing and distributing prospectuses and periodic financial reports to
current shareholders.
* Trade association membership.
* Preparing shareholder reports, proxy materials and holding shareholder
meetings.
We provide all these services to each Fund for a fee calculated as a
percentage of average daily net assets. This fee is reviewed and approved at
least annually by the Trustees and is compared with the fee paid by other
mutual funds of similar size and investment objective to determine if it is
reasonable. The current fees are stated in the Trust's Prospectus.
Our payment under the Services Agreement is in addition to and independent of
payments made pursuant to the Investment Advisory Agreement. We also provide
such services to Mosaic Equity Trust, Mosaic Tax-Free Trust, Mosaic Focus Fund
Trust and Mosaic Government Money Market Trust.
The Trust remains responsible for any extraordinary or non-recurring expenses
it incurs.
Distribution Agreement.
Mosaic Funds Distributor, LLC, is the Distributor of Mosaic Funds. It
receives no compensation for its services under the Distribution Agreement.
The agreement has an initial term of two years beginning July 30, 1998 and may
continue in effect after that term only if approved annually by the Trustees,
including a majority of those who are not "interested persons," as defined in
the Investment Company Act of 1940.
The Distribution Agreement provides for distribution of the Trust's shares
without a sales charge to the investor. The Distributor may act as the
Trust's agent for any sales of its shares, but the Trust may also sell its
shares directly to any person. The Distributor makes each Fund's shares
continuously available to the general public in those States where it has
given notice that it will do so. However, the Distributor has no obligation
to purchase any of the Trust's shares.
The Distributor is wholly owned by Madison Investment Advisors, Inc. and we
share our personnel.
4. Other Service Providers.
We arrange for Trust securities to be held in custody by the Trust's
Custodian, for the Trust to be audited annually by independent accountants and
for the Trust and the Independent Trustees to be represented by outside
counsel. The Trust does not pay any separate fees for the services of these
third parties because the cost of these services is included in the advisory
and service fees we receive to manage the Trust.
Transfer Agent and Dividend-Paying Agent.
The Trust is registered with the Securities and Exchange Commission as the
transfer agent for its shares and acts as its own dividend-paying agent.
While transfer agent personnel and facilities are included among those
services provided to the Trust under the Services Agreement between us and the
Trust (see above), the Trust itself is ultimately responsible for its transfer
agent and dividend payment functions and for supervising those functions by
its officers.
Custodian.
Firstar Bank, N.A., 425 Walnut Steet, Cincinnati, OH 45202, is Custodian for
the cash and securities of the Trust. The Custodian maintains custody of the
Trust's cash and securities, handles its securities settlements and performs
transaction processing for cash receipts and disbursements in connection with
the purchase and sale of the Trust's shares.
From time to time, the Trust may appoint as Special Custodians certain banks,
trust companies, and firms that are members of the New York Stock Exchange and
trade for their own account in the types of securities purchased by the Trust.
Such Special Custodians will be used by the Trust only for the purpose of
providing custody and safekeeping services in limited circumstances. First,
custody would be of relatively short duration. Second, custody would be for
designated types of securities that, in our opinion or in the opinion of the
Trustees, would most suitably be held by such Special Custodians rather than
by the Custodian.
In the event any such Special Custodian is used, it shall serve the Trust only
in accordance with a written agreement with the Trust. The agreement must
meet the requirements of the Securities and Exchange Commission for mutual
fund custodians and be approved and reviewed at least annually by the
Trustees. If the Special Custodian is a securities dealer, it must deliver to
the Custodian its receipt for the safekeeping of each lot of securities
involved prior to payment by the Trust for such securities.
The Trust may also maintain deposit accounts for the handling of cash balances
of relatively short duration with various banks, as we or the Trustees deem
appropriate, to the extent permitted by the Investment Company Act of 1940.
Independent Public Accountant.
Deloitte & Touche LLP, 117 Campus Drive, Princeton, NJ 08540, serves as
independent public accountants to the Trust. The independent accountant
audits the Trust's annual reports and annually reviews the internal controls
of the Trust both as a mutual fund and as a transfer agent.
BROKERAGE ALLOCATION AND OTHER PRACTICES
We make all decisions regarding the purchase and sale of securities and
executing of these transactions. This includes selecting market, broker or
dealer and negotiating commissions. Our decisions are subject to review by
the Trustees.
During its three most recent fiscal years, the Trust did not pay any brokerage
commissions.
In general, we seek to obtain prompt and reliable execution of orders at the
most favorable prices or yields when purchasing and selling Trust securities.
In determining the best price and execution, we may take into account a
dealer's operational and financial capabilities, the type of transaction
involved, the dealer's general relationship with us and any statistical,
research or other services the dealer provides us. To the extent such non-
price factors are taken into account, the execution price paid may be
increased, but only in reasonable relation to the benefit of such non-price
factors to the Trust as we determine in good faith. The Trust may not be our
only client that benefits from our receipt of research from the brokers and
dealers the Trust uses for its trading needs.
Brokers or dealers who execute portfolio transactions for the Trust may also
sell its shares; however, any such sales will not be either a qualifying or
disqualifying factor in selecting brokers or dealers.
We expect that most portfolio transactions will be made directly with a dealer
acting as a principal. As a result, the transaction will not involve payment
of commissions. However, any purchases from an underwriter or selling group
could involve payments of fees and concessions to the underwriting or selling
group.
Affiliated Transactions. We can purchase portfolio securities through an
affiliated broker if we decide it is in the Trust's interests. If we trade
through an affiliated broker, we will observe four requirements. (1) The
transaction must be in the ordinary course of the broker's business. (2) The
transaction cannot involve a purchase from another broker or dealer. (3)
Compensation to the broker in connection with the transaction cannot be in
excess of one percent of the cost of the securities purchased. (4) The terms
to the Trust for purchasing the securities, including the cost of any
commissions, must be as favorable to the Trust as the terms concurrently
available from other sources. Any compensation paid in connection with such a
purchase will be in addition to fees payable to us under the Investment
Advisory Agreement.
We do not anticipate that any such purchases through affiliates will ever
represent a significant portion of the Trust's trading activity. In fact, no
such transactions took place during the Trust's six most recent fiscal years.
Portfolio Turnover. We do not expect to engage in short-term trading for the
any Fund, but securities may be purchased and sold in anticipation of market
interest rate changes, as well as for other reasons. We anticipate that
annual portfolio turnover for these Funds will generally not exceed 100%, but
actual turnover rate will not be a limiting factor if we believe it is
desirable to make purchases or sales.
CAPITAL STOCK AND OTHER SECURITIES
Summary.
The Declaration of Trust, dated November 18, 1982, was filed with the
Secretary of State of the Commonwealth of Massachusetts and the Clerk of the
City of Boston, Massachusetts. Under the terms of the Declaration of Trust,
the Trustees may issue an unlimited number of whole and fractional shares of
beneficial interest without par value for each series of shares they have
authorized. All shares issued will be fully paid and nonassessable and will
have no preemptive or conversion rights. Under Massachusetts law, the
shareholders, under certain circumstances, may be held personally liable for
the Trust's obligations. The Declaration of Trust, however, provides
indemnification out of Trust property of any shareholder held personally
liable for obligations of the Trust.
Shares and Classes of Shares.
Three series of the Trust's shares are currently authorized: Government Fund
shares and Intermediate Income Fund shares. Each share
has one vote and fractional shares have fractional votes. Except as otherwise
required by applicable regulations, any matter submitted to a shareholder vote
will be voted upon by all shareholders without regard to series or class. For
matters where the interests of separate series or classes are not identical,
the question will be voted on separately by each affected series or class.
For example, shareholder votes relating to the election of Trustees or
approval of the Trust's selection of independent public accountants, as well
as any other matter in which the interests of all shareholders are identical,
will be voted on without regard to series or classes of shares. Matters that
affect a particular series or class of shares will not be voted upon by the
unaffected shareholders. On the other hand, required shareholder approval of
the Investment Advisory Agreement and any change in a Fund's fundamental
investment policies will be submitted to a separate vote by each series and
class of shares. When a matter is voted upon separately by more than one
series or class of shares, it may be approved with respect one series or class
even if it is rejected by the shareholders of another series or class.
The Trustees may authorize at any time creating additional series of shares.
The proceeds of the new series would be invested in separate, independently
managed portfolios. The Trustees can also authorize additional classes of
shares within any series (which would be used to distinguish among the rights
of different categories of shareholders, as might be required by future
regulations or other unforeseen circumstances). These classes can have such
preferences, privileges, limitations, and voting and dividend rights as the
Trustees may determine.
All money received by the Trust for shares of any additional series or class,
and all assets in which such consideration is invested, would belong to that
series or class (but classes may represent proportionate undivided interests
in a series), and would be subject to its own related liabilities.
Share Splits and Liquidation Rights.
The Trustees may divide or combine the Trust's shares into a greater or lesser
number of shares as long as the action will not change your proportionate
interest in the Trust. In the event of unforeseen gains or losses, the
Trustees might use this authority to maintain the price of Money Market shares
at $1.00. Any assets, income and expenses of the Trust that we cannot readily
identify as belonging to a particular series will be allocated by or under the
direction of the Trustees as they deem fair and equitable. Upon any
liquidation of the Trust or any of its Funds, you would be entitled to share
pro-rata in the liquidation proceeds available for distribution.
Shareholder Meetings.
Because there is no requirement for annual elections of Trustees, the Trust
does not anticipate having regular annual shareholder meetings. Shareholder
meetings will be called as necessary to consider questions requiring a
shareholder vote. The selection of the Trust's independent accountants will
be submitted to a ratification vote by the shareholders at any meetings held
by the Trust.
Any change in the terms of the Declaration of Trust (except for immaterial
changes like a name change), in the Investment Advisory Agreement (except for
reductions of the Advisor's fee) or in the fundamental investment limitations
of a Fund must be approved by a majority of the shareholders before it can
become effective.
Shareholder inquiries can be made to the offices of the Trust at the address
on the cover of this document.
Voting Rights.
The voting rights of shareholders are not cumulative. As a result, holders of
more than 50 percent of the shares voting can, if they choose, elect all
Trustees being selected, while the holders of the remaining shares would be
unable to elect any Trustees.
A "majority" is constituted by either 50 percent of all shares of the Fund or
67 percent of the shares voted at an annual meeting or special meeting of
shareholders at which at least 50 percent of the shares are present or
represented by proxy.
The Declaration of Trust provides that two-thirds of the holders of record of
the Trust's shares may remove a Trustee from office by votes cast in person or
by proxy at a meeting called for the purpose. A Trustee may also be removed
from office provided two-thirds of the holders of record of the Trust's shares
file declarations in writing with the Trust's Custodian. The Trustees are
required to promptly call a meeting of shareholders for the purpose of voting
on removal of a Trustee if requested to do so in writing by the record holders
of at least 10% of the Trust's outstanding shares.
Ten or more persons who have been shareholders for at least six months and who
hold shares with a total value of at least $25,000 (or 1% of the Trust's net
assets, if less) may require the Trust to assist a shareholder solicitation
with the purpose of calling a shareholder meeting. Such assistance could
include providing a shareholder mailing list or an estimate of the number of
shareholders and approximate cost of the shareholder mailing. In the latter
case, unless the Securities and Exchange Commission determines otherwise, the
shareholders desiring the solicitation may require the Trustees to undertake
the mailing if those shareholders provide the materials to be mailed and
assume the cost of the mailing.
Shareholder Liability.
Under Massachusetts law, the shareholders of an entity such as the Trust may,
under certain circumstances, be held personally liable for its obligations.
The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. The Declaration of Trust
provides for indemnification out of Trust property of any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment against a shareholder under such a claim. The risk of a
shareholder incurring financial loss as a result of being a shareholder is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
Liability of Trustees and Others.
The Declaration of Trust provides that the officers and Trustees of the Trust
will not be liable for any neglect, wrongdoing, errors of judgment, or
mistakes of fact or law. However, they are not protected from liability
arising out of willful misfeasance, bad faith, gross negligence, or reckless
disregard of their duties to the Trust. Similar protection is provided to the
Advisor under the terms of the Investment Advisory Agreement and the Services
Agreement. In addition, protection from personal liability for the
obligations of the Trust itself, similar to that provided to shareholders, is
provided to all Trustees, officers, employees and agents of the Trust.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Mosaic's "Guide to Doing Business" describes the basic procedures for
investing in the Trust. The following information concerning other investment
procedures is presented to supplement the information contained in the Guide.
Offering Price.
We calculate the net asset value (NAV) of each Fund every day the New York
Stock Exchange is open for trading. NAV is not calculated on New Year's Day,
the observance of Martin Luther King, Jr.'s Birthday, Presidents Day, Good
Friday, the observance of Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas Day, and on other days the New York Stock Exchange
is closed for trading. The NAV calculation for each Fund is made at the time
of the close of the New York Stock Exchange.
NAV is determined by adding the value of all securities and other assets of a
Fund, subtracting its liabilities and dividing the result by the total number
of outstanding shares of that Fund. Since the Trust does not charge a "sales
load," its shares are both offered and redeemed at NAV.
We determine the value of each Fund's securities in a number of ways. If
current market quotations are readily available for a security, we value it at
the mean between its bid and asked prices. For securities for which current
market quotations are not readily available, we value them at their fair value
as determined in good faith by the Trustees. We value securities having a
remaining effective maturity of 60 days or less at amortized cost which
approximates market value.
The Trustees authorized using independent pricing services to obtain daily
securities prices when required.
The market for many high yield issues is not active and transactions in such
issues may occur infrequently. Accordingly, the independent pricing service
may price securities with reference to market transactions in comparable
securities and to historical relationships among the prices of comparable
securities. Such prices may also reflect an allowance for the impact upon
prices of the larger transactions typical of trading by institutions.
Shares in all Funds are priced by rounding to the nearest penny. NAV of
shares in each Fund is expected to fluctuate daily, and we will make no
attempt to stabilize the value of these shares.
Shareholder Service Policies.
Our policies concerning shareholder services are subject to change from time
to time. In the event of a material change, you will receive an updated
"Guide to Doing Business."
Minimum Initial Investment and Minimum Balance.
We can change the minimum account size below which an account is subject to a
monthly service charge or to involuntary closing. We may change the Trust's
minimum amount for subsequent investments by 30 days written notice. The
notice may be provided in Mosaic's quarterly shareholder newsletter.
Special Service Charges.
We may impose special service charges for services that are not regularly
afforded to shareholders. In order to do this, we must give 30 days written
notice to you or to shareholders in general. These special charges may
include, but are not limited to, fees for excessive exchange activity or
unusual historical account research and copying requests. Mosaic's standard
service charges are also subject to adjustment from time to time.
Share Certificates.
The Trust will not issue share certificates.
Subaccounting Services.
The Trust can provide subaccounting services to institutions. The Trustees
reserve the right to determine from time to time such guidelines as they deem
appropriate to govern the level of subaccounting service that can be provided
to individual institutions in differing circumstances. Normally, the Trust's
minimum initial investment to open an account will not apply to 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" and the performance of the Intermediate Income Fund
will be compared to mutual funds categorized as "Intermediate Corporate Debt
Funds".
If any of these categories should be changed by Lipper Analytical Services,
Inc., we will make comparisons based on the revised categories. We may
disclose the contents of each Fund as frequently as daily in advertisements
and elsewhere.
Average Maturities. We calculate average maturity information for the Funds.
The "average maturity" of a Fund on any day is determined by first multiplying
the number of days then remaining to the effective maturity of each investment
in the Fund by the value of that investment. Next, the results of these
calculations are summed. Finally, the total is divided by the aggregate value
of the Fund that day. Thus, the average maturity represents a dollar-weighted
average of the effective maturities of Fund investments.
By comparison, the "mean average maturity" of a Fund over some period, such as
seven days, a month or a year, represents the arithmetic mean (i.e., simple
average) of the daily average maturity figures for the Fund during the
respective period.
FINANCIAL STATEMENTS AND OTHER ADDITIONAL INFORMATION
Audited Financial Statements for the Trust, together with the Report of
Deloitte & Touche LLP, Independent Auditors for the fiscal year ended
December 31, 1998, appear in the Trust's Annual Report to shareholders for
the fiscal year ended December 31, 1998. That report is incorporated herein
by reference. The Report was filed with the Securities and Exchange
Commission.
Statements contained in this Statement of Additional Information and in the
Prospectus regarding the contents of contracts and other documents are not
necessarily complete. You should refer to the documents themselves for
definitive information on their provisions. We will supply copies of the
Trust's important documents and contracts to interested persons upon request,
or you can obtain them from the SEC's Internet site at www.sec.gov.
The Trust registered with the Securities and Exchange Commission in
Washington, DC, by the filing a Registration Statement. The Registration
Statement contains certain additional information not included in the
Prospectus or this Statement of Additional Information. This information is
available from the SEC or its Internet site.
APPENDIX - QUALITY RATINGS
Any investment we make will have a "quality rating" determined principally by
ratings assigned by nationally recognized statistical rating organizations
(NRSRO). Otherwise, we will assign a rating according to comparable standards
when there is no published rating or when published ratings differ or are
considered obsolete.
Quality ratings will often be determined by referring to the ratings assigned
by two major NRSROs that rate municipal securities: Moody's Investors Service,
Inc. (Moody's) and Standard and Poor's Corporation (S&P). In cases where more
than one NRSRO rates an issue, it will be graded according to whichever rating
we deem appropriate. In cases where no organization rates an issue, we will
grade it using the following standards that we believe are comparable to those
followed by the NRSROs.
Bonds. Moody's uses ratings Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C; S&P uses
ratings AAA, AA, A, BBB, BB, B, CCC, CC and C. Municipal bonds rated Aaa or
AAA are judged to be of the best quality; interest and principal are secure
and prices respond only to market rate fluctuations. Bonds rated Aa or AA are
also judged to be of high quality, but margins of protection for interest and
principal may not be quite as good as for the highest rated securities.
Municipal bonds rated A are considered upper medium grade by each
organization. Protection for interest and principal is deemed adequate but
susceptible to future impairment, and market prices of such obligations, while
moving primarily with market rate fluctuations, also may respond to economic
conditions and issuer credit factors.
Bonds rated Baa or BBB are considered medium grade obligations. Protection
for interest and principal is adequate over the short term, but these bonds
may have speculative characteristics over the long term and therefore may be
more susceptible to changing economic conditions and issuer credit factors
than they are to market rate fluctuations.
Notes and bonds rated Ba or BB are considered to have immediate
speculative elements and their future can not be considered well
assured; protection of interest and principal may be only moderate and
not secure over the long term; the position of these bonds is
characterized as uncertain.
Notes and bonds rated B or lower by each organization are generally
deemed to lack desirable investment characteristics; there may be only
small assurance of payment of interest and principal or adherence to the
original terms of issue over any long period.
Obligations rated Baa or above by Moody's or rated BBB or above by S&P
are considered "investment grade" securities, whereas lower rated
obligations are considered "speculative grade" securities.
Bond ratings may be further enhanced by the notation "+" or "-." For purposes
of the Trust and its investment policies and restrictions, such notations
shall be disregarded. Thus, for example, bonds rated BBB- are considered
investment grade while bonds rated BB+ are not.
Notes. Moody's rates shorter term municipal issues with "Moody's Investment
Grade" or "MIG" designations, MIG-1, MIG-2 and MIG-3; it assigns separate
"VMIG" ratings, VMIG-1, VMIG-2 and VMIG-3, to variable rate demand obligations
for which the issuer or a third-party financial institution guarantees to
repurchase the obligation upon demand from the holder.
MIG-1 and VMIG-1 notes are of the best quality, enjoying strong protection
from established cash flows for debt service or well established and broadly
based access to the market for refinancing. MIG-2 and VMIG-2 notes are of
high quality, with ample margins of protection, but not as well protected as
the highest rated issues. MIG-3 and VMIG-3 notes are of favorable quality,
having all major elements of security, but lacking the undeniable strength of
the higher rated issues and having less certain access to the market for
refinancing.
S&P assigns the ratings, SP-1, SP-2, and SP-3, to shorter term municipal
issues, which are comparable to Moody's MIG-1, MIG-2 and MIG-3 ratings,
respectively.
Commercial Paper. Commercial paper, only some of which may be tax-exempt, is
rated by Moody's with "Prime" or "P" designations, as P-1, P-2 or P-3, all of
which are considered investment grades. In assigning its rating, Moody's
considers a number of credit characteristics of the issuer, including: (1)
industry position; (2) rates of return; (3) capital structure; (4) access to
financial markets; and (5) backing by affiliated companies.
P-1 issuers have superior repayment capacity and credit characteristics; P-2
issuers have strong repayment capacity but more variable credit
characteristics; P-3 issuers have acceptable repayment capacity, but highly
variable credit characteristics and may be highly leveraged.
S&P rates commercial paper as A-1, A-2 or A-3. To receive a rating from S&P,
the issuer must have adequate liquidity to meet cash requirements, long-term
senior debt rated A or better (except for occasional situations in which a BBB
rating is permitted), and at least two additional channels of borrowing. The
issuer's basic earnings and cash flow must have an upward trend (except for
unusual circumstances) and typically, the issuer has a strong position in a
well-established industry. S&P assigns the individual ratings A-1, A-2 and A-
3 based on its assessment of the issuer's relative strengths and weakness
within the group of ratable companies.
<PAGE>
Financial Statements
This Statement of Additional Information incorporates by reference the
following documents, a copy of each of which accompanies this Statement of
Additional Information:
1. The Prospectus of Mosaic Income Trust dated April 30, 1999 (including the
Mosaic Bond Fund, Mosaic High Yield Fund and Mosaic Government Fund).
2. The Statement of Additional Information of Mosaic Income Trust dated April
30, 1999.
3. The Annual Report of Mosaic Income Trust dated December 31, 1998.
The following pro forma financial statements are prepared as of assets held by
the predecessor of Mosaic Income Trust's Intermediate Income Fund (Mosaic High
Yield Fund) and Mosaic Bond Fund as of December 31, 1998. It is anticipated
that as of the date of the Merger, the Intermediate Income Fund will not hold
any assets rated lower than B and no more than 35% of its assets will be rated
lower than BBB. (See Note 3 to the Pro Forma Financial Statements.)
Pro Forma Financial Statements
December 31, 1998
(unaudited)
Pro Forma Statement of Net Assets
Schedule of Investments
December 31, 1998
<TABLE>
High Yield Bond
Fund Fund Combined Fund
Principal Principal Principal
Amount Value Amount Value Amount Value
<S> <C> <C> <C> <C> <C> <C>
Schedule of Investments
December 31, 1998
COLLATERALIZED MORTGAGE OBLIGATIONS:
Ryland Acceptance Corporation, Class Four,
Series 76, 9%, 8/1/18 $ 67,335 $ 71,195 $ 67,335 $ 71,195
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $68,194) 71,195 71,195
US GOVERNMENT & AGENCY OBLIGATIONS:
US Treasury Notes, 6.25%, 5/31/00 110,000 112,404 110,000 112,404
US Treasury Notes, 6.25%, 4/30/01 105,000 108,809 105,000 108,809
Fannie Mae Notes, 6%, 5/15/08 10,000 10,579 10,000 10,579
TOTAL US GOVERNMENT & AGENCY OBLIGATIONS (Cost $227,563) 231,792 231,792
CORPORATE DEBT SECURITIES:
CABLE TELEVISION
CSC Holdings, Inc., Senior Subordinated
Debentures, 9.875%, 2/15/13 $200,000 $ 224,750 200,000 224,750
Century Communications Corporation,
Senior Notes, 8.875%, 1/15/07 200,000 221,500 200,000 221,500
CAPITAL GOODS: 6.10%
American Standard, Inc., Senior Notes,
7.375%, 2/1/08 175,000 177,406 175,000 177,406
Federal-Mogul Corporation, Notes, 7.875%,
7/1/10 200,000 198,000 200,000 198,000
CELLULAR COMMUNICATIONS: 4.45%
Paging Network, Inc., Senior Subordinated
Notes, 10.125%, 8/1/07 100,000 100,000 100,000 100,000
Sprint Spectrum, L.P., Senior Notes, 11%,
8/15/06 150,000 174,000 150,000 174,000
CHEMICALS: 2.10%
Sterling Chemicals, Inc., Senior Subordinated
Notes, 11.75%, 8/15/06 150,000 129,000 150,000 129,000
CONSUMER PRODUCTS: 3.13%
Outboard Marine Corporation, Notes, Series A,
8.625%, 3/15/01 100,000 98,000 100,000 98,000
Revlon Consumer Products Corporation, Senior
Notes, 8.125%, 2/1/06 100,000 94,500 100,000 94,500
CONSUMER STAPLES - FOOD: 1.70%
Chiquita Brands International, Inc., Senior
Notes, 10.25%, 11/1/06 100,000 104,375 100,000 104,375
ENERGY: 4.96%
Clark Oil & Refining Corporation, Senior
Notes, 9.5%, 9/15/04 200,000 197,000 200,000 197,000
Oryx Energy Company, 8.125%, 10/15/05 100,000 108,000 100,000 108,000
FINANCIALS: 20.55%
Associates Corporation North America, Senior
Notes, 6%, 4/15/03 40,000 40,800 40,000 40,800
Ford Motor Credit Company, 7.75%, 3/15/05 40,000 44,450 40,000 44,450
Merrill Lynch & Company, Inc., 7%, 1/15/07 40,000 43,050 40,000 43,050
Morgan Stanley Dean Witter Discover & Company,
6.375%, 8/1/02 40,000 40,950 40,000 40,950
FOREST & PAPER PRODUCTS: 5.74%
Container Corporation of America, Senior
Notes, 9.750%, 4/1/03 100,000 101,125 100,000 101,125
Crown Paper Company, Senior Subordinated
Notes, 11%, 9/1/05 175,000 153,125 175,000 153,125
Stone Container Corporation, Senior
Subordinated Debentures, 10.75%, 4/1/02 100,000 99,000 100,000 99,000
GAMBLING: 2.14%
Trump Atlantic City Associates, First
Mortgage Notes, 11.25%, 5/1/06 150,000 132,000 150,000 132,000
HEALTHCARE: 7.25%
Healthsouth Corporation, Senior Subordinated
Notes, 9.5%, 4/1/01 150,000 155,438 150,000 155,438
Integrated Health Services, Inc., Senior
Subordinated Notes, Series A, 9.25%, 1/15/08 80,000 76,200 80,000 76,200
Tenet Healthcare Corporation, Senior
Subordinated Notes, 8.625%, 1/15/07 200,000 214,250 200,000 214,250
HOMEBUILDING: 2.69%
D R Horton, Inc., Senior Notes, 10%, 4/15/06 156,000 165,360 156,000 165,360
LODGING & RESTAURANTS: 5.47%
Apple South, Inc. Senior Notes 9.75%, 6/1/06 200,000 190,500 200,000 190,500
HMH Properties, Inc., Senior Notes, Series
B, 7.875%, 8/1/08 150,000 146,437 150,000 146,437
RADIO & TV BROADCASTING: 7.91%
SFX Broadcasting, Inc., Senior Subordinated
Notes, 11.375%, 10/1/00 250,000 260,625 250,000 260,625
Westinghouse Electric Corporation,
Debentures, 8.625%, 8/1/12 200,000 226,000 200,000 226,000
RETAIL: 5.47%
Gap, Inc., 6.9%, 9/15/07 40,000 43,950 40,000 43,950
Kohls Corporation, 6.7%, 2/1/06 40,000 41,900 40,000 41,900
Tommy Hilfiger USA, Inc., Senior Notes,
6.85%, 6/1/08 200,000 197,250 200,000 197,250
Tommy Hilfiger USA, Inc., 6.5%, 6/1/03 40,000 39,950 40,000 39,950
Michael's Stores, Inc., Senior Notes,
10.875%, 6/15/06 131,000 139,187 131,000 139,187
SOVEREIGN NATIONS: 2.23%
Korea Development Bank Bonds, 7.25%, 5/15/06 150,000 137,438 150,000 137,438
SUPERMARKETS: 5.84%
Fred Meyer, Inc. Senior Notes, 7.45%, 3/1/08 150,000 162,375 150,000 162,375
Supermarkets General Holdings Corp.,
Subordinated Notes, 11.625%, 6/15/02 200,000 197,250 200,000 197,250
TECHNOLOGY: 8.16%
Advanced Micro Devices, Inc., Senior Notes,
11%, 8/1/03 150,000 159,000 150,000 159,000
Arrow Electronics, Inc., Senior Notes, 7%,
1/15/07 40,000 44,000 40,000 44,000
Dictaphone Corporation, Senior Subordinated
Notes, 11.75%, 8/1/05 100,000 97,500 100,000 97,500
Lexmark International, Inc., 6.75%, 5/15/08 40,000 40,200 40,000 40,200
Motorola, Inc., 5.8%, 10/15/08 40,000 40,900 40,000 40,900
Seagate Technology, Inc., Senior Notes,
7.37%, 3/1/07 250,000 245,625 250,000 245,625
Xerox Corporation, 5.5%, 11/15/03 20,000 20,050 20,000 20,050
TELECOMMUNICATIONS: 4.34%
Globalstar, L.P., Senior Notes, 11.25%,
6/15/04 100,000 75,750 100,000 75,750
Iridium, L.L.C., /Iridium Capital, Senior
Notes, Series A, 13%, 7/15/05 100,000 92,000 100,000 92,000
Level 3 Communications, Inc., Senior Notes,
9.125%, 5/1/08 100,000 99,500 100,000 99,500
TEXTILES: 3.34%
WestPoint Stevens, Inc., Senior Notes,
7.875%, 6/15/08 200,000 205,500 200,000 205,500
TRANSPORTATION: 1.60%
Northwest Airlines, Inc., Notes, 8.7%,
3/15/07 100,000 98,625 100,000 98,625
UTILITIES: 5.20%
CMS Energy Corporation, Senior Notes,
8.125%, 5/15/02 150,000 157,875 150,000 157,875
Toledo Edison Company, Debentures, 8.7%,
9/1/02 150,000 162,188 150,000 162,188
TOTAL CORPORATE DEBT
SECURITIES (Cost $6,427,749) $5,973,654 440,200 6,413,854
REPURCHASE AGREEMENT (Cost $97,000) $ 29,000 68,000 97,000
TOTAL INVESTMENTS (Cost $6,820,500) $6,002,654 811,187 6,813,841
CASH AND RECEIVABLES LESS LIABILITIES: $ 151,652 12,341 163,993
TOTAL NET ASSETS: 100% $6,154,306 $823,528 6,977,834
Adjustment
Capital Shares Outstanding 888,809 38,819 80,188 1,007,816
Net Asset Value per Share 6.92 21.21 - 6.92
Pro Forma Statement of Operations
High Yield Bond
Fund Fund ADJ Combined
Income
Interest 572,422 58,948 631,370
Other investment income 25,090 - 25,090
Total income 597,512 58,948 - 656,460
Expenses
Investment advisor fee 40,518 4,917 (1,824) 43,611
Transfer agent, registration 34,359 5,901 (8,860) 31,400
administrative and
professional fees
Total Expenses 74,877 10,818 (10,684) 75,011
Net Investment Income 522,635 48,130 10,684 581,449
Net Realized Gain (Loss) (239,050) 9,796 - (229,254)
Unrealized Ap(De)preciation (19,659) 13,124 - (6,535)
Net Gain (Loss) (258,709) 22,920 - (235,789)
Total Increase in Net
Assets 263,926 71,050 10,684 345,660
See Accompanying Notes to Financial Statements
Notes to Pro Forma Financial Statements of
Mosaic Income Trust
December 31, 1998
(unaudited)
1. Basis of Combination
The Pro Forma Statement of Net Assets reflects the accounts of Mosaic Income
Trust High Yield Fund (the "Intermediate Income Fund") and Mosaic Bond Fund
(the "Your Fund") as of December 31, 1998. The Pro Forma Statement of
Operations reflects the accounts of the Intermediate Income Fund and Your Fund
for the year ended December 31, 1998. These statements have been derived from
the Intermediate Income Fund's and Your Fund's books and records utilized in
calculating daily net asset value at December 31, 1998.
The pro forma statements give effect to the proposed transfer of the assets
and stated liabilities of Your Fund in exchange for shares of the New
Bond Fund under generally accepted accounting principles. The historical cost
of investment securities will be carried forward to the surviving entity and
the results of operations of the Intermediate Income Fund for pre-combination
periods will not be restated. The pro forma statements do not reflect the
expenses of either fund in carrying out its obligations under the Agreement
and Plan of Merger since such expenses will not be borne by either fund.
The Pro Forma Statement of Net Assets and the Pro Forma Statement of
Operations should be read in conjunction with the historical financial
statements of Mosaic Income Trust included or incorporated by reference in the
Statement of Additional Information.
2. Shares of Beneficial Interest
The pro forma net asset value per share assumes the issuance of shares of
the Intermediate Income Fund that would have been issued at December 31, 1998,
in connection with the proposed reorganization, had it occurred then.
3. Pro Forma Operations
The Pro Forma Statement of Operations assumes the same rate of
gross investment income for the investments of the Intermediate Income Fund
and Your Fund. However, it is anticipated that all securities held by the
Intermediate Income Fund prior to the proposed reorganization that are rated
below B will be sold prior to the date of the Merger. Also, any securities
rated below BBB that would exceed of 35% of net assets of the combined fund on
the date of the Merger will also be sold. This may reduce gross investment
income. Such sales, however, are not expected to generate taxable capital
gains in light of ample capital loss carryforwards.
Pro Forma operating expenses reflect the service fees approved by the Trustees
for the applicable periods. As a result, Pro Forma operating expenses would be
required to be adjusted downward by approximately $8,850 in order for the pro
forma total expenses to result in an expense ratio of 0.45%. This decrease in
expenses is a result of a general decline in expenses due to the restructuring
of the services agreement between Mosaic Income Trust and the investment
advisor.
<PAGE>
Mosaic Income Trust
Part C
Item 15. Indemnification
The Advisor maintains a Directors and Officers Errors and
Omissions Policy which covers the officers and Trustees of Mosaic
Income Trust as well as the officers and directors of the
Advisor and its affiliates. Such policy does not protect
against any liability resulting from willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
(Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of such registrants pursuant
to any provision in the Trust or its By-Laws, each registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of
such issue.)
Item 16. Exhibits:
1. Declaration of Trust.*
2. Bylaws.*
3. Not applicable.
4. Agreement and Plan of Merger. (Filed herewith)
5. Not applicable.
6. Form of Investment Advisory Agreement.*
7. Distribution Agreement.*
8. Not applicable.
9. Custody Agreement.*
10. Not applicable.
11. Opinion of counsel, Sullivan &
Worcester, LLP (filed herewith).
12. Tax opinion of DeWitt Ross
and Stevens, S.C. (filed herewith).
13. Contracts.*
14. Consent of Independent Auditors. Filed
herewith.
15. Not applicable.
16. Powers of Attorney. Filed herewith.
17. Not applicable.
* Incorporated by reference to Post-Effective Amendment No. 20 filed by Mosaic
Income Trust, 1933 Act Registration Number 2-80808, Investment Company Act of
1940 File Number 811-3616 on February 26, 1999, effective April 30, 1999.
Item 17. Undertakings.
(1) The undersigned Registrant agrees
that prior to any public reoffering
of the securities registered through
the use of a prospectus which is a
part of this Registration Statement
by any person or party who is deemed
to be an underwriter within the
meaning of Rule 145(c) of the
Securities Act of 1933, the
reoffering prospectus will contain
the information called for by the
applicable registration form for
reofferings by persons who may be
deemed underwriters, in addition to
the information called for by the
other items of the applicable form.
(2) The undersigned Registrant agrees
that every prospectus that is filed
under paragraph (1) above will be
filed as a part of an amendment to
the Registration Statement and will
not be used until the amendment is
effective, and that, in determining
any liability under the Securities
Act of 1933, each post-effective
amendment shall be deemed to be a
new Registration Statement for the
securities offered therein, and the
offering of the securities at that
time shall be deemed to be the
initial bona fide offering of them.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the County of Arlington and
Commonwealth of Virginia, on the 30th day of April, 1999.
Registrant: Mosaic Income Trust
By: (signature)
----------------------------------
Name: Katherine L. Frank
Title: President
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
**, Trustee, Vice President (Date)
Frank E. Burgess and Treasurer
**, Trustee
James Imhoff (Date)
**, Trustee
Thomas S. Kleppe (Date)
**, Trustee
Lorence Wheeler (Date)
(signature), **Attorney-In-Fact 4/30/99
John Rashke, Esquire
</TABLE>
Agreement and Plan of Merger
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made as of the 19th
day of April, 1999, by and between the High Yield Fund series of Mosaic Income
Trust, a Massachusetts business trust (the "Trust"), with its principal place
of business at 1655 Ft. Myer Drive, Arlington, Virginia 22209 (the "Acquiring
Fund"), and the Mosaic Bond Fund series of the Trust (the "Selling Fund").
This Agreement is intended to be and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368 (a)(1)(C) of the United States
Internal Revenue Code of 1986 (the "Code"). The reorganization (the "Merger")
will consist of the transfer of substantially all of the assets of the Selling
Fund in exchange solely for shares of beneficial interest, no par value per
share, of the Acquiring Fund (the "Acquiring Fund Shares") and the assumption
by the Acquiring Fund of certain stated liabilities of the Selling Fund and the
distribution, after the Merger Date hereinafter referred to, of the Acquiring
Fund Shares to the shareholders of the Selling Fund in liquidation of the
Selling Fund as provided herein, all upon the terms and conditions hereinafter
set forth in this Agreement.
WHEREAS, both Funds are separate investment series of an open-end,
registered investment company of the management type, and the Selling
Fund owns securities that generally are assets of the character in
which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of beneficial
interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
substantially all of the assets of the Selling Fund for Acquiring Fund
Shares and the assumption of certain stated liabilities by the
Acquiring Fund on the terms and conditions hereinafter set forth is in
the best interests of the Acquiring Fund shareholders and that the
interests of the existing shareholders of the Acquiring Fund will not
be diluted as a result of the transactions contemplated herein;
WHEREAS, the Trustees of the Trust have also determined that the
Selling Fund should transfer substantially all of its assets to the
Acquiring Fund in exchange for the Acquiring Fund Shares and the
assumption of certain liabilities by the Acquiring Fund, on the terms
and conditions hereinafter set forth, that such transfer is in the best
interests of the Selling Fund's shareholders, and that the interests of
the existing shareholders of the Selling Fund will not be diluted as a
result of the transactions contemplated herein:
NOW, THEREFORE, in consideration of the premises and of the
covenants and agreements hereinafter set forth, the parties
hereto covenant and agree as follows:
ARTICLE I
Transfer of Assets of the Selling Fund in Exchange for the Acquiring
Fund Shares and Assumption of Selling Fund Liabilities and Liquidation
of the Selling Fund
1.1 The Exchange. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained
herein, the Selling Fund agrees to transfer the Selling Fund's assets
as set forth in paragraph 1.2 to the Acquiring Fund, and the Acquiring
Fund agrees in exchange therefore
(i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by dividing the
value of the Selling Fund's net assets computed in the manner and as of
the time and date set forth in paragraph 2.1 by the net asset value of
one Acquiring Fund Share computed in the manner and as of the time and
date set forth in paragraph 2.2; and
(ii) to assume certain liabilities of the Selling Fund, as set forth in
paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Merger Date").
1.2 Assets to be Acquired. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including
without limitation all cash, securities, commodities and futures
interests and dividends or interest receivable, which is owned by the
Selling Fund and any deferred or prepaid expenses shown as an asset on
the books of the Selling Fund on the Merger Date. There have been no
changes in either Fund's financial position as reflected in the Trust's
December 31, 1998 audited financial statements other than those
occurring in the ordinary course of their business in connection with
the purchase and sale of securities and the payment of normal operating
expenses. The Selling Fund reserves the right to sell any of such
securities but will not, without the prior written approval of the
Acquiring Fund, acquire any additional securities other than securities
of the type in which the Acquiring Fund is permitted to invest. In the
event that the Selling Fund holds any investments which the Acquiring
Fund may not hold, the Selling Fund will dispose of such securities
prior to the Merger Date. In addition, if it is determined that the
Selling Fund and the Acquiring Fund portfolios, when aggregated, would
contain investments exceeding certain percentage limitations imposed
upon the Acquiring Fund with respect to such investments, the Selling
Fund will dispose of a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Merger Date.
1.3 Liabilities to be Assumed. The Selling Fund will endeavor to discharge all
of its known liabilities and obligations prior to the Merger Date. The
Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared by Madison Mosaic, LLC, the investment advisor and
administrator of the Trust, as of the Valuation Date (as defined in paragraph
2.1), in accordance with generally accepted accounting principles consistently
applied from the prior audited period.
1.4 Liquidation and Distribution. As soon after the Merger Date as is
conveniently practicable (the "Liquidation Date"), (a) the Selling Fund will
liquidate and distribute pro rata to the Selling Fund's shareholders of record,
determined as of the close of business on the Merger Date (the "Selling Fund
Shareholders"), the Acquiring Fund Shares received by the Selling Fund pursuant
to paragraph 1.1. and (b) the Selling Fund will thereupon proceed to dissolve
as set forth in paragraph 1.8 below. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Selling Fund on the books of the Acquiring Fund, to open
accounts on the share records of the Acquiring Fund in the names of the Selling
Fund Shareholders and representing the respective pro rata number of the
Acquiring Fund Shares due such shareholders. All issued and outstanding shares
of the Selling Fund will simultaneously be canceled on the books of the Selling
Fund. The Trust does not issue certificates representing its shares.
1.5 Ownership of Shares. Ownership of Acquiring Fund Shares will be shown on
the books of the Trust. Whole or fractional shares of the Acquiring Fund will
be issued in the manner described in the Prospectus on Form N-14 to be
distributed to shareholders of the Selling Fund as described in Section 5.
1.6 Transfer Taxes. Any transfer taxes payable upon issuance of the Acquiring
Fund Shares in a name other than the registered holder of the Selling Fund
shares on the books of the Trust as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund Shares
are to be issued and transferred.
1.7 Reporting Responsibility. Any reporting responsibility of the Selling Fund
is and shall remain the responsibility of the Selling Fund up to and including
the Merger Date and such later date on which the Selling Fund is terminated.
1.8 Termination. The business of the Selling Fund shall be wound up and the
Selling Fund series of the Trust shall be terminated following the Merger Date
and the making of all distributions pursuant to paragraph 1.4.
ARTICLE II
Valuation
2.1 Valuation of Assets. The value of the Selling Fund's assets to be acquired
by the Acquiring Fund hereunder shall be the value of such assets computed as
of the close of business on the New York Stock Exchange on the business day
immediately preceding the Merger Date (such time and date being hereinafter
called the "Valuation Date"), using the valuation procedures set forth in the
Trust's Declaration of Trust and its current prospectus and statement of
additional information.
2.2 Valuation of Shares. The net asset value of an Acquiring Fund Share shall
be the net asset value per share computed as of the close of business on the
New York Stock Exchange on the Valuation Date, using the valuation procedures
set forth in the Trust's Declaration of Trust and current prospectus and
statement of additional information, as applicable.
2.3 Shares to be Issued. The number of the Acquiring Fund Shares to be issued
(including fractional shares, if any) in exchange for the Selling Fund's assets
shall be determined by dividing the value of the assets of the Selling Fund
determined using the same valuation procedures referred to in paragraph 2.1 by
the net asset value of an Acquiring Fund Share determined in accordance with
paragraph 2.2.
2.4 Determination of Value. All computations of value shall be made by Madison
Mosaic, LLC in accordance with its regular practice and procedures in pricing
the shares and assets of the Trust.
ARTICLE III
Closing and Merger Date
3.1 Merger Date. The Merger Date shall be June 30, 1999 or such later date as
the parties may agree to in writing. All acts taking place at the Closing shall
be deemed to take place simultaneously as of the close of business on the
Merger Date unless otherwise provided. The Closing shall be held as of 4:00
o'clock p.m. at the offices of Madison Mosaic, LLC, 1655 Ft. Myer Drive,
Arlington, Virginia 22209, or at such other time and/or place as the parties
may agree.
3.2 Custodian's Certificate. Firstar Bank, NA, as custodian for the
Trust (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that: (a) the Selling Fund's portfolio securities,
cash, and any other assets shall have been delivered in proper form to the
Acquiring Fund on the Merger Date and (b) all necessary taxes including all
applicable Federal and state stock transfer stamps, if any, shall have been
paid, or provision for payment shall have been made, in conjunction with the
delivery of portfolio securities.
3.3 Effect of Suspension in Trading. In the event that on the Valuation Date
(a) any primary trading market for portfolio securities of the Acquiring Fund
or the Selling Fund shall be closed to trading or trading thereon shall be
restricted, or (b) trading or the reporting of trading on the New York Stock
Exchange or elsewhere shall be disrupted so that accurate appraisal of the
value of the net assets of the Acquiring Fund or the Selling Fund is
impracticable, the Merger Date shall be postponed until the first business day
after the day when trading shall have been fully resumed and reporting shall
have been restored.
3.4 Transfer Agent's Certificate. The Trust, as transfer agent
for each Fund, shall produce at the Closing a certificate of an
authorized officer stating that their records contain the names and
addresses of the Selling Fund Shareholders and the number
and percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Merger. The Trust shall issue a confirmation
evidencing the Acquiring Fund Shares to be credited on the Merger Date to the
Secretary of the Company.
ARTICLE IV
Representations and Warranties
4.1 Representations to Acquiring Fund. The Trust represents and warrants on
behalf of the Selling Fund as follows:
(a) The Selling Fund is a separate investment series of a Massachusetts
business trust duly organized, validly existing and in good standing under the
laws of The Commonwealth of Massachusetts.
(b) The Acquiring Fund is a separate investment series of a Massachusetts
business trust that is registered as an investment company classified as a
management company of the open-end type and its registration with the
Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940 (the "1940 Act") now is in
effect and shall be in full force and effect as of the Merger Date;
(c) The current prospectus and statement of additional information of the
Trust conform in all material respects to the applicable requirements of the
Securities Act of 1933, as amended, (the "1933 Act") and the 1940 Act and the
rules and regulations of the Commission thereunder and do not include any
untrue statement of material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not materially misleading;
(d) The Selling Fund is not, and the execution, delivery and performance of
this Agreement (subject to shareholder approval) will not result, in violation
of any provision of the Trust's Declaration of Trust or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking to which
the Selling Fund is a party or by which it is bound;
(e) The Selling Fund has no material contracts or other commitments (other than
this Agreement) which will be terminated with liability to it prior to the
Merger Date;
(f) Except as otherwise disclosed in writing, no litigation, administrative
proceeding or investigation of or before any court or governmental body is
presently pending or to its knowledge threatened against the Selling Fund or
any of its properties or assets which, if adversely determined, would
materially and adversely affect its financial condition, the conduct of its
business or the ability of the Selling Fund to carry out the transactions
contemplated by this Agreement. The Trust knows of no facts which might form
the basis for the institution of such proceedings and is not a
party to or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects its business
or its ability to consummate the transactions herein contemplated;
(g) The financial statements of the Trust at December 31, 1998 have been
audited by Deloitte & Touche, LLP, certified public accountants, and
are in accordance with generally accepted accounting , principles consistently
applied, and such statements fairly reflect the financial condition of the
Selling Fund as of such date, and there are no known contingent liabilities of
the Selling Fund as of such date not disclosed therein;
(h) Since December 31, 1998, there has not been any material adverse change in
the Selling Fund's financial condition, assets, liabilities or business other
than changes occurring in the ordinary course of business, or any incurrence by
the Selling Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and accepted by the
Acquiring Fund. For the purposes of this subparagraph (h), a decline in the net
asset value of the Selling Fund shall not constitute a material adverse change;
(i) At the Merger Date, all Federal and other tax returns and reports of the
Selling Fund required by law to have been filed by such dates shall have been
filed, and all Federal and other taxes shall have been paid so far as due, or
provision shall have been made for the payment thereof and to the best of the
Trust's knowledge no such return is currently under audit and no assessment has
been asserted with respect to such returns;
(j) For each of the preceding six fiscal years of its operation the Selling
Fund has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains;
(k) All issued and outstanding shares of the Selling Fund are, and at the
Merger Date will be, duly and validly issued and outstanding, fully paid and
non-assessable by the Trust. All of the issued and outstanding shares of the
Selling Fund will, at the time of the orger Date, be held by the persons and
in the amounts set forth in the records of the Trust as provided in paragraph
3.4. The Selling Fund does not have outstanding any options, warrants or other
rights to subscribe for or purchase any of the Selling Fund shares, nor is
there outstanding any security convertible into any of the Selling Fund shares;
(l) At the Merger Date, the Selling Fund will have good and marketable title to
the Selling Fund's assets to be transferred to the Acquiring Fund pursuant to
paragraph 1.2 and full right, power, and authority to sell, assign, transfer
and deliver such assets hereunder, and upon delivery and payment for such
assets, the Acquiring Fund will acquire good and marketable title thereto,
subject to no restrictions on the full transfer thereof, including such
restrictions as might arise under the 1933 Act, other than as disclosed to the
Acquiring Fund and accepted by the Acquiring Fund;
(m) The execution, delivery and performance of this Agreement have been duly
authorized by all necessary action on the part of the Selling Fund and, subject
to approval by the Selling Fund's shareholders, this Agreement constitutes a
valid and binding obligation of the Selling Fund, enforceable in accordance
with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights and to general equity principles;
(n) The information to be furnished by the Selling Fund for use in no-action
letters, applications for orders, registration statements, proxy materials and
other documents which may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete in all material respects and
shall comply in all material respects with Federal securities and other laws
and regulations thereunder applicable thereto;
(o) The proxy statement of the Trust to be included in the Registration
Statement referred to in paragraph 5.7 (other than information therein that
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Merger Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
4.2 Representations to Selling Fund. The Trust represents and warrants on
behalf of the Acquiring Fund as follows:
(a) The Acquiring Fund is a separate investment series of a Massachusetts
business trust duly organized, validly existing and in good standing under the
laws of The Commonwealth of Massachusetts.
(b) The Acquiring Fund is a separate investment series of a Massachusetts
business trust that is registered as an investment company classified as a
management company of the open-end type and its registration with the
Commission as an investment company under the 1940 Act now is in effect and
shall be in full force and effect as of the Merger Date;
(c) The current prospectus and statement of additional information of the
Acquiring Fund, to be effective as of the Merger Date, shall conform in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the rules and regulations of the Commission thereunder and do
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not materially misleading;
(d) The Acquiring Fund is not, and the execution, delivery and performance of
this Agreement will not, result in violation of the Trust's Declaration of
Trust or By-Laws or of any agreement, indenture, instrument, contract, lease or
other undertaking to which the Acquiring Fund is a party or by which it is
bound;
(e) No material litigation, administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against the Acquiring Fund or any of its properties or
assets which, if adversely determined, would materially and adversely affect
its financial condition and the conduct of its business or the ability of the
Acquiring Fund to carry out the transactions contemplated by this Agreement.
The Trust knows of no facts which might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which materially
and adversely affects its business or its ability to consummate the
transactions contemplated herein;
(f) The financial statements of the Acquiring Fund at December 31, 1998 have
been audited by Deloitte & Touche LLP, certified public accountants, and are in
accordance with generally accepted accounting principles consistently applied,
and such statements fairly reflect the financial condition of the Trust as of
such dates, and there are no known contingent liabilities of the Acquiring Fund
as of such dates not disclosed therein;
(g) Since December 31, 1998, there has not been any material adverse change in
the Acquiring Fund's financial condition, assets, liabilities or business other
than changes occurring in the ordinary course of business, or any incurrence by
the Acquiring Fund of indebtedness maturing more than one year from the date
such indebtedness was incurred, except as otherwise disclosed to and accepted
by the Selling Fund. For the purposes of this subparagraph (g), a decline in
the net asset value of the Acquiring Fund shall not constitute a material
adverse change;
(h) At the Merger Date, all Federal and other tax returns and reports of the
Acquiring Fund required by law then to be filed shall have been filed, and all
Federal and other taxes shown due on said returns and reports shall have been
paid or provision shall have been made for the payment thereof and to the best
of the Acquiring Fund's knowledge, no such return is currently under audit and
no assessment has been asserted with respect to such returns;
(i) For each fiscal year of its operation the Acquiring Fund has met the
requirements of Subchapter M of the Code for qualification and treatment as a
regulated investment company;
(j) All issued and outstanding Acquiring Fund Shares are, and at the Merger
Date will be, duly and validly issued and outstanding, fully paid and
non-assessable (except that, under Massachusetts law, shareholders of the
Acquiring Fund could, under certain circumstances, be held personally liable
for obligations of the Acquiring Fund). The Acquiring Fund does not have
outstanding any options, warrants or other rights to subscribe for or purchase
any Acquiring Fund Shares, nor is there outstanding any security convertible
into any Acquiring Fund Shares;
(k) The execution, delivery and performance of this Agreement have been duly
authorized by all necessary action on the part of the Acquiring Fund, and this
Agreement constitutes a valid and binding obligation of the Acquiring Fund
enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to
or affecting creditors' rights and to general equity principles;
(l) The Acquiring Fund Shares to be issued and delivered to the Selling Fund,
for the account of the Selling Fund Shareholders, pursuant to the terms of this
Agreement will at the Merger Date have been duly authorized and, when so issued
and delivered, will be duly and validly issued Acquiring Fund Shares, and will
be fully paid and non-assessable (except that, under Massachusetts law,
shareholders of the Acquiring Fund could, under certain circumstances, be held
personally liable for obligations of the Acquiring Fund);
(m) The information to be furnished by the Acquiring Fund for use in no-action
letters, applications for orders, registration statements, proxy materials and
other documents which may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete in all material respects and
shall comply in all material respects with Federal securities and other laws
and regulations applicable thereto;
(n) The Prospectus to be included in the Registration Statement under Form N-14
(only insofar as it relates to the Acquiring Fund ) shall not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading; and
(o) The Acquiring Fund agrees to use all reasonable efforts to give the
notices or obtain the approvals and authorizations required by the 1933 Act,
the 1940 Act and such of the state Blue Sky or securities laws as it may deem
appropriate in order to continue its operations after the Merger Date.
ARTICLE V
Covenants of the Trust
5.1 Operation in Ordinary Course. The Funds each will operate its business in
the ordinary course between the date hereof and the Merger Date, it being
understood that such ordinary course of business will include customary
dividends and distributions.
5.2 Approval of Shareholders. The Trust will call a meeting of the
Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 Investment Representation. The Selling Fund covenants that the Acquiring
Fund Shares to be issued hereunder are not being acquired for the purpose of
making any distribution thereof other than in accordance with the terms of this
Agreement.
5.4 Further Action. Subject to the provisions of this Agreement, the Trust will
take, or cause to be taken, all action, and do or cause to be done, all things
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement, including any actions required to
be taken after the Merger Date.
5.5 Statement of Earnings and Profits. As promptly as practicable, but in any
case within sixty days after the Merger Date, the Selling Fund shall furnish
the Acquiring Fund, in such form as is reasonably satisfactory to the Acquiring
Fund, a statement of the earnings and profits of the Selling Fund for Federal
income tax purposes which will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be certified by the Selling
Fund's officers.
5.6 Preparation of Form N-14 Registration Statement. The Trust will prepare a
Registration Statement on Form N-14 (the "Registration Statement"), in
compliance with the 1933 Act, the Securities Exchange Act of 1934, as amended,
(the "1934 Act") and the 1940 Act in connection with the meeting of the Selling
Fund Shareholders to consider approval of this Agreement and the transactions
contemplated herein.
ARTICLE VI
Article VI is intentionally omitted.
ARTICLE VII
Conditions Precedent
If any of the conditions set forth below do not exist on or before the
Merger Date with respect to the Selling Fund or the Acquiring Fund, the
other party to this Agreement shall, at its option, not be required to
consummate the transactions contemplated by this Agreement:
7.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Selling Fund in accordance with the provisions of the Trust's Declaration of
Trust and By-Laws as evidenced by certified copies of the resolutions of such
approval maintained in the Minutes of the Trust.
7.2 On the Merger Date the Commission shall not have issued an unfavorable
report under Section 25(b) of the 1940 Act, nor instituted any proceeding
seeking to enjoin the consummation of the transactions contemplated by this
Agreement under Section 25(c) of the 1940 Act and no action, suit or other
proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or
other relief in connection with, this Agreement or the transactions
contemplated herein;
7.3 All required consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities ( including those of
the Commission and of state Blue Sky and securities authorities. including any
necessary "no-action" positions of and exemptive orders from such Federal and
state authorities) to permit consummation of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse effect
on the assets or properties of the Acquiring Fund or the Selling Fund, provided
that the Trust may waive any of such conditions;
7.4 The Registration Statement shall have become effective under the 1933 Act
and no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act;
7.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of
distributing to the Selling Fund Shareholders all of the Selling Fund's
investment company taxable income for all taxable years ending on or prior to
the Merger Date (computed without regard to any deduction for dividends paid)
and all of its net capital gain realized in all taxable years ending on or
prior to the Merger Date (after reduction for any capital loss carryforward);
7.6 The Trust shall have received a favorable opinion of DeWitt, Ross &
Stevens, S.C. substantially to the effect that for Federal income tax purposes:
(a) The transfer of substantially all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain identified liabilities of the Selling Fund followed by the distribution
of the Acquiring Fund's shares to the Selling Fund in dissolution and
liquidation of the Selling Fund, will constitute a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Code and the Acquiring Fund and the
Selling Fund will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code;
(b) no gain or loss will be recognized by the Acquiring Fund upon
the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund;
(c) no gain or loss will be recognized by the Selling Fund upon the transfer of
the Selling Fund assets to the Acquiring Fund in exchange for the Acquiring
Fund Shares and the assumption by the Acquiring Fund of certain identified
liabilities of the Selling Fund or upon the distribution (whether actual or
constructive) of the Acquiring Fund Shares to Selling Fund Shareholders in
exchange for their shares of the Selling Fund;
(d) no gain or loss will be recognized by Selling Fund Shareholders upon
the exchange of their Selling Fund shares for the Acquiring Fund Shares in
liquidation of the Selling Fund;
(e) the aggregate tax basis for the Acquiring Fund Shares received by each
Selling Fund Shareholder pursuant to the Merger will be the same as the
aggregate tax basis of the Selling Fund shares held by such shareholder
immediately prior to the Merger, and the holding period of the Acquiring Fund
Shares to be received by each Selling Fund Shareholder will include the period
during which the Selling Fund shares exchanged therefore were held by such
shareholder (provided the Selling Fund shares were held as capital assets on
the date of the Merger); and
(f) the tax basis of the Selling Fund assets acquired by the Acquiring Fund
will be the same as the tax basis of such assets to the Selling Fund
immediately prior to the Merger, and the holding period of the assets of the
Selling Fund in the hands of the Acquiring Fund will include the period during
which those assets were held by the Selling Fund. Notwithstanding anything
herein to the contrary, neither the Acquiring Fund nor the Selling Fund may
waive the conditions set forth in this paragraph 7.6.
ARTICLE VIII
Brokerage Fees and Expenses
8.1 The Trust represents and warrants that there are no brokers or finders
entitled to receive any payments in connection with the transactions provided
for herein.
8.2 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by either Fund will
be borne by Madison Mosaic, LLC ("Madison"). Such expenses include, without
limitation, (i) expenses incurred in connection with the entering into and
the carrying out of the provisions of this Agreement; (ii) expenses
associated with the preparation and filing of the Registration Statement
under the 1933 Act covering the Acquiring Fund Shares to be issued pursuant
to the provisions of this Agreement; (iii) registration or qualification
fees and expenses of preparing and filing such forms as are necessary
under applicable state securities laws to qualify the Acquiring Fund
Shares to be issued in connection herewith in each state in which the Selling
Fund Shareholders are resident as of the date of the mailing
of the Prospectus and Proxy Statement to such shareholders; (iv) postage; (v)
printing; (vi) accounting fees; (vii) legal fees; and (viii) solicitation cost
of the transactions.
ARTICLE IX
Entire Agreement; Survival of Warranties
9.1 The Trust represents that it has made no representation, warranty or
covenant not set forth herein and that the Agreement constitutes the entire
agreement between the parties.
9.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
ARTICLE X
Termination
10.1 This Agreement may be terminated by the Trust at or prior to the Merger
Date because:
(a) of a breach of any representation, warranty or agreement
contained herein to be performed at or prior to the Merger Date, if not cured
within 30 days; or
(b) a condition herein expressed to be precedent to the obligations of any
party has not been met and it reasonably appears that it will not or
cannot be met.
10.2 In the event of any such termination, in the absence of willful default,
there shall be no liability for damages on the part of either the Acquiring
Fund or the Selling Fund, the Trust, or their respective Trustees or officers,
to any other party or Trustees or officers.
ARTICLE XI
Amendments
This Agreement may be amended, modified or supplemented in such manner
as may necessary or appropriate prior to the Merger; provided, however, that
following the meeting of the Selling Fund Shareholders called by the Selling
Fund pursuant to paragraph 5.2 of this Agreement, no such amendment may have
the effect of changing the provisions for determining the number of the
Acquiring Fund Shares to be issued to the Selling Fund Shareholders under this
Agreement to the detriment of such shareholders without their further approval.
ARTICLE XII
Miscellaneous
12.1 The Article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
12.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
12.3 This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts.
12.4 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by any party
without the written consent of the other party. Nothing herein expressed or
implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
12.5 It is expressly agreed to that the obligations of the Trust hereunder
shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or employees of the Trust, personally, but bind only the
trust property of the Trust, as provided in the Declaration of Trust. The
execution and delivery of this Agreement has been authorized by the Trustees of
the Trust on behalf of each Fund and signed by authorized officers of the
Trust, acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officers shall be deemed to have been made by
any of them individually or to impose any liability on any of them personally,
but shall bind only Trust property as provided in the Trust's Declaration of
Trust.
IN WITNESS WHEREOF, the parties have duly executed and sealed this Agreement,
all as of the date first written above.
Mosaic Income Trust
By:/s/
Name: Katherine L. Frank
Title: President
By: /s/
Name: W. Richard Mason
Title: Secretary
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
April 29, 1999
Mosaic Income Trust
1655 Fort Myer Drive
Suite 1000
Arlington, Virginia 22209
Gentlemen:
We have been requested by the Mosaic Income Trust, a Massachusetts business
trust with transferable shares (the "Trust") established under an Agreement
and Declaration of Trust dated November 18, 1982, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Mosaic High Yield Fund (to be renamed the Mosaic Intermediate Income Fund)(the
"Acquiring Fund"), a series of the Trust. We understand that the Trust is
about to file a Registration Statement on Form N-14 for the purpose of
registering shares of the Trust under the Securities Act of 1933, as amended
(the "1933 Act"), in connection with the proposed acquisition by the Acquiring
Fund of all of the assets of Mosaic Bond Fund (the "Acquired Fund"), also a
series of the Trust, in exchange solely for shares of the Acquiring Fund and
the assumption by the Acquiring Fund of the identified liabilities of the
Acquired Fund pursuant to an Agreement and Plan of Reorganization, the form
of which is included in the Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other proceedings
relating to the Trust. We have examined copies, either certified or otherwise
proved to be genuine to our satisfaction, of the Trust's Declaration and By-
Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us
to render the opinion expressed below.
Based upon the foregoing, and assuming the approval by shareholders of the
Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on June 28, 1999, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued
in accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended
and applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of the
Registration Statement on Form N-14 and to the reference to our firm under the
caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of the
Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section
7 of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
(signature)
- ---------------------------
SULLIVAN & WORCESTER LLP
F:\DML\GIT6\N14SWOP.:3/16/98
DeWitt Ross & Stevens S.C.
Law Firm
Capitol Square Office West Office
Two East Mifflin Street Firstar Financial Centre
Suite 600 8000 Excelsior Drive, Suite 401
Madison, WI 53703-2865 Madison, WI 53717-1914
Fax 608-252-9243 Fax 608-831-2106
Tel 608-255-8891 Tel 608-831-2100
Please respond to: Capitol Square Office
Direct Line: 608-283-5633
April 19, 1999
Board of Trustees
Mosaic Income Trust
1655 Ft. Myer Drive, Suite 1000
Arlington, VA 22209
Gentlemen:
You have requested our opinion with respect to certain federal income tax
consequences of the proposed transfer of substantially all of the assets of
the Mosaic Bond Fund (the "Selling Fund"), a series of the Mosaic Income
Trust, a Massachusetts business trust (the "Trust"), in exchange solely for
shares of beneficial interest in the High Yield Fund (the "Acquiring fund"),
another existing series under the Trust, pursuant to an Agreement and Plan of
Merger, dated as of April 19, 1999 (the "Merger Agreement"). This opinion is
provided to the Board of Trustees of the Trust pursuant to Section 7.6 of the
Merger Agreement.
In rendering this opinion, we have reviewed and relied upon the Merger
Agreement, approved and entered into by the Board of Trustees on the Trust on
behalf of the Selling Fund and the Acquiring Fund and the holders of the
shares of beneficial interest in such respective Funds, and upon the
Prospectus/Proxy Statement, dated May 1, 1999, prepared for submission to the
shareholders of the Selling Fund. We have relied, without independent
verification, upon the factual representations made therein, and further have
assumed that the transaction described therein (the "Merger") is concluded in
accordance with the terms and provisions of the Merger Agreement. We further
have relied on the following representations certified to us by officers of
the Trust on behalf of the Selling Fund and the Acquiring Fund:
A. The Selling Fund has not redeemed and will not redeem any
outstanding share of beneficial interest in the Selling Fund in connection
with the Merger, except to the extent necessary to comply with its legal
obligation to redeem its shares in the ordinary course of its business.
B. The Acquiring Fund has no plan or intention to redeem or reacquire
any of the Acquiring Fund share to be issued to the Selling Fund shareholders
in connection with the Merger, except to the extent necessary to comply with
its legal obligation to redeem its shares in the ordinary course of its
business.
C. The Acquiring Fund has no plan or intention to sell or dispose of
any of the assets of the Selling Fund which will be acquired by the Acquiring
Fund pursuant to the Merger, except for dispositions made in the ordinary
course of its business, and to the extent necessary to enable the Acquiring
Fund to comply with its legal obligation to redeem its shares in the ordinary
course of its business.
D. Following the Merger, the Acquiring Fund will continue the
historic business of the Selling Fund in a substantially unchanged manner, as
part of the ongoing business of the Acquiring Fund as an open-end, registered
investment company.
E. The Acquiring Fund will not make any payment or distribution of
cash or property to the Selling Fund or to any shareholder of the Selling Fund
in connection with the Merger, other than the issuance of shares of beneficial
interest in the Acquiring Fund.
F. To the best knowledge of management of the Trust and the Selling
Fund, there is no present plan or intention on the part of the holders of
shares of beneficial interest in the Selling Fund to sell, exchange or
otherwise dispose of any of the shares of beneficial interest in the Acquiring
Fund which will be received by them pursuant to the Merger.
G. Immediately following consummation of the Merger, the Acquiring
Fund will possess the same assets and liabilities possessed by the Selling
Fund immediately prior to the Merger, excepting only those assets used to pay
expenses incurred in connection with the Merger.
H. Neither the Selling Fund nor the Acquiring Fund expects to issue
additional shares other than in the ordinary course of its business as an
open-end, registered investment company.
I. The foregoing representations are true on the date of this opinion
letter and will be true on the date of closing of the Merger.
Based upon and subject to the foregoing, and upon our examination of the
legal authority we have deemed to be relevant, it is our opinion that for
federal income tax purposes:
1. The transfer of substantially all of the Selling Fund assets in
exchange for the Acquiring Fund shares and the assumption by the Acquiring
Fund of certain identified liabilities of the Selling Fund, followed by the
distribution of the Acquiring Fund's shares to the Selling Fund in dissolution
and liquidation of the Selling Fund, will constitute a "reorganization" within
the meaning of Section 368(a)(1)(C) of the Code, and the Acquiring Fund and
the Selling Fund will each be a "party to a reorganization" within the meaning
of Section 368(b) of the Code.
2. No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Selling Fund solely in exchange for the Acquiring
Fund shares and the assumption by the Acquiring Fund of certain identified
liabilities of the Selling Fund.
3. No gain or loss will be recognized by the Selling Fund upon the
transfer of the Selling Fund assets to the Acquiring Fund in exchange for the
Acquiring Fund shares and the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund, or upon the distribution (whether
actual or constructive) of the Acquiring Fund shares to the Selling Fund
shareholders in exchange for their shares of the Selling Fund.
4. No gain or loss will be recognized by the Selling Fund's
shareholders upon the exchange of their shares in the Selling Fund for the
shares of the Acquiring Fund in liquidation of the Selling Fund.
5. The aggregate tax basis for the Acquiring Fund shares received by
each Selling Fund shareholder pursuant to the Merger will be the same as the
aggregate tax basis of the Selling Fund shares held by such shareholder
immediately prior to the Merger, and the holding period of the Acquiring Fund
shares to be received by each Selling Fund shareholder will include the period
during which the Selling Fund shares exchanged therefor were held by such
shareholder (provided that the Selling Fund shares were held as capital assets
on the date of the Merger ).
6. The tax basis of the Selling Fund assets acquired by the Acquiring
Fund will be the same as the tax basis of such assets to the Selling Fund
immediately prior to the Merger, and the holding period of the assets of the
Selling Fund in the hands of the Acquiring Fund will include the period during
which those assets were held by the Selling Fund.
This opinion is limited to the matters expressly set forth herein, and no
opinion is to be implied or may be inferred beyond the matters expressly
stated. We hereby consent to the filing of this opinion as an exhibit to
be filed by the Trust in connection with the merger and to use of our name and
reference to our firm therein. In giving such consent, we do not thereby
admit that we come within the category of persons whose consent is required
under Section 7(a) of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Sincerely,
DEWITT ROSS & STEVENS S.C.
(signature)
Christopher D. Daniels
CDD:tlh
INDEPENDENT AUDITORS' CONSENT
Mosaic Income Trust:
We consent to the incorporation by reference in this Registration Statement
(Form N-14) relating to the Prospectus/Proxy Statement dated June 1, 1999 to
be voted on at the Special Meeting of Shareholders of Mosaic Income Trust Bond
Fund series, of our report dated February 10, 1999 appearing in the Mosaic
Income Trust Annual Report to Shareholders for the year ended December 31,
1998 and to the references to us under the headings "Financial Highlights" in
the Prospectus and "Financial Statements and Other Additional Information" in
the Statement of Additional Information, both of which are part of such
Registration Statement.
(signature)
DELOITTE & TOUCHE LLP
Princeton, New Jersey
April 29, 1999
RESOLUTION
OF THE BOARDS OF TRUSTEES OF
MOSAIC GOVERNMENT MONEY MARKET TRUST,
MOSAIC INCOME TRUST,
MOSAIC EQUITY TRUST, MOSAIC FOCUS FUND TRUST
AND MOSAIC TAX-FREE TRUST
February 4, 1999
WHEREAS, Rule 483 under the Securities Act of 1933 requires the Trustees to
authorize the use of a power of attorney for purposes of signing the annual
Form N1-A for each of the Trusts and other such filings; and
WHEREAS, the Trustees of each Trust have previously provided written power of
attorney to John Rashke, Esq. of Dewitt Ross & Stevens, SC for purposes of
making all necessary filings on behalf of each Trust with the US Securities and
Exchange Commission:
NOW, THEREFORE, IT IS RESOLVED, that the use of the powers of attorney from each
Trustee dated August 22, 1996 for Mosaic Equity Trust, Mosaic Income Trust,
Mosaic Tax-Free Trust and Mosaic Government Money Market Trust (then known as
GIT Equity Trust, GIT Income Trust, GIT Tax-Free Trust and Government Investors
Trust, repsectively) and dated April 27, 1998 for Mosaic Focus Fund Trust shall
be and hereby is authorized and ratified for purposes of all Form N1-A filings
under the Securities Act of 1933 or the Investment Company Act of 1940 and any
N-14 filings under such acts, if applicable, by each such Trust hereinafter
until revoked by the Trustees; and
RESOLVED FURTHER, that the officers of the Trusts are authorized to take such
actions as are necessary to effectuate the purposes of the foregoing resolution.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of Mosaic Income
Trust, a Massachusetts business trust, does hereby constitute and appoint JOHN
RASHKE and CHRISTOPHER DANIELS, and each of them, his true and lawful attorney
and agent to do any and all acts and things and to execute any and all
instruments which said attorney and agent may deem necessary or advisable: (1)
to enable the said Trust to comply with the Securities Act of 1933, as amended,
and any rules, regulations and requirements of the Securities and Exchange
Commission in respect thereof, in connection with the registration under said
Securities Act of the shares of beneficial interest of said Trust (the
"Securities"), including, specifically, but without limiting the generality of
the foregoing, the power and authority to sign for and on behalf of the
undersigned the name of the undersigned as Trustee of said Trust to a
Registration Statement or to any amendment thereto filed with the Securities and
Exchange Commission in respect of said Securities and to any instrument or
document filed as part of, an exhibit to or in connection with said Registration
Statement or amendment; (2) to enable said Trust to comply with the Investment
Company Act of 1940, as amended, and any rules, regulations and requirements of
the Securities and Exchange Commission in respect thereof, in connection with
the registration under said Investment Company Act of the Trust, including
specifically, but without limiting the generality of the foregoing, the power an
authority to sign for and on behalf of the undersigned the name of the
undersigned as Trustee of said Trust to a Registration Statement or of any
amendment thereto filed with the Securities and Exchange Commission in respect
of said Trust and to any instrument or document filed as part of, as an exhibit
to or in connection with said Registration Statement or amendment; and (3) to
register or qualify said Securities for sale and to register or license said
Trust as a broker or dealer in said Securities under the securities or Blue Sky
laws of all such states as may be necessary or appropriate to permit therein the
offering and sale of said Securities as contemplated by said Registration
Statement, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign for and on behalf of the undersigned
the name of the undersigned as Trustee of said Trust to any application,
statement, petition, prospectus, notice or other instrument or document, or to
any amendment thereto, or to any exhibit filed as a part thereof or in
connection therewith, which is required to be signed by the undersigned and to
be filed with the public authority or authorities administering said securities
or Blue Sky laws for the purpose of so registering or qualifying said Securities
or registering or licensing said Trust, and the undersigned does hereby ratify
and confirm as his own act and deed all that said attorney and agent shall do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 22nd day
of August, 1996.
(signature)
Frank E. Burgess
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of Mosaic Income
Trust, a Massachusetts business trust, does hereby constitute and appoint JOHN
RASHKE and CHRISTOPHER DANIELS, and each of them, his true and lawful attorney
and agent to do any and all acts and things and to execute any and all
instruments which said attorney and agent may deem necessary or advisable: (1)
to enable the said Trust to comply with the Securities Act of 1933, as amended,
and any rules, regulations and requirements of the Securities and Exchange
Commission in respect thereof, in connection with the registration under said
Securities Act of the shares of beneficial interest of said Trust (the
"Securities"), including, specifically, but without limiting the generality of
the foregoing, the power and authority to sign for and on behalf of the
undersigned the name of the undersigned as Trustee of said Trust to a
Registration Statement or to any amendment thereto filed with the Securities and
Exchange Commission in respect of said Securities and to any instrument or
document filed as part of, an exhibit to or in connection with said Registration
Statement or amendment; (2) to enable said Trust to comply with the Investment
Company Act of 1940, as amended, and any rules, regulations and requirements of
the Securities and Exchange Commission in respect thereof, in connection with
the registration under said Investment Company Act of the Trust, including
specifically, but without limiting the generality of the foregoing, the power an
authority to sign for and on behalf of the undersigned the name of the
undersigned as Trustee of said Trust to a Registration Statement or of any
amendment thereto filed with the Securities and Exchange Commission in respect
of said Trust and to any instrument or document filed as part of, as an exhibit
to or in connection with said Registration Statement or amendment; and (3) to
register or qualify said Securities for sale and to register or license said
Trust as a broker or dealer in said Securities under the securities or Blue Sky
laws of all such states as may be necessary or appropriate to permit therein the
offering and sale of said Securities as contemplated by said Registration
Statement, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign for and on behalf of the undersigned
the name of the undersigned as Trustee of said Trust to any application,
statement, petition, prospectus, notice or other instrument or document, or to
any amendment thereto, or to any exhibit filed as a part thereof or in
connection therewith, which is required to be signed by the undersigned and to
be filed with the public authority or authorities administering said securities
or Blue Sky laws for the purpose of so registering or qualifying said Securities
or registering or licensing said Trust, and the undersigned does hereby ratify
and confirm as his own act and deed all that said attorney and agent shall do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 22nd day
of August, 1996.
(signature)
James R. Imhoff, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of Mosaic Income
Trust, a Massachusetts business trust, does hereby constitute and appoint JOHN
RASHKE and CHRISTOPHER DANIELS, and each of them, his true and lawful attorney
and agent to do any and all acts and things and to execute any and all
instruments which said attorney and agent may deem necessary or advisable: (1)
to enable the said Trust to comply with the Securities Act of 1933, as amended,
and any rules, regulations and requirements of the Securities and Exchange
Commission in respect thereof, in connection with the registration under said
Securities Act of the shares of beneficial interest of said Trust (the
"Securities"), including, specifically, but without limiting the generality of
the foregoing, the power and authority to sign for and on behalf of the
undersigned the name of the undersigned as Trustee of said Trust to a
Registration Statement or to any amendment thereto filed with the Securities and
Exchange Commission in respect of said Securities and to any instrument or
document filed as part of, an exhibit to or in connection with said Registration
Statement or amendment; (2) to enable said Trust to comply with the Investment
Company Act of 1940, as amended, and any rules, regulations and requirements of
the Securities and Exchange Commission in respect thereof, in connection with
the registration under said Investment Company Act of the Trust, including
specifically, but without limiting the generality of the foregoing, the power an
authority to sign for and on behalf of the undersigned the name of the
undersigned as Trustee of said Trust to a Registration Statement or of any
amendment thereto filed with the Securities and Exchange Commission in respect
of said Trust and to any instrument or document filed as part of, as an exhibit
to or in connection with said Registration Statement or amendment; and (3) to
register or qualify said Securities for sale and to register or license said
Trust as a broker or dealer in said Securities under the securities or Blue Sky
laws of all such states as may be necessary or appropriate to permit therein the
offering and sale of said Securities as contemplated by said Registration
Statement, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign for and on behalf of the undersigned
the name of the undersigned as Trustee of said Trust to any application,
statement, petition, prospectus, notice or other instrument or document, or to
any amendment thereto, or to any exhibit filed as a part thereof or in
connection therewith, which is required to be signed by the undersigned and to
be filed with the public authority or authorities administering said securities
or Blue Sky laws for the purpose of so registering or qualifying said Securities
or registering or licensing said Trust, and the undersigned does hereby ratify
and confirm as his own act and deed all that said attorney and agent shall do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 22nd day
of August, 1996.
(signature)
Thomas S. Kleppe
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of Mosaic Income
Trust, a Massachusetts business trust, does hereby constitute and appoint JOHN
RASHKE and CHRISTOPHER DANIELS, and each of them, his true and lawful attorney
and agent to do any and all acts and things and to execute any and all
instruments which said attorney and agent may deem necessary or advisable: (1)
to enable the said Trust to comply with the Securities Act of 1933, as amended,
and any rules, regulations and requirements of the Securities and Exchange
Commission in respect thereof, in connection with the registration under said
Securities Act of the shares of beneficial interest of said Trust (the
"Securities"), including, specifically, but without limiting the generality of
the foregoing, the power and authority to sign for and on behalf of the
undersigned the name of the undersigned as Trustee of said Trust to a
Registration Statement or to any amendment thereto filed with the Securities and
Exchange Commission in respect of said Securities and to any instrument or
document filed as part of, an exhibit to or in connection with said Registration
Statement or amendment; (2) to enable said Trust to comply with the Investment
Company Act of 1940, as amended, and any rules, regulations and requirements of
the Securities and Exchange Commission in respect thereof, in connection with
the registration under said Investment Company Act of the Trust, including
specifically, but without limiting the generality of the foregoing, the power an
authority to sign for and on behalf of the undersigned the name of the
undersigned as Trustee of said Trust to a Registration Statement or of any
amendment thereto filed with the Securities and Exchange Commission in respect
of said Trust and to any instrument or document filed as part of, as an exhibit
to or in connection with said Registration Statement or amendment; and (3) to
register or qualify said Securities for sale and to register or license said
Trust as a broker or dealer in said Securities under the securities or Blue Sky
laws of all such states as may be necessary or appropriate to permit therein the
offering and sale of said Securities as contemplated by said Registration
Statement, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign for and on behalf of the undersigned
the name of the undersigned as Trustee of said Trust to any application,
statement, petition, prospectus, notice or other instrument or document, or to
any amendment thereto, or to any exhibit filed as a part thereof or in
connection therewith, which is required to be signed by the undersigned and to
be filed with the public authority or authorities administering said securities
or Blue Sky laws for the purpose of so registering or qualifying said Securities
or registering or licensing said Trust, and the undersigned does hereby ratify
and confirm as his own act and deed all that said attorney and agent shall do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 22nd day
of August, 1996.
(signature)
Lorence D. Wheeler
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
<PAGE>
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
<PAGE>
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.
Mosaic Income Trust
Mosaic High Yield Fund
Mosaic Government Fund
Mosaic Bond Fund
Annual Report
December 31, 1998
Mosaic Funds
<PAGE>
Mosaic Income Trust
Letter to the Shareholders
December 31, 1998
Dear Shareholder:
The year ended December 31, 1998, our first full calendar year under the
Mosaic name, was an eventful one for the Income Trust and the markets in
which the funds are invested. Despite some notable economic bumps, all three
of the funds in the Income Trust ended the period with positive results.
One-year total returns through December 31, 1998 were: 4.07% for High Yield
Fund; 8.52% for Government Fund; and 7.33% for Bond Fund.
The past year was an important one for Mosaic, as we realized our initial
goals for our newly named fund family. Some of these improvements are
represented in our expanded newsletter and annual reports. Others are seen
in terms of service, as we worked hard to make information more accessible to
you through our 24-hour automated telephone line, Mosaic Tiles (1-800-336-
3063) and our website at www.mosaicfunds.com.
We adjusted our fund lineup to provide you a variety of investment vehicles
and realigned our stock funds to reflect our discipline of seeking the best
companies at reasonable valuations.
We hope you are taking advantage of our expanded services and will consider a
fresh look at our fund lineup in light of the diversification opportunities
we now provide.
Thank you again for your continued confidence in Mosaic.
Sincerely,
(signature)
Katherine L. Frank
President
Mosaic Funds
Mosaic Income Trust
Management's Discussion of Fund Performance
December 31, 1998
The Year in Review
Despite a surplus of international woes, domestic political upheaval, and a
volatile stock market, patient bond investors were rewarded with another year
of solid returns. The U.S. bond market exceeded last year's return with the
help of falling interest rates, ongoing global financial turmoil and
expectations of slower economic growth.
The year began with sound economic conditions, rising commodity prices and
the stock market reaching new highs daily. Internationally, Asian markets
appeared to be on the mend while it was argued that world economic problems
would be contained to Asia. The yield curve--the relationship between yields
of short-term and long-term bonds--remained very flat providing very little
advantage for investing in longer bonds.
By mid-summer the stock market was hitting new, perhaps unsustainable, highs
and the world economic problems no longer seemed contained abroad. Commodity
prices turned down abruptly, suggesting possible deflation. The Russian
economy collapsed and they defaulted on their debt. Latin America economies
were troubled. The Federal Reserve Board began to hint at the need to lower
interest rates. All of these factors suggested strong bond performance, and
we lengthened the maturity of bonds in the Income Trust portfolios.
In late summer, the stock market suffered a sharp decline and the flow of
funds was redirected to the bond market. Ten-year bond yields ultimately
fell by more than one percent. As we entered the fall, the wake of
international uncertainties and the stock market drop drove investors from
around the world to the perceived safety of U.S. Treasury bonds. This
produced a relative value gap between government and corporate bonds.
While there has been wide sentiment for a reversal in our domestic economy,
we do not see the economy rolling over again. Growth in the first quarter of
1999 is expected to be rather robust. The consumer continues to spend more
than he earns and appears as confident of his financial well-being as ever.
The stock market, a barometer of future economic strength, looks strong as we
enter 1999, and it is hard to believe the Fed would lower interest rates
further while the stock market is once again accelerating to new heights.
Long term, the world economic softness will likely be felt on our shores. As
a result, rates should continue a gradual decline and inflation should remain
subdued. However, as long as the consumer (representing two-thirds of the
economy) has a head of steam and a pocketful of stock market gains, this
slowing will likely be deferred.
Portfolio Review
Mosaic High Yield Fund
The high yield market had a difficult year in 1998, with the average high-
yield bond fund ending the year slightly negative at -0.08%, as reported by
the Lipper High Yield Bond Fund Index. For the year ended December 31, 1998,
Mosaic High Yield had a relatively strong result, with a total return of
4.07%.
The global turmoil mentioned above had an even bigger impact on the high
yield market than on U.S. Treasury or investment grade corporate bonds. As
investors feared the worst, higher risk assets (such as high yield bonds)
suffered the most. For example, The CSI Asian High Yield Index was down
nearly 25% for 1998. The Mosaic High Yield Fund was able to post a solid
positive return in this environment due to its more cautious and higher
quality approach to managing assets in the high yield market.
Results were enhanced by our investments in the telecommunications, cable and
utility sectors. Among the better returns posted were those of Toledo
Edison, Century Communications and CBS Corp. These companies did well
primarily because their revenue streams are generated domestically and as
such they were not directly impacted by the various financial crises around
the globe. The weakest bond in the entire portfolio was Golden Books Family
Entertainment, whose operating results were below expectation due to very
strong competitive pressures.
With our outlook for a slower global economy, we will continue to position
the portfolio in a somewhat more cautious and defensive posture, while still
maintaining an attractive yield.
Fund-at-a-Glance
Objective: Mosaic High Yield provides relatively higher income by investing
in lower-rated corporate bonds.
Net Assets: $6.2 million
Date of Inception: July 21, 1983
Ticker: GITMX
Mosaic Government Fund
For the calendar year ended December 31, 1998, the Mosaic Government Fund
returned 8.52%. The year proved to be a good one for Treasuries in
particular, with the Lipper Intermediate U.S. Government Fund Index up 8.17%
for the year. This focus on Treasury securities and minimal exposure to
mortgage backed bonds, helped the Fund outpace its peer group for the 12
month period. By extending portfolio maturities at mid-year, we particularly
helped the Fund's relative performance, as interest rates fell and bond
prices rose, shortly after we extended the Fund's duration.
Fund-at-a-Glance
Objective: Mosaic Government provides investors with monthly dividends by
investing in bonds and other securities issued or guaranteed by the U.S.
Government.
Net Assets: $5.8 million
Date of Inception: July 21, 1983
Ticker: GIGVX
Mosaic Bond Fund
For the calendar year ended December 31, 1998, the Mosaic Bond Fund returned
7.33%. The Lipper General Bond Fund Index was up 6.66% for the same period.
Good relative returns resulted because we extended the Fund's maturities at
mid-year, and then significantly increased corporate bond holdings in late
fall as corporate bond yield premiums rose relative to Treasury yields. This
increase in the credit risk of the Fund proved rewarding as corporate bonds
performed well late in 1998 when the Federal Reserve began lowering short-
term interest rates.
Fund-at-a-Glance
Objective: Mosaic Bond Fund has the dual goal of providing dividend income
while seeking capital preservation. The fund invests mainly in investment
grade corporate and government bonds of intermediate maturity.
Net Assets: $824 thousand
Date of Inception: April 23, 1990
Ticker: MBNDX
Comparison of Changes in the Value of a $10,000 Investment
Depicted herein are the following line graphs:
High Yield Lehman Lipper Corp.
Fund Aggregate Bond High Yield
1988 10,000 10,000 10,000
1989 10,279 11,453 9,723
1990 9,503 12,479 8,642
1991 11,938 14,476 12,118
1992 13,381 15,547 14,343
1993 15,393 17,063 17,189
1994 14,981 16,565 16,557
1995 17,146 19,624 19,435
1996 18,318 20,337 21,886
1997 20,135 23,287 24,723
1998 20,955 25,311 25,729
Government Lehman Intermediate
Fund Gov't Bond Index
1988 10,000 10,000
1989 11,111 11,268
1990 11,910 12,345
1991 13,561 14,087
1992 14,292 15,063
1993 15,672 16,294
1994 15,106 16,009
1995 17,277 18,316
1996 17,336 19,059
1997 18,671 20,531
1998 20,261 22,274
Bond Lehman Intermediate
Fund Gov't Corp Bond Index
04/23/1990 10,000 10,000
1990 10,535 10,953
1991 12,011 12,554
1992 12,505 13,454
1993 13,261 14,637
1994 12,984 14,355
1995 14,816 16,555
1996 15,201 17,226
1997 16,119 18,581
1998 17,301 20,150
Average Annual Total Return One Year Five Years Ten Years
High Yield Fund 4.07% 6.37% 7.68%
Government Fund 8.52% 5.27% 7.32%
Bond Fund 7.33% 5.46% 6.51%*
*Since inception on 4/23/90
Past performance is not predictive of future performance.
<PAGE>
Report of Independent Auditors
To the Board of Trustees and Shareholders of Mosaic Income Trust:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the High Yield, Government, and
Bond Funds (the "Funds") of the Mosaic Income Trust as of December 31, 1998,
and the related statements of operations for the year then ended, changes in
net assets and the financial highlights for the year then ended and the
periods ended December 31, 1997. These financial statements and financial
highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net
assets for the year ended March 31, 1997 and the financial highlights of the
High Yield and Government Funds for each of the years in the four-year period
ended March 31, 1997 were audited by other auditors whose report, dated May
2, 1997, expressed an unqualified opinion on the statements of changes in net
assets and financial highlights. The financial highlights of the Bond Fund
for each of the years in the three-year period ended December 31, 1996 were
audited by other auditors whose report, dated January 24, 1997, expressed an
unqualified opinion on the statements of changes in net assets and financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
High Yield, Government, and Bond Funds of the Mosaic Income Trust as of
December 31, 1998, the results of their operations for the year then ended,
the changes in their net assets, and their financial highlights for the year
then ended and the periods ended December 31, 1997 in conformity with
generally accepted accounting principles.
(signature)
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 1999
<PAGE>
High Yield Fund
Portfolio of Investments - December 31, 1998
Credit Rating* Principal
Moody's S&P Amount Value
CORPORATE DEBT SECURITIES: 97.07% of net assets
CABLE TELEVISION: 7.25%
B1 BB- CSC Holdings, Inc., Senior Subordinated
Debentures, 9.875%, 2/15/13 $200,000 $ 224,750
Ba3 BB- Century Communications Corporation,
Senior Notes, 8.875%, 1/15/07 200,000 221,500
CAPITAL GOODS: 6.10%
Ba3 BB- American Standard, Inc., Senior Notes,
7.375%, 2/1/08 175,000 177,406
Ba2 BB+ Federal-Mogul Corporation, Notes, 7.875%,
7/1/10 200,000 198,000
CELLULAR COMMUNICATIONS: 4.45%
B2 B Paging Network, Inc., Senior Subordinated
Notes, 10.125%, 8/1/07 100,000 100,000
Baa3 A- Sprint Spectrum, L.P., Senior Notes, 11%,
8/15/06 150,000 174,000
CHEMICALS: 2.10%
B3 B+ Sterling Chemicals, Inc., Senior Subordinated
Notes, 11.75%, 8/15/06 150,000 129,000
CONSUMER PRODUCTS: 3.13%
B3 B Outboard Marine Corporation, Notes, Series A,
8.625%, 3/15/01 100,000 98,000
B2 B Revlon Consumer Products Corporation, Senior
Notes, 8.125%, 2/1/06 100,000 94,500
CONSUMER STAPLES - FOOD: 1.70%
B1 B+ Chiquita Brands International, Inc., Senior
Notes, 10.25%, 11/1/06 100,000 104,375
ENERGY: 4.96%
Ba3 BB Clark Oil & Refining Corporation, Senior
Notes, 9.5%, 9/15/04 200,000 197,000
Ba1 BB+ Oryx Energy Company, 8.125%, 10/15/05 100,000 108,000
FOREST & PAPER PRODUCTS: 5.74%
B2 B- Container Corporation of America, Senior
Notes, 9.750%, 4/1/03 100,000 101,125
B3 B Crown Paper Company, Senior Subordinated
Notes, 11%, 9/1/05 175,000 153,125
B3 B- Stone Container Corporation, Senior
Subordinated Debentures, 10.75%, 4/1/02 100,000 99,000
GAMBLING: 2.14%
B2 B Trump Atlantic City Associates, First
Mortgage Notes, 11.25%, 5/1/06 150,000 132,000
HEALTHCARE: 7.25%
Ba2 BBB- Healthsouth Corporation, Senior Subordinated
Notes, 9.5%, 4/1/01 150,000 155,438
B2 B- Integrated Health Services, Inc., Senior
Subordinated Notes, Series A, 9.25%, 1/15/08 80,000 76,200
Ba3 BB- Tenet Healthcare Corporation, Senior
Subordinated Notes, 8.625%, 1/15/07 200,000 214,250
HOMEBUILDING: 2.69%
Ba2 BB D R Horton, Inc., Senior Notes, 10%, 4/15/06 156,000 165,360
LODGING & RESTAURANTS: 5.47%
Ba3 B+ Apple South, Inc., Senior Notes, 9.75%, 6/1/06 200,000 190,500
Ba2 BB HMH Properties, Inc., Senior Notes, Series
B, 7.875%, 8/1/08 150,000 146,437
RADIO & TV BROADCASTING: 7.91%
B3 N/R SFX Broadcasting, Inc., Senior Subordinated
Notes, 11.375%, 10/1/00 250,000 260,625
Baa3 BBB- Westinghouse Electric Corporation,
Debentures, 8.625%, 8/1/12 200,000 226,000
RETAIL: 5.47%
Baa3 BBB- Tommy Hilfiger USA, Inc., Senior Notes,
6.85%, 6/1/08 200,000 197,250
Ba2 BB Michael's Stores, Inc., Senior Notes,
10.875%, 6/15/06 131,000 139,187
SOVERIGN NATIONS: 2.23%
Ba2 BB+ Korea Development Bank, Bonds, 7.25%, 5/15/06 150,000 137,438
SUPERMARKETS: 5.84%
Ba2 BB+ Fred Meyer, Inc., Senior Notes, 7.45%, 3/1/08 150,000 162,375
Caa3 CCC+ Supermarkets General Holdings Corp.,
Subordinated Notes, 11.625%, 6/15/02 200,000 197,250
TECHNOLOGY: 8.16%
Ba3 B Advanced Micro Devices, Inc., Senior Notes,
11%, 8/1/03 150,000 159,000
Caa1 CCC Dictaphone Corporation, Senior Subordinated
Notes, 11.75%, 8/1/05 100,000 97,500
Ba1 BBB Seagate Technology, Inc., Senior Notes,
7.37%, 3/1/07 250,000 245,625
TELECOMMUNICATIONS: 4.34%
Caa1 CCC Globalstar, L.P., Senior Notes, 11.25%,
6/15/04 100,000 75,750
B3 B- Iridium, L.L.C., /Iridium Capital, Senior
Notes, Series A, 13%, 7/15/05 100,000 92,000
B3 B Level 3 Communications, Inc., Senior Notes,
9.125%, 5/1/08 100,000 99,500
TEXTILES: 3.34%
Ba3 BB WestPoint Stevens, Inc., Senior Notes,
7.875%, 6/15/08 200,000 205,500
TRANSPORTATION: 1.60%
Ba2 BB Northwest Airlines, Inc., Notes, 8.7%,
3/15/07 100,000 98,625
UTILITIES: 5.20%
Ba3 BB CMS Energy Corporation, Senior Notes,
8.125%, 5/15/02 150,000 157,875
Ba3 BB- Toledo Edison Company, Debentures, 8.7%,
9/1/02 150,000 162,188
TOTAL CORPORATE DEBT SECURITIES (Cost $6,001,538) $5,973,654
REPURCHASE AGREEMENT: 0.47% of net assets
With Donaldson, Lufkin & Jenrette Securities Corporation issued
12/31/98 at 4.625%, due 1/4/99, collateralized by $29,580 in United
States Treasury Notes due 6/30/00. Proceeds at maturity are $29,015
(Cost $29,000) $ 29,000
TOTAL INVESTMENTS (Cost $6,030,538) $6,002,654
CASH AND RECEIVABLES LESS LIABILITIES: 2.46% of net assets $ 151,652
TOTAL NET ASSETS: 100% $6,154,306
Government Fund
Portfolio of Investments - December 31, 1998
Credit Rating* Principal
Moody's S&P Amount Value
US GOVERNMENT & AGENCY OBLIGATIONS: 93.76% of net assets
US TREASURY NOTES: 51.62%
Aaa AAA US Treasury Notes, 7.125%, 2/29/00 $150,000 $ 154,121
Aaa AAA US Treasury Notes, 7.75%, 2/15/01 350,000 371,798
Aaa AAA US Treasury Notes, 6.25%, 4/30/01 500,000 518,140
Aaa AAA US Treasury Notes, 7.25%, 5/15/04 450,000 504,243
Aaa AAA US Treasury Notes, 5.875%, 11/15/05 775,000 828,297
Aaa AAA US Treasury Notes, 5.625%, 2/15/06 250,000 264,605
Aaa AAA US Treasury Notes, 6.5%, 10/15/06 300,000 333,777
US GOVERNMENT AGENCY NOTES: 30.91%
Aaa AAA Fannie Mae Notes, 5.75%, 4/15/03 550,000 565,669
Aaa AAA Fannie Mae Notes, 5.75%, 6/15/05 350,000 362,936
Aaa AAA Fannie Mae Notes, 6.65%, 3/8/06 325,000 334,282
Aaa AAA Fannie Mae Notes, 5.75%, 2/15/08 250,000 259,312
Aaa AAA Freddie Mac Notes, 5.75%, 4/15/08 250,000 259,068
MORTGAGE BACKED SECURITIES: 11.23%
Aaa AAA Freddie Mac, Gold Pass Through Certificates
#E57247, 6.5%, 3/1/09 283,629 288,059
Aaa AAA Government National Mortgage Association II,
Guaranteed Pass Through Certificates #2483,
7%, 9/20/27 352,374 359,309
TOTAL US GOVERNMENT & AGENCY OBLIGATIONS (Cost $5,138,950) $5,403,616
REPURCHASE AGREEMENT: 5.28% of net assets
With Donaldson, Lufkin & Jenrette Securities Corporation issued
12/31/98 at 4.625%, due 1/4/99, collateralized by $310,080
in United States Treasury Notes due 6/30/00.
Proceeds at maturity are $304,156. (Cost $304,000) $ 304,000
TOTAL INVESTMENTS (Cost $5,442,950) $5,707,616
CASH AND RECEIVABLES LESS LIABILITIES: 0.96% of net assets $ 55,203
TOTAL NET ASSETS: 100% $5,762,819
Bond Fund
Portfolio of Investments - December 31, 1998
Credit Rating* Principal
Moody's S&P Amount Value
COLLATERALIZED MORTGAGE OBLIGATIONS: 8.65% of net assets
Aaa AAA Ryland Acceptance Corporation, Class Four,
Series 76, 9%, 8/1/18 $ 67,335 $ 71,195
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $68,194) 71,195
CORPORATE DEBT SECURITIES: 53.45% of net assets
CONSUMER CYCLICALS: 4.85%
Baa3 BBB- Tommy Hilfiger USA, Inc., 6.5%, 6/1/03 40,000 39,950
FINANCIALS: 20.55%
Aa3 A- Associates Corporation North America, Senior
Notes, 6%, 4/15/03 40,000 40,800
A1 A Ford Motor Credit Company, 7.75%, 3/15/05 40,000 44,450
Aa3 AA- Merrill Lynch & Company, Inc., 7%, 1/15/07 40,000 43,050
Aa3 A+ Morgan Stanley Dean Witter Discover & Company,
6.375%, 8/1/02 40,000 40,950
RETAIL: 10.42%
A2 A Gap, Inc., 6.9%, 9/15/07 40,000 43,950
Baa1 BBB+ Kohls Corporation, 6.7%, 2/1/06 40,000 41,900
TECHNOLOGY: 17.63%
A3 A- Arrow Electronics, Inc., Senior Notes, 7%,
1/15/07 40,000 44,000
Baa2 BBB- Lexmark International, Inc., 6.75%, 5/15/08 40,000 40,200
Aa3 AA- Motorola, Inc., 5.8%, 10/15/08 40,000 40,900
A2 A Xerox Corporation, 5.5%, 11/15/03 20,000 20,050
TOTAL CORPORATE DEBT SECURITIES (Cost $426,211) 440,200
US GOVERNMENT & AGENCY OBLIGATIONS: 28.14% of net assets
Aaa AAA US Treasury Notes, 6.25%, 5/31/00 110,000 112,404
Aaa AAA US Treasury Notes, 6.25%, 4/30/01 105,000 108,809
Aaa AAA Fannie Mae Notes, 6%, 5/15/08 10,000 10,579
TOTAL US GOVERNMENT & AGENCY OBLIGATIONS (Cost $227,563) 231,792
TOTAL INVESTMENT SECURITIES $743,187
REPURCHASE AGREEMENT: 8.26% of net assets
With Donaldson, Lufkin & Jenrette Securities Corporation
issued 12/31/98 at 4.625%, due 1/4/99, collateralized by
$69,360 in United States Treasury Notes due 6/30/00.
Proceeds at maturity are $68,035. (Cost $68,000) $ 68,000
TOTAL INVESTMENTS (Cost $789,968) $811,187
CASH AND RECEIVABLES LESS LIABILITIES: 1.50% of net assets $ 12,341
TOTAL NET ASSETS: 100% $823,528
Notes to the Portfolio of Investments:
* Unaudited
Moody's Moody's Investors Services, Inc.
S&P Standard & Poor's Corporation
Statements of Assets and Liabilities
December 31, 1998
High Yield Government Bond
Fund Fund Fund
ASSETS
Investments, at value (Note 1 and 2)
Investment securites $5,973,654 $5,403,616 $743,187
Repurchase agreements 29,000 304,000 68,000
Total investments 6,002,654 5,707,616 811,187
Cash 708 526 969
Receivables
Interest 157,608 68,388 11,650
Capital shares sold 6,097 -- --
Total assets 6,167,067 5,776,530 823,806
LIABILITIES
Payables
Dividends 8,693 2,390 278
Capital shares redeemed 4,068 11,321 --
Total liabilities 12,761 13,711 278
NET ASSETS (Note 4) $6,154,306 $5,762,819 $823,528
CAPITAL SHARES OUTSTANDING 888,809 563,734 38,819
NET ASSET VALUE PER SHARE $6.92 $10.22 $21.21
Statements of Operations
For the year ended December 31, 1998
High Yield Government Bond
Fund Fund Fund
INVESTMENT INCOME (Note 1)
Interest income $572,422 $342,382 $58,948
Other investment income 25,090 -- --
Total investment income 597,512 342,382 58,948
EXPENSES (Notes 3 and 5)
Investment advisory fees 40,518 35,388 4,917
Transfer agent, administrative,
registration and professional fees 34,359 29,443 5,901
Total expenses 74,877 64,831 10,818
NET INVESTMENT INCOME 522,635 277,551 48,130
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on
investments (239,050) 44,837 9,796
Change in net unrealized appreciation
(depreciation) of investments (19,659) 138,728 13,124
NET GAIN (LOSS) ON INVESTMENTS (258,709) 183,565 22,920
TOTAL INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $263,926 $461,116 $71,050
Statements of Changes in Net Assets
for the period indicated
<TABLE>
<CAPTION>
High Yield Fund Government Fund Bond Fund
Year Nine Year Year Nine Year Year Year
Ended Months Ended Ended Ended Months Ended Ended Ended Ended
December December March December December March December December
31, 1998 31, 1997 31, 1997 31, 1998 31, 1997 31, 1997 31, 1998 31, 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
Net investment income $522,635 $399,808 $522,821 $277,551 $223,044 $321,769 $ 48,130 $108,414
Net realized gain (loss) on
investments (239,050) 80,365 8,912 44,837 (64,210) (44,628) 9,796 4,737
Net unrealized appreciation
(depreciation) of investments (19,659) 112,883 (149,195) 138,728 333,544 (128,957) 13,124 (273)
Total increase in net assets resulting
from operations 263,926 593,056 382,538 461,116 492,378 148,184 71,050 112,878
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (522,572) (399,808) (522,821) (277,551) (223,044) (321,769) (48,082) (109,872)
CAPITAL SHARE
TRANSACTIONS (Note 8) (103,499) 69,342 (395,943) 80,235 (561,940) (890,892) (325,972)(2,964,462)
TOTAL INCREASE (DECREASE) IN NET
ASSETS (362,145) 262,590 (536,226) 263,800 (292,606)(1,064,477) (303,004)(2,961,456)
NET ASSETS
Beginning of period $6,516,451 $6,253,861 $6,790,087$5,499,019$5,791,625 $6,856,102$1,126,532 $4,087,988
End of period $6,154,306 $6,516,451 $6,253,861$5,762,819$5,499,019 $5,791,625 $ 823,528 $1,126,532
</TABLE>
Financial Highlights
Selected data for a share outstanding throughout each period:
<TABLE>
Ratio of
Net Ratio of net
Net realized & Distri- Net Net expenses investment
asset Net unrealized butions asset assets to income
value invest. gain Total from from netDist. value end of average (loss) Port.
begin income (loss) on invest. invest. fm. cap.Total end of Total period net to average turnover
period (loss) invest's operat's income gains dist'ions period return (1000s) assets net assets rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund
1998 $7.21 $0.58 $(0.29) $ 0.29 $(0.58) -- $(0.58) $ 6.92 4.07% $6,154 1.16% 8.11% 43%
1997-2 7.01 0.43 0.20 0.63 (0.43) -- (0.43) 7.21 9.12 6,516 1.20-4 7.90-4 38
1997-3 7.16 0.57 (0.15) 0.42 (0.57) -- (0.57) 7.01 6.06 6,254 1.44 8.07 95
1996-3 6.94 0.61 0.22 0.83 (0.61) -- (0.61) 7.16 12.32 6,790 1.60 8.47 237
1995-3 7.29 0.60 (0.35) 0.25 (0.60) -- (0.60) 6.94 3.75 6,726 1.52 8.56 243
1994-3 7.46 0.61 (0.17) 0.44 (0.61) -- (0.61) 7.29 5.89 7,702 1.54 8.02 251
Government Fund
1998 $9.89 $0.49 $0.33 $0.82 $(0.49) -- $(0.49) $10.22 8.52% $5,763 1.15% 4.93% 46%
1997-2 9.43 0.38 0.46 0.84 (0.38) -- (0.38) 9.89 9.07 5,499 1.16-4 5.26-4 37
1997-3 9.71 0.49 (0.28) 0.21 (0.49) -- (0.49) 9.43 2.29 5,792 1.43 5.09 17
1996-3 9.55 0.47 0.16 0.63 (0.47) -- (0.47) 9.71 6.56 6,856 1.59 4.77 190
1995-3 9.70 0.39 (0.15) 0.24 (0.39) -- (0.39) 9.55 2.67 7,653 1.52 4.12 318
1994-3 10.62 0.36 (0.14) 0.22 (0.36) $(0.78) (1.14) 9.70 1.95 8,576 1.54 3.53 287
Bond Fund-1
1998 $20.75 $1.03 $0.46 $1.49 (1.03) -- $(1.03) $21.21 7.33% $ 824 1.11% 4.92% 82%
1997 20.63 1.089 0.121) 1.20 (1.08) -- (1.08) 20.75 6.04 1,127 1.65 4.79 49
1996 21.17 1.07 (0.55) 0.52 (1.06) -- (1.06) 20.63 2.55 4,088 1.51 4.86 94
1995 19.62 1.17 1.55 2.72 (1.17) -- (1.17) 21.17 14.11 5,792 1.35 5.49 58
1994 21.21 1.15 (1.59) (0.44) (1.15) -- (1.15) 19.62 (2.11) 7,166 1.18 5.50 78
</TABLE>
1 Data prior to June 13, 1997 represents Madison Bond Fund, Inc.
2 For the nine-month period ended December 31, 1997.
3 For the year ended March 31.
4 Annualized.
Notes:
Effective July 31, 1996, the investment advisory services transferred
to Madison Mosaic, LLC from Bankers Finance Investment Management Corp.
Mosaic Income Trust
Notes to Financial Statements
December 31, 1998
1. Summary of Significant Accounting Policies. Mosaic Income Trust (the
"Trust") is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 as an open-end, diversified investment
management company. The Trust maintains three separate funds whose principal
objectives are to obtain high current income. The High Yield Fund invests in
long-term debt securities which may include securities rated as low as "Caa"
or "CCC" by Moody's Investors Service, Inc. or Standard & Poor's Corporation,
respectively. The Government Fund invests in securities of the U. S.
Government and its agencies. The Bond Fund invests in investment grade
corporate, government and government agency fixed-income securities. Data for
the Bond Fund prior to June 13, 1997 represents the former Madison Bond Fund,
Inc. which merged ino the Trust on such date.
Securities Valuation: Securities having maturities of 60 days or less are
valued at amortized cost, if determined to approximate market value.
Securities having longer maturities, for which market quotations are readily
available, are valued at the mean between their bid and asked prices.
Securities for which market quotations are not readily available are valued at
their fair value as determined in good faith by the Trustees. Investment
transactions are recorded on the trade date. The cost of investments sold is
determined on the identified cost basis for financial statement and federal
income tax purposes. Repurchase Agreements are valued at amortized cost,
which approximates market value.
Investment Income: Interest income, net of amortization of premium or
discount, and other income (if any) is accrued as earned.
Dividends: Net investment income, determined as gross investment income less
expenses, is declared as a regular dividend each business day. Dividends are
distributed to shareholders or reinvested in additional shares as of the close
of business at the end of each month. Capital gains distributions, if any,
are declared and paid annually at calendar year end. Additional distributions
may be made if necessary.
Income Tax: In accordance with the provisions of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, substantially all
of the taxable income of each fund is distributed to it shareholders and
therefore, no income tax provision is required. As of December 31, 1998, the
High Yield, Government, and Bond Funds had available for federal income tax
purposes the following unused capital loss carryovers:
Expiration Date High Yield Fund Government Fund Bond Fund
December 31, 2002 $740,266 -- $188,652
December 31, 2003 -- $268,589 94,831
December 31, 2004 -- 44,628 --
December 31, 2005 -- 64,210 293
December 31, 2006 239,050 -- --
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ from
those estimates.
Fiscal Year and Accountants: Beginning April 1, 1997 the Trust's fiscal year
changed to December 31 and the Trust changed its Independent Auditors to
Deloitte & Touche LLP.
2. Investments in Repurchase Agreements. When the Trust purchases securities
under agreements to resell, the securities are held for safekeeping by the
Trust's custodian bank as collateral. Should the market value of the
securities purchased under such an agreement decrease below the principal
amount to be received at the termination of the agreement plus accrued
interest, the counterparty is required to place an equivalent amount of
additional securities in safekeeping with the Trust's custodian bank.
Repurchase agreements may be terminated within seven days. Pursuant to an
Exemptive Order issued by the Securities and Exchange Commission, the Trust,
along with other registered investment companies having Advisory and Services
Agreements with the same advisor, transfers uninvested cash balances into a
joint trading account. The aggregate balance in this joint trading account is
invested in one or more consolidated repurchase agreements whose underlying
securities are U.S. Treasury or federal agency obligations.
3. Investment Advisory Fees and Other Transactions with Affiliates. The
Investment Advisor to the Trust, Madison Mosaic, LLC ("the Advisor"), earns an
advisory fee equal to 0.625% per annum of the average net assets of the
Trust's High Yield and Government Funds and 0.50% per annum of the average net
assets of the Bond Fund; the fees are accrued daily and are paid monthly. The
Advisory Agreement between the Trust and the Advisor was approved at the
special meeting of the Trust's shareholders on July 29, 1996.
4. Aggregate Cost and Unrealized Appreciation (Depreciation). The aggregate
cost for federal income tax purposes and the net unrealized appreciation
(depreciation) are stated as follows as of December 31, 1998:
High Yield Government Bond
Fund Fund Fund
Aggregate cost $6,030,538 $5,442,950 $ 789,968
Gross unrealized appreciation $170,002 $ 264,666 $ 21,555
Gross unrealized depreciation (197,886) -- (336)
Net unrealized appreciation
(depreciation) $ (027,884) $ 264,666 $ 21,219
5. Other Expenses. Effective November 1, 1997, all expenses and support
services are provided by the Advisor under a Service Agreement for a fee based
on a percentage of average net assets. This percentage is 0.53% for the High
Yield Fund, 0.52% for the Government Fund and 0.60% for the Bond Fund; the
fees are accrued daily and paid monthly.
The Advisor is also responsible for the fees and expenses of Trustees who are
affiliated with the Advisor and certain promotional expenses.
6. Net Assets. At December 31, 1998, net assets include the following:
High Yield Government Bond
Fund Fund Fund
Net paid in capital on
shares of beneficial interest $7,161,443 $5,875,580 $1,086,085
Undistributed net investment income 63 -- --
Accumulated net realized losses (979,316) (377,427) (283,776)
Net unrealized appreciation
(depreciation) of investments (27,884) 264,666 21,219
Total net assets $6,154,306 $5,762,819 $ 823,528
The High Yield Fund reclassified $889,905 from accumulated net realized losses
to paid in capital as a result of permanent book and tax differences relating
to expired capital loss carryovers for the year ended December 31, 1998. The
reclassification had no impact on net asset value.
7. Investment Transactions. Purchases and sales of securities other than
short-term securities for the year ended December 31, 1998 were as follows:
High Yield Fund Government Fund Bond Fund
Purchases $2,667,218 $2,468,984 $ 726,029
Sales 2,751,524 2,571,348 1,016,713
8. Capital Share Transactions. An unlimited number of capital shares,
without par value, are authorized. Transactions in capital shares for the
following periods were:
<TABLE>
<CAPTION>
High Yield Fund Government Fund Bond Fund
Year Ended 9 Months Ended Year Ended 9 Months Ended Year Ended Year Ended
December December December December December December
31, 1998 31, 1997 31, 1998 31, 1997 31, 1998 31, 1997
<S> <C> <C> <C> <C> <C> <C>
In Dollars
Shares sold $1,538,776 $1,756,590 $711,549 $(,500,312 $ (21,820) $ (80,744)
Shares issued in
reinvestment of
dividends 416,840 326,962 252,269 205,143 43,625 83,381
Total shares issued 1,955,616 2,083,552 963,818 705,455 65,445 164,125
Shares redeemed (2,059,115) (2,014,210) (883,583) (1,267,395) (391,417) (3,128,587)
Net increase
(decrease) $ (103,499) $ 69,342 $ 80,235 $ (561,940) $(325,972)$(2,964,462)
In Shares
Shares sold 215,057 245,860 70,939 51,780 1,050 6,491
Shares issued in
reinvestment of
dividends 58,572 45,466 25,110 21,075 2,084 1,490
Total shares issued 273,629 291,326 96,049 72,855 3,134 7,981
Shares redeemed (288,852) (279,507) (88,226) (130,825) (18,595) (151,880)
Net increase (decrease) (15,223) 11,819 7,823 (57,970) (15,461) (143,899)
</TABLE>