THE RODNEY SQUARE FUND
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
The Rodney Square Fund (the "Fund") consists of two separate portfolios,
the
U.S. Government Portfolio and the Money Market Portfolio (each, a
"Portfolio" and collectively, the "Portfolios"). Each Portfolio
seeks a high level of current income consistent with the
preservation of capital and liquidity by investing in
money market instruments pursuant to its
investment practices.
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STATEMENT OF ADDITIONAL INFORMATION
JANUARY 2, 1998, AS REVISED JANUARY 26, 1998
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This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's current Prospectus, dated January 2, 1998,
and revised January 26, 1998, as amended from time to time. A copy of the
current Prospectus may be obtained without charge, by writing to Rodney Square
Distributors, Inc. ("RSD"), Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-0001, and from certain institutions such as banks or
broker-dealers that have entered into servicing agreements with RSD or by
calling (800) 336-9970.
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TABLE OF CONTENTS
INVESTMENT POLICIES........................................................1
INVESTMENT LIMITATIONS.....................................................4
TRUSTEES AND OFFICERS......................................................5
RODNEY SQUARE MANAGEMENT CORPORATION.......................................7
WILMINGTON TRUST COMPANY...................................................7
INVESTMENT MANAGEMENT AND OTHER SERVICES...................................8
DISTRIBUTION AGREEMENT AND RULE 12B-1 PLAN.................................8
PORTFOLIO TRANSACTIONS.....................................................9
REDEMPTIONS...............................................................10
NET ASSET VALUE AND DIVIDENDS.............................................11
PERFORMANCE INFORMATION...................................................11
TAXES.....................................................................15
DESCRIPTION OF THE FUND...................................................16
OTHER INFORMATION.........................................................16
FINANCIAL STATEMENTS......................................................17
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THE RODNEY SQUARE FUND
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INVESTMENT POLICIES
The Rodney Square Fund consists of two separate portfolios, the Money
Market Portfolio and the U.S. Government Portfolio (the "Portfolios"). The
following information supplements the information concerning each Portfolio's
investment objective, policies and limitations found in the Prospectus.
Each Portfolio has a fundamental policy requiring it to use its best
efforts to maintain a constant net asset value of $1.00 per share, although this
may not be possible under certain circumstances. Each Portfolio values its
portfolio securities on the basis of amortized cost (see "Net Asset Value and
Dividends") pursuant to Rule 2a-7 under the Investment Company Act of 1940 (the
"1940 Act"). As conditions of that Rule, the Fund's Board of Trustees has
established procedures reasonably designed to stabilize each Portfolio's price
per share at $1.00 per share. Each Portfolio maintains a dollar-weighted average
portfolio maturity of 90 days or less; purchases only instruments with effective
maturities of 397 days or less; and invests only in securities which are of high
quality as determined by major rating services or, in the case of instruments
which are not rated, of comparable quality as determined by the Fund's manager,
Rodney Square Management Corporation ("RSMC"), under the direction of and
subject to the review of the Fund's Board of Trustees.
BANK OBLIGATIONS. The Money Market Portfolio's investments in obligations
of U.S. branches and agencies of foreign banks and of wholly-owned banking
subsidiaries of foreign banks located in the United States may be affected by
adverse developments in the country in which the parent bank is located, and
obligations of foreign branches of U.S. and foreign banks may be affected by
adverse developments in the country of domicile of the branch. Various
provisions of federal law governing the establishment and operation of domestic
branches of U.S. banks do not apply to their foreign branches. U.S. agencies of
foreign banks may not accept deposits and thus are not eligible for FDIC
insurance (although such insurance may not be of material benefit to the Money
Market Portfolio, depending upon the principal amount of the obligations of a
particular bank held by the Portfolio).
In the event of a default of an obligation of a foreign branch of a foreign
bank, whether a general obligation of the parent bank or limited to the assets
of the branch, the Money Market Portfolio would be required to pursue its claim
in the court where the branch or the principal office of the parent bank was
located. The merits of the claim and the enforcement of any judgment would be
determined by foreign law. A claim against a U.S. branch, agency or subsidiary
of a foreign bank generally will be subject to the jurisdiction of the U.S.
courts. Enforcement of judgments against U.S. branches, agencies or subsidiaries
of foreign banks with respect to assets located in the United States will be
governed by the law of the state where the assets are located. However,
enforcement of a judgment of a U.S. court with respect to assets located outside
the United States may be subject to the law of the country where such assets are
located. Therefore, recovery in the event of default on the obligations of a
foreign branch of a foreign or U.S. bank or a U.S. branch, agency or subsidiary
of a foreign bank may potentially be a more difficult and expensive process than
in the case of a U.S. branch of a U.S. bank.
FOREIGN SECURITIES. At the present time, portfolio securities of the Money
Market Portfolio which are purchased outside the United States are maintained in
the custody of foreign branches of U.S. banks. To the extent that the Portfolio
may maintain portfolio securities in the custody of foreign subsidiaries of U.S.
banks, and foreign banks or clearing agencies in the future, those sub-custodian
arrangements are subject to regulations under the 1940 Act that govern custodial
arrangements with entities incorporated or organized in countries outside of the
United States.
MUNICIPAL SECURITIES. The Money Market Portfolio may invest in debt
obligations issued by states, municipalities and public authorities ("Municipal
Securities") to obtain funds for various public purposes. The Municipal
Securities must be rated at least AA, A-1 or SP-1 by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P "), Aa, MIG-1/VMIG-1 or P-1 by
Moody's Investors Service, Inc. ("Moody's"), or at least AA or F-1 by Fitch
Investor Services, L.P. ("Fitch"), at the time of investment or, if not rated,
must be determined to be of comparable quality by RSMC under the direction of,
and subject to the review of the Board of Trustees. Yields on Municipal
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Securities are the product of a variety of factors, including the general
conditions of the money market and of the municipal bond and municipal note
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. Although the interest on Municipal Securities may be
exempt from federal income tax, dividends paid by the Money Market Portfolio to
its shareholders will not be tax-exempt.
WHEN-ISSUED SECURITIES. The Portfolios may purchase securities on a
when-issued basis. This means that delivery and payment for the securities
normally will take place approximately 15 to 90 days after the date of the
transaction. The payment obligation and the interest rate that will be received
on securities purchased on a when-issued basis are each fixed at the time the
buyer enters into the commitment. A Portfolio will make commitments to purchase
such securities only with the intention of actually acquiring the securities,
but the Portfolio may dispose of the commitment before the settlement date if it
is deemed advisable as a matter of investment strategy. A separate account of
the Portfolio will be established at the Fund's custodian bank, into which
liquid, unencumbered daily mark-to-market assets equal to the amount of the
above commitments will be deposited. If the market value of the deposited assets
declines, additional assets will be placed in the account on a daily basis so
that the market value of the account will equal the amount of such commitments
by the Portfolio.
A security purchased on a when-issued basis is recorded as an asset on the
commitment date and is subject to changes in market value generally based upon
changes in the level of interest rates. Thus, upon delivery, its market value
may be higher or lower than its cost. When payment for a when-issued security is
due, the Portfolio will meet its obligations from then-available cash flow, the
sale of the securities held in the separate account or the sale of other
securities. The sale of securities to meet such obligations carries with it a
greater potential for the realization of capital gains, which are subject to
federal income tax.
STANDBY COMMITMENTS. The Money Market Portfolio expects that stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary and advisable, the Money Market
Portfolio may pay for stand-by commitments either separately in cash or by
paying a higher price for the obligations acquired subject to such a commitment
(thus reducing the yield to maturity otherwise available for the same
securities). Stand-by commitments purchased by the Money Market Portfolio will
be valued at zero in determining net asset value and will not affect the
valuation of the obligations subject to the commitments. Any consideration paid
for a stand-by commitment will be accounted for as unrealized depreciation and
will be amortized over the period the commitment is held by the Money Market
Portfolio.
SHORT-TERM MUNICIPAL NOTES. This type of note in which the Money Market
Portfolio invests are issued by state and local governments and public
authorities as interim financing in anticipation of tax collections, revenue
receipts or bond sales, such as tax anticipation notes, revenue anticipation
notes, bond anticipation notes and construction loan notes.
YIELDS AND RATINGS OF MONEY MARKET INSTRUMENTS. The yields on the money
market instruments in which the Portfolios invest (such as commercial paper,
bank obligations and Municipal Securities) are dependent on a variety of
factors, including general money market conditions, conditions in the particular
market for the obligation, the financial condition of the issuer, the size of
the offering, the maturity of the obligation and the ratings of the issue. The
ratings of Moody's, S&P and Fitch represent their opinions as to quality of the
obligations they undertake to rate. Ratings, however, are general and are not
absolute standards of quality. Consequently, obligations with the same rating,
maturity and interest rate may have different market prices. Subsequent to its
purchase by the Money Market Portfolio, an issue may cease to be rated or its
rating may be reduced. RSMC, and in certain cases, as required by Rule 2a-7
under the 1940 Act, the Fund's Board of Trustees, will consider whether the
Money Market Portfolio should continue to hold the obligation.
ILLIQUID SECURITIES. The Portfolios may not purchase securities or invest
in repurchase agreements with respect to any securities, if, as a result, more
than 10% of a Portfolio's net assets (taken at current value) would be invested
in repurchase agreements which do not entitle the holder to payment of principal
within seven days and in securities that are illiquid by virtue of legal or
contractual restrictions on resale or the absence of a readily available market.
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In recent years a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933 (the "1933
Act"), including private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments are often
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
For example, commercial paper issues in which the Money Market Portfolio
may invest include securities issued by major corporations without registration
under the 1933 Act in reliance on the exemption from such registration afforded
by Section 3(a)(3) thereof and commercial paper issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is restricted as
to disposition under the federal securities laws in that any resale must
similarly be made in an exempt transaction. However, Section 4(2) paper is
normally resold to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper, thus providing
liquidity.
To facilitate the increased size and liquidity of the institutional markets
for unregistered securities, the Securities and Exchange Commission (the "SEC")
adopted Rule 144A under the 1933 Act. Rule 144A established a "safe harbor" from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Section 4(2) paper that is issued by a
company that files reports under the Securities Exchange Act of 1934, as well as
other types of securities, are generally eligible to be resold in reliance on
the safe harbor of Rule 144A. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment in
order to satisfy share redemption orders. Such markets include automated systems
for the trading, clearance and settlement of unregistered securities, such as
the PORTAL system sponsored by the National Association of Securities Dealers An
insufficient number of qualified institutional buyers interested in purchasing
certain restricted securities held by the Money Market Portfolio, however, could
affect adversely the marketability of such securities and the Money Market
Portfolio might be unable to dispose of such securities promptly or at
reasonable prices.
The Fund's Board of Trustees has the ultimate responsibility for
determining whether specific securities are liquid or illiquid. The Board has
delegated the function of making day-to-day determinations of liquidity to RSMC,
pursuant to guidelines approved by the Board. RSMC will monitor the liquidity of
securities held by the Money Market Portfolio and report periodically on such
decisions to the Board of Trustees. RSMC takes into account a number of factors
in reaching liquidity decisions, including (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers and (5) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how offers are
solicited and the mechanics of transfer).
LOANS OF PORTFOLIO SECURITIES. Although each Portfolio has no present
intention of doing so in excess of 5% of the Portfolio's net assets, each
Portfolio may from time to time lend its portfolio securities to brokers,
dealers and financial institutions. Such loans by either Portfolio will in no
event exceed one-third of that Portfolio's total assets and will be secured by
collateral in the form of cash or securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government Securities"),
which at all times while the loan is outstanding will be maintained in an amount
at least equal to the current market value of the loaned securities.
The primary risk involved in lending securities is that of a financial
failure by the borrower. In such a situation, the borrower might be unable to
return the loaned securities at a time when the value of the collateral has
fallen below the amount necessary to replace the loaned securities. The borrower
would be liable for the shortage, but the Portfolio would be an unsecured
creditor with respect to such shortage and might not be able to recover all or
any of it. In order to minimize this risk, each Portfolio will make loans of
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securities only to firms deemed creditworthy by RSMC and only when, in the
judgment of RSMC, the consideration that the Portfolio will receive from the
borrower justifies the risk.
INVESTMENT LIMITATIONS
The investment limitations described below are fundamental and may not be
changed with respect to either Portfolio without the affirmative vote of the
lesser of (i) 67% or more of the shares of the Portfolio present at a
shareholders' meeting if holders of more than 50% of the outstanding shares of
the Portfolio are present in person or by proxy or (ii) more than 50% of the
outstanding shares of the Portfolio.
Each Portfolio will not as a matter of fundamental policy:
1. purchase the securities of any one issuer if, as a result, more than 5% of
the Portfolio's total assets would be invested in the securities of such
issuer, or the Portfolio would own or hold 10% or more of the outstanding
voting securities of that issuer, except that up to 25% of the Portfolio's
total assets may be invested without regard to these limitations and
provided that these limitations do not apply to securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities;
2. purchase the securities of any issuer if, as a result, more than 25% of a
Portfolio's total assets would be invested in the securities of one or
more issuers having their principal business activities in the same
industry, provided, however, that a Portfolio may invest more than 25% of
its total assets in the obligations of banks. (Neither finance companies
as a group nor utility companies as a group are considered a single
industry for purposes of this policy; the Fund has been advised by the
staff of the SEC that it is the staff's current position that the
exclusion discussed in this item (2) may be applied only to U.S. banks;
the Portfolios, however, will consider both foreign and U.S. bank
obligations within this exclusion.);
3. borrow money, except (i) from a bank for temporary or emergency purposes
(not for leveraging or investment), or (ii) by engaging in reverse
repurchase agreements, provided that borrowings do not exceed an amount
equal to one-third of the current value of the borrowing Portfolio's
assets taken at market value, less liabilities other than borrowings;
4. make loans, except (i) the purchase of a portion of an issue of debt
securities in accordance with its investment objective, policies and
limitations, (ii) engaging in repurchase agreements, or (iii) engaging in
securities loan transactions limited to one-third of the Portfolio's total
assets;
5. underwrite any issue of securities, except to the extent that the
Portfolio may be considered to be acting as underwriter in connection with
the disposition of any portfolio security;
6. purchase or sell real estate, but this limitation shall not prevent a
Portfolio from investing in obligations secured by real estate or
interests therein or obligations issued by companies that invest in real
estate or interests therein; or
7. purchase or sell physical commodities or contracts relating to physical
commodities, provided that currencies and currency-related contracts will
not be deemed physical commodities.
In addition, each Portfolio has adopted several non-fundamental policies,
which can be changed by the Board of Trustees without shareholder approval.
As a matter of non-fundamental policy, each Portfolio will not:
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1. purchase the securities of any one issuer if as a result more than 5% of
the Portfolio's total assets would be invested in the securities of such
issuer, provided that this limitation does not apply to securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities;
2. purchase or otherwise acquire any security or invest in a repurchase
agreement with respect to any securities if, as a result, more than 10% of
a Portfolio's net assets (taken at current value) would be invested in
repurchase agreements not entitling the holder to payment of principal
within seven days and in securities that are illiquid by virtue of legal
or contractual restrictions on resale or the absence of a readily
available market;
3. purchase securities for investment while any bank borrowing equaling 5% or
more of a Portfolio's total assets is outstanding and if at any time a
Portfolio's borrowings exceed the Portfolio's investment limitations due
to a decline in net assets, such borrowings will be promptly (within 3
days) reduced to the extent necessary to comply with the limitations;
4. make short sales of securities or purchase securities on margin (but a
Portfolio may effect short sales against the box and obtain such credits
as may be necessary for the clearance of purchases and sales of
securities);
5. purchase the securities of any open-end investment company, or securities
of any closed-end company except by the purchase in the open market where
no commission or profit to a sponsor or dealer results from such purchase,
provided that in any event the Portfolio may not invest more than 10% of
its total assets in securities issued by investment companies, more than
5% of its total assets in securities issued by any one investment company
or in more than 3% of the voting securities of any one such investment
company, and except when such purchase is part of a plan of merger,
consolidation, reorganization or acquisition of assets; or
6. make loans of portfolio securities unless such loans are fully
collateralized by cash, securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or any combination of cash
and such securities, marked to market value daily.
Whenever an investment policy or limitation states a maximum percentage of
a Portfolio's assets that may be invested in any security or other asset or sets
forth a policy regarding quality standards, such percentage or standard
limitation shall be determined immediately after the Portfolio's acquisition of
such security or other asset. Accordingly, any later increase or decrease
resulting from a change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with a Portfolio's
investment policies and limitations (except where explicitly noted above and
except that, as a condition of Rule 2a-7 under the 1940 Act, quality standards
must be maintained for certain obligations).
TRUSTEES AND OFFICERS
The Fund has a Board, currently composed of five Trustees, which supervises
the Portfolios' activities and reviews contractual arrangements with companies
that provide the Portfolios with services. The Fund's Trustees and officers are
listed below. Except as indicated, each individual has held the office shown or
other offices in the same company for the last five years. All persons named as
Trustees also serve in similar capacities for The Rodney Square Tax-Exempt Fund,
The Rodney Square Multi-Manager Fund and The Rodney Square Strategic
Fixed-Income Fund (together with the Fund, the "Rodney Square Family of Funds").
Those Trustees who are "interested persons" of the Fund (as defined in the 1940
Act ) by virtue of their positions with either RSMC or Wilmington Trust Company
("WTC "), the parent of RSMC, are indicated by an asterisk (*).
MARTIN L. KLOPPING, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Trustee, age 44, was President and Director of RSMC from 1984 to
January 1998. He was also a Director of Rodney Square Distributors, Inc.
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("RSD"), from 1992 to January 1998. He is a Chartered Financial Analyst and
member of the SEC Rules and Investment Advisers Committees of the Investment
Company Institute.
ERIC BRUCKER, School of Management, University of Michigan, Dearborn, MI 48128,
Trustee, age 56, has been Dean of the School of Management at the University of
Michigan since June 1992. He was Professor of Economics, Trenton State College
from September 1989 through June 1992. He was Vice President for Academic
Affairs, Trenton State College, from September 1989 through June 1991. From 1976
until September 1989, he was Dean of the College of Business and Economics and
Chairman of various committees at the University of Delaware. He is also a
member of the Detroit Economic Club, Financial Executive Institute and
Leadership Detroit.
FRED L. BUCKNER, 5 Hearth Lane, Greenville, DE 19807, Trustee, age 65, has
retired as President and Chief Operating Officer of Hercules Incorporated
(diversified chemicals), positions he held from March 1987 through March 1992.
He also served as a member of the Hercules Incorporated Board of Directors from
1986 through March 1992.
JOHN J. QUINDLEN, 313 Southwinds, 1250 West Southwinds Blvd., Vero Beach, FL
32963, Trustee, age 65, has retired as Senior Vice President-Finance of E.I. du
Pont de Nemours and Company, Inc. (diversified chemicals), a position he held
from 1984 to November 30, 1993. He served as Chief Financial Officer of E.I. du
Pont de Nemours and Company, Inc. from 1984 through June 1993. He also serves as
a Director of St. Joe Paper Co. and a Trustee of Kalmar Pooled Investment Trust.
*ROBERT J. CHRISTIAN, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, President and Trustee, age 48, has been Chief Investment Officer of
WTC since February 1996 and Director of RSMC since February 1996. He was
Chairman and Director of PNC Equity Advisors Company, and President and Chief
Investment Officer of PNC Asset Management Group, Inc. from 1994 to 1996. He was
Chief Investment Officer of PNC Bank, N.A. from 1992 to 1996, Director of
Provident Capital Management from 1993 to 1996, and Director of Investment
Strategy PNC Bank, N.A. from 1989 to 1992. He is also a Trustee of LaSalle
University and a member of the Board of Governors for the Pennsylvania Economy
League.
NINA M. WEBB, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Vice President, age 44, has been an Equity Portfolio Manager at WTC
since March 1987. A Chartered Financial Analyst, she previously was employed by
the University of Delaware as Senior Investment Analyst (1985-86), Investment
Analyst (1982-85), and Accountant (1976-82).
JOSEPH M. FAHEY, JR., Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Vice President, age 40, has been with RSMC since 1984, as a
Secretary of RSMC since 1986 and a Vice President of RSMC since 1992. He was an
Assistant Vice President of RSMC from 1988 to 1992.
JOHN J. KELLEY, 400 Bellevue Parkway, Wilmington, DE 19809, Vice President and
Treasurer, age 38, has been a Vice President of PFPC Inc. ("PFPC") since January
1998. He was a Vice President of RSMC from January 1995 to January 1998. He was
an Assistant Vice President of RSMC from 1989 to 1995.
CARL M. RIZZO, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Secretary, age 46, was appointed Vice President of RSMC in July,
1996. From 1995 to 1996 he was Assistant General Counsel of Aid Association for
Lutherans (a fraternal benefit association); from 1994 to 1995 Senior Associate
Counsel of United Services Automobile Association (an insurance and financial
services firm); and from 1987 to 1994 Special Counsel or Attorney-Adviser with a
federal government agency.
The fees and expenses of the Trustees who are not "interested persons" of
the Fund ("Independent Trustees"), as defined in the 1940 Act are paid by each
Portfolio of the Fund. The following table shows the fees paid during the fiscal
year ended September 30, 1997 to the Independent Trustees for their service to
the Fund and to the Rodney Square Family of Funds. On September 30, 1997, the
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Trustees and officers of the Fund, as a group, owned beneficially, or may be
deemed to have owned beneficially, less than 1% of the outstanding shares of
each Portfolio.
1997 TRUSTEES FEES
TOTAL FEES FROM TOTAL FEES FROM THE RODNEY
INDEPENDENT TRUSTEE THE FUND SQUARE FAMILY OF FUNDS
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Eric Brucker $5,100 $12,550
Fred L. Buckner $5,100 $12,550
John J. Quindlen $5,100 $12,550
RODNEY SQUARE MANAGEMENT CORPORATION
RSMC has served as the Fund Manager since October 1, 1985. RSMC is a
Delaware corporation organized on September 17, 1981, which enjoys a reputation
for managing high-quality portfolios using a conservative investment approach.
In a time when safety of principal and liquidity are critical, RSMC's
experienced management team will continue to operate with strict internal
controls and high credit quality standards. RSMC's investment management
services and specialized investment techniques are normally available only to
institutional clients. RSMC also acts as Investment Adviser to The Rodney Square
Multi-Manager Fund and The Rodney Square Tax-Exempt Fund.
RSMC is a wholly-owned subsidiary of WTC, a state-chartered bank organized
as a Delaware corporation in 1903. WTC is the wholly-owned subsidiary of
Wilmington Trust Corporation, a publicly held bank holding company. RSMC may
occasionally consult, on an informal basis, with personnel of WTC's investment
departments. WTC takes no part, however, in determining which securities are to
be purchased or sold by the Portfolios. Prior to RSMC's formation as a separate
company, most of its investment management staff and some of its officers were
employed by WTC in various money market and other fixed-income investment
management and trading departments.
Several affiliates of RSMC are also engaged in the investment advisory
business. Wilmington Trust FSB, a wholly-owned subsidiary of WTC exercises
investment discretion over certain institutional accounts.
RSD, a wholly-owned subsidiary of WTC and the Fund's Distributor is a
registered broker-dealer. Wilmington Brokerage Services Company, another
wholly-owned subsidiary of WTC, is a registered investment adviser and a
registered broker-dealer.
WILMINGTON TRUST COMPANY
WTC, the parent of RSMC, serves as Custodian of the assets of the Fund. The
Fund benefits from the experience, conservative values and special heritage of
WTC and its affiliates. WTC is a financially strong bank and enjoys a reputation
for providing exceptional consistency, stability and discipline in managing both
short-term and long-term investments. WTC is Delaware's largest full-service
bank and, with more than $75 billion in trust, custody and investment management
assets, WTC ranks among the nation's leading money management firms. As of
December 31, 1996, the trust department of WTC was the seventeenth largest in
the United States as measured by discretionary assets under management. WTC is
engaged in a variety of investment advisory activities, including the management
of collective investment pools, and has nearly a century of experience managing
the personal investments of high net-worth individuals. Its current roster of
institutional clients includes several Fortune 500 companies as well. WTC is
also the Investment Adviser of The Rodney Square Strategic Fixed-Income Fund.
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INVESTMENT MANAGEMENT AND OTHER SERVICES
MANAGEMENT AGREEMENT. RSMC serves as Fund Manager pursuant to a contract
with the Fund dated August 9, 1991 (the "Management Agreement"). Under the
Management Agreement, RSMC, subject to the supervision of the Board of Trustees
of the Fund, directs the investments of the Fund in accordance with the Fund's
investment objective, policies, and limitations. Also, under the terms of the
Management Agreement, RSMC supplies office facilities, non-investment related
statistical and research data, executive and administrative services, and
corporate secretarial services for the Fund. For the fiscal years ended
September 30, 1997, 1996 and 1995, RSMC was paid advisory fees and
administration fees by the Fund amounting to $1,660,206, $1,718,316 and
$1,672,293, respectively, for the U.S. Government Portfolio and $5,069,252,
$4,086,710 and $3,240,976, respectively, for the Money Market Portfolio.
The Management Agreement provides that RSMC shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which the Management Agreement relates, except to
the extent of a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its obligations and duties under
the Management Agreement.
The Management Agreement became effective on August 9, 1991, and continues
in effect from year to year thereafter so long as its continuance is approved at
least annually by a majority of the Trustees, including a majority of the
Independent Trustees. The Agreement is terminable by the Fund with respect to a
Portfolio (by vote of the Fund's Board of Trustees or by vote of a majority of
the Portfolio's outstanding voting securities) on sixty (60) days' written
notice given to RSMC or by RSMC on sixty (60) days' written notice given to the
Fund and terminates automatically upon its assignment.
The salaries of any officers and the interested Trustees of the Fund who
are affiliated with RSMC and the salaries of all personnel of RSMC performing
services for the Fund relating to research, statistical and investment
activities are paid by RSMC.
ADMINISTRATIVE AND ACCOUNTING SERVICES. Under a separate Sub-Administration
and Accounting Services Agreement with the Fund and RSMC, PFPC, 400 Bellevue
Parkway, Wilmington, Delaware 19809, performs certain administrative and
accounting services for the Fund. These services include preparing shareholder
reports, providing statistical and research data, assisting WTC in compliance
monitoring activities, and preparing and filing federal and state tax returns on
behalf of the Portfolios. In addition, PFPC prepares and files various reports
with the appropriate regulatory agencies and prepares materials required by the
SEC or any state securities commission having jurisdiction over the Fund. The
accounting services performed by PFPC for the Portfolios include determining the
net asset value per share of each portfolio and maintaining records relating to
the Portfolios' securities transactions.
The Sub-Administration and Accounting Services Agreement provides that PFPC
shall not be liable for any act or omission that does not result from PFPC's
willful misfeasance, bad faith, or gross negligence with respect to its duties
under the Agreement or reckless disregard of such duties.
DISTRIBUTION AGREEMENT AND RULE 12B-1 PLAN
RSD serves as Distributor of the Portfolios' shares pursuant to a
Distribution Agreement with the Fund. Pursuant to the terms of the Distribution
Agreement, RSD is granted the right to sell the shares of the Portfolios as
agent for the Fund. Shares of the Portfolios are offered continuously.
Under the terms of the Distribution Agreement, RSD agrees to use all
reasonable efforts to secure purchasers for shares of the Portfolios and to pay
expenses of printing and distributing prospectuses, statements of additional
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information and reports prepared for use in connection with the sale of
Portfolio shares and any other literature and advertising used in connection
with the offering, subject to reimbursement pursuant to each Portfolio's Plan of
Distribution adopted pursuant to Rule 12b-1 under the 1940 Act (the "12b-1
Plans").
The Distribution Agreement provides that RSD, in the absence of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its obligations and duties under the
Agreement, will not be liable to the Fund or its shareholders for losses arising
in connection with the sale of Portfolio shares.
The Distribution Agreement became effective as of December 31, 1992 and
continues in effect from year to year as long as its continuance is approved at
least annually by a majority of the Trustees, including a majority of the
Independent Trustees. The Distribution Agreement terminates automatically in the
event of its assignment. The Agreement is also terminable without payment of any
penalty with respect to either Portfolio (i) by the Fund (by vote of a majority
of the Trustees of the Fund who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of any Rule 12b-1
Plan of the Fund or any agreements related to the 12b-1 Plan, or by vote of a
majority of the outstanding voting securities of the applicable Portfolio) on
sixty (60) days' written notice to RSD; or (ii) by RSD on sixty (60) days'
written notice to the Fund.
RSD may be reimbursed for distribution expenses according to each 12b-1
Plan which became effective January 1, 1993. Each 12b-1 Plan provides that RSD
may be reimbursed for distribution activities encompassed by Rule 12b-1, such as
public relations services, telephone services, sales presentations, media
charges, preparation, printing and mailing advertising and sales literature,
data processing necessary to support a distribution effort, printing and mailing
of prospectuses, and distribution and shareholder servicing activities of
certain financial institutions such as banks or broker-dealers who have entered
into servicing agreements with RSD ("Service Organizations") and other financial
institutions, including fairly allocable internal expenses of RSD and payments
to third parties.
The 12b-1 Plans further provide that reimbursement shall be made for any
month only to the extent that such payment does not exceed (i) 0.20% on an
annualized basis of each Portfolio's average net assets; and (ii) limitations
set from time to time by the Board of Trustees. The Board of Trustees has only
authorized implementation of each 12b-1 Plan for annual payments of up to 0.20%
of each Portfolio's average net assets to reimburse RSD for making payments to
certain Service Organizations who have sold Portfolio shares and for other
distribution expenses. For the fiscal year ended September 30, 1997, payments
made pursuant to the 12b-1 Plans amounted to $58,313, consisting of $16,546 for
trail commissions and $41,767 for the preparation and distribution of marketing
materials, for the U.S. Government Portfolio and $177,193 consisting of $175,704
for trail commissions and $1,489 for the preparation and distribution of
marketing materials for the Money Market Portfolio.
Under the 12b-1 Plans, if any payments made by RSMC out of its management
fee, not to exceed the amount of that fee, to any third parties (including
banks), including payments for shareholder servicing and transfer agent
functions, were deemed to be indirect financing by the Fund of the distribution
of its shares, such payments are authorized. The Fund may execute portfolio
transactions with and purchase securities issued by depository institutions that
receive payments under the 12b-1 Plans. No preference for instruments issued by
such depository institutions is shown in the selection of investments.
PORTFOLIO TRANSACTIONS
All portfolio transactions are placed on behalf of each Portfolio by RSMC
pursuant to authority contained in the Management Agreement. Debt securities
purchased and sold by each Portfolio are generally traded on the dealer market
on a net basis (i.e., without commission) through dealers acting for their own
account and not as brokers, or otherwise involve transactions directly with the
issuer of the instrument. This means that a dealer (the securities firm or bank
dealing with the Fund) makes a market for securities by offering to buy at one
price and sell at a slightly higher price. The difference between the prices is
known as a spread. When securities are purchased in underwritten offerings, they
include a fixed amount of compensation to the underwriter.
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The primary objective of RSMC in placing orders on behalf of each Portfolio
for the purchase and sale of securities is to obtain best execution at the most
favorable prices through responsible brokers or dealers and, where the spread or
commission rates are negotiable, at competitive rates. In selecting a broker or
dealer, RSMC considers, among other things: (i) the price of the securities to
be purchased or sold; (ii) the rate of the spread or commission; (iii) the size
and difficulty of the order; (iv) the nature and character of the spread or
commission for the securities to be purchased or sold; (v) the reliability,
integrity, financial condition, general execution and operational capability of
the broker or dealer; and (vi) the quality of any services provided by the
broker or dealer to the Portfolios or to RSMC.
RSMC cannot readily determine the extent to which spreads or commission
rates or net prices charged by brokers or dealers reflect the value of their
research, analysis, advice and similar services. In such cases, RSMC receives
services it otherwise might have had to perform itself. The research, analysis,
advice and similar services provided by brokers or dealers can be useful to RSMC
in serving its other clients, as well as in serving the Fund. Conversely,
information provided to RSMC by brokers or dealers who have executed transaction
orders on behalf of other clients of RSMC may be useful to RSMC in providing
services to the Fund. During the fiscal years ended September 30, 1997, 1996 and
1995, neither Portfolio paid brokerage commissions.
Some of RSMC's other clients have investment objectives and programs
similar to that of the Portfolios. Occasionally, RSMC may make recommendations
to other clients which result in their purchasing or selling securities
simultaneously with the Portfolios. Consequently, the demand for securities
being purchased or the supply of securities being sold may increase, and this
could have an adverse effect on the price of those securities. It is RSMC's
policy not to favor one client over another in making recommendations or in
placing orders. In the event of a simultaneous transaction, purchases or sales
are averaged as to price, transaction costs are allocated between the Portfolio
and RSMC's other clients participating in the transaction on a pro rata basis
and purchases and sales are normally allocated between the Portfolio and RSMC's
other clients as to amount according to a formula determined prior to the
execution of such transactions.
REDEMPTIONS
To ensure proper authorization before redeeming shares of the Portfolios,
the Transfer Agent, PFPC, may require additional documents such as, but not
restricted to, stock powers, trust instruments, death certificates, appointments
as fiduciary, certificates of corporate authority and waivers of tax required in
some states when settling estates.
Clients of WTC who have purchased shares through their trust accounts at
WTC and clients of Service Organizations who have purchased shares through their
accounts with those Service Organizations should contact WTC or the Service
Organization prior to submitting a redemption request to ensure that all
necessary documents accompany the request. When shares are held in the name of a
corporation, other organization, trust, fiduciary or other institutional
investor, PFPC requires, in addition to the stock power, certified evidence of
authority to sign the necessary instruments of transfer. THESE PROCEDURES ARE
FOR THE PROTECTION OF SHAREHOLDERS AND SHOULD BE FOLLOWED TO ENSURE PROMPT
PAYMENT. Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption will be sent within 7 days of acceptance of
shares tendered for redemption. Delay may result if the purchase check has not
yet cleared, but the delay will be no longer than required to verify that the
purchase check has cleared, and the Fund will act as quickly as possible to
minimize delay.
A shareholder's right to redeem shares and to receive payment therefor may
be suspended when (a) the New York Stock Exchange (the "Exchange") is closed,
other than customary weekend and holiday closings, (b) trading on the Exchange
is restricted, (c) an emergency exists as a result of which it is not reasonably
practicable to dispose of a Portfolio's securities or to determine the value of
a Portfolio's net assets, or (d) ordered by a governmental body having
jurisdiction over the Fund for the protection of the Fund's shareholders,
provided that applicable rules and regulations of the SEC (or any succeeding
governmental authority) shall govern as to whether a condition described in (b),
(c) or (d) exists. In case of such suspension, shareholders of the affected
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Portfolio may withdraw their requests for redemption or may receive payment
based on the net asset value of the Portfolio next determined after the
suspension is lifted.
The Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption by making payment in whole or
in part with readily marketable securities chosen by the Fund and valued in the
same way as they would be valued for purposes of computing the net asset value
of the applicable Portfolio. If payment is made in securities, a shareholder may
incur transaction expenses in converting these securities into cash. The Fund
has elected, however, to be governed by Rule 18f-1 under the 1940 Act, as a
result of which the Fund is obligated to redeem shares solely in cash if the
redemption requests are made by one shareholder account up to the lesser of
$250,000 or 1% of the net assets of the applicable Portfolio during any 90-day
period. This election is irrevocable unless the SEC permits its withdrawal.
NET ASSET VALUE AND DIVIDENDS
NET ASSET VALUE. Each Portfolio's securities are valued on the basis of the
amortized cost valuation technique. This involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The valuation of each Portfolio's instruments based
upon their amortized cost and the accompanying maintenance of each Portfolio's
per share net asset value of $1.00 is permitted in accordance with Rule 2a-7
under the 1940 Act. Certain conditions imposed by that Rule are set forth under
"Investment Policies." In connection with the use of the amortized cost
valuation technique, the Fund's Board of Trustees has established procedures
reasonably designed to maintain a constant net asset value per share. Such
procedures include a daily review of each Portfolio's holdings to determine
whether a Portfolio's net asset value, calculated based upon available market
quotations, deviates from $1.00 per share. Should any deviation exceed 1/2 of 1%
of $1.00, the Trustees will promptly consider whether any corrective action
should be initiated to eliminate or reduce material dilution or other unfair
results to shareholders. Such corrective action may include selling of portfolio
instruments prior to maturity to realize capital gains or losses, shortening
average portfolio maturity, withholding dividends, redeeming shares in kind and
establishing a net asset value per share based upon available market quotations.
Should a Portfolio incur or anticipate any unusual expense or loss or
depreciation that would adversely affect its net asset value per share or income
for a particular period, the Trustees would at that time consider whether to
adhere to the current dividend policy or to revise it in light of the then
prevailing circumstances. For example, if a Portfolio's net asset value per
share were reduced, or were anticipated to be reduced, below $1.00, the Trustees
could suspend or reduce further dividend payments until net asset value returned
to $1.00 per share. Thus, such expenses or losses or depreciation could result
in investors receiving no dividends or reduced dividends for the period during
which they held their shares or in their receiving upon redemption a price per
share lower than that which they paid.
DIVIDENDS. Dividends are declared on each Business Day of the Fund (as
defined in the Prospectus). The dividend for such a Business Day immediately
preceding a weekend or holiday normally includes an amount equal to the net
income for the subsequent non-Business Days of the Fund on which dividends are
not declared. However, no such dividend includes any amount of net income earned
in a subsequent semiannual accounting period. A portion of the dividends paid by
the U.S. Government Portfolio may be exempt from state taxes.
PERFORMANCE INFORMATION
The performance of a Portfolio may be quoted in terms of its yield and its
total return in advertising and other promotional materials ("performance
advertisements"). Performance data quoted represents past performance and is not
intended to indicate future performance. Performance of the Portfolios will vary
based on changes in market conditions and the level of each Portfolio's
expenses. These performance figures are calculated in the following manner:
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A. YIELD is the net annualized yield for a specified 7 calendar days
calculated at simple interest rates. Yield is calculated by
determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing
the difference by the value of the account at the beginning of the
base period to obtain the base period return. The yield is
annualized by multiplying the base period return by 365/7. The yield
figure is stated to the nearest hundredth of one percent.
The yield for the 7-day period ended September 30, 1997 was 5.11%
for the U.S. Government Portfolio and 5.16% for the Money Market
Portfolio.
B. EFFECTIVE YIELD is the net annualized yield for a specified 7
calendar days assuming reinvestment of income or compounding.
Effective yield is calculated by the same method as yield except the
yield figure is compounded by adding 1, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
Effective yield = [(Base Period Return + 1) 365/7] - 1.
The effective yield for the 7-day period ended September 30, 1997
was 5.24% for the U.S. Government Portfolio and 5.29% for the Money
Market Portfolio.
C. AVERAGE ANNUAL TOTAL RETURN is the average annual compound rate of
return for the periods of one year, five years, ten years and the
life of a Portfolio, where applicable, all ended on the last day of
a recent calendar quarter. Average annual total return quotations
reflect changes in the price of a Portfolio's shares, if any, and
assume that all dividends and capital gains distributions, if any,
during the respective periods were reinvested in Portfolio shares.
Average annual total return is calculated by finding the average
annual compound rates of return of a hypothetical investment over
such periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)1/n - 1
Where: P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED SEPTEMBER 30, 1997
One Five Ten
YEAR YEARS YEARS
---- ----- -----
U.S. Government Portfolio 5.07% 4.33% 5.56%
Money Market Portfolio 5.17% 4.42% 5.72%
D. CUMULATIVE TOTAL RETURN is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period.
Cumulative total return quotations reflect the change in the price
of a Portfolio's shares, if any, and assume that all dividends and
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<PAGE>
capital gains distributions, if any, during the period were
reinvested in Portfolio shares. Cumulative total return is
calculated by finding the cumulative rates of return of a
hypothetical investment over such periods, according to the
following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P)-1
Where: C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
CUMULATIVE TOTAL RETURN FOR PERIODS ENDED SEPTEMBER 30, 1997
One Five Ten
YEAR YEARS YEARS
---- ----- -----
U.S. Government Portfolio 5.07% 23.60% 71.75%
Money Market Portfolio 5.17% 24.14% 74.44%
E. TOTAL RETURN is the rate of return on an investment for a specified
period of time calculated in the manner of Cumulative Total Return.
COMPARISON OF PORTFOLIO PERFORMANCE. A comparison of the quoted performance
offered for various investments is valid only if performance is calculated in
the same manner. Since there are many methods of calculating performance,
investors should consider the effects of the methods used to calculate
performance when comparing performance of a Portfolio with performance quoted
with respect to other investment companies or types of investments. For example,
it is useful to note that yields reported on debt instruments are generally
prospective, contrasted with the historical yields reported by the Fund.
In connection with communicating its performance to current or prospective
shareholders, a Portfolio also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
From time to time, in marketing and other literature, a Portfolio's
performance may be compared to the performance of broad groups of comparable
mutual funds or unmanaged indexes of comparable securities such as the IBC First
Tier Money Market Index for the Money Market Portfolio and the IBC U.S.
Government and Agency Index for the U.S. Government Portfolio. The Fund's yield
and performance over time may also be compared to the performance of bank money
market deposit accounts and fixed-rate insured certificates of deposit (CD's),
or unmanaged indices of securities that are comparable to money market funds in
their terms and intent, such as Treasury bills, bankers' acceptances, negotiable
order of withdrawal accounts, and money market certificates. Most bank CD's
differ from money market funds in several ways: the interest rate is fixed for
the term of the CD, there are interest penalties for early withdrawal of the
deposit from a CD, and the deposit principal in a CD is insured by the FDIC.
Since the assets in all funds are always changing, a Portfolio may be
ranked within one asset-size class at one time and in another asset-size class
at some other time. In addition, the independent organization chosen to rank the
Portfolio in marketing and promotional literature may change from time to time
depending upon the basis of the independent organization's categorizations of
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<PAGE>
mutual funds, changes in a Portfolio's investment policies and investments, a
Portfolio's asset size and other factors deemed relevant. Advertisements and
other marketing literature will indicate the time period and Lipper Analytical
Services, Inc. asset-size class or other performance ranking company criteria,
as applicable, for the ranking in question.
Evaluations of Portfolio performance made by independent sources may also
be used in advertisements concerning a Portfolio, including reprints of, or
selections from, editorials or articles about the Portfolio. Sources for
performance information and articles about a Portfolio may include the
following:
BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
CDA INVESTMENT TECHNOLOGIES, INC., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
CHANGING TIMES, THE KIPLINGER MAGAZINE, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
CONSUMER DIGEST, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
FINANCIAL WORLD, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
FORBES, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
FORTUNE, a national business publication that periodically rates the performance
of a variety of mutual funds.
IBC'S MONEY FUND REPORT, a weekly publication of IBC/Donoghue, Inc., of Ashland,
Massachusetts, reporting on the performance of the nation's money market funds,
summarizing money market fund activity, and including certain averages as
performance benchmarks, specifically "IBC's Money Fund Average," and "IBC's
Government Money Fund Average."
IBC'S MONEY FUND DIRECTORY, an annual directory ranking money market mutual
funds.
INVESTMENT COMPANY DATA, INC., an independent organization which provides
performance ranking information for broad classes of mutual funds.
INVESTOR'S DAILY, a daily newspaper that features financial, economic, and
business news.
LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, a weekly
publication of industry-wide mutual fund averages by type of fund.
MONEY, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
MUTUAL FUND VALUES, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance risk and portfolio
characteristics.
THE NEW YORK TIMES, a nationally distributed newspaper which regularly covers
financial news.
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<PAGE>
PERSONAL INVESTING NEWS, a monthly news publication that often reports on
investment opportunities and market conditions.
PERSONAL INVESTOR, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SUCCESS, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
USA TODAY, the nation's number one daily newspaper.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically reports
mutual fund performance data.
WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
WIESENBERGER INVESTMENT COMPANIES SERVICES, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
TAXES
GENERAL. In order to continue to qualify for treatment as a RIC under the
Code, each Portfolio -- each being treated as a separate entity for these
purposes -- must distribute annually to its shareholders at least 90% of its
investment company taxable income (generally, taxable net investment income plus
net short-term capital gain, if any) and must meet several additional
requirements. With respect to each Portfolio, these requirements include the
following: (a) at least 90% of the Portfolio's gross income each taxable year
must be derived from dividends, interest and gains from the sale or other
disposition of securities, or other income derived with respect to its business
of investing in securities; (b) at the close of each quarter of the Portfolio's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. Government Securities and other securities, with
those other securities limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Portfolio's total assets; and (c) at the
close of each quarter of a Portfolio's taxable year, not more than 25% of the
value of its total assets may be invested in securities (other than U.S.
Government Securities) of any one issuer.
DISTRIBUTIONS. Each Portfolio will be subject to a nondeductible 4% excise
tax to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Distributions from a Portfolio's investment company taxable income, if any,
are taxable to its shareholders as ordinary income to the extent of the
Portfolio's earnings and profits. Because each Portfolio's net investment income
is derived from interest rather than dividends, no portion of the distributions
thereof is eligible for the dividends-received deduction allowed to
corporations.
Shortly after the end of each year, PFPC calculates the federal income tax
status of all distributions made during the year. In addition to federal income
tax, shareholders may be subject to state and local taxes on distributions from
a Portfolio. Shareholders should consult their tax advisers regarding specific
questions relating to federal, state and local taxes.
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<PAGE>
DESCRIPTION OF THE FUND
The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable for the obligations of
the trust. The Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each note, bond, contract or other
undertaking relating to the Fund that is issued by or on behalf of the Fund or
the Trustees. The Declaration of Trust provides for indemnification out of the
assets of the applicable Portfolio of any shareholder held personally liable
solely by virtue of ownership of shares of a Portfolio. The Declaration of Trust
also provides that the applicable Portfolio shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Portfolio and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which a Portfolio itself would be unable to meet its
obligations. RSMC believes that, in view of the above, the risk of personal
liability to shareholders is remote.
The Fund's Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
The shares of each Portfolio that are issued by the Fund are fully paid and
nonassessable. The assets of the Fund received for the issuance or sale of
Portfolio shares and all income, earnings, profits and proceeds therefrom,
subject only to the right of creditors, are allocated to the respective
Portfolio and constitute the underlying assets of that Portfolio. The underlying
assets of each Portfolio are segregated on the books of account and are charged
with the liabilities in respect to such Portfolio and with a share of the
general liabilities of the Fund. Expenses with respect to the two Portfolios are
allocated in proportion to the net asset values of the respective Portfolios
except where allocations of direct expenses can otherwise be fairly made. The
officers of the Fund, subject to the general supervision of the Board of
Trustees, have the power to determine which liabilities are allocable to a given
Portfolio or which are general or allocable to the two Portfolios.
The Declaration of Trust provides that the Fund will continue indefinitely
unless a majority of the shareholders of the Fund or a majority of the
shareholders of the affected Portfolio approve: (a) the sale of the Fund's
assets or the Portfolio's assets to another diversified open-end management
investment company; or (b) the liquidation of the Fund or the Portfolio. In the
event of the liquidation of the Fund or a Portfolio, affected shareholders are
entitled to receive the assets of the Fund or Portfolio that are available for
distribution.
OTHER INFORMATION
INDEPENDENT AUDITORS. Ernst & Young LLP, Suite 4000, 2001 Market Street,
Philadelphia, PA 19103, serves as the Fund's independent auditors, providing
services which include (1) audit of the annual financial statements for the
Portfolios, (2) assistance and consultation in connection with SEC filings and
(3) preparation of the annual federal income tax returns filed on behalf of each
Portfolio.
The financial statements and financial highlights of the Portfolios
appearing or incorporated by reference in the Fund's Prospectus, this Statement
of Additional Information and Registration Statement have been audited by Ernst
& Young LLP, independent auditors, to the extent indicated in their reports
thereon also appearing elsewhere herein and in the Registration Statement or
incorporated by reference. Such financial statements have been included herein
or incorporated herein by reference in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
SUBSTANTIAL SHAREHOLDERS. As of November 30, 1997, WTC owned of record, on
behalf of its customer accounts 90% of the shares of the U.S. Government
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<PAGE>
Portfolio in addition to those shares owned beneficially on behalf of its
customer accounts, and WTC owned of record, on behalf of its customer accounts
75% of the shares of the Money Market Portfolio in addition to those shares
owned beneficially, all on behalf of its customer accounts.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036, serves as counsel to the Fund and has passed upon the
legality of the shares offered by the Prospectus and this Statement of
Additional Information.
CUSTODIAN AND SUB-CUSTODIAN. Wilmington Trust Company, Rodney Square North,
1100 N. Market Street, Wilmington, DE 19890-0001, serves as the Fund's
Custodian. PNC Bank, National Association, 1600 Market Street, Philadelphia, PA
19103, serves as the Fund's Sub-Custodian.
TRANSFER AGENT. PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809,
serves as the Fund's Transfer Agent and Dividend Paying Agent.
FINANCIAL STATEMENTS
The Schedule of Investments as of September 30, 1997 for each of the
Portfolios; the Statement of Assets and Liabilities as of September 30, 1997 for
each of the Portfolios; the Statement of Operations for the fiscal year ended
September 30, 1997 for each of the Portfolios; the Statements of Changes in Net
Assets for the fiscal years ended September 30, 1997 and 1996 for each of the
Portfolios; the Financial Highlights for the fiscal years ended September 30,
1993 through September 30, 1997 for each of the Portfolios; and the Notes to
Financial Statements and the Report of Independent Auditors, each of which is
included in the Annual Report to the shareholders of the Fund as of and for the
fiscal year ended September 30, 1997 are attached hereto.
17
<PAGE>
The Financial statements of the Portfolios and the Report of Independent
Auditors are incorporated herein by reference from the Fund's Annual Report to
Shareholders of the Fund for the fiscal year ended September 30, 1997, filed
with the Securities and Exchange Commission on December 24, 1997, Accession No.
0000700844-97-000012.
