the RODNEY SQUARE FUND
the RODNEY SQUARE TAX-EXEMPT FUND
PROSPECTUS JANUARY 29, 1999
<PAGE>
TRUSTEES
Eric Brucker
Fred J. Buckner
John J. Quindlen
Robert J. Christian
OFFICERS
Robert J. Christian, PRESIDENT
Joseph M. Fahey, Jr., VICE PRESIDENT
John J. Kelley, VICE PRESIDENT AND TREASURER
Carl M. Rizzo, Esq., SECRETARY
Mary Jane Maloney, ASSISTANT SECRETARY
John C. McDonnell, ASSISTANT TREASURER
FUND MANAGER
Rodney Square Management Corporation
Rodney Square North
1100 N. Market St.
Wilmington, DE 19890-0001
SUB-ADMINISTRATOR,
TRANSFER AGENT AND
ACCOUNTING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
Wilmington Trust Company
Rodney Square North
1100 N. Market St.
Wilmington, DE 19890-0001
DISTRIBUTOR
Provident Distributors, Inc.
Four Falls Corporate Center
West Conshohochen, PA 19428
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THE RODNEY SQUARE THE RODNEY SQUARE
FUND TAX-EXEMPT FUND
U.S. GOVERNMENT PORTFOLIO
MONEY MARKET PORTFOLIO
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PROSPECTUS DATED JANUARY 29, 1999
This prospectus gives vital information about these money market mutual funds,
including information on investment policies, risks and fees. For your own
benefit and protection, please read it before you invest, and keep it on hand
for future reference.
Please note that these Funds:
(BULLET) are not bank deposits
(BULLET) are not obligations of, or guaranteed or endorsed by Wilmington Trust
Company or any of its affiliates
(BULLET) are not federally insured
(BULLET) are not obligations of, or guaranteed or endorsed or otherwise
supported by the U.S. Government, the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other governmental
agency
(BULLET) are not guaranteed to achieve their goal(s)
(BULLET) may not be able to maintain a stable $1 share price
Like all mutual fund shares, the Securities and Exchange Commission has not
approved or disapproved the Funds' shares or determined whether this prospectus
is accurate or complete. Anyone who tells you otherwise is committing a crime.
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TABLE OF CONTENTS
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A LOOK AT THE GOALS, PORTFOLIO DESCRIPTION
STRATEGIES, RISKS, EXPENSES Investment Objectives...........................3
AND FINANCIAL HISTORY OF Primary Investment Strategies...................3
EACH PORTFOLIO. Risk Factors Related to the Portfolios..........5
Performance Information.........................6
Fees and Expenses...............................9
Financial Highlights...........................10
DETAILS ABOUT THE SERVICE MANAGEMENT OF THE FUNDS
PROVIDERS. Investment Manager.............................13
Service Providers..............................14
POLICIES AND INSTRUCTIONS FOR SHAREHOLDER INFORMATION
OPENING, MAINTAINING AND Pricing of Shares..............................15
CLOSING AN ACCOUNT IN ANY OF Purchase of Shares.............................16
THE PORTFOLIOS. Redemption of Shares...........................18
Exchange of Shares.............................20
Dividends......................................21
Taxes..........................................21
DETAILS ON DISTRIBUTION DISTRIBUTION ARRANGEMENTS
PLANS. Rule 12b-1 Fees................................22
FOR MORE INFORMATION...........................23
For information about key terms and concepts, look for our "PLAIN TALK"
explanations.
2
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THE RODNEY SQUARE FUND THE RODNEY SQUARE TAX-EXEMPT FUND
(BULLET) U.S. GOVERNMENT PORTFOLIO
(BULLET) MONEY MARKET PORTFOLIO
PORTFOLIO DESCRIPTION
PLAIN TALK
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WHAT ARE MONEY MARKET FUNDS?
Money market funds invest only in high quality, short-term debt
securities, commonly known as money market instruments. Money market
funds follow strict rules about credit risk, maturity and
diversification of their investments. An investment in a money market
fund is not a bank deposit. Although a money market fund seeks to keep
a constant share price of $1.00, you may lose money by investing in a
money market fund.
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INVESTMENT OBJECTIVES
The U.S. Government Portfolio and the Money Market Portfolio each seek 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. The Rodney Square Tax-Exempt Fund seeks as high a level of interest
income exempt from federal income tax as is consistent with a portfolio of
high-quality, short-term municipal obligations selected on the basis of
liquidity and stability of principal. The U.S. Government Portfolio, the Money
Market Portfolio and the Tax-Exempt Fund are referred to as "Portfolios" in this
prospectus. Each Portfolio is a money market fund and intends to maintain a
stable $1 share price although this may not be possible under certain
circumstances.
PRIMARY INVESTMENT STRATEGIES
The U.S. GOVERNMENT PORTFOLIO may invest in:
(BULLET) U.S. Government obligations; and
(BULLET) repurchase agreements relating to such obligations.
U.S. Government obligations are debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The U.S. Government Portfolio
will invest at least 65% of its total assets in U.S. Governement obligations.
3
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The MONEY MARKET PORTFOLIO may invest in:
(BULLET) U.S. dollar-denominated obligations of major U.S. and foreign banks
and their branches located outside of the United States, of U.S.
branches of foreign banks, of foreign branches of foreign banks, of
U.S. agencies of foreign banks and wholly-owned banking subsidiaries
of foreign banks;
(BULLET) high quality commercial paper and corporate obligations;
(BULLET) U.S. Government obligations;
(BULLET) high quality municipal securities; and
(BULLET) repurchase agreements relating to U.S. Government obligations.
Each Portfolio described above may invest more than 25% of their respective
total assets in the obligations of banks.
The TAX-EXEMPT FUND may invest in:
(BULLET) high quality municipal obligations and municipal bonds;
(BULLET) floating and variable rate obligations;
(BULLET) participation interests;
(BULLET) high quality tax-exempt commercial paper; and
(BULLET) high quality short-term municipal notes.
The Tax-Exempt Fund has adopted a fundamental policy that, under normal
circumstances, at least 80% of its annual income will be exempt from federal
income tax. Additionally, at least 80% of its annual income will not be a tax
preference item for purposes of the federal alternative minimum tax.
High quality securities include those that (1) are rated in one of the two
highest short-term rating categories by two nationally statistical rating
organizations ("NRSRO"), such as S&P, Moody's and Fitch IBCA (or by one NRSRO if
only one NRSRO has issued a rating); (2) if unrated, are issued by an issuer
with comparable outstanding debt that is rated; or (3) are otherwise unrated and
determined by the investment adviser to be of comparable quality.
Each Portfolio also may invest in other securities, use other strategies and
engage in other investment practices, which are described in detail in our
Statement of Additional Information. Of course, we cannot guarantee that any
Portfolio will achieve its investment goal.
4
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RISK FACTORS RELATED TO THE PORTFOLIOS
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The following is a general list of the types of risks that may apply to a
Portfolio. Additional information about a Portfolio's investments is available
in our Statement of Additional Information:
(BULLET) An investment in a Portfolio is not a deposit of Wilmington Trust
Company, any other bank, or any of their affiliates and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency. Although each Portfolio seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose
money by investing in a Portfolio.
(BULLET) CREDIT RISK: The risk that the issuer of a security, or the
counterparty to a contract, will default or otherwise become unable to
honor a financial obligation.
(BULLET) FOREIGN SECURITY RISK: The risk of losses due to political,
regulatory, economic, social or other uncontrollable forces in a
foreign country.
(BULLET) INTEREST RATE RISK: The risk of market losses attributable to changes
in interest rates. With fixed-rate securities, a rise in interest
rates typically causes a fall in values, while a fall in rates
typically causes a rise in values. The yield paid by a Portfolio will
vary with changes in interest rates.
(BULLET) LIQUIDITY RISK: The risk that certain securities may be difficult or
impossible to sell at the time and the price that the seller would
like.
(BULLET) MANAGEMENT RISK: The risk that a strategy used by the adviser may fail
to produce the intended result.
(BULLET) MARKET RISK: The risk that the market value of a security may move up
and down, sometimes rapidly and unpredictably.
(BULLET) PREPAYMENT RISK: The risk that a debt security may be paid off and
proceeds invested earlier than anticipated. Depending on market
conditions, the new investments may or may not carry the same interest
rate.
(BULLET) YEAR 2000 COMPLIANCE RISK: Like other mutual funds, financial and
business organizations and individuals around the world, the
Portfolios could be adversely affected if the computer systems used by
Wilmington Trust Company ("WTC"), Rodney Square Management Corporation
("RSMC") and the Portfolios' other service providers do not properly
process and calculate date-related information and data on and after
January 1, 2000. Many existing application software products in the
marketplace were designed only to accommodate a two-digit date
position, which represents the year (e.g., "95" is stored on the
system and represents the year 1995). As a result, the year 1999
(i.e., "99") could be the maximum date value these systems will be
able to accurately process. This is commonly known as the "Year 2000
Problem." RSMC is taking steps that it believes are reasonably
designed to address the Year 2000 Problem with respect to the computer
systems that it uses, and to obtain assurances that comparable steps
are being taken by the Portfolios' other major service providers. At
this time, however, there can be no assurances that these steps will
be sufficient to avoid any adverse impact on the Portfolios.
5
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Additionally, if a company in which a Portfolio is invested is
adversely affected by Year 2000 Problems, it is likely that the price
of that company's securities will also be adversely affected. A
decrease in one or more of a Portfolio's holdings may have a similar
impact on the price of the Portfolio's shares. The adviser will rely
on public filings and other statements made by companies about their
Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the
U.S. The adviser is not able to audit any company and its major
suppliers to verify their Year 2000 readiness.
PERFORMANCE INFORMATION
U.S. GOVERNMENT PORTFOLIO
The chart below shows the changes in annual total returns for the U.S.
Government Portfolio for the last 10 calendar years. The information provides
some indication of the risks of investing in the Portfolio by showing changes in
the Portfolio's performance from year to year. Of course, past performance is
not necessarily an indicator of how the Portfolio will perform in the future.
U.S. GOVERNMENT PORTFOLIO
ANNUAL RETURNS FOR EACH OF THE LAST TEN CALENDAR YEARS
(GRAPHIC OMITTED)
PLOT POINTS FOLLOW:
1989 8.96%
1990 7.86%
1991 5.73%
1992 3.38%
1993 2.82%
1994 3.82%
1995 5.51%
1996 4.99%
1997 5.12%
1998 5.07%
The total return for the U.S. Government Portfolio for the calendar year ended
December 31, 1998 was 5.07%. Over the past 10 calendar years, the highest
quarter total return was 2.31% (quarter ended June 30, 1989). Over the past 10
calendar years, the lowest quarter total return was 0.69% (quarter ended March
31, 1993).
The table below shows the U.S. Government Portfolio's average annual total
returns for the past 1, 5 and 10 calendar years.
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
U.S. Government Portfolio 5.07% 4.90% 5.31%
You may call (800) 336-9970 to obtain the Portfolio's current 7-day yield.
6
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PLAIN TALK
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WHAT IS YIELD?
Yield is a measure of the income (interest) earned by the securities
in the fund's portfolio and paid to shareholders over a specified time
period. The annualized yield is expressed as a percentage of the
offering price per share on a specified date.
----------------------------------------------------------------------
MONEY MARKET PORTFOLIO
The chart below shows the changes in annual total returns for the Money Market
Portfolio for the last 10 calendar years. The information provides some
indication of the risks of investing in the Portfolio by showing changes in the
Portfolio's performance from year to year. Of course, past performance is not
necessarily an indicator of how the Portfolio will perform in the future.
MONEY MARKET PORTFOLIO
ANNUAL RETURNS FOR EACH OF THE LAST TEN CALENDAR YEARS
(GRAPHIC OMITTED)
PLOT POINTS FOLLOW:
1989 9.14%
1990 8.04%
1991 6.05%
1992 3.61%
1993 2.86%
1994 3.89%
1995 5.63%
1996 5.08%
1997 5.22%
1998 5.17%
The total return for the Money Market Portfolio for the calendar year ended
December 31, 1998 was 5.17%. Over the past 10 calendar years, the highest
quarter total return was 2.36% (quarter ended June 30, 1989). Over the past 10
calendar years, the lowest quarter total return was 0.70% (quarter ended June
30, 1993).
The table below shows the Money Market Portfolio's average annual total returns
for the past 1, 5 and 10 calendar years.
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
Money Market Portfolio 5.17% 5.00% 5.46%
You may call (800) 336-9970 to obtain the Portfolio's current 7-day yield.
7
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TAX-EXEMPT FUND
The chart below shows the changes in annual total returns for the Tax-Exempt
Fund for the last 10 calendar years. The information provides some indications
of the risks of investing in the Tax-Exempt Fund's performance from year to
year. Of course, past performance is not necessarily an indicator of how the
Portfolio will perform in the future.
TAX-EXEMPT FUND
ANNUAL RETURNS FOR EACH OF THE LAST TEN CALENDAR YEARS
(GRAPHIC OMITTED)
PLOT POINTS FOLLOW:
1989 6.07%
1990 5.57%
1991 4.15%
1992 2.66%
1993 1.98%
1994 2.42%
1995 3.47%
1996 3.01%
1997 3.15%
1998 2.98%
The total return for the Tax-Exempt Fund for the calendar year ended December
31, 1998 was 2.98%. Over the past 10 calendar years, the highest quarter total
return was 1.61% (quarter ended June 30, 1989). Over the past 10 calendar years,
the lowest quarter total was 0.47% (quarter ended March 31, 1994).
The table below shows the Tax-Exempt Fund's average annual total returns for the
past 1, 5 and 10 calendar years.
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
Tax-Exempt Fund 2.98% 3.00% 3.54%
You may call (800) 336-9970 to obtain the Portfolio's current 7-day yield.
8
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FEES AND EXPENSES
PLAIN TALK
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WHAT ARE FUND EXPENSES?
Unlike an index, every mutual fund has operating expenses to pay for
professional advisory, distribution, administration and custody
services. The Portfolio's expenses in the table below are shown as a
percentage of the Portfolio's net assets. These expenses are deducted
from Portfolio assets.
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The table below describes the fees and expenses that you may pay if you buy and
hold shares of a Portfolio. No sales charges or other fees are paid directly
from your investment.
ANNUAL FUND OPERATING
EXPENSES
(expenses that are deducted U.S. GOVERNMENT MONEY MARKET
from Portfolio assets) PORTFOLIO PORTFOLIO TAX-EXEMPT FUND
- -------------------------- --------------- ------------ ---------------
Management fees 0.47% 0.47% 0.47%
Distribution (12b-1) fees 0.05% 0.05% 0.05%
Other Expenses 0.06% 0.04% 0.07%
TOTAL ANNUAL OPERATING
EXPENSES 1 0.58% 0.56% 0.59%
- ---------------------------
1 While the Distribution (12b-1) Plan provides for reimbursement to the
distributor of up to 0.20% of each Portfolio's average net assets, the Boards of
Trustees have authorized annual payments of up to 0.05% of each Portfolio's
average net assets for the current fiscal year. Actual distribution (12b-1) fees
and total annual operating expenses were 0.01% and 0.54% for the U.S. Government
Portfolio; 0.02% and 0.53% for the Money Market Portfolio; and 0.01% and 0.55%
for the Tax-Exempt Fund, respectively for the fiscal year ended September 30,
1998. For more information see "Rule 12b-1 Fees".
EXAMPLE
This example is intended to help you compare the cost of investing in a
Portfolio with the cost of investing in other mutual funds. The table below
shows what you would pay if you invested $10,000 over the various time frames
indicated. The example assumes that:
(BULLET) you reinvested all dividends
(BULLET) the average annual return was 5%
(BULLET) the Portfolio's maximum total operating expenses are charged and
remain the same over the time periods
(BULLET) you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions,
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
U.S. Government Portfolio $59 $186 $324 $726
Money Market Portfolio $57 $179 $313 $701
Tax-Exempt Fund $60 $189 $329 $738
THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A REPRESENTATION OF
A PORTFOLIO'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.
9
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FINANCIAL HIGHLIGHTS
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The financial highlights table is intended to help you understand each
Portfolio's financial performance for the past 10 years. Certain information
reflects financial results for a single share of a Portfolio. The total returns
in the table represent the rate that a shareholder would have earned on an
investment in a Portfolio (assuming reinvestment of all dividends). This
information has been audited by Ernst & Young LLP, whose report, along with
each Fund's financial statements, is included in the Annual Report, which is
available without charge upon request.
<TABLE>
<CAPTION>
U.S. GOVERNMENT PORTFOLIO
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
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1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Investment Operations:
Net investment income 0.051 0.050 0.050 0.052 0.033 0.028 0.038 0.062 0.078 0.086
Distributions:
From net investment
income (0.051) (0.050) (0.050) (0.052) (0.033) (0.028) (0.038) (0.062) (0.078) (0.086)
NET ASSET VALUE -
END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Total Return 5.19% 5.07% 5.08% 5.37% 3.32% 2.83% 3.88% 6.41% 8.05% 8.91%
Ratios (to average net assets)/Supplemental Data:
Expenses 0.54% 0.55% 0.55% 0.55% 0.53% 0.53% 0.54% 0.53% 0.54% 0.52%
Net investment income 5.06% 4.96% 4.97% 5.25% 3.27% 2.79% 3.84% 6.22% 7.76% 8.55%
Net assets at end of year
(000 omitted) $802,153 $378,475 $341,426 $306,096 $336,766 $386,067 $409,534 $479,586 $364,423 $230,804
</TABLE>
10
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<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
For the Fiscal years Ended September 30,
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1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Investment Operations:
Net investment income 0.051 0.051 0.050 0.054 0.033 0.029 0.041 0.065 0.079 0.087
Distributions:
From net investment
income (0.051) (0.051) (0.050) (0.054) (0.033) (0.029) (0.041) (0.065) (0.079) (0.087)
NET ASSET VALUE -
END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Total Return 5.26% 5.17% 5.17% 5.50% 3.37% 2.92% 4.15% 6.73% 8.23% 9.09%
Ratios (to average net assets)/Supplemental Data:
Expenses 0.53% 0.54% 0.53% 0.54% 0.53% 0.52% 0.52% 0.52% 0.53% 0.52%
Net investment income 5.13% 5.06% 5.03% 5.37% 3.33% 2.88% 4.06% 6.52% 7.92% 8.74%
Net assets at end of year
(000 omitted) $1,702,734 $1,191,271 $980,856 $751,125 $606,835 $649,424 $717,544 $790,837 $766,798 $643,363
</TABLE>
11
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<TABLE>
<CAPTION>
TAX-EXEMPT FUND
For the Fiscal years Ended September 30,
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Investment Operations:
Net investment income 0.031 0.030 0.031 0.033 0.021 0.020 0.030 0.045 0.054 0.059
Distributions:
From net investment
income (0.031) (0.030) (0.031) (0.033) (0.021) (0.020) (0.030) (0.045) (0.054) (0.059)
NET ASSET VALUE -
END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Total Return 3.11% 3.09% 3.11% 3.36% 2.17% 2.07% 3.06% 4.59% 5.58% 6.04%
Ratios (to average net assets)/Supplemental Data:
Expenses 0.55% 0.57% 0.56% 0.54% 0.54% 0.54% 0.54% 0.56% 0.57% 0.57%
Net investment income 3.05% 3.05% 3.08% 3.29% 2.13% 2.05% 3.06% 4.49% 5.45% 5.88%
Net assets at end of year
(000 omitted) $392,610 $280,864 $237,185 $318,213 $388,565 $405,517 $327,098 $353,271 $243,146 $258,713
- -----------------------------------------
</TABLE>
12
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MANAGEMENT OF THE FUNDS
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The Boards of Trustees supervise the management, activities and affairs of the
Funds and have approved contracts with various financial organizations to
provide, among other services, the day-to-day management required by the
Portfolios and their shareholders.
PLAIN TALK
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WHAT IS AN INVESTMENT ADVISER?
The investment adviser makes investment decisions for a Portfolio and
continuously reviews, supervises and administers the Portfolio's
investment program. The Board of Trustees supervises the investment
adviser and establishes policies that the adviser must follow in its
management activities.
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INVESTMENT MANAGER
Rodney Square Management Corporation ("RSMC"), the Funds' investment adviser and
administrator, is located at 1100 North Market Street, Wilmington, Delaware
19890. RSMC is a wholly owned subsidiary of Wilmington Trust Company ("WTC"),
which is wholly owned by Wilmington Trust Corporation. RSMC also provides asset
management services to collective investment funds maintained by WTC. In the
past, RSMC has provided asset management services to individuals, personal
trusts, municipalities, corporations and other organizations. As of October 31,
1998, the aggregate assets of the investment companies managed by RSMC totaled
approximately $3.2 billion.
Each Portfolio pays a monthly fee to RSMC at the annual rate of 0.47% of the
Portfolio's first $1 billion of average daily net assets; 0.43% of the
Portfolio's next $500 million of average daily net assets; 0.40% of the
Portfolio's next $500 million of average daily net assets; and 0.37% of the
Portfolio's average daily net assets in excess of $2 billion, as determined at
the close of business on each day throughout the month. Out of its fee, RSMC
makes payments to PFPC Inc. for the provisions of sub-administration, accounting
and transfer agency services and to WTC for provision of custodial services. For
the fiscal year ended September 30, 1998, RSMC received the following fees, as a
percentage of each Portfolio's average net assets:
U.S. Government Portfolio 0.47%
Money Market Portfolio 0.47%
Tax-Exempt Fund 0.47%
SERVICE PROVIDERS
The chart below provides information on the Funds' primary service providers.
13
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Asset Management Shareholder Services
- ------------------------ ------------------------ ------------------------
INVESTMENT MANAGER TRANSFER AGENT
AND ADMINISTRATOR PFPC INC.
RODNEY SQUARE 400 BELLEVUE PARKWAY
MANAGEMENT CORPORATION WILMINGTON, DE
RODNEY SQUARE NORTH 19809
1100 N. MARKET STREET
WILMINGTON, DE Handles shareholder
19890-0001 services, including
recordkeeping and
Manages each Portfolio's statements, distribution
business and investment of dividends and
activities. processing of buy
and sell requests.
- ------------------------ ------------------------ ------------------------
Fund Operations Asset Safe Keeping
- ------------------------ ------------------------ -------------------------
SUB-ADMINISTRATOR AND CUSTODIANS
ACCOUNTING AGENT WILMINGTON TRUST COMPANY
PFPC INC. RODNEY SQUARE NORTH
400 BELLEVUE PARKWAY 1100 N. MARKET STREET
WILMINGTON, DE 19809 WILMINGTON, DE 19890-0001
PFPC TRUST COMPANY
200 STEVENS DRIVE
Provides facilities, FUND LESTER, PA 19113
equipment and personnel
to carry out Hold each Portfolio's
administrative services assets, settle all
related to each portfolio trades and
Portfolio and calculates collect most of the
each Portfolio's NAV the valuation data
and dividends. required for calculating
each Portfolio's NAV.
- ------------------------ ------------------------ -------------------------
Distribution
------------------------
DISTRIBUTOR
PROVIDENT DISTRIBUTORS, INC.
FOUR FALLS CORPORATE CENTER
WEST CONSHOHOCKEN, PA
19428
Distributes each
Portfolio's Shares.
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14
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SHAREHOLDER INFORMATION
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PRICING OF SHARES
Each Portfolio uses its best effort to maintain its $1 constant share price and
values its securities at cost. This involves valuing a security at its cost and
therafter assuming a constant amortization to maturity of any discount or
premium, regardless of fluctuating interest rates on the market value of the
security. All cash, receivables and current payables are carried at their face
value. Other assets, if any, are valued at fair value as determined in good
faith by, or under the direction of, the Board of Trustees of each Fund.
PLAIN TALK
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WHAT IS THE NET ASSET VALUE or "NAV"?
NAV = Assets - Liabilities
--------------------
Outstanding Shares
----------------------------------------------------------------------
PFPC determines the net asset value (the "NAV") per share of each Portfolio, as
of 12:00 p.m. Eastern time for the Tax-Exempt Fund and 2:00 p.m. Eastern time
for the Rodney Square Fund, on each Business Day (a day that the New York Stock
Exchange, the Transfer Agent and the Philadelphia branch of the Federal Reserve
Bank are open for business). The NAV is calculated by adding the value of all
securities and other assets in a portfolio, deducting its liabilities and
dividing the balance by the number of outstanding shares in that Portfolio.
Shares will not be priced on those days the Funds are closed. As of the date of
this prospectus, those days are:
New Year's Day Memorial Day Veterans Day
Martin Luther King, Jr. Day Independence Day Thanksgiving Day
President's Day Labor Day Christmas Day
Good Friday Columbus Day
15
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PURCHASE OF SHARES
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PLAIN TALK
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HOW TO PURCHASE SHARES:
(BULLET) Directly by mail or by wire
(BULLET) As a client of WTC through a trust account or a corporate
cash management account
(BULLET) As a client of a Service Organization
----------------------------------------------------------------------
Portfolio shares are offered on a continuous basis and are sold without any
sales charges. The minimum initial investment in any Portfolio is $1,000, but
additional investments may be made in any amount. You may purchase shares as
specified below.
You may also purchase shares if you are a client of WTC through your trust or
corporate cash management accounts. If you are a client of an institution (such
as a bank or broker-dealer) that has entered into a servicing agreement with the
Funds' distributor ("Service Organization") you may also purchase shares through
such Service Organization. You should also be aware that you may be charged a
fee by WTC or the Service Organization in connection with your investment in the
Portfolios. If you wish to purchase Portfolio shares through your account at WTC
or a Service Organization, you should contact that entity directly for
information and instructions on purchasing shares.
BY MAIL: You may purchase shares by sending a check drawn on a U.S. bank payable
to The Rodney Square Fund or The Rodney Square Tax-Exempt Fund, indicating the
Portfolio that you have selected, along with a completed application (included
at the end of this prospectus). Send the check and application to The Rodney
Square Fund or The Rodney Square Tax-Exempt Fund, c/o PFPC Inc., P.O. Box 8951,
Wilmington, DE 19899-9752. Any purchase orders sent by overnight mail should be
sent to The Rodney Square Fund or The Rodney Square Tax-Exempt Fund, c/o PFPC,
Inc., 400 Bellevue Parkway, Wilmington, DE 19809. If a subsequent investment is
being made, the check should also indicate your Portfolio account number. When
you make purchases by check, each Portfolio may withhold payment on redemptions
until it is reasonably satisfied that the funds are collected (which can take up
to 10 days). If you purchase shares with a check that does not clear, your
purchase will be canceled and you will be responsible for any losses or fees
incurred in that transaction.
BY WIRE: You may purchase shares by wiring federal funds readily available. You
must advise PFPC at (800) 336-9970 before making a purchase by wire, and if
making an initial purchase, to also obtain an account number. Once you have an
account number, you should instruct your bank to wire federal funds to PFPC, c/o
PFPC Trust Company, Philadelphia, PA, ABA # 031-0000-53, attention: The Rodney
Square Fund or The Rodney Square Tax-Exempt Fund, DDA # 86-0172-6591. Be sure to
also include your account number, the desired Portfolio and your name. If you
make an initial purchase by wire, you must promptly forward a completed
application to the Transfer Agent at the address above. If you are making a
subsequent purchase, the wire should also indicate your Portfolio account
number.
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INDIVIDUAL RETIREMENT ACCOUNTS: You may purchase shares of the Portfolios of the
Rodney Square Fund for a tax-deferred retirement plan such as an individual
retirement account ("IRA"). To order an application for an IRA and a brochure
describing a Portfolio IRA, call the Transfer Agent at (800) 336-9970. PFPC
Trust Company, as custodian for each IRA account receives an annual fee of $10
per account, paid directly to PFPC Trust Company by the IRA shareholder. If the
fee is not paid by the due date, the Portfolio shares owned by the IRA will be
redeemed automatically as payment.
AUTOMATIC INVESTMENT PLAN: You may purchase Portfolio shares through an
Automatic Investment Plan ("AIP"). Under the AIP, the Transfer Agent, at regular
intervals, will automatically debit your bank checking account in an amount of
$50 or more (after the $1,000 minimum initial investment). You may elect to
invest the specified amount monthly, bimonthly, quarterly, semiannually or
annually. The purchase of Portfolio shares will be effected at their offering
price at 12:00 p.m. Eastern time for the Tax-Exempt Fund and at 2:00 p.m.
Eastern time for the Rodney Square Fund, on or about the 20th day of the month.
For an application for the Automatic Investment Plan, check the appropriate box
of the application or call the Transfer Agent at (800) 336-9970. This service is
generally not available for WTC trust account clients, since similar services
are provided through WTC. This service may also not be available for Service
Organization clients who are provided similar services through those
organizations.
ADDITIONAL PURCHASE INFORMATION: Investments in a Portfolio are accepted on the
Business Day that federal funds are deposited for your account on or before
12:00 p.m. Eastern time for the Tax-Exempt Fund and 2:00 p.m. Eastern time for
the Rodney Square Fund. Monies immediately convertible to federal funds are
deposited for your account on or before 12:00 p.m. Eastern time for the
Tax-Exempt Fund and 2:00 p.m. Eastern time for the Rodney Square Fund, or checks
deposited for your account have been converted to federal funds (usually within
two Business Days after receipt). All investments in a Portfolio are credited to
your account in the form of shares of the Portfolio immediately upon acceptance
and become entitled to dividends declared as of the day and time of investment.
Any purchase order may be rejected if a Portfolio determines that accepting the
order would not be in the best interest of the Portfolio or its shareholders.
It is the responsibility of WTC or the Service Organization to transmit orders
for the purchase of shares by its customers to the Transfer Agent and to deliver
required funds on a timely basis, in accordance with the procedures stated
above.
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REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
PLAIN TALK
----------------------------------------------------------------------
HOW TO REDEEM (SELL) SHARES:
(BULLET) By mail
(BULLET) By telephone
(BULLET) By check
(BULLET) Through a Systematic Withdrawal Plan
----------------------------------------------------------------------
You may sell your shares on any Business Day by mail, telephone or check, as
described below. Redemptions are effected at the NAV next determined after the
Transfer Agent has received your redemption request. There is no fee when
Portfolio shares are redeemed. It is the responsibility of WTC or the Service
Organization to transmit redemption orders and credit their customers' accounts
with redemption proceeds on a timely basis. Redemption checks are mailed on the
next Business Day following acceptance by the Transfer Agent of redemption
instructions, but never later than 7 days following such receipt and acceptance.
Amounts redeemed by wire are normally wired on the date of receipt and
acceptance of redemption instructions (if received by the Transfer Agent before
12:00 p.m. Eastern time for the Tax-Exempt Fund and 2:00 p.m. Eastern time for
the Rodney Square Fund or the next Business Day if received after 12:00 p.m.
Eastern time for the Tax-Exempt Fund and 2:00 p.m. Eastern time for the Rodney
Square Fund or on a non-Business Day), but never later than 7 days following
such receipt and acceptance. If you purchased your shares through an account at
WTC or a Service Organization, you should contact WTC or the Service
Organization for information relating to redemptions. The Portfolio's name and
your account number should accompany any redemption requests.
BY MAIL: If you redeem your shares by mail, you should submit written
instructions with a guarantee of your signature by an eligible institution
acceptable to the Transfer Agent. Eligible institutions include a domestic bank
or trust company, broker dealer, clearing agency or savings association, who are
participants in a medallion program recognized by the Securities Transfer
Association. The three recognized medallion programs are Securities Transfer
Agents Medallion Program ("STAMP"), Stock Exchanges Medallion Program ("SEMP"),
and New York Stock Exchange, Inc. Medallion Signature Program ("MSP"). Signature
guarantees that are not part of these programs will not be accepted. The written
instructions and guarantees should be mailed to: The Rodney Square Fund or The
Rodney Square Tax-Exempt Fund, c/o PFPC, Inc., P.O. Box 8951, Wilmington, DE
19899-9752. A redemption order sent by overnight mail should be sent to The
Rodney Square Fund or The Rodney Square Tax-Exempt Fund, c/o PFPC, Inc., 400
Bellevue Parkway, Wilmington, DE 19809. You must indicate the Portfolio name,
your account number and your name.
BY TELEPHONE: If you prefer to redeem your shares by telephone you may elect to
do so. However there are certain risks. The Funds have certain safeguards and
procedures to confirm the identity of callers and to confirm that the
instructions communicated are genuine. If such procedures are followed, you will
bear the risk of any losses.
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<PAGE>
BY CHECK: You may utilize the checkwriting option to redeem Portfolio shares by
drawing a check for $500 or more against a Portfolio account. When the check is
presented for payment, a sufficient number of shares will be redeemed from your
Portfolio account to cover the amount of the check. This procedure enables you
to continue receiving dividends on those shares until the check is presented for
payment. Because the aggregate amount of Portfolio shares owned is likely to
change each day, you should not attempt to redeem all shares held in your
account by using the checkwriting procedure. Charges will be imposed for
specially imprinted checks, business checks, copies of canceled checks, stop
payment orders, checks returned due to "nonsufficient funds" and returned
checks. These charges will be paid by redeeming automatically an appropriate
number of Portfolio shares. Each Fund and the Transfer Agent reserve the right
to terminate or alter the checkwriting service at any time. The Transfer Agent
also reserves the right to impose a service charge in connection with the
checkwriting service. If you are interested in the check writing service,
contact the Transfer Agency for further information. This service is generally
not available for clients of WTC through their trust or corporate cash
management accounts, since it is already provided for these customers through
WTC. The service may also not be available for Service Organization clients who
are provided a similar service by those organizations.
If the shares to be redeemed represent an investment made by check, each
Portfolio reserves the right not to make the redemption proceeds available until
it has reasonable grounds to believe that the check has been collected (which
could take up to 10 days).
Redemption proceeds may be wired to your predesignated bank account in any
commercial bank in the United States if the amount is $1,000 or more. The
receiving bank may charge a fee for this service. Proceeds may also be mailed to
your bank or, for amounts of $10,000 or less, mailed to your Portfolio account
address of record if the address has been established for at least 60 days. In
order to authorize the Transfer Agent to mail redemption proceeds to your
Portfolio account address of record, complete the appropriate section of the
Application for Telephone Redemptions or include your Portfolio account address
of record when you submit written instructions. You may change the account that
you have designated to receive amounts redeemed at any time. Any request to
change the account designated to receive redemption proceeds should be
accompanied by a guarantee of the shareholder's signature by an eligible
institution. A signature and a signature guarantee are required for each person
in whose name the account is registered. Further documentation will be required
to change the designated account when a corporation, other organization, trust,
fiduciary or other institutional investor holds the Portfolio shares.
SYSTEMATIC WITHDRAWAL PLAN: If you own shares of a Portfolio with a value of
$10,000 or more you may participate in the Systematic Withdrawal Plan ("SWP").
Under the SWP, you may automatically redeem a portion of your account monthly,
bimonthly, quarterly, semiannually or annually. The minimum withdrawal available
is $100. The redemption of Portfolio shares will be effected at NAV at 12:00
p.m. Eastern time for the Tax-Exempt Fund and at 2:00 p.m. Eastern time for the
Rodney Square Fund on or about the 25th day of the month. This service is
generally not available for WTC trust accounts or certain Service Organizations,
because a similar service is provided through those organizations.
19
<PAGE>
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EXCHANGE OF SHARES
- --------------------------------------------------------------------------------
PLAIN TALK
----------------------------------------------------------------------
WHAT IS AN EXCHANGE OF SHARES?
An exchange of shares allows you to move your money from one Portfolio
to another Portfolio within the Rodney Square family of funds.
----------------------------------------------------------------------
You may exchange all or a portion of your shares in a Portfolio for shares of
another Portfolio within the Rodney Square family of funds that is currently
being offered. The other Rodney Square funds are:
The Rodney Square Strategic Fixed-Income Fund:
The Rodney Square Short/Intermediate Bond Portfolio
The Rodney Square Intermediate Bond Portfolio
The Rodney Square Municipal Bond Portfolio
The Rodney Square Strategic Equity Fund:
The Rodney Square Large Cap Growth Equity Portfolio
The Rodney Square Large Cap Value Equity Portfolio
The Rodney Square Small Cap Equity Portfolio
The Rodney Square International Equity Portfolio.
Redemption of shares through an exchange will be effected at the NAV per share
next determined after the Transfer Agent receives your request. A purchase of
shares through an exchange will be effected at the NAV per share determined at
that time or as next determined thereafter. The NAV of the Money Market
Portfolios is determined at 12:00 p.m. Eastern time for the Tax-Exempt Fund and
at 2:00 p.m. Eastern time for the Rodney Square Fund on each Business Day. The
NAV of The Rodney Square Strategic Fixed-Income Fund and The Rodney Square
Strategic Equity Fund is determined at the close of regular trading on the New
York Stock Exchange (currently, 4:00 p.m. Eastern time), on each Business Day.
Exchange transactions will be subject to the minimum initial investment and
other requirements of the fund or portfolio into which the exchange is made. An
exchange may not be made if the exchange would leave a balance in a
shareholder's account of less than $500.
To obtain prospectuses of the other Rodney Square funds, you may call (800)
336-9970. To obtain more information about exchanges, or to place exchange
orders, contact the Transfer Agent, or, if your shares are held in a trust
account with WTC or in an account with a Service Organization, contact WTC or
the Service Organization. The Portfolios may terminate or modify the exchange
offer described here and will give you 60 days' notice of such termination or
modification. This exchange offer is valid only in those jurisdictions where the
sale of the Rodney Square fund shares to be acquired through such exchange may
be legally made.
20
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DIVIDENDS
- --------------------------------------------------------------------------------
As a shareholder of a Portfolio, you are entitled to dividends arising from the
net investment income and net realized short-term capital gains, if any, earned
on the investments held by the Portfolios. Generally, each Portfolio declares
its net income daily. Each Portfolio expects to distribute any net realized
gains once a year.
Each Portfolio's net investment income is determined by PFPC on each day that
the Portfolio's NAV is calculated. Dividends are payable to the shareholders of
record at the time the dividends are declared (including holders of shares being
purchased, but excluding holders of shares being redeemed). Dividends declared
by a Portfolio are accrued throughout the month and are paid to you no later
than 7 days after the end of each month.
Dividends are automatically reinvested and are paid in the form of additional
Portfolio shares unless you have elected to receive dividends in cash. If you
are a client of WTC through your trust or corporate cash management account,
dividends are paid in cash and may be reinvested by WTC on the next Business Day
after the dividend payment, resulting in the loss of a day's interest on the day
the dividend is paid. This dividend reinvestment policy differs from the
dividend reinvestment programs of some other money market funds and may result
in WTC having the use of the proceeds of your dividends until they are
reinvested.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
As long as a Portfolio meets the requirements for being a "regulated investment
company", which each Portfolio has done in the past and intends to do in the
future, it pays no Federal income tax on the earnings it distributes to
shareholders. Each Portfolio will notify you following the end of the
calendar year of the amount of dividends paid that year.
Dividends you receive from a Portfolio of the Rodney Square Fund, whether
reinvested in Portfolio shares or taken as cash, are generally taxable to you as
ordinary income.
You will not recognize any gain or loss on the sale (redemption) or exchange of
shares of a Portfolio so long as that Portfolio maintains a stable price of
$1.00 a share.
Dividend distributions by the Tax-Exempt Fund of the excess of its interest
income on tax-exempt securities over certain amounts disallowed as deductions
("exempt-interest dividends") may be treated by you as interest excludable from
your gross income. The Tax-Exempt Fund intends to distribute tax-exempt income,
though it may invest a portion of its assets in securities that generate taxable
income. Additionally, any capital gains earned by an investment in the
Tax-Exempt Fund may be taxable.
State and Local Taxes: The exemption of certain interest income for Federal
income tax purposes does not necessarily mean that such income is exempt under
the laws of any state or local taxing authority. You may be exempt from state
and local taxes on the Tax-Exempt Fund's dividend distributions of interest
income derived from obligations of the state and/or municipalities of the state
in which you reside, but you generally will be taxed on income derived from
obligations of other jurisdictions. YOU SHOULD CONSULT YOUR TAX ADVISERS
CONCERNING STATE AND LOCAL TAX LAWS, WHICH MAY HAVE DIFFERENT CONSEQUENCES FROM
THOSE OF THE FEDERAL INCOME TAX LAW.
21
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DISTRIBUTION ARRANGEMENTS
- --------------------------------------------------------------------------------
Provident Distributors, Inc. manages the Portfolios' distribution efforts and
provides assistance and expertise in developing marketing plans and materials,
enters into dealer agreement with broker-dealers to sell shares and provides
shareholder support services, directly or through affiliates.
- --------------------------------------------------------------------------------
RULE 12B-1 FEES
- --------------------------------------------------------------------------------
PLAIN TALK
----------------------------------------------------------------------
WHAT ARE 12b-1 FEES?
12b-1 fees, charged by some funds, are deducted from fund assets to
pay for marketing and advertising expenses or, more commonly, to
compensate sales professionals.
----------------------------------------------------------------------
Each Portfolio has adopted a plan under Rule 12b-1 that allows the Portfolio to
reimburse PDI for distribution expenses incurred in connection with the
distribution efforts described above. Each plan permits reimbursement in an
amount up to 0.20% of a Portfolio's average net assets. For the current fiscal
year, the Boards of Trustees have authorized annual payments of up to 0.05% of
each Portfolio's average net assets to reimburse PDI for making payments to
certain Service Organizations who have sold Portfolio shares and for other
distribution expenses.
22
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FOR MORE INFORMATION
- --------------------------------------------------------------------------------
FOR INVESTORS WHO WANT MORE INFORMATION ON THE PORTFOLIOS, THE FOLLOWING
DOCUMENTS ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMI-ANNUAL REPORTS: Contain performance data and information on
portfolio holdings and operating results for a Fund's most recently completed
fiscal year or half-year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): Provides a complete technical and
legal description of a Portfolio's policies, investment restrictions, risks, and
business structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Portfolios may be
obtained without charge by contacting:
The Rodney Square Fund or The Rodney Square Tax-Exempt Fund
c/o PFPC Inc.
400 Bellevue Parkway
Suite 108
Wilmington, Delaware 19809
(800) 336-9970
9:00 a.m. to 5:00 p.m., Eastern time
Information about the Funds (including the SAI) can be reviewed and copied at
the Public Reference Room of the Securities and Exchange Commission in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
DC, 20549-6009. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-(800)-SEC-0330. Reports and other information
about the Funds may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING CHANGES TO EXISTING
ACCOUNTS, PURCHASING, EXCHANGING OR REDEEMING SHARES, OR OTHER INVESTOR
SERVICES, PLEASE CALL 1-(800)-336-9970.
The investment company registration numbers for The Rodney Square Fund and The
Rodney Square Tax-Exempt Fund are 811-3406 and 811-4372, respectively.
23
<PAGE>
THE RODNEY SQUARE FUND
U.S. GOVERNMENT PORTFOLIO
MONEY MARKET PORTFOLIO
THE RODNEY SQUARE TAX-EXEMPT FUND
400 Bellevue Parkway
Wilmington, Delaware 19809
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 29, 1999
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Funds' current Prospectus, dated January
29, 1999, as amended from time to time. A copy of the current Prospectus may be
obtained without charge, by writing to Provident Distributors, Inc. ("PDI"),
Four Falls Corporate Center, West Conshohocken, PA 19428, and from certain
institutions such as banks or broker-dealers that have entered into servicing
agreements with PDI or by calling (800) 336-9970.
<PAGE>
TABLE OF CONTENTS
THE FUNDS......................................................................2
INVESTMENT POLICIES............................................................3
DESCRIPTION OF RATINGS.........................................................7
INVESTMENT LIMITATIONS.........................................................8
TRUSTEES AND OFFICERS.........................................................10
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...........................12
RODNEY SQUARE MANAGEMENT CORPORATION..........................................12
WILMINGTON TRUST COMPANY......................................................13
INVESTMENT MANAGEMENT SERVICES................................................13
DISTRIBUTION AGREEMENT AND RULE 12b-1 PLAN....................................15
ADDITIONAL SERVICE PROVIDERS..................................................16
BROKERAGE ALLOCATION AND OTHER PRACTICES......................................16
PURCHASE, REDEMPTION AND PRICING OF SHARES....................................17
DIVIDENDS.....................................................................18
TAXATION OF THE PORTFOLIOS....................................................18
CALCULATION OF PERFORMANCE INFORMATION........................................19
FINANCIAL STATEMENTS..........................................................24
i
<PAGE>
THE FUNDS
The Rodney Square Fund and the Rodney Square Tax-Exempt Fund (each, a
"Fund" and collectively, the "Funds") are diversified, open-end, management
investment companies established under Massachusetts law by Declaration of Trust
on February 16, 1982 and August 1, 1985, respectively and registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund's capital
consists of an unlimited number of shares of beneficial interest. The authorized
shares of beneficial interest in the Rodney Square Fund are currently divided
into two series or portfolios, the U.S. Government Portfolio and the Money
Market Portfolio (each a "Portfolio"). The authorized shares of beneficial
interest in the Rodney Square Tax-Exempt Fund consist of one series or portfolio
(also a "Portfolio" and together with the U.S. Government Portfolio and the
Money Market Portfolio, the "Portfolios"). Each Fund's Board of Trustees is
empowered by the respective Declarations of Trust and the Bylaws to establish
additional classes and series of shares for each Fund, although the Board does
not have present intention of doing so. Shares entitle holders to one vote per
share and fractional votes for fractional shares held. Shares have
non-cumulative voting rights, do not have preemptive or subscription rights and
are transferable. Separate votes are taken by each Portfolio on matters
affecting that Portfolio. For example, a change in the fundamental investment
policies for a Portfolio would be voted upon only by shareholders of that
Portfolio.
The Funds do not hold annual meetings of shareholders. The Trustees
are required to call a meeting of shareholders for the purpose of voting upon
the question of removal of any Trustee when requested in writing to do so by the
shareholders of record owning not less than 10% of a Fund's outstanding shares.
SHAREHOLDER LIABILITY. The Funds are entities 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. Each of the Declarations of Trust, however,
contains an express disclaimer of shareholder liability for acts or obligations
of a Fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by or on behalf of
the Trust or the Trustees relating to a Fund that is issued by or on behalf of a
Fund or the Trustees. The Declarations of Trust provide 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 Declarations
of Trust also provide 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.
LIMITATION OF TRUSTEES' LIABILITY. Each Fund's Declaration of Trust
provides that a Trustee 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.
DESCRIPTION OF SHARES. The shares of each Portfolio are fully paid and
nonassessable. The assets 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 a Fund.
Expenses with respect to the Portfolios are allocated in proportion to the net
assets of the respective Portfolio except where allocations of direct expenses
can otherwise be fairly made. The officers of the Funds, subject to the general
supervision of the Boards of Trustees, have the power to determine which
liabilities are allocable to a given Portfolio or which are general or allocable
to the Portfolios.
2
<PAGE>
INVESTMENT POLICIES
The following information supplements the information concerning each
Portfolio's investment objective, policies and limitations found in the
Prospectus.
Each Portfolio has adopted 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 "Purchase,
Redemption and Pricing of Shares") pursuant to Rule 2a-7 under the 1940 Act. As
conditions of that Rule, each 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 Portfolio's
investment manager, Rodney Square Management Corporation ("RSMC"), under the
direction of and subject to the review of each Fund's Board of Trustees.
Although not required, typically over 90% of each Portfolio's assets are rated
A-1+ by Standard & Poor's ("S&P"), P-1 by Moody's Investors Service, Inc.
("Moody's"), or F-1 by Fitch IBCA. Inc. ("Fitch") or a comparable rating by an
equivalent rating agency.
BANK OBLIGATIONS. The Money Market Portfolio may invest in U.S.
dollar-denominated obligations of major U.S. and foreign banks and their
branches located outside of the United States, of U.S. branches of foreign
banks, of foreign branches of foreign banks, of U.S. agencies of foreign banks
and wholly-owned banking subsidiaries of foreign banks located in the United
States, provided that the bank has capital, surplus and undivided profits (as of
the date of its most recently published annual audited financial statements) in
excess of $100,000,000 (moreover, it is the policy of RSMC to require that the
bank have assets in excess of $5 billion). There may be less publicly available
information about the obligations of foreign banks and other foreign issuers
than domestic issuers, and foreign issuers may not be subject to the same
accounting, auditing and financial record keeping standards as domestic issuers.
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. A brief
description of some typical types of bank obligations follows:
(BULLET) BANKERS' ACCEPTANCES. The Money Market Portfolio and the
Tax-Exempt Portfolio may invest in bankers' acceptances,
which are credit instruments evidencing the obligation of a
bank to pay a draft that has been drawn on it by a customer.
These instruments reflect the obligation of both the bank and
the drawer to pay the face amount of the instrument upon
maturity.
3
<PAGE>
(BULLET) CERTIFICATES OF DEPOSIT. The Money Market Portfolio and the
Tax-Exempt Portfolio may invest in certificates evidencing
the indebtedness of a commercial bank to repay funds
deposited with it for a definite period of time (usually from
14 days to one year) at a stated or variable interest rate.
Variable rate certificates of deposit provide that the
interest rate will fluctuate on designated dates based on
changes in a designated base rate (such as the composite rate
for certificates of deposit established by the Federal
Reserve Bank of New York).
(BULLET) TIME DEPOSITS. The Money Market Portfolio may invest in time
deposits, which are bank deposits for fixed periods of time.
CERTIFICATES OF PARTICIPATION. The Tax-Exempt Portfolio may invest in
certificates of participation, which give the investor an undivided interest in
the municipal obligation in the proportion that the investor's interest bears to
the total principal amount of the municipal obligation.
COMMERCIAL PAPER. The Money Market Portfolio and the Tax-Exempt
Portfolio may invest in commercial paper, which consists of short-term (usually
from 1 to 270 days) unsecured promissory notes issued by corporations in order
to finance their current operations.
CORPORATE OBLIGATIONS. The Money Market Portfolio may invest in
corporate obligations, which are bonds or notes issued by corporations and other
business organizations in order to finance their long-term credit needs. The
Portfolio's investments in these obligations will be limited to such obligations
that have remaining maturities of 397 days.
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.
ILLIQUID SECURITIES. Each Portfolio may not invest more than 10% of the
value of its net assets in securities that at the time of purchase have legal or
contractual restrictions on resale or are otherwise illiquid. Securities are
deemed illiquid if they are not readily marketable and include repurchase
agreements having a maturity of longer than 7 days.
Each 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 Portfolio's 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).
INVESTMENT COMPANY SECURITIES. Each Portfolio may invest in the
securities of other open-end investment companies that seek to maintain a stable
net asset value. Each Portfolio may invest in such securities within the limits
prescribed by the 1940 Act. These limitations currently provide, in part, that a
Portfolio may purchase shares of an investment company unless a) such a purchase
would cause the Portfolio to own in the aggregate more than 3% of the total
outstanding voting stock of the investment company or b) such a purchase would
cause the Portfolio to have more than 5% of its total assets invested in the
investment company or more than 10% of its total assets invested in the
aggregate in all such investment companies. In addition to a Portfolio's
expenses, including various fees, as a shareholder in an
4
<PAGE>
investment company, the Portfolio would bear its pro rata portion of the
investment company's expenses, including advisory fees.
MUNICIPAL SECURITIES. The Money Market Portfolio and the Tax-Exempt
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
S&P, Aa, MIG-1/VMIG-1 or P-1 by Moody's, or at least AA or F-1 by 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 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 Portfolios to their respective shareholders may not be
tax-exempt. A brief description of some typical types of municipal securities
follows:
(BULLET) GENERAL OBLIGATION BONDS are backed by the taxing power of
the issuing municipality and are considered the safest type
of municipal bond.
(BULLET) REVENUE BONDS are backed by the revenues of a specific
project or facility - tolls from a toll-bridge, for example.
(BULLET) BOND ANTICIPATION NOTES normally are issued to provide
interim financing until long-term financing can be arranged.
The long-term bonds then provide money for the repayment of
the Notes.
(BULLET) TAX ANTICIPATION NOTES finance working capital needs of
municipalities and are issued in anticipation of various
seasonal tax revenues, to be payable for these specific
future taxes.
(BULLET) REVENUE ANTICIPATION NOTES are issued in expectation of
receipt of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Program.
(BULLET) INDUSTRIAL DEVELOPMENT BONDS ("IDBs) and PRIVATE ACTIVITY
BONDS ("PAB's") are specific types of revenue bonds issued on
or behalf of public authorities to finance various privately
operated facilities, such as solid waste facilities and
sewage plants. PABs generally are such bonds issued after
April 15, 1986. These obligations are included within the
term "municipal bonds" if the interest paid on them is exempt
from federal income tax in the opinion of the bond issuer's
counsel. IDBs and PABs are in most case revenue bonds and
thus are not payable from the unrestricted revenues of the
issuer. The credit quality of the IDBs and PABs is usually
directly related to the credit standing of the user of the
facilities being financed, or some form of credit enhancement
such as a letter of credit.
(BULLET) TAX-EXEMPT COMMERCIAL PAPER AND SHORT-TERM MUNICIPAL NOTES
provide for short-term capital needs and usually have
maturities of one year or less. They include tax anticipation
notes, revenue anticipation notes and construction loan
notes.
(BULLET) CONSTRUCTION LOAN NOTES are sold to provide construction
financing. After successful completion and acceptance, many
projects receive permanent financing through the Federal
Housing Administration by way of "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the
Government National Mortgage Association).
(BULLET) PUT BONDS are municipal bonds which give the holder the right
to sell the bond back to the issuer or a third party at a
specified price and exercise date, which is typically well in
advance of the bond's maturity date.
5
<PAGE>
REPURCHASE AGREEMENTS. Each Portfolio may invest in repurchase
agreements. These are transactions by which a Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed upon
date and price reflecting a market rate of interest unrelated to the coupon rate
or maturity of the purchased security. While it is not possible to eliminate all
risks from these transactions (particularly the possibility of a decline in the
market value of underlying securities, as well as delays and costs to the
Portfolio if the other Party to the repurchase agreement becomes bankrupt), it
is the policy of the Portfolio to limit repurchase transactions to primary
dealers and banks whose creditworthiness has been reviewed and found to be
satisfactory by RSMC.
SECURITIES LENDING. 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 a 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
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.
STANDBY COMMITMENTS. The Money Market Portfolio may invest in standby
commitments. It is expected 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 standby
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). Standby 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 standby commitment will be
accounted for as unrealized depreciation and will be amortized over the period
the commitment is held by the Money Market Portfolio.
U.S. GOVERNMENT OBLIGATIONS. Each Portfolio may invest in debt
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Although all obligations of agencies and instrumentalities
are not direct obligations of the U.S. Treasury, payment of the interest and
principal on these obligations is generally backed directly or indirectly by the
U.S. Government. This support can range from securities supported by the full
faith and credit of the United States (for example, securities of the Government
National Mortgage Association), to securities that are supported solely or
primarily by the creditworthiness of the issuer, such as securities of the
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation,
Tennessee Valley Authority, Federal Farm Credit Banks and the Federal Home Loan
Banks. In the case of obligations not backed by the full faith and credit of the
United States, a Portfolio must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitments.
VARIABLE AND FLOATING RATE SECURITIES. Each Portfolio may invest in
variable and floating rate securities which are securities the yield on which is
adjusted in relation to changes in specific market rates, such as the prime
rate. Certain of these obligations also may carry a demand feature that gives
6
<PAGE>
the holder the right to demand prepayment of the principal amount of the
security prior to maturity. The demand feature is usually backed by an
irrevocable letter of credit or guarantee by a bank. Portfolio investments in
these securities must comply with conditions established by the SEC under which
they may be considered to have remaining maturities of 397 days or less.
WHEN-ISSUED SECURITIES. Each Portfolio 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.
YIELDS AND RATINGS OF SECURITIES. The yields on the securities in which
the Portfolios may 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 rating 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 a
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, a Fund's
Board of Trustees, will consider whether the Portfolio should continue to hold
the obligation.
DESCRIPTION OF RATINGS
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATING:
A-1 -- This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING:
PRIME-1 -- This designation indicates a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability will often be evidenced
by many of the following characteristics:
(BULLET) Leading market position in well established industries.
(BULLET) High rates of return on funds employed.
(BULLET) Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
(BULLET) Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
(BULLET) Well-established access to a range of financial markets and assured
sources of alternate liquidity.
DESCRIPTION OF S&P'S TWO HIGHEST CORPORATE AND MUNICIPAL BOND RATINGS:
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay
7
<PAGE>
principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
DESCRIPTION OF MOODY'S TWO HIGHEST CORPORATE AND MUNICIPAL BOND RATINGS:
Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high-quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They (the Aa group) are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risk appear somewhat larger than
the Aaa securities.
DESCRIPTION OF S&P'S HIGHEST STATE AND MUNICIPAL NOTES RATING:
S&P's tax-exempt note ratings are generally given to notes due in three years or
less. The highest rating category is as follows:
SP-1 -- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus sign (+) designation.
DESCRIPTION OF MOODY'S HIGHEST STATE AND MUNICIPAL NOTES RATING:
Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade ("MIG"). Short-term ratings on issues with demand
features are differentiated by the use of the "VMIG" symbol to reflect such
characteristics as payment upon periodic demand rather than fixed maturity dates
and payment relying on extreme liquidity. Such ratings recognize the differences
between short-term credit risk and long-term risk. Factors affecting the
liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
The symbol used is as follows: MIG-1/VMIG-1 -- Notes bearing this designation
are of the best quality. There is present strong protection by established cash
flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing.
DESCRIPTION OF FITCH'S HIGHEST STATE AND MUNICIPAL NOTES RATING:
AAA - Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA - Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.
F-1+ - Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
F-1 - Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
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:
8
<PAGE>
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 the U.S. Government Portfolio and the
Money Market Portfolio may invest more than 25% of their respective
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 a Portfolio's
total assets;
5. underwrite any issue of securities, except to the extent that a
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 to the foregoing, as a fundamental policy, the Tax-Exempt
Portfolio may not issue senior securities, except as appropriate to evidence
indebtedness that the Portfolio is permitted to incur, provided that the
Portfolio may issue shares of additional series or classes that the Trustees may
establish, and provided that the Portfolio's use of options, futures contracts
and options thereon or currency-related contracts, will not be deemed to be
senior securities for this purpose.
In addition, each Portfolio has adopted several non-fundamental
policies, which can be changed by the Board of Trustees of a Fund without
shareholder approval.
As a matter of non-fundamental policy, each Portfolio will not:
1. 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;
9
<PAGE>
2. 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;
3. 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);
4. 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.
As a matter of non-fundamental policy, the U.S. Government Portfolio
and the Money Market Portfolio will not 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.
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
Each Fund has a Board, currently composed of four Trustees, which
supervises the Portfolios' activities and reviews contractual arrangements with
companies that provide the Portfolios with services. The 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 Strategic
Equity Fund and The Rodney Square Strategic Fixed-Income Fund (together with the
Funds, the Rodney Square Family of Funds"). Those Trustees who are "interested
persons" of each 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 (*).
10
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------ -------------- ---------------------------------------------------------------
NAME, ADDRESS AND AGE POSITION(S) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
HELD WITH
THE FUND
- ------------------------------ -------------- ---------------------------------------------------------------
<S> <C> <C>
ERIC BRUCKER Trustee Mr. Brucker has been the Dean of the College of Business,
College of Business, Public Policy and Health at the University of Maine since
Public Policy and Health September 1998. Previously he was the Dean of the School of
University of Maine Management at the University of Michigan since June 1992. He
Orono, ME 04473 was Professor of Economics, Trenton State College from
Age 57 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 Trustee Mr. Buckner has retired as President and Chief Operating
5 Hearth Lane, Officer of Hercules Incorporated (diversified chemicals),
Greenville, DE 19807 positions he held from March 1987 through March 1992. He also
Age 66 served as a member of the Hercules Incorporated Board of
Directors from 1986 through March 1992.
- ------------------------------ -------------- ---------------------------------------------------------------
JOHN J. QUINDLEN Trustee Mr. Quindlen has retired as Senior Vice President-Finance of
313 Southwinds, 1250 E.I. du Pont de Nemours and Company, Inc. (diversified
West Southwinds Blvd. chemicals), a position he held from 1984 to November 30,
Vero Beach, FL 32963 1993. He served as Chief Financial Officer of E.I. du Pont
Age 66 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 Trustee, Mr. Christian has been Chief Investment Officer of WTC since
Rodney Square North, President February 1996 and Director of RSMC since February 1996. He
1100 N. Market St., was Chairman and Director of PNC Equity Advisors Company, and
Wilmington, DE 19890 President and Chief Investment Officer of PNC Asset
Age 49 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
Peninsula United Methodist Homes. He is also President and a
Trustee of WT Investment Trust and a Director of Clemente
Capital Inc.
- ------------------------------ -------------- ---------------------------------------------------------------
JOSEPH M. FAHEY, JR. Vice Mr. Fahey has been with RSMC since 1984, as a Director and
Rodney Square North, President Secretary of RSMC since 1986 and a Vice President of RSMC
1100 N. Market St., since 1992. He was an Assistant Vice President of RSMC from
Wilmington, DE 19890 1988 to 1992.
Age 41
- ------------------------------ -------------- ---------------------------------------------------------------
JOHN J. KELLEY Vice Mr. Kelley has been Vice President of PFPC Inc. since January
103 Bellevue Parkway President 1998. He was a Vice President of RSMC from 1995 to January
Wilmington, DE 19809 and 1998 and an Assistant Vice President of RSMC from 1989 to
Age 39 Treasurer 1995.
- ------------------------------ -------------- ---------------------------------------------------------------
CARL M. RIZZO Secretary Mr. Rizzo has been Vice President of RSMC since July, 1996.
Rodney Square North, From 1995 to 1996 he was Assistant General Counsel of Aid
1100 N. Market St., Association for Lutherans (a fraternal benefit association);
Wilmington, DE 19890 from 1994 to 1995 Senior Associate Counsel of United Services
Age 47 Automobile Association (an insurance and financial services
firm); and from 1987 to 1994 Special Counsel or
Attorney-Adviser with a federal government agency.
- ------------------------------ -------------- ---------------------------------------------------------------
</TABLE>
11
<PAGE>
The fees and expenses of the Trustees who are not "interested persons"
of each Fund ("Independent Trustees"), as defined in the 1940 Act are paid by
each Portfolio. The following table shows the fees paid during the fiscal year
ended September 30, 1998 to the Independent Trustees for their service to the
Fund and to the Rodney Square Family of Funds. On November 20, 1998, the
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.
1998 TRUSTEES FEES
<TABLE>
<CAPTION>
AGGREGATE TOTAL
AGGREGATE COMPENSATION COMPENSATION
COMPENSATION FROM RODNEY FROM THE RODNEY
FROM THE RODNEY SQUARE TAX- SQUARE FAMILY OF
INDEPENDENT TRUSTEE SQUARE FUND EXEMPT FUND FUNDS
<S> <C> <C> <C>
Eric Brucker $8,350 $3,800 $21,638
Fred L. Buckner $8,350 $3,800 $21,638
John J. Quindlen $8,350 $3,800 $21,638
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of November 20, 1998, WTC beneficially owned, by virtue of shared or
sole voting or investment power on behalf of its underlying customer accounts,
22% of the shares of the U.S. Government Portfolio, 30% of the shares of the
Money Market Portfolio and 40% of the shares of the Tax-Exempt Fund and may be
deemed to be a controlling person of these Portfolios under the 1940 Act.
As of November 20, 1998, the National Financial Services Corp. Church
Street Station, P.O. Box 3752, New York, NY 10008-3908, owned 6.05% of the Money
Market Portfolio.
RODNEY SQUARE MANAGEMENT CORPORATION
RSMC has served as the Manager of the Rodney Square Fund since October
1, 1985 and of the Rodney Square Tax-Exempt Fund since December 20, 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 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. Wilmington Brokerage
Services Company, a wholly owned subsidiary of WTC, is a registered investment
adviser and a registered broker-dealer.
12
<PAGE>
WILMINGTON TRUST COMPANY
Wilmington Trust Company, the parent of RSMC, serves as Custodian of
the assets of each Fund and is paid for those services by RSMC out of its
management fee from the Fund. Each Fund reimburses WTC for its related
out-of-pocket expenses for such items as postage, forms, mail insurance and
similar items reasonably incurred in the performance of custodial services for
the Fund.
Each 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 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 and the
Rodney Square Strategic Equity Fund.
INVESTMENT MANAGEMENT SERVICES
MANAGEMENT AGREEMENTS. RSMC, in its capacity as Manager of the Funds,
serves as adviser and administrator pursuant to separate contracts each dated
August 9, 1991 and amended June 29, 1998 (the "Management Agreements"). For the
services performed by RSMC under the Management Agreements, each Fund pays a
monthly fee to RSMC at the annual rate of 0.47% of each Portfolio's first $1
billion of average daily net assets; 0.43% of each Portfolio's next $500 million
of average daily net assets; 0.40% of each Portfolio's next $500 million of
average daily net assets; and 0.37% of each Portfolio's average daily net assets
in excess of $2 billion, as determined at the close of business on each day
throughout the month. For the fiscal years ended September 30, 1998, 1997 and
1996, RSMC was paid advisory fees and administration fees by the Rodney Square
Fund amounting to $2,692,214, $1,660,206 and $1,718,316, respectively, for the
U.S. Government Portfolio and $6,392,832, $5,069,252 and $4,086,710,
respectively, for the Money Market Portfolio. For the fiscal years ended
September 30, 1998, 1997 and 1996, RSMC was paid advisory fees and
administration fees by the Rodney Square Tax-Exempt Fund amounting to
$1,588,556, $1,325,491 and $1,346,805, respectively.
Under the terms of the Management Agreements, RSMC agrees to: (a)
supply office facilities, non-investment related statistical and research data,
executive and administrative services, stationery and office supplies, and
corporate secretarial services for each Fund; (b) prepare and file, if
necessary, reports to shareholders of the Funds and reports with the SEC and
state securities commissions; (c) monitor each Portfolio's compliance with the
investment restrictions and limitations imposed by the 1940 Act, and state Blue
Sky laws and applicable regulations thereunder, the fundamental and
non-fundamental investment policies and limitations set forth in the Prospectus
and this Statement of Additional Information, and the investment restrictions
and limitations necessary for each Portfolio to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986, as
amended (the "Code"); (d) monitor sales of each Fund's shares and ensure that
such shares are properly registered with the SEC and applicable state
authorities; (e) prepare and monitor an expense budget for each Fund, including
setting and revising accruals for each category of expenses; (f) determine the
amount of dividends and other distributions payable to shareholders as necessary
to, among other things, maintain each Fund's qualification as a RIC under the
Code; (g) prepare and distribute to appropriate parties notices announcing the
declaration of dividends and other distributions to shareholders; (h) prepare
financial statements and footnotes and other financial information with such
frequency and in such format as required to be included in reports to
shareholders and the SEC; (i) supervise the preparation of federal and state tax
returns; (j) review sales literature and file such with regulatory authorities,
as necessary; (k) maintain Fund/Serv membership; and (l) provide personnel to
serve as officers of the Funds if so elected by the Board of Trustees.
Additionally, RSMC agrees to create and maintain all necessary records in
accordance with all applicable laws, rules and regulations pertaining to the
various functions performed by it and not otherwise created and maintained by
another party pursuant to contract with the Fund. RSMC may at any time or times,
upon approval by the Trustees, enter into one or more sub-administration
agreements with a sub-administrator pursuant to which RSMC delegates any or all
of its duties as listed.
13
<PAGE>
The Management Agreements provides that RSMC shall not be liable for
any error of judgment or mistake of law or for any loss suffered by a 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 Agreements 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 Agreements are terminable by a Fund with
respect to a Portfolio (by vote of a 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 Funds
who are affiliated with RSMC and the salaries of all personnel of RSMC
performing services for each Fund relating to research, statistical and
investment activities are paid by RSMC.
SUB-ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT.
Under separate Sub-Administration and Accounting Services Agreements,
PFPC, Inc. ("PFPC"), 400 Bellevue Parkway, Wilmington, Delaware 19809, performs
certain administrative and accounting services for each 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 Fund. 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
Funds in connection with the matters to which the Sub-Administration and
Accounting Services Agreements relate, except to the extend of a loss resulting
from willful misfeasance, bad faith or gross negligence on their part in the
performance of their obligations and duties under the Sub-Administration and
Accounting Services Agreements.
For the period February 2, 1998 to September 30, 1998, PFPC was paid
accounting services fees amounting to $102,876 for the U.S. Government
Portfolio, $211,102 for the Money Market Portfolio and $67,753 for the
Tax-Exempt Portfolio. PFPC is paid for its sub-administration services out of
RSMC's management fee.
Prior to February 2, 1998, RSMC provided accounting services for each
Fund as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE FISCAL YEAR FOR THE FISCAL
OCTOBER 1, 1997 TO ENDED SEPTEMBER 30, YEAR ENDED
FEBRUARY 2, 1998 1997 SEPTEMBER 30, 1996
------------------- ------------------- ------------------
ACCOUNTING SERVICES FEES
PAID TO RSMC
<S> <C> <C> <C>
U.S. Government Portfolio $41,471 $100,648 $103,119
Money Market Portfolio $93,400 $245,714 $203,902
Rodney Square Tax-Exempt Fund $17,877 $ 45,000 $ 45,000
</TABLE>
14
<PAGE>
DISTRIBUTION AGREEMENT AND RULE 12B-1 PLAN
Provident Distributors, Inc. ("PDI"), Four Falls Corporate Center, West
Conshohocken, PA 19428, serves as the Distributor of the Portfolios' shares
pursuant to separate Distribution Agreements with each Fund. Pursuant to the
terms of the Distribution Agreement, PDI is granted the right to sell the shares
of the Portfolios as agent for the Funds. Shares of the Portfolios are offered
continuously.
Under the terms of the Distribution Agreement, PDI 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
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 Agreements provide that PDI, 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
Agreements, will not be liable to a Fund or its shareholders for losses arising
in connection with the sale of Portfolio shares.
The Distribution Agreements became effective as of January 1, 1999 and
continue 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 Agreements terminate automatically in the
event of an assignment. Each Agreement is also terminable without payment of any
penalty with respect to any Portfolio (i) by a 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 PDI; or (ii) by PDI on sixty (60) days'
written notice to the Fund.
PDI may be reimbursed for distribution expenses according to each 12b-1
Plan which became effective January 1, 1993. Each 12b-1 Plan provides that PDI
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 PDI ("Service Organizations") and other financial
institutions, including fairly allocable internal expenses of PDI 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 0.05%
of each Portfolio's average net assets to reimburse PDI for making payments to
certain Service Organizations who have sold Portfolio shares and for other
distribution expenses.
Prior to January 1, 1999, Rodney Square Distributors, Inc. ("RSD"),
1100 North Market Street, Wilmington, DE 19890, served as the Distributor of
each Portfolio's shares. For these services, RSD received payments pursuant to
the 12b-1 Plan, described in the table below, for the fiscal year ended
September 30, 1998.
<TABLE>
<CAPTION>
PAYMENTS MADE PURSUANT TO THE 12B-1 PLAN U.S GOVERNMENT MONEY MARKET TAX-EXEMPT
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ------------ ----------
<S> <C> <C> <C>
Trail Commissions: $16,641 $251,587 $17,081
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
PAYMENTS MADE PURSUANT TO THE 12B-1 PLAN U.S GOVERNMENT MONEY MARKET TAX-EXEMPT
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ------------ ----------
<S> <C> <C> <C>
Preparation and Distribution of Marketing $37,586 $2,105 $630
Materials:
Total: $54,227 $253,692 17,711
</TABLE>
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 each Fund of the
distribution of its shares, such payments are authorized. Each 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.
ADDITIONAL SERVICE PROVIDERS
INDEPENDENT AUDITORS. Ernst & Young LLP, Suite 4000, 2001 Market
Street, Philadelphia, PA 19103, serves as each Fund's independent auditor,
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.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue,
N.W., Washington, D.C. 20036, serves as counsel to each Fund and has passed upon
the legality of the shares offered by the Prospectus and this Statement of
Additional Information.
CUSTODIAN. Wilmington Trust Company, Rodney Square North, 1100 N.
Market Street, Wilmington, DE 19809, serves as each Fund's Custodian.
TRANSFER AGENT. PFPC Inc., 400 Bellevue Parkway, Wilmington, DE
19890-0001, serves as each Fund's Transfer Agent and Dividend Paying Agent.
BROKERAGE ALLOCATION AND OTHER PRACTICES
All portfolio transactions are placed on behalf of each Portfolio by
RSMC pursuant to authority contained in the Management Agreements. 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 a 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.
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
16
<PAGE>
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 Funds.
During the fiscal years ended September 30, 1998, 1997 and 1996, none of the
Portfolios 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 a 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.
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASE OF SHARES. Information regarding the purchase of shares is
discussed in the "Purchase of Shares" section of the Prospectus. Please see the
Prospectus for further information.
REDEMPTION OF SHARES. To ensure proper authorization before redeeming
shares of the Portfolios, the Transfer Agent 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, RSMC 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 Funds will act as quickly as possible to
minimize delay.
A shareholder's right to redeem shares and to receive payment therefore
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 a 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
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.
Each 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. Each Fund has elected, however, to be governed by Rule 18f-1 under the
1940 Act, as a result of which a 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
17
<PAGE>
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.
PRICING OF SHARES. 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, each Fund's Board of Trustees has
established procedures delegating to RSMC the responsibility for maintaining 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 the 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 (as defined in the
Prospectus). The dividend for a Business Day immediately preceding a weekend or
holiday normally includes an amount equal to the net income for the subsequent
non-Business Days 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.
TAXATION OF THE PORTFOLIOS
GENERAL. To continue to qualify for treatment as a RIC under the Code,
each Portfolio - each of which is being treated as a separate entity for these
purposes - must distribute annually to its shareholders at least 90% of the sum
of its net interest excludable from gross income (if any), plus 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 a 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 a 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.
If a Portfolio failed to qualify as a RIC for any taxable year, it
would be taxed on the full amount of its taxable income for that year without
being able to deduct the distributions it makes to its shareholders and the
shareholders would treat all those distributions, including with respect to the
Tax-Exempt Fund distributors that otherwise would qualify as "exempt-interest
dividends" described in the following paragraph, as dividends (that is, ordinary
income) to the extent of the Portfolio's earnings and profits.
Dividends paid by the Rodney Square Tax-Exempt Portfolio will qualify
as "exempt-interest dividends" (as defined in the Prospectus), and thus will be
excludable from gross income by its
18
<PAGE>
shareholders, if the Portfolio satisfies the additional requirement that, at the
close of each quarter of its taxable year, at least 50% of the value of its
total assets consists of securities the interest on which is excludable from
gross income under section 103(a) of the Code; the Portfolio intends to continue
to satisfy this requirement. The portion of each dividend excludable from the
shareholders' gross income may not exceed the Portfolio's net tax-exempt income.
The treatment of dividends from the Portfolio under state and local income tax
laws may differ from the treatment thereof under the Code.
Tax-exempt interest attributable to certain "private activity bonds"
(including, in the case of a RIC receiving interest on those bonds, a
proportionate part of the exempt-interest dividends paid by the RIC) is a
preference item for purposes of the federal alternative minimum tax.
Furthermore, interest on municipal securities held by the Portfolio that are not
PABs, which interest otherwise would be a tax preference item, nevertheless may
be indirectly subject to the federal alternative minimum tax in the hands of
corporate shareholders when distributed by the Portfolio. PABs are issued by or
on behalf of public authorities to finance various privately operated
facilities. Entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by IDBs or PABs should consult
their tax advisers before purchasing Portfolio shares. For these purposes, the
term "substantial user" is defined generally to include a "non-exempt person"
who regularly uses in trade or business a part of a facility financed from the
proceeds of such bonds.
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. With respect to the U.S. Government Portfolio and the
Money Market Portfolio 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 of these
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.
With respect to the Tax-Exempt Fund to 85% of social security and
railroad retirement benefits may be included in taxable income for recipients
whose adjusted gross income (including income from tax-exempt sources such as
the Tax-Exempt Portfolio) plus 50% of their benefits exceeds certain base
amounts. Exempt-interest dividends from the Tax-Exempt Fund still are tax-exempt
to the extent described in the Prospectus; they are only included in the
calculation of whether a recipient's income exceeds the established amounts.
If the Tax-Exempt Fund invests in any instruments that generate taxable
income, distributions of the interest earned thereon will be taxable to the
Tax-Exempt Fund's shareholders as ordinary income to the extent of the
Tax-Exempt Fund's earnings and profits. Moreover, if the Tax-Exempt Fund
realizes capital gain as a result of market transactions, any distributions of
such gain will be taxable to its shareholders.
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.
CALCULATION OF 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:
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
19
<PAGE>
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, 1998 was 4.94%
for the U.S. Government Portfolio, 5.11% for the Money Market
Portfolio and 3.26 for the Tax-Exempt 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, 1998
was 5.07% for the U.S. Government Portfolio, 5.24% for the Money
Market Portfolio and 3.31% for the Tax-Exempt Portfolio.
C. TAX-EQUIVALENT YIELD is the net annualized taxable yield needed to
produce a specified tax-exempt yield at a given tax rate based on
a specified 7-day period assuming a reinvestment of all dividends
paid during such period. Tax-equivalent yield is calculated by
dividing that portion of the Tax-Exempt Portfolio's yield
(computed as in the yield description above) which is tax-exempt
by 1 minus a stated income tax rate and adding the quotient to
that portion, if any, of the yield of the Tax-Exempt Portfolio
that is not tax-exempt.
The Tax-Exempt Portfolio's tax-equivalent yield for the 7-day
period ended September 30, 1998 was 4.53% for the 28% tax bracket,
4.72% for the 31% tax bracket, 5.09% for the 36% tax bracket and
5.40% for the 39.6% tax bracket.
The following table, which is based upon federal income tax rates in
effect on the date of this Statement of Additional Information, illustrates the
yields that would have to be achieved on taxable investments to produce a range
of hypothetical tax-equivalent yields:
TAX-EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
FEDERAL MARGINAL
INCOME TAX BRACKET TAX-EQUIVALENT YIELDS BASED ON TAX-EXEMPT YIELDS OF:
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2% 3% 4% 5% 6% 7% 8%
-- -- -- -- -- -- --
28% 2.8 4.2 5.6 6.9 8.3 9.7 11.1
31% 2.9 4.3 5.8 7.2 8.7 10.1 11.6
36% 3.1 4.7 6.3 7.8 9.4 10.9 12.5
39.6% 3.3 5.0 6.6 8.3 9.9 11.6 13.2
</TABLE>
D. 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
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<PAGE>
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, 1998
ONE FIVE TEN
YEAR YEARS YEARS
----- ----- -----
U.S. Government Portfolio 5.19% 4.80% 5.40%
Money Market Portfolio 5.26% 4.89% 5.54%
Tax-Exempt Portfolio 3.11% 2.97% 3.61%
E. 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
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, 1998
ONE FIVE TEN
YEAR YEARS YEARS
----- ------ ------
U.S. Government Portfolio 5.19% 26.44% 69.14%
Money Market Portfolio 5.26% 26.96% 71.50%
Tax-Exempt Portfolio 3.11% 15.73% 42.56%
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<PAGE>
F. 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 a 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, the IBC U.S. Government
and Agency Index for the U.S. Government Portfolio and the IBC Stockbroker and
general purpose funds for the Tax-Exempt Portfolio. 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 (CDs), 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 CDs 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 a
Portfolio in marketing and promotional literature may change from time to time
depending upon the basis of the independent organization's categorizations of
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.
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<PAGE>
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.
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.
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<PAGE>
FINANCIAL STATEMENTS
Each Fund's financial statements for the fiscal year ended September
30, 1998, including notes thereto and the report of Ernst & Young LLP thereon,
are incorporated herein by reference to the Fund's Annual Report to
Shareholders.
