Filed with the Securities and Exchange Commission on March 12, 1996
File No. 33-5501
File No. 811-4663
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __ _
Post-Effective Amendment No. 15 x
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17 x
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
---------------------------------------------
(Formerly The Rodney Square Benchmark U.S. Treasury Fund)
(Exact Name of Registrant as Specified in Charter)
RODNEY SQUARE NORTH, 1100 NORTH MARKET STREET, WILMINGTON, DE 19890-0001
------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (302) 651-8280
Marilyn Talman, Esquire
Rodney Square Management Corporation
Rodney Square North, 1100 North Market Street
Wilmington, DE 19890-0001
---------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
X immediately upon filing pursuant to paragraph (b)
__ on ____________ pursuant to paragraph (b)
__ 60 days after filing pursuant to paragraph (a)(1)
__ on pursuant to paragraph (a)(1)
__ 75 days after filing pursuant to paragraph (a)(2)
__ on pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
__ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed a declaration registering an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. Registrant filed the notice required by Rule 24f-2 for its fiscal year
ended October 31, 1995 on or about December 21, 1995.
TOTAL NUMBER OF PAGES: ____ EXHIBIT INDEX ON PAGE: ____
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
================================================================
Title of Proposed Proposed
Securities Amount Maximum Maximum Amount of
Being Being Offering Price Aggregate Registration
Registered Registered Per Share Offering Price Fee
- ---------- ---------- -------------- -------------- ------------
Shares of
Beneficial
Interest of
Municipal
Income
Portfolio 148,687 $13.11 $290,000* $100.00*
Shares of
Beneficial
Interest of
Diversified
Income
Portfolio 444,330 - - -
The fee for the above shares to be registered by this filing has been computed
on the basis of the price in effect on March 4, 1996 for the Municipal
Income Portfolio.
* Calculation of the proposed maximum aggregate offering price has been
made pursuant to Rule 24e-2 under the Investment Company Act of 1940. During
its fiscal year ended October 31, 1995, Registrant redeemed or repurchased
shares of beneficial interest in the aggregate amount of 680,985 shares
($8,521,297). During its current fiscal year, Registrant used 110,088 shares
($1,366,358) of this amount for a reduction pursuant to paragraph (c) of Rule
24f-2 under the Investment Company Act of 1940. Registrant is filing this
post-effective amendment to use the remaining 570,897 shares ($7,154,939) of
the total redemptions and repurchases during its fiscal year ended October 31,
1995 to reduce the fee that would otherwise be required for the shares
registered hereby. During its current fiscal year Registrant has filed no
other post-effective amendments for the purpose of the reduction pursuant to
paragraph (a) of Rule 24e-2.
<PAGE>
CROSS-REFERENCE SHEET
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A
PART A - PROSPECTUS*
ITEM NO. ITEM CAPTION PROSPECTUS CAPTION
- -------- ------------ ------------------
1. Cover Page Cover Page
2. Synopsis Expense Table
Questions and Answers about the
Portfolios
3. Condensed Financial Financial Highlights
Information Performance Information
4. General Description Questions and Answers about the
of Registrant Portfolios
Investment Objective and Policies
Description of the Fund
Appendix
5. Management of the Fund Questions and Answers about the
Portfolios
Management of the Fund
5A. Management's Discussion [Contained in Fund's Annual Report,
of Fund Performance President's Letter]
6. Capital Stock and Questions and Answers about the
Other Securities Portfolios
Dividends, Other Distributions
and Taxes
Description of the Fund
7. Purchase of Securities Questions and Answers about the
Being Offered Portfolios
How Net Asset Value is Determined
Purchase of Shares
Management of the Fund
8. Redemption or Questions and Answers about the
Repurchase Portfolios
Shareholder Accounts
Redemption of Shares
Exchange of Shares
9. Pending Legal Not Applicable
Proceedings
<PAGE>
CROSS-REFERENCE SHEET
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (continued)
PART B - STATEMENT OF ADDITIONAL INFORMATION*
CAPTION IN STATEMENT OF
ITEM NO. ITEM CAPTION ADDITIONAL INFORMATION
- -------- ------------ -----------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Description of Fund
and History
13. Investment Objectives Investment Policies
and Policies Special Considerations
Investment Limitations
Portfolio Turnover
Appendix A
14. Management of the Trustees and Officers
Registrant
15. Control Persons and Trustees and Officers
Principal Holders Other Information
of Securities
16. Investment Advisory Wilmington Trust Company
and Other Services Investment Advisory Services
Administration, Accounting and
Distribution Agreements and Rule
12b-1 Plan
Other Information
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Redemptions
Other Securities Description of the Fund
19. Purchase, Redemption Redemptions
and Pricing of Net Asset Value and Dividends
Securities Being
Offered
20. Tax Status Taxes
21. Underwriters Administration, Accounting and
Distribution Agreements and Rule
12b-1 Plan
22. Calculations of Performance Information
Performance Data
23. Financial Statements Financial Statements
<PAGE>
[Graphic] Ceasar
Rodney upon his
galloping horse
facing right,
reverse image on
dark background
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
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The Rodney Square Strategic Fixed-Income Fund (the "Fund") consists of two
separate portfolios ("Portfolios"), The Rodney Square Diversified Income
Portfolio (the "Diversified Income Portfolio") and The Rodney Square Municipal
Income Portfolio (the "Municipal Income Portfolio"). The Diversified Income
Portfolio seeks high total return, consistent with high current income, by
investing principally in various types of investment grade fixed-income
securities. The Municipal Income Portfolio seeks a high level of income
exempt from federal income tax consistent with the preservation of capital.
PROSPECTUS
MARCH 1, 1996
This Prospectus sets forth information about the Fund that you should know
before investing. Please read and retain this document for future reference.
A Statement of Additional Information (dated March 1, 1996) containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and, as amended or supplemented from time to time, is
incorporated by reference herein. A copy of the Statement of Additional
Information including the Fund's most recent Annual Report to Shareholders may
be obtained, without charge, from certain institutions such as banks or broker-
dealers that have entered into servicing agreements ("Service Organizations")
with Rodney Square Distributors, Inc., by calling the number below, or by
writing to Rodney Square Distributors, Inc. at the address noted on the back
cover of this Prospectus. Rodney Square Distributors, Inc. is a wholly owned
subsidiary of Wilmington Trust Company, a bank chartered in the State of
Delaware.
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FOR FURTHER INFORMATION OR ASSISTANCE IN OPENING AN ACCOUNT, PLEASE CALL:
* NATIONWIDE.......................................(800) 336-9970
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SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
WILMINGTON TRUST COMPANY, NOR ARE THE SHARES INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
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EXPENSE TABLE
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DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
----------- ---------
SHAREHOLDER TRANSACTION COSTS*
Maximum sales load on purchases of shares
(as a percentage of public offering
price).................................... 3.50% 3.50%
==== ====
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fee (after waiver)**............... 0.11% 0.00%
12b-1 Fee***................................ 0.09% 0.10%
Other Expenses**:
Administration and Accounting Services
Expenses (after waiver)................. 0.24% 0.18%
Other Operating Expenses.................. 0.31% 0.47%
---- ----
Total Other Expenses................... 0.55% 0.65%
---- ----
Total Operating Expenses (after waiver)..... 0.75% 0.75%
==== ====
EXAMPLE****
You would pay the following expenses on a $1,000 investment in each Portfolio
assuming (1) 5% annual return and (2) redemption at the end of each time
period:
One year............................... $42 $42
Three years............................ 58 58
Five years............................. 75 75
Ten years.............................. 125 125
- ------------------------------
* Wilmington Trust Company ("WTC"), the Fund's Investment Adviser, and
Service Organizations may charge their clients a fee for providing
administrative or other services in connection with investments in Fund
shares. See "Purchase of Shares" for additional information concerning
volume reductions, sales load waivers and reduced sales load purchase
plans.
2
<PAGE>
** WTC waived a portion of its advisory fee with respect to the Diversified
Income Portfolio during the fiscal year ended October 31, 1995. Without
such waiver, the Advisory Fee and Total Operating Expenses would have
been 0.50% and 1.14%, respectively, of the Portfolio's average daily net
assets. WTC has undertaken to waive all or a portion of its advisory fee
or reimburse the Diversified Income Portfolio monthly to the extent that
the Portfolio's operating expenses (excluding taxes, extraordinary
expenses, brokerage commissions and interest) exceed an annual rate of
0.75% through February, 1997. (See "Management of the Fund " for
additional information.)
WTC waived all of its advisory fee and Rodney Square Management
Corporation ("RSMC") waived a portion of its administration and
accounting services fee with respect to the Municipal Income Portfolio
during the fiscal year ended October 31, 1995. Without such waivers, the
Advisory Fee, Administration and Accounting Services Expenses, Total
Other Expenses, and Total Operating Expenses would have been 0.48%,
0.40%, 0.87%, and 1.45%, respectively, of the Portfolio's average daily
net assets. WTC has undertaken to waive all or a portion of its advisory
fee and RSMC has agreed to waive a portion of its administration and
accounting services fees with respect to the Municipal Income Portfolio,
to the extent the Portfolio's operating expenses (excluding taxes,
extraordinary expenses, brokerage commissions and interest) exceed an
annual rate of 0.75% through February, 1997 (See "Management of the Fund"
for additional information).
*** Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. rules regarding investment companies.
**** The assumption in the Example of a 5% annual return is required by
regulations of the Securities and Exchange Commission applicable to all
mutual funds; the assumed 5% annual return is not a prediction of, and
does not represent, either Portfolio's projected or actual performance.
In the Example, it is assumed that the investor was subject to the
maximum sales load (3.50%) on his or her $1,000 investment.
The purpose of the preceding table is solely to aid shareholders and
prospective investors in understanding the various expenses that investors in
the Portfolios will bear directly or indirectly.
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES INCURRED AND RETURNS MAY BE GREATER
OR LESSER THAN THOSE SHOWN.
3
<PAGE>
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FINANCIAL HIGHLIGHTS
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The following tables include selected per share data and other performance
information for each Portfolio throughout each period derived from the audited
financial statements of the Rodney Square Strategic Fixed-Income Fund. They
should be read in conjunction with the Fund's financial statements and notes
thereto appearing in the Fund's Annual Report to Shareholders for the fiscal
year ended October 31, 1995, which is included, together with the auditor's
unqualified report, as part of the Fund's Statement of Additional Information.
FOR THE
PERIOD
APRIL 2, 1991
(COMMENCEMENT
OF
OPERATIONS)
FOR THE FISCAL TO
YEARS ENDED OCTOBER 31, OCTOBER 31,
---------------------------------- -------------
1995 1994 1993 1992 1991
------- ------- ------- ------ -------
DIVERSIFIED INCOME PORTFOLIO
NET ASSET VALUE -
BEGINNING OF PERIOD....... $ 12.42 $ 13.48 $ 13.20 $ 12.86 $ 12.50
INVESTMENT OPERATIONS:
Net investment income..... 0.83 0.71 0.76 0.83 0.48
Net realized and
unrealized gain (loss)
on investments.......... 0.66 (1.02) 0.39 0.37 0.36
------- ------- ------- ------- -------
Total from investment
operations......... 1.49 (0.31) 1.15 1.20 0.84
------- ------- ------- ------- -------
DISTRIBUTIONS:
From net investment
income.................. (0.83) (0.71) (0.76) (0.83) (0.48)
From net realized gain
on investments.......... _ (0.04) (0.11) (0.03) _
------- ------- ------- ------- -------
Total distributions.. (0.83) (0.75) (0.87) (0.86) (0.48)
------- ------- ------- ------- -------
NET ASSET VALUE -
END OF PERIOD............. $ 13.08 $ 12.42 $ 13.48 $ 13.20 $ 12.86
======= ======= ======= ======= =======
TOTAL RETURN**.............. 12.41% (2.33)% 9.00% 9.58% 6.89%
4
<PAGE>
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses***............. 0.65% 0.65% 0.65% 0.65% 0.89%*
Net investment income... 6.56% 5.53% 5.65% 6.33% 6.64%*
Portfolio turnover rate..... 116.40% 43.77% 24.22% 27.37% 78.45%*
Net assets at end of
period (000 omitted)...... $32,214 $31,721 $40,971 $30,152 $24,171
SENIOR SECURITIES:
Amount of reverse
repurchase agreements
outstanding at end of
period (in thousands).... $ 0 $ 0 $ 0 $ 0 $ 0
Average daily amount of
reverse repurchase
agreements outstanding
during the period
(in thousands)........... $ 0 $ 0 $ 0 $ 0 $ 162
Average daily number of
shares outstanding
during the period
(in thousands)........... 2,492 2,960 2,660 2,109 1,279
Average daily amount
of reverse repurchase
agreements per share
during the period........ $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.13
5
<PAGE>
FOR THE FISCAL YEARS
ENDED OCTOBER 31,
----------------------
1995 1994
------- -------
MUNICIPAL INCOME PORTFOLIO
NET ASSET VALUE - BEGINNING OF YEAR.... $ 11.64 $ 12.50
INVESTMENT OPERATIONS:
Net investment income................ 0.54 0.49
Net realized and unrealized gain
(loss) on investments.............. 0.85 (0.86)
------- -------
Total from investment operations.. 1.39 (0.37)
------- -------
DISTRIBUTIONS:
From net investment income........... (0.54) (0.49)
------- -------
NET ASSET VALUE - END OF YEAR.......... $ 12.49 $ 11.64
======= =======
TOTAL RETURN**......................... 12.23% (3.05)%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses****......................... 0.75% 0.75%
Net investment income................ 4.50% 4.13%
Portfolio turnover rate................ 42.08% 21.95%
Net assets at end of year
(000 omitted)........................ $16,570 $14,283
- ------------------------------
* Annualized.
** These results do not include the sales load. If the sales load had
been included, the returns would have been lower. The total return
figure for the Diversified Income Portfolio for the fiscal period ended
October 31, 1991 has not been annualized.
*** WTC reimbursed a portion of the Portfolio's expenses, exclusive of
advisory fees, amounting to $0.032 per share for the fiscal period
ended October 31, 1991. WTC waived a portion of its fees amounting to
$0.063, $0.051 and $0.056 per share for the fiscal years ended October
31, 1995, 1994 and 1993, respectively. WTC and RSMC waived a portion
of their fees amounting to $0.078 and $0.036 per share for the fiscal
year ended October 31, 1992 and for the fiscal period ended October 31,
1991, respectively. If these expenses, including the advisory and
accounting fees waived, had been incurred by the Portfolio, the
annualized ratio of expenses to average daily net assets for the fiscal
years ended October 31, 1995, 1994, 1993 and 1992, and for the fiscal
period ended October 31, 1991, would have been 1.14%, 1.05%, 1.06%,
1.24% and 1.91%, respectively.
6
<PAGE>
**** WTC waived its entire advisory fee for the fiscal years ended October
31, 1995 and 1994, amounting to $0.057 and $0.059 per share,
respectively. In addition, RSMC waived a portion of its fees for
administration and accounting services amounting to $0.010 and $0.018
per share for the fiscal year ended October 31, 1995 and $0.010 and
$0.037 per share for the fiscal year ended October 31, 1994. If these
expenses had been incurred by the Portfolio, the annualized ratio of
expenses to average daily net assets for the fiscal years ended October
31, 1995 and 1994, would have been 1.45% and 1.62%, respectively.
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QUESTIONS AND ANSWERS ABOUT THE PORTFOLIOS
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The information provided in this section is qualified in its entirety by
reference to the more detailed information elsewhere in this Prospectus.
WHAT ARE THE PORTFOLIOS' INVESTMENT OBJECTIVES?
The Fund is an open-end, management investment company consisting of
two separate diversified portfolios, the Diversified Income Portfolio and
the Municipal Income Portfolio (each a "Portfolio" and collectively the
"Portfolios"). The investment objectives of the Portfolios are as
follows:
DIVERSIFIED INCOME PORTFOLIO. This Portfolio seeks high total
return, consistent with high current income, by investing principally in
various types of investment grade fixed-income securities. (See
"Investment Objectives and Policies - Diversified Income Portfolio.")
MUNICIPAL INCOME PORTFOLIO. This Portfolio seeks a high level of
income exempt from federal income tax consistent with the preservation of
capital. (See "Investment Objectives and Policies - Municipal Income
Portfolio.")
ARE THERE SPECIAL CONSIDERATIONS OR RISKS INVOLVED IN INVESTING IN THE
PORTFOLIOS?
The value of each Portfolio's holdings of fixed-income securities
generally varies inversely with the movement of market interest rates.
Generally, if interest rates rise, prices of fixed-income securities
fall; if interest rates fall, prices of fixed-income securities rise. In
addition, the value of each Portfolio's holdings varies depending on the
average duration and the credit quality of the holdings as well as
general market factors. Generally, the longer the average duration of
the holdings, the more fluctuations in value the Portfolio experiences
when interest rates rise or fall.
The Investment Adviser to the Portfolios may use options, futures
contracts and (with respect to the Diversified Income Portfolio only)
forward currency contracts to hedge against various market risks or to
enhance potential gain. The use of options, futures contracts and
forward currency contracts may entail special risks. (See "Appendix.")
7
<PAGE>
Depending on your tax bracket, your return from the Municipal Income
Portfolio may be substantially higher than the after-tax return you would
earn from comparable taxable investments. Shareholders pay no federal
income tax on tax-exempt dividends paid by the Municipal Income
Portfolio. However, those dividends may be subject to state and local
income taxes. In addition, a portion of that Portfolio's dividends may
be a tax preference item for purposes of the federal alternative minimum
tax. Capital gain distributions from the Municipal Income Portfolio are
subject to federal income tax, as well as state and local taxes. (See
"Dividends, Other Distributions and Taxes.")
HOW CAN YOU BENEFIT BY INVESTING IN THE PORTFOLIOS RATHER THAN BY INVESTING
DIRECTLY IN THE FIXED-INCOME SECURITIES HELD BY THOSE PORTFOLIOS?
Investing in the Portfolios offers two key benefits.
FIRST: Each Portfolio offers a way to keep money invested in a
professionally managed portfolio of securities and at the same time to
maintain daily liquidity. Of course, the proceeds to you upon redemption
may be more or less than the cost of your shares. There are no minimum
periods for investment and no fees will be charged upon redemption.
SECOND: Investors in each Portfolio need not become involved with
the detailed bookkeeping and operating procedures normally associated
with direct investment in the fixed-income securities held by the
Portfolios.
WHO IS THE INVESTMENT ADVISER?
Wilmington Trust Company ("WTC") is the Investment Adviser to the
Portfolios. (See "Management of the Fund.")
WHO IS THE ADMINISTRATOR, TRANSFER AGENT AND ACCOUNTING AGENT?
Rodney Square Management Corporation ("RSMC"), a wholly owned
subsidiary of WTC, serves as Administrator and Transfer Agent of the
Portfolios and provides accounting services for the Fund.
(See "Management of the Fund.")
WHO IS THE DISTRIBUTOR?
Rodney Square Distributors, Inc. ("RSD"), another wholly owned
subsidiary of WTC, serves as the Fund's Distributor. (See "Management of
the Fund.")
8
<PAGE>
HOW DO YOU PURCHASE SHARES OF THE PORTFOLIOS?
Each Portfolio is designed as an investment vehicle for individual
investors, corporations and other institutional investors. The Municipal
Income Portfolio is not, however, appropriate for purchase by tax-exempt
institutions and individual retirement accounts and pension or profit-
sharing plans (which already provide tax-deferred income to their
participants). Shares of each Portfolio may be purchased at their net
asset value next determined after a purchase order is received by RSMC
and accepted by RSD, plus a sales load equal to a maximum of 3.50% of the
offering price, subject to certain waivers and reductions. The minimum
initial investment is $1,000, but additional investments may be made in
any amount.
Shares of each Portfolio are offered on a continuous basis by RSD.
Shares may be purchased directly from RSD, by clients of WTC through
their trust accounts or by clients of certain institutions such as banks
or broker-dealers that have entered into servicing agreements ("Service
Organizations") with RSD through their accounts with those Service
Organizations. Some Service Organizations may receive payments from RSD
which are reimbursed by the Fund under a Plan of Distribution adopted
with respect to each Portfolio pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act"). Shares may also be
purchased directly by wire or by mail. (See "Purchase of Shares.")
The Fund and RSD reserve the right to reject new account
applications and to close, by redemption, an account without a certified
Social Security or other taxpayer identification number.
Please call WTC, or your Service Organization or the number listed
below for further information about the Portfolios or for assistance in
opening an account.
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* NATIONWIDE.............................................(800) 336-9970
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HOW DO YOU REDEEM SHARES OF THE PORTFOLIOS?
If you purchased shares of a Portfolio through an account at WTC or
a Service Organization, you may redeem all or any of your shares in
accordance with the instructions pertaining to that account. Other
shareholders may redeem any or all of their shares by telephone or mail.
There is no fee charged upon redemption. (See "Redemption of Shares.")
HOW ARE DIVIDENDS PAID?
Income dividends for each Portfolio are declared daily and
distributed monthly and net realized capital gains, if any, are
distributed annually, after the close of the Fund's fiscal year (October
31st). Shareholders may elect to receive dividends and/or other
distributions in cash by checking the distribution option on the
Application & New Account Registration form at the end of this Prospectus
("Application"). (See "Dividends, Other Distributions and Taxes.")
9
<PAGE>
ARE EXCHANGE PRIVILEGES AVAILABLE?
You may exchange all or a portion of your Portfolio shares for shares
of the other Portfolio or for any of the other funds in the Rodney Square
complex, subject to certain conditions. (See "Exchange of Shares.")
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INVESTMENT OBJECTIVES AND POLICIES
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DIVERSIFIED INCOME PORTFOLIO
The Diversified Income Portfolio seeks high total return, consistent with
high current income, by investing principally in various types of investment
grade fixed-income securities.
WTC expects to maintain a short to intermediate average duration for the
Diversified Income Portfolio. Duration measures the impact of a change in
interest rates on the value of the fixed-income securities held by the
Portfolio, taking into account any possible calls or early redemptions. Under
normal market conditions, the average dollar weighted duration of securities
held by the Portfolio will fall within a range of 2 1/2 to 4 years.
Under normal market conditions, the Diversified Income Portfolio invests
at least 65% of its total assets in fixed-income securities. The composition
of the Portfolio's holdings varies depending upon WTC's analysis of the fixed-
income markets including, but not limited to, analysis of the most attractive
segments of the yield curve, the relative value of different sectors of the
fixed-income markets and expected trends in those markets. By maintaining a
short to intermediate average duration, WTC seeks to protect the Portfolio's
principal value by reducing fluctuations in value relative to those that may
be experienced by income funds with longer average durations, although that
strategy may reduce the level of income attained by the Portfolio. (See "Both
Portfolios - Special Considerations or Risks.")
Securities purchased by the Diversified Income Portfolio may be purchased
on the basis of their yield or potential capital appreciation or both.
Because WTC seeks to maintain a short to intermediate average duration, yield
usually is a more significant component of the Portfolio's total return.
The Diversified Income Portfolio invests only in investment grade
securities which are rated, at the time of purchase, in the top four
categories by a nationally recognized statistical rating organization such as
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings
Services ("S&P ") or, if not rated, are determined by WTC to be of comparable
quality. (See "Both Portfolios - Special Considerations or Risks" and the
Statement of Additional Information for further information regarding ratings
and the characteristics of securities rated in the top four rating
categories.)
10
<PAGE>
The Portfolio may invest in: bank obligations; corporate bonds, notes and
commercial paper; convertible securities; foreign government and private debt
obligations; guaranteed investment contracts; mortgage-backed securities;
municipal securities; participation interests; asset-backed securities;
preferred stock; supranational agency debt obligations; and obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government obligations"). Short-term debt obligations in which the Portfolio
may invest include certificates of deposit, time deposits, bankers'
acceptances, commercial paper rated, at the time of purchase, in the highest
category by a nationally recognized statistical rating organization, such as
Moody's or S&P or, if not rated, determined by WTC to be of comparable quality
and U.S. Government obligations. The Portfolio may also engage in the
following investment strategies: entering into repurchase agreements fully
collateralized by U.S. Government obligations and reverse repurchase
agreements; purchasing and writing or selling options, futures contracts,
options on futures contracts or forward currency contracts; short selling; and
lending portfolio securities. (See "Appendix.")
When in WTC's judgment, economic or market conditions make pursuing the
Diversified Income Portfolio's basic investment strategy inconsistent with the
best interests of its shareholders, WTC may temporarily use alternative
strategies. In implementing these strategies, the Portfolio may invest in
longer term fixed-income securities or short-term debt obligations such that
the Portfolio's overall average duration falls within a range of 0 to 6 years.
MUNICIPAL INCOME PORTFOLIO
The Municipal Income Portfolio seeks a high level of income exempt from
federal income tax consistent with the preservation of capital. As a
fundamental policy, under normal market conditions, the Municipal Income
Portfolio seeks to achieve this objective by investing at least 80% of its net
assets in a diversified portfolio of municipal securities providing interest
income that is exempt, in the opinion of counsel for the issuer, from federal
income tax.
WTC expects to maintain an intermediate average duration for the
Municipal Income Portfolio. Duration measures the impact of a change in
interest rates on the value of the fixed-income securities held by the
Portfolio, taking into account any possible calls or early redemptions. Under
normal market conditions, the average dollar weighted duration of securities
held by the Portfolio will fall within a range of 4 to 8 years.
Under normal market conditions, the Municipal Income Portfolio invests at
least 65% of its total assets in fixed-income securities. The composition of
the Portfolio's holdings varies depending upon WTC's analysis of the municipal
securities market including, but not limited to, analysis of the most
attractive segments of the yield curve, the relative value of different market
sectors and supply versus demand pressures. By maintaining an intermediate
average duration and maturity, WTC seeks to protect the Portfolio's principal
value by reducing the fluctuations in value relative to those that may be
experienced by municipal funds with longer average durations and maturities,
although that strategy may limit the level of income attained by the Portfolio
as compared to income that may be attained from securities with longer
durations and maturities. (See "Both Portfolios - Special Considerations or
Risks.")
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The Municipal Income Portfolio invests only in investment grade
securities which are rated, at the time of purchase, in the top four
categories by a nationally recognized statistical rating organization such as
Moody's or S&P or, if not rated, are determined by WTC to be of comparable
quality. (See "Both Portfolios - Special Considerations or Risks" and the
Statement of Additional Information for further information regarding ratings
and the characteristics of securities rated in the top four rating
categories.)
Additionally, the Portfolio may invest without limit in municipal
securities issued to finance private activities, the interest on which is a
tax preference item for purposes of the federal alternative minimum tax
("private activity securities"). The Portfolio expects to invest 100% of its
net assets in municipal securities that provide interest income that is exempt
from regular federal income tax; however, up to 20% of its net assets may be
invested in other types of fixed-income securities that provide federally
taxable income, such as U.S. Government obligations, bank obligations or
corporate bonds, under certain market conditions. The Portfolio may also
enter into repurchase agreements and invest in investment companies that seek
to maintain a stable net asset value (money market funds). Reverse repurchase
agreements, lending portfolio securities, short selling and buying or selling
options and futures contracts, that may generate federally taxable income or
capital gains.
When in WTC's judgment, economic or market conditions make pursuing the
Municipal Income Portfolio's basic investment strategy inconsistent with the
best interests of its shareholders, WTC may temporarily use alternative
defensive strategies, primarily designed to reduce fluctuations in the value
of the Portfolio's assets. In implementing these defensive strategies, the
Portfolio may invest in short-term municipal obligations (obligations that
have maturities no longer than one year from the time of purchase), including
tax anticipation notes, bond anticipation notes, revenue anticipation notes
and construction loan notes that are issued to meet the short-term funding
requirements of local, regional and state governments. If short-term
municipal obligations are not available, or overpriced relative to other types
of fixed-income securities, the Portfolio may invest in taxable short-term
debt obligations, including certificates of deposit, time deposits, bankers'
acceptances, commercial paper rated in the highest category by a nationally
recognized statistical rating organization such as Moody's or S&P or, if not
rated, determined by WTC to be of comparable quality, U.S. Government
obligations and repurchase agreements fully collateralized by U.S. Government
obligations.
The Municipal Income Portfolio will not invest more than 25% of its total
assets in any one industry. Governmental issuers of municipal securities are
not considered part of any industry. However, the 25% limitation does apply
to municipal securities backed by the assets and revenues of non governmental
users, such as the private operators of educational, hospital or housing
facilities. WTC may determine that the yields available from concentrating in
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obligations in a particular market sector or political subdivision justifies
the risk that the performance of the Portfolio may be adversely affected by
economic, business, political and other developments related to that market
sector or political subdivision. Under such market conditions, the Portfolio
may invest more than 25% of its assets in sectors of the municipal securities
market such as the health care or housing sectors, or in securities relating
to any one political subdivision, such as a given state or U.S. territory, and
will then be subject to any special risks attendant to that sector or
jurisdiction. At any given point in time, the Portfolio may have more than
25% of its assets invested in one of the three general categories of municipal
obligations - general obligation bonds, revenue or special obligation bonds
and private activity bonds. (See "Appendix.")
SPECIAL CONSIDERATIONS. Proposed tax legislation in recent years has
included several provisions that may affect the supply of, and the demand for,
tax-exempt municipal securities, as well as the tax-exempt nature of interest
paid on those securities. If the availability of tax-exempt securities for
investment or the value of the Municipal Income Portfolio's holdings could be
materially affected by such changes in the law, the Trustees would reevaluate
the Portfolio's investment objective and policies or consider the Portfolio's
dissolution.
BOTH PORTFOLIOS
Both Portfolios may invest in securities with fixed, variable or floating
interest rates or in zero coupon securities. These securities may have
various buy-back features that permit the Portfolios to recover principal by
tendering the securities to the issuer or a third party. The Portfolios may
also purchase participation interests in fixed-income securities or in pools
of fixed-income securities. Certain of the securities purchased by the
Portfolios may be considered illiquid; certain securities may be purchased on
a when-issued or delayed delivery basis. For further information about the
Portfolios' investments and investment strategies, see the Appendix to this
Prospectus and the Statement of Additional Information.
SPECIAL CONSIDERATIONS OR RISKS. Each Portfolio's net asset value per
share will fluctuate, and an investor's redemption proceeds may be higher or
lower than the cost of the shares. The value of the Portfolios' investments
may change in response to changes in interest rates and the relative financial
strength and creditworthiness of each issuer. During periods of falling
interest rates, the values of fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values of those
securities generally decline.
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Each Portfolio invests only in securities that are rated, at the time of
purchase, in the four highest rating categories by a nationally recognized
statistical rating organization such as Moody's or S&P or, if not rated, are
determined by WTC to be of comparable quality. Ratings represent the rating
agency's opinion regarding the quality of the security and are not a guarantee
of quality. Moreover, ratings may change after a security is purchased.
Moody's considers securities in the fourth highest rating category (Baa) to
have speculative characteristics. Such securities tend to have higher yields,
but changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity of the issuer to make principal and interest
payments than is the case for more highly rated securities of similar
maturities. The Portfolio may acquire securities insured by private insurance
companies or supported by letters of credit furnished by domestic or foreign
banks. In those instances, WTC monitors the financial condition of the
parties whose creditworthiness is relied upon in determining the credit
quality of the securities. A change in the rating of a security, in the
issuer's ability to make payments of interest and principal, in a credit
provider's ability to provide credit support or in the market's perception of
those factors will affect the value of the security, and WTC will reevaluate
the security to determine whether the Portfolio should continue to hold it
under the changed conditions.
The ability of the Portfolios to buy and sell securities may be limited
at any particular time and with respect to any particular security. The
amount of information about the financial condition of an issuer of municipal
securities may not be as extensive as information about corporations whose
securities are publicly traded. Generally, the secondary market for municipal
securities is less liquid than that for taxable fixed-income securities. WTC
closely monitors the liquidity of securities that the Portfolios hold and, in
the case of certain securities such as restricted securities that may be sold
only to institutional investors or unrated municipal lease obligations, makes
liquidity determinations in accordance with guidelines adopted by the Board of
Trustees.
Certain securities held by each Portfolio may permit the issuer at its
option to call or redeem the securities. If an issuer redeems securities held
by a Portfolio during a period of declining interest rates, the Portfolio may
not be able to invest the proceeds in securities providing the same investment
return as the securities redeemed. During a period of declining interest
rates, securities held by the Portfolios may have market values that are
higher than the principal amounts payable at maturity. Although
this "premium " value is amortized over the period remaining until maturity,
an investor who purchases shares of a Portfolio during a period of declining
interest rates may face an increased risk of capital loss if the securities
are called or redeemed before maturity.
WTC may make frequent changes in the Portfolios' investments,
particularly during periods of rapidly fluctuating interest rates. These
frequent changes involve transaction costs to the Portfolio and may result in
taxable capital gains.
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OTHER INVESTMENTS. From time to time additional types of fixed-income
securities, financial products and risk management techniques are developed.
WTC may consider use of these securities, products and techniques by either
Portfolio, consistent with their investment objectives and policies, as well
as regulatory and tax considerations.
PORTFOLIO TURNOVER. The frequency of portfolio transactions and a
Portfolio's turnover rate will vary from year to year depending on market
conditions. The portfolio turnover rate for the Diversified Income Portfolio
for the years ended October 31, 1995 and 1994 was 116.40% and 43.77%,
respectively. The portfolio turnover rate for the Municipal Income Portfolio
for the years ended October 31, 1995 and 1994 was 42.08% and 21.95%,
respectively. The high turnover rate for the Diversified Income Portfolio for
the year ended October 31, 1995 was due in part to the repositioning of the
Portfolio in response to a dramatic shift in market conditions as a result of
changes in interest rates.
OTHER INFORMATION. There can be no assurance that the Portfolios will
achieve their respective investment objectives. The investment objective of
each Portfolio is fundamental and may not be changed without the affirmative
vote of the holders of a majority of the Portfolio's outstanding voting
securities (as defined in the 1940 Act). Unless otherwise noted, the
investment policies discussed above are non fundamental and may be changed by
the Board of Trustees without shareholder approval. Additional fundamental
and non fundamental investment policies and limitations are described in the
Appendix to this Prospectus and in the Statement of Additional Information.
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PURCHASE OF SHARES
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HOW TO PURCHASE SHARES. Portfolio shares are offered on a continuous
basis by RSD. Shares may be purchased directly from RSD, by clients of WTC
through their trust accounts, or by clients of Service Organizations through
their Service Organization accounts. WTC and Service Organizations may charge
their clients a fee for providing administrative or other services in
connection with investments in Portfolio shares. A trust account at WTC
includes any account for which the account records are maintained on the trust
system at WTC. Persons wishing to purchase Portfolio shares through their
accounts at WTC or a Service Organization should contact that entity directly
for appropriate instructions. Other investors may purchase Portfolio shares
by mail or by wire as specified below.
BY MAIL: You may purchase shares by sending a check drawn on a U.S. bank
payable to The Rodney Square Strategic Fixed-Income Fund, indicating the
Portfolio you have selected, along with a completed Application (included at
the end of this Prospectus), to The Rodney Square Strategic Fixed-Income Fund,
c/o Rodney Square Management Corporation, P.O. Box 8987, Wilmington, DE 19899-
9752. A purchase order sent by overnight mail should be sent to The Rodney
Square Strategic Fixed-Income Fund, c/o Rodney Square Management Corporation,
Rodney Square North, 1105 North Market Street, Wilmington, DE 19801. If a
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subsequent investment is being made, the check should also indicate your
Portfolio account number. When you purchase by check, the Fund 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 cancelled and you will be
responsible for any losses or fees incurred in that transaction.
BY WIRE: You may purchase shares by wiring federal funds. To advise the
Fund of the wire, and if making an initial purchase, to obtain an account
number, you must telephone RSMC at (800) 336-9970. Once you have an account
number, instruct your bank to wire federal funds to RSMC, c/o Wilmington Trust
Company, Wilmington DE-ABA #0311-0009-2, attention: The Rodney Square
Strategic Fixed-Income Fund, DDA#2610-605-2, further credit-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 RSMC at the
address stated above under "By Mail."
INDIVIDUAL RETIREMENT ACCOUNTS. Shares of the Diversified Income
Portfolio may be purchased for a tax-deferred retirement plan such as an
individual retirement account ("IRA"). For an Application for an IRA and a
brochure describing the Diversified Income Portfolio IRA, call RSMC at (800)
336-9970. WTC makes available its services as IRA custodian for each
shareholder account that is established as an IRA. For these services, WTC
receives an annual fee of $10.00 per account, which fee is paid directly to
WTC by the IRA shareholder. If the fee is not paid by the date due,
Diversified Income Portfolio shares owned by the IRA will be redeemed
automatically for purposes of making the payment.
AUTOMATIC INVESTMENT PLAN. Shareholders may purchase Portfolio shares
through an Automatic Investment Plan. Under the Plan, RSMC, at regular
intervals, will automatically debit a shareholder's bank checking account in
an amount of $50 or more (subsequent to the $1,000 minimum initial
investment), as specified by the shareholder. A shareholder 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 the close of regular trading on the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., Eastern time) on or about the 20th day of
the month. For an Application for the Automatic Investment Plan, check the
appropriate box of the Application at the end of this Prospectus, or call RSMC
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 by those organizations.
ADDITIONAL PURCHASE INFORMATION. The minimum initial investment is
$1,000, but subsequent investments may be made in any amount. WTC and Service
Organizations may impose additional minimum customer account and other
requirements in addition to this minimum initial investment requirement. The
Fund and RSD each reserves the right to reject any purchase order and may
suspend the offering of shares of either Portfolio for a period of time.
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Purchase orders received by RSMC and accepted by RSD before the close of
regular trading on the Exchange on any Business Day of the Fund will be priced
at the net asset value per share that is determined as of the close of regular
trading on the Exchange. (See "How Net Asset Value is Determined.") Purchase
orders received by RSMC and accepted by RSD after the close of regular trading
on the Exchange will be priced as of the close of regular trading on the
Exchange on the following Business Day of the Fund. A "Business Day of the
Fund" is any day on which the Exchange, RSMC and the Philadelphia branch
office of the Federal Reserve are open for business. The following are not
Business Days of the Fund: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day.
It is the responsibility of WTC or the Service Organization involved to
transmit orders for the purchase of shares by its customers to RSMC and to
deliver required funds on a timely basis, in accordance with the procedures
previously stated.
OFFERING PRICE. Shares of each Portfolio are offered at its net asset
value next determined after a purchase order is received by RSMC and accepted
by RSD, plus a sales load which, unless shares were purchased under one of the
reduced sales load plans described below, will vary with the size of the
purchase shown as follows:
SALES LOAD SCHEDULE
SALES LOAD AS A PERCENTAGE OF DISCOUNT TO SERVICE
----------------------------- ORGANIZATIONS AS A
OFFERING NET AMOUNT INVESTED PERCENTAGE OF
AMOUNT OF PURCHASE PRICE (NET ASSET VALUE) OFFERING PRICE
- --------------------- -------- ------------------- -------------------
Up to _ $ 24,999 3.50% 3.63% 3.05%
$ 25,000 _ $ 49,999 3.00 3.09 2.60
$ 50,000 _ $ 99,999 2.50 2.56 2.15
$ 100,000 _ $249,999 2.00 2.04 1.70
$ 250,000 _ $499,999 1.50 1.52 1.25
$ 500,000 _ $999,999 0.50 0.50 0.40
$1,000,000 and over 0.00 0.00 0.00
REDUCED SALES LOAD PLANS. Shares may be purchased at reduced charges
through two reduced sales load plans: (1) a right of accumulation that permits
a purchase of shares of a Portfolio to be aggregated with shares of the other
Portfolio, as well as shares of other funds in the Rodney Square complex on
which the shareholder has already paid a sales load, that are held in the
purchaser's account or in related accounts; and (2) a Letter of Intent ("LOI")
that permits a purchase of shares of a Portfolio to be aggregated with future
purchases of shares of that Portfolio, as well as with shares of the other
Portfolio and the other Rodney Square funds that are subject to a sales load,
within a thirteen-month period.
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The right of accumulation results in a reduced sales load because the
sales load imposed is based on the total dollar amount of Portfolio shares
being purchased, plus the current net asset value of shares of the Portfolio
and shares of other Rodney Square funds on which a sales load has already been
paid that are held in the purchaser's and related accounts at the time of
purchase. Related accounts include other individual accounts, joint accounts,
spouse's accounts and accounts for children who are under the age of 21 (but
only if the purchaser serves as a guardian, trustee or custodian for the
account under the Uniform Gifts to Minors Act or Uniform Transfers to Minors
Act) and/or living at the same residence.
The LOI program also results in a reduced sales load because purchases of
shares of the Portfolios and other Rodney Square funds that are subject to a
sales load made within a thirteen-month period, starting with the first
purchase made pursuant to the LOI, are aggregated for purposes of calculating
the sales load applicable to each purchase. In order to qualify under an LOI,
purchases must be made in the same account; purchases made for related
accounts may not be aggregated. The minimum investment under an LOI is
$25,000. The LOI is not a binding obligation to purchase any amount of
shares, but its execution, if fulfilled, will result in the shareholder's
paying a reduced sales load on the total anticipated amount of the purchase.
The LOI is included as part of the Application at the end of this
Prospectus. Investors should submit a completed LOI to The Rodney Square
Strategic Fixed-Income Fund, c/o Rodney Square Management Corporation, P.O.
Box 8987, Wilmington, DE 19899-9752. A purchase not originally made pursuant
to an LOI may be included under an LOI executed within 90 days of that
purchase, if the purchaser informs RSMC in writing of this intent within the
90-day period. This prior purchase will count toward fulfillment of the LOI;
however,the sales load on any previous purchase will not be adjusted downward.
If the total amount of shares purchased does not equal the amount stated
in the LOI by the end of the eleventh month, the investor will be notified in
writing by RSMC of the amount purchased to date, the amount required to
complete the LOI and the expiration date. Also, at this time the investor
will be notified of the actions to be taken by RSMC if the LOI expires
unfulfilled. Shares having a value equal to 5% of the total amount to be
purchased over the thirteen-month period will be held in escrow during that
period. If the total amount of shares purchased by the expiration date does
not equal the amount stated in the LOI, RSMC will reduce the shares held in
escrow by the difference between the sales load on the shares purchased at the
reduced rate and the sales load applicable to the shares actually purchased,
and the balance of the shares then will be released from the escrow.
SALES LOAD WAIVERS. Shares of each Portfolio may be purchased at net
asset value by "those entitled to a Sales Load Waiver" which is defined as
those employees, retirees and their immediate family (spouses and children
under 21 years of age), officers and trustees/directors of the Fund or of WTC
and its affiliates, any account at WTC for which account records are
maintained on WTC's trust system, employees of Service Organizations, and
clients of Service Organizations which have entered into a special Service
Organization agreement with RSD, the terms of which provide that no sales load
will be charged. Portfolio shares may also be purchased at net asset value by
reinvesting dividends and other distributions.
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SHAREHOLDER ACCOUNTS
- ------------------------------------------------------------------------------
RSMC, as Transfer Agent, maintains for each shareholder an account
expressed in terms of full and fractional shares of each Portfolio rounded to
the nearest 1/1000th of a share.
In the interest of economy and convenience, the Fund does not issue share
certificates. Each shareholder is sent a statement at least quarterly showing
all purchases in or redemptions from the shareholder's account. The statement
also sets forth the balance of shares held in the account by Portfolio.
Due to the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to close any account with a current
value of less than $500 by redeeming all shares in the account and
transferring the proceeds to the shareholder. Shareholders will be notified
if their account value is less than $500 and will be allowed 60 days in which
to increase their account balance to $500 or more before the account is
closed. Reductions in value that result solely from market activity will not
trigger an involuntary redemption.
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REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem their shares by mail or by telephone as described
below. If you purchased your shares through an account at WTC or a Service
Organization, you may redeem all or part of your shares in accordance with the
instructions pertaining to that account. Corporations, other organizations,
trusts, fiduciaries and other institutional investors may be required to
furnish certain additional documentation to authorize redemptions. Redemption
requests should be accompanied by the Fund's name, the Portfolio's name and
your Portfolio account number.
BY MAIL: Shareholders redeeming their shares by mail should submit
written instructions with a guarantee of their signature by an institution
acceptable to the Fund's Transfer Agent, such as a bank, broker, dealer,
municipal securities dealer, government securities dealer, credit union,
national securities exchange, registered securities association, clearing
agency, or savings association ("eligible institution"), to: The Rodney Square
Strategic Fixed-Income Fund, c/o Rodney Square Management Corporation, P.O.
Box 8987, Wilmington, DE 19899-9752. A redemption order sent by overnight
mail should be sent to The Rodney Square Strategic Fixed-Income Fund, c/o
Rodney Square Management Corporation, Rodney Square North, 1105 North Market
Street, Wilmington, DE 19801. The redemption order should indicate the Fund's
name, the Portfolio's name, the Portfolio account number, the number of shares
or dollar amount you wish to redeem and the name of the person in whose name
the account is registered. A signature and a signature guarantee are required
for each person in whose name the account is registered.
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BY TELEPHONE: Shareholders who prefer to redeem their shares by telephone
must elect to do so by applying in writing for telephone redemption privileges
by completing an Application for Telephone Redemptions (included at the end of
this Prospectus) which describes the telephone redemption procedures in more
detail and requires certain information that will be used to identify the
shareholder. When redeeming by telephone, you must indicate your name, the
Fund's name, the Portfolio's name, the Portfolio account number, the number of
shares or dollar amount you wish to redeem and certain other information
necessary to identify you as the shareholder. The Fund employs reasonable
procedures to confirm that instructions communicated by telephone are genuine
and will not be liable for any losses due to unauthorized or fraudulent
telephone transactions. During times of drastic economic or market changes,
the telephone redemption privilege may be difficult to implement. In the
event that you are unable to reach RSMC by telephone, you may make a
redemption request by mail.
ADDITIONAL REDEMPTION INFORMATION. You may redeem all or any part of the
value of your account on any Business Day of the Fund. Redemptions are
effected at the net asset value next calculated after RSMC has received your
redemption request. (See "How Net Asset Value Is Determined.") The Fund
imposes no fee when 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 of the Fund
following acceptance of redemption instructions but in no event later than 7
days following such receipt and acceptance. Amounts redeemed by wire are
normally wired on the next Business Day of the Fund after receipt and
acceptance of redemption instructions (if received by RSMC before the close of
regular trading on the Exchange), but in no event later than 7 days following
such receipt and acceptance. If the shares to be redeemed represent an
investment made by check, the Fund 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. Alternatively, proceeds may
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 a
minimum of 60 days. In order to authorize the Fund 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 which 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 shares
are held by a corporation, other organization, trust, fiduciary or other
institutional investor.
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For more information on redemptions, contact RSMC or, if your shares are
held in an account with WTC or a Service Organization, contact WTC or the
Service Organization.
REINSTATEMENT PRIVILEGE. Shareholders who have redeemed shares of a
Portfolio have a one-time privilege to reinstate their account without a sales
load up to the dollar amount redeemed by purchasing shares of that Portfolio
within 30 days of the redemption. Shareholders must indicate in writing that
they are exercising this privilege and provide evidence of the redemption date
and the amount of redemption proceeds. The reinstatement will be made at the
net asset value per share next computed after the notice of reinstatement and
check are received. The amount of a purchase under this reinstatement
privilege cannot exceed the amount of the redemption proceeds.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own shares of a Portfolio
with a value of $10,000 or more may participate in the Systematic Withdrawal
Plan. For an Application for the Systematic Withdrawal Plan, check the
appropriate box of the Application at the end of this Prospectus or call RSMC
at (800) 336-9970. Under the Plan, shareholders may automatically redeem a
portion of their Portfolio shares monthly, bimonthly, quarterly, semiannually
or annually. The minimum withdrawal available is $100. The redemption of
Portfolio shares will be effected at their net asset value at the close of the
Exchange on or about the 25th day of the month. If you expect to purchase
additional Portfolio shares, it may not be to your advantage to participate in
the Systematic Withdrawal Plan because contemporaneous purchases and
redemptions may result in adverse tax consequences and may cause you to pay a
sales load on amounts withdrawn shortly thereafter. 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 by those organizations.
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EXCHANGE OF SHARES
- ------------------------------------------------------------------------------
EXCHANGES AMONG THE RODNEY SQUARE FUNDS. You may exchange all or a
portion of your shares in a Portfolio for shares of the other Portfolio or any
of the other funds in the Rodney Square complex that currently offer their
shares to investors. These other Rodney Square funds are:
THE RODNEY SQUARE FUND, each portfolio of which seeks a high level of
current income consistent with the preservation of capital and liquidity by
investing in money market instruments pursuant to its investment practices.
Its portfolios are:
U.S. GOVERNMENT PORTFOLIO, which invests in U.S. Government
obligations and repurchase agreements involving such obligations.
MONEY MARKET PORTFOLIO, which invests in U.S. dollar-denominated
obligations of major banks, prime commercial paper and corporate
obligations, U.S. Government obligations, high quality municipal
securities and repurchase agreements involving U.S. Government
obligations.
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THE RODNEY SQUARE TAX-EXEMPT FUND, which 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 RODNEY SQUARE INTERNATIONAL EQUITY FUND, which uses multiple
portfolio advisers to manage the fund's assets and which seeks long-term
capital appreciation primarily through investments in equity securities
(including convertible securities) of issuers located outside the United
States.
THE RODNEY SQUARE MULTI-MANAGER FUND also uses multiple portfolio
advisers to manage the assets of each of its portfolios. Its portfolios are:
GROWTH PORTFOLIO, which seeks superior long-term capital
appreciation by investing in securities of companies which are judged to
possess strong growth characteristics.
GROWTH AND INCOME PORTFOLIO, which seeks superior long-term total
return through a combination of capital appreciation and income by
investing in securities with attractive growth or valuation
characteristics or relatively high income yields.
A redemption of shares through an exchange will be effected at the net
asset value per share next determined after receipt by RSMC of the request,
and a purchase of shares through an exchange will be effected at the net asset
value per share determined at that time or as next determined thereafter, plus
the applicable sales load, if any. The net asset values per share of the
Rodney Square Fund portfolios and the Tax-Exempt Fund are determined at 12
noon, Eastern time, on each Business Day. The net asset values per share of
the Portfolios, the International Equity Fund and the Multi-Manager Fund
portfolios are determined at the close of regular trading on the Exchange
(currently 4:00 p.m., Eastern time), on each Business Day.
A sales load will apply to exchanges into a Portfolio from either of the
Rodney Square Fund portfolios or the Tax-Exempt Fund, except that no sales
load will be charged if the exchanged shares were acquired by a previous
exchange and are shares on which you paid a sales load or which represent
reinvested dividends and other distributions of such shares. In addition,
shares of the Rodney Square Fund portfolios or the Tax-Exempt Fund may be
exchanged for shares of the Portfolios without a sales load by those entitled
to a Sales Load Waiver. A sales load will not apply to other exchanges into
the Portfolios or from the Portfolios. Shares of either Portfolio must be
held at least 90 days before they can be exchanged for shares of the
International Equity Fund or the Multi-Manager Fund without an additional
sales load, unless the shares to be exchanged represent reinvested dividends
and other distributions or you are eligible for a sales load waiver.
Exchange transactions will be subject to the minimum initial investment
and other requirements of the fund into which the exchange is made. An
exchange may not be made if the exchange would leave a balance in a
shareholder's Portfolio account of less than $500.
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<PAGE>
To obtain prospectuses of the other Rodney Square funds contact RSD. To
obtain more information about exchanges, or to place exchange orders, contact
RSMC, 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
Fund, on behalf of the Portfolios, reserves the right to terminate or modify
the exchange offer described here and will give shareholders 60 days' notice
of such termination or modification when required by Securities and Exchange
Commission ("SEC") rules. 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.
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HOW NET ASSET VALUE IS DETERMINED
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RSMC determines the net asset value per share of each Portfolio as of the
close of regular trading on the Exchange (currently 4:00 p.m., Eastern time)
on each Business Day of the Fund. The net asset value per share of each
Portfolio is calculated by dividing the total current market value of all of a
Portfolio's assets, less all its liabilities, by the total number of the
Portfolio's shares outstanding.
The Portfolios value their assets based on their current market prices
when market quotations are readily available. Current market prices are
generally not readily available for municipal securities; current market
prices may also be unavailable for other types of fixed-income securities held
by the Portfolios. To determine the value of those securities, RSMC may use a
pricing service that takes into account not only developments related to the
specific securities, but also transactions in comparable securities. The
value of fixed-income securities maturing within 60 days of the valuation date
may be determined by valuing those securities at amortized cost. Securities
that do not have a readily available current market value are valued in good
faith under the direction of the Board of Trustees of the Fund.
The assets held by the Diversified Income Portfolio which are denominated
in foreign currencies are valued daily in U.S. dollars at the foreign currency
exchange rates that are prevailing at the time that RSMC determines the daily
net asset value per share. That Portfolio does not, however, convert its
foreign currency-denominated assets into U.S. dollars on a daily basis.
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DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
DIVIDENDS AND OTHER DISTRIBUTIONS. The net investment income earned by
each Portfolio is declared as a dividend daily and paid to its shareholders
ordinarily on the first Business Day of the following month, but in no event
later than 7 days after the end of the month in which the dividends are
declared. Net investment income of a Portfolio is determined immediately
prior to the determination of its net asset value per share on each Business
Day (see "How Net Asset Value Is Determined ") and consists of interest
accrued and original issue discount (and, in the case of the Municipal Income
Portfolio, if it so elects, market discount on tax-exempt securities) earned
on its investments less amortization of any premium and accrued expenses. A
dividend is payable to shareholders of a Portfolio who redeem, but not to
shareholders who purchase, shares of the Portfolio on the day the dividend is
declared. Dividends paid by a Portfolio are automatically reinvested in
additional shares of the Portfolio on the payment date at their current net
asset value per share, unless the shareholder elects on the Application to
receive dividends or other distributions, or both, in cash, in the form of a
check.
Each Portfolio makes annual distributions of realized net short-term
capital gain and net capital gain (the excess of net long-term capital gain
over net short-term capital loss), if any, and the Diversified Income
Portfolio annually distributes net realized gains from foreign currency
transactions, if any, after the end of the fiscal year in which the gain was
realized by the Portfolio. Distributions by a Portfolio of these gains are
automatically reinvested in additional shares of the Portfolio on the payment
date at their current net asset value per share, unless the shareholder elects
on the Application to receive dividends or other distributions, or both, in
cash, in the form of a check.
FEDERAL TAX. Each Portfolio intends to continue to qualify for treatment
as a regulated investment company under the Internal Revenue Code of 1986, as
amended, so that it will be relieved of federal income tax on that part of its
investment company taxable income (generally consisting of taxable net
investment income, net short-term capital gain and, in the case of the
Diversified Income Portfolio, net realized gains from certain foreign currency
transactions, if any) and net capital gain that is distributed to its
shareholders. While both Portfolios may invest in securities the interest on
which is subject to federal income tax and securities the interest on which is
exempt from that tax, under normal conditions the Diversified Income Portfolio
will invest primarily in taxable securities and the Municipal Income Portfolio
will invest primarily in tax-exempt securities.
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<PAGE>
Distributions by the Municipal Income Portfolio of the excess of interest
income on tax-exempt securities over certain amounts disallowed as deductions,
as designated by the Portfolio ("exempt-interest dividends"), may be treated
by its shareholders as interest excludable from gross income. However, exempt-
interest dividends are included in a shareholder's "modified adjusted gross
income" for purposes of determining whether any portion of the shareholder's
Social Security or railroad retirement benefits are subject to federal income
tax. A portion of the exempt-interest dividends paid by that Portfolio may be
a tax preference item for purposes of the federal alternative minimum tax.
Dividends from each Portfolio's investment company taxable income (whether
paid in cash or reinvested in additional shares) generally are
taxable to its shareholders as ordinary income. Distributions of a
Portfolio's net capital gain (whether paid in cash or reinvested in additional
shares), when designated as such by the Portfolio, are taxable to its
shareholders as long-term capital gains, regardless of the length of time they
have held their shares. Early in each calendar year, each Portfolio notifies
its shareholders of the amount and federal tax status of dividends and capital
gain distributions paid (or deemed paid) by the Portfolio during the preceding
year.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry Municipal Income Portfolio shares will not be deductible to
the extent that Portfolio's distributions consist of exempt-interest
dividends.
Each Portfolio is required to withhold 31% of all taxable dividends,
capital gain distributions and redemption proceeds payable to any individuals
and certain other noncorporate shareholders who do not provide the Portfolio
with a certified taxpayer identification number. Each Portfolio also is
required to withhold 31% of all taxable dividends and capital gain
distributions payable to those shareholders who otherwise are subject to
backup withholding. In connection with this withholding requirement, each
investor must certify on the Application that the Social Security or other
taxpayer identification number provided thereon is correct and that the
investor is not otherwise subject to backup withholding.
A redemption of Portfolio shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds are
more or less than the shareholder's adjusted basis for the redeemed shares
(which normally includes any sales load paid). Similar tax consequences
generally will result from an exchange of shares of one Portfolio for shares
of the other Portfolio or for shares of another fund in the Rodney Square
complex. (See "Exchange of Shares.") Special rules apply, however, when a
shareholder (1) disposes of shares of a Portfolio through a redemption or
exchange within 90 days after purchase thereof and (2) subsequently acquires
shares of the same Portfolio, the other Portfolio or any Rodney Square fund on
which a sales load normally is imposed ("load fund") without paying any sales
load because of the reinstatement privilege (see "Redemption of Shares") or
the exchange privilege. In these cases, any gain on the disposition of the
original Portfolio shares will be increased, or loss thereon decreased, by the
amount of the sales load paid when the shares were acquired; and that amount
will increase the adjusted basis of the load fund shares subsequently
acquired. Moreover, if Portfolio shares are purchased within 30 days of
redeeming other shares of that Portfolio at a loss (whether pursuant to the
25
<PAGE>
reinstatement privilege or otherwise), that loss will not be deductible to the
extent of the amount reinvested, and an adjustment in that amount will be made
to the shareholder's basis for the newly purchased shares. If a shareholder
holds shares in a Portfolio for six months or less, and sells any of those
shares at a loss, the loss is reduced by the amount of exempt-interest
dividends received by the shareholder with respect to those shares, and the
remaining loss is treated as a long-term, rather than a short-term, capital
loss to the extent of capital gain distributions received on those shares.
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 income or other tax laws of any state or local taxing
authorities. Shareholders may be exempt from state and local taxes on
distributions of interest income derived from obligations of the state and/or
municipalities of the state in which they are resident, but generally are
taxed on income derived from obligations of other jurisdictions. Early each
calendar year, the Municipal Income Portfolio notifies its shareholders of the
portion of their tax-exempt income attributable to each state for the
preceding year.
The foregoing is only a summary of some of the important income tax
considerations generally affecting the Portfolios and their shareholders; a
further discussion appears in the Statement of Additional Information. In
addition to these considerations, which are applicable to any investment in
the Portfolios, there may be other federal, state or local tax considerations
applicable to a particular investor. Prospective investors are therefore
urged to consult their tax advisers with respect to the effects of an
investment on their own tax situations.
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PERFORMANCE INFORMATION
- ------------------------------------------------------------------------------
All performance information advertised by each Portfolio is based on
historical performance of the Portfolio, shows the performance of a
hypothetical investment and is not intended to indicate future performance.
Unlike some bank deposits or other investments which pay a fixed yield for a
stated period of time, a Portfolio's yield and net asset value will vary
depending upon, among other things, changes in market conditions and the level
of the Portfolio's operating expenses. The Fund's annual report to
shareholders contains information with respect to the performance of each
Portfolio. The annual report is available upon request and free of charge.
YIELD. From time to time, quotations of each Portfolio's "yield" may be
included in advertisements, sales literature or shareholder reports.
Quotations of the Municipal Income Portfolio's "tax-equivalent yield" may also
be included in advertisements, sales literature or shareholder reports. These
quotations, as calculated in accordance with regulations of the SEC, reflect
deduction of the maximum 3.50% sales load and may differ from a Portfolio's
net investment income, as calculated for financial reporting purposes. The
yields quoted are historical and not a prediction of future yields.
26
<PAGE>
The yield of a Portfolio refers to the net investment income generated by
the Portfolio over a specified thirty-day (one month) period. This income is
then annualized. That is, the amount of income generated by the Portfolio
during that thirty-day period is assumed to be generated during each month
over a 12-month period and is shown as a percentage. The effective yield is
expressed similarly, but, when annualized, the income earned by an investment
in the Portfolio is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
The Municipal Income Portfolio's tax-equivalent yield is calculated by
determining the yield that would have to be achieved on a fully taxable
investment to produce the after-tax equivalent of that Portfolio's yield,
assuming certain tax brackets for a Portfolio shareholder. That formula is:
The Portfolio's Yield
----------------------------------
100%-The Shareholder's Tax Bracket = The Shareholder's Tax-Equivalent Yield
For example, if the shareholder is in the 39.6% tax bracket and can earn
a tax-exempt yield of 5.0%, the tax-equivalent yield would be 8.28%:
5.0%
------------ = 8.28%
100% - 39.6%
TOTAL RETURN. From time to time, quotations of each Portfolio's average
annual total return ("Standardized Return") may be included in advertisements,
sales literature or shareholder reports. Standardized Return will show
percentage rates reflecting the average annual change in the value of an
assumed initial investment of $1,000, net of the Portfolio's maximum 3.50%
sales load, assuming the investment has been held for periods of one year,
five years and ten years, as of a stated ending date. If the Portfolio has
not been in operation for those time periods, the life of the Portfolio will
be used where applicable. Standardized Return assumes that all dividends and
other distributions were reinvested in additional shares of the Portfolio.
In addition, each Portfolio may advertise other total return performance
data ("Non Standardized Return"). Non Standardized Return shows a percentage
rate of return encompassing all elements of return (i.e., income and capital
appreciation or depreciation); it assumes reinvestment of all dividends and
other distributions. Non Standardized Return may be quoted for the same or
different periods as those for which Standardized Return is quoted and may or
may not reflect the maximum 3.50% sales load; where not included, the
inclusion of the sales load would reduce the Non Standardized Return.
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<PAGE>
Non Standardized Return may consist of a cumulative percentage rate of
return, an average annual percentage rate of return, actual year-by-year rates
or any combination thereof. Cumulative total return represents the cumulative
change in value of an investment in a Portfolio for various periods. To
illustrate the components of overall performance, the cumulative and average
annual returns of a Portfolio may be separated into income results and capital
gain or loss. The total return of a Portfolio is increased to the extent that
either WTC or RSMC has waived all or a portion of its fees or reimbursed all
or a portion of the Portfolio's expenses.
Past performance is no guarantee of future performance.
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MANAGEMENT OF THE FUND
- ------------------------------------------------------------------------------
The Fund's Board of Trustees supervises the management, activities and
affairs of the Fund and has approved contracts with various financial
organizations to provide, among other services, day-to-day management required
by the Portfolios and their shareholders.
INVESTMENT ADVISER. WTC, a wholly owned subsidiary of Wilmington Trust
Corporation, a publicly held bank holding company, is the Investment Adviser
of the Portfolios. Under an Advisory Contract with the Fund, dated April 1,
1991, WTC, subject to the supervision of the Board of Trustees, directs the
investments of the Diversified Income Portfolio in accordance with its
investment objective, policies and limitations. Under an Advisory Agreement
with the Fund, dated November 1, 1993, WTC, subject to the supervision of the
Board of Trustees, directs the investments of the Municipal Income Portfolio
in accordance with its investment objective, policies and limitations. (These
Agreements are collectively referred to as the "Advisory Agreements.")
Under the Advisory Agreements, each Portfolio pays a monthly advisory fee
to WTC at the annual rate of 0.50% of the average daily net assets of the
Portfolio. WTC has agreed to waive its fee or reimburse each Portfolio
monthly to the extent that expenses of the Portfolio (excluding taxes,
extraordinary expenses, brokerage commissions and interest) exceed an annual
rate of 0.75% of the Portfolio's average daily net assets through February,
1997.
In addition to serving as Investment Adviser for the Portfolios and The
Rodney Square International Equity Fund, WTC is engaged in a variety of
investment advisory activities, including the management of collective
investment pools. Eric K. Cheung, Vice President and Manager of the Fixed
Income Management Division and Clayton M. Albright, III, Vice President of the
Fixed Income Management Division of the Investment Management Department of
WTC, are primarily responsible for the day-to-day management of the
Diversified Income Portfolio. From 1978 until 1986, Mr. Cheung was the
Portfolio Manager for fixed-income assets of the Meritor Financial Group. In
1986, Mr. Cheung joined WTC. In 1991, he became the Division Manager for all
fixed-income products. Mr. Albright has been with WTC since 1976. In 1987,
he joined the fixed-income division and since that time has specialized in the
management of intermediate term/long term fixed-income portfolios. Robert F.
Collins, CFA, Vice President of Credit Research and Municipal Trading within
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<PAGE>
the Fixed Income Management Division of the Investment Management Department
of WTC, is primarily responsible for the day-to-day management of the
Municipal Income Portfolio. Mr. Collins has been a municipal bond portfolio
manager and credit analyst for WTC for more than 10 years.
ADMINISTRATOR, TRANSFER AGENT AND DIVIDEND PAYING AGENT. RSMC serves as
Administrator, Transfer Agent and Dividend Paying Agent for the Portfolios.
As Administrator, RSMC supplies office facilities, non-investment related
statistical and research data, stationery and office supplies, executive and
administrative services, internal auditing and regulatory compliance services.
RSMC assists in the preparation of reports to shareholders, prepares proxy
statements, updates prospectuses and makes filings with the SEC and state
securities authorities. RSMC also performs certain budgeting, financial
reporting and compliance monitoring activities. For the services provided as
administrator, RSMC receives a monthly administration fee from each Portfolio
at an annual rate of 0.08% of the Portfolio's average daily net assets. The
Fund does not pay RSMC any separate fees for its services as Transfer Agent
and Dividend Paying Agent for the Portfolios, as WTC assumes the cost of
providing these services to the Portfolios and their shareholders. Any
related out-of-pocket expenses reasonably incurred in the provision of
transfer agent services to a Portfolio are borne by that Portfolio.
CUSTODIAN. WTC serves as Custodian of the Fund. The Fund does not pay
WTC any separate fees for its services as Custodian, as WTC assumes the cost
of providing these services to the Portfolios. Any related out-of-pocket
expenses reasonably incurred in the provision of custodial services to a
Portfolio are borne by that Portfolio.
ACCOUNTING SERVICES. RSMC determines the net asset value per share of
each Portfolio and provides accounting services to the Portfolios pursuant to
an Accounting Services Agreement with the Fund. For providing these services,
RSMC receives an annual fee of $50,000 per Portfolio from the Fund plus an
amount equal to 0.02% of the average daily net assets of each Portfolio in
excess of $100 million.
DISTRIBUTION AGREEMENT AND RULE 12B-1 PLAN. Pursuant to a Distribution
Agreement with the Fund, RSD manages the Fund's distribution efforts and
provides assistance and expertise in developing marketing plans and materials
for the Portfolios, enters into agreements with broker-dealers to sell shares
of the Portfolios and, directly or through its affiliates, provides
shareholder support services.
Under a Plan of Distribution adopted with respect to each Portfolio
pursuant to Rule 12b-1 under the 1940 Act (the "12b-1 Plans"), the Portfolios
may reimburse RSD for distribution expenses incurred in connection with the
distribution efforts described above. The 12b-1 Plans provide that RSD may be
reimbursed for amounts paid and expenses incurred 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 prospectuses, and distribution and
shareholder servicing activities of broker-dealers and other financial
29
<PAGE>
institutions. The Board of Trustees has limited the amount that RSD can
receive under the 12b-1 Plans to 0.25% of each Portfolio's average daily net
assets on an annualized basis. If an increase in this limitation is requested
by RSD and authorized by the Board at some future date, shareholders of the
affected Portfolio will be notified of that increase. It is not anticipated,
however, that such an increase will be requested.
The 12b-1 Plan for the Municipal Income Portfolio also provides that in
the event that RSD is not fully reimbursed for its distribution expenses
during any month due to limitations set by the Trustees, the unpaid portion
may be carried forward for possible reimbursement into successive months and
fiscal years to give RSD the ability to recoup at some point in time any major
capital outlay on behalf of that Portfolio. Under the 12b-1 Plan, RSD may
charge the Municipal Income Portfolio interest or finance charges on
unreimbursed distribution expenses that have been carried forward from prior
fiscal years, but only with express authorization by the Board of Trustees.
RSD does not currently intend to request such authorization. If interest
charges are requested by RSD and authorized by the Board at some future time,
the shareholders of the Municipal Income Portfolio will be advised of those
charges.
BANKING LAWS. Banking laws prohibit deposit-taking institutions and
certain of their affiliates from underwriting or distributing securities. WTC
believes, and counsel to WTC has advised the Fund, that WTC and its affiliates
may perform the services contemplated by their respective agreements with the
Fund without violation of applicable banking laws or regulations. If WTC or
its affiliates were prohibited from performing these services, it is expected
that the Board of Trustees would consider entering into agreements with other
entities. If a bank were prohibited from acting as a Service Organization,
its shareholder clients would be expected to be permitted to remain Portfolio
shareholders and alternative means for servicing such shareholders would be
sought. It is not expected that shareholders would suffer any adverse
financial consequences as a result of any of these occurrences.
State securities laws may require banks and financial institutions
involved in distribution to register as dealers, even if this is not required
by federal law.
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DESCRIPTION OF THE FUND
- ------------------------------------------------------------------------------
The Fund is a diversified open-end investment company established on May
7, 1986 as a Massachusetts business trust under Massachusetts law by a
Declaration of Trust.
The authorized shares of beneficial interest in the Fund are currently
divided into two series or portfolios, the Diversified Income Portfolio and
the Municipal Income Portfolio. The Trustees are empowered by the Declaration
of Trust and the Bylaws to establish additional series and classes of shares,
although they have no present intention of doing so.
30
<PAGE>
The Fund's capital consists of an unlimited number of shares of
beneficial interest. Shares of the Portfolios entitle their holders to one
vote per share and fractional votes for fractional shares held. Separate
votes are taken by each Portfolio on matters affecting that Portfolio. Shares
have noncumulative voting rights, do not have preemptive or subscription
rights and are transferable.
As of January 31, 1996, WTC owned by virtue of shared or sole voting or
investment power on behalf of its underlying customer accounts 68% of the
shares of the Diversified Income Portfolio and 18% of the shares of the
Municipal Income Portfolio, and may be deemed to be a controlling person of
the Fund under the 1940 Act.
The Fund does not hold annual meetings of shareholders. There will
normally be no meetings of shareholders for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. Under
the 1940 Act, shareholders of record owning no less than two-thirds of the
outstanding shares of the Fund may remove a Trustee by vote cast in person or
by proxy at a meeting called for that purpose. 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 the Fund's outstanding shares.
Because the Portfolios use a combined Prospectus and Statement of
Additional Information, it is possible that a Portfolio might become liable
for a misstatement with respect to the other Portfolio in those documents.
The Trustees of the Fund have considered this in approving the use of a
combined Prospectus and Statement of Additional Information.
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APPENDIX
- ------------------------------------------------------------------------------
The following paragraphs contain a brief description of the securities in
which the Portfolios may invest and the strategies in which they may engage
consistent with their investment objectives and policies.
SECURITIES THAT MAY BE PURCHASED BY THE DIVERSIFIED INCOME PORTFOLIO AND THE
MUNICIPAL INCOME PORTFOLIO
ASSET-BACKED SECURITIES. The Portfolios may purchase interests in pools
of obligations, such as credit card or automobile loan receivables, purchase
contracts and financing leases. Such securities are also known as "asset-
backed securities," and the holders thereof may be entitled to receive a fixed
rate of interest, a variable rate that is periodically reset to reflect the
current market rate or an auction rate that is periodically reset at auction.
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<PAGE>
Asset-backed securities typically are supported by some form of credit
enhancement, such as cash collateral, subordinated tranches, a letter of
credit, surety bond or limited guaranty. If the credit enhancement is
exhausted or withdrawn, security holders may experience losses or delays in
payment if required payments of principal and interest are not made with
respect to the underlying obligations. Except in very limited circumstances,
there is no recourse against the vendors or lessors that originated the
underlying obligations.
Asset-backed securities are likely to involve unscheduled prepayments of
principal that may affect yield to maturity, result in losses and may be
reinvested at higher or lower interest rates than the original investment.
The yield to maturity of asset-backed securities that represent residual
interests in payments of principal or interest on fixed-income obligations is
particularly sensitive to prepayments.
The value of asset-backed securities may change because of changes in the
market's perception of the creditworthiness of the servicing agent for the
pool of underlying obligations, the originator of those obligations or the
financial institution providing credit enhancement.
BANK OBLIGATIONS. The Portfolios may invest in U.S. dollar-denominated
obligations of major banks, including certificates of deposit, time deposits
and bankers' acceptances of U.S. banks and their branches located outside of
the United States, of U.S. branches of foreign banks and of wholly owned
banking subsidiaries of such foreign banks located in the United States,
provided that the bank has assets of at least $5 billion at the date of
investment.
Obligations of foreign branches of U.S banks and U.S. branches or wholly
owned subsidiaries of foreign banks may be general obligations of the parent
bank, of the issuing branch or subsidiary, or both, or may be limited by the
terms of a specific obligation or by governmental regulation. Because such
obligations are issued by foreign entities, they are subject to the risks of
foreign investing discussed below in connection with the Diversified Income
Portfolio's investments in foreign debt obligations.
CORPORATE BONDS, NOTES AND COMMERCIAL PAPER. Each Portfolio may invest
in corporate bonds, notes and commercial paper. These obligations generally
represent indebtedness of the issuer and may be subordinated to other
outstanding indebtedness of the issuer. Commercial paper consists of short-
term unsecured promissory notes issued by corporations in order to finance
their current operations.
FIXED-INCOME SECURITIES WITH BUY-BACK FEATURES. Fixed-income securities
purchased by the Portfolios may have various buy-back features that permit the
Portfolios to recover principal upon tendering the securities to the issuer or
a third party. For example, a Portfolio may enter into a stand-by commitment
permitting the Portfolio to resell fixed-income securities back to the
original seller at a specified price. The Portfolios may also purchase long-
term fixed-rate bonds that may be tendered at specified intervals to a bank or
other financial institution for their face value. Demand instruments permit
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<PAGE>
the Portfolios to demand from the issuer payment of principal plus accrued
interest upon a specified number of days' notice. These buy-back features are
often supported by letters of credit or other guarantees obtained by the
issuers or financial intermediaries. However, without credit enhancements, if
there is a default or significant downgrading of a bond or, in the case of a
municipal bond, a loss of its tax-exempt status, the buy-back feature may
terminate automatically and the risk to the Portfolio holding the bond will be
that of holding a long-term security.
ILLIQUID SECURITIES. Certain of the Portfolios' assets may be considered
illiquid, including restricted securities that can only be resold in a
registered public offering, over-the-counter options and repurchase agreements
or time deposits maturing in more than 7 days. No more than 15% of a
Portfolio's net assets may be invested in these and other illiquid securities.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities
representing interests in a pool of mortgages secured by real property. There
are three basic types of mortgage-backed securities: (1) those issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, such as
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"); (2)
those issued by private issuers and collateralized by securities issued or
guaranteed by the U.S. Government; and (3) those issued by private issuers and
collateralized by mortgage loans or other mortgage-backed securities without a
government guarantee but usually with some form of private credit enhancement.
The value of all mortgage-backed securities will vary with the
creditworthiness of the issuer, the level and type of collateralization and
interest rates. In addition, the mortgage-backed securities market in general
may be adversely affected by changes in governmental regulation or tax
policies.
The yield characteristics of mortgage-backed securities differ from those
of traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time. The rates of such prepayments can be
expected to accelerate as interest rates decline. To the extent the
Portfolios purchase these securities at a premium or discount, prepayment
rates will affect yield to maturity. Prepayments also can result in losses on
securities purchased at a premium to the extent of the premium. In addition,
prepayments usually can be expected to be reinvested at lower interest rates
than the original investment. Derivative mortgage-backed securities, such as
stripped mortgage-backed securities or residual interests, generally are more
sensitive to changes in interest rates, and the market for such securities is
less liquid than the market for traditional debt securities and mortgage-
backed securities. Interest only and principal only mortgage-backed
securities backed by fixed-rate mortgages and issued by an agency or
instrumentality of the U.S. Government may be determined to be liquid by WTC
pursuant to guidelines approved by the Fund's Board of Trustees.
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<PAGE>
MUNICIPAL SECURITIES. The municipal securities in which the Portfolios
may invest include general obligation, revenue or special obligation,
industrial development and private activity municipal bonds. General
obligation bonds are secured by an issuer's pledge of its full faith, credit
and unlimited taxing power for the payment of principal and interest. Revenue
or special obligation bonds are payable only from the revenues derived from a
particular facility or class of facility or project or, in some cases, from
the proceeds of a special excise or other tax. Similarly, resource recovery
bonds are issued to build facilities such as solid waste incinerators or waste-
to-energy; the revenue stream from those bonds is secured by fees or rents
paid by municipalities for use of the facilities and depend upon whether the
municipalities appropriate funds for these usage fees. The term "municipal
securities" also includes municipal lease obligations, such as leases,
installment purchase contracts and conditional sales contracts, and
certificates of participation therein. Municipal lease obligations are issued
by state and local governments and authorities to purchase land or various
types of equipment or facilities and may be subject to annual budget
appropriations.
Industrial development bonds ("IDB's") and private activity bonds
("PAB's") finance various privately operated facilities, such as airport or
pollution control facilities. These obligations are included within the term
"municipal securities" if the interest paid thereon is exempt from federal
income tax in the opinion of the bond issuer's counsel. IDB's and PAB's are
in most cases revenue bonds and thus are not payable from the unrestricted
revenues of the issuer. The credit quality of IDB's and PAB's is usually
directly related to the credit standing of the user of the facilities being
financed. The interest on these bonds issued after August 15, 1986, generally
is an item of tax preference for purposes of the federal alternative minimum
tax.
PARTICIPATION INTERESTS. The Portfolios may purchase participation
interests in fixed-income securities that have been issued by banks or other
financial institutions. Participation interests give the holders differing
interests in the underlying securities, depending upon the type or class of
certificate purchased. For example, coupon strip certificates give the holder
the right to receive a specific portion of interest payments on the underlying
securities; principal strip certificates give the holder the right to receive
principal payments and the portion of interest not payable to coupon strip
certificate holders. Holders of certificates of participation in interest
payments may be entitled to receive a fixed rate of interest, a variable rate
that is periodically reset to reflect the current market rate or an auction
rate that is periodically reset at auction.
More complex participation interests involve special risk considerations.
Since these instruments have only recently been developed, there can be no
assurance that any market will develop or be maintained for the instruments.
Generally, the fixed-income securities that are deposited in trust for the
holders of these interests are the sole source of payments on the interests;
holders cannot look to the sponsor or trustee of the trust or to the issuers
of the securities held in trust or to any of their affiliates for payment.
34
<PAGE>
Nevertheless, participation interests may be backed by credit enhancements
such as letters of credit, insurance policies, surety bonds or liquidity
facilities to provide full or partial coverage for certain defaults and losses
relating to the underlying securities or to provide liquidity support for
participation interests that give holders the right to demand payment of
principal upon a specified number of days' notice.
REPURCHASE AGREEMENTS. The Portfolios may invest in repurchase
agreements fully collateralized by U.S. Government obligations. A repurchase
agreement is a transaction in which a Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed upon
market rate of interest that is unrelated to the coupon rate or maturity of
the purchased security. While it does not currently appear possible to
eliminate all risks from these transactions (particularly the possibility of a
decline in the market value of the underlying securities, as well as delay and
costs to the Portfolio in connection with bankruptcy proceedings), it is the
policy of the Portfolios to limit repurchase transactions to those banks and
primary dealers in U.S. Government obligations whose creditworthiness has been
reviewed and found satisfactory by WTC.
U.S. GOVERNMENT OBLIGATIONS. Each Portfolio may purchase obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities ("U.S. Government obligations"), including direct
obligations of the U.S. Government (such as Treasury bills, notes and bonds)
and obligations issued by U.S. Government agencies and instrumentalities.
Agencies and instrumentalities include executive departments of the U.S.
Government or independent federal organizations supervised by Congress.
Although not all obligations of agencies and instrumentalities are 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 obligations supported by the full
faith and credit of the United States (for example, U.S. Treasury securities
or GNMA securities) to obligations that are supported solely or primarily by
the creditworthiness of the issuer (for example, securities issued by FNMA,
FHLMC and the Tennessee Valley Authority). In the case of obligations not
backed by the full faith and credit of the United States, the Portfolios 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. The Portfolios' investments may
include fixed, variable or floating rate securities. Variable or floating
rate securities bear interest at rates subject to periodic adjustment or
provide for periodic recovery of principal on demand. Under certain
conditions, these securities may be considered to have remaining maturities
equal to the time remaining until the next interest rate adjustment date or
the date on which principal can be recovered on demand.
The variable rate securities in which the Portfolios invest may pay
interest at rates that vary inversely to changes in market interest rates.
These securities, referred to as "inverse floating obligations" or "residual
interest bonds" provide opportunities for higher yields but are subject to
greater fluctuations in market value.
35
<PAGE>
WHEN-ISSUED SECURITIES. Each Portfolio may purchase securities on a
"when-issued" basis for delivery to the Portfolio later than the normal
settlement date for such securities, at a stated price and yield. The
Portfolio generally does not pay for such securities or start earning interest
on them until they are received. However, when a Portfolio purchases
securities on a when-issued basis, it immediately assumes the risks of
ownership, including the risk of price fluctuation. Failure by the issuer to
deliver a security purchased on a when-issued basis may result in a loss or a
missed opportunity to make an alternative investment.
ZERO COUPON SECURITIES. The Portfolios may invest in zero coupon
securities of governmental or private issuers. Such securities generally pay
no interest to their holders prior to maturity. Accordingly, such securities
are usually issued and traded at a deep discount from their face or par value
and are subject to greater fluctuations in market value in response to
changing interest rates than are debt obligations of comparable maturities and
credit quality that make current distributions of interest.
SECURITIES THAT MAY BE PURCHASED BY THE DIVERSIFIED INCOME PORTFOLIO
CONVERTIBLE SECURITIES. The Diversified Income Portfolio may invest in
convertible bonds or notes or preferred stock that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula.
The issuer may have the right to call the securities before the conversion
feature is exercised.
FOREIGN DEBT OBLIGATIONS. The Diversified Income Portfolio may invest in
obligations of foreign issuers, including foreign governments, payable in U.S.
dollars and issued in the United States (Yankee bonds). The Portfolio may
invest up to 10% of its total assets, at the time of purchase, in obligations
of foreign and U.S. issuers payable in U.S. dollars and issued outside the
United States (Eurobonds) and other non-U.S. dollar-denominated fixed-income
securities of foreign issuers, including those issued by foreign governments.
The Portfolio's investments in foreign fixed-income securities may involve
risks in addition to those normally associated with investments in domestic
securities, including the possible imposition of exchange control regulations
or currency restrictions, which would prevent cash being brought back to the
United States; less publicly available information with respect to issuers of
securities; less extensive regulation of foreign brokers, the securities
markets and issuers of securities; lack of uniform accounting standards; a
generally lower degree of liquidity than that available in the U.S. markets;
and the possible imposition of foreign taxes, including taxes that may be
confiscatory. Other risks of foreign investment include non-negotiable
brokerage commissions, lower trading volume and greater volatility, possible
delays in settlement, the difficulty of enforcing obligations in foreign
countries, and possible political or social instability in foreign countries.
Further, to the extent that the Diversified Income Portfolio invests in
securities denominated in foreign currencies, the Portfolio will be subject to
fluctuations in foreign currency exchange rates and costs incurred in
conversions between currencies.
36
<PAGE>
OBLIGATIONS ISSUED BY SUPRANATIONAL AGENCIES. The Diversified Income
Portfolio may invest in the obligations of supranational agencies, such as the
International Bank for Reconstruction and Development (the World Bank). Such
obligations may be denominated in U.S. dollars or other currencies.
Supranational agencies rely on funds from participating countries, often
including the United States, from which they must request funds. Such
requests may not always be honored. Moreover, the securities of supranational
agencies, depending on where and how they are issued, may be subject to some
of the risks discussed above with respect to foreign debt obligations.
PREFERRED STOCKS. The Diversified Income Portfolio may invest in
dividend-paying preferred stocks of U.S. and foreign issuers that, in the
judgment of WTC, have substantial potential for income production. Such
equity securities involve greater risk of loss of income than debt securities
because the issuers are not obligated to pay dividends. In addition, equity
securities are subordinate to debt securities and are more subject to changes
in economic and industry conditions and to changes in the financial condition
of the issuers.
REVERSE REPURCHASE AGREEMENTS. The Diversified Income Portfolio may
enter into reverse repurchase agreements to sell portfolio securities to
securities dealers or banks subject to the Portfolio's agreement to repurchase
the securities at an agreed-upon date and price reflecting a market rate of
interest. The value of the securities subject to a reverse repurchase
agreement may decline below the repurchase price. The Portfolio may also
encounter delays in recovering the securities and even loss of rights in the
securities should the opposite party fail financially. Reverse repurchase
agreements, together with other borrowing by the Portfolio, are limited to one-
third of the Portfolio's assets. The Portfolio will maintain with the Fund's
custodian in a segregated account cash or liquid high-grade debt securities,
marked to market daily, in an amount at least equal to the Portfolio's
obligations under reverse repurchase agreements that are outstanding.
INVESTMENT STRATEGIES THAT MAY BE USED BY THE DIVERSIFIED INCOME PORTFOLIO
LENDING OF PORTFOLIO SECURITIES. The Diversified Income Portfolio may
lend securities to increase investment income through interest on the loan.
All loan agreements will require that the loans be fully collateralized by
cash, U.S. Government obligations or any combination of cash and such
securities, marked to market value daily. The Portfolio continues to receive
interest on the securities lent or an equivalent fee from the borrower, while
simultaneously earning income on the investment of the collateral. The
Portfolio retains authority to terminate a loan at any time and retains
voting, subscription, dividend and other rights when it is in the Portfolio's
best interests to do so. If the borrower of the securities fails financially,
there may be a delay in receiving additional collateral, a delay in recovering
the securities or even loss of the collateral. However, loans are only made
to borrowers that are deemed by WTC to be of good standing and when, in the
judgment of WTC, the income that can be earned justifies the attendant risks.
The aggregate value of outstanding securities loans in the Portfolio's
holdings may not exceed one-third of its total assets.
37
<PAGE>
HEDGING STRATEGIES. The Diversified Income Portfolio may engage in
options and futures strategies to hedge various market risks (such as interest
rates and broad or specific market movements) or to enhance potential gain.
The Diversified Income Portfolio may also purchase or sell forward currency
contracts in an attempt to manage the Portfolio's foreign currency exposure.
The Portfolio may enter into forward currency contracts to set the rate at
which currency exchanges will be made for specific contemplated transactions.
The Portfolio may also enter into forward currency contracts in amounts
approximating the value of one or more portfolio positions to fix the U.S.
dollar value of those positions. Use of options, futures and forward currency
contracts by the Diversified Income Portfolio is limited by market conditions,
regulatory limitations and other tax considerations.
The use of forward currency contracts, options and futures involves
certain investment risks and transaction costs. These risks include:
dependence on WTC's and the sub-advisers' ability to predict movements in the
prices of individual securities, fluctuations in the general securities
markets and movements in interest rates and currency markets; imperfect
correlation between movements in the price of currency, options, futures
contracts or related options and movements in the price of the currency or
security hedged or used for cover; the fact that skills and techniques needed
to trade options, futures contracts and related options or to use forward
currency contracts are different from those needed to select the securities in
which the Fund invests; lack of assurance that a liquid secondary market will
exist for any particular option, futures contract or related option at any
particular time; and the possible need to defer closing out certain forward
currency contracts, options, futures contracts and related options in order to
continue to qualify for the beneficial tax treatment afforded regulated
investment companies under the Internal Revenue Code of 1986, as amended. (See
"Taxes" in the Statement of Additional Information.)
SHORT SALES AGAINST THE BOX. The Diversified Income Portfolio may engage
in a short sale against the box as a hedge when WTC believes that the price of
a security held by the Portfolio may decline or for tax planning purposes to
defer recognition of gain or loss for tax purposes. In an ordinary or
uncovered short sale, the seller does not own the securities sold, and must
subsequently purchase an equivalent amount of securities in the market to
complete or cover the transaction. In a "short sale against the box,"
however, the seller already owns securities equivalent to the securities sold
short, and it is these securities which are held by the broker ("against the
box") to cover the transaction. The broker borrows the securities that are
actually sold from a third party. Since the seller already owns the
securities sold and does not need to purchase equivalent securities in the
market, the sale entails no possibility of market gain or risk of market loss
other than the gain or loss that would be realized by an ordinary sale of the
securities.
38
<PAGE>
THE RODNEY SQUARE
STRATEGIC FIXED-INCOME FUND
APPLICATION & NEW ACCOUNT REGISTRATION
____________________________________________________________________________
INSTRUCTIONS: RETURN THIS COMPLETED FORM TO:
FOR WIRING INSTRUCTIONS OR FOR THE RODNEY SQUARE STRATEGIC
ASSISTANCE IN COMPLETING THIS FIXED-INCOME FUND
FORM CALL (800) 336-9970 C/O RODNEY SQUARE MANAGEMENT CORP.
P.O. Box 8987
WILMINGTON, DE 19899-9752
______________________________________________________________________________
PORTFOLIO SELECTION ($1,000 MINIMUM)
__ DIVERSIFIED INCOME PORTFOLIO $___________
__ MUNICIPAL INCOME PORTFOLIO $___________
TOTAL AMOUNT TO BE INVESTED $___________
____By check. (Make payable to "The Rodney Square Stategic Fixed-Income Fund")
____By wire. Call 1-800-336-9970 for Instructions.
____Bank from which funds will be wired _____________________
wire date _____________________
______________________________________________________________________________
ACCOUNT REGISTRATION - JOINT TENANTS USE LINES 1 AND 2; CUSTODIAN FOR A MINOR,
USE LINES 1 AND 3; CORPORATION, TRUST OR OTHER ORGANIZATION OR ANY FIDUCIARY
CAPACITY, USE LINE 4.
1.Individual__________________________________________________________________
First Name MI Last Name Customer Tax ID No.*
2.Joint Tenancy**
__________________________________________________________________
First Name MI Last Name Customer Tax ID No.*
3.Gifts to Minors***
_______________________ _______________ under the __________
Minor's Name Customer Tax ID No.* State
4.Other Registration
_____________________________________ _____________________
Customer Tax ID No.*
5.If Trust, Date of Trust Instrument:_________________________________________
6._______________________________________
Your Occupation
7.___________________________________ _______________________________________
Employer's Name Employer's Address
*Customer Tax Identification No.: (a) for an individual, joint tenants, or
a custodial account under the Uniform Gifts/Transfers to Minors Act, supply
the Social Security number of the registered account owner who is to be taxed;
(b) for a trust, a corporation, a partnership, an organization, a fiduciary,
etc., supply the Employer Identification number of the legal entity or or-
ganization that will report income and/or gains.
** "Joint Tennants with Rights of Survivorship" unless otherwise specified.
*** Regulated by the state's Uniform Gift/Transfers to Minors Act.
______________________________________________________________________________
ADDRESS OF RECORD
______________________________________________________________________________
Street
______________________________________________________________________________
3/96 City State Zip Code
<PAGE>
______________________________________________________________________________
DISTRIBUTION OPTIONS - IF THESE BOXES ARE NOT CHECKED, ALL DISTRIBUTIONS WILL
BE INVESTED IN ADDITIONAL SHARES.
Pay Cash for:
Income Dividends Other
DIVERSIFIED INCOME PORTFOLIO ___ ___
MUNICIPAL INCOME PORTFOLIO ___ ___
______________________________________________________________________________
CHECK ANY OF THE FOLLOWING IF YOU WOULD LIKE ADDITIONAL INFORMATION ABOUT
A PARTICULAR PLAN OR SERVICE SENT TO YOU.
___AUTOMATIC INVESTMENT PLAN ___SYSTEMATIC WITHDRAWAL PLAN ___CHECK REDEMPTIONS
(Check redemptions services are generally not available for clients of
WTC through their trust or corporate cash management accounts; this service
may also not be available for clients of Service Organizations.)
______________________________________________________________________________
RIGHTS OF ACCUMULATION (SEE PROSPECTUS) -- INDICATE ANY RELATED ACCOUNT(S) IN
FUNDS OR PORTFOLIOS IN THE RODNEY SQUARE COMPLEX WHICH WOULD QUALIFY FOR A
REDUCED SALES LOAD AS OUTLINED UNDER "PURCHASE OF SHARES-REDUCED SALES LOAD
PLANS" IN THE PROSPECTUS.
_____________________ ____________ ____________________ ___________________
Fund/Portfolio Name Account No. Registered Owner Relationship
_____________________ ____________ ____________________ ___________________
Fund/Portfolio Name Account No. Registered Owner Relationship
______________________________________________________________________________
LETTER OF INTENT
I agree to the Letter of Intent provisions set forth below. I am not obligated
but intend to invest an aggregate amount of at least:
__ $25,000 __ $50,000 __ $100,000 __ $250,000 __ $500,000 __ $1,000,000
Under the terms described under "PURCHASE OF SHARES-Reduced Sales Load Plans"
in the Prospectus, over a thirteen-month period beginning __________________.
I hereby irrevocably constitute and appoint RSMC as my agent and attorney to
surrender for redemption any or all escrowed shares with full power of
substitution in the premises.
I understand that this letter is not effective until it is accepted by RSMC.
____________________________________ ____________________________________
Authorized Signature Authorized Signature
______________________________________________________________________________
SALES LOAD WAIVERS -- PLEASE INDICATE IN THE SPACE PROVIDED THE NATURE OF YOUR
ELIGIBILITY FOR A WAIVER OF SALES LOADS. (SEE "PURCHASE OF SHARES-SALES LOAD
WAIVERS" IN THE PROSPECTUS.)
Nature of Affiliation ______________________________________________________
______________________________________________________________________________
<PAGE>
CERTIFICATIONS AND SIGNATURE(S) - PLEASE SIGN EXACTLY AS REGISTERED UNDER
"ACCOUNT REGISTRATION."
I have received and read the Prospectus for The Rodney Strategic Fixed-
Income Fund and agree to its terms; I am of legal age. I understand that the
shares offered by this Prospectus are not deposits of, or guaranteed by,
Wilmington Trust Company, nor are the shares insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other agency. I
further understand that investment in these shares involves investment risks,
including possible loss of principal. If a corporate customer, I certify that
appropriate corporate resolutions authorizing investment in The Rodney Square
Strategic Fixed-Income Fund been duly adopted.
I certify under penalties of perjury that the Social Security number or
taxpayer identification number shown above is correct. Unless the box below is
checked, I certify under penalties of perjury that I am not subject to backup
withholding because the Internal Revenue Service (a) has not notified me that
I am as a result of failure to report all interest or dividends, or (b) has
notified me that I am no longer subject to backup withholding. The
certifications in this paragraph are required from all nonexempt persons to
prevent backup withholding of 31% of all taxable distributions and gross
redemption proceeds under the federal income tax law.
____Check here if you are subject to backup withholding.
Signature___________________________________________ Date____________
Signature___________________________________________ Date____________
Joint Owner/Trustee
Check one: __ Owner __ Trustee __ Custodian __ Other _____________________
______________________________________________________________________________
IDENTIFICATION OF SERVICE ORGANIZATION
We authorize Rodney Square Management Corporation ("RSMC"), and Rodney
Square Distributors, Inc. ("RSD") in the case of transactions by telephone, to
act as our agents in connection with transactions authorized by this order
form.
Service Organization Name and Code____________________________________________
Branch Address and Code_______________________________________________________
Representative or Other Employee Code_________________________________________
Authorized Signature of Service Organization___________Telephone (___)________
<PAGE>
THE RODNEY SQUARE
STRATEGIC FIXED-INCOME FUND
APPLICATION for TELEPHONE REDEMPTION OPTION
______________________________________________________________________________
Telephone redemption permits redemption of fund shares by telephone, with
proceeds directed only to the fund account address of record or to the bank
account designated below. For investments by check, telephone redemption is
available only after these shares have been on the Fund's books for 10 days.
This form is to be used to add or change the telephone redemption option on
your Rodney Square Strategic Fixed-Income Fund account(s).
______________________________________________________________________________
ACCOUNT INFORMATION
Portfolio Name(s):_______________________________________________________
Fund Account Number(s):__________________________________________________
(Please provide if you are a current account holder:)
Registered in the Name(s) of:_______________________________________________
_______________________________________________
Registered Address:_________________________________________________________
_________________________________________________________
NOTE: If this form is not submitted together with the application, a coporate
resolution must be included for accounts registered to other than an individ-
ual, a fiduciary or partnership.
______________________________________________________________________________
REDEMPTION INSTRUCTIONS
___Add ___Change
Check one or more.
___Mail proceeds to my fund account address of record (must be $10,000 or
less and address must be established for a minimum of 60 days)
___Mail proceeds to my bank
___Wire proceeds to my bank (minimum $1,000)
___All of the above
Telephone redemption by wire can be used only with financial institutions that
are participants in the Federal Reserve Bank Wire System. If the financial
institution you designate is not a Federal Reserve participant, telephone
redemption proceeds will be mailed to the named financial institution. In
either case, it may take a day or two, upon receipt for your financial
institution to credit your bank account with the proceeds, depending on its
internal crediting procedures.
______________________________________________________________________________
3/96
<PAGE>
BANK INFORMATION
PLEASE COMPLETE THE FOLLOWING INFORMATION ONLY IF PROCEEDS MAILED/WIRED TO YOUR
BANK WAS SELECTED. A VOIDED BANK CHECK MUST BE ATTACHED TO THIS APPLICATION.
Name of Bank________________________________________________________________
Bank Routing Transit #______________________________________________________
Bank Address________________________________________________________________
City/State/Zip______________________________________________________________
Bank________________________________________________________________________
Account Number______________________________________________________________
Name(s) on Bank Account_____________________________________________________
______________________________________________________________________________
AUTHORIZATIONS
By electing the telephone redemption option, I appoint Rodney Square
Management Corporation ("RSMC"), my agent to redeem shares of any designated
Rodney Square fund when so instructed by telephone. This power will continue
if I am disabled or incapacitated. I understand that a request for telephone
redemption may be made by anyone, but the proceeds will be sent only to the
account address of record or to the bank listed above. Proceeds in excess of
$10,000 will only be sent to your predesignated bank. By signing below, I
agree on behalf of myself, my assigns, and successors, not to hold RSMC and
any of its affiliates, or any Rodney Square fund responsible for acting under
the powers I have given RSMC. I also agree that all account and registration
information I have given will remain the same unless I instruct RSMC otherwise
in a written form, including a signature guarantee. If I want to terminate
this agreement, I will give RSMC at least ten days notice in writing. If RSMC
or the Rodney Square funds want to terminate this agreement, they will give me
at least ten days notice in writing.
All owners on the account must sign below and obtain signature guarantee(s).
_____________________________________ ___________________________________
Signature of Individual Owner Signature of Joint Owner (if any)
______________________________________________________________________________
Signature of Corporate Officer, Trustee or other _ please include your title
You must have a signature(s) guaranteed by an eligible institution acceptable
to the Fund's transfer agent, such as a bank, broker/dealer, government securi-
ties dealer, credit union, national securities exchange, registered securities
association, clearing agency or savings association. A Notary Public is not an
acceptable guarantor.
SIGNATURE GUARANTEE(S) (stamp)
<PAGE>
[Outside cover -- Divided into three sections]
[Leftmost Section]
DIRECTORS
Eric Brucker
Fred L. Buckner
Martin L. Klopping
John J. Quindlen
- ------------------
OFFICERS
Martin L. Klopping, President
Joseph M. Fahey, Jr., Vice President
Robert C. Hancock, Vice President & Treasurer
Marilyn Talman, Esq., Secretary
Diane D. Marky, Assistant Secretary
Connie L. Meyers, Assistant Secretary
Louis C. Schwartz, Esq., Assistant Secretary
John J. Kelley, Assistant Treasurer
- -------------------------------------
ADMINISTRATOR AND TRANSFER AGENT
Rodney Square Management Corporation
Rodney Square North
1100 N. Market St.
Wilmington, DE 19890-0001
- ---------------------------
INVESTMENT ADVISER AND CUSTODIAN
Wilmington Trust Company
Rodney Square North
1100 N. Market St.
Wilmington, DE 19890-0001
- ---------------------------
DISTRIBUTOR
Rodney Square Distributors, Inc.
Rodney Square North
1100 N. Market St.
Wilmington, DE 19890-0001
<PAGE>
[Middle Section]
THE RODNEY SQUARE
STRATEGIC
FIXED-INCOME
FUND
[Graphic] Caesar
Rodney upon his
galloping horse
facing right,
reverse image on
dark background
PROSPECTUS
March 1, 1996
<PAGE>
TABLE OF CONTENTS
Page
Expense Table 2
Financial Highlights 4
Questions and Answers About the Funds 6
Investment Objectives and Policies 8
Purchase of Shares 12
Shareholder Accounts 15
Redemption of Shares 15
Exchange of Shares 17
How Net Asset Value is Determined 18
Dividends, Other distributions and Taxes 19
Performance Information 21
Management of the Fund 22
Description of the Fund 24
Appendix 25
Application and New Account Registration 31
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
The Rodney Square Strategic Fixed-Income Fund (the "Fund") is
an open-end investment company consisting of two portfolios, The
Rodney Square Diversified Income Portfolio (the "Diversified Income
Portfolio") and The Rodney Square Municipal Income Portfolio (the
"Municipal Income Portfolio" and, together with the Diversified
Income Portfolio, the "Portfolios"). The Diversified Income
Portfolio seeks high total return, consistent with high current
income, by investing principally in various types of investment
grade fixed-income securities. The Municipal Income Portfolio seeks
a high level of income exempt from federal income tax consistent
with the preservation of capital.
- ------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1996
- ------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Fund's current Prospectus, dated March 1,
1996, as amended from time to time. A copy of the current Prospectus may be
obtained, without charge, by writing to Rodney Square Distributors, Inc.
("RSD"), Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-
0001, and from certain institutions such as banks or broker-dealers that have
entered into servicing agreements with RSD or by calling (800) 336-9970.
<PAGE>
TABLE OF CONTENTS
PAGE
----
INVESTMENT POLICIES....................................... 1
SPECIAL CONSIDERATIONS.................................... 10
INVESTMENT LIMITATIONS.................................... 11
TRUSTEES AND OFFICERS..................................... 14
WILMINGTON TRUST COMPANY.................................. 15
INVESTMENT ADVISORY SERVICES.............................. 16
ADMINISTRATION, ACCOUNTING AND DISTRIBUTION AGREEMENTS
AND RULE 12b-1 PLANS................................. 17
PORTFOLIO TRANSACTIONS.................................... 21
PORTFOLIO TURNOVER........................................ 22
REDEMPTIONS............................................... 22
NET ASSET VALUE AND DIVIDENDS............................. 23
PERFORMANCE INFORMATION................................... 24
TAXES..................................................... 31
DESCRIPTION OF THE FUND................................... 34
OTHER INFORMATION......................................... 35
FINANCIAL STATEMENTS...................................... 36
APPENDICES:
APPENDIX A - OPTIONS, FUTURES AND FORWARD CURRENCY
CONTRACT STRATEGIES............................. A-1
APPENDIX B - DESCRIPTION OF RATINGS.................. B-1
i
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
INVESTMENT POLICIES
The following information supplements the information concerning each
Portfolio's investment objective, policies and limitations found in the
Prospectus.
THE DIVERSIFIED INCOME PORTFOLIO AND THE MUNICIPAL INCOME PORTFOLIO
Wilmington Trust Company ("WTC"), the Portfolios' Investment Adviser,
employs an investment process that is disciplined, systematic and oriented
toward a quantitative assessment and control of volatility. The Portfolios'
exposure to credit risk is moderated by limiting the Portfolios' investments
to securities that, at the time of purchase, are rated investment grade by a
nationally recognized statistical rating organization such as Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Services
("S&P"), or, if unrated, are determined by WTC to be of comparable quality.
Ratings, however, are not guarantees of quality or of stable credit quality.
WTC continuously monitors the quality of the Portfolios' holdings, and should
the rating of a security be downgraded or its quality be adversely affected,
WTC will determine whether it is in the best interest of the affected
Portfolio to retain or dispose of the security.
The effect of interest rate fluctuations in the market on the principal
value of the Portfolios is moderated by limiting the average dollar weighted
duration of their investments - in the case of the Diversified Income
Portfolio to a range of 2.5 to 4 years and in the case of the Municipal Income
Portfolio to a range of 4 to 8 years. Investors may be more familiar with the
term average effective maturity (when, on average, the fixed-income securities
held by the Portfolio will mature) which is sometimes used to express the
anticipated term of the Portfolios' investments. Generally, the stated
maturity of a fixed-income security is longer than its projected duration.
Under normal market conditions, the average effective maturity, in the case of
the Diversified Income Portfolio, is expected to fall within a range of
approximately 3 to 5 years, and in the case of the Municipal Income Portfolio,
within a range of approximately 5 to 10 years.
THE DIVERSIFIED INCOME PORTFOLIO
WTC's goal in managing the Diversified Income Portfolio is to gain
additional return by analyzing all of the market complexities and individual
security attributes which affect the returns of fixed-income securities. The
Portfolio is intended to appeal to investors who want a thoughtful exposure to
the broad fixed-income securities market and the high current returns that
characterize the short to intermediate term sector of that market.
Given the short to intermediate average duration of the Diversified
Income Portfolio's holdings and the current interest rate environment, the
Portfolio should experience smaller price fluctuations than those experienced
by longer term bond funds and a higher yield than fixed-price money market
funds. Of course, the Portfolio will likely experience larger price
fluctuations than money market funds and a lower yield than longer term bond
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funds. Given the quality of its holdings, which must be investment grade
(rated within the top four categories) or comparable to investment grade
securities at the time of purchase, the Portfolio will accept lower yields in
order to avoid the credit concerns experienced by funds that invest in lower
quality fixed-income securities.
THE MUNICIPAL INCOME PORTFOLIO
WTC's goal in managing the Municipal Income Portfolio is to achieve high
interest income that is exempt from federal income tax and to preserve capital
by analyzing the market complexities and individual security attributes which
affect the returns of municipal securities and other types of fixed-income
securities. The Portfolio is intended to appeal to investors who want high
current tax-free income with moderate price fluctuations.
Given the intermediate average duration of the Municipal Income
Portfolio's holdings and the current interest rate environment, the Portfolio
should experience smaller price fluctuations than those experienced by longer
term municipal funds and a higher yield than fixed-price tax-exempt money
market funds. Of course, the Portfolio will likely experience larger price
fluctuations than money market funds and a lower yield than longer term
municipal funds. Given the quality of its holdings, which must be investment
grade (rated within the top four categories) or comparable to investment grade
securities at the time of purchase, the Portfolio should also experience
lesser price fluctuations (as well as lower yields) than those experienced by
funds that invest in lower quality tax-exempt securities.
The Municipal Income Portfolio may invest in the securities of other
investment companies within the limits prescribed by the 1940 Act. Under
normal circumstances, the Portfolio intends to invest less than 5% of the
value of its assets in the securities of other investment companies. In
addition to the Portfolio's expenses (including the various fees), as a
shareholder in another investment company, the Portfolio would bear its pro
rata portion of the other investment company's expenses (including fees).
However, the Portfolio's Investment Adviser will waive its investment advisory
fee with respect to the assets of the Portfolio invested in other investment
companies, to the extent of the advisory fee charged by any investment adviser
to such investment company.
Although it has no current intention of so doing, the Municipal Income
Portfolio may also engage in certain investment strategies, such as entering
into reverse repurchase agreements and short selling that may generate
federally taxable income or capital gains. For additional information
regarding such investment strategies, see "Investment Strategies that may be
used by the Diversified Income Portfolio" in the Appendix to the Prospectus.
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PORTFOLIO INVESTMENTS
The Portfolios may purchase the following types of fixed-income
securities:
FIXED-INCOME SECURITIES WITH BUY-BACK FEATURES. Fixed-income securities
with buy-back features enable the Portfolios to recover principal upon
tendering the securities to the issuer or a third party. These buy-back
features are often supported by letters of credit issued by domestic or
foreign banks. In evaluating a foreign bank's credit, WTC considers whether
adequate public information about the bank is available and whether the bank
may be subject to unfavorable political or economic developments, currency
controls or other governmental restrictions that could adversely affect the
bank's ability to honor its commitment under the letter of credit. The
Municipal Income Portfolio will not acquire municipal securities with buy-back
features if, in the opinion of counsel, the existence of a buy-back feature
would alter the tax-exempt nature of interest payments on the underlying
securities and cause those payments to be taxable to that Portfolio and its
shareholders.
Buy-back features include standby commitments, put bonds and demand
features.
STANDBY COMMITMENTS. The Portfolios may acquire standby
commitments from broker-dealers, banks or other financial
intermediaries to enhance the liquidity of portfolio securities. A
standby commitment entitles a Portfolio to same day settlement at
amortized cost plus accrued interest, if any, at the time of
exercise. The amount payable by the issuer of the standby
commitment during the time that the commitment is exercisable
generally approximates the market value of the securities underlying
the commitment. Standby commitments are subject to the risk that
the issuer of a commitment may not be in a position to pay for the
securities at the time that the commitment is exercised.
Ordinarily, a Portfolio will not transfer a standby commitment
to a third party, although the Portfolio may sell securities subject
to a standby commitment at any time. A Portfolio may purchase
standby commitments separate from or in conjunction with the
purchase of the securities subject to the commitments. In the
latter case, the Portfolio may pay a higher price for the securities
acquired in consideration for the commitment.
PUT BONDS. A put bond (also referred to as a tender option or
third party bond) is a bond created by coupling an intermediate or
long-term fixed-rate bond with an agreement giving the holder the
option of tendering the bond to receive its par value. As
consideration for providing this tender option, the sponsor of the
bond (usually a bank, broker-dealer or other financial intermediary)
receives periodic fees that equal the difference between the bond's
fixed-coupon rate and the rate (determined by a remarketing or
similar agent) that would cause the bond, coupled with the tender
option, to trade at par. By paying the tender offer fees, a
Portfolio in effect holds a demand obligation that bears interest at
the prevailing short-term rate.
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In selecting put bonds for the Portfolios, WTC takes into
consideration the creditworthiness of the issuers of the underlying
bonds and the creditworthiness of the providers of the tender option
features. A sponsor may withdraw the tender option feature if the
issuer of the underlying bond defaults on interest or principal
payments, the bond's rating is downgraded or, in the case of a
municipal bond, the bond loses its tax-exempt status.
DEMAND FEATURES. Many variable-rate securities carry demand
features that permit the holder to demand repayment of the principal
amount of the underlying securities plus accrued interest, if any,
upon a specified number of days' notice to the issuer or its agent.
A demand feature may be exercisable at any time or at specified
intervals. Variable-rate securities with demand features are
treated as having a maturity equal to the time remaining before the
holder can next demand payment of principal. The issuer of a demand
feature instrument may have a corresponding right to prepay the
outstanding principal of the instrument plus accrued interest, if
any, upon notice comparable to that required for the holder to
demand payment.
GUARANTEED INVESTMENT CONTRACTS. A guaranteed investment contract
("GIC") is a general obligation of an insurance company. A GIC is generally
structured as a deferred annuity under which the purchaser agrees to pay a
given amount of money to an insurer (either in a lump sum or in installments)
and the insurer promises to pay interest at a guaranteed rate (either fixed or
variable) for the life of the contract. Some GIC's provide that the insurer
may periodically pay discretionary excess interest over and above the
guaranteed rate. At the GIC's maturity, the purchaser generally is given the
option of receiving payment or an annuity. Certain GIC's may have features
which permit redemption by the issuer at a discount from par value.
Generally, GIC's are not assignable or transferable without the
permission of the issuer. As a result, the acquisition of GIC's is subject to
the limitations applicable to each Portfolio's acquisition of illiquid and
restricted securities. The holder of GIC's is dependent on the credit
worthiness of the issuer as to whether the issuer is able to meet its
obligations. Neither Portfolio intends to invest more than 5% of its net
assets in GIC's.
ILLIQUID SECURITIES. A Portfolio may not purchase or otherwise acquire
any security or invest in a repurchase agreement if, as a result, more than
15% of the Portfolio's net assets (taken at current value) would be invested
in illiquid securities. For purposes of this limitation, repurchase
agreements not entitling the holder to payment of principal within seven days
and securities that are illiquid by virtue of legal or contractual
restrictions on resale ("restricted securities") or the absence of a readily
available market are considered illiquid.
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Restricted securities may be sold only in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act or
in a registered public offering. Where registration is required, a Portfolio
may be obligated to pay all or part of the registration expense and a
considerable period may elapse before the Portfolio may sell the security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Portfolio might obtain a less favorable
price than prevailed when it initially decided to sell the security.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. These instruments are
often restricted securities because the securities are either themselves
exempt from registration or sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to
the general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily
resold or on an issuer's ability to honor a demand for repayment. Therefore,
the fact that there are contractual or legal restrictions on resale to the
general public or certain institutions is not dispositive of the liquidity of
such investments.
To facilitate the increased size and liquidity of the institutional
markets for unregistered securities, the SEC adopted Rule 144A under the 1933
Act. Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act for resales of certain securities to qualified institutional
buyers. Institutional markets for restricted securities have developed as a
result of Rule 144A, providing both readily ascertainable values for
restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
institutional buyers interested in purchasing Rule 144A-eligible restricted
securities held by the Portfolio, however, could affect adversely the
marketability of such portfolio securities, and the Portfolio might be unable
to dispose of such securities promptly or at reasonable prices.
The Board of Trustees has the ultimate responsibility for determining
whether 144A securities are liquid or illiquid. The Board has delegated the
function of making day-to-day determinations of liquidity to WTC pursuant to
guidelines approved by the Board. WTC monitors the liquidity of 144A
securities in the Portfolio's portfolio and reports periodically on such
decisions to the Trustees. WTC 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 made 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 for the security 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 the transfer).
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OVER-THE-COUNTER OPTIONS. All or a portion of the value of the
instrument underlying an over-the-counter option may be illiquid
depending on the assets held to cover the option and the nature and
terms of any agreement a Portfolio may have to close out the option
before expiration.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities
representing interests in a pool of mortgages secured by real property.
Government National Mortgage Association ("GNMA") mortgage-backed
securities are securities representing interests in pools of mortgage loans to
residential home buyers made by lenders such as mortgage bankers, commercial
banks and savings associations and are either guaranteed by the Federal
Housing Administration or insured by the Veterans Administration. Timely
payment of interest and principal on each mortgage loan is backed by the full
faith and credit of the U.S. Government.
The Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") both issue mortgage-backed securities that are
similar to GNMA securities in that they represent interests in pools of
mortgage loans. FNMA guarantees timely payment of interest and principal on
its certificates and FHLMC guarantees timely payment of interest and ultimate
payment of principal. FHLMC also has a program under which it guarantees
timely payment of scheduled principal as well as interest. FNMA and FHLMC
guarantees are backed only by those agencies and not by the full faith and
credit of the U.S. Government; however, the close relationship between
agencies and the U.S. Government makes their securities high quality with
minimal credit risks.
In the case of mortgage-backed securities that are not backed by the U.S.
Government or one of its agencies, a loss could be incurred if the collateral
backing these securities is insufficient. This may occur even though the
collateral is U.S. Government-backed.
Most mortgage-backed securities pass monthly payment of principal and
interest through to the holder after deduction of a servicing fee. However,
other payment arrangements are possible. Payments may be made to the holder
on a different schedule than that on which payments are received from the
borrower, including, but not limited to, weekly, bi-weekly and semiannually.
The monthly principal and interest payments also are not always passed through
to the holder on a pro-rata basis. In the case of collateralized mortgage
obligations ("CMO's"), the pool is divided into two or more tranches and
special rules for the disbursement of principal and interest payments are
established.
CMO residuals are derivative securities that generally represent
interests in any excess cash flow remaining after making required payments of
principal and interest to the holders of the CMO's described above. Yield to
maturity on CMO residuals is extremely sensitive to prepayments. In addition,
if a series of a CMO includes a class that bears interest at an adjustable
rate, the yield to maturity on the related CMO residual also will be extremely
sensitive to the level of the index upon which interest rate adjustments are
based.
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Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities and may be issued by agencies or instrumentalities of the
U.S. Government or by private mortgage lenders. SMBS usually are structured
with two classes that receive different proportions of the interest and/or
principal distributions on a pool of mortgage assets. A common type of SMBS
will have one class of holders receiving all interest payments - "Interest
Only" or "IO" - and another class of holders receiving the principal
repayments - "Principal Only" or "PO." The yield to maturity of IO and PO
classes are extremely sensitive to prepayments on the underlying mortgage
assets.
Although the Portfolios do not intend to invest in securities of
investment companies generally, a Portfolio may invest in mortgage-backed
securities that are issued by entities that would be considered investment
companies under the Investment Company Act of 1940 ("1940 Act") but for an
exemption from that Act granted by the Securities and Exchange Commission
("SEC"); and the Municipal Income Portfolio, as noted in the Prospectus, may
invest, under certain circumstances, in money market funds.
MUNICIPAL SECURITIES. Municipal securities are debt obligations issued
by or on behalf of states, territories and possessions of the United States,
the District of Columbia and their sub-divisions, agencies and
instrumentalities, the interest on which is, may be in the opinion of bond
counsel, exempt from federal income tax. These debt obligations are issued to
obtain funds for various public purposes, such as the construction of public
facilities, the payment of general operating expenses or the refunding of
outstanding debts. They may also be issued to finance various privately owned
or operated activities. The three general categories of municipal securities
are general obligation, revenue or special obligation and private activity
municipal securities.
GENERAL OBLIGATION SECURITIES. The proceeds from general
obligation securities are used to fund a wide range of public
projects, including the construction or improvement of schools,
highways and roads, water and sewer systems. These obligations are
secured by the municipality's pledge of principal and interest and
are payable from the municipality's general unrestricted revenues.
REVENUE OR SPECIAL OBLIGATION SECURITIES. The proceeds from
revenue or special obligation securities are used to fund a wide
variety of capital projects, including electric, gas, water and
sewer systems; highways, bridges and tunnels; port and airport
facilities; colleges and universities; and hospitals. These
obligations are secured by revenues from a specific facility or
group of facilities or, in some cases, from a specific revenue
source such as an excise tax. Many municipal issuers also establish
a debt service reserve fund from which principal and interest
payments are made. Further security may be available in the form of
the state's ability, without obligation, to make up deficits in the
reserve fund.
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MUNICIPAL LEASE OBLIGATIONS. These revenue or special
obligation securities may take the form of a lease, an
installment purchase or a conditional sale contract issued by
state and local governments and authorities to acquire land,
equipment and facilities. Usually, the Portfolios will
purchase a participation interest in a municipal lease
obligation from a bank or other financial intermediary. The
participation interest gives the holder a pro rata, undivided
interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those
associated with general obligation or revenue bonds. The
interest income from the lease obligation may become taxable
if the lease is assigned. Also, to free the municipal issuer
from constitutional or statutory debt issuance limitations,
many leases and contracts include non-appropriation clauses
providing that the municipality has no obligation to make
future payments under the lease or contract unless money is
appropriated for that purpose by the municipality on a yearly
or other periodic basis. Finally, the lease may be illiquid.
RESOURCE RECOVERY BONDS. A number of factors may affect the
value and credit quality of these revenue or special
obligations. These factors include the viability of the
project being financed, environmental protection regulations
and project operator tax incentives.
PRIVATE ACTIVITY SECURITIES. Private activity securities may
be issued by municipalities to finance privately owned or operated
educational, hospital or housing facilities, local facilities for
water supply, gas, electricity or sewage or solid waste disposal and
industrial or commercial facilities. The payment of principal and
interest on these obligations generally depends upon the credit of
the private owner/use of the facilities financed and, in certain
instances, the pledge of real and personal property by the private
owner/user. The interest income from certain types of private
activity securities may be considered a tax preference item for
purpose of the federal alternative minimum tax.
Short-term municipal securities include the following:
TAX ANTICIPATION NOTES ("TAN'S") AND REVENUE ANTICIPATION NOTES
("RAN'S"). These notes are issued by states, municipalities and
other tax-exempt issuers to finance short-term cash needs or,
occasionally, to finance construction. Most TAN's and RAN's are
general obligations of the issuing entity payable from taxes or
revenues, respectively, expected to be received within one year.
BOND ANTICIPATION NOTES ("BAN'S"). These notes are issued with
the expectation that principal and interest of the maturing notes
will be paid out of proceeds from bonds to be issued concurrently or
at a later date. BAN's are issued most frequently by revenue bond
issuers to finance such items as construction and mortgage
purchases.
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CONSTRUCTION LOAN NOTES ("CLN'S"). These notes are issued
primarily by housing agencies to finance construction of projects
for an interim period prior to a bond issue. CLN's are secured by a
lien on the property under construction.
PARTICIPATION INTERESTS AND ASSET-BACKED SECURITIES. The Portfolios may
invest in participation interests in fixed-income securities. A participation
interest provides the certificate holder with a specified interest in an issue
of fixed-income securities. The Portfolios may also purchase participation
interests in pools of securities backed by various types of fixed-income
obligations, known as "asset-backed securities." For example, the Diversified
Income Portfolio may purchase interests in fixed-income obligations generated
by motor vehicle installment sales, installment loan contracts, leases of
various types of real and personal property and receivables from revolving
credit card agreements. The Municipal Income Portfolio may purchase interests
in leases of various types of municipal property.
Some participation interests give the holders differing interests in the
underlying securities, depending upon the type or class of certificate
purchased. For example, coupon strip certificates give the holder the right
to receive a specific portion of interest payments on the underlying
securities; principal strip certificates give the holder the right to receive
principal payments and the portion of interest not payable to coupon strip
certificate holders. Holders of certificates of participation in interest
payments may be entitled to receive a fixed rate of interest, a variable rate
that is periodically reset to reflect the current market rate or an auction
rate that is periodically reset at auction. Asset-backed residuals represent
interests in any excess cash flow remaining after required payments of
principal and interest have been made.
More complex participation interests involve special risk considerations.
Since these instruments have only recently been developed, there can be no
assurance that any market will develop or be maintained for the instruments.
Generally, the fixed-income securities that are deposited in trust for the
holders of these interests are the sole source of payments on the interests;
holders cannot look to the sponsor or trustee of the trust or to the issuers
of the securities held in trust or to any of their affiliates for payment.
Participation interests purchased at a discount may experience price
volatility. Certain types of interests are sensitive to fluctuations in
market interest rates and to prepayments on the underlying securities. A
rapid rate of prepayment can result in the failure to recover the holder's
initial investment.
The extent to which the yield to maturity of a participation interest is
sensitive to prepayments depends, in part, upon whether the interest was
purchased at a discount or premium, and if so, the size of that discount or
premium. Generally, if a participation interest is purchased at a premium and
principal distributions occur at a rate faster than that anticipated at the
time of purchase, the holder's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a participation interest
is purchased at a discount and principal distributions occur at a rate faster
than that assumed at the time of purchase, the investor's actual yield to
maturity will be higher than that assumed at the time of purchase.
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Participation interests in pools of fixed-income securities backed by
certain types of debt obligations involve special risk considerations. The
issuers of securities backed by automobile and truck receivables typically
file financing statements evidencing security interests in the receivables,
and the servicers of those obligations take and retain custody of the
obligations. If the servicers, in contravention of their duty to the holders
of the securities backed by the receivables, were to sell the obligations, the
third party purchasers could acquire an interest superior to the interest of
the security holders. Also, most states require that a security interest in a
vehicle be noted on the certificate of title and the certificate of title may
not be amended to reflect the assignment of the lender's security interest.
Therefore, the recovery of the collateral in some cases may not be available
to support payments on the securities. Securities backed by credit card
receivables are generally unsecured, and both federal and state consumer
protection laws may allow set-offs against certain amounts owed.
The Municipal Income Portfolio will only invest in participation
interests in municipal securities, municipal leases or in pools of securities
backed by municipal assets if, in the opinion of counsel, any interest income
on the participation interest will be exempt from federal income tax to the
same extent as the interest on the underlying securities.
VARIABLE AND FLOATING RATE SECURITIES. Each Portfolio may invest in
variable and floating rate securities. The terms of variable and floating
rate instruments provide for the interest rate to be adjusted according to a
formula on certain predetermined dates. Floating rate securities have
interest rates that change whenever there is a change in a designated base
rate while variable-rate securities provide for a specified periodic
adjustment in the interest rate. In both cases, these adjustments are
intended to result in the securities having a market value that approximates
their par value.
The variable rate nature of these securities decreases changes in their
value due to interest rate fluctuations. As interest rates decrease or
increase, the potential for capital gain and the risk of capital loss is less
than would be the case for fixed-income securities. Variable and floating
rate instruments with minimum or maximum rates set by state law are subject to
somewhat greater fluctuations in value. Because the adjustment of interest
rates on floating and variable-rate securities is made in relation to a
designated base rate or rate adjustment index, interest rates on these
securities may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar stated maturities. Variable
and floating rate instruments that are repayable on demand at a future date
are deemed to have a maturity equal to the time remaining until the principal
will be received on the assumption that the demand feature is exercised on the
earliest possible date. For the purposes of evaluating the credit risks of
variable and floating rate instruments, these instruments are deemed to have a
maturity equal to the time remaining until the earliest date the holder is
entitled to demand repayment of principal.
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Each Portfolio may also purchase inverse floaters which are floating rate
instruments whose interest rates bear an inverse relationship to the interest
rate on another security or the value of an index. Changes in the interest
rate on the other security or index inversely affect the interest rate paid on
the inverse floater, with the result that the inverse floater's price is
considerably more volatile than that of a fixed-rate security. For example,
an issuer may decide to issue two variable-rate instruments instead of a
single long-term, fixed-rate bond. The interest rate on one instrument
reflects short-term interest rates, while the interest rate on the other
instrument (the inverse floater) reflects the approximate rate the issuer
would have paid on a fixed-rate bond multiplied by two minus the interest rate
paid on the short-term instrument. Depending on market availability, the two
variable-rate instruments may be combined to form a fixed-rate bond. The
market for inverse floaters is relatively new.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. Each Portfolio
may buy when-issued securities or sell securities on a delayed-delivery 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 are each fixed
at the time the buyer enters into the commitment. During the period between
purchase and settlement, no payment is made by the purchaser and no interest
accrues to the purchaser. However, when a security is sold on a delayed-
delivery basis, the seller does not participate in further gains or losses
with respect to the security. If the other party to a when-issued or delayed-
delivery transaction fails to transfer or pay for the securities, the
Portfolio could miss a favorable price or yield opportunity or could suffer a
loss.
A Portfolio will make a commitment to purchase when-issued 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 Portfolio may also
sell the underlying securities before they are delivered which may result in
gains or losses. A separate account for each Portfolio is established at the
Fund's custodian bank, into which cash and/or liquid high-grade debt
securities equal to the amount of when-issued purchase commitments is
deposited. If the market value of the deposited securities declines,
additional cash or securities will be placed in the account on a daily basis
to cover the Portfolio's outstanding commitments.
When a Portfolio purchases a security on a when-issued basis, the
security 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, the market value of the security may be higher or
lower than its cost, and this may increase or decrease the Portfolio's net
asset value. When payment for a when-issued security is due, a Portfolio will
meet its obligations from then-available cash flow, the sale of the securities
held in the separate account, the sale of other securities or from the sale of
the when-issued securities themselves. The sale of securities to meet a when-
issued purchase obligation carries with it the potential for the realization
of capital gains or losses.
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The Municipal Income Portfolio may purchase securities on a when-issued
basis in connection with the refinancing of an issuer's outstanding
indebtedness ("refunding contracts"). These contracts require the issuer to
sell and the Portfolio to buy municipal obligations at a stated price and
yield on a settlement date that may be several months or several years in the
future. The offering proceeds are then used to refinance existing municipal
obligations. Although the Municipal Income Portfolio may sell its rights
under a refunding contract, the secondary market for these contracts may be
less liquid than the secondary market for other types of municipal securities.
The Portfolio generally will not be obligated to pay the full purchase price
if it fails to perform under a refunding contract. Instead, refunding
contracts usually provide for payment of liquidated damages to the issuer
(currently 15-20% of the purchase price). The Portfolio may secure its
obligation under a refunding contract by depositing collateral or a letter of
credit equal to the liquidated damages provision of the refunding contract.
When required by SEC guidelines, the Portfolio will place liquid assets in a
segregated custodial account equal in amount to its obligations under
outstanding refunding contracts.
ZERO COUPON BONDS. The Portfolios may invest in zero coupon bonds of
governmental or private issuers that generally pay no interest to their
holders prior to maturity. Since zero coupon bonds do not make regular
interest payments, they allow an issuer to avoid the need to generate cash to
meet current interest payments and may involve greater credit risks than bonds
paying interest currently. Tax laws requiring the distribution of accrued
discount on the bonds, even though no cash equivalent thereto has been paid,
may cause a Portfolio to liquidate investments in order to make the required
distributions.
LENDING OF PORTFOLIO SECURITIES. Each Portfolio may make fully
collateralized loans of its portfolio securities. The Municipal Income
Portfolio has no current intention of so doing but may lend its portfolio
securities only under unusual market conditions, since the interest income
that a Portfolio receives from lending its securities is considered taxable
income.
When a Portfolio lends its portfolio securities, it will retain all or a
portion of the interest received on investment of the cash collateral or will
receive a fee from the borrower. Although voting rights, or rights to
consent, with respect to the loaned securities will pass to the borrower, the
Portfolio will retain the right to call a loan at any time on reasonable
notice, and will do so to exercise voting rights, or rights to consent, on any
matter materially affecting the investment. A Portfolio may also call these
loans in order to sell the securities.
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES. Although the
Municipal Income Portfolio has no current intention of so doing, each
Portfolio may use options, futures contracts and (with respect to the
Diversified Income Portfolio only) forward currency contracts as described in
the Appendix to the Prospectus. For additional information regarding such
investment strategies, see the discussion in Appendix A to this Statement of
Additional Information.
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CONCENTRATION POLICY - THE MUNICIPAL INCOME PORTFOLIO
The Municipal Income Portfolio may invest more than 25% of its assets in
sectors of the municipal securities market, such as the health care, housing
or electric utilities sectors.
HEALTH CARE SECTOR. The health care industry is subject to regulatory
action by a number of private and governmental agencies, including federal,
state and local governmental agencies. A major source of revenues for the
industry is payments from the Medicare and Medicaid programs. As a result,
the industry is sensitive to legislative changes and reductions in
governmental spending for those programs. Numerous other factors may affect
the industry, such as general and local economic conditions; demand for
services; expenses (including malpractice insurance premiums); and competition
among health care providers. In the future, the following may adversely
affect the industry: adoption of legislation proposing a national health
insurance program; medical and technological advances which alter the demand
for health services or the way in which such services are provided; and
efforts by employers, insurers and governmental agencies to reduce the costs
of health insurance and health care services.
Health care facilities include life care facilities, nursing homes and
hospitals. Bonds to finance these facilities are typically secured by the
revenues from the facilities and not by state or local government tax
payments. Moreover, in the case of life care facilities, since a portion of
housing, medical care and other services may be financed by an initial
deposit, there may be a risk of default in the payment of principal or
interest on a bond issue if the facility does not maintain adequate financial
reserves for debt service.
HOUSING SECTOR. Housing revenue bonds typically are issued by state,
county and local housing authorities and are secured only by the revenues of
mortgages originated by those authorities using the proceeds of the bond
issues. Factors that may affect the financing of multi-family housing
projects include acceptable completion of construction, proper management,
occupancy and rent levels, economic conditions and changes in regulatory
requirements.
Since the demand for mortgages from the proceeds of a bond issue cannot
be precisely predicted, the proceeds may be in excess of demand, which would
result in early retirement of the bonds by the issuer. Since the cash flow
from mortgages cannot be precisely predicted, differences in the actual cash
flow from the assumed cash flow could have an adverse impact upon the issuer's
ability to make scheduled payments of principal and interest or could result
in early retirement of the bonds.
Scheduled principal and interest payments are often made from reserve or
sinking funds. These reserves are funded from the bond proceeds, assuming
certain rates of return on investment of the reserve funds. If the assumed
rates of return are not realized because of changes in interest rate levels or
for other reasons, the actual cash flow for scheduled payments of principal
and interest on the bonds may be inadequate.
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ELECTRIC UTILITIES SECTOR. The electric utilities industry has
experienced, and may experience in the future: problems in financing large
construction programs in an inflationary period; cost increases and delays
caused by environmental considerations (particularly with respect to nuclear
facilities); difficulties in obtaining fuel at reasonable prices; the effects
of conservation on the demand for energy; increased competition from
alternative energy sources; and the effects of rapidly changing licensing and
safety requirements.
SPECIAL CONSIDERATIONS
YIELD FACTORS. The yields on fixed-income securities depend on a variety
of factors, including general debt market conditions, effective marginal tax
rates, general conditions in the municipal securities market, the financial
condition of the issuer, the size of a particular offering, the maturity of
the obligation and the rating of the issue. In an attempt to capitalize on
the differences in the yield and price of fixed-income securities of differing
maturities, maturities may be varied according to the structure and level of
interest rates and WTC's expectations of changes in those rates. The interest
rate and price relationships between different categories of fixed-income
securities of the same or generally similar maturity tend to reflect broad
swings in interest rates and relative supply and demand. Disparities in yield
relationships may afford opportunities to invest in more attractive market
sectors or specific issues. Changing preferences and circumstances of lenders
and borrowers in different market sectors may also present market trading
opportunities. WTC may sell securities held for brief periods of time if it
believes that a transaction, net of costs (including taxes with respect to the
Municipal Income Portfolio), will improve the overall return of a Portfolio.
RATINGS. Moody's and S&P are private services that provide ratings of
the credit quality of debt obligations. A description of the ratings assigned
by Moody's and S&P to the securities in which the Portfolios may invest is
included in Appendix B to this Statement of Additional Information. These
ratings represent the opinions of these rating services as to the quality of
the securities which they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
WTC attempts to discern variations in credit rankings of the rating services
and to anticipate changes in credit ranking. However, subsequent to purchase
by a Portfolio, an issue of securities may cease to be rated or its rating may
be reduced below the minimum rating required for purchase by the Portfolio.
In that event, WTC will consider whether it is in the best interest of the
Portfolio to continue to hold the securities.
CREDIT RISK. Although each Portfolio's quality standards are designed to
minimize the credit risk of investing in the Portfolio, that risk cannot be
entirely eliminated. The securities in which a Portfolio may invest are
subject to the provisions of bankruptcy, insolvency and other laws affecting
the rights and remedies of creditors, such as the Federal Bankruptcy Code, and
laws, if any, which may be enacted by Congress or the state legislatures
extending the time for payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations. There is also the
possibility that litigation or other conditions may adversely affect the power
or ability of issuers to meet interest and principal payments on their debt
obligations.
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THE MUNICIPAL INCOME PORTFOLIO
PROPOSED LEGISLATION. From time to time, proposals have been introduced
before Congress for the purpose of restricting or eliminating the federal
income tax exemption for interest on debt obligations issued by states and
their political subdivisions. For example, federal tax legislation now limits
the types and amounts of tax-exempt bonds issuable for industrial development
and other types of private activities. These limitations may affect the
future supply and yields of private activity securities. Further proposals
limiting the value of tax-exempt securities may be introduced in the future.
In addition, proposals have been made, such as that involving the "flat tax,"
that could reduce or eliminate the value of that exemption. If the
availability of municipal securities for investment or the value of the
Municipal Income Portfolio's holdings could be materially affected by such
changes in the law, the Trustees would reevaluate the Portfolio's investment
objective and policies or consider the Portfolio's dissolution.
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% of the shares of the Portfolio present at a
shareholders' meeting if the holders of more than 50% of the outstanding
shares of the Portfolio are present in person or by proxy or (ii) more than
50% of the outstanding shares of the Portfolio.
Each Portfolio will not as a matter of fundamental policy:
(1) purchase securities of any one issuer if as a result more
than 5% of the Portfolio's total assets would be invested in 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 securities of any issuer if, as a result, more
than 25% of its total assets would be invested in securities of a
particular industry, provided that this limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities or to municipal securities;
(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 Portfolio's assets taken at market value, less liabilities other
than borrowings;
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<PAGE>
(4) underwrite any issue of securities, except to the extent
that the Portfolio may be considered to be acting as underwriter in
connection with (i) the disposition of any portfolio security, or
(ii) the disposition of restricted securities;
(5) purchase or sell real estate or real estate limited
partnership interests, but this limitation shall not prevent the
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, including real estate investment
trusts;
(6) invest in commodities or commodity contracts, except
financial and foreign currency futures contracts and options
thereon, options on foreign currencies and forward currency
contracts;
(7) make loans, except by (i) the purchase of a portion of an
issue of debt securities in accordance with the Portfolio's
investment objective, policies and limitations, (ii) engaging in
repurchase agreements, or (iii) engaging in securities loan
transactions limited to one-third of the Portfolio's total assets;
or
(8) issue senior securities, except as appropriate to evidence
indebtedness that the Portfolio is permitted to incur, and provided
that the Portfolio may issue shares of additional series or classes
that the Trustees may establish, and provided further that futures,
options and forward currency transactions will not be deemed to be
senior securities for this purpose.
For purposes of investment limitation (2), repurchase agreements fully
collateralized by U.S. Government obligations are treated as U.S. Government
obligations.
The following non fundamental policies have been adopted by the Fund's
Board of Trustees with respect to each Portfolio and may be changed by the
Board without shareholder approval. As a matter of non fundamental policy,
each Portfolio will not:
(1) purchase or retain the securities of any issuer other than
the Fund if, to the Fund's knowledge, those Trustees/Directors and
officers of the Fund or of the Portfolio's Investment Adviser who
individually own beneficially more than .5 of 1% of the outstanding
securities of the issuer together own beneficially more than 5% of
the outstanding securities;
(2) purchase the securities of any issuer including its
predecessor (other than securities issued or guaranteed by domestic
or foreign governments or political subdivisions thereof) which has
been in operation for less than three years if, as a result, more
than 5% of the value of the Portfolio's total assets would be
invested in the securities of the issuer;
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<PAGE>
(3) (i) purchase or retain the securities of any open-end
investment company except the Municipal Income Portfolio may invest
in money market funds,or (ii) purchase the securities of any closed-
end investment company except in the open market where no commission
except the ordinary broker's commission is paid, provided that in
any event the Portfolio may not invest more than 10% of its total
assets in securities issued by investment companies, invest more
than 5% of its total assets in securities issued by any one
investment company or purchase more than 3% of the voting securities
of any one such investment company. This limitation does not apply
to securities received as dividends, through offers of exchange, or
as a result of merger, consolidation, reorganization or acquisition
of assets;
(4) invest in oil, gas or other mineral exploration or
development programs, or leases provided that the Portfolio may
invest in securities issued by companies engaged in those
activities;
(5) purchase or otherwise acquire any security or invest in a
repurchase agreement with respect to any securities if, as a result,
more than 15% of the 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. Securities used to cover
over-the-counter ("OTC") call options written by the Portfolio are
considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Portfolio may repurchase any OTC options
it writes for a maximum price to be calculated by a formula set
forth in the option agreement. The cover for an OTC call option
written subject to this procedure is considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option;
(6) purchase securities for investment while any bank
borrowing equaling 5% or more of the Portfolio's total assets is
outstanding;
(7) pledge, mortgage or hypothecate the Portfolio's assets
except the Portfolio may pledge securities having a market value at
the time of the pledge not exceeding one-third of the value of the
Portfolio's total assets to secure borrowing, and the Portfolio may
deposit initial and variation margin in connection with transactions
in futures contracts and options on futures contracts;
(8) make short sales of securities except that the Portfolio
may make short sales against the box;
(9) purchase securities on margin, except that (i) the
Portfolio may obtain short-term credit for the clearance of
transactions; and (ii) the Portfolio may make initial margin
deposits and variation margin payments in connection with
transactions in futures contracts and options thereon;
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<PAGE>
(10) invest in warrants (other than options on securities or
futures) except that the Portfolio may invest in warrants valued at
the lower of cost or market, not exceeding 5% of the value of its
net assets, which amount may include warrants that are not listed on
the New York or American Stock Exchange, provided that those
warrants, valued at the lower of cost or market, do not exceed 2% of
the Portfolio's net assets, and provided further that this
restriction does not apply to warrants attached to or sold as a unit
with other securities;
(11) when engaging in options, futures and forward currency
contract strategies, a Portfolio will either: (i) set aside cash,
U.S. Government or other liquid, high-grade debt securities in a
segregated account with the Fund's custodian in the prescribed
amount; or (ii) hold securities or other options or futures
contracts whose values are expected to offset ("cover") its
obligations thereunder. Securities, currencies or other options or
futures contracts used for cover cannot be sold or closed out while
the strategy is outstanding, unless they are replaced with similar
assets;
(12) purchase or sell non-hedging futures contracts or related
options if aggregate initial margin and premiums required to
establish such positions would exceed 5% of the Portfolio's total
assets. For purposes of this limitation, unrealized profits and
unrealized losses on any open contracts are taken into account and
the in-the-money amount of an option that is in-the-money at the
time of purchase is excluded; or
(13) write put or call options having aggregate exercise
prices greater than 25% of the Portfolio's net assets, except with
respect to options attached to or acquired with or traded together
with their underlying securities and securities that incorporate
features similar to options.
If necessary in order to comply with limitations imposed by certain state
securities commissions, either Portfolio may adopt additional restrictions.
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, that percentage shall be
determined, or that standard shall be applied, immediately after the
Portfolio's acquisition of the security or other asset. Accordingly, any
later increase or decrease resulting from a change in the market value of a
security or in the Portfolio's net or total assets will not cause the
Portfolio to violate a percentage limitation. Similarly, any later change in
quality, such as a rating downgrade or the delisting of a warrant, will not
cause the Portfolio to violate a quality standard.
"Value" for the purposes of all investment limitations shall mean the
value used in determining the net asset value of each Portfolio.
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<PAGE>
TRUSTEES AND OFFICERS
The Fund has a Board, presently composed of four Trustees, which
supervises Portfolio activities and reviews contractual arrangements with
companies that provide the Portfolios with services. The Fund's Trustees and
officers are listed below. Except as indicated, each individual has held the
office shown or other offices in the same company for the last five years.
All persons named as Trustees also serve in similar capacities for The Rodney
Square International Securities Fund, Inc., The Rodney Square Fund, The Rodney
Square Tax-Exempt Fund and The Rodney Square Multi-Manager Fund. Those
Trustees who are "interested persons" of the Fund (as defined in the 1940 Act)
by virtue of their positions with Rodney Square Management Corporation
("RSMC") or WTC are indicated by an asterisk (*).
*MARTIN L. KLOPPING, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, President , elected in 1995, and Trustee, age 42, has been
President and Director of RSMC since 1984. He is a Director of RSD, elected
in 1992. He is also a Chartered Financial Analyst and member of the SEC Rules
and Investment Advisers Committees of the Investment Company Institute.
ERIC BRUCKER, School of Management, University of Michigan, Dearborn, MI
48128, Trustee, age 54, has been Dean of the School of Management at the
University of Michigan since June 1992. He was Professor of Economics,
Trenton State College from September 1989 through June 1992. He was Vice
President for Academic Affairs, Trenton State College from September 1989
through June 1991. From 1976 until September 1989, he was Dean of the College
of Business and Economics and Chairman of various committees at the University
of Delaware. He is also a member of the Detroit Economic Club.
FRED L. BUCKNER, 5 Hearth Lane, Greenville, DE 19807, Trustee, age 64, has
retired as President and Chief Operating Officer of Hercules Incorporated
(diversified chemicals), positions he held from March 1987 through March 1992.
He also served as a member of the Hercules Incorporated Board of Directors
from 1986 through March 1992.
JOHN J. QUINDLEN, 313 Southwinds, 1250 West Southwinds Blvd., Vero Beach, FL
32963, Trustee, age 63, has retired as Senior Vice President-Finance of E.I.
du Pont de Nemours and Company, Inc. (diversified chemicals) a position he
held from 1984 to November 30, 1993. He also served as Chief Financial
Officer of E.I. du Pont de Nemours and Company, Inc. from 1984 through June
30, 1993. He also serves as a Trustee of Kiewit Mutual Fund since 1994. He is
a Director of Atlantic Aviation, Inc. and St. Joe Paper Co. and a Trustee of
Winterthur Museum and Gardens and Medical Center of Delaware.
JOSEPH M. FAHEY, JR., Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Vice President, age 39, has been with RSMC since 1984, as a
Secretary of RSMC since 1986, a Director of RSMC since 1989 and a Vice
President of RSMC since 1992. He was an Assistant Vice President of RSMC from
1988 to January 1992.
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ROBERT C. HANCOCK, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Vice President and Treasurer, age 44, has been a Vice President of
RSMC since 1988, and Treasurer of RSMC since 1990. He is also a member of the
Accounting/Treasurer Committee of the Investment Company Institute.
MARILYN TALMAN, Rodney Square North, 1100 N. Market St., Wilmington, DE 19890-
0001, Secretary, age 49, has been a Vice President of RSMC since 1995. She
was an Assistant Vice President of RSMC from 1993 to 1995 and a Senior Fund
Administration Officer of RSMC from 1992 to February 1993. She was an
Associate at Ballard Spahr Andrews & Ingersoll (law firm) from 1989 to 1992.
DIANE D. MARKY, Rodney Square North, 1100 N. Market St., Wilmington, DE 19890-
0001, Assistant Secretary, age 31, has been a Senior Fund Administrator since
1994. She was a Fund Administration Officer of RSMC since 1991 to July 1994.
She was a Mutual Fund Accountant for RSMC from 1989 to 1991.
CONNIE L. MEYERS, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Assistant Secretary, age 35, has been a Fund Administrator of RSMC
since August , 1994. She was a Corporate Custody Administrator for Wilmington
Trust Company from 1989 to 1994.
LOUIS C. SCHWARTZ, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Assistant Secretary, age 28, has been a Senior Fund Administrator
of RSMC since 1995 and a Fund Administration Officer since February, 1996. He
was an Associate at the law offices of Mason, Briody, Gallagher & Taylor from
1993 to 1995.
JOHN J. KELLEY, Rodney Square North, 1100 N. Market St., Wilmington, DE 19890-
0001, Assistant Treasurer, age 36, has been a Vice President of RSMC since
1995 and was an Assistant Vice President of since 1989.
The fees and expenses of the Trustees who are not "interested persons" of
the Fund ("Independent Trustees"), as defined in the 1940 Act, are paid by
each Portfolio. For the fiscal year ended October 31, 1995, such fees and
expenses amounted to $5,400 per Portfolio. The following table shows the fees
paid during calendar 1995 to the Independent Trustees for their services to
the Fund and to the Rodney Square Family of Funds. On January 31, 1996 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
the Diversified Income Portfolio and the Municipal Income Portfolio has not
yet commenced operations, as of the date of this Statement of Additional
Information, no Trustee or officer of the Fund owned any shares of the
Municipal Income Portfolio.
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1995 TRUSTEES FEES
TOTAL FEES FROM TOTAL FEES FROM THE RODNEY
INDEPENDENT TRUSTEE THE FUND SQUARE FAMILY OF FUNDS
- ------------------- --------------- --------------------------
Eric Brucker $3,600 $16,900
Fred L Buckner $3,600 $16,900
John J. Quindlen $3,600 $16,900
WILMINGTON TRUST COMPANY
The Investment Adviser to the Portfolios, WTC, is a state-chartered bank
organized as a Delaware corporation in 1903. WTC is a wholly owned subsidiary
of Wilmington Trust Corporation, a publicly held bank holding company. The
Portfolios benefit from the experience, conservative values and special
heritage of WTC. WTC is a financially strong bank and enjoys a reputation for
providing exceptional consistency, stability and discipline in managing both
short-term and long-term investments. WTC is Delaware's largest full-service
bank and, with more than $75 billion in trust, custody and investment
management assets, WTC ranks among the nation's leading money management
firms. As of December 31, 1995, the trust department of WTC was the
seventeenth largest in the United States as measured by discretionary assets
under management. WTC is engaged in a variety of investment advisory
activities, including the management of collective investment pools, and has
nearly a century of experience managing the personal investments of high net-
worth individuals. Its current roster of institutional clients includes
several Fortune 500 companies. In addition to serving as Investment Adviser
to the Portfolios, WTC also serves as Investment Adviser to The Rodney Square
International Equity Fund and manages over $3 billion in fixed-income assets
for various other institutional clients. Certain departments in WTC engage in
investment management activities that utilize a variety of investment
instruments, such as interest rate futures contracts, options on U.S. Treasury
securities and municipal forward contracts. Of course, there can be no
guarantee that either Portfolio will achieve its investment objective or that
WTC will perform its services for each in a manner which would cause it to
satisfy its objective.
WTC is also the Fund's Custodian and is paid for those services through
the Portfolios' advisory fees. In addition, the 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.
WTC's subsidiary, Rodney Square Management Corporation, serves as
Administrator and Transfer Agent and Dividend Paying Agent for the Fund. RSMC
also provides portfolio accounting services to the Fund pursuant to an
Accounting Services Agreement dated November 1, 1993.
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<PAGE>
Several affiliates of WTC are also engaged in the investment advisory
business. Wilmington Trust Company FSB, a wholly owned subsidiary of
Wilmington Trust Corporation, exercises investment discretion over certain
institutional accounts.
RSMC serves as investment adviser for The Rodney Square Fund, The Rodney
Square Tax-Exempt Fund and The Rodney Square Multi-Manager Fund, each a
registered investment company. RSMC also serves as administrator of those
funds and of The Rodney Square International Securities Fund, Inc. Rodney
Square Distributors, Inc., a wholly owned subsidiary of WTC and the Fund's
Distributor, is a registered broker-dealer. Wilmington Brokerage Services
Company, a wholly owned subsidiary of WTC, is a registered investment adviser
and a registered broker-dealer.
INVESTMENT ADVISORY SERVICES
ADVISORY AGREEMENTS. WTC serves as Investment Adviser to the Diversified
Income Portfolio pursuant to an Advisory Agreement with the Fund dated April
1, 1991; WTC serves as Investment Adviser to the Municipal Income Portfolio
pursuant to an Advisory Agreement with the Fund dated November 1, 1993 (the
"Advisory Agreements"). Under the Advisory Agreements, WTC directs the
investments of each Portfolio in accordance with its investment objective,
policies and limitations.
For WTC's services under the Advisory Agreements, each Portfolio pays WTC
a monthly fee at the annual rate of 0.50% of the average daily net assets of
the Portfolio. The average is computed on the basis of each Portfolio's daily
net assets, as determined at the close of business on each day throughout the
month. For the fiscal years ended October 31, 1995, 1994, and 1993, of the
$158,066, $190,810, and 177,748, respectively, paid in advisory fees, WTC
waived $156,223, $151,291, and $147,474, respectively, for providing advisory
services to the Diversified Income Portfolio. For the fiscal years ended
October 31, 1995 and 1994, of the $73,172 and $62,155, respectively, paid in
advisory fees, WTC waived all of its advisory fee for providing advisory
services to the Municipal Income Portfolio.
WTC has agreed to waive its advisory fee or reimburse each Portfolio
monthly to the extent that the Portfolio's annual operating expenses exceed
the lowest expense limitation prescribed by certain states in which shares of
the Fund are qualified or registered for offer or sale. Currently the lowest
applicable limitation (excluding brokerage commissions, interest, taxes,
distribution fees and extraordinary expenses) is 2.5% per year on the first
$30 million of average daily net assets of a Portfolio, 2.0% of the next $70
million, and 1.50% of the excess over $100 million. WTC has also agreed to
waive its advisory fee or reimburse each Portfolio monthly to the extent that
expenses incurred by the Portfolio (excluding brokerage commissions, interest,
taxes and extraordinary expenses) exceed an annual rate of 0.75% of the
average daily net assets of the Portfolio. These undertakings, which are not
contained in the Advisory Agreements, are fixed through February, 1997, but
may be amended or rescinded in the future.
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<PAGE>
Under the Advisory Agreements, the Fund on behalf of each Portfolio
assumes responsibility for paying all Fund expenses other than those expressly
stated to be payable by WTC. Such expenses include without limitation:
(a) fees payable for administrative services; (b) fees payable for accounting
services; (c) the cost of obtaining quotations for calculating the value of
the assets of each Portfolio; (d) interest and taxes; (e) brokerage
commissions, dealer spreads and other costs in connection with the purchase or
sale of securities; (f) compensation and expenses of its Trustees other than
those who are "interested persons" of the Fund (as defined in the 1940 Act);
(g) legal and audit expenses; (h) fees and expenses related to the
registration and qualification of the Fund and its shares for distribution
under state and federal securities laws; (i) expenses of typesetting,
printing and mailing reports, notices and proxy material to shareholders of
the Fund; (j) all other expenses incidental to holding meetings of the Fund's
shareholders, including proxy solicitations therefor; (k) premiums for
fidelity bond and other insurance coverage; (l) the Fund's association
membership dues; (m) expenses of typesetting for printing Prospectuses;
(n) expenses of printing and distributing Prospectuses to existing
shareholders; (o) out-of-pocket expenses incurred in connection with the
provision of custodial and transfer agency services; (p) service fees payable
by each Portfolio to the Distributor for providing personal services to the
shareholders of each Portfolio and for maintaining shareholder accounts for
those shareholders; (q) distribution fees; and (r) such non-recurring
expenses as may arise, including costs arising from threatened actions,
actions, suits and proceedings to which the Fund is a party and the legal
obligation which the Fund may have to indemnify its Trustees and officers with
respect thereto.
The Advisory Agreements provide that WTC shall not be liable to the Fund
or to any shareholder of the Fund for any act or omission in the course of, or
connected with, rendering services under the Agreements or for any losses that
may be sustained in the purchase, holding or sale of any security or the
making of any investment for or on behalf of the Portfolios, in the absence of
WTC's willful misfeasance, bad faith, gross negligence or reckless disregard
of its obligations or duties under the Agreements.
The Advisory Agreement with respect to the Diversified Income Portfolio
became effective on April 1, 1991 and continues in effect from year to year
with respect to that Portfolio as long as its continuance is approved at least
annually by a majority of the Trustees, including a majority of the
Independent Trustees. The Advisory Agreement with respect to the Municipal
Income Portfolio became effective on November 1, 1993 and continues in effect
from year to year with respect to that Portfolio as long as its continuance is
approved at least annually by a majority of the Trustees, including a majority
of the Independent Trustees.
The Advisory Agreements terminate automatically in the event of their
assignment. The Agreements are also terminable (i) by the Fund (by vote of
the Board of Trustees or by vote of a majority of the outstanding voting
securities of the affected Portfolio), without payment of any penalty, on 60
days' written notice to WTC; or (ii) by WTC on 60 days' written notice to the
Fund.
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ADMINISTRATION, ACCOUNTING AND DISTRIBUTION AGREEMENTS
AND RULE 12b-1 PLANS
RSMC, a Delaware corporation organized on September 17, 1981, serves as
Administrator of the Fund pursuant to an Administration Agreement effective
December 31, 1992 with respect to the Diversified Income Portfolio and
effective August 16, 1993 with respect to the Municipal Income Portfolio.
From July 1, 1991 until the close of business on December 31, 1992, RSMC and
Scudder Investor Services, Inc. ("Scudder") served as co-administrators of the
Fund pursuant to Administration Agreements dated July 1, 1991.
For its services under the current Administration Agreement, RSMC
receives a monthly fee from each Portfolio at an annual rate of 0.08% of the
Portfolio's average daily net assets. From July 1, 1991 until the close of
business on December 31, 1992, RSMC and Scudder received monthly
administration fees from the Diversified Income Portfolio at annual rates of
0.03% and 0.05% of that Portfolio's average daily net assets, respectively.
For the fiscal year ended October 31, 1995, the Fund paid RSMC $25,290 and
$12,290, respectively, for providing administrative services to the
Diversified Income Portfolio and the Municipal Income Portfolio, of which $0
and $12,290 were waived, respectively. For the fiscal year ended October 31,
1994, the Fund paid RSMC $30,530 and $10,199, respectively, for providing
administrative services to the Diversified Income Portfolio and the Municipal
Income Portfolio, of which $0 and $10,199 were waived, respectively. For the
fiscal year ended October 31, 1993, the Fund paid RSMC and Scudder $25,870 and
$2,570, respectively, for providing administrative services to the Diversified
Income Portfolio.
Under the terms of the current Administration Agreement, RSMC agrees to:
(a) supply office facilities, non-investment related statistical and research
data, executive and administrative service, stationery and office supplies,
and corporate management services for the Portfolios; (b) prepare and file,
if necessary, reports to shareholders of the Portfolios and reports with the
SEC and state securities commissions; (c) monitor the Portfolios' compliance
with the investment restrictions and limitations imposed by the 1940 Act and
state Blue Sky laws and applicable regulations thereunder, each Portfolio's
fundamental and non-fundamental investment limitations set forth in the
Prospectus and this Statement of Additional Information and the investment
restrictions and limitations necessary for the Fund 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 Portfolio 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
Portfolio, including setting and revising accruals for each category of
expenses; (f) determine the amounts of dividends and other distributions
payable to shareholders as necessary to, among other things, maintain each
Portfolio's continued qualification for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended (the
"Code") and avoid imposition of a 4% excise tax imposed on RICs in certain
situations; (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
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<PAGE>
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 advertising and
sales literature and file such with regulatory authorities, as necessary; (k)
maintain Fund/Serv membership; (l) provide information regarding material
developments in state securities regulation; and (m) provide personnel to
serve as officers of the Fund 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 a contract with the Fund. RSMC may at any time or
times in its discretion appoint and may at any time remove other parties as
its agent to carry out any of its obligations under the Administration
Agreement.
The Administration Agreement provides that RSMC and its affiliates shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund or its Portfolios in connection with the matters to which
the Administration Agreement relates, except to the extent 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 Administration
Agreement.
The Administration Agreement continues in effect from year to year so
long as its continuance is approved at least annually by a majority of the
Trustees, including a majority of the Independent Trustees. The Agreement is
terminable by the Fund with respect to each Portfolio by 60 days' written
notice given to RSMC or by RSMC by six months' written notice given to the
Fund.
RSMC also provides accounting services for the Portfolios pursuant to an
Accounting Services Agreement with the Fund that became effective on November
1, 1989 with respect to the Diversified Income Portfolio and superseded by a
new Accounting Services Agreement with the Fund that became effective November
1, 1993. For RSMC's services provided under each Accounting Services
Agreement, RSMC receives from the Fund with respect to each Portfolio an
annual fee of $50,000 plus an amount equal to 0.02% of the respective
Portfolio's average daily net assets over $100 million. For the fiscal years
ended October 31, 1995, 1994, and 1993, the Fund paid RSMC $50,000, $50,000,
and $50,000, respectively, for providing accounting services for the
Diversified Income Portfolio. For fiscal years ended October 31, 1995 and
1994 the Fund paid $50,000 and $50,000, respectively, for providing accounting
services for the Municipal Income Portfolio, of which $22,728 and $38,581 were
waived, respectively.
Under the terms of the Accounting Services Agreement, RSMC agrees to:
(a) perform the following accounting functions on a daily basis: (1)
journalize each Portfolio's investment, capital share and income and expense
activities; (2) verify investment buy/sell trade tickets when received from
the Investment Adviser and transmit trade orders to the Fund's Custodian for
proper settlement; (3) maintain individual ledgers for investment securities;
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<PAGE>
(4) maintain historical tax lots for each security; (5) reconcile cash and
investment balances of each Portfolio with the Custodian, and provide the
Investment Adviser with the beginning cash balance available for investment
purposes for each Portfolio; (6) update the cash availability throughout the
day as required by the Investment Adviser; (7) post to and prepare each
Portfolio's Statement of Assets and Liabilities and Statement of Operations;
(8) calculate expenses payable pursuant to the Fund's various contractual
obligations (e.g., advisory and administrative fees); (9) control all
disbursements from the Fund on behalf of each Portfolio and authorize such
disbursements upon written instructions; (10) calculate capital gains and
losses; (11) determine each Portfolio's net income; (12) obtain current
market prices for securities held by the Portfolios and if such prices are
unavailable, then obtain prices from pricing services approved by the
Investment Adviser and by the Board of Trustees, and in either case calculate
the value of each Portfolio's investments; (13) calculate the amortized cost
value of debt instruments with remaining maturities of 60 days or less that
are held by the Portfolios; (14) transmit or mail a copy of the valuation of
each Portfolio's investments to the Investment Adviser; (15) compute the net
asset value of each Portfolio; (16) compute the yields, total returns,
expense ratios and portfolio turnover rate of each Portfolio; and (17) prepare
and monitor expense accruals and notify Fund management of any proposed
adjustments; (b) prepare monthly financial statements which include a
Schedule of Investments, a Statement of Assets and Liabilities, a Statement of
Operations, a Statement of Changes in Net Assets, the Cash Statement and a
Schedule of Capital Gains and Losses for each Portfolio; (c) prepare monthly
security transaction listings; (d) prepare quarterly security transactions
summaries; (e) supply statistical data with respect to the Fund and each
Portfolio, as requested on an ongoing basis; (f) assist in the preparation of
support schedules necessary for completion of federal and state tax returns;
(g) assist in the preparation and filing of the Fund's annual and semiannual
reports with the SEC on Form N-SAR; (h) assist in the preparation and filing
of the Fund's annual and semiannual shareholder reports and proxy statements;
(i) assist in the preparation of amendments to the Fund's registration
statement on Form N-1A and other filings relating to the registration of
shares of the Fund; (j) monitor each Portfolio's status as a RIC under the
Code; (k) act as liaison with the Fund's independent auditors and provide
account analyses, fiscal year summaries and other audit related schedules.
Additionally, RSMC agrees to keep, in accordance with all applicable laws,
rules and regulations, all books and records with respect to the Fund's books
of account and records of each Portfolio's securities transactions.
The Accounting Services Agreement provides that RSMC shall not be liable
for any act or omission which does not constitute willful misfeasance, bad
faith or gross negligence on the part of RSMC in the performance of its
obligations and duties under the Agreement or reckless disregard by RSMC of
such duties and obligations.
The Accounting Services Agreement continues in effect from year to year
so long as its continuance is approved at least annually by a majority of the
Trustees, including a majority of the Independent Trustees. The Agreement is
terminable by the Fund or RSMC by written notice.
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<PAGE>
RSD serves as Distributor of Portfolio shares pursuant to a Distribution
Agreement with the Fund, effective December 31, 1992 with respect to the
Diversified Income Portfolio and effective November 1, 1993 with respect to
the Municipal Income Portfolio. Until the close of business on December 31,
1992, Scudder served as Distributor for shares of the Diversified Income
Portfolio pursuant to a Distribution Agreement with the Fund dated October 1,
1988. For the fiscal year ended October 31, 1995, RSD received underwriting
commissions of $4,942 and $1,800, respectively, in connection with the sale
of shares of the Diversified Income Portfolio and Municipal Income Portfolio.
For the fiscal year ended October 31, 1994, RSD received underwriting
commissions of $6,087 and $3,553, respectively, in connection with the sale
of shares of the Diversified Income Portfolio and Municipal Income Portfolio.
For the fiscal year ended October 31, 1993, RSD and Scudder received
underwriting commissions of $17,360 and $1,447, respectively, in connection
with the sale of shares of the Diversified Income Portfolio.
Pursuant to the terms of the Distribution Agreement, RSD is granted the
right to sell shares of the Portfolios as agent for the Fund, to retain a
portion of sales load proceeds as an underwriting commission and to reallocate
a portion of sales load proceeds to dealers who have sold Portfolio shares.
Shares of the Portfolios are offered continuously.
Under the terms of the Distribution Agreement, RSD agrees to use all
reasonable efforts to secure purchasers for shares of the Portfolios and to
pay expenses of printing and distributing the prospectus, statement of
additional information, shareholder reports, advertising and sales literature
used in connection with the sale of Portfolio shares, subject to reimbursement
pursuant to the Plan of Distribution adopted with respect to each Portfolio
pursuant to Rule 12b-1 under the 1940 Act (the "12b-1 Plans").
The Distribution Agreement provides that RSD, in the absence of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its obligations and duties under the
Agreement, will not be liable to the Fund or its shareholders for losses
arising in connection with the sale of Portfolio shares.
The Distribution Agreement continues in effect from year to year as long
as its continuance is approved at least annually by a majority of the
Trustees, including a majority of the Independent Trustees. The Distribution
Agreement terminates automatically in the event of its assignment. The
Agreement is also terminable without payment of any penalty with respect to
either Portfolio (i) by the Fund (by vote of a majority of the Trustees of the
Fund who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of any Rule 12b-1 Plan of the
Fund or any agreements related to the Plan or by vote of a majority of the
outstanding voting securities of the Fund) on 60 days' written notice to RSD;
or (ii) by RSD on 60 days' written notice to the Fund.
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<PAGE>
Each 12b-1 Plan provides that RSD may be reimbursed for distribution
activities encompassed by Rule 12b-1 under the 1940 Act, including public
relations services, telephone services, sales presentations, media charges,
preparation, printing and mailing of advertising and sales literature, data
processing necessary to support a distribution effort, printing and mailing of
prospectuses, and distribution and shareholder servicing activities of certain
financial institutions such as banks or broker-dealers who have entered into
servicing agreements with RSD ("Service Organizations") and other financial
institutions, including fairly allocable internal expenses of RSD and payments
to third parties.
The Diversified Income Portfolio's 12b-1 Plan provides that reimbursement
shall be made for any month only to the extent that such payment does not
exceed (i) 0.25% on an annualized basis of the Fund's average daily net
assets; and (ii) limitations set from time to time by the Board of Trustees.
The Board of Trustees has only authorized reimbursement of expenses that RSD
has incurred in (i) paying "trail commissions" to Service Organizations that
have sold Portfolio shares and (ii) preparing and distributing marketing
materials. The Municipal Income Portfolio's 12b-1 Plan provides that
reimbursement shall be made for any month only to the extent that such payment
does not exceed (i) 0.75% on an annualized basis of the Portfolio's average
daily net assets; (ii) the limitations applicable pursuant to the rules of the
National Association of Securities Dealers, Inc. as they may be in effect from
time to time; and (iii) limitations set from time to time by the Board of
Trustees. The Board of Trustees has only authorized the Fund to pay up to
0.25% of the Portfolio's average daily net assets annually to reimburse RSD
for expenses that it has incurred in (i) paying "trail commissions" to Service
Organizations that have sold Portfolio shares; and (ii) for marketing efforts
focusing on the preparation and distribution of marketing materials.
For the fiscal year ended October 31, 1995, RSD received payments
amounting to $27,402 under the Diversified Income Portfolio's 12b-1 Plan; of
that amount, $22,065 represented reimbursement of expenses that RSD had
incurred in paying trail commissions to service organizations and $3,584 for
prospectus printing and $1,753 on the preparation and distribution of
marketing materials. For the fiscal year ended October 31, 1995, RSD received
payments amounting to $15,844 under the Municipal Income Portfolio's 12b-1
Plan; of that amount, $13,905 represented reimbursement of expenses that RSD
had incurred in paying trail commissions to Service Organizations and $1,618
for prospectus printing and $321 on the preparation and distribution of
marketing materials.
Under the 12b-1 Plans, if any payments made by WTC out of its advisory
fee, not to exceed the amount of that fee, to any third parties (including
banks), including payments for shareholder servicing and transfer agent
functions, were deemed to be indirect financing by the Fund of the
distribution of its shares, such payments are authorized. The Fund may
execute portfolio transactions with and purchase securities issued by
depository institutions that receive payments under the Plans. No preference
for instruments issued by such depository institutions is shown in the
selection of investments.
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PORTFOLIO TRANSACTIONS
All portfolio transactions are placed on behalf of the Portfolios by WTC
pursuant to authority contained in the Advisory Agreements. Most purchases
and sales of securities by the Portfolios are with the issuers or underwriters
of, or dealers in, those securities, acting as principal. There is generally
no stated commission in the case of fixed-income securities, but the price
paid by a Portfolio usually includes a dealer spread or mark-up. In
underwritten offerings, the price paid includes a fixed underwriting
commission or discount retained by the underwriter or dealer.
Transactions on U.S. stock exchanges, futures markets and other agency
transactions involve the payment by the Portfolios of negotiated brokerage
commissions. Brokers may charge different commissions based on such factors
as the difficulty and size of the transaction. Transactions in foreign
securities by the Diversified Income Portfolio may involve the payment of
fixed brokerage commissions, which may be higher than those in the United
States. During the fiscal years ended October 31, 1995, 1994, and 1993, the
Diversified Income Portfolio paid no brokerage commissions. During the fiscal
years ended October 31, 1995 and 1994, the Municipal Income Portfolio paid no
brokerage commissions.
The primary objective of WTC in placing orders on behalf of the
Portfolios for the purchase and sale of securities is to obtain best execution
at the most favorable prices through responsible brokers or dealers and, where
commission rates are negotiable, at competitive rates. In selecting a broker
or dealer to execute a portfolio transaction, WTC considers among other
things: (i) the price of the securities to be purchased or sold; (ii) the rate
of the commission or the amount of the mark-up to be charged; (iii) the size
and difficulty of the order; (iv) the reliability, integrity, financial
condition and general execution and operational capability of the broker or
dealer; and (v) the quality of the execution and research services provided by
the broker or dealer to the Portfolios and to other discretionary accounts
advised by WTC and its affiliates.
The Portfolios may pay higher commissions in return for execution and
research services, but only if WTC has determined that those commissions are
reasonable in relation to the value of the execution and research services
that have been or will be provided to the Portfolios and to any other
discretionary accounts advised by WTC or its affiliates. In reaching this
determination, WTC will not attempt to place a specific dollar value on the
execution and research services provided or to determine what portion of the
compensation should be related to those services. Execution and research
services may include: pricing services; quotation services; purchase and sale
recommendations; the availability of securities or the purchasers or sellers
of securities; analyses and reports concerning issuers, industries, securities
and economic factors and trends; and functions incidental to the portfolio
transactions, such as clearance and settlement.
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<PAGE>
Some of the other discretionary accounts advised by WTC and its
affiliates, including the other investment companies that they advise, have
investment objectives and policies similar to those of the Portfolios. WTC or
a WTC affiliate may purchase or sell a given security for those accounts on
the same day that it purchases or sells that security for a Portfolio. In
those instances, the demand for the security being purchased or the supply of
the security being sold may increase, and this could have an adverse effect on
the price of the security. In other instances, however, the ability of a
Portfolio to participate in a volume transaction will produce better price and
execution. If two or more of the discretionary accounts advised by WTC and
its affiliates simultaneously purchase or sell the same security, WTC and its
affiliates allocate the prices and amounts according to a formula considered
by the officers of each affected investment company and by the officers of WTC
and its affiliates to be equitable to each account.
On occasion, some of the other discretionary accounts advised by WTC and
its affiliates may have investment objectives and policies that are dissimilar
to those of the Portfolios, causing WTC and its affiliates to buy a security
for one discretionary account while simultaneously selling the security for
another account. In accordance with applicable SEC regulations, one
discretionary account may sell a security to another account. It is the
policy of WTC and its affiliates not to favor one discretionary account over
another in placing purchase and sale orders. However, there may be
circumstances when purchases or sales for one or more discretionary accounts
will have an adverse effect on other accounts.
PORTFOLIO TURNOVER
The portfolio turnover rate for a given fiscal period is the ratio of the
lesser of purchases or sales of portfolio securities during the period to the
monthly average of the value of portfolio securities held during the period,
excluding securities with maturities or expiration dates at acquisition of one
year or less. A Portfolio's turnover rate is not a limiting factor when WTC
considers making a change in the Portfolio's holdings.
REDEMPTIONS
To ensure proper authorization before redeeming shares of the Portfolios,
RSMC may require additional documents such as, but not restricted to, stock
powers, trust instruments, death certificates, appointments as fiduciary,
certificates of corporate authority and tax waivers 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.
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<PAGE>
THESE PROCEDURES ARE FOR THE PROTECTION OF SHAREHOLDERS AND SHOULD BE FOLLOWED
TO ENSURE PROMPT PAYMENT. Redemption requests must not be conditional as to
date or price of the redemption. Proceeds of a redemption will be sent within
7 days of acceptance of shares tendered for redemption. Delay may result if
the purchase check has not yet cleared, but the delay will be no longer than
required to verify that the purchase check has cleared, and the Fund will act
as quickly as possible to minimize delay.
The value of shares redeemed may be more or less than the shareholder's
cost, depending on the net asset value at the time of redemption. Redemption
of shares may result in tax consequences (gain or loss) to the shareholder,
and the proceeds of a redemption may be subject to backup withholding. (See
"Dividends, Other Distributions and Taxes" in the Prospectus.)
A shareholder's right to redeem shares and to receive payment therefor
may be suspended when (a) the New York Stock Exchange (the "Exchange") is
closed other than for 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 assets, or (d) ordered by a governmental
body having jurisdiction over the Fund for the protection of the Fund's
shareholders, provided that applicable rules and regulations of the SEC (or
any succeeding governmental authority) shall govern as to whether a condition
described in (b), (c) or (d) exists. In case of such suspension, shareholders
of the affected Portfolio may withdraw their requests for redemption or may
receive payment based on the net asset value per share of the Portfolio next
determined after the suspension is lifted.
The Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption by making payment in whole or
in part with readily marketable securities chosen by the Fund and valued in
the same way as they would be valued for purposes of computing the net asset
value per share of the applicable Portfolio. If payment is made in
securities, a shareholder may incur transaction expenses in converting these
securities into cash. The Fund has elected, however, to be governed by Rule
18f-1 under the 1940 Act, as a result of which the Fund is obligated to redeem
shares solely in cash if the redemption requests are made by one shareholder
account up to the lesser of $250,000 or 1% of the net assets of the applicable
Portfolio during any 90-day period. This election is irrevocable unless the
SEC permits its withdrawal.
NET ASSET VALUE AND DIVIDENDS
NET ASSET VALUE. The net asset value per share of each Portfolio is
determined by dividing the value of the Portfolio's net assets by the total
number of Portfolio shares outstanding. This determination is made by RSMC as
of the close of regular trading on the Exchange (currently 4:00 p.m., Eastern
time) each day the Fund is open for business. The Fund is open for business
on days when the Exchange, RSMC and the Philadelphia branch office of the
Federal Reserve are open for business ("Business Day").
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<PAGE>
Securities and other assets for which market quotations are readily
available are valued at prices which, in the opinion of RSMC, most nearly
represent the market values of those securities. Currently, such prices are
determined using the last reported sale price in the principal market where
the securities are traded or, if no sales are reported (as in the case of some
securities traded over-the-counter), the last reported bid price, except that
in the case of preferred stock and any other equity securities held by the
Diversified Income Portfolio, if no sales are reported in the principal market
where the securities are traded, at the mean between the last reported bid and
asked prices in that market. Debt instruments with remaining maturities of 60
days or less are valued on the basis of their amortized cost. All other
securities and other assets are valued at their fair value as determined in
good faith by RSMC under the general supervision of the Board of Trustees.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, municipal
securities and certain foreign securities. These investments may be valued on
the basis of prices provided by pricing services when those prices are
believed to reflect the fair market value of the securities. Valuations
furnished by a pricing service are based upon a computerized matrix system or
appraisals by the pricing service, in each case in reliance upon information
concerning market transactions and quotations from recognized securities
dealers. The methods used by the pricing services and the quality of
valuations are reviewed by RSMC under the general supervision of the Trustees.
The calculation of each Portfolio's net asset value per share may not
take place contemporaneously with the determination of the prices of many of
the fixed-income securities used in the calculation. If events materially
affecting the value of those securities occur between the time when their
prices are determined and the time when net asset value is determined, the
securities will be valued at fair value, as determined in good faith by RSMC
under the general supervision of the Trustees.
DIVIDENDS. Dividends are declared on each Business Day for each
Portfoilo of the Fund. The dividend for a Business Day immediately preceding
a weekend or holiday normally includes an amount equal to the net income
expected 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.
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"). Yields and total returns may be quoted numerically or in a
table, graph or similar illustration. Performance data quoted represents past
performance and is not intended to indicate future performance. The
investment return and principal value of an investment in a Portfolio will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than the original cost. The performance of each Portfolio will vary
based on changes in market conditions and the level of the Portfolio's
expenses.
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YIELD CALCULATIONS. From time to time, each Portfolio may advertise its
yield. Yield is calculated by dividing the Portfolio's investment income for
a 30-day period, net of expenses, by the average number of shares entitled to
receive dividends during that period according to the following formula:
YIELD = 2[((A-B)/CD + 1)6-1]
where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends; and
d = the maximum offering price per share on the last
day of the period.
The result is expressed as an annualized percentage (assuming semiannual
compounding) of the maximum offering price per share at the end of the period.
Except as noted below, in determining interest earned during the period
(variable "a" in the above formula), RSMC calculates the interest earned on
each debt instrument held by a Portfolio during the period by: (i) computing
the instrument's yield to maturity, based on the value of the instrument
(including actual accrued interest) as of the last business day of the period
or, if the instrument was purchased during the period, the purchase price plus
accrued interest; (ii) dividing the yield to maturity by 360; and (iii)
multiplying the resulting quotient by the value of the instrument (including
actual accrued interest). Once interest earned is calculated in this fashion
for each debt instrument held by the Portfolio, interest earned during the
period is then determined by totaling the interest earned on all debt
instruments held by the Portfolio.
For purposes of these calculations, the maturity of a debt instrument
with one or more call provisions is assumed to be the next date on which the
instrument reasonably can be expected to be called or, if none, the maturity
date. In general, interest income is reduced with respect to debt instruments
trading at a premium over their par value by subtracting a portion of the
premium from income on a daily basis, and increased with respect to debt
instruments trading at a discount by adding a portion of the discount to daily
income.
In determining dividends earned by any preferred stock or other equity
securities held by the Diversified Income Portfolio during the period
(variable "a" in the above formula), RSMC accrues the dividends daily at their
stated dividend rates. Capital gains and losses generally are excluded from
yield calculations. In calculating the maximum offering price per share at
the end of the period (variable "d" in the above formula), each Portfolio's
maximum 3.50% sales charge is included. The Diversified Income Portfolio's
yield for the 30-day period ended October 31, 1995 was 5.56%. Without fee
waivers by WTC during the period, the yield for that Portfolio would have been
5.12%. The Municipal Income Portfolio's yield for the 30-day period ended
October 31, 1995 was 4.13%. Without fee waivers by WTC and RSMC during the
period, the yield for that Portfolio would have been 3.72%.
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<PAGE>
Since yield accounting methods differ from the accounting methods used to
calculate net investment income for other purposes, a Portfolio's yield may
not equal the dividend income actually paid to investors or the net investment
income reported with respect to the Portfolio in the Fund's financial
statements.
Yield information may be useful in reviewing a Portfolio's performance
and in providing a basis for comparison with other investment alternatives.
However, the Portfolios' yields fluctuate, unlike investments that pay a fixed
interest rate over a stated period of time. Investors should recognize that
in periods of declining interest rates, the Portfolios' yields will tend to be
somewhat higher than prevailing market rates, and in periods of rising
interest rates, the Portfolios' yields will tend to be somewhat lower. Also,
when interest rates are falling, the inflow of net new money to the Portfolios
from the continuous sale of their shares will likely be invested in
instruments producing lower yields than the balance of the Portfolios'
holdings, thereby reducing the current yields of the Portfolios. In periods
of rising interest rates, the opposite can be expected to occur.
TAX-EQUIVALENT YIELD CALCULATIONS. From time to time, the Municipal
Income Portfolio may advertise its tax-equivalent yield. That Portfolio's tax-
equivalent yield is the rate an investor would have to earn from a fully
taxable investment after taxes to equal the Portfolio's tax-exempt yield. Tax-
equivalent yield is computed by (i) dividing that portion of the Portfolio's
yield that is tax-exempt by one minus a stated income tax rate and (ii) adding
the product to that portion, if any, of the Portfolio's yield that is not tax-
exempt. For purposes of this formula, tax-exempt yield is yield that is
exempt from federal income tax.
The following table, which is based upon individual federal income tax
rates in effect during 1995, illustrates the yields that would have to be
achieved on taxable investments to produce a range of hypothetical tax-
equivalent yields:
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TAX-EQUIVALENT YIELD TABLE
Federal Marginal
Income Tax Bracket Tax-Equivalent Yields Based on Tax-Exempt Yields of:
- ----------------- ----------------------------------------------------
4% 5% 6% 7% 8% 9% 10%
--- --- --- ---- ---- ---- ----
28% 5.6 6.9 8.3 9.7 11.1 12.5 13.9
31% 5.8 7.2 8.7 10.1 11.6 13.0 14.5
36% 6.3 7.8 9.4 10.9 12.5 14.1 15.6
39.6% 6.6 8.3 9.9 11.6 13.2 14.9 16.6
TOTAL RETURN CALCULATIONS. From time to time, each Portfolio may
advertise its average annual total return. A Portfolio's average annual total
return is calculated according to the following formula:
P (1 + T)N = ERV
where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at end of the period of a
hypothetical $1,000 payment made at the beginning of
that period.
The time periods used are based on rolling calendar quarters, updated to
the last day of the most recent calendar quarter prior to submission of the
advertisement for publication. Average annual total return, or "T" in the
formula above, is computed by finding the average annual compounded rate of
return over the period that would equate the initial amount invested to the
ending redeemable value ("ERV"). In calculating average annual total return,
each Portfolio's maximum 3.50% sales load is deducted from the initial $1,000
payment, and all dividends and other distributions by the Portfolio are
assumed to have been reinvested at net asset value on the reinvestment date
during the period.
Each Portfolio may also include in its performance advertisements total
return quotations that are not calculated according to the formula set forth
above ("non standardized total return"). For example, because Portfolio
shares may be purchased at a reduced sales load or without a sales load under
certain circumstances, non standardized average annual total return may be
computed without deducting the sales load from the hypothetical $1,000
investment. The following table reflects the Diversified Income Portfolio's
standardized and non standardized average annual total return for the periods
stated below:
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AVERAGE ANNUAL TOTAL RETURN FOR DIVERSIFIED INCOME PORTFOLIO
April 2, 1991
(Commencement of
One Year ended Operations) through
Sales Load(1) October 31, 1995 October 31, 1995
---------- ---------------- -------------------
3.50% 8.47% 6.81%
None 12.41% 7.64%
- ---------------------
1 The Diversified Income Portfolio's maximum sales load was reduced on
November 25, 1991 from 4.50% to 3.50%. The lower maximum sales load is
reflected in the standardized average annual return set forth in this
table.
AVERAGE ANNUAL TOTAL RETURN FOR MUNICIPAL INCOME PORTFOLIO
November 1, 1993
(Commencement of
One Year ended Operations) through
Sales Load October 31, 1995 October 31, 1995
---------- ---------------- -------------------
3.50% 8.30% 2.47%
None 12.23% 4.31%
While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the Portfolios'
performance is not constant over time, but changes from year to year, and that
average annual returns represent averaged figures as opposed to the actual
year-to-year performance of the Portfolios.
Another example of non standardized total return that may be quoted in
the Portfolios' performance advertisements is unaveraged or cumulative total
returns which reflect the change in the value of an investment in a Portfolio
over a stated period. RSMC calculates cumulative total return for each
Portfolio for a specific time period by assuming an initial investment of
$1,000 in shares of the Portfolio and the reinvestment of dividends and other
distributions. RSMC then determines the percentage rate of return on the
hypothetical $1,000 investment by: (i) subtracting the value of the investment
at the beginning of the period from the value of the investment at the end of
the period; and (ii) dividing the remainder by the beginning value. RSMC does
not take each Portfolio's maximum sales load into account in calculating
cumulative total return; if the maximum sales load charged by a Portfolio were
reflected in the calculation, the cumulative total return of the Portfolio
would be reduced. The Diversified Income Portfolio's cumulative total return
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<PAGE>
for the one year period ended October 31, 1995 and for the period from April
2, 1991 (commencement of operations) through October 31, 1995 was 12.41% and
40.16%, respectively. The Municipal Income Portfolio's cumulative total
return for the one year period ended October 31, 1995 and for the period from
November 1, 1993 (commencement of operations) through October 31, 1995 was
12.23% and 8.81%, respectively.
Average annual and cumulative total returns for the Portfolios may be
quoted as a dollar amount, as well as a percentage, and may be calculated for
a series of investments or a series of redemptions, as well as for a single
investment or a single redemption, over any time period. Total returns may be
broken down into their components of income and capital gain (including
capital gains and changes in share price) to illustrate the relationship of
those factors and their contributions to total return.
The following table shows the income and capital elements of the
Diversified Income Portfolio's total return and compares them to the cost of
living (as measured by the Consumer Price Index) over the same periods.
During the periods quoted, interest rates and bond prices fluctuated widely;
the table should not be considered representative of the dividend income or
capital gain or loss that could be realized from an investment in the
Diversified Income Portfolio today.
During the period from April 2, 1991 (Commencement of Operations) through
October 31, 1995, a hypothetical $10,000 investment in the Diversified Income
Portfolio would have been worth $14,016, assuming all distributions were
reinvested and no sales load was paid. During the period November 1, 1993
(Commencement of Operations) through October 31, 1995, a hypothetical $10,000
investment in Municipal Income Portfolio would have been worth $10,881.
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<PAGE>
CHANGE IN $10,000 HYPOTHETICAL INVESTMENT
DIVERSIFIED INCOME PORTFOLIO
<TABLE>
<CAPTION>
Value of Value of Value of Increase in
Initial Reinvested Reinvested Cost of Living
Period Ended $10,000 Income Capital Gain (Consumer
October 31 Investment Dividends Distributions Total Value Price Index )
- ------------ ---------- --------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1995 $10,464 $3,393 $159 $14,016 13.7%
1994 $ 9,936 $2,382 $151 $12,469 10.6%
1993 $10,784 $1,856 $126 $12,766 7.9%
1992 $10,560 $1,129 $ 23 $11,712 5.0%
1991 $10,288 $ 401 $ 0 $10,689 1.8%
</TABLE>
Explanatory Note: A hypothetical initial investment of $10,000 on April
2, 1991 ($10,000), together with the aggregate cost of reinvested dividends
and capital gain distributions for the entire period covered (their cash value
at the time they were reinvested), would have amounted to $13,515. If
dividends and capital gain distributions had not been reinvested, the total
value of the investment in the Portfolio over time would have been smaller,
and cash payments for the period would have amounted to $2,893 for income
dividends and $142 for capital gain distributions. Without fee waivers from
the Portfolio's service providers and expense reimbursements by WTC, the
Portfolio's returns would have been lower. This table does not reflect tax
consequences or the Portfolio's 3.50% maximum sales load, which would reduce
the year-end values of the $10,000 investment from those shown here.
MUNICIPAL INCOME PORTFOLIO
<TABLE>
<CAPTION>
Increase in
Value of Value of Value of Cost of
Initial Reinvested Reinvested Living
Period Ended $10,000 Income Capital Gain (Consumer
October 31 Investment Dividends Distributions Total Value Price Index)
- ------------ ---------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1995 $ 9,992 $889 $0 $10,881 5.4%
1994 $ 9,312 $383 $0 $9,695 2.5%
</TABLE>
Explanatory Note: A hypothetical initial investment of $10,000 on
November 1, 1993 ($10,000), together with the aggregate cost of reinvested
dividends and capital gain distributions for the entire period covered (their
cash value at the time they were reinvested), would have amounted to $10,859.
If dividends and capital gain distributions had not been reinvested, the total
value of the investment in the Portfolio over time would have been smaller,
38
<PAGE>
and cash payments for the period would have amounted to $825. Without fee
waivers from the Portfolio's service providers, the Portfolio's returns would
have been lower. This table does not reflect tax consequences or the
Portfolio's 3.50% maximum sales load, which would reduce the year-end values
of the $10,000 investment from those shown here.
The Portfolios may also, from time to time along with performance
advertisements, illustrate asset allocation by sector weightings. These
illustrations, an example for Diversified Income Portfolio of which follows,
are not intended to reflect current or future portfolio holdings of the
Portfolios.
RODNEY SQUARE DIVERSIFIED INCOME PORTFOLIO
ASSET BREAKDOWN BY SECTOR
As of December 31, 1995
PERCENT OF
SECTOR INVESTMENTS
-------------------------- -----------
US Government Bonds 53.8%
Corporate Bonds 22.8%
Asset Backed Securities 14.6%
Mortgage Backed Securities 6.2%
Cash Equivalents 2.6%
------
Total Investments 100.0%
======
[GRAPHICAL REPRESENTATION (PIE CHART)]
[PIE CHART USES PERCENTAGES FOUND IN TABLE ABOVE.]
The Rodney Square Diversified Income Portfolio may also from time to time
along with performance advertisements, present its investment in the form of
the "Schedule of Investments" included in the Annual Report to the
Shareholders of the Fund as of and for the fiscal year ended October 31, 1995,
a copy of which is attached hereto and incorporated by reference.
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 shares of a Portfolio with
performance quoted with respect to other investment companies or types of
investments. For example, it is useful to note that yields reported on debt
instruments are generally prospective, contrasted with the historical yields
reported by the Portfolios.
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<PAGE>
In connection with communicating its performance to current or
prospective shareholders, a Portfolio also may compare performance figures to
the performance of other mutual funds tracked by mutual fund rating services,
to unmanaged indexes or unit investment trusts with similar holdings or to
individual securities.
From time to time, in marketing and other literature, a Portfolio's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as traced by independent organizations such as
Investment Company Data, Inc. (an organization which provides performance
ranking information for broad classes of mutual funds), Lipper Analytical
Services, Inc. ("Lipper") (a mutual fund research firm which analyzes over
1,800 mutual funds), CDA Investment Technologies, Inc. (an organization which
provides mutual fund performance and ranking information), Morningstar, Inc.
(an organization which analyzes over 2,400 mutual funds) and other independent
organizations. When Lipper's tracking results are used, a Portfolio will be
compared to Lipper's appropriate fund category, that is, by fund objective and
portfolio holdings. Rankings may be listed among one or more of the asset-
size classes as determined by Lipper. When other organizations' tracking
results are used, a Portfolio will be compared to the appropriate fund
category, that is, by fund objective and portfolio holdings, or to the
appropriate volatility grouping, where volatility is a measure of a fund's
risk.
Since the assets in all funds are always changing, a Portfolio may be
ranked within one asset-size class at one time and in another asset-size class
at some other time. In addition, the independent organization chosen to rank
the Portfolio in marketing and promotional literature may change from time to
time depending upon the basis of the independent organization's
categorizations of mutual funds, changes in the Portfolio's investment
policies and investments, the Portfolio's asset size and other factors deemed
relevant. Advertisements and other marketing literature will indicate the
time period and Lipper 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 the Portfolios, including reprints of, or
selections from, editorials or articles about the Portfolios. Sources for
performance information and articles about the Portfolios may include the
following:
BARRON'S, a Dow Jones and Company, Inc. business and financial
weekly that periodically reviews mutual fund performance data.
BUSINESS WEEK, a national business weekly that periodically reports
the performance rankings and ratings of a variety of mutual funds.
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 indexes.
40
<PAGE>
CHANGING TIMES, THE KIPLINGER MAGAZINE, a monthly investment
advisory publication that periodically features the performance of a
variety of securities.
CONSUMER DIGEST, a monthly business/financial magazine that includes
a "Money Watch" section featuring financial news.
FINANCIAL WORLD, a general business/financial magazine that includes
a "Market Watch" department reporting on activities in the mutual
fund industry.
FORBES, a national business publication that from time to time
reports the performance of specific investment companies in the
mutual fund industry.
FORTUNE, a national business publication that periodically rates the
performance of a variety of mutual funds.
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, indexes and portfolio holdings.
SUCCESS, a monthly magazine targeted to the world of entrepreneurs
and growing business, often featuring mutual fund performance data.
USA TODAY, a national daily newspaper.
41
<PAGE>
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.
In advertising the performance of the Portfolios, the performance of a
Portfolio may also be compared to the performance of unmanaged indexes of
securities in which the Portfolio invests or to unit investment trusts
("UITs") that hold the same type of securities in which the Portfolio invests.
The performance of the Diversified Income Portfolio may be compared to the
performance of the Lehman Intermediate Government/Corporate Index; the
performance of the Municipal Income Portfolio may be compared to the
performance of Merrill Lynch Intermediate Municipal Index. Quotations of
index and UIT performance generally assume reinvestment of dividends and other
distributions; however, index and UIT quotations do not reflect expenses
related to asset management.
Performance advertisements for the Municipal Income Portfolio may compare
investing in that Portfolio to investing in an individual municipal bond.
Unlike municipal funds such as the Municipal Income Portfolio, individual
municipal bonds offer a stated rate of interest and, if held to maturity,
repayment of principal. Although some individual municipal bonds might offer
a higher return, they do not offer the reduced risk of a mutual fund which
invests in many different securities. The initial investment requirements and
sales charges of many municipal funds are lower than the purchase cost of
individual municipal bonds, which are generally issued in $5,000 denominations
and are subject to direct brokerage costs.
TAXES
GENERAL. In order to continue to qualify for treatment as a RIC under
the Code, each Portfolio _ each being treated as a separate corporation for
these purposes _ must distribute to its shareholders for each taxable year at
least 90% of its investment company taxable income (generally consisting of
taxable net investment income plus net short-term capital gain) plus, in the
case of the Municipal Income Portfolio, 90% of its net interest income
excludable from gross income under Section 103(a) of the Code ("Distribution
Requirement") and must meet several additional requirements. With respect to
each Portfolio, these requirements include the following: (1) at least 90% of
the Portfolio's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies, or other income
42
<PAGE>
(including gains from options, futures or forward currency contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Portfolio must derive less than 30% of its
gross income each taxable year from the sale or other disposition of
securities, or any of the following, that were held for less than three
months: options or futures (other than those on foreign currencies), or
foreign currencies (or options, futures or forward contracts thereon) that are
not directly related to the Portfolio's principal business of investing in
securities (or options and futures with respect thereto) ("Short-Short
Limitation"); (3) at the close of each quarter of the Portfolio's taxable
year, at least 50% of the value of its total assets must be represented by
cash and cash items, U.S. Government obligations 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 that
does not represent more than 10% of the issuer's outstanding voting
securities; and (4) at the close of each quarter of the 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 obligations) of any one issuer.
If a Portfolio failed to qualify for treatment as a RIC in any taxable
year, it would be subject to tax on its taxable income at corporate rates and
all distributions from earnings and profits, including any distributions from
net tax-exempt income and net long-term capital gains, would be taxable to its
shareholders as ordinary income. In addition, the Portfolio could be required
to recognize unrealized gains, pay substantial taxes and interest and make
substantial distributions before requalifying as a RIC.
Each Portfolio will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary (taxable) 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. For this and other purposes, dividends and other
distributions declared by a Portfolio in October, November or December of any
year and payable to shareholders of record on a date in one of those months
will be deemed to have been paid by the Portfolio and received by the
shareholders on December 31 of that year if they are paid by the Portfolio
during the following January.
A portion of the dividends from each Portfolio's investment company
taxable income (whether paid in cash or reinvested in additional Portfolio
shares) may be eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the aggregate dividends
received by that Portfolio from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the alternative minimum
tax.
43
<PAGE>
If Portfolio shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term instead of short-term, capital
loss to the extent of any capital gain. Investors also should be aware that
if Portfolio shares are purchased shortly before the record date for any
dividend or capital gain distribution (other than an exempt-interest dividend
(as defined in the Prospectus)), the shareholder will pay full price for the
shares and will receive some portion of the price back as a taxable
distribution.
If a Portfolio makes a distribution to shareholders in excess of its
current and accumulated "earnings and profits" in any taxable year, the excess
distribution will be treated by each shareholder as a return of capital to the
extent of the shareholder's tax basis and thereafter as capital gain. Thus a
return of capital is not taxable, though it does reduce a shareholder's tax
basis.
Each Portfolio may acquire zero coupon securities issued with original
issue discount. As the holder of those securities, a Portfolio must take into
account the original issue discount that accrues on the securities during the
taxable year, even if it receives no corresponding payment on them during the
year. Because each Portfolio annually must distribute substantially all of
its investment company taxable income and tax-exempt income, including any
original issue discount, in order to satisfy the Distribution Requirement and
(except with respect to tax-exempt income) avoid imposition of the Excise Tax,
a Portfolio may be required in a particular year to distribute as a dividend
an amount that is greater than the total amount of cash it actually receives.
Those distributions will be made from a Portfolio's cash assets or from the
proceeds of sales of portfolio securities, if necessary. A Portfolio may
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gain (the
excess of net long-term capital gain over net short-term capital loss). In
addition, any such gains may be realized on the disposition of securities held
for less than three months. Because of the Short-Short Limitation, any such
gains would reduce a Portfolio's ability to sell other securities, or certain
options, futures or forward currency contracts, held for less than three
months that it might wish to sell in the ordinary course of its portfolio
management.
THE MUNICIPAL INCOME PORTFOLIO. The Municipal Income Portfolio will be
able to pay to its shareholders exempt-interest dividends only if, at the
close of each quarter of its taxable year, at least 50% of the value of its
total assets consists of obligations the interest on which is excludable from
gross income under Section 103(a) of the Code; the Portfolio intends to
continue to continue to satisfy this requirement. Distributions that the
Portfolio properly designates as exempt-interest dividends are treated by its
shareholders as interest excludable from their gross income for federal income
tax purposes but may be items of tax preference for federal alternative
minimum tax purposes. The aggregate dividends excludable from the
shareholders' gross income may not exceed the Portfolio's net tax-exempt
income. The shareholders' treatment of dividends from the Portfolio under
state and local income tax laws may differ from the treatment thereof under
the Code. In order to qualify to pay exempt-interest dividends, the Portfolio
may be limited in its ability to engage in taxable transactions such as
repurchase agreements, options and futures strategies and portfolio securities
lending.
44
<PAGE>
Tax-exempt interest attributable to certain "private activity bonds"
("PAB's") (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
tax preference item for purposes of the federal alternative minimum tax.
Furthermore, even interest on tax-exempt securities held by the Portfolio that
are not PAB's, which interest otherwise would be a tax preference item,
nevertheless may be indirectly subject to the alternative minimum tax in the
hands of corporate shareholders when distributed to them by the Portfolio.
PAB's are issued by or on behalf of public authorities to finance various
privately operated facilities and are described in the Appendix to the
Prospectus. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by industrial
development bonds or PAB's 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.
Up 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 Portfolio) plus 50% of
their benefits exceeds certain base amounts. Exempt-interest dividends from
the Portfolio 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 shares of the Portfolio are sold at a loss after being held for six
months or less, the loss will be disallowed to the extent of any exempt-
interest dividends received on those shares.
If the portfolio invests in any instruments that generate taxable income,
under the circumstances described in the Prospectus, distributions of the
interest earned thereon will be taxable to its shareholders as ordinary income
to the extent of its earnings and profits. Moreover, if the Portfolio
realizes capital gain as a result of market transactions, any distribution of
that gain will be taxable to its shareholders.
The Portfolio may invest in municipal bonds that are purchased with
"market discount." For these purposes, market discount is the amount by which
a bond's purchase price is exceeded by its stated redemption price at maturity
or, in the case of a bond that was issued with original issue discount
("OID"), the sum of its issue price plus accrued OID, except that market
discount less than the product of (1) 0.25% of the redemption price at
maturity times (2) the number of complete years to maturity after the taxpayer
acquired the bond is disregarded. Market discount generally is accrued
ratably, on a daily basis, over the period from the acquisition date to the
date of maturity. Gain on the disposition of such a bond purchased by the
45
<PAGE>
Portfolio after April 30, 1993 (other than a bond with a fixed maturity date
within one year from its issuance), generally is treated as ordinary (taxable)
income, rather that capital gain, to the extent of the bond's accrued market
discount at the time of disposition. In lieu of treating the disposition gain
as above, the Portfolio may elect to include market discount in its gross
income currently, for each taxable year to which it is attributable.
The Portfolio informs shareholders within 60 days after the Fund's fiscal
year-end (October 31) of the percentage of its income distributions designated
as exempt-interest dividends. The percentage is applied uniformly to all
distributions made during the year, so the percentage designated as tax-exempt
for any particular distribution may be substantially different from the
percentage of the Portfolio's income that was tax-exempt during the period
covered by the distribution.
THE DIVERSIFIED INCOME PORTFOLIO. Interest and dividends received by the
Diversified Income Portfolio may be subject to income, withholding or other
taxes imposed by foreign countries and U.S. possessions that would reduce the
yield on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors.
HEDGING TRANSACTIONS. The use of hedging strategies, such as writing
(selling) options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for federal income tax
purposes the character and timing of recognition of the gains and losses a
Portfolio realizes in connection therewith. Gains from the disposition of
foreign currencies (except certain gains that may be excluded by future
regulations), and gains from options, futures and forward currency contracts
derived by a Portfolio with respect to its business of investing in securities
or foreign currencies, will qualify as permissible income under the Income
Requirement. However, income from the disposition of options and futures
(other than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures and forward contracts
on foreign currencies, that are not directly related to the Diversified Income
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If a Portfolio satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value, whether realized or not, of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Portfolio
satisfies the Short-Short Limitation. Thus, only the net gain, if any, from
the designated hedge will be included in gross income for purposes of that
limitation. It is not clear whether this treatment will be available for all
of a Portfolio's hedging transactions. To the extent this treatment is not
available, a Portfolio may be forced to defer the closing out of certain
options, futures and forward currency contracts beyond the time when it
otherwise would be advantageous to do so, in order for the Portfolio to
continue to qualify as a RIC.
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<PAGE>
Futures and forward currency contracts that are subject to Section 1256
of the Code (other than such contracts that are part of a "mixed straddle"
with respect to which a Portfolio has made an election not of have the
following rules apply) ("Section 1256 Contracts") and that are held by a
Portfolio at the end of its taxable year generally will be deemed to have been
sold at market value for federal income tax purposes. Sixty percent of any
net gain or loss recognized on these deemed sales, and 60% of any net realized
gain or loss from any actual sales of Section 1256 Contracts, will be treated
as long-term capital gain or loss, and the balance will be treated as short-
term capital gain or loss. Section 988 of the Code also may apply to forward
currency contracts and options on foreign currencies. Under Section 988, each
foreign currency gain or loss generally is computed separately and treated as
ordinary income or loss. In the case of overlap between Sections 1256 and 988,
special provisions determine the character and timing of any income, gain or
loss. The Diversified Income Portfolio attempts to monitor its Section 988
transactions to minimize any adverse tax impact.
DESCRIPTION OF THE FUND
The Portfolios are the only series of the Fund, which was established as
a Massachusetts business trust on May 7, 1986. The name of the Fund formerly
was The Rodney Square Benchmark U.S. Treasury Fund. The registration
statement of the Fund with respect to shares of the Diversified Income
Portfolio became effective with the SEC on April 1, 1991, and the Portfolio
commenced operations on April 2, 1991. The registration statement of the Fund
with respect to the Municipal Income Portfolio became effective with the SEC
on October 31, 1993 and the Portfolio commenced operations on November 1,
1993. The name was changed to The Rodney Square Strategic Fixed-Income Fund
effective on March 14, 1991.
Under Massachusetts law, shareholders of a Massachusetts business trust
may, under certain circumstances, be held personally liable for the
obligations of the trust. The Declaration of Trust, as amended and restated
on July 1, 1992, contains an express disclaimer of shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each note, bond, contract or other undertaking relating to the Fund
that is issued by or on behalf of the Fund or the Trustees. The amended and
restated Declaration of Trust provides for indemnification out of assets
belonging to the applicable Portfolio of any shareholder held personally
liable solely by reason of his or her being or having been a shareholder of
the Portfolio. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Portfolio itself would be unable to indemnify the shareholder. WTC believes
that, in view of the above, the risk of personal liability to shareholders is
remote.
The amended and restated Declaration of Trust further provides that the
Trustees will not be liable for neglect or wrongdoing provided they have
exercised reasonable care and have acted under the reasonable belief that
their actions are in the best interest of the Fund; 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.
47
<PAGE>
The Fund's capital consists of an unlimited number of shares of
beneficial interest, $0.01 par value. Shares of the Portfolios that are
issued by the Fund are fully paid and nonassessable. The assets of the Fund
received for the issuance or sale of Portfolio shares and all income,
earnings, profits and proceeds therefrom, subject only to the right of
creditors, are allocated to the respective Portfolio and constitute the
underlying assets of that Portfolio.
The amended and restated Declaration of Trust provides that the Fund will
continue indefinitely unless a majority of the shareholders of the Fund or a
majority of the shareholders of the affected Portfolio approve: (a) the sale
of the Fund's assets or the Portfolio's assets to another diversified open-end
management investment company; or (b) the liquidation of the Fund or the
Portfolio. In the event of the liquidation of the Fund or a Portfolio,
affected shareholders are entitled to receive the assets of the Fund or
Portfolio that are available for distribution.
OTHER INFORMATION
INDEPENDENT AUDITORS. Ernst & Young LLP, 1 North Charles Street,
Baltimore, MD 21201, serves as the Fund's independent auditors, providing
services which include (1) audit of the annual financial statements for the
Portfolios, (2) assistance and consultation in connection with SEC filings,
and (3) preparation of the annual federal and state income tax returns filed
on behalf of the Portfolios.
The financial statements and financial highlights of the Portfolios
appearing or incorporated by reference in the Fund's Prospectus, this
Statement of Additional Information and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, to the extent indicated in
their reports thereon also appearing elsewhere herein and in the Registration
Statement or incorporated by reference. Such financial statements have been
included herein or incorporated herein by reference in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue,
2nd Floor, N.W., Washington, D.C. 20036, serves as counsel to the Fund and has
passed upon the legality of the shares offered by the Prospectus and this
Statement of Additional Information.
CUSTODIAN. WTC, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, serves as the Fund's Custodian.
TRANSFER AGENT. RSMC, Rodney Square North, 1100 N. Market St.,
Wilmington, DE 19890-0001, serves as the Fund's Transfer Agent and Dividend
Paying Agent. Compensation for the services and duties performed is paid by
WTC in accordance with the Advisory Agreements. Certain other fees and
expenses incurred in connection with the provision of these services are
payable by the Fund or the shareholder on whose behalf the service is
performed.
48
<PAGE>
SUBSTANTIAL SHAREHOLDERS. As of January 31, 1996 no shareholder other
than WTC owned of record or beneficially more than 5% of the outstanding
shares of either Portfolio. WTC owned of record 74% of the shares of the
Diversified Income Portfolio, in addition to those shares owned beneficially
on behalf of its customer accounts; and WTC owned of record on behalf of its
customer accounts 52% of the shares of the Municipal Income Portfolio in
addition to those shares owned beneficially on behalf of its customer accounts
on behalf of its underlying customers.
FINANCIAL STATEMENTS
The Schedules of Investments of the Diversified Income Portfolio and
Municipal Income Portfolio as of October 31, 1995, the Statements of Assets
and Liabilities of the Diversified Income Portfolio and Municipal Income
Portfolio as of October 31, 1995, the Statement of Operations of the
Diversified Income Portfolio and Municipal Income Portfolio for the fiscal
year ended October 31, 1995, the Statements of Changes in Net Assets of the
Diversified Income Portfolio and Municipal Income Portfolio for the fiscal
years ended October 31, 1995 and 1994, the Financial Highlights of the
Diversified Income Portfolio for the fiscal years ended October 31, 1995,
1994, 1993 and 1992 and for the period April 2, 1991 (Commencement of
Operations) to October 31, 1991; the Financial Highlights of the Municipal
Income Portfolio for the fiscal years ended October 31, 1995 and 1994, and the
Notes to Financial Statements and the Report of Independent Auditors, each of
which is included in the Annual Report to the shareholders of the Fund as of
and for the fiscal year ended October 31, 1995, are attached hereto, and are
hereby incorporated by reference.
49
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The management of The Rodney Square Strategic Fixed-Income Fund (the
"Fund") is pleased to report to you on the Fund's activity for the fiscal year
ended October 31, 1995.
PERFORMANCE REVIEW*
The Rodney Square Diversified Income Portfolio had a total return of 12.41%
for the fiscal year ended October 31, 1995. This return consisted of an increase
in net asset value per share from $12.42 to $13.08 and distributions from net
investment income during the fiscal year of $0.83 per share. The Portfolio's
performance was very close to the reported return of 12.54% for the Lehman
Intermediate Government/Corporate Index. Wilmington Trust Company ("WTC"), the
Portfolio's adviser, has continued to assist the Portfolio's return by limiting
total expenses of the Portfolio to 0.65% of average daily net assets.
The Rodney Square Municipal Income Portfolio had a 12.23% total return for
the fiscal year. This return consisted of an increase in net asset value per
share from $11.64 to $12.49 and distributions from net investment income during
the fiscal year of $0.54 per share. The Portfolio's performance was
significantly better than the 10.95% return reported for the Merrill Lynch
Intermediate Municipal Index (the "Merrill Index"). WTC, the Portfolio's
adviser, has continued to assist the Portfolio's total return by limiting the
total expense of the Portfolio to 0.75% of average daily net assets. During the
course of the year, WTC determined the Merrill Index to be a better measure of
relative performance than the Lehman State General Obligation Index (the "Lehman
Index") because the average maturity of the Merrill Index at 8.5 years more
closely approximates the Portfolio at 6.8 years. The Lehman Index at 10.95
years is beyond the standard for an intermediate fund which Lipper Analytical
Securities Corp. defines as between 5 and 10 years.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
THE RODNEY SQUARE DIVERSIFIED INCOME PORTFOLIO
The Portfolio is designed to give shareholders broad exposure to the
dynamics of the intermediate term bond market with a stable flow of income and
minimization of risk. This goal is accomplished by applying a disciplined and
systematic investment process to manage actively a core portfolio of investment
grade notes and bonds from a wide range of taxable market sectors.
- ------------------------------
* PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. AN
INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY WILMINGTON TRUST
COMPANY OR ANY OTHER BANKING INSTITUTION, THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. CERTAIN VALUES SHOWN ABOVE DO NOT REFLECT THE EFFECT OF THE MAXIMUM
SALES LOAD OF 3.50%. RETURNS ARE HIGHER DUE TO THE ADVISER'S MAINTENANCE OF
THE FUND'S EXPENSES. SEE FINANCIAL HIGHLIGHTS ON PAGES 18 THROUGH 21.
AR 1
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
PRESIDENT'S MESSAGE -- CONTINUED
- --------------------------------------------------------------------------------
The Portfolio benefited from the dramatic lowering of interest rates which
took place over the past fiscal year. From a starting point of 7.48%, 5 year U.
S. Treasury Notes dropped in yield by 1.67% to 5.81% as of October 1995.
Interest rates fell as it became apparent that economic growth was moderating
and the inflation outlook remained very favorable. Also aiding the interest
rate decline has been the outlook for a significant change in the federal
government's fiscal policies and the prospects of a balanced budget within seven
years. The Portfolio has taken advantage of these developments by extending
maturities to capture both a higher yield and more price appreciation.
Following is a diagram which compares the performance of The Rodney Square
Diversified Income Portfolio, the Lehman Intermediate Government/Corporate Index
and the Consumer Price Index ("CPI"), since the Portfolio's commencement of
operations on April 2, 1991.
[GRAPHICAL REPRESENTION (POINTS AND LINES) REQUIRED BY ITEM 5A OF FORM N-1A]
[FOLLOWING ARE GRAPH POINTS AND TOTAL RETURNS]
COMPARISION OF CHANGE IN VALUE OF $10,000 INVESTMENT **
Inception
Apr-91 Oct-91 Oct-92 Oct-93 Oct-94 Oct-95
Rodney Square
Diversified Income $9,650 $10,314 $11,302 $12,318 $12,031 $13,524
Lehman Intermediate
Government/Corporate
Index $10,000 $10,791 $11,870 $13,050 $12,798 $14,403
Consumer Price Index $10,000 $10,180 $10,506 $10,800 $11,081 $11,391
AVERAGE ANNUAL TOTAL RETURN
1 YEAR * INCEPTION **
-------------------------------------
Rodney Square
Diversified Income 12.4% 6.8%
Lehman Intermediate
Government/Corporate
Index 12.5 8.3
Consumer Price Index 2.8 2.9
- ------------------------------
* PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. AN
INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY WILMINGTON TRUST
COMPANY OR ANY OTHER BANKING INSTITUTION, THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. CERTAIN VALUES SHOWN ABOVE DO NOT REFLECT THE EFFECT OF THE MAXIMUM
SALES LOAD OF 3.50%. RETURNS ARE HIGHER DUE TO THE ADVISER'S MAINTENANCE OF
THE FUND'S EXPENSES. SEE FINANCIAL HIGHLIGHTS ON PAGES 18 THROUGH 21.
** THE VALUES SHOWN FOR THE PORTFOLIO REFLECT THE EFFECT OF THE MAXIMUM SALES
LOAD OF 3.50% ON A HYPOTHETICAL INVESTEMNT OF $10,000 AND WITH DIVIDENDS
REINVESTED.
AR 2
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
PRESIDENT'S MESSAGE -- CONTINUED
- --------------------------------------------------------------------------------
The Portfolio also benefited from several moves to increase yield.
Callable government agency securities have been added along with asset-backed
securities in the home equity and manufactured housing sectors. Corporate bond
exposure has been decreased as spreads against U. S. Treasury securities have
narrowed making them less attractive.
As we close out the current year, we find a bond market that is caught
between many influences ranging from political to financial. The decline in
interest rates seen so far this year has reached a point where further movement
will be unlikely unless it is supported by the active participation of the
Federal Reserve Board (the "Fed") in lowering short-term rates. The role that
the Fed plans to take is unknown at this time since their initial rate cut in
July has not been followed by any further action that would shed light on their
medium to long-term intentions. Indeed the Fed finds itself in a very good
position since the combined outlook of moderate economic growth and well
contained inflation gives them the flexibility to be patient. Our longer term
view remains positive on the bond market. The underlying trends of low
inflation, budget deficit reduction and keen global competition remain in force
with their impact likely being felt through lower long-term rates. However, we
have covered much ground in 1995, and while 1996 may offer some continuation,
the rate declines are likely to be much smaller.
THE RODNEY SQUARE MUNICIPAL INCOME PORTFOLIO
The Portfolio is an intermediate term fund designed to produce a high level
of income which is exempt from federal income taxes while seeking preservation
of capital. The basic strategy of the Portfolio is to identify and purchase the
undervalued sectors of the municipal market. The Portfolio will normally be
fully invested with an average maturity in the 5 to 10 year range.
For all but the first part of the fiscal year, the fixed income markets
exhibited a bullish trend. While it was relatively clear sailing for the
taxable bond markets, the tax-exempt municipal market experienced great
volatility due to several special events during the year. First, the Orange
County, California crisis hit in December 1994 when the county filed for
bankruptcy protection due to heavy losses in its investment funds. The market
impact was brief (except for non-insured California issues) and municipal bond
prices resumed their upward bias by calendar year-end.
During the first quarter of 1995, municipals outperformed their taxable
counterparts due to a severe shortage of new issues. Combined with a high level
of maturities and called bonds in January, this led to an actual decline in
total municipal bonds outstanding. Municipal bond prices rose relative to
Treasuries, the result of too many investors chasing too few bonds. In April,
this relative outperformance by municipals reversed dramatically. In
Washington, D.C., several political leaders proposed radical changes to the
existing tax code. Most of those "flat tax" proposals, as initially presented,
would be detrimental to municipal bonds. By limiting the tax to either earned
income (excluding interest income) or to expenditures (as it would under a
consumption tax), there would be no tax advantage for municipal bonds. This
frightened many retail investors and they reacted by selling bonds, selling tax-
exempt mutual funds or by not reinvesting in the municipal market.
AR 3
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
PRESIDENT'S MESSAGE -- CONTINUED
- --------------------------------------------------------------------------------
Tax reform continued to be a cloud hovering over the municipal market but
its most recent effect is in the long end. Investors have shifted their
emphasis away from long maturity bonds, whose volatility is great, and into
short and intermediate bonds. Over the last four months ending October 31,
1995, 20 and 30 year municipals remain inexpensive relative to Treasuries
(trading at about 90% of the Treasury yield) while 10 year and shorter
maturities have moved from a fair value to a relatively expensive value. For
example, a 5 year municipal was trading at 77% of a comparable Treasury on June
30, 1995 and now is trading at only 73%.
During the year, we made several strategic moves which improved the return
potential of the Portfolio. Two of the strategic moves, a sell program of Texas
bonds and a shortening of the Portfolio's maturity, were outlined in the
semiannual report. Since then we have employed two additional strategies to
strengthen the Portfolio. First, we invested over 12% of the total assets in
cushion bonds. Cushion bonds have high coupons, long stated maturities,
relatively short call dates and trade at large premiums to face value. In
addition to trading at a high yield to the effective maturity (the short call
date), these bonds have the potential of being "refunded" which would
immediately boost the price. The bonds purchased by the Portfolio have an
average effective maturity of only 1.3 years but have a yield of over 5%, based
on October 31, 1995 valuations.
The other strategy employed was to sell issues priced near par and to buy
slightly longer, non-callable premium-priced bonds. The bonds sold performed
well during the year, but now, at par, face a performance disadvantage due to
the after tax yield calculations. The longer maturity, premium-priced issues
offer significantly better downside protection while maintaining similar upside
potential. Approximately 16% of the Portfolio was shifted into these premium,
non-callable bonds. As of October 31, 1995, the average maturity of the
Portfolio was 6.8 years, slightly longer than the average on April 30, 1995.
Following is a diagram that illustrates the performance of The Rodney
Square Municipal Income Portfolio, the Merrill Index, Lehman Index, and the CPI,
since the Portfolio's commencement of operations on November 1, 1993.
[GRAPHICAL REPRESENTION (POINTS AND LINES) REQUIRED BY ITEM 5A OF FORM N-1A]
[FOLLOWING ARE GRAPH POINTS AND TOTAL RETURNS]
AR 4
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
PRESIDENT'S MESSAGE -- CONTINUED
- --------------------------------------------------------------------------------
COMPARISION OF CHANGE IN VALUE OF $10,000 INVESTMENT **
Inception
Oct-93 Oct-94 Oct-95
Rodney Square
Municipal Income $9,650 $9,356 $10,500
Lehman Index $10,000 $9,645 $10,982
Merrill Index $10,000 $10,260 $10,882
Consumer Price Index $10,000 $10,260 $10,547
AVERAGE ANNUAL TOTAL RETURN
1 YEAR * INCEPTION **
-------------------------------------
Rodney Square
Municipal Income 12.2% 2.5%
Lehman Index 13.9 4.8
Merrill Index 11.0 4.3
Consumer Price Index 2.8 2.7
Looking ahead, we are cautiously optimistic. Bond prices are currently
high, with the markets expecting a continuation of slow economic growth and
further easing by the Fed. Evidence of real progress by Congress and the White
House toward balancing the budget should help to push the bond markets to higher
prices. Our caution is focused upon the events unfolding in Washington, D.C.,
including the debate on tax reform measures and the 1996 Presidential election.
Uncertainty, in this case created by political rhetoric, usually leads to
volatile markets.
We invite your comments and questions and we thank you for your investment
in the Rodney Square Strategic Fixed-Income Fund. We look forward to reviewing
our investment outlook and strategy with you in our next report to shareholders.
Sincerely,
/s/ Martin L. Klopping
Martin L. Klopping
President
December 15, 1995
- ------------------------------
* PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. AN
INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY WILMINGTON TRUST
COMPANY OR ANY OTHER BANKING INSTITUTION, THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. CERTAIN VALUES SHOWN ABOVE DO NOT REFLECT THE EFFECT OF THE MAXIMUM
SALES LOAD OF 3.50%. RETURNS ARE HIGHER DUE TO THE ADVISER'S MAINTENANCE OF
THE FUND'S EXPENSES. SEE FINANCIAL HIGHLIGHTS ON PAGES 18 THROUGH 21.
** THE VALUES SHOWN FOR THE PORTFOLIO REFLECT THE EFFECT OF THE MAXIMUM SALES
LOAD OF 3.50% ON A HYPOTHETICAL INVESTEMNT OF $10,000 AND WITH DIVIDENDS
REINVESTED.
AR 5
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------
INVESTMENTS / OCTOBER 31, 1995
(Showing Percentage of Total Value of Net Assets)
- -------------------------------------------------------------------------------
MOODY'S
/ S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
-------- ---------- ------------
ASSET-BACKED SECURITIES - 19.4%
American Express Master Trust,
Ser. 1994-1 Class A, 7.15%,
08/15/99........................ Aaa/AAA $1,000,000 $ 1,030,700
EQCC Home Equity Loan Trust,
Ser. 1994-4A Class A3, 8.68%,
10/15/08........................ Aaa/AAA 700,000 751,765
Equicon Home Equity Loan Trust,
Ser. 1993-1 Class A, 5.85%,
11/18/12........................ Aaa/AAA 573,889 563,137
Green Tree Financial Corp.,
Ser. 1995-2 Class A3, 7.45%,
06/15/26........................ Aaa/AAA 400,000 412,576
Green Tree Financial Corp.,
Ser. 1995-5 Class A4, 6.60%,
10/15/25........................ Aaa/AAA 250,000 250,413
MBNA Master Credit Card Trust,
Ser. 1995-F Class A, 6.60%,
01/15/03........................ Aaa/AAA 300,000 306,174
Merrill Lynch Mortgage Investors,
Inc., Ser. 1991G Class A, 8.15%,
10/15/11........................ Aaa/NR 500,313 517,286
Residential Asset Securities Corp.,
Ser. 1995-KS3, 8.00%, 10/25/24.... Aaa/AAA 400,000 404,840
Resolution Trust Corp., Ser. 1994-C2
Class B, 8.00%, 04/25/25.......... NR/AA 250,000 262,392
Standard Credit Card Master Trust,
Ser. 1995-8 Class A, 6.70%,
09/09/02....................... Aaa/AAA 700,000 706,153
The Money Store Home Equity,
Ser. 1994-D1 Class A3, 8.35%,
10/15/13....................... Aaa/AAA 1,000,000 1,040,088
-----------
TOTAL ASSET-BACKED SECURITIES (COST $6,066,533)........ 6,245,524
-----------
CORPORATE BONDS - 18.6%
FINANCIAL - 10.2%
BankAmerica Corp., 6.75%, 09/15/05.. A3/A 250,000 249,375
Bankers Trust NY Corp., 9.50%,
06/14/00.......................... A3/A 700,000 782,250
Ford Capital B.V., 9.375%,
01/01/98.......................... A1/A+ 300,000 319,500
International Lease Finance,
6.125%, 11/01/99.................. A2/A+ 400,000 398,228
The accompanying notes are an integral part of the financial statements.
AR 6
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------
INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------
MOODY'S
/ S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
-------- ---------- ------------
KFW International Finance, 7.20%,
03/15/14.......................... Aaa/AAA $ 400,000 $ 14,500
Lehman Brothers, Inc., 7.625%,
08/01/98.......................... Baa1/A 600,000 615,000
Merrill Lynch & Co., Inc., 7.05%,
04/15/03.......................... A1/A+ 200,000 200,750
Santander Financial Issuances Ltd.,
7.875%, 04/15/05.................. A1/A+ 300,000 320,250
-----------
3,299,853
-----------
MANUFACTURING - 2.9%
Caterpillar Financial Services Corp.,
9.95%, 02/28/96................... A3/A- 200,000 202,472
Eaton Corp., 8.00%, 08/15/06........ A2/A 650,000 720,687
-----------
923,159
-----------
MERCHANDISING & RETAIL - 0.9%
Dayton-Hudson Corp., 9.35%,
06/16/20.......................... A3/A 250,000 300,345
-----------
OIL, GAS & PETROLEUM - 1.7%
British Petroleum of North America,
Inc., 8.875%, 12/01/97............ Aa3/AA- 200,000 211,000
Societe Nationale Elf Aquitaine,
8.00%, 10/15/01................... Aa3/AA- 300,000 325,500
-----------
536,500
-----------
TELEPHONE & COMMUNICATIONS - 1.9%
Southern New England
Telecommunications Corp., 6.50%,
08/15/00......................... A1/A+ 600,000 607,500
UTILITIES - 1.0%
National Rural Utilities
Cooperative Finance Corp., 9.50%,
05/15/97......................... Aa3/AA 300,000 315,750
-----------
TOTAL CORPORATE BONDS (COST $5,693,869)................ 5,983,107
-----------
TIME DEPOSITS - 8.6%
Sanwa Bank Ltd. (Grand Cayman), 5.88%,
11/01/95 (COST $2,783,590)........ NR/NR 2,783,590 2,783,590
-----------
The accompanying notes are an integral part of the financial statements.
AR 7
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------
INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------
MOODY'S
/ S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
-------- ---------- ------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 12.8%
FEDERAL HOME LOAN MORTGAGE CORP.
INTEREST BEARING NOTES - 2.9%
Federal Home Loan Mortgage Corp.,
8.60%, 01/26/00................. Aaa/NR $ 400,000 $ 421,196
Federal Home Loan Mortgage Corp.,
7.05%, 05/15/02................. Aaa/NR 500,000 502,985
-----------
924,181
-----------
FEDERAL NATIONAL MORTGAGE ASSOC. INTEREST
BEARING NOTES - 9.9%
Federal National Mortgage Assoc.,
5.39%, 08/05/98................. Aaa/NR 2,950,000 2,904,511
Federal National Mortgage Assoc.,
7.50%, 08/25/05................. Aaa/NR 300,000 305,202
-----------
3,209,713
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $3,955,051)..................................... 4,133,894
-----------
U.S. TREASURY OBLIGATIONS* - 40.1%
U.S. TREASURY BONDS - 2.8%
U.S. Treasury Bonds, 11.75%, 02/15/10.. NR/NR 650,000 908,109
U.S. TREASURY NOTES - 37.3%
U.S. Treasury Notes, 8.00%, 10/15/96... NR/NR 2,900,000 2,964,032
U.S. Treasury Notes, 7.50%, 01/31/97... NR/NR 1,500,000 1,533,750
U.S. Treasury Notes, 5.125%, 04/30/98.. NR/NR 250,000 246,810
U.S. Treasury Notes, 6.125%, 05/15/98.. NR/NR 400,000 404,044
U.S. Treasury Notes, 6.75%, 04/30/00... NR/NR 1,250,000 1,295,125
U.S. Treasury Notes, 6.25%, 05/31/00... NR/NR 300,000 305,160
U.S. Treasury Notes, 8.75%, 08/15/00... NR/NR 925,000 1,036,545
U.S. Treasury Notes, 7.75%, 02/15/01... NR/NR 700,000 760,214
U.S. Treasury Notes, 7.88%, 08/15/01... NR/NR 500,000 548,480
U.S. Treasury Notes, 6.375%, 08/15/02.. NR/NR 1,200,000 1,231,295
U.S. Treasury Notes, 6.25%, 02/15/03... NR/NR 100,000 101,738
U.S. Treasury Notes, 7.25%, 05/15/04... NR/NR 600,000 649,140
U.S. Treasury Notes, 6.50%, 08/15/05... NR/NR 900,000 931,599
-----------
12,007,932
-----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $12,504,789)....... 12,916,041
-----------
The accompanying notes are an integral part of the financial statements.
AR 8
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------
INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------
MOODY'S
/ S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
-------- ---------- ------------
TOTAL INVESTMENTS (COST $31,003,832)** - 99.5%.................. $32,062,156
OTHER ASSETS AND LIABILITIES, NET - 0.5%........................ 151,774
-----------
NET ASSETS - 100.0%............................................. $32,213,930
===========
** Cost for federal income tax purposes. At October 31, 1995, net unrealized
appreciation was $1,058,324. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market value
over tax cost of $1,066,844 and aggregate gross unrealized depreciation for
all securities in which there was an excess of tax cost over market value of
$8,520.
* While not rated by Moody's or the S&P, U.S. Treasury Obligations are
considered to be of the highest quality, comparable to AAA.
The accompanying notes are an integral part of the financial statements.
AR 9
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------
INVESTMENTS / OCTOBER 31, 1995
(Showing Percentage of Total Value of Net Assets)
- --------------------------------------------------------------------------------
MOODY'S
/ S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
------- ---------- ------------
MUNICIPAL BONDS - 92.4%
ALASKA - 2.4%
Alaska Municipal Bond Bank Auth. Ref.
Rev Ser. 1993C, 4.90%, 10/01/03..... A/A $ 400,000 $ 399,000
-----------
CALIFORNIA - 11.7%
California State Veterans Bonds Ser. AY,
6.90%, 04/01/01....................... A1/A+ 250,000 255,002
California State Veterans Bonds Ser. AY,
7.00%, 04/01/03....................... A1/A+ 500,000 509,150
Los Angeles, CA Dept. of Water and Power
Electric Plant Rev., 5.75%, 11/15/02.. AA/AA- 300,000 319,125
Los Angeles County, CA Public Works Fin.
Auth. Rev. (LA County Park & Open
Space District) Ser. 1994A, 5.63%,
10/01/03.............................. AA/AA 500,000 524,375
San Francisco, CA City & County
Redevelopment Agency Multi-Family
Housing Ref. Rev. (GNMA South Beach
Proj.) Ser.1994, 4.75%, 09/01/02...... A/NR 345,000 337,237
-----------
1,944,889
-----------
COLORADO - 3.2%
Aurora, CO Certificate of Participation
Lease Ref. Rev., 5.85%, 12/01/02...... A/A 500,000 525,625
DELAWARE - 23.2%
Bethany Beach, DE, 9.75%, 11/01/07...... Aaa/AAA 160,000 223,200
Bethany Beach, DE, 9.75%, 11/01/08...... Aaa/AAA 180,000 255,375
Delaware State Economic Dev. Auth. Rev.
(Delmarva Power & Light), 7.30%,
09/01/15............................. Aaa/AAA 100,000 109,500
Delaware State Housing Auth. Multi-
Family Mortgage Rev., 6.30%,
07/01/98....... A1/A+ 100,000 100,875
Delaware State Housing Auth. Multi-
Family Mortgage Rev. Ser. 1992D,
6.35%, 07/01/03...................... A1/NR 100,000 103,125
Delaware State Housing Auth. Multi-
Family Mortgage Rev. Ser. C, 7.25%,
01/01/07............................. A1/A 240,000 252,600
Delaware State Housing Auth. Single
Family Mortgage Rev. Ser. 1993 Sub.
Ser. A-1, 5.05%, 07/01/05............ Aaa/AAA 315,000 305,550
The accompanying notes are an integral part of the financial statements.
AR 10
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------
INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------
MOODY'S
/ S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
------- ---------- ------------
Delaware State Housing Auth. Single
Family Mortgage Rev. Ser. 1993 Sub.
Ser. A-1, 5.15%, 01/01/06............ Aaa/AAA $ 180,000 $ 175,725
Delaware State Housing Auth. Sr. Home
Mortgage Rev. Sub. Ser. 1991-B, 6.40%,
12/01/02.............................. A1/NR 50,000 51,500
Delaware State Solid Waste Auth. Solid
Waste System Rev., 5.80%, 07/01/01.... A/A 500,000 531,875
Delaware Transportation Auth.
Transportation System Jr. Lien Rev.,
5.00%, 07/01/06....................... Aaa/AAA 500,000 501,875
Delaware Transportation Auth.
Transportation System Jr. Lien Rev.,
Prerefunded 07/01/98 @ 101.50, 7.75%,
07/01/08.............................. Aaa/AAA 250,000 275,937
Delaware Transportation Auth.
Transportation System Sr. Lien Rev.,
6.75%, 07/01/98....................... A1/AA 115,000 122,619
Delaware Transportation Auth.
Transportation System Sr. Lien Rev.,
5.88%, 07/01/00....................... A1/AA 350,000 371,438
Wilmington, DE UDAG Corp. Special
Obligation Rev. (Chase Manhattan Bldg.
Proj.), 8.25%, 04/01/01............... NR/NR 455,000 465,096
-----------
3,846,290
-----------
HAWAII - 4.7%
Hawaii State General Obligation Rev.,
Ser. BW, 6.20%, 03/01/05.............. Aa/AA 700,000 770,875
-----------
MISSISSIPPI - 2.4%
Medical Center Educ. Bldg. Corp., (Univ.
of Mississippi Medical Center Proj.)
Ser. 1993, 5.40%, 12/01/05............ NR/A- 400,000 399,000
-----------
NEVADA - 2.3%
Nevada State General Obligation Rev.,
Ser. B, 4.38%, 08/01/03............... Aa/AA 400,000 387,000
-----------
NEW JERSEY - 3.9%
New Jersey State Transportation Auth.,
Ser. A, 6.00%, 06/15/01............... Aaa/AAA 600,000 644,250
-----------
The accompanying notes are an integral part of the financial statements.
AR 11
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------
INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------
MOODY'S
/ S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
------- ---------- ------------
PENNSYLVANIA - 10.9%
Pennsylvania State Ref. Rev. First Ser.,
5.30%, 05/01/06....................... A1/AA- $ 500,000 $ 507,500
Pennsylvania State Higher Educ. Fac. Auth.
College & Univ. Rev. (Philadelphia
College of Osteopathic Medicine)
Ser. 1993, 5.25%, 12/01/07............ NR/AAA 150,000 148,687
Pennsylvania State Higher Educ. Fac.
Auth. College & Univ. Rev. (Trustees
Univ. of Pennsylvania) Ser. A, 6.625%,
01/01/17.............................. Aa/AA 550,000 556,188
Philadelphia, PA Redevelopment Auth.
Home Improvement Loan Rev., 7.38%,
06/01/03.............................. A/A 40,000 40,800
York County, PA Solid Waste Refuse Auth.
Industrial Dev. Rev. (Resource Recovery
Proj.) Ser. 1985, 8.20%, 12/01/14..... A/AA- 500,000 548,125
-----------
1,801,300
-----------
TEXAS - 3.8%
Austin, TX General Obligation Rev.,
4.75%, 09/01/09....................... Aa/AA 315,000 294,525
Tarrant County, TX Water Control
District No. 1 Rev., 4.75%, 03/01/06.. Aaa/AAA 350,000 336,000
-----------
630,525
-----------
UTAH - 3.2%
Salt Lake City, UT Municipal Bldg.
Auth.Lease Rev. Ser. 1994A, 5.65%,
10/01/03.............................. Aaa/AAA 500,000 525,625
-----------
VERMONT - 7.6%
Vermont Municipal Bond Bank Rev. Ser. 1,
5.50%, 12/01/10....................... Aaa/AAA 400,000 403,000
Vermont Municipal Bond Bank Rev. Ser. 2,
6.00%, 12/01/05....................... Aaa/AAA 790,000 858,138
-----------
1,261,138
-----------
VIRGINIA - 6.1%
Virginia Educ. Loan Auth. Rev. (Student
Loan Prog.) Senior Ser. 1994B, 5.15%,
03/01/04.............................. Aaa/NR 500,000 491,250
The accompanying notes are an integral part of the financial statements.
AR 12
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------
INVESTMENTS -- CONTINUED
- --------------------------------------------------------------------------------
MOODY'S
/ S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
------- ---------- ------------
Virginia State Housing Development Auth.
Commonwealth Mtg. Rev. Ser. 1992C Sub.
Ser. C8, 5.80%, 07/01/04.............. AA1/AA+ $ 500,000 $ 514,375
-----------
1,005,625
-----------
WASHINGTON - 5.2%
Clark County, WA Public Utility Dist.
No. 1 Generating System Rev., 6.00%,
01/01/06.............................. Aaa/AAA 350,000 375,813
Washington State Public Power Supply Sys.
Ref. Rev. (Nuclear Proj. No. 3),
Ser. 1993C, 5.10%, 07/01/07........... Aa/AA 500,000 478,750
-----------
854,563
-----------
WEST VIRGINIA - 1.8%
Oak Hill, WV Industrial Development Ref.
Rev. (Fayette Plaza Proj.) Ser. 1991A,
4.95%, 10/01/09....................... NR/AA- 300,000 304,126
-----------
TOTAL MUNICIPAL BONDS (COST $15,158,756)................... 15,299,831
-----------
TAX-EXEMPT MUTUAL FUNDS - 6.4%
PNC Municipal Cash Tax-Exempt Money
Market Fund.......................... NR/NR 800,000 800,000
PNC Municipal Fund..................... NR/NR 264,181 264,181
-----------
TOTAL TAX-EXEMPT MUTUAL FUNDS (COST $1,064,181)............ 1,064,181
-----------
TOTAL INVESTMENTS (COST $16,222,937)** - 98.8%................. 16,364,012
OTHER ASSETS AND LIABILITIES, NET - 1.2%....................... 206,268
-----------
NET ASSETS - 100.0%............................................ $16,570,280
===========
** Cost for federal income tax purposes. At October 31, 1995, net unrealized
appreciation was $141,075. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market value
over tax cost of $206,365 and aggregate gross unrealized depreciation for
all securities in which there was an excess of tax cost over market value of
$65,290.
The accompanying notes are an integral part of the financial statements.
AR 13
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 1995
DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
------------ ------------
ASSETS:
Investments in securities, at market
(identified cost $31,003,832 and
$16,222,937, respectively) (Note 2)......... $32,062,156 $16,364,012
Receivable for Fund shares sold.............. 4,213 --
Interest receivable.......................... 376,652 242,988
Deferred organization costs (Note 2)......... 7,928 52,160
Other assets................................. 1,133 182
----------- -----------
Total assets................................ 32,452,082 16,659,342
----------- -----------
LIABILITIES:
Dividends payable............................ 172,400 60,647
Payable for Fund shares redeemed............. 25,851 --
Due to Adviser (Note 4)...................... 321 --
Other accrued expenses (Note 4).............. 39,580 28,415
----------- -----------
Total liabilities........................... 238,152 89,062
----------- -----------
NET ASSETS, at market value.................. $32,213,930 $16,570,280
=========== ===========
NET ASSETS CONSIST OF:
Shares of beneficial interest................ $ 24,633 $ 13,268
Additional paid-in capital................... 31,569,202 16,467,339
Net unrealized appreciation of investments... 1,058,324 141,075
Accumulated net realized loss................ (438,229) (51,402)
----------- -----------
NET ASSETS, for 2,463,279 and 1,326,841 shares
outstanding, respectively................... $32,213,930 $16,570,280
=========== ===========
NET ASSET VALUE and redemption price per share
($32,213,930 / 2,463,279 and
$16,570,280 / 1,326,841 outstanding shares
of beneficial interest, $0.01 par value,
respectively)............................... $13.08 $12.49
====== ======
Maximum offering price per share (100/96.5
of $13.08 and 100/96.5 of $12.49,
respectively)............................... $13.55 $12.94
====== ======
The accompanying notes are an integral part of the financial statements.
AR 14
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Fiscal Year Ended October 31, 1995
DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
------------ ------------
INTEREST INCOME.............................. $ 2,280,549 $ 806,744
----------- -----------
EXPENSES:
Advisory fee (Note 4)....................... 158,066 73,172
Administration fee (Note 4)................. 25,290 12,290
Accounting fee (Note 4)..................... 50,000 50,000
Distribution expenses (Note 4).............. 27,402 15,844
Trustees' fees and expenses (Note 4)........ 5,400 5,400
Amortization of organizational expenses
(Note 2).................................. 19,140 18,006
Registration fees........................... 20,008 21,290
Reports to shareholders..................... 11,524 5,377
Legal....................................... 7,824 5,532
Audit....................................... 29,109 10,891
Other....................................... 7,946 5,602
----------- -----------
Total expenses before fee waiver.......... 361,709 223,404
Advisory fee waived (Note 4).............. (156,223) (73,172)
Administration fee waived (Note 4)........ -- (12,290)
Accounting fee waived (Note 4)............ -- (22,728)
----------- -----------
Total expenses, net.................... 205,486 115,214
----------- -----------
Net investment income....................... 2,075,063 691,530
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment transactions. (352,512) (45,859)
Net unrealized appreciation of investments
during the year............................. 1,976,228 1,100,202
----------- -----------
Net gain on investments..................... 1,623,716 1,054,343
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................. $ 3,698,779 $ 1,745,873
=========== ===========
The accompanying notes are an integral part of the financial statements.
AR 15
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
------------ ------------
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income...................... $ 2,075,063 $ 691,530
Net realized loss on investment
transactions............................. (352,512) (45,859)
Net unrealized appreciation of
investments during the year.............. 1,976,228 1,100,202
----------- -----------
Net increase in net assets resulting
from operations.......................... 3,698,779 1,745,873
----------- -----------
Distributions to shareholders from:
Net investment income ($0.83 and $0.54
per share, respectively)................. (2,075,063) (691,530)
----------- -----------
Increase (decrease) in net assets from
Fund share transactions (Note 5)........... (1,131,026) 1,232,525
----------- -----------
Total increase in net assets............... 492,690 2,286,868
NET ASSETS:
Beginning of year.......................... 31,721,240 14,283,412
----------- -----------
End of year................................ $32,213,930 $16,570,280
=========== ===========
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1994
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income...................... $ 2,111,389 $ 526,072
Net realized loss on investment
transactions............................. (85,509) (5,543)
Excess of book value over market
value of securities distributed
upon redemption of shares................ (117,315) --
Net unrealized depreciation of
investments during the year.............. (2,833,319) (959,127)
----------- -----------
Net decrease in net assets resulting
from operations.......................... (924,754) (438,598)
----------- -----------
The accompanying notes are an integral part of the financial statements.
AR 16
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS--CONTINUED
DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
------------ ------------
Distributions to shareholders from:
Net investment income ($0.71 and $0.49
per share, respectively)................. $(2,111,389) $ (526,072)
Net capital gains ($0.04 and $0.00
per share, respectively)................. (111,135) --
----------- -----------
Total distributions to shareholders......... (2,222,524) (526,072)
----------- -----------
Increase (decrease) in net assets from
Fund share transactions (Note 5)......... (6,102,223) 15,248,069
----------- -----------
Total increase (decrease) in net assets.... (9,249,501) 14,283,399
NET ASSETS:
Beginning of year.......................... 40,970,741 13
----------- -----------
End of year................................ $31,721,240 $14,283,412
=========== ===========
The accompanying notes are an integral part of the financial statements.
AR 17
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements. They should be read in conjunction with the financial statements
and notes thereto.
FOR THE PERIOD
APRIL 2, 1991
FOR THE FISCAL (COMMENCEMENT
YEARS ENDED OCTOBER 31, OF OPERATIONS)
-------------------------------- TO OCTOBER 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ --------------
DIVERSIFIED INCOME PORTFOLIO
NET ASSET VALUE - BEGINNING
OF PERIOD................. $12.42 $13.48 $13.20 $12.86 $12.50
------ ------ ------ ------ ------
INVESTMENT OPERATIONS:
Net investment income..... 0.83 0.71 0.76 0.83 0.48
Net realized and
unrealized gain (loss)
on investments.......... 0.66 (1.02) 0.39 0.37 0.36
------ ------ ------ ------ ------
Total from investment
operations.............. 1.49 (0.31) 1.15 1.20 0.84
------ ------ ------ ------ ------
DISTRIBUTIONS:
From net investment
income.................. (0.83) (0.71) (0.76) (0.83) (0.48)
From net realized gain on
investments............. -- (0.04) (0.11) (0.03) --
------ ------ ------ ------ ------
Total distributions....... (0.83) (0.75) (0.87) (0.86) (0.48)
------ ------ ------ ------ ------
NET ASSET VALUE - END
of Period................ $13.08 $12.42 $13.48 $13.20 $12.86
====== ====== ====== ====== ======
TOTAL RETURN **............ 12.41% (2.33)% 9.00% 9.58% 6.89%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses ***.............. 0.65% 0.65% 0.65% 0.65% 0.89%*
Net investment income..... 6.56% 5.53% 5.65% 6.33% 6.64%*
Portfolio turnover rate.... 116.40% 43.77% 24.22% 27.37% 78.45%*
Net assets at end of
period (000 omitted)...... $32,214 $31,721 $40,971 $30,152 $24,171
AR 18
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------
FOR THE PERIOD
APRIL 2, 1991
FOR THE FISCAL (COMMENCEMENT
YEARS ENDED OCTOBER 31, OF OPERATIONS)
-------------------------------- TO OCTOBER 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ --------------
SENIOR SECURITIES:
Amount of reverse repurchase
agreements outstanding at
end of period
(in thousands)........... $ 0 $ 0 $ 0 $ 0 $ 0
Average daily amount of
reverse repurchase
agreements outstanding
during the period (in
thousands)............... $ 0 $ 0 $ 0 $ 0 $ 162
Average daily number of
shares outstanding
during the period (in
thousands)............... 2,492 2,960 2,660 2,109 1,279
Average daily amount of
reverse repurchase
agreements per share
during the period........ $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.13
AR 19
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------
FOR THE FISCAL YEARS ENDED OCTOBER 31,
---------------------------------------
1995 1994
------ -------
MUNICIPAL INCOME PORTFOLIO
NET ASSET VALUE - BEGINNING OF YEAR...... $11.64 $12.50
====== =======
INVESTMENT OPERATIONS:
Net investment income................... 0.54 0.49
Net realized and unrealized gain (loss)
on investments........................ 0.85 (0.86)
------ -------
Total from investment operations.... 1.39 (0.37)
------ -------
DISTRIBUTIONS:
From net investment income.............. (0.54) (0.49)
------ -------
NET ASSET VALUE - END OF YEAR............ $12.49 $11.64
====== =======
TOTAL RETURN**........................... 12.23% (3.05)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA:
Expenses ****......................... 0.75% 0.75%
Net investment income................. 4.50% 4.13%
Portfolio turnover rate.................. 42.08% 21.95%
Net assets at end of year (000 omitted).. $16,570 $14,283
- ------------------------------
* Annualized
** These results do not include the sales load. If the sales load had been
included, the returns would have been lower. The total return figure for
the Diversified Income Portfolio for the fiscal period ended October 31,
1991 has not been annualized.
*** Wilmington Trust Company ("WTC") reimbursed a portion of the Portfolio's
expenses, exclusive of advisory fees, amounting to $0.032 per share for
the fiscal period ended October 31, 1991. WTC waived a portion of its
fees amounting to $0.063, $0.051 and $0.056 per share for the fiscal
years ended October 31, 1995, 1994 and 1993, respectively. WTC and
Rodney Square Management Corporation ("RSMC") waived a portion of their
fees amounting to $0.078 and $0.036 per share for the fiscal year ended
October 31, 1992 and for the fiscal period ended October 31, 1991,
respectively. If these expenses, including the advisory and accounting
fees waived, had been incurred by the Portfolio, the annualized ratio of
expenses to average daily net assets for the fiscal years ended October
31, 1995, 1994, 1993 and 1992, and for the fiscal period ended October
31, 1991, would have been 1.14%, 1.05%, 1.06%, 1.24% and 1.91%,
respectively.
AR 20
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------
**** WTC waived its entire advisory fee for the fiscal years ended October 31,
1995 and 1994, amounting to $0.057 and $0.059 per share, respectively.
In addition, RSMC waived a portion of its fees for administration and
accounting services amounting to $0.010 and $0.018 per share for the
fiscal year ended October 31, 1995 and $0.010 and $0.037 per share for
the fiscal year ended October 31, 1994. If these expenses had been
incurred by the Portfolio, the annualized ratio of expenses to average
daily net assets for the fiscal years ended October 31, 1995 and 1994,
would have been 1.45% and 1.62%, respectively.
AR 21
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1.DESCRIPTION OF THE FUND. The Rodney Square Strategic Fixed-Income Fund (the
"Fund") is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as a diversified, open-end management investment company
established as a Massachusetts business trust. The Declaration of Trust,
dated May 7, 1986, as last amended and restated on February 15, 1993, permits
the Trustees to establish separate series (or "Portfolios"), each of which
may issue separate classes of shares. The authorized shares of beneficial
interest of the Fund are currently divided into two Portfolios, the
Diversified Income Portfolio and the Municipal Income Portfolio (each, a
"Portfolio" and collectively, the "Portfolios"). Each Portfolio currently
consists of a single class of shares.
2.SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the
significant accounting policies of the Fund:
SECURITY VALUATION. Each Portfolio's securities, except short-term
investments with remaining maturities of 60 days or less, are valued at their
market value as determined by their most recent bid prices in the principal
market in which these securities are normally traded, or when stock exchange
valuations are used, at the last quoted sale price on the date of valuation.
Short-term investments with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value, unless the Fund's
Board of Trustees determines that this does not represent fair value. The
value of all other securities is determined in good faith under the direction
of the Board of Trustees.
FEDERAL INCOME TAXES. Each Portfolio is treated as a separate entity and
intends to qualify as a "regulated investment company" under Subchapter M of
the Internal Revenue Code of 1986 and to distribute all of its taxable and
tax-exempt income to its shareholders. Therefore, no federal income tax
provision is required.
INTEREST INCOME AND DIVIDENDS TO SHAREHOLDERS. Interest income is accrued as
earned. Dividends from net investment income consist of accrued interest and
earned discount (including both original issue and market discount) less
amortization of premium and accrued expenses. Dividends to shareholders of
each Portfolio are declared daily from net investment income and paid to
shareholders monthly. Distributions of net capital gains realized by each
Portfolio will be made annually in December.
DEFERRED ORGANIZATION COSTS. Costs incurred by the Portfolios in connection
with the initial registration and public offering of shares have been
deferred and are being amortized on a straight-line basis over a five-year
period beginning on the date that each Portfolio commenced operations.
OTHER. Investment security transactions are accounted for on a trade date
basis. Each Portfolio uses the specific identification method for determining
realized gain and loss on investments for both financial and federal income
tax reporting purposes.
3.INVESTMENT SECURITIES. During the fiscal year ended October 31, 1995,
purchases and sales of investment securities (excluding short-term
investments) aggregated as follows:
AR 22
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
3.INVESTMENT SECURITIES--CONTINUED
DIVERSIFIED MUNICIPAL
INCOME INCOME
----------- ----------
Purchases...................... $34,806,365 $6,636,853
Sales.......................... 37,176,044 5,981,967
With respect to the Diversified Income Portfolio, for the fiscal year ended
October 31, 1994, portfolio securities with a market value of $5,548,278
(cost basis $5,665,593) were distributed in payment of a shareholder
redemption. The unrealized depreciation of such securities was reclassified
to paid-in capital.
4.ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund, on behalf of
each Portfolio, employs Wilmington Trust Company ("WTC"), a wholly owned
subsidiary of Wilmington Trust Corporation, a publicly held bank holding
company, to furnish investment advisory and other services to the Fund. Under
WTC's Advisory Contract with the Fund, WTC acts as Investment Adviser and,
subject to the supervision of the Board of Trustees, directs the investments
of the Fund's Portfolios in accordance with each Portfolio's investment
objective, policies and limitations. For its services under the Advisory
Contract, the Fund pays WTC a monthly fee at the annual rate of 0.50% of the
average daily net assets of each Portfolio of the Fund, excluding those
assets invested in any money market mutual fund. WTC has agreed to waive its
advisory fee or reimburse each Portfolio monthly to the extent that operating
expenses of the Portfolio (excluding taxes, extraordinary expenses, brokerage
commissions and interest) exceed an annual rate of 0.75% of the Portfolio's
average daily net assets through February 1996. For the fiscal year ending
October 31, 1995, with respect to the Diversified Income Portfolio, WTC
further voluntarily agreed to waive its fee or reimburse the Portfolio
monthly to the extent that operating expenses of the Portfolio (excluding
taxes, extraordinary expenses, brokerage commissions, and interest) exceed an
annual rate of 0.65% of average daily net assets. These undertakings may be
amended or rescinded at any time in the future.
The following table summarizes the advisory fees for the fiscal year ended
October 31, 1995:
Gross Advisory Advisory
Fee Fee Waiver
-------------- -----------
Diversified Income Portfolio $158,066 $156,223
Municipal Income Portfolio 73,172 73,172
WTC also serves as Custodian of the assets of the Fund and does not receive
any separate fees from the Fund for the performance of this service. Each
Portfolio of the Fund reimburses WTC for its related out-of-pocket expenses,
if any, incurred in connection with the performance of this service.
AR 23
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
4.ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES--CONTINUED
Rodney Square Management Corporation ("RSMC"), a wholly owned subsidiary of
WTC, serves as Administrator, Transfer Agent and Dividend Paying Agent to the
Fund under separate Administration and Transfer Agent Agreements with the
Fund, each dated December 31, 1992. As Administrator, RSMC is responsible
for services such as financial reporting, compliance monitoring and corporate
management. For the services provided, RSMC receives a monthly administration
fee from the Fund at an annual rate of 0.08% of each Portfolio's average
daily net assets. The administration fee paid to RSMC by the Diversified
Income Portfolio for the fiscal year ended October 31, 1995 amounted to
$25,290. RSMC waived its administration fee for the Municipal Income
Portfolio for the fiscal year ended October 31, 1995 amounting to $12,290.
The Fund does not pay RSMC any separate fees for its services as Transfer
Agent and Dividend Paying Agent for the Portfolios, as WTC assumes the cost
of providing these services to the Portfolios. Each Portfolio reimburses RSMC
for its related out-of-pocket expenses, if any, incurred in connection with
the performance of these services.
Pursuant to a Distribution Agreement with the Fund dated December 31, 1992,
Rodney Square Distributors, Inc. ("RSD"), a wholly owned subsidiary of WTC,
manages the Fund's distribution efforts and provides assistance and expertise
in developing marketing plans and materials. The Fund's Board of Trustees has
adopted distribution plans (the "12b-1 Plan") pursuant to Rule 12b-1 under
the 1940 Act to allow the Fund to reimburse RSD for certain distribution
activities and to allow WTC to incur certain expenses, the payment of which
may be considered to constitute indirect payment by the Fund of distribution
expenses. The Trustees have authorized a payment of up to 0.25% of each
Portfolio's average daily net assets annually to reimburse RSD for such
expenses. For the fiscal year ended October 31, 1995, such expenses
amounted to $27,402 for the Diversified Income Portfolio and $15,844 for the
Municipal Income Portfolio.
RSMC determines the net asset value per share of each Portfolio and provides
accounting services to the Fund pursuant to an Accounting Services Agreement
with the Fund on behalf of each Portfolio. For its services, RSMC receives an
annual fee of $50,000 per Portfolio, plus an amount equal to 0.02% of that
portion of each Portfolio's average daily net assets in excess of $100
million. For the fiscal year ended October 31, 1995, RSMC's fees for
accounting services amounted to $50,000 per Portfolio. RSMC waived $22,728
of the accounting services fee with respect to the Municipal Income
Portfolio.
The salaries and fees of all officers of the Fund, the Trustees who are
"interested persons" of the Fund, WTC, RSMC, RSD, or their affiliates, and
all personnel of the Fund, WTC, RSMC or RSD performing services related to
research, statistical and investment activities are paid by WTC, RSMC, RSD or
their affiliates. The fees and expenses of the "non-interested" Trustees for
the fiscal year ended October 31, 1995 amounted to $5,400 per Portfolio.
AR 24
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
5.FUND SHARES. At October 31, 1995, there were an unlimited number of shares of
beneficial interest of $0.01 par value authorized. The following table
summarizes the activity in shares of each Portfolio:
DIVERSIFIED INCOME PORTFOLIO
FOR THE FISCAL YEAR FOR THE FISCAL YEAR
ENDED OCTOBER 31, 1995 ENDED OCTOBER 31, 1994
---------------------- -----------------------
Shares Amount Shares Amount
--------- ----------- ---------- -----------
Shares sold............... 353,623 $ 4,500,647 478,409 $ 6,218,321
Shares issued to
shareholders in
reinvestment of
distributions............ 64,094 813,935 53,774 696,871
Shares redeemed........... (508,424) (6,445,608)(1,017,549) (13,017,415)
--------- ----------- ---------- -----------
Net decrease.............. (90,707) $(1,131,026) (485,366) $(6,102,223)
=========== ===========
Shares outstanding:
Beginning of year........ 2,553,986 3,039,352
--------- ----------
End of year.............. 2,463,279 2,553,986
========= ==========
MUNICIPAL INCOME PORTFOLIO
FOR THE FISCAL YEAR FOR THE FISCAL YEAR
ENDED OCTOBER 31, 1995 ENDED OCTOBER 31, 1994
---------------------- -----------------------
Shares Amount Shares Amount
--------- ----------- ---------- -----------
Shares sold............... 226,538 $2,755,791 1,411,286 $17,449,149
Shares issued to
shareholders in
reinvestment of
distributions............ 45,994 552,423 31,909 385,335
Shares redeemed........... (172,561) (2,075,689) (216,326) (2,586,415)
--------- ----------- ---------- -----------
Net increase.............. 99,971 $1,232,525 1,226,869 $15,248,069
=========== ===========
Shares outstanding:
Beginning of year........ 1,226,870 1
--------- ---------
End of year.............. 1,326,841 1,226,870
========= =========
AR 25
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Trustees of The Rodney Square Strategic Fixed-Income
Fund:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of The Rodney Square Strategic Fixed-Income Fund
(comprising, respectively, The Diversified Income and The Municipal Income
Portfolios) as of October 31, 1995, and the related statements of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and financial highlights for each of the four
years in the period then ended and for the period from April 2, 1991
(Commencement of Operations) to October 31, 1991 for the Diversified Income
Portfolio and for each of the two years in the period ended October 31, 1995 for
the Municipal Income Portfolio. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting The Rodney Square Strategic Fixed-
Income Fund at October 31, 1995, the results of their operations for the year
then ended, the changes in their net assets for each of the two years in the
period then ended, and financial highlights for each of the four years in the
period then ended and for the period from April 2, 1991 (Commencement of
Operations) to October 31, 1991 for the Diversified Income Portfolio, and for
each of the two years in the period ended October 31, 1995 for the Municipal
Income Portfolio in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Baltimore, Maryland
November 30, 1995
AR 26
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
Pursuant to Section 852 of the Internal Revenue Code of 1986, the Municipal
Income Portfolio designates $678,014 as tax-exempt dividends.
In January 1996, shareholders of the Fund will receive Federal income tax
information on all distributions paid to their accounts in the calendar year
1995, including any distributions paid between October 31, 1995 and December 31,
1995.
AR 27
<PAGE>
TRUSTEES
Eric Brucker THE RODNEY SQUARE
Fred L. Buckner STRATEGIC
Martin L. Klopping FIXED-INCOME FUND
John J. Quindlen
------------------
OFFICERS
Martin L. Klopping, PRESIDENT
Joseph M. Fahey, Jr., VICE PRESIDENT [Graphic] Ceasar
Robert C. Hancock, VICE PRESIDENT & TREASURER Rodney upon his
Marilyn Talman, Esq., SECRETARY gallopping horse
Diane D. Marky, ASSISTANT SECRETARY facing right,
Connie L. Meyers, ASSISTANT SECRETARY reverse image on
Louis C. Schwartz, Esq., ASSISTANT SECRETARY dark background
John J. Kelley, ASSISTANT TREASURER
-------------------------------------
ADMINISTRATOR AND TRANSFER AGENT
Rodney Square Management Corporation
------------------------------------
INVESTMENT ADVISER AND CUSTODIAN
Wilmington Trust Company
--------------------------------
DISTRIBUTOR
Rodney Square Distributors, Inc.
--------------------------------
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
--------------------------
INDEPENDENT AUDITORS ANNUAL REPORT
Ernst & Young LLP OCTOBER 31, 1995
--------------------
THIS REPORT IS SUBMITTED FOR THE GENERAL
INFORMATION OF THE SHAREHOLDERS OF THE
FUND. THE REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS IN
THE FUND UNLESS PRECEDED OR ACCOMPANIED
BY AN EFFECTIVE PROSPECTUS.
RS03
AR COVER
<PAGE>
APPENDIX A
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES
REGULATION OF THE USE OF OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT
STRATEGIES. As discussed in the Prospectus, in managing both Portfolios, WTC
may engage in certain options and futures strategies to hedge various market
risks or to enhance potential gain. In managing the Diversified Income
Portfolio, WTC may also use forward currency contracts to hedge against the
risk of foreign currency fluctuations that could adversely affect that
Portfolio's holdings or contemplated investments. Certain special
characteristics of and risks associated with using these instruments are
discussed below. Use of options, futures and forward currency contracts is
subject to applicable regulations of the SEC, the several options and futures
exchanges upon which these instruments may be traded, the Commodity Futures
Trading Commission (CFTC) and the various state regulatory authorities. The
Board of Trustees has adopted investment guidelines (described below)
reflecting those regulations.
In addition to the products, strategies and risks described below and in
the Prospectus, WTC expects to discover additional opportunities in connection
with options, futures and forward currency contracts. These new opportunities
may become available as WTC develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new options, futures and
forward currency contracts are developed. WTC may utilize these opportunities
to the extent they are consistent with each Portfolio's investment objective
and limitations and permitted by applicable regulatory authorities. The
registration statement for the Portfolios will be supplemented to the extent
that new products and strategies involve materially different risks than those
described below and in the Prospectus.
COVER FOR OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES. The
Portfolios will not use leverage in their options, futures and forward
currency contract strategies. Accordingly, the Portfolios will comply with
guidelines established by the SEC with respect to coverage of these strategies
and will either (1) set aside cash, U.S. Government or other liquid, high-
grade debt securities in a segregated account with the Fund's custodian in the
prescribed amount, or (2) hold securities or other options or futures
contracts whose values are expected to offset ("cover") their obligations
thereunder. Securities, currencies or other options or futures contracts used
for cover cannot be sold or closed out while the strategy is outstanding,
unless they are replaced with similar assets. As a result, there is a
possibility that the use of cover involving a large percentage of a
Portfolio's assets could impede portfolio management or that Portfolio's
ability to meet redemption requests or other current obligations.
OPTIONS STRATEGIES. Each Portfolio may purchase and write (sell) options
on securities and securities indices that are traded on U.S. and foreign
securities exchanges and in the over-the-counter ("OTC") market. Currently,
options on debt securities are primarily traded on the OTC market. Exchange-
traded options in the U.S. are issued by a clearing organization affiliated
with the exchange on which the option is listed, which, in effect, guarantees
A-1
<PAGE>
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between a Portfolio and its contra-party with no
clearing organization guarantee unless the parties provide for it. Thus, when
a Portfolio purchases an OTC option, it relies on the dealer from which it has
purchased the OTC option to make or take delivery of the securities underlying
the option. Failure by the dealer to do so would result in the loss of any
premium paid by the Portfolio as well as the loss of the expected benefit of
the transaction. Accordingly, before a Portfolio purchases or sells an OTC
option, WTC assesses the creditworthiness of each counterparty and any
guarantor or credit enhancement of the counterparty's credit to determine
whether the terms of the option are likely to be satisfied.
Special risks are presented by internationally traded options. Because
of time differences between the United States and various foreign countries,
and because different holidays are observed in different countries, foreign
options markets may be open for trading during hours or on days when U.S.
markets are closed. As a result, option premiums may not reflect the current
prices of the underlying securities in the United States.
Each Portfolio may purchase call options on securities in which it is
authorized to invest in order to fix the cost of a future purchase. Call
options also may be used as a means of enhancing returns by, for example,
participating in an anticipated price increase of a security. In the event of
a decline in the price of the underlying security, use of this strategy would
serve to limit the potential loss to a Portfolio to the option premium paid;
conversely, if the market price of the underlying security increases above the
exercise price and a Portfolio either sells or exercises the option, any
profit eventually realized would be reduced by the premium paid.
Each Portfolio may purchase put options on securities that it holds in
order to hedge against a decline in the market value of the securities held or
to enhance return. The put option enables a Portfolio to sell the underlying
security at the predetermined exercise price; thus, the potential for loss to
the Portfolio below the exercise price is limited to the option premium paid.
If the market price of the underlying security is higher than the exercise
price of the put option, any profit the Portfolio realizes on the sale of the
security is reduced by the premium paid for the put option less any amount for
which the put option may be sold.
Each Portfolio may on certain occasions wish to hedge against a decline
in the market value of securities that it holds at a time when put options on
those particular securities are not available for purchase. At those times, a
Portfolio may purchase a put option on other carefully selected securities in
which it is authorized to invest, the values of which historically have a high
degree of positive correlation to the value of the securities actually held.
If WTC's judgment is correct, changes in the value of the put options should
generally offset changes in the value of the securities being hedged.
However, the correlation between the two values may not be as close in these
transactions as in transactions in which a Portfolio purchases a put option on
a security that it holds. If the value of the securities underlying the put
option falls below the value of the portfolio securities, the put option may
not provide complete protection against a decline in the value of the
portfolio securities.
A-2
<PAGE>
Each Portfolio may write covered call options on securities in which it
is authorized to invest for hedging purposes or to increase return in the form
of premiums received from the purchasers of the options. A call option gives
the purchaser of the option the right to buy, and the writer (seller) the
obligation to sell, the underlying security at the exercise price during the
option period. The strategy may be used to provide limited protection against
a decrease in the market price of the security, in an amount equal to the
premium received for writing the call option less any transaction costs.
Thus, if the market price of the underlying security held by a Portfolio
declines, the amount of the decline will be offset wholly or in part by the
amount of the premium received by the Portfolio. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Portfolio will be obligated to sell the security at less than
its market value.
Securities used to cover OTC call options written by a Portfolio are
considered illiquid and therefore subject to the Portfolio's limitations on
investing in illiquid securities, unless the OTC options are sold to qualified
dealers who agree that the Portfolio may repurchase any OTC options it writes
for a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC call option written subject to this procedure
is considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option. A Portfolio
could lose the ability to participate in an increase in the value of the
underlying securities above the exercise price because the increase would
likely be offset by an increase in the cost of closing out the call option (or
could be negated if the buyer chose to exercise the call option at an exercise
price below the current market value).
Each Portfolio may also write covered put options on securities in which
it is authorized to invest. A put option gives the purchaser of the option
the right to sell, and the writer (seller) the obligation to buy, the
underlying security at the exercise price during the option period. So long
as the obligation of the writer continues, the writer may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring it to make payment of the exercise price against delivery of the
underlying security. The operation of put options in other respects,
including their related risks and rewards, is substantially identical to that
of call options. If the put option is not exercised, the Portfolio will
realize income in the amount of the premium received. This technique could be
used to enhance current return during periods of market uncertainty. The risk
in such a transaction would be that the market price of the underlying
securities would decline below the exercise price less the premiums received,
in which case the Portfolio would expect to suffer a loss.
Each Portfolio may purchase put and call options and write covered put
and call options on indexes in much the same manner as the more traditional
options discussed above, except that index options may serve as a hedge
against overall fluctuations in the securities markets (or a market sector)
rather than anticipated increases or decreases in the value of a particular
security. An index assigns values to the securities included in the index and
fluctuates with changes in such values. Settlements of index options are
effected with cash payments and do not involve delivery of securities. Thus,
upon settlement of a index option, the purchaser will realize, and the writer
will pay, an amount based on the difference between the exercise price and the
A-3
<PAGE>
closing price of the index. The effectiveness of hedging techniques using
index options will depend on the extent to which price movements in the index
selected correlate with price movements of the securities in which a Portfolio
invests. Perfect correlation is not possible because the securities held or
to be acquired by a Portfolio will not exactly match the composition of
indexes on which options are purchased or written.
Each Portfolio may purchase and write covered straddles on securities or
indexes. A long straddle is a combination of a call and a put purchased on
the same security where the exercise price of the put is less than or equal to
the exercise price on the call. A Portfolio would enter into a long straddle
when WTC believes that it is likely that prices will be more volatile during
the term of the options than is implied by the option pricing. A short
straddle is a combination of a call and a put written on the same security
where the exercise price on the put is less than or equal to the exercise
price of the call where the same issue of the security is considered "cover"
for both the put and the call. A Portfolio would enter into a short straddle
when WTC believes that it is unlikely that prices will be as volatile during
the term of the options as is implied by the option pricing. In such case,
the Portfolio will set aside cash and/or liquid, high-grade debt securities in
a segregated account with its custodian equivalent in value to the amount, if
any, by which the put is "in-the-money," that is, that amount by which the
exercise price of the put exceeds the current market value of the underlying
security. Because straddles involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
Each Portfolio may purchase put and call warrants with values that vary
depending on the change in the value of one or more specified indexes ("index
warrants"). An index warrant is usually issued by a bank or other financial
institution and gives a Portfolio the right, at any time during the term of
the warrant, to receive upon exercise of the warrant a cash payment from the
issuer of the warrant based on the value of the underlying index at the time
of exercise. In general, if a Portfolio holds a call warrant and the value of
the underlying index rises above the exercise price of the warrant, the
Portfolio will be entitled to receive a cash payment from the issuer upon
exercise based on the difference between the value of the index and the
exercise price of the warrant; if a Portfolio holds a put warrant and the
value of the underlying index falls, the Portfolio will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between
the exercise price of the warrant and the value of the index. A Portfolio
holding a call warrant would not be entitled to any payments from the issuer
at any time when the exercise price is greater than the value of the
underlying index; a Portfolio holding a put warrant would not be entitled to
any payments when the exercise price is less than the value of the underlying
index. If a Portfolio does not exercise an index warrant prior to its
expiration, then the Portfolio loses the amount of the purchase price that it
paid for the warrant.
A-4
<PAGE>
The Portfolios will normally use index warrants as they use index
options. The risks of the Portfolios' use of index warrants are generally
similar to those relating to their use of index options. Unlike most index
options, however, index warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit
of the bank or other institution which issues the warrant. Also, index
warrants generally have longer terms than index options. Index warrants are
not likely to be as liquid as index options backed by a recognized clearing
agency. In addition, the terms of index warrants may limit the Portfolios'
ability to exercise the warrants at any time or in any quantity.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS. The Diversified Income
Portfolio may take positions in options on foreign currencies to hedge against
the risk of foreign exchange rate fluctuations on foreign securities that
Portfolio holds or that it intends to purchase. For example, if the Portfolio
enters into a contract to purchase securities denominated in a foreign
currency, it could effectively fix the maximum U.S. dollar cost of the
securities by purchasing call options on that foreign currency. Similarly, if
the Portfolio held securities denominated in a foreign currency and
anticipated a decline in the value of that currency against the U.S. dollar,
the Portfolio could hedge against such a decline by purchasing a put option on
the currency involved. The Portfolio's ability to establish and close out
positions in such options is subject to the maintenance of a liquid secondary
market. Although many options on foreign currencies are exchange-traded, the
majority are traded on the OTC market. The Portfolio will not purchase or
write such options unless, in WTC's opinion, the market for them is
sufficiently liquid to ensure that the risks in connection with such options
are not greater than the risks in connection with the underlying currency. In
addition, options on foreign currencies are affected by all of those factors
that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of
the option position may vary with changes in the value of either or both
currencies and may have no relationship to the investment merits of a foreign
security. Available quotation information is generally representative of very
large transactions in the interbank market which is a global, around-the-clock
market. There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers and other market resources be firm or revised on a timely basis.
Since foreign currency transactions occurring in the interbank market
involve substantially larger amounts than those underlying foreign currency
options, interbank quotation information may not reflect rates for foreign
currencies underlying options that would be traded in an odd lot market
(generally consisting of transactions of less than $1 million) at prices that
are less favorable. In addition, to the extent that the U.S. options markets
are closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying markets
that cannot be reflected in the options markets until they reopen.
A-5
<PAGE>
OPTIONS GUIDELINES. In view of the risks involved in using the options
strategies described above, each Portfolio has adopted the following
investment guidelines to govern its use of such strategies; these guidelines
may be modified by the Board of Trustees without shareholder approval:
(1) each Portfolio will write only covered options, and each
such option will remain covered so long as the Portfolio is
obligated under the option; and
(2) the Diversified Income Portfolio will not write put or call
options having aggregate exercise prices greater than 25% of its net
assets.
These guidelines do not apply to options attached to or acquired with or
traded together with their underlying securities and do not apply to
securities that incorporate features similar to options.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. A Portfolio may
effectively terminate its right or obligation under an option by entering into
a closing transaction. If a Portfolio wishes to terminate its obligation to
purchase or sell securities or currencies under a put or a call option it has
written, the Portfolio may purchase a put or a call option of the same series
(that is, an option identical in its terms to the option previously written);
this is known as a closing purchase transaction. Conversely, in order to
terminate its right to purchase or sell specified securities or currencies
under a call or put option it has purchased, a Portfolio may sell an option of
the same series as the option held; this is known as a closing sale
transaction. Closing transactions essentially permit a Portfolio to realize
profits or limit losses on its options positions prior to the exercise or
expiration of the option. If a Portfolio is unable to effect a closing
purchase transaction with respect to options it has acquired, the Portfolio
will have to allow the options to expire without recovering all or a portion
of the option premiums paid. If a Portfolio is unable to effect a closing
purchase transaction with respect to covered options it has written, the
Portfolio will not be able to sell the underlying securities or currencies or
dispose of assets used as cover until the options expire or are exercised, and
the Portfolio may experience material losses due to losses on the option
transaction itself and in the covering securities or currencies.
In considering the use of options to enhance returns or for hedging
purposes, particular note should be taken of the following:
(1) The value of an option position will reflect, among other
things, the current market price of the underlying security, index
or currency, the time remaining until expiration, the relationship
of the exercise price to the market price, the historical price
volatility of the underlying security, index or currency and general
market conditions. For this reason, the successful use of options
depends upon WTC's ability to forecast the direction of price
fluctuations in the underlying securities or currency markets or, in
the case of index options, fluctuations in the market sector
represented by the selected index.
A-6
<PAGE>
(2) Options normally have expiration dates of up to three
years. An American style put or call option may be exercised at any
time during the option period while a European style put or call
option may be exercised only upon expiration or during a fixed
period prior to expiration. The exercise price of the options may
be below, equal to or above the current market value of the
underlying security, index or currency. Purchased options that
expire unexercised have no value. Unless an option purchased by a
Portfolio is exercised or unless a closing transaction is effected
with respect to that position, the Portfolio will realize a loss in
the amount of the premium paid and any transaction costs.
(3) A position in an exchange-listed option may be closed out
only on an exchange that provides a secondary market for identical
options. Although each Portfolio intends to purchase or write only
those exchange-traded options for which there appears to be a liquid
secondary market, there is no assurance that a liquid secondary
market will exist for any particular option at any particular time.
A liquid market may be absent if: (i) there is insufficient trading
interest in the option; (ii) the exchange has imposed restrictions
on trading, such as trading halts, trading suspensions or daily
price limits; (iii) normal exchange operations have been disrupted;
or (iv) the exchange has inadequate facilities to handle current
trading volume.
Closing transactions may be effected with respect to options
traded in the OTC markets only by negotiating directly with the
other party to the option contract or in a secondary market for the
option if such market exists. Although each Portfolio will enter
into OTC options with dealers that agree to enter into, and that are
expected to be capable of entering into, closing transactions with
the Portfolio, there can be no assurance that the Portfolio will be
able to liquidate an OTC option at a favorable price at any time
prior to expiration. In the event of insolvency of the contra-
party, a Portfolio may be unable to liquidate an OTC option.
Accordingly, it may not be possible to effect closing transactions
with respect to certain options, which would result in the Portfolio
having to exercise those options that it has purchased in order to
realize any profit. With respect to options written by a Portfolio,
the inability to enter into a closing transaction may result in
material losses to the Portfolio.
(4) With certain exceptions, exchange listed options generally
settle by physical delivery of the underlying security or currency.
Index options are settled exclusively in cash for the net amount, if
any, by which the option is "in-the-money" (where the value of the
underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the
option) at the time the option is exercised. If a Portfolio writes
a call option on an index, the Portfolio will not know in advance
the difference, if any, between the closing value of the index on
the exercise date and the exercise price of the call option itself
and thus will not know the amount of cash payable upon settlement.
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If a Portfolio holds an index option and exercises it before the
closing index value for that day is available, the Portfolio runs
the risk that the level of the underlying index may subsequently
change.
(5) A Portfolio's activities in the options markets may result
in a higher portfolio turnover rate and additional brokerage costs;
however, a Portfolio also may save on commissions by using options
as a hedge rather than buying or selling individual securities or
currencies in anticipation of, or as a result of, market movements.
FUTURES AND RELATED OPTIONS STRATEGIES. Each Portfolio may engage in
futures strategies for hedging purposes to attempt to reduce the overall
investment risk that would normally be expected to be associated with
ownership of the securities in which it invests. The Portfolios may also
engage in futures strategies to enhance potential gain subject to percentage
limitations. (See discussion of investment guidelines below).
Each Portfolio may use interest rate futures contracts and options
thereon to hedge its securities holdings against changes in the general level
of interest rates. A Portfolio may purchase an interest rate futures contract
when it intends to purchase debt securities but has not yet done so. This
strategy may minimize the effect of all or part of an increase in the market
price of the debt security that the Portfolio intends to purchase in the
future. A rise in the price of the debt security prior to its purchase may
either be offset by an increase in the value of the futures contract purchased
by the Portfolio or avoided by taking delivery of the debt securities under
the futures contract. Conversely, a fall in the market price of the
underlying debt security may result in a corresponding decrease in the value
of the futures position. A Portfolio may sell an interest rate futures
contract in order to continue to receive the income from a debt security,
while endeavoring to avoid part or all of the decline in market value of that
security that would accompany an increase in interest rates.
A Portfolio may purchase a call option on an interest rate futures
contract to hedge against a market advance in debt securities that the
Portfolio plans to acquire at a future date. The purchase of a call option on
an interest rate futures contract is analogous to the purchase of a call
option on an individual debt security, which can be used as a temporary
substitute for a position in the security itself. A Portfolio also may write
covered put options on interest rate futures contracts as a partial
anticipatory hedge and may write covered call options on interest rate futures
contracts as a partial hedge against a decline in the price of debt securities
held in the Portfolio's portfolio. A Portfolio may also purchase put options
on interest rate futures contracts in order to hedge against a decline in the
value of debt securities held by the Portfolio.
A Portfolio may sell index futures contracts in anticipation of a general
market or market sector decline that could adversely affect the market value
of the Portfolio's securities holdings. To the extent that a portion of the
Portfolio's holdings correlate with a given index, the sale of futures
contracts on that index could reduce the risks associated with a market
decline and thus provide an alternative to the liquidation of securities
positions. For example, if a Portfolio correctly anticipates a general market
decline and sells index futures to hedge against this risk, the gain in the
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futures position should offset some or all of the decline in the value of the
Portfolio's holdings. A Portfolio may purchase index futures contracts if a
significant market or market sector advance is anticipated. Such a purchase
of a futures contract would serve as a temporary substitute for the purchase
of the underlying securities which may then be purchased in an orderly
fashion. This strategy may minimize the effect of all or part of an increase
in the market price of securities that the Portfolio intends to purchase. A
rise in the price of the securities should be in part or wholly offset by
gains in the futures position.
As in the case of a purchase of an index futures contract, a Portfolio
may purchase a call option on an index futures contract to hedge against a
market advance in securities that the Portfolio plans to acquire at a future
date. A Portfolio may write covered put options on index futures as a partial
anticipatory hedge and may write covered call options on index futures as a
partial hedge against a decline in the prices of bonds held by the Portfolio.
This is analogous to writing covered call options on securities. A Portfolio
also may purchase put options on index futures contracts. The purchase of put
options on index futures contracts is analogous to the purchase of protective
put options on individual securities where a level of protection is sought
below which no additional economic loss would be incurred by the Portfolio.
The Diversified Income Portfolio may sell foreign currency futures
contracts to hedge against possible variations in the exchange rates of
foreign currencies in relation to the U.S. dollar. In addition, that
Portfolio may sell foreign currency futures contracts when WTC anticipates a
general weakening of foreign currency exchange rates that could adversely
affect the market value of the Portfolio's foreign securities holdings or
interest payments to be received in those foreign currencies. In this case,
the sale of a futures contract on the underlying currency may reduce the risk
to the Portfolio of a reduction in market value caused by a decline in the
exchange rate and, by so doing, provide an alternative to the liquidation of
the securities position and resulting transaction costs. The Portfolio may
also write a covered put option on a foreign currency futures contract as a
partial anticipatory hedge and may write a covered call option on a foreign
currency futures contract as a partial hedge against the effects of a
declining foreign currency exchange rate on the value of securities
denominated in that currency.
When WTC anticipates a significant foreign exchange rate increase while
intending to invest in a security denominated in that currency, the
Diversified Income Portfolio may purchase a foreign currency futures contract
to hedge against the increased rate pending completion of the anticipated
transaction. Such a purchase would serve as a temporary measure to protect
the Portfolio against any rise in the foreign currency exchange rate that may
add additional costs to acquiring the foreign security position. The
Portfolio may also purchase a put or call option on a foreign currency futures
contract to obtain a fixed foreign currency exchange rate at limited risk.
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The Portfolio may purchase a call option on a foreign currency futures
contract to hedge against a rise in the foreign currency exchange rate while
intending to invest in a security denominated in that currency. The Portfolio
may purchase a put option on a foreign currency futures contract as a hedge
against the effects of a decline in the foreign currency exchange rate on the
value of securities denominated in that currency.
Both Portfolios may invest in Eurodollar instruments which are U.S.
dollar-denominated futures contracts or options thereon which are linked to
the London Interbank Offered Rate ("LIBOR"). The Portfolios may use
Eurodollar futures contracts and options on those futures contracts to hedge
against changes in LIBOR to which a number of variable and floating rate
instruments are linked.
The Portfolios may also write put options on interest rate, index or, in
the case of the Diversified Income Portfolio, foreign currency futures
contracts while, at the same time, purchasing call options on the same
interest rate, index or foreign currency futures contract in order to
synthetically create an interest rate, index or foreign currency futures
contract. The options will have the same strike prices and expiration dates.
A Portfolio will only engage in this strategy when it is more advantageous to
the Portfolio to do so as compared to purchasing the futures contract.
The Portfolios may also purchase and write covered straddles on interest
rate or index futures contracts. A long straddle is a combination of a call
and a put purchased on the same security where the exercise price of the put
is less than or equal to the exercise price on the call. A Portfolio would
enter into a long straddle when it believes that it is likely that prices will
be more volatile during the term of the options than is implied by the option
pricing. A short straddle is a combination of a call and a put written on the
same security where the exercise price on the put is less than or equal to the
exercise price of the call where the same issue of the security is
considered "cover" for both the put and the call. A Portfolio would enter
into a short straddle when it believes that it is unlikely that prices will be
as volatile during the term of the options as is implied by the option
pricing. In such case, the Portfolio will set aside cash and/or liquid, high-
grade debt securities in a segregated account with its custodian in the
amount, if any, by which the put is "in-the-money," that is the amount by
which the exercise price of the put exceeds the current market value of the
underlying security.
FUTURES AND RELATED OPTIONS GUIDELINES. In view of the risks involved in
using the futures strategies that are described above, each Portfolio has
adopted the following investment guidelines to govern its use of such
strategies; these guidelines may be modified by the Board of Trustees without
shareholder vote. For purposes of these guidelines, foreign currency options
traded on a commodities exchange are considered "related options."
(1) A Portfolio will not purchase or sell non-hedging futures
contracts or related options if aggregate initial margin and
premiums required to establish such positions would exceed 5% of the
Portfolio's total assets; and
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(2) For purposes of this limitation, unrealized profits and
unrealized losses on any open contracts are taken into account and
in-the-money amount of an option that is in-the-money at the time of
purchase is excluded.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING.
No price is paid upon entering into a futures contract. Instead, upon
entering into a futures contract, a Portfolio is required to deposit with the
Fund's custodian in a segregated account in the name of the futures broker
through whom the transaction is effected an amount of cash, U.S. Government
securities or other liquid, high-grade debt instruments generally equal to 10%
or less of the contract value. This amount is known as "initial margin."
When writing a call or a put option on a futures contract, margin also must be
deposited in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not involve
borrowing to finance the futures transactions. Rather, initial margin on a
futures contract is in the nature of a performance bond or good-faith deposit
on the contract that is returned to the Portfolio upon termination of the
transaction, assuming all obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a Portfolio may be required
by a futures exchange to increase the level of its initial margin payment.
Additionally, initial margin requirements may be increased generally in the
future by regulatory action. Subsequent payments, called "variation margin,"
to and from the broker, are made on a daily basis as the value of the futures
or options position varies, a process known as "marking to the market." For
example, when a Portfolio purchases a contract and the value of the contract
rises, the Portfolio receives from the broker a variation margin payment equal
to that increase in value. Conversely, if the value of the futures position
declines, the Portfolio is required to make a variation margin payment to the
broker equal to the decline in value. Variation margin does not involve
borrowing to finance the futures transaction but rather represents a daily
settlement of the Portfolio's obligations to or from a clearing organization.
Buyers and sellers of futures positions and options thereon can enter
into offsetting closing transactions, similar to closing transactions on
options on securities, by selling or purchasing an offsetting contract or
option. Futures contracts or options thereon may be closed only on an
exchange or board of trade providing a secondary market for such futures
contracts or options.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or related option may vary
either up or down from the previous day's settlement price. Once the daily
limit has been reached in a particular contract, no trades may be made that
day at a price beyond that limit. The daily limit governs only price
movements during a particular trading day and therefore does not limit
potential losses, because prices could move to the daily limit for several
consecutive trading days with little or no trading and thereby prevent prompt
liquidation of unfavorable positions. In such event, it may not be possible
for a Portfolio to close a position and, in the event of adverse price
movements, the Portfolio would have to make daily cash payments of variation
margin (except in the case of purchased options). However, if futures
contracts have been used to hedge portfolio securities, such securities will
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not be sold until the contracts can be terminated. In such circumstances, an
increase in the price of the securities, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that
the price of the securities will, in fact, correlate with the price movements
in the contracts and thus provide an offset to losses on the contracts.
In considering the Portfolios' use of futures contracts and related
options, particular note should be taken of the following:
(1) Successful use by the Portfolios of futures contracts and
related options will depend upon WTC's ability to predict movements
in the direction of the overall securities, currencies and interest
rate markets, which requires different skills and techniques than
predicting changes in the prices of individual securities.
Moreover, futures contracts relate not only to the current price
level of the underlying instrument or currency but also to the
anticipated price levels at some point in the future. There is, in
addition, the risk that the movements in the price of the futures
contract will not correlate with the movements in the prices of the
securities or currencies being hedged. For example, if the price of
an index futures contract moves less than the price of the
securities that are the subject of the hedge, the hedge will not be
fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, the Portfolio would be in a
better position than if it had not hedged at all. If the price of
the securities being hedged has moved in a favorable direction, the
advantage may be partially offset by losses in the futures position.
In addition, if the Portfolio has insufficient cash, it may have to
sell assets to meet daily variation margin requirements. Any such
sale of assets may or may not be made at prices that reflect a
rising market. Consequently, the Portfolio may need to sell assets
at a time when such sales are disadvantageous to the Portfolio. If
the price of the futures contract moves more than the price of the
underlying securities, the Portfolio will experience either a loss
or a gain on the futures contract that may or may not be completely
offset by movements in the price of the securities that are subject
of the hedge.
(2) In addition to the possibility that there may be an
imperfect correlation, or no correlation at all, between price
movements in the futures position and the securities or currencies
being hedged, movements in the prices of futures contracts may not
correlate perfectly with movements in the prices of the hedged
securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the
underlying securities or currencies that cause this situation to
occur. First, as noted above, all participants in the futures
market are subject to initial and variation margin requirements.
If, to avoid meeting additional margin deposit requirements or for
other reasons, investors choose to close a significant number of
futures contracts through offsetting transactions, distortions in
the normal price relationship between the securities or currencies
and the futures markets may occur. Second, because the margin
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deposit requirements in the futures market are less onerous than
margin requirements in the securities market, there may be increased
participation by speculators in the futures market; such speculative
activity in the futures market also may cause temporary price
distortions. As a result, a correct forecast of general market
trends may not result in successful hedging through the use of
futures contracts over the short term. In addition, activities of
large traders in both the futures and securities markets involving
arbitrage and other investment strategies may result in temporary
price distortions.
(3) Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such
futures contracts. Although the Portfolios intend to purchase and
sell futures only on exchanges or boards of trade where there
appears to be an active secondary market, there is no assurance that
a liquid secondary market on an exchange or board of trade will
exist for any particular contract at any particular time. In such
event, it may not be possible to close a futures position, and in
the event of adverse price movements, a Portfolio would continue to
be required to make variation margin payments.
(4) Like options on securities and currencies, options on
futures contracts have limited life. The ability to establish and
close out options on futures will be subject to the development and
maintenance of liquid secondary markets on the relevant exchanges or
boards of trade. There can be no certainty that such markets for
all options on futures contracts will develop.
(5) Purchasers of options on futures contracts pay a premium in
cash at the time of purchase. This amount and the transaction costs
are all that is at risk. Sellers of options on futures contracts,
however, must post initial margin and are subject to additional
margin calls that could be substantial in the event of adverse price
movements. In addition, although the maximum amount at risk when a
Portfolio purchases an option is the premium paid for the option and
the transaction costs, there may be circumstances when the purchase
of an option on a futures contract would result in a loss to the
Portfolio when the use of a futures contract would not, such as when
there is no movement in the level of the underlying index value or
the securities or currencies being hedged.
(6) As is the case with options, the Portfolios' activities in
the futures markets may result in a higher portfolio turnover rate
and additional transaction costs in the form of added brokerage
commissions; however, a Portfolio also may save on commissions by
using futures contracts or options thereon as a hedge rather than
buying or selling individual securities or currencies in
anticipation of, or as a result of, market movements.
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SPECIAL RISKS RELATED TO FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED
OPTIONS. Buyers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the use of futures generally. In addition,
there are risks associated with foreign currency futures contracts and their
use as a hedging device similar to those associated with options on foreign
currencies described above.
Options on foreign currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. Compared
to the purchase or sale of foreign currency futures contracts, the purchase of
call or put options thereon involves less potential risk to the Diversified
Income Portfolio because the maximum amount at risk is the premium paid for
the option (plus transaction costs). However, there may be circumstances when
the purchase of a call or put option on a foreign currency futures contract
would result in a loss, such as when there is no movement in the price of the
underlying currency or futures contract, when the purchase of the underlying
futures contract would not.
FORWARD CURRENCY CONTRACTS. The Diversified Income Portfolio may use
forward currency contracts to protect against uncertainty in the level of
future foreign currency exchange rates.
That Portfolio may enter into forward currency contracts with respect to
specific transactions. For example, when the Portfolio enters into a contract
for the purchase or sale of a security denominated in a foreign currency, or
the Portfolio anticipates the receipt in a foreign currency of dividend or
interest payments on a security that it holds or anticipates purchasing, the
Portfolio may desire to "lock in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such payment, as the case may be, by entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars
or foreign currency, of the amount of foreign currency involved in the
underlying transaction. The Portfolio will thereby be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the currency exchange rates during the period between the date on
which the security is purchased or sold, or on which the payment is declared,
and the date on which such payments are made or received.
The Diversified Income Portfolio also may hedge by using forward currency
contracts in connection with portfolio positions to lock in the U.S. dollar
value of those positions, to increase the Portfolio's exposure to foreign
currencies that WTC believes may rise in value relative to the U.S. dollar or
to shift the Portfolio's exposure to foreign currency fluctuations from one
country to another. For example, when WTC believes that the currency of a
particular foreign country may suffer a substantial decline relative to the
U.S. dollar or another currency, it may enter into a forward contract to sell
the amount of the former foreign currency approximating the value of some or
all of the Portfolio's securities holdings denominated in such foreign
currency. This investment practice generally is referred to as "cross-
hedging" when another foreign currency is used.
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The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. Accordingly, it may be
necessary for the Portfolio to purchase additional foreign currency on the
spot (that is, cash) market (and bear the expense of such purchase) if the
market value of the security is less than the amount of foreign currency the
Portfolio is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received
upon the sale of the security holding if the market value of the security
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
The projection of short-term currency market movements is extremely difficult
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Portfolio to sustain
losses on these contracts and transaction costs. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall
diversification strategies. However, WTC believes that it is important to
have the flexibility to enter into such forward contracts when it determines
that the best interests of the Portfolio will be served.
At or before the maturity date of a forward contract requiring the
Diversified Income Portfolio to sell a currency, the Portfolio may either sell
a security holding and use the sale proceeds to make delivery of the currency
or retain the security and offset its contractual obligation to deliver the
currency by purchasing a second contract pursuant to which the Portfolio will
obtain, on the same maturity date, the same amount of the currency that it is
obligated to deliver. Similarly, the Portfolio may close out a forward
contract requiring it to purchase a specified currency by entering into a
second contract entitling it to sell the same amount of the same currency on
the maturity date of the first contract. The Portfolio would realize a gain
or loss as a result of entering into such an offsetting forward currency
contract under either circumstance to the extent the exchange rate or rates
between the currencies involved moved between the execution dates of the first
contract and the offsetting contract.
The cost to the Diversified Income Portfolio of engaging in forward
currency contracts varies with factors such as the currencies involved, the
length of the contract period and the market conditions then prevailing.
Because forward currency contracts are usually entered into on a principal
basis, no fees or commissions are involved. The use of forward currency
contracts does not eliminate fluctuations in the prices of the underlying
securities the Portfolio owns or intends to acquire, but it does fix a rate of
exchange in advance. In addition, although forward currency contracts limit
the risk of loss due to a decline in the value of the hedged currencies, at
the same time they limit any potential gain that might result should the value
of the currencies increase.
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Although the Diversified Income Portfolio values its assets daily in
terms of U.S. dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. The Portfolio may convert
foreign currency from time to time, and investors should be aware of the costs
of currency conversion. Although foreign exchange dealers do not charge a fee
for conversion, they do realize a profit based on the difference between the
prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the Portfolio at one rate,
while offering a lesser rate of exchange should the Portfolio desire to resell
that currency to the dealer.
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APPENDIX B
DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE, INC.
CORPORATE AND MUNICIPAL BONDS
Aaa: Bonds which are 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 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.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
CORPORATE AND MUNICIPAL COMMERCIAL PAPER. The highest rating for
corporate and municipal commercial paper is "P-1" (Prime-1). Issuers rated P-
1 (or supporting institutions) have a superior ability for repayment of senior
short-term debt obligations. P-1 repayment ability will often be evidenced by
many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
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MUNICIPAL NOTES. The highest ratings for state and municipal short-term
obligations are "MIG 1," "MIG 2" and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG
3" in the case of an issue having a variable-rate demand feature). Notes
rated "MIG 1" or "VMIG 1" are judged to be of the best quality. There is
present strong protection by established cash flows, superior liquidity
support or demonstrated broadbased access to the market for refinancing.
Notes rated "MIG 2" or "VMIG 2" are of high quality, with margins of
protection that are ample although not so large as in the preceding group.
Notes rated "MIG 3" or "VMIG 3" are of favorable quality, with all security
elements accounted for but lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access
for refinancing is likely to be less well established.
STANDARD & POOR'S RATINGS SERVICES
CORPORATE AND MUNICIPAL BONDS
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay interest and repay principal.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
CORPORATE AND MUNICIPAL COMMERCIAL PAPER The "A-1" rating for corporate
and municipal commercial paper indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics will be rated "A-1+."
MUNICIPAL NOTES. The "SP-1" rating reflects a very strong or strong
capacity to pay principal and interest. Those issues determuned to possess
overwhelming safety characteristics will be rated "SP-1+." The "SP-2" rating
reflects a satisfactory capacity to pay principal and interest.
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THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A
PART C OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
a. Financial Statements:
Included in Part A of this Registration Statement:
For The Diversified Income Portfolio:
Financial Highlights for each of the period April 2,
1991(Commencement of Operations) October 31, 1991 and for each of
the four years in the period ended October 31, 1995.
For the Municipal Income Portfolio:
Financial Highlights for each of the two years in the period ended
October 31, 1995.
Included in Part B of this Registration Statement:
FOR THE DIVERSIFIED INCOME PORTFOLIO:
Investments, October 31, 1995
Statement of Assets and Liabilities, October 31, 1995
Statement of Operations, for the fiscal year ended October 31,
1995
Statement of Changes in Net Assets, for the fiscal years ended
October 31, 1994 and October 31, 1995
Financial Highlights, for period April 2, 1991(Commencement of
Operations) to October 31, 1991 and for each of the four years
in the period ended October 31, 1995
Notes to Financial Statements
FOR THE MUNICIPAL INCOME PORTFOLIO:
Investments, October 31, 1995
Statement of Assets and Liabilities, October 31, 1995
Statement of Operations, for the fiscal year ended October 31,
1995
Statement of Changes in Net Assets, for the fiscal years ended
October 31, 1994 and October 31, 1995
Financial Highlights, for each of the two years in the period
ended October 31, 1995
Notes to Financial Statements
Statements, schedules and historical information other than those
listed above have been omitted since they are either not applicable
or are not required.
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (CONTINUED)
PART C OTHER INFORMATION (CONTINUED)
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (CONTINUED).
b. Exhibits:
1. (a) Amended and Restated Declaration of Trust dated July
1, 1992. (Incorporated by reference to Exhibit 1 to Post-
Effective Amendment No. 10 to this Registration Statement
filed on December 24, 1992.)
(b) Amendment to Declaration of Trust dated February 15,
1993. (Incorporated by reference to Exhibit 1(b) to Post-
Effective Amendment No. 11 to this Registration Statement
filed on August 27, 1993.)
2. (a) Bylaws of the Registrant. (Incorporated by reference
to Exhibit 2 to original Registration Statement filed on
May 7, 1986.)
(b) Bylaws of the Registrant as Amended on September 10,
1986. (Incorporated by reference to Exhibit 2 to Pre-
Effective Amendment No. 1 to this Registration Statement
filed on October 30, 1986.)
3. Voting Trust Agreement - None.
4. Instruments Defining the Rights of Shareholders.
(a) Amended and Restated Declaration of Trust dated July
1, 1992, amended February 15, 1993 (relevant portions).
(Incorporated by reference to Exhibit 4(a) to Post-
Effective Amendment No. 11 to this Registration Statement
filed on August 27, 1993.)
(b) Bylaws of the Registrant as Amended on September 10,
1986 (relevant portions). (Incorporated by reference to
Exhibit 4(b) Post-Effective Amendment No. 11 to this
Registration Statement filed on August 27, 1993.)
5. (a) Advisory Contract between the Registrant on behalf of
The Rodney Square Diversified Income Portfolio and
Wilmington Trust Company dated April 1, 1991.
(Incorporated by reference to Exhibit 5 to Post-Effective
Amendment No. 7 to this Registration Statement filed on
March 29, 1991.)
2
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (CONTINUED)
PART C OTHER INFORMATION (CONTINUED)
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (CONTINUED).
(b) Advisory Agreement between the Registrant on behalf
of The Rodney Square Municipal Income Portfolio and
Wilmington Trust Company dated November 1, 1993.
(Incorporated by reference to Exhibit 5(b) to Post-
Effective Amendment No. 11 to this Registration Statement
filed on August 27, 1993.)
6. Distribution Agreement between the Registrant and Rodney Square
Distributors, Inc. dated December 31, 1992
7. Bonus, Profit Sharing or Pension Plans - None.
8. (a) Custodian Contract between the Registrant and
Wilmington Trust Company dated November 12, 1986.
(Incorporated by reference to Exhibit 8 to Post-Effective
Amendment No. 1 to this Registration Statement filed on or
about May 28, 1987.)
(b) Custodial Undertaking with Manufacturers Hanover
Trust Company in connection with Master Repurchase
Agreement of the Registrant and the First Boston
Corporation dated June 6, 1989. (Incorporated by
reference to Exhibit 8(b) to Post-Effective Amendment No.
11 to this Registration Statement filed on August 27,
1993.)
9. (a) Transfer Agency Agreement between the Registrant and
Rodney Square Management Corporation dated December 31,
1992, as amended on August 16, 1993
(b) Accounting Services Agreement between Registrant and
Rodney Square Management Corporation dated November 1,
1993.
(c) Administration Agreement between the Registrant and
Rodney Square Management Corporation dated December 31,
1992, as amended August 16, 1993. (Incorporated by
reference to Exhibit 9(c) to Post-Effective Amendment No.
11 to this Registration Statement filed on August 27,
1993.)
10. (a) Opinion and Consent of Kirkpatrick & Lockhart with
respect to shares of The Rodney Square Diversified Income
Portfolio. (Incorporated by reference to Exhibit 10 to
Post- Effective Amendment No. 7 to this Registration
Statement filed on March 29, 1991.)
3
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (CONTINUED)
PART C OTHER INFORMATION (CONTINUED)
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (CONTINUED).
(b) Opinion and Consent of Kirkpatrick & Lockhart with
respect to shares of The Rodney Square Municipal Income
Portfolio. (Incorporated by reference to Exhibit 10(b) to
Post- Effective Amendment No. 11 to this Registration
Statement filed on August 27, 1993.)
(c) Opinion of Kirkpatrick & Lockhart LLP relating to Rule
24e-2 Registration.
11. Consent of Ernst & Young LLP, independent auditors for
Registrant.
12. Financial Statements omitted from Part B - None.
13. Letter of Investment Intent (on behalf of The Rodney Square
Diversified Income Portfolio). (Incorporated by reference to
Exhibit 13 to Post-Effective Amendment No. 7 to this
Registration Statement filed on March 29, 1991.)
14. Prototype Retirement Plan - None.
15. (a) Amended Plan of Distribution pursuant to Rule 12b-1
under the Investment Company Act of 1940 The Rodney Square
Diversified Income Portfolio effective as of January 1,
1993.
(b) Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act of 1940 of The Rodney Square
Municipal Income Portfolio effective November 1, 1993.
16. (a) Schedule for Computation of Performance Quotations for the
Rodney Square Diversified Income Portfolio.
(b) Schedule for Computation of Performance Quotations for the
Rodney Square Municipal Income Portfolio.
17. (a) Financial Data Schedule for the Rodney Square Diversified
Income Portfolio.
(b) Financial Data Schedule for the Rodney Square Municipal
Income Portfolio.
Power of Attorney included as part of the signature page of this
Post-Effective Amendment No. 15.
4
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (CONTINUED)
PART C OTHER INFORMATION (CONTINUED)
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
(CONTINUED).
a. Persons Controlled by Registrant: None
b. Persons who may be deemed to be under Common Control with Registrant
in the event Wilmington Trust Corporation ("WT Corp.") and
Wilmington Trust Company ("WTC") may be deemed to be a controlling
person(s) of the Registrant:
MUTUAL FUNDS
The Rodney Square Fund
The Rodney Square Tax-Exempt Fund
The Rodney Square Strategic Fixed-Income Fund
The Rodney Square Multi-Manager Fund
The Rodney Square International Securities Fund, Inc.
PRA Real Estate Securities Fund
% HELD
CORPORATE ENTITY STATE OF ORG. BY WTC
---------------- ------------- ------
Wilmington Trust Company Delaware 100%
Wilmington Trust FSB Federally Chartered 100%
Wilmington Trust of Pennsylvania Pennsylvania 100%
% HELD
CORPORATE ENTITY STATE OF ORG. BY WTC
---------------- ------------- ------
Brandywine Insurance Agency, Inc. Delaware 100%
Brandywine Finance Corp. Delaware 100%
Brandywine Life Insurance Company, Inc. Delaware 100%
Compton Realty Corporation Delaware 100%
Delaware Corp. Management Delaware 100%
Drew-I Ltd. Delaware 100%
Drew-VIII Ltd. Delaware 100%
Freedom Valley Bank Pennsylvania 100%
Holiday Travel Agency, Inc. Delaware 100%
Rodney Square Distributors, Inc. Delaware 100%
Rodney Square Management Corporation Delaware 100%
Siobain-VI Ltd. Delaware 100%
Wilmington Brokerage Services Company Delaware 100%
Wilmington Capital Management, Inc. Delaware 100%
Wilmington Trust of Florida, N.A. Florida 100%
WTC Corporate Services, Inc. Delaware 100%
WTC Investments, Inc. Delaware 100%
100 West 10th St. Corporation Delaware 100%
PARTNERSHIPS
Rodney Square Investors, L.P.
5
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (CONTINUED)
PART C OTHER INFORMATION (CONTINUED)
ITEM 26. NUMBER OF HOLDERS OF SECURITIES (AS OF JANUARY 31, 1996).
(1) (2)
TITLE OF CLASS NUMBER OF RECORD SHAREHOLDERS
-------------- -----------------------------
Shares of beneficial
interest $.01 par value
The Rodney Square 575
Diversified Income
Portfolio
The Rodney Square 286
Municipal Income
Portfolio
ITEM 27. INDEMNIFICATION.
Article X, Section 2 of the Registrant's Declaration of Trust provides,
subject to certain exceptions and limitations, that the appropriate Series of
the Registrant will indemnify the Registrant's Trustees or officers ("covered
person") to the fullest extent permitted by law against liability and all
expenses reasonably incurred or paid by such persons in connection with any
claim, action, suit or proceeding in which a covered person becomes involved
as a party or otherwise by virtue of being or having been a Trustee or officer
and against amounts paid or incurred by him or her in the settlement thereof;
provided no covered persons shall be indemnified where there has been an
adjudication, as described in Article X, Section 2(b), that such person is
liable to the Registrant or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of his or her office or did not act in good faith in the
reasonable belief that his or her action was in the best interest of the
Registrant or where there has been a settlement, unless there has been a
determination, as described in Article X, Section 2(b) that such person did
not engage in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office. Article
X, Section 2(c) provides that the Registrant may maintain insurance policies
covering such rights of indemnification.
According to Article XI, Section 1 of the Declaration of Trust, any
person extending credit to, contracting with or having any claim against the
Registrant or the Trustees shall look only to the assets of the appropriate
Series for payment and neither the shareholders nor the Trustees nor any of
their agents, whether past, present or future, shall be personally liable
therefor; except that nothing in the Declaration of Trust shall protect a
Trustee against liability by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
or her office.
6
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (CONTINUED)
PART C OTHER INFORMATION (CONTINUED)
ITEM 27. INDEMNIFICATION (CONTINUED).
Article XI, Section 2 of the Declaration of Trust provides that subject
to the provisions of Article X and Article XI, Section 1, the Trustees shall
not be liable for errors of judgment or mistakes of fact or law, or for any
act or omission in accordance with advice of counsel or other experts or for
failing to follow such advice.
Paragraph 7A of the Advisory Contract and the Form of Advisory Agreement
(collectively, the "Advisory Agreements") between Wilmington Trust Company
("WTC") and the Registrant provides that WTC shall not be liable to the
Registrant or to any shareholder of the Registrant or its Series for any act
or omission in the course of performance of its duties under the contract in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties or for any losses that may be sustained in
the purchase, holding or sale of any security or the making of any investment
for or on behalf of the Registrant. Paragraph 7B of each of the Advisory
Agreements provides that no provision of either the Advisory Contract or the
Form of Advisory Agreement shall be construed to protect any Trustee or
officer of the Registrant, or WTC, from liability in violation of Sections
17(h), 17(i) or 36(b) of the Investment Company Act of 1940. Paragraph 15
provides that obligations assumed by the Registrant pursuant to the Advisory
Agreements are limited in all cases to the Registrant and its assets or a
particular Series and its assets, if liability relates to a Series.
Paragraph 11 of the Administration Agreement between the Registrant and
Rodney Square Management Corporation ("RSMC") provides that RSMC and its
affiliates shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the Registrant in connection with the matters to
which the Agreement relates, except to the extent of a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of RSMC or its
affiliates in the performance of their obligations and duties under the
Agreement. In addition, Paragraph 17 of the Administration Agreement is
similar to Paragraph 15 of the Advisory Agreements.
Paragraph 11 of the Distribution Agreement between the Registrant and
Rodney Square Distributors, Inc. ("RSD") provides that the Registrant agrees
to indemnify and hold harmless RSD and each of its directors and officers and
each person, if any, who controls RSD within the meaning of Section 15 of the
Securities Act of 1933 (the "1933 Act") against any loss, liability, claim,
damages or expense arising by reason of any person acquiring any shares, based
upon the 1933 Act or any other statute or common law, alleging any wrongful
act of the Registrant or any of its employees or representatives, or based
upon the grounds that the registration statements, or other information filed
or made public by the Registrant included an untrue statement of a material
fact or omitted to state a material fact required to be stated or necessary in
order to make the statements not misleading. RSD, however, will not be
indemnified to the extent that the statement or omission is based on
information provided in writing by RSD. In no case is the indemnity of the
Registrant in favor of RSD or any person indemnified to be deemed to protect
7
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (CONTINUED)
PART C OTHER INFORMATION (CONTINUED)
ITEM 27. INDEMNIFICATION (CONTINUED).
RSD or any person against any liability to the Registrant or its security
holders to which RSD or such person would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
under this Agreement. Paragraph 16 of the Distribution Agreement is similar
to Paragraph 15 of the Advisory Agreements.
Paragraph 18 of the Transfer Agency Agreement between the Registrant and
RSMC provides that RSMC and its nominees shall be held harmless from all
taxes, charges, expenses, assessments, claims and liabilities including,
without limitation, liabilities arising under the 1933 Act, the Securities
Exchange Act of 1934 and any state or foreign securities and blue sky laws,
and amendments thereto, and expenses including without limitation reasonable
attorneys' fees and disbursements arising directly or indirectly from any
action or omission to act which RSMC takes at the request of or on the
direction of or in reliance on the advice of the Registrant or upon oral or
written instructions in the absence of RSMC or its nominees' own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under such Agreement. Paragraph 27 of the Transfer Agency
Agreement is similar to Paragraph 15 of the Advisory Agreements.
Paragraph 12 of the Form of Accounting Services Agreement between the
Registrant and RSMC is similar to Paragraph 18 of the Transfer Agency
Agreement. Paragraph 19 of the Form of Accounting Services Agreement is
similar to Paragraph 15 of the Advisory Agreements.
Insofar as indemnification for liability arising under the 1933 Act may
be permitted to Trustees, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such Trustee, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
8
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (CONTINUED)
PART C OTHER INFORMATION (CONTINUED)
ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER.
Wilmington Trust Company ("WTC"), a Delaware corporation, serves as
investment adviser to the Registrant. It currently manages large
institutional accounts and collective investment funds.
The directors and principal executive officer of the Adviser have held
the following positions of a substantial nature in the past two years:
BUSINESS OR OTHER CONNECTIONS OF PRINCIPAL
EXECUTIVE OFFICERS AND DIRECTORS OF
NAME REGISTRANT'S ADVISER
---- ------------------------------------------
Robert H. Bolling, Jr. Owner, R.H. Bolling, Jr. P.E. (consulting
engineering firm)
Carolyn S. Burger President and Chief Executive Officer of
Diamond State Telephone Company
Ted T. Cecala Vice Chairman and Chief Operating Officer,
Wilmington Trust Company
Richard R. Collins Retired President, American Life Insurance
Company
Charles S. Crompton, Esq. Attorney, Partner, Potter Anderson &
Corroon (law firm)
H. Stewart Dunn, Jr., Esq. Attorney, Partner, Ivins, Phillips & Barker
(law firm)
Edward B. du Pont Private investor; Director, E. I. du Pont
de Nemours & Co., Inc.; Retired Chairman,
Atlantic Aviation Corporation
Robert C. Forney Retired Executive Vice President and
Director, E. I. du Pont de Nemours & Co.,
Inc.
Thomas L. Gossage Chairman and Chief Executive Officer,
Hercules Incorporated
Robert V.A. Harra, Jr. President and Treasurer, Wilmington Trust
Company
Andrew B. Kirkpatrick, Jr., Esq. Attorney, Partner, Morris, Nichols, Arsht &
Tunnell (law firm)
Rex L. Mears President of Ray L. Mears & Sons, Inc.
(farming corporation)
9
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (CONTINUED)
PART C OTHER INFORMATION (CONTINUED)
ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER (CONTINUED).
BUSINESS OR OTHER CONNECTIONS OF PRINCIPAL
EXECUTIVE OFFICERS AND DIRECTORS OF
NAME REGISTRANT'S ADVISER
---- ------------------------------------------
Hugh E. Miller Retired Executive, Formerly Vice Chairman,
ICI Americas, Inc.; has been with parent
Imperial Chemicals Industries PLC for 20
years including management positions in the
United States and Europe
Stacey J. Mobley Senior Vice President of Communications, E.
I. du Pont de Nemours & Co., Inc.
Leonard W. Quill Chairman and Chief Executive Officer,
Wilmington Trust Company; formerly
President and Chief Operating Officer
David P. Roselle President, University of Delaware
Thomas P. Sweeney, Esq. Attorney, member, Richards, Layton & Finger
(law firm)
Bernard J. Taylor, II Retired Chairman and Chief Executive
Officer, Wilmington Trust Company
Mary Jornlin Theisen Former New Castle County Executive
Robert W. Tunnell, Jr. Managing Partner of Tunnell Companies,
L.P., owner and developer of real estate
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) The Rodney Square Fund
The Rodney Square International Securities Fund, Inc.
The Rodney Square Multi-Manager Fund
The Rodney Square Tax-Exempt Fund
1838 Investment Advisors Funds
Dracena Funds, Inc.
Heitman Real Estate Fund
The HomeState Group
Kiewit Mutual Fund
The Olstein Funds
(b)
10
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
Items Required By Form N-1A (CONTINUED)
PART C OTHER INFORMATION (CONTINUED)
ITEM 29. PRINCIPAL UNDERWRITERS (CONTINUED).
(1) (2) (3)
POSITION AND
NAME AND PRINCIPAL POSITION AND OFFICES WITH OFFICES WITH
BUSINESS ADDRESS RODNEY SQUARE DISTRIBUTORS, INC. REGISTRANT
- ------------------ -------------------------------- ------------
Jeffrey O. Stroble President, Secretary, None
1105 North Market Street Treasurer & Director
Wilmington, DE 19801
Martin L. Klopping Director President
Rodney Square North & Trustee
1100 North Market Street
Wilmington, DE 19890
Cornelius G. Curran Vice President None
1105 North Market Street
Wilmington, DE 19801
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder and the records relating to the duties of the Registrant's transfer
agent are maintained by Rodney Square Management Corporation, Rodney Square
North, 1100 North Market Street, Wilmington, DE 19890-0001. Records
relating to the duties of the Registrant's custodian are maintained by
Wilmington Trust Company, Rodney Square North, 1100 North Market Street,
Wilmington, DE 19890-0001.
ITEM 31. MANAGEMENT SERVICES.
Inapplicable.
ITEM 32. UNDERTAKINGS.
The Registrant hereby undertakes to furnish a copy of the Registrant's
latest Annual Report to Shareholders to each person to whom a copy of the
Registrant's Prospectus is delivered, upon request and without charge.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Wilmington, and State of Delaware, on
the 28th day of February, 1996.
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
By: /s/ Marilyn Talman
-------------------------
Marilyn Talman, Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to its Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
President (Principal
/s/ Martin L. Klopping Executive Officer) February 28, 1996
- ------------------------ and Trustee
Martin L. Klopping*
/s/ Eric Brucker
- ------------------------ Trustee February 28, 1996
Eric Brucker*
/s/ Fred L. Buckner
- ------------------------ Trustee February 28, 1996
Fred L. Buckner*
/s/ John J. Quindlen
- ------------------------ Trustee February 28, 1996
John J. Quindlen*
Vice President and
Treasurer (Principal
/s/ Robert C. Hancock Financial and February 28, 1996
- ------------------------ Accounting Officer)
Robert C. Hancock*
*By: /s/ Marilyn Talman
------------------------
Marilyn Talman **
** Attorney-in-fact pursuant to a power of attorney filed herewith.
<PAGE>
POWER OF ATTORNEY
-----------------
Each of the undersigned in his capacity as a Trustee or officer, or
both, as the case may be, of the Registrant, does hereby appoint Arthur
J. Brown and Marilyn Talman, and each of them, or jointly, his true and
lawful attorney and agent to execute in his name, place and stead (in
such capacity) any and all post-effective amendments to the Registration
Statement and all instruments necessary or desirable in connection
therewith, to attest the seal of the Registrant thereon and to file the
same with the Securities and Exchange Commission. Each of said
attorneys and agents have power and authority to do and perform in the
name and on behalf of each of the undersigned, in any and all
capacities, every act whatsoever necessary or advisable to be done in
the premises as fully and to all intents and purposes as each of the
undersigned might or could do in person, hereby ratifying and approving
the act of said attorneys and agents and each of them.
SIGNATURE TITLE DATE
/s/ Martin L. Klopping President (Principal
- ----------------------- Executive Officer) February 19, 1996
Martin L. Klopping and Trustee
/s/ Eric Brucker
- -----------------------
Eric Brucker Trustee February 19, 1996
/s/ Fred L. Buckner
- -----------------------
Fred L. Buckner Trustee February 19, 1996
/s/ John J. Quindlen
- ----------------------
John J. Quindlen Trustee February 19, 1996
/s/ Robert C. Hancock
- ----------------------- Treasurer (Principal
Robert C. Hancock Financial and February 19, 1996
Accounting Officer)
<PAGE>
File No. 33-5501
File No. 811-4663
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 15
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 17
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
EXHIBIT INDEX
Exhibit 6 Distribution Agreement between the Registrant
and Rodney Square Distributors, Inc. dated
December 31, 1992............................ EX-6
Exhibit 9(a) Transfer Agency Agreement between the
Registrant and Rodney Square Management
Corporation dated December 31, 1992, as
amended on August 16, 1993................... EX-9.A
Exhibit 9(b) Accounting Services Agreement between
Registrant and Rodney Square Management
Corporation dated November 1, 1993........... EX-9.B
Exhibit 10(c) Opinion of Kirkpatrick & Lockhart LLP
relating to Rule 24e-2 Registration.......... EX-10.C
Exhibit 11 Consent of Ernst & Young LLP, independent
auditors for Registrant...................... EX-11
Exhibit 15(a) Amended Plan of Distribution pursuant to Rule
12b-1 under the Investment Company Act of
1940 The Rodney Square Diversified Income
Portfolio effective as of January 1, 1993.... EX-15.A
Exhibit 15(b) Plan of Distribution pursuant to Rule 12b-1
under the Investment Company Act of 1940 of
The Rodney Square Municipal Income Portfolio
effective November 1, 1993................... EX-15.B
Exhibit 16(a) Schedule for Computation of Performance
Calculations for the Rodney Square
Diversified Income Portfolio................. EX-16.A
Exhibit 16(b) Schedule for Computation of Performance
Calculations for the Rodney Square
Municipal Income Portfolio................... EX-16.B
Exhibit 17(a) Financial Data Schedule for the Rodney Square
Diversified Income Portfolio................. EX-17.A
Exhibit 17(b) Financial Data Schedule for the Rodney Square
Municipal Income Portfolio................... EX-17.B
<PAGE>
Exhibit 6
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT is made as of the 31st day of December, 1992,
between The Rodney Square Strategic Fixed-Income Fund, a Massachusetts
business trust (the "Fund"), having its principal place of business in
Wilmington, Delaware, and Rodney Square Distributors, Inc., a corporation
organized under the laws of the State of Delaware (the "Distributor"), having
its principal place of business in Wilmington, Delaware.
WHEREAS, the Fund wishes to employ the services of Distributor, with such
assistance from its affiliates as the latter may provide, such employment to
take effect at the close of business on December 31, 1992; and
WHEREAS, Distributor wishes to provide distribution services to the Fund
as set forth below;
NOW, THEREFORE, in consideration of the mutual promises and undertakings
herein contained, the parties agree as follows:
1. SALE OF SHARES. The Fund grants to the Distributor the right to sell
shares of beneficial interest, par value $0.01 per share, of all series
of the Fund, now or hereafter created, (the "shares") on its behalf
during the term of this Agreement and subject to the registration
requirements of the Securities Act of 1933, as amended (the "1933 Act"),
and of the laws governing the sale of securities in various states (the
"Blue Sky Laws") under the following terms and conditions: the
Distributor (i) shall have the right to sell, as agent on behalf of the
Fund, shares authorized for issue and registered under the 1933 Act; (ii)
may sell shares under offers of exchange, if available, between and among
the funds distributed by Distributor and advised by Rodney Square
Management Corporation or Wilmington Trust Company; and (iii) shall sell
such shares only in compliance with the terms set forth in the Fund's
currently effective registration statement. Distributor may enter into
selling agreements with selected dealers and others for the sale of Fund
shares and will act only on its own behalf as principal in entering into
such selling agreements.
2. SALE OF SHARES BY THE FUND. The rights granted to the Distributor shall
be non-exclusive in that the Fund reserves the right to sell its shares
to investors on applications received and accepted by the Fund. Further,
the Fund reserves the right to issue shares in connection with (a) the
merger or consolidation, or acquisition by the Fund through purchase or
otherwise, with any other investment company, trust or personal holding
company; and (b) a pro rata distribution directly to the holders of
shares in the nature of a stock dividend or split-up.
3. SHARES COVERED BY THIS AGREEMENT. This Agreement shall apply to issued
shares of all series of the Fund, shares of all series of the Fund held
in its treasury in the event that in the discretion of the Fund treasury
shares shall be sold, and shares of all series of the Fund repurchased
for resale.
FIXDDIST
<PAGE>
4. PUBLIC OFFERING PRICE. Except as otherwise noted in the Fund's current
Prospectus (the "Prospectus") or Statement of Additional Information (the
"SAI") with respect to each series, all shares sold to investors by the
Distributor or the Fund will be sold at the public offering price. The
public offering price for all accepted subscriptions will be the net
asset value per share, determined in the manner described in the Fund's
current Prospectus or SAI with respect to the applicable series plus a
sales charge (if any) described in that Prospectus or SAI. The Fund
shall in all cases receive the net asset value per share on all sales.
If a sales charge is in effect, the Distributor shall have the right,
subject to the Rules of Fair Practice of the National Association of
Securities Dealers and to such rules or regulations of the Securities and
Exchange Commission as may then be in effect pursuant to Section 22 of
the Investment Company Act of 1940, as amended (the "1940 Act"), to pay a
portion of the sales charge to dealers or others who have sold shares of
the applicable series.
5. SUSPENSION OF SALES. If and whenever the determination of net asset
value is suspended and until such suspension is terminated, no further
orders for shares shall be processed by the Distributor except such
unconditional orders placed with the Distributor before it had knowledge
of the suspension. In addition, the Fund reserves the right to suspend
sales and the Distributor's authority to process orders for shares on
behalf of the Fund if, in the judgment of the Fund, it is in the best
interests of the Fund to do so. Suspension will continue for such period
as may be determined by the Fund. In addition, the Distributor reserves
the right to reject any purchase order.
6. SOLICITATION OF SALES. In consideration of these rights granted to the
Distributor, the Distributor agrees to use all reasonable efforts,
consistent with its other business, to secure purchasers for shares of
the Fund. This shall not prevent the Distributor from entering into like
arrangements (including arrangements involving the payment of
underwriting commissions) with other issuers. Distributor agrees to use
all reasonable efforts to ensure that taxpayer identification numbers
provided for shareholders of the Fund are correct.
7. AUTHORIZED REPRESENTATIONS. The Distributor is not authorized by the
Fund to give any information or to make any representations other than
those contained in the appropriate registration statements, Prospectuses
or SAI's filed with the Securities and Exchange Commission under the 1933
Act (as those registration statements, Prospectuses and SAI's may be
amended from time to time), or contained in shareholder reports or other
material that may be prepared by or on behalf of the Fund for the
Distributor's use. This shall not be construed to prevent the
Distributor from preparing and distributing, in compliance with
applicable laws and regulations, sales literature or other material as it
may deem appropriate. Distributor will furnish or cause to be furnished
copies of such sales literature or other material to the President of the
Fund or his designee and will provide him with a reasonable opportunity
to comment on it. Distributor agrees to take appropriate action to cease
using such sales literature or other material to which the Fund
reasonably objects as promptly as practicable after receipt of the
objection.
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<PAGE>
8. PORTFOLIO SECURITIES. Portfolio securities of every series of the Fund
may be bought or sold by or through the Distributor, and the Distributor
may participate directly or indirectly in brokerage commissions or
"spreads" for transactions in portfolio securities of any series of the
Fund. However, all sums of money received by the Distributor as a result
of such purchases and sales or as a result of such participation must,
after reimbursement of actual expenses of the Distributor in connection
with such activity, be paid over by the Distributor to or for the benefit
of the applicable series.
9. REGISTRATION OF SHARES. The Fund agrees that it will take all action
necessary to register shares under the 1933 Act (subject to the necessary
approval, if any, of its shareholders) so that there will be available
for sale the number of shares the Distributor may reasonably be expected
to sell. The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor
may reasonably request for use in connection with the distribution of
shares of each series of the Fund.
10. EXPENSES, COMPENSATION AND REIMBURSEMENT
(a) The Fund shall pay all fees and expenses:
(i) in connection with the preparation, setting in type and
filing of any registration statement, Prospectus and SAI
under the 1933 Act, and any amendments thereto, for the
issue of its shares;
(ii) in connection with the registration and qualification of
shares for sale in the various states in which the Board of
Trustees (the "Trustees") of the Fund shall determine it
advisable to qualify such shares for sale (including
registering the Fund or Series as a broker or dealer or any
officer of the Fund as agent or salesperson in any state);
(iii) of preparing, setting in type, printing and mailing any
report or other communication to shareholders of the Fund in
their capacity as such; and
(iv) of preparing, setting in type, printing and mailing
Prospectuses, SAI's, and any supplements thereto, sent to
existing shareholders.
(b) The Distributor shall pay expenses of:
(i) printing and distributing Prospectuses, SAI's and reports
prepared for its use in connection with the offering of the
shares for sale to the public;
(ii) any other literature used in connection with such offering;
and
(iii) advertising in connection with such offering.
3
<PAGE>
(c) In addition to the services described above, Distributor will
provide services including assistance in the production of marketing
and advertising materials for the sale of shares of the Fund and
their review for compliance with applicable regulatory requirements,
entering into dealer agreements with broker-dealers to sell shares
of the Fund and monitoring their financial strength and contractual
compliance, providing, directly or through its affiliates certain
investor support services, personal service, and the maintenance of
shareholder accounts.
(d) In connection with the services to be provided by the Distributor
under this Agreement, the Distributor shall receive:
(i) a service fee and reimbursement from the Fund (which may
include reimbursement for the expenses incurred pursuant to
Section 10(b) hereof), to the extent and under the terms and
conditions set forth in any Plan of Distribution of the Fund
or its series ("Plan"), as such Plan may be in effect from
time to time, and subject to any further limitations on such
fee or reimbursement as the Trustees of the Fund may impose,
and
(ii) any sales charge, as set forth in the Fund's registration
statement, paid by any purchaser of Fund shares.
11. INDEMNIFICATION.
(a) The Fund agrees to indemnify and hold harmless the Distributor and
each of its directors and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the
1933 Act against any loss, liability, claim, damages or expense
(including the reasonable cost of investigating or defending any
alleged loss, liability, claim, damages, or expense and reasonable
counsel fees incurred in connection therewith) arising by reason of
any person acquiring any shares, based upon the 1933 Act or any
other statute or common law, alleging any wrongful act of the Fund
or any of its employees or representatives, or based upon the
grounds that the registration statements, Prospectuses, SAI's,
shareholder reports or other information filed or made public by the
Fund (as from time to time amended) included an untrue statement of
a material fact or omitted to state a material fact required to be
stated or necessary in order to make the statements not misleading.
However, the Fund does not agree to indemnify the Distributor or
hold it harmless to the extent that the statement or omission was
made in reliance upon, and in conformity with, information furnished
to the Fund in writing by or on behalf of the Distributor. In no
case (i) is the indemnity of the Fund in favor of the Distributor or
any person indemnified to be deemed to protect the Distributor or
any person against any liability to the Fund or its security holders
to which the Distributor or such person would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties or by reason of its reckless disregard
of its obligations and duties under this Agreement, or (ii) is the
Fund to be liable under its indemnity agreement contained in this
Section 11(a) with respect to any claim made against the Distributor
or any person indemnified unless the Distributor or person, as the
4
<PAGE>
case may be, shall have notified the Fund in writing of the
claim within a reasonable time after the summons or other first
written notification giving information of the nature of the claim
shall have been served upon the Distributor or any such person or
after the Distributor or such person shall have received notice of
service on any designated agent. However, failure to notify the
Fund of any claim shall not relieve the Fund from any liability
which it may have to the Distributor or any person against whom such
action is brought other than on account of its indemnity agreement
contained in this Section 11(a). The Fund shall be entitled to
participate at its own expense in the defense, or, if it so elects,
to assume the defense of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be
conducted by counsel chosen by it and satisfactory to the
Distributor, or person or persons, defendant or defendants in the
suit. In the event the Fund elects to assume the defense of any
suit and retain counsel, the Distributor, officers or directors or
controlling person(s) or defendant(s) in the suit, shall bear the
fees and expenses of any additional counsel retained by them. If
the Fund does not elect to assume the defense of any suit, it will
reimburse the Distributor, officers or directors or controlling
person(s) or defendant(s) in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund agrees to notify
the Distributor promptly of the commencement of any litigation or
proceedings against it or any of its officers or Trustees in
connection with the issuance or sale of any of the shares.
(b) The Distributor also covenants and agrees that it will indemnify and
hold harmless the Fund and each of the members of its Trustees and
officers and each person, if any, who controls the Fund within the
meaning of Section 15 of the 1933 Act, against any loss, liability,
damages, claim or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, damages,
claim or expense and reasonable counsel fees incurred in connection
therewith) arising by reason of any person acquiring any shares,
based upon the 1933 Act or any other statute or common law, alleging
any wrongful act of the Distributor or any of its employees or
representatives, or alleging that the registration statements,
Prospectuses, SAI's, shareholder reports or other information filed
or made public by the Fund (as from time to time amended) included
an untrue statement of a material fact or omitted to state a
material fact required to be stated or necessary in order to make
the statements not misleading, insofar as the statement or omission
was made in reliance upon, and in conformity with, information
furnished in writing to the Fund by or on behalf of the Distributor.
In no case (i) is the indemnity of the Distributor in favor of the
Fund or any person indemnified to be deemed to protect the Fund or
any person against any liability to which the Fund or such person
would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties or by
reason of its reckless disregard of its obligations and duties under
this Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this Section 11(b) with respect to
any claim made against the Fund or any person indemnified unless the
Fund or person, as the case may be, shall have notified the
Distributor in writing of the claim within a reasonable time after
the summons or other first written notification giving information
5
<PAGE>
of the nature of the claim shall have been served upon the Fund or
any such person or after the Fund or such person shall have
received notice of service on any designated agent. However,
failure to notify the Distributor of any claim shall not relieve the
Distributor from any liability which it may have to the Fund or any
person against whom the action is brought other than on account of
its indemnity agreement contained in this Section 11(b). In the
case of any notice to the Distributor, it shall be entitled to
participate, at its own expense, in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any
claims, but if the Distributor elects to assume the defense, the
defense shall be conducted by counsel chosen by it and satisfactory
to the Fund, to its officers and Trustees and to any controlling
person(s) or any defendants(s) in the suit. In the event the
Distributor elects to assume the defense of any suit and retain
counsel, the Fund or controlling person(s) or defendant(s) in the
suit, shall bear the fees and expenses of any additional counsel
retained by them. If the Distributor does not elect to assume the
defense of any suit, it will reimburse the Fund, its officers or
Trustees, controlling person(s) or defendant(s) in the suit, for the
reasonable fees and expenses of any counsel retained by them. The
Distributor agrees to notify the Fund promptly of the commencement
of any litigation or proceedings against it in connection with the
issue and sale of any of the shares.
12. EFFECTIVENESS, TERMINATION, ETC. This Agreement shall become effective
at the close of business on December 31, 1992, and unless terminated as
provided, shall continue in force for one (1) year from the date of its
execution and thereafter from year to year, provided continuance after
the one (1) year period is approved at least annually by either (i) the
vote of a majority of the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Fund, and (ii) the
vote of a majority of those Trustees of the Fund who are not interested
persons of the Fund, who have no direct or indirect financial interest in
the operation of any Plan of the Fund or any agreements related to the
Plan and who are not parties to this Agreement or interested persons of
any party, cast in person at a meeting called for the purpose of voting
on the approval. This Agreement shall automatically terminate in the
event of its assignment. As used in this Section 12, the terms "vote of
a majority of the outstanding voting securities," "assignment" and
"interested person" shall have the respective meanings specified in the
1940 Act and the rules enacted thereunder as now in effect or as
hereafter amended. In addition to termination by failure to approve
continuance or by assignment, this Agreement may at any time be
terminated without the payment of any penalty 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
Plan of the Fund or any agreements related to the Plan, or by vote of a
majority of the outstanding voting securities of the Fund, on not more
than sixty (60) days' written notice to the Fund. This Agreement may be
terminated by the Distributor upon not less than sixty (60) days' prior
written notice to the Fund.
13. NOTICE. Any notice under this Agreement shall be given in writing
addressed and hand delivered or sent by registered or certified mail,
postage prepaid, to the other party to this Agreement at its principal
place of business.
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<PAGE>
14. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
15. GOVERNING LAW. To the extent that state law has not been preempted by
the provisions of any law of the United States heretofore or hereafter
enacted, as the same may be amended from time to time, this Agreement
shall be administered, construed and enforced according to the laws of
the State of Delaware.
16. SHAREHOLDER LIABILITY. The Distributor is hereby expressly put on notice
of the limitation of shareholder liability as set forth in the
Declaration of Trust of the Fund and agrees that obligations assumed by
the Fund pursuant to this Agreement shall be limited in all cases to the
Fund and its assets. The Distributor agrees that it shall not seek
satisfaction of any such obligation from the shareholders or any
individual shareholder of the Fund, nor from the Trustees or any
individual Trustee of the Fund.
17. MISCELLANEOUS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the
purposes hereof. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed in two counterparts, each of which taken
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
By: /s/ Peter J. Succoso
-----------------------------------
Peter J. Succoso, President
RODNEY SQUARE DISTRIBUTORS, INC.
By: /s/ Jeffrey O. Stroble
-----------------------------------
Jeffrey O. Stroble, President
7
Exhibit 9(a)
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
TRANSFER AGENCY AGREEMENT
THIS TRANSFER AGENCY AGREEMENT is made as of the 31st day of December,
1992, between The Rodney Square Strategic Fixed-Income Fund, a Massachusetts
business trust (the "Fund"), having its principal place of business in
Wilmington, Delaware, and Rodney Square Management Corporation, a corporation
organized under the laws of the State of Delaware ("RSMC"), having its
principal place of business in Wilmington, Delaware.
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company and
offers for public sale distinct series of shares of beneficial interest, par
value $0.01 per share, each corresponding to a distinct portfolio
("Portfolio");
WHEREAS, each share of a Portfolio represents an undivided interest in
the assets, subject to the liabilities, allocated to that Portfolio and each
Portfolio has a separate investment objective and policies;
WHEREAS, the Fund desires to avail itself of the services of RSMC to
serve as the Fund's transfer agent; and
WHEREAS, RSMC is willing to furnish such services to the Fund with
respect to each of the Portfolios listed in Schedule A to this Agreement on
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Fund and RSMC agree as follows:
1. APPOINTMENTS. The Fund hereby appoints RSMC as transfer agent, registrar
and dividend disbursing agent for the shares of common stock (the
"Shares") of the Fund and as servicing agent in connection with the
disbursements of dividends and distributions and as shareholders'
servicing agent for the Fund, each such appointment to take effect at the
close of business on December 31, 1992, and RSMC shall act as such and
perform its obligations thereof upon the terms and conditions hereafter
set forth and in accordance with the principles of principal and agent
enunciated by the common law.
2. DOCUMENTS. The Fund has furnished RSMC with copies of the Fund's
Declaration of Trust, By-Laws, Advisory Contract, Custodian Agreement,
Administration Agreement, Distribution Agreement, Accounting Services
Agreement, most recent Registration Statement on Form N-1A, current
Prospectus and Statement of Additional Information (the "SAI"), all forms
relating to any plan, program or service offered by the Fund and a
certified copy of the resolution of its Board of Trustees (the"Trustees")
approving RSMC's appointment hereunder and identifying and containing the
signatures of the Fund's officers authorized to issue Oral Instructions
and to sign Written Instructions, as hereinafter defined, on behalf of
the Portfolio and to execute stock certificates representing Shares.
Subject to the provisions of Section 21 hereof, the Fund shall furnish
FIXDTRAG
<PAGE>
promptly to RSMC a copy of any amendment or supplement to the above-
listed documents. The Fund shall furnish to RSMC any additional
documents necessary for it to perform its functions hereunder.
3. DEFINITIONS.
(a) Authorized Person. As used in this Agreement, the term "Authorized
Person" means any officer of the Fund and any other person, whether or
not any such person is an officer or employee of the Fund, duly
authorized by the Trustees of the Fund to give Oral and Written
Instructions on behalf of the Portfolio and certified by the Secretary or
Assistant Secretary of the Fund or any amendment thereto as may be
received by RSMC from time to time.
(b) Oral Instructions. As used in this Agreement, the term "Oral
Instructions" means oral instructions actually received by RSMC from an
Authorized Person or from a person reasonably believed by RSMC to be an
Authorized Person. The Fund agrees to deliver to RSMC, at the time and
in the manner specified in Section 4(b) of this Agreement, Written
Instructions confirming Oral Instructions.
(c) Written Instructions. As used in this Agreement, the term "Written
Instructions" means written instructions delivered by hand, mail, tested
telegram, cable, telex or facsimile sending device, and received by RSMC
and signed by an Authorized Person.
4. INSTRUCTIONS CONSISTENT WITH DECLARATION OF TRUST, ETC.
(a) Unless otherwise provided in this Agreement, RSMC shall act only
upon Oral or Written Instructions. Although RSMC may know of the
provisions of the Declaration of Trust and By-Laws of the Fund, RSMC may
assume that any Oral or Written Instructions received hereunder are not
in any way inconsistent with any provisions of such Declaration of Trust
or By-Laws or any vote, resolution or proceeding of the shareholders, or
of the Trustees, or of any committee thereof.
(b) RSMC shall be entitled to rely upon any Oral Instructions and any
Written Instructions actually received by RSMC pursuant to this
Agreement. The Fund agrees to forward to RSMC Written Instructions
confirming Oral Instructions in such manner that the Written Instructions
are received by RSMC by the close of business of the same day that such
Oral Instructions are given to RSMC. The Fund agrees that the fact that
such confirming Written Instructions are not received by RSMC shall in no
way affect the validity of the transactions or enforceability of the
transactions authorized by such Oral Instructions. The Fund agrees that
RSMC shall incur no liability to the Fund in acting upon Oral
Instructions given to RSMC hereunder concerning such transactions,
provided such instructions reasonably appear to have been received from
an Authorized Person.
5. TRANSACTIONS NOT REQUIRING INSTRUCTIONS. In the absence of contrary
Written Instructions, RSMC is authorized to take the following actions:
(a) Issuance of Shares. Upon receipt of a purchase order from the
Distributor, as defined in the Distribution Agreement between the Fund
and Rodney Square Distributors, Inc. or a prospective shareholder for the
purchase of Shares and sufficient information to enable RSMC to establish
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<PAGE>
a shareholder account or to issue Shares to an existing shareholder
account, and after confirmation of receipt or crediting of Federal funds
for such order from RSMC's designated bank, RSMC shall issue and credit
the account of the investor or other record holder with Shares in the
manner described in the Prospectus. RSMC shall deposit all checks
received from prospective shareholders into an account on behalf of the
Fund, and shall promptly transfer all Federal funds received from such
checks to the Custodian, as defined in the Custodian Agreement between
the Fund and Wilmington Trust Company. (References herein to "Custodian"
shall also be construed to refer to a "Sub-Custodian" if such appointment
has been made.) If so directed by the Distributor, the confirmation
supplied to the shareholder to mark such issuance will be accompanied by
a Prospectus.
(b) Transfer of Shares; Uncertificated Securities. Where a shareholder
does not hold a certificate representing the number of Shares in its
account and does provide RSMC with instructions for the transfer of such
Shares which include a signature guaranteed by a commercial bank, trust
company or member firm of a national securities exchange and such other
appropriate documentation to permit a transfer, then RSMC shall register
such Shares and shall deliver them pursuant to instructions received from
the transferor, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"), and the laws of the Commonwealth of
Massachusetts relating to the transfer of shares of common stock.
(c) Stock Certificates. If at any time the Portfolio issues stock
certificates, the following provisions will apply:
(i) The Fund will supply RSMC with a sufficient supply of stock
certificates representing Shares, in the form approved from time to time
by the Trustees of the Fund, and, from time to time, shall replenish such
supply upon request of RSMC. Such stock certificates shall be properly
signed, manually or by facsimile signature, by the duly authorized
officers of the Fund, and shall bear the corporate seal or facsimile
thereof of the Fund, and notwithstanding the death, resignation or
removal of any officer of the Fund, such executed certificates bearing
the manual or facsimile signature of such officer shall remain valid and
may be issued to shareholders until RSMC is otherwise directed by Written
Instructions.
(ii) In the case of the loss or destruction of any certificate
representing Shares, no new certificate shall be issued in lieu thereof,
unless there shall first have been furnished an appropriate bond of
indemnity issued by the surety company approved by RSMC.
(iii) Upon receipt of signed stock certificates, which shall be
in proper form for transfer, and upon cancellation or destruction
thereof, RSMC shall countersign, register and issue new certificates for
the same number of Shares and shall deliver them pursuant to instructions
received from the transferor, the rules and regulations of the SEC, and
the laws of the Commonwealth of Massachusetts relating to the transfer of
shares of common stock.
(iv) Upon receipt of the stock certificates, which shall be in
proper form for transfer, together with the shareholder's instructions to
hold such stock certificates for safekeeping, RSMC shall reduce such
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<PAGE>
Shares to uncertificated status, while retaining the appropriate
registration in the name of the shareholder upon the transfer books.
(v) Upon receipt of written instructions from a shareholder of
uncertificated securities for a certificate in the number of shares in
its account, RSMC will issue such stock certificates and deliver them to
the shareholder.
(d) Redemption of Shares. Upon receipt of a redemption order from the
Distributor or a shareholder, RSMC shall redeem the number of Shares
indicated thereon from the redeeming shareholder's account and receive
from the Fund's Custodian and disburse pursuant to the redeeming
shareholder's instructions the redemption proceeds therefor, or arrange
for direct payment of redemption proceeds by the Custodian to the
redeeming shareholder or as instructed by the shareholder, in accordance
with such procedures and controls as are mutually agreed upon from time
to time by and among the Fund, RSMC and the Fund's Custodian.
6. AUTHORIZED ISSUED AND OUTSTANDING SHARES. The Fund agrees to notify RSMC
promptly of any change in the number of authorized Shares and of any
change in the number of Shares registered under the Securities Act of
1933, as amended or termination of the Fund's declaration under Rule 24f-
2 of the 1940 Act. The Fund has advised RSMC, as of the date hereof, of
the number of Shares (i) held in any redemption or repurchase account,
and (ii) registered under the Securities Act of 1933, as amended, which
are unsold. In the event that the Fund shall declare a stock dividend or
a stock split, the Fund shall deliver to RSMC a certificate, upon which
RSMC shall be entitled to rely for all purposes, certifying (i) the
number of Shares involved, (ii) that all appropriate corporate action has
been taken, and (iii) that any amendment to the Declaration of Trust of
the Fund which may be required has been filed and is effective. Such
certificate shall be accompanied by an opinion of counsel to the Fund
relating to the legal adequacy and effect of the transaction.
7. DIVIDENDS AND DISTRIBUTIONS. The Fund shall furnish RSMC with
appropriate evidence of action by the Fund's Trustees authorizing the
declaration and payment of dividends and distributions as described in
the Prospectus. After deducting any amount required to be withheld by
any applicable tax laws, rules and regulations or other applicable laws,
rules and regulations, RSMC shall in accordance with the instructions in
proper form from a shareholder and the provisions of the Fund's
Declaration of Trust and Prospectus, issue and credit the account of the
shareholder with Shares, or, if the shareholder so elects, pay such
dividends or distributions in cash to the shareholders in the manner
described in the Prospectus. In lieu of receiving from the Fund's
Custodian and paying to shareholders cash dividends or distributions,
RSMC may arrange for the direct payment of cash dividends and
distributions to shareholders by the Custodian, in accordance with such
procedures and controls as are mutually agreed upon from time to time by
and among the Fund, RSMC and the Fund's Custodian.
RSMC shall prepare, file with the Internal Revenue Service and other
appropriate taxing authorities, and address and mail to shareholders such
returns and information relating to dividends and distributions paid by
the Fund as are required to be so prepared, filed and mailed by
applicable laws, rules and regulations, or such substitute form of notice
as may from time to time be permitted or required by the Internal Revenue
4
<PAGE>
Service. On behalf of the Portfolio, RSMC shall mail certain requests
for shareholders' certifications under penalties of perjury and pay on a
timely basis to the appropriate Federal authorities any taxes to be
withheld on dividends and distributions paid by the Portfolio, all as
required by applicable Federal tax laws and regulation.
In accordance with the Prospectus, resolutions of the Fund's Trustees
that are not inconsistent with this Agreement and are provided to RSMC
from time to time, and such procedures and controls as are mutually
agreed upon from time to time by and among the Fund, RSMC and the Fund's
Custodian, RSMC shall (a) arrange for issuance of Shares obtained through
transfers of funds from shareholders' accounts at financial institutions;
(b) arrange for the exchange of Shares for Shares of other Portfolios of
the Fund, or of shares of other eligible Funds in the Rodney Square
Complex, when permitted by the Prospectus.
8. COMMUNICATIONS WITH SHAREHOLDERS.
(a) Communications to Shareholders. RSMC will address and mail all
communications by the Portfolio to its shareholders, including reports to
shareholders, confirmations of purchases and sales of Shares, monthly
statements, dividend and distribution notices and proxy material for its
meetings of shareholders. RSMC will receive and tabulate the proxy cards
for the meetings of the shareholders of the Portfolio.
(b) Correspondence. RSMC will answer such correspondence from
shareholders, securities brokers and others relating to its duties
hereunder and such other correspondence as may from time to time be
mutually agreed upon between RSMC and the Fund.
9. SERVICES TO BE PERFORMED. RSMC shall be responsible for administering
and/or performing transfer agent functions, for acting as service agent
in connection with dividend and distribution functions and for performing
shareholder account administrative agent functions in connection with the
issuance, transfer and redemption or repurchase (including coordination
with the Fund's custodian bank in connection with shareholder redemption
by check) of the Fund's Shares as set forth in Schedule B. The details
of the operating standards and procedures to be followed shall be
determined from time to time by agreement between RSMC and the Fund and
may be expressed in written schedules which shall constitute attachments
to this Agreement.
10. RECORD KEEPING AND OTHER INFORMATION.
(a) RSMC shall maintain records of the accounts for each Shareholder
showing the items listed in Schedule C.
(b) RSMC shall create and maintain all necessary records in accordance
with all applicable laws, rules and regulations, including but not
limited to records required by Section 31(a) of the 1940 Act and the
rules thereunder, as the same may be amended from time to time, and those
records pertaining to the various functions performed by it hereunder.
All records shall be the property of the Fund at all times and shall be
available for inspection and use by the Fund. Where applicable, such
records shall be maintained by RSMC for the periods and in the places
required by Rule 31a-2 under the 1940 Act.
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<PAGE>
11. AUDIT, INSPECTION AND VISITATION. RSMC shall make available during
regular business hours all records and other data created and maintained
pursuant to this Agreement for reasonable audit and inspection by the
Fund or any person retained by the Fund. Upon reasonable notice by the
Fund, RSMC shall make available during regular business hours its
facilities and premises employed in connection with its performance of
this Agreement for reasonable visitation by the Fund, or any person
retained by the Fund.
12. COMPENSATION. Compensation for the transfer agent services and duties
performed pursuant to this Agreement will be paid by the Fund's
investment adviser pursuant to a separate Advisory Contract. Certain
other fees due and expenses incurred pursuant to this Agreement are
payable by the Fund or the shareholder on whose behalf the service is
performed and are provided in Schedule D hereto.
The Fund shall reimburse RSMC for all reasonable out-of-pocket expenses
incurred by RSMC or its agents in the performance of its obligations
hereunder. Such reimbursement for expenses incurred in any calendar
month shall be made on or before the tenth day of the next succeeding
month.
The term "out-of-pocket expenses" shall mean the following expenses
incurred by RSMC in the performance of its obligations hereunder: the
cost of stationery and forms (including but not limited to checks, proxy
cards, and envelopes), the cost of postage, the cost of insertion of non-
standard size materials in mailing envelopes and other special mailing
preparation by outside firms, the cost of first-class mailing insurance,
the cost of external electronic communications as approved by the
Trustees (to include telephone and telegraph equipment and an allocable
portion of the cost of personnel responsible for the maintenance of such
equipment), toll charges, data communications equipment and line charges
and the cost of microfilming of shareholder records (including both the
cost of storage as well as charges for access to such records). If RSMC
shall undertake the responsibility for microfilming shareholder records,
it may be separately compensated therefor in an amount agreed upon by the
principal financial officer of the Fund and RSMC, such amount not to
exceed the amount which would be paid to an outside firm for providing
such microfilming services.
13. USE OF RSMC'S NAME. The Fund shall not use the name of RSMC in any
Prospectus, SAI, sales literature or other material relating to the Fund
in a manner not approved prior thereto, provided, however, that RSMC
shall approve all uses of its name which merely refer in accurate terms
to its appointments hereunder or which are required by the SEC or a state
securities commission and, provided further, that in no event shall such
approval be unreasonably withheld.
14. USE OF FUND'S NAME. RSMC shall not use the name of the Fund or the
Portfolio of the Fund or material relating to the Fund or the Portfolio
on any checks, bank drafts, bank statements or forms for other than
internal use in a manner not approved prior thereto, provided, however,
that the Fund shall approve all uses of its name which merely refer in
accurate terms to the appointment of RSMC hereunder or which are required
by the SEC or a state securities commission, and, provided, further, that
in no event shall such approval be unreasonably withheld.
6
<PAGE>
15. SECURITY. RSMC represents and warrants that, to the best of its
knowledge, the various procedures and systems which RSMC has implemented
with regard to safeguarding from loss or damage attributable to fire,
theft or any other cause (including provision for twenty-four hours a day
restricted access) the Fund's blank checks, records and other data and
RSMC's records, data, equipment, facilities and other property used in
the performance of its obligations hereunder are adequate and that it
will make such changes therein from time to time as in its judgment are
required for the secure performance of its obligations hereunder. The
parties shall review such systems and procedures on a periodic basis.
16. INSURANCE. RSMC shall notify the Fund should any of its insurance
coverage be materially changed. Such notification shall include the date
of change and the reason or reasons therefor. RSMC shall notify the Fund
of any material claims against it, whether or not they may be covered by
insurance and shall notify the Fund from time to time as may be
appropriate of the total outstanding claims made by RSMC under its
insurance coverage.
17. ASSIGNMENT OF DUTIES TO OTHERS. Neither this Agreement nor any rights or
obligations hereunder may be assigned by RSMC without the written consent
of the Fund. RSMC may, however, at any time or times in its discretion
appoint (and may at any time remove) any other bank or trust company,
which is itself qualified under the Securities Exchange Act of 1934 to
act as a transfer agent, as its agent to carry out such of the services
to be performed under this agreement as RSMC may from time to time
direct; provided, however, that the appointment of any agent shall not
relieve RSMC of any of its responsibilities or liabilities hereunder.
18. INDEMNIFICATION.
(a) The Fund agrees to indemnify and hold harmless RSMC and its nominees
from all taxes, charges, expenses, assessments, claims and liabilities
including, without limitation, liabilities arising under the Securities
Act of 1933, the Securities Exchange Act of 1934 and any state and
foreign securities and blue sky laws, and amendments thereto (the
"Securities Laws"), and expenses, including without limitation reasonable
attorneys' fees and disbursements arising directly or indirectly from any
action or omission to act which RSMC takes (i) at the request of or on
the direction of or in reliance on the advice of the Fund or (ii) upon
Oral or Written Instructions. Neither RSMC nor any of its nominees shall
be indemnified against any liability (or any expenses incident to such
liability) arising out of RSMC's or its nominees' own willful
misfeasance, bad faith, negligence or reckless disregard of its duties
and obligations under this Agreement.
(b) RSMC agrees to indemnify and hold harmless the Fund from all taxes,
charges, expenses, assessments, claims and liabilities arising from
RSMC's obligations pursuant to this Agreement (including, without
limitation, liabilities arising under the Securities Laws, and any state
and foreign securities and blue sky laws, and amendments thereto) and
expenses, including (without limitation) reasonable attorneys' fees and
disbursements arising directly or indirectly out of RSMC's or its
nominees' own willful misfeasance, bad faith, negligence or reckless
disregard of its duties and obligations under this Agreement.
7
<PAGE>
(c) In order that the indemnification provisions contained in this
Section 18 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such assertion,
and shall keep the other party advised with respect to all developments
concerning such claim. The party who may be required to indemnify shall
have the option to participate with the party seeking indemnification in
the defense of such claim. The party seeking indemnification shall in no
case confess any claim or make any compromise in any case in which the
other party may be required to indemnify it except with the other party's
prior written consent.
19. RESPONSIBILITY OF RSMC. RSMC shall be under no duty to take any action
on behalf of the Fund except as specifically set forth herein or as may
be specifically agreed to by RSMC in writing. RSMC shall be obligated to
exercise due care and diligence in the performance of its duties
hereunder, to act in good faith and to use its best efforts in performing
services provided for under this Agreement. RSMC shall be liable for any
damages arising out of or in connection with RSMC's performance of or
omission or failure to perform its duties under this Agreement to the
extent such damages arise out of RSMC's negligence, reckless disregard of
its duties, bad faith or willful misfeasance.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, RSMC, in connection with its duties under
this Agreement, shall not be under any duty or obligation to inquire into
and shall not be liable for (a) the validity or invalidity or authority
or lack thereof of any Oral or Written Instruction, notice or other
instrument which conforms to the applicable requirements of this
Agreement, and which RSMC reasonably believes to be genuine; or (b)
subject to the provisions of Section 20, delays or errors or loss of data
occurring by reason of circumstances beyond RSMC's control, including
acts of civil or military authority, national emergencies, labor
difficulties, fire, flood or catastrophe, acts of God, insurrection, war,
riots or failure of the mails, transportation, communication or power
supply.
20. ACTS OF GOD, ETC. RSMC shall not be liable for delays or errors
occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies,
labor difficulties, fire, flood or catastrophe, acts of God,
insurrection, war, riots, or failure of the mails, transportation,
communication or power supply. In the event of equipment breakdowns
beyond its control, RSMC shall, at no additional expense to the Fund,
take reasonable steps to minimize service interruptions but shall have no
liability with respect thereto. RSMC shall enter into and shall maintain
in effect with appropriate parties one or more agreements making
reasonable provision for emergency use of electronic data processing
equipment to the extent appropriate equipment is available.
21. AMENDMENTS. RSMC and the Fund shall regularly consult with each other
regarding RSMC's performance of its obligations and its compensation
hereunder. In connection therewith, the Fund shall submit to RSMC at a
reasonable time in advance of filing with the SEC copies of any amended
or supplemented registration statements (including exhibits) under the
Securities Act of 1933, as amended, and the 1940 Act, and a reasonable
8
<PAGE>
time in advance of their proposed use, copies of any amended or
supplemented forms relating to any plan, program or service offered by
the Fund. Any change in such material which would require any change in
RSMC's obligations hereunder shall be subject to RSMC's approval, which
shall not be unreasonably withheld. In the event that such change
materially increases the cost to RSMC of performing its obligations
hereunder, RSMC shall be entitled to receive reasonable compensation
therefor.
22. DURATION, TERMINATION, ETC. Neither this Agreement nor any provisions
hereof may be changed, waived, discharged or terminated orally, but only
by written instrument which shall make specific reference to this
Agreement and which shall be signed by the party against which
enforcement of such change, waiver, discharge or termination is sought.
This Agreement shall become effective at the close of business on
December 31,1992, and shall continue in effect for one year from the
effective date, and thereafter as the parties may mutually agree;
provided, however, that this Agreement may be terminated at any time by
six months' written notice given by RSMC to the Fund or six months'
written notice given by the Fund to RSMC; and provided further that this
Agreement may be terminated immediately at any time for cause either by
the Fund or by RSMC in the event that such cause remains unremedied for a
period of time not to exceed ninety days after receipt of written
specification of such cause. Any such termination shall not affect the
rights and obligations of the parties under Section 18 hereof.
Upon the termination hereof, the Fund shall reimburse RSMC for any out-of-
pocket expenses reasonably incurred by RSMC during the period prior to
the date of such termination. In the event that the Fund designates a
successor to any of RSMC's obligations hereunder, RSMC shall, at the
expense and direction of the Fund, transfer to such successor a certified
list of the shareholders of the Fund (with name, address, and, if
provided, tax identification or Social Security number), a complete
record of the account of each shareholder, and all other relevant books,
records and other data established or maintained by RSMC hereunder. RSMC
shall be liable for any losses sustained by the Fund as a result of
RSMC's failure to accurately and promptly provide these materials.
23. REGISTRATION AS A TRANSFER AGENT. RSMC represents that it is currently
registered with the appropriate Federal agency for the registration of
transfer agents, and that it will remain so registered for the duration
of this Agreement. RSMC agrees that it will promptly notify the Fund in
the event of any material change in its status as a registered transfer
agent. Should RSMC fail to be registered with the Federal Deposit
Insurance Corporation or any successor regulatory authority as a transfer
agent at any time during this Agreement, the Fund may, on written notice
to RSMC, immediately terminate this Agreement.
24. NOTICE. Any notice under this Agreement shall be given in writing
addressed and delivered or mailed, postage prepaid, to the other party to
this Agreement at its principal place of business.
25. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
9
<PAGE>
26. GOVERNING LAW. To the extent that state law has not been preempted by
the provisions of any law of the United States heretofore or hereafter
enacted, as the same may be amended from time to time, this Agreement
shall be administered, construed and enforced according to the laws of
the State of Delaware.
27. SHAREHOLDER LIABILITY. RSMC is hereby expressly put on notice of the
limitation of shareholder liability as set forth in the Declaration of
Trust of the Fund and agrees that obligations assumed by the Fund
pursuant to this Agreement shall be limited in all cases to the Fund and
its assets. RSMC agrees that it shall not seek satisfaction of any such
obligation from the shareholders or any individual shareholder of the
Fund, nor from the Trustees or any individual Trustee of the Fund.
28. MISCELLANEOUS. Both parties agree to perform such further acts and
execute such further documents as are necessary to effectuate the
purposes hereof. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two counterparts, each of
which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this agreement as of
the day and year first above written.
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
By: /s/ Peter J. Succoso
-----------------------------------
Peter J. Succoso, President
RODNEY SQUARE MANAGEMENT CORPORATION
By: /s/ Martin L. Klopping
-----------------------------------
Martin L. Klopping, President
Acknowledgement as to the compensation
of Rodney Square Management Corporation,
as Transfer Agent:
WILMINGTON TRUST COMPANY,
as Investment Adviser
By: /s/ Peter J. Succoso
-----------------------------------
Peter J. Succoso, Senior Vice President
Date:December 31, 1992
10
<PAGE>
SCHEDULE A
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
PORTFOLIO LISTING
The Rodney Square Diversified Income Portfolio
The Rodney Square Municipal Income Portfolio
Amended Schedule adopted on August 16, 1993.
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
By: /s/ Peter J. Succoso
---------------------------------------
Peter J. Succoso, President
RODNEY SQUARE MANAGEMENT CORPORATION
By: /s/ Martin L. Klopping
---------------------------------------
Martin L. Klopping, President
A-1
<PAGE>
SCHEDULE B
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
SERVICES TO BE PERFORMED
Rodney Square Management Corporation ("RSMC") will perform the following
functions as transfer agent on an ongoing basis with respect to the Portfolio:
(a) furnish state-by-state registration reports;
(b) calculate sales load or compensation payment and provide such
information;
(c) calculate dealer commissions;
(d) provide toll-free lines for direct shareholder use, plus customer liaison
staff with on-line inquiry capacity;
(e) mail duplicate confirmations to dealers of their clients' activity,
whether executed through the dealer or directly with RSMC;
(f) provide detail for underwriter or broker confirmations and other
participating dealer shareholder accounting, in accordance with such
procedures as may be agreed upon between the Fund and RSMC;
(g) provide shareholder lists and statistical information concerning accounts
of the Portfolio to the Fund; and,
(h) provide timely notification of Portfolio activity and such other
information as may be agreed upon from time to time between RSMC and the
Portfolio or the Custodian, to the Fund or the Custodian.
B-1
<PAGE>
SCHEDULE C
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
SHAREHOLDER RECORDS
Rodney Square Management Corporation ("RSMC") shall maintain records of the
accounts for each shareholder showing the following information:
(a) name, address and United States Tax Identification or Social Security
number;
(b) number of Shares held and number of Shares for which certificates, if
any, have been issued, including certificate numbers and denominations;
(c) historical information regarding the account of each shareholder,
including dividends and distributions paid and the date and price for all
transactions on a shareholder's account;
(d) any stop or restraining order placed against a shareholder's account;
(e) any correspondence relating to the current maintenance of a shareholder's
account;
(f) information with respect to withholdings; and,
(g) any information required in order for RSMC to perform any calculations
contemplated or required by this Agreement.
C-1
<PAGE>
SCHEDULE D
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
FEE SCHEDULE
FEES
Monthly return of checks $ 0.44 per check
Non-return of check 0.10 per check
Out of pocket expenses shall be reimbursed by the Fund to Rodney Square
Management Corporation ("RSMC") or paid directly by the Fund. Such
expenses include but are not limited to the following:
a. Toll-free lines (if required)
b. Forms, envelopes, checks, checkbooks
c. Postage (bulk, pre-sort, first-class at current prevailing rates)
d. Hardware/phone lines for remote terminal(s) (if required)
e. Microfiche/Microfilm
f. Wire fee for receipt or disbursement - $7.50 per wire
g. Mailing fee - approximately $30.00 per 1,000 items
h. Cost of proxy solicitation, mailing and tabulation (if required)
i. Certificate issuance - $2.00 per certificate
j. Development/programming costs/special projects - time and material
NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") FUND/SERV CHARGES (NON-MONEY
MARKET SERIES)
Participation Fee: $50.00 per month
CPU Access Fee: $40.00 per month
Transaction Fee: $ 0.50 each
NSCC will deduct its monthly fee on the 15th of each month from RSMC's
cash settlement that day. These charges will be included on the next bill
as out-of-pocket expenses.
NSCC SYSTEM ACCESS CHARGES (PER FUND)
Transaction fees based on each month's total:
NUMBER OF TRANSACTIONS FEE PER TRANSACTION
---------------------- -------------------
1- 400 $.75
401- 800 $.60
801- 1,200 $.50
1,201- 1,500 $.45
1,501- 2,000 $.40
over 2,000 $.35
PLUS: out-of-pocket expenses for settlements, wire charges, NSCC pickup
charges, hardware, CRT's modems, lines (if required), etc.
ADDITIONAL EXPENSES (PAID BY SHAREHOLDER):
Direct IRA/Keogh processing $10.00 per account per annum
$ 5.00 new account set-up fee
$ 2.50 per distribution
$10.00 per transfer out
D-1
<PAGE>
Account transcripts most recent seven years $35.00
Account transcripts beyond seven years $50.00
Checkwriting charges
Stop payments $ 7.50 per stop
Non-sufficient funds $12.50 per return
Check copy $ 2.00 per copy
PAYMENT
The above will be billed within the first five (5) business days of each
month and will be paid by wire within five (5) business days of receipt.
Amended Schedule adopted on August 16, 1993.
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
By: /s/ Peter J. Succoso
---------------------------------------
Peter J. Succoso, President
RODNEY SQUARE MANAGEMENT CORPORATION
By: /s/ Martin L. Klopping
---------------------------------------
Martin L. Klopping, President
D-2
Exhibit 10(c)
--------------------------
KIRKPATRICK & LOCKHART LLP
--------------------------
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE (202) 778-9000
FACSIMILE (202) 778-9100
ARTHUR J. BROWN
(202) 778-9046
[email protected]
February 27, 1996
The Rodney Square Strategic Fixed-Income Fund
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
Dear Sir or Madam:
The Rodney Square Strategic Fixed-Income Fund (the "Trust") is a business
trust established under Massachusetts law by Declaration of Trust, dated May 7,
1986, as amended and restated as of July 1, 1992. We understand that the Trust
is about to file Post-Effective Amendment No. 15 to its Registration Statement
on Form N-lA for the purpose of registering additional shares of beneficial
interest in its two series, The Rodney Square Diversified Income Portfolio and
The Rodney Square Municipal Income Portfolio under the Securities Act of 1933,
as amended ("1933 Act"), pursuant to Section 24(e)(1) of the Investment Company
Act of 1940, as amended ("1940 Act").
We have, as counsel, participated in various business and other proceedings
relating to the Trust. We have examined copies, either certified or otherwise
proved to be genuine, of its Declaration of Trust, as amended, and By-Laws, as
now in effect, the minutes of meetings of its board of trustees and other
documents relating to its organization and operation, and we are generally
familiar with its affairs. Based upon the foregoing, it is our opinion that the
shares of beneficial interest in the Trust currently being registered pursuant
to Section 24(e)(1) as reflected in Post-Effective Amendment No. 15, when sold
in accordance with the Trust's Declaration of Trust, as amended, and By-Laws,
will be legally issued, fully paid and non-assessable, subject to compliance
with the 1933 Act, the 1940 Act and applicable state laws regulating the offer
and sale of securities.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust. The
Declaration of Trust states that creditors of, contractors with and claimants
against the Trust shall look only to the assets of the Trust for payment. It
DC-250401.1
BOSTON - HARRISBURG - MIAMI - NEW YORK - PITTSBURGH - WASHINGTON
<PAGE>
- --------------------------
KIRKPATRICK & LOCKHART LLP
- --------------------------
The Rodney Square Strategic Fixed-Income Fund
February 27, 1996
Page Two
also states that every note, bond, contract, or other undertaking issued by or
on behalf of the Trust or the trustees relating to the Trust shall include a
recitation limiting the obligation represented thereby to the Trust and its
assets. The Declaration of Trust further provides: (i) for indemnification from
Trust assets, as appropriate, for all losses and expenses of any shareholder
held personally liable for the obligations of the Trust by virtue of ownership
of shares of the Trust; and (ii) for the Trust to assume the defense of any
claim against the shareholder for any act or obligation of the Trust. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust would be unable to meet
its obligations.
We hereby consent to this opinion accompanying Post-Effective Amendment No.
15 which you are about to file with the Securities and Exchange Commission. We
also consent to the reference to our firm under the caption "Other Information -
Legal Counsel" in the statement of additional information incorporated by
reference into the prospectus of the Trust, filed as part of the Trust's
Registration Statement.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Arthur Brown
------------------------
Arthur J. Brown
Exhibit 11
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" and "Financial
Statements" in the Statement of Additional Information and to the incorporation
by reference in this Post-Effective Amendment Number 15 to Registration
Statement Number 33-5501 (Form N-1A) of our report dated November 30, 1995, on
the financial statements and financial highlights of The Rodney Square Strategic
Fixed-Income Fund for the year ended October 31, 1995, included in the 1995
Annual Report to Shareholders.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 22, 1996
Exhibit 15(a)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
OF THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
WITH RESPECT TO THE RODNEY SQUARE DIVERSIFIED INCOME PORTFOLIO
WHEREAS, The Rodney Square Strategic Fixed-Income Fund (the "Fund")
operates as an open-end investment company registered under the Investment
Company Act of 1940 (the "Act");
WHEREAS, the Fund's shares of beneficial interest, par value $0.01 per
share, are divided into separate series ("portfolios");
WHEREAS, at the present time, the Fund has one portfolio, The Rodney
Square Diversified Income Portfolio (the "Portfolio");
WHEREAS, the Fund desires to adopt a Plan of Distribution pursuant to
Rule 12b-1 under the Act;
WHEREAS, the Fund has entered into a Distribution Agreement pursuant
to which the Fund has employed a distributor of the securities of the Fund
(the "Distributor") during the continuous offering of shares of its
portfolios;
NOW THEREFORE, the Fund hereby adopts this Plan of Distribution (the
"Plan") on behalf of the Portfolio in accordance with Rule 12b-1 under the
Act.
1. The Fund shall pay the Distributor, as reimbursement for the
expenses incurred with respect to the Portfolio by the Distributor pursuant to
the Distribution Agreement ("Distribution Expenses"), promptly after the last
day of each month a fee not greater than the Distribution Expenses incurred by
the Distributor during that month and any prior month of the same fiscal year
to the extent that Distribution Expenses in such prior month had not
previously been paid to the Distributor because of the "provided" clause of
this paragraph; provided that payment shall be made for any month only to the
extent that such payment shall not exceed: (i) on an annualized basis, 0.25%
of the Fund's average annual net assets; and (ii) limitations set from time to
time by the Board of Trustees.
2. For purposes hereof, "Distribution Expenses" shall mean all
expenses which the Distributor bears with respect to the Portfolio under the
Distribution Agreement and consists of the amounts paid and expenses incurred
by the Distributor for distribution activities encompassed by Rule 12b-1, such
as public relations services, telephone services, sales presentations, media
charges, preparation, printing and mailing of advertising and sales
literature, data processing necessary to support a distribution effort,
printing and mailing prospectuses, and distribution and shareholder servicing
activities of broker/dealers and other financial institutions. Such expenses
may include fairly allocable internal expenses of the Distributor and payments
to third parties.
3. Nothing in this Plan shall operate or be construed to limit the
extent to which the Fund's manager (the "Manager") or any other person, other
than the Fund, may incur costs and bear expenses associated with the
distribution of securities of which the Portfolio is the issuer.
DIVP12B1 02/12/96
<PAGE>
4. It is contemplated by the Plan that the Manager may from time to
time make payments to third parties out of its management fee, not to exceed
the amount of that fee, including payments of fees for shareholder servicing
and transfer agency functions. If such payments are deemed to be indirect
financing of an activity primarily intended to result in the sale of shares
issued by the Portfolio within the context of Rule 12b-1 under the Act, such
payments shall be authorized by this Plan.
5. (a) This Plan shall not take effect until it has been approved by
votes of the majority of both (i) the Board of Trustees of the Fund and (ii)
the Trustees who are not interested persons of the Fund within the meaning of
Section 2(a)(19) of the Act and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to the Plan
("Independent Trustees"), cast in person at a meeting called for the purpose
of voting on this Plan.
(b) Any limitations set by the Board of Trustees on the amount of
Distribution Expenses that are reimbursable shall be approved by vote of the
majority of both the Board of Trustees of the Fund and the Independent
Trustees.
6. This Plan shall remain in effect for one year from the date of its
effectiveness and may continue in effect thereafter if it is approved at least
annually by a vote of the Board of Trustees of the Fund, and of the
Independent Trustees, cast in person at a meeting called for the purpose of
voting on the Plan.
7. This Plan may be terminated at any time by a majority vote of the
Independent Trustees or by vote of a majority of the outstanding voting
securities of the Portfolio. Upon such termination or upon termination of the
Distribution Agreement, any Distribution Expenses incurred by the Distributor
to the date of termination shall be presented to the Fund for payment subject
to the expense limitation in paragraph (1) hereof. Any Distribution Expenses
incurred by the Distributor prior to the effective date of termination shall
be paid by the Fund in accordance with the Plan except that any expenses not
properly payable by the Fund by fiscal year-end shall expire at fiscal year-
end. The Fund shall have no obligation to make any other payment to the
Distributor under this Plan or the Distribution Agreement.
8. The Distributor shall provide, on at least a quarterly basis, a
written report to the Fund's Board of Trustees of the Distribution Expenses
incurred by the Distributor, the amounts paid on behalf of the Portfolio by
the Fund during the most recently completed quarter pursuant to this Plan or
any related agreements and the purposes for which such expenditures were made.
9. While this Plan is in effect, the selection and nomination of
those Trustees who are not interested persons of the Fund within the meaning
of Section 2(a)(19) of the Act shall be committed to the discretion of the
Trustees then in office who are not interested persons of the Fund.
2
<PAGE>
10. All material amendments to this Plan must be approved by a
majority vote of the Board of Trustees of the Fund and of the Independent
Trustees, cast in person at a meeting called for the purpose of voting
thereon. In addition, this Plan may not be amended to increase materially the
amounts authorized to be spent in paragraphs (1) and (7) hereof without
approval of a majority of the outstanding shares of the Portfolio.
Dated: January 1, 1993
3
[ARTICLE] 6
[CIK] 0000793276
[NAME] RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
[SERIES]
[NUMBER] 1
[NAME] DIVERSIFIED INCOME PORTFOLIO
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-START] NOV-01-1994
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 31004
[INVESTMENTS-AT-VALUE] 32062
[RECEIVABLES] 381
[ASSETS-OTHER] 9
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 32452
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 238
[TOTAL-LIABILITIES] 238
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 31569
[SHARES-COMMON-STOCK] 25
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (438)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 1058
[NET-ASSETS] 32214
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 2281
[OTHER-INCOME] 0
[EXPENSES-NET] 205
[NET-INVESTMENT-INCOME] 2076
[REALIZED-GAINS-CURRENT] (353)
[APPREC-INCREASE-CURRENT] 1976
[NET-CHANGE-FROM-OPS] 3699
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 2075
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 354
[NUMBER-OF-SHARES-REDEEMED] 508
[SHARES-REINVESTED] 64
[NET-CHANGE-IN-ASSETS] (1131)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (86)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 158
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 362
[AVERAGE-NET-ASSETS] 31613
[PER-SHARE-NAV-BEGIN] 12.42
[PER-SHARE-NII] 0.83
[PER-SHARE-GAIN-APPREC] 0.66
[PER-SHARE-DIVIDEND] (0.83)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 13.08
[EXPENSE-RATIO] 0.65
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
EXHIBIT 16(a)
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
THE DIVERSIFIED INCOME PORTFOLIO
HYPOTHETICAL $10,000 INVESTMENT
For the Period April 2, 1991 (Commencement of Operations)
through October 31, 1995
Value of Initial $10,000 = ($10,000 / Beginning NAV) * Ending NAV
Investment = ($10,000 / $12.50) * $13.08
= $10,464.00
Value of Reinvested Income = Shares Reinvested from Income Dividends
Dividends * Ending NAV
= 259.40 * $13.08
= $3,392.95
Value of Reinvested Capital = Shares Reinvested from Capital Gain
Gain Distributions Distributions * Ending NAV
= 12.13 * $13.08
= $158.66
TOTAL VALUE = $10,464.00 + $3,392.95 + $158.66 = $14,015.61
- -----------------------------------------------------------------------------
For the Period April 2, 1991 (Commencement of Operations)
through October 31, 1994
Value of Initial $10,000 = ($10,000 / Beginning NAV) * Ending NAV
Investment = ($10,000 / $12.50) * $12.42
= $9,936.00
Value of Reinvested Income = Shares Reinvested from Income Dividends
Dividends * Ending NAV
= 191.79 * $12.42
= $2,382.03
Value of Reinvested Capital = Shares Reinvested from Capital Gain
Gain Distributions Distributions * Ending NAV
= 12.13 * $12.42
= $150.65
TOTAL VALUE = $9,936.00 + $2,382.03 + $150.65 = $12,468.68
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
THE DIVERSIFIED INCOME PORTFOLIO
(STANDARDIZED RETURNS)
1 YR INCEPTION
---------- ---------
# YEARS IN PERIOD 1 4.5863
AVERAGE ANNUAL TOTAL RETURN 8.47% 6.81%
MAXIMUM SALES LOAD 3.50% 3.50%
FOR THE ONE YEAR PERIOD ENDED OCTOBER 31, 1995
- ------------------------------------------------------------------------
Average Annual Total Return
- ---------------------------
(ERV/P)**(1/N) -1 = T
($1,084.71/1,000)**1 -1 = T
.0847 = T
8.47% = T
INCEPTION THROUGH OCTOBER 31, 1995
- ------------------------------------------------------------------------
Average Annual Total Return
- ---------------------------
(ERV/P)**(1/N) -1 = T
($1,352.50/1,000)
** (1/4.5863) -1 = T
.0681 = T
6.81% = T
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
THE DIVERSIFIED INCOME PORTFOLIO
(NON-STANDARDIZED RETURNS)
1 YR INCEPTION
---------- ---------
# YEARS IN PERIOD 1 4.5863
CUMULATIVE TOTAL RETURN
(Excluding Maximum Sales Load) 12.41% 40.16%
CUMULATIVE TOTAL RETURN
(After Deducting Maximum
Sales Load) 8.47% 35.25%
AVERAGE ANNUAL TOTAL RETURN 12.41% 7.64%
MAXIMUM SALES LOAD 3.50% 3.50%
FOR THE ONE YEAR PERIOD ENDED OCTOBER 31, 1995
- ------------------------------------------------------------------------
Cumulative Total Return Average Annual Total Return
- ----------------------- ---------------------------
(ERV/P) - 1 = T (ERV/P)**(1/N) -1 = T
($1,124.06/1,000) -1 = T ($1,124.06/1,000) -1 = T
.1241 = T .1241 = T
12.41% = T 12.41% = T
INCEPTION THROUGH OCTOBER 31, 1995
- ------------------------------------------------------------------------
Cumulative Total Return Average Annual Total Return
- ----------------------- ---------------------------
(Excluding Maximum Sales Load)
- ------------------------------
(ERV/P) -1 = T (ERV/P)**(1/N) -1 = T
($1,401.55/1,000) -1 = T ($1,401.55/1,000)
** (1/4.5863) -1 = T
.4016 = T .0764 = T
40.16% = T 7.64% = T
Cumulative Total Return (After Deducting Maximum Sales Load)
- -------------------------------------------------------------
(ERV/P) -1 = T
($1,352.50/1,000) -1 = T
.3525 = T
35.25% = T
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
THE DIVERSIFIED INCOME PORTFOLIO
Yield for the Thirty-Day Period Ended October 31, 1995
ACTUAL YIELD FOR THE 30-DAY PERIOD:
- -----------------------------------
Yield = 2[((a-b)/cd + 1)**6 - 1]
Yield = 2[((170,151.25 - 17,209.35)/2,465,609.7594 * $13.55 + 1) ** 6 -1]
Yield = .05556691
Yield = 5.56%
YIELD FOR THE PERIOD WITHOUT THE EFFECT OF FEE WAIVERS:
- -------------------------------------------------------
Yield = 2[((a-b)/cd + 1)**6 - 1]
Yield = 2[((170,151.25 - 28,974.17)/2,465,609.7594 * $13.55 + 1) ** 6 -1]
Yield = .05124735
Yield = 5.12%
Exhibit 9(b)
ACCOUNTING SERVICES AGREEMENT
BETWEEN
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
AND
RODNEY SQUARE MANAGEMENT CORPORATION
AGREEMENT made this 1st day of November, 1993, by and between The Rodney
Square Strategic Fixed-Income Fund, a Massachusetts business trust
(hereinafter called the "Fund"), having its principal place of business in
Wilmington, Delaware, and Rodney Square Management Corporation, a corporation
organized under the laws of the State of Delaware (hereinafter called "RSMC"),
having its principal place of business in Wilmington, Delaware.
WHEREAS the Fund is registered under the Investment Company Act of 1940,
as amended ("Investment Company Act") as an open-end management investment
company and offers for public sale distinct series of shares of beneficial
interest ("Series"), par value $.01 per share, each corresponding to a
distinct portfolio;
WHEREAS each share of a Series represents an undivided interest in the
assets, subject to the liabilities, allocated to that Series and each Series
has a separate investment objective and policies;
WHEREAS the Fund desires to retain RSMC to provide certain accounting
services;
WHEREAS RSMC is willing to furnish such services to the Fund with
respect to the Series listed on Schedule A to this Agreement (the "Portfolio"
or "Portfolios") on the terms and conditions hereinafter set forth;
1. APPOINTMENT. The Fund hereby appoints RSMC to provide certain
accounting services to the Fund for the period and on the terms set forth in
this Agreement. RSMC accepts such appointment and agrees to furnish the
services herein set forth in return for the compensation as provided in
Section 11 of this Agreement. RSMC agrees to comply with all relevant
provisions of the Investment Company Act and applicable rules and regulations
thereunder, and to remain open for business on any day on which the New York
Stock Exchange, the Philadelphia branch office of the Federal Reserve and
Wilmington Trust Company are open for business. The Fund may from time to time
issue separate series or classes or classify and reclassify shares of such
series or class. RSMC shall identify to each such series or class property
belonging to such series or class and in such reports, confirmations and
notices to the Fund called for under this Agreement shall identify the series
or class to which such report, confirmation or notice pertains.
2. DOCUMENTS. The Fund has furnished RSMC with copies properly
certified or authenticated of each of the following:
A. Resolutions of the Fund's Board of Trustees authorizing the
appointment of RSMC to provide certain accounting services to the Fund and
approving this Agreement;
SFIACCTG.DOC
<PAGE>
B. Schedule B identifying and containing the signatures of the
Fund's officers and other persons authorized ("Authorized Persons") to sign
"Written Instructions" (as used in this Agreement to mean written instructions
delivered by hand, mail, tested telegram, cable, telex or facsimile sending
device and received by RSMC, signed by two Authorized Persons) on behalf of
the Fund;
C. The Fund's Declaration of Trust filed with the Secretary of
the Commonwealth of Massachusetts on May 7, 1986 and all amendments thereto
and restatements thereof (such Declaration of Trust, as presently in effect
and as it shall from time to time be amended or restated, is herein called the
"Declaration");
D. The Fund's Bylaws and all amendments thereto and restatements
thereof (such Bylaws, as presently in effect and as they shall from time to
time be amended or restated, are herein called "Bylaws");
E. The Investment Advisory Contract between Wilmington Trust
Company (the "Adviser") and the Fund with respect to The Rodney Square
Diversified Income Portfolio dated as of April 1, 1991;
F. The Advisory Agreement between the Adviser and the Fund with
respect to The Rodney Square Municipal Income Portfolio dated as of November
1, 1993;
G. The Distribution Agreement between the Fund and Rodney Square
Distributors, Inc. dated as of December 31, 1992;
H. The Administration Agreement between the Fund and RSMC dated
as of December 31, 1992;
I. The Custodian Contract between Wilmington Trust Company (the
"Custodian") and the Fund dated as of November 12, 1986;
J. The Transfer Agency Agreement between the Fund and RSMC dated
as of December 31, 1992;
K. The Fund's Notification of Registration filed pursuant to
Section 8(a) of the Investment Company Act as filed with the Securities and
Exchange Commission ("SEC") on May 7, 1986;
L. The Fund's most recent Registration Statement on Form N-1A
under the Securities Act of 1933 (the "1933 Act") (File No. 33-5501) and under
the Investment Company Act, as filed with the SEC relating to shares of
beneficial interest in the Fund, and all amendments thereto;
M. The Fund's most recent prospectuses and statements of
additional information relating to the Portfolios; and
N. If required, a copy of either (i) a filed notice of
eligibility to claim the exclusion from the definition of "commodity pool
operator" contained in Section 2(a)(1)(A) of the Commodity Exchange Act
("CEA") that is provided in Rule 4.5 under the CEA, together with all
supplements as are required by the Commodity Futures Trading Commission
("CFTC"), or (ii) a letter which has been granted the Fund by the CFTC which
2
<PAGE>
states that the Fund will not be treated as a "pool" as defined in Section
4.10(d) of the CFTC's General Regulations, or (iii) a letter which has been
granted the Fund by the CFTC which states that CFTC will not take any
enforcement action if the Fund does not register as a "commodity pool
operator."
The Fund will furnish RSMC from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to
the foregoing, if any.
3. INSTRUCTIONS CONSISTENT WITH DECLARATION, ETC.
A. Unless otherwise provided in this Agreement, RSMC shall act
only upon Oral and Written Instructions ("Oral Instructions" used in this
Agreement shall mean oral instructions actually received by RSMC from an
Authorized Person or from a person reasonably believed by RSMC to be an
Authorized Person). Although RSMC may know of the provisions of the
Declaration and Bylaws of the Fund, RSMC in its capacity under this Agreement
may assume that any Oral or Written Instructions received hereunder are not in
any way inconsistent with any provisions of such Declaration or Bylaws or any
vote, resolution or proceeding of the shareholders, or of the Board of
Trustees, or of any committee thereof.
B. RSMC shall be entitled to rely upon any Oral Instructions and
any Written Instructions actually received by RSMC pursuant to this Agreement.
The Fund agrees to forward to RSMC Written Instructions confirming Oral
Instructions in such manner that the Written Instructions are received by
RSMC, whether by hand delivery, telex, facsimile sending device or otherwise,
by the close of business of the same day that such Oral Instructions are given
to RSMC. The Fund agrees that the fact that such confirming Written
Instructions are not received by RSMC shall in no way affect the validity of
the transactions or enforceability of the transactions authorized by the Fund
by giving Oral Instructions. The Fund agrees that RSMC shall incur no
liability to the Fund in acting upon Oral Instructions given to RSMC hereunder
concerning such transactions provided such instructions reasonably appear to
have been received from an Authorized Person.
4. FUND ACCOUNTING.
A. RSMC shall provide the following accounting functions on a
daily basis:
(1) Journalize each Portfolio's investment, capital share and
income and expense activities;
(2) Verify investment buy/sell trade tickets when received
from the Adviser(s) and transmit trades to the Fund's Custodian for proper
settlement;
(3) Maintain individual ledgers for investment securities;
(4) Maintain historical tax lots for each security;
(5) Reconcile cash and investment balances of each Portfolio
with the Custodian, and provide the Adviser(s) with the beginning cash balance
available for investment purposes;
3
<PAGE>
(6) Update the cash availability throughout the day as
required by the Adviser(s);
(7) Post to and prepare each Portfolio's Statement of Assets
and Liabilities and the Statement of Operations;
(8) Calculate expenses payable pursuant to the Fund's various
contractual obligations;
(9) Control all disbursements from the Fund on behalf of each
Portfolio and authorize such disbursements upon Written Instructions;
(10) Calculate capital gains and losses;
(11) Determine each Portfolio's net income;
(12) Obtain security market prices or if such market prices
are not readily available, then obtain such prices from services approved by
the Adviser(s), and in either case calculate the market or fair value of each
Portfolio's investments;
(13) In the case of debt instruments with remaining maturities
of sixty (60) days or less, calculate the amortized cost value of those
instruments;
(14) Transmit or mail a copy of the portfolio valuations to
the Adviser(s);
(15) Compute the net asset value of each Portfolio;
(16) Compute each Portfolio's yields, total returns, expense
ratios and portfolio turnover rate; and
(17) Prepare and monitor the expense accruals and notify Fund
management of any proposed adjustments.
B. In addition, RSMC will:
(1) Prepare monthly financial statements, which will include
without limitation the Schedule of Investments, the Statement of Assets and
Liabilities, the Statement of Operations, the Statement of Changes in Net
Assets, the Cash Statement, and the Schedule of Capital Gains and Losses; (2)
Prepare monthly security transactions listings;
(3) Prepare quarterly broker security transactions summaries;
(4) Supply various Fund and Portfolio statistical data as
requested on an ongoing basis;
(5) Assist in the preparation of support schedules necessary
for completion of Federal and state tax returns;
(6) Assist in the preparation and filing of the Fund's annual
and semiannual reports with the SEC on Form N-SAR;
(7) Assist in the preparation and filing of the Fund's annual
and semiannual reports to shareholders and proxy statements;
4
<PAGE>
(8) Assist with the preparation of amendments to the Fund's
registration statements on Form N-1A and other filings relating to the
registration of shares; and
(9) Monitor the Portfolios' status as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
from time to time.
5. RECORDKEEPING AND OTHER INFORMATION. RSMC shall create and maintain
all necessary records in accordance with all applicable laws, rules and
regulations, including, but not limited to, records required by Section 31(a)
of the Investment Company Act and the rules thereunder, as the same may be
amended from time to time, pertaining to the various functions (described
above) performed by it and not otherwise created and maintained by another
party pursuant to contract with the Fund. All records shall be the property of
the Fund at all times and shall be available for inspection and use by the
Fund or the Fund's authorized representatives. Upon reasonable request of the
Fund, copies of such records shall be provided by RSMC to the Fund or the
Fund's authorized representatives at the Fund's expense. Where applicable,
such records shall be maintained by RSMC for the periods and in the places
required by Rule 31a-2 under the Investment Company Act.
6. LIAISON WITH ACCOUNTANTS. RSMC shall act as liaison with the Fund's
independent public accountants and shall provide account analysis, fiscal year
summaries and other audit related schedules. RSMC shall take all reasonable
action in the performance of its obligations under this Agreement to assure
that the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Fund from time to
time.
7. CONFIDENTIALITY. RSMC agrees on behalf of itself and its employees
to treat confidentially and as proprietary information of the Fund all records
and other information relative to the Fund and its prior, present or potential
shareholders, and not to use such records and information for any purpose
other than performance of its responsibilities and duties hereunder, except,
after prior notification to and approval in writing by the Fund, which
approval shall not be unreasonably withheld and may not be withheld where RSMC
may be exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Fund.
8. EQUIPMENT FAILURE. In the event of equipment failures beyond RSMC's
control, RSMC shall, at no additional expense to the Fund, take reasonable
steps to minimize service interruptions but shall have no liability with
respect thereto. RSMC shall enter into and shall maintain in effect with
appropriate parties one or more agreements making reasonable provision of
emergency use of electronic data processing equipment to the extent
appropriate equipment is available.
9. RIGHT TO RECEIVE ADVICE.
A. ADVICE OF FUND. If RSMC shall be in doubt as to any action to
be taken or omitted by it, it may request, and shall receive, from the Fund
directions or advice, including Oral or Written Instructions where
appropriate.
5
<PAGE>
B. ADVICE OF COUNSEL. If RSMC shall be in doubt as to any question
of law involved in any action to be taken or omitted by RSMC, it may request
advice at its own cost from counsel of its own choosing (who may be the
regularly retained counsel for the Fund or RSMC, at the option of RSMC).
C. CONFLICTING ADVICE. In case of conflict between directions,
advice or Oral or Written Instructions received by RSMC pursuant to subsection
A of this Section and advice received by RSMC pursuant to subsection B of this
Section, RSMC shall be entitled to rely on and follow the advice received
pursuant to the latter provision alone.
D. PROTECTION OF RSMC. RSMC shall be protected in any action or
inaction which it takes in reliance on any directions, advice or Oral or
Written Instructions received pursuant to subsections A or B of this Section
which RSMC, after receipt of any such directions, advice or Oral or Written
Instructions, in good faith believes to be consistent with such directions,
advice or Oral or Written Instructions, as the case may be. However, nothing
in this Section shall be construed as imposing upon RSMC any obligation (i) to
seek such direction, advice or Oral or Written Instructions, or (ii) to act in
accordance with such directions, advice or Oral or Written Instructions when
received, unless, under the terms of another provision of this Agreement, the
same is a condition to RSMC's properly taking or omitting to take such action.
Nothing in this subsection shall excuse RSMC when an action or omission on the
part of RSMC constitutes willful misfeasance, bad faith, gross negligence or
reckless disregard by RSMC of its duties under this Agreement.
10. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS. The Fund assumes
full responsibility for ensuring that the Fund complies with all applicable
requirements of the Securities Act of 1933 (the "1933 Act"), the Securities
Exchange Act of 1934 (the "1934 Act"), the Investment Company Act, the CEA and
any laws, rules and regulations of governmental authorities having
jurisdiction.
11. COMPENSATION. For the performance of its obligations under this
Agreement, the Fund on behalf of each Portfolio shall pay RSMC in accordance
with the fee arrangements described in Schedule A attached hereto, as such
schedule may be amended from time to time.
12. INDEMNIFICATION. The Fund agrees to indemnify and hold harmless RSMC
and its directors, officers, employees and agents from all taxes, charges,
expenses, assessments, claims and liabilities (including, without limitation,
liabilities arising under the 1933 Act, the 1934 Act, the Investment Company
Act, the CEA and any applicable state and foreign laws, all as or to be
amended from time to time) and expenses, including (without limitation)
attorneys' fees and disbursements arising directly or indirectly from any
action or thing which RSMC takes or does or omits to take or do (i) at the
request or on the direction of or in reliance on the written advice of the
Fund or (ii) upon Oral or Written Instructions, provided, that neither RSMC
nor any of its directors, officers, employees and agents shall be indemnified
against any liability to the Fund or to its shareholders (or any expenses
incident to such liability) arising out of RSMC's own willful misfeasance, bad
faith, gross negligence or reckless disregard of its duties and obligations
specifically described in this Agreement.
6
<PAGE>
13. RESPONSIBILITY OF RSMC. RSMC shall be under no duty to take any
action on behalf of the Fund except as specifically set herein or as may be
specifically agreed to by RSMC in writing. In the performance of its
duties hereunder, RSMC shall be obligated to exercise care and diligence and
to act in good faith and to use its best efforts within reasonable limits in
performing services provided for under this Agreement. RSMC shall be
responsible for its own negligent failure to perform its duties under this
Agreement, but to the extent that duties, obligations and responsibilities are
not expressly set forth in this Agreement, RSMC shall not be liable for any
act or omission which does not constitute willful misfeasance, bad faith or
gross negligence on the part of RSMC or reckless disregard by RSMC of such
duties, obligations and responsibilities. Without limiting the generality of
the foregoing or of any other provision of this Agreement, RSMC in connection
with its duties under this Agreement shall not be under any duty or obligation
to inquire into and shall not be liable for or in respect of (i) the validity
or invalidity or authority or lack thereof of any Oral or Written Instruction,
notice or other instrument which conforms to the applicable requirements of
this Agreement, and which RSMC reasonably believes to be genuine; or (ii)
delays or errors or loss of data occurring by reason of circumstances beyond
RSMC's control, including acts of civil or military authority, national
emergencies, labor difficulties, fire, mechanical breakdown (except as
provided in Section 8), flood or catastrophe, acts of God, insurrection, war,
riots or failure of the mails, transportation, communication or power supply.
14. DURATION, TERMINATION, ETC. The provisions of this Agreement may
not be changed, waived, discharged or terminated orally, but only by written
instrument that shall make specific reference to this Agreement and that shall
be signed by the party against which enforcement of such change, waiver,
discharge or termination is sought.
Upon the termination of this Agreement, the Fund shall pay to RSMC
such compensation as may be payable for the period prior to the effective date
of such termination, including reimbursement for any out-of-pocket expenses
reasonably incurred by RSMC to such date. In the event that the Fund
designates a successor to any of RSMC's obligations hereunder, RSMC shall, at
the expense and direction of the Fund, transfer to such successor all relevant
books, records and other data established or maintained by RSMC under the
foregoing provisions.
15. NOTICES. Any notice under this Agreement shall be given in writing
addressed and delivered or mailed, postage prepaid, to the other party to this
Agreement at its principal place of business.
16. FURTHER ACTIONS. Each Party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
17. AMENDMENTS. This Agreement or any part hereof may be changed or
waived only by an instrument in writing signed by the party against which
enforcement of such change or waiver is sought.
18. DELEGATION. On thirty (30) days' prior written notice to the Fund,
RSMC may assign any part or all its rights and delegate its duties hereunder
to any wholly owned direct or indirect subsidiary of Wilmington Trust Company
provided that (i) the delegate agrees with RSMC to comply with all relevant
provisions of the Investment Company Act and applicable rules and regulations;
7
<PAGE>
(ii) RSMC shall remain responsible for the performance of all of its duties
under this Agreement; (iii) RSMC and such delegate shall promptly provide
such information as the Fund may request; and (iv) RSMC shall respond to such
questions as the Fund may ask, relative to the delegation, including (without
limitation) the capabilities for the delegate.
19. MISCELLANEOUS.
A. RSMC acknowledges that the Fund is a Massachusetts business
trust, and that it is required by the Declaration to limit its liability in
all agreements to the assets of the Fund. Consequently, RSMC agrees that any
claims by it against the Fund may be satisfied only from the assets of the
Fund, and no shareholders, trustees or officers of the Fund may be held
personally liable or responsible for any obligations arising out of this
Agreement.
B. This Agreement embodies the entire agreement and understanding
between the parties thereto, and supersedes all matter hereof, provided that
the parties hereto may embody in one or more separate documents their
agreement, if any, with respect to Written and/or Oral Instructions. The
captions in this Agreement are included for convenience of reference only and
in no way define or delimit any of the provisions hereof or otherwise affect
their construction or effect. This Agreement shall be deemed to be a contract
made in Delaware and governed by Delaware law. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding and shall inure to the benefits of the parties
hereto and their respective successors.
IN WITNESS WHEREOF the parties have caused this instrument to be signed
on their behalf by their respective officers thereunto duly authorized all as
of the date first written above.
THE RODNEY SQUARE STRATEGIC FIXED- INCOME FUND
By: /s/ Peter J. Succoso
-------------------------------------
Peter J. Succoso, President
RODNEY SQUARE MANAGEMENT CORPORATION
By: /s/ Martin L. Klopping
-------------------------------------
Martin L. Klopping, President
8
<PAGE>
SCHEDULE A
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
FEE SCHEDULE
For the services RSMC provides under the Accounting Services Agreement
attached hereto, the Fund on behalf of the Portfolios listed below agrees to
pay RSMC an accounting fee payable monthly expressed as follows:
The Rodney Square Diversified Income Portfolio: An annual fee of $50,000
plus an amount equal to 0.02% of that portion of the Portfolio's average daily
net assets for the year which are in excess of $100 million.
The Rodney Square Municipal Income Portfolio: An annual fee of $50,000
plus an amount equal to 0.02% of that portion of the Portfolio's average daily
assets for the year which are in excess of $100 million.
A-1
<PAGE>
SCHEDULE B
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
AUTHORIZED PERSONS
The following persons have been duly authorized by the Board of Trustees
to give Oral and Written Instructions on behalf of the Portfolios:
Joseph M. Fahey, Jr.
Robert C. Hancock
John J. Kelley
Martin L. Klopping
Diane D. Marky
Connie L. Meyers
Louis C. Schwartz
Marilyn Talman
B-1
Exhibit 15(b)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
OF THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
WITH RESPECT TO THE RODNEY SQUARE MUNICIPAL INCOME PORTFOLIO
WHEREAS, The Rodney Square Strategic Fixed-Income Fund (the "Fund")
operates as an open-end investment company registered under the Investment
Company Act of 1940 (the "Act");
WHEREAS, the Fund's shares of beneficial interest, par value $0.01
per share, are divided into separate series ("portfolios");
WHEREAS, at the present time, the Fund has two portfolios, The
Rodney Square Diversified Income Portfolio and The Rodney Square Municipal
Income Portfolio;
WHEREAS, the Fund desires to adopt a Plan of Distribution pursuant
to Rule 12b-1 under the Act with respect to The Rodney Square Municipal
Income Portfolio (the "Portfolio");
WHEREAS, the Fund has entered into a Distribution Agreement
pursuant to which the Fund has employed a distributor of the securities of
the Fund (the "Distributor") during the continuous offering of shares of
its portfolios;
NOW THEREFORE, the Fund hereby adopts this Plan of Distribution
(the "Plan") on behalf of the Portfolio in accordance with Rule 12b-1 under
the Act.
1. (a) The Fund shall pay the Distributor, as reimbursement
for the expenses incurred with respect to the Portfolio by the Distributor
pursuant to the Distribution Agreement ("Distribution Expenses"), promptly
after the last day of each month a fee on an annualized basis of 0.75% of
the Portfolio's average net assets, and not greater than the Distribution
Expenses incurred by the Distributor during that month and any prior month
to the extent that Distribution Expenses in such prior month had not
previously been paid to the Distributor because of the "provided" clause of
this paragraph; provided that payment shall be made for any month only to
the extent that such payment shall not exceed (i) the limitations
applicable pursuant to the rules of the National Association of Securities
Dealers, Inc. as they may be in effect from time to time, and (ii) any
further limitations set from time to time by the Board of Trustees.
(b) Distribution Expenses from prior months that have not
been reimbursed may be carried forward ("carried-forward Distribution
Expenses") and presented for reimbursement in subsequent months subject to
the expense limitations set forth above, provided that such reimbursement
shall be made on a first-in, first-out basis. Interest or finance charges
on such carried-forward Distribution Expenses may be payable to the
Distributor, but only as provided for in paragraph 6(b) herein.
sfi12b-1 1
<PAGE>
2. For purposes hereof, "Distribution Expenses" shall mean all
expenses which the Distributor bears with respect to the Portfolio under
the Distribution Agreement and consists of the amounts paid and expenses
incurred by the Distributor for distribution activities encompassed by Rule
12b-1, such as public relations services, telephone services, sales
presentations, media charges, preparation, printing and mailing of
advertising and sales literature, data processing necessary to support a
distribution effort, printing and mailing of prospectuses, and distribution
and shareholder servicing activities of broker/dealers and other financial
institutions. Such expenses may include fairly allocable internal expenses
of the Distributor and payments to third parties.
3. Nothing in this Plan shall operate or be construed to limit the
extent to which the Fund's administrator, investment adviser (the
"Adviser") or any other person, other than the Fund, may incur costs and
bear expenses associated with the distribution of shares of beneficial
interest in the Portfolio.
4. It is contemplated by the Plan that the Adviser may from time
to time make payments to third parties out of its advisory fee, not to
exceed the amount of that fee, including payments of fees for shareholder
servicing and transfer agency functions. If such payments are deemed to be
indirect financing of an activity primarily intended to result in the sale
of shares issued by the Portfolio within the context of Rule 12b-1 under
the Act, such payments shall be authorized by this Plan.
5. This Plan shall not take effect until it has been approved by a
vote of at least a majority of the outstanding voting securities of the
Portfolio (as defined in the Act).
6. (a) This Plan shall not take effect until it has been
approved by votes of the majority of both (i) the Board of Trustees of the
Fund and (ii) the Trustees who are not interested persons of the Fund
within the meaning of Section 2(a)(19) of the Act and who have no direct or
indirect financial interest in the operation of the Plan or in any
agreements related to the Plan ("Independent Trustees"), cast in person at
a meeting called for the purpose of voting on this Plan.
(b) Any limitations set by the Board of Trustees on the amount of
Distribution Expenses that are reimbursable shall be approved by vote of
the majority of both the Board of Trustees of the Fund and the Independent
Trustees. Payment of interest or finance charges on carried-forward
Distribution Expenses shall also be approved by a vote of the majority of
both the Board of Trustees and the Independent Trustees.
7. This Plan shall remain in effect for one year from the date of
its effectiveness and may continue in effect thereafter if it is approved
at least annually by a vote of the Board of Trustees of the Fund, and of
the Independent Trustees, cast in person at a meeting called for the
purpose of voting on the Plan.
sfi12b-1 2
<PAGE>
8. This Plan may be terminated at any time by a majority vote of
the Independent Trustees or by vote of a majority of the outstanding voting
securities of the Portfolio (as defined in the Act). Upon such termination
or upon termination of the Distribution Agreement, any Distribution
Expenses incurred by the Distributor, including any carried-forward
Distribution Expenses and any interest or finance charges thereon, to the
date of termination shall be presented to the Fund for payment subject to
the expense limitations in paragraph (1) hereof. Any Distribution Expenses
incurred by the Distributor, including any carried-forward Distribution
Expenses and any interest or finance charges thereon, prior to the
effective date of termination shall be paid by the Fund in accordance with
the Plan except that any expenses, fees and charges not properly payable by
the Fund by fiscal year-end shall expire at fiscal year-end. The Fund shall
have no obligation to make any other payment to the Distributor under this
Plan or the Distribution Agreement.
9. The Distributor shall provide, on at least a quarterly basis, a
written report to the Fund's Board of Trustees of the Distribution Expenses
incurred by the Distributor, including any carried-forward Distribution
Expenses and any interest or finance charges thereon, the amounts paid on
behalf of the Portfolio by the Fund during the most recently completed
quarter pursuant to this Plan or any related agreements and the purposes
for which such expenditures were made.
10. While this Plan is in effect, the selection and nomination of
those Trustees who are not interested persons of the Fund within the
meaning of Section 2(a)(19) of the Act shall be committed to the discretion
of the Trustees then in office who are not interested persons of the Fund.
11. All material amendments to this Plan must be approved by a
majority vote of the Board of Trustees of the Fund and of the Independent
Trustees, cast in person at a meeting called for the purpose of voting
thereon. In addition, this Plan may not be amended to increase materially
the amounts authorized to be spent hereunder without approval of a majority
of the outstanding voting securities of the Portfolio (as defined in the
Act).
Dated: November 1, 1993
sfi12b-1 2
[ARTICLE] 6
[CIK] 0000793276
[NAME] RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
[SERIES]
[NUMBER] 2
[NAME] MUNICIPAL INCOME PORTFOLIO
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-START] NOV-01-1994
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 16223
[INVESTMENTS-AT-VALUE] 16364
[RECEIVABLES] 243
[ASSETS-OTHER] 52
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 16659
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 89
[TOTAL-LIABILITIES] 89
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 16467
[SHARES-COMMON-STOCK] 13
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (51)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 141
[NET-ASSETS] 16570
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 807
[OTHER-INCOME] 0
[EXPENSES-NET] 115
[NET-INVESTMENT-INCOME] 692
[REALIZED-GAINS-CURRENT] (46)
[APPREC-INCREASE-CURRENT] 1100
[NET-CHANGE-FROM-OPS] 1746
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 692
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 227
[NUMBER-OF-SHARES-REDEEMED] 173
[SHARES-REINVESTED] 46
[NET-CHANGE-IN-ASSETS] 1233
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (6)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 73
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 223
[AVERAGE-NET-ASSETS] 15362
[PER-SHARE-NAV-BEGIN] 11.64
[PER-SHARE-NII] 0.54
[PER-SHARE-GAIN-APPREC] 0.85
[PER-SHARE-DIVIDEND] (0.54)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 12.49
[EXPENSE-RATIO] 0.75
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
EXHIBIT 16(b)
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
THE MUNICIPAL INCOME PORTFOLIO
HYPOTHETICAL $10,000 INVESTMENT
For the Period November 1, 1993 (Commencement of Operations)
through October 31, 1995
Value of Initial $10,000 = ($10,000 / Bbeginning NAV) * Ending NAV
Investment = ($10,000 / $12.50) * $12.49
= $9,992.00
Value of Reinvested Income = Shares Reinvested from Income Dividends
Dividends * Ending NAV
= 71.16 * $12.49
= $888.79
Value of Reinvested Capital = Shares Reinvested from Capital Gain
Gain Distributions Distributions * Ending NAV
= 0.00 * $12.49
= $0.00
TOTAL VALUE = $9,992.00 + $888.79 + $0.00 = $10,880.79
- -----------------------------------------------------------------------------
For the Period November 1, 1993 (Commencement of Operations)
through October 31, 1994
Value of Initial $10,000 = ($10,000 / Beginning NAV) * Ending NAV
Investment = ($10,000 / $12.50) * $11.64
= $9,312.00
Value of Reinvested Income = Shares Reinvested from Income Dividends
Dividends * Ending NAV
= 32.91 * $11.64
= $383.07
Value of Reinvested Capital = Shares Reinvested from Capital Gain
Gain Distributions Distributions * Ending NAV
= 0.00 * $11.64
= $0.00
TOTAL VALUE = $9,312.00 + $383.07 + $0.00 = $9,695.07
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
THE MUNICIPAL INCOME PORTFOLIO
(STANDARDIZED RETURNS)
1 YR INCEPTION
---------- ---------
# YEARS IN PERIOD 1 2.0000
AVERAGE ANNUAL TOTAL RETURN 8.30% 2.47%
MAXIMUM SALES LOAD 3.50% 3.50%
FOR THE ONE YEAR PERIOD ENDED OCTOBER 31, 1995
- ------------------------------------------------------------------------
Average Annual Total Return
- ---------------------------
(ERV/P)**(1/N) -1 = T
($1,083.02/1,000)**1 -1 = T
.0830 = T
8.30% = T
INCEPTION THROUGH OCTOBER 31, 1995
- ------------------------------------------------------------------------
Average Annual Total Return
- ---------------------------
(ERV/P)**(1/N) -1 = T
($1,049.97/1,000)
** (1/2.0000) -1 = T
.0247 = T
2.47% = T
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
THE MUNICIPAL INCOME PORTFOLIO
(NON-STANDARDIZED RETURNS)
1 YR INCEPTION
---------- ---------
# YEARS IN PERIOD 1 2.0000
CUMULATIVE TOTAL RETURN
(Excluding Maximum Sales Load) 12.23% 8.81%
CUMULATIVE TOTAL RETURN
(After Deducting Maximum
Sales Load) 8.30% 5.00%
AVERAGE ANNUAL TOTAL RETURN 12.23% 4.31%
MAXIMUM SALES LOAD 3.50% 3.50%
FOR THE ONE YEAR PERIOD ENDED OCTOBER 31, 1995
- ------------------------------------------------------------------------
Cumulative Total Return Average Annual Total Return
- ----------------------- ---------------------------
(ERV/P) - 1 = T (ERV/P)**(1/N) -1 = T
($1,122.29/1,000) -1 = T ($1,122.29/1,000) -1 = T
.1223 = T .1233 = T
12.23% = T 12.33% = T
INCEPTION THROUGH OCTOBER 31, 1995
- ------------------------------------------------------------------------
Cumulative Total Return Average Annual Total Return
- ----------------------- ---------------------------
(Excluding Maximum Sales Load)
- ------------------------------
(ERV/P) - 1 = T (ERV/P)**(1/N) -1 = T
($1,088.07/1,000) -1 = T ($1,088.07/1,000)
** (1/2.0000) -1 = T
.0881 = T .0431 = T
8.81% = T 4.31% = T
Cumulative Total Return (After Deducting Maximum Sales Load)
- -------------------------------------------------------------
(ERV/P) -1 = T
($1,049.97/1,000) -1 = T
.0500 = T
5.00% = T
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
THE MUNICIPAL INCOME PORTFOLIO
Yield for the Thirty-Day Period Ended October 31, 1995
ACTUAL YIELD FOR THE 30-DAY PERIOD:
- -----------------------------------
Yield = 2[((a-b)/cd + 1)**6 - 1]
Yield = 2[((69,472.00 - 10,279.45)/1,339,497.7640 * $12.94 + 1) ** 6 -1]
Yield = .04133146
Yield = 4.13%
YIELD FOR THE PERIOD WITHOUT THE EFFECT OF FEE WAIVERS:
- -------------------------------------------------------
Yield = 2[((a-b)/cd + 1)**6 - 1]
Yield = 2[((69,472.00 - 16,176.83)/1,339,497.7640 * $12.94 + 1) ** 6 -1]
Yield = .03718194
Yield = 3.72%
