Filed with the Securities and Exchange Commission on December 20, 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. 16 [ X ]
------
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 18 [ X ]
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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
--------------
Carl M. Rizzo, Esquire
Rodney Square Management Corporation
Rodney Square North, 1100 North Market Street
Wilmington, DE 19890-0001
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
_____ on ___________ pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
X on March 1, 1997 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, 1996 on or about December 20, 1996
<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 of Questions and Answers about the
Registrant Portfolios
Investment Objectives 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 the Fund's Annual
of Fund Performance Report, 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>
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
16. Investment Advisory Wilmington Trust Company
and Other Services Investment Advisory Services
Administration, Accounting and
Distribution Agreements and
Rule 12b-1 Plans
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 Plans
22. Calculation of Performance Information
Performance
23. Financial Statements Financial Statements
<PAGE>
THE RODNEY SQUARE
STRATEGIC FIXED-INCOME
FUND
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, 1997
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, 1997) 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.
FOR FURTHER INFORMATION OR ASSISTANCE IN OPENING
AN ACCOUNT, PLEASE CALL:
NATIONWIDE (800) 336-9970
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 NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
EXPENSE TABLE
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)** 0.16% 0.00%
12b-1 Fee*** 0.09% 0.12%
Other Expenses**:
Administration and Accounting Services
Expenses (after waiver) 0.23% 0.24%
Other Operating Expenses 0.27% 0.39%
----- -----
Total Other Expenses 0.50% 0.63%
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.)
** WTC waived a portion of its advisory fee with respect
to the Diversified Income Portfolio during the fiscal
year ended October 31, 1996. Without such waiver, the
Advisory Fee and Total Operating Expenses would have
been 0.50% and 1.09%, 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, 1998. (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, 1996. Without such waivers, the
Advisory Fee, Administration and Accounting Services
Expenses, Total Other Expenses, and Total Operating
Expenses would have been 0.48%, 0.38%, 0.77%, and
1.37%, 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, 1998. (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.
<PAGE>
FINANCIAL HIGHLIGHTS
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, 1996, which is included, together with the auditor's
unqualified report, as part of the Fund's Statement of Additional Information.
<TABLE>
<CAPTION>
APRIL 2, 1991
(COMMENCEMENT OF
OPERATIONS) TO
FOR THE FISCAL YEARS ENDED OCTOBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
DIVERSIFIED INCOME PORTFOLIO
NET ASSET VALUE -- BEGINNING OF PERIOD $13.08 $12.42 $13.48 $13.20 $12.86 $12.50
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS:
Net investment income...................... 0.78 0.83 0.71 0.76 0.83 0.48
Net realized and unrealized gain (loss) on
investments................................ (0.13) 0.66 (1.02) 0.39 0.37 0.36
------ ------ ------ ------ ------ ------
Total from investment operations.......... 0.65 1.49 (0.31) 1.15 1.20 0.84
------ ------ ------ ------ ------ ------
Distributions:
From net investment income................. (0.78) (0.83) (0.71) (0.76) (0.83) (0.48)
From net realized gain on investments...... -- -- (0.04) (0.11) (0.03) --
------ ------ ------ ------ ------ ------
Total distributions....................... (0.78) (0.83) (0.75) (0.87) (0.86) (0.48)
------ ------ ------ ------ ------ ------
NET ASSET VALUE -- END OF PERIOD........... $12.95 $13.08 $12.42 $13.48 $13.20 $12.86
====== ====== ====== ====== ====== ======
Total Return**............................. 5.18% 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% 0.65% 0.89%*
Net investment income...................... 6.07% 6.56% 5.53% 5.65% 6.33% 6.64%*
Portfolio turnover rate.................... 85.77% 116.40% 43.77% 24.22% 27.37% 78.45%*
Net assets at end of period (000 omitted).. $31,777 $32,214 $31,721 $40,971 $30,152 $24,171
Senior Securities:
Amount of reverse repurchase agreements out-
standing at end of period (in thousands).. $0 $0 $0 $0 $0 $0
Average daily amount of reverse repurchase
agreements outstanding during the period
(in thousands)............................ $0 $0 $0 $0 $0 $162
Average daily number of shares outstanding
during the period (in thousands).......... 2,545 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 $0.00 $0.13
</TABLE>
FOR THE FISCAL YEARS ENDED
OCTOBER 31,
1996 1995 1994
------ ------ ------
MUNICIPAL INCOME PORTFOLIO
NET ASSET VALUE -- BEGINNING OF YEAR $12.49 $11.64 $12.50
------ ------ ------
Investment Operations:
Net investment income 0.55 0.54 0.49
Net realized and unrealized gain (loss)
on investments (0.03) 0.85 (0.86)
------ ------ ------
Total from investment operations 0.52 1.39 (0.37)
------ ------ ------
Distributions:
From net investment income (0.55) (0.54) (0.49)
------ ------ ------
NET ASSET VALUE -- END OF YEAR $12.46 $12.49 $11.64
====== ====== ======
TOTAL RETURN** 4.24% 12.23% (3.05)%
Ratios (to average net assets)/Supplemental Data:
Expenses++ 0.75% 0.75% 0.75%
Net investment income 4.41% 4.50% 4.13%
Portfolio turnover rate 15.91% 42.08% 21.95%
Net assets at end of year (000 omitted) $16,619 $16,570 $14,283
[FN]
* 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, for the fiscal period ended October
31, 1991. WTC waived a portion of its advisory fees for the fiscal years
ended October 31, 1996, 1995, 1994, 1993 and 1992, and Rodney Square
Management Corporation ("RSMC") waived a portion of its accounting services
fee for the fiscal year ended October 31, 1992 and for the fiscal period
ended October 31, 1991. 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, 1996, 1995, 1994, 1993, 1992, and for
the fiscal period ended October 31,1991, would have been 1.09%, 1.14%,
1.05%, 1.06%, 1.24% and 1.91%, respectively.
++ WTC waived its entire advisory fee and RSMC waived a portion of its
administration and accounting services fee for the fiscal years ended
October 31, 1996, 1995 and 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, 1996, 1995 and 1994, would have been
1.37%, 1.45% and 1.62%, respectively.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE PORTFOLIOS
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.")
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.")
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 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.
NATIONWIDE (800) 336-9970
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.")
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.")
INVESTMENT OBJECTIVES AND POLICIES
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. Of course, there is no guarantee that principal
value can be protected during periods of extreme interest rate
volatility. (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 the 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, a division of the McGraw Hill Companies,
Inc. ("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.)
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.")
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).
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 appear
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 obligations in a particular market sector or
political subdivision justify 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 health care or housing,
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 on 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 when
initially purchased. 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.
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. Not even the highest rating constitutes
assurance that the security will not fluctuate in value or that a
Portfolio will receive the anticipated yield on the security.
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.
DERIVATIVES. Some of the Portfolios' investments may be
referred to as "derivatives," because their value depends on (or
"derives" from) the value of an underlying asset, reference rate
or index. These investments include options, futures contracts
and similar instruments that may be used in hedging and related
income strategies. There is only limited consensus as to what
constitutes a "derivative" security. However, in the view of
WTC, derivatives include "stripped" securities, specially
structured types of mortgage-backed, asset-backed and municipal
securities, such as interest only, principal only and inverse
floaters, and U.S. dollar-denominated securities whose value is
linked to foreign securities. The market value of derivative
instruments and securities sometimes is more volatile than that
of other investments, and each type of derivative may pose its
own special risks. WTC takes these risks into account in its
management of the Portfolios.
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 its 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,
1996 and 1995 was 85.77% and 116.40%, respectively. The portfolio
turnover rate for the Municipal Income Portfolio for the years
ended October 31, 1996 and 1995 was 15.91% and 42.08%,
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.
PURCHASE OF SHARES
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 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 canceled and you will be responsible for any
losses or fees incurred in that transaction.
BY WIRE: You may purchase shares by wiring federal funds. 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. To apply
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.
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
NET AMOUNT ORGANIZATIONS AS A
OFFERING INVESTED (NET PERCENTAGE OF
AMOUNT OF PURCHASE PRICE 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.
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.
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.
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.
BY TELEPHONE: Shareholders who prefer to redeem their shares
by telephone may elect to apply 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 if such procedures are followed, 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.
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.
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.
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 MULTI-MANAGER FUND, which uses multiple
portfolio advisers to manage the Growth Portfolio of assets and
seeks superior long-term capital appreciation by investing in
securities of companies which are judged to possess strong growth
characteristics.
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 and the Growth Portfolio 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
Growth Portfolio 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.
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.
HOW NET ASSET VALUE IS DETERMINED
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.
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.
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, unless an investor has indicated that he
or she is subject to backup withholding, the 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 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.
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.
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 The Shareholder's
------------------------ = Tax-Equivalent Yield
100% - The Shareholder's
Tax Bracket
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.
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.
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 Agreement 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, 1998.
In addition to serving as Investment Adviser for the
Portfolios, 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 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 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.
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.
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 November 30, 1996, WTC owned by virtue of shared or
sole voting or investment power on behalf of its underlying
customer accounts 69.4% of the shares of the Diversified Income
Portfolio and 16.0% 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.
<PAGE>
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.
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.
Credit enhancements do not provide protection against changes in
the market value of the security. 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 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.
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. 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.
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 in cash.
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.
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 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.
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.
<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
Robert J. Christian
Martin L. Klopping
John J. Quindlen
- ------------------
OFFICERS
Martin L. Klopping, President
Joseph M. Fahey, Jr., Vice President
Robert C. Hancock, Vice President & Treasurer
Carl M. Rizzo, Esq., Secretary
Diane D. Marky, Assistant Secretary
Connie L. Meyers, 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, 1997
<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, 1997
- ------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Fund's current Prospectus, dated March 1,
1997, 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
<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, a division of the
McGraw Hill Companies, Inc. ("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 1/2 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 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-term 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
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.
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.
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
creditworthiness 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.
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 resale 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 a Portfolio, however, could affect adversely the
marketability of such portfolio securities, and a 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 each 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).
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.
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.
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, 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, and 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.
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, 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/user 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.
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.
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.
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 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.
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, and would 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.
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.
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 investments by 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.
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;
(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) (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;
(2) 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;
(3) purchase securities for investment while any bank
borrowing equaling 5% or more of the Portfolio's total assets is
outstanding;
(4) 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;
(5) make short sales of securities except that the Portfolio
may make short sales against the box;
(6) 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;
(7) when engaging in options, futures and forward currency
contract strategies, a Portfolio will either: (i) set aside cash or
liquid 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;
(8) 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
(9) 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.
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.
TRUSTEES AND OFFICERS
The Fund has a Board, presently composed of five 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 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 43, 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 55, 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 65, has
retired as President and Chief Operating Officer of Hercules Incorporated
(diversified chemicals), positions he held from March 1987 through March 1992.
He also served as a member of the Hercules Incorporated Board of Directors
from 1986 through March 1992.
*ROBERT J. CHRISTIAN, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Trustee, age 47, has been Chief Investment Officer of WTC since
February 1996 and Director of RSMC since February 1996. He was Chairman and
Director of PNC Equity Advisors Company, and President and Chief Investment
Officer of PNC Asset Management Group, Inc. from 1994 to 1996. He was Chief
Investment Officer of PNC Bank, N.A. from 1992 to 1996, Director of Provident
Capital Management from 1993 to 1996, and Director of Investment Strategy PNC
Bank, N.A. from 1989 to 1992. He is also a Trustee of LaSalle University and
a member of the Board of Governors for the Pennsylvania Economy League.
JOHN J. QUINDLEN, 313 Southwinds, 1250 West Southwinds Blvd., Vero Beach, FL
32963, Trustee, age 64, has retired as Senior Vice President-Finance of E.I.
du Pont de Nemours and Company, Inc. (diversified chemicals) a position he
held from 1984 to November 30, 1993. He served as Chief Financial Officer of
E.I. du Pont de Nemours and Company, Inc. from 1984 through June 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 40, 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.
ROBERT C. HANCOCK, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Vice President and Treasurer, age 45, 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.
CARL M. RIZZO, ESQ., Rodney Square North, 1100 N. Market Street, Wilmington,
DE 19890-0001, Secretary, age 45, was appointed Vice President of RSMC in
July, 1996. From 1995 to 1996 he was Assistant General Counsel of Aid
Association for Lutherans (a fraternal benefit association); from 1994 to 1995
Senior Associate Counsel of United Services Automobile Association (an
insurance and financial services firm); and from 1987 to 1994 Special Counsel
or Attorney-Adviser with a federal government agency.
DIANE D. MARKY, Rodney Square North, 1100 N. Market St., Wilmington, DE 19890-
0001, Assistant Secretary, age 32, 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 36, has been a Fund Administrator of RSMC
since August, 1994. She was a Corporate Custody Administrator for Wilmington
Trust Company from 1989 to 1994.
JOHN J. KELLEY, Rodney Square North, 1100 N. Market St., Wilmington, DE 19890-
0001, Assistant Treasurer, age 37, has been a Vice President of RSMC since
1995 and was an Assistant Vice President of RSMC 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, 1996, such fees and
expenses amounted to $5,625 per Portfolio. The following table shows the fees
paid during calendar 1996 to the Independent Trustees for their services to
the Fund and to the Rodney Square Family of Funds. On November 30, 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.
1996 TRUSTEES FEES
TOTAL FEES FROM TOTAL FEES FROM THE RODNEY
INDEPENDENT TRUSTEE THE FUND SQUARE FAMILY OF FUNDS
------------------- --------------- --------------------------
Eric Brucker $3,750 $17,450
Fred L Buckner $3,750 $17,450
John J. Quindlen $3,750 $17,450
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 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, RSMC, 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.
Several affiliates of WTC are also engaged in the investment advisory
business. Wilmington Trust FSB, a wholly owned subsidiary of Wilmington Trust
Corporation, exercises investment discretion over certain institutional
accounts.
RSMC serves as investment adviser and as administrator for The Rodney
Square Fund, The Rodney Square Tax-Exempt Fund and The Rodney Square Multi-
Manager Fund, each a registered investment company. 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 that Portfolio's investment
objectives, 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, 1996, 1995 and 1994, of the
$164,315, $158,066, and $190,810, respectively, paid in advisory fees by the
Diversified Income Portfolio, WTC waived $144,473, $156,223, and $151,291,
respectively, for providing advisory services to that Portfolio. For the
fiscal years ended October 31, 1996, 1995, and 1994, WTC waived all of its
advisory fee for providing advisory services to the Municipal Income Portfolio
amounting to $81,460, $73,172, and $62,155, respectively.
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. During the past
fiscal year, 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. Currently, no expense limitation is prescribed by any state. WTC
has 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. This undertaking,
which is not contained in the Advisory Agreements, is fixed through February,
1998, but may be amended or rescinded thereafter.
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.
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.
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. For the fiscal year ended October 31,
1996, the Fund paid RSMC $26,291 and $13,428, respectively, for providing
administrative services to the Diversified Income Portfolio and the Municipal
Income Portfolio, of which $0 and $13,428 were waived, 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.
Under the terms of the Administration Agreement, RSMC agrees to: (a)
supply office facilities, non-investment related statistical and research
data, executive and administrative services, 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
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 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 effective November 1, 1993. For
RSMC's services provided under the 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, 1996, 1995,
and 1994, 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, 1996, 1995 and 1994 the Fund paid $50,000,
$50,000 and $50,000, respectively, for providing accounting services for the
Municipal Income Portfolio, of which $9,981, $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;
(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 Accounting
Services Agreement is terminable by the Fund or RSMC by written notice.
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. For the fiscal year ended October 31, 1996,
RSD received underwriting commissions of $1,824 and $3,222, respectively, in
connection with the sales of shares of the Diversified Income Portfolio and
Municipal Income Portfolio. 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.
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
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.
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 Portfolio'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, 1996, RSD received payments
amounting to $28,344 under the Diversified Income Portfolio's 12b-1 Plan; of
that amount, $23,188 represented reimbursement of expenses that RSD had
incurred in paying trail commissions to service organizations and $2,629 for
prospectus printing and $2,527 on the preparation and distribution of
marketing materials. For the fiscal year ended October 31, 1996, RSD received
payments amounting to $19,949 under the Municipal Income Portfolio's 12b-1
Plan; of that amount, $15,580 represented reimbursement of expenses that RSD
had incurred in paying trail commissions to Service Organizations and $2,629
for prospectus printing and $1,740 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.
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, 1996, 1995 and 1994, the
Diversified Income Portfolio paid no brokerage commissions. During the fiscal
years ended October 31, 1996, 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.
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 average purchases and sales as to price and allocate such purchases
and sales 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.
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").
Securities and other assets for which market quotations are readily
available are valued based upon market quotations, provided such quotations
adequately reflect, in the opinion of RSMC, the fair value 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
Portfolio 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.
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, 1996 was 5.60%. Without fee
waivers by WTC during the period, the yield for that Portfolio would have been
5.14%. The Municipal Income Portfolio's yield for the 30-day period ended
October 31, 1996 was 4.20%. Without fee waivers by WTC and RSMC during the
period, the yield for that Portfolio would have been 3.51%.
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 1996, illustrates the yields that would have to be
achieved on taxable investments to produce a range of hypothetical tax-
equivalent yields:
TAX-EQUIVALENT YIELD TABLE
FEDERAL MARGINAL TAX-EQUIVALENT YIELDS
INCOME TAX BRACKET 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:
AVERAGE ANNUAL TOTAL RETURN FOR DIVERSIFIED INCOME PORTFOLIO
APRIL 2, 1991
ONE-YEAR ENDED FIVE-YEARS ENDED (COMMENCEMENT OF OPERATIONS)
SALES LOAD1 OCTOBER 31, 1996 OCTOBER 31, 1996 THROUGH OCTOBER 31, 1996
- ------------ ---------------- ---------------- ----------------------------
3.50% 1.50% 5.88% 6.51%
NONE 5.18% 6.64% 7.19%
AVERAGE ANNUAL TOTAL RETURN FOR MUNICIPAL INCOME PORTFOLIO
NOVEMBER 1, 1993
ONE-YEAR ENDED (COMMENCEMENT OF OPERATIONS)
SALES LOAD OCTOBER 31, 1996 THROUGH OCTOBER 31, 1996
- ---------- ---------------- ----------------------------
3.50% 0.59% 3.05%
None 4.24% 4.28%
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.
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
for the one-year period ended October 31, 1996, the five-year period ended
October 31, 1996 and for the period from April 2, 1991 (commencement of
operations) through October 31, 1996 was 5.18%, 37.92% and 47.42%,
respectively. The Municipal Income Portfolio's cumulative total return for
the one-year period ended October 31, 1996 and for the period from November 1,
1993 (commencement of operations) through October 31, 1996 was 4.24% and
13.42%, 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, 1996, a hypothetical $10,000 investment in the Diversified Income
Portfolio would have been worth $14,741.88 assuming all distributions were
reinvested and no sales load was paid. During the period November 1, 1993
(Commencement of Operations) through October 31, 1996, a hypothetical $10,000
investment in Municipal Income Portfolio would have been worth $11,342.35
CHANGE IN $10,000 HYPOTHETICAL INVESTMENT
DIVERSIFIED INCOME PORTFOLIO
VALUE OF VALUE OF VALUE OF INCREASE IN
INITIAL REINVESTED REINVESTED COST OF LIVING
PERIOD ENDED $10,000 INCOME CAPITAL GAIN TOTAL (CONSUMER PRICE
OCTOBER 31 INVESTMENT DIVIDENDS DISTRIBUTIONS VALUE INDEX)
- ------------ ---------- ---------- ------------- ------- ---------------
1996 $10,360 $4,225 $157 $14,742 17.3%
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%
Explanatory Note: A hypothetical initial investment of $10,000 on April
2, 1991, 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 $14,378. 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 $4,219 for income dividends and
$159 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
VALUE OF VALUE OF VALUE OF INCREASE IN
INITIAL REINVESTED REINVESTED COST OF LIVING
PERIOD ENDED $10,000 INCOME CAPITAL GAIN TOTAL (CONSUMER PRICE
OCTOBER 31 INVESTMENT DIVIDENDS DISTRIBUTIONS VALUE INDEX)
- ------------ ---------- ---------- ------------- ------- ---------------
1996 $9,968 $1,374 $0 $11,342 8.9%
1995 $9,992 $889 $0 $10,881 5.4%
1994 $ 9,312 $383 $0 $9,695 2.5%
Explanatory Note: A hypothetical initial investment of $10,000 on
November 1, 1993, 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 $11,347. 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 $1,347. 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 OCTOBER 31, 1996
PERCENT OF
SECTOR INVESTMENTS
------ -----------
US Government Bonds 57.3%
Corporate Bonds 29.0%
Asset Backed Securities 11.8%
Cash Equivalents 1.9%
-----
Total Investments 100.0%
=====
[GRAPHICAL REPRESENTATION (PIE CHART) OF INFORMATION STATED 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, 1996,
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.
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.
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 businesses, often featuring mutual fund performance
data.
USA TODAY, a national daily newspaper.
U.S. NEWS AND WORLD REPORT, a national business weekly that
periodically reports mutual fund performance data.
WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
WIESENBERGER INVESTMENT COMPANIES SERVICES, an annual compendium of
information about mutual funds and other investment companies,
including comparative data on funds' backgrounds, management
policies, salient features, management results, income and dividend
records, and price ranges.
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
(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.
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 distributions received on those shares.
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 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.
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 and (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 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 than 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.
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 to 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 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.
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.
SUBSTANTIAL SHAREHOLDERS. As of October 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 75.5% 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 52.6% of the
shares of the Municipal Income Portfolio in addition to those shares owned
beneficially on behalf of its customer accounts.
FINANCIAL STATEMENTS
The Schedules of Investments of the Diversified Income Portfolio and
Municipal Income Portfolio as of October 31, 1996, the Statements of Assets
and Liabilities of the Diversified Income Portfolio and Municipal Income
Portfolio as of October 31, 1996, the Statement of Operations of the
Diversified Income Portfolio and Municipal Income Portfolio for the fiscal
year ended October 31, 1996, the Statements of Changes in Net Assets of the
Diversified Income Portfolio and Municipal Income Portfolio for the fiscal
years ended October 31, 1996 and 1995, the Financial Highlights of the
Diversified Income Portfolio for the fiscal years ended October 31, 1996, 1995
1994, 1993 and 1992, the Financial Highlights of the Municipal Income
Portfolio for the fiscal years ended October 31, 1996, 1995 and 1994, 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, 1996, are attached hereto.
<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, or liquid 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 indexes 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
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.
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
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 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.
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 the
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.
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.
(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.
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
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.
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
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
(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 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
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 the
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
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.
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.
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.
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.
<PAGE>
APPENDIX B
DESCRIPTION OF RATINGS
MOODY'S RATINGS
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.
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.
S&P RATINGS
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 differ 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 exhibit 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 determined to possess
overwhelming safety characteristics will be rated "SP-1+." The "SP-2" rating
reflects a satisfactory capacity to pay principal and interest.
<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, 1996.
PERFORMANCE REVIEW*
The Diversified Income Portfolio had a total return of 5.18% during
the fiscal year ended October 31, 1996. This return consisted of a decrease
in net asset value per share, from $13.08 to $12.95, plus distributions
from net investment income during the year of $0.78 per share. The
Portfolio's performance trailed the reported return of 5.81% for the Lehman
Intermediate Government/Corporate Index. Wilmington Trust Company, the
Portfolio's adviser, has continued to assist the Portfolio by limiting
total expenses of the Portfolio to 0.65% of average daily net assets. The
Lehman Intermediate Government/Corporate Index is a total return
performance benchmark consisting of U.S. Government and publicly issued
corporate debt issues rated at least investment grade with maturities from
1 year to 10 years.
The Municipal Income Portfolio provided shareholders with a 4.24%
total return for the fiscal year ended October 31, 1996. This return
consisted of a decrease in the net asset value per share, from $12.49 to
$12.46, plus distributions from net investment income during the year of
$0.55 per share. The Portfolio's performance was lower than the 5.78%
return reported for the Merrill Lynch Intermediate Municipal Index.
Wilmington Trust Company, the Portfolio's adviser, has continued to assist
the Portfolio by limiting total expenses of the Portfolio to 0.75% of
average daily net assets. The Merrill Lynch Intermediate Municipal Index
is a composite return of nearly 400 municipal bond issues with a maturity
range of 0 to 22 years.
ECONOMIC ENVIRONMENT
The domestic fixed income market experienced several interest rate
swings during the past fiscal year in response to changing expectations of
the Federal Reserve Board's (the "Fed") policy. Following the momentum of
declining interest rates during most of 1995, the new year began
anticipating that the Fed would extend the bullish outlook for interest
rates by further reducing short-term interest rates. The fortunes of the
fixed income market took a turn for the worse in February and March of 1996
as economic growth accelerated and all prospects of further rate cuts by
the Fed at that time were eliminated. The fixed income markets continued
to perform poorly into the summer as employment growth triggered additional
concerns regarding inflation and higher wage pressures. However, prospects
for the third quarter began to indicate that the economy was slowing and,
with inflation remaining under control, the markets began to stabilize.
Yields on U.S. Treasury securities with 5-year maturities, which had
bottomed out at 5.13% in mid-February, peaked at 6.82% in early July. The
final months of the fiscal year have seen yields move lower, reaching 6.10%
by October 31, 1996 for the above-mentioned U.S. Treasury securities.
- --------------
* 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 16 AND 17.
Municipal bond prices rose for the first three months of the year,
representing the end of a long rally that started early in 1995. However,
tax-exempts under-performed their taxable counterparts during this period
as the issue of radical tax reform was the primary issue of the Steve
Forbes presidential campaign. The next six months proved to be difficult
for the fixed income markets. An economy showing signs of explosive
growth, combined with rising commodity prices, led to uncertainty regarding
Fed actions and volatility in the markets. Municipals, while participating
in the bear market, were buoyed somewhat by two factors. First, the demise
of the Forbes campaign put to rest, at least temporarily, talk of radical
tax reform. Second, the municipal market experienced a net reduction in
outstanding issuance. The amount of bond redemptions, either from calls or
maturities, peaked in the June/July period with over $60 billion of bonds
retired. Investors' efforts to replace these bonds, when the supply of new
issues was relatively light, minimized the downward price pressures.
Municipal prices declined by less than half of the decline experienced by
Treasury issues.
The final three months of the fiscal year witnessed a recovery in bond
prices so that, over the course of the year, the decline in bond prices was
moderate. The Fed held short-term interest rates steady in the summer in
expectation of a slowing economy. The economy behaved as the Fed expected;
perceived inflation pressures never materialized and the bond markets were
off to the races.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
THE DIVERSIFIED INCOME PORTFOLIO
The Diversified Income Portfolio is designed to give shareholders
broad exposure to the dynamics of the intermediate term bond market. This
goal is accomplished by applying a disciplined and systematic investment
process to actively manage a core portfolio of investment grade bonds and
notes from a wide range of taxable market sectors.
The Portfolio performed well in the volatile interest rate
environment, with the exception of the first quarter of 1996 when interest
rates reversed direction and began to rise. The Portfolio was positioned
with a higher level of interest rate sensitivity in order to capture
possible gains in anticipation of the Fed pushing rates down. When this
did not take place, the Portfolio lost ground as interest rates rose and
bond prices declined. The Portfolio was repositioned defensively as rates
continued to rise and we were able to recapture most of the initial under-
performance. The Portfolio's performance was enhanced during the past
fiscal year by exposure to the corporate and asset-backed markets. The
asset-backed market in particular performed extremely well as new issues
reached record levels and the buyer base for these securities widened,
allowing for the higher supply to be easily absorbed. The Portfolio's
exposure to the asset-backed market was 20% early in the fiscal year and
remained near that level until the third quarter of 1996 when the exposure
was lowered to below 10%. The allocation to this sector was reduced
primarily to capture the strong performance gained earlier in the year.
The corporate bond market also assisted the Portfolios' performance as
spreads against the Treasury market narrowed, reflecting both investors
satisfaction with the overall economic and credit outlook as well as their
need for yield enhanced returns. Corporate allocations have been increased
from near-market weightings earlier in the year to an approximately 6% over-
weighting by the end of the fiscal year. We believe that the favorable
environment in the corporate market for stable growth and low inflation
will continue.
The following graph compares the performance of The 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.
[GRAPH]
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT*
Fund LGIC Index CPI
Apr-91 9,650 10,000 10,000
Oct-91 10,314 10,791 10,180
Oct-92 11,302 11,870 10,506
Oct-93 12,318 13,050 10,800
Oct-94 12,031 12,798 11,081
Oct-95 13,524 14,403 11,391
Oct-96 14,225 15,240 11,733
Average Annual Total Return
---------------------------
1 YEAR 5 YEAR INCEPTION
------ ------ ---------
Fund 1.5% 5.9% 6.5%
Index 5.8% 7.1% 7.8%
CPI 3.0% 2.9% 2.9%
*Past performance is not necessarily indicative of future results. An
investment in the Portfolio 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. The values shown for the Portfolio
reflect the effect of the maximum sales load of 3.50% on a hypothetical
initial investment of $10,000 and with dividends reinvested. Returns are
higher due to the Adviser's maintenance of the Fund's expenses. See
Financial Highlights on pages 16 and 17.
THE MUNICIPAL INCOME PORTFOLIO
The Municipal Income Portfolio is an intermediate, high quality fund
designed to produce a high level of income which is exempt from federal
income tax 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.
Municipals continued to be relatively expensive to Treasury issues due
to the imbalance between supply and demand. We expect this imbalance to
ease somewhat in fiscal 1997 as the peak of the bond redemptions appears to
be behind us. This should lead to municipals under-performing until they
move back to the fair value range, again on a relative basis. As a result,
we have positioned the Portfolio in a slightly defensive position, using
both shorter maturity bonds and higher coupons. The shorter maturities we
bought decreased our duration exposure to 5.06 years, compared to 5.11 for
the Merrill Lynch Index. Our average maturity declined during the year to
6.3 years from 6.6 years as of October 31, 1995. In addition, the
Portfolio's coupon increased to 6.02% versus 5.53% for the Index. This
coupon differential is also defensive in nature because higher coupon
bonds, all else being equal, will have a smaller price reaction to a given
change in interest rates.
Another strategy we are currently utilizing takes advantage of the
positive slope of the municipal yield curve. We are looking to increase
the Portfolio's position in the 12 to 13 year maturity range. These
maturities offer the best roll down value as we approach another calendar
year end. The roll down value is the natural shortening of a bond over
time. As a bond due in 2008 is priced as a 12 year bond in 1996, it will
be priced as an 11 year bond in 1997. This difference represents a 0.5% to
1.0% improvement in relevant price. Our present goal is to have between 5
to 10% of the Portfolio in the 12 to 13 year maturity range.
The following graph compares the performance of The Municipal Income
Portfolio, the Merrill Lynch Intermediate Municipal Index, and the Consumer
Price Index ("CPI"), since the Portfolio's commencement of operations on
November 1, 1993.
[GRAPH]
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT*
CPI Merrill Index RSMIP
10/31/93 $10,000 $10,000 $9,650
10/31/94 $10,260 $9,808 $9,356
10/31/95 $10,568 $10,882 $10,500
10/31/96 $10,885 $12,033 $10,945
Average Annual Total Return
---------------------------
1 YEAR INCEPTION
------ ---------
Fund 0.59% 3.05%
Index 5.78% 4.80%
CPI 3.00% 2.87%
*Past performance is not necessarily indicative of future results. An
investment in the Portfolio 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. The values shown for the Portfolio
reflect the effect of the maximum sales load of 3.50% on a hypothetical
initial investment of $10,000 and with dividends reinvested. Returns are
higher due to the Adviser's maintenance of the Fund's expenses. See
Financial Highlights on pages 16 and 17.
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 14, 1996
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------
INVESTMENTS/OCTOBER 31, 1996
(Showing Percentage of Total Value of Net Assets)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- --------- --------
<S> <C> <C> <C>
ASSET-BACKED SECURITIES - 11.8%
Advanta Mtge. Loan Trust, Ser. 1996-1 Class A6, 6.73%,
08/25/23...................................................... Aaa/AAA $ 300,000 $ 289,695
Federal National Mtge. Assoc., Ser. 1996-4 Class VC, 6.50%,
07/25/02...................................................... NR/NR 274,187 273,132
GE Cap. Mtge. Services, Inc., Ser. 1996HE2 Class A5, 7.94%,
06/25/14...................................................... Aaa/NR 600,000 618,168
Green Tree Financial Corp., Ser. 1995-2 Class A3, 7.45%,
06/15/26...................................................... Aaa/AAA 400,000 411,436
Green Tree Financial Corp., Ser. 1996-5 Class A4, 7.15%,
07/15/27...................................................... Aaa/AAA 750,000 770,501
MBNA Master Credit Card Trust, Ser. 1995F Class A, 6.60%,
01/15/03...................................................... Aaa/AAA 300,000 303,661
Residential Asset Securities Corp., Ser. 1995KS3, 8.00%,
10/25/24...................................................... Aaa/AAA 400,000 406,472
Resolution Trust Corp., Ser. 1994C2 Class B, 8.00%, 04/25/25.... NR/AA 250,000 257,392
The Money Store Home Equity Trust, Ser. 1992D2 Class A3,
7.55%, 01/15/18............................................... Aaa/AAA 396,477 406,480
-------------
TOTAL ASSET-BACKED SECURITIES (COST $3,674,517)................................................. 3,736,937
-------------
CORPORATE BONDS - 28.8%
ELECTRIC UTILITIES - 3.2%
Alabama Power Co., 7.00%, 01/01/03, Callable 01/01/98 @ 101.64.. A1/A+ 1,000,000 1,012,500
-------------
FINANCIAL - 21.7%
American Express Credit Corp., 8.50%, 06/15/99................... Aa3/A+ 350,000 369,688
Associates Corp. N.A., 6.75%, 08/01/01........................... Aa3/AA- 500,000 505,133
BankAmerica Corp., 6.75%, 09/15/05............................... A3/A- 250,000 246,250
Bear Stearns Co., 5.75%, 02/15/01................................ A2/A 500,000 484,375
Ford Capital B.V., 9.375%, 01/01/98.............................. A2/A 300,000 311,625
Heller Financial Corp., 7.875%, 11/01/99......................... A2/BBB+ 800,000 833,000
International Lease Fin., 6.125%, 11/01/99....................... A2/A+ 400,000 398,000
ITT Hartford, 6.375%, 11/01/02................................... A1/A+ 400,000 393,000
J.P. Morgan & Co., 7.625%, 09/15/04.............................. Aa2/AA+ 300,000 316,125
Lehman Brothers, Inc., 7.625%, 08/01/98.......................... A3/A 600,000 613,500
Mellon Bank N.A., 7.625%, 09/15/07............................... A2/A 500,000 521,250
Merrill Lynch & Co., Inc., 7.05%, 04/15/03....................... A1/A+ 200,000 200,750
Merrill Lynch & Co., Inc., 7.00%, 03/15/06....................... A1/A+ 600,000 600,750
Norwest Financial Inc., 6.37%, 11/15/01.......................... Aa3/AA- 500,000 499,095
Santander Financial Issuances Ltd., 7.875%, 04/15/05............. A1/A+ 300,000 315,375
USL Capital Corp., 5.79%, 01/23/01............................... A1/A+ 300,000 291,375
-------------
6,899,291
-------------
MANUFACTURING - 2.2%
Eaton Corp., 8.00%, 08/15/06..................................... A2/A 650,000 702,000
-------------
OIL, GAS & PETROLEUM - 1.7%
British Petroleum N.A., Inc., 8.875%, 12/01/97................... A1/AA- $ 200,000 $ 206,184
Societe Nationale Elf Aquitaine, 8.00%, 10/15/01................. Aa3/AA 300,000 319,500
-------------
525,684
-------------
TOTAL CORPORATE BONDS (COST $8,983,251)......................................................... 9,139,475
-------------
TIME DEPOSITS - 1.9%
Sanwa Bank Cayman Time Deposit, 5.68%, 11/01/96
(COST $605,563)................................................ NR/NR 605,563 605,563
-------------
U.S. GOVERNMENT AGENCY OBLIGATIONS** - 12.3%
FEDERAL HOME LOAN BANKS NOTES - 6.3%
Federal Home Loan Banks Notes, 6.73%, 12/30/99, Callable
12/30/96 @ 100................................................ NR/NR 1,000,000 1,004,380
Federal Home Loan Banks Notes, 6.90%, 08/27/03, Callable
11/27/96 @ 100................................................ NR/NR 500,000 501,730
Federal Home Loan Banks Notes, 7.50%, 09/30/03, Callable
09/30/98 @ 100................................................ NR/NR 475,000 481,727
-------------
1,987,837
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 2.8%
Federal Home Loan Mtge. Corp., 8.60%, 01/26/00................... NR/NR 400,000 402,003
Federal Home Loan Mtge. Corp., 7.05%, 05/15/02................... NR/NR 500,000 502,135
-------------
904,138
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION NOTES - 3.2%
Federal National Mtge. Assoc., 7.50%, 08/25/05................... NR/NR 300,000 302,421
Federal National Mtge. Assoc., 6.71%, 02/13/06................... NR/NR 300,000 295,119
Federal National Mtge. Assoc., 7.58%, 06/02/06................... NR/NR 400,000 410,509
-------------
1,008,049
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (COST $3,850,277)...................................... 3,900,024
-------------
U.S. TREASURY OBLIGATIONS** - 44.5%
U.S. TREASURY BONDS - 2.7%
U.S. Treasury Bonds, 11.75%, 02/15/10............................ NR/NR 650,000 870,974
-------------
U.S. TREASURY NOTES - 41.8%
U.S. Treasury Notes, 7.50%, 01/31/97............................. NR/NR 500,000 502,715
U.S. Treasury Notes, 5.375%, 11/30/97............................ NR/NR 1,150,000 1,147,734
U.S. Treasury Notes, 6.125%, 05/15/98............................ NR/NR 400,000 402,692
U.S. Treasury Notes, 6.375%, 01/15/99............................ NR/NR 250,000 253,112
U.S. Treasury Notes, 6.00%, 08/15/99............................. NR/NR 3,000,000 3,008,790
U.S. Treasury Notes, 6.00%, 10/15/99............................. NR/NR 250,000 250,860
U.S. Treasury Notes, 6.375%, 01/15/00............................ NR/NR 1,400,000 1,418,186
U.S. Treasury Notes, 6.75%, 04/30/00............................. NR/NR $ 1,250,000 $ 1,279,175
U.S. Treasury Notes, 6.25%, 05/31/00............................. NR/NR 300,000 302,364
U.S. Treasury Notes, 8.75%, 08/15/00............................. NR/NR 150,000 163,666
U.S. Treasury Notes, 6.25%, 08/31/00............................. NR/NR 500,000 503,660
U.S. Treasury Notes, 6.125%, 09/30/00............................ NR/NR 200,000 200,638
U.S. Treasury Notes, 7.88%, 08/15/01............................. NR/NR 275,000 295,152
U.S. Treasury Notes, 6.50%, 08/31/01............................. NR/NR 500,000 508,105
U.S. Treasury Notes, 6.375%, 08/15/02............................ NR/NR 650,000 657,495
U.S. Treasury Notes, 6.25%, 02/15/03............................. NR/NR 350,000 351,358
U.S. Treasury Notes, 5.875%, 02/15/04............................ NR/NR 250,000 244,392
U.S. Treasury Notes, 7.25%, 05/15/04............................. NR/NR 600,000 634,860
U.S. Treasury Notes, 6.50%, 08/15/05............................. NR/NR 900,000 909,522
U.S. Treasury Notes, 6.875%, 05/15/06............................ NR/NR 250,000 258,935
-------------
13,293,411
-------------
TOTAL U.S. TREASURY OBLIGATIONS (COST $14,120,674).............................................. 14,164,385
-------------
TOTAL INVESTMENTS (COST $31,234,282)+ - 99.3%................................................... 31,546,384
OTHER ASSETS AND LIABILITIES, NET - 0.7%........................................................ 230,687
-------------
NET ASSETS - 100.0%............................................................................. $ 31,777,071
=============
</TABLE>
* Although certain securities are not rated (NR) by either Moody's or S&P,
they have been determined to be of comparable quality to investment grade
securities by the Portfolio Advisor.
** While not rated by Moody's or S&P, U.S. Government Securities are
considered to be of the highest quality, comparable to AAA.
+ The cost for federal income tax purposes was $31,251,647. At October 31,
1996, net unrealized appreciation was $294,737. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $441,112 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $146,375.
The accompanying notes are an integral part of the financial statements.
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/MUNICIPAL INCOME PORTFOLIO
- ------------------------------------------------------------------------
INVESTMENTS/OCTOBER 31, 1996
(Showing Percentage of Total Value of Net Assets)
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- --------- -------
<S> <C> <C> <C>
MUNICIPAL BONDS - 97.6%
ALASKA - 5.8%
Alaska Municipal Bond Bank Auth. Ref. Rev., Ser. 1993C,
4.90%, 10/01/03............................................... A/A $ 400,000 $ 396,000
Seward, AK Rev. (Alaska Sealife Center Proj.), Ser. 1996,
6.50%, 10/01/01............................................... NR/NR 560,000 562,100
-------------
958,100
-------------
CALIFORNIA - 11.6%
California State Veterans Bonds, Ser. AY, 6.90%, 04/01/01........ Aa/AA 250,000 252,390
California State Veterans Bonds, Ser. 1989, 7.00%, 04/01/03...... Aa/AA 500,000 504,775
Los Angeles County, CA Public Works Fin. Auth. Rev. (LA
County Park & Open Space District), Ser. 1994A, 5.63%,
10/01/03....................................................... Aa/AA 500,000 521,875
Los Angeles, CA Dept. of Water and Power Electric Plant Rev.,
5.75%, 11/15/02................................................ Aa/AA 300,000 316,875
Redev. Agency of San Francisco, CA Multi-Family Housing Ref.
Rev. (GNMA South Beach Proj.), Ser. 1994, 4.75%, 09/01/02...... Aaa/NR 345,000 339,394
-------------
1,935,309
-------------
COLORADO - 3.1%
Aurora, CO Cert. of Participation Lease Ref. Rev., 5.85%,
12/01/02...................................................... A/A 500,000 518,750
-------------
DELAWARE - 23.1%
Bethany Beach, DE, 9.75%, 11/01/07.............................. Aaa/AAA 160,000 218,600
Bethany Beach, DE, 9.75%, 11/01/08.............................. Aaa/AAA 180,000 250,425
Delaware State Economic Dev. Auth. Osteopatic Hosp. Assoc.,
6.00%, 01/01/03............................................... Aaa/NR 500,000 514,375
Delaware State Economic Dev. Auth. Rev. (Delmarva Power
& Light), 7.30%, 09/01/15..................................... Aaa/AAA 100,000 108,500
Delaware State Housing Auth. Multi-Family Mtge. Ref. Rev.,
6.30%, 07/01/98............................................... A1/A+ 100,000 100,625
Delaware State Housing Auth. Multi-Family Mtge. Rev., Ser.
1992D, 6.35%, 07/01/03........................................ A1/NR 100,000 102,875
Delaware State Housing Auth. Multi-Family Mtge. Ref. Rev.,
Ser. C, 7.25%, 01/01/07....................................... A1/A 235,000 247,337
Delaware State Housing Auth. Single Family Mtge. Rev.,
Ser. 1993, Subser. A, 5.05%, 07/01/05......................... Aaa/AAA 315,000 307,519
Delaware State Housing Auth. Single Family Mtge. Rev.,
Ser. 1993, Subser. A1, 5.15%, 01/01/06........................ Aaa/AAA 180,000 176,850
Delaware State Housing Auth. Sr. Home Mtge. Rev. Subser.
1991, 6.40%, 12/01/02......................................... A1/NR 45,000 46,181
Delaware State Solid Waste Auth. Sys. Rev., 5.80%, 07/01/01..... A/A $ 500,000 $ 519,375
Delaware Trans. Auth. Trans. Sys. Jr. Lien Rev., 5.00%,
07/01/06...................................................... Aaa/AAA 500,000 493,125
Delaware Trans. Auth. Trans. Sys. Jr. Lien Rev., 7.75%,
07/01/08, Prerefunded 07/01/98 @ 101.50....................... Aaa/AAA 250,000 268,438
Delaware Trans. Auth. Trans. Sys. Sr. Lien Rev., 6.75%,
07/01/98...................................................... A1/AA- 115,000 119,744
Delaware Trans. Auth. Trans. Sys. Sr. Lien Rev., 5.88%,
07/01/00...................................................... A1/AA- 350,000 365,750
-------------
3,839,719
-------------
HAWAII - 4.6%
Hawaii State Gen. Oblig. Rev., Ser. BW, 6.20%, 03/01/05......... Aa/AA 700,000 758,625
-------------
MISSISSIPPI - 2.4%
Medical Center Educ. Bldg. Corp., (Univ. of Mississippi
Medical Center Proj.), Ser. 1993, 5.40%, 12/01/05............. NR/A- 400,000 396,500
-------------
NEVADA - 2.3%
Nevada State Gen. Oblig. Rev., Ser. B, 4.38%, 08/01/03.......... Aa/AA 400,000 387,500
-------------
NEW JERSEY - 3.1%
New Jersey Econ. Dev. Auth. School Rev. (Blair Academy
1995 Proj.), Ser. B, 6.00%, 09/01/07.......................... A/NR 500,000 515,000
-------------
PENNSYLVANIA - 17.0%
Lancaster County, PA Solid Waste Auth. Rev., Ser. A, 6.15%,
12/15/98...................................................... A/BBB 100,000 101,250
Lancaster County, PA Solid Waste Auth. Rev., 7.75%, 12/15/04.... A/BBB 225,000 238,219
Pennsylvania State Higher Educ. Fac. Auth. College & Univ.
Rev. (Philadelphia College of Osteopathic Medicine), Ser.
1993, 5.25%, 12/01/07......................................... NR/AAA 150,000 148,875
Pennsylvania State Higher Educ. Fac. Auth. College & Univ.
Rev. (Trustees Univ. of Pennsylvania), Ser. A, 6.65%,
01/01/17, Prerefunded 01/01/97 @ 100.......................... Aa/AA 550,000 552,502
Pennsylvania State Ref. Rev. First Ser., 5.30%, 05/01/06........ A1/AA- 500,000 508,125
Philadelphia, PA Municipal Auth. Rev. (Philadelphia Airport),
7.87%, 07/15/17, Prerefunded 07/15/97 @ 102................... Aaa/AAA 275,000 288,431
Philadelphia, PA Redev. Auth. Home Imp. Loan Rev., 7.38%,
06/01/03...................................................... A/A 40,000 40,650
York County, PA Ind. Auth. Personal Care Fac., 9.50%, 10/01/19,
Prerefunded 10/01/02 @ 100.................................... NR/NR 335,000 416,237
York County, PA Solid Waste Refuse Auth. Ind. Dev. Rev.
(Resource Recovery Proj.), Ser. 1985, 8.20%, 12/01/14......... A/AA- 500,000 532,770
-------------
2,827,059
-------------
TEXAS - 1.8%
Austin, TX Gen. Oblig. Rev., 4.75%, 09/01/09.................... Aa/AA $ 315,000 $ 294,131
-------------
UTAH - 3.1%
Salt Lake City, UT Municipal Bldg. Auth. Lease Rev., Ser.
1994A, 5.65%, 10/01/03........................................ Aaa/AAA 500,000 520,000
-------------
VERMONT - 5.1%
Vermont Municipal Bond Bank Rev., Ser. 2, 6.00%, 12/01/05....... Aaa/AAA 790,000 850,238
-------------
VIRGINIA - 4.7%
Virginia Educ. Loan Auth. Rev. (Student Loan Prog.), Ser.
1994B, 5.15%, 03/01/04........................................ Aaa/NR 260,000 263,250
Virginia State Housing Dev. Auth. Commonwealth Mtg. Rev.,
Ser. 1992C Subser. C8, 5.80%, 07/01/04........................ Aa/AA+ 500,000 514,375
-------------
777,625
-------------
WASHINGTON - 5.2%
Clark County, WA Public Utility Dist. No. 1 Generating
Sys. Rev., 6.00%, 01/01/06.................................... Aaa/AAA 350,000 371,438
Washington State Public Power Supply Sys. Ref. Rev. (Nuclear
Proj. No. 3), Ser. 1993C, 5.10%, 07/01/07..................... Aa/AA 500,000 485,625
-------------
857,063
-------------
WEST VIRGINIA - 1.8%
Oak Hill, WV Ind. Dev. Ref. Rev. (Fayette Plaza Proj.),
Ser. 1991A, 4.95%, 10/01/09................................... NR/AA- 300,000 302,625
-------------
WISCONSIN - 2.9%
Appleton, WI Area School Dist., 5.00%, 04/01/11................. Aa/NR 505,000 485,431
-------------
TOTAL MUNICIPAL BONDS (COST $16,106,825) ....................................................... 16,223,675
-------------
TAX-EXEMPT MUTUAL FUNDS - 1.1%
PNC Municipal Cash Tax-Exempt Money Market Fund
(COST $181,043)............................................... NR/NR 181,043 181,043
-------------
TOTAL INVESTMENTS (COST $16,287,868)+ - 98.7%................................................... $ 16,404,718
-------------
OTHER ASSETS AND LIABILITIES, NET - 1.3%........................................................ 213,874
-------------
NET ASSETS - 100.0%............................................................................. $ 16,618,592
=============
</TABLE>
* Although certain securities are not rated (NR) by either Moody's or S&P,
they have been determined to be of comparable quality to investment grade
securities by the Portfolio Advisor.
+ Cost for federal income tax purposes. At October 31, 1996, net unrealized
appreciation was $116,850. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $171,949 and aggregate gross unrealized depreciation
for all securities in which there was an excess of tax cost over market
value of $55,099.
The accompanying notes are an integral part of the financial statements.
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 1996
<TABLE>
<CAPTION>
DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
----------- ----------
<S> <C> <C>
ASSETS:
Investments in securities, at market (identified cost $31,234,282 and
$16,287,868, respectively) (Note 2) ..................................... $ 31,546,384 $ 16,404,718
Receivable for investment securities sold................................. 501,440 -
Receivable for Fund shares sold .......................................... 3,231 -
Interest receivable ...................................................... 469,734 262,757
Deferred organization costs (Note 2) ..................................... - 34,054
Other assets ............................................................. 495 254
------------- --------------
Total assets ............................................................ 32,521,284 16,701,783
------------- --------------
LIABILITIES:
Dividends payable ........................................................ 157,478 61,768
Payable for investment securities purchased............................... 499,915 -
Payable for Fund shares redeemed ......................................... 39,227 -
Due to Adviser (Note 4) .................................................. 684 -
Other accrued expenses (Note 4) .......................................... 46,909 21,423
------------- --------------
Total liabilities ....................................................... 744,213 83,191
------------- --------------
NET ASSETS, at market value .............................................. $ 31,777,071 $ 16,618,592
NET ASSETS CONSIST OF:
Shares of beneficial interest ............................................ $ 24,538 $ 13,340
Additional paid-in capital ............................................... 31,539,886 16,560,216
Net unrealized appreciation of investments ............................... 312,102 116,850
Accumulated net realized loss ............................................ (99,455) (71,814)
------------- --------------
NET ASSETS, for 2,453,780 and 1,334,009 shares outstanding, respectively.. $ 31,777,071 $ 16,618,592
============= ==============
NET ASSET VALUE and redemption price per share ($31,777,071 / 2,453,780
and $16,618,592 / 1,334,009 outstanding shares of beneficial interest,
$0.01 par value, respectively) .......................................... $12.95 $12.46
====== ======
Maximum offering price per share (100/96.5 of $12.95 and 100/96.5
of $12.46, respectively) ................................................ $13.42 $12.91
====== ======
</TABLE>
<PAGE>
STATEMENTS OF OPERATIONS
For the Fiscal Year Ended October 31, 1996
<TABLE>
<CAPTION>
DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
----------- ----------
<S> <C> <C>
INTEREST INCOME ......................................................... $ 2,207,502 $ 865,331
------------- --------------
EXPENSES:
Advisory fee (Note 4) ................................................... 164,315 81,460
Administration fee (Note 4) ............................................. 26,291 13,428
Accounting fee (Note 4) ................................................. 50,000 50,000
Distribution expenses (Note 4) .......................................... 28,344 19,949
Trustees' fees and expenses (Note 4) .................................... 5,625 5,625
Amortization of organizational expenses (Note 2) ........................ 7,927 18,106
Registration fees ....................................................... 17,167 12,166
Reports to shareholders ................................................. 10,925 5,834
Legal ................................................................... 11,289 5,298
Audit ................................................................... 26,717 13,283
Other ................................................................... 9,483 5,605
------------- --------------
Total expenses before fee waivers ...................................... 358,083 230,754
Advisory fee waived (Note 4).......................................... (144,473) (81,460)
Administration fee waived (Note 4).................................... - (13,428)
Accounting fee waived (Note 4)........................................ - (9,981)
------------- --------------
Total expenses, net ................................................... 213,610 125,885
------------- --------------
Net investment income.................................................... 1,993,892 739,446
------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investment transactions..................... 338,775 (20,412)
Net unrealized depreciation of investments during the year.............. (746,222) (24,225)
------------- --------------
Net loss on investments................................................. (407,447) (44,637)
------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................... $ 1,586,445 $ 694,809
============= ==============
</TABLE>
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
----------- ----------
<S> <C> <C>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income.................................................... $ 1,993,892 $ 739,446
Net realized gain (loss) on investment transactions..................... 338,775 (20,412)
Net unrealized depreciation of investments during the year.............. (746,222) (24,225)
------------- --------------
Net increase in net assets resulting from operations .................... 1,586,445 694,809
------------- --------------
Distributions to shareholders from:
Net investment income ($0.78 and $0.55 per share, respectively)......... (1,993,892) (739,446)
------------- --------------
Increase (decrease) in net assets from Fund share transactions (Note 5)... (29,412) 92,949
------------- --------------
Total increase (decrease) in net assets................................. (436,859) 48,312
NET ASSETS:
Beginning of year ....................................................... 32,213,930 16,570,280
------------- --------------
End of year.............................................................. $ 31,777,071 $ 16,618,592
============= ==============
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
============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. They should be read in conjunction with the financial statements
and notes thereto.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
--------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
DIVERSIFIED INCOME PORTFOLIO
NET ASSET VALUE - BEGINNING OF YEAR ............... $13.08 $12.42 $13.48 $13.20 $12.86
------ ------ ------ ------ ------
INVESTMENT OPERATIONS:
Net investment income............................ 0.78 0.83 0.71 0.76 0.83
Net realized and unrealized gain (loss) on
investments .................................. (0.13) 0.66 (1.02) 0.39 0.37
------ ------ ------ ------ ------
Total from investment operations.............. 0.65 1.49 (0.31) 1.15 1.20
------ ------ ------ ------ ------
DISTRIBUTIONS:
From net investment income....................... (0.78) (0.83) (0.71) (0.76) (0.83)
From net realized gain on investments............ - - (0.04) (0.11) (0.03)
------ ------ ------ ------ ------
Total distributions .......................... (0.78) (0.83) (0.75) (0.87) (0.86)
------ ------ ------ ------ ------
NET ASSET VALUE - END OF YEAR .................... $12.95 $13.08 $12.42 $13.48 $13.20
====== ====== ====== ====== ======
TOTAL RETURN* .................................... 5.18% 12.41% (2.33)% 9.00% 9.58%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses + ...................................... 0.65% 0.65% 0.65% 0.65% 0.65%
Net investment income............................ 6.07% 6.56% 5.53% 5.65% 6.33%
Portfolio turnover rate .......................... 85.77% 116.40% 43.77% 24.22% 27.37%
Net assets at end of year (000 omitted) .......... $31,777 $32,214 $31,721 $40,971 $30,152
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
MUNICIPAL INCOME PORTFOLIO
NET ASSET VALUE - BEGINNING OF YEAR............... $12.49 $11.64 $12.50
------ ------ ------
INVESTMENT OPERATIONS:
Net investment income............................ 0.55 0.54 0.49
Net realized and unrealized gain (loss) on
investments................................... (0.03) 0.85 (0.86)
------ ------ ------
Total from investment operations.............. 0.52 1.39 (0.37)
------ ------ ------
DISTRIBUTIONS:
From net investment income....................... (0.55) (0.54) (0.49)
------ ------ ------
NET ASSET VALUE - END OF YEAR..................... $12.46 $12.49 $11.64
====== ====== ======
TOTAL RETURN*..................................... 4.24% 12.23% (3.05)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ++...................................... 0.75% 0.75% 0.75%
Net investment income............................ 4.41% 4.50% 4.13%
Portfolio turnover rate........................... 15.91% 42.08% 21.95%
Net assets at end of year (000 omitted)........... $16,619 $16,570 $14,283
</TABLE>
* These results do not include the sales load. If the sales load had been
included, the returns would have been lower.
+ Wilmington Trust Company ("WTC") waived a portion of its advisory fee for
the fiscal years ended October 31, 1996, 1995, 1994, 1993 and 1992, and
Rodney Square Management Corporation ("RSMC") waived a portion of its
accounting services fee for the fiscal year-ended October 31, 1992. 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, 1996, 1995, 1994, 1993 and 1992, would have been 1.09%, 1.14%,
1.05%, 1.06% and 1.24%, respectively.
++ WTC waived its entire advisory fee and RSMC waived a portion of its
administration and accounting services fees for the fiscal years ended
October 31, 1996, 1995, and 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, 1996, 1995 and 1994, would
have been 1.37%, 1.45% and 1.62%, respectively.
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
NOTES TO 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. The investment objective of the Diversified Income Portfolio is
to seek high total return, consistent with high current income, by
investing principally in various types of investment grade fixed-income
securities. The investment objective of the Municipal Income Portfolio
is to seek a high level of income exempt from federal income tax
consistent with the preservation of capital.
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 using the last reported sales price
in the principal market where the securities are traded or if no sales
are reported, the last reported bid price. 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 continue 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
provision for federal income tax has been made. At October 31, 1996,
the Diversified Income Portfolio and the Municipal Income Portfolio had
net tax basis capital loss carryforwards to offset future capital gains
of approximately $82,000 and $72,000, respectively, which will expire
as follows:
CAPITAL LOSS EXPIRATION
CARRYFORWARD DATE
------------ ----------
Diversified Income Portfolio.... $ 82,000 10/31/03
Municipal Income Portfolio...... 6,000 10/31/02
45,000 10/31/03
21,000 10/31/04
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
realized gains on investments, if any, by each Portfolio will be made
annually in December.
DEFERRED ORGANIZATION COSTS. Costs incurred by the Municipal Income
Portfolio 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 the
Portfolio commenced operations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
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, 1996,
purchases and sales of investment securities (excluding short-term
investments) aggregated as follows:
DIVERSIFIED MUNICIPAL
INCOME INCOME
----------- ----------
Purchases.............. $28,311,261 $3,627,182
Sales.................. 26,521,158 2,570,404
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 1998. For the
fiscal year ending October 31, 1996, 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, 1996:
GROSS ADVISORY ADVISORY
FEE FEE WAIVER
-------------- ----------
Diversified Income Portfolio.... $ 164,315 $ 144,473
Municipal Income Portfolio...... 81,460 81,460
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.
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, 1996 amounted to
$26,291. RSMC waived its administration fee for the Municipal Income
Portfolio for the fiscal year ended October 31, 1996 amounting to
$13,428. 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
Plans") pursuant to Rule 12b-1 under the 1940 Act to allow each of the
Portfolios 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 Portfolio 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, 1996, such
expenses amounted to $28,344 for the Diversified Income Portfolio and
$19,949 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, 1996, RSMC's fees for accounting services amounted to
$50,000 per Portfolio. RSMC waived $9,981 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, 1996 amounted to $5,625
per Portfolio.
5.FUND SHARES. At October 31, 1996, 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, 1996 ENDED OCTOBER 31,1995
---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Shares sold........... 332,967 $4,362,435 353,623 $4,500,647
Shares issued to
shareholders in
reinvestment of
distributions........ 66,445 859,172 64,094 813,935
Shares redeemed....... (408,911) (5,251,019) (508,424) (6,445,608)
--------- ---------- --------- -----------
Net decrease.......... (9,499) $(29,412) (90,707) $(1,131,026)
========== ===========
Shares outstanding:
Beginning of year.... 2,463,279 2,553,986
--------- ---------
End of year.......... 2,453,780 2,463,279
========= =========
MUNICIPAL INCOME PORTFOLIO
FOR THE FISCAL YEAR FOR THE FISCAL YEAR
ENDED OCTOBER 31, 1996 ENDED OCTOBER 31,1995
---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Shares sold........... 141,627 $1,762,290 226,538 $2,755,791
Shares issued to
shareholders in
reinvestment of
distributions........ 45,629 568,432 45,994 552,423
Shares redeemed....... (180,088) (2,237,773) (172,561) (2,075,689)
--------- ---------- --------- -----------
Net increase.......... 7,168 $92,949 99,971 $1,232,525
========== ===========
Shares outstanding:
Beginning of year.... 1,326,841 1,226,870
--------- ---------
End of year.......... 1,334,009 1,326,841
========= =========
<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, 1996, 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 five years in the period then ended
for the Diversified Income Portfolio and for each of the three years in the
period then ended 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, 1996, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of each of the respective portfolios constituting The Rodney Square
Strategic Fixed- Income Fund at October 31, 1996, 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 five years in the period then ended for the Diversified
Income Portfolio and for each of the three years in the period then ended
for the Municipal Income Portfolio, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Baltimore, Maryland
November 27, 1996
<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 $730,747 as tax-exempt dividends.
In January 1997 shareholders of the Fund will receive Federal income tax
information on all distributions paid to their accounts in the calendar
year 1996, including any distributions paid between October 31, 1996 and
December 31, 1996.
<PAGE>
[Outside cover -- divided into two sections]
[Left Section]
TRUSTEES
Eric Brucker
Fred L. Buckner
Robert J. Christian
Martin L. Klopping
John J. Quindlen
----------------------
OFFICERS
Martin L. Klopping, PRESIDENT
Joseph M. Fahey, Jr., VICE PRESIDENT
Robert C. Hancock, VICE PRESIDENT & TREASURER
Carl M. Rizzo, Esq., SECRETARY
Diane D. Marky, ASSISTANT SECRETARY
Connie L. Meyers, ASSISTANT SECRETARY
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
Ernst & Young LLP
----------------------
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 1/97
[Right Section]
the RODNEY SQUARE
STRATEGIC
FIXED-INCOME
FUND
[GRAPHIC - RSMC Logo]
ANNUAL REPORT
OCTOBER 31, 1996
<PAGE>
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 five years in the period
ended October 31, 1996.
For The Municipal Income Portfolio:
Financial Highlights for each of the three years in the period
ended October 31, 1996.
Included in Part B of this Registration Statement:
FOR THE DIVERSIFIED INCOME PORTFOLIO:
Investments, October 31, 1996
Statement of Assets and Liabilities, October 31, 1996
Statement of Operations, for the fiscal year ended October 31,
1996
Statement of Changes in Net Assets, for the fiscal years ended
October 31, 1995 and October 31, 1996
Financial Highlights, for each of the five years in the period
ended October 31, 1996
Notes to Financial Statements
FOR THE MUNICIPAL INCOME PORTFOLIO:
Investments, October 31, 1996
Statement of Assets and Liabilities, October 31, 1996
Statement of Operations, for the fiscal year ended October 31,
1996
Statement of Changes in Net Assets, for the fiscal years ended
October 31, 1995 and October 31, 1996
Financial Highlights, for each of the three years in the period
ended October 31, 1996
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.
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.)
1.(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.)
2.(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.
4.(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.)
4.(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.)
5.(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.
(Incorporated by reference to Exhibit 6 to Post-Effective
Amendment No. 15 to this Registration Statement filed on
March 1, 1996.)
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.)
8.(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. (Incorporated by
Reference to Exhibit 9(a) to Post-Effective Amendment No.
15 to this Registration Statement filed on March 1,
1996.)
9.(b) Accounting Services Agreement between Registrant and
Rodney Square Management Corporation dated November 1,
1993. (Incorporated by reference to Exhibit 9(b) to Post-
Effective Amendment No. 15 to this Registration Statement
filed on March 1, 1996.)
9.(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.)
10.(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.)
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. (Incorporated by reference to Exhibit 15(a) to Post-
Effective Amendment No. 15 to this Registration Statement
filed on March 1, 1996.)
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.
(Incorporated by reference to Exhibit 15 (b) to Post-
Effective Amendment No. 15 to this Registration Statement
filed on March 1, 1996.)
16.(a) Schedule for Computation of Performance Quotations for
the Rodney Square Diversified Income Portfolio.
16.(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.
17.(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. 16.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
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
% Held
CORPORATE ENTITY STATE OF ORG. BY WT CORP.
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%
Holiday Travel Agency, Inc. Delaware 100%
Rodney Square Distributors, Inc. Delaware 100%
Rodney Square Management Corporation Delaware 100%
Siobain-XII Ltd. Delaware 100%
Spar Hill Realty Company Delaware 100%
Wilmington Brokerage Services Company Delaware 100%
WTC Corporate Services, Inc. Delaware 100%
100 West Tenth St. Corporation Delaware 100%
WT Investments Inc. Delaware 100%
PARTNERSHIPS
Rodney Square Investors, L.P.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES (AS OF OCTOBER 31, 1996).
(1) (2)
TITLE OF CLASS NUMBER OF RECORD SHAREHOLDERS
Shares of beneficial
interest $.01 par value
The Rodney Square
Diversified Income
Portfolio 100
The Rodney Square
Municipal Income
Portfolio 83
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.
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 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.
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
NAME DIRECTORS OF REGISTRANTS ADVISER
Robert H. Bolling, Jr. Owner, R.H. Bolling, Jr. P.E.
(consulting engineering firm)
Carolyn S. Burger President and Chief Executive Officer of
Bell Atlantic-Delaware, Incorporated
Ted T. Cecala Chairman and Chief Executive Officer,
Wilmington Trust Corporation and
Wilmington Trust Company
Richard R. Collins Chairman, Collins, Incorporated
(consulting firm for various insurance
industry associations and financial and
nonfinancial companies); 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 and Company,
Incorporated; Retired Chairman, Atlantic
Aviation Corporation
Robert C. Forney Retired Executive Vice President and
Director, E. I. du Pont de Nemours and
Company, Incorporated
Thomas L. Gossage Chairman and Chief Executive Officer,
Hercules Incorporated
Robert V.A. Harra, Jr. President and Treasurer, Wilmington
Trust Corporation and Wilmington Trust
Company
Andrew B. Kirkpatrick, Jr., Esq. Of Counsel to, Morris, Nichols, Arsht &
Tunnell (law firm)
Rex L. Mears President of Ray L. Mears & Sons, Inc.
(farming corporation)
Hugh E. Miller Retired Executive, Formerly Vice
Chairman, ICI Americas, Inc.; was with
parent Imperial Chemicals Industries PLC
for 20 years until 1990 including
management positions in the United
States and Europe
Stacey J. Mobley Senior Vice President of Communications,
E. I. du Pont de Nemours and Company,
Incorporated
Leonard W. Quill Formerly Chairman and Chief Executive
Officer, Wilmington Trust Corporation
and Wilmington Trust Company
David P. Roselle President, University of Delaware
Thomas P. Sweeney, Esq. Attorney, Partner, Richards, Layton &
Finger (law firm)
Bernard J. Taylor, II Retired Chairman and Chief Executive
Officer, Wilmington Trust Corporation
and 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 Multi-Manager Fund
The Rodney Square Tax-Exempt Fund
1838 Investment Advisors Funds
Heitman Real Estate Fund - Heitman/PRA Institutional Class
The HomeState Group
Kiewit Mutual Fund
The Olstein Funds
(b)
(1) (2) (3)
Positions and Offices Positions and
Name and Principal with Rodney Square Offices with
BUSINESS ADDRESS DISTRIBUTORS, INC. REGISTRANT
Jeffrey O. Stroble President, Secretary, None
1105 North Market Street Treasurer & Director
Wilmington, DE 19801
Martin L. Klopping Director President & Trustee
Rodney Square North
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.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 20th day of December, 1996.
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
By: /s/ Carl M. Rizzo
----------------------------
Carl M. Rizzo, 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
- --------- ----- ----
/s/ Martin L. Klopping
- ------------------------
Martin L. Klopping* President & December 20, 1996
Trustee
/s/ Eric Brucker
- ------------------------
Eric Brucker* Trustee December 20, 1996
/s/ Fred L. Buckner
- ------------------------
Fred L. Buckner* Trustee December 20, 1996
/s/ Robert J. Christian
- ------------------------
Robert J. Christian* Trustee December 20, 1996
/s/ John J. Quindlen
- ------------------------
John J. Quindlen* Trustee December 20, 1996
/s/ Robert C. Hancock Vice President and
- ------------------------ Treasurer (Principal
Robert C. Hancock* Financial and December 20, 1996
Accounting Officer)
*By: /s/ Carl M. Rizzo
--------------------------
Carl M. Rizzo **
** 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 Carl M. Rizzo, 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) August 19, 1996
Martin L. Klopping and Trustee
/s/ Eric Brucker
- -----------------------
Eric Brucker Trustee August 19, 1996
/s/ Fred L. Buckner
- -----------------------
Fred L. Buckner Trustee August 19, 1996
/s/ Robert J. Christian
- -----------------------
Robert J. Christian Trustee August 19, 1996
/s/ John J. Quindlen
- -----------------------
John J. Quindlen Trustee August 19, 1996
/s/ Robert C. Hancock Vice President and
- ----------------------- Treasurer (Principal
Robert C. Hancock Financial and August 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. 16
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 18
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 11 Consent of Ernst & Young LLP, independent
auditors for Registrant...............................
Exhibit 16(a) Schedule for Computation of Performance
Calculations for the Rodney Square Diversified
Income Portfolio......................................
Exhibit 16(b) Schedule for Computation of Performance
Calculations for the Rodney Square Municipal
Income Portfolio......................................
Exhibit 17(a) Financial Data Schedule for the Rodney Square
Diversified Income Portfolio..........................
Exhibit 17(b) Financial Data Schedule for the Rodney Square
Municipal Income Portfolio............................
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
inclusion in this Post-Effective Amendment Number 16 to Registration
Statement Number 33-5501 (Form N-1A) of our report dated November 27,
1996, on the financial statements and financial highlights of The Rodney
Square Strategic Fixed-Income Fund for the year ended October 31, 1996,
included in the 1996 Annual Report to Shareholders.
Baltimore, Maryland
December 18, 1996
EXHIBIT 16(a)
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
THE DIVERSIFIED INCOME PORTFOLIO
HYPOTHETICAL $10,000 INVESTMENT
- -----------------------------------------------------------------------------
FOR THE PERIOD APRIL 2, 1993 (COMMENCEMENT OF OPERATIONS)
THROUGH OCTOBER 31, 1996
- -----------------------------------------------------------------------------
Value of Initial $10,000 = ($10,000 / Beginning NAV) * Ending NAV
Investment = ($10,000 / $12.50) * $12.95
= $10,360.00
Value of Reinvested Income = Shares Reinvested from Income Dividends
Dividends * Ending NAV
= 326.24 * $12.95
= $4,224.86
Value of Reinvested Capital = Shares Reinvested from Capital Gain
Gain Distributions Distributions * Ending NAV
= 12.13 * $12.95
= $157.02
TOTAL VALUE = $10,360.00 + $4,224.86 + $157.02 = $14,741.88
- -----------------------------------------------------------------------------
FOR THE PERIOD APRIL 2, 1993 (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
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
DIVERSIFIED INCOME PORTFOLIO
(STANDARDIZED RETURNS)
1 YR INCEPTION
---------- ---------
# YEARS IN PERIOD 1 5.5890
AVERAGE ANNUAL TOTAL RETURN 1.50% 6.51%
MAXIMUM SALES LOAD 3.50% 3.50%
FOR THE ONE YEAR PERIOD ENDED OCTOBER 31, 1996
Average Annual Total Return
- ---------------------------
(ERV/P)**(1/N) -1 = T
($1,015.01/1,000)**1 -1 = T
.0150 = T
1.50% = T
FOR THE FIVE YEAR PERIOD ENDED OCTOBER 31, 1996
Average Annual Total Return
- ---------------------------
(ERV/P)**(1/N) -1 = T
($1,330.94/1,000) -1 = T
** (1/5) .0588 = T
5.88% = T
INCEPTION THROUGH OCTOBER 31, 1996
Average Annual Total Return
- ---------------------------
(ERV/P)**(1/N) -1 = T
($1,422.59/1,000)
** (1/5.5890) -1 = T
.0651 = T
6.51% = T
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
DIVERSIFIED INCOME PORTFOLIO
(NON-STANDARDIZED RETURNS)
1 YR 5 YR INCEPTION
------ ------ ---------
# YEARS IN PERIOD 1 5 5.5890
CUMULATIVE TOTAL RETURN
(Excluding Maximum Sales Load) 5.18% 37.92% 47.42%
CUMULATIVE TOTAL RETURN
(After Deducting Maximum
Sales Load) 1.50% 33.09% 42.26%
AVERAGE ANNUAL TOTAL RETURN 5.18% 6.64% 7.19%
MAXIMUM SALES LOAD 3.50% 3.50% 3.50%
FOR THE ONE YEAR PERIOD ENDED OCTOBER 31, 1996
- ------------------------------------------------------------------------
Cumulative Total Return Average Annual Total Return
- ----------------------- ---------------------------
(ERV/P) - 1 = T (ERV/P)**(1/N) -1 = T
($1,051.83/1,000) -1 = T ($1,051.83/1,000) -1 = T
.0518 = T .0518 = T
5.18% = T 5.18% = T
FOR THE FIVE YEAR PERIOD ENDED OCTOBER 31, 1996
- ------------------------------------------------------------------------
Cumulative Total Return Average Annual Total Return
- ----------------------- ---------------------------
(ERV/P) - 1 = T (ERV/P)**(1/N) -1 = T
($1,379.21/1,000) -1 = T ($1,379.21/1,000)
.3792 = T **(1/5) -1 = T
37.92% = T .0664 = T
6.64% = T
INCEPTION THROUGH OCTOBER 31, 1996
Cumulative Total Return Average Annual Total Return
- ----------------------- ---------------------------
(Excluding Maximum Sales Load)
- ------------------------------
(ERV/P) -1 = T (ERV/P)**(1/N) -1 = T
($1,474.19/1,000) -1 = T ($1,474.19/1,000)
** (1/5.5890) -1 = T
.4742 = T .0719 = T
47.42% = T 7.19% = T
Cumulative Total Return (After Deducting Maximum Sales Load)
- -------------------------------------------------------------
(ERV/P) -1 = T
($1,422.59/1,000) -1 = T
.4226 = T
42.26% = T
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
DIVERSIFIED INCOME PORTFOLIO
Yield for the Thirty-Day Period Ended October 31, 1996
ACTUAL YIELD FOR THE 30-DAY PERIOD:
- -----------------------------------
Yield = 2[((a-b)/cd + 1)**6 - 1]
Yield = 2[((169,788.79 - 16,928.50)/2,469,123.7103 * $13.42 + 1)** 6 -1]
Yield = .05600042
Yield = 5.60%
YIELD FOR THE PERIOD WITHOUT THE EFFECT OF FEE WAIVERS:
- -------------------------------------------------------
Yield = 2[((a-b)/cd + 1)**6 - 1]
Yield = 2[((169,788.79 - 29,271.26)/2,469,123.7103 * $13.42 + 1)** 6 -1]
Yield = .05143068
Yield = 5.14%
EXHIBIT 16(b)
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
MUNICIPAL INCOME PORTFOLIO
HYPOTHETICAL $10,000 INVESTMENT
- -----------------------------------------------------------------------------
FOR THE PERIOD NOVEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS)
THROUGH OCTOBER 31, 1996
- -----------------------------------------------------------------------------
Value of Initial $10,000 = ($10,000 / Beginning NAV) * Ending NAV
Investment = ($10,000 / $12.50) * $12.46
= $9,968.00
Value of Reinvested Income = Shares Reinvested from Income Dividends
Dividends * Ending NAV
= 110.30 * $12.46
= $1,374.35
Value of Reinvested Capital = Shares Reinvested from Capital Gain
Gain Distributions Distributions * Ending NAV
= 0.00 * $12.46
= $0.00
TOTAL VALUE = $9,968.00 + $1,374.35 + $0.00 = $11,342.35
- -----------------------------------------------------------------------------
FOR THE PERIOD NOVEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS)
THROUGH OCTOBER 31, 1995
- -----------------------------------------------------------------------------
Value of Initial $10,000 = ($10,000 / Beginning 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
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
MUNICIPAL INCOME PORTFOLIO
(STANDARDIZED RETURNS)
1 YR INCEPTION
---------- ---------
# YEARS IN PERIOD 1 3.00274
AVERAGE ANNUAL TOTAL RETURN 0.59% 3.05%
MAXIMUM SALES LOAD 3.50% 3.50%
FOR THE ONE YEAR PERIOD ENDED OCTOBER 31, 1996
Average Annual Total Return
- ---------------------------
(ERV/P)**(1/N) -1 = T
($1,005.95/1,000)**1 -1 = T
.0059 = T
0.59% = T
INCEPTION THROUGH OCTOBER 31, 1996
Average Annual Total Return
- ---------------------------
(ERV/P)**(1/N) -1 = T
($1,094.51/1,000)
** (1/3.00274) -1 = T
.0305 = T
3.05% = T
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
MUNICIPAL INCOME PORTFOLIO
(NON-STANDARDIZED RETURNS)
1 YR INCEPTION
---------- ---------
# YEARS IN PERIOD 1 3.00274
CUMULATIVE TOTAL RETURN
(Excluding Maximum Sales Load) 4.24% 13.42%
CUMULATIVE TOTAL RETURN
(After Deducting Maximum
Sales Load) 0.59% 9.45%
AVERAGE ANNUAL TOTAL RETURN 4.24% 4.28%
MAXIMUM SALES LOAD 3.50% 3.50%
FOR THE ONE YEAR PERIOD ENDED OCTOBER 31, 1996
- ------------------------------------------------------------------------
Cumulative Total Return Average Annual Total Return
- ----------------------- ---------------------------
(ERV/P) - 1 = T (ERV/P)**(1/N) -1 = T
($1,042.40/1,000) -1 = T ($1,042.40/1,000) -1 = T
.0424 = T .0424 = T
4.24% = T 4.24% = T
INCEPTION THROUGH OCTOBER 31, 1996
Cumulative Total Return Average Annual Total Return
- ----------------------- ---------------------------
(Excluding Maximum Sales Load)
- ------------------------------
(ERV/P) - 1 = T (ERV/P)**(1/N) -1 = T
($1,134.22/1,000) -1 = T ($1,134.22/1,000)
** (1/3.00274) -1 = T
.1342 = T .0428 = T
13.42% = T 4.28% = T
Cumulative Total Return (After Deducting Maximum Sales Load)
- -------------------------------------------------------------
(ERV/P) -1 = T
($1,094.51/1,000) -1 = T
.0945 = T
9.45% = T
<PAGE>
FUND NAME: RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
THE MUNICIPAL INCOME PORTFOLIO
Yield for the Thirty-Day Period Ended October 31, 1996
ACTUAL YIELD FOR THE 30-DAY PERIOD:
- -----------------------------------
Yield = 2[((a-b)/cd + 1)**6 - 1]
Yield = 2[((69,785.36 - 10,165.29)/1,332,208.4554 * $12.91 + 1) ** 6 -1]
Yield = .04196042
Yield = 4.20%
YIELD FOR THE PERIOD WITHOUT THE EFFECT OF FEE WAIVERS:
- -------------------------------------------------------
Yield = 2[((a-b)/cd + 1)**6 - 1]
Yield = 2[((69,785.36 - 19,878.00)/1,332,208.4554 * $12.91 + 1) ** 6 -1]
Yield = .03507509
Yield = 3.51%
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RODNEY SQUARE STRATEGIC INCOME FUND'S ANNUAL REPORT DATED OCTOBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO THE ANNUAL REPORT DATED
OCTOBER 31,1996.
</LEGEND>
<CIK> 0000793276
<NAME> RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
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<NUMBER> 1
<NAME> DIVERSIFIED INCOME PORTFOLIO
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<INVESTMENTS-AT-VALUE> 31546
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<PAID-IN-CAPITAL-COMMON> 31564
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<SHARES-COMMON-PRIOR> 2463
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<OVERDISTRIBUTION-GAINS> 0
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<NET-INVESTMENT-INCOME> 1993
<REALIZED-GAINS-CURRENT> 339
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<NET-CHANGE-FROM-OPS> 1586
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1994
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 333
<NUMBER-OF-SHARES-REDEEMED> 409
<SHARES-REINVESTED> 67
<NET-CHANGE-IN-ASSETS> (437)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (438)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 164
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 358
<AVERAGE-NET-ASSETS> 32863
<PER-SHARE-NAV-BEGIN> 13.08
<PER-SHARE-NII> 0.78
<PER-SHARE-GAIN-APPREC> (0.13)
<PER-SHARE-DIVIDEND> (0.78)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.95
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RODNEY SQUARE STRATEGIC-FIXED INCOME FUND'S ANNUAL REPORT DATED OCTOBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO THE ANNUAL REPORT
DATES OCTOBER 31, 1996.
</LEGEND>
<CIK> 0000793276
<NAME> RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
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<NAME> MUNICIPAL INCOME PORTFOLIO
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<INVESTMENTS-AT-VALUE> 16405
<RECEIVABLES> 263
<ASSETS-OTHER> 34
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<OVERDISTRIBUTION-NII> 0
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</TABLE>
