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, 1997.
PERFORMANCE REVIEW*
The Rodney Square Diversified Income Portfolio had a total return of
7.13% for the twelve months ended October 31, 1997. This return consisted of a
modest increase in net asset value per share from $12.95 on October 31, 1996
to $13.07 at the end of October 1997 plus dividends of $0.77 per share. The
Portfolio's performance slightly trailed the reported return of 7.49% for the
Lehman Intermediate Government Corporate Index over this 12 month period.
Wilmington Trust Company, the Portfolio's adviser, has continued to assist the
Portfolio's return by limiting total expenses of the Portfolio to 0.65% of
average daily net assets.
The Rodney Square Municipal Income Portfolio provided shareholders with a
6.85% return for the fiscal year ended October 31, 1997. This return
consisted of an increase in the net asset value per share, to $12.74 from
$12.46, plus dividends of $0.55 per share. The Portfolio's performance
was lower than the 7.06% return reported for the Merrill Lynch Intermediate
Municipal Index (the "Merrill Lynch Index"). This Merrill Lynch Index is a
composite return of nearly 400 municipal bond issues with a maturity range
of 0 to 22 years. The index is designed to model the typical holdings and
return characteristics of intermediate-term mutual funds as defined by
Lipper Analytical Services. WTC, the Portfolio's adviser, has continued
to assist in the Portfolio's return by limiting total expenses of the
Portfolio to 0.75% of average daily net assets.
ECONOMIC ENVIRONMENT
The fiscal year started with the bond markets peaking as uneven economic
performance seemed to make the probability of a Federal Reserve Board (the
"Fed") rate hike unlikely. All was rosy until Fed Chairman Greenspan delivered
his now famous "irrational exuberance" speech in December. The bond markets
started a mild retreat that was accelerated when the Fed actually hiked the
Federal Funds rate by 25 basis points in March. The bond markets went into a
tail spin. The 5-Year Treasury bond, which had started the fiscal year
yielding 6.10% rose to 6.75% by the end of March.
As we moved into the second quarter, weak economic data, highlighted by
three consecutive months of declines in retail sales, and benign inflation,
kept the Fed at bay as it did not act again during the year. This "steady as
she goes" rate policy helped the bond markets to reverse their early decline
and sustained a rally that lasted through the end of the fiscal year. By
October 31, 1997, the yield on the 5-Year Treasury issue had declined to
5.70%. In the month of October the rally was given a strong boost as the
economic crisis in the Asian markets sent investors fleeing to the U.S. bond
market for safety.
- ---------------------------
* 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. TOTAL RETURNS SHOWN FOR THE PORTFOLIOS DO NOT REFLECT
THE EFFECT OF THE MAXIMUM SALES LOAD OF 3.50%. RETURNS ARE HIGHER DUE TO
THE ADVISER'S MAINTENANCE OF THE PORTFOLIOS' EXPENSES. SEE FINANCIAL
HIGHLIGHTS ON PAGES 16 AND 17.
1
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THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
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PRESIDENT'S MESSAGE - CONTINUED
- ------------------------------------------------------------------------------
Against this backdrop, the municipal market was driven primarily by
supply of new issues. For the first 6 months of calendar year 1997, there was
a relatively light schedule of new issues and the municipal market
outperformed its taxable counterparts. This occurred while the retail buyer,
both direct and via mutual funds, largely stayed out of the market. Then,
during the summer and fall, the supply pipeline overflowed, resulting in a
muted rally, compared to the strong rally in the taxable markets. At the end
of the fiscal year, the relative valuations for municipal bonds were as
attractive as they had been since April 1996.
MANAGEMENT'S DISCUSSION OF PORTFOLIO PERFORMANCE
THE DIVERSIFIED INCOME PORTFOLIO
The Portfolio is designed to give shareholders broad exposure to the
dynamics of the short-intermediate term bond market with a stable flow of
income and minimization of risk. This goal is accomplished by applying a
disciplined and systematic investment process to actively manage a core
portfolio of investment grade notes and bonds from a wide range of taxable
market sectors.
The taxable fixed income markets responded to a variety of forces over
the past year which affected the Portfolio's performance. The first of these
was Fed policy, which caused a number of interest rate swings during the past
year. The markets began the fiscal year in good shape but this proved to be
short lived as Mr. Greenspan's now famous "irrational exuberance"
characterization of the stock market promptly put the bond market on the
defensive regarding a possible tightening of credit. Mr. Greenspan's February
Humphrey-Hawkins testimony before Congress contained a similar warning and
market yields moved higher. The fears of the market were well founded as the
Fed moved overnight interest rates up a quarter of a percentage point in late
March. During this time, we kept the interest sensitive position of the
portfolio below that of our market index, which helped our performance during
this difficult market period. The Portfolio was also assisted by a strong
reliance on yield enhancement through overweighting the non-U. S. Treasury
sectors of the market such as corporate bonds and asset-backed securities.
With corporate financial positions holding up very well in the robust economy,
credit risks were minimized and these sectors performed very well.
After the Fed's initial rate increase, the markets remained on the
defensive but this outlook began to change as it appeared that the economy was
not overheating and that despite tightening labor markets, inflation was not
becoming a problem. Yield levels began drifting lower and kept moving in this
general direction throughout most of the fiscal period remaining. For the most
part we kept the Portfolio's interest rate sensitivity at or above market
levels during this time. In addition our emphasis on yield enhancement
performed well as corporate credit markets experienced further spread
compression against the U. S. Treasury market.
2
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THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
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PRESIDENT'S MESSAGE - CONTINUED
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During the last few months of the fiscal year, the market witnessed a
dramatic flattening of the yield curve as the two ends of the curve responded
to very different influences. While the Fed has not raised interest rates
since March, the market was respectful of the Fed's bias toward tightening.
Therefore, short term rates did not dip too far below the overnight rate. Long
term rates however, responded well to the low inflation environment and more
recently to concerns over the international situation in Asia. Thus 30 Year
Treasury rates fell by 63 basis points since June 30, while 1-Year Treasury
rates fell by only 30 basis points over the same period. The Portfolio took
advantage of this movement by emphasizing maturities in the 8 to 12-year
maturity range while underweighting holdings in the middle of the curve.
The following graph compares 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.
[GRAPHICAL REPRESENTATION (POINTS AND LINES) REQUIRED BY ITEM 5A OF FORM N-1A]
[FOLLOWING ARE GRAPH POINTS AND TOTAL RETURNS]
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL INVESTMENT*
APR-91 OCT-91 OCT-92 OCT-93 OCT-94 OCT-95 OCT-96 OCT-97
- ------ ------- ------- ------- ------- ------- ------- -------
$9,000 $10,000 $11,000 $12,000 $13,000 $14,000 $15,000 $16,000 $17,000
AVERAGE ANNUAL TOTAL RETURN
---------------------------
1YEAR 5 YEAR INCEPTION
----- ------ ---------
FUND 3.4% 5.4% 6.6%
INDEX 7.5% 6.7% 7.8%
CPI 2.2% 2.7% 2.8%
Diversified Income LGIC Index CPI
* 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 Portfolio's expenses. See
Financial Highlights on pages 16 and 17.
THE MUNICIPAL INCOME PORTFOLIO
The Rodney Square Municipal Income Portfolio is an intermediate, high
quality fund designed to produce a high level of income which is exempt from
federal income taxes while seeking preservation of capital. The basic strategy
of the Portfolio is to identify and purchase the undervalued sectors of the
municipal market. The Portfolio will normally be fully invested with an
average maturity in the 5 to 10 year range.
3
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THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
PRESIDENT'S MESSAGE - CONTINUED
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The yield curve shift that occurred in the last few months of the fiscal
year presented an opportunity in the municipal market. The shift in the yield
curve for municipals involved a widening in the 1 to 5-year and the 10 to 15-
year ranges, and a narrowing in the 5 to 10-year range. This structural change
allowed us to reposition the Portfolio by replacing bonds in the 10-year range
with 5 and 15 year maturity ranges. This strategy, referred to as a barbell,
was implemented without giving up any potential yield. Our expectation is that
when the yield curve returns to normal, we should be able to reverse the
position again thereby actually increasing the yield potential. The positions
swapped represented about 12% of the total portfolio.
Our performance for the fiscal year was aided by this barbelling strategy
as well as our focus on high coupon issues. The Portfolio had an average
coupon of 5.90% as of September 30, 1997, compared to a 5.47% average for the
Merrill Index. This extra cushion helped the Portfolio to outperform the
average return of the funds included in the Lipper Intermediate
Municipal category by nearly 30 basis points for the 12 months ending October
31, 1997.
At fiscal year-end, municipals represented good value versus taxable
bonds. In fact, the municipal market was attracting cross-over buyers who had
been out of the municipal market for nearly 6 months. Cross-over buyers are
tax-exempt organizations, for whom the tax free nature of municipals provides
no benefit. They participate in the municipal market only when municipals
become undervalued and their portfolios can benefit from the outperformance
potential as the municipal bonds move back to fair value.
Looking ahead in the municipal arena, market participants will be
watching at least one indicator for direction, the old "January Effect." For
the last several years, there has been an imbalance between supply (very low
as municipalities are slow to start the new year) and demand (very high as
investors look to reinvest large coupon and called bond proceeds.) This has
resulted in a relatively strong municipal market, at least relative to taxable
bonds. This year the effect should be muted. First, the amount of called bonds
peaked in January 1996 and continues to decline. Second, issuers seem to
be quicker to respond to opportunities. There will be a drop off in the amount
of new issues, but probably not as great as experienced historically.
Below is a diagram that illustrates the performance of The Rodney Square
Municipal Income Portfolio, the Merrill Lynch Index - and the Consumer Price
Index ("CPI"), since the Portfolio's commencement of
operations on November 1, 1993.
4
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THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
PRESIDENT'S MESSAGE - CONTINUED
- ------------------------------------------------------------------------------
[GRAPHICAL REPRESENTATION (POINTS AND LINES) REQUIRED BY ITEM 5A OF FORM N-1A]
[FOLLOWING ARE GRAPH POINTS AND TOTAL RETURNS]
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT*
AVERAGE ANNUAL TOTAL RETURN
---------------------------
1 YEAR INCEPTION
------ ---------
FUND 3.1% 4.0%
INDEX 7.1% 6.5%
CPI 2.2% 2.7%
OCT-93 OCT-94 OCT-95 OCT-96 OCT-97
$9,000 $9,500 $10,000 $10,500 $11,000 $11,500 $12,000 $12,500 $13,000
Municipal Income Merrill Index CPI
* 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 Portfolio'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 Klopping
-------------------
Martin Klopping
President
December 12, 1997
5
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THE RODENY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
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INVESTMENTS/OCTOBER 31, 1997
(SHOWING PERCENTAGE OF TOTAL VALUE OF NET ASSETS
- ------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- ---------- -----------
ASSET-BACKED SECURITIES - 7.9%
AFC Home Equity Loan Trust, Ser.
1996-2 Class 1A4, 7.74%, 09/25/27. Aaa/AAA $ 799,831 $ 835,121
Green Tree Financial Corp., Ser.
1996-5 Class A4, 7.15%, 07/15/27.. Aaa/AAA 750,000 777,618
MBNA Master Credit Card Trust, Ser.
1995-F Class A, 6.60%, 01/15/03... Aaa/AAA 300,000 305,223
Residential Asset Securities Corp.,
Ser. 1995-KS3, 8.00%, 10/25/24.... Aaa/AAA 314,712 317,026
Resolution Trust Corp., Ser. 1994-C2
Class B, 8.00%, 04/25/25.......... NR/AA 250,000 259,887
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $2,439,816) .............................. 2,494,875
-----------
MORTGAGE-BACKED SECURITIES - 11.5%
Advanta Mtge. Loan Trust, Ser.
1996-1 Class A6, 6.73%, 08/25/23.. Aaa/AAA 300,000 303,448
Contimortgage Home Equity Loan Trust,
Ser. 1996-1 Class A6, 6.69%,
01/15/16.......................... Aaa/AAA 299,998 301,789
Federal National Mtge. Assoc. Notes,
Ser. 1995W1 Class A6, 8.10%,
04/25/25.......................... Aaa/NR 500,000 525,976
Federal National Mtge. Assoc. Notes,
Ser. 1996-4 Class VC, 6.50%,
07/25/02.......................... Aaa/NR 233,315 234,534
Federal National Mtge. Assoc. Notes,
Ser. G37 Class G, 7.50%, 12/25/19. Aaa/NR 300,000 305,812
GE CAP. Mtge. Services, Inc., Ser.
1996HE2 Class A5, 7.94%, 06/25/14. Aaa/NR 600,000 639,546
Green Tree Financial Corp., Ser.
1995-2 Class A6, 8.30%, 05/15/26.. Aaa/AAA 325,000 355,537
The Money Store Home Equity Trust,
Ser. 1992D2 Class A3, 7.55%,
01/15/18.......................... Aaa/AAA 331,354 342,293
The Money Store Home Equity Trust,
Ser. 1996B Class A8, 7.91%,
05/15/24.......................... Aaa/AAA 200,000 215,973
The Money Store Home Equity Trust,
Ser. 1996D Class A5, 6.67%, 03/15/18 Aaa/AAA 400,000 403,754
-----------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $3,524,660) .............................. 3,628,662
-----------
CORPORATE BONDS - 47.3%
BANKS - 1.1%
Bank of Montreal, 7.80%, 04/01/07... A1/A+ 300,000 327,000
-----------
The accompanying notes are an integral part of the financial statements.
6
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THE RODENY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- ------------------------------------------------------------------------------
INVESTMENTS-CONTINUED
- ------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- ---------- -----------
ELECTRIC UTILITIES - 7.5%
Alabama Power Co., 7.00%, 01/01/03,
Callable 01/01/98 @ 101.64........ A1/A+ $1,000,000 $ 1,017,500
Central Illinois Public Service,
6.73%, 06/01/01................... Aa1/AA+ 300,000 306,750
Duke Energy Corp., 8.00%, 11/01/99.. Aa3/AA- 1,000,000 1,035,000
-----------
2,359,250
-----------
FINANCIAL - 30.7%
American Express Credit Corp.,
8.50%, 06/15/99................... Aa3/A+ 350,000 364,000
Associates Corp. N.A., 6.75%,
08/01/01.......................... Aa3/AA- 500,000 508,337
Associates Corp. N.A., 8.55%,
07/15/09........................... Aa3/AA- 300,000 346,310
BankAmerica Corp., 6.75%,
09/15/05.......................... A1/A- 250,000 253,438
Bear Stearns Co., 6.625%,
10/01/04.......................... A2/A 400,000 398,763
Beneficial Corp., 8.17%, 11/09/99... A2/A 700,000 728,751
Dean Witter Discover, 6.75%,
08/15/00.......................... A1/A+ 400,000 407,637
General Motors Acceptance Corp.,
6.70%, 07/02/99................... A3/A- 650,000 657,686
Heller Financial Corp., 7.875%,
11/01/99.......................... A2/BBB 800,000 827,000
International Lease Finance, 6.125%,
11/01/99.......................... A1/A+ 400,000 400,500
Lehman Brothers, Inc., 6.50%,
10/01/02........................... Baa1/A 600,000 600,387
Lehman Brothers, Inc., 7.375%,
05/15/04........................... Baa1/A 300,000 312,375
Merrill Lynch & Co., Inc., 7.05%,
04/15/03.......................... AA3/AA- 100,000 100,250
Morgan Stanley Group, 6.375%,
01/18/00.......................... A1/A+ 600,000 604,500
Norwest Financial, Inc., Sr. Notes,
6.85%, 07/15/09................... Aa3/AA- 650,000 663,115
Norwest Financial, Inc., 6.37%,
11/15/01.......................... Aa3/AA- 500,000 504,375
Salomon Brothers, Inc., 6.50%,
03/01/00........................... A2/BBB 425,000 427,959
Santander Financial Issuances, Ltd.,
7.875%, 04/15/05.................. A1/A+ 300,000 323,250
Smith Barney Holdings, 7.00%,
03/15/04.......................... A2/A 550,000 565,369
The accompanying notes are an integral part of the financial statements.
7
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THE RODENY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- ------------------------------------------------------------------------------
INVESTMENTS-CONTINUED
- ------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- ---------- -----------
Union Bank of Switzerland, NY, 7.25%,
07/15/06.......................... Aa1/A $ 350,000 $ 368,375
USL Capital Corp., 5.79%, 01/23/01.. A1/A 300,000 296,626
-----------
9,659,003
-----------
MANUFACTURING - 2.3%
Eaton Corp., 8.00%, 08/15/06........ A2/A 650,000 719,875
-----------
MERCHANDISING & RETAIL - 1.0%
Gap, Inc., 6.90%, 09/15/07.......... A2/A 300,000 308,773
-----------
OIL, GAS & PETROLEUM - 1.0%
Societe Nationale Elf Aquitaine,
8.00%, 10/15/01................... Aa3/AA- 300,000 320,625
-----------
TELEPHONE & COMMUNICATIONS - 3.7%
GTE Southwest, 6.54%, 12/01/05...... A2/AA- 600,000 603,568
United Telecommunications, Inc.,
9.50%, 04/01/03................... A3/A- 500,000 570,000
-----------
1,173,568
-----------
TOTAL CORPORATE BONDS
(COST $14,543,167) ............ 14,868,094
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 10.2%
FEDERAL HOME LOAN BANKS NOTES - 2.8%
Federal Home Loan Banks Notes, 6.095%,
10/23/00........................... Aaa/NR 400,000 399,447
Federal Home Loan Banks Notes, 7.50%,
09/30/03, Callable
09/30/98 @ 100..................... Aaa/NR 475,000 479,828
-----------
879,275
-----------
FEDERAL HOME LOAN MORTGAGE CORPORATION NOTES - 1.6%
Federal Home Loan Mtge. Corp. Notes,
7.05%, 05/15/02.................... Aaa/NR 500,000 502,465
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION NOTES - 5.8%
Federal National Mtge. Assoc. Notes,
7.50%, 08/25/05.................... Aaa/NR 300,000 301,749
Federal National Mtge. Assoc. Notes,
6.71%, 02/13/06.................... Aaa/NR 300,000 299,205
Federal National Mtge. Assoc. Notes,
7.58%, 06/02/06.................... Aaa/NR 400,000 409,946
Federal National Mtge. Assoc. Notes,
7.94%, 09/13/06.................... Aaa/NR 500,000 514,488
The accompanying notes are an integral part of the financial statements.
8
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THE RODENY SQUARE STRATEGIC FIXED-INCOME FUND/DIVERSIFIED INCOME PORTFOLIO
- ------------------------------------------------------------------------------
INVESTMENTS-CONTINUED
- ------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- ---------- -----------
Federal National Mtge. Assoc. Notes,
7.00%, 06/25/07..................... Aaa/NR $ 300,000 $ 305,907
----------
1,831,295
----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (COST $3,161,141).................... 3,213,035
----------
U.S. TREASURY OBLIGATIONS** - 16.7%
U.S. TREASURY BONDS - 2.8%
U.S. Treasury Bonds, 11.75%, 02/15/10. NR/NR 650,000 868,757
----------
U.S. TREASURY NOTES - 13.9%
U.S. Treasury Notes, 6.375%, 04/30/99. NR/NR 400,000 404,204
U.S. Treasury Notes, 6.375%, 07/15/99. NR/NR 400,000 404,750
U.S. Treasury Notes, 6.375%, 01/15/00. NR/NR 1,400,000 1,420,860
U.S. Treasury Notes, 6.75%, 04/30/00.. NR/NR 400,000 409,436
U.S. Treasury Notes, 6.25%, 05/31/00.. NR/NR 300,000 303,741
U.S. Treasury Notes, 8.75%, 08/15/00.. NR/NR 150,000 161,440
U.S. Treasury Notes, 6.50%, 08/31/01.. NR/NR 250,000 256,075
U.S. Treasury Notes, 6.125%, 12/31/01. NR/NR 400,000 405,250
U.S. Treasury Notes, 7.25%, 05/15/04.. NR/NR 550,000 590,953
----------
4,356,709
----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $5,142,214) .............................. 5,225,466
----------
TIME DEPOSITS - 5.9%
Sanwa Bank, Grand Cayman Branch,
5.656%, 11/03/97 (COST $1,853,793).. NR/NR 1,853,793 1,853,793
----------
TOTAL INVESTMENTS (COST $30,664,791)+
- 99.5%.............................................. 31,283,925
OTHER ASSETS AND LIABILITIES,
NET - 0.5%........................................... 171,835
-----------
NET ASSETS - 100.0%.................................... $31,455,760
===========
* 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 Adviser.
** 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 $30,668,968. At October 31,
1997, net unrealized appreciation was $614,957. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $641,304 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $26,347.
The accompanying notes are an integral part of the financial statements.
9
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THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/MUNICIPAL INCOME PORTFOLIO
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INVESTMENTS/OCTOBER 31, 1997
(SHOWING PERCENTAGE OF TOTAL VALUE OF NET ASSETS)
- ------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- ---------- -----------
MUNICIPAL BONDS - 94.7%
ALASKA - 5.6%
Alaska Municipal Bond Bank Auth. Ref.
Rev. Bonds, Ser. 1994C, 4.90%,
10/01/03............................ A2/A $ 400,000 $ 406,000
Seward, AK Rev. Bonds (Alaska Sealife
Center Proj.), Ser. 1996, 6.50%,
10/01/01*........................... NR/NR 560,000 570,500
----------
976,500
----------
CALIFORNIA - 9.7%
California State Veterans Bonds,
Ser. 1989, 7.00%, 04/01/03.......... A1/A+ 500,000 505,730
California State Veterans Bonds,
Ser. AY, 6.90%, 04/01/01............ A1/A+ 250,000 252,815
Los Angeles County, CA Public Works
Fin. Auth. Rev. Bonds
(LA County Park & Open Space Dist.),
Ser. 1994A, 5.63%, 10/01/03......... Aa3/AA 250,000 267,187
Los Angeles, CA Dept. of Water and
Power Electric Plant Rev. Bonds,
5.75%, 11/15/02..................... Aa3/AA 300,000 320,250
Redevelopement Agency of San Francisco,
CA Multi-Family Housing Ref. Rev.
Bonds (GNMA South Beach Proj.), Ser.
1994, 4.75%, 09/01/02............... Aaa/NR 345,000 347,588
----------
1,693,570
----------
COLORADO - 3.0%
Aurora, CO Cert. of Participation Lease
Ref. Rev. Bonds, 5.85%, 12/01/02.... A/A 500,000 526,250
----------
DELAWARE - 19.6%
Bethany Beach, DE Gen. Oblig. Rev.
Bonds, 9.75%, 11/01/07.............. Aaa/AAA 160,000 224,000
Bethany Beach, DE Gen. Oblig. Rev.
Bonds, 9.75%, 11/01/08.............. Aaa/AAA 180,000 256,500
Delaware State Economic Dev. Auth.
Rev. Bonds (Osteopathic Hosp. Assoc.),
6.00%, 01/01/03..................... Aaa/NR 500,000 526,250
Delaware State Economic Dev. Auth.
Rev. Bonds (Delmarva Power & Light),
7.30%, 09/01/15..................... Aaa/AAA 100,000 107,500
The accompanying notes are an integral part of the financial statements.
10
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THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/MUNICIPAL INCOME PORTFOLIO
- ------------------------------------------------------------------------------
INVESTMENTS-CONTINUED
- ------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- ---------- -----------
Delaware State Gen. Oblig. Rev.
Bonds, Ser. A, 5.00%, 01/01/04..... Aa1/AA+ $ 255,000 $ 264,244
Delaware State Housing Auth.
Multi-Family Mtge. Ref. Rev. Bonds,
6.30%, 07/01/98.................... A1/A+ 100,000 100,550
Delaware State Housing Auth.
Multi-Family Mtge. Ref. Rev.
Bonds, Ser. 1992D, 6.35%, 07/01/03. A1/NR 100,000 105,000
Delaware State Housing Auth.
Multi-Family Mtge. Ref. Rev.
Bonds, Ser. C, 7.25%, 01/01/07....... A1/A 225,000 241,594
Delaware State Housing Auth. Single
Family Mtge. Rev. Bonds,
Ser. 1993, Subser. A, 5.05%,
07/01/05........................... Aaa/AAA 305,000 308,430
Delaware State Housing Auth. Single
Family Mtge. Rev. Bonds,
Ser. 1993, Subser. A1, 5.15%,
01/01/06........................... Aaa/AAA 175,000 178,062
Delaware State Housing Auth. Sr.
Home Mtge. Rev. Bonds, Ser. 1991,
Subser. B-1, 6.40%, 12/01/02....... Aa3/NR 40,000 41,800
Delaware State Housing Auth. Sr.
Home Mtge. Rev. Bonds, Ser. 1991,
Subser. B-1, 6.10%, 06/01/99....... Aa3/NR 40,000 40,650
Delaware State Housing Auth. Sr.
Home Mtge. Rev. Bonds, Ser. 91A,
7.00%, 06/01/00.................... Aa3/NR 25,000 25,469
Delaware State Solid Waste Auth. Sys.
Rev. Bonds, 5.80%, 07/01/01........ A/A 500,000 522,500
Delaware Trans. Auth. Trans. Sys.
Sr. Lien Rev. Bonds, 6.75%,
07/01/98........................... A1/AA 115,000 117,130
Delaware Trans. Auth. Trans. Sys.
Sr. Lien Rev. Bonds, 5.88%,
07/01/00........................... A1/AA 350,000 364,875
----------
3,424,554
----------
GEORGIA - 2.6%
Georgia State Gen. Oblig. Rev.
Bonds, Ser. 97A, 6.25%, 04/01/07... Aa+/AAA 400,000 450,500
----------
HAWAII - 4.4%
Hawaii State Gen. Oblig. Rev. Bonds,
Ser. 92BW, 6.20%, 03/01/05......... Aa3/A+ 700,000 770,000
----------
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/MUNICIPAL INCOME PORTFOLIO
- ------------------------------------------------------------------------------
INVESTMENTS-CONTINUED
- ------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- ---------- -----------
MASSACHUSETTS - 2.9%
Massachusetts State Gen. Oblig. Rev.
Bonds, Ser. 93B MBIA, 4.875%, 10/01/13Aaa/AAA 520,000 503,100
----------
MISSISSIPPI - 2.3%
Medical Center Educ. Bldg. Corp.
(Univ. of Mississippi Medical Center
Proj.), Ser. 1993, 5.40%, 12/01/05... NR/A- 400,000 409,500
----------
NEW JERSEY - 3.0%
New Jersey Econ. Dev. Auth. School Rev.
Bonds (Blair Academy 1995 Proj.),
Ser. 95B, 6.00%, 09/01/07........... A3/NR 500,000 518,125
----------
NEW YORK - 3.1%
Municipal Assistance Corp. of New York
City, NY Sales Tax Rev., 5.75%,
07/01/03............................ AA2/AA- 500,000 534,375
----------
PENNSYLVANIA - 14.2%
Dauphin County, PA Gen. Auth. School
Dist. Pooled Fin. Rev. AMBAC, 4.45%,
09/01/32............................ Aaa/NR 500,000 500,000
Lancaster County, PA Solid Waste Auth.
Rev. Bonds, 7.75%, 12/15/04......... Baa2/BBB 225,000 233,150
Lancaster County, PA Solid Waste Auth.
Rev. Bonds, Ser. 91A, 6.15%,
12/15/98............................ Baa2/BBB 100,000 101,125
Pennsylvania State Higher Educ. Fac.
Auth. College & Univ. Rev. Bonds
(Philadelphia College of Osteopathic
Medicine), Ser. 1993, 5.25%, 12/01/07 NR/AAA 150,000 154,500
Philadelphia Parking Auth. Rev. Bonds,
Ser. 1997, 5.50%, 09/01/03.......... Aaa/AAA 500,000 528,750
Philadelphia, PA Redev. Auth. Home Imp.
Loan Rev. Bonds, 7.38%, 06/01/03.... A1/A+ 35,000 35,541
York County, PA Ind. Auth. Personal
Care Fac. 9.50%, 10/01/19, Prerefunded
10/01/02 @ 100...................... NR/NR 335,000 410,375
York County, PA Solid Waste Refuse
Auth. Ind. Dev. Rev. Bonds (Resource
Recovery Proj.), Ser. 85A, 8.20%,
12/01/14............................ A/AA- 500,000 516,340
----------
2,479,781
----------
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/MUNICIPAL INCOME PORTFOLIO
- ------------------------------------------------------------------------------
INVESTMENTS-CONTINUED
- ------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- ---------- -----------
TEXAS - 5.8%
Austin, TX Gen. Oblig. Rev. Bonds,
4.75%, 09/01/09................... Aa2/AA $ 315,000 $ 313,031
Kingsbridge, TX Municipal Utilities
Dist. AMBAC, 4.875%, 03/01/02..... Aaa/N/R 680,000 695,300
----------
1,008,331
----------
UTAH - 3.1%
Salt Lake City, UT Municipal Bldg.
Auth. Lease Rev. Bonds, Ser. 1994A,
5.65%, 10/01/03................... Aaa/AAA 500,000 532,500
----------
VIRGINIA - 7.4%
Virginia Educ. Loan Auth. Rev. Bonds
(Student Loan Prog.), Ser. 1994B,
5.15%, 03/01/04................... Aaa/NR 260,000 268,450
Virginia State Housing Dev. Auth.
Commonwealth Mtge. Rev. Bonds, Ser.
1992C, Subser. C8, 5.80%, 07/01/04. Aa1/AA+ 500,000 526,250
Virginia State Public Bldg. Auth. Rev.
Bonds, Ser. 96A, 5.00%, 08/01/12.. Aa/AA 500,000 500,625
----------
1,295,325
----------
WASHINGTON - 5.1%
Clark County, WA Public Utility Dist.
No. 1 Generating Sys. Rev. Bonds,
6.00%, 01/01/06.................... Aaa/AAA 350,000 381,938
Washington State Public Power Supply
Sys. Ref. Rev. Bonds (Nuclear Proj.
No. 3), Ser. 1993C, 5.10%, 07/01/07. AA1/AA- 500,000 513,750
----------
895,688
----------
WISCONSIN - 2.9%
Appleton, WI Area School Dist., 5.00%,
04/01/11............................ Aa/NR 505,000 505,631
----------
TOTAL MUNICIPAL BONDS (COST
$16,066,778) 16,523,730
----------
TAX-EXEMPT MUTUAL FUNDS - 4.4%
PNC Municipal Cash Tax-Exempt Money
Market Fund, (COST $767,697)........ NR/NR 767,697 767,697
----------
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND/MUNICIPAL INCOME PORTFOLIO
- ------------------------------------------------------------------------------
INVESTMENTS-CONTINUED
- ------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING* AMOUNT (NOTE 2)
----------- ---------- -----------
TOTAL INVESTMENTS (COST $16,834,475)+
- 99.1%.................................. $17,291,427
OTHER ASSETS AND LIABILITIES, NET
- 0.9%................................... 154,829
-----------
NET ASSETS - 100.0%........................ $17,446,256
===========
* 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 Adviser.
+ Cost for federal income tax purposes. At October 31, 1997, net unrealized
appreciation was $456,952. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $457,028 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $76.
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL STATEMENTS
- ----------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 1997
DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
---------- ----------
ASSETS:
Investments in securities, at market
(identified cost $30,664,791 and
$16,834,475, respectively) (Note 2). $31,283,925 $17,291,427
Receivable for investment securities
Sold.............................. 301,434 -
Receivable for Fund shares sold...... 788 965
Interest receivable ................. 478,937 234,480
Deferred organization costs (Note 2). - 15,998
Other assets ........................ 230 121
----------- -----------
Total assets .................... 32,065,314 17,542,991
----------- -----------
LIABILITIES:
Dividends payable .................. 159,171 64,467
Payable for Fund shares redeemed ... 394,514 -
Due to Adviser (Note 4) ............ 2,066 -
Other accrued expenses (Note 4) .... 53,803 32,268
----------- -----------
Total liabilities ............... 609,554 96,735
----------- -----------
NET ASSETS, at market value ........ $31,455,760 $17,446,256
=========== ===========
NET ASSETS CONSIST OF:
Shares of beneficial interest ...... $ 24,059 $ 13,693
Additional paid-in capital ......... 30,928,533 17,007,307
Net unrealized appreciation of
investments ..................... 619,134 456,952
Accumulated net realized loss ...... (115,966) (31,696)
----------- ----------
NET ASSETS, for 2,405,944 and 1,369,252
shares outstanding, respectively . $31,455,760 $17,446,256
=========== ===========
NET ASSET VALUE and redemption price
per share ($31,455,760 / 2,405,944
and $17,446,256 / 1,369,252
outstanding shares of beneficial
interest, $0.01 par value,
respectively) .................... $13.07 $12.74
====== ======
Maximum offering price per share
(100/96.50 of $13.07 and 100/96.50
of $12.74, respectively) ......... $13.54 $13.20
====== ======
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL STATEMENTS-CONTINUED
- ----------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Fiscal Year Ended October 31, 1997
DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
----------- ---------
Interest income....................... $2,090,092 $ 877,182
---------- ----------
EXPENSES:
Advisory fee (Note 4) ............... 157,518 82,587
Administration fee (Note 4) ......... 25,203 13,578
Accounting fee (Note 4) ............. 50,000 50,000
Distribution expenses (Note 4) ...... 25,102 19,101
Trustees' fees and expenses (Note 4). 5,400 5,400
Amortization of organizational
expenses (Note 2) ................. - 18,057
Registration fees ................... 12,252 14,983
Reports to shareholders ............. 17,366 10,669
Legal ............................... 15,735 13,442
Audit ............................... 26,590 13,446
Other ............................... 18,362 16,559
---------- ----------
Total expenses before fee waivers.... 353,528 257,822
Advisory fee waived (Note 4) ........ (148,754) (82,587)
Administration fee waived (Note 4)... - (13,578)
Accounting fee waived (Note 4)....... - (34,363)
---------- ----------
Total expenses, net ............ 204,774 127,294
---------- ----------
Net investment income .......... 1,885,318 749,888
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investment
transactions ...................... (16,511) 40,118
Net unrealized appreciation
of investments during the year .... 307,032 340,102
---------- ----------
Net gain on investments ............. 290,521 380,220
---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ................... $2,175,839 $1,130,108
========== ==========
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL STATEMENTS-CONTINUED
- ---------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
DIVERSIFIED MUNICIPAL
INCOME INCOME
PORTFOLIO PORTFOLIO
----------- ---------
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ................... $ 1,885,318 $ 749,888
Net realized gain (loss) on investment
transactions .......................... (16,511) 40,118
Net unrealized appreciation of
investments during the year ........... 307,032 340,102
----------- -----------
Net increase in net assets resulting
from operations ...................... 2,175,839 1,130,108
----------- -----------
Distributions to shareholders from:
Net investment income.................... (1,885,318) (749,888)
----------- -----------
Increase (decrease) in net assets from
Fund share transactions (Note 5) ...... (611,832) 447,444
----------- -----------
Total increase (decrease) in net assets . (321,311) 827,664
NET ASSETS:
Beginning of year ....................... 31,777,071 16,618,592
----------- -----------
End of year.............................. $31,455,760 $17,446,256
=========== ===========
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..................... (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
=========== ===========
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------
The following tables include selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements. They should be read in conjunction with the financial
statements and notes thereto.
FOR THE FISCAL YEARS ENDED OCTOBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
DIVERSIFIED INCOME PORTFOLIO
NET ASSET VALUE - BEGINNING OF
YEAR...................... $12.95 $13.08 $12.42 $13.48 $13.20
------ ------ ------ ------ ------
INVESTMENT OPERATIONS:
Net investment income..... 0.77 0.78 0.83 0.71 0.76
Net realized and unrealized
gain (loss) on
investments............. 0.12 (0.13) 0.66 (1.02) 0.39
------ ------ ------ ------ ------
Total from investment
Operations.......... 0.89 0.65 1.49 (0.31) 1.15
------ ------ ------ ------ ------
DISTRIBUTIONS:
From net investment income. (0.77) (0.78) (0.83) (0.71) (0.76)
From net realized gain on
Investments............. - - - (0.04) (0.11)
------ ------ ------ ------ ------
Total distributions .. (0.77) (0.78) (0.83) (0.75) (0.87)
------ ------ ------ ------ ------
NET ASSET VALUE - END OF YEAR $13.07 $12.95 $13.08 $12.42 $13.48
====== ====== ====== ====== ======
TOTAL RETURN* .............. 7.13% 5.18% 12.41% (2.33)% 9.00%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses + ............... 0.65% 0.65% 0.65% 0.65% 0.65%
Net investment income..... 5.98% 6.07% 6.56% 5.53% 5.65%
Portfolio turnover rate ..... 83.54% 85.77% 116.40% 43.77% 24.22%
Net assets at end of year
(000 omitted) ............. $31,456 $31,777 $32,214 $31,721 $40,971
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
FINANCIAL HIGHLIGHTS-CONTINUED
- ----------------------------------------------------------------------
FOR THE FISCAL YEARS ENDED OCTOBER 31,
--------------------------------------
1997 1996 1995 1994
------- ------- ------- -------
MUNICIPAL INCOME PORTFOLIO
NET ASSET VALUE - BEGINNING OF
YEAR......................... $ 12.46 $ 12.49 $ 11.64 $ 12.50
------- ------- ------- -------
INVESTMENT OPERATIONS:
Net investment income........ 0.55 0.55 0.54 0.49
Net realized and unrealized
gain (loss) on investments. 0.28 (0.03) 0.85 (0.86)
------- ------- ------- -------
Total from investment
operations ............. 0.83 0.52 1.39 (0.37)
------- ------- ------- -------
DISTRIBUTIONS:
From net investment income.... (0.55) (0.55) (0.54) (0.49)
------- ------- ------- -------
NET ASSET VALUE - END OF YEAR.... $ 12.74 $ 12.46 $ 12.49 $ 11.64
======= ======= ======= =======
TOTAL RETURN* ................... 6.85% 4.24% 12.23% (3.05)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ++ ................... 0.75% 0.75% 0.75% 0.75%
Net investment income.......... 4.42% 4.41% 4.50% 4.13%
Portfolio turnover rate .......... 28.56% 15.91% 42.08% 21.95%
Net assets at end of year
(000 omitted)................... $17,446 $16,619 $16,570 $14,283
* These results do not include a 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, 1997, 1996, 1995, 1994, and 1993. 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, 1997, 1996, 1995, 1994, and 1993, would have been 1.12%,
1.09%, 1.14%, 1.05%, and 1.06%, 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, 1997, 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, 1997, 1996, 1995
and 1994, would have been 1.52%, 1.37%, 1.45%, and 1.62%, respectively.
The accompanying notes are an integral part of the financial statements.
17
<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, 1997, the
Diversified Income Portfolio and the Municipal Income Portfolio had net tax
basis capital loss carryforwards to offset future capital gains of
approximately $112,000 and $32,000, respectively, which will expire as
follows:
CAPITAL LOSS EXPIRATION
CARRY FORWARD DATE
------------- ----------
Diversified Income Portfolio.. $82,000 10/31/03
30,000 10/31/05
Municipal Income Portfolio.... 11,000 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.
18
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS-CONTINUED
- ----------------------------------------------------------------
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, 1997,
purchases and sales of investment securities (excluding short-term
investments) aggregated as follows:
DIVERSIFIED MUNICIPAL
INCOME INCOME
----------- ----------
Purchases.................. $24,494,126 $4,693,418
Sales...................... 26,208,894 4,691,687
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 an 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 ended October 31, 1997, 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.
19
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS-CONTINUED
- ----------------------------------------------------------------
The following table summarizes the advisory fees for the fiscal year ended
October 31, 1997:
GROSS ADVISORY ADVISORY
FEE FEE WAIVER
-------------- ----------
Diversified Income Portfolio. $157,518 $148,754
Municipal Income Portfolio... 82,587 82,587
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 earned by RSMC
from the Diversified Income Portfolio for the fiscal year ended October 31,
1997 amounted to $25,203. RSMC waived its administration fee, which
amounted to $13,578, for the Municipal Income Portfolio for the fiscal year
ended October 31, 1997. 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 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, 1997,
such expenses amounted to $25,102 for the Diversified Income Portfolio and
$19,101 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, 1997, RSMC's fees for
accounting services amounted to $50,000 per Portfolio. RSMC waived $34,363
of the accounting services fee for the Municipal Income Portfolio.
20
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS-CONTINUED
- ----------------------------------------------------------------
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, 1997 amounted to $5,400 per Portfolio.
5.FUND SHARES. At October 31, 1997, 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, 1997 ENDED OCTOBER 31, 1996
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ----------
Shares sold............... 141,848 $1,841,272 332,967 $4,362,435
Shares issued to shareholders
in reinvestment of
distributions............. 58,648 755,881 66,445 859,172
Shares redeemed............ (248,332) (3,208,985) (408,911) (5,251,019)
--------- ---------- --------- ----------
Net decrease............... (47,836) $ (611,832) (9,499) $ (29,412)
---------- ----------
Shares outstanding:
Beginning of year......... 2,453,780 2,463,279
--------- ---------
End of year............... 2,405,944 2,453,780
========= =========
MUNICIPAL INCOME PORTFOLIO
FOR THE FISCAL YEAR FOR THE FISCAL YEAR
ENDED OCTOBER 31, 1997 ENDED OCTOBER 31, 1996
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ----------
Shares sold............... 98,185 $1,235,603 141,627 $1,762,290
Shares issued to shareholders
in reinvestment of
distributions............ 45,831 575,223 45,629 568,432
Shares redeemed........... (108,773) (1,363,382) (180,088) (2,237,773)
--------- ---------- --------- ----------
Net increase.............. 35,243 $ 447,444 7,168 $ 92,949
========== ==========
Shares outstanding:
Beginning of year........ 1,334,009 1,326,841
--------- ---------
End of year.............. 1,369,252 1,334,009
========= =========
21
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
- ---------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- ------------------------------------------------------------------------------
REPORT OF 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 (comprised of respectively, The Diversified Income and The
Municipal Income Portfolios) as of October 31, 1997, 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 periods indicated therein. 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 and financial highlights. Our procedures included
confirmation of securities owned as of October 31, 1997, 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 provides 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, 1997, 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 their financial highlights for each of the periods
indicated therein in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
November 26, 1997
22
<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 $738,423 as tax-exempt dividends.
In January 1998 shareholders of the Fund will receive Federal income tax
information on all distributions paid to their accounts in the calendar year
1997, including any distributions paid between October 31, 1997 and December
31, 1997.
23
[Outside cover -- divided into two sections]
[Left Section] [Right Section]
TRUSTEES THE RODNEY SQUARE
Eric Brucker STRATEGIC
Fred L.Buckner FIXED-INCOME
Robert J. Christian FUND
Martin L. Klopping
John J. Quindlen
- -------------------
OFFICERS [GRAPHIC - RSMC Logo]
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 ANNUAL REPORT
TRANSFER AGENT October 31, 1997
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 12/97
<PAGE>
