THE RODNEY SQUARE
STRATEGIC
FIXED-INCOME
FUND
PROSPECTUS
JUNE 29, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
EXPENSE TABLE..........................................................2
FINANCIAL HIGHLIGHTS...................................................4
QUESTIONS AND ANSWERS ABOUT THE PORTFOLIOS.............................6
INVESTMENT OBJECTIVES AND POLICIES.....................................8
RISK FACTORS..........................................................11
PURCHASE OF SHARES....................................................12
SHAREHOLDER ACCOUNTS..................................................13
REDEMPTION OF SHARES..................................................14
EXCHANGE OF SHARES....................................................15
HOW NET ASSET VALUE IS DETERMINED.....................................16
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES..............................16
PERFORMANCE INFORMATION...............................................18
MANAGEMENT OF THE FUND................................................20
DESCRIPTION OF THE FUND...............................................22
APPENDIX..............................................................22
APPLICATION & NEW ACCOUNT REGISTRATION................................28
i
<PAGE>
the RODNEY SQUARE
STRATEGIC FIXED-INCOME
FUND
The Rodney Square Strategic Fixed-Income Fund (the "Fund") consists of three
separate portfolios (the "Portfolios"): the Short/Intermediate Bond Portfolio,
the Intermediate Bond Portfolio and the Municipal Bond Portfolio. The
Short/Intermediate Bond Portfolio and the Intermediate Bond Portfolio each seeks
high total return, consistent with high current income, by investing principally
in various types of investment-grade fixed income securities. Under normal
market conditions, the average dollar-weighted duration of securities held by
the Short/Intermediate Bond Portfolio and the Intermediate Bond Portfolio will
fall within a range of 2 1/2 to 4 years and 5 to 7 years, respectively. The
Municipal Bond Portfolio seeks a high level of income exempt from federal income
tax, consistent with the preservation of capital. Under normal market
conditions, the average dollar-weighted duration of securities held by the
Municipal Bond Portfolio will fall within a range of 4 to 8 years. Shares of the
Portfolios are offered at net asset value without the imposition of any
front-end sales charge and are not subject to any Rule 12b-1 fees.
PROSPECTUS
JUNE 29, 1998
This Prospectus sets forth information about the Fund that you should know
before investing. Please read this Prospectus carefully and keep it for future
reference. A Statement of Additional Information, dated June 29, 1998,
containing additional information about the Fund has been filed with the
Securities and Exchange Commission ("SEC") and, as amended or supplemented from
time and to time, is incorporated by reference herein. A copy of the Statement
of Additional Information and 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. ("RSD"), by calling the
number below, by writing to RSD at the address noted on the back cover of this
Prospectus, or by accessing the web site maintained by the SEC
(http://www.sec.gov). RSD is a wholly owned subsidiary of Wilmington Trust
Company ("WTC"), a bank chartered in the State of Delaware.
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FOR FURTHER INFORMATION OR ASSISTANCE IN OPENING AN ACCOUNT, PLEASE CALL:
o NATIONWIDE............................................... (800) 336-9970
- --------------------------------------------------------------------------------
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, WILMINGTON TRUST COMPANY OR ANY OTHER BANK, 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.
1
<PAGE>
EXPENSE TABLE
<TABLE>
<CAPTION>
SHORT/INTERMEDIATE INTERMEDIATE MUNICIPAL
BOND BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION COSTS* None None None
ANNUAL PORTFOLIO OPERATING EXPENSES**
(as a percentage of average net assets)
Advisory Fee (after waivers) .................. 0.27% 0.25% 0.00%
12b-1 Fee...................................... 0.00% 0.00% 0.00%
Other Expenses (after reimbursements) ......... 0.28% 0.30% 0.75%
----- ----- -----
Total Operating Expenses (after waivers and reimbursements) .. 0.55% 0.55% 0.75%
===== ===== =====
</TABLE>
EXAMPLE***
You would pay the following expenses on a $1,000 investment in each Portfolio
assuming a 5% annual return and redemption at the end of each time period:
One year........................ $ 6 $ 6 $ 8
Three years..................... $18 $18 $24
Five years...................... $31 $31 $42
Ten years....................... $69 $69 $93
* WTC and/or 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.
** Because the Intermediate Bond Portfolio had no operations prior to the date
of this Prospectus, expenses for that Portfolio are estimated for its first
year of operations, adjusted to reflect WTC's undertaking to waive its
advisory fee or reimburse expenses to the extent that the expenses of the
Portfolio (excluding taxes, extraordinary expenses, brokerage commissions
and interest) exceed an annual rate of 0.55% of its average daily net assets
at least until February 1999. Without waivers, the Advisory Fee for the
Intermediate Bond Portfolio would be 0.35% of the Portfolio's average daily
net assets, and Total Operating Expenses are estimated to be 0.65% of its
average daily net assets. With respect to the Short/Intermediate Bond
Portfolio and the Municipal Bond Portfolio, expenses are based on each
Portfolio's expenses for its fiscal year ended October 31, 1997, adjusted to
reflect its current advisory, administration, accounting services and
transfer agency fees, the termination of its Rule 12b-1 Plan, and WTC's
undertaking to waive its advisory fee or reimburse expenses to the extent
that their expenses (excluding taxes, extraordinary expenses, brokerage
commissions and interest) exceed an annual rate of 0.55%, with respect to
the Short/Intermediate Bond Portfolio, and 0.75%, with respect to the
Municipal Bond Portfolio, of each Portfolio's average daily net assets at
least until February 1999. Without waivers, the Advisory Fee for the
Short/Intermediate Bond Portfolio would be 0.35% of the Portfolio's average
daily net assets, and Total Operating Expenses would be 0.63% of its average
daily net assets. Without waivers and reimbursements, the Advisory Fee for
the Municipal Bond Portfolio would be 0.35% of the Portfolio's average daily
net assets, and Other Expenses and Total Operating Expenses would be 0.95%
and 1.30%, respectively, of its average daily net assets. See "Management of
the Fund " for additional information. WTC currently intends to continue to
waive its advisory fees or reimburse the Portfolios' expenses as described
above after February 1999.
*** The assumption in the Example of a 5% annual return is required by
regulations of the SEC and is applicable to all mutual funds. The assumed 5%
annual return is not a prediction of, and does not represent, any
Portfolio's projected or actual performance.
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.
2
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THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES INCURRED AND RETURNS MAY BE
GREATER OR LESSER THAN THOSE SHOWN.
3
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FINANCIAL HIGHLIGHTS
The following tables include selected per share data and other performance
information for the Short/Intermediate Bond Portfolio and the Municipal Bond
Portfolio throughout the following periods derived from the audited financial
statements of the 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, 1997, which is included,
together with the auditor's unqualified report, as part of the Fund's Statement
of Additional Information.
Information is not provided for the Intermediate Bond Portfolio, as that
Portfolio had no operations prior to the date of this Prospectus.
SHORT/INTERMEDIATE BOND PORTFOLIO
<TABLE>
<CAPTION>
APRIL 2, 1991
(COMMENCEMENT OF
OPERATIONS) TO
FOR THE FISCAL YEARS ENDED OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991
---- ------ ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE-- BEGINNING OF PERIOD ........ $12.95 $13.08 $12.42 $13.48 $13.20 $12.86 $12.50
------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS:
NET INVESTMENT INCOME ...................... 0.77 0.78 0.83 0.71 0.76 0.83 0.48
Net realized and unrealized gain (loss) on
investments .............................. 0.12 (0.13) 0.66 (1.02) 0.39 0.37 0.36
---- ----- ---- ----- ---- ---- ----
Total from investment operations ........ 0.89 0.65 1.49 (0.31) 1.15 1.20 0.84
---- ---- ---- ----- ---- ---- ----
DISTRIBUTIONS:
From net investment income ................. (0.77) (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 ..................... (0.77) (0.78) (0.83) (0.75) (0.87) (0.86) (0.48)
------ ----- ---- ----- ----- ----- -----
NET ASSET VALUE-- END OF PERIOD .............. $13.07 $12.95 $13.08 $12.42 $13.48 $13.20 $12.86
====== ====== ====== ====== ====== ====== ======
TOTAL RETURN** ................................ 7.13% 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% 0.65% 0.89%*
Net investment income ...................... 5.98% 6.07% 6.56% 5.53% 5.65% 6.33% 6.64%*
Portfolio turnover rate ....................... 83.54% 85.77% 116.40% 43.77% 24.22% 27.37% 78.45%*
Net assets at end of period (000 omitted) ..... $31,456 $31,777 $32,214 $31,721 $40,971 $30,152 $24,171
SENIOR SECURITIES:
Amount of reverse repurchase agreements
outstanding at end of period (in thousands)... $0 $0 $0 $0 $0 $0 $0
Average daily amount of reverse repurchase
agreements outstanding during the period
(in thousands) ........................... $0 $0 $0 $0 $0 $0 $162
4
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Average daily number of shares outstanding
during the period (in thousands) ......... 2,441 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 $0.00 $0.13
</TABLE>
* Annualized
** The total return figure for the Portfolio for the fiscal period ended
October 31, 1991 has not been annualized.
+ WTC reimbursed a portion of the Portfolio's expenses, exclusive of advisory
fees, for the fiscal period ended October 31, 1991. WTC waived a portion of
its advisory fees for the fiscal years ended October 31, 1997, 1996, 1995,
1994, 1993 and 1992, and Rodney Square Management Corporation ("RSMC"), the
prior administrator and accounting servicing agent of the Portfolios, 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, 1997, 1996,
1995, 1994, 1993, 1992, and for the fiscal period ended October 31, 1991,
would have been 1.12%, 1.09%, 1.14%, 1.05%, 1.06%, 1.24% and 1.91%,
respectively.
MUNICIPAL BOND PORTFOLIO
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
++ 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, 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.
5
<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 AND PRIMARY INVESTMENT POLICIES?
The Fund is an open-end, management investment company consisting of three
separate diversified portfolios: the Short/Intermediate Bond Portfolio, the
Intermediate Bond Portfolio and the Municipal Bond Portfolio. The investment
objectives and primary investment policies of the Portfolios are as follows:
SHORT/INTERMEDIATE BOND PORTFOLIO (PREVIOUSLY THE RODNEY SQUARE 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 with an average dollar-weighted duration, under normal
market conditions, of 2 1/2 to 4 yearS. (See "Investment Objectives and Policies
- -- Short/Intermediate Bond and Intermediate Bond Portfolios.")
INTERMEDIATE BOND PORTFOLIO. This Portfolio seeks high total return,
consistent with high current income, by investing principally in various types
of investment grade fixed income securities with an average dollar-weighted
duration, under normal market conditions, of 5 to 7 years. (See "Investment
Objectives and Policies -- Short/Intermediate Bond and Intermediate Bond
Portfolios.")
MUNICIPAL BOND PORTFOLIO (PREVIOUSLY THE RODNEY SQUARE MUNICIPAL INCOME
PORTFOLIO). This Portfolio seeks a high level of income exempt from federal
income tax, consistent with the preservation of capital by investing principally
in municipal securities providing interest income that is exempt from federal
income tax with an average dollar-weighted duration, under normal market
conditions, of 4 to 8 years. (See "Investment Objectives and Policies --
Municipal Bond Portfolio.")
WHAT ARE THE RISKS TO CONSIDER BEFORE INVESTING?
Investment in the Portfolios represents an investment in securities with
fluctuating market prices. As market prices fluctuate, the net asset value of an
investor's holdings will also fluctuate and, at the time of redemption, may be
more or less than the purchase price. 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. When interest rates rise or fall, investors should expect more
fluctuations in value in the Intermediate Bond Portfolio than in the
Short/Intermediate Bond Portfolio, due to the latter Portfolio's shorter
duration.
The Portfolios may engage in certain options, futures and (in the case of the
Short/Intermediate Bond Portfolio and the Intermediate Bond Portfolio only)
forward currency transactions. Such transactions may involve certain risks,
increase costs and diminish investment performance. (See "Investment Objectives
and Policies," "Risk Factors" and "Appendix.")
Depending on your tax bracket, your after-tax return from the Municipal Bond
Portfolio may be substantially higher than the after-tax return you would earn
from comparable taxable investments. Shareholders pay no federal income tax on
exempt-interest dividends paid by the Municipal Bond 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 ("Tax Preference Item"). Capital gain
distributions, if any, from the Municipal Bond Portfolio are subject to federal
income income tax, as well as state and local taxes. (See "Dividends, Other
Distributions and Taxes.")
Prior to the date of this Prospectus, the Intermediate Bond Portfolio had no
operations.
HOW CAN YOU BENEFIT BY INVESTING IN THE PORTFOLIOS RATHER THAN BY INVESTING
DIRECTLY IN THE SECURITIES HELD BY THOSE PORTFOLIOS?
Investing in the Portfolios offers two key benefits.
6
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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. The Portfolios also offer a way for investors to diversify their
investment portfolios by participating in pooled funds of taxable or tax-exempt
fixed income securities. There are no minimum periods for investment in the
Portfolios and no fees will be charged at time of purchase or redemption.
SECOND: Investors in a Portfolio need not become involved with the detailed
bookkeeping and operating procedures normally associated with direct investment
in the 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 FOR THE FUND?
PFPC Inc. ("PFPC"), an indirect wholly owned subsidiary of PNC Bank Corp.,
provides administrative, accounting and transfer agency services for the Fund.
RSMC, a wholly owned subsidiary of WTC, provides corporate secretarial services
for the Fund. (See "Management of the Fund.")
WHO IS THE FUND'S 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 Bond 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 PFPC and accepted by RSD as described below. There is no sales load.
The minimum initial investment is $1,000 per Portfolio, but additional
investments may be made in any amount.
Shares of the Portfolios 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. 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 contact RSD or your Service Organization or call the number listed
below, for further information about the Portfolios or for assistance in opening
an account.
- --------------------------------------------------------------------------------
o 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 AND OTHER DISTRIBUTIONS PAID?
Income dividends for the Portfolios are declared daily and distributed
monthly. 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 other distributions in cash by checking the appropriate
7
<PAGE>
boxes 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
another Portfolio or for shares of any of the other funds in the Rodney Square
complex, subject to certain conditions. (See "Exchange of Shares.")
INVESTMENT OBJECTIVES AND POLICIES
SHORT/INTERMEDIATE BOND AND INTERMEDIATE BOND PORTFOLIOS
The Short/Intermediate Bond and the Intermediate Bond Portfolios each seeks
high total return, consistent with high current income, by investing principally
in various types of investment grade fixed income securities.
Under normal market conditions, the Short/Intermediate Bond Portfolio and the
Intermediate Bond Portfolio each will invest at least 85% of its total assets in
investment grade fixed income securities. Each Portfolio may also invest up to
10% of its total assets in investment grade fixed income securities of foreign
issuers.
In investing in fixed income securities, the Short/Intermediate Bond
Portfolio will, as a fundamental policy, maintain a short-to-intermediate
average duration. The Intermediate Bond Portfolio will, as a fundamental policy,
maintain an intermediate average duration. Under normal market conditions, the
average dollar-weighted duration of securities held by the Short/Intermediate
Bond Portfolio will fall within a range of 2 1/2 to 4 years; thosE held by the
Intermediate Bond Portfolio will fall within a range of 5 to 7 years. In the
event of unusual market conditions, the average dollar-weighted duration of the
Portfolios may fall within a broader range. Under those circumstances, the
Short/Intermediate Bond Portfolio may invest in fixed income securities with an
average dollar-weighted duration of 1 to 6 years and the Intermediate Bond
Portfolio may invest in fixed income securities with an average dollar-weighted
duration of 2 to 10 years.
Duration measures the sensitivity of the fixed income securities held by a
Portfolio to a change in interest rates. A longer duration implies a greater
sensitivity and means that the Portfolio's securities will experience a greater
degree of fluctuation should interest rates change. For example, if interest
rates were to move 1%, a bond with a 3 year duration would experience a 3%
change in its principal value. An identical bond with a duration of 5 years
would experience a 5% change in its principal value. Investors may be more
familiar with the term "average effective maturity" (when, on average, the fixed
income securities held by the Portfolios 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 Short/Intermediate Bond Portfolio, is expected to fall within a
range of approximately 3 to 5 years and, in the case of the Intermediate Bond
Portfolio, within a range of approximately 7 to 12 years.
The composition of each Portfolio's holdings varies depending upon WTC's
analysis of the fixed income markets including 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. Securities purchased
by the Portfolios may be purchased on the basis of their yield or potential
capital appreciation or both. By maintaining a short-to-intermediate average
duration or intermediate average duration for the Short/Intermediate and
Intermediate Bond Portfolios, respectively, WTC seeks to protect the Portfolios'
principal value by reducing fluctuations in value relative to those that may be
experienced by fixed income funds with longer average durations, although that
strategy may reduce the level of income attained by the Portfolios. Of course,
there is no guarantee that principal value can be protected during periods of
extreme interest rate volatility.
(See "Risk Factors.")
The Portfolios invest only in securities that are rated, at the time of
purchase, in the top four categories by a nationally recognized statistical
rating organization ("NRSRO") such as Moody's Investors Service, Inc.
8
<PAGE>
("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 "Risk Factors" and the Statement of Additional Information for further
information regarding ratings and the characteristics of securities rated in the
top four rating categories.)
The Portfolios 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 Portfolios
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 Portfolios may also engage in the following
investment strategies: entering into both repurchase agreements and reverse
repurchase agreements; purchasing and writing (selling) options, futures
contracts, options on futures contracts or forward currency contracts; short
selling; and lending portfolio securities. (See "Appendix.") In addition, the
Portfolios may invest in investment companies that seek to maintain a stable net
asset value (money market funds).
MUNICIPAL BOND PORTFOLIO
The Municipal Bond 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 Bond 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.
As a fundamental policy, the Portfolio will maintain an intermediate average
duration. 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. In
the event of unusual market conditions, the average duration for the Portfolio
may fall within a broader range. Under those circumstances, the Portfolio may
invest in securities with an average dollar-weighted duration of 2 to 10 years.
Duration measures the sensitivity of the fixed income securities held by the
Portfolio to a change in interest rates. A longer duration implies a greater
sensitivity and means that the Portfolio's securities experience a greater
degree of fluctuation should interest rates change. For example, if interest
rates were to move 1%, a bond with a 3 year duration would experience a 3%
change in its principal value. An identical bond with a duration of 5 years
would experience a 5% change in its principal value. 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 Portfolio's investments. Generally, the
stated maturity of a fixed income security is longer than its projected
duration. Under normal market conditions, the average effective maturity of the
Municipal Bond Portfolio will fall within a range of approximately 5 to 10
years.
The composition of the Portfolio's holdings varies depending upon WTC's
analysis of the municipal securities market including analysis of the most
attractive segments of the yield curve, the relative value of different market
sectors, expected trends in those markets and supply versus demand pressures. By
maintaining an 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 municipal 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 "Risk Factors.")
The Portfolio invests only in securities that are rated, at the time of
purchase, in the top four categories by an NRSRO such as Moody's or S&P or, if
not rated, are determined by WTC to be of comparable quality. (See "Risk
9
<PAGE>
Factors" 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 without limit in municipal securities issued to
finance private activities, the interest on which is a Tax Preference Item. In
addition, although the Portfolio expects to invest substantially all of its net
assets in municipal securities that provide interest income that is exempt from
federal income tax, it may invest up to 20% of its net assets in other types of
fixed income securities that provide federally taxable income. Such securities
include bank obligations; corporate bond, notes and commercial paper; guaranteed
investment contracts; mortgage-backed securities; participation interest;
asset-backed securities; and U.S. Government obligations. The Portfolio may also
engage in the following investment strategies: entering into repurchase
agreements; purchasing and writing (selling) options, futures, and options on
futures contracts; short selling; and lending Portfolio securities (see
"Appendix.") In addition, the Portfolio may invest in investment companies that
seek to maintain a stable net asset value (money market funds).
The 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.) The 25% limitation applies to municipal securities backed by
the assets and revenues of non-governmental users, such as the private operators
of educational, hospital or housing facilities. However, 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 such concentration. 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. Under these conditions, the Portfolio's vulnerability to any special
risks that affect that sector or jurisdiction, such as a shift in government
policy that would reduce future tax revenue streams pledged to support those
securities, could have a significant adverse impact on the value of an
investment in the Portfolio. There are no limitations on the Portfolio's
investment in any one of the three general categories of municipal obligations
- -- general obligation bonds, revenue (or special) obligation bonds and private
activity bonds. (See "Appendix.")
Proposed tax legislation in recent years has included several provisions that
may affect the supply and 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, or the value of the Municipal Bond Portfolio's
holdings, could be materially affected by such changes in the law, the Fund's
Board of Trustees would reevaluate the Portfolio's investment objective and
policies or consider the Portfolio's dissolution.
ALL PORTFOLIOS
OTHER INVESTMENTS AND INVESTMENT STRATEGIES. Each Portfolio 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. Certain securities may be purchased on a when-issued or delayed
delivery basis. As a matter of fundamental policy, each Portfolio may also
borrow money for temporary or emergency purposes in an aggregate amount not
exceeding one-third of its total assets. As a matter of non-fundamental policy,
however, no Portfolio will purchase securities while borrowings in excess of 5%
of the Portfolio's total assets are outstanding. In addition, certain of the
securities purchased by the Portfolios may be considered illiquid. For further
information about the Portfolios' investments and investment strategies, see the
Appendix to this Prospectus and the Statement of Additional Information.
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 Intermediate Bond Portfolio is expected to be
less than 100%.
OTHER INFORMATION. Each Portfolio is subject to fundamental policies that,
like the Portfolio's investment objective, 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 Investment Company Act of 1940 ("1940
Act")). All investment policies stated within this Prospectus are, unless
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otherwise indicated, non-fundamental and may be changed by the Fund's Board of
Trustees without shareholder approval. Additional fundamental and
non-fundamental investment policies are described in the Appendix to this
Prospectus and in the Statement of Additional Information.
RISK FACTORS
GENERAL. There can be no guarantee that any Portfolio will achieve its
investment objective. 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. WTC may make frequent changes in the Portfolios' investments,
particularly during periods of rapidly fluctuating interest rates. These
frequent changes would involve transaction costs to the Portfolios and could
result in taxable capital gains.
Each Portfolio invests only in securities that are rated, at the time of
purchase, in the four highest rating categories of an NRSRO such as Moody's or
S&P or, if not rated, are determined by WTC to be of comparable quality. A
rating represents the rating agency's opinion regarding the quality of the
security and is 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, the
rating of the security 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
Portfolios 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 Fund's 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.
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,
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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. As a fundamental policy, no more than 15% of a
Portfolio's total assets may at any time be committed or exposed to derivative
strategies.
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACTS. The use of options, futures
and forward currency contracts involves certain investment risks and transaction
costs. These risks include: dependence on WTC's 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; and lack of assurance that a liquid secondary market will exist
for any particular option, futures contract or related option at any particular
time.
YEAR 2000 ISSUE. Like other mutual funds, financial and business
organizations and individuals around the world, the Portfolios could be
adversely affected if the computer systems used by WTC and the Portfolios' other
service providers do not properly process and calculate date-related information
and data after January 1, 2000. This is commonly known as the "Year 2000
Problem." WTC is taking steps that it believes are reasonably designed to
address the Year 2000 Problem with respect to the computer systems that it uses,
and to obtain assurances that comparable steps are being taken by the
Portfolios' other major service providers. At this time, however, there can be
no assurance that these steps will be sufficient to avoid any adverse impact on
the Portfolios.
PURCHASE OF SHARES
HOW TO PURCHASE SHARES. Portfolio shares are offered on a continuous basis by
RSD at their net asset value next determined after a purchase order is received
by PFPC and accepted 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 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 PFPC, P.O. Box 8951, Wilmington, DE 19899-9752. A
purchase order sent by overnight mail should be sent to The Rodney Square
Strategic Fixed-Income Fund, c/o PFPC, 400 Bellevue Parkway, Suite 108,
Wilmington, DE 19809. 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 PFPC at (800) 336-9970. Once you have an account number, instruct
your bank to wire federal funds to PFPC, c/o PNC Bank, Philadelphia PA - ABA#
031-0000-53, attention: The Rodney Square Strategic Fixed-Income Fund, DDA#
86-0172-6591, further credit - your account number, the name of the selected
Portfolio and your name. If you make an initial purchase by wire, you must
promptly forward a completed Application to PFPC at the address stated above
under "By Mail."
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INDIVIDUAL RETIREMENT ACCOUNTS. Shares of the Short/Intermediate Bond and
Intermediate Bond Portfolios only 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 IRA, call PFPC at (800) 336-9970. PNC Bank,
N.A. ("PNC") makes available its services as IRA custodian for each shareholder
account that is established as an IRA. For these services, PNC receives an
annual fee of $10.00 per account, which fee is paid directly to PNC by the IRA
shareholder. If the fee is not paid by the date due, 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, PFPC, 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 p.m. Eastern time) on or
about the 20th day of the month. For an application for the Automatic Investment
Plan, check the appropriate box of the Application at the end of this Prospectus
or call PFPC 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 per
portfolio, 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 the 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 the Portfolios for a period of time.
Purchase orders received by PFPC 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 PFPC 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, PFPC 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 PFPC and to
deliver required funds on a timely basis, in accordance with the procedures
stated above.
SHAREHOLDER ACCOUNTS
PFPC, as Transfer Agent, maintains for each shareholder an account expressed
in terms of full and fractional shares of each Portfolio rounded to the nearest
1/1000th of a share.
In the interest of economy and convenience, the Fund does not issue share
certificates. Each shareholder is sent a statement at least quarterly showing
all purchases in or redemptions from the shareholder's account. The statement
also sets forth the balance of shares held in the account by Portfolio.
Due to the relatively high cost of maintaining small shareholder accounts,
the Fund reserves the right to close any account with a current value of less
than $500 by redeeming all shares in the account and transferring the proceeds
to the shareholder. Shareholders will be notified if their account value is less
than $500 and will be allowed 60 days in which to increase their account balance
to $500 or more before the account is closed. Reductions in value that result
solely from market activity will not trigger an involuntary redemption.
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REDEMPTION OF SHARES
Shareholders may redeem their shares by mail or by telephone as described
below. If you purchased your shares through an account at WTC or a Service
Organization, you may redeem all or part of your shares in accordance with the
instructions pertaining to that account. Corporations, other organizations,
trusts, fiduciaries and other institutional investors may be required to furnish
certain additional documentation to authorize redemptions. Redemption requests
should be accompanied by the Fund's name, the Portfolio's name and the 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
PFPC, such as a domestic bank or trust company, broker, dealer, clearing agency
or savings association, that is a participant in a medallion program recognized
by the Securities Transfer Association. The three recognized medallion programs
are Securities Transfer Agents Medallion Program (STAMP), Stock Exchanges
Medallion Program (SEMP) and New York Stock Exchange, Inc. Medallion Signature
Program (MSP). Signature guarantees that are not part of these programs will not
be accepted. The written instructions should be mailed to: The Rodney Square
Strategic Fixed-Income Fund, c/o PFPC, P.O. Box 8951, Wilmington, DE 19899-9752.
A redemption order sent by overnight mail should be sent to The Rodney Square
Strategic Fixed-Income Fund, c/o PFPC, 400 Bellevue Parkway, Suite 108,
Wilmington, DE 19809. 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 PFPC 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 PFPC has received your redemption
request. (See "How Net Asset Value Is Determined.") The Fund imposes no fee when
shares are redeemed. WTC or the Service Organization is responsible for
transmitting redemption orders and crediting their customer accounts with
redemption proceeds on a timely basis.
Redemption checks are normally mailed or wired on the next Business Day of
the Fund after receipt and acceptance by PFPC of redemption instructions (if
received by PFPC 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 that
you have designated to receive amounts redeemed at any time. Any request to
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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 PFPC or, if your shares are held
in an account with WTC or a Service Organization, contact WTC or the Service
Organization.
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 PFPC 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 regular trading on 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. 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 another Portfolio or for shares 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 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 STRATEGIC EQUITY FUND, each portfolio of which seeks
superior long-term capital appreciation by investing in equity securities. Its
portfolios are:
LARGE CAP GROWTH EQUITY PORTFOLIO, which invests in equity securities of
large cap U.S. companies that are judged to possess strong growth
characteristics.
LARGE CAP VALUE EQUITY PORTFOLIO, which invests in equity securities of
large cap U.S. companies that are judged to be undervalued in the
marketplace relative to underlying profitability.
SMALL CAP EQUITY PORTFOLIO, which invests in equity securities of small
cap U.S. companies that are judged to possess strong growth
characteristics or to be undervalued in the marketplace relative to
underlying profitability.
INTERNATIONAL EQUITY PORTFOLIO, which invests in equity securities of
foreign issuers.
A redemption of shares through an exchange will be effected at the net asset
value per share next determined after receipt by PFPC 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. The net
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asset values per share of The Rodney Square Tax-Exempt Fund and the two
portfolios of The Rodney Square Fund are determined at 12:00 noon Eastern time,
on each Business Day of the Fund. The net asset values per share of the
Portfolios and the Rodney Square Strategic Equity Fund portfolios are determined
at the close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time), on each Business Day.
Exchange transactions will be subject to the minimum initial investment and
other requirements of the fund 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
PFPC 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
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 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
PFPC 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. These prices may be supplied by a
pricing service. 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, PFPC 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 Fund's Board of
Trustees.
The assets held by the Short/Intermediate Bond Portfolio and the Intermediate
Bond Portfolio that 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 PFPC determines the daily net asset value per share.
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 Fund of the following month, but in
no event later than seven 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
of the Fund (see "How Net Asset Value Is Determined ") and consists of interest
accrued and original issue discount (and, in the case of the Municipal Bond
Portfolio, if it so elects, market discount on tax-exempt securities) earned on
its investments less amortization of any premium and accrued expenses. 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 Short/Intermediate Bond and the Intermediate Bond
Portfolios annually distribute net realized gains from foreign currency
transactions, if any, after the end of the fiscal year in which the gain was
realized by the Portfolios.
Dividends and other distributions payable by a Portfolio are automatically
reinvested in additional shares of the Portfolio on the payment date at their
current net asset value, unless the shareholder elects to receive distributions,
in cash, in the form of a check, by checking the appropriate boxes on the
Application accompanying this Prospectus. Each dividend and other distribution
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is payable to shareholders of a Portfolio who redeem, but not to shareholders
who purchase, shares of the Portfolio on the ex-distribution date.
FEDERAL INCOME TAX. The Intermediate Bond Portfolio intends to qualify, and
each other 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 the portion of its
investment company taxable income (generally consisting of taxable net
investment income, net short-term capital gain and, in the case of the
Short/Intermediate Bond and Intermediate Bond Portfolios, net realized gains
from certain foreign currency transactions, if any) and net capital gain that it
distributes to its shareholders. While each Portfolio 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
Short/Intermediate Bond and Intermediate Bond Portfolios invest primarily in
taxable securities and the Municipal Bond Portfolio invests primarily in
tax-exempt securities.
Distributions by the Municipal Bond 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 the
Portfolio may be a Tax Preference Item.
Dividends from each Portfolio's investment company taxable income (whether
paid in cash or reinvested in additional shares) are taxable to its shareholders
as ordinary income to the extent of the Portfolio's earnings and profits.
Distributions of a Portfolio's net capital gain (whether paid in cash or
reinvested in additional shares), when designated as such, are taxable to its
shareholders as long-term capital gain, regardless of the length of time they
have held their shares. Under the Taxpayer Relief Act of 1997, different maximum
tax rates apply to a noncorporate taxpayer's net capital gain depending on the
taxpayer's holding period and marginal rate of federal income tax - generally,
28% for gain recognized on capital assets held for more than one year but not
more than 18 months and 20% (10% for taxpayers in the 15% marginal tax bracket)
for gain recognized on capital assets held for more than 18 months. Each
Portfolio may divide each net capital gain distribution into a 28% rate gain
distribution and a 20% rate gain distribution (in accordance with the its
holding periods for the securities it sold that generated the distributed gain),
in which event its shareholders must treat those portions accordingly. Investors
should be aware that if Portfolio shares are purchased shortly before the record
date for any dividend or capital gain distribution, they will pay the full price
for the shares and will receive some portion of the price back as a taxable
distribution.
Shortly after the end of each calendar year, each Portfolio notifies its
shareholders of the amounts and federal tax status of dividends and capital gain
distributions paid (or deemed paid) by the Portfolio during that year. The
information regarding capital gain distributions designates the portions thereof
subject to the different maximum rates of tax applicable to noncorporate
taxpayers' net capital gain indicated above.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry Municipal Bond 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.
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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. Similar tax
consequences generally will result from an exchange of shares of one Portfolio
for shares of another Portfolio or another fund in the Rodney Square complex.
(See "Exchange of Shares.") In addition, if Portfolio shares are purchased
within 30 days of redeeming other shares of that Portfolio at a loss, 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 redeems shares of the Municipal Bond Portfolio that
were held for six months or less, the deductible loss will be reduced by the
amount of exempt-interest dividends received by the shareholder with respect to
those shares, and the remaining loss (and the entire loss in the case of a
redemption of shares of another Portfolio as a loss after being held for that
period) will be 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 INCOME 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 jurisdiction.
Shareholders may be exempt from state and local income taxes on distributions of
interest income derived from obligations of the state and/or municipalities of
the state in which they reside, but generally are taxed on income derived from
obligations of other jurisdictions. Shortly after the end of each calendar year,
the Municipal Bond Portfolio notifies its shareholders of the portion of their
tax-exempt income attributable to each state for that 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. Any shareholders who are non-resident alien
individuals, or foreign corporations, partnerships, trusts, or estates may be
subject to different federal income tax treatment. 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 information, shows the performance of a hypothetical investment and
is not intended to indicate and is no guarantee of 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 additional performance information. The annual report is available upon
request and free of charge.
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, 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.
A Portfolio's Return (Standardized and Non-Standardized) is increased to the
extent that WTC or RSMC has waived all or a portion of its fees or reimbursed
all or a portion of the Portfolio's expenses. Returns (Standardized and
Non-Standardized) are based on historical performance of the Portfolio, show the
performance of a hypothetical investment and are not intended to indicate future
performance.
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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 Bond 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, 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 Bond 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%
INTERMEDIATE BOND PORTFOLIO. The Intermediate Bond Portfolio commenced
operations on June 29, 1998 following the tax-free transfer of assets by the
Bond Fund, a collective investment fund, to the Intermediate Bond Portfolio in
exchange for shares of the Intermediate Bond Portfolio. The Intermediate Bond
Portfolio's investments on June 29, 1998 were the same as the portfolio of the
Bond Fund immediately prior to the transfer.
The Bond Fund was not a registered investment company as it was exempt from
registration under the 1940 Act. Because, in a practical sense, the Bond Fund
constitutes a "predecessor" of the Intermediate Bond Portfolio, the Intermediate
Bond Portfolio calculates its performance by including the Bond Fund's total
return adjusted to reflect the annual deduction of fee and expenses applicable
to shares of the Intermediate Bond Portfolio as stated in the Expense Table in
this Prospectus (i.e., adjusted to reflect anticipated expenses, absent
investment advisory fee waivers).
The Intermediate Bond Portfolio from time to time may advertise certain
investment performance figures, as discussed below. These figures are based on
historical information and are not intended to indicate, predict or guarantee
future performance of the Intermediate Bond Portfolio.
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PERFORMANCE INFORMATION REGARDING
THE BOND FUND, A COLLECTIVE INVESTMENT FUND
AVERAGE ANNUAL TOTAL RETURN*
Inception
1 YEAR 3 YEARS 5 YEARS (12/90)
------ ------- ------- ---------
11.64% 8.45% 6.21% 7.87%
- ------------------
*Figures were calculated pursuant to a methodology established by the SEC. The
total return figures are as of March 31, 1998. The Bond Fund's inception date
was December 1990.
The above quoted performance data is the performance of the Bond Fund for the
period before the Intermediate Bond Portfolio commenced operations, adjusted to
reflect the annual deduction of fees and expenses applicable to shares of the
Intermediate Bond Portfolio (i.e., adjusted to reflect anticipated expenses,
absent investment advisory fee waivers). The Bond Fund was not registered under
the 1940 Act and therefore was not subject to certain investment restrictions,
limitations and diversification requirements imposed by the 1940 Act and the
Internal Revenue Code of 1986, as amended ("the Code"). If the Bond Fund had
been registered under the 1940 Act, its performance may have been different. The
investment objective, restrictions and strategies of the Intermediate Bond
Portfolio are substantially similar to those followed by the Bond Fund since the
latter's inception. The minimum credit quality for the Bond Fund was "A" through
April 30, 1997; after that date, the minimum credit quality for the Bond Fund
was changed to "BBB," the same as that for the Intermediate Bond Portfolio.
Notwithstanding such differences, WTC believes that the investment objective,
restrictions and strategies of the Intermediate Bond Portfolio are substantially
similar to those of the Bond Fund. WTC, the adviser of the Intermediate Bond
Portfolio, served as the adviser of the Bond Fund from its inception, and the
portfolio manager of the Intermediate Bond Portfolio also managed the Bond Fund
from its inception in December 1990 to the transfer of assets to the
Intermediate Bond Portfolio.
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, WTC, subject to the
supervision of the Board of Trustees, directs the investments of each Portfolio
in accordance with its investment objective, policies and limitations. In
addition to serving as Investment Adviser for the Portfolios, WTC is engaged in
a variety of investment advisory activities, including the management of other
mutual funds and collective investment pools.
Under the Advisory Agreement, each Portfolio pays a monthly advisory fee to
WTC at the annual rate of 0.35% of the average daily net assets of the
Portfolio. WTC has agreed to waive its fees 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 0.55%
(0.75% in the case of the Municipal Bond Portfolio) of the Portfolio's average
daily net assets at least until February, 1999.
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 Asset Management Department of WTC are primarily
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responsible for the day-to-day management of the Short/Intermediate Bond
Portfolio and the Intermediate Bond 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 Management Division and since that time has
specialized in the management of intermediate and 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 Asset Management
Department of WTC is primarily responsible for the day-to-day management of the
Municipal Bond Portfolio. Mr. Collins has been a municipal bond portfolio
manager and credit analyst for WTC for more than 10 years.
ADMINISTRATIVE AND ACCOUNTING SERVICES. Under an Administrative and
Accounting Services Agreement with the Fund, PFPC, 400 Bellevue Parkway,
Wilmington, Delaware 19809, performs certain administrative services for the
Portfolios including preparing shareholder reports, assisting WTC in compliance
monitoring activities and preparing and filing federal and state tax returns on
behalf of the Portfolios. PFPC also performs accounting services for the
Portfolios including determining the net asset value per share of each
Portfolio.
For the services provided under the Administration and Accounting Services
Agreement, the Fund pays PFPC an annual fee equal to the amount derived from the
following schedule: 0.10% of each Portfolio's first $1 billion of average daily
net assets; 0.075% of each Portfolio's next $500 million of average daily net
assets; 0.05% of each Portfolio's next $500 million of average daily net assets;
and 0.035% of each Portfolio's average daily net assets in excess of $2 billion.
In addition, any related out-of-pocket expenses incurred by PFPC in the
provision of services to a Portfolio are borne by that Portfolio.
Under a Fund Secretarial Services Agreement with the Fund, RSMC performs
certain corporate secretarial services on behalf of the Portfolios including
supplying office facilities, non-investment related statistical and research
data and executive and administrative services; preparing and distributing all
materials necessary for meetings of the Trustees and shareholders of the Fund;
and preparing and arranging for filing, printing and distribution proxy
materials and post-effective amendments to the Fund's registration statement.
WTC pays RSMC for the provision of these services out of its advisory fee.
TRANSFER AGENT AND DIVIDEND PAYING AGENT. PFPC also serves as Transfer Agent
and Dividend Paying Agent to the Portfolios. For these services, the Fund pays
PFPC an annual fee of 0.030% of the Fund's average daily net assets plus
transaction charges and out-of-pocket expenses.
CUSTODIAN AND SUB-CUSTODIAN. WTC serves as Custodian, and PNC serves as
Sub-Custodian, of the Portfolios' assets. For its custody services, the Fund
pays WTC an annual fee equal to the amount derived from the following schedule:
0.015% of the first $2 billion of the Fund's average daily net assets; 0.0125%
of the next $1 billion of the Fund's average daily net assets; and 0.010% of the
Fund's average daily net assets in excess of $3 billion, plus transaction
charges. WTC (not the Fund) pays PNC for sub-custodial services. Any related
out-of-pocket expenses incurred in the provision of custodial services to a
Portfolio are borne by that Portfolio.
DISTRIBUTION AGREEMENT. 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 financial institutions to sell shares of the Portfolios
and, directly or through its affiliates, provides investor support services.
BANKING LAWS. Banking laws restrict 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
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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.
DESCRIPTION OF THE FUND
The Fund is a diversified, open-end, management investment company
established on May 7, 1986 as a Massachusetts business trust under Massachusetts
law by a Declaration of Trust. Prior to June 29, 1998, the name of the
Short/Intermediate Bond Portfolio was the Rodney Square Diversified Income
Portfolio and the name of the Municipal Bond Portfolio was the Rodney Square
Municipal Income Portfolio.
The Fund's capital consists of an unlimited number of shares of beneficial
interest. The Trustees are empowered by the Declaration of Trust and the Bylaws
to establish additional series and classes of shares. 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 June 22, 1998, WTC owned of record approximately 79.85% of the shares
of the Short/Intermediate Bond Portfolio, of which it owned beneficially, with
power to vote on behalf of its customer accounts, approximately 60.75% of the
shares of that Portfolio, and approximately 56.37% of the shares of the
Municipal Bond Portfolio, of which it owned beneficially, with power to vote on
behalf of its customer accounts, approximately 51.04% of the shares of that
Portfolio. Accordingly, WTC may be deemed to be a controlling person of those
Portfolios under the 1940 Act. It is anticipated that immediately after the
commencement of operations of the Intermediate Bond Portfolio, WTC will own by
virtue of shared or sole voting or investment power on behalf of its underlying
customer accounts approximately 100% of the shares of the Intermediate Bond
Portfolio, and may be deemed to be a controlling person of that Portfolio 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.
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 PORTFOLIOS
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
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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 Short/Intermediate Bond
Portfolio's and Intermediate Bond 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
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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 bonds,
industrial development bonds ("IDBs") and private activity bonds ("PABs").
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.
IDBs and PABs 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. IDBs and PABs are in
most cases revenue bonds and thus are not payable from the unrestricted revenues
of the issuer. The credit quality of IDBs and PABs 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 a Tax
Preference Item.
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 from a bank or recognized
securities dealer and simultaneously commits to resell that security to a bank
or dealer at an agreed upon date and price reflecting a 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
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transactions (particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to the Portfolio if the
other party to the repurchase agreement becomes bankrupt), it is the policy of
the Portfolios to limit repurchase transactions to those banks and primary
dealers 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 SHORT/INTERMEDIATE BOND AND INTERMEDIATE
BOND PORTFOLIOS
CONVERTIBLE SECURITIES. The Short/Intermediate Bond and Intermediate Bond
Portfolios 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 Short/Intermediate Bond and Intermediate Bond
Portfolios may invest in obligations of foreign issuers, including foreign
governments, payable in U.S. dollars and issued in the United States (Yankee
bonds). Each 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
25
<PAGE>
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 Short/Intermediate Bond
Portfolio or the Intermediate Bond Portfolio invest 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 Short/Intermediate Bond and
Intermediate Bond Portfolios 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 Short/Intermediate Bond and Intermediate Bond
Portfolios 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 Short/Intermediate Bond and Intermediate
Bond Portfolios 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 its
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 PORTFOLIOS
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACTS. The Portfolios 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
Short/Intermediate Bond Portfolio and the Intermediate Bond Portfolio may also
purchase or sell forward currency contracts in an attempt to manage the
Portfolio's foreign currency exposure. The Short/Intermediate Bond Portfolio and
the Intermediate Bond Portfolio may enter into forward currency contracts to set
the rate at which currency exchanges will be made for specific contemplated
transactions. The Short/Intermediate Bond Portfolio and the Intermediate Bond
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 Portfolios is limited by market conditions, regulatory
limitations and other tax considerations.
LENDING OF PORTFOLIO SECURITIES. The Portfolios 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
26
<PAGE>
value daily. The Portfolios continue 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 Portfolios retain authority to terminate a
loan at any time and retain voting, subscription, dividend and other rights when
it is in the Portfolios' 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 Portfolios' holdings may not exceed one-third of their total
assets.
SHORT SALES AGAINST THE BOX. The Portfolios may engage in short sales against
the box as a hedge when WTC believes that the price of a security held by the
Portfolios may decline. 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 that 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. Because 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.
27
<PAGE>
[LOGO]
the RODNEY SQUARE
STRATEGIC FIXED-INCOME FUND
APPLICATION & NEW ACCOUNT REGISTRATION
- -------------------------------------------------------------------------------
INSTRUCTIONS: RETURN THIS COMPLETED FORM TO:
FOR WIRING INSTRUCTION THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
OR FOR ASSISTANCE IN C/O PFPC
COMPLETING THIS FORM P.O. BOX 8951
CALL (800) 336-9970 WILMINGTON, DE 19899-9752
- -------------------------------------------------------------------------------
PORTFOLIO SELECTION ($1,000 MINIMUM PER PORTFOLIO)
|_| SHORT/INTERMEDIATE BOND PORTFOLIO $
|_| INTERMEDIATE BOND PORTFOLIO $
|_| MUNICIPAL BOND PORTFOLIO $
TOTAL AMOUNT TO BE INVESTED $
|_| By check. (Make payable to the applicable Portfolio.)
|_| By wire. Call 1-800-336-9970 for Instructions.
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.*
1. Individual
--------------- ---- ------------------- ----------------------
First Name MI Last Name Customer Tax ID No.*
2. Joint Tenancy**
----------- ---- ------------------- ----------------------
First Name MI Last Name Customer Tax ID No.*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Uniform
Gift/Transfers
3. Gifts to Minors+ under the to Minors Act
----------------------------- ---------------------- ---------
Minor's Name Customer Tax ID No. State
</TABLE>
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
organization that will report income and/or gains.
** "Joint Tenants with Rights of Survivorship" unless otherwise specified.
+ Regulated by the state's Uniform Gift/Transfers to Minors Act.
- --------------------------------------------------------------------------------
ADDRESS OF RECORD
- --------------------------------------------------------------------------------
Street
- --------------------------------------------------------------------------------
City State Zip Code
28
<PAGE>
DISTRIBUTION OPTIONS-IF THESE BOXES ARE NOT CHECKED ALL DISTRIBUTIONS WILL BE
INVESTED IN ADDITIONAL SHARES.
Income Other
Dividends Distributions
SHORT/INTERMEDIATE BOND
PORTFOLIO |_| |_|
INTERMEDIATE BOND PORTFOLIO
|-| |-|
MUNICIPAL BOND PORTFOLIO
|-| |-|
- --------------------------------------------------------------------------------
Check any of the following if you would like additional information about a
particular plan or services sent to you.
|_| AUTOMATIC INVESTMENT |_| SYSTEMATIC WITHDRAWAL
PLAN PLAN
- --------------------------------------------------------------------------------
CERTIFICATIONS AND SIGNATURE(S) - PLEASE SIGN EXACTLY AS REGISTERED UNDER
"ACCOUNT REGISTRATION."
I have received and read the Prospectus for The Rodney Square 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 or any other bank, 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 have 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
Check one: |_| Owner |_| Trustee |_| Custodian |_| Other
- --------------------------------------------------------------------------------
IDENTIFICATION OF SERVICE ORGANIZATION
We authorize PFPC and 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 ( )
----------- --------
- --------------------------------------------------------------------------------
29
<PAGE>
[LOGO]
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 corporate
resolution must be included for accounts registered to other than an individual,
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
- --------------------------------------------------------------------------------
30
<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 PFPC my agent to redeem
shares of any designated Rodney Square Strategic Fixed-Income Fund when so
instructed by telephone. This power will continue if I am disabled or
incapacitated. By granting this power, I understand that PFPC may be
contacted, on my apparent behalf, by impostors. In view of this risk, I
further understand and agree that PFPC plans to follow reasonable procedures
to confirm that instructions communicated by telephone are genuine. Such
procedures shall include sending proceeds of telephone redemption requests
only to my account address of record, or to the bank listed above. Proceeds in
excess of $10,000 will be sent only to my predesignated bank. By signing
below, I agree on behalf of myself, my successors and assigns not to hold
PFPC, any of its affiliates, or any Rodney Square Strategic Fixed-Income Fund
responsible for acting under the powers I have given PFPC, provided the
aforementioned precautionary procedures are duly followed. I also agree that
all account and registration information I have given will remain the same
unless I instruct PFPC otherwise in writing, accompanied by a signature
guarantee. If I want to terminate this agreement, I will give PFPC at least
ten days notice in writing. If PFPC or the Rodney Square Strategic
Fixed-Income Fund wants 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
PFPC, such as a bank, broker/dealer, clearing agency or savings association that
is a participant in a medallion program recognized by the Securities Transfer
Association. A Notary Public is not an acceptable guarantor. For more
information on signature guarantees, see "Redemption of Shares" in the
Prospectus.
SIGNATURE GUARANTEE(S) (stamp)
31
<PAGE>
(This Page Intentionally Left Blank)
32
<PAGE>
TRUSTEES
Eric Brucker
Fred L. Buckner
Robert J. Christian
John J. Quindlen
Nina M. Webb
------------
OFFICERS
Robert J. Christian, President
Nina M. Webb, Vice President
John J. Kelley, Vice President & Treasurer
Carl M. Rizzo, Esq., Secretary
Mary Jane Maloney, Assistant Secretary
John C. McDonnell, Assistant Treasurer
--------------------------------------
INVESTMENT ADVISER
Wilmington Trust Company
Rodney Square North
1100 N. Market St.
Wilmington, DE 19890-0001
-------------------------
ADMINISTRATOR,
TRANSFER AGENT AND
ACCOUNTING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
--------------------
DISTRIBUTOR
Rodney Square Distributors, Inc.
Rodney Square North
1100 N. Market St.
Wilmington, DE 19890-0001
-------------------------
33
<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 three portfolios (the
"Portfolios"): the Short/Intermediate Bond Portfolio, the Intermediate Bond
Portfolio and the Municipal Bond Portfolio. The Short/Intermediate Bond
Portfolio and the Intermediate Bond Portfolio each seeks high total return,
consistent with high current income, by investing principally in various types
of investment grade fixed income securities. The Municipal Bond Portfolio seeks
a high level of income exempt from federal income tax consistent with the
preservation of capital.
- --------------------------------------------------------------------------------
Statement of Additional Information
June 29, 1998
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Fund's current Prospectus, dated June 29, 1998,
as amended from time to time. A copy of the current Prospectus may be obtained,
without charge, by writing to Rodney Square Distributors, Inc. ("RSD"), Rodney
Square North, 1100 North Market Street, Wilmington, 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
Section Page
INVESTMENT POLICIES............................................................1
SPECIAL CONSIDERATIONS........................................................10
INVESTMENT LIMITATIONS........................................................11
TRUSTEES AND OFFICERS.........................................................13
WILMINGTON TRUST COMPANY......................................................15
INVESTMENT ADVISORY SERVICES..................................................15
ADMINISTRATION AND ACCOUNTING SERVICES........................................16
DISTRIBUTION AGREEMENT........................................................17
REDEMPTIONS...................................................................17
PORTFOLIO TRANSACTIONS........................................................18
NET ASSET VALUE AND DIVIDENDS.................................................19
PERFORMANCE INFORMATION.......................................................20
TAXES.........................................................................27
DESCRIPTION OF THE FUND.......................................................31
OTHER INFORMATION.............................................................32
FINANCIAL STATEMENTS..........................................................32
APPENDIX A...................................................................A-1
APPENDIX B...................................................................B-1
<PAGE>
THE RODNEY SQUARE STRATEGIC FIXED-INCOME FUND
INVESTMENT POLICIES
The following information supplements the information concerning the
Portfolios' investment objectives, policies and limitations found in the
Prospectus.
GENERAL
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 their 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 Short/Intermediate Bond
Portfolio to a range of 2 1/2 to 4 years, in the case of the Intermediate Bond
Portfolio to a range of 5 to 7 years, and in the case of the Municipal Bond
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
Short/Intermediate Bond Portfolio, is expected to fall within a range of
approximately 3 to 5 years, in the case of the Intermediate Bond Portfolio,
within a range of approximately 7 to 12 years, and in the case of the Municipal
Bond Portfolio, within a range of approximately 5 to 10 years.
WTC's goal in managing the Short/Intermediate Bond Portfolio and the
Intermediate Bond Portfolio is to gain additional return by analyzing the market
complexities and individual security attributes which affect the returns of
fixed income securities. The Portfolios are 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 holdings of the
Short/Intermediate Bond Portfolio and the Intermediate Bond Portfolio and the
current interest rate environment, the Portfolios 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 Portfolios will likely
experience larger price fluctuations than money market funds and a lower yield
than longer term bond funds. Given the quality of the Portfolios' holdings,
which must be investment grade (rated within the top four categories) or
comparable to investment grade securities at the time of purchase, the
Portfolios will accept lower yields in order to avoid the credit concerns
experienced by funds that invest in lower quality fixed income securities.
WTC's goal in managing the Municipal Bond 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 that
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.
<PAGE>
Given the intermediate average duration of the Municipal Bond
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. In addition, although the Portfolio expects to
invest substantially all of its net assets in municipal securities that provide
interest income that is exempt from federal income tax, it may invest up to 20%
of its net assets in other types of fixed income securities that provide
federally taxable income.
Investments and Strategies -- All Portfolios
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 Bond 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
2
<PAGE>
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 GICs 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 GICs may have features which permit
redemption by the issuer at a discount from par value.
Generally, GICs are not assignable or transferable without the
permission of the issuer. As a result, the acquisition of GICs is subject to the
limitations applicable to each Portfolio's acquisition of illiquid and
restricted securities. The holder of a GIC is dependent on the creditworthiness
of the issuer as to whether the issuer is able to meet its obligations. No
Portfolio intends to invest more than 5% of its net assets in GICs.
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. 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.
Restricted securities may be sold only in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933 ("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.
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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).
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
("CMOs"), 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 CMOs described above. Yield to
maturity on CMO residuals is extremely sensitive to prepayments. In addition, if
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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.
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.
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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 purposes of the
federal alternative minimum tax ("Tax Preference Item").
Short-term municipal securities include the following:
TAX ANTICIPATION NOTES ("TANS") AND REVENUE ANTICIPATION NOTES
("RANS"). These notes are issued by states, municipalities and other
tax-exempt issuers to finance short-term cash needs or, occasionally,
to finance construction. Most TANs and RANs are general obligations of
the issuing entity payable from taxes or revenues, respectively,
expected to be received within one year.
BOND ANTICIPATION NOTES ("BANS"). 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. BANs are issued most frequently by revenue bond issuers to
finance such items as construction and mortgage purchases.
CONSTRUCTION LOAN NOTES ("CLNS"). These notes are issued
primarily by housing agencies to finance construction of projects for
an interim period prior to a bond issue. CLNs are secured by a lien on
the property under construction.
PARTICIPATION INTERESTS AND ASSET-BACKED SECURITIES. Each Portfolio 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
Short/Intermediate Bond 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 Bond 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.
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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 Bond 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 rate 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
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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 Bond 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 Bond 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 Securities and
Exchange Commission ("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. Each Portfolio 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.
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LOANS OF PORTFOLIO SECURITIES. Each Portfolio may from time to time
lend its portfolio securities to brokers, dealers and financial institutions.
Such loans will in no event exceed one-third of the Portfolio's total assets and
will be secured by collateral in the form of cash or securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, which at
all times while the loan is outstanding will be maintained in an amount at least
equal to the current market value of the loaned securities. The Portfolio will
retain all or a portion of the interest received on the investment of 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. The Portfolio may
also call these loans in order to sell the securities.
The primary risk involved in lending securities is a financial failure
by the borrower. In such a situation, the borrower might be unable to return the
loaned securities at a time when the value of the collateral has fallen below
the amount necessary to replace the loaned securities. The borrower would be
liable for the shortage, but a Portfolio would be an unsecured creditor with
respect to such shortage and might not be able to recover all or any of it. In
order to minimize this risk, the Portfolios will make loans of securities only
to firms deemed creditworthy by WTC only when, in the judgment of WTC, the
consideration that the Portfolios will receive from the borrower justifies the
risk.
The Municipal Bond Portfolio has no current intention of lending its
portfolio securities and would do so only under unusual market conditions, since
the interest income that a Portfolio receives from lending its securities is
considered taxable income.
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES. Although the
Municipal Bond Portfolio has no current intention of so doing, each Portfolio
may use options, futures contracts and (with respect to the Short/Intermediate
Bond Portfolio and the Intermediate Bond Portfolio only) forward currency
contracts. For additional information regarding such investment strategies, see
Appendix A to this Statement of Additional Information.
MONEY MARKET FUNDS. Each Portfolio may invest in the securities of
other open-end investment companies that seek to maintain a stable net asset
value ("Money Market Funds"). Each Portfolio may invest in such securities
within the limits prescribed by the Investment Company Act of 1940 ("1940 Act").
These limitations currently provide, in part, that a Portfolio may purchase
shares of an investment company unless (a) such a purchase would cause the
Portfolio to own in the aggregate more than 3% of the total outstanding voting
stock of the investment company or (b) such a purchase would cause the Portfolio
to have more than 5% of its total assets invested in the investment company or
more than 10% of its total assets invested in the aggregate in all such
investment companies. In addition to a Portfolio's expenses (including the
various fees), as a shareholder of a Money Market Fund, the Portfolio would bear
its pro rata portion of the Money Market Fund's expenses (including fees).
INVESTMENTS AND STRATEGIES -- THE MUNICIPAL BOND PORTFOLIO
The Municipal Bond Portfolio may not invest more than 25% of its assets
in any one sector 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
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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
ALL PORTFOLIOS
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 Bond 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
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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 BOND 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 law 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 affecting 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 Bond 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 any Portfolio without the affirmative vote of the
lesser of (i) 67% of the shares of the affected 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 (including repurchase agreements fully collateralized
by U.S. Government obligations) 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
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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 paragraph (2) above, the term "municipal
securities" is limited to tax-exempt municipal securities.
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 of Trustees without shareholder approval. As a
matter of non-fundamental policy, each Portfolio will not:
(1) purchase or otherwise acquire any security or invest in a
repurchase agreement with respect to any securities if, as a result,
more than 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;
(2) purchase securities for investment while any bank
borrowing equaling 5% or more of the Portfolio's total assets is
outstanding;
(3) 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;
(4) make short sales of securities except that the Portfolio
may make short sales against the box;
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(5) 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;
(6) 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;
(7) 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
(8) 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 the Portfolios' activities and reviews contractual arrangements with
companies that provide the Portfolios with services. The Fund's Trustees and
officers are listed below. Except as indicated, each individual has held the
office shown or other offices in the same company for the last five years. All
persons named as Trustees also serve in similar capacities for The Rodney Square
Strategic Equity Fund and, with the exception of Nina M. Webb, The Rodney Square
Fund and The Rodney Square Tax-Exempt 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 (*).
ERIC BRUCKER, School of Management, University of Michigan, Dearborn, MI 48128,
Trustee, age 56, has been Dean of the School of Management at the University of
Michigan since June 1992. He was Professor of Economics, Trenton State College
from September 1989 through June 1992. He was Vice President for Academic
Affairs, Trenton State College from September 1989 through June 1991. From 1976
until September 1989, he was Dean of the College of Business and Economics and
Chairman of various committees at the University of Delaware. He is also a
member of the Detroit Economic Club, Financial Executive Institute and
Leadership Detroit.
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FRED L. BUCKNER, 5 Hearth Lane, Greenville, DE 19807, Trustee, age 66, 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, President and Trustee, age 49, 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, a member of the Board of Governors for the Pennsylvania Economy
League and a Director of Clemente Capital, Inc.
JOHN J. QUINDLEN, 313 Southwinds, 1250 West Southwinds Blvd., Vero Beach, FL
32963, Trustee, age 66, 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 through November 1993. He also served as Chief Financial Officer of
E.I. du Pont de Nemours and Company, Inc. from 1984 through June 1993. He also
serves as a director of St. Joe Paper Co. and a Trustee of Kalmar Pooled
Investment Trust.
*NINA M. WEBB, CFA, Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Vice President and Trustee, age 44, has been an Equity Portfolio
Manager at WTC since March 1987. A Chartered Financial Analyst, she previously
was employed by the University of Delaware as Senior Investment Analyst
(1985-86), Investment Analyst (1982-85), and Accountant (1976-82).
JOSEPH M. FAHEY, JR., Rodney Square North, 1100 N. Market St., Wilmington, DE
19890-0001, Vice President, age 41, has been with RSMC since 1984, 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.
JOHN J. KELLEY, 400 Bellevue Parkway, Wilmington, DE 19809, Vice President and
Treasurer, age 38, has been Vice President of PFPC Inc. ("PFPC") since January
1998. He was a Vice President of RSMC from 1995 to January 1998 and an Assistant
Vice President of RSMC from 1989 to 1995.
CARL M. RIZZO, ESQ., Rodney Square North, 1100 N. Market Street, Wilmington, DE
19890-0001, Secretary, age 46, was appointed Vice President of RSMC in July,
1996. From 1995 to 1996 he was Assistant General Counsel of Aid Association for
Lutherans (a fraternal benefit association); from 1994 to 1995 Senior Associate
Counsel of United Services Automobile Association (an insurance and financial
services firm); and from 1987 to 1994 Special Counsel or Attorney-Adviser with a
federal government agency.
The fees and expenses of the Trustees who are not "interested persons"
of the Fund ("Independent Trustees"), as defined in the 1940 Act, are paid by
the Portfolios. The Portfolios may also reimburse the Independent Trustees for
expenses incurred in attending meetings of the Board. For the fiscal year ended
October 31, 1997, such fees and expenses amounted to $5,400 per Portfolio. The
following table shows the fees paid during calendar 1997 to the Independent
Trustees for their services to the Fund and to the Rodney Square Family of
Funds. On March 31, 1998, the Trustees and officers of the Fund, as a group,
owned beneficially, or may be deemed to have owned beneficially, less than 1% of
the outstanding shares of the Short/Intermediate Bond Portfolio and the
Municipal Bond Portfolio.
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1997 Trustees Fees
Total Fees from Total Fees from the Rodney
Independent Trustee the Fund Square Family of Funds
------------------- --------------- --------------------------
Eric Brucker $3,600 $12,700
Fred L Buckner $3,600 $12,700
John J. Quindlen $3,600 $12,700
WILMINGTON TRUST COMPANY
The Investment Adviser to the Fund, 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 Fund
benefits 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 $114.4 billion in trust, custody and investment management assets, WTC
ranks among the nation's leading money management firms. As of December 31,
1997, the trust department of WTC had $38.4 billion in 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 Fund,
WTC also manages over $3.8 billion in fixed income assets and $1.4 billion in
equity assets for various other institutional clients. Certain departments in
WTC engage in investment management activities that utilize a variety of
investment instruments such as futures contracts, options and forward contracts.
Of course, there can be no guarantee that the Portfolios will achieve their
investment objectives or that WTC will perform its services for each in a manner
which would cause it to satisfy its objective. WTC is also the Custodian of the
Fund's assets.
Several affiliates of WTC are also engaged in the investment advisory
business. Wilmington Trust FSB and RSMC, both wholly owned subsidiaries of
Wilmington Trust Corporation, exercise investment discretion over certain
institutional accounts. Wilmington Brokerage Services Company ("WBS") and RSD,
both wholly owned subsidiaries of WTC, are registered broker-dealers, and with
respect to WBS only a registered investment adviser.
INVESTMENT ADVISORY SERVICES
Advisory Agreement. WTC serves as Investment Adviser to each of the
Portfolios pursuant to an Advisory Agreement with the Fund (the "Advisory
Agreement"). Under the Advisory Agreement, WTC directs the investments of each
Portfolio in accordance with that Portfolio's investment objective, policies and
limitations.
For WTC's services under the Advisory Agreement, each Portfolio pays
WTC a monthly fee at an annual rate of 0.35% of the Portfolio's average daily
net assets. For the fiscal years ended October 31, 1997, 1996, and 1995, of the
$157,518, $164,315, and $158,066, respectively, paid in advisory fees by the
Short/Intermediate Bond Portfolio, WTC waived $148,754, $144,473 and $156,223,
respectively, for providing advisory services to that Portfolio. For the fiscal
years ended October 31, 1997, 1996, and 1995, WTC waived all of its advisory fee
for providing advisory services to the Municipal Bond Portfolio amounting to
$82,587, $81,460 and $73,172, respectively.
Under the Advisory Agreement, the Fund, on behalf of the Portfolios,
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;
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<PAGE>
(c) the cost of obtaining quotations for calculating the value of the assets of
the Portfolios; (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 Agreement provides 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 Agreement 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 Agreement.
The Advisory 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 Advisory Agreement terminates automatically in the event of its
assignment. The Agreement is 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 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 AND ACCOUNTING SERVICES
Under an Administration and Accounting Services Agreement with the
Fund, PFPC, 400 Bellevue Parkway, Wilmington, Delaware 19809, performs certain
administrative and accounting services for the Fund. These services include
preparing shareholder reports, providing statistical and research data,
assisting WTC in compliance monitoring activities, and preparing and filing
federal and state tax returns on behalf of the Portfolios. In addition, PFPC
prepares and files various reports with the appropriate regulatory agencies and
prepares materials required by the SEC or any state securities commission having
jurisdiction over the Fund. The accounting services performed by PFPC for the
Portfolios include determining the net asset value per share of each portfolio
and maintaining records relating to the Portfolios' securities transactions.
The Administration and Accounting Services Agreement provides that PFPC
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 and Accounting Services 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 and Accounting Services Agreement.
Under a Secretarial Services Agreement with the Fund, RSMC performs
certain corporate secretarial services on behalf of the Portfolios. These
services include supplying office facilities, non-investment related statistical
and research data, and executive and administrative services; preparing and
distributing all materials necessary for meetings of the Trustees and
shareholders of the Fund; and preparing and arranging for filing, printing, and
distribution of proxy materials and post-effective amendments to the Fund's
registration statement. WTC pays RSMC for the provision of these services out of
its advisory fee.
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<PAGE>
Prior to February 23, 1998, RSMC provided administrative and accounting
services for the Short/Intermediate Bond Portfolio and the Municipal Bond
Portfolio. For the fiscal years ended October 31, 1997, October 31, 1996 and
October 31, 1995, RSMC was paid administration fees on behalf of the
Short/Intermediate Bond Portfolio amounting to $25,203, $26,291 and $25,290,
respectively. For the fiscal years ended October 31, 1997, October 31, 1996 and
October 31, 1995, RSMC waived its administration fees for the Municipal Bond
Portfolio of $13,578, $13,428 and $12,290, respectively. For each of the fiscal
years ended October 31, 1997, October 31, 1996 and October 31, 1995, RSMC was
paid an accounting services fee of $50,000 with respect to each Portfolio, of
which it waived $34,363, $9,981 and $22,728, respectively, for the Municipal
Bond Portfolio.
DISTRIBUTION AGREEMENT
RSD serves as Distributor of Portfolio shares pursuant to a
Distribution Agreement with the Fund, effective February 23, 1998. For the
fiscal year ended October 31, 1997, RSD received underwriting commissions of
$582 and $936, respectively, in connection with the sales of shares of the
Short/Intermediate Bond Portfolio and Municipal Bond Portfolio. For the fiscal
year ended October 31, 1996, RSD received underwriting commissions of $1,824 and
$3,222, respectively, in connection with the sale of shares of the
Short/Intermediate Bond Portfolio and Municipal Bond 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
Short/Intermediate Bond Portfolio and Municipal Bond Portfolio. Under the
current Distribution Agreement, RSD receives no underwriting commissions or Rule
12b-1 fees in connection with the sales of shares of the Portfolios.
Pursuant to the terms of the Distribution Agreement, RSD is granted the
right to sell shares of the Portfolios as agent for the Fund.
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 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.
REDEMPTIONS
To ensure proper authorization before redeeming shares of the
Portfolios, PFPC may require additional documents such as, but not restricted
to, stock powers, trust instruments, death certificates, appointments as
fiduciary, certificates of corporate authority and 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, PFPC requires, in addition to the stock power, certified evidence of
authority to sign the necessary instruments of transfer. THESE PROCEDURES ARE
FOR THE PROTECTION OF SHAREHOLDERS AND SHOULD BE FOLLOWED TO ENSURE PROMPT
PAYMENT. Redemption requests must not be conditional as to date or price of the
redemption. Redemption proceeds will be sent within 7 days of acceptance of
shares tendered for redemption. Delay may result if the purchase check has not
17
<PAGE>
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 the net assets of a Portfolio, 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 of the Portfolio next determined after the
suspension is lifted.
The Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part with readily marketable securities chosen by the Fund and
valued in the same way as they would be valued for purposes of computing the net
asset value of the applicable Portfolio. If payment is made in securities, a
shareholder may incur transaction expenses in converting those 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 Portfolio during any 90-day period.
This election is irrevocable unless the SEC permits its withdrawal.
PORTFOLIO TRANSACTIONS
All portfolio transactions are placed on behalf of the Portfolios by
WTC pursuant to authority contained in the Advisory Agreement. 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 Short/Intermediate Bond 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, 1997, 1996 and 1995, the Portfolios
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 broker-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,
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 Fund 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
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<PAGE>
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 WTC's other clients have investment objectives and programs
similar to those of the Portfolios. Occasionally, WTC may make recommendations
to other clients that result in their purchasing or selling securities
simultaneously with the Portfolios. Consequently, the demand for securities
being purchased or the supply of securities being sold may increase, and this
could have an adverse effect on the price of those securities. When two or more
clients are simultaneously engaged in the purchase or sale of the same security
and if the entire order cannot be made in a single order, the securities are
allocated among clients in a manner believed to be equitable to each. If two or
more of WTC's clients simultaneously purchase or sell the same security, WTC
allocates the prices and amounts according to a formula considered by the
officers of each affected investment company and by the officers of WTC to be
equitable to each account. While in some cases this practice could have a
detrimental effect upon the price or the value of the security as far as the
Portfolios are concerned, or upon its ability to complete its entire order, in
other cases it is believed that coordination and the ability to participate in
volume transactions will be beneficial to the Portfolios.
On occasion, some of the other accounts advised by WTC may have
investment objectives and policies that are dissimilar to those of the
Portfolios, causing WTC 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 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 is calculated by
dividing the lesser of a Portfolio's annual purchases or sales of portfolio
securities for the particular fiscal year by the monthly average value of the
portfolio securities owned by the Portfolio during the year, excluding
securities whose maturity or the expiration date at the time of acquisition was
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.
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 Short/Intermediate Bond Portfolio for the years ended
October 31, 1997 and 1996 was 83.54% and 85.77%, respectively. The portfolio
turnover rate for the Municipal Bond Portfolio for the fiscal years ended
October 31, 1997 and 1996 was 28.56% and 15.91%, respectively. The portfolio
turnover rate for the Intermediate Bond Portfolio for a one year period after
commencement of operations is expected to be less than 100%.
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 PFPC 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, PFPC 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 WTC, the fair value of those securities.
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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 Short/Intermediate Bond Portfolio or the Intermediate
Bond 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 WTC
under the general supervision of the Board of Trustees.
Reliable market quotations are not considered to be readily available
for certain long-term corporate bonds and notes, preferred stocks, municipal
securities and 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 WTC 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 WTC under the general
supervision of the Trustees.
DIVIDENDS. Dividends from each Portfolio's net investment income are
declared on each Business Day and paid to shareholders ordinarily on the first
Business Day of the following month. 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"). Performance data quoted represents past performance and is not
intended to indicate future performance. The investment return and principal
value of an investment 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. As described in the Prospectus, the Intermediate Bond
Portfolio may advertise investment performance figures of the Intermediate Fund,
a collective investment fund.
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:
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<PAGE>
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), PFPC 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 Short/Intermediate Bond Portfolio during the period
(variable "a" in the above formula), PFPC accrues the dividends daily at their
stated dividend rates. Capital gains and losses generally are excluded from
yield calculations. The Short/Intermediate Bond Portfolio's yield for the 30-day
period ended October 31, 1997 was 5.91%. Without fee waivers by WTC during the
period, the yield for that Portfolio would have been 5.48%. The Municipal Bond
Portfolio's yield for the 30-day period ended October 31, 1997 was 3.95%.
Without fee waivers by WTC and RSMC during the period, the yield for that
Portfolio would have been 3.09%.
Because 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
Bond Portfolio may advertise its tax-equivalent yield. That Portfolio's
21
<PAGE>
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 on the date of this Statement of Additional Information,
illustrates the yields that would have to be achieved on taxable investments to
produce a range of hypothetical tax-equivalent yields:
Tax-Equivalent Yield Table
Federal Marginal
Income Tax Bracket Tax-Equivalent Yields Based on Tax-Exempt Yields of:
- ------------------ -------------------------------------------------------
4% 5% 6% 7% 8% 9% 10%
28% 5.6 6.9 8.3 9.7 11.1 12.5 13.9
31% 5.8 7.2 8.7 10.1 11.6 13.0 14.5
36% 6.3 7.8 9.4 10.9 12.5 14.1 15.6
39.6% 6.6 8.3 9.9 11.6 13.2 14.9 16.6
TOTAL RETURN CALCULATIONS. From time to time, each Portfolio may
advertise its average annual total return. A Portfolio's average annual total
return is calculated according to the following formula:
P (1 + T)n = ERV
where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at end of the
period of a hypothetical $1,000 payment
made at the beginning of that period.
The time periods used are based on rolling calendar quarters, updated
to the last day of the most recent calendar quarter prior to submission of the
advertisement for publication. Average annual total return, or "T" in the
formula above, is computed by finding the average annual compounded rate of
return over the period that would equate the initial amount invested to the
ending redeemable value ("ERV"). In calculating average annual total return, 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.
The following table reflects the Short/Intermediate Bond Portfolio's
standardized average annual total returns for the periods stated below:
22
<PAGE>
Average Annual Total Return for Short/Intermediate Bond Portfolio
April 2, 1991
(Commencement of
One-Year ended Five-Years ended Operations) through
October 31, 1997 October 31, 1997 October 31, 1997
---------------- ---------------- -------------------
7.13% 6.16% 7.19%
Average Annual Total Return for Municipal Bond Portfolio
November 1, 1993
(Commencement of
One-Year ended Operations) through
October 31, 1997 October 31, 1997
---------------- ----------------
6.85% 4.92%
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.
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, the Portfolios may quote
unaveraged or cumulative total returns in performance advertisements which
reflect the change in the value of an investment in the Portfolio over a stated
period. PFPC calculates cumulative total return for each Portfolio for a
specific period of time by assuming an initial investment of $1,000 in shares of
the Portfolio and the reinvestment of dividends and other distributions. PFPC
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. The Short/Intermediate Bond
Portfolio's cumulative total return for the one-year period ended October 31,
1997, the five-year period ended October 31, 1997 and for the period from April
2, 1991 (commencement of operations) through October 31, 1997 was 7.13%, 34.84%
and 57.94%, respectively. The Municipal Bond Portfolio's cumulative total return
for the one-year period ended October 31, 1997 and for the period from November
1, 1993 (commencement of operations) through October 31, 1997 was 6.85% and
21.19%, 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
gain distributions 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
Short/Intermediate Bond 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 Short/Intermediate
Bond Portfolio today.
During the period from April 2, 1991 (Commencement of Operations)
through October 31, 1997, a hypothetical $10,000 investment in the
Short/Intermediate Bond Portfolio would have been worth $15,794 assuming all
23
<PAGE>
distributions were reinvested. During the period November 1, 1993 (Commencement
of Operations) through October 31, 1997, a hypothetical $10,000 investment in
Municipal Bond Portfolio would have been worth $12,119, assuming all
distributions were reinvested.
Change in $10,000 Hypothetical Investment
SHORT/INTERMEDIATE BOND PORTFOLIO
<TABLE>
<CAPTION>
Value of Value of Value of Increase in
Initial Reinvested Reinvested Cost of Living
Period Ended $10,000 Income Capital Gain (Consumer
October 31 Investment Dividends Distributions Total Value Price Index)
- ------------- --------- --------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1997 $10,456 $5,178 $159 $15,793 19.9%
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%
</TABLE>
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 $15,281. 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 $4,136 for income dividends and $142 for capital
gain distributions. Without fee waivers from the Portfolio's service providers
and expense reimbursements by WTC, the Portfolio's returns would have been
lower.
MUNICIPAL BOND PORTFOLIO
<TABLE>
<CAPTION>
Value of Value of Value of Increase in
Initial Reinvested Reinvested Cost of Living
Period Ended $10,000 Income Capital Gain (Consumer
October 31 Investment Dividends Distributions Total Value Price Index)
------------ ---------- ------------ ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1997 $10,192 $1,927 $0 $12,119 11.2%
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%
</TABLE>
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 $11,862. 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 $1,707. Without fee waivers from the
Portfolio's service providers, the Portfolio's returns would have been lower.
The Portfolios may also, from time to time along with performance
advertisements, illustrate asset allocation by sector weightings. These
illustrations, an example for Short/Intermediate Bond Portfolio of which
follows, are not intended to reflect current or future portfolio holdings of the
Portfolios.
24
<PAGE>
Short/Intermediate Bond Portfolio
Asset Breakdown by Sector
As of October 31, 1997
Percent of
Sector Investments
------ -----------
US Government Bonds 27.0%
Corporate Bonds 47.5%
Asset Backed Securities 8.0%
Mortgage Backed Securities 11.6%
Cash Equivalents 5.9%
------------
Total Investments 100.0%
============
[PIE CHART OMITTED]
The Portfolios may also from time to time along with performance
advertisements, present their investments in the form of a "Schedule of
Investments" included in the Annual Report to the Shareholders of the Fund. A
copy of the Annual Report for the fiscal year ended October 31, 1997 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
25
<PAGE>
performance, investors should consider the effects of the methods used to
calculate performance when comparing performance of a Portfolio with performance
quoted with respect to other investment companies or types of investments. For
example, it is useful to note that yields reported on debt instruments are
generally prospective, contrasted with the historical yields reported by the
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 tracked 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.
Because 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.
26
<PAGE>
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.
Performance advertisements for the Municipal Bond Portfolio may compare
investing in that Portfolio to investing in an individual municipal bond. Unlike
municipal bond funds such as the Municipal Bond 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 that invests in many
different securities. The initial investment requirements and sales charges of
many municipal bond 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. Each Portfolio is treated as a separate corporation for
federal income tax purposes. To continue to qualify (or, in the case of the
Intermediate Bond Portfolio, to qualify) for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"),
27
<PAGE>
each Portfolio 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 and net short-term capital gain and, in the case
of the Short/Intermediate Bond Portfolio and the Intermediate Bond Portfolio,
net gains from certain foreign currency transactions) plus, in the case of the
Municipal Bond Portfolio, its net interest income excludable from gross income
under section 103(a) of the Code ("Distribution Requirement") and must meet
several additional requirements. For each Portfolio, these requirements include
the following: (1) the Portfolio must derive at least 90% of its gross income
each taxable year 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) 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,
securities of other RICs 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 (3) 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 or securities of other RICs) 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 capital gain (the excess of net long-term capital
gain over net short-term capital loss), 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 for RIC treatment.
DISTRIBUTIONS. 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. Accordingly, such distributions will be taxed to
the shareholders for the year in which that December 31 falls.
Investors 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.
Each Portfolio may acquire zero coupon securities issued with original
issue discount. As a 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 net tax-exempt income, including any
original issue discount, 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.
28
<PAGE>
THE MUNICIPAL BOND PORTFOLIO. The Municipal Bond Portfolio will be able
to pay exempt-interest dividends to its shareholders 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 Tax
Preference Items. 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"
("PABs") (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. Furthermore, even interest on tax-exempt securities held by the
Portfolio that are not PABs, which interest otherwise would not be a Tax
Preference Item, nevertheless may be indirectly subject to the federal
alternative minimum tax in the hands of corporate shareholders when distributed
to them by the Portfolio. PABs 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 PABs should consult their tax advisers before purchasing
Portfolio shares. For these purposes, the term "substantial user" is defined
generally to include a "non-exempt person" who regularly uses in trade or
business a part of a facility financed from the proceeds of such bonds.
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 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 (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 its 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 SHORT/INTERMEDIATE BOND PORTFOLIO AND THE INTERMEDIATE BOND
PORTFOLIO. Interest and dividends received by the Short/Intermediate Bond
29
<PAGE>
Portfolio and the Intermediate Bond Portfolio, and gains realized thereby, may
be subject to income, withholding or other taxes imposed by foreign countries
and U.S. possessions that would reduce the yield and/or total return on their
securities. Tax conventions between certain countries and the United States may
reduce or eliminate these 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) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for federal
income tax purposes the amount, 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.
Futures and foreign 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 "marked-to-market" (that is, 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. As of the date of this Statement of Additional
Information, it is not entirely clear whether that 60% portion will qualify for
the reduced maximum tax rates on net capital gain enacted by the Taxpayer Relief
Act of 1997 -- 20% (10% for taxpayers in the 15% marginal tax bracket) for gain
recognized on capital assets held for more than 18 months -- instead of the 28%
rate in effect before that legislation, which now applies to gain recognized on
capital assets held for more than one year but not more than 18 months. However,
technical corrections legislation passed by the House of Representatives late in
1997 would clarify that the lower rates apply. Section 1256 Contracts also may
be "marked-to-market" for purposes of the Excise Tax.
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. Each of the
Short/Intermediate Bond Portfolio and the Intermediate Bond Portfolio attempts
to monitor its section 988 transactions to minimize any adverse tax impact.
Code section 1092 (dealing with straddles) also may affect the taxation
of options and futures contracts in which a Portfolio may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Under
section 1092, any loss from the disposition of a position in a straddle
generally may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If a Portfolio makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions would be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to a
Portfolio of straddle transactions are not entirely clear.
If a Portfolio has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward contract
or short sale) with respect to any stock, debt instrument (other than "straight
debt") or partnership interest the fair market value of which exceeds its
adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the Portfolio will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward contract entered into by a Portfolio or
a related person with respect to the same or substantially similar property. In
addition, if the appreciated financial position is itself a short sale or such a
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contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale.
The foregoing tax discussion is a summary included for general
informational purposes only. Each shareholder is advised to consult its own tax
adviser with respect to the specific tax consequences to it of an investment in
a Portfolio, including the effect and applicability of state, local, foreign and
other tax laws and the possible effects of changes in federal or other tax laws.
DESCRIPTION OF THE FUND
The Fund is a diversified open-end series investment company organized
as a Massachusetts business trust on May 7, 1986. The original name of the Fund
was The Rodney Square Benchmark U.S. Treasury Fund. The name was changed to The
Rodney Square Strategic Fixed-Income Fund effective March 14, 1991.
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.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for the obligations of the trust.
However, the Fund's 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 agreement, obligation or instrument entered into or executed by the Fund or
the Trustees. The amended and restated Declaration of Trust authorizes the
creation of multiple series and classes of shares and provides for
indemnification out of assets of the applicable Portfolio of any shareholder
held personally liable solely by virtue of ownership of shares of the series.
Thus, the risk of a shareholder incurring financial loss because of shareholder
liability is limited to circumstances in which the Portfolio itself would be
unable to meet its obligations. 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 or indemnifies a Trustee against any liability to which he or she
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 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. The Declaration of Trust further provides, however, that the Board of
Trustees may take the actions specified in (a) or (b) if a majority of the
Trustees determine that the continuation of a Portfolio or the Trust is not in
the best interests of the Portfolio or the Trust or their respective
shareholders as a result of factors or events adversely affecting the ability of
the Portfolio or the Trust to conduct its business and operations in an
economically viable manner. In the event of the liquidation of the Fund or the
Portfolio, affected shareholders are entitled to receive the assets of the Fund
or Portfolio that are available for distribution.
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OTHER INFORMATION
INDEPENDENT AUDITORS. Ernst & Young LLP, Suite 4000, 2001 Market
Street, Philadelphia, PA 19103, serves as the Fund's independent auditors,
providing services which include (1) audit of the annual financial statements
for the Portfolios, (2) assistance and consultation in connection with SEC
filings, and (3) preparation of the annual federal and state income tax returns
filed on behalf of each Portfolio.
The financial statements and financial highlights of the
Short/Intermediate Bond Portfolio and the Municipal Bond Portfolio 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,
N.W., 2nd Floor, Washington, D.C. 20036, serves as counsel to the Fund and has
passed upon the legality of the shares offered by the Prospectus and this
Statement of Additional Information.
CUSTODIAN AND SUB-CUSTODIAN. WTC, Rodney Square North, 1100 N. Market
St., Wilmington, DE 19890-0001, serves as the Fund's Custodian. PNC Bank,
National Association, 1600 Market Street, Philadelphia, Pennsylvania 19103,
serves as the Fund's Sub-Custodian.
TRANSFER AGENT. PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as the Fund's Transfer Agent and Dividend Paying Agent.
FINANCIAL STATEMENTS
The Schedules of Investments of the Short/Intermediate Bond Portfolio
(formerly the Diversified Income Portfolio) and the Municipal Bond Portfolio
(formerly the Municipal Income Portfolio) as of October 31, 1997, the Statements
of Assets and Liabilities of the Short/Intermediate Bond Portfolio and Municipal
Bond Portfolio as of October 31, 1997, the Statement of Operations of the
Short/Intermediate Bond Portfolio and Municipal Bond Portfolio for the fiscal
year ended October 31, 1997, the Statements of Changes in Net Assets of the
Short/Intermediate Bond Portfolio and Municipal Bond Portfolio for the fiscal
years ended October 31, 1997 and 1996, the Financial Highlights of the
Short/Intermediate Bond Portfolio for the fiscal years ended October 31, 1997,
1996, 1995, 1994 and 1993, the Financial Highlights of the Municipal Bond
Portfolio for the fiscal years ended October 31, 1997, 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, 1997, are attached hereto and incorporated
herein.
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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 a Portfolio, WTC may
engage in certain options and futures strategies for certain bona fide hedging,
risk management or other portfolio management purposes. In managing the
Short/Intermediate Bond Portfolio and the Intermediate Bond 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 the risks
associated with using these strategies are discussed below. Use of options,
futures and forward currency contracts is subject to applicable regulations
and/or interpretations of the SEC and the several options and futures exchanges
upon which these instruments may be traded. The Board of Trustees has adopted
investment guidelines (described below) reflecting these 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 REQUIREMENTS. 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 by either (1) setting aside cash, or liquid
unencumbered, daily marked-to-market securities in a segregated account with the
Fund's custodian in the prescribed amount, or (2) holding 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 these strategies are
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 the
Portfolio's assets could impede portfolio management, or the 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.
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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 the 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
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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
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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 Short/Intermediate Bond
Portfolio and the Intermediate Bond Portfolio may take positions in options on
foreign currencies to hedge against the risk of foreign exchange rate
fluctuations on foreign securities that a Portfolio holds or that it intends to
purchase. For example, if a 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 a 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 Portfolios 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) no Portfolio will 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
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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
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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
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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 Short/Intermediate Bond Portfolio and the Intermediate Bond
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, those Portfolios 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 Portfolios' 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 Portfolios 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 Portfolios 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
Short/Intermediate Bond Portfolio and the Intermediate Bond 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 Portfolios against any rise in the foreign
currency exchange rate that may add additional costs to acquiring the foreign
security position. The Portfolios 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 Portfolios 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 Portfolios 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.
Each Portfolio 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 Short/Intermediate Bond Portfolio and the Intermediate Bond
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
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"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,
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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
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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 Short/Intermediate
Bond Portfolio and the Intermediate Bond 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 Short/Intermediate Bond Portfolio and
the Intermediate Bond Portfolio may use forward currency contracts to protect
against uncertainty in the level of future foreign currency exchange rates.
Those Portfolios may enter into forward currency contracts with respect
to specific transactions. For example, when a 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.
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The Short/Intermediate Bond Portfolio and the Intermediate Bond
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 Portfolios' exposure to foreign currencies that WTC believes may
rise in value relative to the U.S. dollar or to shift the Portfolios' 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 Portfolios' 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 Portfolios 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 Portfolios are
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 Portfolios are 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 Portfolios will be served.
At or before the maturity date of a forward contract requiring the
Short/Intermediate Bond Portfolio or the Intermediate Bond 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 Short/Intermediate Bond Portfolio or the Intermediate
Bond 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 Portfolios own 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 Short/Intermediate Bond Portfolio and the Intermediate
Bond Portfolio values their 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 Portfolios 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
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Portfolios at one rate, while offering a lesser rate of exchange should the
Portfolios desire to resell that currency to the dealer.
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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
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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.
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The Financial Statements of the Registrant are incorporated herein by reference
to the Annual Report to Shareholders filed with the Securities and Exchange
Commission on December 24, 1997, Edgar Accession 0000793276-97-000008.
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