<PAGE>
Filed with the Securities and Exchange Commission on November 20, 1995
Securities Act File No. 33-
Investment Company Act File No. 811-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1933 |X|
Pre-Effective Amendment No. __________
Post-Effective Amendment No. __________
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. __________
Smith Barney Cardinal Investment Fund Inc.
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street, New York, NY 10013
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 212-723-9218
Christina T. Sydor, Esq.
Smith Barney Mutual Fund Management Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
Copy to:
Rose F. DiMartino, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022-4677
<PAGE>
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of the Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Proposed Maximum
Title of Securities Proposed Maximum Aggregate Offering Amount of
Being Registered Amount Being Registered Offering Price per Unit Price Registration Fee
------------------- ----------------------- ----------------------- ------------------ ----------------
Shares of common
stock, $.001 par
value per share Indefinite* Indefinite* Indefinite* $500
- -----------------------
* An indefinite number of shares of common stock of the Registrant is being
registered by this Registration Statement pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended.
</TABLE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
SMITH BARNEY CARDINAL INVESTMENT FUND INC.
FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Part A
Item No. Prospectus Heading
- -------- ------------------
<S> <C> <C>
1. Cover Page................................................... Cover Page
2. Synopsis..................................................... Prospectus Summary
3. Condensed Financial
Information................................................ Not Applicable
4. General Description of Registrant............................ Cover Page; Prospectus Summary;
Investment Objectives and Management
Policies; Why Invest in the Cardinal
Fund; Description of Underlying Smith
Barney Funds; Additional Information;
Appendix
5. Management of the Fund....................................... Prospectus Summary; Management of The
Cardinal Fund; Additional Information
5A. Management's Discussion of
Fund Performance........................................... Not Applicable
6. Capital Stock and Other Securities.......................... Prospectus Summary; Dividends,
Distributions and Taxes; Purchase of
Shares; Exchange Privilege; Additional
Information
7. Purchase of Securities
Being Offered.............................................. Purchase of Shares; Exchange Privilege;
Valuation of Shares; Distributor
8. Redemption or Repurchase..................................... Redemption of Shares; Minimum Account
Size
9. Legal Proceedings............................................ Not applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part B Heading in Statement of
Item No. Additional Information
- -------- ----------------------
<S> <C> <C>
10. Cover Page................................................... Cover Page
11. Table of Contents............................................ Table of Contents
12. General Information and History.............................. Not Applicable
13. Investment Objectives and
Policies................................................... Investment Objectives and Management
Policies
14. Management of the Fund....................................... Management of The Cardinal Fund
15. Control Persons and Principal
Holders of Securities...................................... Management of The Cardinal Fund
16. Investment Advisory and
Other Services............................................. Management of The Cardinal Fund;
Additional Information
17. Brokerage Allocation
and Other Practices........................................ Not Applicable
18. Capital Stock and Other
Securities................................................. Additional Information
19. Purchase, Redemption and
Pricing of Securities
Being Offered.............................................. Purchase of Shares; Redemption of
Shares; Exchange Privilege; Valuation of
Shares
20. Tax Status................................................... Taxes (See in The Prospectus "Dividends,
Distributions and Taxes")
21. Underwriters................................................. Distributor
22. Calculation of Performance
Data....................................................... Performance
23. Financial Statements......................................... Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth after the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR
SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
Subject to completion, dated November 17, 1995
Smith Barney Cardinal Investment Fund Inc.
Prospectus __________ __, 1996
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Cardinal Investment Fund Inc. (the "Cardinal Fund")
offers five professionally managed investment portfolios (each, a
"Portfolio"). Each Portfolio seeks to achieve its objective by investing in a
number of other Smith Barney Mutual Funds.
The Aggressive Portfolio seeks capital appreciation.
The Growth Portfolio seeks long-term growth of capital.
The Traditional Portfolio seeks long-term growth of capital and income.
The Balanced Portfolio seeks a balance of growth of capital and income.
The Income Portfolio seeks high current income.
This Prospectus sets forth concisely certain information about
the Cardinal Fund and each of the Portfolios that prospective investors
will find helpful in making an investment decision. Investors are encouraged
to read this Prospectus carefully and retain it for future reference.
Additional information about each of the Portfolios is contained in
a Statement of Additional Information dated __________ ___, 1996, as
amended or supplemented from time to time, that is available upon request
and without charge by calling or writing the Cardinal Fund at the
telephone number or address set forth above or by contacting a Smith Barney
Financial Consultant. The Statement of Additional Information has been
filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC. Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC. Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Table of Contents
PAGE
Prospectus Summary 3
Why Invest in the Cardinal Fund? 10
Investment Objectives and Management Policies 11
Description of Underlying Smith Barney Funds 16
Valuation of Shares 28
Dividends, Distributions and Taxes 28
Purchase of Shares 29
Exchange Privilege 38
Redemption of Shares 42
Minimum Account Size 43
Performance 43
Management of the Cardinal Fund 44
Distributor 46
Additional information 47
Appendix A-1
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE CARDINAL FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE CARDINAL FUND OR THE DISTRIBUTOR TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY OR
SECURITIES OF ANY UNDERLYING SMITH BARNEY FUND IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
- --------------------------------------------------------------------------------
<PAGE>
Prospectus Summary 3
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE
PROSPECTUS. SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVES The Cardinal Fund is an open-end,
non-diversified management investment company that currently offers five
professionally managed investment portfolios. The Aggressive Portfolio
seeks to provide capital appreciation. The Growth Portfolio seeks to
provide long-term growth of capital. The Traditional Portfolio seeks to
provide long-term growth of capital and income. The Balanced Portfolio
seeks to provide a balance of growth of capital and income. The Income
Portfolio seeks to provide high current income. Each Portfolio seeks to
achieve its investment objective by investing in a diverse mix of
"Underlying Smith Barney Funds", which consist of open-end management
investment companies or series thereof for which Smith Barney Inc.
("Smith Barney") now or in the future acts as principal underwriter or for
which Smith Barney, Smith Barney Mutual Funds Management Inc. ("SBMFM")
or Smith Barney Strategy Advisers Inc. ("SBSA") now or in the future acts as
investment adviser. Investors may choose to invest in one or more of the
Portfolios based on their personal investment goals, risk tolerance and
financial circumstances. See "Investment Objectives and Management
Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS Each Portfolio offers several classes
of shares ("Classes") to investors designed to provide them with the
flexibility of selecting an investment best suited to their needs. The
general public is offered three Classes of shares: Class A shares, Class
B shares and Class C shares, which differ principally in terms of sales
charges and rate of expenses to which they are subject. A fourth Class of
shares, Class Y shares, is offered only to investors meeting an initial
investment minimum of $5,000,000. See "Purchase of Shares" and "Redemption
of Shares."
Class A Shares. Class A shares are sold at net asset value plus
an initial sales charge of up to 5.00% with respect to the Aggressive
Portfolio, the Growth Portfolio and the Traditional Portfolio and up to 4.50%
with respect to the Balanced Portfolio and the Income Portfolio. The initial
sales charge may be reduced or waived for certain purchases. Purchases of
Class A shares which, when combined with current holdings of Class A
shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, will be made at net asset value with no initial sales charge, but
will be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary -
Reduced or No Initial Sales Charge." Class A shares are subject to an annual
service fee of 0.25% of the average daily net assets of the Class.
Class B Shares. Class B shares of the Aggressive Portfolio, the
Growth Portfolio and the Traditional Portfolio are offered at net asset
value subject to a maximum CDSC of 5.00% of redemption proceeds, declining by
1.00% each year after the date of purchase to zero. Class B shares of the
Balanced Portfolio and the Income Portfolio are offered at net asset value
subject to a maximum CDSC of 4.50% of redemption proceeds, declining by
0.50% the first year after purchase and 1.00% each year thereafter to zero.
The CDSC may be waived for certain
<PAGE>
redemptions. Class B shares of the Aggressive Portfolio, the Growth
Portfolio and the Traditional Portfolio are subject to an annual service fee
of 0.25% and an annual distribution fee of 0.75% of the average daily net
assets of the Class. Class B shares of the Balanced Portfolio and the
Income Portfolio are subject to an annual service fee of 0.25% and an
annual distribution fee of 0.50% of the average daily net assets of the
Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will
convert automatically to Class A shares, based on relative net asset value,
eight years after the date of the original purchase. Upon conversion, these
shares will no longer be subject to an annual distribution fee. In addition,
a certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions ("Class B Dividend Shares")
will be converted at that time. See "Purchase of Shares - Deferred Sales
Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with
no initial sales charge; however, investors pay a CDSC of 1.00% if they
redeem Class C shares within 12 months of purchase. The CDSC may be waived
for certain redemptions. Class C shares of the Aggressive Portfolio, the
Growth Portfolio and the Traditional Portfolio are subject to an annual
service fee of 0.25% and an annual distribution fee of 0.75% of the average
daily net assets of the Class. Class C shares of the Balanced Portfolio
and the Income Portfolio are subject to an annual service fee of 0.25% and
an annual distribution fee of 0.45% of the average daily net assets of
the Class. The Class C shares' distribution fee may cause that Class to
have higher expenses and pay lower dividends than Class A shares.
Purchases of Class C shares, which when combined with current holdings of
Class C shares of the Portfolio equal or exceed $500,000 in the
aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
Class Y Shares. Class Y shares are available only to investors
meeting an initial investment minimum of $5,000,000. Class Y shares are
sold at net asset value with no initial sales charge or CDSC. They are not
subject to any service or distribution fees.
In deciding which Class of Portfolio shares to purchase,
investors should consider the following factors, as well as any other
relevant facts and circumstances:
Intended Holding Period. The decision as to which Class of shares
is more beneficial to an investor depends on the amount and intended length
of his or her investment. Shareholders who are planning to establish a
program of regular investment may wish to consider Class A shares; as
the investment accumulates shareholders may qualify for reduced sales
charges and the shares are subject to lower ongoing expenses over the term
of the investment. As an alternative, Class B and Class C shares are sold
without any initial sales charge so the entire purchase price is
immediately invested in a Portfolio. Any investment return on these
additional invested amounts may partially or wholly offset the higher annual
expenses of these Classes. Because a Portfolio's future return cannot be
predicted, however, there can be no assurance that this would be the case.
<PAGE>
Finally, investors should consider the effect of the CDSC period
and any conversion rights of the Classes in the context of their own
investment time frame. For example, while Class C shares have a shorter CDSC
period than Class B shares, they do not have a conversion feature, and
therefore, are subject to an ongoing distribution fee. Thus, Class B shares
may be more attractive than Class C shares to investors with longer term
investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class
Y shares, which are not subject to an initial sales charge, CDSC or
service distribution fees. The maximum purchase amount for Class A
shares is $499,999,999, Class B shares is $249,999 and Class C shares is
$499,999. There is no maximum purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales charge on Class
A shares may be waived for certain eligible purchasers, and the entire
purchase price will be immediately invested in a Portfolio. In addition,
Class A share purchases which, when combined with current holdings of Class
A shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, will be made at net asset value with no initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 aggregate investment may be met by adding the
purchase to the net asset value of all Class A shares offered with a sales
charge held in funds sponsored by Smith Barney listed under "Exchange
Privilege." Class A share purchases also may be eligible for a reduced
initial sales charge. See "Purchase of Shares." Because the ongoing
expenses of Class A shares may be lower than those for Class B and Class C
shares, purchasers eligible to purchase Class A shares at net asset value or
at a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different
compensation for selling each Class of shares. Investors should understand
that the purpose of the CDSC on the Class B and Class C shares is the same as
that of the initial sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a
complete description of the sales charges and service and distribution
fees for each Class of shares and "Valuation of Shares," "Dividends,
Distribution and Taxes" and "Exchange Privilege" for other differences between
the Classes of shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in
the Smith Barney 401(k) Program, which is generally designed to assist plan
sponsors in the creation and operation of the retirement plans under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as other types of participant directed, tax-qualified employee
benefit plans (collectively, "Participating Plans"). Class A, Class B,
Class C and Class Y shares are available as investment alternatives for
Participating Plans. See "Purchase of Shares-Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through a brokerage
account maintained with Smith Barney. Shares may also be purchased through a
broker that clears securities transactions through Smith Barney on a fully
disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group. In addition, certain investors, including qualified
retirement plans and certain other institutional investors, may purchase
shares directly from the Fund through the Fund's transfer agent, First
Data Investor Services Group, Inc.
<PAGE>
("First Data"), a subsidiary of First Data Corporation. See "Purchase
of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each
account, or $250 for an individual retirement account ("IRA") or a
Self-Employed Retirement Plan. Investors in Class Y shares may open an
account for an initial investment of $5,000,000. Subsequent investments of
at least $50 may be made for all Classes. For participants in retirement
plans qualified under Section 403(b)(7) or Section 401(a) of the Code, the
minimum initial investment requirement for Class A, Class B and Class C
shares and the subsequent investment requirement for all Classes is $25.
The minimum initial investment requirement for Class A, Class B and Class C
shares and the subsequent investment requirement for all Classes through
the Systematic Investment Plan described below is $50.
See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN Each Portfolio offers shareholders a
Systematic Investment Plan under which they may authorize the automatic
placement of a purchase order each month or quarter for Portfolio shares
in an amount of at least $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF EACH PORTFOLIO SBMFM serves as each Portfolio's investment
manager. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services, Consumer Finance Services, Life Insurance Services and Property &
Casualty Insurance Services.
SBMFM serves as the investment adviser of each of the Underlying
Smith Barney Funds (other than Smith Barney Premium Total Return Fund).
Greenwich Street Advisors, a division of SBMFM, serves as investment
adviser to Smith Barney Diversified Strategic Income Fund and SBSA, a wholly
owned subsidiary of SBMFM, serves as investment adviser to Smith Barney
Premium Total Return. See "Management of the Cardinal Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds, including the
Underlying Smith Barney Funds held by the Portfolios, at the respective net
asset values next determined, plus any applicable sales charge differential.
See "Exchange Privilege."
VALUATION OF SHARES Net asset value of each Portfolio for the prior day
generally will be quoted daily in the financial section of most newspapers and
is also available from a Smith Barney Financial Consultant. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS The Cardinal Fund intends to pay dividends from
net investment income monthly on shares of the Balanced Portfolio and the
<PAGE>
Income Portfolio and annually on shares of the Aggressive Portfolio, the
Growth Portfolio and the Traditional Portfolio. Distributions of net
realized capital gains, if any, are paid annually for each Portfolio. See
"Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be
subject to any sales charge or CDSC. Class B shares acquired through
dividend and distribution reinvestments will become eligible for
conversion to Class A shares on a pro rata basis. See "Dividends,
Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS The assets of each Portfolio
are invested in certain Underlying Smith Barney Funds, so each
Portfolio's investment performance is directly related to the investment
performance of the Underlying Smith Barney Funds held. The ability of each
Portfolio to meet its investment objective is directly related to the ability
of the Underlying Smith Barney Funds held to meet their objectives as well as
the allocation among those Underlying Smith Barney Funds by SBMFM. There
can be no assurance that the investment objective of any Portfolio or any
Underlying Smith Barney Fund will be achieved.
The value of the Underlying Smith Barney Funds' investments, and
thus the net asset value of both those Underlying Smith Barney Funds'
and the Portfolios' shares, will fluctuate in response to changes in market
and economic conditions, as well as the financial condition and prospects of
issuers in which the Underling Smith Barney Funds invest. For a description of
the risks involved in an investment in the Portfolios; see "Investment
Objectives and Management Policies," "Description of the Underlying Smith
Barney Funds" and the Appendix to this Prospectus.
EACH PORTFOLIO'S EXPENSES The following expense tables list the costs
and expenses an investor will incur as a shareholder of each Portfolio, based
on the maximum sales charge or maximum CDSC that may be incurred at
the time of purchase or redemption and estimates of each Portfolio's
operating expenses for its first full year of operation.
<TABLE>
<CAPTION>
Applicable to the Aggresive Portfolio, the Growth Portfolio
and the Traditional Portfolio
Class A Class B Class C Class Y
- -------------------------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, None* 5.00% 1.00% None
whichever is lower)
- -------------------------------------------------------- --------------- -------------- -------------- --------------
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management fees 0.25% 0.25% 0.25% 0.25%
12b-1 fee** 0.25 1.00 1.00 --
Other expenses*** None None None None
- -------------------------------------------------------- --------------- -------------- -------------- --------------
TOTAL PORTFOLIO OPERATING EXPENSES 0.50% 1.25% 1.25% 0.25%
- -------------------------------------------------------- --------------- -------------- -------------- --------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Applicable to the Balanced Portfolio
and the Income Portfolio
Class A Class B Class C Class Y
- -------------------------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, None* 4.50% 1.00% None
whichever is lower)
- -------------------------------------------------------- --------------- -------------- -------------- --------------
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management fees 0.25% 0.25% 0.25% 0.25%
12b-1 fee** 0.25 0.75 0.70 --
Other expenses*** None None None None
- -------------------------------------------------------- --------------- -------------- -------------- --------------
TOTAL PORTFOLIO OPERATING EXPENSES 0.50% 1.00% 0.95% 0.25%
- -------------------------------------------------------- --------------- -------------- -------------- --------------
<FN>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be at net asset value with no sales charge, but will be
subject to a CDSC of 1.00% on redemptions made within 12 months.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
*** Under the Investment Management Agreement with each Portfolio, SBMFM has
agreed to bear all expenses of each Class of each Portfolio other than the
management fee, the 12b-1 fee and extraordinary expenses.
</TABLE>
The sales charges and CDSCs set forth in the above tables are
the maximum charges imposed on purchases or redemptions of each of the
Portfolio's shares and investors may actually pay lower or no charges,
depending on the amount purchased and, in the case of Class B, Class C
and certain Class A shares, the length of time the shares are held and
whether the shares are held through the Smith Barney 401(k) Program.
See "Purchase of Shares" and "Redemption of Shares." Smith Barney
receives an annual 12b-1 service fee of 0.25% of the value of average daily
net assets of Class A shares. Smith Barney also receives with respect to
Class B and Class C shares of the Aggressive Portfolio, the Growth
Portfolio and the Traditional Portfolio an annual 12b-1 fee of 1.00% of the
value of average daily net assets of the respective Classes, consisting of a
0.75% distribution fee and a 0.25% service fee. For Class B shares of the
Balanced Portfolio and the Income Portfolio, Smith Barney receives an annual
12b-1 fee of 0.75% of the value of average daily net assets of that Class,
consisting of a 0.50% distribution fee and a 0.25% service fee. For Class C
shares of the Balanced Portfolio and the Income Portfolio, Smith Barney
receives an annual 12b-1 fee of 0.70% of the value of average daily net
assets of that Class, consisting of a 0.45% distribution fee and a 0.25%
service fee.
The Portfolios will invest only in Class Y shares of the
Underlying Smith Barney Funds and, accordingly, will not pay any
sales load or 12b-1 service or distribution fees in connection with their
investments in shares of the Underlying Smith Barney Funds. The Portfolios,
however, will indirectly bear their pro rata share of the fees and expenses
incurred by the Underlying Smith Barney Funds which are applicable to
Class Y shareholders. The investment returns of each Portfolio,
therefore, will be net of the expenses of the Underlying Smith Barney
Funds in which it is invested. The following chart shows
<PAGE>
the expense ratios applicable to Class Y shareholders of each Underlying
Smith Barney Fund held by a Portfolio, as of its most recent fiscal year end:
<TABLE>
<CAPTION>
Underlying Smith Barney Fund Expense Ratio
<S> <C>
Smith Barney Aggressive Growth Fund Inc. ____%
Smith Barney Appreciation Fund Inc. 0.77%
Smith Barney Equity Funds
Smith Barney Growth and Income Fund 1.16%
Smith Barney Fundamental Value Fund Inc. ____%
Smith Barney Funds, Inc.
Income and Growth Portfolio 0.65%
Short-Term U.S. Treasury Securities Portfolio 0.55%
Smith Barney Income Funds
Smith Barney High Income Fund ____%
Smith Barney Utilities Fund ____%
Smith Barney Premium Total Return Fund ____%
Smith Barney Convertible Fund ____%
Smith Barney Diversified Strategic Income Fund ____%
Smith Barney Investment Funds Inc.
Smith Barney Managed Growth Fund 0.98%
Smith Barney Special Equities Fund 1.24%
Smith Barney Government Securities Fund 0.75%
Smith Barney Investment Grade Bond Fund 0.86%
Smith Barney Managed Governments Fund Inc. ____%
Smith Barney Money Funds Inc.
Cash Portfolio 0.53%
Smith Barney World Funds, Inc.
International Equity Portfolio 1.09%
Emerging Markets Portfolio 1.40%
International Balanced Portfolio 1.25%
Global Government Bond Portfolio 1.08%
Based on the foregoing, the range of the average weighted expense ratio for
each Portfolio is expected to be as follows: Aggressive Portfolio, __% to __%,
Growth Portfolio, __ % to __%, Traditional Portfolio, __% to __%, Balanced
Portfolio, __% to __%, and Income Portfolio, __% to __%. A range is
provided since the average assets of the Portfolios invested in each
Underlying Smith Barney Fund will fluctuate.
EXAMPLE THE FOLLOWING EXAMPLE IS INTENDED TO ASSIST AN INVESTOR IN
UNDERSTANDING THE VARIOUS COSTS THAT AN INVESTOR IN EACH OF THE PORTFOLIOS
WILL BEAR DIRECTLY OR INDIRECTLY. THE EXAMPLE ASSUMES PAYMENT BY EACH
PORTFOLIO OF OPERATING EXPENSES AT THE LEVELS SET FORTH IN THE TABLE ABOVE
AND OF ITS PRO RATA SHARE OF EXPENSES OF THE UNDERLYING SMITH BARNEY FUNDS
HELD USING THE MIDPOINT OF THE RANGES SET FORTH ABOVE. THIS EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN ABOVE.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
An investor would pay the following An investor would pay the following
expenses on a $1,000 investment, expenses on the same investment, assuming
assuming (1) 5.00% annual return and (2) the same annual return and no redemptions:
redemption at the end of each time
period:
1 Year 3 Years 1 Year 3 Years
------ ------- ------ -------
<S> <C> <C> <C> <C>
Aggressive Portfolio
Class A $ $ $ $
Class B
Class C
Class Y
Growth Portfolio $
Class A $ $ $
Class B
Class C
Class Y
Traditional Portfolio
Class A $ $ $ $
Class B
Class C
Class Y
Balanced Portfolio
Class A $ $ $ $
Class B
Class C
Class Y
Income Portfolio
Class A $ $ $ $
Class B
Class C
Class Y
</TABLE>
Why Invest in the Cardinal Fund?
The proliferation of mutual funds over the last several years has
left many investors in search of a simple means to manage their
long-term investments. With new investment categories emerging each year
and with each mutual fund reacting differently to political, economic and
business events, many investors are forced to make complex investment
decisions in the face of limited experience, time and personal resources. The
Portfolios are designed to meet the needs of investors who prefer to have
their asset allocation decisions made by professional money managers, are
looking for an appropriate core investment for their retirement portfolio
and appreciate the advantages of broad diversification. The Portfolios may be
most appropriate for long-term investors planning for retirement,
particularly investors in tax-advantaged retirement accounts including
IRAs, 401(k) corporate employee savings plans, 403(b) non-profit
organization savings plans, profit-sharing and money-purchase pension plans,
and other corporate pension and savings plans.
<PAGE>
The Cardinal Fund will be managed so that each Portfolio can
serve as a complete investment program or as a core part of a larger
portfolio. Each of the Portfolios invests in a select group of Underlying
Smith Barney Funds suited to the Portfolio's particular investment objective.
The allocation of assets among Underlying Smith Barney Funds within each
Portfolio is determined by SBMFM according to fundamental and quantitative
analysis. Because the assets will be adjusted only periodically and only
within pre-determined ranges that will attempt to ensure broad
diversification, there should not be any sudden large-scale changes in
the allocation of a Portfolio's investments among Underlying Smith
Barney Funds. The Cardinal Fund is not designed as a market timing
vehicle, but rather as a simple and conservative approach to helping
investors meet retirement and other long-term goals.
Investment Objectives and Management Policies
The Cardinal Fund is an open-end, non-diversified,
management investment company that currently offers five managed investment
portfolios. Each Portfolio seeks to achieve its investment objective by
investing within specified ranges among Underlying Smith Barney Funds.
Initially, each Portfolio will invest in the Underlying Smith Barney Funds
listed below.
A portfolio management committee consisting of senior
investment professionals of SBMFM allocates investments for each Portfolio
among Underlying Smith Barney Funds based on the outlook of SBMFM, each
Portfolio's investment manager, for the economy, financial markets and the
relative performance of the Underlying Smith Barney Funds. The allocation
among the Underlying Smith Barney Funds will be made within investment
ranges established by the Board of Directors of the Cardinal Fund which
designate minimum and maximum percentages for each of the Underlying Smith
Barney Funds.
The Aggressive Portfolio's investment objective is to seek
capital appreciation. The Growth Portfolio's investment objective is to seek
long-term growth of capital. The Traditional Portfolio's investment objective
is to seek long-term capital growth and income. The Balanced Portfolio's
investment objective is to seek a balance of growth of capital and income.
The Income Portfolio's investment objective is to seek high current income.
Each Portfolio's investment objective is fundamental and may be changed only
with the approval of a majority of the Portfolio's outstanding shares.
There can be no assurance that any Portfolio's investment objective will be
achieved.
<PAGE>
In investing in Underlying Smith Barney Funds, the Portfolios seek
to maintain different allocations between equity funds and fixed income
funds (including money market funds) depending on a Portfolio's investment
objective. Allocating investments between equity funds and fixed income
funds permits each Portfolio to attempt to optimize performance consistent
with its investment objective. The tables below illustrate the initial
equity/fixed income fund allocation targets and ranges for each Portfolio:
<TABLE>
<CAPTION>
Equity/Fixed Income Fund Range (Percent of Each Portfolio's Net Assets)
Aggressive Portfolio Growth Portfolio
<S> <C> <C> <C> <C> <C>
Type of Fund Target Range Type of Fund Target Range
------------ ------ ----- ------------ ------ -----
Equity 80% 70%-90% Equity 70% 60%-80%
Fixed Income 20% 10%-30% Fixed Income 30% 20%-40%
<CAPTION>
Traditional Portfolio Balanced Portfolio
Type of Fund Target Range Type of Fund Target Range
------------ ------ ----- ------------ ------ -----
Equity 60% 50%-70% Equity 50% 40%-60%
Fixed Income 40% 30%-50% Fixed Income 50% 40%-60%
</TABLE>
<TABLE>
<CAPTION>
Income Portfolio
<S> <C> <C>
Type of Fund Target Range
----------- ----- ------
Equity 30% 20%-40%
Fixed Income 70% 60%-80%
The Portfolios invest their assets in the Underlying Smith Barney
Funds listed below within the ranges indicated.
<PAGE>
- ---------------------------------------------------------------------------------------------------------------------
Investment Range (Percent of Each Portfolio's Net Assets)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Aggressive Growth Traditional Balanced Income
Underlying Smith Barney Fund Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Smith Barney Aggressive Growth Fund Inc. 10-25% 0-15% 0-10% -- --
Smith Barney Appreciation Fund Inc. 0-20% 10-30% 0-20% 0-20% --
Smith Barney Equity Funds: --
Smith Barney Growth and Income Fund 0-20% 0-20% 10-20% 5-20%
Smith Barney Fundamental Value Fund Inc. 0-20% 10-30% 0-20% 0-20% --
Smith Barney Funds, Inc.:
Income and Growth Portfolio -- 20% 10-20% 5-20% 5-20%
Short-Term U.S. Treasury Securities -- 0-15% 0-15% 5-20% 5-20%
Portfolio
Smith Barney Income Funds:
Smith Barney High Income Fund 5-20% 5-20% 0-15% 0-15% 0-20%
Smith Barney Utilities Fund -- 0-20% 0-15% 5-20% 5-20%
Smith Barney Premium Total Return Fund -- -- 0-20% 5-20% 5-25%
Smith Barney Convertible Fund -- -- 0-15% 5-20% 5-15%
Smith Barney Diversified Strategic -- -- 5-20% 5-25% 10-30%
Income Fund
Smith Barney Investment Funds Inc.:
Smith Barney Managed Growth Fund 0-20% 10-30% 0-15% 0-15% --
Smith Barney Special Equities Fund 10-25% 0-15% 0-10% -- --
Smith Barney Government Securities Fund 0-20% 0-20% 0-20% 0-20% 5-20%
Smith Barney Investment Grade Bond Fund 0-20% 0-15% -- -- --
Smith Barney Managed Governments Fund Inc. -- 0-15% 5-20% 5-20% 5-25%
Smith Barney Money Funds, Inc.: 0-20% 0-20% 0-20% 0-25% 0-30%
Cash Portfolio
Smith Barney World Funds, Inc.:
International Equity Portfolio 10-25% 5-20% 5-15% 0-15% 0-10%
Emerging Markets Portfolio 0-20% -- -- -- --
International Balanced Portfolio 0-15% 0-10% 0-10% 0-10% 0-10%
Global Government Bond Portfolio 0-15% 0-15% 0-15% 0-15% 0-20%
</TABLE>
The Underlying Smith Barney Funds have been selected to represent
a broad spectrum of investment options for the Portfolios. The equity/fixed
income ranges and the investment ranges are based on the degree to which the
Underlying Smith Barney Funds selected are expected in combination to be
appropriate for a Portfolio's particular investment objective. If, as a
result of appreciation or depreciation, the percentage of a Portfolio's
assets invested in an Underlying Smith Barney Fund exceeds or is less than the
applicable percentage limitations set forth above, SBMFM will consider, in
its discretion, whether to reallocate the assets of the Portfolio to comply
with the foregoing percentage limitations. The particular Underlying Smith
Barney Funds in which each Portfolio may invest, the equity/fixed income
fund targets and ranges and the investment ranges applicable to each
Underlying Smith Barney Fund may be changed from time to time by the
Cardinal Fund's Board of Directors without the approval of the
Portfolio's shareholders.
Each Portfolio may invest its cash reserves in the Cash Portfolio of
Smith Barney Money Funds Inc. A reserve position provides flexibility in
meeting redemptions, expenses and the timing of new investments, and
serves as a short-term defense during periods of unusual volatility.
For information about the investment objectives of each of
the Underlying Smith Barney Funds and investment techniques and the risks
involved
<PAGE>
in the Underlying Smith Barney Funds, please refer to "Description of
the Underlying Smith Barney Funds", the Appendix to this Prospectus, the
Statement of Additional Information and the prospectus for each of the
Underlying Smith Barney Funds.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Non-Diversified Investment Company. The Cardinal Fund is
a "nondiversified" investment company for purposes of the Investment Company
Act of 1940, as amended (the "1940 Act"), because it invests in the
securities of a limited number of mutual funds. However, the Underlying
Smith Barney Funds themselves are diversified investment companies (with
the exception of the Global Government Bond Portfolio, the International
Balanced Portfolio and the Emerging Markets Portfolio). The Cardinal Fund
intends to qualify as a diversified investment company for the purposes
of Subchapter M of the Internal Revenue Code.
Investing in Underlying Smith Barney Funds. The investments of
each Portfolio are concentrated in the Underlying Smith Barney Funds,
so each Portfolio's investment performance is directly related to the
investment performance of the Underlying Smith Barney Funds held by it. The
ability of each Portfolio to meet its investment objective is directly related
to the ability of the Underlying Smith Barney Funds to meet their
objectives as well as the allocation among those Underlying Smith Barney
Funds by SBMFM. There can be no assurance that the investment objective of
any Portfolio or any Underlying Smith Barney Fund will be achieved.
Affiliated Persons. The officers and directors of the Cardinal Fund
and SBMFM, the investment manager of the Portfolios, presently serve as
officers, directors and investment adviser, respectively, of many of the
Underlying Smith Barney Funds. Therefore, conflicts may arise as these
persons fulfill their fiduciary responsibilities to the Portfolios and the
Underlying Smith Barney Funds.
Investment Practices of Underlying Smith Barney Funds. In addition
to their principal investments, certain Underlying Smith Barney Funds may
invest a portion of their assets in foreign securities; enter into
forward currency transactions; lend their portfolio securities; enter into
stock index, interest rate and currency futures contracts, and options on
such contracts; engage in options transactions; make short sales;
purchase zero coupon bonds and payment-in-kind bonds; purchase restricted
and illiquid securities; enter into forward roll transactions; purchase
securities on a when-issued or delayed delivery basis; enter into
repurchase or reverse repurchase agreements; borrow money; and engage in
various other investment practices.
High Yield Securities. Each of the Portfolios also may invest in
an Underlying Smith Barney Fund which invests primarily in high yield, high
risk securities. As a result, the Portfolios may be subject to some of
the risks resulting from high yield investing. Further, each of the
Portfolios may invest in Underlying Smith Barney Funds that invest in
medium grade bonds. If these
<PAGE>
bonds are downgraded, the Portfolios will consider whether to increase
or decrease their investment in the affected Underlying Smith Barney Fund.
Further information on these investment policies and practices can be
found under "Description of the Underlying Smith Barney Funds," in the
Appendix to this Prospectus and in the Statement of Additional
Information as well as the prospectus of each Underlying Smith Barney Fund.
Concentration. Each Portfolio other than the Aggressive Portfolio
may invest in an Underlying Smith Barney Fund that concentrates its
investments in the utilities industry. Under certain unusual circumstances,
this could result in those Portfolios being indirectly concentrated in this
industry. If this were to occur, the relevant Portfolios would consider
whether to maintain or change its investment in that Underlying Smith Barney
Fund.
Market and Economic Factors. The Portfolios' share prices and
yields will fluctuate in response to various market and economic factors
related to both the stock and bond markets. All Portfolios may invest in
mutual funds that in turn invest in international securities and thus are
subject to additional risks of these investments, including changes in foreign
currency exchange rates and political risk.
PORTFOLIO TURNOVER
Each Portfolio's turnover rate is not expected to be exceed
25% annually. A Portfolio may purchase or sell securities to: (a)
accommodate purchases and sales of its shares, (b) change the percentages
of its assets invested in each of the Underlying Smith Barney Funds in
response to market conditions, and (c) maintain or modify the allocation
of its assets between equity and fixed income funds and among the Underlying
Smith Barney Funds within the percentage limits described above.
INVESTMENT RESTRICTIONS
In addition to the investment objectives of each Portfolio,
the Cardinal Fund has adopted restrictions with respect to each Portfolio
that may not be changed without approval of a majority of the Portfolio's
outstanding shares. The fundamental investment restrictions imposed by the
Cardinal Fund prohibit each Portfolio from, among other things: (i)
borrowing money except from banks for temporary or emergency purposes,
including the meeting of redemption requests in an amount not exceeding
33-1/3% of the value of the Portfolio's total assets (including the amount
borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made and (ii) making loans to others,
except through the purchase of portfolio securities consistent with its
investment objective and policies and repurchase agreements.
Certain other investment restrictions, including
fundamental restrictions as well as restrictions that may be changed without
a shareholder vote, adopted by the Cardinal Fund are described in the
Statement of Additional Information.
<PAGE>
Description of Underlying Smith Barney Funds
The following is a concise description of the investment objectives
and practices for each of the Underlying Smith Barney Funds in which the
Portfolios may invest. There can be no assurance that the investment
objectives of the Underlying Smith Barney Funds will be met. Additional
information regarding the investment practices of the Underlying Smith
Barney Funds is located in the Appendix to this Prospectus, in the Statement
of Additional Information and in the prospectus of each of the Underlying
Smith Barney Funds. No offer is made in this Prospectus of any of the
Underlying Smith Barney Funds.
EQUITY FUNDS The following Underlying Smith Barney Funds are funds
that invest primarily in equity securities.
Smith Barney Aggressive Growth Fund Inc. seeks capital appreciation
by investing primarily in common stock of companies the Fund's investment
adviser believes are experiencing, or have the potential to experience,
growth in earnings that exceed the average earnings growth rate of
companies whose securities are included in the Standard & Poor's Daily Price
Index of 500 Common Stocks (the "S&P 500"), a weighted index which measures
the aggregate change in market value of 400 industrials, 60 transportation
stocks and utility companies and 40 financial issues. SBMFM focuses its
stock election for the Fund on a diversified group of small- or medium-sized
emerging growth companies that have passed their "start-up" phase and show
positive earnings and the prospect of achieving significant profit gains
in the two to three years after the Fund acquires their stocks. These
companies generally may be expected to benefit from new technologies,
techniques, products or services or cost-reducing measures, and may be
affected by changes in management, capitalization or asset deployment,
government regulations or other external circumstances.
Although SBMFM anticipates that the assets of the Fund ordinarily
will be invested primarily in common stocks of U.S. companies, the Fund may
invest in convertible securities, preferred stocks, securities of
foreign issuers, warrants and restricted securities. The Fund also is
authorized to borrow up to 33-1/3% of its total assets less liabilities for
leveraging purposes. Securities of the kinds of companies in which the
Fund invests may be subject to significant price fluctuation and above
average risk.
Smith Barney Appreciation Fund Inc. seeks long-term appreciation
of shareholders' capital. The Fund attempts to achieve its investment
objective by investing primarily in equity securities (consisting of common
stocks, preferred stocks, warrants, rights and securities convertible into
common stocks) which are believed to afford attractive opportunities for
investment appreciation. The core holdings of the Fund are blue chip
companies that are dominant in their industries; however, the same time,
the Fund may hold securities of companies with prospects of sustained
earnings growth and/or companies with a cyclical earnings record if it is
felt these offer attractive investment opportunities. Typically, the Fund
invests in middle- and larger-sized companies, though it does invest in
smaller companies whose securities may reasonably be expected to appreciate.
The Fund's investments are spread broadly among different industries.
The Fund may hold issues traded over-the-counter as well as those listed on
one or more national securities exchanges, and the Fund may make
investments in foreign securities although management intends to limit
such investments to 10% of the Fund's assets.
<PAGE>
Smith Barney Fundamental Value Fund Inc.'s investment objective
is long-term capital growth. Current income is a secondary objective. The
Fund seeks to achieve its primary objective by investing in a diversified
portfolio of common stocks and common stock equivalents and, to a lesser
extent, in bonds and other debt instruments. The Fund's investment
emphasis is on securities which are undervalued in the marketplace and,
accordingly, have above-average potential for capital growth. In general,
the Fund invests in securities of companies which are temporarily
unpopular among investors but which SBMFM regards as possessing
favorable prospects for earnings growth and/or improvements in the
value of their assets and, consequently, as having a reasonable
likelihood of experiencing a recovery in market price.
Smith Barney Special Equities Fund, an investment portfolio of
Smith Barney Investment Funds, Inc., seeks long-term capital appreciation by
investing in equity securities (common stocks or securities which are
convertible into or exchangeable for such stocks, including warrants) which
SBMFM believes to have superior appreciation potential. The Fund invests
primarily in equity securities of secondary growth companies, generally not
within the S&P 500, as identified by SBMFM. These companies may not have
reached a fully mature stage of earnings growth, since they may still be in
the developmental stage, or may be older companies which appear to be
entering a new stage of more rapid earnings progress due to factors
such as management change or development of new technology, products or
markets. A significant number of these companies may be in technology areas,
including health care related sectors, and may have annual sales of less than
$300 million. The Fund may also choose to invest in some relatively
unseasoned stocks, i.e., securities issued by companies whose market
capitalization is under $100 million. Investing in smaller, newer
issuers generally involves greater risk than investing in larger, more
established issuers.
Smith Barney Managed Growth Fund, an investment portfolio of
Smith Barney Investment Funds, Inc., has as its investment objective long
term growth of capital. The Fund attempts to achieve its objective by
investing primarily in undervalued or out of favor common stock and other
securities, including debt securities which are convertible into common stock
and which are currently price depressed. Such securities might typically
be valued at the low end of their 52-week trading range. Although under
normal circumstances the Fund's portfolio will primarily consist of these
securities, the Fund may also invest in preferred stocks and warrants
when SBMFM perceives an opportunity for capital growth from such securities.
The Income and Growth Portfolio, an investment portfolio of
Smith Barney Funds, Inc., seeks current income and long-term growth of
capital. The Fund invests primarily in common stocks offering a current
return from dividends and will also normally include some interest-paying
debt obligations (such as U.S. government obligations, investment grade
bonds and debentures) and high quality short-term debt obligations (such as
commercial paper and repurchase agreements collateralized by U.S. government
securities with broker/dealers or other financial institutions, including
the Fund's custodian) and may also purchase preferred stocks and
convertible securities. Temporary defensive investments or a higher
percentage of debt securities may be held when deemed advisable by SBMFM,
the Fund's adviser. In the selection of common stock investments,
emphasis is generally placed on issues with established dividend records as
well as potential for price appreciation. From time to time, however, a
portion of the assets may be invested in non-dividend paying stocks. The Fund
may make investments in foreign securities, though management currently
intends to limit such investments to 5% of the Fund's assets, and an
additional 10% of its assets may be invested in sponsored ADRs
representing shares in foreign securities that are traded in U.S. securities
markets.
<PAGE>
Smith Barney Growth and Income Fund, an investment portfolio of
Smith Barney Equity Funds, seeks long-term capital growth and income by
investing in income producing equity securities, including dividend-paying
common stocks, securities that are convertible into common stocks and
warrants. Consistent with data used in developing and maintaining
quantitative investment criteria developed by SBMFM to evaluate investment
decisions, the Fund expects to invest primarily in domestic companies of
varying sizes, generally with capitalizations exceeding $250 million in a wide
range of industries. The Fund may also invest up to 20% in the securities
of foreign issuers, including ADRs or European Depository Receipts.
Under normal market conditions, the Fund will invest substantially all,
but not less than, 65% of its assets in equity securities. The Fund may
invest the remainder of its assets in high grade money market
instruments in order to develop income, as well as in corporate bonds
and mortgage related securities that are rated investment grade or are
deemed by SMBFM to be of comparable quality and in U.S. government securities.
Smith Barney Premium Total Return Fund, an investment portfolio
of Smith Barney Income Funds, seeks to provide shareholders with total
return, consisting of long-term capital appreciation and income, by investing
primarily in a diversified portfolio of dividend-paying common stocks.
The Fund also purchases put and call options and writes covered put and
call options on securities it holds and on stock indexes primarily as
a hedge to reduce investment risk. Because the Fund seeks total return by
emphasizing investments in dividend-paying common stocks, it will not
have as much investment flexibility as total return funds which may pursue
their objective by investing in both income and equity stocks without such
an emphasis. The Fund also may invest up to 10% of its assets in: (a)
securities rated less than investment grade by Moody's or S&P or unrated
securities of comparable quality; (b) interest-paying debt securities,
such as U.S. government securities; and (c) other securities, including
convertible bonds, convertible preferred stock and warrants.
The Emerging Markets Portfolio, an investment portfolio of Smith
Barney World Funds, Inc., seeks long term capital appreciation on its assets
through a portfolio invested primarily in securities of emerging
country issuers (consisting of dividend and non-dividend paying common
stocks, preferred stocks, convertible securities and rights and warrants to
such securities). The Fund will also invest in debt securities having
a high potential for capital appreciation, especially in countries where
direct equity investment is not permitted. Under normal conditions, at
least 70% of the Fund's assets will be
<PAGE>
invested in equity securities. For purposes of its investment objective,
the Fund considers as "emerging" all countries other than the United States,
Canada, Ireland, the United Kingdom, Sweden, Norway, Finland, Denmark,
Holland, Germany, Switzerland, Belgium, France, Italy, Spain and
Japan. The Fund is a non-diversified portfolio, but will generally
invest its assets broadly among countries and will normally have at least 65%
of its assets invested in issuers in not less than three different countries.
The Fund also may invest in debt securities of issuers in
countries having smaller capital markets. Capital appreciation in debt
securities may arise as a result of a favorable change in relative foreign
exchange rates, in relative interest rate levels, or in the creditworthiness
of issuers. The Fund will not seek to benefit from anticipated short-term
fluctuations in currency exchange rates. The Fund may invest in debt
securities with relatively high yields (as compared to other debt
securities meeting the Fund's investment criteria), notwithstanding that
the Fund may not anticipate that such securities will experience substantial
capital appreciation. The Fund also may invest in debt securities issued or
guaranteed by foreign governments (including foreign states, provinces and
municipalities) or their agencies and instrumentalities, issued or
guaranteed by supranational organizations or issued by foreign
corporations or financial institutions.
The International Equity Portfolio, an investment portfolio of
Smith Barney World Funds, Inc., seeks a total return on its assets from
growth of capital and income. Under normal market conditions, the Fund
invests at least 65% of its assets in a diversified portfolio of equity
securities consisting of dividend and non-dividend paying common stock,
preferred stock, convertible debt and rights and warrants to such securities
and up to 35% of the Fund's assets in bonds, notes and debt securities
(consisting of securities issued in the Eurocurrency markets or
obligations of the U.S. or foreign governments and their political
subdivisions) of established non-U.S. issuers. Investments may be made for
capital appreciation or for income or any combination of both for the
purpose of achieving a higher overall return than might otherwise be
obtained solely from investing for growth of capital or for income.
There is no limitation on the percent or amount of the Fund's assets which
may be invested for growth or income and, therefore, from time to time the
investment emphasis may be placed solely or primarily on growth of capital or
solely or primarily on income. The Fund may borrow up to 25% of the value of
its assets for investment purposes, which involves certain risk
considerations.
The Fund will generally invest it assets broadly among countries
and will normally have represented in the portfolio business activities in
not less than three different countries. The Fund will normally invest at
least 65% of its assets in companies organized or governments located in
any area of the world other than the U.S. However, under unusual economic or
market conditions as determined by the investment adviser, for defensive
purposes the Fund may temporarily invest all or a major portion of its
assets in U.S. government securities or in debt or equity securities of
companies incorporated in and having their principal business activities in
the U.S.
<PAGE>
FIXED INCOME FUNDS The following Underlying Smith Barney Funds
invest primarily in fixed income securities and includes the money market
fund in which each Portfolio may invest and which serves as the cash reserve
portion of each Portfolio.
Smith Barney High Income Fund, an investment portfolio of the
Smith Barney Income Funds, seeks to provide shareholders with high current
income. Although growth of capital is not an investment objective of the
Fund, SBMFM may consider potential for growth as one factor, among
others, in selecting investments for the Fund. The Fund will seek high
current income by investing, under normal circumstances, at least 65% of
its assets in high-yielding corporate bonds, debentures and notes
denominated in U.S. dollars or foreign currencies. Up to 40% of the Fund's
assets may be invested in fixed-income obligations of foreign issuers,
and up to 20% of its assets may be invested in common stock or other
equity-related securities, including convertible securities, preferred
stock, warrants and rights. Securities purchased by the Fund generally will
be rated in the lower rating categories of recognized rating agencies, as low
as Caa by Moody's or D by S&P, or in unrated securities that SBMFM deems
of comparable quality. However, the Fund will not purchase securities
rated lower than B by both Moody's and S&P unless, immediately after such
purchase, no more than 10% of its total assets are invested in such
securities. The Fund may hold securities with higher ratings when the
yield differential between low-rated and higher-rated securities narrows and
the risk of loss may be reduced substantially with only a relatively small
reduction in yield. The Fund also may invest in higher-rated securities when
SBMFM believes that a more defensive investment strategy is appropriate in
light of market or economic conditions.
Smith Barney Investment Grade Bond Fund, an investment portfolio
of Smith Barney Investment Funds Inc., seeks to provide as high a level of
current income as is consistent with prudent investment management and
preservation of capital. Except when in a temporary defensive investment
position, the Fund intends to maintain at least 65% of its assets invested in
bonds. The Fund seeks to achieve its objective by investing in any of the
following securities: corporate bonds rated Baa or better by Moody's or
BBB or better by S&P; U.S. government securities; commercial paper issued
by domestic corporations and rated Prime-1 or Prime-2 by Moody's or A-1
or A-2 by S&P, or, if not rated, issued by a corporation having an
outstanding debt issue rated Aa or better by Moody's or AA or better by S&P;
negotiable bank certificates of deposit and bankers' acceptances issued
by domestic banks (but not their foreign branches) having total assets in
excess of $1 billion; and high-yielding common stocks and warrants. A
reduction in the rating of a security does not require the sale of the
security by the Fund.
<PAGE>
Smith Barney Government Securities Fund, an investment portfolio
of Smith Barney Investment Funds Inc., seeks high current return by
investing in obligations of, or guaranteed by, the U.S. government,
its agencies or instrumentalities (including, without limitation,
Treasury bills and bonds, mortgage participation certificates issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") and mortgage-backed
securities issued by the Government National Mortgage Association ("GNMA").
The Fund may invest up to 5% of its net assets in U.S. government
securities for which the principal repayment at maturity, while paid in
U.S. dollars, is determined by reference to the exchange rate between the U.S.
dollar and the currency of one or more foreign countries. In addition, the
Fund may borrow money (up to 25% of its total assets) to increase its
investments, thereby leveraging its portfolio and exaggerating the effect on
net asset value of any increase or decrease in the market value of the Fund's
securities. Except when in a temporary defensive investment position, the Fund
intends to maintain at least 65% of its assets invested in U.S. government
securities (including futures contracts and options thereon and options
relating to U.S. government securities).
The Short-Term U.S. Treasury Portfolio, an investment portfolio
of Smith Barney Funds, Inc., seeks current income, preservation of
capital and liquidity. The Fund seeks to achieve its objective by investing
its assets in U.S. Treasury securities backed by the full faith and
credit of the U.S. Government. Shares of the Fund are not issued, insured
or guaranteed, as to value or yield, by the U.S. Government or its agencies
or instrumentalities. In an effort to minimize fluctuations in market value
of its portfolio securities, the Fund is expected to maintain a
dollar-weighted average maturity of approximately three years. Pending
direct investment in U.S. Treasury debt securities, the Fund may enter
into repurchase agreements secured by such securities in an amount up to
10% of the value of its total assets. The Fund may, to a limited degree,
engage in short-term trading to attempt to take advantage of short-term
market variations, or may dispose of a portfolio security prior to its
maturity if it believes such disposition advisable or it needs to generate
cash to satisfy redemptions.
Smith Barney Managed Governments Fund Inc. seeks high current
income consistent with liquidity and safety of capital. The Fund invests
substantially all of its assets in U.S. government securities and, under
normal circumstances, the Fund is required to invest at least 65% of its
assets in such securities. The Fund's portfolio of U.S. government
securities consists primarily of mortgage-backed securities issued or
guaranteed by GNMA, the Federal National Mortgage Association ("FNMA")
and FHLMC. Assets not invested in such mortgage-backed securities are
invested primarily in direct obligations of the United States Treasury and
other U.S. government securities. The weighted average maturity of the
Fund's portfolio will vary from time to time and the Fund may invest in U.S.
government securities of all maturities: short-term, intermediate-term and
long-term. The Fund may invest without limit in securities of any issuer of
U.S. government securities, and may invest up to an aggregate of 15% of its
total assets in securities with contractual or other restrictions on resale
and other instruments that are not readily marketable (such as
repurchase agreements with maturities in excess of seven days). The Fund
may invest up to 5% of its net assets in U.S. government securities for
which the principal repayment at maturity, while paid in U.S. dollars, is
determined by reference to the exchange rate between the U.S. dollar and the
currency of one or more foreign countries.
<PAGE>
Smith Barney Diversified Strategic Income Fund, an investment
portfolio of Smith Barney Income Funds, seeks high current income
primarily through investment in fixed-income securities. The Fund
attempts to achieve its objective by allocating and reallocating its
assets primarily among various types of fixed-income securities selected
by Greenwich Street Advisors (a division of SBMFM) based on its analysis of
economic and market conditions and the relative risks and opportunities
of particular securities. The types of fixed-income securities among
which the Fund's assets will be primarily allocated are: obligations
issued or guaranteed as to principal and interest by the United States
government; mortgage-related securities issued by various governmental and
non-governmental entities; domestic and foreign corporate securities; and
foreign government securities. Under normal conditions, at least 65% of the
Fund's assets will be invested in fixed-income securities, which includes
non-convertible preferred stocks. The Fund generally will invest in
intermediate- and long-term fixed-income securities with the result that,
under normal market conditions, the weighted average maturity of the Fund's
securities is expected to be between five and 12 years.
Mortgage-related securities in which the Fund may invest
include mortgage obligations collateralized by mortgage loans or mortgage
pass-through certificates. Mortgage-related securities held by the Fund
generally will be rated no lower than Aa by Moody's or AA by S&P or, if not
rated, of equivalent investment quality as determined by Greenwich Street
Advisors. The Fund may invest up to 35% of its assets in corporate
fixed-income securities of domestic issuers rated Ba or lower by Moody's
or BB or lower by S&P or in nonrated securities deemed by Greenwich Street
Advisors to be of comparable quality. The Fund may invest in fixed-income
securities rated as low as Caa by Moody's or CCC by S&P.
In general, the Fund may invest in debt securities issued by
foreign governments or any of their political subdivisions that are considered
stable by Global Capital Management, the Fund's subadviser. Up to 5% of the
Fund's assets may be invested in foreign securities issued by countries
with developing economies. The Fund may also invest in securities issued
by supranational organizations.
The Global Government Bond Portfolio, an investment portfolio of
Smith Barney World Funds, Inc., seeks as high a level of current income and
capital appreciation as is consistent with its policy of investing
principally in high quality bonds of the U.S. and foreign governments.
Under normal market conditions, the Fund invests at least 65% of its total
assets in bonds issued or guaranteed by the U.S. or foreign governments
(including foreign states, provinces, cantons and municipalities) or
their agencies, authorities or instrumentalities denominated in various
currencies, including U.S. dollars, or in multinational currency units, such
as the European Currency Unit. Except with respect to government securities
of less developed countries, the Fund invests in foreign government
securities only if the issue or the issuer thereof is rated in the two
highest rating categories by Moody's or S&P, or if unrated, are of comparable
quality in the determination of the investment adviser.
<PAGE>
Under normal circumstances the Fund may invest up to 35% of its
total assets in debt obligations (including debt obligations convertible
into common stock) of U.S. or foreign corporations and financial
institutions and supranational entities. Any non-governmental investment
would be limited to issues that are rated A or better by Moody's or S&P, or if
not rated, determined to be of comparable quality.
The Fund is a non-diversified portfolio and currently
contemplates investing primarily in obligations of the U.S. and of developed
nations (i.e., industrialized countries) which the investment adviser
believes to pose limited credit risks. These countries currently are
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Ireland,
Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal,
Spain, Sweden, Switzerland, the United Kingdom and Germany. Investments may
be made from time to time in government securities of less developed
countries (i.e., Argentina, Brazil, Chile, Mexico and Venezuela). Historical
experience indicates that markets of less developed countries have been more
volatile than the markets of developed countries. The investment adviser
does not intend to invest more than 10% of the Fund's total assets in
government securities of less developed countries and will not invest more
than 5% of its assets in the government securities of any one such
country. Such investments will be made only in investment grade securities
(rated at least Baa by Moody's or BBB by S&P), or if unrated, securities
which are judged to be of comparable quality by the investment adviser. Under
normal market conditions the Portfolio invests at least 65% of its assets
in issues of not less than three different countries; issues of any one
country (other than the United States) will represent no more than 45% of the
Portfolio's total assets.
The Cash Portfolio is an investment portfolio of Smith Barney
Money Funds, Inc., a money market fund that seeks maximum current
income and preservation of capital. The Cash Portfolio may invest in
domestic and foreign money market securities consisting of bank
obligations and high quality commercial paper, corporate obligations and
municipal obligations, in addition to U.S. government obligations and
related repurchase agreements. The Fund intends to maintain at least 25% of
its total assets invested in obligations of domestic and foreign banks.
Shares of the Fund are not insured or guaranteed by the U.S. government.
The Fund has adopted certain investment policies to assure that, to
the extent reasonably possible, the Fund's price per share will not change
from $1.00, although no assurance can be given that this goal will be
achieved on a continuous basis. In order to minimize fluctuations in market
price, the Fund will not purchase a security with a remaining maturity of
greater than 13 months or maintain a dollar-weighted average portfolio
maturity in excess of 90 days (securities used as collateral for repurchase
agreements are not subject to these restrictions).
<PAGE>
The Fund's investments will be limited to U.S.
dollar-denominated instruments that have received the highest rating from the
"Requisite NRSROs", securities of issuers that have received such rating
with respect to other short-term debt securities and comparable unrated
securities. "Requisite NRSROs" means (a) any two nationally recognized
statistical ratings organizations ("NRSROs") that have issued a rating with
respect to a security or class of debt obligations of an issuer, or (b) one
NRSRO, if only one NRSRO has issued such a rating at the time that the Fund
acquires the security. The NRSROs currently designated as such by the SEC
are Standard & Poor's Corporation ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Fitch Investors Services, Inc., Duff and Phelps Inc., IBCA
Limited and its affiliate, IBCA, Inc. and Thomson BankWatch.
For purposes of the equity/fixed income fund allocation targets
and ranges applicable to each Portfolio (see page 12 above), each of the
following Underlying Smith Barney Fund, is considered to be an equity fund
with respect to 50% of a Portfolio's investment in such Fund and an income
fund with respect to the remaining 50% of such Portfolio's investment.
The Smith Barney Convertible Fund an investment portfolio of
Smith Barney Income Funds, seeks current income and capital appreciation by
investing in convertible securities and in combinations of nonconvertible
fixed-income securities and warrants or call options that together
resemble convertible securities ("synthetic convertible securities"). Under
normal circumstances, the Fund will invest at least 65% of its assets in
convertible securities, but is not required to sell securities to conform
to this limitation and may retain on a temporary basis securities received
upon the conversion or exercise of such securities. The Fund will not invest
in fixed-income securities that are rated lower than B by Moody's or S&P or,
if unrated, deemed by SMBFM to be comparable to securities rated lower than
B. The Fund may invest up to 35% of its assets in synthetic convertible
securities and in equity and debt securities that are not convertible into
common stock and, for temporary defensive purposes, may invest in these
securities without limitation.
The Smith Barney Utilities Fund, an investment portfolio of
Smith Barney Income Funds, seeks current income by investing in equity
and debt securities of companies in the utility industry. Long-term capital
appreciation is a secondary objective of the Fund. The utility industries
are deemed to be comprised of companies principally engaged (that is, at least
50% of a company's assets, gross income or net profits results from
utility operations or the company is regulated as a utility by a government
agency or authority) in the manufacture, production, generation,
transmission and sale of electric and gas energy and companies principally
engaged in the communications field, including entities such as telephone,
telegraph, satellite, microwave and other companies regulated by
governmental agencies as utilities that provide communication facilities
for the public benefit, but not including those in public
broadcasting. The Fund will invest primarily in utility equity and
debt securities that have a high expected rate of return as determined by
SBMFM. Under normal market conditions, the Fund will invest at least 65% of
its assets in such securities. The Fund may invest up to 35% of its assets
in equity and debt securities of non-utility companies believed to
afford a reasonable opportunity for achieving the Fund's investment
objectives. The Fund will invest in investment grade debt securities, but
may invest up to 10% of its assets in securities rated BB or B by S&P or Ba
or B by Moody's whenever SBMFM believes that the incremental yield on such
securities is advantageous to the Fund in comparison to the additional risk
involved.
<PAGE>
The International Balanced Portfolio, an investment portfolio of
Smith Barney World Funds, Inc., seeks a competitive total return on its
assets from growth of capital and income through a portfolio invested
primarily in securities of established non-U.S. issuers. The Fund may borrow
up to 15% of the value of its assets for investment purposes, which involves
certain risks. Under normal market conditions, the Fund will invest its
assets in an international portfolio of equity securities (consisting of
dividend and non-dividend paying common stocks, preferred stocks,
convertible securities, ADRs and rights and warrants to such securities)
and debt securities (consisting of corporate debt securities, sovereign debt
instruments issued by governments or governmental entities, including
supranational organizations and U.S. and foreign money market
instruments). The Fund attempts to achieve a balance between equity and debt
securities. However, the proportion of equity and debt held by the Fund at
any one time will depend on SBMFM's views on current market and
economic conditions. Under normal conditions, no more than 70%, nor less than
30%, of the Fund's assets will be invested in either equity or debt
securities; however, there is no limitation on the percent of amount of the
Fund's assets which may be invested for growth or income.
The Fund is a non-diversified portfolio but will generally invest
its assets broadly among countries and will normally have at least 65% of its
assets invested in business activities in not less than three different
countries outside of the U.S. The Fund will invest in a broad range of
industries and sectors and will mainly invest in securities issued by
companies with market capitalization of at least $50,000,000. The Fund
may invest in companies organized or governments located in any area of
the world. However, under unusual economic or market conditions as
determined by the investment adviser, for defensive purposes the Fund may
temporarily invest all or a major portion of its assets in U.S. government
securities, debt or equity securities of companies incorporated in and having
their principal business activities in the U.S. or in U.S. as well as foreign
money market instruments and equivalents.
The debt securities in which the Portfolio expects to invest
will generally range in maturity from two to ten years. Debt securities of
developed foreign countries must be rated as investment grade (or deemed by
SBMFM to be of comparable quality) at the time of purchase. Debt securities
of emerging market counties may be rated below investment grade and could
include securities that are in default as to payments of principal or
interest. Up to 25% of the total assets of the Portfolio may be invested
in securities of emerging market countries.
<PAGE>
PERFORMANCE OF UNDERLYING SMITH BARNEY FUNDS
The following chart shows the average annual total returns for each
of the Underlying Smith Barney Funds in which the Portfolios may invest (other
than the Cash Portfolio of Smith Barney Money Funds Inc.) for the most
recent one-, five- and ten-year periods (or since inception if shorter) and
the 30-day yields for income-oriented funds, in each case for the period ended
____ ___, 1995.
<TABLE>
<CAPTION>
Average Annual Total Returns 30-Day Yield
(through __ _, 1995) for period
Inception Assets as of ended ___
Underlying Smith Barney Fund Date ____, 1995 One Year Five Years Ten Years ______,1995
<S> <C> <C> <C> <C> <C> <C>
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Growth and Income Fund
Smith Barney Fundamental Value Fund Inc.
Income and Growth Portfolio
Short-Term U.S. Treasury Securities
Portfolio
Smith Barney High Income Fund
Smith Barney Utilities Fund
Smith Barney Premium Total Return Fund
Smith Barney Convertible Fund
Smith Barney Diversified Strategic
Income Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Government Securities Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
International Equity Portfolio
Emerging Markets Portfolio
International Balanced Portfolio
Global Government Bond Portfolio
</TABLE>
For the seven-day period ended ___________ __, 1995, the yield for
the Cash Portfolio of Smith Barney Money Funds Inc. was __% and the effective
yield was ___%.
INVESTMENT POLICIES AND STRATEGIES OF THE UNDERLYING SMITH BARNEY FUNDS
In pursuing their investment objectives and programs, each of
the Underlying Smith Barney Funds is permitted to engage in a wide
range of investment policies. The Underlying Smith Barney Funds' risks are
determined by the nature of the securities held and the investment
strategies used by the Funds' adviser. Certain of these policies are
described below and further information about the investment policies and
strategies of the Underlying Smith Barney Funds in which the Portfolios may
invest is contained in the Appendix to this Prospectus and in the Statement
of Additional Information as well as the prospectuses of the Underlying
Smith Barney Funds. Because each Portfolio invests in the Underlying
Smith Barney Funds, shareholders of each Portfolio will be affected by these
investment policies in direct proportion to the amount of assets each
Portfolio allocates to the Underlying Smith Barney Funds pursuing such
policies.
<PAGE>
Securities of Non-U.S. Issuers. The Portfolios will each invest
in certain Underlying Smith Barney Funds that invest all or a portion of
their assets in securities of non-U.S. issuers. These include non-dollar
denominated securities traded outside the U.S. and dollar-denominated
securities traded in the U.S. (such as ADRs). Such investments involve
some special risks such as fluctuations in foreign exchange rates,
future political and economic developments, and the possible imposition
of exchange controls or other foreign governmental laws or restrictions.
In addition, with respect to certain countries, there is the possibility
of expropriation of assets, repatriation, confiscatory taxation,
political or social instability or diplomatic developments which could
adversely affect investments in those countries. There may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing, and financial
reporting standards and requirements comparable to or as uniform as those of
U.S. companies. Non-U.S. securities markets, while growing in volume,
have, for the most part, substantially less volume than U.S. markets, and
securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transaction costs
on non-U.S. securities markets are generally higher than in the U.S.
There is generally less government supervision and regulation of exchanges,
brokers and issuers than there is in the U.S. An Underlying Smith Barney
Fund might have greater difficulty taking appropriate legal action in non-U.S.
courts. Dividend and interest income from non-U.S. securities will
generally be subject to withholding taxes by the country in which the
issuer is located and may not be recoverable by the Underlying Smith Barney
Fund or a Portfolio investing in such Fund.
Options and Futures. Certain of the Underlying Smith Barney Funds
may enter into stock index, interest rate and currency futures contracts (or
options thereon) as a hedging device, or as an efficient means of
regulating their exposure to various markets. Certain of the Underlying
Smith Barney Funds may also purchase and sell call and put options.
Futures (a type of potentially high-risk derivative) are often used to
manage risk because they enable the investor to buy or sell an asset at a
predetermined price in the future. The Underlying Smith Barney Funds may
buy and sell futures and options contracts for a number of reasons including:
to manage their exposure to changes in interest rates, stock and bond prices,
and foreign currencies; as an efficient means of adjusting their overall
exposure to certain markets; to adjust the portfolio's duration; to
enhance income; and to protect the value of the portfolio securities.
Certain of the Underlying Smith Barney Funds may purchase, sell or write
call and put options on securities, financial indices, and foreign
currencies. Options and futures can be volatile investments, and involve
certain risks. If the adviser to the Underlying Smith Barney Fund applies a
hedge at an inappropriate time or judges market conditions incorrectly,
options and futures strategies may lower the Underlying Smith Barney Fund's
return. The Cardinal Fund could also experience losses if the prices of
its options and futures positions were poorly correlated with its other
investments, or if it could not close out its positions because of an
illiquid secondary market.
Debt Securities. Certain of the Underlying Smith Barney Funds may
be affected by general changes in interest rates which will result in
increases or decreases in the market value of the debt securities held by
the Funds. The market value of the fixed-income obligations in which the
Underlying Smith Barney Funds may invest can be expected to vary inversely
in relation to the changes in prevailing interest rates and also may be
affected by other market and credit factors.
<PAGE>
Certain of the Underlying Smith Barney Funds may invest only
in high-quality, high-grade or investment-grade securities. High quality
securities are those rated in the two highest categories by Moody's (Aaa or
Aa) or S&P (AAA or AA). High-grade securities are those rates in the three
highest categories by Moody's (Aaa, Aa or A) or S&P (AAA, AA or A).
Investment-grade securities are those rated in the four highest categories
by Moody's (Aaa, Aa, A or Baa) or S&P (AAA, AA, A or BBB). Securities
rated Baa or BBB may have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity of their issuers to make principal and interest payments
than is the case with higher grade securities.
Certain Underlying Smith Barney Funds may invest in securities
which are related below investment-grade; that is rated below Baa by Moody's
or BBB by S&P. Securities rated below investment grade (and comparable unrated
securities) are the equivalent of high yield, high risk bonds, commonly
known as "junk bonds." Such securities are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and involve
major risk exposure to adverse business, financial, economic or
political conditions. See the Appendix to the Statement of Additional
Information for additional information on the bond ratings by Moody's and
S&P.
Valuation of Shares
Each Portfolio's net assets value per share is determined as of
the close of regular trading on the NYSE on each day that the NYSE is
open, by dividing the value of the Portfolio's net assets attributable to
each Class by the total number of shares of the Class outstanding. The
value of each Underlying Smith Barney Fund will be its net asset value
at the time of computation. Short-term investments that have a maturity of
more than 60 days are valued at prices based on market quotations for
securities of similar type, yield and maturity. Short-term investments that
have a maturity of 60 days or less are valued at amortized cost unless
conditions dictate otherwise.
Dividends, Distributions and Taxes
DIVIDENDS AND DISTRIBUTIONS
The Cardinal Fund intends to declare monthly income dividends
on shares of the Balanced Portfolio and the Income Portfolio and annually
income dividends on shares of the Aggressive Portfolio, the Growth Portfolio
and the Traditional Portfolio. In addition, the Cardinal Fund intends to make
annual distributions of capital gains, if any, on the shares of each
Portfolio.
If a shareholder does not otherwise instruct, dividends and
capital gain distributions will be reinvested automatically in additional
shares of the same Class at net asset value, subject to no sales charge or
CDSC.
Income dividends and capital gain distributions that are invested
are credited to shareholders' accounts in additional shares at the net value
as of the close of business on the payment date. A shareholder may change
the option at any time by notifying his or her Smith Barney Financial
Consultant. Accounts held directly by First Data should notify First Data
in writing at least five business days prior to the payment date to permit
the change to be entered in the shareholder's account.
<PAGE>
The per share dividends on Class B and Class C shares of each
Portfolio may be lower than the per share dividends on Class A and
Class Y shares principally as a result of the distribution fee applicable
with respect to Class B and Class C shares. The per share dividends on
Class A shares of each Portfolio may be lower than the per share
dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any,
will be in the same amount of Class A, Class B, Class C and Class Y shares.
TAXES
Each Portfolio intends to qualify as a regulated investment
company under Subchapter M of the Code to be relieved of federal income tax on
that part of its net investment income and realized capital gains which it
pays out to its shareholders. To qualify, the Portfolio must meet certain
tests, including distributing at least 90% of its investment company taxable
income, and deriving less than 30% of its gross income from the sale or other
disposition of certain investments held for less than three months.
Dividends from net investment income and distributions of
realized short-term capital gains on the sale of securities, whether paid
in cash or automatically invested in additional shares of the same Portfolio,
are taxable to shareholders of each Portfolio as ordinary income. A
portion of each Portfolio's dividends may qualify for the dividends
received deduction for corporations. Dividends and distributions declared by
each Portfolio may also be subject to state and local taxes. Distributions
out of net long-term capital gains (i.e., net long-term capital gains in
excess of net short-term capital losses) are taxable to shareholders as
long-term capital gains. Information as to the tax status of dividends paid
or deemed paid in each calendar year will be mailed to shareholders as early
in the succeeding year as practical but not later than January 31.
Purchase of Shares
GENERAL
Each Portfolio's offers four Classes of Shares. Class A shares are
sold to investors with an initial sales charge and Class B and Class C
shares are sold without an initial sales charge but are subject to a CDSC
payable upon certain redemptions. Class Y shares are sold without an
initial charge or CDSC and are available only to investors investing a
minimum of $5,000,000. See "Prospectus Summary-Alternative Purchase
Agreements" for a discussion of factors to consider in selecting which Class
of shares to purchase.
<PAGE>
Shares may be purchased through a brokerage account maintained
with Smith Barney. Shares may also be purchased through an Introducing
Broker or an investment dealer in the selling group. In addition,
certain investors, including qualified retirement plans and certain other
institutional investors, may purchase shares directly from the Cardinal
Fund through First Data. When purchasing shares of a Portfolio, investors
must specify whether the purchase is for Class A, Class B, Class C or Class
Y shares. No maintenance fee will be charged by the Cardinal Fund.
Investors in Class A, Class B and Class C shares may open an account
by making an initial investment of at least $1,000 for each account, or $250
for an IRA or a Self-Employed Retirement Plan in a Portfolio. Investors
in Class Y shares may open an account by making an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes in a Portfolio is $25. For each
Portfolio's Systematic Investment Plan, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes is $50. There are no minimum
investment requirements in Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, Directors of the Cardinal
Fund, and their spouses and children. The Cardinal Fund reserves the right
to waive or change minimums, to decline any order to purchase its shares and
to suspend the offering of shares from time to time. Shares purchased will
be held in the shareholder's account by the Cardinal Fund's transfer
agent, First Data. Share certificates are issued only upon a shareholder's
written request to First Data.
Purchase orders received by the Cardinal Fund or Smith Barney prior
to the close of regular trading on the NYSE, on any day a Portfolio
calculates its net asset value, are priced according to the net asset value
determined on that day (the "trade date"). Orders received by dealers or
Introducing Brokers prior to the close of regular trading on the NYSE on any
day a Portfolio calculates its net asset value, are priced according to
the net asset value determined on that day, provided the order is received by
the Cardinal Fund or Smith Barney prior to Smith Barney's close of business.
Payment for Portfolio shares is due on the third business day after the trade
date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time
by purchasing shares through a service known as the Systematic Investment
Plan. Under the Systematic Investment Plan, Smith Barney or First Data is
authorized through preauthorized transfers of $50 or more to charge the
regular bank account or other financial institution indicated by the
shareholder on a monthly or quarterly basis to provide systematic
additions to the shareholder's Portfolio account. A shareholder who has
insufficient funds to complete the transfer will be charged a fee of up to
$25 by Smith Barney or First Data. The Systematic Investment Plan also
authorizes Smith Barney to apply cash held in the shareholder's Smith
Barney brokerage account or redeem the shareholder's shares of a Smith
Barney money market fund to make additions to the account. Additional
information is available from the Cardinal Fund or a Smith Barney Financial
Consultant.
<PAGE>
INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES
The sales charges applicable to purchases of Class A shares of
the Aggressive Portfolio, the Growth Portfolio and the Traditional Portfolio
are as follows:
<TABLE>
<CAPTION>
Sales Charge
Dealers'
% of Offering % of Amount Reallowance as %
Price Invested of Offering Price
Amount of Investment
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 3.00 3.09 2.70
250,000 - 499,999 2.00 2.04 1.80
500,000 and over * * *
</TABLE>
The sales charges applicable to purchases of Class A shares of
the Balanced Portfolio and the Income Portfolio are as follows:
<TABLE>
<CAPTION>
Sales Charge
Dealers' Reallowance as %
% of Offering % of Amount of Offering Price
Amount of Investment Price Invested
<S> <C> <C> <C>
Less than $25,000 4.50% 4.71% 4.05%
$25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 2.50 2.56 2.25
250,000 - 499,999 1.50 1.52 1.35
500,000 and over * * *
<FN>
* Purchases of Class A shares, which when combined with current holdings
of Class A shares offered with a sales charge equal or exceed $500,000
in the aggregate, will be made at net asset value without any
initial sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney
Financial Consultants and other dealers whose clients make purchases
of $500,000 or more. The CDSC is waived in the same circumstances in
which the CDSC applicable to Class B and Class C shares is waived. See
"Deferred Sales Charge Alternatives" and "Waivers of CDSC." </TABLE>
Members of the selling group may receive up to 90% of the sales
charge and may be deemed to be underwriters of the Cardinal Fund
as defined in the Securities Act of 1933, as amended.
The reduced sales charges shown above apply to the aggregate
of purchases of Class A shares of a Portfolio made at one time by "any
person," which includes an individual, his or her spouse and children, or a
trustee or other fiduciary of a single trust estate or single fiduciary
account. The reduced sales charge minimums may also be met by aggregating
the purchase with the net asset value of all Class A shares offered with a
sales charge held in funds sponsored by Smith Barney listed under "Exchange
Privilege."
<PAGE>
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without
a sales charge in the following circumstances: (a) sales of Class A
shares to Directors of the Cardinal Fund and employees of Travelers and its
subsidiaries, or to the spouse and children of such persons (including the
surviving spouse of a deceased Director or employee, and retired Directors or
employees), or sales to any trust, pension, profit-sharing or other
benefit plan for such persons provided such sales are made upon the
assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through
redemption or repurchase; (b) offers of Class A shares to any other
investment company in connection with the combination of such company with
the Portfolio by merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with Smith Barney), on the condition the
purchase of Class A shares is made with the proceeds of the redemption of
shares of a mutual fund which (i) was sponsored by the Financial Consultant's
prior employer, (ii) was sold to the client by the Financial Consultant
and (iii) was subject to a sales charge; (d) shareholders who have redeemed
Class A shares in a Portfolio (or Class A shares of another fund of the Smith
Barney Mutual Funds that are sold with a maximum sales charge equal to or
greater than the maximum sales charge of the Portfolio) and who wish to
reinvest their redemption proceeds in the Portfolio, provided the
reinvestment is made within 60 calendar days of the redemption; and (e)
accounts managed by registered investment advisory subsidiaries of
Travelers. In order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit verification that
the purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of a Portfolio may be purchased by "any person"
(as defined above) at a reduced sales charge or at net asset value
determined by aggregating the dollar amount of the new purchase and the
total net asset value of all Class A shares of the Portfolio and of funds
sponsored by Smith Barney that are offered with a sales charge listed under
"Exchange Privilege" then held by such person and applying the sales charge
applicable to such aggregate. In order to obtain such discount, the
purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for the reduced sales
charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
<PAGE>
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge
or purchase at net asset value will also be available to employees (and
partners) of the same employer purchasing as a group, provided each
participant makes the minimum initial investment required. The sales charge
applicable to purchases by each member of such a group will be determined
by the table set forth above under "Initial Sales Charge Alternative--Class A
Shares," and will be based upon the aggregate sales of Class A shares of
Smith Barney Mutual Funds offered with a sales charge to, and share
holdings of, all members of the group. To be eligible for such reduced
sales charges or to purchase at net asset value, all purchases must be
pursuant to an employer- or partnership-sanctioned plan meeting certain
requirements. One such requirement is that the plan must be open to specified
partners or employees of the employer and its subsidiaries, if any. Such plan
may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the
Code. Smith Barney may also offer a reduced sales charge or net asset value
purchase for aggregating related fiduciary accounts under such conditions
that Smith Barney will realize economies of sales efforts and sales related
expenses. An individual who is a member of a qualified group may also
purchase Class A shares at the reduced sales charge applicable to the group as
a whole. The sales charge is based upon the aggregate dollar value of Class A
shares offered with a sales charge that have been previously purchased and
are still owned by the group, plus the amount of the current purchase. A
"qualified group" is one which (a) has been in existence for more than six
months, (b) has a purpose other than acquiring Portfolio shares at a
discount and (c) satisfies uniform criteria which enable Smith Barney
to realize economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, must be available to arrange
for group meetings between representatives of the Portfolio and the members,
and must agree to include sales and other materials related to the Portfolio
in its publications and mailings to members at no cost to Smith Barney. In
order to obtain such reduced sales charge or to purchase at net asset value,
the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to
the discretion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or
more provides an opportunity for an investor to obtain a reduced sales
charge by aggregating investments over a 13month period, provided that
the investor refers to such Letter when placing orders. For purposes of a
Letter of Intent, the "Amount of Investment" as referred to in the preceding
sales charge table includes purchases of all Class A shares of each
Portfolio and other funds of the Smith Barney Mutual Funds offered with a
sales charge over a 13-month period based on the total amount of intended
purchases plus the value of all Class A shares previously purchased and
still owned. An alternative is to compute the 13-month period starting up to
90 days before the date of execution of a Letter of Intent. Each investment
made during the period receives the reduced sales charge applicable to the
total amount of the investment goal. If the goal is not achieved within the
period, the investor must pay the difference between the sales charges
applicable to the purchases made and the charges previously paid, or an
appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of
Intent application.
<PAGE>
Class Y Shares. A Letter of Intent may also be used as a
way for investors to meet the minimum investment requirement for Class Y
shares. Such investors must make an initial minimum purchase of $1,000,000
in Class Y shares of a Portfolio and agree to purchase a total of $5,000,000
of Class Y shares of the same Portfolio within six months from the date of
the Letter. If a total investment of $5,000,000 is not made within the
six-month period, all Class Y shares purchased to date will be transferred
to Class A shares, where they will be subject to all fees (including a
service fee of 0.25%) and expenses applicable to such Portfolio's Class
A shares, which may include a CDSC of 1.00%. Please contact a Smith
Barney Financial Consultant or First Data for further information.
DEFERRED SALES CHARGE ALTERNATIVES
CDSC Shares are sold at net asset value next determined without
an initial sales charge so that the full amount of an investor's purchase
payment may be immediately invested in a Portfolio. A CDSC, however, may be
imposed on certain redemptions of these shares. "CDSC Shares" are: (a) Class
B shares; (b) Class C shares; and (c) Class A shares which when combined
with Class A shares offered with sales charge currently held by an investor
equal or exceed $500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to the
lesser of the original cost of the shares being redeemed or their net asset at
the time of redemption. CDSC Shares that are redeemed will not be subject
to a CDSC to the extent that the value of such shares represents: (a) capital
appreciation of Portfolio assets; (b) reinvestment of dividends or capital
gain distributions; (c) with respect to Class B shares, shares redeemed
more than five years after their purchase; or (d) with respect to Class C
shares and Class A shares that are CDSC Shares, shares redeemed more than 12
months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to
a 1.00% CDSC if redeemed within 12 months of purchase. In circumstances in
which the CDSC is imposed on Class B shares, the amount of the charge will
depend on the number of years since the shareholder made the purchase
payment from which the amount is being redeemed. Solely for purposes of
determining the number of years since a purchase payment, all purchase
payments made during a month will be aggregated and deemed to have been
made on the last day of the preceding Smith Barney statement month. The
following table sets forth the rates of the charge for redemptions of Class B
shares by shareholders, except in the case of purchases by Participating
Plans, as described below. See "Purchase of Shares--Smith Barney 401(k)
Program."
<PAGE>
<TABLE>
<CAPTION>
CDSC
Applicable to Aggressive Portfolio, CDSC
Years Since Purchase Growth Portfolio and Traditional Applicable to Balanced
Payment Was Made Portfolio Portfolio and Income Portfolio
<S> <C> <C>
- ------------------------------------------- ------------------------------------------- -------------------------------------------
First 5.00% 4.50%
Second 4.00 4.00
Third 3.00 3.00
Fourth 2.00 2.00
Fifth 1.00 1.00
Sixth 0.00 0.00
Seventh 0.00 0.00
Eighth 0.00 0.00
=========================================== =========================================== ===========================================
</TABLE>
Class B shares will convert automatically to Class A shares eight
years after the date on which they were purchased and thereafter will no
longer be subject to any distribution fees. There will also be converted at
that time such proportion of Class B Dividend Shares owned by the
shareholder as the total number of his or her Class B shares converting at
the time bears to the total number of outstanding Class B shares (other than
Class B Dividend Shares) owned by the shareholder. Shareholders who held
Class B shares of Smith Barney Shearson Short-Term World Income Fund (the
"Short-Term World Income Fund") on July 15, 1994 and who subsequently
exchange those shares for Class B shares of a Portfolio will be offered the
opportunity to exchange all such Class B shares for Class A shares of such
Portfolio four years after the date on which those shares were deemed to
have been purchased. Holders of such Class B shares will be notified of the
pending exchange in writing approximately 30 days before the fourth
anniversary of the purchase date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the fourth
anniversary date. See "Prospectus Summary--Alternative Purchase
Arrangements--Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that
a redemption is made first of shares representing capital appreciation,
next of shares representing the reinvestment of dividends and capital gain
distributions and finally of other shares held by the shareholder for the
longest period of time. The length of time that CDSC Shares acquired through
an exchange have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other Smith Barney Mutual
Funds, and Portfolio shares being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital
gain distribution reinvestments in such other funds. For Federal income tax
purposes, the amount of the CDSC will reduce the gain or increase the loss,
as the case may be, on the amount realized on redemption. The amount of any
CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B
shares at $10 per share for a cost of $1,000. Subsequently, the investor
acquired 5 additional shares through dividend reinvestment. During the
fifteenth month after the purchase, the investor decided to redeem
$500 of his or her investment. Assuming at the time of the redemption
the net asset value had appreciated to $12 per share, the value of the
investor's shares would be $1,260 (105 shares at $12 per share). The CDSC
would not be applied to the amount which represents appreciation ($200) and
the value of the reinvested dividend shares ($60). Therefore, $240 of the
$500 redemption proceeds ($500 minus $260) would be charged at a rate of
4.00% (the applicable rate for Class B shares) for a total deferred sales
charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) automatic cash withdrawals in amounts equal to or less than
1.00% per month of the value of the shareholder's shares at the time the
withdrawal plan commences (see "Automatic Cash Withdrawal Plan")
(provided, however, that automatic cash withdrawals in amounts equal to or
less than 2.00% per month of the value of the shareholder's shares will be
permitted for withdrawal plans that were established prior to November 7,
1994); (c) redemptions of shares within twelve months following the death
or disability of the shareholder; (d) redemption of shares made in
connection with qualified distributions from retirement plans or IRAs
upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares in connection with a combination of the Portfolio with
any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other funds of the Smith
Barney Mutual Funds may, under certain circumstances, reinvest all or part of
the redemption proceeds within 60 days and receive pro rata credit for any
CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith
Barney in the case of shareholders who are also Smith Barney clients or by
First Data in the case of all other shareholders) of the shareholder's status
or holdings, as the case may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney
401(k) Program, which is generally designed to assist plan sponsors in the
creation and operation of retirement plans under Section 401(a) of the
Code. To the extent applicable, the same terms and conditions are offered to
all Participating Plans in the Smith Barney 401(k) Program.
Each Portfolio offers to Participating Plans Class A, Class B, Class
C and Class Y shares as investment alternatives under the Smith Barney
401(k) Program. Class A, Class B and Class C shares acquired through the
Smith Barney 401(k) Program are subject to the same service and/or
distribution fees as, but different sales charge and CDSC schedules than, the
Class A, Class B and Class C shares acquired by other investors. Similar to
those shares available to other investors, Class Y shares acquired through
the Smith Barney 401(k) Program are not subject to any service or
distribution fees or any initial sales charge or CDSC. Once a Participating
Plan has made an initial investment in the Portfolio, all of its subsequent
investments in the Portfolio must be in the same Class of shares, except as
otherwise described below.
<PAGE>
Class A Shares. Class A shares of each Portfolio are offered
without any initial sales charge to any Participating Plan that purchases
from $500,000 to $4,999,999 of Class A shares of one or more funds of the
Smith Barney Mutual Funds. Class A shares acquired through the Smith
Barney 401(k) Program are subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the
date the Participating Plan first enrolled in the Smith Barney 401(k)
Program.
Class B Shares. Class B shares of each Portfolio are offered to
any Participating Plan that purchases less than $250,000 of one or more funds
of the Smith Barney Mutual Funds. Class B shares acquired through the
Smith Barney 401(k) Program are subject to a CDSC of 3.00% of redemption
proceeds, if the Participating Plan terminates within eight years of the
date the Participating Plan first enrolled in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program, it will be offered the opportunity to exchange
all of its Class B shares for Class A shares of a Portfolio. Such Plans will
be notified of the pending exchange in writing approximately 60 days
before the eighth anniversary of the enrollment date and, unless the
exchange has been rejected in writing, the exchange will occur on or about
the eighth anniversary date. Once the exchange has occurred, a Participating
Plan will not be eligible to acquire additional Class B shares of the
Portfolio but instead may acquired Class A shares of the Portfolio. If the
Participating Plan elects not to exchange all of its Class B shares at that
time, each Class B share held by the Participating Plan will have the
same conversion feature as Class B shares held by other investors. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of each Portfolio are offered to
any Participating Plan that purchases from $250,000 to $499,999 of one or more
funds of the Smith Barney Mutual Funds. Class C shares acquired through
the Smith Barney 401(k) Program are subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of
the date the Participating Plan first enrolled in the Smith Barney 401(k)
Program. Each year after the date a Participating Plan enrolled in the Smith
Barney 401(k) Program, if its total Class C holdings equal at least
$500,000 as of the calendar year-end, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of a
Portfolio. Such Plans will be notified in writing within 30 days after the
last business day of the calendar year, and unless the exchange offer has
been rejected in writing, the exchange will occur on or about the last
business day of the following March. Once the exchange has occurred, a
Participating Plan will not be eligible to acquire Class C shares of a
Portfolio but instead may acquire Class A shares of such Portfolio. Any
Class C shares not converted will continue to be subject to the distribution
fee.
Class Y Shares. Class Y shares of each Portfolio are offered
without any service or distribution fees, sales charge or CDSC to any
Participating Plan that purchases $5,000,000 or more of Class Y shares of one
or more funds of the Smith Barney Mutual Funds.
<PAGE>
No CDSC is imposed on redemptions of CDSC Shares to the extent
that the net asset value of the shares redeemed does not exceed the
current net asset value of the shares purchased through reinvestment of
dividends or capital gain distributions, plus (a) with respect to Class A and
Class C shares, the current net asset value of such shares purchased more
than one year prior to redemption and, with respect to Class B shares, the
current net asset value of Class B shares purchased more than eight years
prior to the redemption, plus (b) with respect to Class A and Class C
shares, increases in the net asset value of the shareholder's Class A or
Class C shares above the purchase payments made during the preceding year
and, with respect to Class B shares, increases in the net asset value of the
shareholder's Class B shares above the purchase payments made during the
preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating
Plan first became enrolled in the Smith Barney 401(k) Program,
unlike the applicability of the CDSC to other shareholders, which depends on
the number of years since those shareholders made the purchase payment from
which the amount is being redeemed.
The CDSC will be waived on redemptions of Class A, Class B and Class
C shares in connection with lump-sum or other distributions made
by a Participating Plan as a result of: (a) the retirement of an employee
in the Participating Plan; (b) the termination of employment of an
employee in the Participating Plan; (c) the death or disability of an
employee in the Participating Plan; (d) the attainment of age 59 1/2 by
an employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code;
or (f) redemptions of shares in connection with a loan made by the
Participating Plan to an employee.
Participating Plans wishing to acquire shares of a Portfolio
through the Smith Barney 401(k) Program must purchase such shares directly
from First Data. For further information regarding the Smith Barney
401(k) Program, investors should contact a Smith Barney Financial Consultant.
Exchange Privilege
Except as otherwise noted below, shares of each Class may be
exchanged for shares of the same Class in any other Portfolio of the
Cardinal Fund, as well as in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state
of residence. Exchange of Class A, Class B and Class C shares are
subject to minimum investment requirements and all shares are subject to
the other requirements of the fund into which exchanges are made and a sales
charge differential may apply.
<PAGE>
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Funds, Inc.--Utility Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*Smith Barney Funds, Inc.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government Portfolio
Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities
Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
*Smith Barney Intermediate Maturity California Municipals Fund
*Smith Barney Intermediate Maturity New York Municipals Fund
*Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Funds Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds--California Portfolio
*Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New Jersey Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
<PAGE>
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond
Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
+++Smith Barney Municipal Money Market Fund, Inc.
+++Smith Barney Muni Funds--California Money Market Portfolio
+++Smith Barney Muni Funds--New York Money Market Portfolio
- ----------------------------------
[FN]
* Available for exchange with Class A, Class C and Class Y
shares of the Portfolio.
** Available for exchange with Class A, Class B and Class Y
shares of the Portfolio. In addition, shareholders who
own Class C shares of the Portfolio through the Smith
Barney 401(k) Program may exchange those shares for
Class C shares of this fund.
*** Available for exchange with Class A shares of the Portfolio.
+ Available for exchange with Class B and Class C shares of
the Portfolio.
++ Available for exchange with Class A and Class Y shares of
the Portfolio. In addition, shareholders who own Class C
shares of the Portfolio through the Smith Barney 401(k)
Program may exchange those shares for Class C shares of
this fund.
+++ Available for exchange with Class A and Class Y shares of
each Portfolio.
<PAGE>
Class A Exchanges. Class A shares of Smith Barney Mutual Funds
sold without a sales charge or with a maximum sales charge of less than the
maximum charged by other Smith Barney Mutual Funds will be subject to the
appropriate "sales charge differential" upon the exchange of such shares for
Class A shares of a fund sold with a higher sales charge. The "sales charge
differential" is limited to a percentage rate no greater than the excess of
the sales charge rate applicable to purchases of shares of the mutual fund
being acquired in the exchange over the sales charge rate(s) actually paid
on the mutual fund shares relinquished in the exchange and on any
predecessor of those shares. For purposes of the exchange privilege,
shares obtained through automatic reinvestment of dividends and capital
gain distributions are treated as having paid the same sales charges
applicable to the shares on which the dividends or distributions were paid;
however, except in the case of the Smith Barney 401(k) Program, if no sales
charge was imposed upon the initial purchase of the shares, any shares
obtained through automatic reinvestment will be subject to a sales charge
differential upon exchange. Class A shares held in a Portfolio that are
subsequently exchanged for shares of other funds in the Smith Barney
Mutual Funds will not be subject to a sales charge differential.
Class B Exchanges. In the event a Class B shareholder (unless
such shareholder was a Class B shareholder of the Short-Term World Income
Fund on July 15, 1994) wishes to exchange all or a portion of his or her
shares in any of the funds imposing a higher CDSC than that imposed by a
Portfolio, the exchanged Class B shares will be subject to the higher
applicable CDSC. Upon an exchange, the new Class B shares will be deemed to
have been purchased on the same date as the Class B shares of the Portfolio
that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will
be deemed to have been purchased on the same date as the Class C shares
of the Portfolio that have been exchanged.
Class Y Exchanges. Class Y shareholders of each Portfolio who wish
to exchange all or a portion of their Class Y shares for Class Y shares in
any of the funds identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although
the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the Portfolio's performance and its
shareholders. SBMFM may determine that a pattern of frequent exchange is
excessive and contrary to the best interests of each Portfolio's other
shareholders. In this event, SBMFM will notify Smith Barney and Smith Barney
may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, Smith Barney
will provide notice in writing or by telephone to the shareholder at least
15 days prior to suspending the exchange privilege and during the 15 day
period the shareholder will be required to (a) redeem his or her shares in
the Portfolio or (b) remain invested in the Portfolio or exchange into any of
the funds of the Smith Barney Mutual Funds ordinarily available, which
position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining
what constitutes an abusive pattern of exchanges.
<PAGE>
Exchanges will be processed at the net asset value next
determined, plus any applicable sales charge differential. Redemption
procedures discussed below are also applicable for exchanging shares, and
exchanges will be made upon receipt of all supporting documents in proper
form. If the account registration of the shares of the fund being acquired is
identical to the registration of the shares of the fund exchanged, no
signature guarantee is required. A capital gain or loss for tax purposes will
be realized upon the exchange, depending upon the cost or other basis of
shares redeemed. Before exchanging shares, investors should read the
current prospectus describing the shares to be acquired. Each Portfolio
reserves the right to modify or discontinue exchange privileges upon 60
days' prior notice to shareholders.
Redemption of Shares
The Cardinal Fund is required to redeem the shares of each
Portfolio tendered to it, as described below, at a redemption price equal
to their net asset value per share next determined after receipt of a
written request in proper form at no charge other than any applicable CDSC.
Redemption requests received after the close or regular trading on the NYSE
are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any requests
for redemption must specify the Class being redeemed. In the event of a
failure to specify which Class, or if the investor owns fewer shares of
the Class than specified, the redemption request will be delayed until the
Cardinal Fund's transfer agent receives further instructions from Smith
Barney or if the shareholder's account is with Smith Barney, from the
shareholder directly. The redemption proceeds will be remitted on or
before the third business day following receipt of proper tender,
except on any days on which the NYSE is closed or as permitted under the
1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will
not be invested for the shareholder's benefit without specific instruction
and Smith Barney will benefit from the use of temporarily uninvested funds.
Redemption proceeds for shares purchased by check, other than a certified or
official bank check, will be remitted upon clearance of the check, which
may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by
submitting a written request to a Smith Barney Financial Consultant.
Shares other than those held by Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, Introducing Broker or dealer
in the selling group or by submitting a written request for redemption to:
Smith Barney Cardinal Investment Fund Inc.
Class A, B, C or Y (please specify)
C/o First Data Investor Services Group, Inc.
POB 9134
Boston, Massachusetts 02205-9134
<PAGE>
A written redemption request must (a) state the Class and number
or dollar amount of shares to be redeemed (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the
shares are registered. If the shares to be redeemed were issued in
certificate form, the certificates must be endorsed for transfer (or be
accompanied by an endorsed stock power) and must be submitted to First Data
together with the redemption request. Any signature appearing on a
redemption request, share certificate or stock power must be guaranteed by an
eligible guarantor institution, such as a domestic bank, savings and loan
institution, domestic credit union, member bank of the Federal Reserve System
or member firm of a national securities exchange. First Data may require
additional supporting documents for redemptions made by corporations,
executors, administrators, trustees or guardians. A redemption request
will not be deemed properly received until First Data receives all
required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
Each Portfolio offers shareholders an automatic cash withdrawal
plan, under which shareholders who own shares with a value of at least
$10,000 may elect to receive cash payments of at least $50 monthly or
quarterly. Retirement plan accounts are eligible for automatic cash
withdrawal plans only where the shareholder is eligible to receive qualified
distributions and has an account value of at least $5,000. The withdrawal
plan will be carried over on exchanges between funds or Classes of a
Portfolio. Any applicable CDSC will not be waived on amounts withdrawn by a
shareholder that exceed 1.00% per month of the value of the shareholder's
shares subject to the CDSC at the time the withdrawal plan commences. (With
respect to withdrawal plans in effect prior to November 7, 1994, any
applicable CDSC will be waived on amounts withdrawn that do not exceed 2.00%
per month of the value of the shareholder's shares subject to CDSC.) For
further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
Minimum Account Size
The Cardinal Fund reserves the right to involuntarily liquidate
any shareholder's account in a Portfolio if the aggregate net asset value
of the shares held in that Portfolio account is less than $500. (If a
shareholder has more than one account in a Portfolio, each account must
satisfy the minimum account size.) The Fund, however, will not redeem shares
based solely on market reductions in net asset value. Before the Fund
exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring accounts up to the minimum to avoid involuntary
liquidation.
Performance
From time to time a Portfolio may include its total return,
average annual total return, yield and current dividend return in
advertisements and/or other types of sales literature. These figures are
computed separately for Class A, Class B, Class C and Class Y shares of each
Portfolio. These figures are based on historical earnings and are
not intended to indicate future performance. Total return is computed
for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all
income dividends and capital gain distributions on the reinvestment dates
at prices calculated as stated in this Prospectus, then dividing the
value of the investment at the end of the period so calculated by the
initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC is derived from this total return,
which provides the ending redeemable value. Such standard total return
information may
<PAGE>
also be accompanied with nonstandard total return information for
differing periods computed in the same manner but without annualizing the
total return or taking sales charges into account. The yield of a
Portfolio's Class refers to the net investment income earned by
investments in the Class over a 30-day period. This net investment income
is then annualized, i.e., the amount of income earned by the investments
during that 30-day period is assumed to be earned each 30-day period for
twelve periods and is expressed as a percentage of the investments. The yield
is calculated according to a formula prescribed by the SEC to facilitate
comparison with yields quoted by other investment companies. [The
Traditional Portfolio and the Balanced Portfolio] calculate current
dividend return for each of their Classes by dividing the current
dividend by the net asset value or the maximum public offering price
(including sales charge) on the last day of the period for which current
dividend return is presented. [The Income Portfolio] calculates current
dividend return for each of its Classes by annualizing the most recent monthly
distribution, including net equalization credits or debits, and dividing
by the net asset value or the maximum public offering price (including
sales charge) on the last day of the period for which current dividend
return is presented. Each Class' current dividend return may vary from time
to time depending on market conditions, the composition of its investment
portfolio and operating expenses. These factors and possible differences
in the methods used in calculating current dividend return should be
considered when comparing a Class' current return to yields published for
other investment companies and other investment vehicles. Each Portfolio
may also include comparative performance information in advertising or
marketing its shares. Such performance information may include data from
Lipper Analytical Services, Inc. and other financial publications.
Management of the Cardinal Fund
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the
Cardinal Fund rests with the Cardinal Fund's Board of Directors. A
majority of the Cardinal Fund's directors will be non-interested persons as
defined in Section 2(a)(19) of the 1940 Act. However, the directors and
officers of the Cardinal Fund also serve in similar positions with many of
the Underlying Smith Barney Funds. Thus, if the interests of a Portfolio
and the Underlying Smith Barney Funds were ever to become divergent, it is
possible that a conflict of interest could arise and affect how the
directors and officers of the Cardinal Fund fulfill their fiduciary duties
to that Portfolio and the Underlying Smith Barney Funds. The Directors of
the Cardinal Fund believe they have structured each Portfolio to avoid
these concerns. However, conceivably a situation could occur where proper
action for the Cardinal Fund or a Portfolio separately could be adverse to
the interests of an Underlying Smith Barney Fund, or the reverse could
occur. If such a possibility arises, the directors and officers of the
Cardinal Fund, the affected Underlying Smith Barney Funds and SBMFM
will carefully analyze the situation and take all steps they believe
reasonable to minimize and, where possible, eliminate the potential
conflict. Moreover, limitations on aggregate investments in the Underlying
Smith Barney Funds have been adopted by the Cardinal Fund to minimize this
possibility, and close and continuous monitoring will be exercised to avoid,
insofar as is possible, these concerns. The Statement of Additional
Information contains background information regarding each Director and
executive officer of the Cardinal Fund.
<PAGE>
INVESTMENT MANAGER--SBMFM
SBMFM, the investment manager to each Portfolio, is a
registered investment adviser whose principal offices are located at 388
Greenwich Street, New York, New York 10013. SBMFM (through its predecessor
entities) has been in the investment counseling business since 1940. SBMFM
renders investment advice to a wide variety of individual, institutional and
investment company clients which had aggregate assets under management as of
_______ __, 1995, in excess of $__ billion. Subject to the supervision and
direction of the Cardinal Fund's Board of Directors, SBMFM will determine
how each Portfolio's assets will be invested in the Underlying Smith
Barney Funds pursuant to the investment objective and policies of each
Portfolio set forth in this Prospectus and make recommendations to the
Board of Directors concerning changes to (a) the Underlying Smith
Barney Funds in which the Portfolios may invest, (b) the percentage
range of assets that may be invested by each Portfolio in any one
Underlying Smith Barney Fund and (c) the percentage range of assets of
any Portfolio that may be invested in equity funds and fixed income funds
(including money market funds). The Directors of the Cardinal Fund will
periodically monitor the allocations made and the basis upon which such
allocations were made or maintained. SBMFM also furnishes each Portfolio with
bookkeeping, accounting and administrative services, office space and
equipment, and the services of the officers and employees of the Cardinal
Fund. Under the Investment Management Agreement with each Portfolio,
SBMFM has agreed to bear all expenses of the Cardinal Fund other than the
management fee, the fees payable pursuant to the Rule 12b-1 Plan and
extraordinary expenses. For the services rendered and expenses borne,
each Portfolio pays SBMFM a monthly fee at the annual rate of ____% of the
value of its average daily net assets.
SBMFM also serves as investment adviser to each of the Underlying
Smith Barney Funds in which the Portfolios may invest (other than the
Smith Barney Premium Total Return Fund) and is responsible for the selection
and management of each of the Underlying Smith Barney Fund's investments.
Greenwich Street Advisors, a division of SBMFM, serves as investment
adviser to Smith Barney Diversified Strategic Income Fund. SBSA, located at
388 Greenwich Street, New York, New York 10013, serves as investment adviser
to Smith Barney Premium Total Return Fund. SBSA has been in the investment
counseling business since 1968 and is a wholly owned subsidiary of SBMFM.
SBSA renders investment advice to investment companies that had
aggregate assets under management as of ___________ __, 1995 in excess
of $_ billion.
<PAGE>
Each Portfolio, as a shareholder in the Underlying Smith Barney Funds,
will indirectly bear its proportionate share of any investment management fees
and other expenses paid by the Underlying Smith Barney Funds. The management fee
of each of the Underlying Smith Barney Funds in which the Portfolios may invest
is calculated at the following percentage rate of the Fund's annual net assets:
<TABLE>
<CAPTION>
<S> <C>
Underlying Smith Barney Fund Management Fees
Smith Barney Aggressive Growth Fund Inc. 0.80%
Smith Barney Appreciation Fund Inc. 0.62%
Smith Barney Equity Funds
Smith Barney Growth and Income Fund 0.65%
Smith Barney Fundamental Value Fund Inc. 0.75%
Smith Barney Funds, Inc.
Income and Growth Portfolio 0.58%
Short-Term U.S. Treasury Securities Portfolio 0.45%
Smith Barney Income Funds
Smith Barney High Income Fund 0.70%
Smith Barney Utilities Fund 0.65%
Smith Barney Premium Total Return Fund 0.75%
Smith Barney Convertible Fund 0.70%
Smith Barney Diversified Strategic Income Fund 0.63%
Smith Barney Investment Funds Inc.
Smith Barney Managed Growth Fund 0.85%
Smith Barney Special Equities Fund 0.75%
Smith Barney Government Securities Fund 0.55%
Smith Barney Investment Grade Bond Fund 0.65%
Smith Barney Managed Governments Fund Inc. 0.65%
Smith Barney Money Funds Inc.
Cash Portfolio 0.44%
Smith Barney World Funds, Inc.
International Equity Portfolio 0.85%
Emerging Markets Portfolio 1.00%
International Balanced Portfolio 0.85%
Global Government Bond Portfolio 0.75%
</TABLE>
PORTFOLIO MANAGEMENT COMMITTEE
A portfolio management committee, chaired by Thomas B. Stiles II,
Chief Investment Officer of SBMFM, has primary responsibility for the
day-to-day management of each Portfolio. Certain managing directors of SBMFM
constitute the other members of this committee.
<PAGE>
Distributor
Smith Barney, located at 388 Greenwich Street, New York, New
York 10013, distributes shares of each Portfolio as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities
as may be sold to the public. Pursuant to a plan of distribution adopted
by each Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith
Barney is paid a service fee with respect to Class A, Class B and Class C
shares of each Portfolio at the annual rate of 0.25% of the average daily
net assets attributable to these Classes. Smith Barney is also paid a
distribution fee with respect to Class B shares and Class C shares of the
Aggressive Portfolio, the Growth Portfolio and the Traditional Portfolio at
the annual rate of 0.75% of the average daily net assets attributable to
those Classes. Smith Barney is paid a distribution fee with respect to
Class B and Class C shares of the Balanced Portfolio and the Income
Portfolio at the annual rate of 0.50% and 0.45%, respectively, of the
average daily net assets attributable to those Classes. Class B shares
that automatically convert to Class A shares eight years after the date of
original purchase will no longer be subject to a distribution fee. The fees
are used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B and Class C shares, to
cover expenses primarily intended to result in the sale of those
shares. These expenses include: advertising expenses; the cost of printing
and mailing prospectuses to potential investors; payments to and expenses of
Smith Barney Financial Consultants and other persons who provide support
services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Portfolio shares, including lease, utility, communications
and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling
shares of a Class include a commission or fee paid by the investor or Smith
Barney at the time of sale and, with respect to Class A, Class B and Class
C shares, a continuing fee for servicing shareholder accounts for as long
as a shareholder remains a holder of that Class. Smith Barney Financial
Consultants may receive different levels of compensation for selling different
Classes of shares.
Actual distribution expenses for Class B and Class C shares of
each Portfolio for any given year may exceed the fees received pursuant to
the Plan and will be carried forward and paid by each Portfolio in future
years so long as the Plan is in effect. Interest is accrued monthly on
such carryforward amounts at a rate comparable to that paid by Smith Barney
for bank borrowings.
Additional Information
The Cardinal Fund, an open-end, non-diversified investment company,
was incorporated in Maryland on August 11, 1995. The Cardinal Fund has an
authorized capital of 3,000,000,000 shares with a par value of $.001 per
share. The Board of Directors has authorized the issuance of five
series of shares, each representing shares in one of five separate
Portfolios and may authorize the issuance of additional series of shares
in the future. The assets of each Portfolio are segregated and separately
managed and a shareholder's interest is in the assets of the Portfolio in
which he or she holds shares. Class A, Class B, Class C and Class Y shares
of a Portfolio represent interests in the assets of that Portfolio and have
identical voting, dividend, liquidation and other rights on the same terms
and conditions except that expenses related to the distribution of each
Class of shares are borne solely by each Class and each Class of shares has
exclusive voting rights with respect to provisions of the Cardinal Fund's
Rule 12b-1 distribution plan which pertain to a particular Class. As
described under "Voting" in the Statement of Additional Information,
<PAGE>
the Cardinal Fund ordinarily will not hold shareholder meetings;
however, shareholders have the right to call a meeting upon a vote of 10% of
the Cardinal Fund's outstanding shares for the purpose of voting to remove
directors, and the Cardinal Fund will assist shareholders in calling such a
meeting as required by the 1940 Act. Shares do not have cumulative voting
rights or preemptive rights and are fully paid, transferable and
non-assessable when issued for payment as described in this Prospectus.
On matters submitted for consideration by shareholders of
any Underlying Smith Barney Fund, a Portfolio will vote its shares in
proportion to the vote of all other holders of shares of that Fund or, in
certain limited instances, the Portfolio will vote its shares in the manner
indicated by a vote of holders of shares of the Portfolio.
PNC Bank, National Association, located at 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103 serves as custodian of the
Portfolio's investments.
First Data, located at Exchange Place, Boston, Massachusetts
02109, serves as the Cardinal Fund's transfer agent.
The Cardinal Fund intends to send its shareholders a semi-annual
report and an audited annual report, which will include listings of the
investment securities held by the Cardinal Fund at the end of the period
covered. In an effort to reduce the Cardinal Fund's printing and mailing
costs, the Cardinal Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that
a household having multiple accounts with the identical address of record
will receive a single copy of each report. In addition, the Cardinal Fund
also plans to consolidate the mailing of its Prospectus so that a
shareholder having multiple accounts (that is, individual, IRA and/or
Self-Employed Retirement Plan accounts) will receive a single Prospectus
annually. Shareholders who do not want this consolidation to apply to their
account should contact their Smith Barney Financial Consultant or the
Cardinal Fund's transfer agent.
<PAGE>
Appendix
DESCRIPTIONS OF CERTAIN RISKS RELATED TO VARIOUS SECURITIES INVESTED IN, AND
INVESTMENT STRATEGIES EMPLOYED BY, THE UNDERLYING SMITH BARNEY FUNDS IN WHICH
THE PORTFOLIOS MAY INVEST
Repurchase Agreements. Repurchase agreements could involve
certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the ability of an Underlying
Smith Barney Fund to dispose of the underlying securities, the risk of a
possible decline in the value of the underlying securities during the period
in which an Underlying Smith Barney Fund seeks to assert its rights to
them, the risk of incurring expenses associated with asserting those
rights and the risk of losing all or part of the income from the agreement.
Reverse Repurchase Agreements. Certain of the Underlying Smith
Barney Funds may engage in reverse repurchase agreement transactions
with banks, brokers and other financial institutions. Reverse repurchase
agreements involve the risk that the market value of the securities sold by
the Underlying Smith Barney Fund may decline below the repurchase price of
the securities.
Lending of Portfolio Securities. The risks in lending
portfolio securities, like those associated with other extensions of
secured credit, consist of possible delays in receiving additional collateral
or in the recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Loans will be made to
firms deemed by the adviser to the Underlying Smith Barney Fund to be of
good standing and will not be made unless, in the judgment of the adviser,
the consideration to be earned from such loans would justify the risk.
When-Issued Securities and Delayed-Delivery Transactions. The
purchase of securities on a when-issued or delayed-delivery basis involves the
risk that, as a result of an increase in yields available in the marketplace,
the value of the securities purchased will decline prior to the settlement
date. The sale of securities for delayed delivery involves the risk that the
prices available in the market on the delivery date may be greater than those
obtained in the sale transaction.
Non-Diversified Funds. Certain of the Underlying Smith Barney Funds
are classified as non-diversified investment companies under the 1940 Act.
Since, as a non-diversified fund, such Underlying Smith Barney Funds are
permitted to invest a greater proportion of their assets in the
securities of a smaller number of issuers, such Funds may be subject to
greater risk with respect to its individual portfolio than a Fund that is more
broadly diversified.
Securities of Unseasoned Issuers. Securities in which certain of
the Underlying Smith Barney Funds may invest may have limited marketability
and, therefore, may be subject to wide fluctuations in market value. In
addition, certain securities may lack a significant operating history and be
dependent on products or services without an established market share.
<PAGE>
Convertible Securities and Synthetic Convertible Securities.
While convertible securities generally offer lower yields than
non-convertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
entail less credit risk than the issuer's common stock.
Synthetic convertible securities are created by
combining non-convertible bonds or preferred stocks with warrants or stock
call options. Synthetic convertible securities differ from convertible
securities in certain respects, including that each component of a synthetic
convertible security has a separate market value and responds differently
to market fluctuations. Investing in synthetic convertible securities
involves the risks normally involved in holding the securities
comprising the synthetic convertible security.
Securities of Developing Countries. A developing country generally
is considered to be a country that is in the initial stages of
its industrialization cycle. Investing in the equity and fixed-income
markets of developing countries involves exposure to economic structures that
are generally less diverse and mature, and to political systems that can be
expected to have less stability, than those of developed countries.
Historical experience indicates that the markets of developing countries
have been more volatile than the markets of the more mature economies of
developed countries; however, such markets often have provided higher rates
of return to investors.
Sovereign Debt Obligations. Sovereign debt of developing countries
may involve a high degree of risk, and may be in default or present the
risk of default. Governmental entities responsible for repayment of the
debt may be unable or unwilling to repay principal and interest when due,
and may require renegotiation or rescheduling of debt payments. In
addition, prospects for repaying of principal and interest may depend on
political as well as economic factors. Although some sovereign debt, such as
Brady Bonds, is collateralized by U.S. Government securities, repayment
of principal and interest is not guaranteed by the U.S. government.
Restrictions On Foreign Investment. Some countries prohibit or
impose substantial restrictions on investments in their capital markets,
particularly their equity markets, by foreign entities. As illustrations,
certain countries require governmental approval prior to investments by
foreign persons, or limit the amount of investment by foreign persons in a
particular company, or limit the investment by foreign persons to only a
specific class of securities of a company which may have less advantageous
terms than securities of the company available for purchase by nationals or
limit the repatriation of funds for a period of time.
Smaller capital markets, while often growing in trading volume,
have substantially less volume than U.S. markets, and securities in many
smaller capital markets are less liquid and their prices may be more
volatile than securities of comparable U.S. companies. Brokerage
commissions, custodial services, and other costs relating to investment in
smaller capital markets are generally more expensive than in the U.S. Such
markets have different clearance and settlement procedures, and in certain
markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult
to conduct such transactions. Further, satisfactory custodial services
for investment securities may not be available in some countries having
smaller capital markets, which may result in an Underlying Smith
Barney Fund incurring additional costs and delays in transporting and
custodying such securities outside such countries. Delays in settlement
could result in temporary periods when assets of a Fund are
uninvested and no return is earned thereon. The inability of an Underlying
Smith Barney Fund to make intended security purchases due to settlement
problems could cause such Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to
settlement problems could result either in losses to the Fund due to
subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible
liability to the purchaser. There is generally less government
supervision and regulation of exchanges, brokers and issuers in countries
having smaller capital markets than there is in the U.S.
Mortgage-Related Securities. To the extent that an Underlying
Smith Barney Fund purchases mortgage-related securities at a premium,
mortgage foreclosures and prepayments of principal by mortgagors (which may
be made at any time without penalty) may result in some loss of the
Fund's principal investment to the extent of the premium paid. The Underlying
Smith Barney Fund's yield may be affected by reinvestment of prepayments at
higher or lower rates than the original investment. In addition, like
other debt securities, the values of mortgage-related securities,
including government and government-related mortgage pools, generally
will fluctuate in response to market interest rates.
Non-Publicly Traded and Illiquid Securities. The sale of
securities that are not publicly traded is typically restricted under
the Federal securities laws. As a result, an Underlying Smith Barney Fund
may be forced to sell these securities at less than fair market value or may
not be able to sell them when the Fund's adviser believes it desirable to do
so. Investments by an Underlying Smith Barney Fund in illiquid securities are
subject to the risk that should the Fund desire to sell any of these
securities when a ready buyer is not available at a price that the Fund's
adviser deems representative of its value, the value of the Underlying
Smith Barney Fund's net assets could be adversely affected.
Short Sales. Possible losses from short sales differ from losses
that could be incurred from a purchase of a security, because losses from
short sales may be unlimited, whereas losses from purchases can equal only
the total amount invested.
Forward Roll Transactions. Forward roll transactions involve the
risk that the market value of the securities sold by an Underlying Smith
Barney Fund may decline below the repurchase price of the securities.
Forward roll transactions are considered borrowings by a Fund. Although
investing the proceeds of these borrowings in repurchase agreements
or money market instruments may provide an Underlying Smith Barney Fund with
the opportunity for higher income, this leveraging practice will increase
a Fund's exposure to capital risk and higher current expenses. Any income
earned from the securities purchased with the proceeds of these borrowings
that exceeds the cost of the borrowings would cause a Fund's net asset value
per share to increase faster than would otherwise be the case; any
decline in the value of the securities purchased would cause a Fund's net
asset value per share to decrease faster than would otherwise be the case.
<PAGE>
Leverage. Certain of the Underlying Smith Barney Funds may borrow
from banks, on a secured or unsecured basis, in order to leverage their
portfolios. Leverage creates an opportunity for increased returns to
shareholders of an Underlying Smith Barney Fund but, at the same time,
creates special risk considerations. For example, leverage may exaggerate
changes in the net asset value of a Fund's shares in a Fund's yield.
Although the principal or stated value of such borrowings will be fixed,
the Fund's assets may change in value during the time the borrowing is
outstanding. Leverage will create interest or dividend expenses for the
Fund which can exceed the income from the assets retained. To the extent
the income or other gain derived from securities purchased with
borrowed funds exceeds the interest or dividends the Fund will have to pay in
respect thereof, the Fund's net income or other gain will be greater than
if leverage had not been used. Conversely, if the income or other gain from
the incremental assets is not sufficient to cover the cost of leverage,
the net income or other gain of the Fund will be less than if leverage had not
been used. If the amount of income for the incremental securities is
insufficient to cover the cost of borrowing, securities might have to
be liquidated to obtain required funds. Depending on market or other
conditions, such liquidations could be disadvantageous to the Underlying Smith
Barney Fund.
Floating and Variable Rate Income Securities. Floating and
variable rate income securities include securities whose rates vary
inversely with changes in market rates of interest. Such securities may
also pay a rate of interest determined by applying a multiple to the variable
rate. The extent of increases and decreases in the value of securities whose
rates vary inversely with changes in market rates of interest
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate security having similar credit quality,
redemption provisions and maturity.
Zero Coupon, Discount and Payment-in-Kind Securities. Zero
coupon securities generally pay no cash interest (or dividends in the case of
preferred stock) to their holders prior to maturity. Payment-in-kind
securities allow the lender, at its option, to make current interest
payments on such securities either in cash or in additional securities.
Accordingly, such securities usually are issued and traded at a deep
discount from their face or par value and generally are subject to greater
fluctuations of market value in response to changing interest rates than
securities of comparable maturities and credit quality that pay cash
interest (or dividends in the case of preferred stock) on a current basis.
<PAGE>
Premium Securities. Premium securities are income securities
bearing coupon rates higher than prevailing market rates. Premium
securities are typically purchased at prices greater than the principal
amounts payable on maturity. If securities purchased by an Underlying
Smith Barney Fund at a premium are called or sold prior to maturity, the
Fund will recognize a capital loss to the extent the call or sale price is
less than the purchase price. Additionally, the Fund will recognize a
capital loss if it holds such securities to maturity.
Yankee Bonds. Yankee bonds are U.S. dollar-denominated bonds sold in
the U.S. by non-U.S. issuers. As compared with bonds issued in the U.S., such
bond issues normally carry a higher interest rate but are less actively
traded.
Swap Agreements. As one way of managing its exposure to different
types of investments, certain of the Underlying Smith Barney Funds may
enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Swap agreements can be highly
volatile and may have a considerable impact on a Fund's performance. Swap
agreements are subject to risks related to the counterparty's ability to
perform, and may decline in value if the counterparty's creditworthiness
deteriorates. A Fund may also suffer losses if it is unable to terminate
outstanding swap agreements or reduce its exposure through offsetting
transactions.
Indexed Securities. Certain of the Underlying Smith Barney Funds
may invest in indexed securities, including inverse floaters, whose value is
linked to currencies, interest rates, commodities, indices, or other
financial indicators. Indexed securities may be positively or negatively
indexed (i.e., their value may increase or decrease if the underlying
instrument appreciates), and may have return characteristics similar to
direct investments in the underlying instrument or to one or more options
on the underlying instrument. Indexed securities may be more volatile than
the underlying instrument itself.
Investment in Utility Securities. The Smith Barney Utilities Fund
is particularly subject to risks that are inherent to the utility
industries, including difficulty in obtaining an adequate return on
invested capital, difficulty in financing large construction programs
during an inflationary period, restrictions on operations and increased cost
and delays attributable to environmental considerations and regulation,
difficulty in raising capital in adequate amounts on reasonable terms in
periods of high inflation and unsettled capital markets, increased costs and
reduced availability of certain types of fuel, occasional reduced
availability and high costs of natural gas for resales, the effects of energy
conservation, the effects of a national energy policy and lengthy delays and
greatly increased costs and other problems associated with the design,
construction, licensing, regulation and operation of nuclear facilities
for electric generation, including, among other considerations, the problems
associated with the use of radioactive materials and the disposal of
radioactive wastes. There are substantial differences between the
regulatory practices and policies of various jurisdictions, and any given
regulatory agency may make major shifts in policy from time to time. There is
no assurance that regulatory authorities will grant rate increases in
the future or that such increases will be adequate to permit the payment of
dividends on common stocks. Additionally, existing and possible future
regulatory legislation may make it even more difficult for these utilities
to obtain adequate relief. Certain of the issuers of securities held by
the Smith Barney Utilities Fund may own or operate nuclear generating
facilities. Governmental authorities may from time to time review existing
policies, and impose additional requirements governing the licensing,
construction and operation of nuclear power plants.
<PAGE>
Each of the risks referred to above could adversely affect the
ability and inclination of public utilities to declare or pay dividends and
the ability of holders of common stock to realize any value from the assets
of the issuer upon liquidation or bankruptcy. All of the utilities which
are issuers of the securities held by the Smith Barney Utilities Fund have
been experiencing one or more of these problems in varying degrees. Moreover,
price disparities within selected utility groups and discrepancies in
relation to averages and indices have occurred frequently for reasons not
directly related to the general movements or price trends of utility
common stocks. Causes of these discrepancies include changes in the
overall demand for and supply of various securities (including the
potentially depressing effect of new stock offerings), and changes in
investment objectives, market expectations or cash requirements of other
purchasers and sellers of securities.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE>
Subject to completion, dated November 17, 1995
Smith Barney
Cardinal Investment Fund Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information __________ __, 1996
This Statement of Additional Information expands upon and supplements
the information contained in the current Prospectus of Smith Barney Cardinal
Investment Fund Inc. (the "Cardinal Fund") dated ___________ __, 1996, as
amended or supplemented from time to time, and should be read in conjunction
with the Cardinal Fund's Prospectus. The Cardinal Fund currently offers five
investment portfolios (individually, a "Portfolio" and collectively, the
"Portfolios"). Each Portfolio seeks to achieve its objective by investing in a
number of Underlying Smith Barney Funds, which consist of open-end management
investment companies or series thereof for which Smith Barney Inc. ("Smith
Barney") now or in the future acts as principal underwriter or for which Smith
Barney, Smith Barney Mutual Funds Management Inc. ("SBMFM") or Smith Barney
Strategy Advisers Inc. ("SBSA") now or in the future acts as investment adviser.
The Cardinal Fund's Prospectus may be obtained from a Smith Barney Financial
Consultant, or by writing or calling the Company at the address or telephone
number listed above. This Statement of Additional Information, although not in
itself a prospectus, is incorporated by reference into the Prospectus in its
entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in the Prospectus and
this Statement of Additional Information, except where shown below:
Page
----
MANAGEMENT OF THE CARDINAL FUND ................................... 2
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES...................... 4
PURCHASE OF SHARES ..................................................... 24
REDEMPTION OF SHARES ................................................... 25
DISTRIBUTOR .............................................................. 26
VALUATION OF SHARES ..................................................... 27
EXCHANGE PRIVILEGE ...................................................... 27
IRA AND OTHER PROTOTYPE PLANS .......................................... 29
PERFORMANCE .............................................................. 29
TAXES (SEE IN THE PROSPECTUS
"DIVIDENDS, DISTRIBUTIONS AND TAXES") ................................... 31
VOTING (SEE IN THE PROSPECTUS "ADDITIONAL INFORMATION") .................. 34
ADDITIONAL INFORMATION ................................................... 34
FINANICAL STATEMENT ...................................................... 35
APPENDIX - RATINGS OF DEBT OBLIGATIONS ................................. A-1
<PAGE>
MANAGEMENT OF THE CARDINAL FUND
The executive officers of the Cardinal Fund are employees of certain of the
organizations that provide services to the Cardinal Fund. These organizations
are the following:
<TABLE>
<CAPTION>
<S> <C>
Name Service
- ---- -------
Smith Barney.........................................................Distributor
SBMFM.........................................................Investment Manager
PNC Bank, National Association
("PNC Bank").........................................................Custodian
First Data Investor Services Group, Inc.
("First Data"), a subsidiary of First
Data Corporation................................................Transfer Agent
</TABLE>
These organizations and the functions they perform for the Cardinal
Fund are discussed in the Prospectus and in this Statement of Additional
Information.
Directors and Executive Officers of the Cardinal Fund
The names of the Directors and executive officers of the Cardinal Fund, together
with information as to their principal business occupations during the past five
years, are shown below. Each Director who is an "interested person" of the
Cardinal Fund, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), is indicated by an asterisk.
*Heath B. McLendon, Chairman of the Board (Age 63). Managing Director
of Smith Barney, Chairman of the Board of Smith Barney Strategy Advisers Inc.
and President of SBMFM; prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"), Vice Chairman of
Asset Management Division of Shearson Lehman Brothers. Mr. McLendon also
serves as director or trustee of ___ other mutual funds of the Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York, New York 10013.
Jessica M. Bibliowicz, President (Age 35). Executive President of
Smith Barney; prior to 1994, Director of Sales and Marketing for Prudential
Mutual Funds; prior to 1990, First Vice President, Asset Management Division of
Shearson Lehman Brothers. Ms. Bibliowicz also serves as President of __ other
mutual funds of the Smith Barney Mutual Funds. Her address is 388 Greenwich
Street, New York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 37).
Managing Director of Smith Barney; Chief Financial Officer of Smith Barney
Mutual funds; Director and Senior Vice President of SBMFM. Mr. Daidone also
serves as Senior Vice President and Treasurer of __ other mutual funds of the
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New York, New
York 10013.
<PAGE>
*Christina T. Sydor, Director and Secretary (Age 44). Managing
Director of Smith Barney; General Counsel and Secretary of SBMFM. Ms. Sydor
also serves as Secretary of __ other mutual funds of the Smith Barney Mutual
Funds. Her address is 388 Greenwich Street, New York, New York 10013.
No officer, director or employee of Smith Barney or any parent or
subsidiary will receive any compensation from the Cardinal Fund for serving as
an officer or Director of the Cardinal Fund. The Cardinal Fund pays each
Director who is not an officer, director or employee of Smith Barney or any of
its affiliates a fee of $_____ per annum plus $_____ per meeting attended and
reimburses travel and out-of-pocket expenses.
Investment Manager - SBMFM
SBMFM acts as investment manager to each Portfolio pursuant to
separate investment management agreements (the "Management Agreements").
SBMFM is a wholly owned subsidiary of Smith Barney Holdings ("Holdings") and
Holdings is a wholly owned subsidiary of The Travelers Inc. ("Travelers").
The Management Agreements with respect to each Portfolio were approved
by the Board of Directors, including a majority of the Directors who
are not "interested persons" of the Cardinal Fund or SBMFM (the
"Independent Directors"), on ________ __, 1995 and by the initial shareholder
of the respective Portfolios on _______ __, 1995. Pursuant to the Management
Agreements, SBMFM will determine how each Portfolio's assets will be
invested in the Underlying Smith Barney Funds pursuant to the investment
objectives and policies of each Portfolio set forth in the Prospectus and
make recommendations to the Board of Directors concerning changes to (a)
the Underlying Smith Barney Funds in which the Portfolios may invest,
(b) the percentage range of assets that may be invested by each Portfolio in
any one Underlying Smith Barney Fund and (c) the percentage range of assets of
any Portfolio that may be invested in equity funds and fixed income funds
(icnlduing money market funds). In addition to such services, SBMFM pays the
salaries of all officers and employees who are employed by both it and the
Cardinal Fund, maintains office facilities for the Cardinal Fund, furnishes
the Cardinal Fund with statistical and research data, clerical help
and accounting, data processing, bookkeeping, internal auditing and legal
services and certain other services required by the Cardinal Fund and each
Portfolio, prepares reports to each Portfolio's shareholders and prepares
tax returns, reports to and filings with the Securities and Exchange
Commission (the "SEC") and state Blue Sky authorities. SBMFM provides
investment advisory and management services to investment companies
affiliated with Smith Barney.
The management fee for each Portfolio is calculated at the annual
rate of __% of the Portfolio's average daily net assets. Under the
Management Agreements, SBMFM has agreed to bear all expenses incurred in the
operation of
<PAGE>
each Portfolio other than the management fee, the fees payable pursuant to the
plan adopted pursuant to Rule 12b-1 under the 1940 Act and extraordinary
expenses. Such expenses include taxes, interest, brokerage fees and commissions,
if any; fees of Directors who are not officers, directors, shareholders or
employees of Smith Barney or SBMFM; SEC fees and state Blue Sky qualification
fees; charges of custodians; transfer and dividend disbursing agent's fees;
certain insurance premiums; outside auditing and legal expenses; costs of
maintenance of corporate existence; investor services (including allocated
telephone and personnel expenses); and costs of preparation and printing of the
prospectus for regulatory purposes and for distribution to existing
shareholders; cost of shareholders' reports and shareholder meetings and
meetings of the officers or Board of Directors of the Cardinal Fund.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the Cardinal Fund. The
Directors who are not "interested persons" of the Cardinal Fund have selected
Stroock & Stroock & Lavan as their legal counsel.
KPMG Peat Marwick LLP, independent accountants, 345 Park Avenue, New
York, New York 10154, have been selected as auditors for the Cardinal Fund and
will render an opinion on the Cardinal Fund's financial statements annually.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectus discusses the investment objectives of the Portfolios and each of
the Underlying Smith Barney Funds in which the Portfolios may invest, as well as
the policies employed to achieve those objectives. This section contains
supplemental information concerning the types of securities and other
instruments in which the Portfolios and/or the Underlying Smith Barney Funds may
invest, the investment policies and portfolio strategies the Portfolios and/or
the Underlying Smith Barney Funds may utilize and certain risks attendant to
such investments, policies and strategies. There can be no assurance that the
respective investment objectives of the Portfolios or the Underlying Smith
Barney Funds will be achieved.
The Articles of Incorporation of the Cardinal Fund permit the Board of
Directors to establish additional Portfolios of the Cardinal Fund from time to
time. The investment objectives, policies and restrictions applicable to
additional Portfolios would be established by the Board of Directors at the time
such Portfolios were established and may differ from those set forth in the
Prospectus and this Statement of Additional Information.
Money Market Instruments. Each of the Portfolios and the Underlying
Smith Barney Funds may invest in certain types of money market instruments which
may include: U.S. government securities; certificate of deposit ("CDs"), time
deposits ("TDs") and bankers' acceptances issued by domestic banks (including
their branches located outside the United States and subsidiaries located in
Canada), domestic branches of foreign banks, savings and loan associations and
similar institutions; high grade commercial paper; and repurchase agreements
with respect to the foregoing types of instruments. The following is a more
detailed description of such money market instruments.
<PAGE>
U.S. Government Securities. U.S. government securities include debt
obligations of varying maturities issued or guaranteed by the U.S. government
or its agencies or instrumentalities. U.S. government securities include not
only direct obligations of the U.S. Treasury, but also securities issued or
guaranteed by the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Land Banks, Federal National Mortgage Association ("FNMA"),
Maritime Administration, Tennessee Valley Authority, District of Columbia
Armory Board, Student Loan Marketing Association, International Bank for
Reconstruction and Development and Resolution Trust Corporation. Certain U.S.
government securities, such as those issued or guaranteed by GNMA, FNMA and
Federal Home Loan Mortgage Corporation ("FHLMC"), are mortgage-related
securities. Because the U.S. government is not obligated by law to provide
support to an instrumentality that it sponsors, a Portfolio or an Underlying
Smith Barney Fund will invest in obligations issued by such an instrumentality
only if its investment adviser determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Portfolio or the Fund, as the case may be.
Bank Obligations. Domestic commercial banks organized under Federal law
are supervised and examined by the Comptroller of the Currency and are required
to be members of the Federal Reserve System and to be insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state
law are supervised and examined by state banking authorities but are members of
the Federal Reserve System only if they elect to join. Most state banks are
insured by the FDIC (although such insurance may not be of material benefit to
an Underlying Smith Barney Fund, depending upon the principal amount of
certificates of deposit ("CDs") of each held by the Fund) and are subject to
Federal examination and to a substantial body of Federal law and regulation. As
a result of Federal and state laws and regulations, domestic branches of
domestic banks are, among other things, generally required to maintain specified
levels of reserves, and are subject to other supervision and regulation designed
to promote financial soundness.
Obligations of foreign branches of U.S. banks, such as CDs and time
deposits ("TDs"), may be general obligations of the parent bank in addition to
the issuing branch, or may be limited by the terms of a specific obligation and
governmental regulation. Obligations of foreign branches of U.S. banks and
foreign banks are subject to different risks than are those of U.S. banks or
U.S. branches of foreign banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. Foreign
branches of U.S. banks are not necessarily subject to the same or similar
regulatory requirements that apply to U.S. banks, such as mandatory reserve
requirements, loan limitations and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a U.S. bank than about a U.S. bank. CDs
issued by wholly owned Canadian subsidiaries of U.S. banks are guaranteed as to
repayment of principal and interest, but not as to sovereign risk, by the U.S.
parent bank.
<PAGE>
Obligations of U.S. branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. A U.S. branch of a foreign bank with assets in excess
of $1 billion may or may not be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may or may not be required to: (a) pledge to the regulator by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities; and (b) maintain assets within the
state in an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of State Branches may not necessarily be
insured by the FDIC. In addition, there may be less publicly available
information about a U.S. branch of a foreign bank than about a U.S. bank.
Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender, such as one of the
Underlying Smith Barney Funds, pursuant to which the lender may determine to
invest varying amounts. Transfer of such notes is usually restricted by the
issuer, and there is no secondary trading market for such notes.
Repurchase Agreements. The Portfolios and the Underlying Smith Barney
Funds may purchase securities and concurrently enter into repurchase agreements
with certain member banks which are the issuers of instruments acceptable for
purchase by the Portfolio or the Fund, as the case may be, and with certain
dealers on the Federal Reserve Bank of New York's list of reporting dealers.
Repurchase agreements are contracts under which they buyer of a security
simultaneously commits to resell the security to the seller at an agreed-upon
price and date. Under each repurchase agreement, the selling institution will be
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon a Portfolio's or a Fund's ability
to dispose of the underlying securities, the risk of a possible decline in the
value of the underlying securities during the period in which the Portfolio or
Fund seeks to assert its rights to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all or part of the
income from the repurchase agreement.
When-Issued Securities and Delayed-Delivery Transactions. To secure an
advantageous price or yield, certain of the Underlying Smith Barney Funds may
purchase certain securities on a when-issued basis or purchase or sell
securities for delayed delivery. Delivery of the securities in such cases occurs
beyond the normal settlement periods, but no payment or delivery is made by a
Fund prior to the reciprocal delivery or payment by the other party to the
transaction. In entering into a when-issued or delayed-delivery transaction, an
Underlying Smith Barney Fund will rely on the other party to consummate the
transaction and may be disadvantaged if the other party fails to do so.
<PAGE>
U.S. government securities normally are subject to changes in value
based upon changes, real or anticipated, in the level of interest rates and the
public's perception of the creditworthiness of the issuers. In general, U.S.
government securities tend to appreciate when interest rates decline and
depreciate when interest rates rise. Purchasing these securities on a
when-issued or delayed-delivery basis, therefore, can involve the risk that the
yields available in the market when the delivery takes place may actually be
higher than those obtained in the transaction itself. Similarly, the sale of
U.S. government securities for delayed delivery can involve the risk that the
prices available in the market when the delivery is made may actually be higher
than those obtained in the transaction itself.
In the case of the purchase by an Underlying Smith Barney Fund of
securities on a when-issued or delayed-delivery basis, a segregated account in
the name of the Fund consisting of cash or liquid debt securities equal to the
amount of the when-issued or delayed-delivery commitments will be established at
the Fund's custodian. For the purpose of determining the adequacy of the
securities in the accounts, the deposited securities will be valued at market or
fair value. If the market or fair value of the securities declines, additional
cash or securities will be placed in the account daily so that the value of the
account will equal the amount of such commitments by the Fund involved. On the
settlement date, a Fund will meet its obligations from then-available cash flow,
the sale of securities held in the segregated account, the sale of other
securities or, although it would not normally expect to do so, from the sale of
the securities purchased on a when-issued or delayed-delivery basis (which may
have a value greater or less than the Fund's payment obligations).
Lending of Portfolio Securities. Certain of the Underlying Smith Barney
Funds have the ability to lend portfolio securities to brokers, dealers and
other financial organizations. A Fund will not lend portfolio securities to
Smith Barney unless it has applied for and received specific authority to do so
from the SEC. Loans of portfolio securities will be collateralized by cash,
letters of credit or U.S. government securities which are maintained at all
times in an amount at least equal to the current market value of the loaned
securities. From time to time, an Underlying Smith Barney Fund may pay a part of
the interest earned from the investment of collateral received for securities
loaned to the borrower and/or a third party which is unaffiliated with the Fund
and is acting as a "finder."
By lending its securities, an Underlying Smith Barney Fund can increase
its income by continuing to receive interest on the loaned securities as well as
by either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when U.S. government
securities are used as collateral. A Fund will comply with the following
conditions whenever its portfolio securities are loaned: (a) the Fund must
receive at least 100% cash collateral or equivalent securities from the
borrower; (b) the borrower must increase such collateral whenever the market
value of the securities loaned rises above the level of such collateral; (c) the
<PAGE>
Fund must be able to terminate the loan at any time; (d) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities, and any increase in market value; (e)
the Fund may pay only reasonable custodian fees in connection with the loan; and
(f) voting rights on the loaned securities may pass to the borrower; provided,
however, that if a material event adversely affecting the investment in the
loaned securities occurs, the Fund's trustees or directors, as the case may be,
must terminate the loan and regain the right to vote the securities. The risks
in lending portfolio securities, as with other extensions of secured credit,
consist of a possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will be made to firms deemed by each
Underlying Smith Barney Fund's investment adviser to be of good standing and
will not be made unless, in the judgment of the adviser, the consideration to be
earned from such loans would justify the risk.
Options on Securities. Certain of the Underlying Smith Barney Funds may
engage in transactions in options on securities, which, depending on the Fund,
may include the writing of covered put options and covered call options, the
purchase of put and call options and the entry into closing transactions.
The principal reason for writing covered call options on securities is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. Certain Underlying Smith Barney
Funds, however, may engage in option transactions only to hedge against adverse
price movements in the securities that it holds or may wish to purchase and the
currencies in which certain portfolio securities may be denominated. In return
for a premium, the writer of a covered call option forfeits the right to any
appreciation in the value of the underlying security above the strike price for
the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer of
a covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that a Fund may receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
Options written by an Underlying Smith Barney Fund normally will have
expiration dates between one and nine months from the date written. The exercise
price of the options may be below, equal to or above the market values of the
underlying securities at the times the options are written. In the case of call
options, these exercise prices are referred to as "in-the-money", "at-the-money"
and "out-of-the-money," respectively. An Underlying Smith Barney Fund with
option-writing authority may write (a) in-the-money call options when its
investment adviser expects that the price of the underlying security will remain
flat or decline moderately during the option period, (b) at-the-money call
options when its adviser expects that the price of the underlying security will
remain flat or advance moderately during the option period and (c)
out-of-the-money call options when its adviser expects that the price of the
underlying security may increase but not above a price equal to the sum of the
exercise price plus the premiums received from writing the call option. In any
of the preceding situations, if the market price of the underlying security
declines and the security is sold at this lower price, the amount of any
realized loss will be offset wholly or in part by the premium received.
Out-of-the-money, at-the-money and in-the-money put options (the reverse of call
options as to the relation of exercise price to market price) may be utilized in
the same market environments that such call options are used in equivalent
transactions.
<PAGE>
So long as the obligation of an Underlying Smith Barney Fund as the
writer of an option continues, the Fund may be assigned an exercise notice by
the broker-dealer through which the option was sold, requiring the Fund to
deliver, in the case of a call, or take delivery of, in the case of a put, the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or the Fund effects a closing purchase
transaction. A Fund can no longer effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice. To secure its
obligation to deliver the underlying security when it writes a call option, or
to pay for the underlying security when it writes a put option, an Underlying
Smith Barney Fund will be required to deposit in escrow the underlying security
or other assets in accordance with the rules of the Options Clearing Corporation
(the "Clearing Corporation") or similar foreign clearing corporation and of the
securities exchange on which the option is written.
Certain Underlying Smith Barney Funds may purchase and sell put, call
and other types of option securities that are traded on domestic or foreign
exchanges or the over-the-counter market including, but not limited to, "spread"
options, "knock-out" options, "knock-in" options and "average rate" or
"look-back" options. "Spread" options are dependent upon the difference between
the price of two securities or futures contracts, "Knock-out" options are
canceled if the price of the underlying asset reaches a trigger level prior to
expiration, "Knock-in" options only have value if the price of the underlying
asset reaches a trigger level and, "average rate" or "look-back" options are
options where, at expiration, the option's strike price is set based on either
the average, maximum or minimum price of the asset over the period of the
option.
An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized securities
exchange or in the over-the-counter market. Certain Underlying Smith Barney
Funds with option-writing authority may write options on U.S. or foreign
exchanges and in the over-the-counter market.
An Underlying Smith Barney Fund may realize a profit or loss upon
entering into a closing transaction. In cases in which a Fund has written an
option, it will realize a profit if the cost of the closing purchase transaction
is less than the premium received upon writing the original option and will
incur a loss if the cost of the closing purchase transaction exceeds the premium
received upon writing the original option. Similarly, when a Fund has purchased
an option and engages in a closing sale transaction, whether the Fund realizes a
profit or loss will depend upon whether the amount received in the closing sale
transaction is more or less than the premium that the Fund initially paid for
the original option plus the related transaction costs.
Although an Underlying Smith Barney Fund generally will purchase or
write only those options for which its adviser believes there is an active
secondary market so as to facilitate closing transactions, there is no assurance
that sufficient trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any particular
time, and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of reasons. In
the past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, have at times rendered inadequate certain of the
facilities of the Clearing Corporation and U.S. and foreign securities exchanges
and resulted in the institution of special procedures, such as trading
rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
<PAGE>
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If as a covered call option
writer a Fund is unable to effect closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Securities exchanges generally have established limitations governing
the maximum number of calls and puts of each class which may be held or written,
or exercised within certain time periods, by an investor or group of investors
acting in concert (regardless of whether the options are written on the same or
different securities exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible that the Underlying
Smith Barney Funds with authority to engage in options transactions and other
clients of their respective advisers and certain of their affiliates may be
considered to be such a group. A securities exchange may order the liquidation
of positions found to be in violation of these limits and it may impose certain
other sanctions.
In the case of options written by an Underlying Smith Barney Fund that
are deemed covered by virtue of the Fund's holding convertible or exchangeable
preferred stock or debt securities, the time required to convert or exchange and
obtain physical delivery of the underlying common stocks with respect to which
the Fund has written options may exceed the time within which the Fund must make
delivery in accordance with an exercise notice. In these instances, an
Underlying Smith Barney Fund may purchase or borrow temporarily the underlying
securities for purposes of physical delivery. By so doing, the Fund will not
bear any market risk because the Fund will have the absolute right to receive
from the issuer of the underlying security an equal number of shares to replace
the borrowed stock, but the Fund may incur additional transaction costs or
interest expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the U.S. government
securities for which an Underlying Smith Barney Fund may write covered call
options. If a Fund writes covered call options on mortgage-backed securities,
the securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. The Fund will compensate
for the decline in the value of the cover by purchasing an appropriate
additional amount of those securities.
Stock Index Options. Certain of the Underlying Smith Barney Funds may
purchase and write put and call options on U.S. stock indexes listed on U.S.
exchanges for the purpose of hedging its portfolio. A stock index fluctuates
with changes in the market values of the stocks included in the index. Some
stock index options are based on a broad market index such as the New York Stock
Exchange Composite Index or a narrower market index such as the Standard &
Poor's 100. Indexes also are based on an industry or market segment such as the
American Stock Exchange Oil and Gas Index or the Computer and Business Equipment
Index.
Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are monthly, while those of
stock options currently are quarterly, and (b) the delivery requirements are
<PAGE>
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (a) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (b) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the option. The amount of cash
received will be equal to such difference between the closing price of the index
and the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an exchange or it may let the options expire unexercised.
The effectiveness of purchasing or writing stock index options as a
hedging technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price movements of
the stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether a Fund will realize a gain or loss from the purchase or writing of
options on an index depends upon movements in the level of stock prices in the
stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by a Fund of options on stock indexes will be
subject to its adviser's ability to predict correctly movements in the direction
of the stock market generally or of a particular industry. This requires
different skills and techniques than predicting changes in the prices of
individual stocks.
An Underlying Smith Barney Fund will engage in stock index options
transactions only when determined by its adviser to be consistent with the
Fund's efforts to control risk. There can be no assurance that such judgment
will be accurate or that the use of these portfolio strategies will be
successful. When a Fund writes an option on a stock index, the Fund will
establish a segregated account with its custodian in an amount equal to the
market value of the option and will maintain the account while the option is
open.
Mortgage-Related Securities. The average maturity of pass-through pools
of mortgage related securities varies with the maturities of the underlying
mortgage instruments. In addition, a pool's stated maturity may be shortened by
unscheduled payments on the underlying mortgages. Factors affecting mortgage
prepayments include the level of interest rates, general economic and social
conditions, the location of the mortgaged property and age of the mortgage.
Because prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. Common practice is to
assume that prepayments will result in an average life ranging from 2 to 10
years for pools of fixed-rate 30-year mortgages. Pools of mortgages with other
maturities or different characteristics will have varying average life
assumptions.
Mortgage-related securities may be classified as private, governmental
or government-related, depending on the issuer or guarantor. Private
mortgage-related securities represent pass-through pools consisting principally
of conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
<PAGE>
insurance companies. Governmental mortgage-related securities are backed up by
the full faith and credit of the U.S. GNMA, the principal guarantor of such
securities, is a wholly owned U.S. government corporation within the Department
of Housing and Urban Development. Government-related mortgage-related securities
are not backed by the full faith and credit of the U.S. government. Issuers of
such securities include FNMA and FHLMC. FNMA is a government-sponsored
corporation owned entirely by private stockholders, which is subject to general
regulation by the Secretary of Housing and Urban Development. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA. FHLMC is a corporate instrumentality of the U.S., the stock of
which is owned by the Federal Home Loan Banks. Participation certificates
representing interests in mortgages from FHLMC's national portfolio are
guaranteed as to the timely payment of interest and ultimate collection of
principal by FHLMC.
Private U.S. governmental or government-related entities create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or interest
payments may vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage-related securities are developed and offered
to investors, certain of the Underlying Smith Barney Funds, consistent with
their investment objective and policies, may consider making investments in such
new types of securities.
Currency Transactions. Certain of the Underlying Smith Barney Funds may
enter into forward currency exchange transactions. A forward currency contract
is an obligation to purchase or sell a currency against another currency at a
future date and price as agreed upon by the parties. An Underlying Smith Barney
Fund that enters into a forward currency contract may either accept or make
delivery of the currency at the maturity of the forward contract or, prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract. Certain Funds may engage in forward currency transactions
in anticipation of, or to protect itself against, fluctuations in exchange
rates. A Fund might sell a particular foreign currency forward, for example,
when it holds bonds denominated in that currency but anticipates, and seeks to
be protected against, decline in the currency against the U.S. dollar.
Similarly, certain Funds may sell the U.S. dollar forward when it holds bonds
denominated in U.S. dollars but anticipates, and seeks to be protected against,
a decline in the U.S. dollar relative to other currencies. Further, certain
Funds may purchase a currency forward to "lock in" the price of securities
denominated in that currency which it anticipates purchasing.
Transaction hedging is the purchase or sale of forward currency
contracts with respect to specific receivable or payables of the Fund generally
arising in connection with the purchase or sale of its securities. Position
hedging, generally, is the sale of forward currency contracts with respect to
portfolio security positions denominated or quoted in the currency. A Fund may
not position hedge with respect to a particular currency to an extent greater
than the aggregate market value at any time of the security or securities held
in its portfolio denominated or quoted in or currently convertible (such as
through exercise of an option or consummation of a forward currency contract)
into that particular currency, except that certain Underlying Smith Barney Funds
may utilize forward currency contracts denominated in the European Currency Unit
<PAGE>
to hedge portfolio security positions when a security or securities are
denominated in currencies of member countries in the European Monetary System.
If a Fund enters into a transaction hedging or position hedging transaction, it
will cover the transaction through one or more of the following methods: (a)
ownership of the underlying currency or an option to purchase such currency; (b)
ownership of an option to enter into an offsetting forward currency contract;
(c) entering into a forward contract to purchase currency being sold or to sell
currency being purchased, provided that such covering contract is itself covered
by any one of these methods unless the covering contract closes out the first
contract; or (d) depositing into a segregated account with the custodian or a
sub-custodian of the Fund cash or readily marketable securities in an amount
equal to the value of the Fund's total assets committed to the consummation of
the forward currency contract and not otherwise covered. In the case of
transaction hedging, any securities placed in an account must be liquid debt
securities. In any case, if the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account so
that the value of the account will equal the above amount. Hedging transactions
may be made from any foreign currency into dollars or into other appropriate
currencies.
At or before the maturity of a forward contract, a Fund either may sell
a portfolio security and 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 relevant Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or loss to the extent movement has occurred in forward
contract prices. Should forward prices decline during the period between a
Fund's entering into a forward contract for the sale of a currency and the date
that it enters into an offsetting contract for the purchase of the currency, the
Fund will realize a gain to the extent that the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The cost to a Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because transactions in currency exchange are
usually conducted on a principal basis, no fees or commissions are involved. The
use of forward currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. In addition, although forward currency
contracts limit the risk of loss due to a decline in the value of the hedged
currency, at the same time, they limit any potential gain that might result
should the value of the currency increase.
If a devaluation is generally anticipated a Fund may not be able to
contract to sell the currency at a price above the devaluation level they
anticipate.
Foreign Currency Options. Certain Underlying Smith Barney Funds may
purchase or write put and call options on foreign currencies for the purpose of
hedging against changes in future currency exchange rates. Foreign currency
options generally have three, six and nine month expiration cycles. Put options
convey the right to sell the underlying currency at a price which is anticipated
to be higher than the spot price of the currency at the time the option expires.
Call options convey the right to buy the underlying currency at a price which is
expected to be lower than the spot price of the currency at the time that the
option expires.
<PAGE>
An Underlying Smith Barney Fund may use foreign currency options under
the same circumstances that it could use forward currency exchange transactions.
A decline in the dollar value of a foreign currency in which a Fund's securities
are denominated, for example, will reduce the dollar value of the securities,
even if their value in the foreign currency remains constant. In order to
protect against such diminutions in the value of securities that it holds, the
Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell the currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its securities that otherwise would have resulted. Conversely,
if a rise in the dollar value of a currency in which securities to be acquired
are denominated is projected, thereby potentially increasing the cost of the
securities, the Fund may purchase call options on the particular currency. The
purchase of these options could offset, at least partially, the effects of the
adverse movements in exchange rates. The benefit to the Fund derived from
purchases of foreign currency options, like the benefit derived from other types
of options, will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direction or
to the extent anticipated, the Fund could sustain losses on transactions in
foreign currency options that would require it to forego a portion or all of the
benefits of advantageous changes in the rates.
Foreign Government Securities. Among the foreign government securities
in which certain Underlying Smith Barney Funds may invest are those issued by
countries with developing economies, which are countries in the initial stages
of their industrialization cycles. Investing in securities of countries with
developing economies involves exposure to economic structures that are generally
less diverse and less mature, and to political systems that can be expected to
have less stability, than those of developed countries. The markets of countries
with developing economies historically have been more volatile than markets of
the more mature economies of developed countries, but often have provided higher
rates of return to investors.
Ratings as Investment Criteria. In general, the ratings of nationally
recognized statistical rating organization ("NRSROs") represent the opinions of
these agencies as to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute standards of quality
and do not evaluate the market value risk of the securities. These ratings will
be used the by Underlying Smith Barney Funds as initial criteria for the
selection of portfolio securities, but the Funds also will rely upon the
independent advice of their respective advisers to evaluate potential
investments. Among the factors that will be considered are the long-term ability
of the issuer to pay principal and interest and general economic trends. The
Appendix to this Statement of Additional Information contains further
information concerning the rating categories of NRSROs and their significance.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. In addition, it is possible that an NRSRO might not change its
rating of a particular issue to reflect subsequent events. None of these events
<PAGE>
will require sale of such securities by a Fund, but the Fund's adviser will
consider such events in its determination of whether the Fund should continue to
hold the securities. In addition, to the extent that the ratings change as a
result of changes in such organizations or their rating systems, or due to a
corporate reorganization, a Fund will attempt to use comparable ratings as
standards for its investments in accordance with its investment objective and
policies.
Futures Contracts. The purpose of the acquisition or sale of a futures
contract by a Fund is to mitigate the effects of fluctuations in interest rates
or currency or market values, depending on the type of contract, on securities
or their values without actually buying or selling the securities. Of course,
because the value of portfolio securities will far exceed the value of the
futures contracts sold by a Fund, an increase in the value of the futures
contracts could only mitigate -- but not totally offset -- the decline in the
value of the Fund.
Certain of the Underlying Smith Barney Funds may enter into futures
contracts or related options on futures contracts that are traded on a domestic
or foreign exchange or in the over-the-counter market. Generally, these
investments may be made solely for the purpose of hedging against changes in the
value of its portfolio securities due to anticipated changes in interest rates,
currency values and/or market conditions when the transactions are economically
appropriate to the reduction of risks inherent in the management of the Fund and
not for purposes of speculation. However, the International Equity Portfolio and
the International Balanced Portfolio may also enter into futures transactions
for non-hedging purposes, subject to applicable law. The ability of the Funds to
trade in futures contracts may be limited by the requirements of the Internal
Revenue Code of 1986 as amended (the "Code"), applicable to a regulated
investment company.
No consideration is paid or received by a Fund upon entering into a
futures contract. Initially, a Fund will be required to deposit with its
custodian an amount of cash or cash equivalents equal to approximately 1% to 10%
of the contract amount (this amount is subject to change by the board of trade
on which the contract is traded and members of such board of trade may charge a
higher amount). This amount, known as initial margin, is in the nature of a
performance bond or good faith deposit on the contract and is returned to a Fund
upon termination of the futures contract, assuming that all contractual
obligations have been satisfied. Subsequent payments, known as variation margin,
to and from the broker, will be made daily as the price of the securities,
currency or index underlying the futures contract fluctuates, making the long
and short positions in the futures contract more or less valuable, a process
known as "marking-to-market." At any time prior to expiration of a futures
contract, a Fund may elect to close the position by taking an opposite position,
which will operate to terminate the Fund's existing position in the contract.
Several risks are associated with the use of futures contracts as a
hedging device. Successful use of futures contracts by a Fund is subject to the
ability of its adviser to predict correctly movements in interest rates, stock
or bond indices or foreign currency values. These predictions involve skills and
techniques that may be different from those involved in the management of the
portfolio being hedged. In addition, there can be no assurance that there will
be a correlation between movements in the price of the underlying securities,
currency or index and movements in the price of the securities which are the
<PAGE>
subject of the hedge. A decision of whether, when and how to hedge involves the
exercise of skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected trends in
interest rates or currency values.
There is no assurance that an active market will exist for future
contracts at any particular time. Most futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit. It is
possible that futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses. In such event, and in the event of adverse price movements,
a Fund would be required to make daily cash payments of variation margin, and an
increase in the value of the portion of the portfolio being hedged, if any, may
partially or completely offset losses on the futures contract. As described
above, however, there is no guarantee that the price of the securities being
hedged will, in fact, correlate with the price movements in a futures contract
and thus provide an offset to losses on the futures contract.
If a Fund has hedged against the possibility of a change in interest
rates or currency or market values adversely affecting the value of securities
held in its portfolio and rates or currency or market values move in a direction
opposite to that which the Fund has anticipated, the Fund will lose part or all
of the benefit of the increased value of securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund had insufficient cash, it may have to sell securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. These sales of securities may, but will not
necessarily, be at increased prices which reflect the change in interest rates
or currency values, as the case may be.
Options on Futures Contracts. An option on an interest rate futures
contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in the
underlying interest rate futures contract at a specified exercise price at any
time prior to the expiration date of the option. An option on a foreign currency
futures contract, as contracted with the direct investment in such a contract,
gives the purchaser the right, but not the obligation, to assume a long or short
position in the relevant underlying future currency at a predetermined exercise
price at a time in the future. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option on the futures contract. The potential
for loss related to the purchase of an option on futures contracts is limited to
the premium paid for the option (plus transaction costs). Because the value of
the option is fixed at the point of sale, there are no daily cash payments to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net asset
value of a Fund investing in the options.
Several risks are associated with options on futures contracts. The
ability to establish and close out positions on such options will be subject to
<PAGE>
the existence of a liquid market. In addition, the purchase of put or call
options on interest rate and foreign currency futures will be based upon
predictions by a Fund's adviser as to anticipate trends in interest rates and
currency values, as the case may be, which could price to be incorrect. Even if
the expectations of an adviser are correct, there may be an imperfect
correlation between the change in the value of the options and of the portfolio
securities in the currencies being hedged.
Foreign Investments. Investors should recognize that investing in
foreign companies involves certain considerations which are not typically
associated with investing in U.S. issuers. Since certain Underlying Smith Barney
Funds will be investing in securities denominated in currencies other than the
U.S. dollar, and since certain Funds may temporarily hold funds in bank deposits
or other money market investments denominated in foreign currencies, the Funds
may be affected favorably or unfavorably by exchange control regulations or
changes in the exchange rate between such currencies and the dollar. A change in
the value of a foreign currency relative to the U.S. dollar will result in a
corresponding change in the dollar value of a Fund's assets denominated in that
foreign currency. Changes in foreign currency exchange rates may also affect the
value of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gain, if any, to be distributed to
shareholders by the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange markets.
Changes in the exchange rate may result over time from the interaction of many
factors directly indirectly affecting economic conditions and political
developments in other countries. Of particular importance are rates of
inflation, interest rate levels, the balance of payments and the extend of
government surpluses or deficits in the U.S. and the particular foreign country,
all of which are in turn sensitive to the monetary, fiscal and trade policies
pursued by the governments of the U.S. and other foreign countries important to
international trade and finance. Governmental intervention may also play a
significant role. National governments rarely voluntarily allow their currencies
to float freely in response to economic forces. Sovereign governments use a
variety of techniques, such as intervention by a country's central bank or
imposition of regulatory controls or taxes, to affect the exchange rates of
their currencies.
Securities held by an Underlying Smith Barney Fund may not be
registered with, nor the issuers thereof be subject to reporting requirements
of, the SEC. Accordingly, there may be less publicly available information about
the securities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Foreign issuers are
generally not subject to uniform financial reporting standards, practices and
requirements comparable to those applicable to U.S. issuers. In addition, with
respect to some foreign countries, there is the possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or domestic developments which could
affect U.S. investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments positions.
Certain Underlying Smith Barney Funds may invest in securities of foreign
governments (or agencies or instrumentalities thereof), and many, if not all, of
the foregoing considerations apply to such investments as well.
<PAGE>
Securities of some foreign companies are less liquid and their prices
are more volatile than securities of comparable domestic companies. Certain
foreign countries are known to experience long delays between the trade and
settlement dates of securities purchased or sold.
The interest payable on a Fund's foreign securities may be subject to
foreign withholding taxes, and while investors may be able to claim some credit
or deductions for such taxes with respect to their allocated shares of such
foreign tax payments, the general effect of these taxes will be to reduce the
Fund's income. Additionally, the operating expenses of a Fund can be expected to
be higher than that of an investment company investing exclusively in the U.S.
securities, since the expenses of the Fund, such as custodial costs, valuation
costs and communication costs, as well as the rate of the investment advisory
fees, though similar to such expenses of some other international funds, are
higher than those costs incurred by other investment companies.
Short Sales. Certain of the Underlying Smith Barney Funds may from time
to time sell securities short. A short sale is a transaction in which the Fund
sells securities that it does not own (but has borrowed) in anticipation of a
decline in the market price of the securities.
When a Fund makes a short sale, the proceeds it receives from the sale
are retained by a broker until the Fund replaces the borrowed securities. To
deliver the securities to the buyer, the Fund must arrange through a broker to
borrow the securities and, in so doing, the Fund becomes obligated to replace
the securities borrowed at their market price at the time of replacement,
whatever that price may be. The Fund may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
A Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or U.S. government securities. In addition, the Fund will place
in a segregated account with its custodian an amount of cash or U.S. government
securities equal to the difference, if any, between (a) the market value of the
securities sold at the time they were sold short and (b) any cash or U.S.
government securities deposited as collateral with the broker in connection with
the short sale (not including the proceeds of the short sale). Until it replaces
the borrowed securities, the Fund will maintain the segregated account daily at
a level so that the amount deposited in the account plus the amount deposited
with the broker (not including the proceeds from the short sale) (a) will equal
the current market value of the securities sold short and (b) will not be less
than the market value of the securities at the time they were sold short.
Short Sales Against the Box. Certain of the Underlying Smith Barney
Funds may enter into a short sale of common stock such that when the short
position is open the Fund involved owns an equal amount of preferred stocks or
debt securities, convertible or exchangeable, without payment of further
consideration, into an equal number of shares of the common stock sold short.
This kind of short sale, which is described as "against the box," will be
entered into by a Fund for the purpose of receiving a portion of the interest
earned by the executing broker from the proceeds of the sale. The proceeds of
the sale will be held by the broker until the settlement date when the Fund
delivers the convertible securities to close out its short position. Although
prior to delivery a Fund will have to pay an amount equal to any dividends paid
on the common stock sold short, the Fund will receive the dividends from the
preferred stock or interest from the debt securities convertible into the stock
sold short, plus a portion of the interest earned from the proceeds of the short
<PAGE>
sale. The Funds will deposit, in a segregated account with their custodian,
convertible preferred stock or convertible debt securities in connection with
short sales against the box.
Swap Agreements. Among the hedging transactions into which certain
Underlying Smith Barney Funds may enter are interest rate swaps and the purchase
or sale of interest rate caps and floors. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payment of interest on a notional principal amount
from the party selling such interest rate floor.
Certain Underlying Smith Barney Funds may enter into interest rate
swaps, caps and floors on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities, and will
usually enter into interest rate swaps on a net basis, i.e., the two payment
streams are netted but, with the Fund receiving or paying, as the case may be,
only the net amount of the two payments. Inasmuch as these hedging transactions
are entered into for good faith hedging purposes, the investments adviser and
the Fund believe such obligations do not constitute senior securities and,
accordingly will not treat them as being subject to its borrowing restrictions.
The net amount of the excess, if any, of a Fund's obligations over its
entitlement with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or liquid securities having an aggregate net asset
value at least equal to the accrued excess will be maintained in a segregated
account by a custodian that satisfied the requirements of the 1940 Act. [The
Funds will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in the highest rating category of at least one nationally
recognized rating organization at the time of entering into such transaction.]
If there is a default by the other party to such a transaction, a Fund will have
contractual remedies pursuant to the agreement related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
swap documentation. As a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations for which standardized documentation
has not yet been developed and, accordingly, they are less liquid than swaps.
New options and futures contracts and various combinations thereof
continue to be developed and certain Underlying Smith Barney Funds may invest in
any such options and contracts as may be developed to the extent consistent with
its investment objective and regulatory requirements applicable to investment
companies.
Restricted Securities. Certain of the Underlying Smith Barney Funds may
invest in securities the disposition of which is subject to legal or contractual
restrictions. The sale of restricted securities often requires more time and
<PAGE>
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on a national
securities exchange that are not subject to restrictions on resale. Restricted
securities often sell at a price lower than similar securities that are no
subject to restrictions on resale.
Reverse Repurchase Agreements. Certain Underlying Smith Barney Funds
may enter into reverse repurchase agreements. A reverse repurchase agreement
involves the sale of a money market instrument held by an Underlying Smith
Barney Fund coupled with an agreement by the Fund to repurchase the instrument
at a stated price, date and interest payment. The Fund will use the proceeds of
a reverse repurchase agreement to purchase other money market instruments which
either mature at a date simultaneous with or prior to the expiration of the
reverse repurchase agreement or which are held under an agreement to resell
maturing as of that time.
An Underlying Smith Barney Fund will enter into a reverse repurchase
agreement only when the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
transaction. Under the 1940 Act, reverse repurchase agreements may be considered
to be borrowings by the seller.
Certain Underlying Smith Barney Funds may enter into reverse repurchase
agreements with banks or broker-dealers. Entry into such agreements with
broker-dealers requires the creation and maintenance of a segregated account
with the Fund's custodian consisting of U.S. government securities, cash or cash
equivalents.
Leveraging. Certain of the Underlying Smith Barney Funds may from time
to time leverage their investments by purchasing securities with borrowed money.
A Fund is required under the 1940 Act to maintain at all times an asset coverage
of 300% of the amount of its borrowings. If, as a result of market fluctuations
or for any other reason, the Fund's asset coverage drops below 300%, the Fund
must reduce its outstanding bank debt within three business days so as to
restore its asset coverage to the 300% level.
Any gain in the value of securities purchased with borrowed money that
exceeds the interest paid on the amount borrowed would cause the net asset value
of the Underlying Smith Barney Fund's shares to increase more rapidly than
otherwise would be the case. Conversely, any decline in the value of securities
purchased would cause the net asset value of the Fund's shares to decrease more
rapidly than otherwise would be the case. Borrowed money thus creates an
opportunity for greater capital gain but at the same time increases exposure to
capital risk. The net cost of any borrowed money would be an expense that
otherwise would not be incurred, and this expense could restrict or eliminate a
Fund's net investment income in any given period.
Foreign Commodity Exchanges. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the
Commodity Futures Trading Commission and may be subject to greater risks than
trading on domestic exchanges. For example, same foreign exchanges may be
principal markets so that no common clearing facility exists and a trader may
look only to the broker for performance of the contract. In addition, unless an
underlying Smith Barney Fund trading on a foreign commodity exchange hedges
against fluctuations in the exchange rate between the U.S. dollar and the
currencies in which trading is done on foreign exchanges, any profits that the
Fund might realize in trading could be eliminated by adverse changes in the
exchange rate, or the Fund could incur losses as a result of those changes.
<PAGE>
American, European and Continental Depository Receipts. Certain of the
Underlying Smith Barney Funds may invest in the securities of foreign and
domestic issuers in the form of American Depositary Receipts ("ADRs") and
European Depositary Receipts ("EDRs"). These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a U.S. bank or trust company
that evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which sometimes are referred to as Continental Depositary
Receipts ("CDRs"), are receipts issued in Europe typically by foreign banks and
trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and CDRs, in bearer form, are designed for use in
European securities markets.
Convertible Securities. Convertible securities are fixed-income
securities that may be converted at either a stated price or stated rate into
underlying shares of common stock. Convertible securities have general
characteristics similar to both fixed-income and equity securities. Although to
a lesser extent than with fixed-income securities generally, the market value of
convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition, because of
the conversion feature, the market value of convertible securities tends to vary
with fluctuations in the market value of the underlying common stocks and,
therefore, also will react to variations in the general market for equity
securities. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As fixed-income securities, convertible securities are investments that
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. There can be
no assurance of capital appreciation, however, because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar nonconvertible securities.
<PAGE>
Warrants. Because a warrant does not carry with it the right to
dividends or voting rights with respect to the securities that the warrant
holder is entitled to purchase, and because it does not represent any rights to
the assets of the issuer, a warrant may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Warrants acquired by an Underlying Smith Barney Fund in units or attached to
securities may be deemed to be without value.
Preferred Stock. Preferred stocks, like debt obligations, are
generally fixed-income securities. Shareholder of preferred stocks normally
have the right to receive dividends at a fixed rate when and as declared by
the issuer's board of directors, but do not participate in other amounts
available for distribution by the issuing corporation. Dividends on the
preferred stock may be cumulative, and all cumulative dividends usually must
be paid prior to common shareholders receiving any dividends. Preferred stock
dividends must be paid before common stock dividends and, for that reason,
preferred stocks generally entail less risk than common stocks. Upon
liquidation, preferred stocks are entitled to a specified liquidation
preference, which is generally the same as the par or stated value, and are
senior in right of payment to common stock. Preferred stocks are, however,
equity securities in the sense that they do not represent a liability of the
issuer and, therefore, do not offer as great a degree of protection of capital
or assurance of continued income as investments in corporate debt securities.
In addition, preferred stocks are subordinated in right of payment to all debt
obligations and creditors of the issuer, and convertible preferred stocks may
be subordinated to other preferred stock of the same issuer.
Investment Restrictions
The Cardinal Fund has adopted the following investment restrictions for
the protection of shareholders. Restrictions 1 through 6 below have been
adopted by the Cardinal Fund with respect to each Portfolio as fundamental
policies. Under the 1940 Act, a fundamental policy of a Portfolio may not be
changed without the vote of a majority, as defined in the 1940 Act, of
the outstanding voting securities of the Portfolio. Such majority is
defined as the lesser of (a) 67% or more of the shares present at the meeting,
if the holders of more than 50% of the outstanding shares of the Portfolio
are present or represented by proxy, or (b) more than 50% of the outstanding
shares. Investment restrictions 7 through 15 may be changed by a vote of a
majority of the Cardinal Fund's Board of Directors at any time.
The investment policies adopted by the Cardinal Fund prohibit a
Portfolio from:
1. Borrowing money except from banks for temporary or
emergency purposes, including the meeting of redemption requests in an
amount not exceeding 33-1/3% of the value of the Portfolio's total
assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the
borrowing is made.
2. Making loans of money to others, except through the
purchase of portfolio securities consistent with its investment
objective and policies and repurchase agreements.
<PAGE>
3. Underwriting the securities of other issuers, except
insofar as the Portfolio may be deemed an underwriter under the
Securities Act of 1933, as amended, by virtue of disposing of portfolio
securities.
4. Purchasing or selling real estate except that each
Portfolio may purchase and sell money market securities that are
secured by real estate or issued by companies that invest or deal in
real estate.
5. Investing in commodities.
6. Issuing senior securities except as permitted by
investment restriction 1.
7. Purchasing securities on margin.
8. Making short sales of securities or maintaining a
short position.
9. Pledging, hypothecating, mortgaging or otherwise
encumbering more than 33-1/3% of the value of the Portfolio's total
assets.
10. Investing in oil, gas or other mineral exploration
or development programs.
11. Writing or selling puts, calls, straddles, spreads
or combinations thereof.
12. Purchasing restricted securities, illiquid
securities (such as repurchase agreements with maturities in excess of
seven days) or other securities that are not readily marketable.
13. Purchasing any security if as a result the Portfolio
would then have more than 5% of its total assets invested in securities
of companies (including predecessors) that have been in continuous
operation for fewer than three years (except for Underlying Smith
Barney Funds).
14. Making investments for the purpose of exercising
control or management.
15. Purchasing or retaining securities of any company
if, to the knowledge of the Cardinal Fund, any officer or director of
the Cardinal Fund or SBMFM individually owns more than 1/2 of 1% of the
outstanding securities of such company and together they own
beneficially more than 5% of such securities.
The Cardinal Fund may make commitments more restrictive than the
restrictions listed above with respect to a Portfolio so as to permit the sale
of shares of the Portfolio in certain states. Should the Cardinal Fund determine
that any such commitment is no longer in the best interests of the Portfolio and
its shareholders, the Cardinal Fund will revoke the commitment by terminating
the sale of shares of the Portfolio in the relevant state. The percentage
limitations contained in the restrictions listed above (other than with respect
to (1) above) apply at the time of purchases of securities.
<PAGE>
Notwithstanding the foregoing investment restrictions, the Underlying
Smith Barney Funds in which the Portfolios invest have adopted certain
investment restrictions which may be more or less restrictive than those listed
above, thereby permitting a Portfolio to engage in investment strategies
indirectly that are prohibited under the investment restrictions listed above.
The investment restrictions of an Underlying Smith Barney Funds are located in
its Statement of Additional Information.
Pursuant to an exemptive order issued by the SEC (Investment Company
Act Release No. IC- , __________ __, 1995) each Portfolio may (i) purchase more
than 3% of the outstanding voting securities of any Underlying Smith Barney
Fund, (ii) invest more than 5% of its assets in any one Underlying Smith Barney
Fund and (iii) invest substantially all of its assets in the Underlying Smith
Barney Funds.
Because of their investment objectives and policies, the Portfolios
will each concentrate more than 25% of their assets in the mutual fund industry.
In accordance with the Portfolios' investment programs set forth in the
Prospectus, each of the Portfolios may invest more than 25% of its assets in
certain Underlying Smith Barney Funds. However, each of the Underlying Smith
Barney Funds in which each Fund will invest (other than the Smith Barney
Utilities Fund) will not concentrate more than 25% of its total assets in any
one industry. The Smith Barney Utilities Fund will invest at least 65% of its
assets in securities of companies in the utility industries.
Portfolio Turnover
Each Portfolio's turnover rate is not expected to exceed 25% annually. A
Portfolio may purchase or sell securities to: (a) accommodate purchases and
sales of its shares, (b) change the percentages of its assets invested in each
of the Underlying Smith Barney Funds in response to market conditions, and (c)
maintain or modify the allocation of its assets between equity and fixed income
funds and among the Underlying Smith Barney Funds within the percentage limits
described in the Prospectus.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in the Prospectus
applies to purchases made by any "purchaser," which is defined to include the
following: (a) an individual; (b) an individual's spouse and his or her children
purchasing shares for his or her own account; (d) a pension, profit-sharing or
other employee benefit plan qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and qualified employee benefit
plans of employers who are "affiliated persons" of each other within the meaning
of the 1940 Act; (e) tax-exempt organizations enumerated in Section 501(c)(3) or
(13) of the Code; and (f) a trustee or other professional fiduciary (including a
bank, or an investment adviser registered with the SEC under the Investment
Advisers Act of 1940, as amended ) purchasing shares of a Portfolio for one or
more trust estates of fiduciary accounts. Purchasers who wish to combine
purchase orders to take advantage of volume discounts on Class A shares should
contact a Smith Barney Financial Consultant.
<PAGE>
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the Prospectus, apply
to any purchase of Class A shares if the aggregate investment in Class A shares
of a Portfolio and in Class A shares of other funds of the Smith Barney Mutual
Funds that are offered with an initial sales charge, including the purchase
being made, of any purchaser is $25,000 or more. The reduced sales charge is
subject to confirmation of the shareholder's holdings through a check of
appropriate records. The Cardinal Fund reserves the right to terminate or amend
the combined right of accumulation at any time after written notice to
shareholders. For further information regarding the combined right of
accumulation, shareholders should contact a Smith Barney Financial Consultant.
Determination of Public Offering
The Cardinal Fund offers its shares to the public on a continuous basis. The
public offering price for Class A shares of the Cardinal Fund is equal to the
net asset value per share at the time of purchase plus an initial sales charge
based on the aggregate amount of the investment. The public offering price for
Class B, Class C and Class Y shares (and Class A share purchases, including
applicable rights of accumulation, equaling or exceeding $500,000) is equal to
the net asset value per share at the time of purchase and no sales charge is
imposed at the time of purchase. A contingent deferred sales charge ("CDSC"),
however, is imposed on certain redemptions of Class B and Class C shares, and of
Class A shares when purchased in amounts equaling or exceeding $500,000. The
method of computation of the public offering price is shown in the Cardinal
Fund's financial statements incorporated by reference in their entirety into
this Statement of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed (a)
for any period during which the NYSE is closed (other than for customary weekend
or holiday closings), (b) when trading in markets a Portfolio normally utilizes
is restricted, or an emergency, as determined by the SEC, exists so that
disposal of a Portfolio's investments or determination of net asset value is not
reasonably practicable or (c) for such other periods as the SEC by order may
permit for protection of a Portfolio's shareholders.
<PAGE>
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 ($5,000 for
retirement plan accounts) and who wish to receive specific amounts of cash
monthly or quarterly. withdrawals of at least $100 may be made under the
Withdrawal Plan by redeeming as many shares of a Portfolio as may be necessary
to cover the stipulated withdrawal payment. Any applicable CDSC will not be
waived on amounts withdrawn by shareholders that exceed 1.00% per month of the
value of a shareholder's shares at the time the Withdrawal Plan commences. (With
respect to Withdrawal Plans in effect prior to November 7, 1994, any applicable
CDSC will be waived on amounts withdrawn that do not exceed 2.00% per month of
the value of a shareholder's shares at the time the Withdrawal Plan commences.)
To the extent withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in a Portfolio, there will be a reduction in the value
of the shareholder's and continued withdrawal payments will reduce the
shareholder's investment and ultimately may exhaust it. Withdrawal payments
should not be considered as income from investment in a Portfolio. Furthermore,
as it generally would not be advantageous to a shareholder to make additional
investments in a Portfolio at the same time he or she is participating in the
Withdrawal Plan, purchases by such shareholders in amounts of less than $5,000
ordinarily will not be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who
hold their shares in certificate form must deposit their share certificates with
First Data as agent for Withdrawal Plan members. All dividends and distributions
on shares in the Withdrawal Plan are reinvested automatically at net asset value
in additional shares of the Portfolio. Effective November 7, 1994, Withdrawal
Plans should be set up with any Smith Barney Financial Consultant. A
shareholders who purchase shares directly through TSSG may continue to do so and
applications for participation in the Withdrawals Plan must be received by TSSG
no later than the eighth day of the month to be eligible for participation
beginning with that month's withdrawal. For additional information, shareholders
should contact a Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Cardinal Fund's distributor on a best efforts basis
pursuant to a distribution agreement (the "Distribution Agreement"). The
Distribution Agreement also gives authority to the Cardinal Fund to use the
"Smith Barney" name so long as the Distribution Agreement is in effect. To
compensate Smith Barney for the services it provides and for the expense it
bears under the Distribution Agreement, the Cardinal Fund has adopted a services
and distribution plan (the "Plan'") pursuant to Rule 12b-1 under the 1940 Act.
Under the Plan, each Portfolio pays Smith Barney a service fee, accrued daily
and paid monthly, calculated at the annual rate of .25% of the value of the
Portfolio's average daily net assets attributable to the Class A, Class B and
Class C shares. In addition, each Portfolio pays Smith Barney a distribution fee
with respect to the Class B and Class C shares primarily intended to compensate
Smith Barney for its initial expense of paying Financial Consultants a
commission upon sales of those shares. The distribution fees applicable to Class
B and Class C shares of the Aggressive Portfolio, the Growth Portfolio and the
Traditional Portfolio, accrued daily and paid monthly, are calculated at the
annual rate of .75% of the value of a Portfolio's average daily net assets
attributable to the shares of the respective Class. The distribution fees
applicable to Class B and Class C shares of the Balanced Portfolio and the
Income Portfolio, accrued daily and paid monthly, are calculated at the annual
rate of .50% and .45%, respectively, of the value of the Portfolio's average
daily net assets attributable to the shares of the respective Class.
<PAGE>
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Cardinal Fund's Board of
Directors, including a majority of the Independent Directors. The Plan may not
be amended to increase the amount of the service and distribution fees without
shareholders approval, and all material amendments of the Plan also must be
approved by the Directors and Independent Directors in the manner described
above. The Plan may be terminated with respect to a Class of a Portfolio at any
time, without penalty, by the vote of a majority of the Independent Directors or
by a vote of a majority of the outstanding voting securities of the Class (as
defined in the 1940 Act). Pursuant to the Plan, Smith Barney will provide the
Cardinal Fund's Board of Directors with periodic reports of amounts expended
under the Plan and the purpose for which such expenditures were made.
VALUATION OF SHARES
The net asset value of each Portfolio's Classes of Shares will be determined on
any day that the New York Stock Exchange (the "NYSE") is open. The NYSE is
closed on the following holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day,
and on the preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Because of the differences in
distribution fees and Class-specific expenses, the per share net asset value of
each Class may differ. The following is a description of the procedures used by
each Portfolio in valuing its assets.
The value of each Underlying Smith Barney Fund will be its net asset
value at the time of computation. Short-term investments that have a maturity of
more than 60 days are valued at prices based on market quotations for securities
of similar type, yield and maturity. Short-term investments that have a maturity
of 60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Cardinal Fund's Board of Directors. Amortized cost involves
valuing an instrument at its original cost to the Portfolio and thereafter
assuming a constant amortization to maturity of any discount or premium
regardless of the effect of fluctuating interest rates on the market value of
the instrument.
EXCHANGE PRIVILEGE
Except as noted below and in the Prospectus, shareholders of any fund of the
Smith Barney Mutual Funds may exchange all or part of their shares of the same
class of other funds of the Smith Barney Mutual Funds, to the extent such shares
are offered for sale in the shareholder's state of residence, on the basis of
relative net asset value per share at the time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may
be exchanged for Class A shares of any of the other funds, and
<PAGE>
the sales charge differential, if any, will be applied. Class
A shares of any fund may be exchanged without a sales charge
for shares of the funds that are offered without a sales
charge. Class A shares of any fund purchased without a sales
charge may be exchanged for shares sold with a sales charge,
and the appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of
shares may be exchanged for Class A shares of any of the other
funds, and the sales charge differential, if any, will be
applied.
C. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of any fund exchanged for Class B
shares of another fund will be subject to the higher
applicable CDSC of the two funds and, for purposes of
calculating CDSC rates, and conversion periods, will be deemed
to have been held since the date the shares being exchanged
were deemed to be purchased.
Dealers other than Smith Barney must notify First Data of the
investor's prior ownership of Class A shares of Smith Barney High Income Fund
and the account number in order to accomplish an exchange of shares of Smith
Barney High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the
same Class in a fund with different investment objectives when they believe that
a shift between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the fund shares being
acquired may legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund into which an
exchange is being considered. Prospectuses may be obtained from a Smith Barney
Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value and, subject to any applicable CDSC, the proceeds are immediately
invested, at a price as described above, in shares of the fund being acquired.
Smith Barney reserves the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time after written notice to
shareholders.
IRA AND OTHER PROTOTYPE PLANS
Copies of the following plans with custody or trust agreements have been
approved by the Internal Revenue Service and are available from the Cardinal
Fund or Smith Barney; investors should consult with their own tax or retirement
planning advisors prior to the establishment of a plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Tax Reform Act of 1986 (the "Tax Reform Act") changed the eligibility
requirements for participants in Individual Retirement Accounts ("IRAs"). Under
the Tax Reform Act's new provisions, if you or your spouse has earned income and
neither you nor your spouse is an active participant in any employer-sponsored
retirement plan, each of you may establish an IRA and make maximum annual
contributions equal to the lesser of earned income or $2,000. If your spouse is
not employed, you may contribute and deduct on your joint venture a total of
$2,250 between two IRA's.
<PAGE>
If you or your spouse is an active participant in an employer-sponsored
retirement plan, a deduction for contributions to an IRA might still be allowed
in full or in part, depending on your combined adjusted gross income. For
married couples filing jointly, a full deduction of contributions to an IRA will
be allowed where the couples' adjusted gross income is below $40,001 ($25,001
for an unmarried individual); a partial deduction will be allowed when adjusted
gross income is between $40,001-$50,000 ($25,001-$35,000 for an unmarried
individual); and no deduction when adjusted income is $50,000 ($35,000 for an
unmarried individual). Shareholders should consult their tax advisors concerning
the effects of the Tax Reform Act on the deductibility of their IRA
contributions.
A Rollover IRA is available to defer taxes on lump sum payments and
other qualifying rollover amounts (no maximum) received from another retirement
plan.
An employer who has established a Simplified Employee Pension - IRA
("SEP-IRA") on behalf of eligible employees may make a maximum annual
contribution to each participant's account of 15% (up to $22,500) of each
participant's compensation.
In addition, certain small employers (those who have 25 or fewer
employees) can establish a Simplified Employees Pension Plan - Salary Reduction
Plan ("SEP-Salary Reduction Plan") under which employees can make elective
pre-tax contributions up to $9,240 of gross income. Consult your tax advisor for
special rules regarding establishing either type of SEP.
An ERISA disclosure statement providing additional details is included
with each IRA application sent to participants.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-corporate entities
may purchase shares of the Fund through the Smith Barney Prototype Paired
Defined Contribution Plan. the prototype permits adoption of profit-sharing
provisions, money purchase pension provisions, or both, to provide benefits for
eligible employees and their beneficiaries. The prototype provides for a maximum
annual tax deductible contribution on behalf of each Participant of up to 25% of
compensation, but not to exceed $30,000 (provided that a money purchase pension
plan or both a profit-sharing plan and a money purchase pension plan are adopted
thereunder).
PERFORMANCE
From time to time, the Cardinal Fund may quote a Portfolio's yield or total
return in advertisements or in reports and other communications to shareholders.
The Cardinal Fund may include comparative performance information in advertising
or marketing the Portfolio's shares. Such performance information may include
the following industry and financial publications: Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Times, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar Mutual Fund Values, The New York
Times, USA Today and The Wall Street Journal. To the extent any advertisement or
sales literature of a Portfolio describes the expenses or performance of a
Class, it will also disclose such information for the other Classes.
<PAGE>
Yield
A Portfolio's 30-day yield figure described below is calculated according to a
formula prescribed by the SEC. The formula can be expressed as follows:
YIELD = 2[( [GRAPHIC OMITTED] + 1)6 - 1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the
last day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations purchased by the Portfolio at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that in periods of declining interest rates
a Portfolio's yield will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates, the Portfolio's yield will tend
to be somewhat lower. In addition, when interest rates are falling, the inflow
of net new money to the Portfolio from the continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than the
balance of the Portfolio's investments, thereby reducing the current yield of
the Portfolio. In periods of rising interest rates, the opposite can be expected
to occur.
Average Annual Total Return
"Average annual total return" figures, as described below, are computed
according to a formula prescribed by the SEC. The formula can be expressed as
follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a
Hypothetical $1,000 investment made
at the beginning of a 1-, 5- or
10-year period at the end of the 1-,
5- or 10-year period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions. A Class' total return
figures calculated in accordance with
the above formula assume that the
maximum applicable sales charge or
maximum applicable CDSC, as the case
may be, has been deducted from the
hypothetical $1,000 initial investment
at the time of purchase or redemption,
as applicable.
<PAGE>
Aggregate Total Return
Aggregate total return figures, as described below, represent the cumulative
change in the value of an investment in the Class for the specified period and
are computed by the following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a
Hypothetical $10,000 investment made at
the beginning of a 1-, 5- or 10-year
period (or fractional portion thereof),
at the end of the 1-, 5- or 10-year
period (or fractional portion thereof),
assuming reinvestment of all dividends
and distributions.
A Class' performance will vary from time to time depending upon market
conditions, the composition of the Portfolio's investment portfolio and
operating expenses and the expenses exclusively attributable to the Class.
Consequently, any given performance quotation should not be considered
representative of the Class' performance for any specified period in the future.
Because performance will vary, it may not provide a basis for comparing an
investment in the Class with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Class'
performance with that of other mutual funds should give consideration to the
quality and maturity of the respective investment companies' portfolio
securities.
TAXES
The following is a summary of certain Federal income tax considerations that may
affect the Cardinal Fund and its shareholders. The summary is not intended as a
substitute for individual tax advice, and investors are urged to consult their
tax advisors as to the tax consequences of an investment in any Portfolio of the
Cardinal Fund.
Tax Status of the Portfolios
Each Portfolio will be treated as a separate taxable entity for Federal income
tax purposes.
Each Portfolio intends to qualify separately each year as a "regulated
investment company" under the Code. A qualified Portfolio will not be liable for
Federal income taxes to the extent that its taxable net investment income and
net realized capital gains are distributed to its shareholders, provided that
each Portfolio distributes at least 90% of its net investment income.
Each Portfolio intends to accrue dividend income for Federal income tax
purposes in accordance with the rules applicable to regulated investment
<PAGE>
companies. In some cases, these rules may have the effect of accelerating (in
comparison to other recipients of the dividend) the time at which the dividend
is taken into account by a Portfolio as taxable income.
Distributions of an Underlying Smith Barney Fund's investment company
taxable income are taxable as ordinary income to a Portfolio which invests in
the Fund. Distributions of the excess of an Underlying Smith Barney Fund's
net long-term capital gain over its net short-term capital loss, which are
properly designated as "capital gains dividends," are taxable as long-term
capital gain to a Portfolio which invests in the Fund, regardless of how long
the Portfolio held the Fund's shares, and are not eligible for the corporate
dividends-received deduction. Upon the sale or other disposition by a
Portfolio of shares of any Underlying Smith Barney Fund, the Portfolio
generally will realize a capital gain or loss which will be long-term or
short-term, generally depending upon the Portfolio's holding period for the
shares.
Tax Treatment of Shareholders
Distributions of investment company taxable income generally are taxable
to shareholders as ordinary income. If an Underlying Smith Barney Fund
derives dividends from domestic corporations, a portion of the income
distributions of a Portfolio which invests in that Fund may be eligible for
the 70% deduction for dividends received by corporations. Shareholders will
be informed of the portion of dividends which so qualify. The dividends
received deduction is reduced to the extent the shares of the Underlying
Smith Barney Fund with respect to which the dividends are received are
treated as debt-financed under federal income tax law and is eliminated if
either the shares of the corporation paying the dividend, the shares of the
Underlying Smith Barney Fund or the shares of the Portfolio are deemed to have
been held by the Underlying Smith Barney Fund, the Portfolio or the
shareholders, as the case may be, for less than 46 days.
Distributions of net realized capital gains designated by a Portfolio
as capital gains dividends are taxable to shareholders as long-term capital
gain, regardless of the length of time the shares of a Portfolio have been held
by a shareholder. Distributions of capital gains, whether long- or short-term,
are not eligible for the dividends received deduction.
Dividends (including capital gain dividends) declared by a Portfolio in
October, November or December of any calendar year to shareholders of record on
a date in such a month will be deemed to have been received by shareholders on
December 31 of that calendar year, provided that the dividend is actually paid
by the Portfolio during January of the following calendar year.
All dividends are taxable to the shareholder whether reinvested in
additional shares or received in cash. Shareholders receiving distributions in
the form of additional shares will have a cost basis for Federal income tax
purposes in each share received equal to the net asset value of a share of
Portfolio on the reinvestment date. Shareholders will be notified annually as to
the Federal tax status of distributions.
Distributions by a Portfolio reduce the net asset value of the
Portfolio's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless generally would be
taxable to the shareholder as ordinary income or capital gains as described
above, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should be careful to consider the
tax implications of buying shares just prior to a distribution. The price of
shares purchased at that time includes the amount of the forthcoming
distribution but the distribution generally would be taxable to him or her.
Upon redemption, sale or exchange of his shares, a shareholder will
realize a taxable gain or loss depending upon his basis for his shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. Such gain or loss generally will be long-term
or short-term depending upon the shareholder's holding period for the shares.
However, a loss realized by a shareholder on the sale of shares of a Portfolio
<PAGE>
with respect to which capital gain dividends have been paid will, to the extent
of such capital gain dividends, be treated as long-term capital loss if such
shares have been held by the shareholder for six months or less. A gain realized
on a redemption, sale or exchange will not be affected by a reacquisition of
shares. A loss realized on a redemption, sale or exchange, however, will be
disallowed to the extent the shares disposed of are replaced (whether through
reinvestment of distributions or otherwise) within a period of 61 days beginning
30 days before and ending 30 days after the disposition of the shares. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
If a shareholder (a) incurs a sales charge in acquiring shares of the
Cardinal Fund, (b) disposes of those shares within 90 days and (c) acquires
shares in a mutual fund for which the otherwise applicable sales charge is
reduced by reason of a reinvestment right (i.e., exchange privilege), the
original sales charge increases the shareholder's tax basis in the original
shares only to the extent the otherwise applicable sales charge for the second
acquisition is not reduced. The portion of the original sales charge that does
not increase the shareholder's tax basis in the original shares would be treated
as incurred with respect to the second acquisition and, as a general rule, would
increase the shareholder's tax basis in the newly acquired shares. Furthermore,
the same rule also applies to a disposition of the newly acquired shares made
within 90 days of the subsequent acquisition. This provision prevents a
shareholder from immediately deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Backup Withholding. If a shareholder fails to furnish a correct taxpayer
identification number, fails to fully report dividend or interest income, or
fails to certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to such withholding, then the
shareholder may be subject to a 31% "backup withholding tax" with respect to (a)
any taxable dividends and distributions and (b) any proceeds of any redemption
of the Cardinal Fund shares. An individual's taxpayer identification number is
his or her social security number. The backup withholding tax is not an
additional tax and may be credited against a shareholder's regular federal
income tax liability.
Taxation of the Underlying Smith Barney Funds
Each Underlying Smith Barney Fund intends to qualify annually and elect to be
treated as a regulated investment company under Subchapter M of the Code. In any
year in which an Underlying Smith Barney Fund qualifies as a regulated
investment company and timely distributes all of its taxable income, the
Underlying Smith Barney Fund generally will not pay any federal income or excise
tax.
<PAGE>
If more than 50% in value of an Underlying Smith Barney Fund's assets
at the close of any taxable year consists of stocks or securities of foreign
corporations, that Underlying Smith Barney Fund may elect to treat certain
foreign taxes paid by it as paid by its shareholders. The shareholders would
then be required to include their proportionate share of the electing Fund's
foreign income and related foreign taxes in income even if the shareholder
does not receive the amount representing foreign taxes. Shareholders
itemizing deductions could then deduct the foreign taxes or, subject to
certain limitations, claim a direct dollar for dollar tax credit against their
U.S. federal income tax liability attributable to foreign income. In many
cases, a foreign tax credit will be more advantageous than a deduction for
foreign taxes. Smith Barney World Funds, Inc. ("World Funds") will invest in
some Underlying Smith Barney Funds that expect to be eligible to make the
above-described election. While World Funds will be able to deduct the
foreign taxes that it will be treated as receiving if the election is made,
World Funds will not itself be able to elect to treat its foreign taxes as
paid by its shareholders. Accordingly, the shareholders of World Funds will
not have an option of claiming a foreign tax credit for foreign taxes paid by
the Underlying Smith Barney Funds, while persons who invest directly in such
Underlying Smith Barney Funds may have that option.
General
The foregoing discussion related only to Federal income tax law as
applicable to U.S. citizens. Distributions by the Portfolio also may be subject
to state, local and foreign taxes, and their treatment under state, local and
foreign income tax laws may differ from the Federal income tax treatment.
Shareholders should consult their tax advisors with respect to particular
questions of Federal, state, local and foreign taxation.
VOTING
As permitted by Maryland law, there will normally be no meetings of shareholders
for the purpose of electing directors unless and until such time as less than a
majority of the directors holding office have been elected by shareholders. At
that time, the directors then in office will call a shareholders' meeting for
the election of directors. The directors must call a meeting of shareholders for
the purpose of voting upon the question or removal of any director when
requested in writing to do so by the record holders of not less than 10% of the
outstanding shares of the Cardinal Fund. At such a meeting, a director may be
removed after the holders of record of not less than a majority of the
outstanding shares of the Cardinal Fund have declared that the director be
removed either by declaration in writing or by votes cast in person or by proxy.
Except as set forth above, the directors shall continue to hold office and may
appoint successor directors.
On matters submitted for consideration by shareholders of any
Underlying Smith Barney Fund, a Portfolio will vote its shares in proportion to
the vote of all other holders of shares of that Fund or, in certain limited
instances, the Portfolio will vote its shares in the manner indicated by a vote
of holders of shares of the Portfolio.
As used in the Prospectus and this Statement of Additional Information,
a "vote of a majority of the outstanding voting securities" means the
affirmative vote of the lesser of (a) more than 50% of the outstanding shares of
the Cardinal Fund (or the affected Portfolio or Class) or (b) 67% or more of
such shares present at a meeting if more than 50% of the outstanding shares of
the Cardinal Fund (or the affected Portfolio or Class) are represented at the
meeting in person or by proxy. A Portfolio or Class shall be deemed to be
affected by a matter unless it is clear that the interests of each Portfolio or
Class in the matter are identical or that the matter does not affect any
interest of the Portfolio or Class. The approval of a management agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a Portfolio only if approved by a "vote of a majority of the
outstanding voting securities" of the Portfolio affected by the matter; however,
the ratification of independent accountants, the election of directors, and the
approval of a distribution agreement that is submitted to shareholders are not
subject to separate voting requirements and may be effectively acted upon by a
vote of the holders of a majority of all Cardinal Fund shares voting without
regard to Portfolio.
ADDITIONAL INFORMATION
The Cardinal Fund was incorporated in Maryland on August 11, 1995.
Portfolio securities and cash owned by the Cardinal Fund are held in
the custody of PNC Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103.
<PAGE>
In the event of the liquidation or dissolution of the Cardinal Fund,
shareholders of a Portfolio are entitled to receive the assets belonging to that
Portfolio that are available for distribution and a proportionate distribution,
based upon the relative net assets of the respective Portfolios, of any general
assets not belonging to any particular Portfolio that are available for
distribution.
FINANCIAL STATEMENT
The Cardinal Fund's Statement of Assets and Liabilities as of ________ ___, 1995
accompanies this Statement of Additional Information and is incorporated herein
by reference. [To be added by amendment.]
<PAGE>
0041220.02
APPENDIX - RATINGS OF DEBT OBLIGATIONS
BOND (AND NOTES) RATINGS
Moody's Investors Services, Inc.
Aaa - Bonds that 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 that 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 that make the long term risks appear somewhat larger than in "Aaa"
securities.
A - Bonds that 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 that suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds that 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.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
<PAGE>
Con (..) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Standard & Poor's Corporation
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
'BB' indicates the lowest degree of speculation and 'C' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Plus (+) or Minus(-): The ratings from 'AA' to 'B' may be modified by
the addition of a plus or minus to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
<PAGE>
L - The letter "L" indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully insured
by the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance
Corp.
+ Continuance of the rating is contingent upon S&P's receipt of closing
documentation confirming investments and cash flow.
* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures 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.
Issuers rated "Prime-2" (or related supporting institutions) have
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Corporation
A-1 - This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issuers determined
to possess overwhelming safety characteristics will be noted with a plus (+)
sign designation.
A-2 - Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
<PAGE>
Part C
OTHER INFORMATION
Item 24: Financial Statements and Exhibits.
a. Financial Statements:
Included in part A of this Registration Statement:
None.
Included in Part B of this Registration Statement:
Statement of assets and liabilities as of
______ __, 1995.*
Statements, schedules and historical information other than those
listed above have been omitted since they are either not applicable or
are not required.
b. Exhibits:
1. Articles of Incorporation of the Registrant.
2. By-Laws of the Registrant.
3. Inapplicable.
4. (a) Registrant's form of stock certificates for Class
A, B, C and Y Shares of the Aggressive Growth
Portfolio.*
(b) Registrant's form of stock certificates for Class
A, B, C and Y Shares of the Growth Portfolio.*
(c) Registrant's form of stock certificates for Class
A, B, C and Y Shares of the Traditional
Portfolio.*
- ------------------------
* To be filed by amendment.
<PAGE>
(d) Registrant's form of stock certificates for Class
A, B, C and Y Shares of the Balanced Portfolio.*
(e) Registrant's form of stock certificates for Class
A, B, C and Y Shares of the Income Portfolio.*
5. Form of Investment Management Agreement between the
Registrant and Smith Barney Mutual Funds Management Inc.*
6. Form of the Distribution Agreement between the Registrant
and Smith Barney Inc.*
7. Inapplicable.
8. Form of Custodian Agreement between the Registrant and
PNC Bank, National Association.*
9. Form of Transfer Agency and Service Agreement between
the Registrant and The Shareholder Services Group, Inc.*
10. Opinion and Consent of Willkie Farr & Gallagher as to
legality of shares being registered.*
11. Consent of Independent Public Accountants.*
12. Inapplicable.
13. Purchase Agreement between the Registrant and the
Purchaser of the initial shares.*
14. (a) Smith Barney Individual Retirement Plan.*
(b) Smith Barney Rollover Individual Retirement Plan.*
(c) Smith Barney Simplified Employee Pension -
Individual Retirement Plan.*
(d) Smith Barney Simplified Employees Pension Plan -
Salary Reduction Plan.*
(e) Smith Barney Prototype Paired Defined Contribution
Plan.*
- ------------------------
* To be filed by amendment.
<PAGE>
15. Form of Service and Distribution Plan pursuant to
Rule 12b-1 between the Registrant and Smith Barney Inc.*
16. Schedule for Computation of Performance Quotations.*
17. Inapplicable.
18. Multiple Class Plan pursuant to Rule 18f-3(d) of the
Investment Company Act of 1940.*
- ------------------------
* To be filed by amendment.
Item 25. Persons Controlled by or Under Common Control
with Registrant.
All of the outstanding shares of the Registrant, representing all of the
interests in Smith Barney Cardinal Investment Fund Inc., on the date
Registrant's Registration Statement becomes effective will be owned by Smith
Barney Mutual Funds Management Inc. ("SBMFM").
Item 26. Number of Holders of Securities.
It is anticipated that SBMFM will hold all of the shares par value $.001 per
share of the Registrant on the date Registrant's Registration Statement becomes
effective.
Item 27. Indemnification.
Under Maryland law, directors and officers of the Registrant are not liable to
the Registrant or its stockholders except for an act or omission committed in
bad faith or as a result of active and deliberate dishonesty or for the receipt
of an improper personal benefit. The Registrant's corporate charter requires
that it indemnify its directors and officers against liabilities and advance
expenses to the fullest extent permitted by Maryland law, subject to the
limitation that no director or officer may be protected against liability for
willful misfeasance, bad faith, gross negligence or reckless disregard for the
duties involved in the conduct of his office.
<PAGE>
Item 28. Business or Other Connections of Investment
Adviser.
Investment Adviser -- Smith Barney Mutual Funds Management Inc.,
formerly known as Smith Barney Advisers, Inc.
SBMFM was incorporated in December 1968 under the laws of the State of
Delaware. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.), which in turn is a
wholly owned subsidiary of The Travelers Inc. (formerly known as Primerica
Corporation) ("Travelers"). SBMFM is registered as an investment adviser under
the Investment Advisers Act of 1940 (the "Advisers Act").
The list required by this Item 28 of officers and directors of SBMFM
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
the Form ADV filed by SBMFM pursuant to the Advisers Act (SEC File No.
801-8314).
Item 29. Principal Underwriters.
Smith Barney Inc. ("Smith Barney") also serves as distributor for each of the
following investment companies:
(a) Smith Barney Managed Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Global Opportunities Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Principal Return Fund
Smith Barney Income Funds
Smith Barney Equity Funds
Smith Barney Investment Funds Inc.
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Telecommunications Trust
Smith Barney Arizona Municipals Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
The USA High Yield Fund N.V.
Garzarelli Sector Analysis Portfolio N.V.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Series Fund
Consulting Group Capital Markets Funds
Smith Barney Income Trust
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Florida Municipals Fund
Smith Barney Oregon Municipals Fund
Smith Barney Funds, Inc.
Smith Barney Muni Funds
Smith Barney World Funds, Inc.
Smith Barney Money Funds, Inc.
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Variable Account Funds
Smith Barney U.S. Dollar Reserve Fund (Cayman)
Worldwide Special Fund, N.V.
Worldwide Securities Limited (Bermuda)
Smith Barney International Fund (Luxembourg)
and various series of unit investment trusts.
<PAGE>
(b) The information required by this Item 29(b) with respect to
each director and officer of Smith Barney is incorporated by
reference to Schedule A of the Form BD filed by Smith Barney
pursuant to the Securities Exchange Act of 1934 (File No.
8-8177).
(c) Inapplicable.
Item 30. Location of Accounts and Records.
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), and the Rules
promulgated thereunder are maintained by Smith Barney Inc.,
388 Greenwich Street, New York, New York 10013. Records
relating to the duties of the Registrant's custodian are
maintained by PNC Bank, National Association, 17th and
Chestnut Streets, Philadelphia, Pennsylvania. Records relating
to the duties of the Registrant's transfer agent are
maintained by The Shareholder Services Group, Inc., Exchange
Place, Boston, Massachusetts.
Item 31. Management Services.
Inapplicable.
Item 32. Undertakings.
The Registrant hereby undertakes to file a post-effective
amendment, using financial statements which need not be
certified, within four to six months from the effectiveness
date of Registrant's initial Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act").
<PAGE>
The Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's
latest annual report to shareholders upon request and without
charge.
The Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting on the question of
removal of a Director or Directors when requested to do so by
the holders of at least 10% of the Registrant's outstanding
shares and in connection with such meeting to comply with the
provisions of Section 16(c) of the Investment Company Act
relating to shareholder communications.
The Registrant hereby undertakes, insofar as indemnification
for liability arising under the Securities Act may be
permitted to Directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or
otherwise, to indemnify the Directors, officers and
controlling persons of the Registrant. The Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act
and will be governed by the final adjudication of such issue.
<PAGE>
0043145.01
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York and the State of New York on the 17th
day of November, 1995.
SMITH BARNEY CARDINAL INVESTMENT
FUND INC.
By:/s/ Heath B. McLendon
Heath B. McLendon
President
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE TITLE DATE
--------- ----- ----
/s/Heath B. McLendon President and Treasurer November 17, 1995
- --------------------
Heath B. McLendon
/s/Christina T. Sydor Director and Secretary November 17, 1995
- ---------------------
Christina T. Sydor
</TABLE>
<PAGE>
Exhibit Index
1. Articles of Incorporation of the Registrant.
2. By-Laws of the Registrant.
<PAGE>1
ARTICLES OF INCORPORATION
OF
SMITH BARNEY CARDINAL INVESTMENT FUND INC.
ARTICLE I
INCORPORATOR
The undersigned, Sharon J. Weinberg, whose post office address is
c/o Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New
York, New York 10022, being at least 18 years of age, does hereby act as an
incorporator and forms a corporation under the Maryland General Corporation
Law.
ARTICLE II
NAME
The name of the corporation is Smith Barney Cardinal Investment Fund
Inc. (the "Corporation").
ARTICLE III
PURPOSES AND POWERS
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of an investment company.
(2) To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash.
(3) To issue and sell shares of its capital stock in such amounts,
on such terms and conditions, for such purposes and for such amount or kind of
consideration as may now or hereafter be permitted by law.
(4) To redeem, purchase or acquire in any other manner, hold,
dispose of, resell, transfer, reissue or cancel (all without the vote or
consent of the stockholders of the Corporation) shares of its capital stock,
in any manner and to the extent now or hereafter permitted by law and by this
Charter.
(5) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
<PAGE>2
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by
the Maryland General Corporation Law now or hereafter in force, and the
enumeration of the foregoing shall not be deemed to exclude any powers, rights
or privileges so granted or conferred.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation
in the State of Maryland is c/o The Corporation Trust Company Incorporated, 32
South Street, Baltimore, Maryland 21202. The name and address of the resident
agent of the Corporation in the State of Maryland is The Corporation Trust
Company Incorporated, a Maryland corporation, 32 South Street, Baltimore,
Maryland 21202.
ARTICLE V
CAPITAL STOCK
(1) The total number of shares of capital stock that the
Corporation shall have authority to issue is three billion (3,000,000,000)
shares, of the par value of one tenth of one cent ($.001) per share and of the
aggregate par value of three million dollars ($3,000,000), all of which three
billion (3,000,000,000) shares are designated Common Stock.
(2) The Board of Directors of the Corporation is authorized, from
time to time, to classify or to reclassify, as the case may be, any unissued
shares of the Corporation, whether now or hereafter authorized, in separate
series and classes. The shares of said series and classes of stock shall have
such preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption as shall be fixed and determined from time to time by the Board of
Directors. The Board of Directors is authorized to increase or decrease the
number of shares of any series or class, but the number of shares of any
series or class shall not be decreased by the Board of Directors below the
number of shares thereof then outstanding.
(3) The Board of Directors may redesignate a class or series of
shares of capital stock whether or not shares of such class or series are
issued and outstanding, provided that such redesignation does not in itself
affect the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock.
<PAGE>3
(4) There is hereby established and classified three separate
series of stock, each series comprised initially of five hundred million
(500,000,000) shares, each with a par value of one tenth of one cent ($.001),
to be known initially as the "Smith Barney Aggressive Fund" "Smith Barney
Moderate Fund", and "Smith Barney Conservative Fund", respectively. Without
limiting the authority of the Board of Directors set forth herein to establish
and designate any further series or classes, and to classify and reclassify
any unissued shares, and subject to such authority, shares of each series, now
authorized and hereafter authorized, shall be subject to the following
provisions:
(a) As more fully set forth hereafter, the assets and liabilities
and the income and expenses of each series shall be determined separately
and, accordingly, the net asset value, the dividends payable to holders,
and the amounts distributable in the event of dissolution of the
Corporation to holders of shares of the Corporation's stock may vary from
series to series.
(b) All consideration received by the Corporation for the issue or
sale of shares of a particular series, together with all assets in which
such consideration is invested or reinvested, all income, earnings,
profits, and proceeds thereof, including all proceeds derived from the
sale, exchange or liquidation thereof, and any funds or payments derived
from any reinvestment of such proceeds in whatever form the same may be,
shall irrevocably belong to that series for all purposes, subject only to
the rights of creditors and shall be referred to as "assets belonging to"
that series. The assets belonging to a particular series shall be so
recorded upon the books of the Corporation.
(c) The assets belonging to each particular series shall be charged
with the liabilities of the Corporation with respect to that series, all
expenses, costs, charges and reserves attributable to that series and
that series' share of the liabilities, expenses, costs, charges or
reserves of the Corporation not attributable to any particular series, in
the latter case in the proportion that the net asset value of that series
(determined without regard to such liabilities) bears to the net asset
value of all series (determined without regard to such liabilities). The
determination of the Board of Directors shall be conclusive as to the
allocation of liabilities, including accrued expenses and reserves, and
assets to a particular series or series.
(d) Shares of each series shall be entitled to such dividends and
distributions, in shares or in cash or both, as may be declared from time
to time by the Board of Directors, acting in its sole discretion, with
respect to
<PAGE>4
such series, provided that dividends and distributions shall be paid on shares
of a series only out of lawfully available assets belonging to that series.
Dividends may be declared daily or otherwise pursuant to a standing resolution
or resolutions adopted only once or with such frequency as the Board of
Directors may determine. Any such dividend or distribution paid in shares
will be paid at the current net asset value thereof.
(e) The Board of Directors shall have the power, in its sole
discretion, to distribute in any fiscal year as dividends (including
dividends designated in whole or in part as capital gain distributions)
an amount sufficient, in the opinion of the Board of Directors, to enable
each series of the Corporation to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as from time to time
amended, or any successor or comparable statute thereto, and regulations
promulgated thereunder, and to avoid liability of each series of the
Corporation for federal income and excise taxes in respect of that year.
However, nothing in the foregoing shall limit the authority of the Board
of Directors to make distributions greater than or less than the amount
necessary to qualify as a regulated investment company and to avoid
liability of any series of the Corporation for such taxes.
(f) In the event of the liquidation or dissolution of the
Corporation, the stockholders of a series shall be entitled to receive,
as a single class, out of the assets of the Corporation available for
distribution to stockholders, the assets belonging to that series. The
assets so distributable to the stockholders of a series shall be
distributed among such stockholders in proportion to the number of shares
of that series held by them and recorded on the books of the Corporation
or, in the event that the series is divided into classes, in the manner
determined by the Board of Directors in accordance with the Investment
Company Act of 1940, as amended. In the event that there are any assets
available for distribution that are not attributable to any particular
series, such assets shall be allocated to all series in proportion to the
net assets of the respective series and then distributed to the holders
of stock of each series as aforesaid.
(g) If a series is divided into multiple classes, the classes may
be invested with one or more other classes in the common investment
portfolio comprising the series. Notwithstanding the foregoing
provisions of this Article V(4) of these Articles of Incorporation, if
two or more classes are invested in a common investment portfolio, the
shares of each such class of stock of the Corporation shall be subject to
the following preferences, conversion and
<PAGE>5
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, and, if there are other
classes of stock invested in a different investment portfolio comprising a
different series, shall also be subject to the provisions of Article V(4)(a)
through (f) of these Articles of Incorporation at the series level as if the
classes invested in the common investment portfolio were one class:
(i) The income and expenses of the series shall be allocated
among the classes comprising the series in such manner as may be
determined by the Board of Directors in accordance with law.
(ii) As more fully set forth in this Article V(4)(g) of these
Articles of Incorporation, the liabilities and expenses of the classes
comprising the series shall be determined separately from those of each
other and, accordingly, the net asset values, the dividends and
distributions payable to holders, and the amounts distributable in the
event of liquidation of the Corporation or termination of a series to
holders of shares of the Corporation's stock may vary within the classes
comprising the series. Except for these differences and certain other
differences set forth in this Article V(4)(g) or elsewhere in these
Articles of Incorporation, the classes comprising a series shall have the
same preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption.
(iii) The dividends and distributions of investment income and
capital gains with respect to the classes comprising a series shall be in
such amounts as may be declared from time to time by the Board of
Directors, and such dividends and distributions may vary among the
classes comprising the series to reflect differing allocations of the
expenses and liabilities of the Corporation among the classes and any
resultant differences between the net asset values per share of the
classes, to such extent and for such purposes as the Board of Directors
may deem appropriate. The allocation of investment income, capital
gains, expenses and liabilities of the Corporation among the classes
comprising a series shall be determined by the Board of Directors in a
manner that is consistent with applicable law.
(h) The proceeds of the redemption of the shares of any class of
stock of the Corporation may be reduced by the amount of any contingent
deferred sales charge, liquidation charge, or other charge (which charges
may vary within and among the classes) payable on such redemption
pursuant to
<PAGE>6
the terms of issuance of such shares, all in accordance with the Investment
Company Act of 1940, as amended, and applicable rules and regulations of the
National Association of Securities Dealers, Inc. ("NASD").
(i) At such times (which may vary between and among the holders of
particular classes) as may be determined by the Board of Directors (or
with the authorization of the Board of Directors, by the officers of the
Corporation) in accordance with the Investment Company Act of 1940, as
amended, applicable rules and regulations thereunder and applicable rules
and regulations of the NASD and reflected in the pertinent registration
statement of the Corporation, shares of any particular class of stock of
the Corporation may be automatically converted into shares of another
class of stock of the Corporation based on the relative net asset values
of such classes at the time of conversion, subject, however, to any
conditions of conversion that may be imposed by the Board of Directors
(or with the authorization of the Board of Directors, by the officers of
the Corporation) and reflected in the pertinent registration statement of
the Corporation as aforesaid.
Except as provided above, all provisions of the Articles of Incorporation
relating to stock of the Corporation shall apply to shares of, and to the
holders of, all classes of stock.
(5) All holders of shares of stock shall vote as a single class
except (i) with respect to any matter which affects only one or more classes
or series of stock, in which case only the holders of shares of the classes or
series affected shall be entitled to vote, or (ii) as otherwise may be
required by the Investment Company Act of 1940, as amended.
(6) The presence in person or by proxy of the holders of one-third
(1/3) of the shares of capital stock of the Corporation outstanding and
entitled to vote thereat shall constitute a quorum for the transaction of
business at a stockholders' meeting, except that where any provision of law
or of the Charter of the Corporation permit or require that holders of any
series or class shall vote as a separate series or class, then one-third (1/3)
of the aggregate number of shares of capital stock of that series or class, as
applicable, outstanding and entitled to vote shall constitute a quorum for the
transaction of business by that series or class, as applicable.
(7) The Corporation may issue shares in fractional denominations to
the same extent as its whole shares, and any fractional share shall carry
proportionately the rights of a whole share including, without limitation, the
right to vote, the right to receive dividends and distributions and the right
to
<PAGE>7
participate upon liquidation of the Corporation. A fractional share shall
not, however, have the right to receive a certificate evidencing it.
(8) No holder of stock of the Corporation by virtue of being such a
holder shall have any right to purchase, subscribe for, or otherwise acquire
any shares of the Corporation or any other security that the Corporation may
issue or sell (whether out of the number of shares authorized by the Charter
of the Corporation or out of any shares of the Corporation's capital stock
that the Corporation may acquire) other than a right that the Board of
Directors in its discretion may determine to grant.
(9) Notwithstanding any provision of the Maryland General
Corporation Law requiring any action to be taken or authorized by the
affirmative vote of a greater proportion than a majority of the votes of all
classes or of any class of stock of the Corporation, such action shall be
effective and valid if taken or authorized by the affirmative vote of a
majority of the total number of votes entitled to be cast thereon, except as
otherwise provided in the Charter of the Corporation or by law.
(10) All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of the Charter of Corporation and
the By-Laws of the Corporation, as from time to time amended or supplemented.
ARTICLE VI
REDEMPTION
Each holder of shares of the Corporation s capital stock shall be
entitled to require the Corporation to redeem all or any part of the shares of
capital stock of the Corporation standing in the name of the holder on the
books of the Corporation, and all shares of capital stock issued by the
Corporation shall be subject to redemption by the Corporation, at the
redemption price of the shares as in effect from time to time as may be
determined by or pursuant to the direction of the Board of Directors of the
Corporation in accordance with the provisions of Article VII, subject to the
right of the Board of Directors of the Corporation to suspend the right of
redemption or postpone the date of payment of the redemption price in
accordance with provisions of applicable law. Without limiting the generality
of the foregoing, the Corporation shall, to the extent permitted by applicable
law, have the right at any time to redeem the shares owned by any holder of
capital stock of the Corporation (i) if the redemption is, in the opinion of
the Board of Directors of the Corporation, desirable in order to prevent the
Corporation from being deemed a "personal holding company" within the meaning
of the Internal Revenue Code of 1986 or (ii) if the value of the
<PAGE>8
shares in the account maintained by the Corporation or its transfer agent for
any class of stock for the stockholder is below an amount determined from time
to time by the Board of Directors of the Corporation (the "Minimum Account
Balance") and the stockholder has been given at least 60 (sixty) days' written
notice of the redemption and has failed to make additional purchases of shares
in an amount sufficient to bring the value in his account to at least the
Minimum Account Balance before the redemption is effected by the Corporation.
Payment of the redemption price shall be made in cash by the Corporation at
the time and in the manner as may be determined from time to time by the Board
of Directors of the Corporation unless, in the opinion of the Board of
Directors, which shall be conclusive, conditions exist that make payment
wholly in cash unwise or undesirable; in such event the Corporation may make
payment wholly or partly by securities or other property included in the
assets belonging or allocable to the class of the shares for which redemption
is being sought, the value of which shall be determined as provided herein.
The Board of Directors may establish procedures for redemption of shares.
ARTICLE VII
BOARD OF DIRECTORS
(1) The number of directors constituting the Board of Directors
shall be one or such other number as may be set forth in the By-Laws or
determined by the Board of Directors pursuant to the By-Laws. The number of
Directors shall at no time be less than the minimum number required under the
Maryland General Corporation Law. Christina T. Sydor has been appointed
director of the Corporation to hold office until the first annual meeting of
stockholders or until her successor is elected and qualified.
(2) In furtherance, and not in limitation, of the powers conferred
by the Maryland General Corporation Law, the Board of Directors is expressly
authorized:
(i) To make, alter or repeal the By-Laws of the Corporation,
except where such power is reserved by the By-Laws to the stockholders, and
except as otherwise required by the 1940 Act.
(ii) From time to time to determine whether and to what extent
and at what times and places and under what conditions and regulations the
books and accounts of the Corporation, or any of them other than the stock
ledger, shall be open to the inspection of the stockholders. No stockholder
shall have any right to inspect any account or book or document of the
Corporation, except as conferred by law or authorized by resolution of the
Board of Directors or of the stockholders.
<PAGE>9
(iii) Without the assent or vote of the stockholders, to
authorize the issuance from time to time of shares of the stock of any class
of the Corporation, whether now or hereafter authorized, and securities
convertible into shares of stock of the Corporation of any class or classes,
whether now or hereafter authorized, for such consideration as the Board of
Directors may deem advisable.
(iv) Without the assent or vote of the stockholders, to
authorize and issue obligations of the Corporation, secured and unsecured, as
the Board of Directors may determine, and to authorize and cause to be
executed mortgages and liens upon the real or personal property of the
Corporation.
(v) Notwithstanding anything in this Charter to the contrary,
to establish in its absolute discretion the basis or method for determining
the value of the assets belonging to any class, the value of the liabilities
belonging to any class and the net asset value of each share of any class of
the Corporation s stock.
(vi) To determine in accordance with generally accepted
accounting principles and practices what constitutes net profits, earnings,
surplus or net assets in excess of capital, and to determine what accounting
periods shall be used by the Corporation for any purpose; to set apart out of
any funds of the Corporation reserves for such purposes as it shall determine
and to abolish the same; to declare and pay any dividends and distributions in
cash, securities or other property from surplus or any other funds legally
available therefor, at such intervals as it shall determine; to declare
dividends or distributions by means of a formula or other method of
determination, at meetings held less frequently than the frequency of the
effectiveness of such declarations; and to establish payment dates for
dividends or any other distributions on any basis, including dates occurring
less frequently than the effectiveness of declarations thereof.
(vii) In addition to the powers and authorities granted herein
and by statute expressly conferred upon it, the Board of Directors is
authorized to exercise all powers and do all acts that may be exercised or
done by the Corporation pursuant to the provisions of the laws of the State of
Maryland, this Charter and the By-Laws of the Corporation.
(3) Any determination made in good faith, and in accordance with
applicable law and generally accepted accounting principles and practices, if
applicable, by or pursuant to the direction of the Board of Directors, with
respect to the amount of assets, obligations or liabilities of the
Corporation, as to the amount of net income of the Corporation from dividends
and interest for any period or amounts at any time legally available
<PAGE>10
for the payment of dividends, as to the amount of any reserves or charges set
up and the propriety thereof, as to the time of or purpose for creating
reserves or as to the use, alteration or cancellation of any reserves or
charges (whether or not any obligation or liability for which the reserves or
charges have been created has been paid or discharged or is then or thereafter
required to be paid or discharged), as to the value of any security owned by
the Corporation, the determination of the net asset value of shares of any
class of the Corporation s capital stock, or as to any other matters relating
to the issuance, sale or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors regarding whether any transaction
constitutes a purchase of securities on "margin," a sale of securities
"short," or an underwriting of the sale of, or a participation in any
underwriting or selling group in connection with the public distribution of,
any securities, shall be final and conclusive, and shall be binding upon the
Corporation and all holders of its capital stock, past, present and future,
and shares of the capital stock of the Corporation are issued and sold on the
condition and understanding, evidenced by the purchase of shares of capital
stock or acceptance of share certificates, that any and all such
determinations shall be binding as aforesaid. No provision of this Charter
shall be effective to (i) require a waiver of compliance with any provision of
the Securities Act of 1933, as amended, or the 1940 Act, or of any valid rule,
regulation or order of the Securities and Exchange Commission under those Acts
or (ii) protect or purport to protect any director or officer of the
Corporation against any liability to the Corporation or its security holders
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
ARTICLE VIII
INDEMNIFICATION AND LIMITATION OF LIABILITY
(1) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation Law,
no director or officer of the Corporation shall have any liability to the
Corporation or its stockholders for money damages. This limitation on
liability applies to events occurring at the time a person serves as a
director or officer of the Corporation whether or not such person is a
director or officer at the time of any proceeding in which liability is
asserted.
(2) The Corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent that
indemnification of directors and advancement
<PAGE>11
of expenses to directors is permitted by the Maryland General Corporation
Law. The Corporation shall indemnify and advance expenses to its officers to
the same extent as its directors and to such further extent as is consistent
with such law. The board of directors may, through a by-law, resolution or
agreement, make further provisions for indemnification of directors, officers,
employees and agents to the fullest extent permitted by the Maryland General
Corporation Law.
(3) No provision of this Article VIII shall be effective to protect
or purport to protect any director or officer of the Corporation against any
liability to the Corporation or its stockholders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
(4) References to the Maryland General Corporation Law in this
Article VIII are to the law as from time to time amended. No amendment to
this Charter shall affect any right of any person under this Article VIII
based on any event, omission or proceeding prior to such amendment. The term
"Charter" as used herein shall have the meaning set forth in the Maryland
General Corporation Law and includes these Articles of Incorporation and all
amendments thereto.
ARTICLE IX
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendment to its Charter, now or hereafter authorized by law, including any
amendment that alters the contract rights, as expressly set forth in this
Charter, of any outstanding stock, and all rights at any time conferred upon
the stockholders of the Corporation by its Charter are granted subject to the
provisions of this Article and the reservation of the right to amend the
Charter herein contained.
IN WITNESS WHEREOF, I have adopted and signed these Articles of
Incorporation and do hereby acknowledge that the adoption and signing are my
act.
/s/ Sharon Weinberg
Incorporator
Dated the 10th day of August, 1995
<PAGE>1
BY-LAWS
OF
SMITH BARNEY CARDINAL INVESTMENT FUND INC.
A Maryland Corporation
ARTICLE I
STOCKHOLDERS
SECTION 1. Annual Meetings. No annual meeting of the stockholders
of the Corporation shall be held unless required by applicable law or
otherwise determined by the Board of Directors. An annual meeting may be held
at any place within the United States as may be determined by the Board of
Directors and as shall be designated in the notice of the meeting, and at the
time specified by the Board of Directors. Any business of the Corporation may
be transacted at an annual meeting without being specifically designated in
the notice unless otherwise provided by statute, the Corporation's Charter, as
amended or supplemented (the "Charter"), or these By-Laws.
SECTION 2. Special Meetings. Special meetings of the stockholders
for any purpose or purposes, unless otherwise prescribed by statute or by the
Corporation's Charter, may be held at any place within the United States, and
may be called at any time by the Board of Directors or by the President, and
shall be called by the Secretary at the request in writing of a majority of
the Board of Directors or at the request in writing of stockholders entitled
to cast at least 10 (ten) percent of the votes entitled to be cast at the
meeting upon payment by such stockholders to the Corporation of the reasonably
estimated cost of preparing and mailing a notice of the meeting (which
estimated cost shall be provided to such stockholders by the Secretary of the
Corporation). Notwithstanding the foregoing, unless requested by stockholders
entitled to cast a majority of the votes entitled to be cast at the meeting, a
special meeting of the stockholders need not be called at the request of
stockholders to consider any matter which is substantially the same as a
matter voted on at any special meeting of the stockholders held during the
preceding 12 (twelve) months. A written request shall state the purpose or
purposes of the proposed meeting.
SECTION 3. Notice of Meetings. Written or printed notice of the
purpose or purposes and of the time and place of every meeting of the
stockholders shall be given by the Secretary
<PAGE>2
of the Corporation to each stockholder of record entitled to vote at the
meeting, by placing the notice in the mail at least 10 (ten) days, but not
more than 90 (ninety) days, prior to the date designated for the meeting
addressed to each stockholder at his address appearing on the books of the
Corporation or supplied by the stockholder to the Corporation for the purpose
of notice. The notice of any meeting of stockholders may be accompanied by a
form of proxy approved by the Board of Directors in favor of the actions or
persons as the Board of Directors may select. Notice of any meeting of
stockholders shall be deemed waived by any stockholder who attends the meeting
in person or by proxy, or who before or after the meeting submits a signed
waiver of notice that is filed with the records of the meeting.
SECTION 4. Quorum. Except as otherwise provided by law or by the
Corporation's Charter, the presence in person or by proxy of stockholders of
the Corporation entitled to cast at least one-third of the votes entitled to
be cast shall constitute a quorum at each meeting of the stockholders;
provided, however, that where any provision of law or the Charter permits or
requires that stockholders of any series or class of capital stock of the
Corporation shall vote as a series or class, stockholders of one-third of the
aggregate number of shares of capital stock of that series or class
outstanding and entitled to vote shall constitute a quorum at such meeting.
Except as otherwise required by law, all questions shall be decided by a
majority of the votes cast on such questions, except for the election of
directors. A plurality of all the votes cast at a meeting at which a quorum
is present is sufficient to elect a director. In the absence of a quorum, the
stockholders present in person or by proxy, by majority vote and without
notice other than by announcement at the meeting, may adjourn the meeting from
time to time as provided in Section 5 of this Article I until a quorum shall
attend. The stockholders present at any duly organized meeting may continue
to do business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum. The absence from any meeting in
person or by proxy of holders of the number of shares of stock of the
Corporation in excess of one-third that may be required by the laws of the
State of Maryland, the Investment Company Act of 1940, as amended, or other
applicable statute, the Corporation's Charter or these By-Laws, for action
upon any given matter shall not prevent action at the meeting on any other
matter or matters that may properly come before the meeting, so long as there
are present, in person or by proxy, holders of the number of shares of stock
of the Corporation required for action upon the other matter or matters.
<PAGE>3
SECTION 5. Adjournment. Any meeting of the stockholders may be
adjourned from time to time, without notice other than by announcement at the
meeting at which the adjournment is taken to a date not more than 120 (one
hundred twenty) days after the original record date. At any adjourned meeting
at which a quorum shall be present any action may be taken that could have
been taken at the meeting originally called.
SECTION 6. Organization. At every meeting of the stockholders, the
Chairman of the Board, or in his absence or inability to act, the President,
or in his absence or inability to act, a Vice President, or in the absence or
inability to act of the Chairman of the Board, the President and all the Vice
Presidents, a Chairman chosen by the stockholders, shall act as Chairman of
the meeting. The Secretary, or in his absence or inability to act, a person
appointed by the Chairman of the meeting, shall act as secretary of the
meeting and keep the minutes of the meeting.
SECTION 7. Order of Business. The order of business at all
meetings of the stockholders shall be as determined by the chairman of the
meeting.
SECTION 8. Voting. Except as otherwise provided by statute or the
Corporation's Charter, each holder of record of shares of stock of the
Corporation having voting power shall be entitled at each meeting of the
stockholders to one vote for every share of stock standing in his name on the
records of the Corporation as of the record date determined pursuant to
Section 9 of this Article I; provided, however, that when required by the
Corporation's Charter, the Investment Company Act of 1940, as amended, or the
laws of the State of Maryland or when the Board of Directors has determined
that the matter affects only the interest of one series or class of stock,
matters may be submitted only to a vote of the stockholders of that particular
series or class, and each stockholder thereof shall be entitled to votes equal
to the shares of stock of that series or class registered in his name on the
books of the Corporation.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by the
stockholder or his attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof, unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except in those cases in which the proxy states that
it is irrevocable and in which an irrevocable proxy is permitted by law.
<PAGE>4
If a vote shall be taken on any question then unless required by
statute or these By-Laws, or determined by the Chairman of the meeting to be
advisable, any such vote need not be by ballot. On a vote by ballot, each
ballot shall be signed by the stockholder voting, or by his proxy, and shall
state the number of shares voted.
SECTION 9. Fixing of Record Date. The Board of Directors may set a
record date for the purpose of determining stockholders entitled to vote at
any meeting of the stockholders. The record date for a particular meeting
shall be not more than 90 (ninety) nor fewer than 10 (ten) days before the
date of the meeting. All persons who were holders of record of shares as of
the record date of a meeting, and no others, shall be entitled to vote at such
meeting and any adjournment thereof.
SECTION 10. Inspectors. The Board of Directors may, in advance of
any meeting of stockholders, appoint one or more inspectors to act at the
meeting or at any adjournment of the meeting. If the inspectors shall not be
so appointed or if any of them shall fail to appear or act, the chairman of
the meeting may appoint inspectors. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath to execute faithfully the
duties of inspector at the meeting with strict impartiality and according to
the best of his ability. The inspectors shall determine the number of shares
outstanding and the voting power of each share, the number of shares
represented at the meeting, the existence of a quorum and the validity and
effect of proxies, and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots or consents, determine the result,
and do those acts as are proper to conduct the election or vote with fairness
to all stockholders. On request of the chairman of the meeting or any
stockholder entitled to vote at the meeting, the inspectors shall make a
report in writing of any challenge, request or matter determined by them and
shall execute a certificate of any fact found by them. No Director or
candidate for the office of Director shall act as inspector of an election of
Directors. Inspectors need not be stockholders of the Corporation.
SECTION 11. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by statute, any action required to be taken at any meeting
of stockholders, or any action that may be taken at any meeting of the
stockholder, may be taken without a meeting, without prior notice and without
a vote, if the following are filed with the records of stockholders' meetings:
(i) a unanimous written consent that sets forth the action and is signed by
each stockholder entitled
<PAGE>5
to vote on the matter and (ii) a written waiver of any right to dissent signed
by each stockholder entitled to notice of the meeting but not entitled to vote
at the meeting.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. General Powers. Except as otherwise provided in the
Corporation's Charter, the business and affairs of the Corporation shall be
managed under the direction of the Board of Directors. All powers of the
Corporation may be exercised by or under authority of the Board of Directors
except as conferred on or reserved to the stockholder by law, by the
Corporation's Charter or by these By-Laws.
SECTION 2. Number of Directors. The number of Directors initially
shall be one, and thereafter shall be fixed from time to time by resolution of
the Board of Directors adopted by a majority of the entire Board of Directors;
provided, however, that the number of Directors shall in no event be fewer
than the number required by the Maryland General Corporation Law nor more than
fifteen. Any vacancy created by an increase in Directors may be filled in
accordance with Section 6 of this Article II. No reduction in the number of
Directors shall have the effect of removing any Director from office prior to
the expiration of his term unless the Director is specifically removed
pursuant to Section 5 of this Article II at the time of the decrease. A
Director need not be a stockholder of the Corporation, a citizen of the United
States or a resident of the State of Maryland.
SECTION 3. Election and Term of Directors. The term of office of
each director shall be from the time of his election and qualification until
his successor shall have been elected and shall have qualified, or until his
death, or until he shall have resigned or have been removed as provided in
these By-Laws, or as otherwise provided by statute or the Corporation's
Charter.
SECTION 4. Resignation. A Director of the Corporation may resign
at any time by giving written notice of his resignation to the Board of
Directors or the Chairman of the Board or to the President or the Secretary of
the Corporation. Any resignation shall take effect at the time specified in
it or, should the time when it is to become effective not be specified in it,
immediately upon its receipt. Acceptance of a resignation shall not be
necessary to make it effective unless the resignation states otherwise.
<PAGE>6
SECTION 5. Removal of Directors. Any Director of the Corporation
may be removed by the stockholders with or without cause at any time by a vote
of a majority of the votes entitled to be cast for the election of Directors.
SECTION 6. Vacancies. Subject to the provisions of the Investment
Company Act of 1940, as amended, any vacancies in the Board of Directors,
whether arising from death, resignation, removal or any other cause except an
increase in the number of Directors, shall be filled by a vote of the majority
of the Board of Directors then in office even though that majority is less
than a quorum, provided that no vacancy or vacancies shall be filled by action
of the remaining Directors if, after the filling of the vacancy or vacancies,
fewer than two-thirds of the Directors then holding office shall have been
elected by the stockholders of the Corporation. A majority of the entire
Board in office at the time of increase may fill a vacancy which results from
an increase in the number of Directors. In the event that at any time a
vacancy exists in any office of a Director that may not be filled by the
remaining Directors, a special meeting of the stockholders shall be held as
promptly as possible and in any event within 60 (sixty) days, for the purpose
of filling the vacancy or vacancies. Any Director elected or appointed to
fill a vacancy shall hold office until a successor has been chosen and
qualifies or until his earlier resignation or removal.
SECTION 7. Place of Meetings. Meetings of the Board may be held at
any place that the Board of Directors may from time to time determine or that
is specified in the notice of the meeting.
SECTION 8. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at the time and place determined by the
Board of Directors.
SECTION 9. Special Meetings. Special meetings of the Board of
Directors may be called by two or more Directors of the Corporation or by the
Chairman of the Board or the President.
SECTION 10. Notice of Special Meetings. Notice of each special
meeting of the Board of Directors shall be given by the Secretary as
hereinafter provided. Each notice shall state the time and place of the
meeting and shall be delivered to each Director, either personally or by
telephone or other standard form of telecommunication, at least 24 (twenty-
four) hours before the time at which the meeting is to be held, or by first-
class mail, postage prepaid, addressed to the Director at his residence
<PAGE>7
or usual place of business, and mailed at least 3 (three) days before the day
on which the meeting is to be held.
SECTION 11. Waiver of Notice of Meetings. Notice of any special
meeting need not be given to any Director who shall, either before or after
the meeting, sign a written waiver of notice that is filed with the records of
the meeting or who shall attend the meeting.
SECTION 12. Quorum and Voting. One-third (but not fewer than 2
(two)) of the members of the entire Board of Directors shall be present in
person at any meeting of the Board in order to constitute a quorum for the
transaction of business at the meeting (unless there is only one director, in
which case that one will constitute a quorum for the transaction of business),
and except as otherwise expressly required by statute, the Corporation's
Charter, these By-Laws, the Investment Company Act of 1940, as amended, or any
other applicable statute, the act of a majority of the Directors present at
any meeting at which a quorum is present shall be the act of the Board. In
the absence of a quorum at any meeting of the Board, a majority of the
Directors present may adjourn the meeting to another time and place until a
quorum shall be present. Notice of the time and place of any adjourned
meeting shall be given to all Directors. At any adjourned meeting at which a
quorum is present, any business may be transacted that might have been
transacted at the meeting as originally called.
SECTION 13. Organization. The Board of Directors may designate a
Chairman of the Board, who shall preside at each meeting of the Board. In the
absence or inability of the Chairman of the Board to act, the President, or,
in his absence or inability to act, another Director chosen by a majority of
the Directors present, shall act as chairman of the meeting and preside at the
meeting. The Secretary, or, in his absence or inability to act, any person
appointed by the chairman, shall act as secretary of the meeting and keep the
minutes thereof.
SECTION 14. Committees. The Board of Directors may designate one
or more committees of the Board of Directors, each consisting of 2 (two) or
more Directors. To the extent provided in the resolution, and permitted by
law, the committee or committees shall have and may exercise the powers of the
Board of Directors in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers that may require it. Any committee or committees shall have the name
or names determined from time to time by resolution adopted by the Board of
Directors. Each committee shall keep regular minutes of its meetings and
report
<PAGE>8
the same to the Board of Directors when required. The members of a committee
present at any meeting, whether or not they constitute a quorum, may appoint a
Director to act in the place of an absent member.
SECTION 15. Written Consent of Directors in Lieu of a Meeting.
Subject to the provisions of the Investment Company Act of 1940, as amended,
any action required or permitted to be taken at any meeting of the Board of
Directors or of any committee of the Board may be taken without a meeting if
all members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of the Board or committee.
SECTION 16. Telephone Conference. Members of the Board of
Directors or any committee of the Board may participate in any Board or
committee meeting by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other at the same time. Participation by such means shall constitute
presence in person at the meeting.
SECTION 17. Compensation. Each Director shall be entitled to
receive compensation, if any, as may from time to time be fixed by the Board
of Directors, including a fee for each meeting of the Board or any committee
thereof, regular or special, he attends. Directors may also be reimbursed by
the Corporation for all reasonable expenses incurred in traveling to and from
the place of a Board or committee meeting.
ARTICLE III
OFFICERS, AGENTS AND EMPLOYEES
SECTION 1. Number and Qualifications. The officers of the
Corporation shall be a President, a Secretary and a Treasurer, each of whom
shall be elected by the Board of Directors. The Board of Directors may elect
or appoint one or more Vice Presidents and may also appoint any other
officers, agents and employees it deems necessary or proper. Any two or more
offices may be held by the same person, except the offices of President and
Vice President, but no officer shall execute, acknowledge or verify in more
than one capacity any instrument required by law to be executed, acknowledged
or verified by more than one officer. Officers shall be elected by the Board
of Directors to hold office until their successors shall have been duly
elected and shall have qualified. Officers shall serve at the pleasure of the
Board of Directors. The Board of Directors
<PAGE>9
may from time to time elect, or delegate to the President the power to
appoint, such officers (including one or more Assistant Vice President, one or
more Assistant Treasurers and one or more Assistant Secretaries) and such
agents as may be necessary or desirable for the business of the Corporation.
Such other officers and agents shall have such duties and shall hold their
offices for such terms as may be prescribed by the Board or by the appointing
authority.
SECTION 2. Resignations. Any officer of the Corporation may resign
at any time by giving written notice of his resignation to the Board of
Directors, the Chairman of the Board, the President or the Secretary. Any
resignation shall take effect at the time specified therein or, if the time
when it shall become effective is not specified therein, immediately upon its
receipt. Acceptance of a resignation shall not be necessary to make it
effective unless the resignation states otherwise.
SECTION 3. Removal of Officer, Agent or Employee. Any officer,
agent or employee of the Corporation may be removed by the Board of Directors
with or without cause at any time, and the Board may delegate the power of
removal as to agents and employees not elected or appointed by the Board of
Directors. Removal shall be without prejudice to the person's contract
rights, if any, but the appointment of any person as an officer, agent or
employee of the Corporation shall not of itself create contract rights.
SECTION 4. Vacancies. A vacancy in any office whether arising from
death, resignation, removal or any other cause, may be filled in the manner
prescribed in these By-Laws for the regular election or appointment to the
office.
SECTION 5. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer with respect to other officers under his control.
SECTION 6. Bonds or Other Security. If required by the Board, any
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in an amount and with any
surety or sureties as the Board may require.
SECTION 7. President. The President shall be the chief executive
officer of the Corporation. In the absence or inability of the Chairman of
the Board (or if there is none) to act, the President shall preside at all
meetings of the stockholders and of the Board of Directors. The President
shall
<PAGE>10
have, subject to the control of the Board of Directors, general charge of the
business and affairs of the Corporation, and may employ and discharge
employees and agents of the Corporation, except those elected or appointed by
the Board, and he may delegate these powers.
SECTION 8. Chief Operating Officer. The Chief Operating Officer
shall be the Chief Operating Officer of the Corporation, and shall have
responsibility for the various operational facilities and personnel and
related support services of the Corporation. In general, he shall perform all
duties incident to the office of Chief Operating Officer and such other duties
as from time to time may be assigned to him by the Board of Directors or the
President.
SECTION 9. Vice President. Each Vice President shall have the
powers and perform the duties that the Board of Directors or the President may
from time to time prescribe.
SECTION 10. Treasurer. Subject to the provisions of any contract
that may be entered into with any custodian pursuant to authority granted by
the Board of Directors, the Treasurer shall have charge of all receipts and
disbursements of the Corporation and shall have or provide for the custody of
the Corporation's funds and securities; he shall have full authority to
receive and give receipts for all money due and payable to the Corporation,
and to endorse checks, drafts and warrants, in its name and on its behalf and
to give full discharge for the same; he shall deposit all funds of the
Corporation, except those that may be required for current use, in such banks
or other places of deposit as the Board of Directors may from time to time
designate; and, in general, he shall perform all duties incident to the office
of Treasurer and such other duties as may from time to time be assigned to him
by the Board of Directors or the President.
SECTION 11. Secretary. The Secretary shall
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board of Directors, the committees
of the Board and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation (unless
the seal of the
<PAGE>11
Corporation on such certificates shall be a facsimile, as hereinafter
provided) and affix and attest the seal to all other documents to be executed
on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept
and filed; and
(e) in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Board of Directors or the President.
SECTION 12. Delegation of Duties. In case of the absence of any
officer of the Corporation, or for any other reason that the Board of
Directors may deem sufficient, the Board may confer for the time being the
powers or duties, or any of them, of such officer upon any other officer or
upon any Director.
ARTICLE IV
STOCK
SECTION 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon specific written request to such person as
may be designated by the Corporation to have a certificate or certificates, in
a form approved by the Board, representing the number of shares of stock of
the Corporation owned by him; provided, however, that certificates for
fractional shares will not be delivered in any case. The certificates
representing shares of stock shall be signed by or in the name of the
Corporation by the Chairman of the Board, the President or a Vice President
and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer and sealed with the seal of the Corporation. Any or all
of the signatures or the seal on the certificate may be facsimiles. In case
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate shall be issued,
it may be issued by the Corporation with the same effect as if such officer,
transfer agent or registrar were still in the office at the date of issue.
SECTION 2. Transfers of Shares. Transfers of shares of stock of
the Corporation shall be made on the stock records of the Corporation only by
the registered holder thereof, or by his
<PAGE>12
attorney thereunto authorized by power of attorney duly executed and filed
with the Secretary or with a transfer agent or transfer clerk, and on
surrender of the certificate or certificates, if issued, for the shares
properly endorsed or accompanied by a duly executed stock transfer power and
the payment of all taxes thereon. Except as otherwise provided by law, the
Corporation shall be entitled to recognize the exclusive right of a person in
whose name any share or shares stand on the record of stockholders as the
owner of the share or shares for all purposes, including, without limitation,
the rights to receive dividends or other distributions and to vote as the
owner, and the Corporation shall not be bound to recognize any equitable or
legal claim to or interest in any such share or shares on the part of any
other person.
SECTION 3. Regulations. The Board of Directors may make any
additional rules and regulations, not inconsistent with these By-Laws, as it
may deem expedient concerning the issue, transfer and registration of
certificates for shares of stock of the Corporation. It may appoint, or
authorize any officer or officers to appoint, one or more transfer agents or
one or more transfer clerks and one or more registrars and may require all
certificates for shares of stock to bear the signature or signatures of any of
them.
SECTION 4. Stolen, Lost, Destroyed or Mutilated Certificates. The
holder of any certificate representing shares of stock of the Corporation
shall immediately notify the Corporation of its theft, loss, destruction or
mutilation and the Corporation may issue a new certificate of stock in the
place of any certificate issued by it that has been alleged to have been
stolen, lost or destroyed or that shall have been mutilated. The Board may,
in its discretion, require the owner (or his legal representative) of a
stolen, lost, destroyed or mutilated certificate to give to the Corporation a
bond in a sum, limited or unlimited, and in a form and with any surety or
sureties, as the Board in its absolute discretion shall determine, to
indemnify the Corporation against any claim that may be made against it on
account of the alleged theft, loss or destruction of any such certificate, or
issuance of a new certificate. Anything herein to the contrary
notwithstanding, the Board of Directors, in its absolute discretion, may
refuse to issue any such new certificate, except pursuant to legal proceedings
under the laws of the State of Maryland.
SECTION 5. Fixing of Record Date for Dividends, Distributions, etc.
The Board may fix, in advance, a date not more than 90 (ninety) days preceding
the date fixed for the payment of any dividend or the making of any
distribution or the
<PAGE>13
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities entitled to
receive any such dividend, distribution, allotment, rights or interests, and
in such case only the stockholders of record at the time so fixed shall be
entitled to receive such dividend, distribution, allotment, rights or
interests.
SECTION 6. Information to Stockholders and Others. Any stockholder
of the Corporation or his agent may inspect and copy during the Corporation's
usual business hours the Corporations' By-Laws, minutes of the proceedings of
its stockholders, annual statements of its affairs and voting trust agreements
on file at its principal office.
ARTICLE V
INDEMNIFICATION AND INSURANCE
SECTION 1. Indemnification of Directors and Officers. Any person
who was or is a party or is threatened to be made a party in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is a
current or former Director or officer of the Corporation, or is or was serving
while a Director or officer of the Corporation at the request of the
Corporation as a Director, officer, partner, trustee, employee, agent or
fiduciary of another corporation, partnership, joint venture, trust,
enterprise or employee benefit plan, shall be indemnified by the Corporation
against judgments, penalties, fines, excise taxes, settlements and reasonable
expenses (including attorneys' fees) actually incurred by such person in
connection with such action, suit or proceeding to the full extent permissible
under the Maryland General Corporation Law, the Securities Act of 1933 and the
Investment Company Act of 1940, as such statutes are now or hereafter in
force, except that such indemnity shall not protect any such person against
any liability to the Corporation or any stockholder thereof to which such
person 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 office ("disabling conduct").
SECTION 2. Advances. Any current or former Director or officer of
the Corporation claiming indemnification within the scope of this Article V
shall be entitled to advances from the Corporation for payment of the
reasonable expenses incurred by
<PAGE>14
him in connection with proceedings to which he is a party in the manner and to
the full extent permissible under the Maryland General Corporation Law, the
Securities Act of 1933 and the Investment Company Act of 1940, as such
statutes are now or hereafter in force; provided, however, that the person
seeking indemnification shall provide to the Corporation a written affirmation
of his good faith belief that the standard of conduct necessary for
indemnification by the Corporation has been met and a written undertaking to
repay any such advance unless it is ultimately determined that he is entitled
to indemnification, and provided further that at least one of the following
additional conditions are met: (1) the person seeking indemnification shall
provide a security in form and amount acceptable to the Corporation for his
undertaking; (2) the Corporation is insured against losses arising by reason
of the advance; or (3) a majority of a quorum of Directors of the Corporation
who are neither "interested persons" as defined in Section 2(a)(19) of the
Investment Company Act of 1940, as amended, nor parties to the proceeding
("disinterested non-party directors"), or independent legal counsel, in a
written opinion, shall determine, based on a review of facts readily available
to the Corporation at the time the advance is proposed to be made, that there
is reason to believe that the person seeking indemnification will ultimately
be found to be entitled to indemnification.
SECTION 3. Procedure. At the request of any current or former
Director or officer, or any employee or agent whom the Corporation proposes to
indemnify, the Board of Directors shall determine, or cause to be determined,
in a manner consistent with the Maryland General Corporation Law, the
Securities Act of 1933 and the Investment Company Act of 1940, as such
statutes are now or hereafter in force, whether the standards required by this
Article V have been met; provided, however, that indemnification shall be made
only following: (1) a final decision on the merits by a court or other body
before whom the proceeding was brought that the person to be indemnified was
not liable by reason of disabling conduct or (2) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that
the person to be indemnified was not liable by reason of disabling conduct, by
(a) the vote of a majority of a quorum of disinterested non-party Directors or
(b) an independent legal counsel in a written opinion.
SECTION 4. Indemnification of Employees and Agents. Employees and
agents who are not officers or Directors of the Corporation may be
indemnified, and reasonable expenses may be advanced to such employees or
agents, in accordance with the procedures set forth in this Article V to the
extent permissible under the Investment Company Act of 1940, the Securities
Act of
<PAGE>15
1933 and the Maryland General Corporation Law, as such statutes are now or
hereafter in force, and to such further extent, consistent with the foregoing,
as may be provided by action of the Board of Directors or by contract.
SECTION 5. Other Rights. The indemnification provided by this
Article V shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such indemnification may
be entitled under any insurance or other agreement, vote of stockholders or
disinterested Directors or otherwise, both as to action by a Director or
officer of the Corporation in his official capacity and as to action by such
person in another capacity while holding such office or position, and shall
continue as to a person who has ceased to be a Director or officer and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
SECTION 6. Insurance. The Corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
Director, officer, employee or agent of the Corporation, or who, while a
Director, officer, employee or agent of the Corporation, is or was serving at
the request of the Corporation as a Director, officer, partner, trustee,
employee, agent or fiduciary of another corporation, partnership, joint
venture, trust, enterprise or employee benefit plan, against any liability
asserted against and incurred by him in any such capacity, or arising out of
his status as such.
SECTION 7. Constituent, Resulting or Surviving Corporations. For
the purposes of this Article V, references to the "Corporation" shall include
all constituent corporations absorbed in a consolidation or merger as well as
the resulting or surviving corporation so that any person who is or was a
Director or officer of a constituent corporation or is or was serving at the
request of a constituent corporation as a Director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise
shall stand in the same position under this Article V with respect to the
resulting or surviving corporation as he would if he had served the resulting
or surviving corporation in the same capacity.
ARTICLE VI
SEAL
The seal of the Corporation shall be circular in form and shall bear
the name of the Corporation, the year of its incorporation, the words
"Corporate Seal" and "Maryland" and any
<PAGE>16
emblem or device approved by the Board of Directors. The seal may be used by
causing it or a facsimile to be impressed or affixed or in any other manner
reproduced, or by placing the word "(seal)" adjacent to the signature of the
authorized officer of the Corporation.
ARTICLE VII
FISCAL YEAR
The Corporation's fiscal year shall be fixed by the Board of
Directors.
ARTICLE VIII
AMENDMENTS
These By-Laws may be amended or repealed by the affirmative vote of
a majority of the Board of Directors at any regular or special meeting of the
Board of Directors, subject to the requirements of the Investment Company Act
of 1940, as amended.
Dated: August 11, 1995
