SEMI- ANNUAL
REPORT
[Small box above fund name showing the White House with three
flags in front.]
Smith Barney Shearson
MANAGED
GOVERNMENTS
FUND INC.
........................................
JANUARY 31, 1994
[LOGO OF SMITH BARNEY SHEARSON APPEARS HERE]
------------------------------------------
<PAGE>
Managed Governments Fund
DEAR SHAREHOLDER:
The domestic economy continues to improve, due in large part to the impact of
lower interest rates. Lower interest rates encourage stronger construction
spending, dramatically improve home sales, and instill a greater sense of
well-
being among consumers that results in increased retail spending. Despite the
inflation fears of some investors, we believe inflation will remain low. Fac-
tory orders, confirmed by industrial production statistics, point towards a
healthy economy. This rosy scenario is marred only by increased reports of
cor-
porate layoffs and a declining savings rate. We also are keeping a watchful
eye
on health care reform, from both a consumer and cost perspective, which
remains
a wild card.
Since our last report to you six months ago, it has been a period of
heightened
interest rate volatility. There was a 77 basis point - more than three-
quarters
of one percentage point - swing in long-term interest rates between their high
and low points with volatile swings within this range. In a preemptive strike
against inflation and potentially higher long-term interest rates, the Federal
Reserve Board in February raised the level of short-term interest rates and
has
signaled their intent to raise rates even higher. Perversely, this move sent
long-term rates skyward. Looking ahead, we expect that short-term interest
rates could rise about 1% in 1994 and long-term interest rates (specifically
the 30-year Treasury bond) will trade in a range of 6.25% to 7%.
INVESTMENT STRATEGY
Six months ago, when the economy was still struggling to get onto a firm foot-
ing and interest rates were still working their way lower, the portfolio had
only a 60% exposure to mortgage securities because of the risk that lower in-
terest rates would make it more attractive for homeowners to refinance
(prepay)
their mortgages. At one point the mortgage allocation was as low as 5%, and
95%
of the Fund was in Treasuries. Today, we've allocated 80% of the Fund's assets
to mortgage-backed securities and 20% to Treasuries. We believe that mortgage
securities will provide good investment income and the rise in interest rates
minimizes the risk of mortgage prepayments. We are in the process of extending
the maturity of the Treasury component to ten years from five years.
PERFORMANCE
The Fund generated total return results in the past six months of 2.07% for A
shares and 1.80% for B shares. The Fund paid income of $0.41 to owners of A
shares and income of $0.38 to owners of B shares during the past six months,
1
<PAGE>
which offset the decrease in the net asset value per share to $13.15 from
$13.29 that resulted from the declining price of government securities.
On a final note, Fortune magazine's March 21st biannual review of mutual funds
listed Smith Barney Shearson Managed Governments Fund as one of the funds that
"are truly the best." In the words of Fortune, funds included in this survey
are "champions with no hidden costs to dim their shine." We urge you to add
this article to your reading list.
We will continue in our efforts to provide you with this level of superior in-
vestment service. We look forward to reporting to you in our Annual Report.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman of the Board and Vice President
Investment Officer Investment Officer
March 15, 1994
2
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
PORTFOLIO HIGHLIGHTS (UNAUDITED) JANUARY 31, 1994
INDUSTRY BREAKDOWN
Portfolio Breakdown
Pie chart depicting the allocation of the Managed Government Fund's investment
securities held at January 31, 1994 by security type. The pie is broken in
pieces representing security types in the following percentages:
Industry Percentage
Mortgage-Backed Securities 79.8%
U.S. Treasury Securities, Repurchase
Agreement and Net Other Assets 20.2%
AVERAGE MATURITY 7.5 YEARS
3
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
PORTFOLIO OF INVESTMENTS (UNAUDITED) JANUARY 31, 1994
KEY TO SECURITY DESCRIPTION
----------------------------------------------------------------------
STRIPS -- SEPARATE TRADING OF REGISTERED INTEREST AND PRINCIPAL OF
SECURITIES.
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
- -----------------------------------------------------------------------
<C> <S> <C>
MORTGAGE-BACKED SECURITIES -- 79.8%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) -- 77.9%
$ 1,064 GNMA 7.500%, 15 Year $ 1,126
6,202 GNMA 8.500%, 30 Year 6,588
629,961,390 GNMA 9.000%, 30 Year 673,857,100
6,224,389 GNMA 9.500%, 30 Year 6,759,551
8,796 GNMA 10.000%, 30 Year 9,709
- -----------------------------------------------------------------------
680,634,074
- -----------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) -- 1.2%
438 FHLMC 7.500%, 30 Year 454
9,305 FHLMC 8.000%, 30 Year 9,704
3,833,688 FHLMC 9.000%, 30 Year 4,039,748
1,008,018 FHLMC 10.000%, 15 Year 1,103,144
5,140,592 FHLMC 10.000%, 30 Year 5,625,710
46,346 FHLMC 14.750%, 30 Year 53,848
- -----------------------------------------------------------------------
10,832,608
- -----------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) -- 0.7%
2,139 FNMA 9.500%, 15 Year 2,272
5,672,953 FNMA 10.000%, 30 Year 6,265,039
- -----------------------------------------------------------------------
6,267,311
- -----------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $697,464,307) 697,733,993
- -----------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
PORTFOLIO OF INVESTMENTS (UNAUDITED) (cont'd) JANUARY 31, 1994
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
U.S. TREASURY (UST) SECURITIES -- 67.2%
$247,000,000 UST Notes, 5.250%, 7/31/98 $ 250,294,980
115,500,000 UST Notes, 4.750%, 8/31/98 114,716,910
45,300,000 UST Notes, 4.750%, 9/30/98 44,987,430
86,000,000 UST Notes, 5.750%, 8/15/03 86,632,960
340,000,000 UST Principal Strips, Zero Coupon, 11/15/15 79,026,200
71,000,000 UST Principal Strips, Zero Coupon, 05/15/21 11,754,760
- ------------------------------------------------------------------------------
TOTAL U.S. TREASURY (UST) SECURITIES
(COST $588,678,518) 587,413,240
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.5% (COST $3,902,000)
3,902,000 Agreement with Fuji Bank, 3.150% dated
1/31/94, to be repurchased at $3,902,341 on
2/1/94, collateralized by $3,380,000 U.S.
Treasury Note, 9.875% due 5/15/98 3,902,000
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $1,290,044,825*) 147.5% 1,289,049,233
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) (47.5) (415,058,533)
- ------------------------------------------------------------------------------
NET ASSETS 100.0% $ 873,990,700
- ------------------------------------------------------------------------------
</TABLE>
* Aggregate cost for Federal tax purposes.
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JANUARY 31, 1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $1,290,044,825) (Note 1)
See accompanying schedule
$1,289,049,233
Cash
3,929
Receivable for investment securities sold
220,075,278
Interest receivable
8,946,800
Receivable for Fund shares sold
1,223,831
Prepaid expenses
12,410
- ------------------------------------------------------------------------------
- -
TOTAL ASSETS
1,519,311,481
==============================================================================
=
LIABILITIES:
Payable for investment securities purchased $642,666,203
Payable for Fund shares redeemed 979,116
Dividends payable 441,334
Investment advisory fee payable (Note 2) 334,967
Distribution fee payable (Note 3) 189,493
Service fee payable (Note 3) 186,135
Administration fee payable (Note 2) 148,874
Transfer agent fees payable (Notes 2 and 4) 66,036
Custodian fees payable (Note 2) 41,285
Accrued Directors' fees and expenses (Note 2) 6,500
Accrued expenses and other payables 260,838
- ------------------------------------------------------------------------------
- -
TOTAL LIABILITIES
645,320,781
==============================================================================
=
NET ASSETS $
873,990,700
==============================================================================
=
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (continued)
JANUARY 31, 1994
<TABLE>
<S> <C> <C>
NET ASSETS CONSIST OF:
Distributions in excess of net investment income earned
to date $ (7,566,523)
Accumulated net realized loss on investments sold (137,309,873)
Unrealized depreciation of investments (995,592)
Par value 66,440
Paid-in capital in excess of par value 1,019,796,248
- -----------------------------------------------------------------------------
TOTAL NET ASSETS $ 873,990,700
=============================================================================
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($429,237,362 / 32,630,911 SHARES OF COMMON STOCK
OUTSTANDING) $13.15
- -----------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($13.15 / 0.955)
(BASED ON SALES CHARGE OF 4.5% OF THE OFFERING PRICE ON
JANUARY 31, 1994) $13.77
- -----------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE+
($444,677,240 / 33,802,909 SHARES OF COMMON STOCK
OUTSTANDING) $13.15
- -----------------------------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($76,098 / 5,785 SHARES OF COMMON STOCK OUTSTANDING) $13.15
=============================================================================
</TABLE>
+ Redemption price per share is equal to Net Asset Value less any applicable
contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JANUARY 31,
1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 27,585,252
- ------------------------------------------------------------------------------
- -
EXPENSES:
Investment advisory fee (Note 2) $ 2,064,173
Distribution fee (Note 3) 1,164,237
Service fee (Note 3) 1,146,763
Administration fee (Note 2) 917,410
Transfer agent fees (Notes 2 and 4) 376,502
Custodian fees (Note 2) 158,211
Legal and audit fees 32,337
Directors' fees and expenses (Note 2) 15,770
Other 98,227
- ------------------------------------------------------------------------------
- -
Total Operating Expenses Before Interest 5,973,630
Interest expense (Notes 5 and 8) 868,155
- ------------------------------------------------------------------------------
- -
TOTAL EXPENSES 6,841,785
- ------------------------------------------------------------------------------
- -
NET INVESTMENT INCOME 20,743,467
==============================================================================
=
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain on:
Securities transactions 12,031,299
Futures contracts 217,447
- ------------------------------------------------------------------------------
- -
Net realized gain on investments during the period 12,248,746
- ------------------------------------------------------------------------------
- -
Net unrealized depreciation of investments during
the period
(15,081,600)
- ------------------------------------------------------------------------------
- -
NET REALIZED AND UNREALIZED LOSS ON INVESTMENT
(2,832,854)
==============================================================================
=
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 17,910,613
==============================================================================
=
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
1/31/94 7/31/93
(UNAUDITED)
<S> <C> <C>
Net investment income $ 20,743,467 $ 41,217,330
Net realized gain on investments sold and futures
contracts during the period 12,248,746 34,759,285
Net unrealized appreciation/(depreciation) on
investments during the period (15,081,600) 11,975,055
- ------------------------------------------------------------------------------
- -
Net increase in net assets resulting from
operations 17,910,613 87,951,670
Distributions to shareholders from net investment
income:
Class A (13,755,818)
(23,942,531)
Class B (12,983,887)
(14,115,251)
Class D (1,257)
(23)
Distributions in excess of net investment income:
Class A --
(345,744)
Class B --
(203,832)
Distributions in excess of realized capital gains:
Class A --
(8,339,209)
Class B --
(5,559,481)
Class D --
(10)
Net increase/(decrease) in net assets from Fund
share transactions (Note 6):
Class A (29,085,454)
(40,318,139)
Class B (24,966,255) 453,153,505
Class D 65,066 11,553
- ------------------------------------------------------------------------------
- -
Net increase/(decrease) in net assets (62,816,992) 448,292,508
NET ASSETS:
Beginning of period 936,807,692 488,515,184
- ------------------------------------------------------------------------------
- -
End of period (including distributions in excess
of net investment income of $7,566,523 and
$1,569,028, respectively) $873,990,700 $936,807,692
==============================================================================
=
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED ENDED ENDED
1/31/94 7/31/93# 7/31/92
(UNAUDITED)
<S> <C> <C> <C>
Net asset value, beginning of year $ 13.29 $ 12.88 $ 12.09
- ------------------------------------------------------------------------------
- -
Income from investment operations:
Net investment income 0.32 0.69 0.91
Net realized and unrealized gain/(loss)
on investments (0.05) 0.61 0.87
- ------------------------------------------------------------------------------
- -
Total from investment operations 0.27 1.30 1.78
- ------------------------------------------------------------------------------
- -
Less distributions:
Distributions to shareholders from:
Dividends from net investment income (0.41) (0.65)
(0.91)
Distributions in excess of net investment
income -- (0.01) --
Distributions from net realized capital
gains -- -- --
Distributions in excess of net realized
capital gains -- (0.23)
Distributions from capital (Note 1)++ -- --
(0.08)
- ------------------------------------------------------------------------------
- -
Total distributions: (0.41) (0.89)
(0.99)
- ------------------------------------------------------------------------------
- -
Net asset value, end of year $ 13.15 $ 13.29 $ 12.88
- ------------------------------------------------------------------------------
- -
Total return+++ 2.07% 10.43%
15.25%
==============================================================================
=
Ratios to average net assets/Supplemental
Data:
Net assets, end of year (in 000's) $429,237 $462,703 $488,515
Ratio of operating expenses to average
net assets 1.04%**+ 0.99%**
0.82%
Ratio of net investment income to average
net assets 4.78%+ 5.35%
7.23%
Portfolio turnover rate 142% 436%
426%
==============================================================================
=
</TABLE>
* The Fund commenced operations on September 4, 1984. Any shares outstanding
prior to November 6, 1992 were designated as Class A shares.
** The annualized operating expense ratio excludes interest expense. The
annualized ratios including interest expense were 1.23% and 1.00% for the
six months ended January 31, 1994 and the year ended July 31, 1993,
respec-
tively.
+ Annualized.
++ Results from the Fund's level monthly distribution policy.
+++ Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charge.
# Per share amounts have been calculated using the monthly average share
meth-
od, which more appropriately presents the per share data for the year
since
use of the undistributed method did not accord with results of operations.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
7/31/91 7/31/90# 7/31/89 7/31/88 7/31/87 7/31/86 7/31/85*
<S> <C> <C> <C> <C> <C> <C>
$ 12.13 $ 12.19 $ 12.04 $ 12.62 $ 13.32 $ 13.03 $ 12.35
- ------------------------------------------------------------------------------
0.98 1.07 0.96 1.09 1.11 1.34 1.23
0.07 (0.03) 0.26 (0.56) (0.36) 0.38 0.71
- ------------------------------------------------------------------------------
1.05 1.04 1.22 0.53 0.75 1.72 1.94
- ------------------------------------------------------------------------------
(0.98) (1.07) (0.96) (1.09) (1.11) (1.34) (1.23)
-- -- -- -- -- -- --
-- -- -- (0.01) (0.34) (0.09) (0.03)
-- -- -- -- -- -- --
(0.11) (0.03) (0.11) (0.01) -- -- --
- ------------------------------------------------------------------------------
(1.09) (1.10) (1.07) (1.11) (1.45) (1.43) (1.26)
- ------------------------------------------------------------------------------
$ 12.09 $ 12.13 $ 12.19 $ 12.04 $ 12.62 $ 13.32 $ 13.03
- ------------------------------------------------------------------------------
9.02% 9.01% 10.62% 4.43% 5.69% 13.81% 16.33%
==============================================================================
$474,305 $511,867 $621,752 $871,468 $1,366,998 $1,435,923 $1,082,285
0.82% 0.81% 0.81% 0.77% 0.78% 0.79% 0.87%+
8.12% 8.87% 8.12% 8.98% 8.35% 9.98% 11.23%+
365% 163% 51% 288% 241% 136% 83%
==============================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED ENDED
1/31/94 7/31/93*#
(UNAUDITED)
<S> <C> <C>
Net asset value, beginning of period $ 13.29 $ 12.64
- ------------------------------------------------------------------------------
- -
Income from investment operations:
Net investment income 0.29 0.47
Net realized and unrealized gain/(loss) on
investments (0.05) 0.75
- ------------------------------------------------------------------------------
- -
Total from investment operations 0.24 1.22
- ------------------------------------------------------------------------------
- -
Less distributions:
Dividends from net investment income (0.38) (0.40)
Distributions in excess of net investment income -- (0.01)
Distributions from net realized capital gains -- (0.16)
- ------------------------------------------------------------------------------
- -
Total distributions: (0.38) (0.57)
- ------------------------------------------------------------------------------
- -
Net asset value, end of period $ 13.15 $ 13.29
- ------------------------------------------------------------------------------
- -
Total return+ 1.80% 9.92%
- ------------------------------------------------------------------------------
- -
Ratios to average net assets
(annualized)/Supplemental Data:
Net assets, end of period (in 000's) $444,677 $474,093
Ratio of net investment income to average net assets 1.56%**
1.62%**
Ratio of operating expenses to average net assets 4.27% 4.72%
Portfolio turnover rate 142% 436%
==============================================================================
=
</TABLE>
* The Fund commenced selling Class B shares on November 6, 1992.
** The annualized operating expense ratio excludes interest expense. The
annualized ratios including interest expense were 1.75% and 1.63% for the
six months ended January 31, 1994 and the period ended July 31, 1993, re-
spectively.
+ Total return represents aggregate total return for the periods indicated
and
does not reflect any applicable sales charge.
# Per share amounts have been calculated using the monthly average share
meth-
od, which more appropriately presents the per share data for this year
since
use of the undistributed method did not accord with results of operations.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED ENDED
1/31/94 7/31/93*#
(UNAUDITED)
<S> <C> <C>
Net asset value, beginning of period $13.29 $13.18
- ------------------------------------------------------------------------------
- -
Income from investment operations:
Net investment income 0.31 0.07
Net realized and unrealized gain/(loss) on investments (0.07) 0.09
- ------------------------------------------------------------------------------
- -
Total from investment operations 0.24 0.16
- ------------------------------------------------------------------------------
- -
Less distributions:
Dividends from net investment income (0.38) (0.03)
Distributions in excess of net investment income --
(0.00)++
Distributions from net realized capital gains -- (0.02)
- ------------------------------------------------------------------------------
- -
Total distributions: (0.38) (0.05)
- ------------------------------------------------------------------------------
- -
Net asset value, end of period $13.15 $13.29
- ------------------------------------------------------------------------------
- -
Total return+ 1.80% 1.25%
==============================================================================
=
Ratios to average net assets (annualized)/Supplemental
Data:
Net assets, end of period (in 000's) $ 76 $ 12
Ratio of net investment income to average net assets 1.61%**
1.55%**
Ratio of operating expenses to average net assets 4.22% 4.80%
Portfolio turnover rate 142% 436%
==============================================================================
=
</TABLE>
* The Fund commenced selling Class D shares on January 29, 1993 and these
shares commenced operations on June 29, 1993.
** The annualized operating expense ratio excludes interest expense. The
annualized ratios including interest expense were 1.80% and 1.56% for the
six months ended January 31, 1994 and the year ended July 31, 1993, respec-
tively.
+ Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charge.
++ Amount represents less than $0.01 per share.
# Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this year
since use of the undistributed method did not accord with results of opera-
tions.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Managed Governments Fund Inc. (the "Fund") was incorpo-
rated under the laws of the State of Maryland on June 15, 1984. The Fund is a
diversified, open-end management investment company registered with the
Securities and Exchange Commission under the Investment Company Act of 1940,
as
amended (the "1940 Act"). As of November 6, 1992, the Fund offered two classes
of shares to the general public: Class A shares and Class B shares. Class A
shares are sold with a front-end sales charge. Class B shares may be subject
to
a contingent deferred sales charge ("CDSC"). On January 29, 1993, the Fund be-
gan offering Class D shares to investors that are eligible to participate in
the Smith Barney Shearson 401(k) Program. Class D shares are offered without a
front-end sales charge or CDSC fee. Each class of shares have identical rights
and privileges except with respect to the effect of the respective sales
charges, the distribution and/or service fees borne by each class, expenses
al-
locable exclusively to each class, voting rights on matters affecting a single
class, the exchange privilege of each class and the conversion feature of
Class
B shares. The following is a summary of significant accounting policies con-
sistently followed by the Fund in the preparation of its financial statements.
Portfolio valuation: Securities are valued by The Boston Company Advisors,
Inc.
("Boston Advisors") after consultation with dealers in such securities. Short-
term obligations are valued at amortized cost. Investments in securities for
which market quotations are not readily available are valued at fair value as
determined in good faith by and under the general supervision of the Board of
Directors of the Fund. U.S. government securities (other than short-term secu-
rities) are valued at the quoted bid price in the over-the-counter market.
Repurchase agreements: The Fund may engage in repurchase agreement transac-
tions. Under the terms of a typical repurchase agreement, the Fund takes pos-
session of an underlying debt obligation subject to an obligation of the
seller
to repurchase, and the Fund to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is
at least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the
right to use the collateral to offset losses incurred. There is potential loss
to the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities, including the risk of a possi-
ble decline in the value of the underlying securities during the
14
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
period while the Fund seeks to assert its rights. The Fund's investment ad-
viser or administrator, acting under the supervision of the Board of Direc-
tors, reviews on an ongoing basis the value of the collateral and the credit-
worthiness of those banks and dealers with which the Fund enters into repur-
chase agreements to evaluate potential risks.
Reverse repurchase agreements: The Fund may enter into reverse repurchase
agreement transactions for leveraging purposes. A reverse repurchase agreement
involves a sale by the Fund of securities that it holds with an agreement by
the Fund to repurchase the same securities at an agreed upon price and date. A
reverse repurchase agreement involves the risk that the market value of the
securities sold by the Fund may decline below the repurchase price of the se-
curities. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. The Fund will establish a segregated account with
its custodian, Boston Safe Deposit and Trust Company ("Boston Safe"), in which
the Fund will maintain cash, U.S. government securities or other liquid high
grade debt obligations equal in value to its obligations with respect to re-
verse repurchase agreements.
Option contracts: Upon the purchase of a put option or a call option by the
Fund, the premium paid is recorded as an investment, the value of which is
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the cost of the option. When the Fund enters into a
closing sale transaction, the Fund will realize a gain or loss depending on
whether the sales proceeds from the closing sale transaction are greater or
less than the cost of the option. When the Fund exercises a put option, it
will realize a gain or loss from the sale of the underlying security and the
proceeds from such sale will be decreased by the premium originally paid. When
the Fund exercises a call option, the cost of the security which the Fund pur-
chases upon exercise will be increased by the premium originally paid.
When a Fund writes a call option or a put option, an amount equal to the pre-
mium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a
gain equal to the amount of the premium received. When the Fund enters into a
closing purchase transaction, the Fund realizes a gain (or loss if the cost of
the closing purchase
15
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
transaction exceeds the premium received when the option was sold) without re-
gard to any unrealized gain or loss on the underlying security, and the lia-
bility related to such option is eliminated. When a call option is exercised,
the Fund realizes a gain or loss from the sale of the underlying security and
the proceeds from such sale are increased by the premium originally received.
When a put option is exercised, the amount of the premium originally received
will reduce the cost of the security which the Fund purchased upon exercise.
The risk of loss associated with purchasing options is limited to the premium
originally paid. The risk in writing a call option is that the Fund may forego
the opportunity of profit if the market price of the underlying security in-
creases and the option is exercised. The risk of writing a put option is that
the Fund may incur a loss if the market price of the underlying security de-
creases and the option is exercised. In addition, there is the risk the Fund
may not be able to enter into a closing transaction because of an illiquid
secondary market.
Futures contracts: Upon entering into a futures contract, the Fund is required
to deposit with the broker an amount of cash or cash equivalents equal to a
certain percentage of the contract amount. This is known as the "initial mar-
gin." Subsequent payments ("variation margin") are made or received by the
Fund each day, depending on the daily fluctuation of the value of the con-
tract. For financial statement purposes, an amount equal to the settlement
amount of the contract is included in its Statement of Assets and Liabilities
as an asset and as an equivalent liability. For long futures positions, the
asset is marked-to-market daily; for short futures positions, the liability is
marked-to-market daily. The daily changes in the contract are recorded as
unrealized gains or losses. The Fund recognizes a realized gain or loss when
the contract is closed.
There are several risks associated with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with
the change in value of the hedged investments. In addition, there is the risk
the Fund may not be able to enter into a closing transaction because of an il-
liquid secondary market.
Options on futures contracts: Options on futures generally operate in the same
manner as options purchased or written directly on the underlying debt securi-
ties. The Fund is required to deposit, in a manner similar to futures con-
tracts, initial margin and variation margin with respect to put and call op-
tions written on futures contracts. In addition, upon exercise, net premiums
received will decrease the
16
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
unrealized loss or increase the unrealized gains on the future. The potential
risk to the Fund is that the change in value of the underlying securities may
not correlate to the change in value of the contracts.
Securities transactions and investment income: Securities transactions are re-
corded as of the trade date. Interest income is recorded on the accrual basis.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date. Realized gains or losses from
se-
curities sold are recorded on the identified cost basis. Investment income and
realized and unrealized gains and losses are allocated based upon relative net
assets of each class.
Dividends and distributions to shareholders: Dividends from net investment in-
come are determined on a class level. Distributions of net investment income
are declared daily and paid at the end of each Smith Barney Shearson Inc.
("Smith Barney Shearson") statement month. Distributions of any remaining net
realized long- and short-term capital gains are declared and paid annually af-
ter the end of the year in which they are earned. To the extent that net real-
ized capital gains can be offset by capital loss carryovers, it is the policy
of the Fund not to distribute such gains. Additional distributions of net in-
vestment income and capital gains may be made at the discretion of the Board
of
Directors to avoid the application of a nondeductible 4% excise tax on certain
undistributed amounts of ordinary income and capital gain. Income
distributions
and capital gain distributions on a Fund level are determined in accordance
with income tax regulations which may differ from generally accepted
accounting
principles. These differences are primarily due to differing treatments of in-
come and gains on various investment securities held by the Fund, timing dif-
ferences and differing characterization of distributions made by the Fund as a
whole.
Federal income taxes: It is the Fund's policy to qualify as a regulated
invest-
ment company, if such qualification is in the best interests of its sharehold-
ers, by complying with the requirements of the Internal Revenue Code of 1986,
as amended, applicable to regulated investment companies and by distributing
substantially all of its earnings to its shareholders. Therefore, no Federal
income tax provision is required.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER RELATED
PARTY TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Management
17
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
Corp., which is controlled by Smith Barney Shearson Holdings Inc.
("Holdings").
Holdings is a wholly owned subsidiary of The Travelers Inc. Under the terms of
the Advisory Agreement, the Fund pays a monthly fee at the annual rate of
0.45%
of the value of its average daily net assets up to $1 billion and 0.415% of
the
value of the average daily net assets in excess of $1 billion.
The Boston Company Advisors, Inc. ("Boston Advisors"), an indirect wholly
owned
subsidiary of Mellon Bank Corporation ("Mellon"), serves as the Fund's
adminis-
trator pursuant to an administration agreement (the "Administration
Agreement"). Under the Administration Agreement, the Fund pays a monthly fee
at
the annual rate of 0.20% of the value of its average daily net assets up to $1
billion and 0.185% of the value of the average daily net assets in excess of
$1
billion.
No officer, director or employee of Smith Barney Shearson, Boston Advisors or
of any parent or subsidiary of those corporations receives any compensation
from the Fund for serving as a Director or officer of the Fund. The Fund pays
each Director who is not an officer, director, or employee of Smith Barney
Shearson, Boston Advisors or any of their affiliates $4,000 per annum plus
$500
per meeting attended and reimburses each such Director for travel and out-of-
pocket expenses.
Smith Barney Shearson acts as the exclusive distributor of the Fund's shares.
For the six months ended January 31, 1994, Smith Barney Shearson received
$237,377 from investors representing commissions (sales charges) on sales of
Class A shares.
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years (eight years in the case of certain 401(k)
plans) after the date of purchase. In circumstances in which the CDSC is im-
posed, the amount of the charge ranges between 4.5% and 1.0% of net asset
value
depending on the number of years since the date of purchase (except in the
case
of purchases by certain 401(k) plans in which case a 3% charge is imposed for
the eight year period after the date of purchase). For the six months ended
January 31, 1994, Smith Barney Shearson received $190,701 from shareholders in
CDSCs on the redemption of Class B shares.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc.,
a
subsidiary of First Data Corporation, serves as the Fund's transfer agent.
18
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
3. DISTRIBUTION AGREEMENT
Smith Barney Shearson acts as distributor of the Fund's shares pursuant to a
distribution agreement with the Fund and sells shares of the Fund through
Smith
Barney Shearson or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a Services and
Distribution Plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney Shearson for servicing shareholder accounts for both Class A and Class
B
shareholders, and covers expenses incurred in distributing Class B shares.
Smith Barney Shearson is paid an annual service fee with respect to Class A,
Class B and Class D shares of the Fund at the rate of .25% of the value of the
average daily net assets of each respective class of shares. Smith Barney
Shearson is also paid an annual distribution fee with respect to Class B and
Class D shares at the rate of .50% of the value of the average daily net
assets
attributable to those shares. For the six months ended January 31, 1994, the
Fund incurred $564,645 in service fees for Class A shares. For the six months
ended January 31, 1994, the Fund incurred $582,061 and $1,164,123 in service
fees and distribution fees, respectively, for Class B shares. For the six
months ended January 31, 1994, the Fund incurred $114 and $57 in distribution
and service fees for Class D shares.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class
of shares are prorated among the classes based upon the relative net assets of
each class. Operating expenses directly attributable to a class of shares are
charged to that class' operations. In addition to the above servicing and dis-
tribution fees, class specific operating expenses include transfer agent fees
of $165,858, $210,611 and $33 for Class A, Class B and Class D, respectively.
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of U.S. government securities, ex-
cluding short-term investments, during the six months ended January 31, 1994,
amounted to $1,708,570,286 and $1,354,969,044, respectively.
At January 31, 1994, aggregate gross unrealized appreciation for all
securities
in which there was an excess of value over tax cost amounted to $1,858,174 and
the aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value amounted to $2,853,766.
19
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
Information regarding borrowing by the Fund under reverse repurchase
agreements
is as follows:
<TABLE>
- ----------------------------------------------------------
<S> <C>
Reverse Repurchase Agreements--
Maximum amount outstanding during the period $263,095,165
Average amount outstanding during the period $ 68,893,992
- ----------------------------------------------------------
</TABLE>
Interest rates ranged from 0.88% to 3.05% during the period. The average
amount
outstanding during the period was calculated by summing borrowings at the end
of each day and dividing the sum by the number of days in the six months ended
January 31, 1994.
Interest paid for the six months ended January 31, 1994 on borrowings by the
Fund under reverse repurchase agreements aggregated $867,986.
6. COMMON STOCK
At January 31, 1994, 500 million shares of $.001 par value common stock
divided
into three classes (Class A, Class B and Class D) were authorized. Changes in
common stock outstanding were as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED 1/31/94 7/31/93
CLASS A SHARES: Shares Amount Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 833,382 $ 11,071,697 2,546,489 $ 33,102,420
Issued as reinvestment of
dividends 702,960 9,309,368 1,692,084 21,937,977
Redeemed (3,729,190) (49,466,519) (7,342,882) (95,358,536)
- ------------------------------------------------------------------------------
Net decrease (2,192,848) $(29,085,454) (3,104,309) $(40,318,139)
- ------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
<TABLE>
<CAPTION>
SIX MONTHS PERIOD ENDED
ENDED 1/31/94 7/31/93**
CLASS B SHARES: Shares Amount Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 1,755,040 $ 23,309,189 4,106,505 $ 55,665,193
Issued as reinvestment of
dividends 649,170 8,597,082 994,526 12,963,733
Issued in exchange for
shares of Mortgage
Portfolio (Note 9) -- -- 37,436,980 473,899,753
Redeemed (4,285,022) (56,872,526) (6,854,290) (89,375,174)
- ------------------------------------------------------------------------------
Net increase/(decrease) (1,880,812) $(24,966,255) 35,683,721 $453,153,505
- ------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
1/31/94 7/31/93**
CLASS D SHARES: Shares Amount Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 5,118 $ 67,814 874 $ 11,521
Issued as reinvestment of
dividends 92 1,222 2 32
Redeemed (301) (3,970) -- --
- ------------------------------------------------------------------------------
Net increase 4,909 $ 65,066 876 $ 11,553
- ------------------------------------------------------------------------------
</TABLE>
* The Fund began offering Class B shares on November 6, 1992. Any shares out-
standing prior to November 6, 1992 were designated as Class A shares.
** The Fund began offering Class D shares on January 29, 1993. These shares
commenced operations on June 29, 1993.
7. CAPITAL LOSS CARRYFORWARDS
At July 31, 1993, the Fund had available for Federal tax purposes unused capi-
tal loss carryforwards of approximately $91,435,096 expiring in 1995,
$44,206,489 expiring in 1996 and $13,917,034 expiring in 1997.
8. NOTES PAYABLE
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Continental Bank N.A. under an Amended and Restated Line of
Credit Agreement (the "Agreement") dated April 30, 1992, primarily for tempo-
rary or emergency purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Under this
Agreement, the Fund may borrow up to the lesser of $25 million or 10% of its
net assets. Interest is payable either at the bank's Money Market Rate or the
London Interbank Offered Rate plus 0.375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 annually which is allocated equally among each of the participants.
The Agreement
21
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
requires, among other provisions, each participating fund to maintain a ratio
of net assets (not including funds borrowed pursuant to the Agreement) to ag-
gregate amount of indebtedness pursuant to the Agreement of no less than 5 to
1. During the six months ended January 31, 1994, the Fund had an average out-
standing daily balance of $9,783 with an interest rate of 3.375%. Interest ex-
pense totalled $169 for the six months ended January 31, 1994.
9. REORGANIZATION
On November 20, 1992, the Fund (Acquiring Fund) acquired the assets and
certain
liabilities of the Mortgage Portfolio (Acquired Fund), in exchange for shares
of the Acquiring Fund, pursuant to a plan of reorganization approved by the
Acquired Fund's shareholders on October 13, 1992. Total shares issued by the
Acquiring Fund, total net assets of the Acquired Fund and the Acquiring Fund
and any unrealized appreciation included in the Acquired Fund's total net as-
sets are as follows:
<TABLE>
<CAPTION>
Shares Total Net Total Net Acquired
Issued by Assets of Assets of Fund
Acquiring Acquired Acquiring Acquired Acquiring Unrealized
Fund Fund Fund Fund* Fund Depreciation
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage
The Fund Portfolio 37,436,980 $473,899,753 $480,130,148 $(801,156)
----------------------------------------------------------------------
</TABLE>
*The net assets of the Acquiring Fund immediately after the acquisition were
$954,029,901.
22
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
PARTICIPANTS
DISTRIBUTOR
Smith Barney Shearson Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
23
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
CAPITAL GAIN (OR LOSS) This is the increase (or decrease) in the market value
(price) of a security in your portfolio. If a stock or bond appreciates in
price, there is a capital gain; if it depreciates there is a capital loss. A
capital gain or loss is "realized" upon the sale of a security; if net capital
gains exceed net capital losses, there may be a capital gain distribution to
shareholders.
CONTINGENT DEFERRED SALES CHARGE (CDSC) One kind of back-end load, a CDSC may
be imposed if shares are redeemed during the first few years of ownership. The
CDSC may be expressed as a percentage of either the original purchase price or
the redemption proceeds. Most CDSCs decline over time, and some will not be
charged if shares are redeemed after a certain period of time.
DISTRIBUTION RATE This is the rate at which a mutual fund pays out (or dis-
tributes interest, dividends and realized capital gains to shareholders. A
fund's distribution rate is usually expressed as an annualized percent of the
fund's offering price.
DIVIDEND This is income generated by securities in a portfolio and distributed
after expenses to shareholders.
FRONT-END SALES CHARGE This is the sales charge which may be applied to an in-
vestment at the time of initial purchase.
NET ASSET VALUE (NAV) Net asset value is the total market value of all securi-
ties held by a fund, minus any liabilities, divided by the number of shares
outstanding. It is the value of a single share of a mutual fund on a given
day. The total value of your investment would be the NAV multiplied by the
number of shares you own.
SEC YIELD This standardized calculation of a mutual fund's yield is based on a
formula developed by the Securities and Exchange Commission (SEC) to allow
funds to be compared on an equal basis. It is an annualized yield based on the
portfolio's potential earnings from dividends, interest and yield to maturity
of its holdings, and it reflects the payments of all portfolio expenses for
the most recent 30-day period. Mutual funds are required to use this figure
when stating yield.
TOTAL RETURN Total return measures a fund's performance, taking into account
the combination of dividends paid and the gain or loss in the value of the se-
curities held in the portfolio. It may be expressed on an average annual basis
or cumulative basis (total change over a given period). In addition, total re-
turn may be expressed with or without the effects of sales charges or the re-
investment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the aver-
age annual total return according to the standardized calculation developed by
the SEC. The SEC average annual total return calculation includes the effects
of all fees and sales charges and assumes the reinvestment of all dividends
and capital gains.
24
<PAGE>
MANAGED
GOVERNMENTS
FUND INC.
DIRECTORS
Burt N. Dorsett
Elliot S. Jaffe
Harry W. Knight
Heath B. McLendon
Cornelius C. Rose
OFFICERS
Heath B. McLendon
Chairman of the Board
Stephen J. Treadway
President
Richard P. Roelofs
Executive Vice President
James E. Conroy
Vice President and Investment Officer
Vincent Nave
Treasurer
Francis J. McNamara, III
Secretary
This report is submitted for the general information of the shareholders of
Smith Barney Shearson Managed Governments Fund. It is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus for the Fund, which contains information concerning the
Fund's investment policies, fees and expenses as well as other pertinent
information.
[LOGO OF SMITH BARNEY SHEARSON APPEARS HERE]
SMITH BARNEY SHEARSON MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 16,184,241
FD0164 C4
