(Art Work on Cover)
Small box above fund name showing the White House with three flags in
front.
Managed
Governments
Fund Inc.
Directors
Burt N. Dorsett
Isaac B. Grainger*
Elliot S. Jaffe
Harry W. Knight*
Heath B. McLendon
Cornelius C. Rose
*Director Emeritus
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
Lewis E. Daidone
Treasurer
Christina T. Sydor
Secretary
This report is submitted for the general information of the shareholders of
Smith Barney Shearson Managed Governments Fund Inc. 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.
SMITH BARNEY
Smith Barney Shearson
Mutual Funds
Two World Trade Center
New York, New York 10048
Fund 16,184,241
FD0421 I4
[Recycle Logo]
Recycled
Recyclable
<PAGE>
Managed Governments Fund Inc.
Dear Shareholder:
By any measure the past year has been an extraordinarily challenging one
for
investors. The media vividly reports the daily swings in both the stock
market and interest rates. The Federal Reserve Board once again finds
itself
in the spotlight as investors follow its meetings and activities. The
Federal
Reserve Board influences the direction and level of interest rates and
thereby the likely future direction of the economy in the United States via
their control of the Federal funds rate, which is the interest rate banks
charge each other for overnight loans. The Federal funds rate is viewed as
a
base level for interest rates as well as a good indicator of the direction
of
interest rates in general. Between 1990 and 1993, in response to an economy
that was only slowly recovering from a deep, stagnating recession, the
Federal Reserve drove interest rates down to their lowest levels in over 25
years in expectation of stimulating borrowing by consumers and businesses
and
thereby stimulating the economy.
The Federal Reserve's plan was successful in moving the economy out of
recession and onto a growth path, aided by a record surge in mortgage
refinancings during 1993. Buoyed by optimism after so many months of
restraining spending in fear of becoming yet another victim of the
recession,
and flush with extra income from refinanced mortgages, consumers responded
with vigor in late 1993 and early 1994. GDP, gross domestic product, a
broad
measure of economic growth, grew at an annualized rate of 7% in the last
three months of 1993.
Growth was so strong that in the early part of 1994 the Federal Reserve
Board
became concerned about the potential for increasing inflation and an
overheated economy. Consequently they reversed their previous policy of
stimulating the economy and instead began raising short-term interest rates
to slow some of the momentum. Between February and August of this year, the
Federal Reserve Bank raised the Federal funds rate five times to its
current
rate of 4.75% and the discount rate to 4.00%. Their goal is to moderate the
rate of growth and avoid rising inflation.
Usually during the early stages of a Federal Reserve tightening, long-term
interest rates also rise, albeit by less than the increase in short-term
rates. However, in 1994, long-term rates behaved atypically and skyrocketed
from a low point of 5.82% to their current level of nearly 8%, causing bond
prices to tumble.
Market volatility and historically high mortgage-backed security
prepayments
created difficult conditions in the government securities market during the
past fiscal year. Rarely was there a perfect, clear-cut route. Because of
the
inverse relationship between price and yield, bond prices increased as
interest rates declined in both 1992 and 1993. This appreciation in price
in
the Fund's Treasury holdings
1
<PAGE>
was a major component of the Fund's total return over the previous two
fiscal
years. On October 20, 1993, the bellwether 30-year Treasury bond reached a
low yield of 5.82%, signaling to us that further declines in yield were
highly unlikely--especially since the economy appeared to be gaining steam.
Consequently, we believed that as we approached 1994, income would be a
more
important contributor to the Fund's total return to investors. The Fund
sold
the majority of its Treasury security holdings and began increasing its
allocation to mortgage-backed securities. In January, when mortgage-backed
securities had an annualized prepayment rate of approximately 45%, the Fund
committed to purchase mortgage securities for settlement in the portfolio
in
April. We anticipated that prepayment rates would decline by then as
interest
rates increased and made mortgage refinancings less attractive for most
consumers. In addition, mortgage securities tend to be less volatile than
Treasury issues in a rising interest rate environment, helping to minimize
the decline in the Fund's net asset value.
The Fund's strategy was successful in meeting this year's investment
challenges, placing its performance among the top half of its peer group.
Because of their higher yields, mortgage-backed securities retained their
value better than did Treasury securities as the Federal Reserve increased
interest rates. The Fund's net asset value per share declined to $12.50
from
$13.29, and we believe that the decline would have been larger had the Fund
been more heavily invested in Treasury issues. Investors owning Class A
shares received distributions of $0.80 per share, and investors owning
Class
B or D shares received distributions of $0.73 per share. These
distributions
helped offset the decline in the net asset value per share, resulting in a
positive total return of 0.08% for Class A shares and a negative total
return
of 0.46% for Class B and D shares. These returns placed the Fund 19th and
25th, respectively, among its peer group of 52 funds investing in mortgage
securities as measured by Lipper Analytical Service, Inc., a nationally-
recognized mutual fund ranking organization.
However, the investment strategies employed resulted in a return of capital
of $0.19 for Class A shares and $0.17 for Class B and D shares. This was
the
result of two primary factors: (1) the lower level of income earned by the
portfolio when the Fund had substantial Treasury holdings earlier in the
fiscal year, and (2) the higher-than-anticipated level of prepayments in
the
Fund's mortgage-backed security holdings, particularly in the last quarter
of the Fund's fiscal year. Tax rules require that losses realized on
prepayments be treated as a reduction of the Fund's net investment income.
We
believe that the risk of prepayments associated with higher coupon mortgage
securities was preferable to the lower income and greater potential market
risk presented by a portfolio of Treasury securities and/or lower coupon
mortgage securities. This return of capital, which will be reported to you
in
your year-end tax statement, reduces the tax cost of your Fund shares. Over
the life of your investment, your economic result will be the same: lower
taxable income now will be offset by a higher gain/reduced loss when you
sell
your Fund shares in the future.
2
<PAGE>
Although it is not explicitly stated in the prospectus, the Fund's policy
is
to pay a level monthly dividend based on our projections for the government
securities market and the general direction of interest rates. This policy
has no appreciable impact on the Fund's investment strategies or total
return
per share since it is guided by market conditions. We are currently
evaluating our existing dividend levels based on our projections for the
government securities market in 1995.
It is clear to us from the Federal Reserve's actions of the last few months
that they will continue to raise interest rates as long as they see
inflation
risks in the economy. The real issue is whether or not the economy reaches
the equilibrium state of growth with low inflation that the Federal Reserve
is striving for. Because of this uncertainty, we have adopted a neutral
investment stance and are keeping the Fund's average maturity at five
years.
Should we become very negative on the long-term prospects for the
government
securities market, we would shorten the Fund's average maturity to the two-
to three-year range; conversely, we would lengthen the Fund's average
maturity to seven to ten years if we become very positive on the prospects
for the government securities market.
Within the context of the Fund's current average maturity of five years, we
are maintaining our strategy of using higher-coupon, generic mortgage-
backed
securities. At no time have mortgage derivative securities been used to
boost
the Fund's dividend yield at the risk of market liquidity. Our mortgage
holdings are complemented with intermediate-maturity Treasury securities
and
a modest presence in Treasury STRIPS.
The past fiscal year has been a difficult one, but we believe our
investment
strategies have proven to be relatively successful in meeting our stated
goals of providing investors with a high level of current income while
attempting to preserve principal by using investments in U.S. Treasury and
agency securities. During this next fiscal year we will endeavor to do the
same, and look forward to reporting to you in the Fund's Semi-Annual
Report.
Sincerely,
[Signature of Heath B. McLendon]
Heath B. McLendon
Chairman of the Board
and Investment Officer
[Signature of James E. Conroy]
James E. Conroy
Vice President and
Investment Officer
September 19, 1994
3
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Historical Performance -- Class A Shares
<TABLE>
<CAPTION>
Return Capital
Year Ended Net Asset Value of Gains Dividends
Total
July 31 Beginning Ending Capital Paid Paid
Return*
<S> <C> <C> <C> <C> <C>
<C>
9/4/84-7/31/85 $12.35 $13.03 -- $ 0.03 $1.23
16.33%
1986 $13.03 $13.32 -- $ 0.09 $1.34
13.81%
1987 $13.32 $12.62 -- $ 0.34 $1.11
5.69%
1988 $12.62 $12.04 $ 0.01 $ 0.01 $1.09
4.43%
1989 $12.04 $12.19 $ 0.11 -- $0.96
10.62%
1990 $12.19 $12.13 $ 0.03 -- $1.07
9.01%
1991 $12.13 $12.09 $ 0.11 -- $0.98
9.02%
1992 $12.09 $12.88 $ 0.08 -- $0.91
15.25%
1993 $12.88 $13.29 -- $ 0.23 $0.66
10.43%
1994 $13.29 $12.50 $ 0.19 -- $0.61
0.08%
Total $ 0.53 $ 0.70 $9.96
Cumulative Total Return -- (9/4/84 through 7/31/94)
144.68%
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions
at net asset value and do not assume deduction of the front-end sales
charge
(maximum 4.5%).
</TABLE>
The Fund's policy is to distribute dividends monthly,
and capital gains, if any, annually.
Average Annual Total Return** -- Class A Shares
<TABLE>
<CAPTION>
Without Sales Charge With Sales
Charge***
<S> <C> <C>
Year Ended 7/31/94 0.08% (4.42)%
Five Years Ended 7/31/94 8.64% 7.65%
Inception 9/4/84 through 7/31/94 9.45% 8.95%
<FN>
**All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
***Average annual total return figures assume the deduction of the maximum
4.5% sales charge.
</TABLE>
Note: On November 6, 1992, existing shares of the Fund were designated as
Class A shares. Class A shares are subject to a maximum 4.5% front-end
sales
charge and service fee of 0.25% of the value of the average daily net
assets
attributable to that class. The Fund's annual rates of return would have
been
lower had service fees been in effect prior to November 6, 1992.
4
<PAGE>
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF
SMITH BARNEY SHEARSON MANAGED GOVERNMENTS FUND INC.(+)
VS. UNMANAGED INDICES
SEPTEMBER 4, 1984 -- JULY 31, 1994
(Mountain chart)
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Managed
Governments
Fund's Class A shares on September 4, 1984 through July 31, 1994 as
compared
with the growth of a $10,000 investment in the Lehman Brothers Government
Bond
Index and the Lipper Mortgage Securities Average. The plot points used to
draw
the line graph were as follows:
<TABLE>
<CAPTION>
Growth of $10,000
Investment in the Growth of
$10,000
Growth of $10,000 Lehman Brothers Investment
in the
Month Invested in Class A Government Lipper
Mortgage
Ended shares of the Fund Bond Index Securities
Average
<S> <C> <C> <C>
8/30/84 -- $10,000
$10,000
09/04/84 $ 9,550 -- --
09/84 $ 9,660 $10,203
$10,225
12/84 $10,172 $10,933
$10,804
03/85 $10,445 $11,165
$11,052
06/85 $11,108 $12,035
$11,781
09/85 $11,393 $12,275
$12,064
12/85 $11,981 $13,166
$12,735
03/86 $12,419 $14,307
$13,249
06/86 $12,436 $14,495
$13,286
09/86 $12,860 $14,779
$13,717
12/86 $13,341 $15,182
$14,155
03/87 $13,520 $15,361
$14,406
06/87 $13,317 $15,093
$14,161
09/87 $13,080 $14,687
$13,786
12/87 $13,587 $15,515
$14,536
03/88 $13,874 $16,027
$15,080
06/88 $14,057 $16,179
$15,270
09/88 $14,390 $16,452
$15,561
12/88 $14,483 $16,607
$15,622
03/89 $14,453 $16,783
$15,738
06/89 $15,250 $18,133
$16,793
09/89 $15,360 $18,283
$16,955
12/89 $15,923 $18,971
$17,580
03/90 $16,017 $18,735
$17,533
06/90 $16,568 $19,390
$18,121
09/90 $16,784 $19,551
$18,375
12/90 $17,531 $20,626
$19,225
03/91 $17,788 $21,072
$19,718
06/91 $18,038 $21,357
$20,050
09/91 $19,200 $22,577
$21,101
12/91 $20,373 $23,788
$22,096
03/92 $19,876 $23,372
$21,822
06/92 $20,700 $24,294
$22,677
09/92 $21,660 $25,492
$23,438
12/92 $21,617 $25,504
$23,500
03/93 $22,518 $26,653
$24,300
06/93 $23,034 $27,425
$24,828
09/93 $22,725 $28,315
$25,211
12/93 $23,593 $28,219
$25,286
3/94 $23,020 $27,369
$24,599
6/94 $22,942 $27,055
$24,165
7/94 $23,367 $27,553
$24,513
<FN>
(+) Illustration of $10,000 invested in Class A shares on September 4, 1984
assuming deduction of the maximum 4.5% front-end sales charge at the time
of
investment and reinvestment of dividends and capital gains at net asset
value
through July 31, 1994.
</TABLE>
The Lehman Brothers Government Bond Index is an unmanaged, broad-based
index
of all public debt obligations of the U.S. government and its agencies and
has an average maturity of approximately nine years. The index is useful in
depicting the general movement of the government securities market, but
because it is unmanaged the index is not subject to the same management and
trading expenses of a mutual fund.
Lipper Analytical Services, Inc. U.S. Mortgage Securities Bond Fund Average
("Lipper Mortgage Securities Average") is composed of the Fund's peer group
of mutual funds (58 funds as of July 31, 1994) investing in U.S.
mortgage-backed securities. Lipper Analytical Services, Inc. is a
widely-recognized mutual fund information service.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the class has been used.
Note: All figures cited here and on the following pages represent past
performance of Class A shares and do not guarantee future results.
5
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Historical Performance -- Class B Shares
Return Capital
Year Ended Net Asset Value of Gains Dividends
Total
July 31 Beginning Ending Capital Paid Paid
Return*
11/6/92-7/31/93 $12.64 $13.29 -- $ 0.16 $0.41
9.92%
1994 $13.29 $12.50 $ 0.17 -- $0.56
(0.46)%
Total $ 0.17 $ 0.16 $0.97
Cumulative Total Return -- (11/6/92 through 7/31/94)
9.41%
*Figures assume reinvestment of all dividends and capital gains
distributions
at net asset value and do not assume deduction of the contingent deferred
sales charge ("CDSC").
Average Annual Total Return** -- Class B Shares
Without CDSC With CDSC***
Year Ended 7/31/94 (0.46)% (4.70)%
Inception 11/6/92 through 7/31/94 5.33% 3.11%
**All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
***Average annual total return figures assume the deduction of the maximum
applicable CDSC which is described in the prospectus.
Note: The Fund began offering Class B shares on November 6, 1992. Class B
shares are subject to a 4.5% CDSC and service and distribution fees of
0.25%
and 0.50%, respectively, of the value of the average daily net assets
attributable to that class.
6
<PAGE>
GROWTH OF $10,000 INVESTED IN CLASS B SHARES OF
SMITH BARNEY SHEARSON MANAGED GOVERNMENTS FUND INC.(+)
VS. UNMANAGED INDICES
NOVEMBER 6, 1992 -- JULY 31, 1994
(Mountain Chart)
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Managed
Governments
Fund's Class B shares on November 6, 1992 through July 31, 1994 as compared
with
the growth of a $10,000 investment in the Lehman Brothers Government Bond
Index
and the Lipper Mortgage Securities Average. The plot points used to draw
the
line graph were as follows:
Growth of $10,000
Investment in the Growth of
$10,000
Growth of $10,000 Lehman Brothers Investment
in the
Month Invested in Class B Government Lipper
Mortgage
Ended shares of the Fund Bond Index Securities
Average
10/92 - $10,000
$10,000
11/6/92 $10,000 -
- -
11/92 $10,018 $ 9,985
$10,021
12/92 $10,208 $10,150
$10,158
3/93 $10,619 $10,608
$10,503
6/93 $10,849 $10,915
$10,732
9/93 $11,160 $11,269
$10,898
12/93 $11,084 $11,231
$10,930
3/94 $10,799 $10,893
$10,633
6/94 $10,746 $10,768
$10,445
7/94 $10,941 $10,966
$10,596
(+) Illustration of $10,000 invested in Class B shares on November 6, 1992
(when Class B shares were first offered) assuming reinvestment of dividends
and capital gains at net asset value through July 31, 1994.
(++) Value does not assume deduction of applicable CDSC.
(+++) Value assumes deduction of applicable CDSC (assuming redemption on
July
31, 1994).
The Lehman Brothers Government Bond Index is an unmanaged, broad-based
index
of all public debt obligations of the U.S. government and its agencies and
has an average maturity of approximately nine years. The index is useful in
depicting the general movement of the government securities market, but
because it is unmanaged the index is not subject to the same management and
trading expenses of a mutual fund.
Lipper Analytical Services, Inc. U.S. Mortgage Securities Bond Fund Average
("Lipper Mortgage Securities Average") is composed of the Fund's peer group
of mutual funds (58 funds as of July 31, 1994) investing in U.S.
mortgage-backed securities. Lipper Analytical Services, Inc. is a
widely-recognized mutual fund information service.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the class has been used.
Note: All figures cited here and on the following pages represent past
performance of Class B shares and do not guarantee future results.
7
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Historical Performance -- Class D Shares
Return Capital
Year Ended Net Asset Value of Gains Dividends
Total
July 31 Beginning Ending Capital Paid Paid
Return*
6/29/93-7/31/93 $13.18 $13.29 -- $ 0.02 $0.03
1.25%
1994 $13.29 $12.50 $ 0.17 -- $0.56
(0.46)%
Total $ 0.17 $ 0.02 $0.59
Cumulative Total Return -- (6/29/93 through 7/31/94)
0.78%
*Figures assume reinvestment of all dividends and capital gains
distributions at net asset value.
Average Annual Total Return** -- Class D Shares
Actual
Year Ended 7/31/94
(0.46)%
Inception 6/29/93 through 7/31/94
0.72%
**All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
Note: The Fund began selling Class D Shares on June 29, 1993. Class D
shares
are subject to service and distribution fees of 0.25% and 0.50%,
respectively, of the value of the average daily net assets attributable to
that class.
8
<PAGE>
GROWTH OF $10,000 INVESTED IN CLASS D SHARES OF
SMITH BARNEY SHEARSON MANAGED GOVERNMENTS FUND INC.(+)
VS. UNMANAGED INDICES
JUNE 29, 1993 -- JULY 31, 1994
(Mountain Chart)
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Managed
Governments
Fund's Class D shares on June 29, 1993 through July 31, 1994 as compared
with
the growth of a $10,000 investment in the Lehman Brothers Government Bond
Index
and the Lipper Mortgage Securities Average. The plot points used to draw
the
line graph were as follows:
Growth of $10,000
Investment in the Growth of
$10,000
Growth of $10,000 Lehman Brothers Investment in
the
Month Invested in Class D Government Lipper
Mortgage
Ended shares of the Fund Bond Index Securities
Average
5/93 -- $10,000
$10,000
6/29/93 $10,000 -- --
6/93 $ 9,992 $10,222
$10,137
9/93 $10,280 $10,553
$10,293
12/93 $ 9,932 $10,518
$10,324
3/94 $ 9,947 $10,201
$10,043
6/94 $ 9,899 $10,084 $
9,866
7/94 $10,078 $10,269
$10,008
(+) Illustration of $10,000 invested in Class D shares on June 29, 1993
(when
Class D shares were first offered) assuming reinvestment of dividends and
capital gains at net asset value through July 31, 1994.
The Lehman Brothers Government Bond Index is an unmanaged, broad-based
index
of all public debt obligations of the U.S. government and its agencies and
has an average maturity of approximately nine years. The index is useful in
depicting the general movement of the government securities market, but
because it is unmanaged the index is not subject to the same management and
trading expenses of a mutual fund.
Lipper Analytical Services, Inc. U.S. Mortgage Securities Bond Fund Average
("Lipper Mortgage Securities Average") is composed of the Fund's peer group
of mutual funds (58 funds as of July 31, 1994) investing in U.S.
mortgage-backed securities. Lipper Analytical Services, Inc. is a
widely-recognized mutual fund information service.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the class has been used.
Note: All figures cited here and on the following pages represent past
performance of Class D shares and do not guarantee future results.
9
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Portfolio Highlights (unaudited) July 31, 1994
Portfolio Breakdown
(Pie Chart)
Pie chart depicting the allocation of the Managed Government Fund's
investment
securities held at July 31, 1994 by security type. The pie is broken in
pieces
representing security types in the following percentages:
Security Type
Percentage
Mortgage-Backed Securities 66.6%
U.S. Treasury Securities, Repurchase Agreement, Futures
Contracts and Net Other Assets 33.4%
Average Maturity: 5.0 years
U.S. Treasury Securities are debt obligations of the United States
government. They are secured by the full faith and credit of the federal
government, and include such instruments as Treasury notes, bills and
bonds.
Mortgage-Backed Securities are debt securities issued by the U.S.
government
agencies such as the Federal Home Loan Mortgage Corporation (FHLMC),
Federal
National Mortgage Association (FNMA) and Government National Mortgage
Association (GNMA). They represent thousands of individual home mortgages
that are pooled to form securities. As homeowners pay interest and
principal
each month, these payments are passed on to investors. Mortgage-backed
securities are backed by the full faith and credit of the issuing agency.
10
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Portfolio of Investments July 31, 1994
Key to Security Description
STRIPS--Separate Trading of Registred Interest and Principal of
Securities.
<TABLE>
<CAPTION>
Face Market
Value
Value (Note
1)
<C> <S> <C>
MORTGAGE-BACKED SECURITIES -- 66.6%
Government National Mortgage Association (GNMA) -- 64.9%
$1,336 GNMA 8.500%, 30 Year $
1,368
371,398,989 GNMA 9.000%, 30 Year
387,762,829
100,024,598 GNMA 9.500%, 30 Year
106,120,097
7,799 GNMA 10.000%, 30 Year
8,411
Total GNMA
493,892,705
Federal Home Loan Mortgage Corporation (FHLMC) -- 1.0%
381 FHLMC 7.500%, 30 Year
370
8,617 FHLMC 8.000%, 30 Year
8,574
2,631,482 FHLMC 9.000%, 30 Year
2,707,137
785,226 FHLMC 10.000%, 15 Year
834,789
3,908,961 FHLMC 10.000%, 30 Year
4,155,695
35,334 FHLMC 14.750%, 30 Year
40,148
Total FHLMC
7,746,713
Federal National Mortgage Association
(FNMA) -- 0.7%
1,688 FNMA 9.500%, 15 Year
1,776
4,549,145 FNMA 10.000%, 30 Year
4,896,018
Total FNMA
4,897,794
TOTAL MORTGAGE-BACKED SECURITIES
(Cost $514,382,242)
506,537,212
U.S. TREASURY (UST) SECURITIES -- 32.6%
25,000,000 UST Notes, 6.750%, 5/31/99
25,042,000
6,000,000 UST Notes, 5.750%, 8/15/03+
5,458,560
75,000,000 UST Notes, 5.875%, 2/15/04
68,611,500
100,000,000 UST Notes, 7.250%, 5/15/04
100,968,000
45,100,000 UST Principal Strips, Zero Coupon, 02/15/15
9,498,060
190,000,000 UST Principal Strips, Zero Coupon, 11/15/15
38,036,100
TOTAL U.S. TREASURY (UST) SECURITIES
(Cost $260,157,215)
247,614,220
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Portfolio of Investments (continued) July 31, 1994
Market
Value
Contracts (Note
1)
CALL OPTION PURCHASED -- 0.2% (Cost $719,509)
1,000 U.S. Treasury Bond, September, $104.00
$1,453,130
PUT OPTION PURCHASED -- 0.0% (Cost $320,290)
1,000 U.S. Treasury Bond, September, $100.00
62,500
Face Value
REPURCHASE AGREEMENT -- 3.8% (Cost $28,945,000)
$28,945,000 Agreement with Barclays, Zoete and Wedd,
4.180% dated 7/29/94, to be repurchased
at $28,955,083 on 8/1/94, collateralized by
$28,740,000 U.S. Treasury Note, 5.500%
due 5/15/95
28,945,000
TOTAL INVESTMENTS (Cost $804,524,256*) 103.2%
784,612,062
Contracts
FUTURES CONTRACTS--SHORT POSITIONS -- (6.9)%
(Contract Amount $51,906,250)
(500) U.S. Treasury Bond, September, 1994 (6.9)
(52,390,625)
OTHER ASSETS AND LIABILITIES (Net) 3.7
28,319,209
NET ASSETS 100.0%
$760,540,646
<FN>
* Aggregate cost for Federal tax purposes.
+ A portion of the security is held as collateral for futures contracts.
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Statement of Assets and Liabilities July 31, 1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $804,524,256)(Note 1)
See accompanying schedule
$784,612,062
Cash
10,508
Receivable for investment securities sold
129,540,388
Aggregate exercise cost of futures--short position
51,906,250
Interest receivable
9,358,934
Receivable for Fund shares sold
2,865,025
Total Assets
978,293,167
LIABILITIES:
Payable for investment securities purchased $159,530,641
Futures contracts--short position, at value
(Contract amount $51,906,250) (Note 1)
See accompanying schedule 52,390,625
Dividends payable 4,031,227
Payable for Fund shares redeemed 818,447
Investment advisory fee payable (Note 2) 289,457
Distribution fee payable (Note 3) 164,670
Service fee payable (Note 3) 160,951
Administration fee payable (Note 2) 128,647
Custodian fees payable (Note 2) 100,593
Transfer agent fees payable (Note 2) 58,008
Accrued expenses and other payables 79,255
Total Liabilities
217,752,521
NET ASSETS
$760,540,646
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Statement of Assets and Liabilities (continued) July 31, 1994
<TABLE>
<S> <C>
NET ASSETS consist of:
Distributions in excess of net investment income $
(4,031,227)
Accumulated net realized loss on investments sold
(144,198,251)
Net unrealized depreciation of investments and
futures contracts
(20,396,569)
Par value
60,857
Paid-in capital in excess of par value
929,105,836
TOTAL NET ASSETS $
760,540,646
NET ASSET VALUE:
CLASS A SHARES:
Net Asset Value and redemption price per share
($371,085,743 / 29,693,662 shares of common stock
outstanding)
$12.50
Maximum offering price per share ($12.50 / 0.955)
(based on sales charge of 4.5% of offering price on July 31,
1994)
$13.09
CLASS B SHARES:
Net Asset Value and offering price per share(+)
($389,382,573 / 31,157,829 shares of common stock
outstanding)
$12.50
CLASS D SHARES:
Net Asset Value, offering and redemption price per share
($72,330 / 5,788 shares of common stock outstanding)
$12.50
<FN>
(+) Redemption price per share is equal to Net Asset Value less any
applicable contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Statement of Operations For the Year Ended July 31, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $
58,156,713
EXPENSES:
Investment advisory fee (Note 2) $3,840,009
Distribution fee (Note 3) 2,171,085
Service fee (Note 3) 2,133,338
Administration fee (Note 2) 1,706,671
Transfer agent fees (Notes 2 and 4) 707,586
Custodian fees (Note 2) 368,048
Legal and audit fees 71,941
Directors' fees and expenses (Note 2) 22,308
Other 40,847
Total Operating Expenses Before Interest
11,061,833
Interest expense (Notes 5 and 8)
1,589,418
Total Expenses
12,651,251
NET INVESTMENT INCOME
45,505,462
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (Notes 1 and 5):
Net realized gain/(loss) on:
Securities transactions
(15,583,336)
Futures contracts
2,672,744
Net realized loss on investments during the year
(12,910,592)
Net change in unrealized appreciation/(depreciation)
of:
Securities
(33,998,202)
Futures contracts
(484,375)
Net unrealized depreciation of investments during
the year
(34,482,577)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(47,393,169)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $
(1,887,707)
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year
Year
Ended
Ended
7/31/94
7/31/93
<S> <C>
<C>
Net investment income $ 45,505,462 $
41,217,330
Net realized gain/(loss) on investments sold and
futures contracts during the year (12,910,592)
34,759,285
Net unrealized appreciation/(depreciation) on
investments and futures contracts during the
year (34,482,577)
11,975,055
Net increase/(decrease) in net assets resulting
from operations (1,887,707)
87,951,670
Distributions to shareholders from net investment
income:
Class A (18,518,455)
(23,942,531)
Class B (17,488,055)
(14,115,251)
Class D (2,526)
(23)
Distributions in excess of net investment income:
Class A (1,266,241)
(345,744)
Class B (1,195,785)
(203,832)
Class D (173)
- --
Distributions in excess of realized capital
gains:
Class A --
(8,339,209)
Class B --
(5,559,481)
Class D --
(10)
Distributions from capital:
Class A (6,010,374) --
Class B (5,675,946) --
Class D (820) --
Net increase/(decrease) in net assets from Fund
share transactions (Note 6):
Class A (66,053,025)
(40,318,139)
Class B (58,233,274)
453,153,505
Class D 65,335
11,553
Net increase/(decrease) in net assets (176,267,046)
448,292,508
NET ASSETS:
Beginning of year 936,807,692
488,515,184
End of year (including distributions in excess of
net investment income of $4,031,227 and
$1,569,028, respectively) $ 760,540,646
$936,807,692
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Financial Highlights
For a Class A share outstanding throughout each year.
<TABLE>
<CAPTION>
Year Year
Year
Ended Ended
Ended
7/31/94 7/31/93(#)
7/31/92
<S> <C> <C>
<C>
Net Asset Value,
beginning of year $ 13.29 $ 12.88 $
12.09
Income from investment operations:
Net investment income 0.75 0.69
0.91
Net realized and unrealized gain/(loss) on
investments and futures contracts (0.74) 0.61
0.87
Total from investment operations 0.01 1.30
1.78
Less distributions:
Dividends from net investment income (0.57) (0.65)
(0.91)
Distributions in excess of net
investment income (0.04) (0.01)
- --
Distributions from net realized
capital gains -- --
- --
Distributions in excess of net
realized capital gains -- (0.23)
- --
Distributions from capital (Note 1)(++) (0.19)(a) --
(0.08)
Total distributions (0.80) (0.89)
(0.99)
Net asset value, end of year $ 12.50 $ 13.29 $
12.88
Total return(+++) 0.08% 10.43%
15.25%
Ratios to average net assets/
Supplemental Data:
Net assets, end of year (in 000's) $371,086 $462,703
$488,515
Ratio of operating expenses to
average net assets 1.03%** 0.99%**
0.82%
Ratio of net investment income to
average net assets 5.60% 5.35%
7.23%
Portfolio turnover rate 236% 436%
426%
</TABLE>
<TABLE>
<CAPTION>
Year
Year
Ended
Ended
7/31/91
7/31/90#
<S> <C> <C>
Net Asset Value, beginning of year $ 12.13 $
12.19
Income from investment operations:
Net investment income 0.98
1.07
Net realized and unrealized gain/(loss) on
investments and futures contracts 0.07
(0.03)
Total from investment operations 1.05
1.04
Less distributions:
Dividends from net investment income (0.98)
(1.07)
Distributions in excess of net investment income --
- --
Distributions from net realized capital gains --
- --
Distributions in excess of net realized capital
gains --
- --
Distributions from capital (Note 1)(++) (0.11)
(0.03)
Total distributions (1.09)
(1.10)
Net asset value, end of year $ 12.09 $
12.13
Total return(+++) 9.02%
9.01%
Ratios to average net assets/Supplemental Data:
Net assets, end of year (in 000's) $474,305
$511.867
Ratio of operating expenses to average net assets 0.82%
0.81%
Ratio of net investment income to average net
assets 8.12%
8.87%
Portfolio turnover rate 365%
163%
<FN>
* The Fund commenced operations on September 4, 1984. As of November 6,
1992,
existing shares of the Fund were designated as Class A shares.
** The annualized operating expense ratios exclude interest expense. The
annualized ratios including interest expense were 1.22% and 1.00% for the
years ended July 31, 1994 and 1993, respectively.
(+) 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
method, which more appropriately presents the per share data for the year
since the use of the undistributed method does not accord with results of
operations.
(a) Tax basis.
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Financial Highlights (continued)
For a Class A share outstanding throughout each period.
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
7/31/89 7/31/88 7/31/87
<S> <C> <C> <C>
Net Asset Value, beginning of year $ 12.04 $ 12.62 $
13.32
Income from investment operations:
Net investment income 0.96 1.09
1.11
Net realized and unrealized gain/(loss)
on investments and futures contracts 0.26 (0.56)
(0.36)
Total from investment operations 1.22 0.53
0.75
Less distributions:
Dividends from net investment income (0.96) (1.09)
(1.11)
Distributions in excess of net
investment income -- --
- --
Distributions from net realized capital
gains -- (0.01)
(0.34)
Distributions in excess of net realized
capital gains -- --
- --
Distributions from capital (Note 1)(++) (0.11) (0.01)
- --
Total distributions (1.07) (1.11)
(1.45)
Net asset value, end of year $ 12.19 $ 12.04 $
12.62
Total return(+++) 10.62% 4.43%
5.69%
Ratios to average net assets/Supplemental
Data:
Net assets, end of year (in 000's) $621,752 $871,468
$1,366,998
Ratio of operating expenses to average
net assets 0.81% 0.77%
0.78%
Ratio of net investment income to
average net assets 8.12% 8.98%
8.35%
Portfolio turnover rate 51% 288%
241%
</TABLE>
<TABLE>
<CAPTION>
Year Period
Ended Ended
7/31/86 7/31/85*
<S> <C> <C>
Net Asset Value, beginning of year $ 13.03 $ 12.35
Income from investment operations:
Net investment income 1.34 1.23
Net realized and unrealized gain/(loss)
on investments and futures contracts 0.38 0.71
Total from investment operations 1.72 1.94
Less distributions:
Dividends from net investment income (1.34) (1.23)
Distributions in excess of net
investment income -- --
Distributions from net realized capital
gains (0.09) (0.03)
Distributions in excess of net realized
capital gains -- --
Distributions from capital (Note 1)(++) -- --
Total distributions (1.43) (1.26)
Net asset value, end of year $ 13.32 $ 13.03
Total return(+++) 13.81% 16.33%
Ratios to average net assets/Supplemental
Data:
Net assets, end of year (in 000's) $1,435,923 $1,082,285
Ratio of operating expenses to average
net assets 0.79% 0.87%(+)
Ratio of net investment income to
average net assets 9.98% 11.23%(+)
Portfolio turnover rate 136% 83%
<FN>
* The Fund commenced operations on September 4, 1984. As of November 6,
1992,
existing shares of the Fund were designated as Class A shares.
** The annualized operating expense ratios exclude interest expense.
The annualized ratios including interest expense were 1.22% and 1.00% for
the
years ended July 31, 1994 and 1993, respectively.
(+) 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.
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Financial Highlights
For a Class B share outstanding throughout each period.
<TABLE>
<CAPTION>
Year Period
Ended Ended
7/31/94
7/31/93*(#)
<S> <C> <C>
Net Asset Value, beginning of period $ 13.29 $ 12.64
Income from investment operations:
Net investment income 0.69 0.47
Net realized and unrealized gain/(loss) on
investments and futures contracts (0.75) 0.75
Total from investment operations (0.06) 1.22
Less Distributions:
Dividends from net investment income (0.52)
(0.40)
Distributions in excess of net investment income (0.04)
(0.01)
Distributions in excess of net realized capital
gains --
(0.16)
Distributions from capital (Note 1)(+++) (0.17)(a) --
Total distributions (0.73)
(0.57)
Net asset value, end of period $ 12.50 $ 13.29
Total return(+) (0.46)%
9.92%
Ratios to average net assets/
Supplemental Data:
Net assets, end of period (in 000's) $389,383 $474,093
Ratio of operating expenses to average net assets** 1.55%
1.62%(++)
Ratio of net investment income to average net assets 5.08%
4.72%(++)
Portfolio turnover rate 236%
436%
<FN>
*The Fund commenced selling Class B shares on November 6, 1992.
**The annualized operating expense ratios exclude interest expense. The
annualized ratios including interest expense were 1.74% and 1.63% for the
year ended July 31, 1994 and for the period ended July 31, 1993,
respectively.
(+)Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charge.
(++)Annualized.
(+++)Results from the Fund's level monthly distribution policy.
(#) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the year
since the use of the undistributed method does not accord with results of
operations.
(a) Tax basis.
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Financial Highlights
For a Class D share outstanding throughout each period.
<TABLE>
<CAPTION>
Year Period
Ended Ended
7/31/94
7/31/93*(#)
<S> <C> <C>
Net Asset Value, beginning of period $13.29 $13.18
Income from investment operations:
Net investment income 0.69 0.07
Net realized and unrealized gain/(loss) on
investments and futures contracts (0.75) 0.09
Total from investment operations (0.06) 0.16
Less Distributions:
Dividends from net investment income (0.52) (0.03)
Distributions in excess of net investment income (0.04)
0.00(++)
Distributions in excess of net realized capital
gains -- (0.02)
Distributions from capital (Note 1)*** (0.17)(a) --
Total distributions (0.73) (0.05)
Net asset value, end of period $12.50 $13.29
Total return(+) (0.46)% 1.25%
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $ 72 $ 12
Ratio of operating expenses to average net assets** 1.58%
1.55%(+++)
Ratio of net investment income to average net assets 5.05%
4.80%(+++)
Portfolio turnover rate 236% 436%
<FN>
* The Fund commenced selling Class D shares on January 29, 1993 and
commenced
operations on June 29, 1993.
**The annualized operating expense ratios exclude interest expense. The
annualized ratios including interest expense were 1.76% and 1.56% for the
year ended July 31, 1994 and for the period ended July 31, 1993,
respectively.
***Results from the Fund's level monthly distribution policy.
(+)Total return represents aggregate total return for the periods
indicated.
(++)Amount represents less than $0.01 per share.
(+++)Annualized.
(#) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the year
since the use of the undistributed method does not accord with results of
operations.
(a) Tax basis.
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Notes to Financial Statements
1. Significant Accounting Policies
Smith Barney Shearson Managed Governments Fund Inc. (the "Fund") was
incorporated 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: 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"). Class B shares will
automatically
convert to Class A shares eight years after the date of original purchase.
As
of January 29, 1993, the Fund offered Class D shares to investors that are
eligible to participate in the Smith Barney 401(k) Program. Class D shares
are offered without a front-end sales charge or CDSC fee. All classes 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 allocable 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 consistently 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 securities) are valued at the quoted bid price in
the
over-the-counter market.
Repurchase agreements: The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund
takes possession 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
21
<PAGE>
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 possible decline in the
value
of the underlying securities during the period while the Fund seeks to
assert
its rights. The Fund's investment adviser, administrator or
sub-administrator, acting under the supervision of the Board of Directors,
reviews on an ongoing basis the value of the collateral and the
creditworthiness of those banks and dealers with which the Fund enters into
repurchase 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 securities. 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 reverse 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 purchases 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
premium received by the Fund is recorded as a liability, the value of which
is
22
<PAGE>
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 transaction exceeds the premium received when the
option was sold) without regard to any unrealized gain or loss on the
underlying security, and the liability 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 increases 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 decreases 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 margin." Subsequent payments ("variation margin") are made or
received by the Fund each day, depending on the daily fluctuation of the
value of the contract. 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 illiquid 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
securities.
23
<PAGE>
The Fund is required to deposit, in a manner similar to futures contracts,
initial margin and variation margin with respect to put and call options
written on futures contracts. In addition, upon exercise, net premiums
received will decrease the 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
recorded 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 securities 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
income are determined on a class level. Distributions of net investment
income are declared daily and paid at the end of each Smith Barney Inc.
("Smith Barney") statement month. Distributions of any remaining net
realized
long- and short-term capital gains are declared and paid annually after the
end of the year in which they are earned. To the extent that net realized
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
investment 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. For
purposes of the statement of changes in net assets, 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
income and gains on various investment securities held by the Fund, timing
differences and differing characterization of distributions made by the
Fund
as a whole. Permanent differences incurred during the year ended July 31,
1994 resulting from different book and tax accounting for certain debt
instruments and over distributions of dividends have been reclassified to
paid-in-capital.
Federal income taxes: It is the Fund's policy to qualify as a regulated
investment company, if such qualification is in the best interests of its
shareholders, 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.
24
<PAGE>
2. Investment Advisory Agreement,
Administration Agreement and Other Transactions
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Management
Corp., which is controlled by Smith Barney 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.
Prior to April 20, 1994, the Fund was a party to an administration
agreement
with Boston Advisors, an indirect wholly owned subsidiary of Mellon Bank
Corporation ("Mellon"). Under this agreement, the Fund paid 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.
As of the close of business on April 20, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains
substantially
the same terms and conditions, including the level of fees, as the
predecessor agreement.
As of the close of business on April 20, 1994, the Fund also entered into a
sub-administration agreement (the "Sub-Administration Agreement") with
Boston Advisors. Under the Sub-Administration Agreement, SBA pays Boston
Advisors a portion of its fee at a rate agreed upon from time to time
between
SBA and Boston Advisors.
No officer, director or employee of Smith Barney or any parent or
subsidiary
of this corporation 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 or any of its affiliates
$4,000 per annum plus $500 per meeting attended and reimburses each such
Director for travel and out-of-pocket expenses.
For the year ended July 31, 1994, Smith Barney received $362,103 from
investors representing commissions (sales charges) on sales of Class A
shares.
25
<PAGE>
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 imposed, 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 year ended July 31, 1994, Smith Barney received $449,792 from
shareholders in CDSCs on the redemption of Class B shares.
Boston Safe, 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.
3. Distribution Plan
Smith Barney 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 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 for servicing shareholder accounts for Class A, Class B and
Class D shareholders, and covers expenses incurred in distributing Class B
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class D shares of the Fund at the rate of 0.25% of the value of
the average daily net assets of each respective class of shares. Smith
Barney
is also paid an annual distribution fee with respect to Class B and Class D
shares at the rate of 0.50% of the value of the average daily net assets
attributable to each respective class of shares. For the year ended July
31,
1994, the Fund incurred $1,047,795 in service fees for Class A shares. For
the year ended July 31, 1994, the Fund incurred $1,085,386 and $2,170,771
in
service and distribution fees, respectively, for Class B shares. For the
year
ended July 31, 1994, the Fund incurred $157 and $314 in service and
distribution fees, respectively, for Class D shares.
26
<PAGE>
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
distribution fees, class specific operating expenses include transfer agent
fees of $297,009, $410,505 and $72 for Class A, Class B and Class D,
respectively, for the year ended July 31, 1994.
5. Securities Transactions
Costs of purchases and proceeds from sales of U.S. government securities,
excluding short-term investments, during the year ended July 31, 1994,
amounted to $2,065,386,145 and $2,198,418,086, respectively.
At July 31, 1994, aggregate gross unrealized appreciation for all
securities
in which there was an excess of value over tax cost amounted to $1,701,682
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value amounted to $21,613,876.
Information regarding borrowing by the Fund under reverse repurchase
agreements is as follows:
Reverse Repurchase Agreements--
Maximum amount outstanding during the period
$264,171,250
Average amount outstanding during the period $
65,595,102
Interest rates ranged from 0.88% to 3.50% during the year. The average
amount outstanding during the year was calculated by summing borrowings
at the end of each day and dividing the sum by the number of days in the
year
ended July 31, 1994.
Interest paid for the year ended July 31, 1994 on borrowings by the Fund
under reverse repurchase agreements aggregated $1,589,249.
27
<PAGE>
6. Common Stock
At July 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>
Year Ended Year Ended
7/31/94 7/31/93
Class A shares: Shares Amount Shares
Amount
<S> <C> <C> <C> <C>
Sold 1,234,269 $ 16,119,677 2,546,489 $
33,102,420
Issued as reinvestment
of dividends 1,364,311 17,605,656 1,692,084
21,937,977
Redeemed (7,728,677) (99,778,358) (7,342,882)
(95,358,536)
Net decrease (5,130,097) $(66,053,025) (3,104,309)
$(40,318,139)
</TABLE>
<TABLE>
<CAPTION>
Year Ended Period Ended
7/31/94 7/31/93*
Class B shares: Shares Amount Shares
Amount
<S> <C> <C> <C> <C>
Sold 2,953,503 $ 38,395,975 4,106,505 $
55,665,193
Issued as reinvestment
of dividends 1,255,487 16,203,005 994,526
12,963,733
Issued in exchange for
shares of Mortgage
Portfolio (Note 9) -- -- 37,436,980
473,899,753
Redeemed (8,734,882) (112,832,254) (6,854,290)
(89,375,174)
Net increase/(decrease) (4,525,892) $ (58,233,274) 35,683,721
$453,153,505
</TABLE>
<TABLE>
<CAPTION>
Year Ended Period Ended
7/31/94 7/31/93**
Class D shares: Shares Amount Shares
Amount
<S> <C> <C> <C> <C>
Sold 7,485 $ 97,581 874
$11,521
Issued as reinvestment
of dividends 270 3,456 2
32
Redeemed (2,843) (35,702) --
- --
Net increase 4,912 $ 65,335 876
$11,553
<FN>
* The Fund began offering Class B shares on November 6, 1992. Any shares
outstanding prior to November 6, 1992 were designated as Class A shares.
** The Fund began offering Class D shares on January 29, 1993 and commenced
operations on June 29, 1993.
</TABLE>
28
<PAGE>
7. Capital Loss Carryforwards
At July 31, 1994, the Fund had available for Federal tax purposes unused
capital loss carryforwards of $111,396,220 expiring in 1996, $29,387,864
expiring in 1997 and $3,422,711 expiring in 2002.
8. Line of Credit
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 and renewed
effective May 31, 1994, primarily for temporary 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. Under the terms of the agreement, as
amended, the Fund and the other affiliated entities are charged an
aggregate
commitment fee of $100,000 annually, which is allocated equally among each
of
the participants. The Agreement requires, among other provisions, each
participating fund to maintain a ratio of net assets (not including funds
borrowed pursuant to the Agreement) to aggregate amount of indebtedness
pursuant to the Agreement of no less than 5 to 1. During the year ended
July
31, 1994, the Fund had an average outstanding daily balance of $4,931 with
an
interest rate of 3.375%. Interest expense totalled $169 for the year ended
July 31, 1994.
9. Reorganization
On November 20, 1992, the Fund (the "Acquiring Fund") acquired the assets
and
certain liabilities of the Mortgage Portfolio of Shearson Lehman Brothers
Income Funds (the "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 assets
are
as follows:
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
The Fund Mortgage
Portfolio 37,436,980 $473,899,753 $480,130,148
$(801,156)
* The net assets of the Acquiring Fund immediately after the acquisition
were
$954,029.901. In connection with the merger, the Acquiring Fund assumed
$128,381,264 in capital loss carryforwards from the Acquired Fund. Internal
Revenue Code Section 382 serves to limit the utilization of capital loss
carryforwards when a merger or change in ownership occurs. As a result,
capital loss carryforwards of $108,836,470 accumulated by the Acquiring
Fund
will be subject to a limitation of $28,197,035 per year. These losses will
also be subject to normal capital loss carryforward expiration rules.
29
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Report of Independent Accountants
To the Shareholders and Board of Directors of
Smith Barney Shearson Managed Governments Fund Inc.:
We have audited the accompanying statement of assets and liabilities of
Smith
Barney Shearson Managed Governments Fund Inc. including the schedule of
portfolio investments, as of July 31, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial
highlights for each of the nine years in the period then ended and for the
period September 4, 1984 (commencement of operations) to July 31, 1985.
These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
investments and cash held by the custodian as of July 31, 1994, and
confirmation of securities owned as of July 31, 1994 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to
above present fairly, in all material respects, the financial position of
Smith Barney Shearson Managed Governments Fund Inc. as of July 31, 1994,
the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the
financial
highlights for each of the nine years in the period then ended and for the
period September 4, 1984 (commencement of operations) to July 31, 1985, in
conformity with generally accepted accounting principles.
Coopers & Lybrand
L.L.P.
Boston, Massachusetts
September 9, 1994
30
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Tax Information
Year Ended July 31, 1994
Of the dividends paid by the Fund from net investment income for the year
ended July 31, 1994, 74.8% has been derived from investments in U.S.
government and agency obligations. All or a portion of the distributions
from
this income may be exempt from taxation at the state level. Consult your
tax
adviser for the state specific information.
31
<PAGE>
Smith Barney Shearson
Managed Governments Fund Inc.
Participants
Distributor
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Investment Adviser
Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
Administrator
Smith, Barney Advisers, Inc.
1345 Avenue of Americas
New York, New York 10105
Sub-Administrator
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
Auditors and Counsel
Coopers & Lybrand L.L.P.
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
32
