Smith Barney
MANAGED GOVERNMENTS FUND INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 7, 1994
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney Managed
Governments Fund Inc. (the "Fund"), dated November 7, 1994, as amended or
supplemented from time to time, and should be read in conjunction with the
Fund's Prospectus. The Fund's Prospectus may be obtained from your Smith
Barney Financial Consultant or by writing or calling the Fund at the ad-
dress or telephone number listed above. This Statement of Additional In-
formation, although not in itself a prospectus, is incorporated by refer-
ence into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both the Pro-
spectus and this
Statement of Additional Information, except
where shown below:
<TABLE>
<S>
<C>
Management of the Fund
1
Investment Objective and Management Policies
5
Purchase of Shares
17
Redemption of Shares
18
Distributor
19
Valuation of Shares
20
Exchange Privilege
21
Performance Data (See in the Prospectus "Performance")
21
Taxes (See in the Prospectus "Dividends, Distributions and Taxes")
23
Additional Information
26
Financial Statements
26
</TABLE>
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the organi-
zations that provide services to the Fund. These organizations are as fol-
lows:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Smith Barney Inc.
("Smith Barney") Distributor
Smith Barney Mutual Funds Management Inc. Investment Adviser and
Administrator
("SBMFM")
The Boston Company Advisors, Inc.
("Boston Advisors") Sub-Administrator
Boston Safe Deposit and Trust Company
("Boston Safe") Custodian
The Shareholder Services Group, Inc. ("TSSG"),
a subsidiary of First Data Corporation Transfer Agent
</TABLE>
These organizations and the functions they perform for the Fund are dis-
cussed in the Prospectus and in this Statement of Additional Information.
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
The Directors and executive officers of the Fund, together with informa-
tion as to their principal business occupations during the past five
years, are shown below. Each Director who is an "interested person" of the
Fund, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), is indicated by an asterisk.
Burt N. Dorsett, Director. Managing Partner of Dorsett McCabe Management,
Inc., an investment counseling firm; Director of Research Corporation
Technologies Inc., a non-profit patent-clearing and licensing firm. His
address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Director. Chairman of the Board and President of The
Dress Barn, Inc. His address is 30 Dunnigan Drive, Suffern,
New
York
10901.
*Heath B. McLendon, Chairman of the Board and Investment Officer. Execu-
tive Vice President of Smith Barney and Chairman of the Board of Smith
Barney Strategy Advisers Inc. ("SBSA"); prior to July, 1993, Senior Execu-
tive Vice President of Shearson Lehman Brothers Inc. ("Shearson Lehman
Brothers"); Vice Chairman of Shearson Asset Management; a Director of Pa-
nAgora Asset Management, Inc. and PanAgora Asset Management Limited. His
address is 388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director. President, Cornelius C. Rose Associates,
Inc., financial consultants, and Chairman and Director of Performance
Learning Systems, an educational consultant. His address is P.O. Box 335,
Fair Oaks, Enfield, New Hampshire 03748.
Stephen J. Treadway, President. Executive Vice President and Director of
Smith Barney; Director and President of Mutual Management Corp. and SBMFM;
and Trustee of Corporate Realty Income Trust I. His address is 388 Green-
wich Street, New York, New York 10013.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney; President of SBSA; prior to July 1993, Senior Vice President of
Shearson Lehman Brothers; Vice President of Shearson Lehman Investment
Strategy Advisors Inc. His address is 388 Greenwich Street, New York, New
York 10013.
James E. Conroy, First Vice President and Investment Officer. Investment
Officer of SBMFM; prior to July, 1993, Managing Director of Shearson Leh-
man Advisors. His address is 388 Greenwich Street, New York, New York
10013.
Lewis E. Daidone, Treasurer. Managing Director and Chief Financial Officer
of Smith Barney; Director and Senior Vice President of SBMFM. His address
is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary. Managing Director of Smith Barney
;
General Counsel and Secretary of SBMFM. Her address is 388
Greenwich Street, New York, New York 10013.
Isaac B. Grainger, Director Emeritus. Director of the Fund since commence-
ment of the Fund's operations until February 26, 1990. Director of Hart-
ford Insurance Group; Director of Safety Railway Service Corporation; Ad-
visory Director of Union Electric Company, St. Louis, Missouri; retired
President and currently adviser to Chemical Bank. His address is Chemical
Bank, 11 West 51st Street, 2nd Floor, New York, New York 10019.
Harry W. Knight, Director Emeritus. Mr. Knight served as a Director of the
Fund since the Fund's commencement of operations until June 22,
1994. Chairman of the Board of Hillsboro Associates, Inc., a private
investment
and management firm; formerly Senior Partner with Booz, Allen & Hamilton
Inc.; among the corporations of which he has served in the past as Director
are
Burlington Industries, Inc., The Foxboro Company, The Waldorf-Astoria Hotel
and Menlo Ventures. His address is 1230 Sharon Park Drive, Menlo Park,
California 94025.
A Director Emeritus may attend meetings of the Fund's Board of Directors
but has no voting rights at such meetings.
Each Director also serves as a director, trustee and/ or general
partner of certain other mutual funds for which Smith Barney serves as
distributor. As of October 31, 1994, the Directors and officers of the
Fund,
as a group, owned less than 1.00% of the outstanding common stock
of the Fund.
No officer, director or employee of Smith Barney or any parent
or subsidiary of Smith Barney receives any compensation from the Fund
for serving as an officer or Director of the Fund. The Fund pays each
Director
who is not an officer , director or employee of Smith Barney or any
of its affiliates a fee of $4,000 per annum plus $500 per meeting attended
and reimbursement for travel and out-of-pocket expenses. For the Fund's
fiscal year ended July 31, 1994, such fees and expenses totalled
$22,308.
INVESTMENT ADVISER AND ADMINISTRATOR -- SBMFM
SBMFM serves as investment adviser to the Fund pursuant to a transfer
of the investment advisory agreement effective November 7, 1994, from
its affiliate, Mutual management Corp. (Mututal Management Corp. and
SBMFM are both wholly owned subsidiaries of Smith Barney Holdings Inc.
(Holdings), which in turn is a wholly owned subsidiary of The Travelers
Inc. (Travelers).) The advisory agreement is
dated July 30, 1993
(the "Advisory Agreement"),
and was most recently
approved by the Board of Directors, including a majority of the Directors
who are not "interested persons" of the Fund or SBMFM, on April 1, 1993.
The services provided by SBMFM under the Advisory Agreement
are described in theProspectus under "Management of the Fund."
SBMFM pays the salary of any officer and employee who is employed
by both it and the Fund.
As compensation for investment advisory services, the Fund pays
SBMFM a fee computed daily and paid monthly at the
following annual rates of the Funds average daily net assets:
0.45%
up to $1 billion and
0.415%
in excess of $1 billion.
For the fiscal years ended July 31,
1992, 1993 and 1994 ,
the Fund paid Mutual Management Corp., a wholly owned subsidiary of
Holdings and previously the Fund's investment adviser and/or Shearson
Lehman Advisors, the Fund's investment adviser prior to Mutual
ManagementCorp. $2,173,422, $3,645,285 and $3,840,009,
respectively, in investment advisory fees.
SBMFM also serves as administrator to the Fund pursuant to a written
agreement dated April 20, 1994 (the "Administration Agreement"), which
was most recently approved by the Funds Board of Directors,
including a majority of the Directors who are not "interested persons" of
the Fund or SBMFM, on July 20, 1994. The services provided by SBMFM
under the Administration Agreement are described in the Prospectus under
"Management of the Fund." SBMFM pays the salary of any officer and
employee who is employed by both it and the Fund. As
compensation for administration services, the Fund pays
SBMFM
a fee computed daily and paid monthly at the annual
rate of
0.20% of the value of the average daily net assets up
to $1billion and 0.185% of the value of the average daily net assets in
excess of $1 billion.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors serves as sub-administrator to the Fund
pursuant to a written agreement (the "Sub- Administration Agreement")
which was most recently approved by the Fund's Board of Directors, includ-
ing a majority of Directors who are not "interested persons" of the Fund
or Boston Advisors on April 20, 1994. Under the Sub-Administration
Agreement, Boston Advisors is paid a portion of the administration fee paid
by the Fund to SBMFM at a rate agreed upon from time to time between
Boston Advisors and SBMFM. Boston Advisors is a wholly owned
subsidiary of The Boston Company, Inc. (TBC), a financial services
holding company, which is in turn a wholly owned subsidiary of Mellon
Bank Corporation (Mellon)
Prior to the close of business on May 21, 1993, Boston Advisors also
acted in the capacity as the Fund's sub-investment adviser and
administrator. As compensation for administration
services rendered, the Fund paid a fee computed daily and paid monthly
at the following annual rates: 0.20% of the value of the Funds average
daily net assets up to $1 billion; 0.185% of the value of its average
daily
net assets in excess of $1 billion. For the 1992, 1993 and 1994 fiscal
years,
the Fund paid Boston Advisors, $965,965, $1,620,110 and $1,706,671, in
sub-investment advisory and/or administration fees.
Certain of the services provided to the Fund by Boston Advisors
pursuant to the Sub-Administration Agreement are described in
the Prospectus under "Management of the Fund." In addition to those
services, Boston Advisors pay the salaries of all officers and
employees who are employed by both it and the
Fund, maintains office facilities for the Fund, furnishes the Fund with
statistical and research data, clerical help and accounting, data
processing,
bookkeeping, internal auditing and legal services and certain other
services
required by the Fund, prepares reports to the Fund's shareholders and
prepares tax returns, reports to and filings with the Securities and
Exchange
Commission (the "SEC") and state Blue Sky authorities.
Boston Advisors bears all expenses in connection with the performance
of its
services.
The Fund bears expenses incurred in its operation, including taxes, inter-
est, brokerage fees and commissions, if any; fees of Directors who are not
officers, directors, shareholders or employees of Smith Barney or Boston
Advisors; SEC fees and state Blue Sky qualification fees; charges of cus-
todians; transfer and dividend disbursing agents' fees; certain insurance
premiums; outside auditing and legal expenses; costs of maintenance of
corporate existence; investor services (including allocated telephone and
personnel expenses); costs of preparation and printing of prospectuses and
statements of additional information for regulatory purposes and for dis-
tribution to shareholders; costs of shareholders' reports and corporate
meetings.
SBMFM and Boston Advisors have agreed that if in any fiscal year the ag-
gregate expenses of the Fund (including fees paid pursuant to the Advi-
sory, Administration and Sub-Administration Agreements, but excluding in-
terest, taxes, brokerage
fees paid pursuant to the Funds services and
distribution plan and, with the prior written consent of the neces-
sary state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Fund, SBMFM
and Boston Advisors will, to the extent required by state law, reduce
their management fees by such excess expenses. Such fee
reductions, if any, will be reconciled on a monthly basis. The
most restrictive state expense limitation currently applicable to
the Fund would require SBMFM and Boston Advisors to reduce their fees in
any year that such expenses exceed 2.50% of the first $30 million
of average net assets, 2.00% of the next $70 million of average
daily
net assets and
1.50% of the remaining average net
assets. No such fee reduction was required for the fiscal years ended July
31,
1992, 1993 and 1994.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Fund. The Direc-
tors who are not "interested persons" of the Fund have selected Stroock &
Stroock & Lavan as their legal counsel.
KPMG Peat Marwick L.L.P. , independent accountants, 345
Park Avenue, New York, New York 10154, serve as auditors of the
Fund and render an opinion on the Fund's financial statements annually.
Prior to October 19, 1994, Coopers & Lybrand L.L.P., independent
auditors, served as auditors of the Fund and rendered an opinion on the
financial statements for the fiscal year ended February 28, 1994.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the policies
it employs to achieve its objective. This section contains supplemental
information concerning the types of securities and other instruments in
which the Fund may invest, the investment policies and portfolio strate-
gies that the Fund may utilize and certain risks attendant to such invest-
ments, policies and strategies.
MORTGAGE-BACKED GOVERNMENT SECURITIES
Government National Mortgage Association ("GNMA") certificates are liquid
securities and represent ownership interests in a pool of mortgages issued
by a mortgage banker or other mortgagee. Distributions on GNMA certifi-
cates include principal and interest components. GNMA, a corporate instru-
mentality of the U.S. Department of Housing and Urban Development, guaran-
tees timely payment of principal and interest on GNMA certificates; this
guarantee is deemed a general obligation of the United States, backed by
its full faith and credit.
Each of the mortgages in a pool supporting a GNMA certificate is insured
by the Federal Housing Administration or the Farmers Home Administration,
or is insured or guaranteed by the Veterans Administration. The mortgages
have maximum maturities of 40 years. Government statistics indicate, how-
ever, that the average life of the underlying mortgages is shorter, due to
scheduled amortization and unscheduled prepayments (attributable to volun-
tary prepayments or foreclosures). These statistics indicate that the av-
erage life of the mortgages backing most GNMA certificates, which are
single-family mortgages with 25- to 30-year maturities, ranges from two to
ten years depending on the mortgages' coupon rate, and yields on pools of
single-family mortgages are often quoted on the assumption that the pre-
payment rate for any given pool will remain constant over the life of the
pool. (The actual maturity of specific GNMA certificates will vary based
on the prepayment experience of the underlying mortgage pool.) Based on
this constant prepayment assumption, GNMA certificates have had historical
yields at least 3/4 of 1% greater than Treasury Bonds and U.S. government
agency bonds and 1/4 of 1% greater than the highest grade corporate bonds.
Actual yield comparisons will vary with the prepayment experience of spe-
cific GNMA certificates.
The Fund also may invest in pass-through securities backed by adjustable-
rate mortgages, which have been introduced by GNMA, the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). These securities bear interest at a rate which is
adjusted monthly, quarterly or annually. The prepayment experience of the
mortgages underlying these securities may vary from that for fixed-rate
mortgages.
The average maturity of FHLMC and FNMA mortgage-backed pools, like
GNMA mortgage-backed pools, varies with the maturities of the underlying
mortgage instruments, and a pool's stated average life also may be
shortened
by unscheduled payments on the underlying mortgages. Factors affecting
mortgage prepayments include the level of interest rates, general economic
and social conditions, the location of the mortgaged property and age of
the mortgage. Because prepayment rates of individual pools vary widely, it
is not possible to accurately predict the average life of a particular
pool. As noted above, it is a common practice to assume that prepayments
will result in an average life ranging from two to ten years for pools of
fixed-rate 30-year mortgages. Pools of mortgages with other maturities or
different characteristics will have varying average life assumptions. The
actual maturity of and realized yield on specific FHLMC and FNMA certifi-
cates will vary based on the prepayment experience of the underlying pool
of mortgages.
U.S. GOVERNMENT SECURITIES
Direct obligations of the United States Treasury include a variety of se-
curities that differ in their interest rates, maturities and dates of is-
suance. Treasury Bills have maturities of less than one year, Treasury
Notes have maturities of one to ten years and Treasury Bonds generally
have maturities of greater than ten years at the date of issuance.
In addition to direct obligations of the United States Treasury, debt ob-
ligations of varying maturities issued or guaranteed by the United States
government or its agencies or instrumentalities ("U.S. government securi-
ties") include securities issued or guaranteed by the Federal Housing Ad-
ministration, Federal Financing Bank, Export-Import Bank of the United
States, Small Business Administration, GNMA, General Services Administra-
tion, Federal Home Loan Banks, FHLMC, FNMA, Maritime Administration,
Tennessee Valley Authority, Resolution Trust Corporation, District of
Colum-
bia Armory Board, Student Loan Marketing Association and various institu-
tions that previously were or currently are part of the Farm Credit System
(which has been undergoing a reorganization since 1987). Because the
United States government is not obligated by law to provide support to an
instrumentality that it sponsors, the Fund will invest in obligations of
an instrumentality to which the United States government is not obligated
by law to provide support only if SBMFM determines that the credit risk
with respect to the instrumentality does not make its securities unsuit-
able for investment by the Fund.
The Fund may invest up to 5% of its net assets in U.S. government securi-
ties for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S.
dollar and the currency of one or more foreign countries ("Exchange Rate-
Related Securities"). Exchange Rate-Related Securities are issued in a va-
riety of forms, depending on the structure of the principal repayment for-
mula. The principal repayment formula may be structured so that the secu-
rityholder will benefit if a particular foreign currency to which the
security is linked is stable or appreciates against the U.S. dollar. In
the alternative, the principal repayment formula may be structured so that
the securityholder benefits if the U.S. dollar is stable or appreciates
against the linked foreign currency. Finally, the principal repayment for-
mula can be a function of more than one currency and, therefore, be de-
signed in either of the aforementioned forms or a combination of those
forms.
Investments in Exchange Rate-Related Securities entail special risks.
There is the possibility of significant changes in rates of exchange be-
tween the U.S. dollar and any foreign currency to which an Exchange Rate-
Related Security is linked. If currency exchange rates do not move in the
direction or to the extent anticipated at the time of purchase of the se-
curity, the amount of principal repaid at maturity might be significantly
below the par value of the security, which might not be offset by the in-
terest earned by the Fund over the term of the security. The rate of ex-
change between the U.S. dollar and other currencies is determined by the
forces of supply and demand in the foreign exchange markets. These forces
are affected by the international balance of payments and other economic
and financial conditions, government intervention, speculation and other
factors. The imposition or modification of foreign exchange controls by
domestic or foreign governments or intervention by central banks also
could affect exchange rates. Finally, there is no assurance that suffi-
cient trading interest to create a liquid secondary market will exist for
particular Exchange Rate-Related Securities due to conditions in the debt
and foreign currency markets. Illiquidity in the forward foreign exchange
market and the high volatility of the foreign exchange market may from
time to time combine to make it difficult to sell an Exchange Rate-Related
Security prior to maturity without incurring a significant price loss.
WRITING PUT AND CALL OPTIONS
The principal reason for writing covered call options on securities is to
attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, the
writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life
of the option (or until a closing purchase transaction can be effected).
Nevertheless, the call writer retains the risk of a decline in the price
of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The
writer of a covered put option accepts the risk of a decline in the price
of the underlying security. The size of the premiums that the Fund may re-
ceive may be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-writing ac-
tivities.
Options written by the Fund normally will have expiration dates between
one and nine months from the date written. The exercise price of the op-
tions may be below, equal to, or above the current market values of the
underlying securities at the times the options are written. In the case of
call options these exercise prices are referred to as "in-the-money," "at-
the-money" and "out-of-the-money," respectively.
The Fund may write (a) in-the-money call options when SBMFM expects that
the price of the underlying security will remain flat or decline moder-
ately during the option period, (b) at-the-money call options when SBMFM
expects that the price of the underlying security will remain flat or ad-
vance moderately during the option period and (c) out-of-the-money call
options when SBMFM expects that the price of the security may increase but
not above a price equal to the sum of the exercise price plus the premiums
received from writing the call option. In any of the preceding situations,
if the market price of the underlying security declines and the security
is sold at this lower price, the amount of any realized loss will be off-
set wholly or in part by the premium received. Out-of-the-money, at-the-
money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be utilized in the same
market environments that such call options are used in equivalent transac-
tions.
So long as the obligation of the Fund as the writer of an option contin-
ues, the Fund may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring it to deliver, in the case of
a call, or take delivery of, in the case of a put, the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase transaction. The
Fund can no longer effect a closing purchase transaction with respect to
an option once it has been assigned an exercise notice. To secure its ob-
ligation to deliver the underlying security when it writes a call option,
or to pay for the underlying security when it writes a put option, the
Fund will be required to deposit in escrow the underlying security or
other assets in accordance with the rules of the Options Clearing Corpora-
tion (the "Clearing Corporation") or similar clearing corporation and the
securities exchange on which the option is written.
An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities ex-
change or in the over-the-counter market. The Fund expects to write op-
tions only on national securities exchanges or in the over-the-counter
market.
The Fund may realize a profit or loss upon entering into a closing trans-
action. In cases in which the Fund has written an option, it will realize
a profit if the cost of the closing purchase transaction is less than the
premium received upon writing the original option and will incur a loss if
the cost of the closing purchase transaction exceeds the premium received
upon writing the original option.
PURCHASING PUT AND CALL OPTIONS
Buying a put option on a U.S. government security will give the Fund the
right to sell the security at a particular price and may act to limit,
until that right expires, the Fund's risk of loss through a decline in the
market value of the security. Any appreciation in the value of the under-
lying security will be offset in part by the amount of the premium that
the Fund pays for the put option and any related transaction costs. By
purchasing a put option on a security that it does not own, the Fund would
seek to benefit from a decline in the market price of its investment port-
folio generally. If the market price of the underlying security remains
equal to or greater than the exercise price during the life of the put op-
tion, the Fund would lose its entire investment in the put option. For the
purchase of a put option to be profitable, the market price of the under-
lying security must decline sufficiently below the exercise price to cover
the premium and transaction costs, unless the put option is sold at a
profit before expiration in a closing sale transaction. The Fund would not
purchase a put option if, as a result of the purchase, more than 10% of
the Fund's assets would be invested in put options.
As the holder of a call option on a U.S. government security, the Fund
would have the right to purchase the underlying security at the exercise
price at any time during the option period. The Fund would purchase a call
option to acquire the underlying security for its portfolio. Utilized in
this fashion, the purchase of call options would enable the Fund to fix
its cost of acquiring the underlying security at the exercise price of the
call option plus the premium paid. Pending exercise of the call option,
the Fund could invest the exercise price of the call option, which would
otherwise have been used for the immediate purchase of the security, in
short-term investments providing additional current return. At times, the
net cost of acquiring securities in this manner may be less than the cost
of acquiring the securities directly. So long as it holds such a call op-
tion rather than the underlying security itself, the Fund is partially
protected from any unexpected decline in the market price of the underly-
ing security and could allow the call option to expire, incurring a loss
only to the extent of the premium paid for the option. The Fund also could
purchase call options on U.S. government securities to increase its return
to investors at a time when the call is expected to increase in value due
to anticipated appreciation of the underlying security. The Fund would not
purchase a call option if, as a result of the purchase, more than 10% of
the Fund's assets would be invested in call options.
The Fund may enter into closing transactions with respect to put and call
options that it purchases, exercise the options, or permit the options to
expire. Profit or loss from a closing transaction will depend on whether
the amount that the Fund received on the transaction is more or less than
the premium paid for the option plus any related transaction costs.
Although the Fund generally will purchase or write only those options for
which SBMFM believes that there is an active secondary market so as to fa-
cilitate closing transactions, there is no assurance that sufficient trad-
ing interest to create a liquid secondary market on a securities exchange
will exist for any particular option or at any particular time, and for
some options no such secondary market may exist. A liquid secondary market
in an option may cease to exist for a variety of reasons. In the past, for
example, higher than anticipated trading activity or order flow, or other
unforeseen events, have at times rendered certain of the facilities of na-
tional securities exchanges inadequate and resulted in the institution of
special procedures, such as trading rotations, restrictions on certain
types of orders or trading halts or suspensions in one or more options.
There can be no assurance that similar events, or events that may other-
wise interfere with the timely execution of customers' orders, will not
recur. In such event, it might not be possible to effect closing transac-
tions in particular options. If, as a covered call option writer, the Fund
is unable to effect a closing purchase transaction in a secondary market,
it will not be able to sell the underlying security until the option ex-
pires or it delivers the underlying security upon exercise.
Securities exchanges generally have established limitations governing the
maximum number of calls and puts of each class which may be held or writ-
ten, or exercised within certain periods, by an investor or group of in-
vestors acting in concert (regardless of whether the options are written
on the same or different securities exchanges or are held, written or ex-
ercised in one or more accounts or through one or more brokers). It is
possible that the Fund and other clients of SBMFM and certain of their af-
filiates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these lim-
its, and it may impose certain other sanctions. At the date of this State-
ment of Additional Information, the position and exercise limits for com-
mon stocks on United States exchanges were 3,000, 5,500 or 8,000 options
per stock (i.e., options representing 300,000, 550,000 or 800,000 shares),
depending on various factors relating to the underlying security and the
Fund's combined stock and option position.
Additional risks exist with respect to certain of the U.S. government se-
curities for which the Fund may write covered call options. If the Fund
writes covered call options on mortgage-backed securities, the securities
that it holds as cover may, because of scheduled amortization or unsched-
uled prepayments, cease to be sufficient cover. The Fund will compensate
for the decline in the value of the cover by purchasing an appropriate ad-
ditional amount of those securities.
The trading market in options on U.S. government securities has varying
degrees of depth for various securities. SBMFM will attempt to take appro-
priate measures to minimize risks relating to the Fund's writing and pur-
chasing of put and call options, but there can be no assurance that the
Fund will succeed in its option program.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
In order to secure what SBMFM considers to be an advantageous price or
yield, the Fund may purchase U.S. government securities on a when-issued
basis or purchase or sell U.S. government securities for delayed delivery.
The Fund will enter into such purchase transactions for the purpose of ac-
quiring portfolio securities and not for the purpose of leverage. Delivery
of the securities in such cases occurs beyond the normal settlement peri-
ods, but no payment or delivery is made by the Fund prior to the recipro-
cal delivery or payment by the other party to the transaction. In entering
into a when-issued or delayed-delivery transaction, the Fund relies on the
other party to consummate the transaction and may be disadvantaged if the
other party fails to do so.
U.S. government securities normally are subject to changes in value based
upon changes, real or anticipated, in the level of interest rates and, to
a lesser extent, the public's perception of the creditworthiness of the
issuers. In general, U.S. government securities tend to appreciate when
interest rates decline and depreciate when interest rates rise. Purchasing
U.S. government securities on a when-issued basis or delayed-delivery
basis, therefore, can involve the risk that the yields available in the
market when the delivery takes place may actually be higher than those ob-
tained in the transaction itself. Similarly, the sale of U.S. government
securities for delayed delivery can involve the risk that the prices
available in the market when the delivery is made may actually be higher
than those obtained in the transaction itself.
The Fund will at all times maintain in a segregated account at Boston Safe
cash or liquid securities equal to the amount of the Fund's when-issued or
delayed-delivery commitments. For the purpose of determining the adequacy
of the securities in the account, the deposited securities will be valued
at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account on a
daily basis so that the value of the account will equal the amount of such
commitments by the Fund. Placing securities rather than cash in the ac-
count may have a leveraging effect on the Fund's assets. That is, to the
extent that the Fund remains substantially fully invested in securities at
the time that it has committed to purchase securities on a when-issued
basis, there will be greater fluctuation in its net asset value than if it
had set aside cash to satisfy its purchase commitments. On the settlement
date, the Fund will meet its obligations from then-available cash flow,
the sale of securities held in the separate account, the sale of other se-
curities or, although it normally would not expect to do so, from the sale
of the when-issued or delayed-delivery securities themselves (which may
have a greater or lesser value than the Fund's payment obligations).
LENDING OF PORTFOLIO SECURITIES
As stated in the Prospectus, the Fund has the ability to lend securities
from its portfolio to brokers, dealers and other financial organizations.
Such loans, if and when made, may not exceed 33 1/3 % of the Fund's total
assets, taken at value. The Fund may not lend its portfolio securities to
Smith Barney or its affiliates without specific authorization from the
SEC. Loans of portfolio securities by the Fund will be collateralized by
cash, letters of credit or securities issued or guaranteed by the United
States government or its agencies which are maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. From time to time, the Fund may return a part of the interest
earned from the investment of collateral received for securities loaned to
the borrower and/or a third party, which is unaffiliated with the Fund or
with Smith Barney, and which is acting as a "finder."
In lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities, as well as either
investing the cash collateral in short-term instruments or by obtaining
yield in the form of interest paid by the borrower when U.S. government
securities are used as collateral. Requirements of the SEC, which may be
subject to further modifications, currently provide that the following
conditions must be met whenever portfolio securities are loaned: (a) the
Fund must receive at least 100% cash collateral or equivalent securities
from the borrower; (b) the borrower must increase such collateral whenever
the market value of the securities rises above the level of such collat-
eral; (c) the Fund must be able to terminate the loan at any time; (d) the
Fund must receive reasonable interest on the loan, as well as an amount
equal to any dividends, interest or other distributions on the loaned se-
curities, and any increase in market value; (e) the Fund may pay only rea-
sonable custodian fees in connection with the loan; and (f) voting rights
on the loaned securities may pass to the borrower; however, if a material
event adversely affecting the investment occurs, the Fund's Board of Di-
rectors must terminate the loan and regain the right to vote the securi-
ties. The risks in lending portfolio securities, as with other extensions
of secured credit, consist of possible delay in receiving additional col-
lateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will be made to
firms deemed by SBMFM to be of good standing and will not be made unless,
in the judgment of SBMFM the consideration to be earned from such loans
would justify the risk.
TRANSACTIONS IN INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may enter into interest rate futures contracts and options on in-
terest rate futures contracts that are traded on a U.S. exchange or board
of trade. These investments may be made by the Fund solely for the purpose
of hedging against changes in the value of its portfolio securities due to
anticipated changes in interest rates and market conditions and not for
purposes of speculation. The Fund will not be permitted to enter into fu-
tures and options contracts (other than those considered bona fide hedging
by the Commodity Futures Trading Commission) for which aggregate initial
margin deposits and premiums exceed 5% of the fair market value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on contracts into which it has entered.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of specified
interest rate sensitive financial instruments (debt security) at a speci-
fied price, date, time and place.
The purpose of entering into a futures contract by the Fund is to protect
the Fund from fluctuations in interest rates on securities without actu-
ally buying or selling the securities. For example, if the Fund owns long-
term U.S. government securities and interest rates are expected to in-
crease, the Fund may enter into a futures contract to sell U.S. Treasury
Bonds. Such a transaction would have much the same effect as the Fund's
selling some of the long-term bonds in its portfolio. If interest rates
increase as anticipated, the value of certain long-term U.S. government
securities in the portfolio would decline, but the value of the Fund's fu-
tures contracts would increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it may
have otherwise. Of course, because the value of portfolio securities will
far exceed the value of the futures contracts sold by the Fund, an in-
crease in the value of the futures contracts can only mitigate-but not to-
tally offset-the decline in the value of the portfolio. If, on the other
hand, the Fund held cash reserves and interest rates are expected to de-
cline, the Fund may enter into futures contracts for the purchase of U.S.
government securities in anticipation of later purchases of securities.
The Fund can accomplish similar results by buying securities with long ma-
turities and selling securities with short maturities. But by using fu-
tures contracts as an investment tool to reduce risk, given the greater
liquidity in the futures market than in the cash market, it may be possi-
ble to accomplish the same result more easily and more quickly.
No consideration will be paid or received by the Fund upon entering into a
futures contract. Initially, the Fund will be required to deposit with the
broker an amount of cash or cash equivalents equal to approximately 1% to
10% of the contract amount (this amount is subject to change by the board
of trade on which the contract is traded and members of such board of
trade may charge a higher amount). This amount is known as "initial mar-
gin" and is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund, upon termination of the fu-
tures contract, assuming that all contractual obligations have been satis-
fied. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the price of the securities underlying the
futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as "marking-to-
market." In addition, when the Fund enters into a long position in futures
or options on futures, it must deposit and maintain in a segregated ac-
count with its custodian an amount of cash or cash equivalents equal to
the total market value of such futures contract, less the amount of ini-
tial margin for the contract and any profits on the contract that may be
held by the broker. At any time prior to the expiration of a futures con-
tract, the Fund may elect to close the position by taking an opposite po-
sition, which will operate to terminate the Fund's existing position in
the contract.
There are several risks in connection with the use of futures contracts as
a hedging device. Successful use of futures contracts by the Fund is sub-
ject to the ability of SBMFM to predict correctly movements in the direc-
tion of interest rates. These predictions involve skills and techniques
that may be different from those involved in the management of the Fund.
In addition, there can be no assurance that there will be a perfect corre-
lation between movements in the price of the securities underlying the fu-
tures contract and movements in the price of the securities which are the
subject of the hedge. A decision as to whether, when and how to hedge in-
volves the exercise of skill and judgment, and even a well-conceived hedge
may be unsuccessful to some degree because of market behavior or unex-
pected trends in interest rates.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that a liquid
market will exist for the contracts at any particular time. Most domestic
futures exchanges and boards of trade limit the amount of fluctuation per-
mitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. It is possible that futures
contract prices could move to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquida-
tion of futures positions and subjecting some futures traders to substan-
tial losses. In such event, and in the event of adverse price movements,
the Fund would be required to make daily cash payments of variation mar-
gin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may partially or completely offset losses
on the futures contract.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities held in its portfolio
and rates decrease instead, the Fund will lose part or all of the benefit
of the increased value of securities which it has hedged because it will
have offsetting losses in its futures positions. In addition, in such sit-
uations, if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements at a time when it may be dis-
advantageous to do so. These sales of securities may, but will not neces-
sarily, be at increased prices which reflect the decline in interest
rates.
Purchasing Options. Options on interest rate futures contracts are simi-
lar to options on securities, except that an option on an interest rate
futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in an interest rate futures contract (rather
than to purchase securities) at a specified exercise price at any time
prior to the expiration date of the option. A call option gives the pur-
chaser of such option the right to take a long position, and obliges its
writer to take a short position in a specified underlying futures contract
at a stated exercise price at any time prior to the expiration date of the
option. A purchaser of a put option has the right to enter into a short
position, and the writer has the obligation to enter into a long position
in such contract at the exercise price during the option period. If an op-
tion is exercised on the last trading day prior to the expiration date of
the option, the settlement will be made entirely in cash equal to the dif-
ference between the exercise price of the option and the closing price of
the interest rate futures contract on the expiration date. The potential
loss related to the purchase of an option on interest rate futures con-
tracts is limited to the premium paid for the option (plus transaction
costs), and there are no daily cash payments to reflect changes in the
value of the underlying contract. However, the value of the option does
change daily and that change is reflected in the net asset value of the
Fund.
The purchase of put options on interest rate futures contracts is analo-
gous to the purchase of protective puts on debt securities so as to hedge
a portfolio of debt securities against the risk of rising interest rates.
The Fund may purchase put options on interest rate futures contracts if
SBMFM anticipates a rise in interest rates. Because of the inverse rela-
tionship between trends in interest rates and the values of debt securi-
ties, a rise in interest rates would result in a decline in the value of
the Fund's portfolio securities. Because the value of an interest rate fu-
tures contract moves inversely in relation to changes in interest rates,
as is the case with debt securities, a put option on such a contract be-
comes more valuable as interest rates rise. By purchasing put options on
interest rate futures contracts at a time when SBMFM expects interest
rates to rise, the Fund would seek to realize a profit to offset the loss
in value of its portfolio securities, without the need to sell such secu-
rities.
The Fund may purchase call options on interest rate futures contracts if
SBMFM anticipates a decline in interest rates. Historically, unscheduled
prepayments on mortgage-backed securities (such as GNMA certificates) have
increased in periods of declining interest rates, as mortgagors have
sought to refinance at lower interest rates. As a result, if the Fund pur-
chases such securities at a premium prior to a period of declining inter-
est rates, the subsequent prepayments at par will reduce the yield on such
securities by magnifying the effect of the premium in relationship to the
principal amount of securities, and may, under extreme circumstances, re-
sult in a loss to the Fund. This effect may not be offset by any apprecia-
tion in value in a debt security normally attributable to the interest
rate decline. To protect itself against the possible erosion of principal
on securities purchased at a premium, the Fund may purchase call options
on interest rate futures. The option would increase in value as interest
rates declined, thereby tending to offset any reductions of the yield on
portfolio securities purchased at a premium resulting from the effect of
prepayments on the amortization of such premiums.
Writing Options. The Fund may write put and call options on interest rate
futures contracts other than as part of closing sale transactions, in
order to increase its ability to hedge against changes in interest rates.
A call option gives the purchaser of such option the right to take a long
position, and obliges the Fund as its writer to take a short position in a
specified underlying futures contract at a stated exercise price at any
time prior to the expiration date of the option. A purchaser of a put op-
tion has the right to take a short position, and obliges the Fund as the
writer to take a long position in such contract at the exercise price dur-
ing the option period.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the debt securities which are deliver-
able upon exercise of the futures contract. If the futures price at expi-
ration is below the exercise price, the Fund will retain the full amount
of the option premium, which provides a partial hedge against any decline
that may have occurred in the Fund's holdings of debt securities. If a put
option is exercised, the net cost to the Fund of the debt securities ac-
quired by it will be reduced by the amount of the option premium received.
Of course, if market prices have declined, the Fund's purchase price upon
exercise of the option may be greater than the price at which the debt se-
curities might be purchased in the cash market, and, therefore, a loss may
be realized when the difference between the exercise price and the market
value of the debt securities is greater than the premium received for
writing the option.
As is currently the case with respect to its purchases of futures, the
Fund will write put and call options on interest rate futures contracts
only as a hedge against changes in the value of its securities that may
result from market conditions, and not for purposes of speculation.
When the Fund writes a call or a put option, it will be required to de-
posit initial margin and variation margin pursuant to brokers' require-
ments similar to those applicable to interest rate futures contracts de-
scribed above. In addition, net option premiums received for writing op-
tions will be included as initial margin deposits. At any time prior to
the expiration of the option, the Fund may elect to close the position by
taking an opposite position, which will operate to terminate the Fund's
existing position in the option.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on interest rate futures con-
tracts. These risks include the lack of assurance of perfect correlation
between price movements in the options on interest rate futures, on the
one hand, and price movements in the portfolio securities that are the
subject of the hedge, on the other hand. In addition, the Fund's writing
of put and call options on interest rate futures will be based upon pre-
dictions as to anticipated interest rate trends, which predictions could
prove to be inaccurate. The ability to establish and close out positions
on such options will be subject to the maintenance of a liquid market, and
there can be no assurance that such a market will be maintained or that
closing transactions will be effected. Moreover, the option may not be
subject to daily price fluctuation limits while the underlying futures
contract is subject to such limits, and as a result normal pricing rela-
tionships between options and the underlying futures contract may not
exist when the future is trading at its price limit. In addition, there
are risks specific to writing (as compared to purchasing) such options.
While the Fund's risk of loss with respect to purchased put and call op-
tions on interest rate futures contracts is limited to the premium paid
for the option (plus transaction costs), the writer of an option who does
not have a covering position in the underlying futures contract is subject
to risk of loss on the futures contract less the premium received. When
the Fund writes such an option, it is obligated to a broker for the pay-
ment of initial and variation margin.
Under policies adopted by the Board of Directors, the Fund's investment in
premiums paid for call and put options at any one time may not exceed 5%
of the value of the Fund's total assets.
INVESTMENT RESTRICTIONS
Restrictions numbered 1 through 8 below have been adopted by the Fund as
fundamental policies. These restrictions cannot be changed without ap-
proval by the holders of a majority of the outstanding shares of the Fund,
defined as the lesser of (a) 67% or more of the shares present at a meet-
ing if the holders of more than 50% of the outstanding shares are present
in person or by proxy or (b) more than 50% of the Fund's outstanding
shares. The remaining restrictions may be changed by a vote of the Fund's
Board of Directors at any time.
The Fund will not:
1. With respect to 75% of the value of its total assets, invest more than
5% of its total assets in securities of any one issuer, except securities
issued or guaranteed by the United States government, or purchase more
than 10% of the outstanding voting securities of such issuer.
2. Issue senior securities as defined in the 1940 Act and any rules and
orders thereunder, except insofar as the Fund may be deemed to have issued
senior securities by reason of: (a) borrowing money or purchasing securi-
ties on a when-issued or delayed-delivery basis; (b) purchasing or selling
futures contracts and options on futures contracts and other similar in-
struments; and (c) issuing separate classes of shares.
3. Invest more than 25% of its total assets in securities, the issuers of
which are in the same industry. For purposes of this limitation, U.S. gov-
ernment securities and securities of state or municipal governments and
their political subdivisions are not considered to be issued by members of
any industry.
4. Borrow money, except that: (a) the Fund may borrow from banks for tem-
porary or emergency (not leveraging) purposes, including the meeting of
redemption requests which might otherwise require the untimely disposition
of securities, in an amount not exceeding 10% of the value of the Fund's
total assets (including the amount borrowed) valued at market less liabil-
ities (not including the amount borrowed) at the time the borrowing is
made; and (b) the Fund may enter into reverse repurchase agreements and
forward roll transactions. Whenever borrowings other than reverse repur-
chase agreements and forward roll transactions exceed 5% of the value of
the Fund's total assets, the Fund will not make any additional invest-
ments.
5. Make loans. This restriction does not apply to: (a) the purchase of
debt obligations in which the Fund may invest consistent with its invest-
ment objective and policies; (b) repurchase agreements; and (c) loans of
its portfolio securities.
6. Engage in the business of underwriting securities issued by other per-
sons, except to the extent that the Fund may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in disposing
of portfolio securities.
7. Purchase or sell real estate, real estate mortgages, real estate in-
vestment trust securities, commodities or commodity contracts, but this
shall not prevent the Fund from: (a) investing in securities of issuers
engaged in the real estate business and securities which are secured by
real estate or interests therein; (b) holding or selling real estate re-
ceived in connection with securities it holds; or (c) trading in futures
contracts and options on futures contracts.
8. Purchase any securities on margin (except for such short-term credits
as are necessary for the clearance of purchases and sales of portfolio se-
curities) or sell any securities short (except against the box). For pur-
poses of this restriction, the deposit or payment by the Fund of initial
or maintenance margin in connection with futures contracts and related op-
tions and options on securities is not considered to be the purchase of a
security on margin.
9. Purchase or sell oil, gas or other mineral exploration or development
programs.
10. Invest in securities of other investment companies, except as they
may be acquired as part of a merger, consolidation, reorganization or ac-
quisition of assets.
11. Purchase restricted securities, illiquid securities (such as repur-
chase agreements with maturities in excess of seven days) or other securi-
ties which are not readily marketable if more than 15% of the total assets
of the Fund would be invested in such securities.
12. Purchase any security if as a result the Fund would then have more
than 5% of its total assets (taken at current value) invested in securi-
ties of companies that have been in continuous
operation for fewer than three years , except that this restriction will
apply to U.S. government securiteis. (For purposes of this restriction,
issuers include predecessors sponsors, controlling persons, general
partners
and guarantors of underlying assets.
13. Make investments for the purpose of exercising control or management.
14. Purchase or retain securities of any company if, to the knowledge of
the Fund, any of the Fund's officers and Directors or any officer or di-
rector of either SBMFM or Boston Advisors individually owns more than 1/2
of 1% of the outstanding securities of such company and together they own
beneficially more than 5% of the securities.
15. Engage in the purchase or sale of put, call, straddle or spread op-
tions or in the writing of such options, except that (a) the Fund may pur-
chase and sell options on U.S. government securities, write covered put
and call options on U.S. government securities and enter into closing
transactions with respect to such options and (b) the Fund may sell inter-
est rate futures contracts and write put and call options on interest rate
futures contracts.
The percentage limitations contained in these restrictions apply at the
time of purchases of securities.
Certain restrictions listed above permit the Fund without shareholder ap-
proval to engage in investment practices that the Fund does not currently
pursue. The Fund has no present intention of altering its current invest-
ment practices as otherwise described in the Prospectus and this Statement
of Additional Information and any future change in those practices would
require Board approval and appropriate disclosure to investors. In order
to permit sale of the Fund's shares in certain states, the Fund may make
commitments more restrictive than the investment restrictions described
above. Should the Fund determine that any such commitment is no longer in
the best interests of the Fund and its shareholders, it will revoke the
commitment by terminating sales of its shares in the state involved.
PORTFOLIO TURNOVER
While the Fund does not intend to trade in securities for short-term prof-
its, securities may be sold without regard to the amount of time that they
have been held by the Fund when warranted by the circumstances. Certain
practices which may be employed by the Fund could result in a turnover
rate in excess of 100%. A portfolio turnover rate of 100% would occur, for
example, if all of the Fund's securities were replaced once during a pe-
riod of one year. For the 1994, 1993 and 1992 fiscal years, the Fund's
rates of portfolio turnover (the lesser of purchases or sales of portfolio
securities, excluding short-term securities, for the year divided by the
monthly average value of portfolio securities) were 236%, 436% and 426%,
respectively.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the Fund are made by SBMFM, sub-
ject to the overall supervision and review of the Fund's Board of Direc-
tors. Portfolio securities transactions for the Fund are effected by or
under the supervision of SBMFM.
The Fund normally purchases newly issued U.S. government securities di-
rectly from the U.S. Treasury or from the agency or instrumentality that
is the issuer. Certain U.S. government securities are purchased from an
underwriter acting as principal. Other purchases and sales usually are
placed with those dealers from which it appears that the best price or ex-
ecution will be obtained; such dealers may be acting as either agents or
principals. No brokerage commissions typically are paid by the Fund on
purchases and sales of portfolio securities. The purchase price paid by
the Fund to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securi-
ties from dealers in the after-market normally are executed at a price be-
tween the bid and asked prices. The Fund paid $69,080, $176,375 and
$0 , respectively, in brokerage commissions during the fiscal years
ended July 31, 1992, 1993 and 1994. For the fiscal years ended July 31,
1991 and 1992, the Fund paid to Shearson Lehman Brothers (the Fund's dis-
tributor prior to Smith Barney), $56,950 and $69,080, respectively in bro-
kerage commissions.
SBMFM selects dealers for portfolio transactions in its best judgment and
in a manner deemed fair and reasonable to shareholders. The primary con-
siderations are the availability of the desired security and the prompt
execution of orders in an effective manner at the most favorable prices.
Subject to these considerations, dealers which provide supplemental in-
vestment research and statistical or other services to SBMFM may receive
orders for portfolio transactions by the Fund. Information so received en-
ables SBMFM to supplement its own research and analysis with the views and
information of other securities firms. Such information may be useful to
SBMFM in serving both the Fund and other clients, and, conversely, supple-
mental information obtained by the placement of business of other clients
may be useful to SBMFM in carrying out its obligations to the Fund.
While investment decisions for the Fund are made independently from those
of the other accounts managed by SBMFM, investments of the type that the
Fund may make also may be made by such other accounts. When the Fund and
one or more other accounts managed by SBMFM are prepared to invest in, or
desire to dispose of, the same security, available investments or opportu-
nities for sales will be allocated in a manner believed by SBMFM to be eq-
uitable to each. In some cases, this procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained or
disposed of by the Fund.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedule of sales charges for Class A and Class B shares
described in the Prospectus applies to purchases made by any "purchaser,"
which is defined to include the following: (a) an individual; (b) an
individual's
spouse and his or her children purchasing shares for his or her own ac-
count; (c) a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account; (d) a pension, profit-sharing or
other employee benefit plan qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and qualified employee ben-
efit plans of employers who are "affiliated persons" of each other within
the meaning of the 1940 Act; (e) tax-exempt organizations enumerated in
Section 501(c)(3) or (13) of the Code; and (f) a trustee or other profes-
sional fiduciary (including a bank, or an investment adviser registered
with the SEC under the Investment Advisers Act of 1940, as amended) pur-
chasing shares of the Fund for one or more trust estates or fiduciary ac-
counts. Purchasers who wish to combine purchase orders to take advantage
of volume discounts should contact a Smith
Barney Financial Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in
Class A shares of the Fund and in Class A shares of other funds of the
Smith Barney Mutual Funds that are offered with a sales charge,
including the purchase being made, of any purchaser is
$25,000 or more. The reduced sales charge is subject to confirmation of
the shareholder's holdings through a check of appropriate records. The
Fund reserves the right to terminate or amend the combined right of accu-
mulation at any time after written notice to shareholders. For
further information regarding the combined right of accumulation,
shareholders should contact a Smith Barney Financial Consultant.
DETERMINATION OF PUBLIC OFFERING PRICES
The Fund offers its shares to the public on a continuous basis. The public
offering price for a Class A and Class Y shares of the Fund is
equal to the net asset value per share at the time of purchase, plus for
Class A shares an initial sales charge based on the aggregate amount
of the investment. The public offering price for a Class B and
Class C shares (and Class A share purchases, including applicable rights
of accumulation, equalling or exceeding $500,000), is equal to the net
asset value per share at the time of purchase and no sales charge is
imposed at the time of purchase. A contingent deferred sales charge
("CDSC"), however, is imposed on certain redemptions of Class B
shares and Class C shares and of
Class A shares
when purchased in amounts equalling or exceeding $500,000. The
method of computation of the public offering price is shown in the
Fund's financial statements
incorporated by reference in the
entirety to this Statement of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed
(a) for any period during which the New York Stock Exchange, Inc. ("NYSE")
is closed (other than for customary weekend or holiday closings), (b) when
trading in the markets the Fund normally utilizes is restricted, or an
emergency exists, as determined by the SEC, so that disposal of the Fund's
investments or determination of net asset value is not reasonably practi-
cable or (c) for such other periods as the SEC by order may permit for the
protection of the Fund's shareholders.
DISTRIBUTIONS IN KIND
If the Board of Directors of the Fund determines that it
would be detrimental to the best interests of the remaining shareholders of
the Fund to make a redemption payment wholly in cash, the Fund may pay,
in accordance with rules SEC rules , any portion of a redemption in
excess of the lesser of $250,000 or 1.00% of the Fund's net assets by a
distribution in kind of portfolio securities in lieu of cash.
Securities issued as a distribution in kind will be readily
marketable,
although shareholders receiving distributions in kind may incur brokerage
commissions when shareholders subsequently sell those
securities.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 and who wish
to receive specific amounts of cash monthly or quarterly. Withdrawals of
at least $100 may be made under the Withdrawal Plan by redeeming as many
shares of the Fund as may be necessary to cover the stipulated withdrawal
payment. Any applicable CDSC will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a shareholder's
shares at the time the withdrawal plan commences (With respect to With-
drawal Plans in effect prior to November 7, 1994, any applicable CDSC
will be waived on amounts withdrawn that do not exceed 2.00%
per month of the value of a shareholder's shares at the time the Withdrawal
Plan commences.) To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in the Fund,
there will be a reduction in the value of the shareholder's investment and
continued withdrawal payments will reduce the shareholder's investment
and may ultimately exhaust it. Withdrawal payments should not be
considered as income from investment in the Fund. Furthermore, as it
generally would not be advantageous to a shareholder to make additional
investments in the Fund at the same time he or she is participating
in the Withdrawal Plan, purchases by such shareholders in amounts of less
than $5,000 ordinarily will not be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates
with TSSG as agent for Withdrawal Plan members. All dividends and distri-
butions on shares in the Withdrawal Plan are reinvested automatically at
net asset value in additional shares of the Fund. Effective November 7,
1994, Withdrawal Plans should be set up with a Smith
Barney Financial Consultant. A shareholder who purchases shares directly
through TSSG may continue to do so and applications for participation in
the
Withdrawal Plan must be received by TSSG no later than the eighth day of
the month to be eligible for participation beginning with that month's
withdrawal. For additional information, shareholders should contact a
Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts basis pur-
suant to a written agreement ("the Distribution Agreement"), which was
most recently approved by the Fund's Board of Directors on July 20, 1994.
For the fiscal years ended July 31, 1992, 1993 and 1994, Smith Barney or
its predecessor Shearson Lehman Brothers received $1,153,117 and $247,035
and $362,103, respectively, in sales charges for the sale of the Fund's
Class A shares and did not reallow any portion thereof to dealers. For the
period from November 6, 1992 through July 31, 1993, and for the fiscal
year ended July 31, 1994, Smith Barney or Shearson Lehman Brothers re-
ceived $192,923 and $449,792, respectively, representing CDSC on
redemption of the Fund's Class B shares.
When payment is made by the investor before the settlement date, unless
otherwise directed by the investor, the funds will be held as a free
credit balance in the investor's brokerage account, and Smith Barney may
benefit from the temporary use of the funds. The investor may designate
another use for the funds prior to settlement date, such as an investment
in a money market fund (other than the Smith Barney Exchange Reserve Fund)
of the Smith Barney Mutual Funds. If the investor instructs Smith Barney
to invest the funds in a Smith Barney money market fund, the
amount of the investment will be included as part of the average daily net
assets of both the Fund and the Smith Barney
money market fund,
and affiliates of Smith Barney which serve the funds in an investment
advisory
or administrative capacity will benefit from the fact that
they are receiving fees from both such investment companies for managing
these assets computed on the basis of their average daily net assets. The
Fund's Board of Directors has been advised of the benefits to Smith Barney
resulting from five-day settlement procedures and will take such benefits
into consideration when reviewing the Advisory, Administration and Distri-
bution Agreements for continuance.
For the fiscal years ended July 31, 1993 and 1994, Smith Barney incurred
distribution expenses totaling approximately $2,265,000 and $3,351,000,
consisting of approximately $19,000 and $39,000 for advertising, $44,000
and $24,000 for printing and mailing of Prospectuses, $1,928,000 and
$1,284,000 for support services, $1,245,000 and $921,000 to Smith Barney
Financial Consultants, and $95,000 and $17,000, respectively, in accruals
for interest on the excess of Smith Barney expenses incurred in
distributing
the Funds shares over the sum of the distribution fees and CDSC received
by Smith Barney from the Fund. No comparable information is available
for 1992 because that was the year that the variable pricing system was
implemented.
DISTRIBUTION ARRANGEMENTS
To compensate Smith Barney for the services it provides and for the ex-
pense it bears under the Distribution Agreement, the Fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, the Fund pays Smith Barney a service fee,
accrued daily and paid monthly, calculated at the annual rate of 0.25% of
the value of the Fund's average daily net assets attributable to the Class
A, Class B and Class C shares. In addition, the Fund pays
Smith Barney a distribution fee with respect to the Class B and
Class C shares primarily intended to compensate Smith Barney
for its initial expense of paying Financial Consultants a commis-
sion upon sales of those shares. The Class B distribution fee is
calculated at the annual rate of 0.50% of the value of the Fund's average
daily net assets attributable to the shares of the Class. The Class C dis-
tribution fee is calculated at the annual rate of 0.45% of the value of
the Fund's average daily net assets attributable to the shares of the
Class.
For the period from November 6, 1992 through July 31, 1993, the
Fund's Class A and Class B shares incurred $854,985 and $834,882, respec-
tively, in service fees. For the same period, the Fund's Class B shares
incurred $1,669,763 in distribution fees. For the fiscal year ended July
31, 1994, the Class A and Class B shares incurred $1,047,795 and
$1,085,386, respectively, in service fees. For the same period, the Class
B shares incurred $2,170,771 in distribution fees. For the fiscal year
ended July 31, 1994, the Fund incurred $157 and $314 in service fees and
distribution fees, respectively, for Class C shares (formerly designated
as Class D shares.)
Under its terms, the Plan continues from year to year, provided such con-
tinuance is approved annually by vote of the Fund's Board of Directors,
including a majority of the Directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the op-
eration of the Plan or the Distribution Agreement
(the "Independent Directors"). The Plan may not be amended to increase
the amount
of the services and distribution fees without
shareholder approval, and all material amendments of the Plan
also must be approved by the Directors and Independent Directors
in the manner described above. The Plan may be terminated with
respect to a Class at any time, without penalty, by vote of a majority of
the
Independent Directors or by vote of a majority of the outstanding voting
securities of the Class (as defined in the 1940 Act) on not more than
30 days' written notice to any other party to the Plan. Pursuant to the
Plan, Smith Barney will provide the Fund's Board of Directors with
periodic reports of amounts expended under the Plan and the purpose
for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE cur-
rently is scheduled to be closed on New Year's Day,
Presidents
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas, and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. Because of the differences in distribution fees
and Class-specific expenses, the per share net asset value of each Class
may differ. The following is a description of the procedures used by the
Fund in valuing its assets.
Securities listed on a national securities exchange will be valued on the
basis of the last sale on the date on which the valuation is made or, in
the absence of sales, at the mean between the closing bid and asked
prices. Over-the-counter securities will be valued on the basis of the bid
price at the close of business on each day, or, if market quotations for
those securities are not readily available, at fair value, as determined
in good faith by the Fund's Board of Directors. Short-term obligations
with maturities of 60 days or less are valued at amortized costs, which
constitutes fair value as determined by the Fund's Board of Directors. Am-
ortized cost involves valuing an instrument at its original cost to the
Fund and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest
rates on the market value of the instrument. All other securities and
other assets of the Fund will be valued at fair value as determined in
good faith by the Fund's Board of Directors.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund of the Smith Barney Mutual
Funds may exchange all or part of their shares for shares of the same
Class of other funds of the Smith Barney Mutual Funds, to the extent such
shares are offered for sale in the shareholder's state of residence, on
the basis of relative net asset value per share at the time of exchange as
follows:
A. Class A shares of any fund purchased with a sales charge may be ex-
changed for Class A shares of any of the other funds, and the sales charge
differential, if any, will be applied. Class A shares of any fund may be
exchanged without a sales charge for shares of the funds that are offered
without a sales charge. Class A shares of any fund purchased without a
sales charge may be exchanged for shares sold with a sales charge, and the
appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of shares
purchased with a sales charge may be exchanged for Class A shares of any
of the other funds, and the sales charge differential, if any, will be ap-
plied.
C. Class B shares of any fund may be exchanged without a sales charge.
Class B shares of the Fund exchanged for Class B shares of another fund
will be subject to the higher applicable CDSC of the two funds and, for
purposes of calculating CDSC rates and conversion periods, will be deemed
to have been held since the date the shares being exchanged were deemed to
be purchased.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the ac-
count number in order to accomplish an exchange of shares of Smith Barney
High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same
Class in a fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision. This
privilege is available to shareholders residing in any state in
which the fund shares being acquired may legally be sold. Prior to any
exchange, the shareholder should obtain and review a copy of the current
prospectus of each fund into which an exchange is being considered
Prospectuses may be obtained from your Smith Barney Financial
Consultant.
Upon receipt of proper instructions and all necessary supporting docu-
ments, shares submitted for exchange are redeemed at the then-current net
asset value and, subject to any applicable CDSC, the proceeds are
immediately invested, at a price as described above, in shares of the fund
being acquired. Smith Barney reserves the right to reject any exchange
request. The exchange privilege may be modified or terminated at any
time after written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote its yield or total return in adver-
tisements or in reports and other communications to shareholders. The Fund
may include comparative performance information in advertising or market-
ing the Fund's shares. Such performance information may include the fol-
lowing industry and financial publications: Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Times, Forbes, Fortune, Institu-
tional Investor, Investors Daily, Money, Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. To the extent
any advertisement or sales literature of the Fund describes the expenses
or performance of a Class, it will also describe such information for the
other Classes.
YIELD
A Class' 30-day yield figure described below is calculated according to a
formula prescribed by the SEC. The formula can be expressed as follows:
YIELD =2 [ ( a-bcd +1)6--1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the pe-
riod that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by the Fund at a discount
or premium, the formula generally calls for amortization of the discount
or premium; the amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
Class A's yield, Class B's yield and Class C's yield for the 30-day period
ended July 31, 1994 were 5.45%, 5.15% and 5.07%, respectively.
Investors should recognize that in periods of declining interest rates the
Class' yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates the Class' yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net
new money to the Fund from the continuous sale of its shares will likely
be invested in portfolio instruments producing lower yields than the bal-
ance of the Fund's portfolio, thereby reducing the current yield of the
Class shares. In periods of rising interest rates, the opposite can be ex-
pected to occur.
AVERAGE ANNUAL TOTAL RETURN
"Average annual total return" figures are computed according to a
formula prescribed by the SEC. The formula can be expressed as follows:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5- or 10-year period at the
end of the 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and distri-
butions.
The following total return figures assume that the maximum 4.50% sales
charge has been deducted from the investment at the time of purchase and
have been restated to show the change in the maximum sales charge. The
Funds average total returns for Class A shares were as follows for the
periods indicated:
(4.42%) for the one-year period beginning August 1, 1993 through July 31,
1994;
7.65% per annum during the five-year period beginning on August 1, 1989
through July 31, 1994; and
8.95% per annum during the period from commencement of operations
(September 4, 1984) through July 31, 1994.
The Funds average total returns for Class A shares without sales charges
were as follows for the period indicated:
0.08% for the one-year period beginning August 1, 1993 through
July 31, 1994;
8.64% per annum during the five-year period beginning on August 1, 1989
through July 31, 1994; and
9.45% per annum during the period from commencement of operations
(September 4, 1984) through July 31, 1994.
The Funds average total returns for Class B shares assuming the maximum
applicable CDSC were as follows for the periods indicated:
(4.70)% for the one-year period beginning August 1, 1993 through July
31, 1994;
3.11% per annum during the period from commencement (November 6,
1992) through July 31, 1994.
The Funds average total returns for Class B shares without CDSC were as
follows for the periods indicated:
(0.46)% for the one-year period beginning August 1, 1993 through July 31,
1994;
5.33% per annum during the period from commencement (November 6,
1992) through July 31, 1994.
The Funds average total returns for Class C shares (formerly designated
Class D shares) were as follows for the periods indicated:
(0.46)% for the one-year period beginning August 1, 1993 through July
31, 1994;
0.72% per annum during the period from inception (June 29, 1993)
through July 31, 1994.
AGGREGATE TOTAL RETURN
"Aggregate total return" figures represent the cumulative change in the
value of an investment in the Class for the specified period and are com-
puted by the following formula:
ERV-P P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment
made at the beginning of the 1-, 5- or 10-year period at the
end of the 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and distri-
butions.
The Funds aggregate total returns for Class A shares were as follows for
the periods indicated:
(4.42%) for the one-year period beginning August 1, 1993 through July
31, 1994;
44.56% per annum during the five-year period beginning on August 1, 1989
through July 31, 1994; and
133.67% per annum during the period from commencement of operations
(June 15, 1984) through July 31, 1994.
The Funds aggregate total returns for Class B shares assuming the
maximum applicable CDSC were as follows for the periods indicated:
(4.70)% for the one-year period beginning August 1, 1993 through July
31, 1994;
5.45% per annum during the period from commencement (November 6,
1992) through July 31, 1994.
The Funds aggregate total returns for Class B shares without CDSC were
as follows for the periods indicated:
(0.46)% for the one-year period beginning August 1, 1993 through July
31, 1994;
9.41% per annum during the period from commencement (November 6,
1992) through July 31, 1994.
The Funds aggregate total returns for Class C shares (formerly designated
Class D shares) without CDSC were as follows for the periods indicated:
(0.46)% for the one-year period beginning August 1, 1993 through July
31, 1994;
The Funds aggregate total returns for Class C shares (formerly designated
Class D shares) assuming the maximum applicable CDSC were as follows
for the periods indicated:
(1.41)% for the one-year period beginning August 1, 1993 through July
31, 1994;
0.78% per annum during the period from commencement (November 6,
1992) through July 31, 1994.
Performance will vary from time to time depending upon market conditions,
the composition of the Fund's portfolio, and operating expenses
and the expenses exclusively attributable to the Class. Consequently, any
given performance quotation should not be considered representative of
the Class' performance for any specified period in the future. Because
performance will vary, it may not provide a basis for comparing an
investment in the Class with certain bank deposits or other investments
that pay a fixed yield for a stated period of time. Investors comparing
the Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
It is important to note that the total return figures set forth above are
based on historical earnings and are not intended to indicate future per-
formance.
TAXES
TAXATION OF THE FUND
The following is a summary of certain Federal income tax considerations
that may affect the Fund and its shareholders. This summary is not
intended as a substitute for individUAl tax advice, and investors are urged
to consult their own tax advisors as to the tax consequences of an
investment in the Fund.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Provided that the Fund (a)
qualifies as a regulated investment company and (b) distributes at least
90% of its net investment income (including, for this purpose, net real-
ized short-term capital gains), the Fund will not be liable for Federal
income taxes to the extent that its net investment income and its net re-
alized long- and short-term capital gains, if any, are distributed to its
shareholders. Interest received from U.S. government securities, and gains
from the sale of U.S. government securities and from the Fund's options
transactions, will qualify toward this 90% limitation. The Code also re-
quires a regulated investment company to earn less than 30% of its gross
income from the sale of securities or certain financial instruments held
less than three months. This limitation may restrict the Fund's ability to
dispose of its securities, to write or purchase options on securities that
have been held for less than three months, to write or purchase options
that expire within three months, or to enter into closing transactions
with respect to its options positions.
TAXATION OF FUND SHAREHOLDERS
The Fund will pay dividends consisting of substantially all of its net in-
vestment income monthly. Distributions of net realized short-term capital
gains, if any, generally are declared and paid annually, although they may
be declared or paid more frequently or less frequently at the discretion
of the Fund's Board of Directors. The Fund will distribute net realized
long-term capital gains, if any, at the end of the fiscal year in which
they are earned. Dividends from net investment income and distributions of
net realized short-term capital gains are taxable to a shareholder as or-
dinary income for Federal income tax purposes, regardless of whether the
shareholder receives the dividends or distributions in additional shares
or in cash. Distributions of net realized long-term capital gains are tax-
able to a shareholder as long-term capital gains, regardless of how long
the shareholder has held the Fund's shares and regardless of whether the
distribution is received in additional shares or in cash. However, if a
shareholder receives a distribution taxable as long-term capital gain with
respect to any share and if such share is held by the shareholder for six
months or less, then any loss on the redemption or exchange of such share,
up to the amount of the distribution, will be treated as long-term capital
loss. Dividends and distributions paid by the Fund generally will not be
eligible for the dividends received deduction for corporations.
If a shareholder (a) incurs a sales charge in acquiring or redeeming
shares of the Fund, (b) disposes of those shares within 90 days and (c)
acquires shares in a mutual fund for which the otherwise applicable sales
charge is reduced by reason of a reinvestment right (i.e., exchange privi-
lege), the original sales charge increases the shareholder's tax basis in
the original shares only to the extent that the otherwise applicable sales
charge for the second acquisition is not reduced. The portion of the orig-
inal sales charge that does not increase the shareholder's tax basis in
the original shares would be treated as incurred with respect to the sec-
ond acquisition and, as a general rule, would increase the shareholder's
tax basis in the newly acquired shares. Furthermore, the same rule also
applies to a disposition of the newly acquired or redeemed shares made
within 90 days of the second acquisition. This provision prevents a share-
holder from immediately deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Investors considering buying shares of the Fund on or just prior to a
record date for a taxable dividend or capital gain distribution should be
aware that, regardless of whether the price of the Fund shares to be pur-
chased reflects the amount of the forthcoming dividend or distribution
payment, any such payment will be a taxable dividend or distribution pay-
ment.
If a shareholder fails to furnish a correct taxpayer identification num-
ber, fails to fully report dividend or interest income, or fails to cer-
tify that he or she has provided a correct taxpayer identification number
and that he or she is not subject to "backup withholding," then the share-
holder may be subject to a 31% backup withholding tax with respect to (a)
dividends and distributions and (b) proceeds of any redemptions of Fund
shares. An individual's taxpayer identification number is his or her so-
cial security number. The backup withholding tax is not an additional tax
and may be credited against a shareholder's regular Federal income tax li-
ability.
TAXATION OF THE FUND'S INVESTMENTS
Gains or losses on the sales of securities by the Fund generally will be
long-term capital gains or losses if the securities have been held by the
Fund for more than one year and will be short-term capital gains or losses
if the securities have been held by the Fund for one year or less. If the
Fund acquires a debt security at a substantial discount, a portion of any
gain on its sale or redemption may be characterized as ordinary income,
rather than capital gain, to the extent that it reflects accrued market
discount.
When the Fund writes a covered call option on a debt security, it will re-
ceive a premium. If an option which the Fund has written expires on its
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a clos-
ing purchase transaction exceeds the premium received when the option was
written) without regard to any unrealized gain or loss on the underlying
security. Subject to the "straddle rules" discussed below, any such gain
or loss is recognized as a short-term capital gain or loss for Federal in-
come tax purposes. If a call option written by the Fund is exercised, the
Fund will realize (subject to the straddle rules discussed below) a capi-
tal gain or loss from the sale of the underlying security, and will treat
the premium originally received as additional proceeds from the sale. Such
gain or loss will be long-term or short-term depending on the holding pe-
riod of the underlying security. If a put option written by the Fund is
exercised, the Fund will treat the premium received as an adjustment to
its purchase price of the debt security and the Fund's holding period with
respect to the debt security that it has acquired will begin on the date
of purchase of the debt security, rather than on the date that the put was
written.
For Federal income tax purposes, gains and losses on interest rate futures
contracts, options on interest rate futures contracts, and certain other
options that are traded on a qualified board of trade (collectively re-
ferred to herein as "section 1256 contracts") are taxed pursuant to a spe-
cial "mark-to-market system." Pursuant to the mark-to-market system, the
Fund may be treated as realizing a greater or lesser amount of gains or
losses than actually realized. As a general rule, gain or loss on section
1256 contracts is treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss, and accordingly, the mark-to-market sys-
tem generally will affect the amount of capital gains or losses taxable to
the Fund and the amount of distributions to a shareholder. Moreover, if
the Fund invests in both section 1256 contracts and "offsetting positions"
in such contracts, then the Fund might not be able to receive the benefit
of certain recognized losses for an indeterminate period of time. The Fund
expects that its activities with respect to section 1256 contracts and
offsetting positions in such contracts (a) will not cause it or its share-
holders to be treated as receiving a materially greater amount of capital
gains or distributions than actually realized or received and (b) will
permit it to use substantially all of its losses for the fiscal years in
which such losses actually occur.
Section 1092 of the Code provides rules, overriding the rules described
above, in the case of straddles. Straddles are defined to include "offset-
ting positions" in actively traded personal property. It is not clear
under current law under what circumstances one investment made by the
Fund, such as in options or futures contracts, would be treated as "off-
setting" another investment also held by the Fund, such as the underlying
debt security (or vice versa) and, therefore, whether the Fund may be
treated as having entered into a straddle. In general, investment posi-
tions may be offsetting if there is a substantial diminution in the risk
of loss from holding one position by reason of holding one or more other
positions. If two or more positions constitute a straddle, a realized loss
from one position (including a mark-to-market loss) must be deferred to
the extent of unrecognized gain in an offsetting position. Furthermore,
with respect to such positions, the holding period rules described above
may be modified to recharacterize long-term gain as short-term gain (but
not, as a general rule, for purposes of the less than 30% requirement de-
scribed above), or to recharacterize short-term loss as long-term loss, in
connection with certain straddle transactions. Moreover, interest and
other carrying charges allocable to personal property that is part of a
straddle must be capitalized. Section 1092 also provides that "wash sale"
rules are applicable to transactions in which a position is sold at a loss
and a new offsetting position is acquired within or has been held for a
prescribed period. To the extent that the straddle rules apply to posi-
tions established by the Fund, losses realized by the Fund may be deferred
or recharacterized as long-term losses, and long-term gains realized by
the Fund may, for certain purposes, be converted to short-term gains.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders, and is not intended as a substi-
tute for careful tax planning. Shareholders are urged to consult their tax
advisors with specific reference to their own tax situations, including
state and local tax liabilities.
ADDITIONAL INFORMATION
The Fund was incorporated on June 15, 1984 under the name Shearson Govern-
ment Mortgage Income Fund Inc. On January 20, 1988, November 4, 1992, July
30, 1993 and October 14, 1994, the Fund changed its name to Shearson Leh-
man Managed Governments Inc. to Shearson Lehman Brothers Managed Govern-
ments Fund Inc. to Smith Barney Shearson Managed Governments Fund Inc. and
Smith Barney Managed Governments Fund Inc., respectively.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as the custodian
of the Fund. Under its custody agreement with the Fund, Boston Safe holds
the Fund's portfolio securities and keeps all necessary accounts and
records. For its services, Boston Safe receives a monthly fee based upon
the month-end market value of securities held in custody and also receives
securities transactions charges. The assets of the Fund are held under
bank custodianship in compliance with the 1940 Act.
TSSG, a subsidiary of First Data Corporation, is located at Exchange
Place, Boston, Massachusetts 02109, and serves as the Fund's transfer
agent. Under the transfer agency agreement, TSSG maintains the shareholder
account records for the Fund, handles certain communications between
shareholders and the Fund and distributes dividends and distributions pay-
able by the Fund. For these services, TSSG receives a monthly fee computed
on the basis of the number of shareholder accounts that it maintains for
the Fund during the month and is reimbursed for certain out-of-pocket ex-
penses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended July 31, 1994 accompa-
nies this Statement of Additional Information and is incorporated herein
by reference in its entirety.
Smith Barney
MANAGED GOVERNMENTS FUND INC.
388 Greenwich Street
New York, New York 10013
Fund 16,184,241
Smith Barney
MANAGED
GOVERNMENTS
FUND INC.
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 7, 1994
