- --------------------------------------------------------------------------------
A N N U A L R E P O R T
- --------------------------------------------------------------------------------
1995
1995
1995
1995
1995
Smith Barney
Managed
Governments
Fund Inc.
------------------------------------------------
July 31, 1995
[LOGO OF SMITH BARNEY MUTUAL FUNDS APPEARS HERE]
- ------------------------------------------
Smith Barney Managed Governments Fund Inc.
- ------------------------------------------
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Managed
Governments Fund. For the 12 months ended July 31, 1995, the Fund generated a
total return of 7.67% and paid dividends totaling $0.79 per share for Class A
shares.
Economic and Market Update
The Federal Reserve Board's seven increases in short-term interest rates, which
began in February 1994 and continued over a 13-month period, produced weakening
economic conditions as 1995 began. While the central bank, under Alan
Greenspan's leadership, contended that its pre-emptive measures were necessary
to combat the inflationary ghosts of the 1980's, the financial markets were
quick to recognize the almost immediate response to higher rates which was a
reduction in consumer spending. As a result, interest rates across the maturity
spectrum declined dramatically. The chart below shows the drop in rates from
January 1995 to June 1995.
<TABLE>
<CAPTION>
Rate at Rate at
Maturity 1/2/95 6/30/95 Change
------------------------------------------------------------------------------
<S> <C> <C> <C>
3-Month 5.682% 5.563% -0.1193
6-Month 6.495 5.576 -0.9183
1-Year 7.162 5.623 -1.5380
2-Year 7.690 5.793 -1.8970
3-Year 7.778 5.852 -1.9263
5-Year 7.827 5.970 -1.8570
10-Year 7.827 6.203 -1.6235
30-Year 7.876 6.617 -1.2585
------------------------------------------------------------------------------
</TABLE>
During this period, the U.S. dollar continued under pressure versus many of the
world's major currencies while strengthening against the currency of our major
trading partners, Canada and Mexico. Consequently, weaker demand for U.S.
exports from our border neighbors was offset by stronger demand from the newer
economies of Eastern Europe and the Pacific Rim. These circumstances tended to
heighten the nervous mood in the financial markets.
In the political arena, the American citizen received an early introduction to
the 1996 Presidential campaign after the overwhelming Republican victory in
November. While the Republican Party's 100-day "Contract with America" appeared
to be a media success, we believe that the real work still needs to be done. As
doubts surface about politicians' conviction to reach the next legislative
level, for instance in such key areas as balancing the budget, the
1
markets may become a more important sounding board as reflected in interest-
rate movements. In our opinion, market and economic events, together with
political developments, should keep the financial markets in a relatively
uncertain mood over the coming months.
Portfolio Strategy
The bull market of 1993 and the bear market of 1994 caused us to conclude that
1995 would probably reflect both the best and the worst conditions of the past
two years. The first six months of the year provided us with a good taste of
declining rates, which translated into increased economic activity as consumer
sentiment picked up. Fearful of overstaying a beneficial market, many investors
have resorted to more conservative strategies. As the year began, we were not
certain if the bull or bear market would appear first. Therefore, the Fund's
portfolio remained more heavily weighted in mortgage-backed securities. As
interest rates declined during the first half, Treasuries performed well, and
the Fund's weighting in mortgage-backed securities hindered its performance
somewhat.
One of the primary catalysts for the good performance in the Treasury market was
the fact that, as rates started to decline, prepayment fears increased. As a
result, investors began to sell mortgage-backed securities and to buy
Treasuries. We believe, however, that there is little prepayment risk to the
mortgage-backed market at this time, because the bulk of refinancing activity
had already taken place in 1993. Also, interest rates are not as low as they
were in 1993, which removes the major incentive to refinance.
Our strategy throughout the second half of the Fund's fiscal year has been to
take a more neutral or "middle of the road" approach which places us squarely
between the bulls of 1993 and the bears of 1994. The Fund's portfolio currently
has an income orientation with 65% of its assets allocated to higher-coupon
mortgage-backed securities and 35% invested in U.S. Treasury notes. The
mortgage-backed securities provide us with maximum potential income while the
Treasuries should enable us to participate in a market rally should rates
decline further. The Fund's average maturity is currently five years.
By taking this income-oriented approach to the markets, we believe that we can
avoid the unnecessary volatility which may occasionally appear in today's
climate of economic and political uncertainty. In this way, we believe that we
can serve the best interests of our shareholders.
Outlook
During the second half of 1995, rates should fluctuate considerably less as
market participants focus on investment income rather than interest-rate
projections. Barring indications of a recession, we believe that the market will
2
likely trade within a relatively narrow range. We will continue to emphasize
higher-coupon mortgage securities, which generally perform better in a stable
or rising interest-rate environment, in conjunction with five- and 10-year
U.S. Treasury securities. This strategy has already succeeded in earning
attractive income for our shareholders, and we do not have any immediate plans
to change it.
We thank you for your confidence in our investment management. Should you have
any questions about your investment in the Fund, please speak with your Smith
Barney Financial Consultant.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman and Vice President and
Investment Officer Investment Officer
August 21, 1995
3
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------------------------------------
Net Asset Value
----------------------
Beginning End Income Capital Gain Return of Total
Year Ended of Year of Year Dividends Distributions Capital Returns/(1)/
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/95 $12.50 $12.63 $0.74 $0.00 $0.04 7.67%
- --------------------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.61 0.00 0.19 0.08
- --------------------------------------------------------------------------------------------------------------
7/31/93 12.88 13.29 0.66 0.23 0.00 10.43
- --------------------------------------------------------------------------------------------------------------
7/31/92 12.09 12.88 0.91 0.00 0.08 15.25
- --------------------------------------------------------------------------------------------------------------
7/31/91 12.13 12.09 0.98 0.00 0.11 9.02
- --------------------------------------------------------------------------------------------------------------
7/31/90 12.19 12.13 1.07 0.00 0.03 9.01
- --------------------------------------------------------------------------------------------------------------
7/31/89 12.04 12.19 0.96 0.00 0.11 10.62
- --------------------------------------------------------------------------------------------------------------
7/31/88 12.62 12.04 1.09 0.01 0.01 4.43
- --------------------------------------------------------------------------------------------------------------
7/31/87 13.32 12.62 1.11 0.34 0.00 5.69
- --------------------------------------------------------------------------------------------------------------
7/31/86 13.03 13.32 1.34 0.09 0.00 13.81
- --------------------------------------------------------------------------------------------------------------
Inception*
- 7/31/85 12.35 13.03 1.23 0.03 0.00 16.33
==============================================================================================================
Total $10.70 $0.70 $0.57
==============================================================================================================
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------------------------------------
Net Asset Value
----------------------
Beginning End Income Capital Gain Return of Total
Year Ended of Year of Year Dividends Distributions Capital Returns/(1)/
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/95 $12.50 $12.63 $0.67 $0.00 $0.04 7.04%
- --------------------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.56 0.00 0.17 (0.46)
- --------------------------------------------------------------------------------------------------------------
Inception*
- 7/31/93 12.64 13.29 0.41 0.16 0.00 9.92
==============================================================================================================
Total $1.64 $0.16 $0.21
==============================================================================================================
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------------------------------------
Net Asset Value
----------------------
Beginning End Income Capital Gain Return of Total
Year Ended of Year of Year Dividends Distributions Capital Returns/(1)/
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/95 $12.50 $12.63 $0.67 $0.00 $0.04 7.04%
- --------------------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.56 0.00 0.17 (0.46)
- --------------------------------------------------------------------------------------------------------------
Inception*
- 7/31/93 13.18 13.29 0.03 0.02 0.00 1.25
==============================================================================================================
Total $1.26 $0.02 $0.21
==============================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
4
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge/(1)/
---------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Year Ended 7/31/95 7.67% 7.04% 7.04%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/95 8.38 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/95 8.52 N/A N/A
- --------------------------------------------------------------------------------
Inception* - 7/31/95 9.29 5.95 3.70
- --------------------------------------------------------------------------------
<CAPTION>
With Sales Charge/(2)/
---------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Year Ended 7/31/95 2.83% 2.54% 6.04%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/95 7.38 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/95 8.02 N/A N/A
- --------------------------------------------------------------------------------
Inception* - 7/31/95 8.83 4.95 3.70
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
<CAPTION>
Without Sales Charge/(1)/
-------------------------
<S> <C>
Class A (7/31/85 through 7/31/95) 126.52%
- --------------------------------------------------------------------------------
Class B (Inception* through 7/31/95) 17.11
- --------------------------------------------------------------------------------
Class C (Inception* through 7/31/95) 7.88
- --------------------------------------------------------------------------------
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions at net
asset value and does not reflect deduction of the applicable sales charge
with respect to Class A shares or the applicable contingent deferred sales
charges ("CDSC") with respect to Class B and Class C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions at net
asset value. In addition, Class A shares reflect the deduction of the
maximum initial sales charge of 4.50% and Class B shares reflect the
deduction of a 4.50% CDSC which applies if shares are redeemed less than one
year from initial purchase. This CDSC declines by 0.50% the first year after
purchase and then by 1.00% per year thereafter until no CDSC is incurred.
Class C shares reflect the deduction of a 1.00% CDSC which applies if shares
are redeemed within the first year of purchase.
* Inception dates for Class A, B and C shares are September 4, 1984,
November 6, 1992 and June 29, 1993, respectively.
5
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Managed Governments Fund Inc.
vs. the Lehman Brothers Government Bond Index
and the Lipper Mortgage Securities Average/+/
(unaudited)
- --------------------------------------------------------------------------------
July 1985 - July 1995
[GRAPH APPEARS HERE]
+ Hypothetical illustration of $10,000 invested in Class A shares on July 31,
1985, assuming deduction of the maximum 4.50% sales charge at the time of
investment and reinvestment of dividends and capital gains, if any, at net
asset value through July 31, 1995. The Lehman Brothers Government Bond Index
is a broad-based index of all public debt obligations of the U.S. government
and its agencies and has an average maturity of approximately nine years. The
index is unmanaged and it is not subject to the same management and trading
expenses as a mutual fund. The Lipper Analytical Services, Inc. U.S. Mortgage
Securities Bond Fund Average ("Lipper Mortgage Securities Average") is
composed of the Fund's peer group of mutual funds (11 funds as of July 31,
1995) investing in U.S. mortgage-backed securities. Lipper Analytical
Services, Inc. is a widely-recognized mutual fund information service. The
performance of the Fund's other classes may be greater or less than the Class
A shares' performance indicated on this chart, depending on whether greater or
lesser sales charges and fees were incurred by shareholders investing in other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost. No adjustment has been made
for shareholder tax liability on dividends or capital gains.
6
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) July 31, 1995
- --------------------------------------------------------------------------------
Portfolio Breakdown
[PIE CHART APPEARS HERE]
U.S. Treasury Securities are debt obligations of the United States
Government. They are secured by the full faith and credit of the Federal
Government, and include such instruments as Treasury notes, bills and bonds.
Mortgage-Backed Securities are debt securities issued by the U.S.
Government agencies such as the Federal Home Loan Mortgage Corporation (FHLMC),
Federal National Mortgage Association (FNMA) and Government National Mortgage
Association (GNMA). They represent thousands of individual home mortgages that
are pooled to form securities. As homeowners pay interest and principal each
month, these payments are passed on to investors. Mortgage-backed securities are
backed by the full faith and credit of the issuing agency.
7
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Schedule of Investments July 31, 1995
- ------------------------------------------------------------------------------------------------------
FACE COUPON
AMOUNT SECURITY RATE MATURITY+ VALUE
- ------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS -- 93.7%
<S> <C> <C> <C> <C>
$ 6,000,000 U.S. Treasury Note 5.750% 08/15/03 $ 5,742,900
40,000,000 U.S. Treasury Note 7.500 02/15/05 42,871,200
5,000,000 U.S. Treasury Note 7.125 02/29/00 5,180,350
35,000,000 U.S. Treasury Note 6.875 03/31/00 35,933,100
65,000,000 U.S. Treasury Note 6.750 04/30/00 66,427,400
60,000,000 U.S. Treasury Note 6.500 05/15/05 60,255,600
330 FHLMC Certificates 7.500 11/01/09 328
7,387 FHLMC Certificates 8.000 08/01/17 7,468
28,305 FHLMC Certificates 14.750 03/01/10 32,320
369 FNMA Certificates 9.500 06/01/01 388
1,085 FNMA Certificates 9.500 07/07/02 1,139
1,324 GNMA Certificates 8.500 06/15/21 1,373
317,410,655 GNMA Certificates++ 9.000 12/15/17 337,629,714
102,003,998 GNMA Certificates 9.000 11/15/17 108,504,713
6,100 GNMA Certificates 10.000 10/15/18 6,649
- ------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS (Cost -- $637,408,444) 662,594,642
- ------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES SECURITY VALUE
- ------------------------------------------------------------------------------------------------------
OPTIONS -- 0.00%
<S> <C> <C>
150,000 U.S. Treasury 10 Year Note Call @114 expires 8/19/95
(Cost -- $39,606) 2,344
- ------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 6.3%
<S> <C> <C>
$ 44,749,000 Citibank, 5.822% due 08/01/95; Proceeds
at maturity -- $44,756,237; (Fully collateralized by
U.S. Treasury Notes, 5.875% due 7/31/97;
Market value -- $45,647,222) (Cost -- $44,749,000) 44,749,000
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $682,197,050*) $707,345,986
- ------------------------------------------------------------------------------------------------------
</TABLE>
+ Date shown represents the last in the range of maturity dates of mortgage
certificates only.
++ Security held in segregated account by custodian.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
8
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 1995
- ---------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (Cost -- $682,197,050) $ 707,345,986
Cash 70,901
Receivable for Fund shares sold 256,143
Receivable for securities sold 118,425,742
Interest receivable 8,803,815
- ---------------------------------------------------------------------------------------------
Total Assets 834,902,587
- ---------------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased 655,198
Reverse repurchase agreement 44,050,000
Investment advisory fees payable 255,277
Administration fees payable 113,497
Distribution costs payable 334,406
Payable for securities purchased 127,081,315
Accrued expenses 698,972
- ---------------------------------------------------------------------------------------------
Total Liabilities 173,188,665
- ---------------------------------------------------------------------------------------------
Total Net Assets $ 661,713,922
=============================================================================================
NET ASSETS:
Par value of capital shares $ 52,395
Capital paid in excess of par value 823,353,674
Accumulated net realized loss on investments (186,841,083)
Net unrealized appreciation of investments 25,148,936
- ---------------------------------------------------------------------------------------------
Total Net Assets $ 661,713,922
=============================================================================================
Shares Outstanding:
Class A 41,849,499
------------------------------------------------------------------------------------------
Class B 10,521,407
------------------------------------------------------------------------------------------
Class C 23,673
------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.63
------------------------------------------------------------------------------------------
Class B* $12.63
------------------------------------------------------------------------------------------
Class C** $12.63
------------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $13.23
=============================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by 4.50% if shares are
redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by 1.00% if shares are
redeemed within the first year of purchase.
See Notes to Financial Statements.
9
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 1995
- --------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest (Net of interest expense of $935,457) $ 52,805,932
- --------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 3,107,867
Distribution fees (Note 2) 2,596,070
Administration fees (Note 2) 1,380,613
Shareholder servicing fees 589,308
Custody 318,961
Shareholder communications 92,020
Audit and legal 60,675
Registration fees 50,899
Directors' fees 31,400
Other 54,896
- --------------------------------------------------------------------------------------------
Total Expenses 8,282,709
- --------------------------------------------------------------------------------------------
Net Investment Income 44,523,223
- --------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, OPTIONS AND FUTURES (NOTE 3):
Realized Loss From:
Security transactions (excluding short-term securities) (35,900,766)
Options contracts (387,853)
Futures contracts (6,354,213)
- --------------------------------------------------------------------------------------------
Net Realized Loss (42,642,832)
- --------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year (20,396,569)
End of year 25,148,936
- --------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 45,545,505
- --------------------------------------------------------------------------------------------
Net Gain on Investments, Options and Futures 2,902,673
- --------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 47,425,896
============================================================================================
</TABLE>
See Notes to Financial Statements.
10
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
- ---------------------------------------------------------------------------------------------
1995 1994
=============================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 44,523,223 $ 45,505,462
Net realized loss on
security transactions (42,642,832) (12,910,592)
Increase (decrease) in net unrealized
appreciation of investments 45,545,505 (34,482,577)
- ---------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Operations 47,425,896 (1,887,707)
- ---------------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (40,491,996) (36,009,036)
Overdistribution of net income -- (2,462,199)
Capital (1,998,735) (11,687,140)
- ---------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (42,490,731) (50,158,375)
- ---------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sales 259,445,859 54,613,233
Net value of shares issued to
shareholders for reinvestment
of dividends 28,024,578 33,812,117
Cost of reacquired shares (391,232,326) (212,646,314)
- ---------------------------------------------------------------------------------------------
Decrease in Net Assets
From Fund Share Transactions (103,761,889) (124,220,964)
- ---------------------------------------------------------------------------------------------
Decrease in Net Assets (98,826,724) (176,267,046)
NET ASSETS:
Beginning of year 760,540,646 936,807,692
- ---------------------------------------------------------------------------------------------
End of year* $ 661,713,922 $ 760,540,646
=============================================================================================
* Includes undistributed (overdistributed)
net investment income of: -- $(4,031,227)
=============================================================================================
</TABLE>
See Notes to Financial Statements.
11
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Managed Governments Fund Inc. ("Fund"), a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) securities transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price was reported and U.S. Government and Government Agency
obligations are valued at bid price, or in the absence of a recent bid price, at
the bid equivalent obtained from one or more of the major market makers; (c)
short-term securities that have a maturity of more than 60 days are valued at
prices based on market quotations for securities of similar type, yield and
maturity; (d) short-term investments that have a maturity of 60 days or less are
valued at cost plus accreted discount, or minus amortized premium, as
applicable; (e) dividend income is recorded on ex-dividend date and interest
income is recorded on the accrual basis; (f) gains or losses on the sale of
securities are recorded on the identified cost basis; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) direct
expenses are charged to the Fund and each class; management fees and general
Fund expenses are allocated on the basis of the relative net assets of each
class; (i) in accordance with Statement of Position 93-2 Determination,
--------------
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
- -----------------------------------------------------------------------------
Return of Capital Distributions by Investment Companies, book and tax basis
- --------------------------------------------------------
differences relating to shareholder distributions and other permanent book and
tax differences are reclassified to paid-in capital. As of July 31, 1995, the
cumulative effect of such differences, totaling $1,998,735, were reclassified to
paid-in capital from accumulated net investment loss. Net investment income, net
realized gains, and net assets were not affected by this change; and (j) the
Fund intends to comply with the applicable provisions of the Internal Revenue
Code of 1986, as amended, pertaining to regulated investment companies and to
make distributions of taxable income sufficient to relieve it from substantially
all Federal income and excise taxes.
12
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
In addition, the Fund may from time to time enter into options and/or
futures contracts to hedge market risk.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment advisor to the Fund. The Fund
pays SBMFM an advisory fee calculated at an annual rate of 0.45% of the average
daily net assets up to $1 billion and 0.415% of the average daily net assets in
excess of $1 billion; this fee is calculated daily and paid monthly.
SBMFM acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets up to $1
billion and 0.185% of the average daily net assets in excess of $1 billion: this
fee is calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, acted as
administrator to the Fund. The Fund paid Boston Advisors a portion of its
administration fee at a rate agreed upon from time to time between SBMFM and
Boston Advisors. As of March 27, 1995 this relationship was terminated.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the year ended July 31, 1995, SB received sales charges of
approximately $1,626,500 on sales of the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares if redemption occurs less than one year from initial purchase and
thereafter declines by 0.50% the first year after purchase and by 1.00% per year
until no CDSC is incurred. Class C shares have a 1.00% CDSC if redemption occurs
within the first year from the date such investment was made. For the year ended
July 31, 1995, CDSC's of approximately $466,900 were paid to SB.
Pursuant to a Distribution Plan, the Fund pays a distribution fee with
respect to Class B and C shares calculated at the annual rate of 0.50% and
0.45%, respectively, of the average daily net assets for each class.
13
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
The Fund also pays a service fee with respect to Class A, B and C shares
calculated at the annual rate of 0.25% of the average daily net assets of each
class, respectively.
All officers and one director of the Fund are employees of SB.
3. Investments
During the year ended July 31, 1995, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) was $2,071,169,983 and $2,164,697,191, respectively.
At July 31, 1995, the net unrealized appreciation of investments for
Federal income tax purposes consisted of the following:
<TABLE>
===============================================================================
<S> <C>
Gross unrealized appreciation $25,499,832
Gross unrealized depreciation (350,896)
- -------------------------------------------------------------------------------
Net unrealized appreciation $25,148,936
===============================================================================
</TABLE>
4. Capital Loss Carryforward
At July 31, 1995, the Fund had for Federal tax purposes unused capital loss
carryforwards of approximately $186,227,742 available, subject to certain
limitations, to offset future capital gains. To the extent that these
carryforward losses are used to offset capital gains, it is probable that the
gains so offset will not be distributed. The amount and the year of expiration
for each loss carryforward is indicated below:
<TABLE>
<CAPTION>
7/31/96 7/31/97 7/31/02 7/31/03
================================================================================
<S> <C> <C> <C> <C>
Carryforward $120,171,153 $29,387,864 $3,422,711 $33,246,014
================================================================================
</TABLE>
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
14
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
6. Reverse Repurchase Agreement
The Fund may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by the Fund
of securities that it holds with an agreement by the Fund to repurchase the same
securities at an agreed upon price and date. The Fund will establish a
segregated account with its custodian, in which the Fund will maintain cash,
U.S. government securities or other liquid high grade debt obligations equal in
value to its obligations with respect to reverse repurchase agreements.
At July 31, 1995 the Fund had the following reverse repurchase agreement
open:
<TABLE>
<CAPTION>
Description
================================================================================
<S> <C>
Morgan Stanley, 4.00% due 8/7/95; Maturity value $44,103,839
(Underlying collateral: U.S. Treasury Bond, 7.50% due 02/15/05) $44,050,000
================================================================================
</TABLE>
Interest paid for the year ended July 31, 1995 on borrowings by the Fund
under reverse repurchase agreements totalled $935,457.
7. Option Contracts
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into closing sales transaction, the Fund will realize a gain or loss
depending on whether the sales proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Fund exercises a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Fund exercises a call option, the cost of the security
which the Fund purchases upon exercise will be increased by the premium
originally paid.
When a Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a
gain equal to the amount of the premium received. When the Fund enters into a
closing purchase transaction, the Fund realizes a
15
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
gain (or loss if the cost of the closing purchase transaction exceeds the
premium received when the option was written) without regard to any unrealized
gain or loss on the underlying security, and the liability related to such
option is eliminated. When a call option is exercised the cost of the security
sold will be increased by the premium originally received. When a put option is
exercised, the amount of the premium originally received will reduce the cost of
the security which the Fund purchased upon exercise.
8. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recognized as assets due from the broker (the Fund's agent in acquiring the
futures position). During the period the futures contract is open, changes in
the value of the contract are recognized as unrealized gains or losses by
"marking to market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or received
and recognized as assets due from or liabilities due to broker, depending upon
whether unrealized gains or losses are incurred. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transactions and the Fund's basis in the
contract.
At July 31, 1995, the Fund had no open futures contracts.
9. Securities Traded on a When-Issued or To-Be-Announced Basis
The Fund may trade portfolio securities on a "to-be-announced" ("TBA")
basis. In a TBA transaction, the Fund commits to purchasing or selling
securities for which all specific information is not yet known at the time of
the trade, particularly the face amount and maturity date in GNMA transactions.
Securities purchased on a TBA basis are not settled until they are delivered to
the Fund, normally 15 to 45 days later. These transactions are subject to market
fluctuation and their current value is determined in the same manner as for
other portfolio securities.
As of July 31, 1995, there were no TBA transactions.
10. Common Stock
At July 31, 1995 the Fund had authorized 500 million shares of $.001 par
value common stock. The Fund has the ability to issue
16
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
multiple classes of shares. Each share of a class represents an identical
interest and has the same rights, except that each class bears certain direct
expenses, including those specifically related to the distribution of its
shares. Effective November 7, 1994, the Fund adopted a new class structure,
renaming the former Class D shares as Class C shares. At July 31, 1995, total
paid-in capital amounted to the following for each class:
<TABLE>
<CAPTION>
Class A Class B Class C
=========================================================================================
<S> <C> <C> <C>
Total Paid-in Capital $695,456,335 $127,651,229 $298,505
=========================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1995 July 31, 1994
---------------------------- ---------------------------
Shares Amount Shares Amount
==========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 19,786,976 $ 241,728,620 1,234,269 $ 16,119,677
Shares issued on
reinvestment 1,797,001 22,108,190 1,364,311 17,605,656
Shares redeemed (9,428,140) (115,641,617) (7,728,677) (99,778,358)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) 12,155,837 $ 148,195,193 (5,130,097) $ (66,053,025)
==========================================================================================
Class B
Shares sold 1,422,270 $ 17,423,153 2,953,503 $ 38,395,975
Shares issued on
reinvestment 479,870 5,909,325 1,255,487 16,203,005
Shares redeemed (22,538,562) (275,512,867) (8,734,882) (112,832,254)
- ------------------------------------------------------------------------------------------
Net Decrease (20,636,422) $(252,180,389) (4,525,892) $ (58,233,274)
==========================================================================================
Class C *
Shares sold 23,676 $ 294,086 7,485 $ 97,581
Shares issued on
reinvestment 569 7,063 270 3,456
Shares redeemed (6,360) (77,842) (2,843) (35,702)
- ------------------------------------------------------------------------------------------
Net Increase 17,885 $ 223,307 4,912 $ 65,335
==========================================================================================
</TABLE>
* On November 7, 1994 the former Class D shares were renamed Class C shares.
17
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1995 1994 1993 1992 1991
===================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.50 $13.29 $12.88 $12.09 $12.13
- ---------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.81 0.75 0.69 0.91 0.98
Net realized and unrealized
gain (loss) on investments 0.10 (0.74) 0.61 0.87 0.07
- ---------------------------------------------------------------------------------------------------
Total Income From Operations 0.91 0.01 1.30 1.78 1.05
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.74) (0.57) (0.65) (0.91) (0.98)
Overdistribution of net income -- (0.04) (0.01) -- --
Overdistribution of net realized gains -- -- (0.23) -- --
Capital (0.04) (0.19) -- (0.08) (0.11)
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.78) (0.80) (0.89) (0.99) (1.09)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.63 $12.50 $13.29 $12.88 $12.09
- ---------------------------------------------------------------------------------------------------
Total Return 7.67% 0.08% 10.43% 15.25% 9.02%
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $528,533 $371,086 $462,703 $488,515 $474,305
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.07% 1.03% 0.99% 0.82% 0.82%
Net investment income 6.57 5.60 5.35 7.23 8.12
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 292% 236% 436% 426% 365%
===================================================================================================
<CAPTION>
Class B Shares 1995 1994 1993(1)
===================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $12.50 $13.29 $12.64
- ---------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.75 0.69 0.47
Net realized and unrealized
gain (loss) on investments 0.09 (0.75) 0.75
- ---------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.84 (0.06) 1.22
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.67) (0.52) (0.40)
Overdistribution of net income -- (0.04) (0.01)
Net realized gains -- -- (0.16)
Capital (0.04) (0.17) --
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.71) (0.73) (0.57)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.63 $12.50 $13.29
- ---------------------------------------------------------------------------------------------------
Total Return 7.04% (0.46)% 9.92%++
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $132,882 $389,383 $474,093
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.57% 1.55% 1.62%+
Net investment income 6.07 5.08 4.72+
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 292% 236% 436%
===================================================================================================
</TABLE>
(1) For the period from November 6, 1992 (inception date) to July 31, 1993.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
18
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares 1995 1994 1993(1)
==========================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $12.50 $13.29 $13.18
- ------------------------------------------------------------------------------------------
Income From Operations From:
Net investment income 0.76 0.69 0.07
Net realized and unrealized
gain (loss) on investments 0.08 (0.75) 0.09
- ------------------------------------------------------------------------------------------
Total Income From Operations 0.84 (0.06) 0.16
- ------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.67) (0.52) (0.03)
Overdistribution of net income -- (0.04) --
Net realized gains -- -- (0.02)
Capital (0.04) (0.17) --
- ------------------------------------------------------------------------------------------
Total Distributions (0.71) (0.73) (0.05)
- ------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.63 $12.50 $13.29
- ------------------------------------------------------------------------------------------
Total Return 7.04% (0.46)% 1.25%++
- ------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $299 $72 $12
- ------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.52% 1.58% 1.55%+
Net investment income 6.12 5.05 4.80+
- ------------------------------------------------------------------------------------------
Portfolio Turnover Rate 292% 236% 436%
==========================================================================================
</TABLE>
(1) For the period from June 29, 1993 (inception date) to July 31, 1993.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
Change in Independent Auditor: On October 19, 1994, based upon the
recommendation of the Audit Committee of the Fund, the Board of Directors
determined not to retain Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as
the Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP.
During the Fund's two most recent fiscal years, Coopers & Lybrand's audit
reports contained no adverse opinion or disclaimer of opinion; nor were the
reports qualified or modified as to uncertainty, audit scope, or accounting
principles. Further, during this same period there were no disagreements with
Coopers & Lybrand on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Coopers & Lybrand, would have caused it to
make reference to the subject matter of such disagreements in connection with
its audit reports. The Fund has requested Coopers & Lybrand to provide a letter
to the Securities and Exchange Commission stating whether Coopers & Lybrand
agrees with the foregoing statements, and to provide the Fund with a copy of
such letter. A copy of this letter is available upon request by calling the Fund
at (212) 723-9218.
19
Smith Barney
Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Smith Barney Managed Governments Fund Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Managed Governments Fund
Inc. as of July 31, 1995, and the related statement of operations, statement of
changes in net assets, and financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the year ended July 31, 1994 and the financial
highlights for each of the years in the four-year period then ended, were
audited by other auditors whose report thereon, dated September 9, 1994,
expressed an unqualified opinion on that statement of changes in net assets and
those financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
July 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Smith Barney Managed
Governments Fund Inc. as of July 31, 1995, and the results of its operations,
changes in its net assets and financial highlights for the year then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
September 22, 1995
20
Smith Barney
Managed
Governments
Fund Inc.
Directors
Burt N. Dorsett
Elliot S. Jaffe
Heath B. McLendon
Cornelius C. Rose, Jr.
Officers
Heath B. McLendon
Chairman and Investment Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
James E. Conroy
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
[LOGO OF SMITH BARNEY APPEARS HERE]
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Managed Governments Fund Inc. It is not authorized for distribution
to prospective investors unless accompanied or preceded by an effective
Prospectus for the Fund, which contains information concerning the Fund's
investment policies and expenses as well as other pertinent information.
Smith Barney
Managed Governments
Fund Inc.
388 Greenwich Street
New York, New York 10013
FD 0421 9/95
