<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME
SHOWING THE WHITE HOUSE
WITH THREE FLAGS IN FRONT.
SEMI- SMITH BARNEY
ANNUAL MANAGED
REPORT GOVERNMENTS
FUND INC.
.......................................
JANUARY 31, 1995
[LOGO]
<PAGE>
Managed Governments Fund Inc.
DEAR SHAREHOLDER:
The six months ended January 31, 1995 witnessed a continuation
of the waiting game as investors tried to discern a pattern and
meaning in the economic and market crosscurrents. The Federal
Reserve increased the federal funds rate (a sensitive indicator of the
direction of interest rates) twice more, bringing to six the total
number of increases in that period and the federal funds rate itself
to 5.50%. (In February of 1995, the federal funds rate rose to 6.00%.)
Unemployment steadily declined and the inflation rate remained low;
however, retail sales also declined, which indicate the growing
success of the Federal Reserve's attempts to slow the pace of economic
growth. Investors also needed to assess the meaning and impact of the
Republican landslide in the November elections as well as the losses
experienced by Orange County, California in the derivatives market.
Interest rates for Treasury maturities rose during the six months
ended January 31, 1995 in response to the uncertainties in the
economic environment. The yield on the benchmark 30-year Treasury bond
rose from a low of 7.37% on August 4, 1994 to a high of 8.18% on
November 4, 1994 and then retraced its path to yield 7.70% on January 31, 1995.
Interest rates on other maturities displayed similar volatility in their yields.
PORTFOLIO STRATEGY
The Smith Barney Managed Governments Fund Inc. is managed in a very
straightforward, uncomplicated fashion which emphasizes non-derivative, liquid,
income-producing mortgage securities and strategies. The Fund is flexibly
structured to take advantage of short-term rallies in the mortgage and
government securities markets. Neither this portfolio structure nor our
investment strategy changed drastically during the past six months. In light of
the volatility in the markets in the previous months and our expectations for
continued uncertainty, in early August we anticipated that income still would be
the greatest component of total return to the Fund's shareholders and that
minimizing the erosion of their principal would be the most crucial investment
challenge. As a result, we invested the majority of the portfolio in mortgage
securities that had coupons higher than the then-current market rate and kept a
small part of the portfolio in Treasury zero coupon bonds. The Fund's average
maturity at the end of this fiscal period was approximately 9 years.
1
<PAGE>
The negative impact of rising interest rates during the period was not as great
on the Fund's portfolio as it potentially could have been had we been invested
in securities with lower yields. The Fund's total return for the six-month
period ended January 31, 1995 was 0.48% for Class A shares (the oldest class of
shares offered by the Fund); and 0.18% for Class B and C shares, respectively.
These returns placed the Fund in the top performance quartile among its peers
investing in mortgage securities for the period and was ranked as the
top-performing fund for the five-year period ended December 31, 1994 by Lipper
Analytical Services, Inc., a nationally recognized mutual fund ranking
organization. Additional information about the performance of the Fund during
this and previous fiscal periods is available in the "Financial Highlights"
pages of this report.
At this juncture, we expect interest rates to decline, particularly on
securities with maturities of five years and longer. This expected decline will
be prompted by clear signs of a moderating economy and a deficit reduction
program emanating from Washington. Although we anticipate a decline in interest
rates, we do not believe that they will decline to the remarkably low levels
reached in 1993. We will continue to invest the portfolio in high quality
securities that have the liquidity necessary to react to a changing market.
We appreciate your confidence during this difficult and sometimes perplexing
investment environment and join you in looking forward to a more benign 1995.
Should you have any questions about your investment in the Fund or how other
Smith Barney mutual funds may help you reach your financial goals, please speak
with your Smith Barney Financial Consultant.
Sincerely,
Heath B. McLendon James E. Conroy
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
AND INVESTMENT OFFICER INVESTMENT OFFICER
MARCH 20, 1995
2
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) JANUARY 31, 1995
PORTFOLIO BREAKDOWN
Pie chart depicting the allocation of the Managed Governments Fund investment
securities held at January 31, 1995 by industry breakdown. The pie is broken in
pieces representing industry breakdown in the following percentages:
<TABLE>
<CAPTION>
INDUSTRY BREAKDOWN PERCENTAGE
<S> <C>
Mortgage-Backed Securities 91.2%
U.S. Treasury Securities, Purchased
Option, Repurchase Agreement, and
Net Other Assets and Liabilities 8.8%
</TABLE>
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 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.
AVERAGE MATURITY 9.2 years
3
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) JANUARY 31, 1995
-------------------------------------------------------------
<TABLE>
<S> <C> <C>
KEY TO SECURITY DESCRIPTION
STRIPS -- Separate Trading of Registered Interest
and Principal of Securities.
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
--------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES -- 91.2%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) -- 89.6%
$ 1,330 GNMA 8.500%, 30 Year $ 1,328
20,474,732 GNMA 9.000%, 30 Year 20,986,601
502,686,842 GNMA 9.000%, 30 Year Platinum 515,570,706
66,927,265 GNMA 9.500%, 30 Year 70,022,651
7,281 GNMA 10.000%, 30 Year 7,755
--------------------------------------------------------------------------------
Total GNMA 606,589,041
--------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) -- 1.0%
348 FHLMC 7.500%, 30 Year 330
8,226 FHLMC 8.000%, 30 Year 7,982
2,314,175 FHLMC 9.000%, 30 Year 2,335,859
1,677,244 FHLMC 10.000%, 15 Year 1,763,202
2,519,822 FHLMC 10.000%, 30 Year 2,648,963
31,627 FHLMC 14.750%, 30 Year 35,521
--------------------------------------------------------------------------------
Total FHLMC 6,791,857
--------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) -- 0.6%
1,591 FNMA 9.500%, 15 Year 1,657
3,865,824 FNMA 10.000%, 30 Year 4,097,773
--------------------------------------------------------------------------------
Total FNMA 4,099,430
--------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost $614,929,011) 617,480,328
--------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------------
<C> <S> <C>
U.S. TREASURY (UST) SECURITIES -- 7.4%
$ 6,000,000 UST Notes, 5.750%, 8/15/03 $ 5,307,960
37,000,000 UST Principal Strips, Zero Coupon,
2/15/19 5,745,360
185,000,000 UST Principal Strips, Zero Coupon,
2/15/15 39,012,800
--------------------------------------------------------------------------------
TOTAL U.S. TREASURY (UST) SECURITIES
(Cost $47,529,558) 50,066,120
--------------------------------------------------------------------------------
<CAPTION>
CONTRACTS
<C> <S> <C>
--------------------------------------------------------------------------------
PUT OPTION PURCHASED -- 0.0% (Cost $15,183)
216 U.S. Treasury Bond, March, $97.00 6,750
--------------------------------------------------------------------------------
<CAPTION>
FACE VALUE
<C> <S> <C>
--------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.9% (COST $5,978,000)
$ 5,978,000 Agreement with Citibank N.A., 5.800%
dated 1/31/95,
to be repurchased at $5,978,963 on
2/1/95,
collateralized by $6,060,000 U.S.
Treasury
Note, 7.750% due 1/31/00 5,978,000
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $668,451,752*) 99.5% 673,531,198
OTHER ASSETS AND LIABILITIES (NET) 0.5 3,422,084
--------------------------------------------------------------------------------
NET ASSETS 100.0% $676,953,282
--------------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JANUARY 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$668,451,752) (Note 1)
See accompanying schedule $ 673,531,198
Cash 366,208
Receivable for investment securities
sold 159,383,826
Interest receivable 4,713,453
Receivable for Fund shares sold 373,924
- ------------------------------------------------------------------------------
TOTAL ASSETS 838,368,609
- ------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities
purchased $159,416,825
Payable for Fund shares redeemed 724,623
Dividends payable 508,296
Investment advisory fee payable (Note
2) 259,594
Service fee payable (Note 3) 144,217
Administration fee payable (Note 2) 115,375
Custodian fees payable (Note 2) 61,115
Distribution fee payable (Note 3) 56,699
Transfer agent fees payable (Note 2) 43,011
Accrued expenses and other payables 85,572
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 161,415,327
- ------------------------------------------------------------------------------
NET ASSETS $ 676,953,282
- ------------------------------------------------------------------------------
NET ASSETS consist of:
Distributions in excess of net
investment income earned to date $ (3,134,154)
Accumulated net realized loss on
investments sold (191,051,190)
Net unrealized appreciation of
investments 5,079,446
Par value 55,660
Paid-in capital in excess of par value 866,003,520
- ------------------------------------------------------------------------------
TOTAL NET ASSETS $ 676,953,282
- ------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------- JANUARY 31, 1995
<TABLE>
<S> <C> <C>
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($542,909,338 DIVIDED BY 44,639,036 shares of common
stock outstanding) $12.16
- ------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($12.16 DIVIDED BY
0.955)
(based on sales charge of 4.50% of offering price on
January 31, 1995) $12.73
- ------------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($133,949,600 DIVIDED BY 11,012,997 shares of common
stock outstanding) $12.16
- ------------------------------------------------------------------------------
CLASS C SHARES:
NET ASSET VALUE and offering price per share+
($94,344 DIVIDED BY 7,756 shares of common stock
outstanding) $12.16
- ------------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------
FOR THE SIX MONTHS ENDED JANUARY 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 27,688,720
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) $ 1,610,095
Service fee (Note 3) 894,497
Administration fee (Note 2) 714,896
Distribution fee (Note 3) 535,120
Transfer agent fees (Notes 2 and 4) 309,695
Custodian fees (Note 2) 209,649
Legal and audit fees 28,236
Directors' fees and expenses (Note 2) 13,607
Other 77,446
- -------------------------------------------------------------------------------------
TOTAL EXPENSES 4,393,241
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 23,295,479
- -------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized loss on:
Securities transactions (42,131,650)
Futures contracts (4,721,289)
- -------------------------------------------------------------------------------------
Net realized loss on investments during the period (46,852,939)
- -------------------------------------------------------------------------------------
Net change in unrealized
appreciation/(depreciation) of:
Securities 24,991,640
Futures contracts 484,375
- -------------------------------------------------------------------------------------
Net unrealized appreciation during the period 25,476,015
- -------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (21,376,924)
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,918,555
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
1/31/95 ENDED
(UNAUDITED) 7/31/94
<S> <C> <C>
Net investment income $ 23,295,479 $ 45,505,462
Net realized loss on investments sold and futures
contracts during the period (46,852,939) (12,910,592)
Net unrealized appreciation/(depreciation) on
investments and futures contracts during the period 25,476,015 (34,482,577)
- -------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
operations 1,918,555 (1,887,707)
Distributions to shareholders from net investment
income:
Class A (16,264,143) (18,518,455)
Class B (6,131,956) (17,488,055)
Class C (formerly Class D) (2,307) (2,526)
Distributions in excess of net investment income:
Class A -- (1,266,241)
Class B -- (1,195,785)
Class C (formerly Class D) -- (173)
Distributions from capital:
Class A -- (6,010,374)
Class B -- (5,675,946)
Class C (formerly Class D) -- (820)
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A 182,892,654 (66,053,025)
Class B (246,023,922) (58,233,274)
Class C (formerly Class D) 23,755 65,335
- -------------------------------------------------------------------------------------
Net decrease in net assets (83,587,364) (176,267,046)
NET ASSETS:
Beginning of period 760,540,646 936,807,692
- -------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of $3,134,154 and $4,031,227,
respectively) $ 676,953,282 $ 760,540,646
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR
1/31/95 ENDED ENDED
(UNAUDITED) 7/31/94 7/31/93#
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 12.50 $ 13.29 $ 12.88
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.44 0.75 0.69
Net realized and unrealized gain/(loss)
on investments and futures contracts (0.39) (0.74) 0.61
- --------------------------------------------------------------------------------
Total from investment operations 0.05 0.01 1.30
Less distributions:
Dividends from net investment income (0.39) (0.57) (0.65)
Distributions in excess of net
investment income -- (0.04) (0.01)
Distributions from net realized capital
gains -- -- --
Distributions in excess of net realized
capital gains -- -- (0.23)
Distributions from capital (Note 1)++ -- (0.19)@ --
- --------------------------------------------------------------------------------
Total distributions (0.39) (0.80) (0.89)
- --------------------------------------------------------------------------------
Net Asset Value, end of period $ 12.16 $ 12.50 $ 13.29
- --------------------------------------------------------------------------------
Total return+++ 0.48% 0.08% 10.43%
- --------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of period (in 000's) $542,909 $371,086 $462,703
Ratio of operating expenses to average
net assets 1.07%+ 1.03%** 0.99%**
Ratio of net investment income to
average net assets 6.67%+ 5.60% 5.35%
Portfolio turnover rate 236% 236% 436%
- --------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on September 4, 1984. Any shares outstanding
prior to November 6, 1992 were designated as Class A shares.
** The annualized operating expense ratio excludes interest expense. The
annualized ratios including interest expense were 1.22% and 1.00% for the
years ended July 31, 1994 and 1993, respectively.
+ Annualized.
++ Results from the Fund's level monthly distribution policy.
+++ Total return represents aggregate total return for the periods indicated and
does not reflect any applicable sales charge.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the year
since the use of the undistributed net investment income method does not
accord with results of operations.
@ Tax basis.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
7/31/92 7/31/91 7/31/90# 7/31/89 7/31/88 7/31/87 7/31/86 7/31/85*
<S> <C> <C> <C> <C> <C> <C> <C>
$ 12.09 $ 12.13 $ 12.19 $ 12.04 $ 12.62 $ 13.32 $ 13.03 $ 12.35
- -------------------------------------------------------------------------------------
0.91 0.98 1.07 0.96 1.09 1.11 1.34 1.23
0.87 0.07 (0.03) 0.26 (0.56) (0.36) 0.38 0.71
- -------------------------------------------------------------------------------------
1.78 1.05 1.04 1.22 0.53 0.75 1.72 1.94
(0.91) (0.98) (1.07) (0.96) (1.09) (1.11) (1.34) (1.23)
-- -- -- -- -- -- -- --
-- -- -- -- (0.01) (0.34) (0.09) (0.03)
-- -- -- -- -- -- -- --
(0.08) (0.11) (0.03) (0.11) (0.01) -- -- --
- -------------------------------------------------------------------------------------
(0.99) (1.09) (1.10) (1.07) (1.11) (1.45) (1.43) (1.26)
- -------------------------------------------------------------------------------------
$ 12.88 $ 12.09 $ 12.13 $ 12.19 $ 12.04 $ 12.62 $ 13.32 $ 13.03
- -------------------------------------------------------------------------------------
15.25% 9.02% 9.01% 10.62% 4.43% 5.69% 13.81% 16.33%
- -------------------------------------------------------------------------------------
$488,515 $474,305 $511,867 $621,752 $871,468 $1,366,998 $1,435,923 $1,082,285
0.82% 0.82% 0.81% 0.81% 0.77% 0.78% 0.79% 0.87%+
7.23% 8.12% 8.87% 8.12% 8.98% 8.35% 9.98% 11.23%+
426% 365% 163% 51% 288% 241% 136% 83%
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
1/31/95 ENDED ENDED
(UNAUDITED) 7/31/94 7/31/93*#
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 12.50 $ 13.29 $ 12.64
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.34 0.69 0.47
Net realized and unrealized gain/(loss) on investments and
futures contracts (0.32) (0.75) 0.75
- -------------------------------------------------------------------------------------
Total from investment operations 0.02 (0.06) 1.22
Less distributions:
Dividends from net investment income (0.36) (0.52) (0.40)
Distributions in excess of net investment income -- (0.04) (0.01)
Distributions in excess of net realized capital gains -- -- (0.16)
Distributions from capital (Note 1)+++ -- (0.17)@ --
- -------------------------------------------------------------------------------------
Total distributions (0.36) (0.73) (0.57)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 12.16 $ 12.50 $ 13.29
- -------------------------------------------------------------------------------------
Total return+ 0.18% (0.46)% 9.92%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $133,950 $389,383 $474,093
Ratio of operating expenses to average net assets 1.59%++ 1.55%** 1.62%**++
Ratio of net investment income to average net assets 6.15%++ 5.08% 4.72%++
Portfolio turnover rate 236% 236% 436%
- -------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class B shares on November 6, 1992.
** The annualized operating expense ratio excludes interest expense. The
annualized ratios including interest expense were 1.74% and 1.63% for the
year ended July 31, 1994 and for the period ended July 31, 1993,
respectively.
+ Total return represents aggregate total return for the periods indicated and
does not reflect any applicable sales charge.
++ Annualized.
+++ Results from the Fund's level monthly distribution policy.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the year
since the use of the undistributed net investment income method does not
accord with results of operations.
@ Tax basis.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
1/31/95 ENDED ENDED
(UNAUDITED) 7/31/94 7/31/93*#
<S> <C> <C> <C>
Net Asset Value, beginning of period $12.50 $13.29 $13.18
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.38 0.69 0.07
Net realized and unrealized gain/(loss) on investments and
futures contracts (0.36) (0.75) 0.09
- -------------------------------------------------------------------------------------
Total from investment operations 0.02 (0.06) 0.16
Less distributions:
Dividends from net investment income (0.36) (0.52) (0.03)
Distributions in excess of net investment income -- (0.04) 0.00++
Distributions in excess of net realized capital gains -- -- (0.02)
Distributions from capital (Note 1)+++ -- (0.17)@ --
- -------------------------------------------------------------------------------------
Total distributions (0.36) (0.73) (0.05)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $12.16 $12.50 $13.29
- -------------------------------------------------------------------------------------
Total return+ 0.18% (0.46)% 1.25%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 94 $ 72 $ 12
Ratio of operating expenses to average net assets** 1.59%+++ 1.58% 1.55%+++
Ratio of net investment income to average net assets 6.15%+++ 5.17% 4.80%+++
Portfolio turnover rate 236% 236% 436%
- -------------------------------------------------------------------------------------
<FN>
* The Fund began selling Class C shares (formerly "Class D shares") on January
29, 1993 and these shares commenced operations on June 29, 1993.
** The annualized operating expense ratio excludes interest expense. The
annualized ratio including interest expense were 1.65% and 1.56% for the year
ended July 31, 1994 and for the period ended July 31, 1993, respectively.
+ Total return represents aggregate total return for the periods indicated and
does not reflect any applicable sales charge.
++ Amount represents less than $0.01 per share.
+++ Annualized.
# Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the year
since the use of the undistributed net investment income method does not
accord with results of operations.
@ Tax basis.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Managed Governments Fund Inc. (formerly Smith Barney Shearson
Managed Governments Fund Inc.) (the "Fund") was incorporated under the laws of
the State of Maryland on June 15, 1984. The Fund is a diversified, open-end
management investment company registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"). Effective November 7, 1994, the Fund began offering Class Y shares and
continued to offer Class A, Class B and Class C shares (which were previously
designated "Class D" shares). As of January 31, 1995, no Class Y shares have
been sold. Class A shares are sold with a front-end sales charge. Class B and
Class C shares may be subject to a contingent deferred sales charge ("CDSC")
upon redemption. Class B shares will convert automatically to Class A shares
eight years after the date of original purchase. Class Y shares are available to
investors making an initial investment of at least $5 million and are not
subject to any sales charges, distribution or service fees. All classes of
shares have identical rights and privileges except with respect to the effect of
the respective sales charges, the distribution and/or service fees borne by each
class, expenses allocable exclusively to each class, voting rights on matters
affecting a single class, the exchange privilege of each class and the
conversion feature of Class B shares. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
PORTFOLIO VALUATION: Securities are valued by The Boston Company
Advisors, Inc. ("Boston Advisors"), the Fund's sub-administrator, after
consultation with dealers in such securities. Short-term obligations are valued
at amortized cost. Investments in securities for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund. U.S. government
securities (other than short-term securities) are valued at the quoted bid price
in the over-the-counter market.
REPURCHASE AGREEMENTS: The Fund engages in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon
14
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
price and time, thereby determining the yield during the Fund's holding period.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is potential loss to the
Fund in the event the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a possible decline
in the value of the underlying securities during the period while the Fund seeks
to assert its rights. The Fund's investment adviser or administrator, acting
under the supervision of the Board of Directors, reviews on an ongoing basis the
value of the collateral and the creditworthiness of those banks and dealers with
which the Fund enters into repurchase agreements to evaluate potential risks.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreement transactions for leveraging purposes. A reverse repurchase agreement
involves a sale by the Fund of securities that it holds with an agreement by the
Fund to repurchase the same securities at an agreed upon price and date. A
reverse repurchase agreement involves the risk that the market value of the
securities sold by the Fund may decline below the repurchase price of the
securities. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. The Fund will establish a segregated account with its
custodian, Boston Safe Deposit and Trust Company ("Boston Safe"), in which the
Fund will maintain cash, U.S. government securities or other liquid high grade
debt obligations equal in value to its obligations with respect to reverse
repurchase agreements.
OPTION CONTRACTS: Upon the purchase of a put option or a call option by the
Fund, the premium paid is recorded as an investment, the value of which is
marked-to-market daily. When a purchased option expires, the Fund will realize a
loss in the amount of the cost of the option. When the Fund enters into a
closing sale transaction, the Fund will realize a gain or loss depending on
whether the sales proceeds from the closing sale transaction are greater
15
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
or less than the cost of the option. When the Fund exercises a put option, it
will realize a gain or loss from the sale of the underlying security and the
proceeds from such sale will be decreased by the premium originally paid. When
the Fund exercises a call option, the cost of the security which the Fund
purchases upon exercise will be increased by the premium originally paid.
When a Fund writes a call option or a put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is eliminated. When a call option is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received. When a put option is exercised, the amount of the premium originally
received will reduce the cost of the security which the Fund purchased upon
exercise.
The risk of loss associated with purchasing options is limited to the premium
originally paid. The risk in writing a call option is that the Fund may forego
the opportunity of profit if the market price of the underlying security
increases and the option is exercised. The risk of writing a put option is that
the Fund may incur a loss if the market price of the underlying security
decreases and the option is exercised. In addition, there is the risk the Fund
may not be able to enter into a closing transaction because of an illiquid
secondary market.
FUTURES CONTRACTS: The Fund may enter into futures contracts. The Fund's futures
transactions will be entered into for hedging purposes, to protect against a
decline in the price of securities that the Fund owns, or to protect the Fund
against an increase in the price of securities it is committed to purchase.
16
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Upon entering into a futures contract, the Fund is required to deposit with the
broker an amount of cash or cash equivalents equal to a certain percentage of
the contract amount. This is known as the "initial margin." Subsequent payments
("variation margin") are made or received by the Fund each day, depending on the
daily fluctuation of the value of the contract.
For financial statement purposes, an amount equal to the settlement amount of
the contract is included in its Statement of Assets and Liabilities as an asset
and as an equivalent liability. For long futures positions, the asset is
marked-to-market daily; for short futures positions, the liability is marked-to-
market daily. The daily changes in the contract are recorded as unrealized gains
or losses. The Fund recognizes a realized gain or loss when the contract is
closed.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk the
Fund may not be able to enter into a closing transaction because of an illiquid
secondary market.
OPTIONS ON FUTURES CONTRACTS: Options on futures generally operate in the same
manner as options purchased or written directly on the underlying debt
securities. The Fund is required to deposit, in a manner similar to futures
contracts, "initial margin" and "variation margin" with respect to put and call
options written on futures contracts. In addition, upon exercise, net premiums
received will decrease the unrealized loss or increase the unrealized gains on
the futures contracts. The potential risk to the Fund is that the change in
value of the underlying securities may not correlate to the change in value of
the contracts.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Interest income is recorded on the accrual basis.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date. Realized gains or
17
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
losses from securities sold are recorded on the identified cost basis.
Investment income and realized and unrealized gains and losses are allocated
based upon relative net assets of each class.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income are determined on a class level. Distributions of net investment income
are declared daily and paid on the last business day of each Smith Barney Inc.
("Smith Barney") statement month. Distributions of any remaining net realized
long- and short-term capital gains, if any, are declared and paid annually after
the end of the fiscal year in which they are earned. To the extent that net
realized capital gains can be offset by capital loss carryovers, it is the
policy of the Fund not to distribute such gains. Additional distributions of net
investment income and capital gains may be made at the discretion of the Board
of Directors to avoid the application of a nondeductible 4% excise tax on
certain undistributed amounts of ordinary income and capital gain. Income
distributions and capital gain distributions on a Fund level are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of income and gains on various investment securities held by the
Fund, timing differences and differing characterization of distributions made by
the Fund as a whole.
FEDERAL INCOME TAXES: It is the Fund's policy to qualify as a regulated
investment company, if such qualification is in the best interests of its
shareholders, by complying with the requirements of the Internal Revenue Code of
1986, as amended, applicable to regulated investment companies and by
distributing substantially all of its earnings to its shareholders. Therefore,
no Federal income tax provision is required.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION
AGREEMENT AND OTHER PARTY TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM") serves as the Fund's
investment adviser pursuant to a transfer of an investment advisory agreement
(the "Advisory Agreement"), effective November 7, 1994, from its affiliate,
Mutual Management Corporation. Mutual Management Corporation and SBMFM are both
wholly owned subsidiaries of Smith Barney
18
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of The
Travelers Inc. Under the Advisory Agreement, the Fund pays a monthly fee at the
annual rate of 0.45% of the value of its average daily net assets up to $1
billion and 0.415% of the value of the average daily net assets in excess of $1
billion.
The Fund is also party to an administration agreement (the "Administration
Agreement") with SBMFM (formerly known as Smith, Barney
Advisers, Inc.). Under the Administration Agreement, the Fund pays a monthly fee
at the annual rate of 0.20% of the value of its average daily net assets.
The Fund and SBMFM have also entered into a sub-administration agreement (the
"Sub-Administration Agreement") with Boston Advisors, an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Sub-Administration
Agreement, SBMFM pays Boston Advisors a portion of its administration fee at a
rate agreed upon from time to time between SBMFM and Boston Advisors.
For the six months ended January 31, 1995, Smith Barney received $1,520,442 from
investors representing commissions (sales charges) on sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the redemption
of certain Class A, Class B and Class C shares. In circumstances in which the
CDSC is imposed, the amount of the charge will vary depending on the number of
years since the date of purchase. For the six months ended January 31, 1995,
Smith Barney received from shareholders $279,866 and $0 in CDSCs on the
redemption of Class B and Class C shares, respectively.
No officer, director or employee of Smith Barney or of any of its affiliates
receives any compensation from the Fund for serving as a Director or officer of
the Fund. The Fund pays each Director who is not an officer, director, or
19
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
employee of Smith Barney or any of its affiliates $4,000 per annum plus $500 per
meeting attended. All Directors are reimbursed by the Fund for travel and
out-of-pocket expenses.
Boston Safe, an indirect wholly owned subsidiary of Mellon, serves as the Fund's
custodian. The Shareholder Services Group, Inc., a subsidiary of First Data
Corporation, serves as the Fund's transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares pursuant to a distribution
agreement with the Fund, and sells shares of the Fund through Smith Barney or
its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a services and
distribution plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A, Class B and Class C
shareholders, and covers expenses incurred in distributing Class B and Class C
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class C shares of the Fund at the annual rate of 0.25% of the value
of the average daily net assets of each respective class of shares. Smith Barney
is also paid an annual distribution fee with respect to Class B and Class C
shares at the annual rates of 0.50% and 0.45%, respectively, of the value of the
average daily net assets of each respective class of shares. For the six months
ended January 31, 1995, the service fee for Class A, Class B and Class C shares
was $626,932, $267,465 and $100, respectively. For the six months ended January
31, 1995, the distribution fee for Class B and Class C shares was $534,930 and
$190, respectively.
Under its terms, the Plan shall remain in effect from year to year, provided
that such continuance is approved annually by vote of the Fund's Directors,
including a majority of those Directors who are not "interested persons" of the
Fund and who have no direct or indirect financial interest in the operation of
the Plan.
20
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class of
shares are prorated among the classes based upon the relative net assets of each
class. Operating expenses directly attributable to a class of shares are charged
to that class' operations. In addition to the above service and distribution
fees, class specific operating expenses include transfer agent fees. For the six
months ended January 31, 1995, transfer agent fees for Class A, Class B and
Class C were $200,662, $108,986 and $47, respectively.
5. SECURITY TRANSACTIONS
Cost of purchases and proceeds from sales of U.S. government securities,
excluding short-term investments, during the six months ended January 31, 1995,
aggregated $1,751,835,736 and $1,824,363,986, respectively.
At January 31, 1995, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost amounted to $9,487,955 and
the aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value amounted to $4,408,509.
Information regarding borrowing by the Fund under reverse repurchase agreements
is as follows:
<TABLE>
<C> <S> <C>
--------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS--
---------------------------------------------------------------------------
Maximum amount outstanding during the period $68,250,000
Average amount outstanding during the period $12,362,772
------------------------------------------------------------------------------------
</TABLE>
Interest rates ranged from 3.25% to 4.50% during the six months ended January
31, 1995. The average amount outstanding during the period was calculated by
summing borrowings at the end of each day and dividing the sum by the number of
days in the six months ended January 31, 1995.
Interest paid for the six months ended January 31, 1995 on borrowings by the
Fund under reverse repurchase agreements aggregated $255,482.
21
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. COMMON STOCK
At January 31, 1995, the Fund had authorized 500 million shares of $.001 par
value common stock. The shares are divided by the Fund into four classes of
shares, Class A, Class B, Class C and Class Y. Changes in the common stock
outstanding were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 19,305,857 $ 235,708,675 1,234,269 $ 16,119,677
Issued as reinvestment of dividends 890,237 10,799,056 1,364,311 17,605,656
Redeemed (5,250,720) (63,615,077) (7,728,677) (99,778,358)
- -------------------------------------------------------------------------------------
Net increase/(decrease) 14,945,374 $ 182,892,654 (5,130,097) $ (66,053,025)
- -------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 890,829 $ 10,811,869 2,953,503 $ 38,395,975
Issued as reinvestment of dividends 283,327 3,458,089 1,255,487 16,203,005
Redeemed (21,318,988) (260,293,880) (8,734,882) (112,832,254)
- -------------------------------------------------------------------------------------
Net decrease (20,144,832) $(246,023,922) (4,525,892) $ (58,233,274)
- -------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS C SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 5,698 $ 69,199 7,485 $ 97,581
Issued as reinvestment of dividends 187 2,270 270 3,456
Redeemed (3,917) (47,714) (2,843) (35,702)
- -------------------------------------------------------------------------------------
Net increase 1,968 $ 23,755 4,912 $ 65,335
- -------------------------------------------------------------------------------------
</TABLE>
As of January 31, 1995, no Class Y shares had been sold.
22
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. CAPITAL LOSS CARRYFORWARDS
At July 31, 1994, the Fund had available for Federal tax purposes unused capital
loss carryforwards of approximately $111,396,220 expiring in 1996, $29,387,864
expiring in 1997 and $3,422,711 expiring in 2002.
8. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Bank of America (formerly known as Continental Bank N.A.)
under an Amended and Restated Line of Credit Agreement (the "Agreement") dated
April 30, 1992, and renewed effective May 31, 1994, primarily for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. Under the Agreement, the
Fund may borrow up to the lesser of $25 million or 25% of its net assets.
However, pursuant to the Fund's prospectus, the Fund may only borrow up to 10%
of its net assets. Interest is payable either at the bank's Money Market Rate or
the London Interbank Offered Rate plus 0.375% on an annualized basis. The Fund
and the other affiliated entities are charged an aggregate commitment fee of
$100,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less than 5
to 1. During the six months ended January 31, 1995, the Fund had an average
outstanding daily balance of $59,239 with interest rates ranging from 5.6875% to
6.0625%. Interest expense totalled $1,798 and is offset against interest income
in the Fund's Statement of Operations for the six months ended January 31, 1995.
At January 31, 1995, the Fund had no outstanding borrowings under this
Agreement.
23
<PAGE>
Smith Barney
Managed Governments Fund Inc.
- ---------------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services
Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit
and Trust Company
One Boston Place
Boston, Massachusetts 02108
24
<PAGE>
MANAGED
GOVERNMENTS
FUND INC.
DIRECTORS
Burt N. Dorsett
Elliot S. Jaffe
Heath B. McLendon
Cornelius C. Rose, Jr.
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
AND INVESTMENT OFFICER
Jessica M. Bibliowicz
PRESIDENT
James E. Conroy
VICE PRESIDENT AND
INVESTMENT OFFICER
Lewis E. Daidone
SENIOR VICE PRESIDENT AND
TREASURER
Christina T. Sydor
SECRETARY
[LOGO]
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, FEES, APPLICABLE SALES CHARGE AND EXPENSES AS WELL AS OTHER
PERTINENT INFORMATION.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
[LOGO]
Fund 16, 184, 241, 461
FD0164 C5
