Registration Nos. 2-91948
811-4061
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 22 X
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 X
Amendment No. 21 X
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
(Exact name of Registrant as specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
(212) 723-9218
(Registrant's telephone number, including Area Code)
Christina T. Sydor
Secretary
Smith Barney Managed Governments Fund Inc.
388 Greenwich Street
New York, New York 10013
(22nd Floor)
(Name and address of agent for service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
X immediately upon filing pursuant to Rule 485(b)
on pursuant to Rule 485(b)
on pursuant to Rule 485(a)
The Registrant has previously filed a declaration of indefinite
registration of its shares pursuant to Rule 24f-2
under the Investment Company Act of 1940. Registrant's Rule 24f-2
Notice for the fiscal year ended July 31,
1996 was filed on September 27, 1996 as Accession Number 0000748826-96-
000002.
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A.
Item No. Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Information Financial Highlights;
The Fund's Performance
4. General Description of Registrant Cover Page; Prospectus
Summary;
Purchase of Shares; Investment
Objective and
Management Policies; Additional
Information
5. Management of the Fund Management of the Fund;
Distributor;
Additional Information
6. Capital Stock and Other Securities Purchase of Shares;
Dividends, Distributions
and Taxes; Additional Information
7. Purchase of Securities Purchase of Shares; Valuation
of Shares;
Redemption of Shares; Exchange
Privilege;
Distributor; Additional Information
8. Redemption or Repurchase Purchase of Shares; Redemption
of Shares
9. Legal Proceedings Not Applicable
Part B Statement of
Item No. Additional Information Caption
10. Cover Cover Page
11. Table of Contents Table of Contents
12. General Information Additional
Information ; Distributor
13. Investment Objectives and Policies Investment Objective and
Management
Policies
14. Management of the Fund Management of the Fund;
Distributor
15. Control Persons and Principal Management of the Fund
Holders of Securities
16. Investment Advisory and Other Services Management of the Fund;
Distributor
17. Brokerage Allocation Investment Objective and
Management Policies
18. Capital Stock and Other Securities Purchase of Shares;
Redemption of Share;
Taxes
19. Purchase, Redemption and Pricing of Purchase of Shares; Redemption
of Shares;
Securities Being Offered Distributor; Valuation of
Shares; Exchange Privilege
20. Tax Status Taxes
21. Underwriters Distributor
22. Calculation of Performance Data Performance Data
23. Financial Statements Financial Statements
SMITH BARNEY NEW MANAGED GOVERNMENTS FUND INC.
PART A
SMITH BARNEY
Managed
Governments
Fund Inc.
NOVEMBER 27, 1996
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
P R O S P E C T U S
<PAGE>
PROSPECTUS
NOVEMBER 27, 1996
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Managed Governments Fund Inc. (the "Fund") is a diversified
fund designed to provide investors with high current income consistent with
liquidity and safety of capital. The Fund seeks to achieve this objective by
investing in debt obligations of varying maturities issued or guaranteed by
the United States government or its agencies or instrumentalities (with empha-
sis on mortgage-backed government securities) and by writing covered put and
call options against certain of such securities. The Fund also may enter into
certain other options and futures transactions for hedging purposes.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges, distribution and service fees and expenses, that pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
Additional information about the Fund is contained in a Statement of Addi-
tional Information dated November 27, 1996, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by con-
tacting a Smith Barney Financial Consultant. The Statement of Additional
Information has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 9
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
- -------------------------------------------------
VALUATION OF SHARES 21
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 21
- -------------------------------------------------
PURCHASE OF SHARES 23
- -------------------------------------------------
EXCHANGE PRIVILEGE 33
- -------------------------------------------------
REDEMPTION OF SHARES 36
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 39
- -------------------------------------------------
PERFORMANCE 39
- -------------------------------------------------
MANAGEMENT OF THE FUND 40
- -------------------------------------------------
DISTRIBUTOR 41
- -------------------------------------------------
ADDITIONAL INFORMATION 42
- -------------------------------------------------
</TABLE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those
contained in this Prospectus and, if given or made, such other
information or representations must not be relied upon as having been
authorized by the Fund or the distributor. This Prospectus does not
constitute an offer by the Fund or the distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management invest-
ment company designed to provide investors with high current income consistent
with liquidity and safety of capital. The Fund seeks to achieve its objective
by investing in debt obligations of varying maturities issued or guaranteed by
the United States government or its agencies or instrumentalities ("U.S. gov-
ernment securities") and by writing covered put and call options. The Fund's
portfolio of U.S. government securities will consist principally of mortgage-
backed securities issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC"). The Fund may seek to
hedge against changes in the value of its portfolio securities by purchasing
options on securities and by purchasing and selling interest rate futures con-
tracts and related options. See "Investment Objective and Management Poli-
cies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rates of
expenses to which they are subject. A fourth Class of shares, Class Y shares,
is offered only to investors meeting an initial investment minimum of
$5,000,000. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which
when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no initial sales charge, but will be subject to a contingent
deferred sales charge ("CDSC") of 1.00% on redemptions made within 12 months
of purchase. See "Prospectus Summary--Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first
year after purchase and 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual serv-
ice fee of 0.25% and an annual distribution fee of 0.50% of the average daily
net assets of the Class. The Class B shares' distribution fee may cause that
Class to have higher expenses and pay lower dividends than Class A shares.
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. The CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of the Fund's shares, which
when combined with current holdings of Class C shares of the Fund equal or
exceed $500,000 in the aggregate, should be made in Class A shares at net
asset value with no sales charge, and will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any serv-
ice or distribution fees.
In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share pur-
chases which, when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, will be made at
net asset value with no initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all
Class A shares offered with a sales charge held in funds sponsored by Smith
Barney Inc. ("Smith Barney") listed under "Exchange Privilege." Class A share
purchases may also be eligible for a reduced initial sales charge. See "Pur-
chase of Shares." Because the ongoing expenses of Class A shares may be lower
than those for Class B and Class C shares, purchasers eligible to purchase
Class A shares at net asset value or at a reduced sales charge should consider
doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a complete descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and "Ex-
change Privilege" for other differences between the Classes of shares.
SMITH BARNEY 401(k) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Other investors may be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without a
sales charge as investment alternatives under the Programs. See "Purchase of
Shares--Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Barney
on a fully disclosed basis (an "Introducing Broker") or an investment dealer in
the selling group. In addition, certain investors, including qualified retire-
ment plans and certain other institutional investors, may purchase shares
directly from the Fund through the Fund's transfer agent, First Data Investor
Services Group, Inc. (the "Transfer Agent"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Retirement Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. For minimum investment requirements for all Classes through
the Systematic Investment Plan see below. There is no minimum investment
requirement in Class A for unitholders who invest distributions from a unit
investment trust ("UIT") sponsored by Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial and subsequent
investment for shareholders purchasing shares through the Systematic Investment
Plan on a monthly basis is $25 and on a quarterly basis is $50. See "Purchase
of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser and administrator. SBMFM is a wholly
owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a diversified
financial services holding company engaged, through its subsidiaries, princi-
pally in four business segments: Investment Services, Consumer Finance Servic-
es, Life Insurance Services and Property & Casualty Insurance Services. See
"Management of the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid on
the last Friday of each calendar month to shareholders of record as of three
business days prior thereto. Distributions of net realized long- and short-term
capital gains, if any, are paid annually. See "Dividends, Distributions and
Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution rein-
vestments will become eligible for conversion to Class A shares on a pro rata
basis. See "Dividends, Distributions and Taxes."
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. Historically, the yields provided
by mortgage-backed U.S. government securities have exceeded the yields on other
types of U.S. government securities of comparable maturity. Thus, the Fund's
yield may at times be higher than that of mutual funds investing solely in
other types of U.S. government securities. However, mortgage-backed U.S. gov-
ernment securities may be less effective than other such securities as a means
of "locking in" attractive long-term interest rates due to the need to reinvest
prepayments of principal generally and the possibility of significant
unscheduled prepayments resulting from declines in mortgage interest rates. In
addition, the market values of the U.S. government securities held in the
Fund's portfolio--and, accordingly, the Fund's net asset value--generally will
vary inversely with changes in market interest rates, both declining when
interest rates rise and rising when interest rates decline. Mortgage-backed
U.S. government securities, however, may have less potential for capital appre-
ciation than other investments of comparable maturities due to the likelihood
of increased prepayments of mortgages as interest rates decline, while having
comparable risk of decline in value during periods of rising rates. See "In-
vestment Objective and Management Policies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur either directly or indirectly as a shareholder of
the Fund, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Fund's operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever
is lower) None* 4.50% 1.00% None
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.65% 0.65% 0.65% 0.65%
12b-1 Fees** 0.25 0.75 0.70 None
Other Expenses*** 0.14 0.16 0.14 0.13
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.04% 1.56% 1.49% 0.78%
- ------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares which, when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, will be made at net asset value with no sales charge, but will
be subject to a CDSC of 1.00% on redemptions made within 12 months.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
*** For Class Y shares, "Other Expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares were sold prior to
February 7, 1996.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges depending on the amount purchased and, in the
case of Class B, Class C shares and certain Class A shares, the length of time
the shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.25% of the value of average
daily net assets of Class A shares. Smith Barney also receives, with respect to
Class B shares, an annual 12b-1 service fee of 0.75% of the value of the aver-
age daily net assets of that Class, consisting of a 0.50% distribution fee and
a 0.25% service fee. For Class C shares, Smith Barney receives an annual 12b-1
fee of 0.70% of the value of average daily net assets of this Class, consisting
of a 0.45% distribution fee and a 0.25% service fee. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A.................................. $55 $77 $100 $166
Class B.................................. 61 79 95 172
Class C.................................. 25 47 81 178
Class Y.................................. 8 25 43 97
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A.................................. $55 $77 $100 $166
Class B.................................. 16 49 85 172
Class C.................................. 15 47 81 178
Class Y.................................. 8 25 43 97
- ------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
8
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the two year period ended July 31, 1996 has been
audited by KPMG Peat Marwick LLP, independent accountants, whose report
thereon appears in the Fund's Annual Report dated July 31, 1996. The following
information for the fiscal years ended July 31, 1987 through July 31, 1994 has
been audited by other auditors. This information should be read in conjunction
with the financial statements and related notes that also appear in the Fund's
Annual Report, which is incorporated by reference into the Statement of Addi-
tional Information.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS A SHARES 1996(1) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 12.63 $ 12.50 $ 13.29 $ 12.88 $ 12.09 $ 12.13
- -------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.81 0.81 0.75 0.69 0.91 0.98
Net realized and
unrealized
gain (loss) (0.34) 0.10 (0.74) 0.61 0.87 0.07
- -------------------------------------------------------------------------------------
Total Income From
Operations 0.47 0.91 0.01 1.30 1.78 1.05
- -------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.82) (0.74) (0.57) (0.65) (0.91) (0.98)
Overdistribution of net
investment income -- -- (0.04) (0.01) -- --
Overdistribution of net
realized gains -- -- -- (0.23) -- --
Capital (0.01) (0.04) (0.19) -- (0.08) (0.11)
- -------------------------------------------------------------------------------------
Total Distributions (0.83) (0.78) (0.80) (0.89) (0.99) (1.09)
- -------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $ 12.27 $ 12.63 $ 12.50 $ 13.29 $ 12.88 $ 12.09
- -------------------------------------------------------------------------------------
TOTAL RETURN 3.76% 7.67% 0.08% 10.43% 15.25% 9.02%
- -------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $454,679 $528,533 $371,086 $462,703 $488,515 $474,305
- -------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.04% 1.07% 1.03% 0.99% 0.82% 0.82%
Net investment income 6.46 6.57 5.60 5.35 7.23 8.12
- -------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 275% 292% 236% 436% 426% 365%
- -------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
1990 1989 1988 1987
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.19 $ 12.04 $ 12.62 $ 13.32
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 1.07 0.96 1.09 1.11
Net realized and unrealized
gain/(loss)
on investments and futures contracts (0.03) 0.26 (0.56) (0.36)
- -------------------------------------------------------------------------------
Total Income from Operations 1.04 1.22 0.53 0.75
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (1.07) (0.96) (1.09) (1.11)
Overdistribution of net investment
income -- -- -- --
Net realized capital gains -- -- (0.01) (0.34)
Overdistribution of net realized
capital gains -- -- -- --
Capital (0.03) (0.11) (0.01) --
- -------------------------------------------------------------------------------
Total Distributions (1.10) (1.07) (1.11) (1.45)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.13 $ 12.19 $ 12.04 $ 12.62
- -------------------------------------------------------------------------------
TOTAL RETURN 9.01% 10.62% 4.43% 5.69%
- -------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S) $511,867 $621,752 $871,468 $1,366,998
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.81% 0.81% 0.77% 0.78%
Net investment income 8.87 8.12 8.98 8.35
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 163% 51% 288% 241%
- -------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS B SHARES 1996(1) 1995 1994 1993(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 12.63 $ 12.50 $ 13.29 $ 12.64
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.75 0.75 0.69 0.47
Net realized and unrealized
gain (loss) (0.34) 0.09 (0.75) 0.75
- -------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.41 0.84 (0.06) 1.22
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.76) (0.67) (0.52) (0.40)
Overdistribution of net investment
income -- -- (0.04) (0.01)
Overdistribution of net realized
gains -- -- -- (0.16)
Capital (0.01) (0.04) (0.17) --
- -------------------------------------------------------------------------------
Total Distributions (0.77) (.71) (0.73) (0.57)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 12.27 $ 12.63 $ 12.50 $ 13.29
- -------------------------------------------------------------------------------
TOTAL RETURN 3.24% 7.04% (0.46)% 9.92%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $110,724 $132,882 $389,383 $474,093
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.56% 1.57% 1.55% 1.62%+
Net investment income 5.94 6.07 5.08 4.72+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 275% 292% 236% 436%
- -------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) 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.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS C SHARES 1996(1) 1995 1994 1993(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.63 $12.50 $13.29 $13.18
- ------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.75 0.76 0.69 0.07
Net realized and unrealized gain (loss) (0.34) 0.08 (0.75) 0.09
- ------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.41 0.84 (0.06) 0.16
- ------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.76) (0.67) (0.52) (0.03)
Overdistribution of net investment income -- -- (0.04) --
Overdistribution of net realized gains -- -- -- (0.02)
Capital (0.01) (0.04) (0.17) --
- ------------------------------------------------------------------------------
Total Distributions (0.77) (0.71) (0.73) (0.05)
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.27 $12.63 $12.50 $13.29
- ------------------------------------------------------------------------------
TOTAL RETURN 3.25% 7.04% (0.46)% 1.25%++
- ------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $1,238 $299 $72 $12
- ------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.49% 1.52% 1.58% 1.55%+
Net investment income 5.99 6.12 5.05 4.80+
- ------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 275% 292% 236% 436%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) 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.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS Y SHARES 1996(1)(2)
- ---------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.86
- ---------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.35
Net realized and unrealized loss (0.49)
- ---------------------------------------------------
Total Loss From Operations (0.14)
- ---------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.44)
Capital (0.01)
- ---------------------------------------------------
Total Distributions (0.45)
- ---------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.27
- ---------------------------------------------------
TOTAL RETURN++ (1.10)%
- ---------------------------------------------------
NET ASSETS, END OF YEAR (000s) $27,215
- ---------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses 0.78%
Net investment income 6.62
- ---------------------------------------------------
PORTFOLIO TURNOVER RATE 275%
- ---------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) For the period from February 7, 1996 (inception date) to July 31, 1996.
+ Annualized.
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is to provide investors with high cur-
rent income consistent with liquidity and safety of capital. This objective may
not be changed without the approval of the holders of a majority of the Fund's
shares. There can be no assurance that the Fund will achieve its investment
objective.
The Fund invests substantially all of its assets in U.S. government securi-
ties and, under normal circumstances, the Fund is required to invest at least
65% of its assets in such securities. The Fund's portfolio of U.S. government
securities consists primarily of mortgage-backed securities issued or guaran-
teed by GNMA, FNMA and FHLMC. Assets not invested in such mortgage-backed secu-
rities are invested primarily in direct obligations of the United States Trea-
sury, such as Treasury Bills, Treasury Notes and Treasury Bonds ("U.S. Treasury
Securities"), and other U.S. government securities. Obligations issued by U.S.
government agencies and instrumentalities include: obligations that are sup-
ported by the full faith and credit of the United States, such as GNMA certifi-
cates and obligations of the General Services Administration and Federal Mari-
time Administration; securities that are supported by the right of the issuer
to borrow from the United States Treasury, such as securities of Federal Home
Loan Banks and others; and securities that are supported only by the credit of
the instrumentality, such as FNMA and FHLMC certificates. Because the United
States government is not obligated by law to provide support to an instrumen-
tality that it sponsors, the Fund invests in obligations issued by such an
instrumentality only when SBMFM determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
The GNMA certificates in which the Fund will invest will be of the "modified
pass-through" type, which means that the scheduled monthly interest and princi-
pal payments related to mortgages in the pool backing the certificates will be
"passed-through" to investors. Timely payment of principal and interest on GNMA
certificates is guaranteed by GNMA and backed by the full faith and credit of
the United States, but market value and yield are not guaranteed.
Mortgage participation certificates issued by FHLMC and FNMA generally repre-
sent ownership interests in a pool of fixed-rate conventional mortgages. Timely
payment of principal and interest on these certificates is guaranteed solely by
the issuer of the certificates. FHLMC is a U.S. government-created entity con-
trolled by the Federal Home Loan Banks. FNMA is a government-chartered corpora-
tion owned entirely by private stockholders, which is subject to general regu-
lation by the Secretary of Housing and Urban Development.
Mortgage-backed U.S. government securities differ from conventional bonds in
that principal is paid back to the certificate holder over the life of the loan
rather than at maturity. As a result, the Fund will receive monthly scheduled
payments of principal and interest. In addition, the Fund may receive
unscheduled principal pay-
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ments representing prepayments on the underlying mortgages, which will cause
the maturity of and realized yield on specific GNMA, FNMA and FHLMC certifi-
cates to vary based on the prepayment experience of the underlying pool of
mortgages. The Fund will reinvest all payments and unscheduled prepayments of
principal in additional GNMA, FNMA and FHLMC certificates or other U.S. govern-
ment securities (which may have lower interest rates than the balance of the
obligations held by the Fund), and will distribute the interest to shareholders
in the form of monthly dividends.
To the extent that they are purchased at par or at a discount, GNMA certifi-
cates offer a high degree of safety of principal investment because of the GNMA
guarantee, and other mortgage-backed U.S. government securities also are
believed to offer significant safety of principal investment. If the Fund buys
mortgage-backed U.S. government securities at a premium, however, mortgage
foreclosures and prepayments of principal by mortgagors (which may be made at
any time without penalty) may result in some loss of the Fund's principal
investment to the extent of the premium paid.
The composition and weighted average maturity of the Fund's portfolio will
vary from time to time, based upon the determination of the Fund's management
of how best to further the Fund's investment objective. The Fund may invest in
U.S. government securities of all maturities: short-term, intermediate-term and
long-term. The Fund may invest without limit in securities of any issuer of
U.S. government securities, and may invest up to an aggregate of 15% of its
total assets in securities with contractual or other restrictions on resale and
other instruments that are not readily marketable (such as repurchase agree-
ments with maturities in excess of seven days). The Fund may invest up to 5% of
its net assets in U.S. government securities for which the principal repayment
at maturity, while paid in U.S. dollars, is determined by reference to the
exchange rate between the U.S. dollar and the currency of one or more foreign
countries ("Exchange Rate-Related Securities"). The interest payable on these
securities is denominated in U.S. dollars and is not subject to foreign cur-
rency risk. The Fund also is authorized to borrow in an amount of up to 10% of
its total assets under unusual or emergency circumstances, including when nec-
essary to meet redemptions, and to pledge its assets to the same extent in con-
nection with such borrowings. When SBMFM believes that market conditions war-
rant, the Fund may, for temporary defensive purposes and without limitation,
invest in short-term instruments including certificates of deposit of domestic
banks and repurchase agreements involving U.S. government securities. Repur-
chase agreements also may be used as one of the Fund's normal investment
techniques.
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ADDITIONAL INVESTMENTS
In attempting to achieve its investment objective, the Fund may employ, among
others, the following portfolio strategies:
Writing Options. The Fund may from time to time write covered put and call
options on U.S. government securities in its portfolio. The Fund will realize a
fee (referred to as a "premium") when it writes an option. The Fund will only
write covered put and call options, which means that for so long as the Fund
remains obligated as the writer of the option it will, in the case of a call
option, continue to own the underlying security and, in the case of a put
option, maintain an amount of cash or high-grade liquid debt securities in a
segregated account equal to the exercise price of the option. A put option
embodies the right of its purchaser to compel the writer of the option to pur-
chase from the optionholder an underlying security at a specified price at any
time during the option period. In contrast, a call option embodies the right of
its purchaser to compel the writer of the option to sell the option holder an
underlying security at a specified price at any time during the option period.
Thus, the purchaser of a put option has the right to compel the Fund to pur-
chase from it the underlying security at the agreed-upon price for a specified
time period, while the purchaser of a call option has the right to purchase
from the Fund the underlying security owned by the Fund at the agreed-upon
price for a specified time period.
Upon the exercise of a put option, the Fund may suffer a loss equal to the
difference between the price at which the Fund is required to purchase the
underlying security and its market value at the time of the option exercise,
less the premium received for writing the option. Upon the exercise of a call
option, the Fund may suffer a loss equal to the excess of the security's market
value at the time of the option exercise over the Fund's acquisition cost of
the security, less the premium received for writing the option. The Fund ordi-
narily will write only covered put and call options for which a secondary mar-
ket exists on a national securities exchange or in the over-the-counter market.
In order to realize a profit, to prevent an underlying security from being
called or to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the option's expiration),
the Fund may engage in a closing purchase transaction. The Fund will incur a
loss if the cost of the closing purchase transaction, plus transaction costs,
exceeds the premium received upon writing the original option. To effect a
closing purchase transaction, the Fund would purchase, prior to the exercise of
an option that it has written, an option of the same series as that on which it
desires to terminate its obligation. There can be no assurance that the Fund
will be able to effect a closing purchase transaction at a time when it wishes
to do so. The obligation of the Fund to purchase or deliver securities, respec-
tively, upon the exercise of a covered put or call option which it has written
terminates upon the effectuation of a closing purchase transaction.
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Purchasing Options. By purchasing put options on U.S. government securities,
the Fund seeks to limit the risk of loss from a decline in the market value of
the underlying securities in its investment portfolio. For the purchase of a
put option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and trans-
action costs, unless the put option is sold at a profit before expiration in a
closing sale transaction.
By buying call options on U.S. government securities the Fund could acquire
the underlying securities at prices that avoid any additional costs resulting
from substantial increases in the market value of securities at any time dur-
ing the option period. At times, the net cost of acquiring securities in this
manner may be less than the cost of acquiring the securities directly.
The Fund may (a) enter into closing transactions with respect to put and
call options that it purchases, (b) exercise the options or (c) permit the
options to expire. Profit or loss from a closing transaction will depend on
whether the amount that the Fund receives on the transaction is more or less
than the premium paid for the option plus any related transaction costs.
Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions on U.S. government securities with certain member banks of the Federal
Reserve System and with certain dealers on the Federal Reserve Bank of New
York's list of reporting dealers. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a rela-
tively short period (usually not more than one week) subject to an obligation
of the seller to repurchase, and the Fund to resell, the obligation at an
agreed-upon price and time, thereby determining the yield during the Fund's
holding period. Under each repurchase agreement the selling institution will
be required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. SBMFM, acting under the
supervision of the Fund's 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 may enter into repurchase agreements to evaluate potential
risks.
When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase U.S.
government securities on a when-issued basis or may purchase or sell U.S. gov-
ernment securities for delayed delivery. In such transactions delivery of the
securities occurs beyond the normal settlement periods, but no payment or
delivery is made by the Fund prior to the actual delivery or payment by the
other party to the transaction. The Fund will not accrue income with respect
to a when-issued or delayed-delivery security prior to its stated delivery
date. The Fund will establish a segregated account with its custodian, PNC
Bank, National Association ("PNC"), consisting of cash, U.S. government secu-
rities or other liquid securities in an amount
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
equal to the amount of the Fund's when-issued and delayed-delivery commit-
ments. Placing securities rather than cash in the segregated account may have
the effect of leveraging the Fund's net assets.
Lending of Portfolio Securities. The Fund is authorized to lend securities
that it holds to brokers, dealers and other financial organizations. These
loans, if and when made, may not exceed 33 1/3% of the Fund's assets taken at
value. The Fund's loans of securities will be collateralized at all times in a
segregated account with the Fund's custodian in an amount at least equal to
100% of the current market value of the loaned securities. The segregated
account may consist of cash, cash equivalents, U.S. government securities or
debt securities of any grade provided such assets are liquid, unencumbered and
marked to market daily. By lending its portfolio securities, the Fund will
seek to generate income by continuing to receive interest on the loaned secu-
rities, by investing the cash collateral in short-term instruments or by
obtaining yield in the form of interest paid by the borrower when debt securi-
ties are used as collateral.
Forward Roll Transactions. In order to enhance current income, the Fund may
invest up to 30% of its assets in forward roll transactions with respect to
mortgage-backed securities issued by GNMA, FNMA and FHLMC. In a forward roll
transaction, the Fund sells a mortgage security to a financial institution,
such as a bank or broker-dealer, and simultaneously agrees to repurchase a
similar security from the institution at a later date at an agreed upon price.
The mortgage securities that are repurchased will bear the same interest rate
as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold. During the
period between the sale and repurchase, the Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of
the sale will be invested in short-term instruments, particularly repurchase
agreements, and the income from these investments, together with any addi-
tional fee income received on the sale will generate income for the Fund
exceeding the yield on the securities sold. Forward roll transactions involve
the risk that the market value of the securities sold by the Fund may decline
below the repurchase price of those securities. At the time that the Fund
enters into a forward roll transaction, it will place in a segregated custo-
dial account cash and liquid debt securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor
the account to insure that such equivalent value is maintained. Forward roll
transactions are considered to be borrowings by the Fund.
Interest Rate Futures Contracts and Options on Futures. The Fund will enter
into interest rate futures contracts solely for the purpose of hedging against
changes in the value of its portfolio securities due to anticipated changes in
interest rates and market conditions and not for purposes of speculation. An
interest rate futures
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
contract provides for the future sale by one party and the purchase by the
other party of a certain amount of a specified financial instrument (debt secu-
rity) at a specified price, date, time and place. The Fund may enter into
futures contracts and options on futures contracts (a) without limit for bona
fide hedging purposes and (b) for other purposes, provided the aggregate ini-
tial margin deposits and premiums do not exceed 5% of the fair market value of
the Fund's assets after taking into account unrealized profits and unrealized
losses on futures contracts into which it has entered. With respect to each
long position in a futures contract or option thereon, the underlying commodity
value of such contract always will be covered by cash and cash equivalents
equal to the market value of the underlying commodity set aside in a segregated
account with the Fund's custodian.
The Fund may purchase put options on interest rate futures contracts to hedge
its portfolio securities against the risk of rising interest rates, and may
purchase call options on interest rate futures contracts when it believes that
interest rates will decline, in anticipation of purchases of portfolio securi-
ties at a higher price, but may not enter into these transactions for purposes
of speculation. The Fund will write put or call options on interest rate
futures contracts as part of closing purchase transactions to terminate its
option positions, although there is no guarantee that such closing transactions
can be effected. The Fund may write put and call options on interest rate
futures contracts other than as a part of closing sale transactions, in order
to increase its ability to hedge against the effect of changes in interest
rates. The Fund will write put and call options only on interest rate futures
contracts which are traded on a domestic exchange or board of trade. A call
option gives the purchaser of such option the right to buy (assume a long posi-
tion) and obliges the Fund as its writer to sell, a specified underlying
futures contract at a stated exercise price at any time prior to the expiration
date of the option. A purchaser of a put option has the right to sell (assume a
short position), and obliges the Fund as the writer to buy, such contract at
the exercise price during the option period.
CERTAIN RISK CONSIDERATIONS
Historically, the yields provided by mortgage-backed U.S. government securi-
ties have exceeded the yields on other types of U.S. government securities of
comparable maturity. Thus, the Fund's yield may at times be higher than that of
mutual funds investing solely in other types of U.S. government-securities.
However, mortgage-backed U.S. government securities may be less effective than
other U.S. government securities as a means of "locking in" attractive long-
term interest rates due to the need to reinvest prepayments of principal gener-
ally and the possibility of significant unscheduled prepayments resulting from
declines in mortgage interest rates. In addition, the market values of the U.S.
government securities held in the Fund's portfolio--and, accordingly, the
Fund's net asset value--generally will vary
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
inversely with changes in market interest rates, both declining when interest
rates rise and rising when interest rates decline. Mortgage-backed U.S. gov-
ernment securities, however, may have less potential for capital appreciation
than other investments of comparable maturities due to the likelihood of
increased prepayments of mortgages as interest rates decline, while having
comparable risk of decline in value during periods of rising rates.
The purchase of securities on a when-issued or delayed-delivery basis
involves the risk that, as a result of an increase in yields available in the
marketplace, the value of the securities purchased will decline prior to the
settlement date. The sale of securities for delayed delivery involves the risk
that the prices available in the market on the delivery date may be greater
than those obtained in the sale transaction.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the risk of a pos-
sible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement.
The risks associated with lending portfolio securities, as with other exten-
sions of credit, consist of possible loss of rights in the collateral should
the borrower fail financially. Forward roll transactions involve the risk that
the market value of the securities sold by the Fund may decline below the
repurchase price of the securities. Forward roll transactions are considered
borrowings by the Fund. Although investing the proceeds of these borrowings in
repurchase agreements or money market instruments may provide the Fund with
the opportunity for higher income, this leveraging practice will increase the
Fund's exposure to capital risk and higher current expenses. Any income earned
from the securities purchased with the proceeds of these borrowings that
exceeds the cost of the borrowings would cause the Fund's net asset value per
share to increase faster than would otherwise be the case; any decline in the
value of the securities purchased would cause the Fund's net asset value per
share to decrease faster than would otherwise be the case.
There are several risks in connection with the use of futures contracts and
options on futures contracts as a hedging device. A decision of whether, when
and how to hedge involves the exercise of skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of market behavior
or unexpected trends in interest rates. There can be no assurance that there
will be a correlation between price movements in the securities underlying the
interest rate futures or options thereon, on the one hand, and price movements
in the Fund's portfolio securities which are the subject of the hedge, on the
other hand. In addition, the Fund's transactions in futures contracts or put
or call options on them will
20
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
be based upon predictions as to anticipated interest rate trends, which could
prove to be inaccurate. The potential loss related to the purchase of an option
on an interest rate futures contract is limited to the premium paid for the
option. Positions in futures contracts and options on futures contracts may be
closed out only on the exchange or board of trade on which they were entered
into, and there can be no assurance that an active market will exist or be
maintained or that closing transactions can be effected. Losses incurred in
hedging transactions and the costs of these transactions will affect the Fund's
performance.
PORTFOLIO TURNOVER
Under certain market conditions the Fund may experience high portfolio
turnover as a result of investment strategies. For example, the exercise of a
substantial number of options written by the Fund and the purchase or sale of
securities in anticipation of a rise or decline in interest rates could result
in high portfolio turnover. Short-term gains realized from portfolio transac-
tions are taxable to shareholders as ordinary income. The Fund will not con-
sider portfolio turnover rate a limiting factor in making investment decisions
consistent with its objective and policies.
Further information about the Fund's investment policies, including a list of
those restrictions on its investment activities that cannot be changed without
shareholder approval, appears in the Statement of Additional Information.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Directors. Short-
term investments that mature in 60 days or less are valued at amortized cost
whenever the Directors determine that amortized cost is fair value. Amortized
cost involves valuing an investment at its cost initially and, thereafter,
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the investment. Further information regarding the Fund's valuation policies is
contained in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends from its net investment income (that is, income
other than net realized long- and short-term capital gains) monthly; dividends
ordi-
21
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
narily will be paid on the last Friday of each calendar month to shareholders
of record as of three business days prior thereto. Any net realized gains,
after utilization of capital loss carryforwards, will be distributed at least
annually, and net realized short-term capital gains (including short-term capi-
tal gains from options transactions, if any) may be paid more frequently, with
the distribution of dividends from net investment income.
If a shareholder does not otherwise instruct, dividends or capital gain dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. Dividends and
distributions are treated the same for tax purposes whether taken in cash or
reinvested in additional shares. The per share dividends on Class B and Class C
shares may be lower than the per share dividends on Class A and Class Y shares
principally as a result of the distribution fees applicable with respect to
Class B and Class C shares. The per share dividends on Class A shares of the
Fund may be lower than the per share dividends on Class Y shares principally as
a result of the service fee applicable to Class A shares. Distributions of cap-
ital gains, if any, will be in the same amount for Class A, B, C and Y shares.
In addition, as determined by the Board of Directors, distributions of the Fund
may include a return of capital. Shareholders will be notified of the amount of
any distribution that represents a return of capital. In order to comply with a
calendar year distribution requirement under the Code, it may be necessary for
the Fund to make distributions at times other than those set forth above.
TAXES
The Fund has qualified and intends to continue to qualify each year as a reg-
ulated investment company under the Code. Dividends paid from the Fund's net
investment income and distributions of net realized short-term capital gains
are taxable to shareholders as ordinary income, regardless of how long share-
holders in the Fund have held their shares and whether such dividends and dis-
tributions are received in cash or reinvested in additional shares of the Fund.
Distributions of the Fund's net realized long-term capital gains will be tax-
able to shareholders as long-term capital gains, regardless of how long share-
holders have held Fund shares and whether such distributions are received in
cash or are reinvested in additional Fund shares. Furthermore, as a general
rule, a shareholder's gain or loss on a sale or redemption of shares of the
Fund will be a long-term capital gain or loss if the shareholder has held the
shares for more than one year and will be a short-term capital gain or loss if
the shareholder has held the shares for one year or less. The Fund's dividends
and distributions will not qualify for the Federal dividends-received deduction
for corporations. Some states, if certain assets and diversification require-
ments are met, permit shareholders to treat their portions of a fund's divi-
dends that are attributable to interest on U.S. Treasury Securities and certain
22
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
U.S. government securities as income that is exempt from state and local income
taxes.
Statements as to the tax status of each shareholder's dividends and distribu-
tions are mailed annually. These statements will, among other things, tell
shareholders the portion of their dividends that are attributable to U.S. Trea-
sury Securities and specific types of U.S. government securities. Each share-
holder will also receive, if appropriate, various written notices after the
close of the Fund's prior taxable year as to the Federal income tax status of
his or her dividends and distributions which were received from the Fund during
the Fund's prior taxable year.
Shareholders should consult their tax advisors with specific reference to
their own tax situations and about the status of the Fund's dividends and dis-
tributions for state and local tax liabilities, particularly regarding the con-
sequences of investing in the Fund under state and local laws generally, and to
determine whether dividends paid by the Fund that represent interest derived
from U.S. government securities are exempt from any otherwise applicable state
or local income taxes.
PURCHASE OF SHARES
GENERAL
The Fund currently offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC
and will be available to investors investing a minimum of $5,000,000 (except
for purchases of Class Y shares by the Smith Barney Concert Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary--Alterna-
tive Purchase Agreements" for a discussion of factors to consider in selecting
which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group. When purchasing shares of the Fund, investors must specify whether the
purchase is for Class A, Class B, Class C or Class Y shares. No maintenance fee
will be charged by the Fund in connection with a brokerage account through
which an investor purchases or holds shares.
Investors in Class A, Class B and Class C shares may open an account by mak-
ing an initial investment of at least $1,000 for each account in the Fund.
Investors in Class Y shares may open an account by making an initial investment
of $5,000,000. Subsequent investments of at least $50 may be made for all Clas-
ses.
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
For shareholders purchasing shares of the Fund through the Systematic Invest-
ment Plan on a monthly basis, the minimum initial investment requirement for
Class A, Class B and Class C shares and the minimum subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a quarterly basis, the minimum
initial investment requirement for Class A, Class B and Class C shares, and the
minimum subsequent investment minimum for all Classes is $50. There are no min-
imum investment requirements for Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, unitholders who invest distributions
from a UIT sponsored by Smith Barney, and Directors of the Fund and their
spouses and children. The Fund reserves the right to waive or change minimums,
to decline any order to purchase its shares and to suspend offering of shares
from time to time. Shares purchased will be held in the shareholder's account
by the Transfer Agent. Share certificates are issued only upon a shareholder's
written request to the Transfer Agent.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset val-
ue, are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular trad-
ing on the NYSE on any day the Fund calculates its net asset value, are priced
according to the net asset value determined on that day, provided the order is
received by the Fund or Smith Barney prior to Smith Barney's close of business
(the "trade date"). For shares purchased through Smith Barney or Introducing
Brokers purchasing through Smith Barney, payment for Fund shares is due on the
third business day after the trade date (the "settlement date"). In all other
cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or the Transfer Agent is authorized
through preauthorized transfers of $25 or $50 or more to charge the sharehold-
er's account held with a bank or other financial institution on a monthly or
quarterly basis, respectively, as indicated by the shareholder to provide sys-
tematic additions to the shareholder's Fund account. A shareholder who has
insufficient funds to complete the transfer will be charged a fee of up to $25
by Smith Barney or the Transfer Agent. The Systematic Investment Plan also
authorizes Smith Barney to apply cash held in the shareholder's Smith Barney
brokerage account or redeem the shareholder's shares of a Smith Barney money
market fund to make additions to the account. Additional information is avail-
able from the Fund or a Smith Barney Financial Consultant.
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------ DEALERS'
AMOUNT OF % OF % OF REALLOWANCE AS %
INVESTMENT OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 4.50% 4.71% 4.00%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 2.50 2.56 2.25
250,000 - 499,999 1.50 1.52 1.35
500,000 and over * * *
- ----------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, will be made at net asset value without any initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months
of purchase. The CDSC on Class A shares is payable to Smith Barney, which
compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B and Class C shares is
waived. See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual, his or her spouse and children or a trustee or other fiduciary of
a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value
of all Class A shares held in funds sponsored by Smith Barney that are offered
with a sales charge listed under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) by (i) Board Members of any of the
Smith Barney Mutual Funds, and employees of Travelers and its subsidiaries and
to the immediate families of such persons (including the surviving spouse of a
deceased Board Member or employee, and retired Board Member or employees),
pension, profit-sharing or other benefit plan for such persons and (ii)
employees of members of the National Association of Securities Dealers, Inc.,
provided such sales are made upon the assurance of the purchaser that the pur-
chase is made for investment purposes and that the securities will not be
resold except through redemption or repurchase; (b) offers of Class A shares
to any other investment company in connection with the combination of such
company with the Fund by merger, acquisition of assets or otherwise; (c) pur-
chases of Class A shares by any client of a newly employed Smith Barney Finan-
cial Consultant (for a period up to 90 days
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
from the commencement of the Financial Consultant's employment with Smith Bar-
ney), on the condition the purchase of Class A shares is made with the proceeds
of the redemption of shares of a mutual fund which (i) was sponsored by the
Financial Consultant's prior employer, (ii) was sold to the client by the
Financial Consultant and (iii) was subject to a sales charge; (d) shareholders
who have redeemed Class A shares in the Fund (or Class A shares of another
Smith Barney Mutual Fund that is offered with a sales charge equal to or
greater than the maximum sales charge of the Fund) and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made within
60 calendar days of the redemption; (e) accounts managed by registered invest-
ment advisory subsidiaries of Travelers; (f) investments of distributions from
a UIT sponsored by Smith Barney; and (g) purchases by Section 403(b) or Section
401(a) or (k) accounts associated with Copeland Retirement Programs. In order
to obtain such discounts, the investor must provide sufficient information at
the time of purchase to permit verification that the purchase would qualify for
the elimination of the sales charge.
Purchases of Class A shares also may be made at net asset value without a
sales charge in the following circumstances: (1) direct rollovers by plan par-
ticipants of distributions from a 401(k) plan enrolled in the Smith Barney
401(k) Program (Note: Subsequent investments will be subject to the applicable
sales charge); (2) purchases by separate accounts used to fund certain unregis-
tered variable annuity contracts; and (3) purchases by investors participating
in a Smith Barney fee based arrangement.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at net asset value determined by aggregating the dollar amount of the
new purchase and the total net asset value of all Class A shares of the Fund
and of funds sponsored by Smith Barney which are offered with a sales charge
listed under "Exchange Privilege" then held by such person and applying the
sales charge applicable to such aggregate. In order to obtain such discount,
the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for purchase at net asset val-
ue. The right of accumulation is subject to modification or discontinuance at
any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, purchases at net asset value
will also be available to employees (and partners) of the same employer pur-
chasing as a group, provided each participant makes the minimum initial invest-
ment required. The sales charge, if any, applicable to purchases by each member
of such a group
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
will be determined by the table set forth above under "Initial Sales Charge
Alternative--Class A Shares" and will be based upon the aggregate sales of
Class A shares of the Smith Barney Mutual Funds offered with a sales charge to,
and share holdings of, all members of the group. To be eligible for such pur-
chase at net asset value, all purchases must be pursuant to an employer- or
partnership-sanctioned plan meeting certain requirements. One such requirement
is that the plan must be open to specified partners or employees of the
employer and its subsidiaries, if any. Such plan may, but is not required to,
provide for payroll deductions. Smith Barney also may offer net asset value
purchases for aggregating related fiduciary accounts under such conditions that
Smith Barney will realize economies of sales efforts and sales related
expenses. An individual who is a member of a qualified group may also purchase
Class A shares at the sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of Class A shares offered
with a sales charge that have been previously purchased and are still owned by
the group, plus the amount of the current purchase. A "qualified group" is one
which (a) has been in existence for more than six months, (b) has a purpose
other than acquiring Fund shares at a discount and (c) satisfies uniform crite-
ria which enable Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10 members, must be
available to arrange for group meetings between representatives of the Fund and
the members, and must agree to include sales and other materials related to the
Fund in its publications and mailings to members at no cost to Smith Barney. In
order to purchase at net asset value, the purchaser must provide sufficient
information at the time of purchase to permit verification that the purchase
qualifies for purchase at net asset value. Approval of group purchases at net
asset value is subject to the discretion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $500,000 or more provides
an opportunity for an investor to purchase shares at net asset value by aggre-
gating the investments over a 13 month period, provided that the investor
refers to such Letter when placing orders. For purposes of a Letter of Intent,
the "Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Fund and other Smith Barney
Mutual Funds offered with a sales charge over a 13 month period based on the
total amount of intended purchases plus the value of all Class A shares previ-
ously purchased and still owned. An alternative is to compute the 13 month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the sales charge appli-
cable to the total amount of the investment goal. If the goal is not achieved
within the period, the investor must pay the difference between the sales
charges applicable to the purchases made and the charges previously paid, or an
appropriate number of escrowed shares will be redeemed.
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Please contact a Smith Barney Financial Consultant or the Transfer Agent to
obtain a Letter of Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
make an initial minimum purchase of $1,000,000 in Class Y shares of the Fund
and agree to purchase a total of $5,000,000 of Class Y shares of the Fund
within six months from the date of the Letter. If a total investment of
$5,000,000 is not made within the six-month period, all Class Y shares pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject to all fees (including a service fee of 0.25%) and expenses applicable to
the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund expects
that such transfer will not be subject to Federal income taxes. Please contact
a Smith Barney Financial Consultant or the Transfer Agent for further informa-
tion.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares which when combined with Class A shares offered
with a sales charge currently held by an investor equal or exceed $500,000 in
the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class C shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
purchases by
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Participating Plans, as described below. See "Purchase of Shares--Smith Barney
401(k) Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There also will be converted at that time
such proportion of Class B Dividend Shares owned by the shareholder as the
total number of his or her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than Class B Dividend
Shares) owned by the shareholder. Shareholders who held Class B shares of
Smith Barney Shearson Short-Term World Income Fund (the "Short-Term World
Income Fund") on July 15, 1994 and who subsequently exchanged those shares for
Class B shares of the Fund will be offered the opportunity to exchange all
such Class B shares for Class A shares of the Fund four years after the date
on which those shares were deemed to have been purchased. Holders of such
Class B shares will be notified of the pending exchange in writing approxi-
mately 30 days before the fourth anniversary of the purchase date and, unless
the exchange has been rejected in writing, the exchange will occur on or about
the fourth anniversary date. See "Prospectus Summary--Alternative Purchase
Arrangements--Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gain distribution reinvestments in such other funds.
For Federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount realized on redemp-
tion. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
the time of the redemption the net asset value had appreciated to $12 per
share, the value of the investor's shares would be $1,260 (105 shares at $12
per share). The CDSC would not be applied to the amount which represents appre-
ciation ($200) and the value of the reinvested dividend shares ($60). There-
fore, $240 of the $500 redemption proceeds ($500 minus $260) would be charged
at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b) au-
tomatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of
the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares in connection with a combination of the Fund with any
investment company by merger, acquisition of assets or otherwise. In addition,
a shareholder who has redeemed shares from other funds of the Smith Barney
Mutual Funds may, under certain circumstances, reinvest all or part of the
redemption proceeds within 60 days and receive pro rata credit for any CDSC
imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by the Transfer Agent
in the case of all other shareholders) of the shareholder's status or holdings,
as the case may be.
SMITH BARNEY 401(k) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans
participating ("Participating Plans") in these programs.
The Fund offers to Participating Plans Class A and Class C shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class C shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class C shares
acquired by other investors; however, they are not subject to any initial sales
charge or CDSC. Once a Participating Plan has made an initial investment in the
Fund, all of its subsequent
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
investments in the Fund must be in the same Class of shares, except as other-
wise described below.
Class A Shares. Class A shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class C shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. At the end
of the fifth year after the date a Participating Plan enrolled in the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, if its total
Class C holdings in all non-money market Smith Barney Mutual Funds equal at
least $1,000,000, it will be offered the opportunity to exchange all of its
Class C shares for Class A shares of the Fund. (For Participating Plans that
were originally established through a Smith Barney retail brokerage account,
the five year period will be calculated from the date the retail brokerage
account was opened.) Such Participating Plans will be notified of the pending
exchange in writing within 30 days after the fifth anniversary of the enroll-
ment date and, unless the exchange offer has been rejected in writing, the
exchange will occur on or about the 90th day after the fifth anniversary date.
If the Participating Plan does not qualify for the five year exchange to Class
A shares, a review of the Plan's holdings will be performed each quarter until
either the Plan qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
C holdings in all non-money market Smith Barney Mutual Funds equal at least
$500,000 as of the calendar year-end, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund. Such Plans will be notified in writing within 30 days after the last
business day of the calendar year and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the last business day
of the following March.
Any Participating Plan in the Smith Barney 401(k) Program that has not previ-
ously qualified for an exchange into Class A shares will be offered the oppor-
tunity to exchange all of its Class C shares for Class A shares of the Fund,
regardless of asset size, at the end of the eighth year after the date the Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program. Such Plans will be
notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the
31
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Fund but instead may acquire Class A shares of the Fund. Any Class C shares not
converted will continue to be subject to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from the Transfer Agent. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the Fund
are not available for purchase by Participating Plans opened on or after June
21, 1996, but may continue to be purchased by any Participating Plan in the
Smith Barney 401(k) Program opened prior to such date and originally investing
in such Class. Class B shares acquired are subject to a CDSC of 3.00% of
redemption proceeds, if the Participating Plan terminates within eight years of
the date the Participating Plan first enrolled in the Smith Barney 401(k) Pro-
gram.
At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, it will be offered the opportunity to
exchange all of its Class B shares for Class A shares of the Fund. Such Partic-
ipating Plan will be notified of the pending exchange in writing approximately
60 days before the eighth anniversary of the enrollment date and, unless the
exchange has been rejected in writing, the exchange will occur on or about the
eighth anniversary date. Once the exchange has occurred, a Participating Plan
will not be eligible to acquire additional Class B shares of the Fund but
instead may acquire Class A shares of the Fund. If the Participating Plan
elects not to exchange all of its Class B shares at that time, each Class B
share held by the Participating Plan will have the same conversion feature as
Class B shares held by other investors. See "Purchase of Shares--Deferred Sales
Charge Alternatives".
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
32
<PAGE>
PURCHASE OF SHARES (CONTINUED)
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements, and all shares
are subject to the other requirements of the fund into which exchanges are
made.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Fund
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*Smith Barney Funds, Inc.--Income Return Account Portfolio
33
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Funds, Inc.--Monthly Payment Government Portfolio
+++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Port-
folio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
*Smith Barney Intermediate Maturity California Municipals Fund
*Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Funds
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Series Inc.
Smith Barney Concert Series Inc.--Balanced Portfolio
Smith Barney Concert Series Inc.--Conservative Portfolio
Smith Barney Concert Series Inc.--Growth Portfolio
Smith Barney Concert Series Inc.--High Growth Portfolio
Smith Barney Concert Series Inc.--Income Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
***Smith Barney Municipal Money Market Fund, Inc.
34
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
***Smith Barney Muni Funds--California Money Market Portfolio
***Smith Barney Muni Funds--New York Money Market Portfolio
- -------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the Fund through
the Smith Barney 401(k) Program may exchange those shares for Class C
shares of this fund.
*** Available for exchange with Class A and Class Y shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund in a Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
Class B Exchanges. In the event a Class B shareholder (unless such share-
holder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in any
of the funds imposing a higher CDSC than that imposed by the Fund, the
exchanged Class B shares will be subject to the higher applicable CDSC. Upon
an exchange, the new Class B shares will be deemed to have been purchased on
the same date as the Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without impo-
sition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. SBMFM may
determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Fund's other shareholders. In this event, the Fund
may, at its discretion, decide to limit additional purchases and/or exchanges
by a shareholder. Upon such a determination, the Fund will provide notice in
writing or by telephone to the shareholder at least 15 days prior to sus-
pending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in the Fund or (b) remain
invested in the Fund or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges
35
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
will be processed at the net asset value next determined. Redemption proce-
dures discussed below are also applicable for exchanging shares, and exchanges
will be made upon receipt of all supporting documents in proper form. If the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged, no signature guarantee
is required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to the net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close
of regular trading on the NYSE are priced at the net asset value next deter-
mined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Transfer Agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemp-
tion proceeds will be remitted on or before the third day following receipt of
proper tender, except on any day on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemp-
tion proceeds are remitted to a Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruc-
tion and Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a certi-
fied or official bank check, will be remitted upon clearance of the check,
which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than
those held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Managed Governments Fund Inc.
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
36
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to the Transfer Agent together with the redemption
request.
Any signature appearing on a share certificate, stock power or on a written
redemption request in excess of $2,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an invest-
or's address of record.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM FOR
SHAREHOLDERS WHO DO NOT HAVE A SMITH BARNEY
BROKERAGE ACCOUNT
Certain shareholders may be eligible to redeem and exchange Fund shares by
telephone. To determine if a shareholder is entitled to participate in this
program, he or she should contact the Transfer Agent at (800) 451-2010. Once
eligibility is confirmed, the shareholder must complete and return a
Telephone/Wire Authorization form, including a signature guarantee, that will
be provided by the Transfer Agent upon request. (Alternatively, an investor may
authorize telephone redemptions on the new account application with a signature
guarantee when making his/her initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any Class or Classes of
the Fund's shares may be made by eligible shareholders by calling the Transfer
Agent at (800) 451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Redemptions of shares
(i) by retirement plans or (ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The
37
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the fund being acquired is identical to the registra-
tion of the shares of the fund exchanged. Such exchange requests may be made
by calling the Transfer Agent at (800) 451-2010 between 9:00 a.m. and 4:00
p.m. (New York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven (7) days' prior notice to shareholders.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. Retire-
ment plan accounts are eligible for automatic cash withdrawal plans only where
the shareholder is eligible to receive qualified distributions and has an
account value of at least $5,000. The withdrawal plan will be carried over on
exchanges between funds or Classes of the Fund. Any applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed 1.00% per month of
the value of the shareholder's shares subject to the CDSC at the time the
withdrawal plan commences. (With respect to withdrawal plans in effect prior
to November 7, 1994, any applicable CDSC will be waived on amounts withdrawn
that do not exceed 2.00% per month of the value of a shareholder's shares sub-
ject to the CDSC.) For further information regarding the automatic cash with-
drawal plan, shareholders should contact a Smith Barney Financial Consultant.
38
<PAGE>
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is com-
puted by dividing the net investment income per share earned by the Class dur-
ing the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming the amount of income is
generated each month over a one-year period and is compounded semi-annually.
The annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the invest-
ment at the end of the period so calculated by the initial amount invested and
subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeem-
able value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value of the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The Fund's
current dividend return may vary from time to time depending on market condi-
tions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent
39
<PAGE>
PERFORMANCE (CONTINUED)
dividend return should be considered when comparing a Class' current return to
yields published for other investment companies and other investment vehicles.
The Fund may also include comparative performance information in advertising or
marketing its shares. Such performance information may include data from Lipper
Analytical Services, Inc. or similar independent services that monitor the per-
formance of mutual funds, or other industry publications.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Directors. The Directors approve all significant agreements
between the Fund and the companies that furnish services to the Fund, including
agreements with the Fund's distributor, investment adviser, administrator, cus-
todian and Transfer Agent. The day-to-day operations of the Fund are delegated
to the Fund's investment adviser and administrator. The Statement of Additional
Information contains general background information regarding each Director and
executive officer of the Fund.
INVESTMENT ADVISER AND ADMINISTRATOR--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to an investment advisory agreement most
recently approved by the Fund's Board of Directors on July 17, 1996. SBMFM has
been in the investment counseling business since 1934 and is a registered
investment adviser. SBMFM renders investment advice to investment companies
that had aggregate assets under management as of October 31, 1996 in excess of
$79 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research services to the Fund. Under
the investment advisory agreement, the Fund pays SBMFM a monthly fee at the
annual rate of 0.45% of the value of the Fund's average daily net assets up to
$1 billion and 0.415% of the value of its average daily net assets in excess of
$1 billion. For the fiscal year ended July 31, 1996, the Fund paid investment
advisory fees to SBMFM in an amount equal to 0.45% of the value of its average
daily net assets.
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets up to $1 billion and 0.185% of the value of the aver-
age daily net assets in excess of $1 billion.
40
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
PORTFOLIO MANAGEMENT
James Conroy, Vice President of SBMFM, has served as Vice President and
Investment Officer of the Fund since February 1990 and is responsible for man-
aging the day-to-day operations of the Fund, including the making of investment
deci- sions.
Management discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1996, is included in
the Annual Report dated July 31, 1996. A copy of the Annual Report may be
obtained upon request and without charge from a Smith Barney Financial Consul-
tant or by writing or calling the Fund at the address or phone number listed on
page one of this Prospectus.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), 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 average daily net assets of the respective
Class. Smith Barney is also paid an annual distribution fee with respect to
Class B and Class C shares at an annual rate of 0.50% and 0.45%, respectively,
of the average daily net assets attributable to those Classes. Class B shares,
which automatically convert to Class A shares eight years after the date of
original purchase, will no longer be subject to distribution fees. The fees are
used by Smith Barney to pay its Financial Consultants for servicing shareholder
accounts and, in the case of Class B and Class C shares, to cover expenses pri-
marily intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to poten-
tial investors; payments to and expenses of Smith Barney Financial Consultants
and other persons who provide support services in connection with the distribu-
tion of shares; interest and/or carrying charges; and indirect and other over-
head costs of Smith Barney associated with the sale of Fund shares, including
lease, utility, communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
41
<PAGE>
DISTRIBUTOR (CONTINUED) DATE
Payments under the Plan with respect to Class A and Class B shares are not
tied exclusively to the distribution and shareholder service expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Directors evaluates the appropriateness
of the Plan and its payment terms on a continuing basis and in doing so will
consider all relevant factors, including expenses borne by Smith Barney,
amounts received under the Plan and proceeds of the CDSC.
ADDITIONAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on June 15,
1984 and is registered with the SEC as a diversified, open-end management
investment company. Each Class of shares of the Fund has a par value of $.001
per share. Each Class of shares has the same rights, privileges and prefer-
ences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees borne by each Class; (d) the expenses allocable exclusively
to each Class; (e) voting rights on matters exclusively affecting a single
Class; (f) the exchange privileges of each Class; and (g) the conversion fea-
ture of the Class B shares. The Fund's Board of Directors does not anticipate
that there will be any conflicts among the interests of the holders of the dif-
ferent Classes. The Directors, on an ongoing basis, will consider whether any
such conflict exists and, if so, take appropriate action.
The Fund does not hold annual shareholder meetings. There normally will be no
meeting of shareholders for the purpose of electing Directors unless and until
such time as less than a majority of the Directors holding office have been
elected by shareholders. The Directors will call a meeting for any purpose upon
written request of shareholders holding at least 10% of the Fund's outstanding
shares, and the Fund will assist shareholders in calling such a meeting as
required by the 1940 Act. When matters are submitted for shareholder vote,
shareholders of each Class will have one vote for each full share owned and a
proportionate, fractional vote for any fractional share held of that Class.
Generally, shares of the Fund will be voted on a Fund-wide basis on all matters
except matters affecting only the interests of one or more of the Classes.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania, serves
as custodian of the Fund's investments.
First Data Investor Services Group, Inc., located at Exchange Place, Boston,
Massachusetts 02109, serves as the Fund's Transfer Agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of investment securities held by the Fund at the
end
42
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
of the period covered. In an effort to reduce the Fund's printing and mailing
costs, the Fund plans to consolidate the mailing of the Fund's semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with identical address of record will receive a single copy
of each report. Shareholders who do not want this consolidation to apply to
their accounts should contact their Smith Barney Financial Consultant, or the
Fund's Transfer Agent.
43
<PAGE>
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<PAGE>
[LOGO]
SMITH BARNEY
------------
A Member of Travelers Group
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
388 Greenwich Street New York, New York 10013
FD0212 11/96
SMITH BARNEY NEW MANAGED GOVERNMENTS FUND INC.
PART B
Smith Barney
Managed Governments Fund Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information
November 27, 1996
This Statement of Additional Information expands upon and supplements
the information contained in the
current Prospectus of Smith Barney Managed Governments Fund Inc. (the
Fund), dated November 27, 1996, as
amended or supplemented from time to time, and should be read in
conjunction with the Fund's Prospectus. The
Fund's Prospectus may be obtained from a Smith Barney Financial
Consultant or by writing or calling the Fund at
the address or telephone number listed above. This Statement of
Additional Information, although not in itself a
prospectus, is incorporated by reference into the Prospectus in its
entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional
Information, except where shown below:
Management of the Fund 1
Investment Objective and Management Policies 5
Purchase of Shares 17
Redemption of Shares 17
Distributor 18
Valuation of Shares 20
Exchange Privilege 20
Performance Data (See in the Prospectus Performance'') 21
Taxes (See in the Prospectus Dividends, Distributions and Taxes'')
23
Additional Information 26
Financial Statements 26
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund.
These organizations are as follows:
Name Service
Smith Barney Inc.
(Smith Barney'') Distributor
Smith Barney Mutual Funds Management Inc.
(SBMFM'') Investment Adviser and Administrator
PNC Bank, National Association (PNC) Custodian
First Data Investor Services Group, Inc. (First Data'')
Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this
Statement of Additional Information.
Directors and Executive Officers of the Fund
The names of the Directors and executive officers of the Fund, together
with information as to their principal
business occupations during the past five years, are shown below. Each
Director who is an interested person'' of
the Fund, as defined in the Investment Company Act of 1940, as amended
(the 1940 Act''), is indicated by an
asterisk.
Herbert Barg (Age 73). Private Investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania
19004.
Alfred Bianchetti (Age 73). Retired; formerly Senior Consultant to Dean
Witter Reynolds Inc. His address is
19 Circle End Drive, Ramsey, New Jersey 07446.
Martin Brody (Age 75). Vice Chairman of the Board of Restaurant
Associates Industries Corp. and a Director
of Jaclyn, Inc. His address is HMK Associates, 30 Columbia Turnpike,
Florham Park, New Jersey 07932.
Dwight B. Crane (Age 59). Professor, Graduate School of Business
Administration, Harvard University. His
address is Harvard Business School, Soldiers Field, Morgan Hall #371,
Boston, Massachusetts 02163.
Burt N. Dorsett, Director (Age 66). Managing Partner of Dorsett McCabe
Management, Inc., an investment
counseling firm; Director of Research Corporation Technologies, Inc., a
non-profit patent-clearing and licensing
firm. His address is 45 Rockefeller Plaza, New York, New York 10111.
Elliot S. Jaffe, Director (Age 70). Chairman of the Board and President
of The Dress Barn, Inc. His address is
30 Dunnigan Drive, Suffern, New York 10901.
Stephen E. Kaufman (Age 64). Attorney. His address is 277 Park Avenue,
New York, New York 10172.
Joseph J. McCann (Age 66). Financial Consultant and formerly Vice
President of Ryan Homes, Inc. His
address is 200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age
63). Managing Director of Smith
Barney, Chairman of the Board of Smith Barney Strategy Advisers Inc. and
President of SBMFM; prior to July
1993, Senior Executive Vice President of Shearson Lehman Brothers Inc.
(Shearson Lehman Brothers''), Vice
Chairman of Asset Management Division of Shearson Lehman Brothers. Mr.
McLendon is Chairman of the Board
and Investment Officer of 42 Smith Barney Mutual Funds. His address is
388 Greenwich Street, New York, New
York 10013.
Cornelius C. Rose, Jr., Director (Age 63). President, Cornelius C. Rose
Associates, Inc., financial consultants,
and Chairman and Director of Performance Learning Systems, an
educational consultant. His address is P.O. Box
355, Enfield, New Hampshire 03748.
James J. Crisona, Director Emeritus. Attorney; formerly Justice of the
Supreme Court of the State of New
York, His address is 118 East 60th Street, New York, New York 10022.
Isaac B. Grainger, Director Emeritus. Director of the Fund since
commencement of the Fund's operations until
February 26, 1990. Director of Hartford Insurance Group; Advisory
Director of Union Electric Company, St.
Louis, Missouri; retired President and currently adviser to Chase
Manhattan Bank. His address is Chase
Manhattan Bank, 11 West 51st Street, 2nd Floor, New York, New York
10019.
A Director Emeritus may attend meetings of the Fund's Board of Directors
but has no voting rights at such
meetings.
Jessica M. Bibliowicz, President (Age 37). Executive Vice President of
Smith Barney; prior to 1994, Director
of Sales and Marketing for Prudential Mutual Funds; prior to 1990, First
Vice President, Asset Management
Division of Shearson Lehman Brothers. Ms. Bibliowicz also serves as
President of 40 Smith Barney Mutual
Funds. Her address is 388 Greenwich Street, New York, New York 10013.
James E. Conroy, First Vice President and Investment Officer (Age 46).
Investment Officer of SBMFM; prior
to July 1993, Managing Director of Shearson Lehman Advisors. Mr. Conroy
serves as Investment Officer of four
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 39). Managing
Director of Smith Barney;
Director and Senior Vice President of SBMFM. Mr. Daidone serves as
Senior Vice President and Treasurer of 42
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Christina T. Sydor, Secretary (Age 45). Managing Director of Smith
Barney; General Counsel and Secretary
of SBMFM. Ms. Sydor serves as Secretary of 42 Smith Barney Mutual
Funds. Her address is 388 Greenwich
Street, New York, New York 10013.
As of October 23, 1996, the Directors and officers of the Fund, as a
group, beneficially owned less than 1.00%
of the outstanding common stock of the Fund. As of October 23, 1996, to
the knowledge of the Fund and its Board
of Directors, no single shareholder or group (as the term is used in
Section 13(d) of the Securities Act of 1933)
beneficially owned more than 5% of the outstanding shares of the Fund.
No Director, officer or employee of Smith Barney or of any parent or
subsidiary receives any compensation
from the Fund for serving as a Director or officer of the Fund. The Fund
pays each director who is not an officer,
director or employee of Smith Barney or any of its affiliates a fee of
$4,000 per annum plus $500 per meeting
attended and each Director emeritus who is not an officer, director or
employee of Smith Barney or any of its
affiliates a fee of $2,000 per annum plus $250 per in-person meeting and
$100 per telephonic meeting. The Fund
reimburses all Directors for travel and out-of-pocket expenses. For the
fiscal year ended July 31, 1996, such fees
and expenses totaled $11,349.82.
For the fiscal year ended July 31, 1996, the Directors of the Fund were
paid the following compensation:
Director (*)
Aggregate Compensation
from the Fund**
Aggregate Compensation
from the Smith Barney
Mutual Funds
Herbert Barg (18)
$7,100.00
$106,325.00
Alfred Bianchetti (13)
7,100.00
57,725.00
Martin Brody (20)
7,100.00
75,825.00
Dwight Crane (24)
6,600.00
138,425.00
Burt Dorsett *(13)
7,600.00
50,225.00
Elliot Jaffe (13)
6,600.00
57,075.00
Stephen Kaufman (14)
7,100.00
89,425.00
Joseph McCann (13)
7,100.00
57,925.00
Heath McLendon (42)
- ---
- ---
Cornelius Rose (13)
6,600.00
58,025.00
- -
- -
James Crisona***(10)
- ---
21,962.00
Isaac Grainger***(3)
2,500.00
4,375.00
_________________________
* Number of directorships/trusteeships held with the Smith Barney
Mutual Funds.
** The aggregate remuneration paid to the Directors by the Fund for
the fiscal year ended July 31, 1996 amounted
to $12,904.19 (including reimbursement for travel and out-of-pocket
expenses).
*** Director Emeritus
* Pursuant to the Fund's deferred compensation plan, Mr. Dorsett has
elected to defer the payment of some or all
of the compensation due to him from the Funds.
Investment Adviser and Administrator - SBMFM
SBMFM serves as investment adviser to the Fund pursuant to an investment
advisory agreement (the Advisory
Agreement) which was most recently approved by the Board of Directors,
including a majority of Directors who
are not interested persons of the Fund or SBMFM (the Independent
Directors), on July 17, 1996. SBMFM is a
wholly owned subsidiary of Smith Barney Holdings Inc. (Holdings''),
which, in turn, is a wholly owned subsidiary
of Travelers Group Inc. (Travelers''). The Advisory Agreement is dated
July 30, 1993 and was first approved by
the Board of Directors, including a majority of the Independent
Directors, on April 7, 1993. The services provided
by SBMFM under the Advisory Agreement are described in the Prospectus
under Management of the Fund.''
SBMFM pays the salary of any officer or employee who is employed by both
it and the Fund.
As compensation for investment advisory services, the Fund pays SBMFM a
fee computed daily and paid
monthly at the following annual rates of the Fund's average daily net
assets: 0.45% up to $1 billion; and 0.415% in
excess of $1 billion. For the fiscal years ended July 31, 1994, 1995
and 1996, the Fund paid SBMFM and/or
Mutual Management Corp. (an affiliate of SBMFM) and/or Shearson Lehman
Advisors, the Fund's investment
advisers prior to SBMFM, $3,840,009 $3,107,867 and $2,816,295,
respectively, in investment advisory fees.
SBMFM also serves as administrator to the Fund pursuant to a written
agreement dated April 20, 1994 (the
Administration Agreement''), which was most recently approved by the
Fund's Board of Directors, including a
majority of the Independent Directors, on July 17, 1996. The services
provided by SBMFM under the
Administration Agreement are described in the Prospectus under
Management of the Fund.'' SBMFM pays the
salary of any officer and employee who is employed by both it and the
Fund and bears all expenses incurred in
connection with the performance of its services. As compensation for
administration services, the Fund pays
SBMFM a fee computed daily and paid monthly at the annual rate of 0.20%
of the value of the average daily net
assets of the Fund up to $1 billion and 0.185% of the value of the
average daily net assets in excess of $1 billion.
Prior to June 12, 1995, The Boston Company Advisors, Inc. (Boston
Advisors), an indirect wholly owned
subsidiary of Mellon Bank Corporation, served as the Fund's sub-
administrator. For the 1994 and 1995 fiscal years,
Boston Advisors received $1,706,671 and $1,380,613, respectively, in
sub-administration fees.
The Fund bears expenses incurred in its operations, including: taxes,
interest, brokerage fees and
commissions, if any; fees of Directors who are not officers, directors,
shareholders or employees of Smith Barney,
SEC fees and state Blue Sky qualification fees; charges of custodians;
transfer and dividend disbursing agent's fees;
certain insurance premiums; outside auditing and legal expenses; costs
of maintenance of corporate existence;
investors services (including allocated telephone and personnel
expenses); costs of preparation and printing of
prospectuses and statements of additional information for regulatory
purposes and for distribution to existing
shareholders; costs of shareholders' reports and corporate meetings.
SBMFM has agreed that if in any fiscal year the aggregate expenses of
the Fund (including fees paid pursuant
to the Advisory and Administration Agreements, but excluding interest,
taxes, brokerage fees paid pursuant to the
Fund's services and distribution plan, and, with the prior written
consent of the necessary state securities
commissions, extraordinary expenses) exceed the expense limitation of
any state having jurisdiction over the Fund,
SBMFM will, to the extent required by state law, reduce its management
fees by such excess expenses. Such fee
reductions, if any, will be estimated and reconciled on a monthly basis.
The most restrictive state expense
limitation currently applicable to the Fund would require SBMFM to
reduce its fees in any year that such expenses
exceed 2.50% of the first $30 million of average net assets, 2.00% of
the next $70 million of average net assets and
1.50% of the remaining average net assets. No such fee reduction was
required for the fiscal years ended July 31,
1994, 1995 and 1996.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the Fund. The
Independent Directors of the Fund have
selected Stroock & Stroock & Lavan as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the Fund's
independent auditor to examine and report on the Fund's financial
statements and highlights for the fiscal year
ending July 31, 1997.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the
policies it employs to achieve its objective.
This section contains supplemental information concerning the types of
securities and other instruments in which
the Fund may invest, the investment policies and portfolio strategies
that the Fund may utilize and certain risks
attendant to such investments, policies and strategies.
Mortgaged-Backed Government Securities
Government National Mortgage Association (GNMA) certificates are liquid
securities and represent
ownership interests in a pool of mortgages issued by a mortgage banker
or other mortgagee. Distributions on
GNMA certificates include principal and interest components. GNMA, a
corporate instrumentality of the U.S.
Department of Housing and Urban Development, guarantees timely payment
of principal and interest on GNMA
certificates; this guarantee is deemed a general obligation of the
United States, backed by its full faith and credit.
Each of the mortgages in a pool supporting a GNMA certificate is insured
by the Federal Housing
Administration or the Farmers Home Administration, or is insured or
guaranteed by the Veterans Administration.
The mortgages have maximum maturities of 40 years. Government
statistics indicate, however, that the average
life of the underlying mortgages is shorter, due to scheduled
amortization and unscheduled prepayments
(attributable to voluntary prepayments or foreclosures). These
statistics indicate that the average life of the
mortgages backing most GNMA certificates, which are single-family
mortgages with 25- to 30-year maturities,
ranges from two to ten years depending on the mortgages' coupon rate,
and yields on pools of single-family
mortgages are often quoted on the assumption that the prepayment rate
for any given pool will remain constant
over the life of the pool. (The actual maturity of specific GNMA
certificates will vary based on the payment
experience of the underlying mortgage pool.) Based on this constant
prepayment assumption, GNMA certificates
have had historical yields at least 3/4 of 1% greater than the highest
grade corporate bonds. Actual yield
comparisons will vary with the prepayment experience of specific GNMA
certificates.
The Fund also may invest in pass-through securities backed by
adjustable-rate mortgages, which have been
issued by GNMA, the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage
Corporation (FHLMC). These securities bear interest at a rate which is
adjusted monthly, quarterly or annually.
The prepayment experience of the mortgages underlying these securities
may vary from that for fixed-rate
mortgages.
The average maturity of FHLMC and FNMA mortgage-backed pools, like GNMA
mortgage-backed pools,
varies with the maturities of the underlying mortgage instruments, and a
pool's stated average life also may be
shortened by unscheduled payments on the underlying mortgages. Factors
affecting mortgage prepayments include
the level of interest rates, general economic and social conditions, the
location of the mortgaged property and the
age of the mortgage. Because prepayment rates of individual pools vary
widely, it is not possible to accurately
predict the average life of a particular pool. As noted above, it is a
common practice to assume that prepayments
will result in an average life ranging from two to ten years for pools
of fixed-rate 30 year mortgages. Pools of
mortgages with other maturities or different characteristics will have
varying average life assumptions. The actual
maturity of and realized yield on specific FHLMC and FNMA certificates
will vary based on the prepayment
experience of the underlying pool of mortgages.
U.S. Government Securities
Direct obligations of the United States Treasury include a variety of
securities that differ in their interest rates,
maturities and dates of issuance. Treasury Bills have maturities of
less than one year, Treasury Notes have
maturities of one to ten years and Treasury Bonds generally have
maturities of greater than ten years at the date of
issuance.
In addition to direct obligations of the United States Treasury, debt
obligations of varying maturities issued or
guaranteed by the United States government or its agencies or
instrumentalities (U.S. government securities)
include securities issued or guaranteed by the Federal Housing
Administration, Federal Financing Bank, Export-
Import Bank of the United States, Small Business Administration, GNMA,
General Services Administration,
Federal Home Loan Banks, FHLMC, FNMA, Maritime Administration, Tennessee
Valley Authority, Resolution
Trust Corporation, District of Columbia Armory Board, Student Loan
Marketing Association and various
institutions that previously were or currently are part of the Farm
Credit System (which has been undergoing a
reorganization since 1987). Because the United States government is not
obligated by law to provide support to an
instrumentally that it sponsors, the Fund will invest in obligations of
an instrumentally to which the United States
government is not obligated by law to provide support only if SBMFM
determines that the credit risk with respect
to the instrumentality does not make its securities unsuitable for
investment by the Fund.
The Fund may invest up to 5% of its net assets in U.S. government
securities for which the principal
repayment at maturity, while paid in U.S. dollars, is determined by
reference to the exchange rate between the U.S.
dollar and the currency of one or more foreign countries (Exchange Rate-
Related Securities). Exchange Rate-
Related Securities are issued in a variety of forms, depending on the
structure of the principal repayment formula.
The principal repayment formula may be structured so that the security-
holder will benefit if a particular foreign
currency to which the security is linked is stable or appreciates
against the U.S. dollar. In the alternative, the
principal repayment formula may be structured so that the securityholder
benefits if the U.S. dollar is stable or
appreciates against the linked foreign currency. Finally, the principal
repayment formula can be a function of
more than one currency and, therefore, be designed in either the
aforementioned forms or a combination of those
forms.
Investment in Exchange Rate-Related Securities entails special risks.
There is the possibility of significant
changes in rates of exchange between the U.S. dollar and any foreign
currency to which an Exchange Rate-Related
Security is linked. If currency exchange rates do not move in the
direction or to the extent anticipated at the time
of purchase of the security, the amount of principal repaid at maturity
might be significantly below the par value of
the security, which might not be offset by the interest earned by the
Fund over the term of the security. The rate of
exchange between the U.S. dollar and other currencies is determined by
the forces of supply and demand in the
foreign exchange markets. These forces are affected by the
international balance of payments and other economic
and financial conditions, government intervention, speculation and other
factors. The imposition or modification
of foreign exchange controls by domestic or foreign governments or
intervention by central banks also could affect
exchange rates. Finally, there is no assurance that sufficient trading
interest to create a liquid secondary market
will exist for particular Exchange Rate-Related Securities due to
conditions in the debt and foreign currency
markets. Illiquidity in the forward exchange market and the high
volatility of the foreign exchange market may
from time to time combine to make it difficult to sell an Exchange Rate-
Related Security prior to maturity without
incurring a significant price loss.
Writing Put and Call Options
The principal reason for writing covered call options on securities is
to attempt to realize, through the receipt
of premiums, a greater return than would be realized on the securities
alone. In return for a premium, the writer of
a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike
price for the life of the option (or until a closing purchase
transaction can be effected). Nevertheless, the call writer
retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The
writer of a covered put option accepts the
risk of a decline in the price of the underlying security. The size of
the premium that the Fund may receive may be
adversely affected as new or existing institutions, including other
investment companies, engage in or increase
their option-writing activities.
Options written by the Fund normally will have expiration dates between
one and nine months from the date
written. The exercise price of the options may be below, equal to, or
above, the current market values of the
underlying securities at the times the options are written. In the case
of call options these exercise prices are
referred to as in-the-money, at-the-money, and out-of-the-money,
respectively.
The Fund may write (a) in-the-money call options when SBMFM expects that
the price of the underlying
security will remain flat or decline moderately during the options
period, (b) at-the-money call options when
SBMFM expects that the price of the underlying security will remain flat
or advance moderately during the option
period and (c) out-of-money call options when SBMFM expects that the
price of the security may increase but not
above a price equal to the sum of the exercise price plus the premiums
received from writing the call option. In
any of the preceding situations, if the market price of the underlying
security declined and the security is sold at
this lower price, the amount of any realized loss will be offset wholly
or in part by the premium received. Out-of-
money, at-the-money and in-the-money put options (the reverse of call
options as to the relations of exercise price
to market price) may be utilized in the same market environments that
such call options are used in equivalent
transactions.
So long as the obligation of the Fund as the writer of an option
continues, the Fund may be assigned an
exercise notice by the broker-dealer through which the option was sold,
requiring it to deliver, in the case of a call,
or take delivery of, in the case of a put, the underlying security
against payment of the exercise price. This
obligation terminates when the option expires or the Fund effects a
closing purchase transaction. The Fund can no
longer effect a closing purchase transaction with respect to an option
once it has been assigned an exercise notice.
To secure its obligation to deliver the underlying security when it
writes a call option, or to pay for the underlying
security when it writes a put option, the Fund will be required to
deposit in escrow the underlying security or other
assets in accordance with the rules of the Options Clearing Corporation
(the Clearing Corporation) or similar
clearing corporation and the securities exchange on which the option is
written.
An option positions may be closed out only where there exists a
secondary market for an option of the same
series on a recognized securities exchange or in the over-the-counter
market. The Fund expects to write options
only on national securities exchanges or in the over-the-counter market.
The Fund may realize a profit or loss upon entering into a closing
transaction. In cases in which the Fund has
written an option, it will realize a profit if the cost of the closing
purchase transaction is less than the premium
received upon writing the original option and will incur a loss if the
cost of the closing purchase transaction
exceeds the premium received upon writing the original option.
Purchasing Put and Call Options
Buying a put option on a U.S. government security will give the Fund the
right to sell the security at a
particular price and may act to limit, until that right expires, the
Fund's risk of loss through a decline in the market
value of the security. Any appreciation in the value of the underlying
security will be offset in part by the amount
of the premium that the Fund pays for the put option and any related
transaction costs. By purchasing a put option
on a security that it does not own, the Fund would seek to benefit from
a decline in the market price of its
investment portfolio generally. If the market price of the underlying
security remains equal to or greater than the
exercise price during the life of the put option, the Fund would lose
its entire investment in the put option. For the
purchase of a put option to be profitable, the market price of the
underlying security must decline sufficiently below
the exercise price to cover the premium and transaction costs, unless
the put option is sold at a profit before
expiration in a closing sale transaction. The Fund would not purchase a
put option if, as a result of the purchase,
more than 10% of the Fund's assets would be invested in put options.
As the holder of a call option on a U.S. government security, the Fund
would have the right to purchase the
underlying security at the exercise price at any time during the option
period. The Fund would purchase a call
option to acquire the underlying security for its portfolio. Utilized
in this fashion, the purchase of call options
would enable the Fund to fix its costs of acquiring the underlying
security at the exercise price of the call option
plus the premium paid. Pending exercise of the call option, the Fund
could invest the exercise price of the call
option, which would otherwise have been used for the immediate purchase
of the security, in short-term
investments providing additional current return. At times, the net costs
of acquiring securities in this manner may
be less than the cost of acquiring the securities directly. So long as
it holds such a call option rather than the
underlying security itself, the Fund is partially protected from any
unexpected decline in the market price of the
underlying security and could allow the call options to expire,
incurring a loss only to the extent of the premium
paid for the option. The Fund also could purchase call options on U.S.
government securities to increase its return
to investors at a time when the call is expected to increase in value
due to anticipated appreciation of the
underlying security. The Fund would not purchase a call option if, as a
result of the purchase, more than 10% of
the Fund's assets would be invested in call options.
The Fund may enter into closing transactions with respect to put and
call options that it purchases, exercise
the options, or permit the options to expire. Profit or loss from a
closing transaction will depend on whether the
amount that the Fund received on the transaction is more or less than
the premium paid for the options plus any
related transaction costs.
Although the Fund generally will purchase or write only those options
for which SBMFM believes that there is
an active secondary market so as to facilitate closing transactions,
there is no assurance that sufficient trading
interest to create a liquid secondary market on a securities exchange
will exist for any particular options or at any
particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option
may cease to exist for a variety of reasons. In the past, for example,
higher than anticipated trading activity or
order flow, or other unforeseen events, have at times rendered certain
of the facilities of national securities
exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on
certain types of orders or trading halts or suspensions in one or more
options. There can be no assurance that
similar events, or events that may otherwise interfere with the timely
execution of customers' orders, will not recur.
In such event, it might not be possible to effect closing transactions
in particular options. If, as a covered call
option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it delivers
the underlying security upon exercise.
Securities exchanges generally have established limitations governing
the maximum number of calls and puts
of each class which may be held or written, or exercised within certain
periods, by an investor or group of investors
acting in concert (regardless of whether the options are written on the
same or different securities exchanges or are
held, written or exercised in one or more accounts or through one or
more brokers). It is possible that the Fund
and other clients of SBMFM and certain of their affiliates may be
considered to be such a group. A securities
exchange may order the liquidation of positions found to be in
violations of these limits, and it may impose certain
other sanctions. At the date of this Statement of Additional
Information, the positions and exercise limited for
common stocks on United States exchanges were 3,000, 5,500 or 8,000
options per stock (i.e., options representing
300,000, 550,000 or 800,000 shares), depending on various factors
relating to the underlying security and the
Fund's combined stock and options position.
Additional risks exist with respect to certain of the U.S. government
securities for which the Fund may write
covered call options. If the Fund writes covered call options on
mortgage-backed securities, the securities that it
hold as cover may, because of scheduled amortization or unscheduled
prepayments, cease to be sufficient cover.
The Fund will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount
of those securities.
The trading market in options on U.S. governments securities has varying
degrees of depth for various
securities. SBMFM will attempt to take appropriate measures to minimize
risks relating to the Fund's writing and
purchasing of put and call options, but there can be no assurance that
the Fund will succeed in its options program.
When-Issued Securities and Delayed Delivery Transactions
In order to secure what SBMFM considers to be an advantageous price or
yield, the Fund may purchase U.S.
government securities on a when-issued basis or purchase or sell U.S.
government securities for delayed delivery.
The Fund will enter into such purchase transactions for the purpose of
acquiring portfolio securities and not for the
purpose of leverage. Delivery of the securities in such cases occurs
beyond the normal settlement periods, but no
payment or delivery is made by the Fund prior to the reciprocal delivery
or payment by the other party to the
transaction. In entering into a when-issued or delayed-delivery
transaction, the Fund relies on the other party to
consummate the transaction and may be disadvantaged if the other party
fails to do so.
U.S. government securities normally are subject to changes in value
based upon changes, real or anticipated,
in the level of interest rates and, to a lesser extent, the public's
perception of the creditworthiness of the issuers. In
general, U.S. government securities tend to appreciate when interest
rates decline and depreciate when interest
rates rise. Purchasing U.S. government securities on a when-issued
basis or delayed-delivery basis, therefore, can
involve the risk that the yields available in the market when the
delivery takes place may actually be higher than
those obtained in the transaction itself. Similarly, the sale of U.S.
government securities for delayed delivery can
involve the risk that the prices available in the market when the
delivery is made may actually be higher than those
obtained in the transaction itself.
The Fund will at times maintain in a segregated account at PNC cash or
liquid securities equal to the amount
of the Fund's when-issued or delayed-delivery commitments. For the
purpose of determining the adequacy of the
securities in the account, the deposited securities will be valued at
market or fair value. If the market or fair value
of such securities declines, additional cash or securities will be
placed in the account on a daily basis so that the
value of the account will equal the amount of such commitments by the
Fund. Placing securities rather than cash
in the account may have a leveraging effect on the Fund's assets. That
is, to the extent that the Fund remains
substantially fully invested in securities at the time that it has
committed to purchase securities on a when-issued
basis, there will be greater fluctuation in its net asset value than if
it had set aside cash to satisfy its purchase
commitments. On the settlement date, the Fund will meet its obligations
from then-available cash flow, the sale of
securities held in the separate account, the sale of other securities
or, although it normally would not expect to do
so, from the sale of the when-issued or delayed-delivery securities
themselves (which may have a greater or lesser
value than the Fund's payment obligations).
Lending of Portfolio Securities
As stated in the Prospectus, the Fund has the ability to lend securities
from its portfolio to brokers, dealers and
other financial organizations. Such loans, if and when made, may not
exceed 33 1/3% of the Fund's total assets,
taken at value. The Fund may not lend its portfolio securities to Smith
Barney or its affiliates without specific
authorization from the Securities and Exchange Commission (the SEC).
Loans of portfolio securities by the Fund
will be collateralized by cash, letters of credit or securities issued
or guaranteed by the United States government or
its agencies which are maintained at all times in an amount equal to at
least 100% of the current market value of
the loaned securities. From time to time, the Fund may return a part of
the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third
party, which is unaffiliated with the Fund or
with Smith Barney and which is acting as a finder.
In lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the
loaned securities, as well as either investing the cash collateral in
short-term instruments or by obtaining yield in
the form of interest paid by the borrower when U.S. government
securities are used as collateral. Requirements of
the SEC, which may be subject to further modifications, currently
provide that the following conditions must be
met whenever portfolio securities are loaned: (a) the Fund must receive
at least 100% cash collateral or equivalent
securities from the borrower; (b) the borrower must increase such
collateral whenever the market value of the
securities rises above the level of such collateral; (c) the Fund must
be able to terminate the loan at any time; (d)
the Fund must receive reasonable interest on the loan, as well as an
amount equal to any dividends, interest or
other distributions on the loaned securities, and any increase in market
value; (e) the Fund may pay only
reasonable custodian fees in connection with the loan; and (f) voting
rights on the loaned securities may pass to the
borrower; however, if a material event adversely affecting the
investment occurs, the Fund's Board of Directors
must terminate the loan and regain the right to vote the securities.
The risks in lending portfolio securities, as
with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will be made
to firms deemed by SBMFM to be of good standing and will not be made
unless, in the judgment of SBMFM, the
consideration to be earned from such loans would justify the risk.
Transactions in Interest Rate Futures Contracts and Related Options
The Fund may enter into interest rate futures contracts and options on
interest rate futures contracts that are
traded on a U.S. exchange or board of trade. These investments may be
made by the Fund for the purpose of
hedging against changes in the value of its portfolio securities due to
anticipated changes in interest rates and
market conditions and not for purposes of speculation. The Fund will
not be permitted to enter into futures and
options contracts (other than those considered bona fide hedging by the
Commodity Futures Trading Commission)
for which aggregate initial margin deposits and premiums exceed 5% of
the fair market value of the Fund's assets,
after taking into account unrealized profits and unrealized losses on
contracts into which it has entered.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of
a certain amount of specified interest rate sensitive financial
instruments (debt securities) at a specified price, date,
time and place.
The purpose of entering into a futures contract by the Fund is to
protect the Fund from fluctuations in interest
rates on securities without actually buying or selling the securities.
For example, if the Fund owns long-term U.S.
government securities and interest rates are expected to increase, the
Fund may enter into a futures contract to sell
U.S. Treasury Bonds. Such a transaction would have much the same effect
as the Fund's selling some of the long-
term bonds in its portfolio. If interest rates increase as anticipated,
the value of certain long-term U.S. government
securities in the portfolio would decline, but the value of the Fund's
futures contracts would increase at
approximately the same rate, thereby keeping the net asset value of the
Fund from declining as much as it may
have otherwise. Of course, because the value of portfolio securities
will far exceed the value of the futures
contracts sold by the Fund, an increase in the value of the futures
contracts can only mitigate - but not totally offset
- - the decline in the value of the portfolio. If, on the other hand, the
Fund held cash reserves and interest rates are
expected to decline, the Fund may enter into futures contracts for the
purchase of U.S. government securities in
anticipation of later purchases of securities. The Fund can accomplish
similar results by buying securities with
long maturities and selling securities with short maturities. But by
using futures contracts as an investment tool to
reduce risk, given the greater liquidity in the futures market than in
the cash market, it may be possible to
accomplish the same result more easily and more quickly.
No consideration will be paid or received by the Fund upon entering into
a futures contract. Initially, the Fund
will be required to deposit with the broker an amount of cash or cash
equivalents equal to approximately 1% to
10% of the contract amount (this amount is subject to change by the
board of trade on which the contract is traded
and members of such board of trade may charge a higher amount). This
amount is known as initial margin and is
in the nature of a performance bond or good faith deposit on the
contract which is returned to the Fund, upon
termination of the futures contract, assuming that all contractual
obligations have been satisfied. Subsequent
payments, known as variation margin, to and from the broker, will be
made daily as the price of the securities
underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less
valuable, a process known as marking-to-market. In addition, when the
Fund enters into a long position in futures
or options on futures, it must deposit and maintain in a segregated
account with its custodian an amount of cash or
cash equivalents equal to the total market value of such futures
contract, less the amount of initial margin for the
contract and any profits on the contract that may be held by the broker.
At any time prior to the expiration of a
futures contract, the Fund may elect to close the position by taking an
opposite position, which will operate to
terminate the Fund's existing position in the contract.
There are several risks in connection with the use of futures contracts
as a hedging device. Successful use of
futures contracts by the Fund is subject to the ability of SBMFM to
predict correctly movements in the direction of
interest rates. These predictions involve skills and techniques that
may be different from those involved in the
management of the Fund. In addition, there can be no assurance that
there will be a perfect correlation between
movements in the price of the securities underlying the futures contract
and movements in the price of the
securities which are the subject of the hedge. A decision as to
whether, when and how to hedge involves the
exercise of skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of
market behavior or unexpected trends in interest rates.
Although the Fund intends to enter into futures contracts only if there
is an active market for such contracts,
there is no assurance that a liquid market will exist for the contracts
at any particular time. Most domestic futures
exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single
trading day. Once the daily limit has been reached in a particular
contract no trades may be made that day at a
price beyond that limit. It is possible that futures contract prices
could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and
subjecting some futures traders to substantial losses. In such event,
and in the event of adverse price movements,
the Fund would be required to make daily cash payments of variation
margin. In such circumstances, an increase
in the value of the portion of the portfolio being hedged, if any, may
partially or completely offset losses on the
futures contract.
If the Fund had hedged against the possibility of an increase in
interest rates adversely affecting the value of
securities held in its portfolio and rates decrease instead, the Fund
will lose part or all of the benefit of the
increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may
have to sell securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so.
These sales of securities may, but will not
necessarily, be at increased prices which reflect the decline in
interest rates.
Purchasing Options. Options on interest rate futures contracts are
similar to options on securities, except that
an option on an interest rate futures contract gives the purchaser the
right, in return for the premium paid, to
assume a position in an interest rate futures contract (rather than to
purchase securities) at a specified exercise
price at any time prior to the expiration date of the option. A call
option gives the purchaser of such option the
right to take a long position, and obliges its writer to take a short
position in a specified underlying futures contract
at a stated exercise price at any time prior to the expiration date of
the option. A purchaser of a put option has the
right to enter into a short position, and the writer has the obligation
to enter into a long position in such contract at
the exercise price during the option period. If an option is exercised
on the last trading day prior to the expiration
date of the option, the settlement will be made entirely in cash equal
to the difference between the exercise price of
the option and the closing price of the interest rate futures contract
on the expiration date. The potential loss
related to the purchase of an option on interest rate futures contracts
is limited to the premium paid for the option
(plus transaction costs), and there are no daily cash payments to
reflect changes in the value of the underlying
contract. However, the value of the option does change daily and that
change is reflected in the net asset value of
the Fund.
The purchase of put options on interest rate futures contracts is
analogous to the purchase of protective puts on
debt securities so as to hedge a portfolio of debt securities against
the risk of rising interest rates. The Fund may
purchase put options on interest rate futures contracts if SBMFM
anticipates a rise in interest rates. Because of the
inverse relationship between trends in interest rates and the values of
debt securities, a rise in interest rates would
result in a decline in the value of the Fund's portfolio securities.
Because the value of an interest rate futures
contract moves inversely in relation to changes in interest rates, as is
the case with debt securities, a put option on
such a contract becomes more valuable as interest rates rise. By
purchasing put options on interest rate futures
contracts at a time when SBMFM expects interest rates to rise, the Fund
would seek to realize a profit to offset the
loss in value of its portfolio securities, without the need to sell such
securities.
The Fund may purchase call options on interest rate futures contracts if
SBMFM anticipates a decline in
interest rates. Historically, unscheduled prepayments on mortgage-
backed securities (such as GNMA certificates)
have increased in periods of declining interest rates, as mortgagors
have sought to refinance at lower interest rates.
As a result, if the Fund purchases such securities at a premium prior to
a period of declining interest rates, the
subsequent prepayments at par will reduce the yield on such securities
by magnifying the effect of the premium in
relationship to the principal amount of securities, and may, under
extreme circumstances, result in a loss to the
Fund. This effect may not be offset by any appreciation in value in a
debt security normally attributable to the
interest rate decline. To protect itself against the possible erosion
of principal on securities purchased at premium,
the Fund may purchase call options on interest rate futures. The option
would increase in value as interest rates
decline, thereby tending to offset any reductions of the yield on
portfolio securities purchased at a premium
resulting from the effect of prepayments on the amortization of such
premiums.
Writing Options. The Fund may write put and call options on interest
rate futures contracts other than as part
of closing sale transactions, in order to increase its ability to hedge
against changes in interest rates. A call option
gives the purchaser of such option the right to take a long position,
and obliges the Fund as its writer to take a
short position in a specified underlying futures contract at a stated
exercise price at any time prior to the expiration
date of the option. A purchaser of a put option has the right to take a
short position, and obliges the Fund as the
writer to take a long position in such contract at the exercise price
during the option period.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the debt
securities which are deliverable upon exercise of the futures contract.
If the futures price at expiration is below the
exercise price, the Fund will retain the full amount of the option
premium, which provides a partial hedge against
any decline that may have occurred in the Fund's holdings of debt
securities. If a put option is exercised, the net
cost to the Fund of the debt securities acquired by it will be reduced
by the amount of the option premium received.
Of course, if market prices have declined, the Fund's purchase price
upon exercise of the option maybe greater than
the price at which the debt securities might be purchased in the cash
market, and, therefore, a loss may be realized
when the difference between the exercise price and the market value of
the debt securities is greater than the
premium received for writing the option.
As is currently the case with respect to its purchases of futures, the
Fund will write put and call options on
interest rate futures contracts only as a hedge against changes in the
value of its securities that may result from
market conditions, and not for purposes of speculation.
When the Fund writes a call or a put option, it will be required to
deposit initial margin and variation margin
pursuant to brokers' requirements similar to those applicable to
interest rate futures contracts described above. In
addition, net option premiums received for writing options will be
included as initial margin deposits. At any time
prior to the expiration of the option, the Fund may elect to close the
position.
In addition to the risks that apply to all options transactions, there
are several special risks relating to options
on interest rate futures contracts. These risks include the lack of
assurance of perfect correlation between price
movements in the option on interest rate futures, on the one hand, and
price movements in the portfolio securities
that are the subject of the hedge, on the other hand. In addition, the
Fund's writing of put and call options on
interest rate futures will be based upon predictions as to anticipated
interest rate trends, which predictions could
prove to be inaccurate. The ability to establish and close out
positions on such options will be subject to the
maintenance of a liquid market, and there can be no assurance that such
a market will be maintained or that
closing transactions will be effected. Moreover, the option may not be
subject to daily price fluctuation limits while
the underlying futures contract is subject to such limits, and as a
result normal pricing relationships between
options and the underlying futures contract may not exist when the
future is trading at its price limit. In addition,
there are risks specific to writing (as compared to purchasing) such
options. While the Fund's risk of loss with
respect to purchased put and call options on interest rate futures
contracts is limited to the premium paid for the
option (plus transaction costs), the writer of an option who does not
have a covering position in the underlying
futures contract is subject to risk of loss on the futures contract less
the premium received. When the Fund writes
such an option, it is obligated to a broker for the payment of initial
and variation margin.
Under policies adopted by the Board of Directors, the Fund's investment
in premiums paid for call and put
options at any one time may not exceed 5% of the value of the Fund's
total assets.
Investment Restrictions
Restrictions numbered 1 through 8 below have been adopted by the Fund as
fundamental policies. These
restrictions cannot be changed without approval by the holders of a
majority of the outstanding shares of the Fund,
defined as the lesser of (a) 67% or more of the shares present at a
meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (b) more than
50% of the Fund's outstanding shares. The
remaining restrictions may be changed by a vote of the Fund's Board of
Directors at any time.
The Fund will not:
1. With respect to 75% of the value of its total assets, invest more
than 5% of its total assets in securities of
any one issuer, except securities issued or guaranteed by the United
States government, or purchase more than
10% of the outstanding voting securities of such issuer.
2. Issue senior securities as defined in the 1940 Act and any rules
and orders thereunder, except insofar as
the Fund may be deemed to have issued senior securities by reason of:
(a) borrowing money or purchasing
securities on a when-issued or delayed-delivery basis; (b) purchasing or
selling futures contracts and options
on futures contracts and other similar instruments; and (c) issuing
separate classes of shares.
3. Invest more than 25% of its total assets in securities, the
issuers of which are in the same industry. For
purposes of this limitation, U.S. government securities and securities
of state or municipal governments and
their political subdivisions are not considered to be issued by members
of any industry.
4. Borrow money, except that: (a) the Fund may borrow from banks for
temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests which
might otherwise require the
untimely disposition of securities, in an amount not exceeding 10% of
the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities (not
including the amount borrowed) at the
time the borrowing is made; and (b) the Fund may enter into reverse
repurchase agreements and forward roll
transactions. Whenever borrowings other than reverse repurchase
agreements and forward roll transactions
exceed 5% of the value of the Fund's total assets, the Fund will not
make additional investments.
5. Make loans. This restriction does not apply to: (a) the purchase
of debt obligations in which the Fund
may invest consistent with its investment objective and policies; (b)
repurchase agreements; and (c) loans of its
portfolio securities.
6. Engage in the business of underwriting securities issued by other
persons, except to the extent that the
Fund may technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in
disposing of portfolio securities.
7. Purchase or sell real estate, real estate mortgages, real estate
investment trust securities, commodities or
commodity contracts, but this shall not prevent the Fund from: (a)
investing in securities of issuers engaged in
the real estate business and securities which are secured by real estate
or interests therein; (b) holding or
selling real estate received in connection with securities it holds; or
(c) trading in futures contracts and options
on futures contracts.
8. Purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of
purchases and sales of portfolio securities) or sell any securities
short (except against the box). For purposes of
this restriction, the deposit or payment by the Fund of initial or
maintenance margin in connection with
futures contracts and related options and options on securities is not
considered to be the purchase of a security
on margin.
9. Purchase or sell oil, gas or other mineral exploration or
development programs.
10. Invest in securities of other investment companies, except as they
may be acquired as part of a merger,
consolidation, reorganization or acquisition of assets.
11. Purchase restricted securities, illiquid securities (such as
repurchase agreements with maturities in excess
of seven days) or other securities which are not readily marketable if
more than 15% of the total assets of the
Fund would be invested in such securities.
12. Purchase any security if as a result the Fund would then have more
than 5% of its total assets (taken at
current value) invested in securities of companies that have been in
continuous operations for fewer than three
years, except that this restriction will not apply to U.S. government
securities. (For purposes of this
restriction, issuers include predecessors, sponsors, controlling
persons, general partners and guarantors of
underlying assets.)
13. Make investments for the purpose of exercising control or
management.
14. Purchase or retain securities of any company if, to the knowledge
of the Fund, any of the Fund's officers
and Directors or any officer or director of SBMFM individually owns more
than 1/2 of 1% of the outstanding
securities of such company and together they own beneficially more than
5% of the securities.
15. Engage in the purchase or sale of put, call, straddle or spread
options or in the writing of such options,
except that (a) the Fund may purchase and sell options on U.S.
government securities, write covered put and
call options on U.S. government securities and enter into closing
transactions with respect to such options and
(b) the Fund may sell interest rate futures contracts and write put and
call options on interest rate futures
contracts.
Certain restrictions listed above permit the Fund without shareholder
approval to engage in investment
practices that the Fund does not currently pursue. The Fund has no
present intention of altering its current
investment practices as otherwise described in the Prospectus and this
Statement of Additional Information and
any future change in those practices would require Board approval and
appropriate disclosure to investors. In
order to permit sale of the Fund's shares in certain states, the Fund
may make commitments more restrictive than
the investment restrictions described above. Should the Fund determine
that any such commitment is no longer in
the best interests of the Fund and its shareholders, it will revoke the
commitment by terminating sales of its shares
in the state involved.
Portfolio Turnover
While the Fund does not intend to trade in securities for short-term
profits, securities may be sold without regard to
the amount of time that they have been held by the Fund when warranted
by the circumstances. Certain practices
which may be employed by the Fund would result in a turnover rate in
excess of 100%. A portfolio turnover rate
100% would occur, for example, if all of the Fund's securities were
replaced once during a period of one year. For
the 1996, 1995 and 1994 fiscal years, the Fund's rates of portfolio
turnover (the lesser of purchases or sales of
portfolio securities, excluding short-term securities, for the year
divided by the monthly average value of portfolio
securities) were 275%, 292%, 236%, respectively.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are made by SBMFM,
subject to the overall supervision and
review of the Fund's Board of Directors. Portfolio securities
transactions for the Fund are effected by or under the
supervision of SBMFM.
The Fund normally purchases newly issued U.S. government securities
directly from the U.S. Treasury or from
the agency or instrumentality that is the issuer. Certain U.S.
government securities are purchased from an
underwriter acting as principal. Other purchases and sales usually are
placed with those dealers from which it
appears that the best price or execution will be obtained; such dealers
may be acting as either agents or principals.
No brokerage commissions typically are paid by the Fund on purchases and
sales of portfolio securities. The
purchase price paid by the Fund to underwriters of newly issued
securities and dealers in the after-market normally
are executed at a price between the bid and asked prices. The Fund paid
no brokerage commissions during the
fiscal years ended July 31, 1994, 1995 and 1996.
SBMFM selects dealers for portfolio transactions in its best judgment
and in a manner deemed fair and
reasonable to shareholders. The primary considerations are the
availability of the desired security and the prompt
execution of orders in an effective manner at the most favorable prices.
Subject to these considerations, dealers
which provide supplemental investment research and statistical or other
services to SBMFM may receive orders for
portfolio transactions by the Fund. Information so received enables
SBMFM to supplement its own research and
analysis with the views and information of other securities firms. Such
information may be useful to SBMFM in
serving both the Fund and other clients, and, conversely, supplemental
information obtained by the placement of
business of other clients may be useful to SBMFM in carrying out its
obligations to the Fund.
While investment decisions for the Fund are made independently from
those of the other accounts managed by
SBMFM, investments of the type that the Fund may make also may be made
by such other accounts. When the
Fund and one or more other accounts managed by SBMFM are prepared to
invest in, or desire to dispose of, the
same security, available investments or opportunities for sales will be
allocated in a manner believed by SBMFM to
be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in the
Prospectus applies to purchases made by any
purchaser,'' which is defined to include the following: (a) an
individual; (b) an individual's spouse and his or her
children purchasing shares for his or her own account; (c) a trustee or
other fiduciary purchasing shares for a
single trust estate or single fiduciary account; (d) a pension, profit-
sharing or other employee benefit plan qualified
under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the Code''), and qualified employee
benefit plans of employers who are affiliated persons'' of each other
within the meaning of the 1940 Act; (e) tax-
exempt organizations enumerated in Section 501(c)(3) or (13) of the
Code; and (f) a trustee or other professional
fiduciary (including a bank, or an investment adviser registered with
the SEC under the Investment Advisers Act
of 1940, as amended) purchasing shares of the Fund for one or more trust
estates or fiduciary accounts. Purchasers
who wish to combine purchase orders to take advantage of volume
discounts should contact a Smith Barney
Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the
Prospectus, apply to any purchase of Class A shares
if the aggregate investment in Class A shares of the Fund and in Class A
shares of other Smith Barney Mutual
Funds offered with a sales charge, including the purchase being made, of
any purchaser is $25,000 or more. The
reduced sales charge is subject to confirmation of the shareholder's
holdings through a check of appropriate
records. The Fund reserves the right to terminate or amend the combined
right of accumulation at any time after
written notice to shareholders. For further information regarding the
right of accumulation, shareholders should
contact a Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The
public offering price for a Class A and Class Y
share of the Fund is equal to the net asset value per share at the time
of purchase, plus for Class A shares an initial
sales charge based on the aggregate amount of the investment. The
public offering price for a Class B and Class C
share (and Class A share purchases, including applicable rights of
accumulation, equaling or exceeding $500,000),
is equal to the net asset value per share at the time of purchase and no
sales charge is imposed at the time of
purchase. A contingent deferred sales charge (CDSC''), however, is
imposed on certain redemptions of Class B
and Class C shares, and Class A shares when purchased in amounts
equaling or exceeding $500,000. The method
of computation of the public offering price is shown in the Fund's
financial statements incorporated by reference in
their entirety into this Statement of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment
postponed (a) for any period during which the
New York Stock Exchange, Inc. (NYSE'') is closed (other than for
customary weekend and holiday closings), (b)
when trading in markets the Fund normally utilizes is restricted, or an
emergency exists, as determined by the
SEC, so that disposal of the Fund's investments or determination of net
asset value is not reasonably practicable or
(c) for such other periods as the SEC by order may permit for the
protection of the Fund's shareholders.
Distribution in Kind
If the Board of Directors of the Fund determines that it would be
detrimental to the best interests of the remaining
shareholders of the Fund to make a redemption payment wholly in cash,
the Fund may pay, in accordance with
SEC rules, any portion of a redemption in excess of the lesser of
$250,000 or 1.00% of the Fund's net assets by a
distribution in kind of portfolio securities in lieu of cash. Securities
issued as a distribution in kind may incur
brokerage commissions when shareholders subsequently sell those
securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the Withdrawal Plan'') is available
to shareholders who own shares with a
value of at least $10,000 and who wish to receive specific amounts of
cash monthly or quarterly. Withdrawals of at
least $50 may be made under the Withdrawal Plan by redeeming as many
shares of the Fund as may be necessary
to cover the stipulated withdrawal payment. Any applicable CDSC will not
be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan
commences. (With respect to Withdrawal Plans in effect prior to November
7, 1994, any applicable CDSC will be
waived on amounts withdrawn that do not exceed 2.00% per month of the
value of a shareholder's shares at the
time the Withdrawal Plan commences.) To the extent that withdrawals
exceed dividends, distributions and
appreciation of a shareholder's investment in the Fund, there will be a
reduction in the value of the shareholder's
investment and continued withdrawal payments will reduce the
shareholder's investment and may ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in the Fund. Furthermore,
as it generally would not be advantageous to a shareholder to make
additional investments in the Fund at the same
time he or she is participating in the Withdrawal Plan, purchases by
such shareholders in amounts of less than
$5,000 ordinarily will not be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form
must deposit their share certificates with the Transfer Agent as agent
for Withdrawal Plan members. All dividends
and distributions on shares in the Withdrawal Plan are reinvested
automatically at net asset value in additional
shares of the Fund. Withdrawal Plans should be set up with a Smith
Barney Financial Consultant. A shareholder
who purchases shares directly through the Transfer Agent may continue to
do so and applications for participation
in the Withdrawal Plan must be received by the Transfer Agent no later
than the eighth day of the month to be
eligible for participation beginning with that month's withdrawal. For
additional information, shareholders should
contact a Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts basis
pursuant to a written agreement (the
Distribution Agreement), which was most recently approved by the Fund's
Board of Directors on July 17, 1996. For
the fiscal years ended July 31, 1994, 1995, and 1996, Smith Barney or
its predecessor, Shearson Lehman Brothers,
received $362,103, $1,626,500 and $279,000, respectively, in sales
charges for the sale of the Fund's Class A
shares and did not reallow any portion thereof to dealers. For the
fiscal years ended July 31, 1994, 1995 and 1996,
Smith Barney or Shearson Lehman Brothers received $449,792, $466,900 and
$489,000, respectively, representing
CDSC on redemption of the Fund's Class B shares.
When payment is made by the investor before the settlement date, unless
otherwise directed by the investor,
the funds will be held as a free credit balance in the investor's
brokerage account, and Smith Barney may benefit
from the temporary use of the funds. The investor may designate another
use for the funds prior to settlement date,
such as an investment in a money market fund (other than the Smith
Barney Exchange Reserve Fund) of the Smith
Barney Mutual Funds. If the investor instructs Smith Barney to invest
the funds in a Smith Barney money market
fund, the amount of the investment will be included as part of the
average daily net assets of both the Fund and the
Smith Barney money market fund, and affiliates of Smith Barney which
serve the funds in an investment advisory
or administrative capacity will benefit from the fact that they are
receiving fees from both such investment
companies for managing these assets computed on the basis of their
average daily net assets. The Fund's Board of
Directors has been advised of the benefits to Smith Barney resulting
from three-day settlement procedures and will
take such benefits into consideration when reviewing the Advisory,
Administration and Distribution Agreements
for continuance.
For the fiscal year ended July 31, 1996, Smith Barney incurred
distribution expenses totaling approximately
$2,181,911 consisting of approximately $110,843 for advertising, $14,309
for printing and mailing of
prospectuses, $1,556,817 for support services, $498,020 to Smith Barney
Financial Consultants, and $1,922 in
accruals for interest on the excess of Smith Barney expenses incurred in
distributing the Fund's shares over the
sum of the distribution fees and CDSC received by Smith Barney from the
Fund.
Distribution Arrangements
To compensate Smith Barney for the services it provides and for the
expense it bears under the Distribution
Agreement, the Fund has adopted a services and distribution plan (the
Plan) pursuant to Rule 12b-1 under the 1940
Act. Under the Plan, the Fund pays Smith Barney a service fee, accrued
daily and paid monthly, calculated at the
annual rate of 0.25% of the value of the Fund's average daily net assets
attributable to the Class A, Class B and
Class C shares. In addition, the Fund pays Smith Barney a distribution
fee with respect to the Class B and Class C
shares primarily intended to compensate Smith Barney for its initial
expense of paying Financial Consultants a
commission upon sales of those shares. The Class B distribution fee is
calculated at the annual rate of 0.50% of the
value of the Fund's average daily net assets attributable to the shares
of the Class. The Class C distribution fee is
calculated at the annual rate of 0.45% of the value of the Fund's
average daily net assets attributable to the shares
of the Class.
The following service and distribution fees were incurred during the
periods indicated:
Service Fees
Fiscal Year
Ended 7/31/96
Fiscal Year
Ended 7/31/95
Fiscal Year
Ended 7/31/94
Class A
$1,252,333
$1,291,642
$1,047,795
Class B
307,888
434,551
1,085,386
Class C
2,113
329
157
Distribution Fees
Fiscal Year
Ended 7/31/96
Fiscal Year
Ended 7/31/95
Fiscal Year
Ended 7/31/94
Class A
$0
$0
$0
Class B
615,775
869,103
2,170,771
Class C
3,802
445
314
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of
the Fund's Board of Directors, including a majority of the Independent
Directors. The Plan may not be amended to
increase the amount of the service and distribution fees without
shareholder approval, and all material amendments
of the Plan also must be approved by the Directors and Independent
Directors in the manner described above. The
Plan may be terminated with respect to a Class at any time, without
penalty, by vote of a majority of the
Independent Directors or by vote of a majority of the outstanding voting
securities of the Class (as defined in the
1940 Act) on not more than 30 days' written notice to any other party to
the Plan. Pursuant to the Plan, Smith
Barney will provide the Fund's Board of Directors with periodic reports
of amounts expended under the Plan and
the purpose for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the
NYSE is closed. The NYSE currently is scheduled to be closed on New
Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. Because of the
differences in distribution fees and Class-specific expenses, the per
share net asset value of each Class may differ.
The following is a description of the procedures used by the Fund in
valuing its assets.
Securities listed on a national securities exchange will be valued on
the basis of the last sale on the date on which
the valuation is made or, in the absence of sales, at the mean between
the closing bid and asked prices. U.S.
government securities will be valued at the mean between the closing bid
and asked prices on each day, or, if
market quotations for those securities are not readily available, at
fair value, as determined in good faith by the
Fund's Board of Directors. Over-the-counter securities will be valued
on the basis of the bid price at the close of
business on each day, or, if market quotations for those securities are
not readily available, at fair value, as
determined in good faith by the Fund's Board of Directors. Short-term
obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as
determined by the Fund's Board of Directors.
Amortized cost involves valuing an instrument at its original cost to
the Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the
effect of fluctuating interest rates on the
market value of the instruments. All other securities and other assets
of the Fund will be valued at fair value as
determined in good faith by the Fund's Board of Directors.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any of the Smith Barney Mutual
Funds may exchange all or part of their
shares for shares of the same Class of other Smith Barney Mutual Funds,
to the extent such shares are offered for
sale in the shareholder's state of residence, on the basis of relative
net asset value per share at the time of exchange
as follows:
A. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of the Fund
exchanged for Class B shares of another fund will be subject to the
higher applicable CDSC of the two funds
and, for purposes of calculating CDSC rates and conversion periods, will
be deemed to have been held since
the date the shares being exchanged were deemed to be purchased.
B. Class C shares of any fund may be exchanged without a sales
charge. For purposes of calculating
CDSC rates and conversion periods, Class C shares of the Fund exchanged
for Class C shares of another
fund will be deemed to have been held since the date the shares bring
exchanged were deemed to be
purchased.
Dealers other than Smith Barney must notify the Transfer Agent of the
investor's prior ownership of Class A
shares of the same Class in a fund with different investment objectives
when they believe that a shift between funds
is an appropriate investment decision. This privilege is available to
shareholders residing in any state in which the
fund shares being acquired may legally be sold. Prior to any exchange,
the shareholder would obtain and review a
copy of the current prospectus of each fund into which an exchange is
being considered. Prospectuses may be
obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are
redeemed at the then-current net asset value and the proceeds are
immediately invested, at a price as described
above, in shares of the fund being acquired. Smith Barney reserves the
right to reject any exchange request. The
exchange privilege may be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote its yield or total return in
advertisements or in reports and other
communications to shareholders. The Fund may include comparative
performance information in advertising or
marketing the Fund's shares. Such performance information may include
data from the following industry and
financial publications: Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes,
Fortune, Institutional Investor, Investors Business Daily, Money,
Morningstar Mutual Funds Values, The New
York Times, USA Today and The Wall Street Journal.
Average Annual Total Return
Average annual total return figures are computed according to a formula
prescribed by the SEC. The formula can
be expressed as follows:
P(1 = T)n = ERV
Where P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-
, 5-, or 10-year period at the end of the 1-, 5- or 10-year period (or
fractional portion
thereof), assuming reinvestment of all dividends and distributions.
The Fund's average annual total returns for Class A shares were as
follows for the periods indicated:
(0.94)% for the one-year period beginning August 1, 1995 through
July 31, 1996;
6.32% per annum during the five-year period beginning on August 1,
1991 through July 31, 1996; and
7.02% per annum during the ten-year period beginning in August 1,
1986 through July 31, 1996.
The average annual total return figures assume that the maximum 4.50%
sales charge has been deducted from the
investment at the time of purchase. If the maximum sales charge of
4.50% had not been deducted at the time of
purchase, the average annual total return for the same periods would
have been 3.76%, 7.31%, and 7.52%,
respectively.
The Fund's average annual total returns for Class B shares were as
follows for the periods indicated:
(1.26)% for the one-year period beginning August 1, 1995 though
July 31, 1996; and
4.74% per annum during the period from commencement of operations
(November 6, 1992) through July
31, 1996.
The average annual total return figures assume that the maximum
applicable CDSC has been deducted from the
investment at the time of redemption. If the maximum applicable CDSC
had not been deducted at the time of
redemption, the average annual total return for the same periods would
have been 3.24% and 5.21%, respectively.
The Fund's average total returns for Class C shares (formerly designated
Class D shares) were as follows for the
periods indicated:
2.25% for the one-year period beginning August 1, 1995 through
July 31, 1996; and
3.55 % per annum during the period from commencement of operations
(June 29, 1993) through July 31,
1996.
The average annual total return figures assume that the maximum
applicable CDSC has been deducted from the
investment at the time of redemption. If the maximum applicable CDSC
had not been deducted at the time of
redemption, the average annual total return for the same periods would
have been 3.25% and 3.55%, respectively.
Aggregate Total Return
Aggregate total return figures represent the cumulative change in the
value of an investment in the Class for the
specified period and are computed by the following formula:
ERV-P
P
Where: P = a hypothetical initial payment of
$10,000
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning
of the 1-, 5-, or 10-year period at the end of the 1-, 5- or 10-year
period (or fractional
portion thereof), assuming reinvestment of all dividends and
distributions.
The Fund's aggregate totals returns for Class A shares were as follows
for the periods indicated:
(0.94)% for the one-year period beginning August 1, 1995 through
July 31, 1996;
35.90% during the five-year period beginning on August 1, 1990
through July 31, 1996; and
106.46% during the ten-year period beginning on August 1, 1986
through July 31, 1996.
These aggregate total return figures assume that the maximum 4.50% sales
charge has been deducted from the
investment at the time of purchase. If the maximum sales charge had not
been deducted at the time of purchase, the
Class A shares' aggregate total return for the same periods would have
been 3.76%, 42.30%, and 173.36%,
respectively.
The Fund's aggregate total returns for Class B shares were as follows
for the periods indicated:
(1.26)% for the one-year period beginning August 1, 1995 through
July 31, 1996; and
20.87% during the period from commencement of operations (November
6, 1992) through July 31, 1996.
These aggregate total return figures assume that the maximum applicable
CDSC has been deducted from the
investment at the time of redemption. If the maximum CDSC had not been
deducted at the time of redemption, the
Class B shares' aggregate total return for the same periods would have
been 3.21% and 20.87%, respectively.
The Fund's aggregate total returns for Class C shares (formerly
designated Class D shares) were as follows for the
periods indicated:
2.25% for the one-year period beginning August 1, 1995 through
July 31, 1996; and
11.39% during the period from commencement of operations (June 29,
1993) through July 31, 1996.
These aggregate total return figures assume that the maximum applicable
CDSC has been deducted from the
investment at the time of redemption. If the maximum CDSC had not been
deducted at the time of redemption, the
Class C shares' aggregate total return for the same periods would have
been 3.25% and 11.39%, respectively.
Performance will vary from time to time depending upon market
conditions, the composition of the Fund's
portfolio, operating expenses and the expenses exclusively attributable
to the Class. Consequently, any given
performance quotation should not be considered representative of the
Class' performance for any specified period
in the future. Because performance will vary, it may not provide a
basis for comparing an investment in the Class
with certain bank deposits or other investments that pay a fixed yield
for a stated period of time. Investors
comparing the Class' performance with that of other mutual funds should
give consideration to the quality and
maturity of the respective investment companies' portfolio securities.
It is important to note that the total return figures set forth above
are based on historical earnings and are not
intended to indicate future performance
TAXES
Taxation of the Fund
The following is a summary of certain Federal income tax considerations
that may affect the Fund and its
shareholders. This summary is not intended as a substitute for
individual tax advice and investors are urged to
consult their own tax advisors as to the tax consequences of an
investment in the Fund.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under
the Code. Provided that the Fund (a) qualifies as a regulated investment
company and (b) distributes at least 90%
of its net investment income (including, for this purpose, net realized
short-term capital gains), the Fund will not
be liable for Federal income taxes to the extent that its net investment
income and its net realized long- and short-
term capital gains, if any, are distributed to its shareholders.
Interest received from U.S. government securities, and
gains from the sale of U.S. government securities and from the Fund's
options transactions, will qualify toward this
90% limitation. The Code also requires a regulated investment company to
earn less than 30% of its gross income
from the sale of securities or certain financial instruments held less
than three months. This limitation may restrict
the Fund's ability to dispose of its securities, to write or purchase
options on securities that have been held for less
than three months, to write or purchase options that expire within
three months, or to enter into closing
transactions with respect to its options positions.
Taxation of Fund Shareholders
The Fund will pay dividends consisting of substantially all of its net
investment income monthly. Distributions of
net realized short-term capital gains, if any, generally are declared
and paid annually, although they may be
declared or paid more or less frequently at the discretion of the Fund's
Board of Directors. The Fund will distribute
net realized long-term capital gains, if any, at the end of the fiscal
year in which they are earned. Dividends from
net investment income and distributions of net realized short-term
capital gains are taxable to a shareholder as
ordinary income for Federal income tax purposes, regardless of whether
the shareholder receives the dividends or
distributions in additional shares or in cash. Distributions of net
realized long-term capital gains are taxable to a
shareholder as long-term capital gains, regardless of how long the
shareholder has held the Fund's shares and
regardless of whether the distribution is received in additional shares
or in cash. However, if a shareholder receives
a distribution taxable as long-term capital gain with respect to any
share and if such share is held by the
shareholder for six months or less, then any loss on the redemption or
exchange of such share, up to the amount of
the distribution, will be treated as long-term capital loss. Dividends
and distributions paid by the Fund generally
will not be eligible for the dividends received deduction for
corporations.
If a shareholder (a) incurs a sales charge in acquiring or redeeming
shares of the Fund, (b) disposes of those
shares within 90 days and (c) acquires shares in a mutual fund for which
the otherwise applicable sales charge is
reduced by reason of a reinvestment right (i.e., exchange privilege),
the original sales charge increases the
shareholder's tax basis in the original shares only to the extent that
the otherwise applicable sales charge for the
second acquisition is not reduced. The portion of the original sales
charge that does not increase the shareholder's
tax basis in the original shares would be treated as incurred with
respect to the second acquisition and, as a general
rule, would increase the shareholder's tax basis in the newly acquired
shares. Furthermore, the same rule also
applies to a disposition of the newly acquired or redeemed shares made
within 90 days of the second acquisition.
This provision prevents a shareholder from immediately deducting the
sales charge by shifting his or her
investment in a family of mutual funds.
Investors considering buying shares of the Fund on or just prior to a
record date for a taxable dividend or
capital gain distribution should be aware that, regardless of whether
the price of the Fund shares to be purchased
reflects the amount of the forthcoming distribution payment, any such
payment will be a taxable dividend or
distribution payment.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to fully report dividend or
interest income, or fails to certify that he or she has provided a
correct taxpayer identification number and that he
or she is not subject to backup withholding, then the shareholder may be
subject to a 31% backup withholding tax
with respect to (a) dividends and distributions and (b) proceeds of any
redemption of Fund shares. An individual's
taxpayer identification number is his or her social security number. The
backup withholding tax is not an
additional tax and may be credited against a shareholder's regular
Federal income tax liability.
Taxation of the Fund's Investments
Gains or losses on the sales of securities by the Fund generally will be
long-term capital gains or losses if the
securities have been held by the Fund for more than one year and will be
short-term capital gains or losses if the
securities have been held by the Fund for one year or less. If the Fund
acquires a debt security at a substantial
discount, a portion of any gain on its sale or redemption may be
characterized as ordinary income, rather than
capital gains, to the extent that it reflects accrued market discount.
When the Fund writes a covered call option on a debt security, it will
receive a premium. If an option which
the Fund has written expires on its stipulated expiration date, or if
the Fund enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the premium
received when the option was written) without regard to any unrealized
gain or loss on the underlying security.
Subject to the straddle rules discussed below, any such gain or loss is
recognized as a short-term capital gain or
loss for Federal income tax purposes. If a call option written by the
Fund is exercised, the Fund will realize (subject
to the straddle rules discussed below) a capital gain or loss from the
sale of the underlying security, and will treat
the premium originally received as additional proceeds from the sale.
Such gain or loss will be long-term or short-
term depending on the holding period of the underlying security. If a
put option written by the Fund is exercised,
the Fund will treat the premium received as an adjustment to its
purchase price of the debt security and the Fund's
holding period with respect to the debt security that it has acquired
will begin on the date of purchase of the debt
security, rather than on the date that the put was written.
For Federal income tax purposes, gains and losses on interest rate
futures contracts, options on interest rate
futures contracts, and certain other options that are traded on a
qualified board of trade (collectively referred to
herein as section 1256 contracts) are taxed pursuant to a special mark-
to-market system. Pursuant to the mark-to-
market system, the Fund may be treated as realizing a greater or lesser
amount of gains or losses than actually
realized. As a general rule, gain or loss on section 1256 contracts is
treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss, and accordingly, the mark-to-
market system generally will affect the
amount of capital gains or losses taxable to the Fund and the amount of
distributions to a shareholder. Moreover, if
the Fund invests in both section 1256 contracts and offsetting positions
in such contracts, then the Fund might not
be able to receive the benefit of certain recognized losses for an
indeterminate period of time. The Fund expects
that its activities with respect to section 1256 contracts and
offsetting positions in such contracts (a) will not cause
it or its shareholders to be treated as receiving a materially greater
amount of capital gains or distributions than
actually realized or received and (b) will permit it to use
substantially all of its losses for the fiscal years in which
such losses actually occur.
Section 1092 of the Code provides rules, overriding the rules described
above, in the case of straddles.
Straddles are defined to include offsetting positions in actively traded
personal property. It is not clear under
current law under what circumstances one investment made by the Fund,
such as in options or futures contracts,
would be treated as offsetting another investment also held by the Fund,
such as the underlying debt security (or
vice versa) and, therefore, whether the Fund may be treated as having
entered into a straddle. In general,
investment positions may be offsetting if there is a substantial
diminution in the risk of loss from holding one
position by reason of holding one or more other positions. If two or
more positions constitute a straddle, a realized
loss from one position (including a mark-to-market loss) must be
deferred to the extent of unrecognized gain in an
offsetting position. Furthermore, with respect to such positions, the
holding period rules described above may be
modified to recharacterize long-term gain as short-term gain (but not,
as a general rule, for purposes of the less
than 30% requirement described above), or to recharacterize short-term
loss as long-term loss, in connection with
certain straddle transactions. Moreover, interest and other carrying
charges allocable to personal property that is
part of a straddle must be capitalized. Section 1092 also provides that
wash sale rules are applicable to transactions
in which a position is sold at a loss and a new offsetting position is
acquired within or has been held for a
prescribed period. To the extent that the straddle rules apply to
positions established by the Fund, losses realized by
the Fund may be deferred or recharacterized as long-term losses, and
long-term gains realized by the Fund may,
for certain purposes, be converted to short-term gains.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its
shareholders, and is not intended as a substitute for careful tax
planning. Shareholders are urged to consult their
tax advisors with specific reference to their own tax situations,
including state and local tax liabilities.
ADDITIONAL INFORMATION
The Fund was incorporated on June 15, 1984 under the name Shearson
Government Mortgage Income Fund Inc.
On January 20, 1988, November 4, 1992, July 30, 1993 and October 14,
1994, the Fund changed its name to
Shearson Lehman Managed Governments Inc., Shearson Lehman Brothers
Managed Governments Fund, Smith
Barney Shearson Managed Governments Fund Inc. and Smith Barney Managed
Governments Fund Inc.,
respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania,
serves as the custodian of the Fund.
Under its custody agreement with the Fund, PNC holds the Fund's
portfolio securities and keeps all necessary
accounts and records. For its services, PNC receives a monthly fee based
upon the month-end market value of
securities held in custody and also receives securities transactions
charges. The assets of the Fund are held under
bank custodianship in compliance with the 1940 Act.
First Data Investor Services Group, Inc., located at Exchange Place,
Boston, Massachusetts 02109, serves as
the Fund's Transfer Agent. Under the transfer agency agreement, the
Transfer Agent maintains the shareholder
account records for the Fund, handles certain communications between
shareholders and the Fund and distributes
dividends and distributions payable by the Fund. For these services, the
Transfer Agent receives a monthly fee
computed on the basis of the number of shareholder accounts that it
maintains for the Fund during the month and
is reimbursed for certain out-of-pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended July 31, 1996
accompanies this Statement of Additional
Information.
Smith Barney
Managed
Governments
Fund Inc.
Statement of
Additional Information
November 27, 1996
Smith Barney
Managed Governments Fund Inc.
388 Greenwich Street
New York, NY 10013
...................................Fund........................
SMITH BARNEY
A Member of Travelers
Group
g:\funds\govt\1996\secdocs\govsai96.doc 20
SMITH BARNEY NEW MANAGED GOVERNMENTS FUND INC.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the year ended July 31, 1996
and the report of Independent
Accountants dated September 23, 1996, are incorporated by reference to
the Definitive 30b-1 filed on October 1,
1996 as Accession # 0000091155-96-000396
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
Exhibit No. Description of Exhibits
All references are to the Registrant's Registration
Statement on Form N-1A (the "Registration
Statement") as filed with the SEC on June 29, 1984 (File Nos. 2-91948
and 811-4061).
(1)(a) Registrant's Articles of Incorporation dated June 18,
1984 are incorporated by reference to the
Registration Statement.
(b) Form of Articles of Amendment to Articles of Incorporation
dated August 20, 1984, May 20,
1988, November 4, 1992, November 19, 1992, July 30, 1993 and October 14,
1994 and November
7, 1994, respectively, are incorporated by reference to Post-Effective
Amendment No. 20 to the
Registration Statement filed on November 7, 1994 ("Post-Effective
Amendment No. 20").
(2) Registrant's By-Laws are incorporated by reference to the
Registration Statement.
(3) Not Applicable.
(4)(a) Registrant's form of stock certificate for Class A
shares is incorporated by reference to Pre-
Effective Amendment No. 1 to the
Registration Statement as filed
with the SEC on
August 8, 1985 ("Pre-Effective Amendment No. 1").
(b) Registrant's form of stock certificate for Class B shares is
incorporated by reference to Post-
Effective Amendment No. 13 to the
Registration Statement as
filed with the SEC on
October 23, 1992 ("Post-Effective Amendment No. 13").
(5) (a) Investment Advisory Agreement dated July 30, 1993 between
the Registrant and Greenwich Street
Advisors is incorporated by reference to Post-Effective Amendment No. 16
to the
Registration Statement as filed with the SEC on September 30, 1993
("Post-Effective Amendment
No. 16") .
(b) Form of Transfer of Investment Advisory Agreement dated as
of November 7, 1994, among
Registrant, Mutual Management Corp. and SBMFM is incorporated by
reference to Post Effective
Amendment No. 21 dated November 30, 1995.
(6) Distribution Agreement dated July 30, 1993 between the
Registrant and Smith Barney Shearson
Inc. is incorporated by reference to Post-Effective Amendment No. 16.
(7) Not Applicable.
(8) Form of Custody Agreement between the Registrant and PNC
Bank, National Association dated
as of July 12, 1995 is incorporated by reference to Post Effective
Amendment No. 21 dated
November 30, 1995
(9)(a) Transfer Agency Agreement dated August 2, 1993 between
the Registrant and The Shareholder
Services Group, Inc. is incorporated by reference to Post-Effective
Amendment No. 12 to the
Registration Statement filed with the SEC on October 23, 1992.
(b) Administration Agreement dated April 20, 1994 between the
Registrant and Smith, Barney
Advisers, Inc. ("SBA") is incorporated by reference to Post-Effective
Amendment No. 20.
(10) Not Applicable.
(11)(a) Consent of Independent Accountants is filed herein.
(b) Consent of Morningstar Mutual Fund Values is incorporated by
reference to Post-Effective
Amendment No. 13.
(12) Not Applicable.
(13) Not Applicable.
(14) Not applicable
(15) Amended and Restated Services and Distribution Plan pursuant
to Rule 12b-1 between the
Registrant and Smith Barney Inc. ("Smith Barney") is incorporated by
reference to Post-Effective
Amendment No. 20.
(16) Performance Data is incorporated by reference to Post-
Effective Amendment No. 7 to the
Registration Statement as filed with the SEC on November 29, 1988.
(17) Financial Data Schedule is filed herewith.
(18) Form of Rule 18f-(3)d Multiple Class Plan A Registrant is
incorporated by reference to
Post Effective Amendment No. 21 dated November 30,
1995.
Item 25. Persons Controlled by or under Common Control with
Registrant
None
Item 26. Number of Holders of Securities
(1) (2)
Number of Record Holders
Title of Class by Class as of October
31, 1996
Common stock, par
Class A 27,093
value $.001 per share Class B 7,011
Class C 74
Class Y 5
Item 27. Indemnification
Response to this item is incorporated by reference to Post-
Effective Amendment No. 13.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser and Administrator - - Smith Barney Mutual Funds
Management Inc., formerly
known as Smith, Barney Advisers, Inc. ("SBMFM")
SBMFM, was incorporated in December 1968 under the laws of the State of
Delaware. SBMFM is a wholly owned
subsidiary of Smith Barney Holdings Inc. (formerly known as Smith Barney
Shearson Holdings Inc.), which in
turn is a wholly owned subsidiary of Travelers Group Inc. (formerly
known as Primerica Corporation)
("Travelers"). SBMFM is registered as an investment adviser under the
Investment Advisers Act of 1940 (the
"Advisers Act") and has, through its predecessors, been in the
investment counseling business since 1934
The list required by this Item 28 of the officer and directors of SBMFM
together with information as to any other
business, profession, vocation or employment of a substantial nature
engaged in by such officer and directors
during the past two fiscal years, is incorporated by reference to
Schedules A and D of FORM ADV filed by
SBMFM pursuant to the Advisers Act (SEC File No. 801-8314).
Item 29. Principal Underwriter
Smith Barney Inc. ("Smith Barney") currently acts as distributor for
Smith Barney Managed Municipals Fund Inc.,
Smith Barney New York Municipals Fund Inc., Smith Barney California
Municipals Fund Inc., Smith Barney
Massachusetts Municipals Fund, Smith Barney Global Opportunities Fund,
Smith Barney Aggressive Growth
Fund Inc., Smith Barney Appreciation Fund Inc., Smith Barney Principal
Return Fund, Smith Barney Income
Funds, Smith Barney Equity Funds, Smith Barney Investment Funds Inc.,
Smith Barney Precious Metals and
Minerals Fund Inc., Smith Barney Telecommunications Trust, Smith Barney
Arizona Municipals Fund Inc., Smith
Barney New Jersey Municipals Fund Inc., The USA High Yield Fund N.V.,
Garzarelli Sector Analysis Portfolio
N.V., Smith Barney Fundamental Value Fund Inc., Smith Barney Series
Fund, Consulting Group Capital Markets
Funds, Smith Barney Investment Trust, Smith Barney Adjustable Rate
Government Income Fund, Smith Barney
Florida Municipals Fund, Smith Barney Oregon Municipals Fund, Smith
Barney Funds, Inc., Smith Barney Muni
Funds, Smith Barney World Funds, Inc., Smith Barney Money Funds, Inc.,
Smith Barney Municipal Money
Market Fund., Inc., Smith Barney Variable Account Funds, Smith Barney
U.S. Dollar Reserve Fund (Cayman),
Worldwide Special Fund, N.V., Worldwide Securities Limited, (Bermuda),
Smith Barney International Fund
(Luxembourg) and various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Holdings. On June 1,
1994, Smith Barney changed its
name from Smith Barney-Shearson Inc. to its current name. The
information required by this Item 29 with respect
to each director, officer and partner of Smith Barney is incorporated by
reference to Schedule A of FORM BD filed
by Smith Barney pursuant to the Securities Exchange Act of 1934 (SEC
File No. 812-8510).
Item 30. Location of Accounts and Records
(1) Smith Barney Managed Governments Fund Inc.
388 Greenwich Street
New York, New York, 10013
(2) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania 19101
(4) First Data Investor Services Group, Inc.
One Boston Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable
Item 32. Undertakings
The Registrant hereby undertakes to furnish to each person
to whom a prospectus of the
Registrant is delivered, a copy of the Registrant's latest annual
report, upon request and without
charge.
Rule 485(b) Certification
The Registrant hereby certifies that it meets all of the
requirements for effectiveness pursuant
to Rule 485(b) under the Securities Act of 1933, as amended.
The Registrant further represents pursuant to Rule
485(b)(2)(iv) that the resignations of Dr.
Hardin and Mr. Frankel as Directors of the Registrant was not due to any
disagreement with the Registrant on any
matter relating to its operation, policies or practices. Messrs. Hardin
and Frankel resigned because of increased
board responsibilities for other investment companies and a desire to
reduce travel and minimize scheduling
conflicts with other professional obligations.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act
of 1940, as amended, the Registrant, SMITH BARNEY MANAGED GOVERNMENTS
FUND INC., has duly
caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly
authorized, all in the City of New York, State of New York on the
27th day of November 1996,
SMITH BARNEY MANAGED GOVERNMENTS
FUND INC.
By: /s/ Heath B. McLendon
Heath B. McLendon,
Chairman of the Board
We, the undersigned, hereby severally constitute and appoint Heath
B. McLendon, Christina T. Sydor and
Caren A. Cunningham and each of them singly, our true and lawful
attorney, with full power to them
and each of them to sign for us, and in our hands and in the capacities
indicated below, any and all Amendments to
this Registration Statement and to file the same, with all exhibits
thereto, and other documents therewith, with the
Securities and Exchange Commission, granting unto said attorneys, and
each of them, acting alone, full authority
and power to do and perform each and every act and thing requisite or
necessary to be done in the premises, as
fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorneys or any of them may lawfully do or cause to be done by virtue
thereof.
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the
Registration Statement and the above Power of Attorney have been signed
below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Heath B. McLendon Chairman of the Board
11/27/96
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone Treasurer (Chief Financial
11/27/96
Lewis E. Daidone and Accounting Officer)
/s/ Herbert Barg Director
11/27/96
Herbert Barg
/s/ Alfred Bianchetti Director
11/27/96
Alfred Bianchetti
/s/ Martin Brody Director
11/27/96
Martin Brody
/s/ Dwight Crane Director
11/27/96
Dwight Crane
/s/ Burt N. Dorsett Director
11/27/96
Burt N. Dorsett
/s/ Elliot S. Jaffe Director
11/27/96
Elliot S. Jaffe
/s/ Stephen Kaufman Director
11/27/96
Stephen Kaufman
/s/ Joseph McCann Director
11/27/96
Joseph McCann
/s/ Cornelius C. Rose, Jr. Director
11/27/96
Cornelius C. Rose, Jr.
g:\funds\gov485bcvr
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney Managed Governments Fund Inc.
We consent to the use of our report dated September 23, 1996
incorporated herein by reference and to
the references to our Firm under the headings "Financial Highlights" in
the Prospectus and "Counsel
and Auditors" in the Statement of Additional Information.
KPMG Peat Marwick LLP
New York, New York
November 27, 1996
[ARTICLE] 6
[CIK] 0000748826
[NAME] SMITH BARNEY MANAGED GOVERNMENT FUND - CLASS A
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] JUL-31-1996
[PERIOD-END] JUL-31-1996
[INVESTMENTS-AT-COST] 629,872,576
[INVESTMENTS-AT-VALUE] 632,918,773
[RECEIVABLES] 6,408,386
[ASSETS-OTHER] 3,979,114
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 643,306,273
[PAYABLE-FOR-SECURITIES] 48,410,783
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,039,364
[TOTAL-LIABILITIES] 49,450,147
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 660,467,723
[SHARES-COMMON-STOCK] 37,046,411
[SHARES-COMMON-PRIOR] 41,849,499
[ACCUMULATED-NII-CURRENT] (3,500)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (69,654,294)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 3,046,197
[NET-ASSETS] 593,856,126
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 47,015,867
[OTHER-INCOME] 0
[EXPENSES-NET] 7,143,566
[NET-INVESTMENT-INCOME] 39,872,301
[REALIZED-GAINS-CURRENT] 5,790,569
[APPREC-INCREASE-CURRENT] (22,102,739)
[NET-CHANGE-FROM-OPS] 23,560,131
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 32,148,456
[DISTRIBUTIONS-OF-GAINS] 497,563
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,032,903
[NUMBER-OF-SHARES-REDEEMED] 7,593,103
[SHARES-REINVESTED] 1,757,112
[NET-CHANGE-IN-ASSETS] (67,857,796)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (186,841,083)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 4,100,491
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 7,143,566
[AVERAGE-NET-ASSETS] 497,817,608
[PER-SHARE-NAV-BEGIN] 12.63
[PER-SHARE-NII] 0.81
[PER-SHARE-GAIN-APPREC] (0.34)
[PER-SHARE-DIVIDEND] 0.82
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0.01
[PER-SHARE-NAV-END] 12.27
[EXPENSE-RATIO] 1.04
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[CIK] 0000748826
[NAME] SMITH BARNEY MANAGED GOVERNMENT FUND - CLASS B
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] JUL-31-1996
[PERIOD-END] JUL-31-1996
[INVESTMENTS-AT-COST] 629,872,576
[INVESTMENTS-AT-VALUE] 632,918,773
[RECEIVABLES] 6,408,386
[ASSETS-OTHER] 3,979,114
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 643,306,273
[PAYABLE-FOR-SECURITIES] 48,410,783
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,039,364
[TOTAL-LIABILITIES] 49,450,147
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 660,467,723
[SHARES-COMMON-STOCK] 9,021,160
[SHARES-COMMON-PRIOR] 10,521,407
[ACCUMULATED-NII-CURRENT] (3,500)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (69,654,294)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 3,046,197
[NET-ASSETS] 593,856,126
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 47,015,867
[OTHER-INCOME] 0
[EXPENSES-NET] 7,143,566
[NET-INVESTMENT-INCOME] 39,872,301
[REALIZED-GAINS-CURRENT] 5,790,569
[APPREC-INCREASE-CURRENT] (22,102,739)
[NET-CHANGE-FROM-OPS] 23,560,131
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 7,254,198
[DISTRIBUTIONS-OF-GAINS] 126,351
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,032,903
[NUMBER-OF-SHARES-REDEEMED] 7,593,103
[SHARES-REINVESTED] 1,757,112
[NET-CHANGE-IN-ASSETS] (67,857,796)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (186,841,083)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 4,100,491
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 7,143,566
[AVERAGE-NET-ASSETS] 122,375,605
[PER-SHARE-NAV-BEGIN] 12.63
[PER-SHARE-NII] 0.75
[PER-SHARE-GAIN-APPREC] (0.34)
[PER-SHARE-DIVIDEND] 0.76
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0.01
[PER-SHARE-NAV-END] 12.27
[EXPENSE-RATIO] 1.56
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[CIK] 0000748826
[NAME] SMITH BARNEY MANAGED GOVERNMENT FUND - CLASS C
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] JUL-31-1996
[PERIOD-END] JUL-31-1996
[INVESTMENTS-AT-COST] 629,872,576
[INVESTMENTS-AT-VALUE] 632,918,773
[RECEIVABLES] 6,408,386
[ASSETS-OTHER] 3,979,114
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 643,306,273
[PAYABLE-FOR-SECURITIES] 48,410,783
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,039,364
[TOTAL-LIABILITIES] 49,450,147
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 660,467,723
[SHARES-COMMON-STOCK] 100,934
[SHARES-COMMON-PRIOR] 23,673
[ACCUMULATED-NII-CURRENT] (3,500)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (69,654,294)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 3,046,197
[NET-ASSETS] 593,856,126
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 47,015,867
[OTHER-INCOME] 0
[EXPENSES-NET] 7,143,566
[NET-INVESTMENT-INCOME] 39,872,301
[REALIZED-GAINS-CURRENT] 5,790,569
[APPREC-INCREASE-CURRENT] (22,102,739)
[NET-CHANGE-FROM-OPS] 23,560,131
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 53,515
[DISTRIBUTIONS-OF-GAINS] 828
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 85,229
[NUMBER-OF-SHARES-REDEEMED] 11,848
[SHARES-REINVESTED] 3,880
[NET-CHANGE-IN-ASSETS] (67,857,796)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (186,841,083)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 4,100,491
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 7,143,566
[AVERAGE-NET-ASSETS] 864,449
[PER-SHARE-NAV-BEGIN] 12.63
[PER-SHARE-NII] 0.75
[PER-SHARE-GAIN-APPREC] (0.34)
[PER-SHARE-DIVIDEND] 0.08
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0.01
[PER-SHARE-NAV-END] 12.27
[EXPENSE-RATIO] 1.49
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[CIK] 0000748826
[NAME] SMITH BARNEY MANAGED GOVERNMENT FUND - CLASS Y
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] JUL-31-1996
[PERIOD-END] JUL-31-1996
[INVESTMENTS-AT-COST] 629,872,576
[INVESTMENTS-AT-VALUE] 632,918,773
[RECEIVABLES] 6,408,386
[ASSETS-OTHER] 3,979,114
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 643,306,273
[PAYABLE-FOR-SECURITIES] 48,410,783
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,039,364
[TOTAL-LIABILITIES] 49,450,147
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 660,467,723
[SHARES-COMMON-STOCK] 2,219,224
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] (3,500)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (69,654,294)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 3,046,197
[NET-ASSETS] 593,856,126
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 47,015,867
[OTHER-INCOME] 0
[EXPENSES-NET] 7,143,566
[NET-INVESTMENT-INCOME] 39,872,301
[REALIZED-GAINS-CURRENT] 5,790,569
[APPREC-INCREASE-CURRENT] (22,102,739)
[NET-CHANGE-FROM-OPS] 23,560,131
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 419,632
[DISTRIBUTIONS-OF-GAINS] 69,802
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2,219,224
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 3,880
[NET-CHANGE-IN-ASSETS] (67,857,796)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (186,841,083)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 4,100,491
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 7,143,566
[AVERAGE-NET-ASSETS] 6,017,535
[PER-SHARE-NAV-BEGIN] 12.86
[PER-SHARE-NII] 0.35
[PER-SHARE-GAIN-APPREC] (0.49)
[PER-SHARE-DIVIDEND] 0.44
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0.01
[PER-SHARE-NAV-END] 12.27
[EXPENSE-RATIO] 0.78
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
