<PAGE>
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
[PHOTO APPEARS HERE]
Smith Barney
Managed
Governments
Fund Inc.
- ----------------
January 31, 1996
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc.
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide the semi-annual report for the period ended January
31, 1996 for the Smith Barney Managed Governments Fund. In this report, we
summarize the period's prevailing economic and market conditions and briefly
outline our portfolio strategy. A detailed summary of performance and current
holdings can be found in the appropriate sections that follow in the semi-annual
report.
Performance Summary and Fund Strategy
For the six months ended January 31, 1996, the Smith Barney Managed Governments
Fund posted a total return of 5.03% for Class A shares. The chart below, which
sets forth the yields from U.S. Treasury securities, shows the volatility of
that market during the period covered by this report:
<TABLE>
<CAPTION>
6/30/95 1/31/96 High Low
------- ------- ---- ---
<S> <C> <C> <C> <C>
3-month
Treasury bill 5.56% 5.04% 5.57% 5.04%
5-year
Treasury note 5.85 5.02 6.23 5.11
10-year
Treasury bond 6.20 5.57 6.61 5.57
30-year
Treasury bond 6.62 6.02 6.99 5.93
</TABLE>
Since we expected market volatility, the Fund focused during the period on the
income provided by higher-coupon mortgage-backed securities, which are generally
more stable in periods of market turbulence. As of January 31, 1996, we had
increased the Fund's mortgage-backed holdings to 68.9% from 63.1%, which is a
9.2% increase. The Fund's average weighted bond maturity was approximately 16.3
years.
Market Outlook
In our view, the main factors currently affecting the securities markets are the
ongoing federal budget negotiations in Washington, D.C., the discussion
regarding the federal debt ceiling limit, the strength of the U.S. economy and
the Federal Reserve Board's recent short-term interest rate cuts.
Looking forward, we expect investor concerns about the market to increase
because of the upcoming 1996 Presidential elections, the flat tax issue and
fears about job security among many individuals in an era of corporate
downsizing. In addition, the potential impact of federal budget cuts on state
and local governments and the discussions involving the federal debt limit
1
<PAGE>
ceiling may also have a negative effect on the market. However, no matter what
happens in the markets over the coming months, we remain committed to our
portfolio strategy of striving to provide income through diversification.
In closing, we would like to thank you for your investment in the Smith Barney
Managed Governments Fund. We look forward to continue to serve your investment
needs.
Sincerely,
/s/ HEATH B. MCLENDON /s/ JAMES E. CONROY
Heath B. McLendon James E. Conroy
Chairman and First Vice President and
Chief Executive Officer Investment Officer
February 27, 1996
2
<PAGE>
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
====================================================================================================
Historical Performance -- Class A Shares
====================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
<S> <C> <C> <C> <C> <C> <C>
====================================================================================================
1/31/96 $12.63 $12.86 $0.40 $0.00 $0.00 5.03%+
- ----------------------------------------------------------------------------------------------------
7/31/95 12.50 12.63 0.74 0.00 0.04 7.67
- ----------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.61 0.00 0.19 0.08
- ----------------------------------------------------------------------------------------------------
7/31/93 12.88 13.29 0.66 0.23 0.00 10.43
- ----------------------------------------------------------------------------------------------------
7/31/92 12.09 12.88 0.91 0.00 0.08 15.25
- ----------------------------------------------------------------------------------------------------
7/31/91 12.13 12.09 0.98 0.00 0.11 9.02
- ----------------------------------------------------------------------------------------------------
7/31/90 12.19 12.13 1.07 0.00 0.03 9.01
- ----------------------------------------------------------------------------------------------------
7/31/89 12.04 12.19 0.96 0.00 0.11 10.62
- ----------------------------------------------------------------------------------------------------
7/31/88 12.62 12.04 1.09 0.01 0.01 4.43
- ----------------------------------------------------------------------------------------------------
7/31/87 13.32 12.62 1.11 0.34 0.00 5.69
- ----------------------------------------------------------------------------------------------------
7/31/86 13.03 13.32 1.34 0.09 0.00 13.81
====================================================================================================
Total $9.87 $0.67 $0.57
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==================================================================================================
Historical Performance -- Class B Shares
==================================================================================================
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
<S> <C> <C> <C> <C> <C> <C>
==================================================================================================
1/31/96 $12.63 $12.86 $0.37 $0.00 $0.00 4.75%+
- --------------------------------------------------------------------------------------------------
7/31/95 12.50 12.63 0.67 0.00 0.04 7.04
- --------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.56 0.00 0.17 (0.46)
- --------------------------------------------------------------------------------------------------
Inception*
- 7/31/93 12.64 13.29 0.41 0.16 0.00 9.92+
==================================================================================================
Total $2.01 $0.16 $0.21
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================
Historical Performance -- Class C Shares
=========================================================================================
Net Asset Value
--------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
<S> <C> <C> <C> <C> <C> <C>
=========================================================================================
1/31/96 $12.63 $12.85 $0.37 $0.00 $0.00 4.68%+
- -----------------------------------------------------------------------------------------
7/31/95 12.50 12.63 0.67 0.00 0.04 7.04
- -----------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.56 0.00 0.17 (0.46)
- -----------------------------------------------------------------------------------------
Inception*
- 7/31/93 13.18 13.29 0.03 0.02 0.00 1.25+
=========================================================================================
Total $1.63 $0.02 $0.21
=========================================================================================
It is the Fund's policy to distribute dividends monthly and
capital gains, if any, annually.
</TABLE>
3
<PAGE>
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
=================================================================================
Average Annual Total Return
=================================================================================
Without Sales Charge(1)
---------------------------------
Class A Class B Class C
<S> <C> <C> <C>
=================================================================================
Six Months Ended 1/31/96+ 5.03% 4.75% 4.68%
- ---------------------------------------------------------------------------------
Year Ended 1/31/96 12.54 11.93 11.85
- ---------------------------------------------------------------------------------
Five Years Ended 1/31/96 8.30 N/A N/A
- ---------------------------------------------------------------------------------
Ten Years Ended 1/31/96 8.15 N/A N/A
- ---------------------------------------------------------------------------------
Inception*-1/31/96 9.33 6.52 4.80
=================================================================================
With Sales Charge(2)
--------------------------------
Class A Class B Class C
=================================================================================
Six Months Ended 1/31/96+ 0.30% 0.25% 3.68%
- ---------------------------------------------------------------------------------
Year Ended 1/31/96 7.48 7.43 10.85
- ---------------------------------------------------------------------------------
Five Years Ended 1/31/96 7.31 N/A N/A
- ---------------------------------------------------------------------------------
Ten Years Ended 1/31/96 7.65 N/A N/A
- ---------------------------------------------------------------------------------
Inception*-1/31/96 8.89 5.98 4.80
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Cumulative Total Return
================================================================================
Without Sales Charge(1)
<S> <C>
================================================================================
Class A (1/31/86 through 1/31/96) 118.84%
- --------------------------------------------------------------------------------
Class B (Inception* through 1/31/96) 22.68
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/96) 12.93
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable sales
charge with respect to Class A shares or the applicable contingent deferred
sales charges ("CDSC") with respect to Class B and C shares.
2) Assumes reinvestment of all dividends and capital gain distributions, if any,
at net asset value. In addition, Class A shares reflect the deduction of the
maximum initial sales charge of 4.50%; Class B shares reflect the deduction of a
4.50% CDSC, which applies if shares are redeemed less than one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred. Class C shares reflect
the deduction of a 1.00% CDSC, which applies if shares are redeemed within the
first year of purchase.
* Inception dates for Class A, B and C shares are September 4, 1984, November
6, 1992 and June 29, 1993, respectively.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
</TABLE>
4
<PAGE>
Smith Barney
Managed Governments Fund Inc.
================================================================================
Historical Performance (unaudited)
================================================================================
<TABLE>
<CAPTION>
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Managed Governments Fund Inc.
vs. Lehman Brothers Government Bond Index
and Lipper Mortgage Securities Average+
- --------------------------------------------------------------------------------
January 1986 January 1996
[CHART APPEARS HERE]
SB Managed Lipper Mortgage Lehman Brothers
Governments Fund Securities Average Aggregate Bond
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1/86 10,000.00 10,000.00 10,000.00
7/86 9,999.90 10,541.00 11,030.00
7/87 10,568.86 10,434.54 10,823.74
7/88 11,037.08 10,576.45 10,854.05
7/89 12,209.45 11,423.62 11,950.00
7/90 13,309.79 12,056.49 12,549.01
7/91 14,510.13 12,586.97 13,008.31
7/92 16,723.59 13,296.88 13,836.94
7/93 18,467.11 13,899.23 14,660.24
7/94 18,481.97 13,255.69 14,122.20
7/95 19,899.57 14,343.98 15,360.72
7/96 20,900.33 15,226.14 16,508.17
- --------------------------------------------------------------------------------
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on January 31,
1986, assuming deduction of the maximum 4.50% sales charge at the time of
investment and reinvestment of dividends and capital gains, if any, at net
asset value through January 31, 1996. The Lehman Brothers Government Bond
Index is a broad-based index of all public debt obligations of the U.S.
Government and its Agencies and has an average maturity of approximately nine
years. The index is unmanaged and is not subject to the same management and
trading expenses as a mutual fund. The Lipper Analytical Services, Inc. U.S.
Mortgage Securities Bond Fund Average ("Lipper Mortgage Securities Average")
is composed of the Fund's peer group of mutual funds (12 funds as of January
31, 1996) investing in U.S. mortgage-backed securities. Lipper Analytical
Services, Inc. is a widely-recognized mutual fund information service. The
performance of the Fund's other classes may be greater or less than the Class
A shares' performance indicated on this chart, depending on whether greater or
lesser sales charges and fees were incurred by shareholders investing in other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost. No adjustment has been made
for shareholder tax liability on dividends or capital gains.
5
<PAGE>
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
================================================================================
Portfolio Highlights (unaudited) January 31, 1996
================================================================================
Portfolio Breakdown
[CHART APPEARS HERE]
Title Percentage
<S> <C>
- --------------------------------------------------------------------------------
GNMA 67.2%
U.S. Treasury Notes 17.6%
Call Options and Repurchase Agreement 8.9%
FHLMC and FNMA 6.3%
- --------------------------------------------------------------------------------
U.S. Treasury Securities are debt obligations of the United States
Government. They are secured by the full faith and credit of the Federal
Government, and include such instruments as Treasury notes, bills and bonds.
Mortgage-Backed Securities are debt securities issued by U.S. Government
Agencies such as the Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA) and Government National Mortgage
Association (GNMA). They represent thousands of individual home mortgages that
are pooled to form securities. As homeowners pay interest and principal each
month, these payments are passed on to investors. Mortgage-backed securities are
backed by the full faith and credit of the issuing agency.
</TABLE>
6
<PAGE>
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
================================================================================
Schedule of Investments (unaudited) January 31, 1996
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 91.1%
<S> <C> <C>
$ 8,600,000 U.S. Treasury Bond, 6.250% due 8/15/23 $ 8,753,854
21,000,000 U.S. Treasury Note, 5.250% due 1/31/01 20,986,350
56,550,000 U.S. Treasury Note, 5.875% due 11/15/05+ 57,753,384
182,400,000 U.S. Treasury Note, zero coupon due 2/15/19 43,299,936
308 FHLMC Certificates, 7.500% due 11/1/09 315
26,369 FHLMC Certificates, 14.750% due 3/1/10 30,119
7,076 FHLMC Certificates, 8.000% due 8/1/17 7,289
7,993,581 FHLMC Certificates Gold, 8.500% due 1/1/25 8,346,658
23,004,070 FHLMC Certificates Gold, 7.500% due 12/1/25 23,632,081
332 FNMA Certificates, 9.500% due 6/7/02 351
710 FNMA Certificates, 9.500% due 7/7/02 750
55,600,000 FNMA Principal Strips, zero coupon due 10/9/19 11,912,856
3,004,170 GNMA I Certificates, 10.000% due 7/15/20* 3,306,450
14,994,137 GNMA I Certificates, 8.500% due 5/15/22* 15,715,656
29,992,544 GNMA I Certificates, 7.000% due 7/15/23* 30,376,749
35,992,276 GNMA I Certificates, 6.500% due 5/15/24* 35,733,492
38,006,024 GNMA I Certificates, 8.000% due 5/15/24* 39,122,261
21,965,072 GNMA I Certificates, 9.000% due 1/15/25* 23,228,064
33,044,393 GNMA I Certificates, 8.000% due 11/15/25* 34,386,657
229,167,055 GNMA I Certificates Platinum, 9.000% due 12/15/17* 245,350,833
1,508,555 GNMA II Certificates, 10.000% due 10/20/16* 1,652,803
12,030,411 GNMA II Certificates, 8.500% due 8/20/24* 12,549,163
14,989,029 GNMA II Certificates, 7.000% due 9/20/25* 15,106,094
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost-- $617,159,113) 631,252,165
================================================================================
OPTIONS -- 0.0%
1,193,000 U.S. Treasury Long Bond Put @ $118, Expires 2/17/96
(Cost-- $643,074) 261,267
================================================================================
REPURCHASE AGREEMENTS -- 8.9%
60,000,000 First Boston, Inc., 5.839% due 2/1/96; Proceeds at
maturity-- $60,009,732; (Fully collateralized by
U.S. Treasury Notes, 7.500% due 1/31/97;
Market value-- $61,225,962) 60,000,000
1,372,000 Citibank, Inc., 5.900% due 2/1/96; Proceeds at
maturity -- $1,372,224; (Fully collateralized
by U.S. Treasury Bills due 1/9/97; Market value
-- $1,399,563) 1,372,000
================================================================================
TOTAL REPURCHASE AGREEMENTS
(Cost-- $61,372,000) 61,372,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $679,174,187)++ $692,885,432
================================================================================
</TABLE>
* Date shown represents the last in the range of maturity dates of mortgage
certificates only.
+ Security has been segregated by custodian for reverse repurchase agreements.
++ Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
7
<PAGE>
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
================================================================================
Statement of Assets and Liabilities (unaudited) January 31, 1996
================================================================================
ASSETS:
<S> <C>
Investments, at value (Cost-- $679,174,187) $ 692,885,432
Receivable from broker 69,000
Receivable for Fund shares sold 206,209
Interest receivable 4,251,175
- --------------------------------------------------------------------------------
Total Assets 697,411,816
- --------------------------------------------------------------------------------
LIABILITIES
Reverse repurchase agreement (Note 6) 58,458,563
Payable for securities purchased 383,962
Investment advisory fees payable 244,319
Distribution fees payable 189,543
Administration fees payable 108,586
Interest payable 51,439
Payable to bank 16,165
Accrued expenses 222,670
- --------------------------------------------------------------------------------
Total Liabilities 59,675,247
- --------------------------------------------------------------------------------
Total Net Assets $ 637,736,569
================================================================================
NET ASSETS:
Par value of capital shares $ 49,610
Capital paid in excess of par value 787,749,310
Undistributed net investment income 1,386,848
Accumulated net realized loss on security transactions,
options and futures contracts (165,307,501)
Net unrealized appreciation of investments, options and
future contracts 13,858,302
- --------------------------------------------------------------------------------
Total Net Assets $ 637,736,569
- --------------------------------------------------------------------------------
Shares Outstanding:
Class A 39,782,704
-----------------------------------------------------------------------------
Class B 9,752,628
-----------------------------------------------------------------------------
Class C 74,090
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.86
-----------------------------------------------------------------------------
Class B* $12.86
-----------------------------------------------------------------------------
Class C** $12.85
-----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $13.47
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by 4.50% if shares are
redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by 1.00% if shares are
redeemed within the first year of purchase.
8
<PAGE>
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
================================================================================
Statement of Operations (unaudited)
================================================================================
For the Six Months Ended January 31, 1996
INVESTMENT INCOME:
<S> <C>
Interest $ 26,498,975
Less: Interest expense (1,474,568)
- --------------------------------------------------------------------------------
Total Investment Income 25,024,407
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 1,562,228
Distribution fees (Note 2) 1,148,522
Administration fees (Note 2) 569,553
Shareholder and system servicing fees 294,654
Custody 139,481
Shareholder communications 45,000
Audit and legal 29,000
Registration fees 25,450
Directors' fees 15,700
Other 21,525
- --------------------------------------------------------------------------------
Total Expenses 3,851,113
- --------------------------------------------------------------------------------
Net Investment Income 21,173,294
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, OPTIONS AND FUTURES (NOTES 3 AND 7):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 20,979,907
Options contracts (105,701)
Futures contracts 659,376
- --------------------------------------------------------------------------------
Net Realized Gain 21,533,582
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments, Options and Futures:
Beginning of period 25,148,936
End of period 13,858,302
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (11,290,634)
Net Gain on Investments, Options and Futures 10,242,948
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 31,416,242
================================================================================
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Smith Barney
Managed Governments Fund Inc.
<TABLE>
<CAPTION>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended January 31, 1996 (unaudited)
and the Year Ended July 31, 1995
1996 1995
================================================================================
OPERATIONS:
<S> <C> <C>
- --------------------------------------------------------------------------------
Net investment income $ 21,173,294 $ 44,523,223
Net realized gain (loss) 21,533,582 (42,642,832)
Increase (decrease) in net
unrealized appreciation (11,290,634) 45,545,505
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 31,416,242 47,425,896
- --------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (19,786,446) (40,491,996)
Capital -- (1,998,735)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (19,786,446) (42,490,731)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sales 14,465,132 259,445,859
Net asset value of shares issued
for reinvestment of dividends 13,328,563 28,024,578
Cost of shares reacquired (63,400,844) (391,232,326)
- --------------------------------------------------------------------------------
Decrease in Net Assets
From Fund Share Transactions (35,607,149) (103,761,889)
- --------------------------------------------------------------------------------
Decrease in Net Assets (23,977,353) (98,826,724)
NET ASSETS:
Beginning of period 661,713,922 760,540,646
- --------------------------------------------------------------------------------
End of period $637,736,569 $661,713,922
================================================================================
* Includes undistributed investment income of: $1,386,848 --
================================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Smith Barney
Managed Governments Fund Inc.
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Managed Governments Fund Inc. ("Fund"), a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) securities transactions are accounted for on trade date; b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price was reported and U.S. Government and Agency Obligations
are valued at bid price, or in the absence of a recent bid price, at the bid
equivalent obtained from one or more of the major market makers; (c) short-term
securities that have a maturity of more than 60 days are valued at prices based
on market quotations for securities of similar type, yield and maturity; (d)
short-term investments and securities maturing within 60 days are valued at cost
plus accreted discount, or minus amortized premium which approximates market
value; (e) dividend income is recorded on ex-dividend date and interest income
is recorded on the accrual basis; (f) gains or losses on the sale of securities
are recorded on the identified cost basis; (g) dividends and distributions to
shareholders are recorded on the ex-dividend date; (h) direct expenses are
charged to each class; management fees and general Fund expenses are allocated
on the basis of the relative net assets; (i) in accordance with Statement of
Position 93-2 Determination, Disclosure, and Financial Statement Presentation of
------------------------------------------------------------------
Income, Capital Gain, and Return of Capital Distributions by Investment
- -----------------------------------------------------------------------
Companies, book and tax basis differences relating to shareholder distributions
- ---------
and other permanent book and tax differences are reclassified to paid-in
capital. As of July 31, 1995, the cumulative effect of such differences,
totaling $1,998,735, were reclassified to paid-in capital from accumulated net
investment loss. Net investment income, net realized gains, and net assets were
not affected by this change; (j) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
and (k) estimates and assumptions are required to be made regarding assets,
11
<PAGE>
Smith Barney
Managed Governments Fund Inc.
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ from these amounts.
In addition, the Fund may from time to time enter into options and/or
futures contracts to hedge market risk.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The Fund
pays SBMFM an advisory fee calculated at an annual rate of 0.45% of the average
daily net assets up to $1 billion and 0.415% of the average daily net assets in
excess of $1 billion. This fee is calculated daily and paid monthly.
SBMFM acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets up to $1
billion and 0.185% of the average daily net assets in excess of $1 billion. This
fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the six months ended January 31, 1995, SB received sales
charges of approximately $77,000 on sales of the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the six months ended January 31, 1996, CDSCs paid to SB for Class
B shares were approximately $147,000.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B and C shares calculated at the annual rate of 0.25% of the average
daily net assets of each respective class. In addition, the Fund pays a
distribution fee with respect to Class B and C
12
<PAGE>
Smith Barney
Managed Governments Fund Inc.
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
shares calculated at an annual rate of 0.50% and 0.45%, respectively, of the
average daily net assets for each class. For the six months ended January 31,
1996, total Distribution Plan fees incurred were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
DISTRIBUTION PLAN FEES $655,540 $490,924 $2,058
================================================================================
</TABLE>
All officers and one Director of the Fund are employees of SB.
3. INVESTMENTS
During the six month ended January 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Purchases $898,384,935
================================================================================
Sales 876,197,703
================================================================================
</TABLE>
At January 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Gross unrealized appreciation $14,157,089
Gross unrealized depreciation (445,844)
- --------------------------------------------------------------------------------
Net unrealized appreciation* $13,711,245
================================================================================
</TABLE>
- ----------
* Net unrealized appreciation includes a loss of $381,807 on option contracts.
4. CAPITAL LOSS CARRYFORWARD
At July 31, 1995, the Fund had for Federal tax purposes capital loss
carryforwards of $186,227,742 available, subject to certain limitations, to
offset future capital gains. To the extent that these capital carryforward
losses are used to offset capital gains, it is probable that the gains so offset
will not be distributed. The following capital loss carryforward amount expire
on July 31, in the year indicated below:
<TABLE>
<CAPTION>
1996 1997 2002 2003
================================================================================
<S> <C> <C> <C> <C>
Carryforward Amounts $120,171,153 $29,387,864 $3,422,711 $33,246,014
================================================================================
</TABLE>
13
<PAGE>
Smith Barney
Managed Governments Fund Inc.
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
5. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
Securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
6. REVERSE REPURCHASE AGREEMENT
The Fund may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by the Fund
of securities that it holds with an agreement by the Fund to repurchase the same
securities at an agreed upon price and date. The Fund will establish a
segregated account with its custodian, in which the Fund will maintain cash,
U.S. Government Securities or other liquid high grade debt obligations equal in
value to its obligations with respect to reverse repurchase agreements.
At January 31, 1996, the Fund had the following reverse repurchase agreement
open:
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<C> <C> <C>
$58,458,563 REVERSE REPURCHASE AGREEMENT WITH MORGAN
STANLEY GROUP, INC. DATED 1/18/96 BEARING 1.500%
TO BE REPURCHASED AT $58,530,345 ON
1/31/96, COLLATERALIZED BY $56,550,000 U.S.
TREASURY NOTE, 5.875% DUE 11/15/05 $58,458,563
================================================================================
</TABLE>
During the six months ended January 31, 1996, the maximum and average amount
of reverse repurchase agreements outstanding were as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Maximum amount outstanding $125,442,375
- --------------------------------------------------------------------------------
Average amount outstanding 73,370,851
================================================================================
</TABLE>
Interest expense for the six months ended January 31, 1996, on borrowings by
the Fund, under reverse repurchase agreements totaled $1,474,568.
14
<PAGE>
Smith Barney
Managed Governments Fund Inc.
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
7. OPTION CONTRACTS
Premiums paid when put or call options are purchased by the Fund represent
investments which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into closing sales transaction, the Fund will realize a gain or loss
depending on whether the sales proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Fund exercises a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Fund exercises a call option, the cost of the security
which the Fund purchases upon exercise will be increased by the premium
originally paid.
When a Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
written) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is eliminated. When a call
option is exercised, the cost of the security sold will be increased by the
premium originally received. When a put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the Fund
purchased upon exercise.
At January 31, 1996, the Fund had no written options outstanding.
8. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets due from the broker (the Fund's agent in acquiring the
futures position). During the period the futures contract is open, changes in
the value of the contract are recognized as unrealized gains or losses by
"marking to market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or received
and recognized as assets due from or liabilities due to broker, depending upon
whether unrealized gains or
15
<PAGE>
Smith Barney
Managed Governments Fund Inc.
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
losses are incurred. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the proceeds from (or cost of) the
closing transactions and the Fund's basis in the contract.
At January 31, 1996, the Fund had the following open futures contracts:
<TABLE>
<CAPTION>
Expiration
Month/ # of Basis Market Unrealized
Year Contracts Value Value Gain
================================================================================
<S> <C> <C> <C> <C> <C>
Futures contracts purchased:
U.S. Long Bond 3/96 276 $33,231,693 $33,378,750 $147,057
================================================================================
</TABLE>
9. SECURITIES TRADED ON A WHEN-ISSUED OR
TO-BE-ANNOUNCED BASIS
The Fund may trade portfolio securities on a "to-be-announced" ("TBA")
basis. In a TBA transaction, the Fund commits to purchasing or selling
securities for which all specific information is not yet known at the time of
the trade, particularly the face amount and maturity date in GNMA transactions.
Securities purchased on a TBA basis are not settled until they are delivered to
the Fund, normally 15 to 45 days later. These transactions are subject to market
fluctuation and their current value is determined in the same manner as for
other portfolio securities.
As of January 31, 1996, there were no TBA transactions.
10. COMMON STOCK
At January 31, 1996, the Fund had 500 million shares of capital stock
authorized with a par value of $0.001 per share. The Fund has the ability to
issue multiple classes of shares. Each share of a class represents an identical
interest in the Fund and has the same rights, except that each class bears
certain expenses specifically related to the distribution of its shares.
Effective November 7, 1994, the Fund adopted a new class structure, renaming the
former Class D shares as Class C shares.
At January 31, 1996, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Total Paid-in Capital $669,148,807 $117,705,951 $944,162
================================================================================
</TABLE>
16
<PAGE>
Smith Barney
Managed Governments Fund Inc.
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1996 July 31, 1995
---------------- -------------
Shares Amount Shares Amount
================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 473,345 $ 7,673,024 19,786,976 $ 241,728,620
Shares issued on
reinvestment 855,379 10,919,120 1,797,001 22,108,190
Shares redeemed (3,395,519) (44,900,390) (9,428,140) (115,641,617)
- --------------------------------------------------------------------------------
Net Increase (Decrease) (2,066,795) $(26,308,246) 12,155,837 $ 148,195,193
================================================================================
Class B
Shares sold 443,825 $ 6,075,974 1,422,270 $ 17,423,153
SHARES ISSUED ON
REINVESTMENT 208,507 2,366,943 479,870 5,909,325
Shares redeemed (1,421,111) (18,387,693) (22,538,562) (275,512,867)
- --------------------------------------------------------------------------------
Net Decrease (768,779) $(9,944,776) (20,636,422) $(252,180,389)
================================================================================
Class C*
Shares sold 57,831 $ 716,134 23,676 $ 294,086
Shares issued on
reinvestment 1,363 42,500 569 7,063
Shares redeemed (8,777) (112,761) (6,360) (77,842)
- --------------------------------------------------------------------------------
Net Increase 50,417 $ 645,873 $17,885 $ 223,307
================================================================================
</TABLE>
- ----------
* On November 7, 1994, the former Class D shares were renamed Class C shares.
17
<PAGE>
Smith Barney
Managed Governments Fund Inc.
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1995 1994 1993 1992 1991
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.63 $ 12.50 $ 13.29 $ 12.88 $ 12.09 $ 12.13
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.44 0.81 0.75 0.69 0.91 0.98
Net realized and unrealized
gain (loss) 0.19 0.10 (0.74) 0.61 0.87 0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.63 0.91 0.01 1.30 1.78 1.05
Less Distributions From:
Net investment income (0.40) (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 -- (0.04) (0.19) -- (0.08) (0.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.78) (0.80) (0.89) (0.99) (1.09)
Net Asset Value, End of Period $ 12.86 $ 12.63 $ 12.50 $ 13.29 $ 12.88 $ 12.09
Total Return 5.03%++ 7.67% 0.08% 10.43% 15.25% 9.02%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $511,410 $528,533 $371,086 $462,703 $488,515 $474,305
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.07%+ 1.07% 1.03% 0.99% 0.82% 0.82%
Net investment income 6.58+ 6.57 5.60 5.35 7.23 8.12
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 135% 292% 236% 436% 426% 365
====================================================================================================================================
Class B Shares 1996(1) 1995 1994 1993(2)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.63 $ 12.50 $ 13.29 $ 12.64
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.42 0.75 0.69 0.47
Net realized and unrealized
gain (loss) 0.18 0.09 (0.75) 0.75
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.60 0.84 (0.06) 1.22
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.67) (0.52) (0.40)
Overdistribution of net investment
income -- -- (0.04) (0.01)
Overdistribution of net realized gains -- -- -- (0.16)
Capital -- (0.04) (0.17) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.37) (0.71) (0.73) (0.57)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.86 $ 12.63 $ 12.50 $ 13.29
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 4.75%++ 7.04% (0.46)% 9.92%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $125,374 $132,882 $389,383 $474,093
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.56%+ 1.57% 1.55% 1.62%+
Net investment income 6.06+ 6.07 5.08 4.72+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 135% 292% 236% 436%
====================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1996 (unaudited).
(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.
18
<PAGE>
Smith Barney
Managed Governments Fund Inc.
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1995 1994 1993(2)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.63 $ 12.50 $ 13.29 $ 13.18
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations From:
Net investment income 0.42 0.76 0.69 0.07
Net realized and unrealized gain (loss) 0.17 0.08 (0.75) 0.09
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.59 0.84 (0.06) 0.16
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.67) (0.52) (0.03)
Overdistribution of net investment income -- -- (0.04) --
</TABLE>
