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. 24 X
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 X
Amendment No. 23 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) 816-6474
(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, 1997 was filed
on September 16, 1997 as Accession Number 0000091155-97-000416.
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and
documents
Front Cover
Contents Page
Cross-Reference Sheet
Part C - Other Information
Signature Page
Exhibit
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, Purchase of Shares;
Redemption and Pricing of 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
PART A
PROSPECTUS
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Managed
Governments
Fund Inc.
NOVEMBER 28, 1997
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
PROSPECTUS
NOVEMBER 28, 1997
388 Greenwich Street
New York, New York 10013
800-451-2010
Smith Barney Managed Governments Fund Inc. (the "Fund") is a diversified fund
designed to provide investors with high current income consistent with liquid-
ity and safety of capital. The Fund seeks to achieve this objective by invest-
ing in debt obligations of varying maturities issued or guaranteed by the
United States government or its agencies or instrumentalities (with emphasis on
mortgage-backed government securities) and by writing covered put and call
options against certain of such securities. The Fund also may enter into cer-
tain 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 28, 1997, 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 Infor-
mation 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 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 15
- -------------------------------------------------
VALUATION OF SHARES 23
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 24
- -------------------------------------------------
PURCHASE OF SHARES 25
- -------------------------------------------------
EXCHANGE PRIVILEGE 35
- -------------------------------------------------
REDEMPTION OF SHARES 38
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 41
- -------------------------------------------------
PERFORMANCE 41
- -------------------------------------------------
MANAGEMENT OF THE FUND 42
- -------------------------------------------------
DISTRIBUTOR 43
- -------------------------------------------------
ADDITIONAL INFORMATION 44
</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 of
$500,000 or more, 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 Summa-
ry--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
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
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.
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Finally, investors should consider the effect of the CDSC period and any con-
version 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.
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 of $500,000 or more, 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 investment may be met by adding the pur-
chase 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 "Ex-
change Privilege." Class A share purchases may also be eligible for a reduced
initial sales charge. See "Purchase of Shares." Because the ongoing expenses of
Class A shares may be lower than those for Class B and Class C shares, purchas-
ers 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. Investors may also 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 both of these Programs. See "Pur-
chase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
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
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
selling group. In addition, certain investors, including qualified retirement
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
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 participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B, and Class C shares and the subsequent invest-
ment requirement for all Classes is $25. For minimum investment requirements
for all Classes through the Systematic Investment Plan, see below. See "Pur-
chase 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 investment require-
ment for Class A, Class B and Class C shares and the subsequent investment
requirement for all Classes for shareholders purchasing shares through the Sys-
tematic 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."
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are generally
paid on the last Friday of each calendar month to shareholders of record as of
three business days prior thereto. Distributions of net realized 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."
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."
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 the Fund's operating
expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
MANAGED GOVERNMENTS FUND 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 0.11 0.13 0.11 0.04
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.01% 1.53% 1.46% 0.69%
- ------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more 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 of purchase.
** 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.
Class A shares of the Fund purchased through the Smith Barney AssetOne Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant. 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 and cer-
tain Class A shares, the length of time the shares are held and whether the
shares are held through the Smith Barney 401(k) and ExecChoice(TM) Programs.
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 fee of 0.75% of the value of the average 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.
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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>
MANAGED GOVERNMENTS FUND 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 $76 $98 $163
Class B.................................. 61 78 93 168
Class C.................................. 25 46 80 175
Class Y.................................. 7 22 38 86
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A.................................. $55 $76 $98 $163
Class B.................................. 16 48 83 168
Class C.................................. 15 46 80 175
Class Y.................................. 7 22 38 86
- ------------------------------------------------------------------------------
</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.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the three year period ended July 31, 1997 has
been audited by KPMG Peat Marwick LLP, independent accountants, whose report
thereon appears in the Fund's Annual Report dated July 31, 1997. 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:
MANAGED GOVERNMENTS FUND
<TABLE>
<CAPTION>
CLASS A SHARES 1997(1) 1996(1) 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $ 12.27 $ 12.63 $ 12.50 $ 13.29 $ 12.88
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.80 0.81 0.81 0.75 0.69
Net realized and unrealized
gain (loss) 0.59 (0.34) 0.10 (0.74) 0.61
- -------------------------------------------------------------------------------
Total Income From Operations 1.39 0.47 0.91 0.01 1.30
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.82) (0.82) (0.74) (0.61) (0.66)
Net realized gains -- -- -- -- (0.23)
Capital -- (0.01) (0.04) (0.19) --
- -------------------------------------------------------------------------------
Total Distributions (0.82) (0.83) (0.78) (0.80) (0.89)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.84 $12.27 $12.63 $12.50 $13.29
- -------------------------------------------------------------------------------
TOTAL RETURN 11.80% 3.76% 7.67% 0.08% 10.43%
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $414,571 $454,679 $528,533 $371,086 $462,703
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.01% 1.04% 1.07% 1.03% 0.99%
Net investment income 6.43 6.46 6.57 5.60 5.35
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 121% 275% 292% 236% 436%
- -------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
MANAGED GOVERNMENTS FUND
<TABLE>
<CAPTION>
CLASS A SHARES 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $ 12.09 $ 12.13 $ 12.19 $ 12.04 $ 12.62
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.91 0.98 1.07 0.96 1.09
Net realized and unrealized
gain (loss) 0.87 0.07 (0.03) 0.26 (0.56)
- -------------------------------------------------------------------------------
Total Income From Operations 1.78 1.05 1.04 1.22 0.53
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.91) (0.98) (1.07) (0.96) (1.09)
Net realized gains -- -- -- -- (0.01)
Capital (0.08) (0.11) (0.03) (0.11) (0.01)
- -------------------------------------------------------------------------------
Total Distributions (0.99) (1.09) (1.10) (1.07) (1.11)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.88 $12.09 $12.13 $12.19 $12.04
- -------------------------------------------------------------------------------
TOTAL RETURN 15.25% 9.02% 9.01% 10.62% 4.43%
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $488,515 $474,305 $511,867 $621,752 $871,468
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.82% 0.82% 0.81% 0.81% 0.77%
Net investment income 7.23 8.12 8.87 8.12 8.98
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 426% 365% 163% 51% 288%
- -------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
MANAGED GOVERNMENTS FUND
<TABLE>
<CAPTION>
CLASS B SHARES 1997(1) 1996(1) 1995 1994 1993(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $ 12.27 $ 12.63 $ 12.50 $ 13.29 $ 12.64
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.74 0.75 0.75 0.69 0.47
Net realized and
unrealized gain (loss) 0.59 (0.34) 0.09 (0.75) 0.75
- -------------------------------------------------------------------------------
Total Income (Loss) From
Operations 1.33 0.41 0.84 (0.06) 1.22
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.76) (0.76) (0.67) (0.56) (0.41)
Net realized gains -- -- -- -- (0.16)
Capital -- (0.01) (0.04) (0.17) --
- -------------------------------------------------------------------------------
Total Distributions (0.76) (0.77) (0.71) (0.73) (0.57)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $12.84 $12.27 $12.63 $12.50 $13.29
- -------------------------------------------------------------------------------
TOTAL RETURN 11.23% 3.24% 7.04% (0.46)% 9.92%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $96,747 $110,724 $132,882 $389,383 $474,093
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.53% 1.56% 1.57% 1.55% 1.62%+
Net investment income 5.91 5.94 6.07 5.08 4.72+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 121% 275% 292% 236% 436%
- -------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(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.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
MANAGED GOVERNMENTS FUND
<TABLE>
<CAPTION>
CLASS C SHARES 1997(1) 1996(1) 1995 1994 1993(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $12.27 $12.63 $12.50 $13.29 $13.18
- ------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.74 0.75 0.76 0.69 0.07
Net realized and unrealized gain
(loss) 0.59 (0.34) 0.08 (0.75) 0.09
- ------------------------------------------------------------------------------
Total Income (Loss) From
Operations 1.33 0.41 0.84 (0.06) 0.16
- ------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.76) (0.76) (0.67) (0.56) (0.03)
Net realized gains -- -- -- -- (0.02)
Capital -- (0.01) (0.04) (0.17) --
- ------------------------------------------------------------------------------
Total Distributions (0.76) (0.77) (0.71) (0.73) (0.05)
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.84 $12.27 $12.63 $12.50 $13.29
- ------------------------------------------------------------------------------
TOTAL RETURN 11.26% 3.25% 7.04% (0.46)% 1.25%++
- ------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $1,866 $1,238 $299 $72 $12
- ------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.46% 1.49% 1.52% 1.58% 1.55%+
Net investment income 6.01 5.99 6.12 5.05 4.80+
- ------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 121% 275% 292% 236% 436%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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.
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
MANAGED GOVERNMENTS FUND
<TABLE>
<CAPTION>
CLASS Y SHARES 1997(/1/) 1996(/1/)(/2/)
- -------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.27 $12.86
- -------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.84 0.35
Net realized and unrealized gain (loss) 0.59 (0.49)
- -------------------------------------------------------------------
Total Income (Loss) From Operations 1.43 (0.14)
- -------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.86) (0.44)
Capital -- (0.01)
- -------------------------------------------------------------------
Total Distributions (0.86) (0.45)
- -------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.84 $12.27
- -------------------------------------------------------------------
TOTAL RETURN 12.16% (1.10)%++
- -------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $85,194 $27,215
- -------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.62% 0.78%+
Net investment income 6.82 6.62+
- -------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 121% 275%
- -------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from February 7, 1996 (inception date) to July 31, 1996.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
14
<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
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
principal and interest. In addition, the Fund may receive unscheduled principal
pay-ments representing prepayments on the underlying mortgages, which will
cause the maturity of and realized yield on specific GNMA, FNMA and FHLMC cer-
tificates 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.
16
<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
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
securities, respectively, upon the exercise of a covered put or call option
which it has written terminates upon the effectuation of a closing purchase
transaction.
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 transac-
tion 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 during
the option period. At times, the net cost of acquiring securities in this man-
ner 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 pre-
mium 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.
Zero Coupon Securities. The Fund may invest in zero coupon bonds. A zero cou-
pon bond pays no interest in cash to its holder during its life, although
interest is accrued during that period. Its value to an investor consists of
the difference between its face value at the time of maturity and the price for
which it was acquired, which is generally at significantly less than its face
value (sometimes referred to as a "deep discount" price). Because such securi-
ties usually trade at a
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
deep discount, they will be subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable matu-
rities which make periodic distributions of interest. On the other hand,
because there are no periodic interest payments to be reinvested prior to
maturity, zero coupon securities eliminate reinvestment risk and lock in a
rate of return to maturity.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements. A reverse repurchase agreement involves the sale of a money market
instrument by the Fund and its agreement to repurchase the instrument at a
specified time and price. The Fund will maintain a segregated account consist-
ing of U.S. government securities or cash or cash equivalents to cover its
obligations under reverse repurchase agreements with broker-dealers and other
financial institutions. The Fund will invest the proceeds in other money mar-
ket instruments or repurchase agreements maturing not later than the expira-
tion of the reverse repurchase agreement. Under the Investment Company Act of
1940, as amended, (the "1940 Act") reverse repurchase agreements may be con-
sidered borrowing by the seller.
Reverse repurchase agreements create opportunities for increased returns to
the shareholders of the Fund but, at the same time, create special risk con-
siderations. Although the principal or stated value of such borrowings will be
fixed, the Fund's assets may change in value during the time the borrowing is
outstanding. To the extent the income or other gain derived from securities
purchased with borrowed funds exceed the interest or dividends the Fund will
have to pay in respect thereof, the Fund's net income or other gain will be
greater than if this type of leverage had not been used. Conversely, if the
income or other gain from the incremental assets is not sufficient to cover
this cost, the net income or other gain of the Fund will be less than if the
reverse repurchase agreement had not been used.
The Fund currently intends to invest not more than 33% of its net assets in
reverse repurchase agreements.
When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or
sell securities on a when-issued or delayed-delivery basis. The Fund will
enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. 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. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on those securities may be higher or lower than the yields available
in the market on the dates when the investments are actually delivered to the
buyers. The Fund will establish with its custodian a segregated account con-
sisting of cash or equity and debt securities of any grade provided
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
such securities have been determined by SBMFM to be liquid and unencumbered
pursuant to guidelines established by the Directors in an amount equal to the
amount of its when-issued and delayed-delivery commitments. Placing securities
rather than cash in the segregated account may have a leveraging effect on 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
20
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
and market conditions and not for purposes of speculation. 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 a specified financial instrument (debt
security) 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
21
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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
appreciation than other investments of comparable maturities due to the like-
lihood 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
22
<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.
23
<PAGE>
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
ordinarily will be paid on the last Friday of each calendar month to sharehold-
ers 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
24
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED) DATE
Fund's dividends and distributions will not qualify for the Federal dividends-
received deduction for corporations. Some states, if certain assets and diver-
sification requirements are met, permit shareholders to treat their portions of
a fund's dividends that are attributable to interest on U.S. Treasury Securi-
ties and certain U.S. government securities as income that is exempt from state
and local income taxes.
Information as to the tax status of dividends paid or deemed paid in each
calendar year including eligibility of long-term capital gains dividends for a
reduced maximum 20% tax rate, will be mailed to shareholders as early in the
succeeding year as practical but not later than January 31.
This information will, among other things, tell shareholders the portion of
their dividends that are attributable to U.S. Treasury Securities and specific
types of U.S. government securities.
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 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 are available only to investors investing a minimum of $5,000,000 (except
for purchases of Class Y shares by Smith Barney Concert Allocation Series Inc.
for which there is no minimum purchase amount). See "Prospectus Summary--
Alternative Purchase Arrangements" 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, except for investors purchasing shares of the Fund through a qualified
retirement plan who may do so directly through First Data. 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
25
<PAGE>
PURCHASE OF SHARES (CONTINUED) DATE
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
making an initial investment of at least $1,000 for each account, or $250 for
an IRA or a Self-Employed Retirement Plan 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 Classes. For
participants in retirement plans qualified under Section 403(b)(7) or Section
401(a) of the Code, the minimum initial investment requirement for Class A,
Class B and Class C shares and the subsequent investment requirement for all
Classes in the Fund is $25. For shareholders purchasing shares of the Fund
through the Systematic Investment 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 is $50. There are no
minimum investment requirements for Class A shares for employees of Travelers
and its subsidiaries, including 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 the
offering of shares from time to time. Shares purchased will be held in the
shareholder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First
Data.
The minimum initial and subsequent investment requirements in the Fund for an
account established under the Uniform Gift to Minors Act is $250 and the
subsequent investment requirement is $50.
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. In all other cases, payment must be
made with the purchase order.
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or $50 on a
quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder, to provide systematic 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
First Data. 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 available from the Fund or a Smith
Barney Financial Consultant.
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 of $500,000 or more 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 and his or her immediate family or a trustee or other fiduciary of
a single trust estate or single fiduciary account.
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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) sales to (i) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families
of such persons (including the surviving spouse of a deceased Board Member or
employee); and to a 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 purchase 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 to effect the combination of such
company with the Fund by merger, acquisition of assets or otherwise; (c)
purchases of Class A shares by any client of a newly employed Smith Barney
Financial Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with Smith Barney), 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) purchases by shareholders who have
redeemed Class A shares in the Fund (or Class A shares of another fund of the
Smith Barney Mutual Funds that are offered with a sales charge) and who wish to
reinvest their redemption proceeds in the Fund, provided the reinvestment is
made within 60 calendar days of the redemption; (e) purchases by accounts
managed by registered investment advisory subsidiaries of Travelers; (f) direct
rollovers by plan participants of distributions from a 401(k) plan offered to
employees of Travelers or its subsidiaries or a 401(k) plan enrolled in
the Smith Barney 401(k) Program (Note: subsequent investments will be subject
to the applicable sales charge); (g) purchases by separate accounts used to
fund certain unregistered variable annuity contracts; and (h) purchases by
investors participating in a Smith Barney fee-based arrangement. In order to
obtain such discounts, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing 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
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
discount, the purchaser must provide sufficient information at the time of pur-
chase to permit verification that the purchase qualifies for the reduced sales
charge. 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 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 purchase at net asset value, all purchases must be pursuant to an employ-
er- 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
distribut-ing 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
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 pur-
chases 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 previously 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 applicable 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. Please contact a Smith Barney Financial Con-
sultant 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 that were purchased without an initial sales
charge but subject to a CDSC.
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.
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
<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 pro-
portion 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. 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 redemption.
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 addi-
tional shares through dividend reinvestment. During the fifteenth month after
the pur-
31
<PAGE>
PURCHASE OF SHARES (CONTINUED)
chase, the investor decided to redeem $500 of his or her investment. Assuming
at 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 to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a share-
holder 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
32
<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 whether opened
before or after June 21, 1996, that has not previously qualified for an
exchange into Class A shares will be offered the opportunity 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 Participating 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 anniver -
33
<PAGE>
PURCHASE OF SHARES (CONTINUED)
sary date. Once an exchange has occurred, a Participating Plan will not be eli-
gible to acquire additional Class C shares of the 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.
34
<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 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 min-
imum investment requirements and all shares are subject to the other require-
ments 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
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
Concert Social Awareness 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.--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
35
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation 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.
***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 and Class B 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.
36
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
+ 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) or ExecChoice(TM) 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 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 will
be processed at the net asset value next determined. Redemption procedures
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
37
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 shares tendered to it, as described below, at
a redemption price equal to their 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 trad-
ing on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, 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 redemption proceeds will
be remitted on or before the third business day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted under
the 1940 Act, in extraordinary circumstances. Generally, if the redemption pro-
ceeds are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified 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 Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney Managed Governments Funds Inc.
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
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
38
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power)
and must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor insti-
tution such as a domestic bank, savings and loan institution, domestic 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 or the redemption proceeds are to be sent to an
address other than the address of record. Unless otherwise directed, redemption
proceeds will be mailed to an investor's address of record. First Data may
require additional supporting documents for redemptions made by corporations,
executors, administrators, trustees or guardians. A redemption request will not
be deemed properly received until First Data receives all required documents in
proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account 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 First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, including a signature guaran-
tee, that will be provided by First Data 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 First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. 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 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
39
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined.
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 cash payments of at least $50 monthly or quarterly. Retirement 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 shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
40
<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 involuntary liquidation.
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
41
<PAGE>
PERFORMANCE (CONTINUED)
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent 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 and other financial 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.
SBMFM has been in the investment counseling business since 1934 and is a regis-
tered investment adviser. SBMFM renders investment advice to investment compa-
nies that had aggregate assets under management as of October 31, 1997 in
excess of $84.5 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, 1997, 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
42
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
daily net assets up to $1 billion and 0.185% of the value of the average daily
net assets in excess of $1 billion.
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, 1997, is included in
the Annual Report dated July 31, 1997. 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
43
<PAGE>
DISTRIBUTOR (CONTINUED) DATE
of sale and, with respect to Class A, Class B and Class C shares, a continuing
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.
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.
44
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
First Data, 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 of the period covered. In an effort to reduce the Fund's printing and mail-
ing 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 hav-
ing multiple accounts with identical address of record will receive a single
copy of each report. In addition, the Fund also plans to consolidate the mail-
ing of its Prospectus so that a shareholder having multiple accounts (that is,
individual, IRA and for Self-Employed Retirement Plan accounts) will receive a
single Prospectus annually. 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.
45
<PAGE>
SMITH BARNEY
-------------------------------
A Member of TravelersGroup LOGO
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
388 Greenwich Street New York, New York 10013
FD0212 11/97
PART B
STATEMENT OF ADDITIONAL INFORMATION
Smith Barney
Managed Governments Fund Inc.
388 Greenwich Street
New York, New York 10013
1-800-451-2010
Statement of Additional
Information
November 28, 1997
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 28, 1997, 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 ....4
Purchase of Shares .....14
Redemption of Shares 15
Distributor....... 16
Valuation of Shares .17
Exchange Privilege 17
Performance Data (See in the Prospectus "Performance'') 18
Taxes (See in the Prospectus "Dividends, Distributions and Taxes'') 20
Additional Information 22
Financial Statements 22
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 74). Private Investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
Alfred Bianchetti (Age 74). Retired; formerly Senior Consultant to Dean
Witter Reynolds Inc. His address is 19 Circle End Drive, Ramsey, New Jersey
07446.
Martin Brody (Age 76). Consultant, HMK Associates. Retired Vice Chairman
of the Board of Restaurant Associates Corp. and a Director of Jaclyn, Inc.
His address is c/o HMK Associates, 30 Columbia Turnpike, Florham Park, New
Jersey 07932.
Dwight B. Crane (Age 60). Professor, Harvard Business School. His address
is c/o Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02163.
Burt N. Dorsett, Director (Age 67). Managing Partner of Dorsett McCabe
Management, Inc., an investment counseling firm; Director of Research
Corporation Technologies, Inc., a non-profit patent-clearing and licensing
firm. His address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Director (Age 71). 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 65). Attorney. His address is 277 Park Avenue, New
York, New York 10172.
Joseph J. McCann (Age 67). Financial Consultant; Retired Financial
Executive 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 64).
Managing Director of Smith Barney, Chairman of the Board of Smith Barney
Strategy Advisers Inc. and President and Director of SBMFM and Travelers
Investment Advisor, Inc. (TIA"); prior to July 1993, Senior Executive Vice
President of Shearson Lehman Brothers Inc.; Vice Chairman of Shearson Asset
Management. Mr. McLendon is Chairman of the Board and Investment Officer of
certain other Smith Barney Mutual Funds. His address is 388 Greenwich Street,
New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 64). President, Cornelius C. Rose
Associates, Inc., financial consultants, and Chairman and Director of
Performance Learning Systems, an educational consultant. His address is P.O.
Box 335, High Street, 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.
A Director Emeritus may attend meetings of the Fund's Board of Directors
but has no voting rights at such meetings.
James E. Conroy, First Vice President and Investment Officer (Age 47).
Investment Officer of SBMFM; prior to July 1993, Managing Director of Shearson
Lehman Advisors. Mr. Conroy serves as Investment Officer of certain other
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New York, New
York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40). Managing
Director of Smith Barney; Chief Financial Officer of Smith Barney Mutual Fund;
Director and Senior Vice President of SBMFM and TIA. Mr. Daidone serves as
Senior Vice President and Treasurer of certain other Smith Barney Mutual
Funds. His address is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 46). Managing Director of Smith Barney;
General Counsel and Secretary of SBMFM and TIA. Ms. Sydor also serves as
Secretary of certain other Smith Barney Mutual Funds. Her address is 388
Greenwich Street, New York, New York 10013.
As of November 25, 1997, 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 November 25, 1997, 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, 1997, such fees and
expenses totaled $12,063.99.
For the fiscal year ended July 31, 1997, the Directors of the Fund were
paid the following compensation:
Director
Aggregate
Compensatio
n
from the
Fund
Pension or
Retirement
Benefits
Accrued as
Part of
Fund Expenses
Aggregate
Compensation
from the Smith
Barney
Mutual Funds
Total Number of
Funds
for which
Director/Trusteeship
Serves Within Fund
Complex
Herbert Barg
$6,200
$0
$105,175
18
Alfred
Bianchetti
6,100
0
51,500
13
Martin Brody
6,000
0
124,286
21
Dwight Crane
6,100
0
140,375
24
Burt Dorset*
6,200
0
47,400
13
Elliot Jaffe
6,100
0
51,000
13
Stephen
Kaufman
6,200
0
92,336
15
Joseph McCann
6,200
0
52,700
13
Heath
McLendon
- ---
0
- ---
42
Cornelius
Rose
6,200
0
51,400
13
James
Crisona**
- ---
0
20,575
12
Issac
Grainger **
1,550
0
3,500
_________________________
* The aggregate remuneration paid to the Directors by the Fund for the fiscal
year ended July 31, 1997 amounted to $12,063.99 (including reimbursement
for travel and out-of-pocket expenses).
** Upon attainment of age 80, Fund Trustees are required to change to emeritus
status. Trustees Emeritus are entitled to serve in emeritus status for a
maximum of 10 years, during which time they are paid 50% of the annual
retainer fee and meeting fees otherwise applicable to Fund Trustees,
together with reasonable out-of-pocket expenses for each meeting attended.
Mr. Crisona, and Mr. Grainger are Directors Emeritus and as such may attend
meetings but have no voting rights.
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 16, 1997. 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, 1995, 1996 and 1997, the Fund
paid SBMFM $3,107,867, $2,816,295 and $2,661,308, 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 16, 1997. 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.
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.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the Fund. The Independent
Directors of the Fund have selected Stroock & Stroock & Lavan LLP 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, 1998.
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 instrumentality that it sponsors,
the Fund will invest in obligations of such an instrumentality 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 position 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 holds 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.
Zero Coupon Securities
The Fund may invest in zero coupon bonds. A zero coupon bond pays no
interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for which it was
acquired, which is generally at significantly less than its face value
(sometimes referred to as a "deep discount" price). Because such securities
usually trade at a deep discount, they will be subject to greater fluctuations
of market value in response to changing interest rates than debt obligations
of comparable maturities which make periodic distributions of interest. On
the other hand, because there are no periodic interest payments to be
reinvested prior to maturity, zero coupon securities eliminate reinvestment
risk and lock in a rate of return to maturity.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. A reverse
repurchase agreement involves the sale of a money market instrument by the
Fund and its agreement to repurchase the instrument at a specified time and
price. The Fund will maintain a segregated account consisting of U.S.
government securities or cash or cash equivalents to cover its obligations
under reverse repurchase agreements with broker-dealers and other financial
institutions. The Fund will invest the proceeds in other money market
instruments or repurchase agreements maturing not later than the expiration of
the reverse repurchase agreement. Under the Investment Company Act of 1940,
as amended, reverse repurchase agreements may be considered borrowing by the
seller.
Reverse repurchase agreements create opportunities for increased returns to
the shareholders of the Fund but, at the same time, create special risk
considerations. Although the principal or stated value of such borrowings
will be fixed, the Fund's assets may change in value during the time the
borrowing is outstanding. To the extent the income or other gain derived from
securities purchased with borrowed funds exceeds the interest or dividends the
Fund will have to pay in respect thereof, the Fund's net income or other gain
will be greater than if this type of leverage had not been used. Conversely,
if the income or other gain from the incremental assets is not sufficient to
cover this cost, the net income or other gain of the Fund will be less than if
the reverse repurchase agreement had not been used.
The Fund currently intends to invest not more than 33% of its net assets in
reverse repurchase agreements.
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.
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 of 100% would occur, for example, if all of
the Fund's securities were replaced once during a period of one year. For the
1997, 1996 and 1995 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 121%, 275%, and 292%, 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.
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 16, 1997. For the fiscal
years ended July 31, 1995, 1996 and 1997, Smith Barney received $1,626,500,
$279,000, and $148,000, 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, 1995, 1996, and 1997 Smith Barney received
$466,900, $489,000, and $216,000 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, 1997, Smith Barney incurred distribution
expenses totaling approximately $709,664.00 consisting of approximately
$19,265 for advertising, $4,061 for printing and mailing of prospectuses,
$353,198 for support services, $151,000 to Smith Barney Financial Consultants,
and $140 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
7/31/97
Fiscal Year
Ended
7/31/96
Fiscal Year
Ended 7/31/95
Class A
1,078,392
1,252,233
1,291,642
Class B
258,560
307,888
434,551
Class C
3,736
2,113
329
Distribution Fees
Fiscal Year
Ended
7/31/97
Fiscal Year
Ended
7/31/96
Fiscal Year
Ended 7/31/95
Class A
- -0-
- -0-
- -0-
Class B
258,560
615,775
869,103
Class C
3,736
3,802
445
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, Martin Luther King Jr. 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:
6.79% for the one-year period beginning August 1, 1996 through July 31,
1997;
5.68% per annum during the five-year period beginning on August 1, 1992
through July 31, 1997; and
7.64% per annum during the ten-year period beginning in August 1, 1987
through July 31, 1997.
The average annual total return figures assume that the maximum 4.5% sales
charge has been deducted from the investment at the time of purchase. If the
maximum sales charge of 4.5% had not been deducted at the time of purchase,
the average annual total return for the same periods would have been 11.84%,
6.66%, and 8.13%, respectively.
The Fund's average annual total returns for Class B shares were as follows for
the periods indicated:
6.77% for the one-year period beginning August 1, 1996 though July 31,
1997; and
6.29% per annum during the period from commencement of operations
(November 6, 1992) through July 31, 1997.
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 11.27% and
6.46%, respectively.
The Fund's average total returns for Class C shares (formerly designated Class
D shares) were as follows for the periods indicated:
10.30% for the one-year period beginning August 1, 1996 through July 31,
1997; and
5.39% per annum during the period from commencement of operations (June
29, 1993) through July 31, 1997.
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 11.30% and
5.39%, 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:
6.79% for the one-year period beginning August 1, 1996 through July 31,
1997;
31.83% during the five-year period beginning on August 1, 1992 through
July 31, 1997; and
108.72% during the ten-year period beginning on August 1, 1987 through
July 31, 1997.
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 1.84%,
38.07%, and 118.47%, respectively.
The Fund's aggregate total returns for Class B shares were as follows for the
periods indicated:
6.77% for the one-year period beginning August 1, 1996 through July 31,
1997; and
33.49% during the period from commencement of operations (November 6,
1992) through July 31, 1997.
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 11.27% and
34.49%, respectively.
The Fund's aggregate total returns for Class C shares (formerly designated
Class D shares) were as follows for the periods indicated:
10.30% for the one-year period beginning August 1, 1996 through July 31,
1997; and
23.97% during the period from commencement of operations (June 29, 1993)
through July 31, 1997.
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 11.30% and
23.97%, 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.
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, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent. Under the transfer agency agreement, First Data
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, First Data 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, 1997 accompanies
this Statement of Additional Information.
Smith Barney
Managed
Governments
Fund Inc.
Statement of
Additional
Information
November 28, 1997
Smith Barney
Managed Governments Fund Inc.
388 Greenwich Street
New York, NY 10013
...................................Fund........................
SMITH BARNEY
A Member of Travelers Group
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, 1997
and the report of Independent Accountants dated September 15, 1997, are
incorporated by reference to the Definitive 30b-1 filed on September 30,
1997 as Accession # 0000091155-97-000437.
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) 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 herewith
(b) Consent of Morningstar Mutual Fund Values is incorporated by
reference to Post-Effective Amendment No. 13.
(12) Not Applicable.
(13) Not Applicable.
(14) Form of Smith Barney Defined Contributions Plan Document is
incorporated by reference to Post Effective Amendment No. 23 filed on December
6, 1996
(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)
Title of Class Number of Record Holders
by Class as of October
31, 1997
Common stock, par Class A 23,169
value $.001 per share Class B 5,601
Class C 92
Class Y 9
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
Consulting Group Capital Markets Funds; Global Horizons
Investment Series (Cayman Islands); Greenwich Street
California Municipal Fund Inc.; Greenwich Street Municipal Fund Inc.;
Greenwich Street Series Fund; High Income Opportunity Fund Inc.;
The Italy Fund Inc.; Managed High Income Portfolio Inc.;
Managed Municipals Portfolio II Inc.; Managed Municipals Portfolio Inc.;
Municipal High Income Fund Inc.; Puerto Rico Daily Liquidity Fund Inc.;
Smith Barney Adjustable Rate Government Income Fund;
Smith Barney Aggressive Growth Fund Inc.; Smith Barney Appreciation Fund Inc.;
Smith Barney Arizona Municipals Fund Inc.;
Smith Barney California Municipals Fund Inc.; Smith Barney Concert Series
Inc.;
Smith Barney Disciplined Small Cap Fund, Inc.; Smith Barney Equity Funds;
Smith Barney Fundamental Value Fund Inc.; Smith Barney Funds, Inc.;
Smith Barney Income Funds; Smith Barney Income Trust;
Smith Barney Institutional Cash Management Fund, Inc.;
Smith Barney Intermediate Municipal Fund, Inc.;
Smith Barney Investment Funds Inc.; Smith Barney Investment Trust;
Smith Barney Large Capitalization Growth Fund;
Smith Barney Managed Governments Fund Inc.;
Smith Barney Managed Municipals Fund Inc.;
Smith Barney Massachusetts Municipals Fund; Smith Barney Money Funds, Inc.;
Smith Barney Muni Funds; Smith Barney Municipal Fund, Inc.;
Smith Barney Municipal Money Market Fund, Inc.;
Smith Barney Natural Resources Fund Inc.;
Smith Barney New Jersey Municipals Fund Inc.;
Smith Barney Oregon Municipals Fund Inc.; Smith Barney Principal Return Fund;
Smith Barney Telecommunications Trust; Smith Barney Variable Account Funds;
Smith Barney World Funds, Inc.;
Smith Barney Worldwide Special Fund N.V. (Netherlands Antilles);
Travelers Series Fund Inc.; The USA High Yield Fund N.V.;
Worldwide Securities Limited (Bermuda); Zenix Income Fund Inc.
and various series of unit investment trusts.
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 28th day of November 1997.
SMITH BARNEY MANAGED GOVERNMENTS
FUND INC.
By: /s/ Heath B. McLendon
Heath B. McLendon,
Chairman of the Board
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 has 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 11/28/97
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone Treasurer (Chief Financial 11/28/97
Lewis E. Daidone and Accounting Officer)
/s/ Herbert Barg* Director 11/28/97
Herbert Barg
/s/ Alfred Bianchetti* Director 11/28/97
Alfred Bianchetti
/s/ Martin Brody* Director 11/28/97
Martin Brody
/s/ Dwight Crane* Director 11/28/97
Dwight Crane
/s/ Burt N. Dorsett* Director 11/28/97
Burt N. Dorsett
/s/ Elliot S. Jaffe * Director 11/28/97
Elliot S. Jaffe
/s/ Stephen Kaufman* Director 11/28/97
Stephen Kaufman
/s/ Joseph McCann* Director 11/28/97
Joseph McCann
/s/ Cornelius C. Rose, Jr*. Director 11/28/97
Cornelius C. Rose, Jr.
______________________________________________________________
* Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant
to power of attorney dated November 27, 1996.
/s/ Heath B. McLendon
Heath B. McLendon
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 15, 1997, for the Smith
Barney Managed Governments Fund 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 28, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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