<PAGE>
[PHOTO]
[GRAPHIC]
SMITH BARNEY
MANAGED
GOVERNMENTS
FUND INC.
- ---------------------------------
ANNUAL REPORT
- ---------------------------------
July 31, 1997
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.(SM)
<PAGE>
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
================================================================================
The Smith Barney Managed Governments Fund ("Fund") seeks high current income
consistent with liquidity and safety of capital. The Fund invests primarily in
the debt obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities, with an emphasis on mortgage-backed government securities
such as Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Association (FHLMC).
Smith Barney Managed Governments Fund Inc.'s
Average Annual Total Returns Ended
July 31, 1997
Without Sales Charges*
------------------------------------
Class A Class B Class C
================================================================================
One-Year 11.80% 11.23% 11.26%
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Five-Year 6.66 N/A N/A
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Ten-Year 8.12 N/A N/A
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Since Inception+ 9.04 6.46 5.38
================================================================================
With Sales Charges**
------------------------------------
Class A Class B Class C
================================================================================
One-Year 6.76% 6.73% 10.26%
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Five-Year 5.68 N/A N/A
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Ten-Year 7.63 N/A N/A
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Since Inception+ 8.65 6.29 5.38
- --------------------------------------------------------------------------------
* Assumes reinvestment of all dividends and capital gain distributions, if any,
at net asset value and does not reflect the deduction of the applicable sales
charges with respect to Class A shares or the applicable contingent deferred
sales charges ("CDSC") with respect to Class B and C shares.
** Assumes reinvestment of all dividends and capital gain distributions, if any,
at net asset value. In addition, Class A shares reflect the deduction of the
maximum initial sales charge of 4.50%; and Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from initial purchase. This CDSC declines by 0.50% the first year after
purchase and thereafter by 1.00% per year until no CDSC is incurred. Class C
shares reflect the deduction of a 1.00% CDSC which applies if shares are
redeemed within the first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Inception dates for Class A, B and C shares are September 4, 1984, November
6, 1992 and June 29, 1993, respectively.
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OUR INVESTMENT PHILOSOPHY
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At Smith Barney Mutual Funds, your investment needs come first. Our goal is to
deliver consistent and competitive returns over time, using a wide range of
investment strategies.
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NASDAQ SYMBOL
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Class A SHMGX
Class B MGVBX
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WHAT'S INSIDE
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Shareholder Letter ............................................1
An Interview with Portfolio Manager
James E. Conroy................................................3
Historical Performance.........................................6
Smith Barney Managed Governments
Fund Inc. at a Glance..........................................8
Schedule of Investments........................................9
Statement of Assets and Liabilities...........................10
Statement of Operations.......................................11
Statements of Changes in Net Assets...........................12
Notes to Financial Statements.................................13
Financial Highlights..........................................18
Tax Information...............................................20
Independent Auditors' Report..................................21
<PAGE>
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Shareholder Letter
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[PHOTO] [PHOTO]
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for Smith Barney Managed Governments
Fund Inc. for the year ended July 31, 1997. In this report, we summarize the
period's prevailing economic and market conditions and briefly outline our
portfolio strategy. A detailed summary of performance and current holdings can
be found in the appropriate sections that follow. In addition, an interview with
Jim Conroy, the Fund's Portfolio Manager, begins on page three.
Performance Update
As noted, the Fund invests primarily in mortgage-backed securities issued or
guaranteed by the Government National Mortgage Association (GNMA), Federal
National Mortgage Association (FNMA) or the Federal Home Loan Mortgage
Association (FHLMC).
For the year ended July 31, 1997, we are pleased to report that the Fund's Class
A shares had a total return of 11.80% and outperformed its Lipper Analytical
Services, Inc. peer group average total return of 10.05%. (Lipper is a major
fund-tracking organization.) The Fund distributed income dividends totaling
$0.82 per share over the past year. Based on the net asset value of $12.84 as of
July 31, 1997, this equates to an annualized dividend yield of 6.35%. As of July
31, 1997, the Fund's mortgage-backed securities represented 59% of the portfolio
and its U.S. Treasury holdings made up 41% of the portfolio.
Market Overview
The U.S. economy continued to grow vigorously during 1997. An annualized rate of
increase in the Gross Domestic Product ("GDP") of 5.6% for the first quarter of
1997 came on the heels of already brisk 3.8% annualized GDP growth for the
fourth quarter of 1996. This increase raised concerns from many investors that
the Federal Reserve Board ("Fed") would have to raise short-term interest rates.
The Fed has stated that it considers an annual economic growth rate of
approximately 2.0% or 2.5% to be the limit the U.S. economy can absorb without
increasing inflationary pressures. As a result of unexpected strength in the
U.S. economy, the Fed raised the federal-funds rate by 25 basis points, or
0.25%, at its March 1997 meeting. (The federal-funds rate is the interest rate
banks charge each other for overnight loans and is a closely watched indicator
of the direction of interest rates.) Nevertheless, recently released economic
reports gave the Fed the necessary leeway to leave interest rates unchanged at
their May, July and August meetings.
Despite robust growth and historically low unemployment, inflationary pressures
have been nearly absent in the U.S. economy. In fact, the cost of manufactured
goods has been declining and consumer prices have risen less than a 2% annual
rate so far this year, as represented by the Producers Price Index ("PPI") and
the Consumers Price Index ("CPI"), respectively.
Other significant factors that have affected the market during the reporting
period include:
o The re-election of President Clinton was positively received by the
financial markets. Most investors reacted favorably to the general
direction of government policy.
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Smith Barney Managed Governments Fund Inc. 1
<PAGE>
o The U.S. Congress passing a balanced budget accord that limits government
spending.
o Recent elections in France that restored the Socialists to power
heightening anxiety over the ultimate fate of European Monetary Union.
o The handover of Hong Kong to China in July that was viewed favorably by
the investment community.
Yields from U.S. Treasuries
The chart below indicates that longer-term interest rates are trading towards
6%.
July 31, July 31,
U.S. Treasury Securities 1996 1997 High
- ------------------------ -------- -------- ----
90-Day Treasury Bills 5.30% 5.23% 5.60%
2-Year Treasury Note 6.22 5.72 6.49
5-Year Treasury Note 6.56 5.90 6.84
10-Year Treasury Bond 6.79 6.01 6.97
30-Year Treasury Bond 6.97 6.30 7.17
Investment Strategy
Given our expectations for falling interest rates, we reduced the Fund's
targeted exposure to mortgage-backed securities during the reporting period to
65%. (At any given time during this period, allocations may temporarily be above
or below the agreed upon target.) We increased our holdings in zero coupon bonds
because they represent good value. We focused on coupon bonds in the five-to
ten-year range in order to provide shareholders with consistent income. In
addition, because of our positive outlook for the bond market, we roughly
doubled the Fund's duration from approximately 4 to 7 years during the reporting
period. (Duration is a measure of a fund's volatility relative to a given change
in interest rates.)
Market Outlook
We remain bullish on the bond market in the coming months. We expect that
interest rates should continue to go down for the remainder of the year with the
benchmark 30-year U.S. Treasury bond yield falling to around 6%. Moreover, we
believe that bonds should benefit from the continued steady growth of the U.S.
economy with little or no threat of higher inflationary pressures.
In closing, thank you for investing in the Smith Barney Managed Governments
Fund. We look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President and
Investment Officer
August 26, 1997
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2 1997 Annual Report to Shareholders
<PAGE>
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An Interview with Portfolio Manager
James E. Conroy
- --------------------------------------------------------------------------------
Jim Conroy is a Managing Director of Smith Barney and the Portfolio Manager of
the Smith Barney Managed Governments Fund. Jim is responsible for managing
roughly $4 billion in government bond and mortgage-backed security mutual fund
assets for Smith Barney. He joined the firm in 1983 and since then has served as
head of Taxable Fixed Income Management. Prior to 1983, he was a portfolio
manager with Equitable Asset Management. Jim holds a B.A. in Economics from
Muhlenberg College.
Jim, you were recently cited in a Fortune Magazine article as a "manager with a
proven long-term record in good times and bad." How have you managed the Fund
over the years?
Jim: The primary reason we have maintained a solid long-term track record is
that we tend to be nimble in getting in and out of the marketplace. Our main
concern is keeping to our long-term investment horizon. We are not short-term
traders, but long-term investors.
The key is that a proven long-term record goes hand in hand with investment
experience. We have been around long enough to realize that for every good time,
once in a while you have a bad time. In order to gain an advantage over your
competition but still stay true to your shareholders' needs, you sometimes have
to buy securities that nobody else wants. So when something is out of favor,
that's typically when you will want to look closely at the possible
opportunities because that's probably when it's going to be the least expensive
time to buy it.
Jim, how would you describe the Fund's investment style?
Jim: Our investment style emphasizes total return. We are concerned about income
from the standpoint of paying dividends to shareholders, but our overriding goal
is doing what's right for shareholders in the context of current market
conditions. For example, if interest rates are going lower, we are not going to
defy the market and buy high-income coupon securities that typically do not
perform well when interest rates are going down. Rather, we would buy securities
that reflect a lower interest rate environment.
Every fixed-income mutual fund that pays a dividend has to think about the
income it earns. In fact, there are some portfolio managers out there who manage
strictly for income. They don't care if rates go up or down.
We manage money with a strong total return orientation. The problem you have in
today's environment is that you have a lot of publications talking about the
benefits of risk-averse management. That's tough to do, because in order to make
money in the market you sometimes have to take risks. If you don't take risks
you are still assuming risk because you can miss out on some significant
opportunities.
Given your total-return emphasis, how do you select investments for the Fund?
Jim: Our first priority in terms of investment style is to determine who are the
people who invest in our Fund. We have found that over the years, especially
through all the public seminars we have conducted, and through client meetings,
that our investors are typically conservative with their investments. They tend
to buy U.S. Treasuries and mortgage-backed securities -- and they trust the
portfolio manager to do the right thing.
We always keep the conservative investors' needs in mind when we make investment
decisions. We can make decisions that we think may be right in terms of the
market, but if we're wrong, it's the shareholder who pays the price. So we
typically stay away from "riskier" types of securities. Instead, we take a very
generic approach to the marketplace and buy straightforward securities. We look
at economic growth, investor perceptions of the economy, inflation and political
developments throughout the world before we invest.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 3
<PAGE>
Then we analyze technical aspects of the market. Technical analysis takes into
account such things as market liquidity and day-to-day trading volume. We
attempt to know what our competitors are doing and thinking, which is central to
our investment strategy. In the investment business, you can be the brightest
and most hard working person in the world and still not do well. If you don't
understand the competition and what they are doing, you can be behind the eight
ball. In our view, the best portfolio managers in this business today are those
who truly understand the marketplace.
Jim, you mentioned that the Smith Barney Managed Governments Fund is suitable
for conservative investors. How would you describe the typical investor in your
Fund?
Jim: It's almost impossible for us to say what type of investor should be in the
Fund. What we would say is that almost every investor could participate in the
Fund. It really depends on their tolerance for risk. For example, someone who is
willing to take a lot of risk might want to have only 10% of their assets in a
conservative fund like ours. But someone who is older, who has had his or her
aggressive day in the sun, might say, "I need more conservative, income-oriented
investments and the Managed Governments Fund may be right for me."
Given the fact that interest rates have dropped in recent months, do you feel
this trend is sustainable?
Jim: As a portfolio manager, no matter how strongly you believe that interest
rates are going up or down, you always have to look at the other side of the
equation and try to prove yourself wrong. We don't want to look only at research
that agrees with our current analysis. We want to look at the other side as well
to see if we're perhaps missing something.
However, we do think interest rates are going lower. Investors have been
somewhat apprehensive, because everybody keeps talking about an economy that is
growing again. We personally do not think that's going to happen. Instead, we
believe the world has changed dramatically.
Since Eastern Europe and Asia have opened up, with the exception of China, what
you now see is a global labor force competing for jobs. This means that workers
are not able to go in and demand whatever they want in terms of wages. There
will always be somebody out there who is talented and willing to work for less.
Likewise, corporations cannot raise prices because there is always another
competitor who will undercut them.
If we had told people five years ago that the U.S. government was actually going
to get its fiscal house in order, people would have said we were crazy. But
today we are actually paying down the debt of the U.S. government. As a result,
there are fewer government securities being issued, and the supply of these
securities is diminishing. In addition, demand is strong because people who have
never saved are now saying, "I better start saving for retirement." There is so
much money coming into this marketplace that the diminishing supply of
securities is forcing rates down.
What impact do you think interest rates will have on mortgage-backed securities?
Jim: You have to be very selective with regard to mortgage-backed securities. We
do believe that there has been a trend toward derivatives again. Yet portfolio
managers are still reaching for yield because their clients are demanding higher
yields. If interest rates keep going down, those more exotic forms of securities
are going to come under greater pressure.
Assuming our expectations for the market come true, we believe that derivatives
are ultimately going to be difficult to sell. The portfolio managers who buy
these derivatives are going to have a lot of problems. That's why we always buy
generic mortgage-backed securities. If interest rates keep coming down, we will
adjust coupon rates to stay in line with the current level of interest rates. We
will not have the pre-payment problems that are usually associated with lower
rates.
- --------------------------------------------------------------------------------
4 1997 Annual Report to Shareholders
<PAGE>
By their very nature, mortgage-backed securities always lag when rates go lower.
We can accept less coupon interest, and try to compensate for the lower
interest. But once we give up some coupon interest, we sacrifice some income.
And that income is important for the Fund's dividends.
Mortgage-backed securities are definitely there as income-generating vehicles
but we do not need them to be the drivers of the Fund's portfolio.
Jim, why did you become a portfolio manager?
Jim: I doubt anybody ever dreams of becoming a portfolio manager. But when I got
into the business in 1977, I got a call from a friend. He said, "Would you like
to get in the bond business?" I went for an interview not to be a portfolio
manager, but to be a trader.
And it's funny, recently somebody at a public seminar asked me where did I go to
school to become a portfolio manager. There is no such thing. Portfolio
management comes from experience and I think you really learn when you're in the
line of fire. Within six months, most people will know whether they have what it
takes to be a successful portfolio manager. I would say being a portfolio
manager is just like trying to be a good golfer. Unless you have patience and
realize that every bad shot is going to be followed by some good shots, you will
ultimately not be a good portfolio manager.
To be a good portfolio manager, you must be organized and disciplined. You have
to have the ability to say you are wrong, and make the necessary adjustments. If
you cannot do that, you are going to get in trouble. I see many portfolio
managers who can call markets right and make a lot of money, but not know how to
get out of the marketplace. Admitting you're wrong is one of the hardest
admissions you can make.
Jim, thanks for spending some time with us today.
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Smith Barney Managed Governments Fund Inc. 5
<PAGE>
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Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/97 $12.27 $12.84 $0.82 $0.00 $0.00 11.80%
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 12.63 12.27 0.82 0.00 0.01 3.76
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 12.50 12.63 0.74 0.00 0.04 7.67
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.61 0.00 0.19 0.08
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/93 12.88 13.29 0.66 0.23 0.00 10.43
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/92 12.09 12.88 0.91 0.00 0.08 15.25
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/91 12.13 12.09 0.98 0.00 0.11 9.02
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/90 12.19 12.13 1.07 0.00 0.03 9.01
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/89 12.04 12.19 0.96 0.00 0.11 10.62
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/88 12.62 12.04 1.09 0.01 0.01 4.43
====================================================================================================================================
Total $8.66 $0.24 $0.58
====================================================================================================================================
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Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/97 $12.27 $12.84 $0.76 $0.00 $0.00 11.23%
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 12.63 12.27 0.76 0.00 0.01 3.24
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 12.50 12.63 0.67 0.00 0.04 7.04
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.56 0.00 0.17 (0.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/93 12.64 13.29 0.41 0.16 0.00 9.92+
====================================================================================================================================
Total $3.16 $0.16 $0.22
====================================================================================================================================
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Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/97 $12.27 $12.84 $0.76 $0.00 $0.00 11.26%
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 12.63 12.27 0.76 0.00 0.01 3.25
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 12.50 12.63 0.67 0.00 0.04 7.04
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.56 0.00 0.17 (0.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/93 13.18 13.29 0.03 0.02 0.00 1.25+
====================================================================================================================================
Total $2.78 $0.02 $0.22
====================================================================================================================================
</TABLE>
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6 1997 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/97 $12.27 $12.84 $0.86 $0.00 $0.00 12.16%
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/96 12.86 12.27 0.44 0.00 0.01 (1.10)+
====================================================================================================================================
Total $1.30 $0.00 $0.01
====================================================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
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Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
------------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 7/31/97 11.80% 11.23% 11.26% 12.16%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/97 6.66 N/A N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/97 8.12 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* -- 7/31/97 9.04 6.46 5.38 7.26
================================================================================
With Sales Charge(2)
-------------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 7/31/97 6.76% 6.73% 10.26% 12.16%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/97 5.68 N/A N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/97 7.63 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* -- 7/31/97 8.65 6.29 5.38 7.26
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (7/31/87 through 7/31/97) 118.40%
- --------------------------------------------------------------------------------
Class B (Inception* through 7/31/97) 34.45
- --------------------------------------------------------------------------------
Class C (Inception* through 7/31/97) 23.92
- --------------------------------------------------------------------------------
Class Y (Inception* through 7/31/97) 10.93
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charges with respect to Class A shares or the applicable contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum sales charge of 4.50% and Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from initial purchase. This CDSC declines by 0.50% the first year after
purchase and thereafter by 1.00% per year until no CDSC is incurred. Class C
shares reflect the deduction of a 1.00% CDSC, which applies if shares are
redeemed within the first year of purchase.
* Inception dates for Class A, B, C and Y shares are September 4, 1984,
November 6, 1992, June 29, 1993 and February 7, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
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Smith Barney Managed Governments Fund Inc. 7
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of the Smith Barney Managed
Governments Fund Inc. vs. Lipper Mortgage Securities Average and Lehman Brothers
Government Bond Index+
- --------------------------------------------------------------------------------
July 1987--July 1997
[GRAPH]
<TABLE>
<CAPTION>
Smith Barney Managed Lipper Mortgage Lehman Brothers
Governments Fund Inc. Securities Average Government Bond Index
<S> <C> <C> <C>
July 1987 $ 9,553 $ 10,000 $ 10,000
July 1988 9,977 10,722 10,936
July 1989 11,036 12,033 12,603
July 1990 12,031 12,956 13,366
July 1991 13,116 14,313 14,708
July 1992 15,117 16,205 16,951
July 1993 16,693 17,578 18,782
July 1994 16,706 17,227 18,757
July 1995 17,988 18,734 22,034
July 1996 18,662 19,660 23,171
July 1997 20,872 21,636 25,528
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on July 31,
1987, assuming deduction of the maximum 4.50% sales charge at the time of
investment and reinvestment of dividends and capital gains, if any, at net
asset value through July 31, 1997. The Lipper Analytical Services, Inc. U.S.
Mortgage Securities Bond Fund Average ("Lipper Mortgage Securities Average")
is composed of the Fund's peer group of mutual funds (67 funds as of July 31,
1997) investing in U.S. mortgage-backed securities. Lipper Analytical
Services, Inc. is a widely-recognized mutual fund information service. The
Lehman Brothers Government Bond Index is a broad-based index of all public
debt obligations of the U.S. government and its agencies and has an average
maturity of approximately nine years. The index is unmanaged and is not
subject to the same management and trading expenses as a mutual fund. The
performance of the Fund's other classes may be greater or less than the Class
A shares' performance indicated on this chart, depending on whether greater or
lesser sales charges and fees were incurred by shareholders investing in other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost. No adjustment has been made
for shareholder tax liability on dividends or capital gains.
Investment Breakdown
- --------------------------------------------------------------------------------
[PIE CHART]
12.1% U.S. Treasury Notes
1.0% FHLMC and FNMA
29.3% U.S. Treasury Strips
57.6% GNMA
U.S. Treasury Securities are debt obligations of the United States Government.
They are secured by the full faith and credit of the Federal Government, and
include such instruments as Treasury notes, bills and bonds.
Mortgage-Backed Securities are debt securities issued by U.S. Government
Agencies such as the Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA) and Government National Mortgage
Association (GNMA). They represent thousands of individual home mortgages that
are pooled to form securities. As homeowners pay interest and principal each
month, these payments are passed on to investors. Mortgage-backed securities are
backed by the full faith and credit of the issuing agency.
- --------------------------------------------------------------------------------
8 1997 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments July 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
====================================================================================================================================
<C> <S> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 100%
$ 20,000,000 U.S. Treasury Notes, 6.250% due 6/30/02 $ 20,284,800
23,000,000 U.S. Treasury Notes, 5.875% due 2/15/04+ 22,918,810
28,000,000 U.S. Treasury Notes, 6.500% due 10/15/06 28,856,240
225,000,000 U.S. Treasury Strips, zero coupon due 2/15/15 75,035,250
100,300,000 U.S. Treasury Strips, zero coupon due 8/15/17 27,997,742
280,000,000 U.S. Treasury Strips, zero coupon due 2/15/19 70,742,000
219 FHLMC Certificates, 7.500% due 11/1/09 224
18,795 FHLMC Certificates, 14.750% due 3/1/10 22,225
6,081 FHLMC Certificates, 8.000% due 8/1/17 6,285
648 FNMA Certificates, 9.500% due 7/1/02++ 682
594,265 FNMA Certificates, 8.000% due 4/1/27++ 613,021
5,000,000 FNMA Global Bond, 6.350% due 11/23/01 5,016,150
2,272,670 GNMA I Certificates, 10.000% due 7/15/20++ 2,496,369
15,355,021 GNMA I Certificates, 9.000% due 7/15/26++ 16,348,185
129,345,288 GNMA I Certificates, 8.000% due 7/15/28++ 133,669,301
173,768,758 GNMA I Certificates Platinum, 9.000% due 12/15/17+ ++ 188,539,103
1,168,744 GNMA II Certificates, 10.000% due 10/20/16 1,272,097
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $557,591,160*) $593,818,484
====================================================================================================================================
</TABLE>
+ Security is partially segregated for futures contracts commitments.
++ Date shown represents the last in the range of maturity dates of mortgage
certificates.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $557,591,160) $ 593,818,484
Cash 286,103
Interest receivable 3,643,427
Receivable for Fund shares sold 1,492,765
- --------------------------------------------------------------------------------
Total Assets 599,240,779
================================================================================
LIABILITIES:
Payable for Fund shares purchased 432,880
Investment advisory fees payable 221,698
Administration fees payable 98,532
Distribution fees payable 64,896
Accrued expenses 45,092
- --------------------------------------------------------------------------------
Total Liabilities 863,098
- --------------------------------------------------------------------------------
Total Net Assets $ 598,377,681
================================================================================
NET ASSETS:
Par value of capital shares $ 46,606
Capital paid in excess of par value 609,651,768
Overdistributed net investment income (13,750)
Accumulated net realized loss from security
transactions and futures contracts (47,534,267)
Net unrealized appreciation of investments 36,227,324
- --------------------------------------------------------------------------------
Total Net Assets $ 598,377,681
================================================================================
Shares Outstanding:
Class A 32,290,057
--------------------------------------------------------------------------
Class B 7,535,886
--------------------------------------------------------------------------
Class C 145,307
--------------------------------------------------------------------------
Class Y 6,634,456
--------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 12.84
--------------------------------------------------------------------------
Class B * $ 12.84
--------------------------------------------------------------------------
Class C ** $ 12.84
--------------------------------------------------------------------------
Class Y (and redemption price) $ 12.84
--------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $ 13.45
================================================================================
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if
shares are redeemed within one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1997 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 45,488,481
Less: Interest expense (Note 6) (1,301,442)
- --------------------------------------------------------------------------------
Total Investment Income 44,187,039
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 2,661,308
Distribution fees (Note 2) 1,863,928
Administration fees (Note 2) 1,182,804
Shareholder and system servicing fees 396,007
Shareholder communication fees 99,987
Audit and legal fees 56,994
Directors' fees 47,952
Registration fees 25,000
Custody fees 24,988
Other 10,702
- --------------------------------------------------------------------------------
Total Expenses 6,369,670
- --------------------------------------------------------------------------------
Net Investment Income 37,817,369
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 8):
Realized Loss From:
Security transactions
(excluding short-term securities) (354,724)
Futures contracts (5,088,662)
- --------------------------------------------------------------------------------
Net Realized Loss (5,443,386)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments:
Beginning of year 3,046,197
End of year 36,227,324
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 33,181,127
- --------------------------------------------------------------------------------
Net Gain on Investments and Futures Contracts 27,737,741
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 65,555,110
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
=======================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 37,817,369 $ 39,872,301
Net realized gain (loss) (5,443,386) 5,790,569
Increase (decrease) in net unrealized appreciation 33,181,127 (22,102,739)
- ---------------------------------------------------------------------------------------
Increase in Net Assets From Operations 65,555,110 23,560,131
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (38,741,258) (39,875,801)
Capital -- (694,545)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (38,741,258) (40,570,346)
- ---------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares 140,522,188 53,060,297
Net asset value of shares issued for
reinvestment of dividends 23,011,974 26,887,140
Cost of shares reacquired (185,826,459) (130,795,018)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (22,292,297) (50,847,581)
- ---------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 4,521,555 (67,857,796)
NET ASSETS:
Beginning of year 593,856,126 661,713,922
- ---------------------------------------------------------------------------------------
End of year* $ 598,377,681 $ 593,856,126
=======================================================================================
* Includes overdistributed net
investment income of: $ (13,750) $ (3,500)
=======================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1997 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Smith Barney Managed Governments Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing price on such markets;
securities for which no sales price was reported and U.S. government and agency
obligations are valued at bid price, or in the absence of a recent bid price, at
the bid equivalent obtained from one or more of the major market makers; (c)
securities that have a maturity of more than 60 days are valued at prices based
on market quotations for securities of similar type, yield and maturity; (d)
securities maturing within 60 days are valued at cost plus accreted discount, or
minus amortized premium, which approximates value; (e) interest income is
recorded on the accrual basis; (f) gains or losses on the sale of securities are
calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) direct
expenses are charged to each class; management fees and general fund expenses
are allocated on the basis of the relative net assets of each class; (i) the
Fund intends to comply with the applicable provisions of the Internal Revenue
Code of 1986, as amended, pertaining to regulated investment companies and to
make distributions of taxable income sufficient to relieve it from substantially
all Federal income and excise taxes; (j) the character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. At July 31, 1997,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Accordingly, a portion of accumulated net realized
losses amounting to $27,563,413 and a portion of overdistributed net investment
income amounting to $913,639 was reclassified to paid-in capital. Net investment
income, net realized gains and net assets were not affected by this change; and
(k) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The Fund
pays SBMFM an investment advisory fee calculated at an annual rate of 0.45% of
the average daily net assets up to $1 billion and 0.415% of the average daily
net assets in excess of $1 billion. This fee is calculated daily and paid
monthly.
SBMFM also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets up to $1
billion and 0.185% of the average daily net assets in excess of $1 billion. This
fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of Fund
shares. For the year ended July 31, 1997, SB received sales charges of
approximately $148,000 on sales of the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B shares,
which applies if redemption occurs less than one year from initial purchase and
declines thereafter by 1.00% per year until no
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
CDSC is incurred. Class C shares have a 1.00% CDSC if redemption occurs within
the first year of purchase. In certain cases, Class A shares have a 1.00% CDSC,
which applies if redemption occurs within the first year of purchase. This CDSC
only applies to those purchases of Class A shares, which, when combined with
current holdings of Class A shares, equal or exceed $500,000 in the aggregate.
These purchases do not incur an initial sales charge.
For the year ended July 31, 1997, CDSCs paid to SB were approximately:
Class A Class B Class C
================================================================================
CDSCs $1,000 $173,000 $1,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B and C shares calculated at the annual rate of 0.25% of the average
daily net assets of each respective class. In addition, the Fund pays a
distribution fee with respect to Class B and C shares calculated at an annual
rate of 0.50% and 0.45% of the average daily net assets for each class,
respectively. For the year ended July 31, 1997, total Distribution Plan fees
incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $1,078,042 $775,428 $10,458
================================================================================
All officers and one Director of the Fund are employees of SB.
3. Investments
During the year ended July 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $726,855,560
- --------------------------------------------------------------------------------
Sales 712,908,944
================================================================================
At July 31, 1997, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $36,263,461
Gross unrealized depreciation (36,137)
- --------------------------------------------------------------------------------
Net unrealized appreciation $36,227,324
================================================================================
4. Capital Loss Carryforward
At July 31, 1997, the Fund had, for Federal income tax purposes, capital loss
carryforwards of approximately $40,267,000 available, subject to certain
limitations, to offset future capital gains. To the extent that these capital
carryforward losses are used to offset capital gains, it is probable that the
gains so offset will not be distributed.
The amount and expiration of the carryforwards are indicated below. Expiration
occurs on July 31 of the year indicated:
2002 2003 2004
================================================================================
Carryforward
Amounts $3,423,000 $33,246,000 $3,598,000
================================================================================
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
6. Reverse Repurchase Agreement
The Fund may enter into reverse repurchase agreement transactions for leveraging
purposes. A reverse repurchase agreement involves a sale by the Fund of
securities that it holds with an agreement by the Fund to repurchase the same
securities at an agreed upon price and date. A reverse repurchase agreement
involves the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of the securities. The Fund will establish a
segregated account with its custodian, in which the Fund will maintain cash,
U.S. government securities or other liquid high grade debt obligations equal in
value to its obligations with respect to reverse repurchase agreements.
- --------------------------------------------------------------------------------
14 1997 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
During the year ended July 31, 1997, the maximum and average amount of reverse
repurchase agreements outstanding were as follows:
================================================================================
Maximum amount outstanding $63,011,750
- --------------------------------------------------------------------------------
Average amount outstanding $42,380,125
================================================================================
Interest rates ranged from 3.95% to 5.25% during the year. Interest expense for
the year ended July 31, 1997 on borrowings by the Fund under reverse repurchase
agreements totalled $1,301,442.
At July 31, 1997, the Fund had no open reverse repurchase agreements.
7. Option Contracts
Premiums paid when put or call options are purchased by the Fund represent
investments which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into closing sales transaction, the Fund will realize a gain or loss
depending on whether the sales proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Fund exercises a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Fund exercises a call option, the cost of the security
which the Fund purchases upon exercise will be increased by the premium
originally paid.
At July 31, 1997, the Fund had no purchased call or put options outstanding.
When a Fund writes a call or put option, an amount equal to the premium received
by the Fund is recorded as a liability, the value of which is marked-to-market
daily. When a written option expires, the Fund realizes a gain equal to the
amount of the premium received. When the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is eliminated. When a written call option
is exercised, the cost of the security sold will be reduced by the premium
originally received. When a written put option is exercised, the amount of the
premium received will reduce the cost of the security which the Fund purchased
upon exercise. When written index options are exercised, settlement is made in
cash.
The risk associated with purchasing options is limited to the premium originally
paid. The Fund enters into options for hedging purposes. The risk in writing a
call option is that the Fund gives up the opportunity to participate in any
decrease in the price of the underlying security beyond the exercise price. The
risk in writing a put option is that the Fund is exposed to the risk of loss if
the market price of the underlying security declines.
During the year ended July 31, 1997, the Fund did not write any call or put
options.
8. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. The initial margin is segregated by the custodian and is noted in the
schedule of investments. During the period the futures contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking-to market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or received
and recognized as assets due from or liabilities due to broker, depending upon
whether unrealized gains or losses are incurred. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transactions and the Fund's basis in the
contract. The Fund enters into such contracts to hedge a portion of its
portfolio. The Fund bears the market risk that arises from changes in the value
of the financial instruments and securities indices (futures contracts) and the
credit risk should a counterparty fail to perform under such contracts.
At July 31, 1997, the Fund had no open futures contracts.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
9. Securities Traded on a To-Be-Announced Basis
The Fund may trade portfolio securities on a "to-be-announced" ("TBA") basis. In
a TBA transaction, the Fund commits to purchasing or selling securities for
which all specific information is not yet known at the time of the trade,
particularly the face amount and maturity date in GNMA transactions. Securities
purchased on a TBA basis are not settled until they are delivered to the Fund,
normally 15 to 45 days later. These transactions are subject to market
fluctuation and their current value is determined in the same manner as for
other portfolio securities.
At July 31, 1997, no TBA transactions were outstanding.
10. Dollar Roll Transactions
The Fund may enter into dollar roll transactions. A dollar roll transaction
involves a sale by the Fund of securities that it holds with an agreement by the
Fund to repurchase similar securities at an agreed upon price and date. The
securities repurchased will bear the same interest as those sold, but generally
will be collateralized by pools of mortgages with different prepayment histories
than those securities sold. Proceeds of the sale will be invested and the income
from these investments, together with any additional income for the Fund
exceeding the yield on the securities sold.
At July 31, 1997, the Fund had no open dollar roll transactions.
11. Capital Shares
At July 31, 1997, the Fund had 500 million shares of capital stock authorized
with a par value of $0.001 per share. The Fund has the ability to issue multiple
classes of shares. Each share of a class represents an identical interest in the
Fund and has the same rights, except that each class bears certain expenses
specifically related to the distribution of its shares.
At July 31, 1997, total paid-in capital amounted to the following for each
class:
Amount
================================================================================
Class A $457,897,243
- --------------------------------------------------------------------------------
Class B 68,394,561
- --------------------------------------------------------------------------------
Class C 1,681,195
- --------------------------------------------------------------------------------
Class Y 81,725,375
================================================================================
- --------------------------------------------------------------------------------
16 1997 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1997 July 31, 1996*
------------------------- ------------------------
Shares Amount Shares Amount
======================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 6,171,191 $ 76,961,923 1,032,903 $ 13,040,397
Shares issued on reinvestment 1,529,298 18,987,649 1,757,112 22,112,953
Shares redeemed (12,456,843) (155,307,950) (7,593,103) (95,509,679)
- ---------------------------------------------------------------------------------------
Net Decrease (4,756,354) $ (59,358,378) (4,803,088) $(60,356,329)
=======================================================================================
Class B
Shares sold 609,775 $ 7,606,444 904,230 $ 11,419,095
Shares issued on reinvestment 318,982 3,960,584 375,339 4,725,545
Shares redeemed (2,414,031) (30,078,314) (2,779,816) (35,133,985)
- ---------------------------------------------------------------------------------------
Net Decrease (1,485,274) $ (18,511,286) (1,500,247) $(18,989,345)
=======================================================================================
Class C
Shares sold 74,553 $ 929,800 85,229 $ 1,083,476
Shares issued on reinvestment 5,135 63,741 3,880 48,642
Shares redeemed (35,315) (440,195) (11,848) (151,341)
- ---------------------------------------------------------------------------------------
Net Increase 44,373 $ 553,346 77,261 $ 980,777
=======================================================================================
Class Y
Shares sold 4,415,232 $ 55,024,021 2,219,225 $ 27,517,329
Shares issued on reinvestment -- -- -- --
Shares redeemed -- -- (1) (13)
- ---------------------------------------------------------------------------------------
Net Increase 4,415,232 $ 55,024,021 2,219,224 $ 27,517,316
=======================================================================================
</TABLE>
* Transactions for Class Y shares are for the period from February 7, 1996
(inception date) to July 31, 1996.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<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%
=============================================================================================================================
Class B Shares 1997(1) 1996(1) 1995 1994 1993(2)
=============================================================================================================================
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.
- --------------------------------------------------------------------------------
18 1997 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<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.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class Y Shares 1997(1) 1996(1)(2)
================================================================================
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%
================================================================================
(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.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
A total of 38.86% of the ordinary income dividends paid by the Fund have
been derived from federal obligations and may be exempt from taxation at the
state level.
- --------------------------------------------------------------------------------
20 1997 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Smith Barney Managed Governments Fund Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Managed Governments Fund
Inc. as of July 31, 1997, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the three-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for each of the years in the
two-year period ended July 31, 1994, were audited by other auditors whose report
thereon, dated September 9, 1994, expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1997, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Smith Barney Managed Governments Fund Inc. as of July 31, 1997, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and the financial highlights for
each of the years in the three-year period then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
September 15, 1997
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Smith Barney Managed Governments Fund Inc. 21
<PAGE>
SMITH BARNEY
MANAGED
GOVERNMENTS
FUND INC.
Directors
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
Burt N. Dorsett
Elliot S. Jaffe
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon, Chairman
Cornelius C. Rose, Jr.
James J. Crisona, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
James E. Conroy
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is for the information of shareholders of Smith Barney Managed
Governments Fund Inc., but it may also be used as sales literature when preceded
or accompanied by the current prospectus, which gives details about charges,
expenses, investment objectives and operating policies of the Fund. If used as
sales material after September 30, 1997, this report must be accompanied by
performance information for the most recently completed calendar quarter.
SMITH BARNEY
- ---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY MANAGED
GOVERNMENTS FUND INC.
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
FD01181 9/97
