Registration Nos: 2-91948
811-4061
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 25 X
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 X
Amendment No. 24 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:
immediately upon filing pursuant to Rule 485(b)
on X November 27, 1998 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, 1998 was filed
on October 8, 1998 as Accession Number 0000091155-98-000619.
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
Exhibits
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;
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>
<PAGE>
SMITH BARNEY
Managed
Governments
Fund Inc.
NOVEMBER 27, 1998
Prospectus begins on page one
P R O S P E C T U S
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
PROSPECTUS
NOVEMBER 27, 1998
Smith Barney Managed Governments Fund Inc.
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 25, 1998, (the "SAI") as amended or supple-
mented 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 contacting a Salomon Smith Barney Financial Consultant. The SAI has been
filed with the Securities and Exchange Commission (the "SEC") and is incorpo-
rated by reference into this Prospectus in its entirety.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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 24
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DIVIDENDS, DISTRIBUTIONS AND TAXES 24
- -------------------------------------------------
PURCHASE OF SHARES 26
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EXCHANGE PRIVILEGE 34
- -------------------------------------------------
REDEMPTION OF SHARES 37
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 40
- -------------------------------------------------
PERFORMANCE 40
- -------------------------------------------------
MANAGEMENT OF THE FUND 41
- -------------------------------------------------
DISTRIBUTOR 42
- -------------------------------------------------
ADDITIONAL INFORMATION 43
</TABLE>
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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 SAI. Cross references in
this summary are to headings in the Prospectus. 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 L
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
$15,000,000. 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 Class. The Class B shares' distribution fee may cause that
Class to have higher expenses and pay lower dividends than Class A shares.
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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 L shares within 12 months of purchase. The CDSC may be waived for
certain redemptions. The Class L 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 L
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 $15,000,000. Class Y shares are sold at net
asset value with no initial sales charge or CDSC. They are not subject to any
service 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 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 this Class. Because the Fund's future return cannot
be predicted, however, there can be no assurance that this would be the case.
Class L shares which have a lower upfront sales charge but are subject to
higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a sub-
stantial sales charge discount and who have a short-term or undetermined time
frame.
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 L 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 L 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 Salomon Smith Barney Inc. ("Salomon Smith Barney")
listed under "Exchange Privilege." Class A share purchases may also be eligible
for a reduced initial sales charge. See "Purchase of Shares." Because the ongo-
ing expenses of Class A shares may be lower than those for Class B and Class L
shares, purchasers eligible to purchase Class A shares at net asset value or at
a reduced sales charge should consider doing so.
Salomon Smith Barney Financial Consultants may receive different compensation
for selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L 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 L 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."
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. ("CFBDS")
to distribute the Fund's shares.
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker
that clears securities through Salomon Smith Barney. (An investment dealer in
the selling group and a broker that clears securities through Salomon Smith
Barney are collectively referred to as "Dealer Representatives.") In addition,
certain investors, including qualified retirement plans and investors purchas-
ing through certain Dealer Representatives, 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 L 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 $15,000,000. 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 L 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 L 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 Mutual Management Corp. ("MMC" or the "Advisor") (for-
merly known as Smith Barney Mutual Funds Management Inc.) serves as the Fund's
investment adviser and administrator. MMC is a wholly owned subsidiary of Salo-
mon Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsid-
iary of Citigroup Inc. ("Citigroup"). Citigroup businesses produce a broad
range of financial services -- asset management, banking and consumer finance,
credit and charge cards, insurance, investments, investment banking and trading
- -- and use diverse channels to make them available to consumer and corpo -
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
rate customers around the world. Among these businesses are Citibank, Commer-
cial Credit, Primerica Financial Services, Salomon Smith Barney, SSBC Asset
Management, Travelers Life & Annuity, and Travelers Property Casualty. 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 respec-
tive 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 Salomon Smith Barney Financial Consultants. See "Valuation of Shares."
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 at least 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 dis-
tribution reinvestments 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 pro-
vided 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.
government 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
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. See
"Investment 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 L* CLASS Y
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<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on
purchases
(as a percentage of offering price) 4.50% None 1.00% 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 0.13 0.16 0.14 0.04
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TOTAL FUND OPERATING EXPENSES 1.03% 1.56% 1.49% 0.69%
- ------------------------------------------------------------------------------
</TABLE>
* Class L shares were called Class C shares until June 12, 1998. For
shareholders who owned Class C shares of the Fund as of June 12, 1998,
Class L shares may be purchased without paying the 1% initial sales charge
until June 22, 2001.
** 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 L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class L 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 Salomon 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 L and certain 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." Salomon Smith Barney receives an annual
12b-1 service fee of 0.25% of the value of average daily net assets of Class A
shares. Salomon 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 L shares, Salomon 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% dis-
tribution 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 under-
standing 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*
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<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 $99 $165
Class B.................................. 61 79 95 171
Class L.................................. 35 57 91 186
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 $99 $165
Class B.................................. 16 49 85 171
Class L.................................. 25 57 91 186
Class Y.................................. 7 22 38 86
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</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 four year period ended July 31, 1998 has
been audited by KPMG Peat Marwick LLP, independent accountants, whose report
thereon appears in the Fund's Annual Report dated July 31, 1998. The following
information for the fiscal years ended July 31, 1989 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 1998 1997(1) 1996(1) 1995 1994 1993(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $12.84 12.27 $12.63 $12.50 $13.29 $12.88
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.75 0.80 0.81 0.81 0.75 0.69
Net realized and unrealized
gain (loss) (0.06) 0.59 (0.34) 0.10 (0.74) 0.61
- -------------------------------------------------------------------------------
Total Income From Operations 0.69 1.39 0.47 0.91 0.01 1.30
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.80) (0.82) (0.82) (0.74) (0.61) (0.66)
Net realized gains -- -- -- -- -- (0.23)
Capital -- -- (0.01) (0.04) (0.19) --
- -------------------------------------------------------------------------------
Total Distributions (0.80) (0.82) (0.83) (0.78) (0.80) (0.89)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.73 $12.84 $12.27 $12.63 $12.50 $13.29
- -------------------------------------------------------------------------------
TOTAL RETURN 5.51% 11.80% 3.76% 7.67% 0.08% 10.43%
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $374 $415 $455 $529 $371 $463
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.03% 1.01% 1.04% 1.07% 1.03% 0.99%
Net investment income 5.78 6.43 6.46 6.57 5.60 5.35
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 363% 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
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.09 $12.13 $12.19 $12.04
- ------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.91 0.98 1.07 0.96
Net realized and unrealized gain (loss) 0.87 0.07 (0.03) 0.26
- ------------------------------------------------------------------------
Total Income From Operations 1.78 1.05 1.04 1.22
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.91) (0.98) (1.07) (0.96)
Capital (0.08) (0.11) (0.03) (0.11)
- ------------------------------------------------------------------------
Total Distributions (0.99) (1.09) (1.10) (1.07)
- ------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.88 $12.09 $12.13 $12.19
- ------------------------------------------------------------------------
TOTAL RETURN 15.25% 9.02% 9.01% 10.62%
- ------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $489 $474 $512 $622
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.82% 0.82% 0.81% 0.81%
Net investment income 7.23 8.12 8.87 8.12
- ------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 426% 365% 163% 51%
- ------------------------------------------------------------------------
</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 1998(1) 1997(1) 1996(1) 1995 1994 1993(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $12.84 $12.27 $12.63 $12.50 $13.29 $12.64
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.67 0.74 0.75 0.75 0.69 0.47
Net realized and
unrealized gain (loss) (0.05) 0.59 (0.34) 0.09 (0.75) 0.75
- -------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.62 1.33 0.41 0.84 (0.06) 1.22
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.73) (0.76) (0.76) (0.67) (0.56) (0.41)
Net realized gains -- -- -- -- -- (0.16)
Capital -- -- (0.01) (0.04) (0.17) --
- -------------------------------------------------------------------------------
Total Distributions (0.73) (0.76) (0.77) (0.71) (0.73) (0.57)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $12.73 $12.84 $12.27 $12.63 $12.50 $13.29
- -------------------------------------------------------------------------------
TOTAL RETURN 4.99% 11.23% 3.24% 7.04% (0.46)% 9.92%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $74 $97 $111 $133 $389 $474
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.56% 1.53% 1.56% 1.57% 1.55% 1.62%+
Net investment income 5.27% 5.91 5.94 6.07 5.08 4.72+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 363% 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 L SHARES(1) 1998(2) 1997(2) 1996(2) 1995 1994 1993(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $12.84 $12.27 $12.63 $12.50 $13.29 $13.18
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.67 0.74 0.75 0.76 0.69 0.07
Net realized and
unrealized gain (loss) (0.04) 0.59 (0.34) 0.08 (0.75) 0.09
- -------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.63 1.33 0.41 0.84 (0.06) 0.16
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.74) (0.76) (0.76) (0.67) (0.56) (0.03)
Net realized gains -- -- -- -- -- (0.02)
Capital -- -- (0.01) (0.04) (0.17) --
- -------------------------------------------------------------------------------
Total Distributions (0.74) (0.76) (0.77) (0.71) (0.73) (0.05)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $12.73 $12.84 $12.27 $12.63 $12.50 $13.29
- -------------------------------------------------------------------------------
TOTAL RETURN 5.07% 11.26% 3.25% 7.04% (0.46)% 1.25%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $2,811 $1,866 $1,238 $299 $72 $12
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.49% 1.46% 1.49% 1.52% 1.58% 1.55%+
Net investment income 5.28 6.01 5.99 6.12 5.05 4.80+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 363% 121% 275% 292% 236% 436%
- -------------------------------------------------------------------------------
</TABLE>
(1) Class L shares were called Class C shares until June 12, 1998.
(2) 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.
(3) 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 1998 1997(/1/) 1996(/1/)(/2/)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.84 $12.27 $12.86
- ----------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.80 0.84 0.35
Net realized and unrealized gain (loss) (0.06) 0.59 (0.49)
- ----------------------------------------------------------------------------
Total Income (Loss) From Operations 0.74 1.43 (0.14)
- ----------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.84) (0.86) (0.44)
Capital -- -- (0.01)
- ----------------------------------------------------------------------------
Total Distributions (0.84) (0.86) (0.45)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.74 $12.84 $12.27
- ----------------------------------------------------------------------------
TOTAL RETURN 5.94% 12.16% (1.10)%++
- ----------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $ 91 $ 85 $ 27
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.69% 0.69%* 0.78%+
Net investment income 6.10 6.82 6.62+
- ----------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 363% 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.
* Amount has been restated from the July 31, 1997 Annual Report.
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 the Advisor 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
payments representing prepayments on the underlying mortgages, which will cause
the maturity of and realized yield on specific GNMA, FNMA and FHLMC certifi-
cates to vary based on the prepayment experience of the underlying pool of
mortgages. The Fund will reinvest all payments and unscheduled prepayments of
principal in additional GNMA, FNMA and FHLMC certificates or other U.S. govern-
ment securities (which may have lower interest rates than the balance of the
obligations held by the Fund), and will distribute the interest to shareholders
in the form of monthly dividends.
To the extent that they are purchased at par or at a discount, GNMA certifi-
cates offer a high degree of safety of principal investment because of the GNMA
guarantee, and other mortgage-backed U.S. government securities also are
believed to offer significant safety of principal investment. If the Fund buys
mortgage-backed U.S. government securities at a premium, however, mortgage
foreclosures and prepayments of principal by mortgagors (which may be made at
any time without penalty) may result in some loss of the Fund's principal
investment to the extent of the premium paid.
The composition and weighted average maturity of the Fund's portfolio will
vary from time to time, based upon the determination of the Fund's management
of how best to further the Fund's investment objective. The Fund may invest in
U.S. government securities of all maturities: short-term, intermediate-term and
long-term. The Fund may invest without limit in securities of any issuer of
U.S. government securities, and may invest up to an aggregate of 15% of its
total assets in securities with contractual or other restrictions on resale and
other instruments that are not readily marketable (such as repurchase agree-
ments with maturities in excess of seven days). The Fund may invest up to 5% of
its net assets in U.S. government securities for which the principal repayment
at maturity, while paid in U.S. dollars, is determined by reference to the
exchange rate between the U.S. dollar and the currency of one or more foreign
countries ("Exchange Rate-Related Securities"). The interest payable on these
securities is denominated in U.S. dollars and is not subject to foreign cur-
rency risk. The Fund also is authorized to borrow in an amount of up to 10% of
its total assets under unusual or emergency circumstances, including when nec-
essary to meet redemptions, and to pledge its assets to the same extent in con-
nection with such borrowings. When the Advisor believes that market conditions
warrant, 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. MMC, acting under the super-
vision 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 borrowings 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 MMC to be liquid and unencumbered pur-
suant 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. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities that it holds to bro-
kers, 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 con-
sist of cash, cash equivalents, U.S. government securities or debt securities
of any grade provided such assets are liquid, unencumbered and marked to mar-
ket daily. By lending its portfolio securities, the Fund will seek to generate
income by continuing to receive interest on the loaned securities, by invest-
ing the cash collateral in short-term instruments or by obtaining yield in the
form of interest paid by the borrower when debt securities are used as collat-
eral.
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.
Year 2000--The investment management services provided to the Fund by the
Adviser and the services provided to shareholders by Salomon Smith Barney
depend on the smooth functioning of their computer systems. Many computer soft-
ware systems in use today cannot recognize the year 2000, but revert to 1900 or
some other date, due to the manner in which dates were encoded and calculated.
That failure could have a negative impact on the Fund's operations, including
the handling of securities trades, pricing and account services. The Adviser
andSalomon Smith Barney have advised the Fund that they have been reviewing all
of their computer systems and actively working on necessary changes to their
systems to prepare for the year 2000 and expect that their systems will be com-
pliant before that date. In addition, the Adviser has been advised by the
Fund's custodian, transfer agent and accounting service agent that they are
also in the process of modifying their systems with the same goal. There can,
however, be no assurance that the Adviser, Salomon Smith Barney or any other
service provider will be successful, or that interaction with other non-comply-
ing computer systems will not impair Fund services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
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.
23
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 Informa-
tion.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regu-
lar 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.
When, in the judgment of the pricing service, quoted bid prices for invest-
ments are readily available and are representative of the bid side of the mar-
ket, these investments are valued at the mean between the quoted bid and asked
prices. Investments for which, in the judgment of the pricing service, there
is no readily obtainable market quotation (which may constitute a majority of
the portfolio securities) are carried at fair value of securities of similar
type, yield and maturity. Pricing services generally determine value by refer-
ence to transactions in municipal obligations, quotations from municipal bond
dealers, market transactions in comparable securities and various relation-
ships between securities. Short-term investments that mature in 60 days or
less are valued at amortized cost whenever the Board of Directors determines
that amortized cost is fair value. Amortized cost valuation involves valuing
an instrument at its cost initially and, thereafter, assuming a constant amor-
tization to maturity of any discount or premium, regardless of the impact of
the fluctuating interest rates on the market value of the instrument. Securi-
ties and other assets that are not priced by a pricing service and for which
quotations are not available will be valued in good faith at fair value by or
under the direction of the fund's Board of Directors. Further information
regarding the Fund's valuation policies is contained in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to declare and pay monthly dividends from its net
investment income. Dividends from net realized capital gains, if any, will be
distributed annually. The Fund may also pay additional dividends shortly
before December 31 from certain amounts of undistributed ordinary income and
capital gains realized, in order to avoid a Federal excise tax liability. If a
shareholder does not otherwise instruct, dividends and capital gain distribu-
tions will be automatically reinvested in additional same Class shares at the
appropriate net asset value, with no additional sales charge or CDSC.
24
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The per share amounts of dividends form net investment income on Classes B
and L may be lower than that of Classes A and Y, mainly as a result of the dis-
tribution fees applicable to Class B and L shares. Similarly, the per share
amounts of dividends from net investment income on Class A shares may be lower
than that of Class Y, as a result of the service fee attributable to Class A
shares. Capital gain distributions, if any, will be the same amount across all
Classes of Fund shares (A, B, L and Y).
TAXES
The following is a summary of the material federal tax considerations
affecting the Fund and Fund shareholders. Please refer to the SAI for further
discussion. In addition to the considerations described below and in the SAI,
there may be other federal, state, local, and/or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are
urged to consult their tax advisors for more detailed information with respect
to the tax consequences of any investment.
The Fund intends to qualify, as it has in prior years, under Subchapter M of
the Internal Revenue Code (the "Code") for tax treatment as a regulated invest-
ment company. In each taxable year that the Fund qualifies, so long as such
qualification is in the best interests of its shareholders, the Fund will pay
no federal income tax on its net investment company taxable income and long-
term capital gain that is distributed to shareholders.
Dividends paid from net investment income and net realized short-term
securities gain, are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains, derived
from the sale of securities held by the Fund for more than one year, are
taxable as long-term capital gains, regardless of the length of time a
shareholder has owned Fund shares.
Shareholders are required to pay tax on all taxable distributions, even if
those distributions are automatically reinvested in additional Fund shares. A
portion of the dividends paid by the Fund may qualify for the corporate
dividends received deduction. Dividends consisting of interest from U.S.
government securities may be exempt from state and local income taxes. The Fund
will inform shareholders of the source and tax status of all distributions
promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of Fund shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term gain
or loss depending on the length of time the shares had been owned at disposi-
tion. Losses realized by a shareholder on the disposition of Fund shares owned
for six
25
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
months or less will be treated as a long-term capital loss to the extent a
capital gain dividend had been distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for share-
holders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for share-
holders who otherwise are subject to backup withholding. Any tax withheld as a
result of backup withholding does not constitute an additional tax, and may be
claimed as a credit on the shareholders' federal income tax return.
PURCHASE OF SHARES
SALES CHARGE ALTERNATIVES
The following Classes of shares are available for purchase through this
Prospectus. See "Prospectus Summary--Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charges as follows:
<TABLE>
<CAPTION>
SALES CHARGE DEALERS'
SALES CHARGE AS A % OF REALLOWANCE AS
AMOUNT OF AS A % OF AMOUNT % OF
INVESTMENT TRANSACTION INVESTED 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 Salomon Smith Barney, which compensates Salomon 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 L shares is waived. See "Deferred
Sales Charge Provisions" 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 "1933 Act"). The reduced sales charges shown above
apply to the aggregate of purchases of Class A shares of the Fund made at one
time by
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
"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.
Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of 1.00%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC pay-
able upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001 purchases of Class L shares by investors who were holders
of Class C shares of the Fund on June 12, 1998 will not be subject to the 1.00%
initial sales charge.
Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).
GENERAL
Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors,
including qualified retirement plans purchasing through certain Dealer
Representatives, may purchase shares directly from the Fund. When purchasing
shares of the Fund, investors must specify whether the purchase is for Class A,
Class B, Class L or Class Y shares. Salomon Smith Barney and Dealer
Representative may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or
holds shares. Accounts held directly at the Transfer Agent are not subject to a
maintenance fee.
Investors in Class A, Class B and Class L shares may open an account in the
Fund by making an initial investment of at least $1,000 for each account, or
$250 for an IRA or a Self-Employed Retirement Plan. Investors in Class Y shares
may open an account by making an initial investment of $15,000,000. 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(c) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
L 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 L shares and 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 required for Class A, Class B and Class L shares and the subsequent
investment requirement for all Classes is $50. There are no minimum investment
requirements
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
for Class A shares for employees of Citigroup and its subsidiaries, including
Salomon Smith Barney, and Directors/Trustees of any of the Smith Barney Mutual
Funds 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 Transfer Agent. Share certificates are issued only
upon a shareholder's written request to the Transfer Agent.
Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant prior to the close of regular trading 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 (the "trade date"). Orders received by a Dealer
Representative prior to the close of regular trading 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 the
Fund's agent prior to its
close of business. For shares purchased through Salomon Smith Barney or a
Dealer Representative purchasing through Salomon 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.
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, Salomon Smith Barney or the Transfer Agent is
authorized through preauthorized transfers of at least $25 on a monthly basis
or at least $50 on a quarterly basis to charge the shareholder's account held
with a bank or other financial institution on a monthly or quarterly basis as
indicated by the shareholder to provide for 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 Salomon Smith
Barney or the Transfer Agent. The Systematic Investment Plan also authorizes
Salomon Smith Barney to apply cash held in the shareholder's Salomon Smith
Barney brokerage account or redeem the shareholder's shares of a Salomon Smith
Barney money market fund to make additions to the account. Additional
information is available from the Fund or a Salomon Smith Barney Financial
Consultant.
SALES CHARGE WAIVERS AND REDUCTIONS
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
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including 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 Salomon Smith Barney Financial Consultant (for a
period up to 90 days from the commencement of the Financial Consultant's
employment with Salomon 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 Smith Barney Mutual Fund that is 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 Citigroup; (f) direct rollovers by plan participants of
distributions from a 401(k) plans enrolled in the Smith Barney 401(k) Program
(Note: subsequent investment 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 Salomon
Smith Barney fee-based arrangements. 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
aggregating the
dollar amount of the new purchase and the total net asset value of all Class A
shares of the Fund and of other Smith Barney Mutual Funds that are offered with
a sales charge as currently listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
Class A Shares. A Letter of Intent for an amount of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made
during the period receives the reduced 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. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date. Please contact a Salomon Smith Barney Financial Consultant or
the Transfer Agent to obtain a Letter of Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares (except purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Fund and agree to purchase a
total of $15,000,000 of Class Y shares of the Fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made within the
13 month period, all Class Y shares purchased to date will be transferred to
Class A shares, where they will be subject 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%. Please contact a Salomon Smith Barney Financial
Consultant or the Transfer Agent for further information.
DEFERRED SALES CHARGE PROVISIONS
"CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.
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 L 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 L 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
Salomon 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 will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. 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 Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the
31
<PAGE>
PURCHASE OF SHARES (CONTINUED)
purchase, 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
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $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)
automatic 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) redemptions of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 ; (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
shareholder who has redeemed shares from other 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 Salomon Smith Barney
in the case of shareholders who are also Salomon 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 L shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class L shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class L shares
acquired by other
32
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 investments in the Fund must be in the same Class of shares,
except as otherwise 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 L Shares. Class L 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 L 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 L holdings in all non-money market Smith Barney Mutual Funds equal to at
least $1,000,000, it will be offered the opportunity to exchange all of its
Class L shares for Class A shares of the Fund. (For Participating Plans that
were originally established through a Salomon Smith Barney retail brokerage
account, the five year period will be calculated from the date the retail bro-
kerage account was opened.) Such Participating Plans will be notified of the
pending exchange in writing within 30 days after the fifth anniversary of the
enrollment 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
L 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 L 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 L 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
33
<PAGE>
PURCHASE OF SHARES (CONTINUED)
days before the eighth anniversary of the enrollment date and, unless the
exchange has been rejected in writing, the exchange will occur on or about the
eighth anniversary date. Once an exchange has occurred, a Participating Plan
will not be eligible to acquire additional Class L shares of the Fund but
instead may acquire Class A shares of the Fund. Any Class L shares not con-
verted 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 Salomon Smith Barney Financial
Consultant.
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 L 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
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
34
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Taxable Fixed-Income Fund
*Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Total Return Bond Fund
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
**Smith Barney Intermediate Maturity California Municipals Fund
**Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Funds
Smith Barney Municipal High Income Fund
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
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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.--Global 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
35
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 and Class B shares of the Fund. In
addition, shareholders who own Class L shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class L shares
of this fund.
** Available for exchange with Class A, Class L and Class Y shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class A and Class Y shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, Participating Plans opened prior to June 21, 1996 and investing
in Class L shares may exchange Fund shares for Class L shares of this
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 L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L 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. The Advisor
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
suspending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in
36
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 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
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Transfer Agent
receives further instructions from Salomon Smith Barney, or if the sharehold-
er's account is not with Salomon 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 proceeds are remitted to a Salomon Smith Barney
brokerage account, these funds will not be invested for the shareholder's ben-
efit without specific instruction and Salomon Smith Barney will benefit from
the use of temporarily uninvested funds. Redemption proceeds for shares pur-
chased by check, other than a certified or official bank check, will be remit-
ted upon clearance of the check, which may take up to ten days or more.
Shares held by Salomon Smith Barney as custodian must be redeemed by submit-
ting a written request to a Salomon Smith Barney Financial Consultant. Shares
37
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
other than those held by Salomon Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, Dealer Representative or by sub-
mitting a written request for redemption to:
Smith Barney Managed Governments Funds Inc.
Class A, B, L 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 the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed
stock power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or writ-
ten redemption request in excess of $10,000 must be guaranteed by an eligible
guarantor institution 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 $10,000
or less do not require a signature guarantee unless more than one such redemp-
tion 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 direct-
ed, 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 Salomon 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 con-
tact First Data at 1-800-451-2010. Once eligibility is confirmed, the share-
holder must complete and return a Telephone/Wire Authorization Form, including
a signature guarantee, which 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 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
38
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 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 4:00
p.m. (Eastern 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
39
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
Fund. Any applicable CDSC will not be waived on amounts withdrawn by a share-
holder 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 share-
holder's shares subject to the CDSC.) For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Salomon Smith
Barney Financial Consultant, Introducing Broker or dealer in the selling group.
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 L 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
40
<PAGE>
PERFORMANCE (CONTINUED)
Prospectus, then dividing the value of the investment 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 redeemable value. Such standard total
return information may also be accompanied with nonstandard total return infor-
mation 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 conditions, the composi-
tion of its investment portfolio and operating expenses. These factors and pos-
sible differences in the methods used in calculating current 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 SAI contains general
background information regarding each Director and executive officer of the
Fund.
INVESTMENT ADVISER AND ADMINISTRATOR--MMC
The Fund's investment adviser, MMC, is a registered investment adviser whose
principal executive offices are located at 388 Greenwich Street, New York, New
York 10013. MMC was incorporated in March, 1968 under the laws of Delaware and
renders investment advice to a wide variety of individual, institutional and
investment company clients that had aggregate assets under management as of
September 30, 1998 in excess of $108 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
the Advisor manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfo-
lio managers and
41
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
securities analysts who provide research services to the Fund. Under the
investment advisory agreement, the Fund pays the Advisor 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. This fee is calculated daily and paid monthly. For the fiscal year
ended July 31, 1998, the Fund paid investment advisory fees to the Advisor in
an amount equal to 0.45% of the value of its average daily net assets.
MMC 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 MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets up to $1 billion and 0.185% of the value of the aver-
age daily net assets in excess of $1 billion. This fee is calculated daily and
paid monthly.
PORTFOLIO MANAGEMENT
James Conroy, an investment officer of MMC and a Managing Director of Salomon
Smith Barney, has been and is respon-
sible for managing the day-to-day operations of the Fund, including the making
of investment decisions, since February 1990.
Management discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1998, is included in
the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request and without charge from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
On October 8, 1998, the merger of Travelers Group, Inc. and Citicorp, Inc.
was consummated thereby creating a new entity called Citigroup. Citigroup
is a bank holding company subject to regulation under the Bank Holding
Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall
Act and certain other laws and regulations. MMC does not believe that its
compliance with the applicable law will have a material adverse effect on
its ability to continue to provide the Fund with the same level of in
receives.
DISTRIBUTOR
CFBDS is located at 21 Milk Street, Boston, MA 02109-5408. It distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS, Inc. to take
and pay for only such securities as may be sold to the public.
42
<PAGE>
DISTRIBUTOR (CONTINUED)
The Fund has adopted a plan of distribution under Rule 12b-1 under the 1940
Act (the "Plan"), pursuant to which Salomon Smith Barney is paid an annual
service fee with respect to Class A, Class B and Class L shares of the Fund at
the annual rate of 0.25% of the average daily net assets of the respective
Class. Salomon Smith Barney is also paid an annual distribution fee with
respect to Class B and Class L shares at the 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 Salomon Smith Barney to pay its Financial Consultants for
servicing shareholder accounts and, in the case of Class B and Class L shares,
to cover expenses primarily intended to result in the sale of those shares.
These expenses include: advertising; the cost of printing and mailing prospec-
tuses to potential investors; payments to and expenses of Salomon Smith Barney
Financial Consultants and other persons who provide support services in con-
nection with the distribution of shares; interest and/or carrying charges; and
indirect and overhead costs of Salomon Smith Barney associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses.
The payments to Salomon Smith Barney Financial Consultants for selling
shares of a Class include a commission or fee paid by the investor or Salomon
Smith Barney at the time of sale and, with respect to Class A, Class B and
Class L shares, a continuing fee for servicing shareholder accounts for as
long as a shareholder remains a holder of that Class. Salomon 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 Salomon Smith Barney and the payments may exceed distribution
expenses actually incurred. The Fund's Board of Directors evaluates the appro-
priateness of the Plan and its payment terms on a continuing basis and in
doing so will consider all relevant factors, including expenses borne by Salo-
mon 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 man-
agement 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
preferences, except with respect to: (a) the designation of each Class; (b)
the effect of the respective sales charges for each Class; (c) the distribu-
tion and/or service fees borne by each
43
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
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 feature 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 different Classes. The Directors, on an
ongoing basis, will consider whether any such conflict exists and, if so, take
appropriate action.
The Fund does not hold annual shareholder meetings. There normally will be no
meeting of shareholders for the purpose of electing Directors unless and until
such time as less than a majority of the Directors holding office have been
elected by shareholders. The Directors will call a meeting for any purpose upon
written request of shareholders holding at least 10% of the Fund's outstanding
shares, and the Fund will assist shareholders in calling such a meeting as
required by the 1940 Act. When matters are submitted for shareholder vote,
shareholders of each Class will have one vote for each full share owned and a
proportionate, fractional vote for any fractional share held of that Class.
Generally, shares of the Fund will be voted on a Fund-wide basis on all matters
except matters affecting only the interests of one or more of the Classes.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania, serves
as custodian of the Fund's investments.
First Data, 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 Salomon Smith Barney Financial
Consultant, or the Fund's Transfer Agent.
44
<PAGE>
SALOMON SMITH BARNEY
-------------------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
SMITH BARNEY
MANAGED
GOVERNMENTS
FUND INC.
388 Greenwich Street
New York, New York 10013
FD0212 11/98
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 27,
1998
This Statement of Additional Information (the "SAI") expands upon
and supplements the information contained in the current Prospectus of
Smith Barney Managed Governments Fund Inc. (the "Fund"), dated November
27, 1998, 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 Salomon Smith Barney Financial Consultant or by
writing or calling the Fund at the address or telephone number listed
above. This SAI, 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 SAI, except where shown below:
Management of the Fund ............1
Investment Objective and Management Policies ....4
Purchase of Shares .....14
Redemption of Shares 15
Distributor....... 15
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
CFBDS, Inc. ("CFBDS" or "Distributor") Distributor
Mutual Management Corp. ("MMC'' or "Advisor" or
"Administrator") Investment Adviser and
Administrator
PNC Bank, National Association ("PNC" or "Custodian")
Custodian
First Data Investor Services Group, Inc. ("First Data'' or
the "Transfer Agent") Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this SAI.
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 75). Private Investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
Alfred Bianchetti (Age 75). Retired; formerly Senior Consultant to
Dean Witter Reynolds Inc. His address is 19 Circle End Drive, Ramsey,
New Jersey 07446.
Martin Brody (Age 77). Consultant, HMK Associates. Retired Vice
Chairman of the Board of Restaurant Associates Corp. His address is
c/o HMK Associates, 30 Columbia Turnpike, Florham Park, New Jersey
07932.
Dwight B. Crane (Age 61). Professor, Harvard Business School. His
address is c/o Harvard Business School, Soldiers Field Road, Boston,
Massachusetts 02163.
Burt N. Dorsett, Director (Age 68). 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 72). 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 66). Attorney. His address is 277 Park
Avenue, New York, New York 10172.
Joseph J. McCann (Age 68). 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 65). Managing Director of Salomon Smith Barney, Chairman of the
Board of Smith Barney Strategy Advisers Inc. and President and Director
of MMC and Travelers Investment Advisor, Inc. ("TIA"); Chairman or Co-
Chairman of the Board and Director of 58 investment companies
associated with Salomon Smith Barney Holdings Inc. His address is 388
Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 65). President, Cornelius C.
Rose Associates, Inc., financial consultants, and Chairman and Director
of Performance Learning Systems, an educational consultant. His
address is Meadwobrook Village, Building 4, Apt. 6, West Lebanon, N.H.
03784.
James E. Conroy, Vice President and Investment Officer (Age 48).
Investment Officer of MMC; 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 41).
Managing Director of Salomon Smith Barney; Chief Financial Officer of
Smith Barney Mutual Fund; Director and Senior Vice President of MMC 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 47). Managing Director of Salomon
Smith Barney; General Counsel and Secretary of MMC 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 3, 1998, 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 3, 1998, to the knowledge of the
Fund and its Board of Directors, the following 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:
Class L Shares
Lexington Foundation Inc.
127 East State Street
Gloversville, NY 12078
Owned 34,857 (10.96%)
No Director, officer or employee of Salomon 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 Salomon 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 Salomon 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, 1998, such
fees and expenses totaled $11,423.05.
For the fiscal year ended July 31, 1998, the Directors of the Fund
were paid the following compensation:
Director
Aggregate
Compensati
on
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
$6,600
$0
$101,600
18
Alfred
Bianchetti
6,600
0
49,600
13
Martin Brody
5,600
0
119,814
21
Dwight Crane
5,600
0
133,850
24
Burt Dorset
6,600
0
49,600
13
Elliot Jaffe
6,100
0
48,500
13
Stephen
Kaufman
6,600
0
91,964
15
Joseph McCann
6,600
0
49,600
13
Heath
McLendon
- ---
0
- ---
42
Cornelius
Rose
6,600
0
49,600
13
_________________________
* The aggregate remuneration paid to the Directors by the Fund for the
fiscal year ended July 31, 1998 amounted to $11,423 (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. Directors Emeritus may attend meetings but
have no voting rights. During the Fund's last fiscal year aggregate
compensation paid by the Fund to Directors Emeritus totaled
$8,600.00.
Investment Adviser and Administrator - MMC
MMC (formerly known as Smith Barney Mutual Fund Management) 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 MMC (the "Independent
Directors"). MMC is a wholly owned subsidiary of Salomon Smith Barney
Holdings Inc. ("Holdings''), which, in turn, is a wholly owned
subsidiary of Citigroup Inc. ("Citigroup''). The services provided by
MMC under the Advisory Agreement are described in the Prospectus under
"Management of the Fund.'' MMC 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 MMC
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, 1996,
1997 and 1998, the Fund paid MMC $2,816,295, $2,661,308 and $2,503,412,
respectively, in investment advisory fees.
MMC also serves as administrator to the Fund pursuant to a written
agreement (the "Administration Agreement''), which was most recently
approved by the Fund's Board of Directors, including a majority of the
Independent Directors. The services provided by MMC under the
Administration Agreement are described in the Prospectus under
"Management of the Fund.'' MMC 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 MMC 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. For the fiscal years ended July 31, 1996, 1997, and 1998, the
Fund paid MMC $2,138,789, $1,182,804 and $1,112,627, respectively, in
administration fees.
The Fund bears expenses incurred in its operations, including:
taxes, interest, brokerage fees and commissions, if any; fees of
Directors who are not officers, directors, shareholders or employees of
Salomon 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 financial highlights for the
fiscal year ending July 31, 1999.
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 MMC 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 the Advisor
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 the Advisor 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 the Advisor 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 the Advisor 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
the Advisor 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 SAI, the positions and
exercise limitations 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. The Advisor 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 the Advisor 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 all times maintain in a segregated account at the
Custodian, 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, consistent with applicable regulatory
requirements the Fund may lend securities from its portfolio to
brokers, dealers and other financial organizations. The Fund may not
lend its portfolio securities to Salomon 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 Salomon 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 MMC to be of good standing and
will not be made unless, in the judgment of the Advisor, 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 the Advisor 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 the Advisor 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 the Advisor 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 the Advisor 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 a 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
may be 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 7 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. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Issue "senior securities" as defined in the 1940 Act and the
rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder
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 (including its agencies
and instrumentalities) 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, and (b) the Fund may, to the
extent consistent with its investment policies, enter into reverse
repurchase agreements, forward roll transactions and similar
investment strategies and techniques. To the extent that it
engages in transactions described in (a) and (b), the Fund will be
limited so that no more than 33 1/3% of the value of its total
assets (including the amount borrowed), valued at the lesser of
cost or market, less liabilities (not including the amount
borrowed) valued at the time the borrowing is made, is derived
from such transactions.
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 objectives and policies; (b) repurchase agreements;
and (c) loans of its portfolio securities, to the fullest extent
permitted under the 1940 Act.
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, commodities
or commodity contracts, but this restriction shall not prevent the
Fund from (a) investing in securities of issuers engaged in the
real estate business or the business of investing in real estate
(including interests in limited partnerships owning or otherwise
engaging in the real estate business or the business of investing
in real estate) 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 held; (c) trading in
futures contracts and options on futures contracts (including
options on currencies to the extent consistent with the Funds'
investment objective and policies); or (d) investing in real
estate investment trust securities.
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 underlying securities and other assets
in escrow and collateral agreements with respect to initial or
maintenance margin in connection with futures contracts and
related options and options on securities, indexes or similar
items 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. 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.
11. 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.)
12. Make investments for the purpose of exercising control or
management.
13. 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 SAI and any future change in those practices would
require Board approval and appropriate disclosure to investors. If a
percentage restriction is complied with at the time of an investment, a
later increase or decrease in the percentage of assets resulting from a
change in the values of portfolio securities or in the amount of the
Fund's assets will not constitute a violation of such restriction.
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
1998, 1997 and 1996 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 363%, 121% and 275%,
respectively.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are made by the
Advisor, 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 the Advisor.
The Fund normally purchases newly issued U.S. government securities
directly from the U.S. Treasury or from the agency or instrumentality
that is the issuer. Certain U.S. government securities are purchased
from an underwriter acting as principal. Other purchases and sales
usually are placed with those dealers from which it appears that the
best price or execution will be obtained; such dealers may be acting as
either agents or principals. No brokerage commissions typically are
paid by the Fund on purchases and sales of portfolio securities. The
purchase price paid by the Fund to underwriters of newly issued
securities and dealers in the after-market normally are executed at a
price between the bid and asked prices.
The Advisor 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 the Advisor may receive orders for portfolio transactions
by the Fund. Information so received enables the Advisor to supplement
its own research and analysis with the views and information of other
securities firms. Such information may be useful to the Advisor 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 the Advisor 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 the Advisor, 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 the Advisor 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 the Advisor 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 Salomon 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 Salomon 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 L 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 L 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 SAI.
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 Salomon
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 Salomon Smith
Barney Financial Consultant.
DISTRIBUTOR
CFBDS serves as the Fund's distributor pursuant to a written agreement
dated October 8, 1998 (the "Distribution Agreement"), which was
approved by the Fund's Board of Directors on July 15, 1998. Prior to
the merger of Travelers Group, Inc. and Citicorp Inc. on October 8,
1998, Salomon Smith Barney served as the Fund's distributor. For the
fiscal years ended July 31, 1996, 1997 and 1998, Salomon Smith Barney
received $279,000, $148,000 and $144,000, 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,
1996, 1997, and 1998, Salomon Smith Barney received $489,000, $216,000
and $141,000, 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 Salomon
Smith Barney may benefit from the temporary use of the funds. The
Fund's Board of Directors has been advised of the benefits to Salomon
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, 1998, Salomon Smith Barney
incurred distribution expenses totaling approximately $1,662,117
consisting of approximately $80,118 for advertising, $6,544 for
printing and mailing of prospectuses, $925,669 for support services,
$609,890 to Salomon Smith Barney Financial Consultants, and $105 in
accruals for interest on the excess of Salomon Smith Barney expenses
incurred in distributing the Fund's shares over the sum of the
distribution fees and CDSC received by Salomon Smith Barney from the
Fund.
Distribution Arrangements
To compensate Salomon Smith Barney for the services it provides and for
the expense it bears, 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 Salomon 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 L shares. In addition, the Fund pays Salomon Smith
Barney a distribution fee with respect to the Class B and Class L
shares primarily intended to compensate Salomon 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 L
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 pursuant
to a Distribution Plan during the periods indicated:
Distribution Plan Fees
Fiscal Year
Ended
7/31/98
Fiscal Year
Ended
7/31/97
Fiscal Year
Ended 7/31/96
Class A
$975,661
1,078,392
1,252,233
Class B
$631,602
775,428
923,663
Class L*
$16,373
10,458
5,915
*Class L shares were called Class C shares until June 12, 1998.
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, Salomon 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 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 of the Smith Barney
Mutual Fund Complex may do so without imposition of any
charge.
B. 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. Upon an exchange, the new
Class B shares will be deemed to have purchased on the same
date as the Class B shares of the Fund that have been
exchanged.
C. Upon exchange, the new Class L shares will be deemed to have
been purchased on the same date as the Class L shares of the
fund that have been exchanged.
Dealers other than Salomon 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 Salomon 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.
Salomon Smith Barney reserves the right to reject any exchange request.
The exchange privilege may be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote its yield or total return in
advertisements or in reports and other communications to shareholders.
The Fund may include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may
include data from the following industry and financial publications:
Barron's, Business Week, CDA Investment Technologies, Inc., Changing
Times, Forbes, Fortune, Institutional Investor, Investors Business
Daily, Money, Morningstar Mutual Funds Values, The New York Times, USA
Today and The Wall Street Journal.
Average Annual Total Return
"Average annual total return" figures are computed according to a
formula prescribed by the SEC. The formula can be expressed as
follows:
P(1 = T)n = ERV
Where P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5-, or 10-year
period at the end of the 1-, 5- or 10-year period (or
fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The Fund's average annual total returns for Class A shares were as
follows for the periods indicated:
0.73% for the one-year period beginning August 1, 1997 through July
31, 1998;
4.72% per annum during the five-year period beginning on August 1,
1993 through July 31, 1998; and
7.74% per annum during the ten-year period beginning in August 1,
1988 through July 31, 1998.
The average annual total return figures assume that the maximum 4.50%
sales charge has been deducted from the investment at the time of
purchase. If the maximum sales charge of 4.50% had not been deducted
at the time of purchase, the average annual total return for the same
periods would have been 5.51%, 5.70%, and 8.24%, respectively.
The Fund's average annual total returns for Class B shares were as
follows for the periods indicated:
0.53% for the one-year period beginning August 1, 1997 through July
31, 1998;
4.98% for the five-year period beginning August 1, 1993 through
July 31, 1998; and
6.20% per annum during the period from commencement of operations
(November 6, 1992) through July 31, 1998.
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 4.99%, 5.14% and 6.20%, respectively.
The Fund's average total returns for Class L shares (formerly
designated Class C shares) were as follows for the periods indicated:
3.04% for the one-year period beginning August 1, 1997 through
July 31, 1998;
4.96% for the five-year period beginning August 1, 1993 through
July 31, 1998; and
5.13% per annum during the period from commencement of operations
(June 29, 1993) through July 31, 1998.
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 5.07%, 5.17% and 5.33%, 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 total returns for Class A shares were as follows
for the periods indicated:
0.73% for the one-year period beginning August 1, 1997 through July
31, 1998;
25.96% during the five-year period beginning on August 1, 1993
through July 31, 1998; and
110.76% during the ten-year period beginning on August 1, 1988
through July 31, 1998.
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 5.51%, 31.93%, and 120.74%, respectively.
The Fund's aggregate total returns for Class B shares were as
follows for the periods indicated:
0.53% for the one-year period beginning August 1, 1997 through July
31, 1998; and
41.20% during the period from commencement of operations (November
6, 1992) through July 31, 1998.
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 4.99% and 41.20%, respectively.
The Fund's aggregate total returns for Class L shares (formerly
designated Class C shares) were as follows for the periods indicated:
3.04% for the one-year period beginning August 1, 1997 through July
31, 1998; and
28.99% during the period from commencement of operations (June 29,
1993) through July 31, 1998.
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 L shares' aggregate total return for the same periods would
have been 5.07% and 30.26%, 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 short-term 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 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 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, or to
recharacterize short-term loss as long-term loss. 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, 1998 is
incorporated herein by reference in its entirety.
Smith Barney
Managed
Governments
Fund Inc.
Statement of
Additional
Information
November 27, 1998
Smith Barney
Managed Governments Fund Inc.
388 Greenwich Street
New York, NY 10013
...................................Fund........................
SALOMON SMITH BARNEY
A Member of Citigroup
27
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, 1998
and the report of Independent Accountants dated September 15, 1998, are
incorporated by reference to the Definitive 30b-1 filed on October 26,
1998 as Accession # 0000091155-98-000637.
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").
(c) Articles of Amendment to Articles of Incorporation dated
June 1, 1998, filed herein.
(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)(a) Distribution Agreement dated July 30, 1993 between the
Registrant and Smith Barney Shearson Inc. is incorporated by
reference to Post-Effective Amendment No. 16.
(b) Form of Distribution Agreement dated October 8, 1998 between
the Registrant and CFBDS, Inc. is filed herein.
(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)(a) 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.
(b) Form of Amended and Restated Services and Distribution Plan
pursuant to Rule 12b-1 dated October 8, 1998 between the
Registrant and Salomon Smith Barney, Inc.
(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 herein.
(18)(a) 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.
(b) Rule 18f-3(d) Multiple Class Plan filed herein.
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 - - Mutual Management Corp.
("MMC")
(f/k/a Smith Barney Mutual Funds Management Inc.), was
incorporated in December 1968 under the laws of the State of
Delaware. MMC is a wholly owned subsidiary of Salomon Smith Barney
Holdings
Inc. ("Holdings"),(formerly known as Smith Barney Holdings Inc.), which
in
turn is a wholly owned subsidiary of Citigroup Inc. MMC 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. MMC serves as the Investment
Advisor and Administrator for the Fund.
The list required by this Item 28 of the officer and directors of MMC
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 MMC pursuant to the Advisers
Act (SEC File No. 801-8314).
Item 29. Principal Underwriters
(a) CFBDS, the Registrant's Distributor, is also the distributor for the
following Smith Barney funds: Concert Investment Series, 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., Puerto Rico Equity Index and Income 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 Allocation Series Inc., Smith Barney
Equity Funds, Smith Barney Fundamental Value Fund Inc., Smith Barney
Funds, Inc., Smith Barney Income Funds, Smith Barney Institutional Cash
Management Fund, Inc., Smith Barney Intermediate Municipal Fund, Inc.,
Smith Barney Investment Funds Inc., Smith Barney Investment Trust, 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 Small Cap Blend Fund, Inc., 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.(Netherlands Antilles), Worldwide Securities Limited
(Bermuda), Zenix Income Fund Inc. and various series of unit investment
trusts.
In addition, CFBDS is also the distributor for CitiFunds(SM)
International Growth & Income Portfolio, CitiFunds(SM) International
Growth Portfolio, CitiFunds(SM) Intermediate Income Portfolio,
CitiFunds(SM) Short-Term U.S. Government Income Portfolio, CitiFunds(SM)
Large Cap Growth Portfolio, CitiFunds(SM) Cash Reserves, CitiFunds(SM)
U.S. Treasury Reserves, CitiFunds(SM) Premium U.S. Treasury Reserves,
CitiFunds(SM) Premium Liquid Reserves, CitiFunds(SM) Tax Free Reserves,
CitiFunds(SM) California Tax Free Reserves, CitiFunds(SM) Connecticut
Tax Free Reserves, CitiFunds(SM) New York Tax Free Reserves,
CitiFunds(SM) Balanced Portfolio, CitiFunds(SM) Small Cap Value
Portfolio, CitiFunds(SM) Growth & Income Portfolio, CitiFunds(SM) Small
Cap Growth Portfolio, CitiFunds(SM) National Tax Free Income Portfolio,
CitiFunds(SM) New York Tax Free Income Portfolio, CitiFunds(SM)
California Tax Free Income Portfolio, CitiSelect(R) VIP Folio 200,
CitiSelect(R) VIP Folio 300, CitiSelect(R) VIP Folio 400, CitiSelect(R)
VIP Folio 500, CitiFunds(SM) Small Cap Growth VIP Portfolio,
CitiSelect(R) Folio 200, CitiSelect(R) Folio 300, CitiSelect(R) Folio
400, and CitiSelect(R) Folio 500. CFBDS is also the placement agent for
Large Cap Value Portfolio, Small Cap Value Portfolio, International
Portfolio, Foreign Bond Portfolio, Intermediate Income Portfolio, Short-
Term Portfolio, Growth & Income Portfolio, Large Cap Growth Portfolio,
Small Cap Growth Portfolio, International Equity Portfolio, Balanced
Portfolio, Government Income Portfolio, Tax Free Reserves Portfolio,
Cash Reserves Portfolio and U.S. Treasury Reserves Portfolio.
In addition, CFBDS is also the distributor for the following Salomon
Brothers funds: Salomon Brothers Opportunity Fund Inc., Salomon
Brothers Investors Fund Inc., Salomon Brothers Capital Fund Inc.,
Salomon Brothers Series Funds Inc., Salomon Brothers Institutional
Series Funds Inc., Salomon Brothers Variable Series Funds Inc.
(b) The information required by this Item 29 with respect to each
director and officer of CFBDS is incorporated by reference to Schedule A
of Form BD filed by CFBDS pursuant to the Securities and Exchange Act of
1934 (File No. 8-32417).
(c) not applicable
Item 30. Location of Accounts and Records
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
Mutual Management Corp. 388 Greenwich Street, 22nd
Floor
(Investment Adviser and Administrator) New York, NY
10013
CFBDS, Inc. 21 Milk Street, 5th Floor
(Distributor) Boston, MA 02109
PNC Bank, National Association 17th and Chestnut
Streets
(Custodian) Philadelphia, PA 19103
First Data Investor Services Group Inc. One Exchange Place,
(Transfer Agent) Boston, MA 02109
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of Registrant's latest report to shareholders,
upon request and without charge.
EXHIBIT INDEX
Exhibit No. Exhibit
(1)(c) Amendment to Articles of Incorporation dated June 1, 1998.
(6)(b) Distribution Agreement between the Registrant and CFBDS,
Inc. dated October 8, 1998.
(11)(a) Consent of KPMG Peat Marwick LLP
(15)(b) Amended and Restated Services and Distribution Plan pursuant
to Rule 12b-1 dated October 8, 1998, between the Registrant and Salomon
Smith Barney, Inc.
(17) Financial Data Schedule
(18) Rule 18f-3(d) Multiple Class Plan
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the
Registrant, SMITH BARNEY MANAGED GOVERNMENTS FUND INC.,
has duly caused this Amendment to the Registration Statement to be
signed on
its behalf
by the undersigned, thereunto duly authorized, all in the City of New
York, State of New York on the 27th day of November 1998.
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 11/27/98
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone Treasurer (Chief Financial
11/27/98
Lewis E. Daidone and Accounting Officer)
/s/ Herbert Barg* Director 11/27/98
Herbert Barg
/s/ Alfred Bianchetti* Director 11/27/98
Alfred Bianchetti
/s/ Martin Brody* Director 11/27/98
Martin Brody
/s/ Dwight Crane* Director 11/27/98
Dwight Crane
/s/ Burt N. Dorsett* Director 11/27/98
Burt N. Dorsett
/s/ Elliot S. Jaffe * Director 11/27/98
Elliot S. Jaffe
/s/ Stephen Kaufman* Director 11/27/98
Stephen Kaufman
/s/ Joseph McCann* Director 11/27/98
Joseph McCann
/s/ Cornelius C. Rose, Jr*. Director 11/27/98
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
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
ARTICLES OF AMENDMENT
Smith Barney Managed Governments Fund Inc., a Maryland
corporation, having its principal office in Baltimore City, Maryland
(the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended to
provide that the name of all of the issued and unissued Class C Common
Stock of the Corporation is hereby changed to Class L Common Stock.
SECOND: The foregoing amendment to the Charter of the
Corporation has been approved by a majority of the entire Board of
Directors and is limited to a change expressly permitted by Section 2-
605 of the Maryland General Corporation Law to be made without action
of the stockholders.
THIRD: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
FOURTH: The amendment to the Charter of the Corporation
effected hereby shall become effective at 9:00 a.m. on June 12, 1998.
IN WITNESS WHEREOF, Smith Barney Managed Governments Fund Inc.
has caused these presents to be signed in its name and on its behalf
by its President and witnessed by its Assistant Secretary as of June
1, 1998.
WITNESS: SMITH BARNEY MANAGED
GOVERNMENTS FUND INC.
/s/ Michael Kocur By: /s/ Heath
B. McLendon
Michael Kocur Heath B. McLendon
Assistant Secretary President
THE UNDERSIGNED, President of Smith Barney Managed Governments Fund
Inc., who executed on behalf of the Corporation Articles of Amendment
of which this Certificate is made a part, hereby acknowledges in the
name and on behalf of said Corporation the foregoing Articles of
Amendment to be the corporate act of said Corporation and hereby
certifies that the matters and facts set forth herein with respect to
the authorization and approval thereof are true in all material
respects under the penalties of perjury.
/s/ Heath B. McLendon
Heath B. McLendon,
President
LEGAL\FUNDS\GOVT\GOVTAMND.DOC
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
FORM OF
DISTRIBUTION AGREEMENT
October 8, 1998
CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, the above-named investment company (the "Fund")
has agreed that you shall be, for the period of this Agreement, the non-
exclusive principal underwriter and distributor of shares of the Fund
and each Series of the Fund set forth on Exhibit A hereto, as such
Exhibit may be revised from time to time (each, including any shares of
the Fund not designated by series, a "Series"). For purposes of this
Agreement, the term "Shares" shall mean shares of the each Series, or
one or more Series, as the context may require.
1. Services as Principal Underwriter and Distributor
1.1 You will act as agent for the distribution of Shares
covered by, and in accordance with, the registration statement,
prospectus and statement of additional information then in effect under
the Securities Act of 1933, as amended (the "1933 Act"), and the
Investment Company Act of 1940, as amended (the "1940 Act"), and will
transmit or cause to be transmitted promptly any orders received by you
or those with whom you have sales or servicing agreements for purchase
or redemption of Shares to the Transfer and Dividend Disbursing Agent
for the Fund of which the Fund has notified you in writing.
1.2 You agree to use your best efforts to solicit orders
for the sale of Shares. It is contemplated that you will enter into
sales or servicing agreements with registered securities dealers and
banks and into servicing agreements with financial institutions and
other industry professionals, such as investment advisers, accountants
and estate planning firms. In entering into such agreements, you will
act only on your own behalf as principal underwriter and distributor.
You will not be responsible for making any distribution plan or service
fee payments pursuant to any plans the Fund may adopt or agreements it
may enter into.
1.3 You shall act as principal underwriter and distributor
of Shares in compliance with all applicable laws, rules, and
regulations, including, without limitation, all rules and regulations
made or adopted from time to time by the Securities and Exchange
Commission (the "SEC") pursuant to the 1933 Act or the 1940 Act or by
any securities association registered under the Securities Exchange Act
of 1934, as amended.
1.4 Whenever in their judgment such action is warranted for
any reason, including, without limitation, market, economic or political
conditions, the Fund's officers may decline to accept any orders for, or
make any sales of, any Shares until such time as those officers deem it
advisable to accept such orders and to make such sales and the Fund
shall advise you promptly of such determination.
2. Duties of the Fund
2.1 The Fund agrees to pay all costs and expenses in
connection with the registration of Shares under the 1933 Act, and all
expenses in connection with maintaining facilities for the issue and
transfer of Shares and for supplying information, prices and other data
to be furnished by the Fund hereunder, and all expenses in connection
with the preparation and printing of the Fund's prospectuses and
statements of additional information for regulatory purposes and for
distribution to shareholders; provided however, that nothing contained
herein shall be deemed to require the Fund to pay any of the costs of
advertising or marketing the sale of Shares.
2.2 The Fund agrees to execute any and all documents and to
furnish any and all information and otherwise to take any other actions
that may be reasonably necessary in the discretion of the Fund's
officers in connection with the qualification of Shares for sale in such
states and other U.S. jurisdictions as the Fund may approve and
designate to you from time to time, and the Fund agrees to pay all
expenses that may be incurred in connection with such qualification.
You shall pay all expenses connected with your own qualification as a
securities broker or dealer under state or Federal laws and, except as
otherwise specifically provided in this Agreement, all other expenses
incurred by you in connection with the sale of Shares as contemplated in
this Agreement.
2.3 The Fund shall furnish you from time to time, for use
in connection with the sale of Shares, such information reports with
respect to the Fund or any relevant Series and the Shares as you may
reasonably request, all of which shall be signed by one or more of the
Fund's duly authorized officers; and the Fund warrants that the
statements contained in any such reports, when so signed by the Fund's
officers, shall be true and correct. The Fund also shall furnish you
upon request with (a) the reports of annual audits of the financial
statements of the Fund for each Series made by independent certified
public accountants retained by the Fund for such purpose; (b) semi-
annual unaudited financial statements pertaining to each Series; (c)
quarterly earnings statements prepared by the Fund; (d) a monthly
itemized list of the securities in each Series' portfolio; (e) monthly
balance sheets as soon as practicable after the end of each month; (f)
the current net asset value and offering price per share for each
Series on each day such net asset value is computed and (g) from time to
time such additional information regarding the financial condition of
each Series of the Fund as you may reasonably request.
3. Representations and Warranties
The Fund represents to you that all registration statements,
prospectuses and statements of additional information filed by the Fund
with the SEC under the 1933 Act and the 1940 Act with respect to the
Shares have been prepared in conformity with the requirements of said
Acts and the rules and regulations of the SEC thereunder. As used in
this Agreement, the terms "registration statement", "prospectus" and
"statement of additional information" shall mean any registration
statement, prospectus and statement of additional information filed by
the Fund with the SEC and any amendments and supplements thereto filed
by the Fund with the SEC. The Fund represents and warrants to you that
any registration statement, prospectus and statement of additional
information, when such registration statement becomes effective and as
such prospectus and statement of additional information are amended or
supplemented, will include at the time of such effectiveness, amendment
or supplement all statements required to be contained therein in
conformance with the 1933 Act, the 1940 Act and the rules and
regulations of the SEC; that all statements of material fact contained
in any registration statement, prospectus or statement of additional
information will be true and correct when such registration statement
becomes effective; and that neither any registration statement nor any
prospectus or statement of additional information when such registration
statement becomes effective will include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading to a
purchaser of the Fund's Shares. The Fund may, but shall not be
obligated to, propose from time to time such amendment or amendments to
any registration statement and such supplement or supplements to any
prospectus or statement of additional information as, in the light of
future developments, may, in the opinion of the Fund, be necessary or
advisable. If the Fund shall not propose such amendment or amendments
and/or supplement or supplements within fifteen days after receipt by
the Fund of a written request from you to do so, you may, at your
option, terminate this Agreement or decline to make offers of the Fund's
Shares until such amendments are made. The Fund shall not file any
amendment to any registration statement or supplement to any prospectus
or statement of additional information without giving you reasonable
notice thereof in advance; provided, however, that nothing contained in
this Agreement shall in any way limit the Fund's right to file at any
time such amendments to any registration statement and/or supplements to
any prospectus or statement of additional information, of whatever
character, as the Fund may deem advisable, such right being in all
respects absolute and unconditional.
4. Indemnification
4.1 The Fund authorizes you to use any prospectus or
statement of additional information furnished by the Fund from time to
time, in connection with the sale of Shares. The Fund agrees to
indemnify, defend and hold you, your several officers and directors, and
any person who controls you within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any such counsel fees
incurred in connection therewith) which you, your officers and
directors, or any such controlling person, may incur under the 1933 Act
or under common law or otherwise, arising out of or based upon any
untrue statement, or alleged untrue statement, of a material fact
contained in any registration statement, any prospectus or any statement
of additional information or arising out of or based upon any omission,
or alleged omission, to state a material fact required to be stated in
any registration statement, any prospectus or any statement of
additional information or necessary to make the statements in any of
them not misleading; provided, however, that the Fund's agreement to
indemnify you, your officers or directors, and any such controlling
person shall not be deemed to cover any claims, demands, liabilities or
expenses arising out of any statements or representations made by you or
your representatives or agents other than such statements and
representations as are contained in any prospectus or statement of
additional information and in such financial and other statements as are
furnished to you pursuant to paragraph 2.3 of this Agreement; and
further provided that the Fund's agreement to indemnify you and the
Fund's representations and warranties herein before set forth in
paragraph 3 of this Agreement shall not be deemed to cover any liability
to the Fund or its shareholders to which you would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties, or by reason of your reckless disregard of
your obligations and duties under this Agreement. The Fund's agreement
to indemnify you, your officers and directors, and any such controlling
person, as aforesaid, is expressly conditioned upon the Fund's being
notified of any action brought against you, your officers or directors,
or any such controlling person, such notification to be given by letter
or by telegram addressed to the Fund at its principal office in New
York, New York and sent to the Fund by the person against whom such
action is brought, within ten days after the summons or other first
legal process shall have been served. The failure so to notify the Fund
of any such action shall not relieve the Fund from any liability that
the Fund may have to the person against whom such action is brought by
reason of any such untrue, or alleged untrue, statement or omission, or
alleged omission, otherwise than on account of the Fund's indemnity
agreement contained in this paragraph 4.1. The Fund will be entitled to
assume the defense of any suit brought to enforce any such claim, demand
or liability, but, in such case, such defense shall be conducted by
counsel of good standing chosen by the Fund. In the event the Fund
elects to assume the defense of any such suit and retains counsel of
good standing, the defendant or defendants in such suit shall bear the
fees and expenses of any additional counsel retained by any of them; but
if the Fund does not elect to assume the defense of any such suit, the
Fund will reimburse you, your officers and directors, or the controlling
person or persons named as defendant or defendants in such suit, for the
fees and expenses of any counsel retained by you or them. The Fund's
indemnification agreement contained in this paragraph 4.1 and the Fund's
representations and warranties in this Agreement shall remain operative
and in full force and effect regardless of any investigation made by or
on behalf of you, your officers and directors, or any controlling
person, and shall survive the delivery of any of the Fund's Shares.
This agreement of indemnity will inure exclusively to your benefit, to
the benefit of your several officers and directors, and their respective
estates, and to the benefit of the controlling persons and their
successors. The Fund agrees to notify you promptly of the commencement
of any litigation or proceedings against the Fund or any of its officers
or Board members in connection with the issuance and sale of any of the
Fund's Shares.
4.2 You agree to indemnify, defend and hold the Fund, its
several officers and Board members, and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act, free and harmless from
and against any and all claims, demands, liabilities and expenses
(including the costs of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith)
that the Fund, its officers or Board members or any such controlling
person may incur under the 1933 Act, or under common law or otherwise,
but only to the extent that such liability or expense incurred by the
Fund, its officers or Board members, or such controlling person
resulting from such claims or demands shall arise out of or be based
upon (a) any unauthorized sales literature, advertisements, information,
statements or representations or (b) any untrue, or alleged untrue,
statement of a material fact contained in information furnished in
writing by you to the Fund and used in the answers to any of the items
of the registration statement or in the corresponding statements made in
the prospectus or statement of additional information, or shall arise
out of or be based upon any omission, or alleged omission, to state a
material fact in connection with such information furnished in writing
by you to the Fund and required to be stated in such answers or
necessary to make such information not misleading. Your agreement to
indemnify the Fund, its officers or Board members, and any such
controlling person, as aforesaid, is expressly conditioned upon your
being notified of any action brought against the Fund, its officers or
Board members, or any such controlling person, such notification to be
given by letter or telegram addressed to you at your principal office in
Boston, Massachusetts and sent to you by the person against whom such
action is brought, within ten days after the summons or other first
legal process shall have been served. You shall have the right to
control the defense of such action, with counsel of your own choosing,
satisfactory to the Fund, if such action is based solely upon such
alleged misstatement or omission on your part or with the Fund's
consent, and in any event the Fund, its officers or Board members or
such controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action with counsel of
its own choosing reasonably acceptable to you but shall not have the
right to settle any such action without your consent, which will not be
unreasonably withheld. The failure to so notify you of any such action
shall not relieve you from any liability that you may have to the Fund,
its officers or Board members, or to such controlling person by reason
of any such untrue, or alleged untrue, statement or omission, or alleged
omission, otherwise than on account of your indemnity agreement
contained in this paragraph 4.2. You agree to notify the Fund promptly
of the commencement of any litigation or proceedings against you or any
of your officers or directors in connection with the issuance and sale
of any of the Fund's Shares.
5. Effectiveness of Registration
No Shares shall be offered by either you or the Fund under any of
the provisions of this Agreement and no orders for the purchase or sale
of such Shares under this Agreement shall be accepted by the Fund if and
so long as the effectiveness of the registration statement then in
effect or any necessary amendments thereto shall be suspended under any
of the provisions of the 1933 Act, or if and so long as a current
prospectus as required by Section 5(b) (2) of the 1933 Act is not on
file with the SEC; provided, however, that nothing contained in this
paragraph 5 shall in any way restrict or have an application to or
bearing upon the Fund's obligation to repurchase its Shares from any
shareholder in accordance with the provisions of the Fund's prospectus,
statement of additional information or charter documents, as amended
from time to time.
6. Offering Price
Shares of any class of any Series of the Fund offered for sale by
you shall be offered for sale at a price per share (the "offering
price") equal to (a) their net asset value (determined in the manner
set forth in the Fund's charter documents and the then-current
prospectus and statement of additional information) plus (b) a sales
charge, if applicable, which shall be the percentage of the offering
price of such Shares as set forth in the Fund's then-current prospectus
relating to such Series. In addition to or in lieu of any sales charge
applicable at the time of sale, Shares of any class of any Series of the
Fund offered for sale by you may be subject to a contingent deferred
sales charge as set forth in the Fund's then-current prospectus and
statement of additional information. You shall be entitled to receive
any sales charge levied at the time of sale in respect of the Shares
without remitting any portion to the Fund. Any payments to a broker or
dealer through whom you sell Shares shall be governed by a separate
agreement between you and such broker or dealer and the Fund's then-
current prospectus and statement of additional information
7. Notice to You
The Fund agrees to advise you immediately in writing:
(a) of any request by the SEC for
amendments to the registration statement,
prospectus or statement of additional
information then in effect or for additional
information;
(b) in the event of the issuance by
the SEC of any stop order suspending the
effectiveness of the registration statement,
prospectus or statement of additional
information then in effect or the initiation
of any proceeding for that purpose;
(c) of the happening of any event that
makes untrue any statement of a material fact
made in the registration statement,
prospectus or statement of additional
information then in effect or that requires
the making of a change in such registration
statement, prospectus or statement of
additional
information in order to make the statements
therein not misleading; and
(d) of all actions of the SEC with
respect to any amendment to the registration
statement, or any supplement to the
prospectus or statement of additional
information which may from time to time be
filed with the SEC.
8. Term of the Agreement
This Agreement shall become effective on the date hereof, shall
have an initial term of one year from the date hereof, and shall
continue for successive annual periods thereafter so long as such
continuance is specifically approved at least annually by (a) the Fund's
Board or (b) by a vote of a majority (as defined in the 1940 Act) of the
Fund's outstanding voting securities, provided that in either event the
continuance is also approved by a majority of the Board members of the
Fund who are not interested persons (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. This Agreement is terminable,
without penalty, on 30 days' notice by the Fund's Board or by vote of
holders of a majority of the relevant Series outstanding voting
securities, or on 90 days' notice by you. This Agreement will also
terminate automatically, as to the relevant Series, in the event of its
assignment (as defined in the 1940 Act and the rules and regulations
thereunder).
9. Arbitration
Any claim, controversy, dispute or deadlock arising under
this Agreement (collectively, a "Dispute") shall be settled by
arbitration administered under the rules of the American Arbitration
Association ("AAA") in New York, New York. Any arbitration and award
of the arbitrators, or a majority of them, shall be final and the
judgment upon the award rendered may be entered in any state or federal
court having jurisdiction. No punitive damages are to be awarded.
10. Miscellaneous
So long as you act as a principal underwriter and distributor of
Shares, you shall not perform any services for any entity other than
investment companies advised or administered by Citigroup Inc. or its
subsidiaries. The Fund recognizes that the persons employed by you to
assist in the performance of your duties under this Agreement may not
devote their full time to such service and nothing contained in this
Agreement shall be deemed to limit or restrict your or any of your
affiliates right to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature. This
Agreement and the terms and conditions set forth herein shall be
governed by, and construed in accordance with, the laws of the State of
New York.
11. Limitation of Liability (Massachusetts business trusts
only)
The Fund and you agree that the obligations of the Fund under this
Agreement shall not be binding upon any of the Trustees, shareholders,
nominees, officers, employees or agents, whether past, present or
future, of the Fund, individually, but are binding only upon the assets
and property of the Fund, as provided in the Master Trust Agreement.
The execution and delivery of this Agreement have been authorized by the
Trustees and signed by an authorized officer of the Fund, acting as
such, and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by any of
them individually or to impose any liability on any of them personally,
but shall bind only the trust property of the Fund as provided in its
Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning to
us the enclosed copy, whereupon this Agreement will become binding on
you.
Very truly yours,
SMITH BARNEY MANAGED GOVERNMENTS
FUND INC.
By: _____________________
Authorized Officer
Accepted:
CFBDS, INC.
By: __________________________
Authorized Officer
U:\legal\general\forms\dist12b1\SBManagedGovernment
Page: 3
8
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, 1998, with
respect to the Smith Barney Managed Governments Fund Inc.,
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 24, 1998
FORM OF
AMENDED AND RESTATED
SHAREHOLDER SERVICES AND DISTRIBUTION PLAN
This Amended and Restated Shareholder Services and Distribution
Plan (the "Plan") is adopted in accordance with Rule 12b-1 (the
"Rule") under the Investment Company Act of 1940, as amended (the
"1940 Act"), by Smith Barney Managed Governments Fund Inc., a
corporation organized under the laws of the State of Maryland (the
"Fund"), subject to the following terms and conditions:
Section 1. Annual Fee.
(a) Service Fee for Class A shares. The Fund will pay to Salomon
Smith Barney Inc., a corporation organized under the laws of
the State of Delaware ("Salomon Smith Barney"), a service
fee under the Plan at an annual rate of 0.25% of the average
daily net assets of the Fund attributable to the Class A
shares sold and not redeemed (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to Salomon
Smith Barney a service fee under the Plan at the annual rate
of 0.25% of the average daily net assets of the Fund
attributable to the Class B shares sold and not redeemed
(the "Class B Service Fee").
(c) Distribution Fee for Class B shares. In addition to the
Class B Service Fee, the Fund will pay Salomon Smith Barney
a distribution fee under the Plan at the annual rate of
0.50% of the average daily net assets of the Fund
attributable to the Class B shares sold and not redeemed
(the "Class B Distribution Fee").
(d) Service Fee for Class L shares. The Fund will pay to
Salomon Smith Barney a service fee under the plan at the
annual rate of 0.25% of the average daily net assets of the
Fund attributable to the Class L shares sold and not
redeemed (the "Class L Service Fee").
(e) Distribution Fee for Class L shares. In addition to the
Class L Service Fee, the Fund will pay Salomon Smith Barney
a distribution fee under the Plan at the annual rate of
0.50% of the average daily net assets of the Fund
attributable to the Class L shares sold and not redeemed
(the "Class L Distribution Fee").
(f) Payment of Fees. The Service Fees and Distribution Fees will
be calculated daily and paid monthly by the Fund with
respect to the foregoing classes of the Fund's shares (each
a "Class" and together, the "Classes") at the annual rates
indicated above.
Section 2. Expenses Covered by the Plan.
With respect to expenses incurred by each Class, its respective
Service Fee and/or Distribution Fee may be used by Smith Barney for:
(a) costs of printing and distributing the Fund's prospectuses,
statements of additional information and reports to prospective
investors in the Fund; (b) costs involved in preparing, printing and
distributing sales literature pertaining to the Fund; (c) an
allocation of overhead and other branch office distribution-related
expenses of Smith Barney; (d) payments made to, and expenses of,
Smith Barney's financial consultants and other persons who provide
support services to Fund shareholders in connection with the
distribution of the Fund's shares, including but not limited to,
office space and equipment, telephone facilities, answering routine
inquires regarding the Fund and its operation, processing shareholder
transactions, forwarding and collecting proxy material, changing
dividend payment elections and providing any other shareholder
services not otherwise provided by the Fund's transfer agent; and (e)
accruals for interest on the amount of the foregoing expenses that
exceed the Distribution Fee for that Class and, in the case of Class
B and Class L shares, any contingent deferred sales charges received
by Smith Barney; provided, however, that (i) the Distribution Fee for
a particular Class may be used by Smith Barney only to cover expenses
primarily intended to result in the sale of shares of that Class,
including, without limitation, payments to the financial consultants
of Smith Barney and other persons as compensation for the sale of the
shares, and (ii) the Service Fees are intended to be used by Smith
Barney primarily to pay its financial consultants for servicing
shareholder accounts, including a continuing fee to each such
financial consultant, which fee shall begin to accrue immediately
after the sale of such shares.
Section 3. Approval by Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of
the Plan, with respect to a Class until the Plan has been approved by
a vote of at least a majority
of the outstanding voting securities of the Class. The Plan will be
deemed to have been approved
with respect to a Class so long as a majority of the outstanding
voting securities of the Class votes
for the approval of the Plan, notwithstanding that: (a) the Plan has
not been approved by a majority of the outstanding voting securities
of any other Class, or (b) the Plan has not been
approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval by Directors.
Neither the Plan nor any related agreements will take effect until
approved by a majority vote of both (a) the Board of Directors and
(b) those Directors who are not interested persons of the Fund and
who have no direct or indirect financial interest in the operation of
the Plan or in any agreements related to it (the "Qualified
Directors"), cast in person at a meeting called for the purpose of
voting on the Plan and the related agreements.
Section 5. Continuance of the Plan.
The Plan will continue in effect with respect to each Class until
July , 1999 and thereafter for successive twelve-month periods
with respect to each Class; provided, however, that such continuance
is specifically approved at least annually by the Directors of the
Fund and by a majority of the Qualified Directors.
Section 6. Termination.
The Plan may be terminated at any time with respect to a Class (i)
by the Fund without the payment of any penalty, by the vote of a
majority of the outstanding voting securities of such Class or (ii)
by a majority vote of the Qualified Directors. The Plan may remain in
effect with respect to a particular Class even if the Plan has been
terminated in accordance with this Section 6 with respect to any
other Class.
Section 7. Amendments.
The Plan may not be amended with respect to any Class so as to
increase materially the amounts of the fees described in Section 1
above, unless the amendment is approved by a vote of holders of at
least a majority of the outstanding voting securities of that Class.
No material amendment to the Plan may be made unless approved by the
Fund's Board of Directors in the manner described in Section 4 above.
Section 8. Selection of Certain Directors.
While the Plan is in effect, the selection and nomination of the
Fund's Directors who are not interested persons of the Fund will be
committed to the discretion of the Directors then in office who are
not interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, any person
authorized to direct the disposition of monies paid or payable by the
Fund pursuant to the Plan or any related agreement will prepare and
furnish to the Fund's Board of Directors and the Board will review,
at least quarterly, written reports complying with the requirements
of the Rule, which set out the amounts expended under the Plan and
the purposes for which those expenditures were made.
Section 10. Preservation of Materials.
The Fund will preserve copies of the Plan, any agreement relating
to the Plan and any report made pursuant to Section 9 above, for a
period of not less than six years (the first two years in an easily
accessible place) from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and "majority
of the outstanding voting securities" will be deemed to have the same
meaning that those terms have under the rules and regulations under
the 1940 Act, subject to any exemption that may be granted to the
Fund under the 1940 Act, by the Securities and Exchange Commission.
IN WITNESS WHEREOF, the Fund has executed the Plan as of October
8, 1998.
Smith Barney Managed Governments
Fund Inc. On behalf of
By:
____________________________________
Heath B. McLendon
Chairman of the Board
Rule 18f-3 (d) Multiple Class Plan for Smith Barney Mutual Funds
Introduction
This plan (the "Plan") is adopted pursuant to Rule 18f-3 (d) of
the Investment Company Act of 1940, as amended (the "1940 Act").
The purpose of the Plan is to restate the existing arrangements
previously approved by the Boards of Directors and Trustees of
certain of the open-end investment companies set forth on Schedule
A (the "Funds" and each a "Fund") under the Funds' existing order of
exemption (Investment Company Act Release Nos. 20042 (January 28,
1994) (notice) and 20090 (February 23, 1994)). Shares of the
Funds are distributed pursuant to a system (the "Multiple Class
System") in which each class of shares (a "Class") of a Fund
represents a pro rata interest in the same portfolio of
investments of the Fund and differs only to the extent outlined
below.
I. Distribution Arrangements and Service Fees
One or more Classes of shares of the Funds are offered for
purchase by investors with the following sales load structure. In
addition, pursuant to Rule 12b-1 under the 1940 Act (the "Rule"),
the Funds have each adopted a plan (the "Services and Distribution
Plan") under which shares of the Classes are subject to the
services and distribution fees described below.
1. Class A Shares
Class A shares are offered with a front-end sales load and under
the Services and Distribution Plan are subject to a service fee of
up to 0.25% of average daily net assets. In addition, the Funds
are permitted to assess a contingent deferred sales charge
("CDSC") on certain redemptions of Class A shares sold pursuant to
a complete waiver of front-end sales loads applicable to large
purchases, if the shares are redeemed within one year of the date
of purchase. This waiver applies to sales of Class A shares where
the amount of purchase is equal to or exceeds $500,000 although
this amount may be changed in the future.
2. Class B Shares
Class B shares are offered without a front-end sales load, but are
subject to a five-year declining CDSC and under the Services and
Distribution Plan are subject to a service fee at an annual rate
of up to 0.25% of average daily net assets and a distribution fee
at an annual rate of up to 0.75% of average daily net assets.
3. Class D Shares
Class D shares are offered without a front-end sales load, CDSC,
service fee or distribution fee.
4. Class L Shares
Class L shares are offered with a front-end load, are subject to a
one-year CDSC and under the Services and Distribution Plan are
subject to a service fee at an annual rate of up to 0.25% of
average daily net assets and a distribution fee at an annual rate
of up to 0.75% of average daily net assets. Unlike Class B
shares, Class L shares do not have the conversion feature as
discussed below and accordingly, these shares are subject to a
distribution fee for an indefinite period of time. The Funds
reserve the right to impose these fees at such higher rates as may
be determined.
5. Class I Shares
Class I shares are offered without a front-end sales load, but are
subject under the Services and Distribution Plan to a service fee
at an annual rate of up to 0.25% of average daily net assets.
6. Class O Shares
Class O shares are offered without a front-end load, but are
subject to a one-year CDSC and under the Services and Distribution
Plan are subject to a service fee at an annual rate of up to 0.25%
of average daily net assets and a distribution fee at an annual
rate of up to 0.50% of average daily net assets. Unlike Class B
shares, Class O shares do not have the conversion feature as
discussed below and accordingly, these shares are subject to a
distribution fee for an indefinite period of time. The Funds
reserve the right to impose these fees at such higher rates as may
be determined.
Effective June 28, 1999, Class O shares will be offered with a
front-end load and will continue to be subject to a one year CDSC,
a service fee at an annual rate of up to 0.25% of average daily
net assets and a distribution fee at an annual rate of up to 0.50%
of average daily net assets.
7. Class Y Shares
Class Y shares are offered without imposition of either a sales
charge or a service or distribution fee for investments where the
amount of purchase is equal to or exceeds a specific amount as
specified in each Fund's prospectus.
8. Class Z Shares
Class Z shares are offered without imposition of either a sales
charge or a service or distribution fee for purchase (i) by
employee benefit and retirement plans of Salomon Smith Barney Inc.
("Salomon Smith Barney") and its affiliates, (ii) by certain unit
investment trusts sponsored by Salomon Smith Barney and its affiliates,
and (iii) although not currently authorized by the governing boards of the
Funds, when and if authorized, (x) by employees of Salomon Smith Barney and
its affiliates and (y) by directors, general partners or trustees of any
investment company listed on Schedule A and, for each of (x) and (y), their
spouses and minor children.
9. Additional Classes of Shares
The Boards of Directors and Trustees of the Funds have the
authority to create additional classes, or change existing
Classes, from time to time, in accordance with Rule 18f-3 of the
1940 Act.
II. Expense Allocations
Under the Multiple Class System, all expenses incurred by a Fund
are allocated among the various Classes of shares based on the net
assets of the Fund attributable to each Class, except that each
Class's net asset value and expenses reflect the expenses
associated with that Class under the Fund's Services and
Distribution Plan, including any costs associated with obtaining
shareholder approval of the Services and Distribution Plan (or an
amendment thereto) and any expenses specific to that Class. Such
expenses are limited to the following:
(i) transfer agency fees as identified by the transfer
agent as being attributable to a specific Class;
(ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses
and proxies to current shareholders;
(iii) Blue Sky registration fees incurred by a Class of
shares;
(iv) Securities and Exchange Commission registration fees
incurred by a Class of shares;
(v) the expense of administrative personnel and services
as required to support the shareholders of a specific Class;
(vi) litigation or other legal expenses relating solely to
one Class of shares; and
(vii) fees of members of the governing boards of the funds
incurred as a result of issues relating to one Class of shares.
Pursuant to the Multiple Class System, expenses of a Fund
allocated to a particular Class of shares of that Fund are borne
on a pro rata basis by each outstanding share of that Class.
III. Conversion Rights of Class B Shares
All Class B shares of each Fund will automatically convert to
Class A shares after a certain holding period, expected to be, in
most cases, approximately eight years but may be shorter. Upon
the expiration of the holding period, Class B shares (except those
purchases through the reinvestment of dividends and other
distributions paid in respect of Class B shares) will
automatically convert to Class A shares of the Fund at the
relative net asset value of each of the Classes, and will, as a
result, thereafter be subject to the lower fee under the Services
and Distribution Plan. For purposes of calculating the holding
period required for conversion, newly created Class B shares
issued after the date of implementation of the Multiple Class
System are deemed to have been issued on (i) the date on which the
issuance of the Class B shares occurred or (ii) for Class B shares
obtained through an exchange, or a series of exchanges, the date
on which the issuance of the original Class B shares occurred.
Shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares are also Class B
shares. However, for purposes of conversion to Class A, all Class
B shares in a shareholder's Fund account that were purchased
through the reinvestment of dividends and other distributions paid
in respect of Class B shares (and that have not converted to Class
A shares as provided in the following sentence) are considered to
be held in a separate sub-account. Each time any Class B shares
in the shareholder's Fund account (other than those in the sub-
account referred to in the preceding
sentence) convert to Class A, a pro rata portion of the Class B
shares then in the sub-account also converts to Class A. The
portion is determined by the ratio that the shareholder's Class B
shares converting to Class A bears to the shareholder's total
Class B shares not acquired through dividends and distributions.
The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling of the Internal Revenue
Service that payment of different dividends on Class A and Class B
shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Internal Revenue
Code of 1986, as amended (the "Code"), and the continuing
availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event under the
Code. The conversion of Class B shares to Class A shares may be
suspended if this opinion is no longer available, In the event
that conversion of Class B shares does not occur, Class B shares
would continue to be subject to the distribution fee and any
incrementally higher transfer agency costs attending the Class B
shares for an indefinite period.
IV. Exchange Privileges
Shareholders of a Fund may exchange their shares at net asset
value for shares of the same Class in certain other of the Smith
Barney Mutual Funds as set forth in the prospectus for such Fund.
Funds only permit exchanges into shares of money market funds
having a plan under the Rule if, as permitted by paragraph (b) (5)
of Rule 11a-3 under the 1940 Act, either (i) the time period
during which the shares of the money market funds are held is
included in the calculations of the CDSC or (ii) the time period
is not included but the amount of the CDSC is reduced by the
amount of any payments made under a plan adopted pursuant to the
Rule by the money market funds with respects to those shares.
Currently, the Funds include the time period during which shares
of the money market fund are held in the CDSC period. The
exchange privileges applicable to all Classes of shares must
comply with Rule 11a-3 under the 1940 Act.
Smith Barney Sponsored Investment Companies
Operating under Rule 18f-3 - Schedule A
(as of October 31, 1998)
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
Smith Barney Concert Allocation Series Inc.
Conservative Portfolio
Balanced Portfolio
Global Portfolio
Growth Portfolio
Income Portfolio
High Growth Portfolio
Smith Barney Equity Funds -
Concert Social Awareness Fund
Smith Barney Large Cap Blend Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -
Large Cap Value Fund
Short-Term High Grade Bond Fund
U.S. Government Securities Fund
Smith Barney Income Funds -
Smith Barney Balanced Fund
Smith Barney Convertible Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Exchange Reserve Fund
Smith Barney High Income Fund
Smith Barney Municipal High Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Total Return Bond Fund
Smith Barney Investment Trust -
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney S&P 500 Index Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Investment Funds Inc. -
Concert Peachtree Growth Fund
Smith Barney Contrarian Fund
Smith Barney Government Securities Fund
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Special Equities Fund
Smith Barney Institutional Cash Management Fund, Inc.
Cash Portfolio
Government Portfolio
Municipal Portfolio
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc. -
Cash Portfolio
Government Portfolio
Retirement Portfolio
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Muni Funds -
California Money Market Portfolio
Florida Portfolio
Georgia Portfolio
Limited Term Portfolio
National Portfolio
New York Portfolio
New York Money Market
Pennsylvania Portfolio
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust -
Smith Barney Telecommunications Income Fund
Smith Barney World Funds, Inc. -
International Equity Portfolio
International Balanced Portfolio
European Portfolio
Pacific Portfolio
Global Government Bond Portfolio
Emerging Markets Portfolio
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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