<PAGE>
[GRAPHIC]
Smith Barney
[GRAPHIC] Managed
Governments
Fund Inc.
-------------
ANNUAL REPORT
-------------
July 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(SM)
<PAGE>
Smith Barney Managed
Governments Fund Inc.
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================================================================================
The Smith Barney Managed Governments Fund ("Fund") seeks high current income
consistent with liquidity and safety of capital. The Fund invests primarily in
the debt obligations of varying maturities issued or guaranteed by the U.S.
government or its agencies or instrumentalities, with an emphasis on
mortgage-backed government securities.
Smith Barney Managed Governments Fund Inc.
Average Annual Total Returns
July 31, 1998
<TABLE>
<CAPTION>
Without Sales Charges(1)
--------------------------------------------
Class A Class B Class L(2)
================================================================================
<S> <C> <C> <C>
One-Year 5.51% 4.99% 5.07%
- --------------------------------------------------------------------------------
Five-Year 5.70 5.14 5.17
- --------------------------------------------------------------------------------
Ten-Year 8.24 N/A N/A
- --------------------------------------------------------------------------------
Since Inception+ 8.78 6.20 5.33
================================================================================
<CAPTION>
With Sales Charges(3)
--------------------------------------------
Class A Class B Class L(2)
================================================================================
<S> <C> <C> <C>
One-Year 0.73% 0.53% 3.04%
- --------------------------------------------------------------------------------
Five-Year 4.72 4.98 4.69
- --------------------------------------------------------------------------------
Ten-Year 7.74 N/A N/A
- --------------------------------------------------------------------------------
Since Inception+ 8.42 6.20 5.13
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 4.50% and 1.00%,
respectively; and Class B shares reflect the deduction of a 4.50% CDSC,
which applies if shares are redeemed within one year from purchase. This
CDSC declines by 0.50% the first year after purchase and thereafter by
1.00% per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC which applies if shares are redeemed within the
first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Inception dates for Class A, B and L shares are September 4, 1984, November
6, 1992 and June 29, 1993, respectively.
================================================================================
FUND HIGHLIGHT
================================================================================
There are a number of reasons to expect a slowdown in U.S. economic growth and,
therefore, a diminishing threat of higher inflation. We believe that the U.S.
has yet to feel the full impact of the Asian crisis and the accompanying
narrowing of corporate profit margins. In addition, we do not believe that
business investment and home building can sustain their recent energetic pace.
For these reasons, we remain very positive on the prospects for U.S. government
agency securities.
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NASDAQ SYMBOL
================================================================================
Class A SHMGX
Class B MGVBX
================================================================================
What's Inside
================================================================================
Shareholder Letter ................................................... 1
Historical Performance ............................................... 3
Smith Barney Managed Goverments
Fund Inc. at a Glance ................................................ 5
Schedule of Investments .............................................. 6
Statement of Assets and Liabilities .................................. 7
Statement of Operations .............................................. 8
Statements of Changes in Net Assets .................................. 9
Notes to Financial Statements ........................................ 10
Financial Highlights ................................................. 15
Independent Auditors' Report ......................................... 17
Additional Shareholder Information ................................... 18
Tax Information ...................................................... 19
<PAGE>
================================================================================
Shareholder Letter
================================================================================
[PHOTO] [PHOTO]
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for Smith Barney Managed Governments
Fund Inc. for the year ended July 31, 1998. In this report, we summarize the
period's prevailing economic and market conditions and briefly outline our
portfolio strategy. A detailed summary of performance and current holdings can
be found in the appropriate sections that follow. We hope you find this report
to be useful and informative.
Performance Update
We are pleased to report that the Fund's Class A shares posted a total return of
5.51% for the year ended July 31, 1998. The Fund's performance was roughly in
line with its Lipper Analytical Services Inc. peer group average of 5.67% for
the same period. (Lipper is an independent fund-tracking organization.) In
addition, the Fund distributed income dividends of approximately $0.80 per Class
A share during the past year. For performance information on the Fund's other
share classes, please turn to page three.
Market Update and Outlook
Two distinct themes dominated bond markets in the past year: ongoing economic
turmoil in Asia and steady U.S. economic growth with low inflation. Both of
these developments have proven to be quite favorable for bonds.
As can be seen from the chart below, interest rates have continued to decline
during the past year:
Yields from U.S. Treasury Securities
<TABLE>
<CAPTION>
7/31/98 8/1/97
------- ------
<S> <C> <C>
90-Day U.S. Treasury Bill 5.05% 5.27%
2-Year U.S. Treasury Note 5.48 5.87
5-Year U.S. Treasury Note 5.50 6.07
10-Year U.S. Treasury Bond 5.49 6.18
30-Year U.S. Treasury Bond 5.72 6.45
</TABLE>
It has been more than a year after the first signs of trouble in Asia began to
surface and, so far, no clear resolution has emerged. The U.S. dollar has
strengthened considerably in response to weakening economies in the region, and
as the crisis drags on, fears of another round of currency devaluations have
heightened. Moreover, major Asian banks could soon find themselves enveloped in
a crisis of their own as they face mounting numbers of non performing loans.
Of special concern has been the floundering Japanese economy because of its
status as the economic linchpin for Asia and a key U.S. trading partner. The
inability of the Japanese government to provide effective solutions to its
prolonged recession culminated in a political crisis in July. As a result, Prime
Minister Hashimoto was forced to resign. Since then, news from Japan continues
to worsen. Incoming Prime Minister Obuchi quickly announced reforms to salvage
Japan's ailing banking system but has yet to capture the confidence of
investors.
One result of the Asian crisis has been a flight of capital to U.S. financial
markets as many investors sought out a "safe haven" from the tumult surrounding
many global markets. We believe that foreign investors, whose holdings of U.S.
Treasury securities have nearly doubled in the last three years, have been
attracted to Treasurys because of a strong U.S. dollar as well as the
competitive yields that they currently offer.
In addition, a robust U.S. economy has dramatically increased tax receipts,
enabling government officials to project a federal budget surplus for the first
time in years and reducing the need for federal borrowing.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 1
<PAGE>
Issuance of U.S. Treasury securities in 1998 is expected to be substantially
less than in 1997. Auctions of five-year U.S. Treasury notes have been reduced
from monthly to quarterly and auctions of three-year U.S. Treasury notes have
been eliminated all together. This decreased supply combined with a burgeoning
demand has helped sustain a U.S. Treasury market rally, driving the yield on the
benchmark 30-year U.S. Treasury bond to new historic lows.
For its part, the Federal Reserve Board ("Fed") has chosen to remain on the
sidelines. At each of its meetings in March 1998, May 1998 and July 1998, the
Federal Open Market Committee ("FOMC"), the Fed's policy-making panel, elected
to leave short-term interest rates unchanged. However, the FOMC did indicate a
bias toward tightening monetary policy on fears that persistent strength in the
U.S. economy would soon lead to a pick up in inflationary pressures.
Fed Chairman Alan Greenspan has cited a number of crosscurrents in the U.S.
economy that has led the FOMC to adopt a wait-and-see attitude. By many
traditional measures, U.S. economic growth has been quite robust. The U.S.
economy grew at an annualized rate of 5.4% in the first quarter of 1998 compared
to the 3.7% annual rate for 1997 and unemployment dropped to a mere 4.3% in
April 1998, the lowest level in decades. In recent months, there have been
increasing signs of upward wage pressures, especially in the service industries.
In addition, the housing market, a leading indicator of economic growth, was
particularly strong. This vigorous growth has led to increased concern that
demand might soon outpace capacity and lead to price increases.
However, we share the view of some FOMC members who have suggested that
continued weakness in most Asian economies should help to dampen inflationary
pressures in the U.S. economy. Clearly, the Asian crisis has had an adverse
effect on a number of U.S. industries. Moreover, in recent months, conditions in
Asian financial markets have deteriorated even further since the crisis began.
Falling commodity prices (especially oil) around the world have also offset
inflationary pressures. Many economists have projected U.S. economic growth to
be substantially lower in the second quarter of 1998, due in large part to
softening Asian demand.
Investment Strategy
For most of the calendar year 1997, U.S. Treasury securities drove the Fund's
performance. In response to the historically low yields of U.S. Treasury
securities, we have placed an increased emphasis on mortgage-backed securities
so far in 1998.
Market Outlook
Looking ahead, we view the U.S. bond market as very attractive. With currently
low interest rates and mortgage prepayments at their highest since 1993, some
would argue that interest rates should not decline further. In our view, there
is evidence that suggests interest rates could drop even more. Real interest
rates (the interest rate after subtracting the effects of inflation) are
approaching 4% compared to a historical norm of 2.75%.
Moreover, there are a number of reasons to expect a slowdown in U.S. economic
growth and, therefore, a diminishing threat of higher inflation. We believe that
the U.S. has yet to feel the full impact of the Asian crisis and the
accompanying narrowing of corporate profit margins. In addition, we do not
believe that business investment and home building can sustain their recent
energetic pace. For all of the above reasons, we remain very positive on the
prospects for U.S. government agency securities.
In closing, thank you for investing in the Smith Barney Managed Governments
Fund. We look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President and
Investment Officer
July 31, 1998
- --------------------------------------------------------------------------------
2 1998 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Historical Performance -- Class A Shares
===================================================================================================================================
Net Asset Value
--------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/98 $12.84 $12.73 $0.80 $0.00 $0.00 5.51%
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/97 12.27 12.84 0.82 0.00 0.00 11.80
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/96 12.63 12.27 0.82 0.00 0.01 3.76
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/95 12.50 12.63 0.74 0.00 0.04 7.67
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.61 0.00 0.19 0.08
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/93 12.88 13.29 0.66 0.23 0.00 10.43
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/92 12.09 12.88 0.91 0.00 0.08 15.25
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/91 12.13 12.09 0.98 0.00 0.11 9.02
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/90 12.19 12.13 1.07 0.00 0.03 9.01
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/89 12.04 12.19 0.96 0.00 0.11 10.62
===================================================================================================================================
Total $8.37 $0.23 $0.57
===================================================================================================================================
<CAPTION>
===================================================================================================================================
Historical Performance -- Class B Shares
===================================================================================================================================
Net Asset Value
--------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<C> <C> <C> <C> <C> <C> <C>
7/31/98 $12.84 $12.73 $0.73 $0.00 $0.00 4.99%
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/97 12.27 12.84 0.76 0.00 0.00 11.23
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/96 12.63 12.27 0.76 0.00 0.01 3.24
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/95 12.50 12.63 0.67 0.00 0.04 7.04
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.56 0.00 0.17 (0.46)
- -----------------------------------------------------------------------------------------------------------------------------------
Inception*-- 7/31/93 12.64 13.29 0.41 0.16 0.00 9.92+
===================================================================================================================================
Total $3.89 $0.16 $0.22
===================================================================================================================================
<CAPTION>
===================================================================================================================================
Historical Performance -- Class L Shares
===================================================================================================================================
Net Asset Value
--------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<C> <C> <C> <C> <C> <C> <C>
7/31/98 $12.84 $12.73 $0.74 $0.00 $0.00 5.07%
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/97 12.27 12.84 0.76 0.00 0.00 11.26
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/96 12.63 12.27 0.76 0.00 0.01 3.25
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/95 12.50 12.63 0.67 0.00 0.04 7.04
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/94 13.29 12.50 0.56 0.00 0.17 (0.46)
- -----------------------------------------------------------------------------------------------------------------------------------
Inception*-- 7/31/93 13.18 13.29 0.03 0.02 0.00 1.25+
===================================================================================================================================
Total $3.52 $0.02 $0.22
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 3
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Historical Performance -- Class Y Shares
===================================================================================================================================
Net Asset Value
---------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/98 $12.84 $12.74 $0.84 $0.00 $0.00 5.94%
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/97 12.27 12.84 0.86 0.00 0.00 12.16
- -----------------------------------------------------------------------------------------------------------------------------------
Inception*-- 7/31/96 12.86 12.27 0.44 0.00 0.01 (1.10)+
===================================================================================================================================
Total $2.14 $0.00 $0.01
===================================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
<TABLE>
<CAPTION>
===================================================================================================================================
Average Annual Total Returns
====================================================================================================================================
Without Sales Charges(1)
--------------------------------------------------------------
Class A Class B Class L Class Y
===================================================================================================================================
<S> <C> <C> <C> <C>
Year Ended 7/31/98 5.51% 4.99% 5.07% 5.94%
- -----------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/98 5.70 5.14 5.17 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/98 8.24 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/98 8.78 6.20 5.33 6.73
===================================================================================================================================
<CAPTION>
With Sales Charges(2)
--------------------------------------------------------------
Class A Class B Class L Class Y
===================================================================================================================================
<S> <C> <C> <C> <C>
Year Ended 7/31/98 0.73% 0.53% 3.04% 5.94%
- -----------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/98 4.72 4.98 4.96 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/98 7.74 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/98 8.42 6.20 5.13 6.73
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Cumulative Total Return
================================================================================
Without Sales Charges(1)
================================================================================
<S> <C>
Class A (7/31/88 through 7/31/98) 120.74%
- --------------------------------------------------------------------------------
Class B (Inception* through 7/31/98) 41.20
- --------------------------------------------------------------------------------
Class L (Inception* through 7/31/98) 30.26
- --------------------------------------------------------------------------------
Class Y (Inception* through 7/31/98) 17.52
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charges with respect to Class A and L shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and L
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum sales charge of 4.50% and 1.00%, respectively; and
Class B shares reflect the deduction of a 4.50% CDSC, which applies if
shares are redeemed within one year from purchase. This CDSC declines by
0.50% the first year after purchase and thereafter by 1.00% per year until
no CDSC is incurred. Class L shares also reflect the deduction of a 1.00%
CDSC, which applies if shares are redeemed within the first year of
purchase.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B, L and Y shares are September 4, 1984,
November 6, 1992, June 29, 1993 and February 7, 1996, respectively.
- --------------------------------------------------------------------------------
4 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Smith Barney Managed Governments Fund Inc. at a Glance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of the Smith Barney Managed
Governments Fund Inc. vs. Lipper Mortgage Securities Average and Lehman Brothers
Government Bond Index+
- --------------------------------------------------------------------------------
July 1988 -- July 1998
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney Lipper Mortgage Lehman Brothers
Managed Governments Securities Aggregate
Fund Inc. Average Bond Index
---------------- --------------- ---------------
<S> <C> <C> <C>
July 1988 $ 9,548 $10,000 $10,000
July 1989 $10,562 $11,223 $11,524
July 1990 $11,514 $12,084 $12,223
July 1991 $12,552 $13,350 $13,449
July 1992 $14,467 $15,114 $15,500
July 1993 $15,976 $16,394 $17,175
July 1994 $15,988 $16,068 $17,152
July 1995 $17,215 $17,473 $20,148
July 1996 $17,860 $18,337 $21,188
July 1997 $19,975 $20,180 $23,344
July 1998 $21,077 $21,444 $25,293
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on July 31,
1988, assuming deduction of the maximum 4.50% sales charge at the time of
investment and reinvestment of dividends and capital gains, if any, at net
asset value through July 31, 1998. The Lipper Analytical Services, Inc.
U.S. Mortgage Securities Bond Fund Average ("Lipper Mortgage Securities
Average") is composed of the Fund's peer group of mutual funds (71 funds as
of July 31, 1998) investing in U.S. mortgage-backed securities. Lipper
Analytical Services, Inc. is a widely-recognized mutual fund information
service. The Lehman Brothers Government Bond Index is a broad-based index
of all public debt obligations of the U.S. government and its agencies and
has an average maturity of approximately nine years. The index is unmanaged
and is not subject to the same management and trading expenses as a mutual
fund. The performance of the Fund's other classes may be greater or less
than the Class A shares' performance indicated on this chart, depending on
whether greater or lesser sales charges and fees were incurred by
shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
Investment Breakdown*
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
U.S. Treasury\Strips 2.4%
GNMA 29.1%
Repurchase Agreement 13.8%
FHLMC and FNMA 54.7%
</TABLE>
* As a percentage of total investments.
U.S. Treasury Securities are debt obligations of the United States Government.
They are secured by the full faith and credit of the Federal Government, and
include such instruments as Treasury bonds, notes and bills.
Mortgage-Backed Securities are debt securities issued by U.S. Government
Agencies such as the Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA) and Government National Mortgage
Association (GNMA). They represent thousands of individual home mortgages that
are pooled to form securities. As homeowners pay interest and principal each
month, these payments are passed on to investors. Mortgage-backed securities are
backed by the full faith and credit of the issuing agency.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 5
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedule of Investments July 31, 1998
====================================================================================================================================
FACE
AMOUNT SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 86.2%
$27,750,000 U.S. Treasury Strip, zero coupon due 11/15/09 $ 14,637,293
15,330 Federal Home Loan Mortgage Corporation, 14.750% due 3/1/10 18,128
55,000,000 Federal Home Loan Mortgage Corporation, 7.000% due 8/1/13* 56,134,729
4,770 Federal Home Loan Mortgage Corporation, 8.000% due 8/1/17 4,981
26,933,162 Federal Home Loan Mortgage Corporation, 7.000% due 6/1/28 27,362,207
44,775,001 Federal Home Loan Mortgage Corporation, 6.000% due 7/1/28 43,571,674
10,000,000 Federal Home Loan Mortgage Corporation, 6.000% due 7/1/28* 9,715,600
25,000,000 Federal Home Loan Mortgage Corporation, 6.500% due 7/1/28* 25,304,500
3,000,000 Federal National Mortgage Association, 5.500% due 6/1/05* 2,931,540
43,483,905 Federal National Mortgage Association, 5.500% due 7/1/05+ 42,491,603
30,000,000 Federal National Mortgage Association, 6.500% due 8/1/13* 30,187,500
30,149,971 Federal National Mortgage Association, 6.500% due 8/1/13 30,338,409
284,921 Federal National Mortgage Association, 8.000% due 4/1/27+ 295,427
58,500,000 Federal National Mortgage Association, 6.500% due 8/1/28* 58,152,510
35,000,000 Federal National Mortgage Association P-Strip, zero coupon due 7/5/14 13,590,850
1,685,221 Government National Mortgage Association I, 10.000% due 7/15/20+ 1,841,627
10,616,477 Government National Mortgage Association I, 9.000% due 7/15/26+ 11,349,651
55,500,000 Government National Mortgage Association I, 8.000% due 7/1/28* 57,546,285
7,096,481 Government National Mortgage Association I, 8.000% due 7/1/28+ 7,369,199
25,000,000 Government National Mortgage Association I, 7.000% due 8/1/28* 25,367,000
40,000,000 Government National Mortgage Association I, 7.500% due 8/1/28* 41,137,200
32,977,096 Government National Mortgage Association I Platinum, 9.000% due 11/15/17+++ 35,615,264
869,606 Government National Mortgage Association II, 10.000% due 10/20/16 941,619
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost -- $533,579,213) 535,904,796
====================================================================================================================================
REPURCHASE AGREEMENT -- 13.8%
85,579,000 Goldman, Sachs & Co., 5.599% due 8/3/98; Proceeds at
maturity -- $85,618,926; (Fully collateralized by U.S.
Treasury Notes, 5.375% due 7/31/00;
Market value -- $87,330,419) (Cost -- $85,579,000) 85,579,000
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $619,158,213**) $621,483,796
====================================================================================================================================
</TABLE>
* Security has been issued on a to-be-announced basis ("TBA") (See Note 9).
+ Date shown represents the last in range of maturity dates for the mortgage
certificates only.
++ Security partially segregated by custodian for reverse repurchase
agreements.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1998 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
Statement of Assets and Liabilities July 31, 1998
========================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost -- $533,579,213) $535,904,796
Repurchase agreement, at value (Cost -- $85,579,000) 85,579,000
Cash 131,898
Receivable for securities sold 311,341,645
Receivable for Fund shares sold 8,608,427
Interest receivable 2,052,366
- ----------------------------------------------------------------------------------------
Total Assets 943,618,132
- ----------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 400,217,967
Dividends payable 1,302,212
Investment advisory fees payable 196,127
Payable for Fund shares purchased 164,465
Administration fees payable 87,167
Distribution fees payable 22,155
Accrued expenses 41,641
- ----------------------------------------------------------------------------------------
Total Liabilities 402,031,734
- ----------------------------------------------------------------------------------------
Total Net Assets $541,586,398
========================================================================================
NET ASSETS:
Par value of capital shares $ 42,556
Capital paid in excess of par value 557,078,841
Overdistributed net investment income (1,316,529)
Accumulated net realized loss from security
transactions and futures contracts (16,544,053)
Net unrealized appreciation of investments 2,325,583
- ----------------------------------------------------------------------------------------
Total Net Assets $541,586,398
========================================================================================
Shares Outstanding:
Class A 29,397,011
- ----------------------------------------------------------------------------------------
Class B 5,809,348
- ----------------------------------------------------------------------------------------
Class L 220,935
- ----------------------------------------------------------------------------------------
Class Y 7,128,618
- ----------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.73
- ----------------------------------------------------------------------------------------
Class B * $12.73
- ----------------------------------------------------------------------------------------
Class L ** $12.73
- ----------------------------------------------------------------------------------------
Class Y (and redemption price) $12.74
- ----------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $13.33
- ----------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $12.86
========================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 7
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Statement of Operations For the Year Ended July 31, 1998
================================================================================
<S> <C>
INVESTMENT INCOME:
Interest $38,654,105
Less: Interest expense (Note 6) (698,652)
- --------------------------------------------------------------------------------
Total Investment Income 37,955,453
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 2,503,412
Distribution fees (Note 2) 1,623,636
Administration fees (Note 2) 1,112,627
Shareholder and system servicing fees 338,622
Shareholder communication fees 105,598
Registration fees 90,002
Directors' fees 59,999
Audit and legal fees 53,998
Custody fees 24,999
Other 27,189
- --------------------------------------------------------------------------------
Total Expenses 5,940,082
- --------------------------------------------------------------------------------
Net Investment Income 32,015,371
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 35,573,160
Futures contracts (4,582,946)
- --------------------------------------------------------------------------------
Net Realized Gain 30,990,214
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 36,227,324
End of year 2,325,583
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (33,901,741)
- --------------------------------------------------------------------------------
Net Loss on Investments and Futures Contracts (2,911,527)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $29,103,844
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================
Statements of Changes in Net Assets For the Years Ended July 31,
=======================================================================================================
1998 1997
=======================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $32,015,371 $37,817,369
Net realized gain (loss) 30,990,214 (5,443,386)
Increase (decrease) in net unrealized appreciation (33,901,741) 33,181,127
- -------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 29,103,844 65,555,110
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (34,404,614) (38,741,258)
- -------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (34,404,614) (38,741,258)
- -------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares 263,002,004 140,522,188
Net asset value of shares issued for reinvestment of dividends 19,073,434 23,011,974
Cost of shares reacquired (333,565,951) (185,826,459)
- -------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (51,490,513) (22,292,297)
- -------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (56,791,283) 4,521,555
NET ASSETS:
Beginning of year 598,377,681 593,856,126
- -------------------------------------------------------------------------------------------------------
End of year* $541,586,398 $598,377,681
=======================================================================================================
* Includes overdistributed net investment income of: $(1,316,529) $(13,750)
=======================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 9
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
Smith Barney Managed Governments Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing price on such markets;
securities for which no sales price was reported and U.S. government agencies
and obligations are valued at bid price, or in the absence of a recent bid
price, at the bid equivalent obtained from one or more of the major market
makers; (c) securities that have a maturity of more than 60 days are valued at
prices based on market quotations for securities of similar type, yield and
maturity; (d) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (e)
interest income is recorded on an accrual basis; (f) gains or losses on the sale
of securities are calculated by using the specific identification method; (g)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (h) direct expenses are charged to each class; management fees and general
fund expenses are allocated on the basis of the relative net assets of each
class; (i) the Fund intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; (j) the character of
income and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
July 31, 1998, reclassifications were made to the Fund's capital accounts to
reflect permanent book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, a portion of
overdistributed net investment income amounting to $1,086,464 was reclassified
to paid-in capital. Net investment income, net realized gains and net assets
were not affected by these changes; and (k) estimates and assumptions are
required to be made regarding assets, liabilities and changes in net assets
resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment adviser to the Fund. The Fund pays MMC an
investment advisory fee calculated at an annual rate of 0.45% of the average
daily net assets up to $1 billion and 0.415% of the average daily net assets in
excess of $1 billion. This fee is calculated daily and paid monthly.
MMC also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets up to $1
billion and 0.185% of the average daily net assets in excess of $1 billion. This
fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SSBH, acts as distributor of
Fund shares.
On June 12, 1998, the Fund's Class C shares were renamed Class L shares.
Effective June 15, 1998, Class L shares are being sold at net asset value plus a
maximum initial sales charge of 1.00%. Class L shares also have a 1.00%
contingent deferred sales charge ("CDSC"), which applies if redemption occurs
within the first year of purchase.
There is also a CDSC of 4.50% on Class B shares, which applies if redemption
occurs within one year from purchase. This CDSC declines by 0.50% the first
- --------------------------------------------------------------------------------
10 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
year after purchase and thereafter by 1.00% per year until no CDSC is incurred.
For the year ended July 31, 1998, SB received sales charges of approximately
$144,000 on sales of the Portfolio's Class A shares. In addition, CDSCs paid to
SB were approximately:
<TABLE>
<CAPTION>
Class A Class B Class L
================================================================================
<S> <C> <C> <C>
CDSCs $1,000 $141,000 $1,000
================================================================================
</TABLE>
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B and L shares calculated at an annual rate of 0.25% of the average
daily net assets of each respective class. In addition, the Fund pays a
distribution fee with respect to Class B and L shares calculated at an annual
rate of 0.50% and 0.45% of the average daily net assets for each class,
respectively. For the year ended July 31, 1998, total Distribution Plan fees
incurred were:
<TABLE>
<CAPTION>
Class A Class B Class L
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $975,661 $631,602 $16,373
================================================================================
</TABLE>
All officers and one Director of the Fund are employees of SB.
3. Investments
During the year ended July 31, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Purchases $2,009,828,487
- --------------------------------------------------------------------------------
Sales 2,015,457,488
================================================================================
</TABLE>
At July 31, 1998, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Gross unrealized appreciation $3,019,891
Gross unrealized depreciation (694,308)
- --------------------------------------------------------------------------------
Net unrealized appreciation $2,325,583
================================================================================
</TABLE>
4. Capital Loss Carryforward
At July 31, 1998, the Fund had, for Federal income tax purposes, capital loss
carryforwards of approximately $16,544,000 available, subject to certain
limitations, to offset future capital gains. To the extent that these capital
carryforward losses are used to offset capital gains, it is probable that the
gains so offset will not be distributed.
The amount and expiration of the carryforwards are indicated below. Expiration
occurs on July 31 of the year indicated:
<TABLE>
<CAPTION>
2003 2004
================================================================================
<S> <C> <C>
Carryforward Amounts $12,946,000 $3,598,000
================================================================================
</TABLE>
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
6. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreement transactions for leveraging
purposes. A reverse repurchase agreement involves a sale by the Fund of
securities that it holds with an agreement by the Fund to repurchase the same
securities at an agreed upon price and date. A reverse repurchase agreement
involves the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of the securities. The Fund will establish a
segregated account with its custodian, in which the Fund will maintain cash,
U.S. government securities or other liquid high grade debt obligations equal in
value to its obligations with respect to reverse repurchase agreements.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 11
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
At July 31, 1998, the Fund had no reverse repurchase agreements outstanding.
During the year ended July 31, 1998, the maximum and average amount of reverse
repurchase agreements transacted were as follows:
<TABLE>
================================================================================
<S> <C>
Maximum amount outstanding $96,068,750
- --------------------------------------------------------------------------------
Average amount outstanding $62,250,592
================================================================================
</TABLE>
Interest rates ranged from 1.25% to 5.02% during the period.
Interest expense for the year ended July 31, 1998 on borrowings by the Fund
under reverse repurchase agreements totalled $698,652.
7. Option Contracts
Premiums paid when put or call options are purchased by the Fund represent
investments which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into closing sales transaction, the Fund will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Fund exercises a put
option, it will realize a gain or loss from the sale of the underlying security
and the proceeds from such sale will be decreased by the premium originally
paid. When the Fund exercises a call option, the cost of the security which the
Fund purchases upon exercise will be increased by the premium originally paid.
At July 31, 1998, the Fund had no purchased call or put options outstanding.
When a Fund writes a call or put option, an amount equal to the premium received
by the Fund is recorded as a liability, the value of which is marked-to-market
daily. When a written option expires, the Fund realizes a gain. When the Fund
enters into a closing purchase transaction, the Fund realizes a gain or loss
depending upon whether the cost of the closing transaction is greater or less
than the premium originally received, without regard to any unrealized gain or
loss on the underlying security, and the liability related to such option is
eliminated. When a written call option is exercised, the cost of the security
sold will be reduced by the premium originally received. When a written put
option is exercised, the amount of the premium received will reduce the cost of
the security which the Fund purchased upon exercise. When written index options
are exercised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium originally
paid. The Fund enters into options for hedging purposes. The risk in writing a
call option is that the Fund gives up the opportunity to participate in any
decrease in the price of the underlying security beyond the exercise price. The
risk in writing a put option is that the Fund is exposed to the risk of loss if
the market price of the underlying security declines.
During the year ended July 31, 1998, the Fund did not write any call or put
options.
8. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. The initial margin is segregated by the custodian and is noted in the
schedule of investments. During the period the futures contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking-to market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or received
and recognized as assets due from or liabilities due to broker, depending upon
whether unrealized gains or losses are incurred. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transactions and the Fund's basis in the
contract.
- --------------------------------------------------------------------------------
12 1998 Annual Report to Stockholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
The Fund enters into such contracts to hedge a portion of its portfolio. The
Fund bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At July 31, 1998, the Fund had no open futures contracts.
9. Securities Traded on a To-Be-Announced Basis
The Fund may trade portfolio securities on a "to-be-announced" ("TBA") basis. In
a TBA transaction, the Fund commits to purchasing or selling securities for
which all specific information is not yet known at the time of the trade,
particularly the face amount and maturity date in GNMA transactions. Securities
purchased on a TBA basis are not settled until they are delivered to the Fund,
normally 15 to 45 days later. These transactions are subject to market
fluctuation and their current value is determined in the same manner as for
other portfolio securities. At July 31, 1998, the Fund held nine TBA securities
with a total cost of $306,405,080.
10. Dollar Roll Transactions
The Fund may enter into dollar roll transactions. A dollar roll transaction
involves a sale by the Fund of securities that it holds with an agreement by the
Fund to repurchase similar securities at an agreed upon price and date. The
securities repurchased will bear the same interest as those sold, but generally
will be collateralized by pools of mortgages with different prepayment histories
than those securities sold. Proceeds from the sale will be invested and the
income from these investments, together with any additional income received on
the sale, will generate income for the Fund exceeding the yield on the
securities sold.
At July 31, 1998, the Fund had no open dollar roll transactions.
11. Capital Shares
At July 31, 1998, the Fund had 500 million shares of capital stock authorized
with a par value of $0.001 per share. The Fund has the ability to issue multiple
classes of shares. Each share of a class represents an identical interest in the
Fund and has the same rights, except that each class bears certain expenses
specifically related to the distribution of its shares. Effective June 12, 1998,
the Fund adopted the renaming of existing Class C shares as Class L shares.
At July 31, 1998, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Amount
================================================================================
<S> <C>
Class A $420,316,012
- --------------------------------------------------------------------------------
Class B 46,215,478
- --------------------------------------------------------------------------------
Class L 2,644,585
- --------------------------------------------------------------------------------
Class Y 87,945,322
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 13
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1998 July 31, 1997
---------------------------------- ----------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 16,954,331 $ 216,616,814 6,171,191 $ 76,961,923
Shares issued on reinvestment 1,253,963 15,981,884 1,529,298 18,987,649
Shares redeemed (21,101,340) (269,419,526) (12,456,843) (155,307,950)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Decrease (2,893,046) $ (36,820,828) (4,756,354) $ (59,358,378)
====================================================================================================================================
Class B
Shares sold 466,979 $ 5,966,361 609,775 $ 7,606,444
Shares issued on reinvestment 234,702 2,990,699 318,982 3,960,584
Shares redeemed (2,428,219) (30,972,127) (2,414,031) (30,078,314)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Decrease (1,726,538) $ (22,015,067) (1,485,274) $ (18,511,286)
====================================================================================================================================
Class L*
Shares sold 118,157 $ 1,510,406 74,553 $ 929,800
Shares issued on reinvestment 7,906 100,851 5,135 63,741
Shares redeemed (50,435) (643,303) (35,315) (440,195)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 75,628 $ 967,954 44,373 $ 553,346
====================================================================================================================================
Class Y
Shares sold 3,050,271 $ 38,908,423 4,415,232 $ 55,024,021
Shares issued on reinvestment -- -- -- --
Shares redeemed (2,556,109) (32,530,995) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 494,162 $ 6,377,428 4,415,232 $ 55,024,021
====================================================================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1998 1997(1) 1996(1) 1995 1994
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.84 $12.27 $12.63 $12.50 $13.29
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.75 0.80 0.81 0.81 0.75
Net realized and unrealized gain (loss) (0.06) 0.59 (0.34) 0.10 (0.74)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.69 1.39 0.47 0.91 0.01
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.80) (0.82) (0.82) (0.74) (0.61)
Capital -- -- (0.01) (0.04) (0.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.80) (0.82) (0.83) (0.78) (0.80)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.73 $12.84 $12.27 $12.63 $12.50
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 5.51% 11.80% 3.76% 7.67% 0.08%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $374,109 $414,571 $454,679 $528,533 $371,086
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.78% 6.43% 6.46% 6.57% 5.60%
Interest expense 0.13 0.22 0.47 0.14 0.19
Other expenses 1.03 1.01 1.04 1.07 1.03
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 363% 121% 275% 292% 236%
====================================================================================================================================
<CAPTION>
Class B Shares 1998(1) 1997(1) 1996(1) 1995 1994
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.84 $12.27 $12.63 $12.50 $13.29
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.67 0.74 0.75 0.75 0.69
Net realized and unrealized gain (loss) (0.05) 0.59 (0.34) 0.09 (0.75)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.62 1.33 0.41 0.84 (0.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.73) (0.76) (0.76) (0.67) (0.56)
Capital -- -- (0.01) (0.04) (0.17)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.73) (0.76) (0.77) (0.71) (0.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.73 $12.84 $12.27 $12.63 $12.50
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 4.99% 11.23% 3.24% 7.04% (0.46)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $73,905 $96,747 $110,724 $132,882 $389,383
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.27% 5.91% 5.94% 6.07% 5.08%
Interest expense 0.13 0.22 0.47 0.14 0.19
Other expenses 1.56 1.53 1.56 1.57 1.55
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 363% 121% 275% 292% 236%
====================================================================================================================================
</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.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 15
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class L Shares 1998(1) 1997(1) 1996(1) 1995 1994
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.84 $12.27 $12.63 $12.50 $13.29
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.67 0.74 0.75 0.76 0.69
Net realized and unrealized gain (loss) (0.04) 0.59 (0.34) 0.08 (0.75)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.63 1.33 0.41 0.84 (0.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.74) (0.76) (0.76) (0.67) (0.56)
Capital -- -- (0.01) (0.04) (0.17)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.74) (0.76) (0.77) (0.71) (0.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.73 $12.84 $12.27 $12.63 $12.50
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 5.07% 11.26% 3.25% 7.04% (0.46)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $2,811 $1,866 $1,238 $299 $72
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.28% 6.01% 5.99% 6.12% 5.05%
Interest expense 0.13 0.22 0.47 0.14 0.19
Other expenses 1.49 1.46 1.49 1.52 1.58
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 363% 121% 275% 292% 236%
====================================================================================================================================
<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 (000s) $90,761 $85,194 $27,215
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.10% 6.82% 6.62%+
Interest expense 0.13 0.22 0.47
Other expenses 0.69 0.62 0.78+
- ----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 363% 121% 275%
==========================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average share
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.
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Smith Barney Managed Governments Fund Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Managed Governments Fund
Inc. as of July 31, 1998, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the four-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for the year ended July 31, 1994,
were audited by other auditors whose report thereon, dated September 9, 1994,
expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1998, by correspondence with the custodian. As to securities purchased or
sold but not yet received or delivered, we performed other appropriate auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Smith Barney Managed Governments Fund Inc. as of July 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and the financial highlights for
each of the years in the four-year period then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
September 15, 1998
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 17
<PAGE>
================================================================================
Additional Shareholder Information (unaudited)
================================================================================
On March 9, 1998, the Special Meeting of shareholders of the Fund was held for
the purpose of voting on the following matters:
1. To elect Directors of the Fund; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Director For Shares Voted Against Shares Voted
====================================================================================================================================
<S> <C> <C> <C> <C>
Herbert Barg 22,465,492.128 97.067% 678,814.041 2.933%
Alfred J. Bianchetti 22,458,339.810 97.036 685,966.359 2.964
Martin Brody 22,472,789.695 97.099 671,516.474 2.901
Dwight B. Crane 22,514,498.612 97.279 629,807.557 2.721
Burt N. Dorsett 22,518,859.333 97.298 625,446.836 2.702
Elliot S. Jaffe 22,499,388.172 97.213 644,917.997 2.787
Stephen E. Kaufman 22,504,509.438 97.236 639,796.731 2.764
Joseph J. McCann 22,505,466.669 97.240 638,859.500 2.760
Heath B. McLendon 22,509,392.399 97.257 634,913.770 2.743
Cornelius C. Rose, Jr. 22,517,407.391 97.291 626,898.778 2.709
====================================================================================================================================
</TABLE>
Proposal 2 requested that shareholders approve certain changes to the
fundamental policies of the Fund in order to modernize them in view of certain
regulatory, business or industry developments that have occurred since original
adoption of these policies by the Fund. The following chart demonstrates that
all proposals were approved by the shareholders.
Please note that "M" indicates a modification of the policy; "E" indicates the
elimination of the policy; and "R" indicates the reclassification of the policy
from fundamental (which would require shareholder approval to change) to
non-fundamental (which can be changed by a vote of the Board of Directors).
<TABLE>
====================================================================================================================================
<S> <C>
"M" Diversification Approved
- ------------------------------------------------------------------------------------------------------------------------------------
"M" Issuance of Senior Securities Approved
- ------------------------------------------------------------------------------------------------------------------------------------
"M" Borrowing Approved
- ------------------------------------------------------------------------------------------------------------------------------------
"M" Lending by the Fund Approved
- ------------------------------------------------------------------------------------------------------------------------------------
"R" Margin and Short-Sales Approved
- ------------------------------------------------------------------------------------------------------------------------------------
"M" Real Estate Approved
====================================================================================================================================
</TABLE>
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Fund on all of the items in Proposal 2.*
<TABLE>
<CAPTION>
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Voted
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
20,828,128.794 90.307% 515,334.298 2.234% 1,720,246.086 7.459%
====================================================================================================================================
</TABLE>
* Broker non-votes constituted less than one percent of the shares voted.
- --------------------------------------------------------------------------------
18 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Tax Information (unaudited)
================================================================================
A total of 15.39% of the ordinary dividends paid by the Fund from net
investment income are derived from Federal obligations and may be exempt from
taxation at the state level.
- --------------------------------------------------------------------------------
Smith Barney Managed Governments Fund Inc. 19
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney
Managed
Governments
Fund Inc.
Directors Investment Adviser
Herbert Barg Mutual Management Corp.
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane Distributor
Burt N. Dorsett Smith Barney Inc.
Elliot S. Jaffe
Stephen E. Kaufman
Joseph J. McCann Custodian
Heath B. McLendon, Chairman PNC Bank, N.A.
Cornelius C. Rose, Jr.
Officers Shareholder Servicing Agent
Heath B. McLendon First Data Investor Services Group, Inc.
President and Chief Executive Officer P.O. Box 9134
Boston, MA 02205-9134
Lewis E. Daidone
Senior Vice President and Treasurer
James E. Conroy This report is submitted for the general
Vice President and Investment Officer information of shareholders of Smith
Barney Managed Governments Fund Inc. It
Thomas M. Reynolds is not authorized for distribution to
Controller prospective investors unless accompanied
or preceded by a current Prospectus for
Christina T. Sydor the Fund, which contains information
Secretary concerning the Fund's investment
policies and expenses as well as other
pertinent information.
SMITH BARNEY
------------
A Member of TravelersGroup [LOGO]
Smith Barney Managed
Governments Fund Inc.
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD01181 9/98
